With the presidential elections coming next year Lithuania has a clear front runner in the polls, SEB Lithuania Bank’s Chief Economist, Gitanas Nauseda. “I tend to downplay the rankings because, just like in sport, they’re subject to change at any point in the race,” says Nauseda humbly. When pressed to answer why so many of his compatriots like him, the renowned economist assumed a more matter-of-fact composure. “My guess is that the people’s seeing and thinking echo that of my own.”
Nauseda recently sat down with The Baltic Times for an interview.
We’re speaking in the wake of a major Wall Street shake up when the Dow Jones Index has plummeted over 1,000 points twice in the course of one week. Is this a clear sign that the world economy is close to a 2008-like slump?
We can reason a lot about what happened [in the exchange], but I’m pretty sure that it’s not a prelude to a new global economic crisis. For stock exchanges it’s quite common to undergo from time to time what I call ‘belching’. In this particular case it was triggered by a large quantity of money tossed into the exchange to gain expected big yields. So the ‘belching’ is reflexive, yet affecting, and has already affected exchanges worldwide, albeit to a different degree. The panic was rather destructive during the first days and saw large stock sell-outs, but, later on, with the common sense kicking in, the exchanges bottomed out and the operations smoothed out. I believe that the foundation of the world economy is firm and even the Wall Street shake up shouldn’t damage it.
Yet Sweden, on whose banks the Lithuanian banking sector is hinged on, has already constrained borrowing. Coupled with the fact that the Swedish real estate sector has been stagnating, can we expect this year the Central Bank of Lithuania to take these developments into consideration and put on the brakes to slow down borrowing, which is near 2008 levels?
I believe it depends on the situation in Lithuania itself. As of now, the Central Bank of Lithuania has already issued several statements on the changing situation within the Lithuanian real estate market, especially in Vilnius. However, let’s admit that they were neither too strong nor too assertive. Although there’s a certain glut in the market, in the segment of rentals in particular, it’s way too early to speak of a forming a ‘bubble’ in the market. Some of the RE investors have pocketed pretty decent yields [from their investments] over the last three or four years.
However, those who recently invested in the market can’t expect the same profits. With a surplus in the supply of rental flats, prices have been edging slightly downward for quite some time. I believe It’ll certainly reduce the appetite of some building companies to pursue new construction projects. The Central Bank has a range of tools to influence #borrowing, and some instruments from the toolkit have already been applied by it, as a matter of fact. If the Central Bank decides to push harder on the brakes, the commercial banks will certainly adjust to the new rules.
That said, I should note that we’re monitoring very closely what’s going on in the Scandinavian markets. Indeed, there are signs that the real estate bubble is bursting in Stockholm, although our colleagues there don’t sound too distressed due to the good health of the Swedish economy and its large export volumes.
Also, I want to emphasise that Lithuanian commercial banks in terms of financial resources have become quite independent, by which I mean their ability to attract solid financial crediting resources in the domestic market. Note, with the interest rates hovering at zero. The volumes of monetary deposits, both in the private and business sectors, is growing constantly and allows us all to feel quite comfortable for now.
You’ll agree that cycles of economic growth and recession are quite characteristic to an economy. Yet do you believe Lithuania and the Baltics in general have learnt all the lessons from the downturn between 2008 and 2010 and have established an efficient mechanism to prevent or mitigate a new economic slump?
I don’t think that we’ve employed a full arsenal of ‘weapons’ to prevent a new recession, which, sooner or later, will hit us along the way.
I’m not however a fan of the mathematic calculations on the timing of a new crisis though. For a long time now, we’ve been rubber-stamping deficit budgets, which run counter the striving to shun a crisis. Only in the last couple of years have we been aiming at a fiscal surplus [of the budget], which has allowed us to accumulate a certain reserve. However, it’s too meagre to be called an economy stabilisation fund. I think we ought to take advantage of the economic growth and set the goal of having a long-term fiscal surplus. That said, I should emphasise that the Central Bank acts exuberantly though conservatively and is ready to prevent a new crisis by the means in its possession. However, no country, including Lithuania, is [economic] crisis-proof. Recession is global and borderless phenomena.
With fewer people on the payroll, does Lithuania have any other choice than hike existing taxes and enact new ones to secure fiscal resources?
Indeed, it’s a grave problem from a number of perspectives, be it the disparities of regional development or the aspects of the macro economy. A further decreasing in the number of those employed will bring about many bad consequences. First, it means a complete languishing and near death of some of the regions. Even so in terms of purchasing power, as with only retirees left, the local economy will have to change inevitably. The service sector will disappear as pensioners won’t be able to afford these services.
In terms of the macro economy it will mean shallower budget coffers and a strain on the social security budget. Simply speaking, we may come short of money in increasing the pensions according the adopted pension indexation model.
How to tackle these looming gloomy prospects?
I believe, first of all, that we have to loosen the screws on small businesses. This is especially important when looking at it from our endeavour to bring back emigrants. Many Lithuanians now living in, say, the United Kingdom would like to make the comeback, but they don’t like the idea of working for someone here. It would understandably mean receiving a lower wage than they’re receiving now. Yet many emigrants would consider the idea of returning provided they receive favourable legislation and tax incentives here. Considering the country’s current bureaucracy and heavy liability for social security contributions, which many find preposterous, I don’t see them coming back yet.
The other thing I’d like to pay attention to is our immigration politics. I believe we ought to have what I call liberally selective immigration policies. Where there’s a shortage in the local workforce, or where Lithuanians aren’t prepared to take one or other job, be it due the small wage or any other reason, we have to be liberal and flexible and allow, say, the Ukrainians or other citizens from third countries to fill up these vacancies. Needless to say, it would strengthen our labour market, add more social security contributors and improve the general social environment in the country. Considering that the demographic trends we’re currently facing are formidable, we need to proceed with changes in our immigration policies as soon as possible.
Will life in, say, 20 years from now, revolve around Lithuania’s three largest cities of Vilnius, Kaunas and Klaipeda?
Indeed, we see big regional disparities [in development], yet the situation isn’t tragic. In fact, I was a whole lot more pessimistic a year and a half or so ago. Today I see a lot of initiatives on a regional level aimed at rescuing the provinces, even without a nod from Vilnius. This is being accomplished through the free economic zones and the intensified creation of industrial parks throughout the country. I’d say we’ve been observing for quite some time now an interesting phenomenon, namely that of investors reversing to the regions. It’s very important however that they find the required workers in them. If there’s a shortage of a skilled workforce, an investor won’t pursue their investment. This is simple logic. Lately, investors have unveiled ambitious business plans in the Marijampole and Siauliai free economic zones as well as in the Naujoji Akmene district. This is heartening.
The so-called White Book, drawn up by the Lithuanian Ministry of Interior Affairs on the Strategy of Regional Policies throughout 2022, envisions among other things the introduction of the principle of competition between the regions. I think the criteria and the economic development-gauging indicators embedded in the book will allow us to better assess the performance of each municipality, including those of the mayors and the municipal councils as well. I think the mayors out there are becoming very aware of the looming reality, and many of them are already putting in an extra effort to prove they’re capable in this capacity.
Lithuanian municipalities heavily rely on the financial assistance from the European Union when carrying out an infrastructure project. With the flow of European funding inevitably lessening after 2020, what would be your advice be to them?
It’s clear that European funding of the so-called ‘face-lifting’ of municipality public spaces, be they town squares, stadiums or parks etc., will come to an end very soon. With fewer people and scarcer resources locally, the costs of maintaining infrastructure will predictably become too heavy a burden for many municipalities. What they should do from now until the end of the current EU financial period in 2020 is to start looking, without delay, for inner economic engines that can be revved up and can help accumulate local financial resources over the next five to 10 years.
Otherwise many municipalities run the risk of ending up in a situation where they’ll have to manage expensive new infrastructure in deserted towns with very little money in the municipal coffers. In my estimation, of the country’s 60 municipalities, between 10 and 15 are quite attractive economically due to their ability to spur growth and provide good prospects of life for the local population.
In that sense, the country’s northeast is more of an exception. The town of Utena, which was a thriving industrial town not that long ago, has lost its development momentum. Among the municipalities that deserve praise in attracting investors for example are those of Taurage in the southwest and Marijampole in the south of the country.
What we have to do when tackling uneven regional development is to ensure the territorial mobility of the workforce. By this I mean that local inhabitants must have the possibility to work 50 or even 80 kilometres away from home. In fact, a recent poll showed that most Lithuanians are willing to make these daily trips, provided they’re offered a well-paid job within the aforementioned range. In the past, employers’ money for workers’ transportation was heavily taxed, but the new transportation compensation system, tax-wise, is a lot more employer-friendly. As a result, we’ve started seeing some great examples, when, say, the Intersurgical company in Pabrade, a small town on the Belarusian border, brings its workers daily on the train from as far away as Ignalina some 60km away. And there are many more examples of this kind. I believe it reflects how Lithuanian companies will start to organise their operations in the near future, provided the state comes up with a functional regional model.
When will Lithuania catch up with Estonia, the Baltic leader? Do you see any macro indicators showing that we’re getting closer to our northern neighbour, or even outstripping it?
There are quite a few economic indicators to which we’re on par with Estonia such as the scope of consumption per capita, which in Lithuania is higher than in Estonia. And our GDPs are pretty similar, even in terms of GDP growth. However, when it comes to indicators measuring technological renewal and inroads of this sort as well as the attraction of investments, we’re unfortunately lagging behind. Thus the disparity in average salaries, pensions etc. However, the rapid flow of new investments we’re seeing in Kaunas’ Free Economic Zone for example makes me feel quite upbeat and, I’m sure, some of our closest neighbours envy us this success.
Ahead of Lithuania’s centenary, many prominent Lithuanians, and not only them, have voiced their ideas which embodiment according to them lead to a more prosperous Lithuania. What is your idea for Lithuania? Frankly, I’ve not come along with it anywhere…
To be honest, I’ve not advertised it much in order to shun a clash of interests. My idea, which I’ve already introduced at a conference, relates to the regions and their empowerment through a toolkit of economic and political leverages. I’d go so far in this regard as to allow municipalities to have a stronger say on the formation of land lots and let them even regulate the average wage according the factual economic situation [within each individual municipality]. For some of the poorer performing municipalities, the increase in the minimum wage would be unbearable now as it nears the average salary in some municipalities. To ensure better performance among the regions, it perhaps makes sense to go so far as to think about merging some municipalities.
You’re the front-runner in all the presidential race polls. How do you explain it? When can we expect a statement from you on your candidacy in the 2019 elections?
I’ll announce my decision in September or October after having thought out everything and, certainly, having consulted with my family. It won’t an easy decision however.
How do you explain your popularity in the polls?
I tend to downplay the rankings because, just like in sport, they’re subject to change at any point in the race. Yet indeed, I neither sing well nor shoot the ball outstandingly, which could explain the high support ratings at the point. I reckon many people find the ideas I promote attractive. Perhaps they somehow echo their own ways of seeing and thinking too.
However, you’re being labelled as a presidential candidate of the elite. What’s your response to this? Do you believe you’d easily strike a chord with, say, a bootleg cigarette seller in the remote corner of a market in Pagegiai, a small yon the Lithuanian-Russian border?
Believe me, no-one ever can rebuke me for fearing or avoiding people. I’m very social and gregarious and, sometimes, I like to engage in chat with a child just to hear my daughter say that I can scare the child [laughs]. To tell the truth, I’m not entirely sure about the meaning of the word ‘elite’. Isn’t a teacher in a small town ‘elite’? Or does living in the capital city send a person up the social ladder to the rank of ‘elite’?
As an avid reader I often stop by libraries when travelling around Lithuania and I usually engage in conversation with the people I meet in and outside them. I can say very honestly that I enjoy these conversations. To answer your question about the man selling contraband cigarettes somewhere, I’m sure we’d hit it off, and furthermore I’d be curious to learn how he gets the stuff and what economic circumstances of the man’s life have caused him to resort to this business.