The Baltic States investment potential. Can we become more interesting?

Lithuania Economy Conference, March 1, 2017

Dear friends,

Ladies and gentlemen,

Last summer, Lithuania, Latvia and Estonia celebrated the 25th anniversary of restoring our independence. We were robbed of our freedom and we lost over 50 years in our development, but we have shown great stamina and resilience, wit and resourcefulness and I am very proud of what the three Baltic States have achieved. Estonia  and Latvia rank top 20 globally and top 10 in Europe in Ease of Doing Business Index (Lithuania 21 globally, 13 in Europe).   

For many years now, Baltic business-oriented and favorable economic environment has amazed policy-makers and business people around the world. As a region we are considered as one. As a region, we are doing well, our economies are growing and the still existing inconsistencies between the three of us will eventually be smoothened out if we continue to take the right decisions towards greater connectivity.

While we have come a long way in the past 25 years, we are not there yet. The progress of our countries and our societies so far is a foundation for the future and we should be confident enough to both preserve that as right and valuable, and yet make the necessary changes. Our aim should be to achieve the Nordic standard of living and the best possible living environment for our people, not simply by copying but by becoming more flexible with more courage to take risks. We need to show more initiative, to experiment more, become a testbed to new innovative solutions and thus becoming more interesting as a region.

In December last year according to their monthly forecast of economic growth, European Central Bank estimated that economic growth will accelerate in all three Baltic States within 3 years. But it is also clear, that the current growth pace is not satisfactory if our aim is to reach the Nordic standard of living.

In reaching that goal, our governments must stay true to liberal values - promoting the merits of trade and free market, free flow of data and people is the way forward. Governments must keep in mind that by creating a favourable business environment and by meddling as little as possible is how you help boost the economic growth.

It is also important to recognise the reasons and threats that cap economic growth because then and only then can we review and rethink what could be done to further improve the Baltic States investment potential. Which in turn will also increase the living standards and quality of life of our people.

In Estonia, as Prime Minister I decided to summon 10 economic experts representing different fields to map and analyse the bottlenecks of Estonian economy. These experts compared Estonia, on the one hand, against the Nordic and Anglo-Saxon countries and, on the other hand, compared economic performance against the benchmarks set out in various strategies. They came up with 80 different proposals that were grouped under 7 different fields for the government to implement. According to them, implementing these proposals would boost the Estonian economic growth beyond 4 percent.   

Thorough work was done over the past year by the economic development working group which culminated in the realization that Estonia does not have economic growth hindrances that could be easily removed. Instead, they found certainty in that there is no silver bullet with which to solve all problems, but they also found certainty that positive economic development could be reached if the working group's ideas were realized. The working group called for a more committed implementation of actions envisaged in various strategies.

The proposed amendments and conversions of the economic development working group included:

    • As many people as possible need to be brought back to the labor market;

    • Create better conditions for foreign skilled workers to come to Estonia;

    • Make education and training systems more flexible, achieving a better match with the labor market needs;

    • Establish innovation as the main driver for growth, prioritize innovation;

    • Set digitalisation of economy as a separate economic aim;

    • Improve the managerial skills and ability to run a business both in private and public sectors;

    • Improve the business environment and enhance Estonia’s international attractiveness.

Similarly to the findings of the Estonian economic development working group, the PwC’s Global CEO Survey concluded that there are no silver bullets to threats that are holding back economic growth. Yet, policy action can help if directed to support the top drivers for growth. And the main drivers for growth according to CEOs globally are innovation, technology and human capital. The Baltic top executives also considered favorable tax environment and export as important growth drivers.

Over the past 20-25 years, we have witnessed tremendous upheavals as a result of globalisation and technological change. Globalisation has brought many benefits and has opened new doors for our people and businesses. We must not nourish fears about losing any jobs due to globalisation or technological change, because this will keep back the creation of tomorrow’s jobs.

According to the PwC Global CEO survey, geopolitical uncertainty is seen as a top 5 threat to growth while 58% of the CEOs surveyed think it's becoming harder to compete on the world stage due to more closed national policies. Estonian top executives also consider geopolitical uncertainty the biggest threat to growth followed closely by uncertain economic growth and the future of the Euro. But interestingly enough Latvian and Lithuanian CEOs saw the greatest risk to growth in the increasing tax burden - 82% of the respondents said this was a problem for them!

At the same time, CEOs are surprisingly optimistic about short-term business growth. Why such optimism? One conclusion could be that many businesses have undoubtedly had to cope with stormy conditions lately and anyone who has reached the top has already adapted to uncertainty. Alternatively, perhaps, CEOs have learned to look for the upside and seize on the opportunities the uncertainty brings. One thing is clear - CEOs have recognised that it is not enough to focus on organic growth and cost reductions - they are prioritising investment in innovation, digital capabilities and human capital. For understandable reasons, the Baltic senior managers also considered export as one of the main drivers for growth.

28% of Estonian CEOs consider Latvia the most important export market in terms of business growth and 27% think growth comes from export to Lithuania (1st - 40% Finland, 2nd - 29% Sweden). 52% of Latvian CEOs consider Lithuania their most important export market and Estonia follows closely with 49%. For the Lithuanians, Estonia is only the 4th export market with 15% of the top executives expecting the business to grow due to export to Estonia (1st - 31% Scandinavia, 2nd - 23% Latvia, 3rd - 16% Germany).

What could thus increase the Baltic States investment potential? How could we become more interesting as a region?

I propose connectivity as an additional growth driver for the Baltic States. If we are more closely connected, firstly via (rail)road, secondly through electricity and gas interconnectivity and thirdly digitally, we become stronger and more attractive as a region. While there is quite a lot of emotionality in economics, enabling people, goods and data to move freely and seamlessly continues to and will make a difference.

Co-operation projects such as Rail Baltic or Baltic Energy Market Interconnection Plan are very important decisions and investments for all three Baltic States. Rail Baltic will support the development of business, tourism and transport sectors and will strongly connect us with Central Europe.

Cooperation and constructive competition in energy sector has guaranteed security in supply and has resulted in lower energy prices for domestic consumers. It is worth reminding that Lithuania’s decision to invest in LNG terminal has also benefitted Latvia and Estonia - gas pipes connect our countries and 25% of gas consumed in Estonia comes from Lithuania.

Projects like these are also an example and inspiration to the rest of Europe. Maybe it’s time we also take Via Baltica to the next level?

Another field we are not connected enough is digital. While technological advancement has quite often seen as an obstacle - be it the connectivity, digital divide or th exacerbated challenge technology brings about breaches of data privacy - becoming a digital society has helped Estonia in numerous ways to become economically more attractive.

Doing things digitally has become an integral part of our everyday lives. Digital solutions enable more efficient ways of doing business every day, reduce bureaucracy and hassle. Today e-Estonia is not just about useful public digital services, but also disruptive private ones.

The growth of digital industry has turned Estonia into a hub for tech-based start-ups. Skype was the first major breakthrough in this area, already ten years ago when it was largely built in Estonia – and biggest development centre is still in Tallinn. Estonia now has numerous other success stories building up – the up-and-coming next stars, disrupting their industries with digital solutions. Be it Transferwise’s peer-to-peer online currency exchange, GrabCAD’s cloud-based meeting place for mechanical engineers or Funderbeam’s first and only Blockschain-based platform in the world where growth companies are funded and traded across borders.

Smart use of technology should be the way for all of us in the Baltics and EU in general. And there’s an initiative opening - becoming a testbed, as I mentioned earlier. The Baltics along with the Nordics could show the rest of the world what could be achieved if free movement of data and information would be the 5th fundamental freedom in the EU.

If we were able to reuse and share data collected by private companies or government crossborder, booking a doctor’s appointment within 500 kilometre radius should be possible and as easy as using the Uber or app anywhere in the world.

I am confident it would boost the innovation potential of the Baltics and Europe, also our start-ups, as product development and go-to-market would be in Europe the fastest in the world.

Let’s remove and reduce the barriers to free movement of data. Let’s make digital happen! Only then will we be able to become more interesting and attractive as a region and increase competitiveness of our economies.