Baltics need to raise productivity - World Bank

  • 2008-07-04
  • By Mike Collier

UP THE WORKERS: Gains need to be made in the labor market (Photo: Mike Collier)

BRUSSELS  - The countries ofEastern Europe and the former Soviet Union, including the BalticStates, need to innovate, include all their citizens in thedevelopment of their countries, and integrate with the broader globaleconomy if they want to sustain growth, according to a new World Bank report.

Launched in Brussels on July 2, thestudy with the snappy title: 'Innovation, Inclusion, and Integration:From Transition to Convergence in Eastern Europe and the FormerSoviet Union', says productivity growth is "the only viable routeto lasting prosperity."

In order to achieve that growth thereneeds to be a supportive, competitive business environment, a keenfinancial sector, good governance, and superior skills andinfrastructure, the report says.

A particular challenge is identified asaging populations, which will slow economic growth unless more of thepopulation is brought into the labor force. Resources should be usedmore efficiently, and pensions and health care systems are reformedto avoid them becoming sources of acute fiscal pressure, the WorldBank says.

"When it comes to the importance ofcompetition for restructuring activities in firms, the transitioneconomies are following in the footsteps of developed marketeconomies," said Pradeep Mitra, the World Bank's Chief Economistfor Europe and Central Asia Region, the author of the report. "Theirbusiness and financial sectors are maturing as well, relying less onfamily and informal sources to fund fixed investments."

According to Mitra, "Boostingproductivity requires firms either to innovate, developing knowledgenew to the world, or to absorb knowledge, integrating andcommercializing knowledge new to the firm but not to the world."

"Productivity growth," said Mitra,"is higher in firms when they face stronger pressure from domesticcompetitors to develop new products and markets; when they are inindustries that rely more on external finance in countries with moredeveloped financial sectors; when rules and regulations are morepredictable and there is greater confidence in the legal system; whenthey offer more on-the-job training to their workers; and when theavailability of mainline telephone services is higher and theincidence of power outages is lower."

Of the Baltics, only Estonia merits aspecial mention in the report. "The Czech Republic, Estonia,Hungary, Poland, and the Slovak Republic," said Mitra, "haveattracted large amounts of foreign direct investment, and participatealmost as heavily as developing East Asia in producer-driven globalcommodity chains, such as those for automotives and informationtechnology and export capital and skilled labor-intensive products.In contrast, most CIS countries export natural resources andunskilled labor-intensive products."

However, all three Baltic states haveissues with demographics and their labor markets.

Said Mitra: "The challenge posed toeconomic growth by rapidly aging populations... is serious andsystemic. Offsetting it requires, first, getting the most out of theexisting capital stock and labor force 's through all the reforms ofthe business environment needed for productivity growth. Second, itcalls for using all and not just part of a country's humanresources by raising and equalizing the retirement ages for men andwomen and, where the fiscal situation allows, reducing taxes on laborthat make hiring labor expensive. Third, it requires reform ofpensions and health care systems, so that fiscal pressures do notcrowd out desirable spending on infrastructure and social safety netsand the private investment for productivity growth."

"Finally," Mitra added,"international circular migration of labor that is coordinatedbetween sending and receiving countries and respects migrants'rights can supplement such a policy package. Migration involvescomplex political, economic, and social factors, and it is for thisreason that policy experiments might be needed to improve theframeworks that regulate it."