swedbank analysis · baltic economies have recovered quickly, but investments remain behind the...

November 6, 2014 Please see important disclosures at the end of this document of 20

Macro Research - Swedbank Analysis

Swedbank Analysis

Baltic economies have recovered quickly, but investments remain behind the curve

The Baltic countries have been commended for a quick adjustment of labour costs, increase in efficiency, and repair of public sector finances, all of which contributed to a successful recovery from the crisis. All three countries went through a painful internal devaluation and were able to come out of the crisis through a spectacular growth of exports. However, investments remained behind the curve, especially in Lithuania. This might impede competitiveness and the growth potential in the future.

Companies have deleveraged significantly, but they still face some credit constraints. Companies claim that the efficiency of financial markets in Lithuania is smaller than in the other Baltic countries. Investment in R&D and attracting FDI poses challenges as well.

Research suggests that one of the most effective ways to increase investments is to not tax the reinvested profit. This would also make a country more attractive for FDI. In addition, heavy labour taxation and rigid labour markets are detrimental to investments. Finally, more efficient government spending and regulation are needed.

Painful economic collapse, followed by spectacular recovery Internal devaluation led to rapid export growth and recovery of Baltic economies.

Wages will continue growing; investments must follow Wages are again growing faster than productivity, this may hurt competitiveness.

Recommendations Taxes, regulatory environment and public sector efficiency have to be improved.

Swedbank Analysis

Vaiva Šečkutė +370 5258 2156 [email protected] Lija Strašuna +371 6744 5875 [email protected] Tõnu Mertsina +372 888 7589 [email protected]

15

20

25

30

35

40

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Gross fixed capital formation as % of GDP

European Union (27 countries) Estonia Latvia Lithuania

Source: Eurostat.

Macro Research - 6 November, 2014

Please see important disclosures at the end of this document

mailto:[email protected]





Painful economic collapse, followed by rapid export-driven recovery

During the recent financial and economic crisis, the Baltic economies were among the most severely affected – as real estate and consumption bubbles deflated, output contracted by 16-24 percent from peak to trough. Nevertheless, competitiveness was restored through internal devaluation, and the countries rebounded forcefully as exports increased well above the pre-crisis levels. Lithuania's export volumes in the second quarter of 2014 were 40.4% higher than the pre-crisis peak; Latvia's (in the first quarter of 2014) and Estonia's export was higher by 19.4% and 29.6%, respectively.

1 The recovery of the economies was export

driven. Exports as a share of GDP increased significantly in all three countries compared with 2007. It increased from 67.1% in 2007 to 87.7% last year in Estonia, from 42.5% to 59.7% in Latvia, and from 53.8% to 86.9% in Lithuania.

The collapse in household consumption, which before the crisis had been fuelled by a rapid increase of financial leverage, was one of the main reasons behind the deep recession. Household consumption has recovered since, but remains about 10% below the pre-crisis peaks in all three Baltic countries. With the job market recovering, household consumption will increase steadily in the coming years and will be much less volatile.

However, the investment recovery has been delayed by weak confidence even though companies have decreased their leverage significantly; capacity utilisation in Latvia and Lithuania is back to the pre-crisis highs and interest rates have dropped to historic lows. Investments remain well below the pre crisis level (in Lithuania; e.g., in the second quarter of this year they were 20.3% lower than in 2007). However, a comeback to the pre-crisis level is neither likely nor needed, since irrational exuberance caused companies to overinvest heavily in 2006 and 2007 – in Latvia and Estonia, gross fixed capital formation amounted to around 35% of GDP. More than half of investments during the peak were to dwellings and other buildings and structures. However, the largest share was recorded in 2009 as investment in transport and other machinery and equipment decreased more than investments in dwellings and other buildings and structures. The share of investments to dwellings and other buildings and structures has decreased since then by about 10 percentage points in Estonia and Lithuania, and by 2 percentage points in Latvia.

1 All data in this analysisare presented according to ESA95 methodology.

-1.1-6.5

14.4

40.4

-20.3

-70

-50

-30

-10

10

30

50

2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1

Lithuania, peak=0

GDP Government consumption Household consumption

Imports Exports Investment

Sources: Eurostat and Swedbank.Sources: Eurostat and Swedbank.

-

0.4

Household consumption is

recovering steadily, but

investments are far from

where we’d like them to be



Overall, despite the 2008-2009 setback, the Baltic countries‟ convergence towards the EU average has been rapid. Labour productivity per hour worked in Lithuania increased from 49.9% of the EU average in PPS (purchasing power standard) in 2004 to 66.4% of the EU average in 2013. Over the same period, Estonia's productivity rose from 48.5% to 61.4%, and Latvia's from 36.5% to 56.9%.

-8.3

-12.2-15.3

19.4

-42.8

-70

-50

-30

-10

10

30

50

2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1

Latvia, peak=0



Source: Eurostat and Swedbank.Source: Eurostat and Swedbank.Source: Eurostat and Swedbank.Source: Eurostat and Swedbank.

-11.7

0.23.0

-8.1

12.4

29.6

-23.8

-70

-50

-30

-10

10

30

50

2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1

Estonia, peak=0



Source: Eurostat and Swedbank.

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

0

20

40

60

80

100

120

140

160

180

Labour productivity per hour worked, Index (EU27=100), 2013

Productivity Index change compared with 2004 (rs)Source: Eurostat

All three Baltic countries

have recovered on the back

of booming exports.



However, further progress and convergence will almost certainly be slower. Many EU countries – the Czech Republic, Malta, Greece, the UK, Italy, Finland, Sweden, France, Netherlands, Belgium, and Luxembourg – have lost some productivity in relation to the EU average in a decade. But this is not an option =for the Baltic countries – they need to raise productivity in order to raise living standards, curtail emigration, and lessen the pressure of aging populations on public finances. Productivity can be increased through structural reforms and improvements in the institutional environment, education, and, finally, investments, especially foreign direct investment (FDI), which allow for spillovers and technological transfers. In this Swedbank Analysis we focus on investment trends in the

Baltic countries and try to identify possible growth bottlenecks.

Productive investments must accompany wage growth

Investments, especially in machinery and equipment and R&D, are essential for sustainable economic growth – they increase productivity and competitiveness and allow for higher wage growth without destroying companies‟ cost competitiveness.

Before the crisis, unit labour costs (ULCs) have been increasing at an accelerated pace. ULC growth was somewhat more contained in Lithuania, and this, at least partially, explains why Lithuania‟s contraction in 2009 was somewhat milder than that in Latvia and Estonia. Nevertheless, all countries had to regain competitiveness through internal devaluation; thus, they have cut their ULCs through redundancies and even lower wages. Restored cost competitiveness helped the Baltic economies to rebound on the back of rapidly increasing exports.

However, although unemployment remains well above pre-crisis levels, it is probably already close to or below the natural level of unemployment, and wage pressures have started to build up – wages are again growing faster than productivity, especially in Estonia and Latvia. Wage growth is a natural consequence of real and nominal economic convergence – its growth will continue as unemployment declines and wage expectations increase. Thus, companies have to ensure their cost competitiveness by increasing their productivity at least at the same pace. And this is hard to achieve without investments.

Household investments in real estate have recovered

During the crisis, business investment contracted more than household investments in Lithuania. In all three Baltic countries, business investments as a share of GDP contracted roughly by half, whereas the drop was most pronounced in Lithuania – from 19.2% in 2007 to a meagre 9.5% of GDP in 2010--and the recovery has been small.

Nevertheless, one of the reasons why recovery in gross fixed capital formation was lagging behind other components of GDP was households‟ reluctance to invest in real estate. This, finally, is changing. Activity in the real estate and construction sector has not only a direct impact on investments and GDP, but, as more housing is built and purchased, positive spillover effects can be seen in other sectors, from manufacturers of furniture and household appliances, to retail, transport, and other services.

-15

-10

-5

0

5

10

15

20

25

30

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Nominal unit labour costs, yoy

Estonia Latvia Lithuania SwedenSource: Eurostat.Source:

Further productivity growth

is likely, but convergence

towards EU average will be

slower



In Tallinn and Riga, activity in the real estate market this year compared with the peak is still about 50% lower. Prices have recovered most from the trough in Tallinn and least in Riga. In Tallinn, price growth has been driven by lack of supply, which has started catching up with demand recently. Therefore, we expect somewhat slower price growth in Tallinn. In Riga, price growth should remain modest as well, as buyers are expected to be cautious due to geopolitical uncertainty and the somewhat worsened economic outlook.

During this year and 2013, activity growth in the real estate market has been very rapid in Vilnius. The main reasons behind the recovering market have been better lending conditions and expectations, high rent yield, higher real income growth, and lack of alternative profitable investments. At least some of the higher demand could in part be attributed to the planned adoption of the euro as of January 1 next year. In the second quarter of this year, only 44% of all apartment purchases were financed with the help of loans. This indicates that part of the savings is being invested in real estate before the currency changeover – and probably also due to price increase expectations. Part of these savings might be earnings from the shadow economy.

As t price growth has accelerated in most major Lithuanian cities this year, the growth in the number of transactions has moderated. In June and July, annual price growth was close to 20%. This was well above our expectations and not justified by economic fundamentals – again, a sign of a temporary spike in demand and restless buyers. For now, the apartment price-to-income ratio is below its long-term average, and the housing affordability index and rent yield are above its long-term averages. This indicates that there are no signs of a price bubble yet. However, the price-to-income ratio and housing affordability index came closer to their averages in the second quarter of this year. This means that further price growth at such a pace would be unsustainable and, in our opinion, is unlikely – new macroprudential measures and fresh memories of the recent bubble will deter reckless speculation.

The rising activity in the residential real estate market has positive effects on some other economic sectors, but has almost nothing to do with external competitiveness. Households

6.9

4.0

3.9

4.2

4.4

4.2

3.6

2.1 2.6

2.3 3.9

3.6

2.2

2.2

2.1

21

.4

12.2

11.2 1

5.3

15.4

22.6

13

.7

12.4 14

.5

16

.1 16.6

9.7

9.5 11.5

10.9

4.6

5.1

3.9

4.1 5.4

4.3

4.3

3.7

4.3 4

.4

4.3

3.9

4.6 4

.4

3.7

26

.1

27.3

27.1

27

.5

21.1

22

.8

22.8

23

.9

18

.3

19.0

19.5

20.9

0

5

10

15

20

25

30

35

2004

-2008

20

09

20

10

20

11

20

12

20

13

2014*

2015*

2016*

2004

-2008

20

09

20

10

20

11

20

12

20

13

2014*

2015*

2016*

2004

-2008

20

09

20

10

20

11

20

12

20

13

2014*

2015*

2016*

Investments by institutional sector, % of GDP

Households Business Government TotalSource: Eurostat.* forecasts are made according to ESA 2010, historical series calculated according to ESA95

Estonia Latvia Lithuania

200

400

600

800

1000

1200

1400

1600

400

600

800

1000

1200

1400

1600

1800

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Number of transactions and average price of apartments12 month moving average

Tallinn EUR/m2 Riga EUR/m2

Vilnius EUR/m2 Tallinn nr.of deals (rs)

Riga nr.of deals (rs) Vilnius nr.of deals (rs)

Source: National registry offices and Swedbank.

Investments in residential

real estate have recovered,

but they have little impact

on long-term potential

growth



may invest as much as they want to, but if companies will not expand their capacity, innovate, and improve efficiency, external competitiveness and long-term potential growth will suffer.

Lithuania invests the least of the Baltic countries

Gross fixed capital formation per inhabitant in Lithuania last year was still the lowest in the Baltic countries as % of EU 27 average based on PPS. However, in Lithuania it recovered the most compared with the pre-crisis peak in 2007. Last year, it was at 78.3% of the EU average in Lithuania, at 81.7% in Latvia, and by 9.6% higher than EU average in Estonia.

In the long run, lagging investments might make Lithuanian companies less competitive and, in general, hamper business expansion abroad. All three Baltic economies are very open and highly dependent on continued export growth. Exports constituted 87.7% of GDP in Estonia, 59.7% of GDP in Latvia, and 86.9% of GDP in Lithuania in 2013.

In 2012, gross fixed capital formation in Lithuania was at only 16.6% of GDP, compared with

25-28% of GDP during the pre-crisis period. Last year, investments recovered to 18.3% of GDP but still lagged behind Latvia, where gross fixed capital formation was at 21.1% of GDP, and Estonia (26.1% of GDP).

Many sectors still invest much less than they did before the crisis. For example, investments in tangible assets in the construction sector last year in Lithuania were 75.2% lower compared with the peak in 2007 in nominal terms. However, the pre-crisis level is not an excellent reference point. A country may overinvest, especially if capital is cheap and abundant, whereas its allocation process is distorted – e.g. if EU structural funds are not distributed transparently and fairly. There were signs of capital misallocation and overinvestment (especially in the real estate sector) before the crisis, but the current level is a dangerous swing in the opposite direction away from the equilibrium.

External uncertainty deters investments, especially in Lithuania

In Lithuania, investments in machinery and equipment increased by 17.2% in 2013, but as a share of GDP they remain much lower than in the other two Baltic countries. Furthermore, since 2008 these investments are even lower than the EU average. This is not normal for a developing economy, which Lithuania still is – its GDP per capita (at PPS) last year was only 74% of the EU average.

10

30

50

70

90

110

130

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

GFCF as % of EU (27 countries) average (based on PPS per inhabitant)

Estonia Latvia LithuaniaSource: Eurostat

Overinvestment and capital

misallocation before the

crisis were replaced by

underinvestment and

excessive wariness



Part of this decline in investments can be explained by the less favourable lending conditions for small and medium-sized enterprises (SMEs) in the aftermath of the crisis. During recent years, there may have been some reluctance to expand capacity due to the crisis in the euro area. Companies themselves most likely are less eager to increase leverage in times of uncertainty as well. However the structure of all three Baltic economies is similar. The share of SMEs is similar in all three countries. In Lithuania, it is even slightly lower than in Estonia or Latvia. All countries were similarly exposed to euro area woes; thus it remains unclear why Lithuanian companies severely underinvested in machinery and equipment. Although the euro area debt crisis is probably a thing of the past (as suggested by government bond yields), companies have another thing to worry about – Russia. This indicates that investments are likely to grow slower than they could.

Companies have deleveraged, although they didn’t need to

Nonfinancial corporations in the Baltic countries have decreased their leverage significantly. The net debt-to-income ratio in Lithuania decreased from 173.2% in 2009 to 62.4% in 2012, in Estonia from 466.4% in 2009 to 175.7% in 2012, and in Latvia from 324.5% in 2008 to 254.2% in 2011. Lithuanian companies are the least leveraged in the EU. Moreover, their leverage is most likely overestimated as estimates show that the shadow economy amounts to one-fourth of GDP

2 in Lithuania and part of income is thus hidden. On the one hand, this

means that companies have become more resilient – they are less susceptible to external shocks in the financial markets. On the other hand, too-low leverage is just a consequence of underinvestment, which dampens potential growth in the future.

Total liabilities to equity decreased significantly compared with the pre-crisis period in Lithuania. However, current liabilities have been increasing rapidly since the beginning of

2 Lithuanian Free Market Institute estimate.

3

4

5

6

7

8

9

10

11

12

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Investment in machinery and equipment as % of GDP

Lithuania Latvia Estonia European Union (27 countries)

Source: Eurostat.

0

50

100

150

200

250

300

350

400

450

500

2004 2005 2006 2007 2008 2009 2010 2011 2012

Net debt-to-income ratio, after taxes, of non-financial corporations

Lithuania Latvia Estonia Euro area (18 countries)Source: Eurostat.

Lithuanian companies seem

to be too wary when it

comes to investing in new

machinery



2012 mainly due to rising current trade credits. Long-term financial liabilities have been declining for most of the time since the second quarter of 2009 through the second quarter of this year. This shows that companies were reluctant to borrow for the long term and lately have been using trade credits more actively for short-term financing. There is some anecdotal evidence that companies in Lithuania now more often seek financing from shareholders or other individuals. However, in the second quarter of this year, the growth of loan stock of nonfinancial corporations accelerated.

A M.Avarmaa (2011) study, amongst many others, concluded that “leverage has a positive impact on the growth of local companies, especially at low levels of leverage.“ Therefore, credit constraints limit economic growth. Low financial leverage could be a consequence of unwillingness to invest using borrowed capital – many companies do that with the help of retained earnings and EU structural funds. However, low leverage can also be one of the reasons (if companies are unable to borrow) behind lower investments in Lithuania than in its two Baltic counterparts.

A bank lending survey by Bank of Lithuania shows that lending conditions,3 as reported by

the banks, have been easing since the end of 2010, with one exception (from the end of 2011 to the beginning of 2012 more banks tightened lending conditions than eased them). Nevertheless, demand for borrowing has been increasing quite significantly since the beginning of 2010 as well. Therefore, it is likely that demand still might be somewhat higher than supply.

3 Net percentage in lending conditions is defined as the difference between the percentage for

”tightened considerably” and ”tightened somewhat”, and the percentage for ”eased somewhat” and

”eased considerably.”Net percentage in demand is defined as the difference between the percentage

for ”increased considerably” and ”increased somewhat”, and the percentage for ”decreased

somewhat” and ”decreased considerably.”

96.0%

73.9%

39.9%

31.5%

14.6%

12.4%

53.9%

62.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Non-financial corporation liabilities in Lithuania

Liabilities to equity Long-term financial liabilities to total liabilities

Current financial liabilities to total liabilities Current liabilities to total liabilities

Sources: Statistics Lithuania, Swedbank.

-80

-60

-40

-20

0

20

40

60

80

100

120

2006 2007 2008 2009 2010 2011 2012 2013 2014

Bank lending survey results for Lithuania (net percentage)

Lending conditions Borrowing demand

Source: Bank of Lithuania.

Low financial leverage

increases resistance to

external shocks, but at the

cost of lower growth



According to the bank lending survey, in the beginning of 2014 lending conditions eased in three out of nine banks. However, at that time only one bank planned to ease lending conditions for business from April until October of this year. Other banks did not plan to change their lending conditions.

Alternative sources of finance are still very scarce

One of the reasons why, historically, companies invested less in Lithuania than in the other two Baltic countries might be a lack of external financing. The debt-to-income ratio of Lithuanian companies is one of the lowest in the EU. Moreover, companies claim that the efficiency of financial markets in Lithuania is less than in the other Baltic countries. According to the results of the World Economic Forum‟s global competitiveness index, there is less venture capital available in Lithuania than in Latvia or Estonia. Lithuania is in 91

st

place out of 144 countries in terms of ease of access to loans and 73rd

in terms of venture capital availability.

According to a survey of nonfinancial corporations by the Bank of Lithuania in the beginning of this year, 61% of companies finance their operations by using their own funds. Unfortunately, all three Baltic countries have very shallow capital markets. Last year, stock market turnover in Lithuania, Latvia, and Estonia was, respectively, only 0.3%, 0.1%, and 1.0% of GDP, compared with 40.6% of GDP

4 in the euro area. During the last few years,

more companies have decided to delist than to make an IPO. The inability to attract borrowed and equity capital in financial markets leaves companies too dependent on bank lending.

EU structural funds are an important source of funds as well. Therefore, it is important that the allocation of support would be transparent, and most productive investments would be financed.

Higher R&D expenditure could increase productivity

Investment in R&D is of a great importance for economies as it creates innovation. Research by M. Coccia (2007) that included EU members, candidate countries, Iceland, Norway, Switzerland, Japan, and the US shows that the returns to R&D expenditure are diminishing. This means that at some point the additional euro invested in R&D increases productivity by less than at lower levels of R&D. The study shows that the highest productivity growth is reached when gross domestic expenditure on R&D is at 2.3 - 2.6 % of GDP. The EU average, which is at 2.1% of GDP, is close to this level. Estonia‟s R&D expenditure is also close to this level – at 2.2% of GDP. However, Latvian and Lithuanian companies lag far behind the optimal level – their R&D expenditure is less than half of what could be expected. An increase in expenditure on R&D in these countries could be one of the shortcuts to higher productivity growth.

Even though Lithuania invests more in R&D than Latvia, the number of applications filed under the Patent Cooperation Treaty (PCT) per million of population in Lithuania during 2009-2010 was only 4.74 – the third lowest in the EU. This means that R&D expenditure in Lithuania is also less effective. However, there is little that policymakers could do to improve it. One of the reasons for the lower effectiveness of R&D spending might be lower FDI inflows and, therefore, fewer opportunities to benefit from technological transfer and other

4 Euro area data are for 2012.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Total R&D expenditure as % of GDP, 2012

Source: Eurostat

Venture capital, especially in

Lithuania, is scarce, and

capital markets are in their

infancy

Investments in R&D in Latvia

and Lithuania are alarmingly

low

Bank lending conditions

improved somewhat, but

banks remain wary



spillovers. R&D expenditure and its ability to create innovation can be increased by a general improvement in the investment climate (e.g., better institutional quality, more effective regulation, development of the financial markets, and a more flexible labour market) and cooperation between science institutions and business. However, Latvia and Lithuania also could increase their government procurement of advanced technology products as they both scores low in this area. According to the Global Competitiveness Report, Lithuania is 101

st and Latvia is 92

nd out of 144 in terms of government procurement

of advanced technology products. Estonia, on the other hand, is ranked 15th

and is well ahead of the other two Baltic countries. One reason why Estonia has invested so much in technology products is its specific development plans. For example, Estonia has a Development Plan for IT/Infosociety through 2020 and its implementation agenda. Estonia also has a list of other development plans that favour government investments in technology (an Estonian strategy for business growth, and a development plan for energy, for electricity, transport, etc.).

During the new Multiannual Financial Framework (2014–2020), Lithuania will receive EUR 6.7 billion in structural funds. The largest share – EUR 1.2 billion – will be invested in sustainable transport infrastructure, while energy efficiency and renewable energy will be supported with EUR 1 billion. The government plans to allocate EUR 0.8 billion to support environmental projects; EUR 0.7 billion will be spend for employment and labour market participation, and another EUR 0.7 billion is planned for support of R&D and innovation. EUR 0.5 billion will be allocated to strengthen competitiveness of small and medium-sized businesses. According to the Ministry of Economy, the new period will be different from 2007-2014 because a bigger part of the support will be allocated through financial products (loans, guarantees, venture capital funds, etc.) and less through direct subsidies. This should not disrupt competition as such subsidies and support can be used several times.

This Multinational Financial Framework is probably the last one in which Baltic countries will get substantial support from the EU; thus transparency and the efficient allocation of funds are crucial in order to accelerate the convergence of productivity and living standards.

Priorities of EU structural support millions of EUR 2014-2020

Sustainable development of transport infrastructure 1154

Energy efficiency and renewable energy 971

Environmental protection, sustainable use of natural resources and climate change 838

Employment and labour market participation 729

R&D and innovation 679

Education and higher potential of human resources 664

Social inclusion and fight against poverty 536

Competitiveness of small and medium businesses 532

Informational society 244

Technical support 213

Public administration 150

Source: Ministry of Finance

Priorities of EU structural support millions of EUR (values include co-financing) 2007-2013

Environment and sustainable development 1242

Development of trans-european transport network 1124

Urban and local development, cultural heritage and environmental preservation and tourism 1017

Quality and availability of public services 736

Business productivity and business environment 631

Economic infrastructure 601

R&D for higher competitiveness and growth of economy 562

Employment and social issues 478

Informational society 282

Lifelong learning 252

Technical support 180

Administrative skil ls and effectiveness of public administration 171

Developing skil ls of researchers 135

Source: www.esparama.lt

EU structural funds can help,

but their disbursement

should become more

transparent and efficient



Accumulated FDI in Lithuania is the lowest in the region

Lithuania lags behind Latvia and Estonia, as well as most of Europe, in terms of FDI. FDI stock was at 36.7% of GDP in Lithuania in 2012. This was the fifth worst result in the EU and the lowest among Central and Eastern European countries. For comparison, in Latvia FDI stock was at 46.4% of GDP and in Estonia at 84.2% of GDP in 2012.

The main strengths of the Baltic countries as FDI destinations are somewhat higher expected yields, sill lower costs, good location, and lower taxes (at least some of them). Their strategic location – between East and West – may however lose some of its importance if tensions and trade barriers between Russia and the EU are here to stay. Tax policy should remain FDI friendly, and all three Baltic countries could benefit from a lighter tax burden on labour – as wage costs increase, the tax wedge on labour could narrow. And there is always room to improve the investment climate – nothing chases away FDI as does corruption, bureaucracy, and unnecessary regulation.

The recent example of Lithuania‟s passing a law that imposes restrictions on local and foreign investors who want to buy farm-land is a good example how to achieve underinvestment. Some restrictions are preposterous – e.g., agricultural activities should be carried out for at least 5 years before the land (if the plot is larger than 10 hectares) can be sold again. Moreover, buyers have to have experience in agricultural activities or have education related to agriculture. True, this law affects only one small sector, but it sends a very negative signal to investors about possible hindrances in other areas as well.

Lower investments have already dented the potential growth of Baltic countries’ economies

Some of the potential growth in Baltic countries must have been lost due to the crisis. One of the reasons for this is structural unemployment, as some workers may not be able to return to the labour market because the economy has changed and their competence might not be needed anymore. For example, the construction sector is not likely to reach its pre-crisis level of production any time soon. Moreover, investment might stay depressed as lending conditions are stricter now than before the crisis and there is more uncertainty.

According to a European Commission study in 2009, projected potential output growth decreased from 5-6% before the crisis (during the period from 1999 to 2008) to 1-2% after the crisis (2009-2013). Now, according to the European Commission, potential GDP growth for 2014-2015 for the Baltics is estimated to be in the range of 2% to 4% approximately.

According to the Bank of Lithuania, during 2000–2008 average potential GDP growth in Lithuania was at 5.2%; it decreased to 1.1% in 2009-2012. The main reason for the lower potential growth was total factor productivity and stock of capital. The average capital contribution to potential GDP growth decreased from 3.8% during 2000–2008 to 1.2% from 2009 through 2012. According to the Bank of Lithuania, the investment fall was caused by lower investments in the construction sector, an increase in corporate bankruptcies, and stricter lending conditions.

Potential growth could decrease even further if investments remain too low. According to M. Buti and P. Mohl (2014), “a 5 percentage-point reduction in the investment rate leads to a

0

20

40

60

80

100

120

140

160

180

200

FDI stock, % of GDP in 2012

Source: Eurostat

Baltic countries are losing

their edge – FDI inflows are

likely to diminish; tax

systems, regulative burden

,and general investment

environment have to

improve faster

Loss of investments and

capital stock has a direct

negative impact on potential

growth



reduction in potential growth of nearly 0.5%.”5 The study suggests that a lack of investments

affects the short-term outlook via its impact on aggregate demand, and medium-term growth via its impact on capital stock. Medium-term productivity is affected ”through the diffusion of new technologies and innovation.”

Corporate taxation is most favourable in Estonia

One of the main determinants of FDI is the corporate tax rate. According to S. Raudonen and A. Freytag (2012), tax rate differentials are a strong driver of FDI inflows: The Baltic countries are effective in attracting FDI due to differences in the tax rates between investor and host country.” N. Nikula and M. Kotilainen (2012) also suggest that corporate taxation is one of the main factors for making an investment decision. Moreover, this is particularly important for developing countries with lower productivity levels because these countries compete more with other low-cost countries.

Estonia„s tax system is more favourable for investments as only distributed profits are taxed. A study by J. Masso et al. (2011) revealed that Estonia benefitted from corporate income tax reform and performed better than the other two Baltic countries. The study results show that investment growth after the profit tax reform was higher by 0.37 percentage points than in Lithuania and Latvia as a cumulative impact over four years. Labour productivity per employee grew by 13 percentage points more than in Lithuania and Latvia in four years after the reform. Another study by Võrk et al. (2010) found that the change in the corporate tax system in Estonia increased investments by 6-11.2%, consumption by 0.5-11.2%, and GDP by 1.9-4.9%. Moreover, tax losses from corporate taxes amounting to EUR 0.16 billion were at least partly compensated for by higher personal income tax revenue, which increased by EUR 19-38 million; social security tax income EUR, which rose by EUR 31-63 million; and VAT and excise duties, which rose by EUR 45-95 million--all in 1995 prices.

Lithuania introduced tax incentives for investments in 2008. Companies can reduce their payable profit tax up to 50% if they invest in technological improvements. Unfortunately, this exemption remains temporary (in 2013, it was extended until 2018) – the tax system would be more stable, predictable, and attractive for investments, if such sensible exemptions would be made permanent. There is also a tax exemption for investment in R&D. Some R&D expenses can be subtracted from income three times if R&D is or will be the companies‟ regular business from which income is earned. The current profit tax exemption costs the budget about LTL 120 million (EUR 35 million) in a year. Therefore, taxing only distributed profits must pay off through higher investment, productivity and employment growth. According to the State Tax Inspectorate, during 2009-2011 about 1,500 companies, which invested about LTL 1.9 billion (EUR 550 million), reduced their payable profits by using this exemption.

In Latvia, companies can reduce their profit tax by 25% of the investment value (if the investment value is between EUR 10 million and EUR 50 million) or 15% (if above EUR 50 million) if certain criteria are fulfilled (e.g.,, investment should be in prioritised industries, investment in building and structures should be no more than 40%, and it should be focused on new products or new areas). The final decision of whether a discount is applied is taken by the government (evaluated by the Ministry of Economy). For some fixed assets, higher depreciation rates are applied (thus reducing tax payments). For example, for new technological equipment (bought in 2009-2020) a tax depreciation coefficient of 1.5 can be used. A coefficient of 3 can be applied to R&D expenses (for labour costs and R&D services performed by scientific institutions).

Both Lithuania and Latvia have made appropriate attempts to implement investment-friendly profit tax exemptions, but the complexity and temporality of these exemptions make the system less attractive and less predictable (no one knows what will change after the new government takes office).

Some surveys indicate that government policies in Lithuania encourage the transferring of businesses abroad

According to a survey made by the Lithuanian Free Market institute, 70% of respondents claimed that during the last five years there have been more factors related to governance that encourages transferring part or the whole of their activities to other countries. The main reasons were hard-to-predict and fast-changing laws and the high level of bureaucracy.

Lithuanian direct investment abroad to professional, scientific, and technical activities (the establishment of holding companies is included in this category) increased from 8.8% of total investments in 2008 to 36.6% in 2013. Estonia was one of the main destinations, as 29.6% of the total investment in professional, scientific, and technical activities went there. Companies said that the taxation of reinvested profit and profit tax were the most important elements of the tax system when deciding to transfer their businesses. And, obviously, a

5 The estimations are based on an EA-12 sample.

Taxing distributed profits

only seems like a no-brainer,

but only Estonia does this

One of the most important

determinants of business

investments – stable and

predictable government

policies



business transfer (even if only in a form of a holding company) from Lithuania means lower tax revenues.

Uncertainty regarding economic policy is another important factor that may lead some companies to consider moving their activities abroad. For example, after the minimum wage was increased by 25% in 2013, most companies were not significantly affected. However, persistent calls by some of the government coalition members to raise the minimum wage by another 50% seem excessive and by no means can this be considered as justified or sustainable.

During the next decade, the Baltic companies are likely to increase their outflow FDI – small local markets, advanced know-how, and stronger brands will make them look for innovative ways (besides exports) to penetrate new markets. This is a natural and welcome development, but governments should not implement burdensome and erratic policies in an attempt to hasten this process.

Business environment can and should to be improved

The Baltic countries are amongst the 10 most business-friendly countries in the EU, according to the World Bank‟s Doing Business report. All three Baltic countries perform quite well in the registering property score in this report. Lithuania takes 2

nd place in the EU in

terms of registering property and Latvia and Estonia take 8th

and 4th places, respectively.

This means that it does not take much time or cost to register property. Dealing with construction permits is not too burdensome in the Baltic countries either. Lithuania is one of the three best performing countries in this area, and Latvia and Estonia take 8

th and 6

th

places, respectively, in the EU.

Lithuania also takes second place in the EU in terms of starting a business. There is no minimum paid in capital, and it takes only 3.5 days. Lithuania increased its score after introducing a new form of limited-liability company with no minimum capital requirement. Estonia is in third place in the EU in terms of trading across borders – exporting and importing goods is cost and time efficient.

But registering a company and starting a business is just one small step – it‟s nice if this is quick and cheap, but this has little to do with overall business efficiency and competitiveness. A Doing Business ranking indicates that there are a number of important

weaknesses that need to be addressed, e.g., resolving insolvency and protecting minority investors. Getting electricity is a problem in Lithuania and Latvia. In Lithuania, it takes longer than in most of the other EU countries, and in Latvia and Estonia it is relatively costly. Estonia takes only 14th place in the EU in terms of enforcing contracts. The number of its procedures is higher than in most other EU countries.

Austria

Belgium

Croatia

Denmark

Estonia

Finland

France

Germany

Greece

Ireland

ItalyLatvia

Lithuania

Luxembourg

Netherlands

Poland

Portugal

Slovak Republic

Slovenia

Spain

Sweden

UK

Austria

Belgium

Bulgaria

Croatia

Cyprus

Denmark

Estonia

Finland

France

Germany

Greece

Ireland

Italy

Latvia

Lithuania

Malta

Poland

Portugal

Romania

Slovenia

SpainSweden

UK

Austria

Belgium

Bulgaria

Croatia

Cyprus

Czech Republic

Denmark

Estonia

Finland

France

Germany

Greece

Hungary

IrelandItaly

Latvia

Lithuania

Luxembourg

Netherlands

Poland

Portugal

Romania

Slovak Republic

Slovenia

SpainSweden

UK

0

20

40

60

80

100

120

Doing business rankings 2015

Source: Doing business 2015

Getting electricity

22nd in the EU

Protecting minority investors

23th place in the EU

Resolving insolvency


World Bank’s doing business

index shows that it is relatively

easy to do business in Baltic

countries



According to the World Economic Forum‟s global competitiveness ranking, Lithuania lags behind the other Baltic countries in terms of labour market regulation, taxation, and burden of government regulation (which probably also reflects respondents‟ perception of corruption). Lithuania is one of the 40 worst performers in the world in terms of redundancy costs and the effect of taxation on incentives to invest, and one of the 20 worst performers in terms of hiring-and-firing practices. A World Economic Forum executive opinion survey showed that Lithuania is also one of the 40 worst performers in terms of the burden of government regulation and one of the 60 worst in terms of wastefulness of government spending. The survey also showed that Lithuania is weak in terms of the prevalence of trade barriers and of foreign ownership, the business impact of rules on FDI, cooperation in labour-employer relations, and soundness of banks.

Austria

Croatia

Denmark

Estonia

Finland

France

Germany

Greece

Ireland

Latvia

Luxembourg

Poland

Portugal

Slovenia

Spain

Sweden

UK

Austria

Belgium

Bulgaria

Cyprus

Denmark

France

Ireland

Italy

Latvia

Poland

Romania

Slovenia

Spain

Sweden

UK

Austria

Belgium

Bulgaria

Czech Republic

Denmark

Estonia

Finland

France

Germany

IrelandItaly

Latvia

Netherlands

Poland

Portugal

Slovak RepublicSpain

SwedenUK

0

10

20

30

40

50

60

70

80

90

100


Source: Doing Business 2015

Getting electricity Resolving insolvency



Protecting minority investors


Austria

Belgium

BulgariaCyprus

Denmark

Estonia

France

Germany

Ireland

Italy

Latvia

Malta

Poland

Portugal

Romania

Slovenia

Spain

Sweden

UKAustria

Belgium

Estonia

Finland

FranceGermany

Hungary

IrelandLatviaLithuania

Luxembourg

Netherlands

Portugal

Sweden

AustriaBelgium

Czech Republic

Denmark

Estonia

Finland

France

Germany

Ireland

Italy

Netherlands

Poland

Portugal

Slovak Republic

Spain

Sweden

UK

0

10

20

30

40

50

60


Source: Doing Business 2015

Resolving insolvencyProtecting minority investors



Enforcing contracts


WEF Global competitiveness

report is a handy recipe for

reform



Latvia lags behind other Baltic countries in terms of quality of roads, financing through local equity markets, and quantity of social suppliers.

Estonia lags behind other Baltic countries in terms of primary education enrolment, quality of air transport infrastructure, internet bandwidth, and value chain breadth.

Wastefulness of gov't spending

Burden of gov't regulation

Eff iciency of legal f ramework in

challenging regs.

Protection of minority shareholders' interests

Available airline seat

Ef fect of taxation on incentives to invest

Total tax rate, % of prof its

Prevalence of trade barriers

Prevalence of foreign ownership

Business impact of rules on FDI

Buyer sophistication

Cooperation in labour-employer relations

Hiring and f iring practices

Redundancy costs

Ef fect of taxation on incentives to work

Country capacity to retain talent

Country capacity to attract talent

Ease of access to loans

Soundness of banks

State of cluster development

Gov't procurement of advanced tech products

84

94

104

114

124

134

144

Lithuania's weaknesses: position among 144 countries, selected criteria

Goods market efficiency Labour market efficiency

Business sophistication

Institutions InnovationFinancial market development

Bo

tto

m40

Bo

tto

m20

Bo

tto

m60

Source: WEF Global competitiveness report 2014-2015.

Infrastructure

Eff iciency of legal f ramework in settling

disputes

Eff iciency of legal f ramework in

challenging regs.

Protection of minority shareholders' interests

Quality of roads


HIV prevalence

Buyer sophistication

Effect of taxation on incentives to work



Financing through local equity markets

Ease of access to loans

Domestic market size

GDP (PPP$ billions)

Local supplier quantity


Gov't procurement of advanced tech

products

Availability of scientists and

engineers

84

89

94

99

104

109

114

119

124

Latvia's weaknesses: position among 144 countries, selected criteria


Goods market efficiency

Labour market efficiency

Financial market development

Business sophisticationInstitutions

InnovationInfrastructure Market size

Bo

tto

m 6

0B

ott

om

40

Health and primary

education



All three countries have a poor capacity to retain and attract talent. This is mainly due to wage differentials between Baltic countries and other more developed European countries. This results in higher emigration and a decreasing labour force. The state of cluster development is not sufficient as well. More developed clusters would support innovation. A problematic area in all countries is the availability of airline seats and buyer sophistication.

The efficiency of the legal framework and protection of minority shareholders‟ interests are poor in Latvia and Lithuania. The effect of taxation on incentives to work and ease of access to loans are evaluated negatively as well. Latvia and Lithuania also lag behind Estonia is terms of government procurement of advanced technology products. Lithuania and Estonia lag behind Latvia in terms of total tax rate, although in general all three Baltic countries lack tax competitiveness. Estonia and Latvia lag behind Lithuania in terms of HIV prevalence, domestic market size, GDP, and availability of scientists and engineers.

So, what next?

All three Baltic countries would benefit from higher investments, but the greatest benefits could be reaped in Lithuania and Latvia, since current investments and accumulated capital are lower in these countries. Lithuania ranks lowest in gross fixed capital formation, investment into efficiency, FDI stock, and patent numbers amongst the Baltic countries. Furthermore, the need to increase productivity through investments is underlined in Lithuania by the most rapidly aging population in Europe. Too-low investment might impede competitiveness and productivity, and employment growth and decrease the potential growth of the economy even more. Even though investments recently have recovered, measures should be taken to make investing in Lithuania more attractive to local and foreign investors.

Research suggests that one of the most effective ways to increase investments is not to tax the reinvested profit. Even better – Lithuania and Latvia could follow the Estonian example and only tax profits when they are distributed to shareholders. This would make Lithuania more attractive for FDI as well. Studies and the Estonian example show that this would increase investments, which is one of the main productivity drivers.

Lithuania, as well as the other Baltic countries, has one of the lowest capital taxation rates in the EU, but labour taxation is relatively high, especially compared to non-EU countries. This creates a higher unemployment trap, discourages work, and encourages unreported remuneration. Although high taxes on labour may encourage companies to substitute labour with physical capital and invest more, this is possible only to some extent and only with low-skill routine jobs. Such a substitution would be welcome and increase business‟ competitiveness, but it would probably also increase the already high natural level of unemployment.

Tax-exempt income was somewhat increased in Lithuania; however, a more substantial rise is needed. An upper limit for social security contributions would also relieve the burden for highly skilled workers and encourage the creation of such jobs (Latvia reintroduced such ceilings in 2014 – social contributions are not imposed on wages above EUR 46,400). Lower labour taxes would probably help to reduce the size of the shadow economy. It is estimated

Quality of air transport inf rastructure


Inf lation

HIV prevalence

Primary education enrollment

Total tax rateBuyer sophistication



Internet bandwidth

Domestic market size

Foreign market size

GDP (PPP$ billions)


Value chain breadth

Availability of scientists and

engineers

64

74

84

94

104

114

124

Estonia's weaknesses: position among 144 countries, selected criteria


Goods market efficiency

Labour market efficiency Business

sophistication

Infrastructure InnovationHealth & primary ed.

Market size

Bo

tto

m40

Bo

tto

m60

Bo

tto

m80

Macroeconomic environment

Technological readiness

Profit taxation has many

flaws

Large tax wedge on low

earners creates both

economic and social

problems



that approximately one-fifth of the Lithuanian labour market is in the shadow.6 On the other

hand, Lithuania and Latvia already has one of the lowest in the EU general government revenues as a percent of GDP. A significant cut in the tax wedge on labour would decrease budget revenues and could result in inadequate investments in infrastructure, education, and health. Therefore, decisions to lower labour taxation should be followed by a more efficient use of public funds, a combating of the shadow economy, and the introduction of taxes, which have a less negative effect on economic activity. Residential real estate or personal car taxes have relatively little distortion to economic activity, are easy to collect, and difficult to evade. Lithuania and Latvia already have residential real estate taxes, but in Lithuania only very expensive real estate is taxed – only the value that exceeds the EUR 290 million threshold is taxed with a 1% tariff. According to the State Tax Inspectorate, only EUR 1.4 million and EUR 1.2 million were collected in 2012 and 2013, respectively. There is a plan to decrease the threshold from EUR 290 million to LTL 217 million as of 2015, and to cut the tax tariff from 1% to 0.5%. The changes are unlikely to substantially affect budget revenues. In Latvia, the tax is more effective as its base is broader. The tariff is calculated as a share of the cadastral value of the real estate, ranging from 0.3% to 0.6% depending on the value of the real estate.

In 2009, Estonia passed a law that increased the flexibility of the labour market by reducing the costs of terminating a contract.

7 Estonia is the 12

th in the world in terms of hiring-and-

firing practices, according to the Global Competitiveness Report. However, Lithuania is one of the worst performers and takes only 125

th place in terms of hiring-and-firing practices.

Lithuania and Latvia score low in the effect of taxation on incentives to work. In the Global competitiveness Report, Lithuania takes 124

th place and Latvia – 103

rd.

In Lithuania, the labour market is not effective enough due to rigid regulation and high labour taxation. An IMF study

8 showed that greater labour market flexibility decreases

unemployment. Moreover, hiring-and-firing regulations have the strongest effect. Therefore, Lithuania should consider changing its strict rules on firing. An employer has to give a two-to-four months notice before firing an employee, whereas, e.g., in Latvia, only one month is required.

Long notice periods and high severance pay force businesses to be more cautious about hiring new employees, especially during times of high uncertainty. More flexibility in the labour market would allow companies to adjust to changing conditions faster and, therefore, make them more competitive; Lithuania would become more attractive to foreign investors as well. In June, the Lithuanian Parliament approved changes to the Labour Code, which, according to "Invest Lithuania" will ease the administrative burden up to 80%. Employers will be allowed not to use paper-based record books of employment, certificates of employment of prescribed form, and paper-based working-time schedules. A standardised form of the employment contract will no longer be mandatory but will serve as a guidance indicating only the parts of the contract that are mandatory. The employer will also be able to issue electronic pay slips and work schedules instead of paper-based ones. Employers will also be able to decide themselves about the form and necessity of certificate of employment. Now time records may be electronic and less strict in form. The government plans to further modernise labour market regulation. The current changes are a significant step forward in easing the administrative burden for businesses and improving the business environment. However, further changes are needed in order to make hiring-and-firing practices more flexible and not weigh on employment growth.

The lack of alternative sources of finance is another important bottleneck that stifles the growth of investments, especially in SMEs. There are ways to pep up Baltic capital markets, e.g., by listing a fraction of the shares of state-owned enterprises (SOEs).. A greater capitalisation of the stock market would attract more investors (including, perhaps, local

6 A survey by the Lithuanian Free Market Institute at

http://www.lrinka.lt/n/index.php/menu/newsroom/press_releases/one_fifth_of_lithuanian_labour_mar

ket_is_undeclared/5951 7 The notice period was reduced as was the amount paid in severance payments. The notice period

and severance pay depend on the length of tenure with the present employer. Before 2009, the notice

period for a person with tenure up to 1 year was 2 months; now - 15 days. The severance pay

decreased from 2 monthly-average wages to 1 monthly-average wage. For a tenure of 1 to 3 years, the

notice period decreased from 2 months to 30 calendar days, and the severance pay from 2 monthly-

average wages to 1 monthly-average wage. For a tenure of 4 to 5 years, the notice period decreased

from 2 months to 30 calendar days, and the severance pay from 2 monthly-average wages to 1

monthly-average wage. For a tenure of 6 to 10 years the notice period decreased from 3 months to 60

calendar days, and the severance pay from 3 monthly- average wages to 1 monthly-average wage,

plus 1 monthly-average wage from unemployment insurance pay. 8 https://www.imf.org/external/pubs/ft/wp/2012/wp1264.pdf

Labour markets should

become more flexible

Restricted funding is another

bottleneck

A drop in budget revenues as

a share of GDP would not be

welcome, but lower labour

taxes can be substituted by

property taxes



pension funds) and provide an alternative and more viable source of capital – not only for SOEs, but also for private companies.

9

Going forward, the quality of education will become even more important. Aging populations and a shrinking labour force will require best matches of skills between demanded and supplied. Technological progress, digitalisation, and computerisation are changing the job market – many routine jobs will be lost during the next decade. IDC, a technology research firm, predicts that 60% of the most popular jobs at the beginning of the next decade do not exist today. This means that education systems have to adapt accordingly. Cognitive skills – creativity, decision making, problem identification, and problem solving – and life-long learning will become much more important than memorising facts.

More efficient government spending and regulation would also improve the investment climate. More efficient use of public resources would relieve the tax burden. A higher quality of public services could also increase the willingness to pay taxes and shrink the shadow economy. More efficient business regulation would make complying with regulations less burdensome.

In Estonia, businesses claim that government regulation is not a burden for them, and this is one of the competitive strengths of the Estonian economy. Lithuania is one of the 24 countries with the most friendly business environment, according to a Doing Business report. However, in Latvia and, especially, Lithuania, the burden of government regulation is one the weaknesses, according to the Global Competitiveness Report. Latvia is the 75

th and

Lithuania – the 105th according to the burden of government regulation. Estonia is one of the

10 countries in the world with the lightest regulatory burdens. Lithuania and Latvia should

eliminate all unnecessary procedures, that increase the burden, but are not essential.

Finally, stable, transparent, and predictable government policies are one of the most important ingredients when it comes to stimulating domestic and foreign investments. Erratic and unjustified changes in economic policy create unnecessary uncertainty, deter investments, and encourage the transferring of business to other countries. At least, this principle can become a common understanding and a guiding principle of all Baltic governments.

Vaiva Šečkutė

Nerijus Mačiulis

Literature

1. Avarmaa M. (2011). Does Leverage Affect Company Growth in the Baltic Countries? Available at: http://www.ipedr.com/vol21/18-ICIF2011-F10014.pdf

2. Bank of Lithuania. Lithuanian economic review. Available at: http://www.lietuvosbankas.lt/lithuanian_economic_review_february_2013

3. Buti M., Mohl P. (2014). Lacklustre investment in the Eurozone: Is there a puzzle? Available at: http://www.voxeu.org/article/raising-investment-eurozone

4. Coccia M. (2007). What is the optimal rate of R&D investment to maximize productivity growth? National Research Council of Italy and Max Planck Institute of Economics, Germany. Available at: http://www.fep.up.pt/conferencias/eaepe2007/papers%20and%20abstracts_cd/coccia.pdf

5. Economic Crisis in Europe: Causes, Consequences and Responses. European economy 7|2009. Available at: http://ec.europa.eu/economy_finance/publications/publication15887_en.pdf

6. Invest Lithuania press release. Available at: http://www.investlithuania.com/lt/infocentras/biblioteka/leidiniai/visuomenes-nuomones-tyrimas-del-darbo-santykiu-reguliavimo

9 We have proposed game-changing reforms in our most recent Baltic Sea Region Report:

http://www.swedbank-research.com/english/baltic_sea_region_report/2013/11/28/index.csp

Inefficient and sometimes

nontransparent government

spending fosters shadow

economy and depresses tax

revenues

Burden of regulation should

not be excessive – sometimes

less is more

The economy is undergoing

massive transformation--so

should education systems

http://www.lietuvosbankas.lt/lithuanian_economic_review_february_2013

http://www.fep.up.pt/conferencias/eaepe2007/papers%20and%20abstracts_cd/coccia.pdf

http://www.fep.up.pt/conferencias/eaepe2007/papers%20and%20abstracts_cd/coccia.pdf

http://ec.europa.eu/economy_finance/publications/publication15887_en.pdf

http://www.investlithuania.com/lt/infocentras/biblioteka/leidiniai/visuomenes-nuomones-tyrimas-del-darbo-santykiu-reguliavimo

http://www.investlithuania.com/lt/infocentras/biblioteka/leidiniai/visuomenes-nuomones-tyrimas-del-darbo-santykiu-reguliavimo

http://www.swedbank-research.com/english/baltic_sea_region_report/2013/11/28/index.csp



7. Invest Lithuania press release. Available at: http://www.investlithuania.com/lt/infocentras/sc/naujienos/categoryView/investicine-aplinka/priimti-darbo-kodekso-pakeitimai-leisiantys-sutaupyti-milijonus-litu

8. Investment plan of 2014-2020 EU structural funds program. Available at: http://www.google.lt/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CDIQFjAA&url=http%3A%2F%2Fwww.esparama.lt%2Fes_parama_pletra%2Ffailai%2Ffm%2Ffailai%2FES_paramos_ateitis%2FVeiksmu_programos_projektas_2014_01_30.doc&ei=uqp8U5alNvPsygOY2YCoBw&usg=AFQjCNGrd4721ALjUBV-LKD4dRyw5kqJrg

9. Lorenzo E. Bernal-Verdugo L.E, Furceri D., Guillaume D. (2012). Labor Market Flexibility and Unemployment: New Empirical Evidence of Static and Dynamic Effects. IMF Working Paper. Available at: https://www.imf.org/external/pubs/ft/wp/2012/wp1264.pdf

10. Masso J., Meriküll J., Vahter P. (2011). Gross profit taxation versus distributed profit taxation and form performance: effects of Estonia„s corporate income tax reform. The University of Tartu Faculty of Economics and Business Administration Working Paper No. 81-2011

11. Ministry of Economy press release. Available at: http://www.ukmin.lt/web/lt/naujienos/naujienos/ukio_ministras_e_gustas_susitikime_su_verslo_asociacijomis_aptare_20142020_m_europos_sajungos_paramos_prioritetus_

12. Nikula N., Kotileinen M. (2012). Determinants for foreign direct investments in the Baltic Sea Region. Available at: http://www.etla.fi/wp-content/uploads/ETLA-Raportit-Reports-1.pdf

13. Raudonen S., Freytag A. (2012). Determinants of FDI inflows into the Baltic countries: Empirical evidence from a gravity model. Available at: http://zs.thulb.uni-jena.de/servlets/MCRFileNodeServlet/jportal_derivate_00228390/wp_2012_060.pdf

14. Rekašius. L. (2014). Lietuvos ekonomikos tyrimas 2013/2014 (2). Lithuanian free market institute. Available at: http://files.lrinka.lt/LET2013_2014_2/LET33.pdf

15. Võrk A., Jürgenson A., Kaarna R., Kuusk K., Sein K. (2010). Zero tax rate on corporate retained earnings – the impact on investment and economic development (Ettevõtete jaotamata kasumi mittemaksustamise mõju investeeringutele ja majandusarengule). Praxis Center for Policy Studies, Tartu University and law firm ”Glimstedt”.

http://www.google.lt/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CDIQFjAA&url=http%3A%2F%2Fwww.esparama.lt%2Fes_parama_pletra%2Ffailai%2Ffm%2Ffailai%2FES_paramos_ateitis%2FVeiksmu_programos_projektas_2014_01_30.doc&ei=uqp8U5alNvPsygOY2YCoBw&usg=AFQjCNGrd4721ALjUBV-LKD4dRyw5kqJrg





https://www.imf.org/external/pubs/ft/wp/2012/wp1264.pdf

http://www.ukmin.lt/web/lt/naujienos/naujienos/ukio_ministras_e_gustas_susitikime_su_verslo_asociacijomis_aptare_20142020_m_europos_sajungos_paramos_prioritetus_



http://files.lrinka.lt/LET2013_2014_2/LET33.pdf



General disclaimer

This research report has been prepared by analysts of Swedbank Large

Corporates & Institutions’ Macro Research department. The Macro

Research department consists of research units in Estonia, Latvia,

Lithuania, Norway and Sweden, and is responsible for preparing reports

on global and home market economic developments.

Analyst’s certification

The analyst(s) responsible for the content of this report hereby confirm

that notwithstanding the existence of any such potential conflicts of

interest referred to herein, the views expressed in this report accurately

reflect their personal and professional views.

Research reports are independent and based solely on publicly available

information.

Issuer, distribution & recipients

This report by Swedbank Large Corporates & Institutions Macro

Research department is issued by the Swedbank Large Corporates &

Institutions business area within Swedbank AB (publ) (“Swedbank”).

Swedbank is under the supervision of the Swedish Financial

Supervisory Authority (Finansinspektionen).

In no instance is this report altered by the distributor before distribution.

In Finland this report is distributed by Swedbank’s branch in Helsinki,

which is under the supervision of the Finnish Financial Supervisory

Authority (Finanssivalvonta).

In Norway this report is distributed by Swedbank’s branch in Oslo,

which is under the supervision of the Financial Supervisory Authority of

Norway (Finanstilsynet).

In Estonia this report is distributed by Swedbank AS, which is under the

supervision of the Estonian Financial Supervisory Authority

(Finantsinspektsioon).

In Lithuania this report is distributed by “Swedbank” AB, which is

under the supervision of the Central Bank of the Republic of Lithuania

(Lietuvos bankas).

In Latvia this report is distributed by Swedbank AS, which is under the

supervision of The Financial and Capital Market Commission (Finanšu

un kapitala tirgus komisija).

In the United States this report is distributed by Swedbank First

Securities LLC ('Swedbank First'), which accepts responsibility for its

contents. This report is for distribution only to institutional investors.

Any United States institutional investor receiving the report, who wishes

to effect a transaction in any security based on the view in this

document, should do so only through Swedbank First. Swedbank First is

a U.S. broker-dealer, registered with the Securities and Exchange

Commission, and is a member of the Financial Industry Regulatory

Authority. Swedbank First is part of Swedbank Group.

For important U.S. disclosures, please reference:

http://www.swedbankfs.com/disclaimer/index.htm

In the United Kingdom this communication is for distribution only to

and directed only at "relevant persons". This communication must not

be acted on – or relied on – by persons who are not "relevant persons".

Any investment or investment activity to which this document relates is

available only to "relevant persons" and will be engaged in only with

"relevant persons". By "relevant persons" we mean persons who:

Have professional experience in matters relating to investments

falling within Article 19(5) of the Financial Promotions Order.

Are persons falling within Article 49(2)(a) to (d) of the Financial

Promotion Order ("high net worth companies, unincorporated

associations etc").

Are persons to whom an invitation or inducement to engage in

investment activity (within the meaning of section 21 of the

Financial Services and Markets Act 2000) – in connection with the

issue or sale of any securities – may otherwise lawfully be

communicated or caused to be communicated.

Limitation of liability

All information, including statements of fact, contained in this research

report has been obtained and compiled in good faith from sources

believed to be reliable. However, no representation or warranty, express

or implied, is made by Swedbank with respect to the completeness or

accuracy of its contents, and it is not to be relied upon as authoritative

and should not be taken in substitution for the exercise of reasoned,

independent judgment by you.

Opinions contained in the report represent the analyst's present opinion

only and may be subject to change. In the event that the analyst's

opinion should change or a new analyst with a different opinion

becomes responsible for our coverage, we shall endeavour (but do not

undertake) to disseminate any such change, within the constraints of any

regulations, applicable laws, internal procedures within Swedbank, or

other circumstances.

Swedbank is not advising nor soliciting any action based upon this

report. This report is not, and should not be construed as, an offer to sell

or as a solicitation of an offer to buy any securities.

To the extent permitted by applicable law, no liability whatsoever is

accepted by Swedbank for any direct or consequential loss arising from

the use of this report.

Reproduction & dissemination

This material may not be reproduced without permission from

Swedbank Large Corporates & Institutions. This report is not intended

for physical or legal persons who are citizens of, or have domicile in, a

country in which dissemination is not permitted according to applicable

legislation or other decisions.

Produced by Swedbank Large Corporates & Institutions.

Address Swedbank LC&I, Swedbank AB (publ), SE-105 34 Stockholm.

Visiting address: Landsvägen 42, Sundbyberg

http://www.swedbankfs.com/disclaimer/index.htm

swedbank analysis · baltic economies have recovered quickly, but investments remain behind the...

Documents