Publication: Monitor Volume: 5 Issue: 203

When third-quarter GDP growth figures are released for the Baltic countries, they are expected to show that growth has returned to Estonia and Latvia. Lithuania’s third-quarter GDP, however, will almost certainly still be falling, even though the output drop in Lithuania this year has already been sharper in Lithuania than in Estonia and Latvia.

The severity of Lithuania’s recession in part reflects the fact that Lithuania has absorbed the greatest shock from the collapse in trade with Russia. In July 1998, the month before the Russian devaluation, Lithuanian exports to Russia were 21 percent of total exports, compared to 15 percent for both Estonia and Latvia. But by mid-1999 the share of Lithuania’s exports going to Russia had dropped to 6.7 percent, compared to 8.8 percent in Estonia and 6.9 percent in Latvia. Also, Lithuania’s economy is less diversified than Latvia’s and Estonia’s, both sectorally and in terms of geographic orientation. Agriculture, food processing, oil refining and transit, all of which depend heavily on Russia account for a third of Lithuanian GDP. Third, privatization has proceeded more slowly in Lithuania than in Estonia and Latvia, and state-owned enterprises are often less adaptable to changing circumstances.

Lithuania also had less room for policy flexibility after the Russian crisis. Like Lithuania, Estonia in 1998 had an enormous current account deficit caused by excessive domestic spending. Contrary to Lithuania, however, Estonia has consistently reported budget surpluses, and had already begun to slow domestic spending before the August 1998 crisis. Estonia has therefore been able to loosen fiscal policy and fight the recession in 1999 without losing control over fiscal balances. Moreover, Lithuania still reported strong GDP growth in the fourth quarter of 1998, when Estonia and Latvia were already headed toward recession. Since its recession started a quarter later than its Baltic neighbors, Lithuania may need another quarter to shake off the effects of the Russian flu.