PRODUCTIVITY AND CURRENT TRENDS AND OPTIONS OF LATVIAN INFORUM MODEL

PRODUCTIVITY AND CURRENT TRENDS AND OPTIONS OF LATVIAN INFORUM MODEL R.Počs, A.Auziņa, V.Ozoliņa Riga Technical University G.Piņķe Ministry of Economy of Latvia

STRUCTURE OF PRESENTATION Current macroeconomic situation, problems Productivity analysis Latvian macroeconometric model Options of Latvian INFORUM model

GDP growth rates in Latvia (% change on previous year) 2000-2008 14 12 10 8 6 6.9 8.0 6.5 7.2 8.7 10.6 12.2 10.0 4 2 0-2 -4-6 2000 2001 2002 2003 2004 2005 2006 2007 2008-4.6 Data source: Central Statistical Bureau of Latvia

GDP growth rates in Latvia (% change on previous year) 2007 I 2009 II 15.0 10.0 9.0 9.3 11.4 10.0 5.0 0.0-5.0-10.0-15.0-20.0 0.5 2007 I 2007 II 2007 III 2007 IV 2008 I 2008 II 2008 III 2008 IV 2009 I 2009 II -1.9-5.2-10.3-18.0-18.7-25.0 Data source: Central Statistical Bureau of Latvia

GDP growth rate (%), 2007 Slovakia Latvia Lithuania Slovenia Poland Estonia Bulgaria Romania Czech Republic Ireland Luxembourg Cyprus Malta Finland Greece Spain Netherlands Austria EU-27 Belgium Sweden United Germany France Portugal Denmark Italy Hungary Data source: Eurostat 0.0 2.0 4.0 6.0 8.0 10.0 12.0

GDP growth rate (%), 2008 Romania Slovakia Bulgaria Poland Cyprus Slovenia Czech Republic Lithuania Greece Malta Netherlands Austria Germany Spain Belgium Finland EU-27 United Hungary France Portugal Sweden Luxembourg Italy Denmark Ireland Estonia Latvia -6.0-4.0-2.0 0.0 2.0 4.0 6.0 8.0 Data source: Eurostat

Value added change (% of corresponding period of previous year) 2009 I Agriculture Fishing Mining Manufacturing Energy Construction Trade Hotels and restaurants Transport Financial services Other business services Public services Education Health Other services -40-35 -30-25 -20-15 -10-5 0 5 10 Data source: Central Statistical Bureau of Latvia

Inflation - CPI (%) 18 16 14 12 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Data source: Central Statistical Bureau of Latvia

Dynamics of average weighted interest rates in LVL on deposits and credits in credit, inflation 18.0 16.0 14.0 12.0 10.0 8.0 Annual average rate of change in Harmonized Indices of Consumer Prices Deposits in credit institutions 6.0 4.0 Credits in credit institutions 2.0 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008

CONSUMER PRICE CHANGES (% of corresponding period of previous year) 20 18 16 14 12 10 8 6 4 2 0 I II III IV V VI VII VIII IX X XI XII I II III IV V VI VII VIII IX X XI XII I II III IV V VI VII 2007 2008 2009 Data source: Central Statistical Bureau of Latvia

Harmonized Indices of Consumer Prices (HICPs) EU-27 Belgium Bulgaria Czech Denmark Germany Estonia Ireland Greece Spain France Italy Cyprus Latvia Lithuania Luxembour Hungary Malta Netherlands Austria Poland Portugal Romania Slovenia Slovakia Finland Sweden United 0 2 4 6 8 10 12 14 16 18 Data source: Eurostat 2007 2008

Harmonised unemployment rate (%) EU-27 Belgium Bulgaria Czech Denmark Germany Estonia Ireland Greece Spain France Italy Cyprus Latvia Lithuania Luxembour Hungary Malta Netherlands Austria Poland Portugal Romania Slovenia Slovakia Finland Sweden UK 0 2008m12 5 2009m07 10 15 20 Data source: Eurostat

Balance of the current account in Latvia (% of GDP) 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008-5.0-10.0-4.8-7.6-6.6-8.2-12.8-12.5-12.6-15.0-20.0-22.5-22.5-25.0 Data source: Bank of Latvia

Balance of the current account in Latvia (% of GDP) 5.0 0.0-5.0-10.0-15.0-20.0-25.0 1.1 I II III IV I II III IV I 2007 2008 2009-8.3-11.8-14.2-16.8-18.3-23.1-24.5-25.0-30.0 Data source: Bank of Latvia

GDP in Purchasing Power Standards (PPS) per person employed relative to EU-27 in 2008 (EU-27 = 100), % 180 160 140 120 100 80 60 40 20 0 % EU-27 EU-15 Luxembourg Ireland Belgium France Netherlands Austria Sweden United Finland Italy Germany Spain Greece Denmark Malta Cyprus Slovenia Slovakia Hungary Czech Portugal Estonia Poland Lithuania Latvia Romania Bulgaria Data source: Eurostat

GDP in Purchasing Power Standards (PPS) per person employed in Latvia relative to EU-27 (EU-27 = 100), % % 60 50 40 30 20 10 0 53.5 48 49.9 51.1 45.9 41.3 43 44.1 40 2000 2001 2002 2003 2004 2005 2006 2007 2008

Productivity by industries in Latvia thous LVL 35 Agriculture Fishing 30 Mining Manufacturing Energy 25 Construction Trade 20 Hotels and restaurants Transport 15 Financial services Other business services Public services 10 Education Health 5 Other services Total 0 1996 1998 2000 2002 2004 2006 2008*

Employment structure in Latvia by hours worked per week, % % 100 90 80 70 60 50 40 30 20 10 0 2002 2003 2004 2005 2006 2007 2008 2009 I no data 41 and more hours 40 hours 1-39 hours 0 hours

Latvian macroeconometric model

World s Most Significant Macroeconometric Models Country USA USA Euro zone countries Euro zone countries Austria Austria Belgium Denmark France Greece Estonia Estonia Lithuania Slovakia Slovenia Finland Malawi Group of countries Group of countries Title of model US model Global Insight s model AWM MCM AQM-06 A-LMM NBB ADAM Mascotte Greece model Estonian model EMMA LITMOD Slovakian model SLOPOL6 EMMA Malawi model MCD BbkM

Blocks of Macroeconometric Models Title of model Number of blocks US model 5 Global Insight s model 7 AWM 6 MCM 4 AQM-06 7 A-LMM 6 NBB 8 Mascotte 7 Greece model 5 Estonian model 5 EMMA 6 LITMOD 7 Slovakian model 6 EMMA 4 Malawi model 6 MCD 40 BbkM 13

Latvian macroeconometric model s scheme 1. GDP by expenditure and by income 2. Goods and services supply and production factors 3. Prices and wages 4. Foreign trade and balance of payment 5. Employment and demographic indicators 6. Fiscal sector 7. Energy sector

Size of Macroeconometric Models Models Number of equations Econometrically estimated equations US model 125 30 Global Insight s model 1700 AWM 84 15 MCM 80-100 15-20 1 AQM-06 107 38 A-LMM >100 NBB 150 30 ADAM 2500 Mascotte 280 60 Greece model 93 17 Estonian model 34 17 EMMA 84 14 LITMOD >200 Slovakian model >50 SLOPOL6 57 21 EMMA 71 15 Malawi model 116 7 MCD >1000 314 BbkM 691 292

Latvian macroeconometric model Model contains 378 equations, of them 73 are econometrically estimated. Model includes sectoral disaggregations 15 industries (according to NACE 1.1.red.).

Factors of Private Consumption Function 1 2 3 4 5 6 7 8 9 10 11 Yd Yd/CP W W/Yd CP(-1) r u PCI Cr t AWM + + + + MCM + + + AQM-06 + + + + A-LMM + + NBB + + + Mascotte + + + Estonian + + model EMMA + + + + LITMOD + + + + Slovakian model + + SLOPOL6 + + EMMA + + + + Malawi + + model MCD BbkM +

Cons_fp_priv = 3131.7 + 0.35 (di/pi_cons_pr) 111.4 unempl_r_tot + 0,63 cred (-1) t: 3.2 2.9-2.8 4.8 R2 = 0.99 DW = 2.61 P(F-stat) = 0.00 [1997 2007]

GDP forecast by Latvian macroeconometric model 9000 8000 7000 6000 5000 4000 3000 1995 2000 2005 2010 2015 GDP_FP GDP_FP (Baseline) GDP_FP (Scenario 2) Data source: V.Ozolina calculations

GDP forecasts 2007* 2008* 2009 2010 2011 2012 2013 2014 2015 Nominal GDP (mil LVL) 1 st scenario 14780 16243 13244 12524 12542 13042 13963 15322 16922 2 nd scenario 14780 16243 12090 11124 11038 11386 12049 13178 14488 GDP per capita (thous LVL) 1 st scenario 6493 7168 5869 5571 5600 5842 6275 6906 7647 2 nd scenario 6493 7168 5358 4948 4928 5101 5415 5939 6547 Real GDP (mil LVL) 1 st scenario 8692 8293 7078 6756 6757 6964 7306 7750 8232 2 nd scenario 8692 8293 6497 6052 6004 6144 6375 6742 7133 Real GDP growth rate (%) 1 st scenario 10,0-4,6-14,6-4,6 0,0 3,1 4,9 6,1 6,2 2 nd scenario 10,0-4,6-21,7-6,9-0,8 2,3 3,8 5,8 5,8

OPTIONS OF LATVIAN INFORUM MODEL

LATVIAN INFORUM MODEL 55 sectors; Long-term forecasting till 2020; IO 2000;

Current state of the model: Waiting for Generation III; Begining I; In last September/October - II; Hibernate since last October; Waiting for new IO table; Runs on the basis of current data base;

The Latvian INFORUM model At the current moment, in the Latvian INFORUM model productivity by branches is estimated outside the model due to considerably short time series and radical changes in the recent years. Taking into account the estimated productivity growth and integrating these values in the model, results are computed that represent the further economic and sectoral development pace on the basis of integrated assumptions. The applied approach is used to examine the productivity changes influence on the economy. As in many fields, Latvia converges with the average EU level or, at least, the average Baltic States level of indicators, therefore, such a study gives an insight in potential development trends.

Last year (2008) very optimistic view Assumptions regarding the scenario are mainly based on the current economic trends. Since the forth quarter of 2007, the economic development slow down has been observable, and hence the included assumptions are reflecting slow down also in the next few years. It is believed that households final consumption will grow by 6% in 2008, by 5.5% in 2009, and in 2010 and 2012 it recovers, but in long-term it gradually decreases to 3% in 2020.

Last year (2008) Output and employment forecasts (average annual change, %) NACE Output forecasts Employment forecasts No. code 2007-2010 2011-2015 2016-2020 2007-2020 2007-2010 2011-2015 2016-2020 2007-2020 6 D 15 4.3 2.5 0.4 2.3 0.3-1.4-2.5-1.3 8 D 17 7.9 9.7 6.6 8.1 3.8 5.5 3.5 4.3 9 D 18 4.9 7.3 4.7 5.7 0.9 3.1 1.6 1.9 10 D 19 7.4 9.7 5.6 7.6 3.3 5.5 2.5 3.8 11 D 20 6.5 5.3 3.5 5.0 2.4 1.3 0.5 1.3 12 D 21 0.2 6.0 3.6 3.4-3.7 1.9 0.6-0.2 13 D 22 4.6 8.3 5.4 6.2 0.5 4.2 2.3 2.5 14 D 23 4.3 3.2 1.8 3.0 0.3-0.7-1.1-0.6 15 D 24 4.5 4.3 2.9 3.8 0.5 0.3-0.1 0.2 16 D 25 3.4 3.4 1.9 2.9-0.6-0.5-1.1-0.7 17 D 26 8.6 6.3 4.2 6.2 4.4 2.2 1.2 2.5 18 D 27 8.1 6.4 4.3 6.1 3.9 2.3 1.3 2.4 19 D 28 6.4 5.4 3.5 5.0 2.3 1.3 0.5 1.3 20 D 29 9.6 7.4 4.8 7.1 5.3 3.2 1.8 3.3 21 D 30 11.1 7.0 4.4 7.2 6.9 2.9 1.4 3.5 22 D 31 4.4 6.3 4.1 4.9 0.4 2.2 1.0 1.3 23 D 32 5.2 7.0 4.2 5.5 1.1 2.8 1.2 1.8 24 D 33 7.3 5.8 3.7 5.5 3.1 1.7 0.7 1.8 26 D 35 11.0 6.4 4.0 6.8 6.7 2.3 0.9 3.1 27 D 36 8.9 7.0 4.7 6.7 4.7 2.9 1.7 3.0 28 D 37 6.8 5.6 3.7 5.3 2.7 1.5 0.7 1.6

This year (2009) Again, the assumptions regarding the scenario are mainly based on the current economic trends. Since the forth quarter of 2007, the economic development slow down has been observable, and hence the included assumptions are reflecting slow down also in the next few years. It is believed that households final consumption will fall by 10% in 2009, by 8% in 2010, and by 5% in 2011, in 2012 it recovers, but in long-term it gradually decreases to 3% in 2020. It is believed that exports will fall by 15% in 2009, by 10% in 2010, and by 4% in 2011, in 2012 it recovers, but in long-term it gradually decreases to 4% in 2020.

Output and employment forecasts (average annual change, %) Output forecasts Employment forecasts No NACE 1.1.red. Short namcode 2008-2010 2011-2015 2016-2020 2008-2010 2011-2015 2016-2020 6 FoodBeve 15-16.9-1.0-0.4-20.1-4.8-3.3 7 Tobacco 16-13.7 4.5 3.7-17.0 0.5 0.7 8 Textiles 17-12.1 7.3 6.5-15.5 3.2 3.4 9 Clothing 18-12.5 4.8 4.3-15.8 0.7 1.3 10 Leather 19-16.1 6.5 5.3-19.3 2.4 2.3 11 Wood 20-10.1 4.6 4.2-13.6 0.6 1.2 12 PulpPape 21-14.2 3.4 3.7-17.5-0.6 0.7 13 PrintReco 22-11.7 4.0 4.3-15.1 0.0 1.2 14 Coke 23-11.3 2.3 2.7-14.8-1.6-0.3 15 Chemical 24-8.3 1.8 2.3-11.8-2.1-0.6 16 RubPlast 25-12.0 1.3 2.2-15.4-2.6-0.8 17 OthNMet 26-7.6 2.5 4.5-11.1-1.5 1.4 18 BasicMet 27-10.0 3.9 4.3-13.5-0.1 1.3 19 MetalProd 28-9.9 1.9 3.7-13.4-2.1 0.7 20 MachEqu 29-7.2 2.9 5.1-10.7-1.0 2.0 21 MachOffic 30-6.2 2.3 5.0-9.8-1.7 2.0 22 MachElec 31-8.4 3.0 4.0-11.9-1.0 1.0 23 CommEq 32-8.3 2.5 4.4-11.9-1.4 1.3 24 MedOptIn 33-8.8 2.7 3.6-12.3-1.2 0.5 25 Vehicles 34 13.0 15.7 12.8 8.7 11.2 9.5 26 OthTrans 35-10.2 4.1 4.9-13.7 0.1 1.8 27 FurnitOht 36-8.7 3.9 5.3-12.2-0.1 2.3 28 SecRawM 37-10.8 5.0 4.5-14.2 1.0 1.5 Total economy -8.2 2.0 3.0-12.0-2.2-0.1

Employment forecasts (thous persons) 1 400.00 1 200.00 1 000.00 800.00 600.00 400.00 200.00 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Employment forecasts (thous persons) 2 500.00 2 000.00 1 500.00 1 000.00 500.00 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Thank you for attention! Contacts: R.Počs: remigs.pocs@rtu.lv A.Auziņa: astra.auzina@rtu.lv V.Ozolina: velga.ozolina@rtu.lv