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Baltic economies: who won in 2005?

  • 2005-12-21
  • By Ben Nimmo
RIGA - If you check the Latvian Statistics Bureau Web site 's as I do frequently, though I really should get a life 's you may notice a curious fact: the most recent report on GDP growth for the first three quarters of 2005 includes a snide little chart at the bottom comparing Latvia's performance with that of Lithuania and Estonia.

This is no accident: whatever platitudes Baltic politicians may spout about "regional cooperation" and "economic collaboration," the whole point of Baltic economic development is to beat the neighbors, and the main question that always gets asked is not, "Are we doing well?" but "Are we doing better than them?"

It therefore seems appropriate to analyse the events of 2005 in the spirit in which the Baltic states would undoubtedly do so: that of murderous, cut-throat, neighborly competition.

GDP: Latvia on top

One of the year's undoubted success stories has been the Baltics' record-breaking GDP growth. According to Eurostat, the EU's central statistical body, the Baltics recorded the fastest growth across the union this year and are expected to keep doing so for at least the next two years. Within the Baltics, as the Latvian Statistics Bureau points out, Latvia has consistently outperformed its neighbors. According to preliminary figures, GDP growth in the first three quarters of 2005 topped 10 percent, squeaking in ahead of Estonia's 9.3 percent and leaving Lithuania's 6.7 percent for dead. (These figures differ somewhat from the EU's predicted full-year scores of 9.1 for Latvia, 8.4 for Estonia and 7.0 for Lithuania, but the pattern is the same.)

Latvia has every right to feel proud of itself: the poorest country in the EU25 has turned in the best growth figures. The key drivers of this phenomenal growth were retail trade (especially car sales, up 51 percent on 2004), passenger transport (up 31 percent), metal manufacturing (up 23 percent) and residential construction (up a staggering 71 percent).

This consumption-based growth has led to concerns as to the boom's sustainability, but so far the message is clear: when it comes to economic growth, Latvia leads the field.

Inflation: euro worries

However, Latvia's top-class economic performance in 2005 is offset by macroeconomic ignominy. This year, the country's inflation has been the highest in the EU, remaining so high for so long that only the most optimistic politicians are still certain the country will join the euro in 2008. Latvia's score over the first three-quarters of 2005 was 6.6 percent, compared with Estonia's 4.1 and Lithuania's 2.6. While some politicians have tried to blame the rises on oil prices 's presumably as part of the Latvian government's current "secret anti-inflation plan" 's the head of the Bank of Latvia, Ilmars Rimsevics, recently declared that it had far more to do with strong domestic consumption.

In other words, it's the population's unrestrained enthusiasm for new homes, cars and holidays that has sparked inflation.

The problem may well have European ramifications. According to the Maastricht criteria for euro adoption, Latvia's inflation this September should have been below 2.4 percent. Instead, Latvia scored 6.8 percent (compared with Lithuania's 2.6 percent and Estonia's 4.9). Lithuania's chances of joining the euro in 2007 seem pretty solid. Estonia's are slimmer, but it may yet pull it off.

To achieve its goals, Latvia will have to take drastic action, and given that populist campaigning for next autumn's general election has already begun, that hardly seems likely to happen. In the inflation stakes, Lithuania is simply streets ahead of the neighbors. There will be happy faces in Vilnius this Christmas.

Making the brand

However, the Baltics' main challenge since EU accession has been to create a brand: this is widely recognized as being the only way to make friends, hit targets and earn the ultimate accolade of having your flag burned by anti-globalization demonstrators. Baltic branding has been a hot topic ever since Estonia coined the unforgettable phrase "Welcome to ESTonia," and recently Estonia's brand has made impressive progress. This year, the Economist and BBC have both carried stories on the Estonian flat-tax model, reported the country's e-voting experiment and trumpeted the $2.6-billion deal in which the online auction firm eBay bought online phone company Skype, some of whose functions are carried out in Estonia.

In terms of high-tech branding, at least, Estonia is the best in the Baltics.

Lithuania, on the other hand, is increasingly marketing itself as a manufacturing center. Ahead of its rivals in terms of furniture and machinery exports, it has also paradoxically benefited from Estonia's strength as an IT brand: so much media attention has focused on Estonia's IT innovations in recent years that the country's impressive manufacturing record has been rather eclipsed. Lithuania has reaped the benefits, and its brand as a reliable manufacturer has really taken off this year.

Meanwhile, Latvia's image is all about glamour. Despite the fact that it boasts the region's highest exports of base-metal products, its international image this year has been shaped almost exclusively by Riga. Tipped as the EU's new party capital, featured by the BBC as one of the most attractive real-estate markets in Europe, soon to host the World Ice Hockey Championship and a NATO summit, Latvia's capital has hit the branding jackpot.

Tourism figures for the year have been stupendous, with Riga Airport almost doubling its passenger numbers, and the national airline, airBaltic, posting an 80-plus percent rise. Admittedly, the city port's abysmal failure to keep ferry services running has rather blotted its copybook, but with Tallink set to drop its anchor in March in the Latvian capital, that situation should change drastically.

And there is a danger that the uncontrolled spread of strip-bars and gambling may yet deter other tourists from visiting, but so far, its image-creation exercise has been an almost unadulterated triumph.

Baltic capital still

Indeed, the most accurate answer to the question, "Which Baltic state did best in 2005?" is, quite simply, "Riga." Latvia as a whole may have out-scored its neighbors on GDP; Estonia has beaten the field with its high-tech image; Lithuania is making a name for itself as a reliable manufacturing center; but it's Riga which has grabbed the headlines with its tourism and real estate booms, the visit of U.S. President George W Bush and forthcoming international events. Balts living elsewhere may not be happy with the trend, but if 2006 throws up anything like a similar pattern to 2005, it's not going to be long before we talk of the Riga area as a state in its own right.

Which would not make the other Latvians any happier than it would their neighbors. Baltic "cooperation" is always about competition: Riga looks likely to set the sparks flying in 2006.