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Europe > Latvia, Republic of

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Cover IMF Working Papers
Competitiveness and Productivity in the Baltics: Common Shocks, Different Implications
Saioa Armendariz
,
Carlos de Resende
,
Alice Fan
,
Gianluigi Ferrucci
,
Bingjie Hu
,
Sadhna Naik
, and
Can Ugur
This paper examines competitiveness and productivity in the Baltics. Focusing on recent developments, it asks why Russia’s war in Ukraine led to a prolonged recession and strong decline in competitiveness in Estonia, while Latvia and Lithuania shielded their economies more effectively. The paper starts by documenting a deterioration in export performance across the region. Using a constant share decomposition, it finds that, unlike in Latvia and Lithuania, Estonia’s declining export share has been mainly linked to a reduction in the ‘intensive margin’—a sign of weakening external competitiveness and declining relative productivity. Multivariate filtering techniques and estimates of the real effective exchange rates based on historical productivity trends, consistent with Balassa-Samuelson, confirm that differences in long-term total factor productivity growth have affected external competitiveness. While Estonia’s post-GFC slowdown in productivity growth and real exchange rate appreciation have eroded its competitive edge, Latvia and Lithuania have shown greater resilience, aided by more balanced real effective exchange rates and, for Lithuania, stronger corporate balance sheets. A micro-econometric analysis further reveals that resource misallocation, particularly in the services sector, has been a key driver of declining productivity in the region. These findings underscore the need for targeted reforms to improve allocative efficiency, boost productivity, and restore competitiveness in the Baltic region.
Keywords:
Export shares; Competitiveness; Productivity; Baltics; export share; productivity in the Baltic; resource misallocation; productivity trend; TFP dynamics; TFP deceleration; Total factor productivity; Real effective exchange rates; Real exchange rates; Global
Cover IMF Working Papers
Shocked: Electricity Price Volatility Spillovers in Europe
Serhan Cevik
and
Yueshu Zhao
European electricity markets are in the midst of unprecedented changes—caused by Russia’s invasion of Ukraine and the rise of renewable sources of energy. Using high-frequency data, this paper investigates volatility spillovers across 24 countries in the European Union (EU) during the period 2014–2024 to provide a better understanding of the transmission of risks in an international context. We develop both a static and a dynamic assessment of spillover effects and directional decomposition between individual countries. Our main findings show that about 73 percent of the forecast error variation is explained by cross-variance shares, which means only 27 percent can be attributed to shocks within each country. In other words, cross-border volatility spillovers dominate the behavior in national electricity markets in Europe—and this effect has grown over time. We also implement an augmented gravity model of bilateral volatility spillovers across power markets in the EU. Altogether, these results provide important insights to policymakers and regulators with regards to greater integration of electricity markets and infrastructure improvements that would also help with the transition to low-carbon sources of power generation and strengthen energy security in Europe.
Keywords:
Electricity prices; Volatility; Spillovers; Gravity model; Renewable energy; Electricity market reform; Europe; volatility spillover; spillover effect; markets in the EU; electricity market; Electricity; Gravity models
Cover IMF Staff Country Reports
Republic of Latvia: Selected Issues
International Monetary Fund. European Dept.
This paper assesses recent developments in Latvia’s competitiveness and productivity in the context of Baltic economies. Latvia’s export market share has declined in recent years reflecting weakening external demand and the effects of EU trade sanctions, but only limited loss of competitiveness. Latvia faces weakening competitiveness. Latvia’s real effective exchange rate appreciation in recent years has been greater than that implied by its productivity trend, so the economy faces a narrowing competitiveness buffer. Latvia’s total factor productivity growth boost post-global financial crisis is unlikely to be sustained without structural reforms and efforts to increase capital investment. A decade-long weak investment, large infrastructure gaps, aging and emigration, and insufficient accumulation in skills weigh on Latvia’s productivity growth and competitiveness. These also pose risks that Lavia could be caught in a middle-income trap with low growth and slow convergence to euro area income level. Therefore, Latvia requires significantly higher investment for sustained convergence. In order to preserve Latvia’s competitiveness and build more resilience against future shocks, it is key to promote productivity growth via structural reforms and capital investment. Boosting productivity is also needed to meet challenges presented from Russia’s war in Ukraine and the ongoing transitions to sustain income convergence.
Keywords:
labor productivity growth; D. allocative efficiency; export share decline; D. Latvia's productivity growth; B. CSA Decomposition; Total factor productivity; Productivity; Labor productivity; Real effective exchange rates; Baltics; Europe
Cover IMF Staff Country Reports
Republic of Estonia: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper explains Estonia’s recent losses of export market shares. Estonia’s export market share has fallen sharply, signalling that exporters have difficulties to keep up with foreign competition. While the immediate cause of this decline can be traced back to an adverse combination of external shocks triggered by the war in Ukraine, signs of faltering export performance surfaced already in the aftermath of the global financial crisis, and thus predate recent shocks. Using a constant share decomposition, this paper shows that, unlike in Latvia and Lithuania, a significant portion of the decline in Estonia’s export share can be attributed to the ‘intensive margin’, i.e., a shrinking share of Estonia’s exports in the main destination markets—a sign of weakening external competitiveness and declining relative productivity. A few high-level policy implications can be drawn. Addressing the erosion of external competitiveness will require structural reforms aimed at enhancing productivity, removing impediment to a structural transformation of the economy toward more technologically intensive and higher value-added products and services, as well as efforts to ensure that real wage growth remains closely aligned with productivity growth. By addressing these underlying challenges, Estonia can restore external competitiveness and ensure continued convergence toward the income levels of EU most advanced economies and Nordic neighbors.
Keywords:
labor market liberalization; Within-Sector allocative efficiency; export market share; export share decline; TFP dynamics; Estonia's government spending; tax revenue-to-GDP ratio; Total factor productivity; Exports; Capital adequacy requirements; Productivity; Baltics; Global; Europe
Cover IMF Working Papers
Is Inflation Good for Business? The Firm-Level Impact of Inflation Shocks in the Baltics, 1997-2021
Serhan Cevik
,
Alice Fan
, and
Sadhna Naik
Using a large panel of firm-level data, this paper provides an analysis of how inflation shocks in the Baltics between 1997 and 2021 affected total factor productivity (TFP), gross profitability, and net fixed investment in nonfinancial sectors. First, we find that inflation and inflation volatility had mixed effects on TFP growth, profitability and net fixed investment in the first year as well as over the medium term, albeit at a dissipating rate. Second, focusing on subsamples, we find that inflation shocks had differential effects on large versus small firms. Third, we explore sectoral heterogeneity in how firms responded to inflation shocks and observe significant variation across tradable and non-tradable sectors. Finally, estimates from a state-dependent model suggest that firms’ response to inflation shocks varied with the state of the economy. The results suggest that nonfinancial firms in the Baltics have been agile in adjusting to inflation shocks, possibly by either transferring higher production costs to consumers or substituting inputs. Given the differences in the level and nature of the recent inflation shock and the sample period on which our analysis is based, empirical findings presented in this paper might not necessarily apply to the latest bout of inflation in the Baltics.
Keywords:
Inflation; firm performance; productivity; profitability; fixed investment; Baltics; Estonia; Latvia; Lithuania; inflation shock; inflation volatility; IMF working paper No. 24/43; nonfinancial firm; impact of inflation; affected total factor productivity; Total factor productivity; Economic recession
Cover IMF Working Papers
Far More Than a Shot in the Arm: Vaccines and Consumer Spending
Mr. Serhan Cevik
The spread of the COVID-19 pandemic and government interventions have reshaped economic activity with abrupt changes in household consumption behavior across the world. This paper provides an empirical investigation of how the COVID-19 vaccine rollout has affected consumer spending at daily frequency using debit and credit card transactions in three European countries. Empirical results show that COVID-19 vaccinations, along with other policy interventions, have mitigated the severe negative impact of the pandemic and boosted consumer spending. First, the vaccination deployment has a statistically and economically significant positive effect on private consumption. Second, other policy responses to the pandemic—designed to contain the spread of the virus and provide support to businesses and households—have significant effects on the amount and composition of debit and credit card transactions. Third, the impact of COVID-19 vaccinations in terms of stimulating consumer spending appears to be more pronounced on contact-intensive sectors such as services than goods.
Keywords:
Pandemic; COVID-19; vaccination; household behavior; consumer spending; card transactions; Baltics; Estonia; Latvia; Lithuania; vaccine rollout; credit card transactions; vaccination deployment; government intervention; vaccination effort; Consumer credit; Household consumption
Cover IMF Staff Country Reports
Republic of Latvia: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper analyses the implications of global value chains (GVC) participation for Latvia’s competitiveness and exposure to risks. Using a structural model, it assesses Latvia’s competitiveness through different real effective exchange rate (REER) measures and examines the main factors behind differences in the measures. Based on this analysis, the paper suggests policy options to strengthen Latvia’s competitiveness. The paper also estimates the impact of an appreciation of the GVC related REER measure on value added export growth and real GDP growth, and finds sizable effects, suggesting that a rapid labor market tightening could lead to erosion in competitiveness and reduction in growth. Finally, trade tension induced tariff hikes may have significant cost for Latvia, especially in terms of value added produced in the country. Trade tension induced tariff hikes are likely to have moderate costs for Latvia in terms of value added produced in the country. In this regard, policies aimed at enhancing product sophistication or quality and export market diversification could mitigate Latvia’s exposure to trade shocks in GVCs.
Keywords:
ISCR; CR; firm; zombie firm; VA REER appreciation; REER index; firm gain; GVC participation; micro firm; value-added REER; Productivity; Anti-money laundering and combating the financing of terrorism (AML/CFT); Total factor productivity; Real effective exchange rates; Currencies; Global; Europe; Baltics; Western Europe; Asia and Pacific
Cover IMF Staff Country Reports
Republic of Latvia: Selected Issues
International Monetary Fund. European Dept.
This paper discusses potential growth and its drivers for Latvia 6 years after the growth turnaround and presents projections for the medium term. As the labor force is projected to decline, implementation of policies to increase investment and support total factor productivity (TFP) growth will be essential to ensure income convergence going forward. The level of potential growth has direct consequences for Latvia’s convergence path. Latvia’s GDP per capita was about 62 percent of the EU-15 average in 2015. A better understanding of potential output is important for policy setting. For example, an estimate of the output gap enters the fiscal reaction function through the cyclical adjustment of the fiscal balance and therefore directly influences policy makers’ assessments of whether fiscal policy should respond to deviations from potential. Potential output is an elusive concept and can be defined in various ways. Potential output is generally defined according to the Okun concept as the level of output consistent with stable inflation, while short-run deviations of actual from potential output, due to the slow adjustment of wages and prices to shocks, reflect the output gap—or economic slack.
Keywords:
ISCR; CR; Latvia; capital stock; support total factor productivity; IMF staff calculation; statistics Latvia; PF approach; imputed TFP series; Total factor productivity; Potential output; Output gap; Capacity utilization; Global
Cover IMF Staff Country Reports
Republic of Latvia: 2017 Article IV Consultation-Press Release; Staff Report
International Monetary Fund. European Dept.
This 2017 Article IV Consultation highlights that Latvia’s economic growth eased to 2 percent in 2016, as gross investment contracted significantly by 11.7 percent on the back of lower than expected absorption of European Union (EU) funds. This effect was compounded by a drag from net exports, as import volume growth accelerated markedly, while export growth remained modest. Despite a strong rise in imports, the current account recorded a surplus of 1.5 percent in 2016 as the terms of trade, driven largely by falling energy prices, improved by over 4.7 percent. Growth is expected to pick up to 3.2 percent in 2017 on the back of an accelerated pace of disbursement of EU funds and continued robust private credit growth.
Keywords:
ISCR; CR; balance of payments; current account; Latvia; growth; EU fund; credit growth; IMF staff estimate; World Bank-International Monetary Fund mission; liability position vis-à-vis nonresident; Credit; Informal economy; Total factor productivity; Western Europe
Cover IMF Staff Country Reports
Ukraine: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper analyzes the extent of corruption in Ukraine compared with other countries. The level of corruption in Ukraine is exceptionally high. This could severely undermine economic growth prospects by hindering private investment. Reducing corruption is therefore essential to speed economic convergence with the rest of Europe. Regional comparisons help identify best practices in reducing corruption. The Ukrainian authorities have recently adopted key measures that follow some of these best practices. The country is, however, facing several challenges, including the concentration of political and economic power in a small group of people, which may hamper effective anticorruption efforts.
Keywords:
ISCR; CR; Ukraine; NBU Council; pension; pension benefit; pension system; ICRG corruption index; law enforcement agency; corruption effort; Pension spending; Corruption; Aging; Retirement; Inflation targeting; Europe; Eastern Europe