1. Baltic Forum 28th May Growth acceleration in the Baltic States: What can growth accounting tell us? Report by BICEPS Alf Vanags Rudolfs Bems

2. Baltic Forum 28th May Other contributors Sirje Padam Mark Chandler Kristine Vitola Morten Hansen Slava Dombrovsky World Bank team

3. Baltic Forum 28th May The facts Cumulative growth in the period 1996-2003 has been Estonia 51% Latvia59% Lithuania 52% Can be identified as an example of ‘growth acceleration’ :– increase of growth of 2% or more that is sustained for at least 8 years (Haussman,Prichett, Rodrik 2004)

4. Baltic Forum 28th May The issues What lies behind the growth acceleration? Are there differences between the three countries? Is the acceleration sustainable?

5. Baltic Forum 28th May Growth accounting approach Seeks to quantify the ‘proximate’ causes of growth Decomposition into contributions of inputs: labour capital total factor productivity (residual) Does not identify ‘deeper’ causes of growth eg policy, reform, savings, FDI etc

6. Baltic Forum 28th May Results (1) CountryAverage growth Capital contribution Labour contribution TFP contribution Estonia5.1%62%-10%49% Latvia5.6%50%5%45% Lithuania5.2%52%-12%60% Aggregate growth accounting 1996-2003

7. Baltic Forum 28th May Results (2) CountryNon-traded sectorTraded sector GrowthCapitalLabourTFPGrowthCapitalLabourTFP Estonia6.0%59%6%35%4.8%51%-57%106% Latvia6.5%64%14%22%3.9%34%-29%95% Lithuania4.9%65%4%31%4.4%47%-55%108% Traded/non-traded growth accounting 1996-2002

8. Baltic Forum 28th May Further dissaggregation: construction, trade, transport, and manufacturing

9. Baltic Forum 28th May Interpretation Aggregate level: contribution of labour negligible – contribution of Capital and TFP 50/50 Disaggregate level: capital contributes more in non-traded sector – TFP contributes more in non traded sector Labour contributes modestly in non-traded – very negative in traded sector

10. Baltic Forum 28th May Sustainability? Sustainability of growth depend on sustainability of growth of inputs Labour force we know is going to decline especially in Latvia and Estonia. Immigration?? Investment shares not abnormally high – exhaustion of investment opportunities in non-traded TFP growth – also high, but not abnormally so

11. Baltic Forum 28th May Historical evidence on TFP growth (average annual %) 1995-2002 1960-1980 Estonia 2.5Argentina1.1 Latvia2.6Brazil 1.85 Lithuania 3.1Chile 1.5 Colombia 1.2 Mexico2.3 Peru0 1947-1973Venezuela0.5 Canada1.751996-1990 France 2.96 Germany3.74Hong Kong2.2 Italy3.37Singapore-0.4 Japan4.2South Korea1.2 Netherlands2.48Taiwan1.8 UK US1.35

12. Baltic Forum 28th May Conclusions For sure a demographic shock Continued TFP growth is possible but difficult “Different theories provide very different conceptions of TFP. Some model TFP as changes in technology (the “instructions” for producing goods and services), others highlight the role of externalities, some focus on changes in the sector composition of production, while others see TFP as reflecting the adoption of lower cost production methods…… we do not have empirical evidence, however, that confidently assesses the relative importance of each of these conceptions of TFP in explaining economic growth. Economists need to provide much more shape and substance to the amorphous term ‘TFP’.”