Industrial and intellectual capital clusters in the Baltic states

Various recent developments, eg the 'new economic geography' as exemplified by say, Krugman, P. (1991) or work originating in the business literature (Porter 1998), point to industrial and intellectual capital clusters as key factors associated with economic development. Indeed recent evidence suggests that multiple clustering leads to higher regional economic development. This leads to the idea that clusters should be encouraged as for example in the Latvian context in Phare (2001), an idea that is explicitly supported by theoretical argument in Norman and Venables (2001). In this paper we explore and describe the geographic concentration of production and human resources in the three Baltic States and attempt to identify its determinants. In particular, we address the issues of industrial and human resource base restructuring in the Baltic States. For the investigation of the regions or districts of the Baltic countries and their industries a variety of statistical methods and measures are used, including cluster analysis and the location quotient method, which may be used to measure the concentration and importance of an economic activity in cluster regions relative to other selected territories. Work is in progress but the aim is to reveal the pattern and dynamics of industrial and intellectual clusters in the Baltic states since independence. Casual evidence suggests that economic activity is less concentrated in Lithuania than in either Latvia or Estonia. The paper seeks to establish more formally whether there are indeed significant differences between the three Baltic countries with respect to i) the extent of cluster formation in general, ii) differences in the extent to which clusters have emerged in particular industries, and iii) how these have changed over time. The territorial units of analysis employed in the research are counties in Lithuania and Estonia (10 and 15 respectively) and in Latvia districts (26 of them). The descriptive part of the paper develops the work of Francis (2000) and Rivza and Stokmane (2000). Having calculated the descriptive statistics the paper combines several theoretical approaches to measure and evaluate clusters. In particular we modify Davis and Weinstein (1998) model to apply it to the case of the Baltic States. Davis, D.R. and D.E. Weinstein (1998) "Market Access, Economic Geography, and Comparative Advantage: An Empirical Assessment"; NBER Working Paper W6787 Francis, I.(2000),"Basic Analysis of Riga's Economy"; 6th Nordic-Baltic Conference in Regional Science. Riga, Latvia, October 4-7 2000. Reports, pp.111-115 Krugman, P. (1991a) Geography and Trade; Cambridge: MIT Press Norman, V.D. and A.J. Venables (2001) "Industrial Clusters: Equilibrium, Welfare, and Policy"; mimeo, London School of Economics Phare project (2001) Support to Industrial Cluster Restructuring; News Letters, Riga, Latvia Porter, M.E. (1998) "Clusters and the New Economics of Competition"; Harvard Business Review, 76:6 Rivza, B. and I. Stokmane (2000), "Economic and Social Analysis of the Baltic Countries"; 6th Nordic-Baltic conference in Regional Science. Riga, Latvia, October 4-7 2000. Reports, pp.293-296

Industrial and intellectual capital clusters in the Baltic states

Various recent developments, eg the 'new economic geography' as exemplified by say, Krugman, P. (1991) or work originating in the business literature (Porter 1998), point to industrial and intellectual capital clusters as key factors associated with economic development. Indeed recent evidence suggests that multiple clustering leads to higher regional economic development. This leads to the idea that clusters should be encouraged as for example in the Latvian context in Phare (2001), an idea that is explicitly supported by theoretical argument in Norman and Venables (2001). In this paper we explore and describe the geographic concentration of production and human resources in the three Baltic States and attempt to identify its determinants. In particular, we address the issues of industrial and human resource base restructuring in the Baltic States. For the investigation of the regions or districts of the Baltic countries and their industries a variety of statistical methods and measures are used, including cluster analysis and the location quotient method, which may be used to measure the concentration and importance of an economic activity in cluster regions relative to other selected territories. Work is in progress but the aim is to reveal the pattern and dynamics of industrial and intellectual clusters in the Baltic states since independence. Casual evidence suggests that economic activity is less concentrated in Lithuania than in either Latvia or Estonia. The paper seeks to establish more formally whether there are indeed significant differences between the three Baltic countries with respect to i) the extent of cluster formation in general, ii) differences in the extent to which clusters have emerged in particular industries, and iii) how these have changed over time. The territorial units of analysis employed in the research are counties in Lithuania and Estonia (10 and 15 respectively) and in Latvia districts (26 of them). The descriptive part of the paper develops the work of Francis (2000) and Rivza and Stokmane (2000). Having calculated the descriptive statistics the paper combines several theoretical approaches to measure and evaluate clusters. In particular we modify Davis and Weinstein (1998) model to apply it to the case of the Baltic States. Davis, D.R. and D.E. Weinstein (1998) "Market Access, Economic Geography, and Comparative Advantage: An Empirical Assessment"; NBER Working Paper W6787 Francis, I.(2000),"Basic Analysis of Riga's Economy"; 6th Nordic-Baltic Conference in Regional Science. Riga, Latvia, October 4-7 2000. Reports, pp.111-115 Krugman, P. (1991a) Geography and Trade; Cambridge: MIT Press Norman, V.D. and A.J. Venables (2001) "Industrial Clusters: Equilibrium, Welfare, and Policy"; mimeo, London School of Economics Phare project (2001) Support to Industrial Cluster Restructuring; News Letters, Riga, Latvia Porter, M.E. (1998) "Clusters and the New Economics of Competition"; Harvard Business Review, 76:6 Rivza, B. and I. Stokmane (2000), "Economic and Social Analysis of the Baltic Countries"; 6th Nordic-Baltic conference in Regional Science. Riga, Latvia, October 4-7 2000. Reports, pp.293-29

Tax reform in Latvia: Could it be fair?

Executive summary The recently published guidelines for the medium term development of Latvia's tax system (NodokĜu un nodevu sistēmas attīstības pamatnostādĦes 2011-2015" have for the first time introduced social fairness (socialais taisnīgums) as an explicit goal of Latvian tax policy. Social fairness is further explained in the guidelines as "a more progressive tax system" and a "lower tax burden on lower wage workers and a higher tax burden on exclusive properties". The challenge for policy-makers is how to realise this goal in combination with the other goals, in particular the goal of improving the competitiveness of the Latvian economy. The aim of this paper is to operationalise the concept of fairness of a tax system by developing quantitative indicators of tax fairness. We take 'progressivity' of a tax or a tax system to be the fundamental indicator of fairness, where progressivity means that the tax liability of higher income groups is higher than their share of income and that the tax liability of poorer people is less than their share of income. This approach leads naturally to the use of the Kakwani index (developed by • direct taxes are overall progressive but indirect taxes are overall regressive; • the overall tax system is mildly progressive; • international comparisons suggest that the Latvian tax system is towards the less progressive end of the spectrum; • the tax measures implemented since 2006 have overall been regressive; • the measures proposed in the guidelines are overall marginally regressive, especially removing the reduced rate of VAT and reducing the income tax rate to 21%; • increasing the untaxed income allowance and introducing a higher property tax are both progressive; • a reduced (10%) rate of VAT on food is quite strongly progressive even if it is used to substitute for the current reduced rate regime. The revenue impact of the various tax changes suggests that the removal of the reduced rate of VAT and the extension of the property tax would result in more revenue but not by enough to compensate for the loss of revenue from the proposed income tax changes. The net effect would be a total tax revenue loss of 3.9% as compared with planned 2010 tax revenues. Thus, the policy paper measures are both regressive overall and would lose revenue. The comparator proposal of a reduced rate of VAT on food is clearly progressive and even if uncompensated by removing the existing reduced rate of VAT would result in an overall loss of 3.3% of planned 2010 revenues. It is hoped that these results throw a new light on Latvia's tax system and can inform the debate on tax policy in the election campaign and beyond.

Stagflation in Latvia: how long, how far, how deep?

This policy paper assesses Latvian inflation performance in an EU and Baltic states context and speculates on the overall prospects for the Latvian economy in the light of the emerging slowdown both in Latvia and elsewhere. On inflation it is likely that, in the absence of new major price shocks, the May 2008 figure represents the peak of the current inflation episode – the slowdown of the economy and thus the unwinding of the overheated labour market should ensure this. On the pace of disinflation, evidence from a simple Phillips curve analysis, together with the flexibility of the Latvian labour market, points in the direction of a fast disinflation, while evidence from other countries emphasises the persistence of inflation. However, the Phillips curve analysis also predicts that lower inflation will come at the cost of higher unemployment. Using two alternative decompositions of inflation the paper examines the balance between a common inflation component and country specific inflation for Latvia and the Baltic states as against the EU-27 and the EU new member states. We find that, irrespective of method used, Latvia has much the biggest domestic inflation component of the three Baltic states. A much more overheated labour market in Latvia and perhaps belated policy response are to blame for the worse performance in Latvia. On duration and depth of a recession in Latvia we use evidence from international experience which suggests that the cumulative loss from a recession might be the equivalent of up to two years of double digit GDP growth relative to trend. Instead of growing 10-11% as was the norm until 2008 Latvia may experience negative growth of perhaps minus 1% for up to two years. This loss of potential GDP is a major setback for the prospects of Latvian convergence.

Financial engineering instruments : the way forward for cohesion policy support? Recent experience from the Baltic states

Reikšminiai žodžiai: Baltijos šalys (Baltic states); Finansų inžinerija; Finansų inžinerijos priemonės; Rinkos nepakankamumas; SVV paskolų programos; Baltic states; Financial engineering; Financial engineering instruments; Market failure; SME loan programmesTraditionally, EU cohesion policy support to businesses and local authorities has almost exclusively taken the form of non-repayable grants or subsidies. However, in the current structural funds programming period (2007-2013), financial engineering instruments (FEIs) have emerged as a significant support mechanism in addition to grant assistance5. Thus, “in 2007-2013 the use of different modes of financial instruments has become more widespread. Financial instruments are quickly growing in variety, scope and amounts committed to them. In the 2014-2020 period an even wider application is envisaged – the financial instruments can be used in all policy areas where feasible” (European Commission 2012, p.1). Financial engineering instruments include the following: equity (venture capital), loans, loan guarantees, micro-finance, mezzanine finance and other forms of revolving assistance. The final recipients can be SMEs or other recipients of public funding, such as urban development funds and energy efficiency/renewable energy projects, and even individual citizens

Financial engineering instruments: the way forward for cohesion policy support? Recent experience from the Baltic states

Reikšminiai žodžiai: Baltijos šalys (Baltic states); Finansų inžinerija; Finansų inžinerijos priemonės; Rinkos nepakankamumas; SVV paskolų programos; Baltic states; Financial engineering; Financial engineering instruments; Market failure; SME loan programmesTraditionally, EU cohesion policy support to businesses and local authorities has almost exclusively taken the form of non-repayable grants or subsidies. However, in the current structural funds programming period (2007-2013), financial engineering instruments (FEIs) have emerged as a significant support mechanism in addition to grant assistance5. Thus, “in 2007-2013 the use of different modes of financial instruments has become more widespread. Financial instruments are quickly growing in variety, scope and amounts committed to them. In the 2014-2020 period an even wider application is envisaged – the financial instruments can be used in all policy areas where feasible” (European Commission 2012, p.1). Financial engineering instruments include the following: equity (venture capital), loans, loan guarantees, micro-finance, mezzanine finance and other forms of revolving assistance. The final recipients can be SMEs or other recipients of public funding, such as urban development funds and energy efficiency/renewable energy projects, and even individual citizens