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Paper within Development Economics
Authors: Lauris Ancupans 810304
Sergejs Bolsakovs 750128
Tutor: Börje Johansson
Jönköping April, 2000
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Table of Contents
1 Introduction.................................................................................. 1
2 Theoretical
Outlook: Trade and Growth................................. 2
3.1 Trade of Latvia by groups of countries......................................................... 8
3.2 The analysis of the structure of Latvian export and import ................... 13
4 Trade and Growth in Latvia..................................................... 19
5 Conclusion................................................................................. 20
References....................................................................................... 21
Appendices...................................................................................... 22
1 Introduction
The end of the 20th century has been
quite eventful. The European customs union was established in 1968. In 1992
Maastricht Treaty was signed which
extended European cooperation. Dissolution of Soviet Union occurred in 1991.
Latvia as well as Estonia and Lithuania
after 51 year of occupation regain their independence. Since that Latvia
started its way toward market economy and democracy. European Union (EU) is an
active supporter of these processes.
The liberalisation of Latvia led to trade
relations with already existing market economies. It is obvious that such small
countries like Latvia need international trade
and integration with the rest of the world to survive and prosper. In
1991 staying on the cross-road Latvia had three ways to go: to stay apart from
the integration, to integrate into CIS block
(12 former USSR countries), or to become a member of EU. Only one choice
is wise and it was done. Membership in EU was set as the main aim of Latvian
foreign policy. To achieve the aim Latvia has to fulfil some criteria. Today
Latvia is one of the most real candidates to join EU. In December 1999, during
EU summit in Helsinki, the memberstates accepted decision to start with Latvia
official negotiations. On February 15, 1999 the negotiations were started.
Latvia’s integration process into EU picks up the speed.
Aim of the study
One of the most important elements
of the integration is economic integration of the parts engaged in the process.
Economic integration is not possible without trade relations. Trade relations
between Latvia and EU countries is the subject of the essay. The aim of the
study is to analyse these relations and to determine what elements influence
them. To achieve the aim within the analysis we should answer a number of
questions: what is the role of EU in trade with Latvia, how does the flows of import to Latvia from EU and flows of export
to EU from Latvia vary in terms of structure, dynamics and proportions. We will observe the process of Latvia’s
transitions from primary export to secondary export. We will figure out if the
process of import substitutions in trade between Latvia and EU does take place.
The Strömquist and Åberg as well as Johansson and Hacker studies of gravity
model will help us to understand the perspectives of further trade relations
between the parties as well as the role of link attributes, demand and supply
factors in these relations. We will observe if the link between trade and
growth in GDP does exist in Latvian case.
Problem
As we will see in theoretical
outlook there are many theories concerning international trade relations, but no one of them is completely reliable.
Classic theories by Ricardo and Smith as well as Heckscher-Ohlin theory do not
explain directions and quantities of trade. Gravity model takes in account
these factors, but this model has different formulations and results. The
variables in the gravity model are still meter for experimentation.
Previous studies
There are many both theoretical and empirical
studies concerning growth and trade.
As a cornerstone of the theory on trade is
Smith and Ricardo’s theory of comparative advantages, which explain importance
of trade among nations. Their theory was
emended by Heckscher-Ohlin theory, which includes more factors of production.
These both theories could be explained by comparison of the relative
prices of the commodities in each country in the absence of trade with world
prices.
Gravity model in distinguish with
above mentioned theories explains directions and quantities of trade.
Strömquist and Åberg as well as Johansson and Hacker constructed the gravity model for the Baltic
Sea area. The results of both the studies among the other conclusions confirmed
the importance of regional integration as well.
Strömquist and Åberg noted that
predicted economic growth in Baltic Region will increase trade. Basing on their
predictions between 1995-2015 trade could even triple.
Södersten and Ekholm in their studies stressed,
that there is a very strong connection between the growth of real income per
capita and growth of real income terms of trade. A close link has been observed
in several NIE countries between growth of GDP and growth in income terms of
trade. Ceteris paribus, growth in exports will lead to also growth of GDP.
Empirical analysis of Latvia’s
performance in trade relations in conjunction with growth in GDP was observed
in different surveys made by European Commission, OECD, World Bank, UN and
other international organization as well as by Latvian authorities.
Outline of the study
Chapter two
provides a theoretical outlook the aim of which is to find out answers on two
questions: what is the link between growth and trade and why nations should
trade. We emphasize on the gravity model in this outlook. The theory observed
in the 2nd chapter will succeed empirical analysis, which will be made within
chapter three and chapter four. In chapter four we will analyse the role of EU
in Latvia’s trade relations as well structure and dynamics of export and import
flows between Latvia and EU. In chapter four we will find out correlation
between trade and growth in Latvian case. Thus, we will see how does theory
comply with practice. Finally, conclusions will end this essay.
2 Theoretical Outlook: Trade and Growth
The main aim of theory penetration is to find out answers on two
fundamental questions understanding of which is a key for the empirical
analysis:
u Why nations trade? What they
benefit from it?
v What is the link between trade and
growth of countries engaged in this trade?
Concerning the first question it should be
noted that all the authors (Gillis, Cipher, Mole, Nafziger) of literature
penetrated emphasize on theory
of comparative advantage formulated
by Adam Smith and David Ricardo. The sense of the theory is that world welfare
is greatest when each country exports products which comparative (with other
world’s countries) costs are lower at home than abroad and imports goods which
comparative costs are lower abroad than at home. This theory could be emended by Heckscher-Ohlin theory, which
includes more factors of
production: a country exports
products that use its abundant factors of production more intensively (abundant factors are
cheaper, and thus, the good which uses these factors are cheaper as well) and
imports products that require relatively more of its scarce factors (Gillis,
1996). These both theories could be
explained by comparison of the relative prices of the commodities in each
country in the absence of trade with world prices. Gillis presents an example:
when the home country has comparative advantage (more efficiently, with higher
productivity and lower costs) in producing of vegetables, but the rest of world
in producing of computers. As long as
the rest of the world specializes on
computers, limited demand of vegetables drives their prices higher than in the
home country. From the other hand higher production of computers compared to the demand drives its
prices lower than in the home country.
In terms of trade the home country can export vegetables for higher
prices than domestic. At the same time it is
not necessary to produce computers for domestic consumption in
inefficient way (with higher costs, lower productivity and inefficient spending
of natural resources). Instead of this in terms of trade the home country can
shift labour to farming such increasing both production and export as well as
country’s welfare. With export of vegetables the home country can then import
computers. In such way the home country
has opportunity to benefit from trade and as result improve its welfare. It must be mentioned that small
countries benefit more from trade because the gains are greater the more the
pretrade relative price differs from the posttrade world price (Gillis, 1996).
At the same time Argentine economist Raul Predisch and Hans Singer of the
University of Sussex argued that in long time period prices received for vegetables
(as in our case) will fall on world markets relative to the prices of home
country’s import of computers from the rest of world. The most used measure of
relative prices is Net Barter Terms of
Trade (NTT) or Income Terms of Trade (ITT). As soon as we have mentioned
these measures it is easily to find link between growth and trade.
As a very
important factor which is closely correlated with GDP is Income Terms of Trade.
This concept can be defined as the export volume multiplied with Net Barter
Terms of Trade or as the volume of exports divided by an impor price index.
Net Barter Terms
of Trade can be defined as:
[2-1]
Where Pe – export price index; Pm – import
price index, t – current year, 0 – base year.
ITT can
be defined as:
[2-2]
Where Px is export price indice, Pm is import
price indeice and Qx is volume of exports. There is a very strong connection
between the growth of real income per
capita and growth of real income terms of trade. A close link has been observed in several New
Industrialised Countries (NIE) countries between growth of GDP and growth in
ITT. Ceteris paribus, growth in exports will lead to also growth of
GDP.
Thus, both volume and price effects are
included in the concept. There is a hypothesis that ITT plays a very
significant role in growth of GDP of a country (Södersten, Ekholm, 1999).
Theory and historical practices show that mostly there is a certain growth of
GDP according to growth of trade. Respectively, 1% of growth in GDP creates
around 2.5% of growth in trade. We shall attempt to prove this hypothesis
basing on Latvia’s growth and trade with the European Union countries.
Above described concept of comparative
advantages and Heckscher – Ohlin theory are the most often used one to describe
trade among nations. However, these models do not tell us much about volume and direction of international
trade. A gravity-type model of
international trade, by contrast,
has a feature, that it includes the volume or value and direction of trade
(Strömquist and Åberg, 1998). This model is illustrated graphically in figure
1.
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 |
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LINK ATTRIBUTES
 |
Supply
Demand
Figure 1
Graphical illustration of the gravity model.
Source: Nilsson, 1999
The model describes the trade flow 
from a particular
origin country (region) i to a particular destination country j. The model is divided as to “mass
factors” and link attributes. Three types of factors are included which
contribute to a quantitative explanation of the trade flow between any pair of
countries:
from a particular
origin country (region) i to a particular destination country j. The model is divided as to “mass
factors” and link attributes. Three types of factors are included which
contribute to a quantitative explanation of the trade flow between any pair of
countries:
p Supply factors. Economic forces at
the flow’s origin or source – factors indicating the total potential supply of
the exporting country i. The major
factor determining potential supply of country i is its capacity of production (
), represented by GDP, and the ratio of its production for export to total
production (the “openness ratio”), presented by size of population. As it was
proved above GDP varies positively with trade. However, the openness ratio
trends to vary negatively with population. Population increasing leads to
conditions when country could satisfy its own demand under autarchy.
), represented by GDP, and the ratio of its production for export to total
production (the “openness ratio”), presented by size of population. As it was
proved above GDP varies positively with trade. However, the openness ratio
trends to vary negatively with population. Population increasing leads to
conditions when country could satisfy its own demand under autarchy.
p Demand factors. Economic forces at the flow’s
destination or sink – factors indicating the total potential demand of the
importing country j.
p Link attributes. Economic forces
either aiding or resisting the flow’s movement between countries – these factors
reflect trade resistance or transaction costs (link attributes). Transaction
costs comprise a great variety of variables, which can be divided into three
main categories: natural impediments
(for example sea), artificial obstacles (administrative borders), and
affinities (language). Transaction costs are often expressed in terms of
geographical distance between certain points within each country. Increasing
distance results in higher transaction costs and a decline in trade. One more important
factor is market information. We are still better informed about markets in our
neighbourhood than in faraway countries.
The general model has the following form
(Strömquist and Åberg, 1998):
[2-3]
Where is the US dollar value
of the flow from the country i to j.
is the US dollar value
of the flow from the country i to j.
is the US dollar value
of GDP as a measure of supply capacity in i.
is the US dollar value
of GDP as a measure of demand capacity in j.
represents links attributes between i and j, reflecting various transaction costs of doing business.
In the empirical part of the essay we will
present Strönquist’s and Åberg’s, and, Johansson and Hacker’s searches results
in Baltic Sea Region using the gravity model.
The link between trade and growth
could be found using Harrod-Domar
production function as well, according to which there are four sources
of growth:
Y = f (K, L, R, A) [2-4]
Where Y - output of national product, K - stock of
capital, L - size of labor force, R - natural
resources, A - increases in the productivity or efficiency with which
inputs are used. (Gillis, 1996)
It is obviously that increases of each variable
in certain sector of national economy leads to increase of GDP – measure of
growth of a country. It is important to remember that from microeconomics
theory point of view increase in labour force is efficient only untill certain level. As
concerning natural resources there should be a direct link between increasing
of share of the resources and efficiency of using them in the process of production. It is significantly important for growth in GDP to improve both
productivity and efficiency as well as ensure inflow of capital in certain
sector of national economy.
From another hand national income on
expenditure side must be analysed:
Y = C
+ I + (X – M) [2-5]
Where Y –
national income, C – consumption, I – domestic capital formation or
investment, X – export of goods and
services, M – import of goods and
services (Nafziger, 1997). From the sense of theory it is clear that increases
in output could be efficient only in terms of high demand on both world and
domestic markets. High internal demand is linked with the level of consumers’
welfare and high external demand for the export is linked with level of
comparative advantage of exported goods. It is obviously from the penetration
of theory that trade could be the engine for increasing of each source of
growth, as well as growth lead to the increase in trade.
Trade is an especially important
element of development process for small countries (e.g. Latvia). Nations with
larger markets are able to develop a wider range of industries sooner in their
development because thay can take advantage of scale economies - larger
facilities are able to produce at lower unit costs than small ones (Gillis,
1996). Thus, on the earlier stages of
development as engine of growth could be primary export or import
substitution. In empirical analysis we will emphasize on the role of trade in
growth of GDP in Latvia.
P Primary export (staple theory of
growth) – a country take advantage to export agricultural products and raw
materials. The feature of primary - orientated early industries countries is export of labour intensive
goods produced by simple technologies and import such goods as equipment,
intermediate products from chemical,
petroleum, and metals industries (Gillis, 1996). Further development leads to
improved factors utilization, expended factor endowments and linkage effects.
We would like to emphasize on backward and forward linkages.
á Backward linkage – growth of one
industry stimulate to develop other industry, which uses inputs of first one.
The using industry becomes so large that supplying industries can achieve
economies of scale of their own. For example, wheat industry in North
America in 19 century created sufficient
demand for transportation equipment and farm machinery (Gillis, 1996).
â Forward linkage occurs in industries that produce goods that
became inputs in other industries. For
example, rather than start with automobiles, a country can prefer to
start at the other end by setting up a steel mill (Gillis, 1996).
Thus, creation of these linkages could lead to
setting up industries and transition from primary-oriented country to
manufacturing-oriented country – from long term point of view it is of course
much more favourable for the process of development of a country.
P Import substitution – setting up
industries, which can efficiently produce certain kinds of import goods in such a way
successfully competing with[SB1] importers. At the same time
according to the two-way trade practice in most cases it is impossible to
completely avoid from import of certain group of goods because of process
widening of the assortment. From other
leg import substitution usually leads to capital goods imports (electrical,
mechanical, and transport equipment, machinery and instruments) for
producing goods liable to substitution. Such capital goods oriented import
positively emphasize developing of the country in way of improving productivity, quality, infrastructure,
lowering production costs and increasing output. Import substitution can be defined as:
[2-6]
Where 
- import substitution
index, 
- import of certain
brand (group) of goods and M –
total import (Cypher, 1997). According to the theory the index decreasing in
time period analysed tells us that
share of the group of goods in total import decreasing and thus, import substitution occurs. Here we must mention
that in our opinion we cannot be sure
that cause of such decreasing is import substitution as result of enlargement
of domestic industry. As the cause of decreasing could be, for example big
amount of trade balance deficit (export minus import). This deficit may be
financed by borrowing, attracting investments, or receiving grants from abroad.
Essentially:
- import substitution
index, - import of certain
brand (group) of goods and M –
total import (Cypher, 1997). According to the theory the index decreasing in
time period analysed tells us that
share of the group of goods in total import decreasing and thus, import substitution occurs. Here we must mention
that in our opinion we cannot be sure
that cause of such decreasing is import substitution as result of enlargement
of domestic industry. As the cause of decreasing could be, for example big
amount of trade balance deficit (export minus import). This deficit may be
financed by borrowing, attracting investments, or receiving grants from abroad.
Essentially:
M – X = F [2-7]
Where F is a capital import (Nafziger, 1997) . Foreign
loans enable a country to spend more than it produces, invest more than it
saves, and import more than it exports. Hollis B. Chenery and Alan M. Strout
identify three development stages in
which growth proceeds at the highest rate permitted by the reducing limits of
such factors: the skill limit, the savings gap (investment minus savings), and
the foreign exchange rate. Foreign skills and technology reduce the skill
limit, foreign aid and capital
reduce the gap that limits accelerated growth (Niftier, 1997).
In our empirical analysis we will assess the
level of primary export and import substitution in Latvia as well as the
process of establishment of linkages and trade balance problems.
As it was already mentioned, import
substitution leads to increasing of capital goods imports. A study of economists indicates
that without capital goods imports developing countries run an export surplus
(Niftier, 1997). Contemporary
industrializing countries effectively using capital inflows from abroad should
usually be able to pay back loans with increased output and productivity. In another case in long term such deficit
could be a cause of default. In next
paragraph described problem also leads to trade balance deficit.
Nowadays terms of trade also depend on level of
trade integration among trade partners,
membership in trade areas. Such trade areas implement practice of
protection of memberstates’ internal market using in trade with third countries
such instruments as protective tariffs,
import quotas, subsidies and export protection. Of course this impacts
negatively the development of third countries. The level of the impact depends
on both the shares of the partner and the protected good in total export. In empirical part of the essay
we will present this problem while analysing
Latvia’s export of agricultural products to EU.
Another factor which could negatively emphasize
terms of trade is overvalued exchange rate – official exchange rate is to high,
for example, in dollars per national currency or to low in national currency
per dollar (or another foreign currency) to balance the importers’ demand for
foreign exchange with the exporters’ supply of foreign exchange without high
protective tariffs, import quotas, and restrictions on other foreign exchange
transactions (Gillis, 1996). Thus,
overvalued exchange rate discourages exports and encourages imports. In
empirical part we will find out if the exchange rate of Lats is favourable for
Latvian export or not. Sometimes exchange rate becomes overvalued also as a
result of a boom in primary exports,
which causes appreciation of the real exchange rate (national currency
becomes worth more in foreign currency than before). The most used example of
this is Dutch disease. Natural gas export boom and the balance of payments
surplus during the 1970s led to rising inflation, declining export of manufactures,
lower rates of income growth, and rising unemployment. This paradox can be
explained as follows. First, the influx of foreign currency from higher export
earnings creates a surplus of this currency
which trends to drive down its price in domestic currency. This shift in
supply causes the currency to appreciate in value. Second, higher income from
booming primary export also spurs faster domestic inflation, because the
additional incomes creates greater demand for all goods and services in the economy (Gillis, 1996).
For the future empirical analysis it is
important to understand why developed countries with enhanced resources (for
example wood) prefer to import it from developing countries instead using own wood. The main explanation
is concerned with the value of time. It is obviously that benefits and costs
realized in the future have less present value than those that are realized
immediately. If the discount rate (the real interest rate) is r percent per year, then in any future
year n, the present value placed on
resource flows (PV) is:
[2-8]
In developing countries the real discount rate
is rather higher than in developed countries. Thus, developed countries,
because of low discount rate, expect that in future increasing in prices for
the resource will exceed discount rate and so these countries will be able to
gain more than at present. For developing countries such expectation is quite
unreal. The second reason why
developed countries preserve their resources is that these countries
take care about ecology and future generations much more.
Concluding theoretical outlook we
would like to mention these indicators, which as well as already noted ones,
will be used in the empirical analysis.
Analysing structure of trade we will
calculate:
ˆ Share of total export and import as
well as certain group of import and export goods in GDP.
ˆ Share of certain group of export
and import goods in total export and import.
ˆ Share of certain group of export
and import goods in total trade turnover.
ˆ Share of trade surplus or deficit
in total trade turnover.
ˆ Share of two-way trade calculated
as value of two way trade divided by total value of trade.
Within the analysis of “quality” of trade such
indicators will be presented:
ˆ export and import value per ton
calculated respectively as export and import divided by quantity of goods exported or imported.
The following analysis also will
present structure of Latvia’s trade
partners by regions and EU countries.
Thus, theory presented in this
chapter should be considered as the tools for the following empirical analysis.
3 Latvia and EU: Trade Relations
3.1 Trade of Latvia by groups of countries
First
of all implementing empirical analysis of trade relations between Latvia and EU
it is important to find out the role of EU in Latvian trade activities. In
figures 2 and 3 we will overview the
share of Latvian export to EU and the share of EU import to Latvia.
Source: Central Statistical Bureau of Latvia, 2000
From the
figure 2 it is clear that EU is the major buyer of Latvian export starting with
1995. The share of Latvian export to EU over the period
observed increased almost twice. We could explain this as follows. Firstly, the
main aim of Latvian foreign policy is to join the EU. This target asks for the integration process,
especially economic integration, which leads to much more active trade
relations between the parties, engaged in the process. We can prove this
statement also by figures placed in appendix 1, which shows that the similar
with Latvia tendencies regarding EU share in export exist in all EU membership
candidate states. Furthermore, less share of exports to EU in total export than
in Latvia exists only in Lithuania, Bulgaria, Slovakia and Turkey. It is
obvious that the process of Latvia’s integration into EU picks up speed.
Secondly, Latvia’s development processes demands capital goods for industrialization. Theory shows and practice
proves that the suppliers of capital goods
are developed countries, which are specialized on their producing. Thirdly, from the figure 2 we can see that rapid increasing of share of
Latvian export to EU started in 1997. It is the time when crisis in Russia (former major buyer of Latvian
export) occurred. Purchasing power and as result demand decreased sharply in
Russia. From the figure 2 follows that sharp increasing of Latvian export to EU
accompanies with sharp decreasing of Latvian export to CIS. Thus, crisis in
Russia is the engine of Latvian trade
reorientation “from east to west”. Figure 2 also indicates increasing of
Latvian export to other countries and to the Latvia’s neighbours – Estonia and
Lithuania. Thus, in 1999 share of
Latvian export to CIS (mainly to Russia) was less than that one to Estonia and Lithuania. In our opinion it
is good example when such link attributes as common border, distance and
language (most Latvians speak Russian) stop to work. However, negative
historical background exists between the countries (Soviet occupation).
Now we will overview the
dynamics of the share of EU’s import to Latvia.
Source:
Central Statistical Bureau of Latvia, 2000
From figure 3 we can find out
similar trends as from figure 2: EU is the major importer of its goods to Latvia. The
share over the period observed increased more than twice. However, contrary to
Latvian export tends, the most rapid increasing occurred on the earlier stage
of Latvia’s developing. We can explain it so. Every company must be aimed on “conquering” of new markets, niches.
Strong companies from developed countries have more opportunities to do this.
As soon as Latvian market was liberalized it was “conquered” by EU’s
importers. Also in 1994 market protection mechanisms were not yet
established. Here is one more explanation: on earlier stage of developing a
country needs for much more capital goods than on the latter ones. In each case
import structure should be analysed – it will be done latter. From 1996 the
import from EU grows 2-4% on average annually. This growth occurs as result of
division of decreasing CIS’s import
share between EU and other countries. As in the case with export, the similar
with Latvia tendencies concerning EU’s import share in total import exist in
all candidate states (see appendix 1).
To understand the cause of such
strong trade relations between Latvia and EU we should deep our analysis and
find out which EU countries are the main Latvia’s trade partners.
As we can see from table 1 Latvia’s export to
Germany, Sweden and Great Britain
compiles about half of total export. The share of export to each country
increases over the period observed, especially to Great Britain. Absolute value
of export to Great Britain increases sharply as well, while in Sweden case it
declines.
Table 1. The main Latvia’s export partners in EU
over the period 1998, 1999
and January, 2000
|
Country
|
Value,
Ths. Lats
|
Share, %
|
|
|||
|
|
1998
|
1999
|
2000-Jan
|
1998
|
1999
|
2000-Jan
|
|
Germany
|
166822
|
169984
|
14845
|
15.6
|
16.9
|
18.6
|
|
Great Britain
|
144343
|
165838
|
13746
|
13.5
|
16.4
|
17.3
|
|
Sweden
|
110017
|
107621
|
9916
|
10.3
|
10.7
|
12.5
|
Source: Central Statistical Bureau of Latvia, 2000
As we can see from table 2 the import from
three major partners compiles about 1/3 of total import to Latvia. The share
and absolute value of import from Germany and Finland tends to decline, while
import from Sweden in January, 2000 increased.
Table 2. The main Latvia’s import partners in EU
over the period 1998, 1999 and January, 2000
|
Country
|
Value,
Ths. Lats
|
Share,
%
|
|
|||
|
|
1998
|
1999
|
2000-Jan
|
1998
|
1999
|
2000-Jan
|
|
Germany
|
315547
|
261297
|
15982
|
16.8
|
15.2
|
13.3
|
|
Finland
|
179189
|
156876
|
12890
|
9.5
|
9.1
|
10.7
|
|
Sweden
|
135096
|
124847
|
10833
|
7.2
|
7.2
|
9.0
|
Source: Central Statistical Bureau of Latvia, 2000
Thus, Latvia’s major both import and export
partners are Germany and Sweden. If we compare figures in table 1 and table 2
we can see that value of Germany’s and Sweden’s import is much higher than
value of Latvian export to these countries (Latvia has trade deficit with
Sweden and Germany). However, share of Latvia’s export to both the countries is
higher than their share of import to Latvia.
This analysis could be extended by overview of
Latvian export share in total import to EU and Latvian export main partners –
Germany, Sweden and UK.
Table 3. Share of Latvia’s export
in total import to EU over the period 1993-1998 and its memberstates over the
period 1996-1998, (%)
|
|
1993
|
1994
|
1995
|
1996
|
1997
|
1998
|
|
EU
|
0.063
|
0.115
|
0.163
|
0.187
|
0.198
|
0.248
|
|
Germany
|
…
|
…
|
…
|
0.036
|
0.041
|
0.47
|
|
Sweden
|
…
|
…
|
…
|
0.113
|
0.167
|
0.217
|
|
UK
|
…
|
…
|
…
|
0.45
|
0.61
|
0.63
|
Source: Eurostat, 1999; Direction of Trade, 1998
It
is obviously that share of Latvian export in total import of EU and its
memberstates cannot be large. The most important conclusion we can find out
from table 3 is that the share has tend to increase. Figures placed in appendix
2 shows that among the candidate states only the shares of Poland, Czech
Republics and Turkey in extra-EU trade are expressed in full per cent.
The next step of our analysis is
to find out why EU countries, especially Germany and Sweden, are so important
Latvia’s trade partners. To answer these question link attributes and results
of Strömquist and Åberg’s, and Johansson and Hacker’s studies of gravity model
for the Baltic region should be analysed. The gravity model was estimated
on cross-section data where flows within
the Baltic Sea region and additional flows to the other countries outside the
area were included. Strömquist and Åberg used such a formula:
[3-1]
Where is country’s i export to j , measured in million 1995 USD; GDP in country i (j) , is measured using level of 1995
(USD); 
is the airflight
distance between the capitals of the countries; EU is a dummy variable, where 1
indicates membership in EU and 0 otherwise; CEFTA (Central European Free Trade
Area) is another dummy variable; I denotes
pairs of countries dependent on sea borne transport; 
are parameters
representing income elasticity (Strömquist and Åberg, 1998). GDP and distance
are common variables for the gravity model. Other ones are the subject for
experimentation. Johansson and Hacker beside GDP and distance used such
variables as common border, situations when both the partners are inter mature-countries, Poland and
M-country, inter Nordic, inter emergency-Baltic, Baltic-Nordic and Estonia,
Latvia or Lithuania, as well as intercept variable (Johansson and Hacker, the
materials on the course “European Economic Integration”).
is country’s i export to j , measured in million 1995 USD; GDP in country i (j) , is measured using level of 1995
(USD); is the airflight
distance between the capitals of the countries; EU is a dummy variable, where 1
indicates membership in EU and 0 otherwise; CEFTA (Central European Free Trade
Area) is another dummy variable; I denotes
pairs of countries dependent on sea borne transport; are parameters
representing income elasticity (Strömquist and Åberg, 1998). GDP and distance
are common variables for the gravity model. Other ones are the subject for
experimentation. Johansson and Hacker beside GDP and distance used such
variables as common border, situations when both the partners are inter mature-countries, Poland and
M-country, inter Nordic, inter emergency-Baltic, Baltic-Nordic and Estonia,
Latvia or Lithuania, as well as intercept variable (Johansson and Hacker, the
materials on the course “European Economic Integration”).
Some results of the studies are showed in table 4. Coefficients indicate
how each variable impact flows, and
trade-value indicates variables impact trade turnover. Income has relatively
high positive values for its coefficient estimates, which indicates a strong
income effect on trade. Higher income leads to higher demand and supply and
thus to increasing of trade flows and turnover. The income effect on trade is stronger according
to Johansson and Åberg’s studies.
Table 4. Selected Results of the estimated
gravity model in the Strömquist’s and Åberg’s and Johansson’s and Hacker’s
studies.
|
Variable
|
Coefficient
|
T-value
|
||
|
|
Johansson & Hacker
|
Strömquist & Åberg
|
Johansson & Hacker
|
Strömquist & Åberg
|
|
GDP, importer
|
0.74
|
0.61
|
30.5
|
14.18
|
|
GDP, exporter
|
0.83
|
0.67
|
34.2
|
15.51
|
|
Distance
|
-0.87
|
-0.00115
|
-14.3
|
-7.85
|
|
Common border
|
0.38
|
X
|
3.3
|
X
|
|
EU
|
X
|
1.06
|
X
|
4.67
|
|
Inter
M-countries
|
1.46
|
X
|
16.0
|
X
|
|
Inter Nordic
|
0.61
|
X
|
3.8
|
X
|
|
Inter E-baltic
|
1.47
|
X
|
7.8
|
X
|
|
Baltic-Nordic-ELL
|
0.97
|
X
|
5.4
|
X
|
Source: Strömquist and Åberg, 1998; Johansson and Hacker, 2000
However, the studies gave different results
concerning effect of distance on trade. The importance of distance is not so
extensive in Strömquist and Åberg’s model: if the distance increases by the
kilometre, trade flows will diminish with 0.1 per cent. This result could explain that relatively long distance between
Riga and London is not important limitation factor for Latvia to export
relatively large share of its export to Great Britain, wile both Latvian export
to Sweden and Finland’s and Germany’s import to Latvia declining. But at the same time according to Johansson
and Hacker’s results distance has even stronger negative effect on trade than
positive effect of income for exporter. Common border has not very strong
effect in their study.
We suppose that the most important result of
the studies for understanding of the aim of the essay is that the results of
both of the studies confirm the
importance of regional integration. Especially we would like emphasize on
straight of EU factor.
The fact, that Latvia, Sweden and
Germany are Baltic-Nordic – ELL
countries has quite strong positive effect on trade as well.
To understand importance of Latvia’s
trade with Sweden and Germany such link attributes as artificial obstacles,
natural impediments, language similarities, historical background should be
analysed. Latvia, Sweden and Germany are The Baltic Sea countries, this factor
of course is positive. Short distance between Latvia and Sweden gives us the
right to state that our countries are neighbours, despite the fact that we
don’t have a common border. Both Sweden and Germany have strong historical
links to Latvia. The Vikings raided the country and German crusaders invaded
the territory and governed it for two
centuries. Concerning language similarities while studying Swedish we noted that there are many
similar words in Latvian and Swedish.
Strömquist’s and Åberg, and
Johansson’s and Hacker models allow to see that the potential to extend trade
relations still exists. Concerning Latvia and Sweden the results is quite
similar: the share of Latvian export to
Sweden could be larger, while Sweden import to Latvia is almost optimal.
Regarding Latvia and Germany the results differ. Johansson and Hacker suppose
that these trade relations are almost optimal, while Strömquist and Åberg
consider that the relations are far from predicted.
Table 5. Relative gap
(1-P/O) between observed and
model-predicted trade flows
between Latvia-Sweden and Latvia-Germany, (%)
|
|
Sweden
|
Germany
|
||
|
|
Johansson & Hacker
|
Strömquist & Åberg
|
Johansson & Hacker
|
Strömquist & Åberg
|
|
Exporter
|
-0.01
|
-0.04
|
-0.07
|
-0.71
|
|
Importer
|
-0.25
|
-0.19
|
0.01
|
-0.66
|
Source: Nilsson, 1999; Johansson and Hacker
Thus, EU and its members, especially
Sweden and Germany play significantly important role in Latvia’s trade relations.
There are all prerequisites to proceed developing of trade relations because of Latvia’s integration into EU and
existing of favourable link attributes for trade relations with Sweden, Germany
and other EU members.
3.2 The analysis of the structure of Latvian
export and import
Before analysing the structure of
Latvian export and import by commodities we would like to present total data on
export and import calculated using the formulas described in the theoretical
outlook. Table 6 data shows that the share (% from GDP) of Latvian export to EU
in ling term has tend to increase, while the share of total export decreasing.
This fact one more time confirms that the process of gradual Latvian export
reorientation from Russian market to EU markets takes place. Comparing table 6
data with figure 2 data we can see that in 1999 comparing with 1998, share of
Latvian export to EU in total export increased, while the share in GDP
decreased. This can be explained in such a way: in 1999 comparing with 1998 value
of Latvian export to EU decreased by 0.3%, while value of the export to CIS
decreased by 7%. Thus, share of the export to EU in total export increased. At
the same time GDP in 1999 increased by 0.5%. Thus, share of the export in GDP
decreased, because value of GDP increased, while value of export to EU
decreased (Central Statistical Bureau of
Latvia, 2000).
Table 6. Share of Latvian export and import in GDP and total
trade turnover over the time period 1995-1999
|
|
1995
|
1996
|
1997
|
1998
|
1999
|
|
Total export,
% of GDP
|
30.7
|
29.0
|
32.6
|
31.5
|
27.5
|
|
Export to EU,
% of GDP
|
12.9
|
12.6
|
14.5
|
16.9
|
16.5
|
|
Total import,
% of GDP
|
43.8
|
44.5
|
47.7
|
49.1
|
47.1
|
|
Import from
EU, % of GDP
|
20.4
|
22.3
|
25.7
|
29.0
|
25.7
|
|
Total trade
balance, % of GDP
|
-13.0
|
-15.5
|
-15.1
|
-17.6
|
-19.5
|
|
Trade balance
with EU, % of GDP
|
-7.5
|
-9.5
|
-11.2
|
-12.1
|
-9.2
|
|
Share of
total trade deficit in turnover, %
|
16.5
|
23.3
|
24.0
|
27.5
|
26.2
|
|
Share of
trade with EU deficit in turnover, %
|
52.0
|
56.5
|
53.8
|
51.4
|
48.1
|
Source: Calculated using Central Statistical Bureau of Latvia data
The shares of total import and import from EU
have the same tends, but decreasing of the share of import from EU is more
sharp. However, in 1999 both shares have decreased. We can try to explain this.
We suppose that it happened due to decreasing in demand, which occurred as
result of decreasing in people’s income. We consider that in short-term period
reorientation of export has also negative aspect: it takes time to find new
markets and to adapt their “rules of game”. The reorientation asks for
modernization of industry, sometimes for changes in assortment of export
production. Many factories in Latvia practice so called “extra-holydays” tactic
for their workers. Very often it is one
or even two month long. As result workers wages decrease.
In fact, being a non-member state, it is quite
difficult for Latvia to export its commodities to EU. First of all, each
certain exporter should have special licence on quality issued by EU
authorities. Of course, besides above described negative short-term factor, it
has long-term positive aspect: industry modernization, quality improving, costs
and price lowering. Especially strict requirements regarding Latvian export
have food products exporter. Besides quality requirements EU also exercises
quota policy for non-member states exporters. First of all it is applicable for
agricultural products. It is known that in EU exists agricultural products
surplus. Thus, EU exercises not only quota policy for imports of such products,
but also export subsidies policy. These facts one more time underline the
importance of Latvia’s membership in EU, when limitations will be abolished and
Latvia will be able enjoy the same trade conditions as all EU members and then
Latvian agricultural products will be “the head ache” of EU. According to
Strömquit and Åberg estimation we can expect the significant growth of trade
flows when Latvia will join EU.
The most important achievement in bilateral
relations with the EC was The Agreement On Free Trade And Trade-Related
Matters, which entered into force on January 1, 1995. The restrictions on
import and export of industrial products were
eliminated in January 1995
(Europe Agreement between The EC and Republic of Latvia, Art. 10 and 11). For
agricultural and food products, the Agreement provides for reciprocal trade
concessions. The broad-ranging Association Agreement between the EU and each of
the Baltic States, concluded on June 9, 1995, entered into force on February
12, 1998. Since July 1996, these trade agreements have been modified to take
into account the Agreement on Agriculture concluded during the GATT Uruguay
Round, and also to reflect further improvements in the concessions on
agricultural products granted to the Baltic States by the Community. In the
Marrakech agreement, the EC replaced the variable agricultural levies and other
non-tariff barriers by fixed customs duties from July 1, 1995. This replacement
effected the agricultural concession granted in the Free Trade Agreements with
the Baltic States, and in order to
maintain the degree of preferential access granted, it was therefore necessary
to adjust the agricultural concessions provided in the Agreements on free trade
and trade-related matters. In 1997, trade in processed products was even further liberalised. At
the same time allocated quotas of dairy products were slightly extended and
exports of confectionery and spirits to the EU were possible on more favourable
terms. The GATT-related adjustments, together with the new concessions decided
by the EC, resulted in the level of preference for all agricultural products
being increased from 60 to 80%. The applicable duty is in general 20% of the
MFN duty (compared to 40% previously). The arrangements also provide for a 5%
yearly increase in the volumes of the tariff quotas. Concerning the EC imports
of agricultural products to Latvia, there are no quotas, but the rates of the
customs duties vary from 0 to 20% (Europe Agreement, 1995).
One more factor, which limits export and is
favourable for import is high national currency (Lats) rate towards foreign
currencies. For example, 1 USD costs 0.59 Lats. This rate is stable since 1993.
Thus, export is expensive and import is cheap. Latvian government suppose that
devaluations of Lats from long-term point of view will have negative effect.
The surplus of EU import to Latvia over Latvian
export to EU best of all can be described by such indicator as share of trade
deficit in trade turnover (see table 6). The deficit compiles a half of trade
turnover between Latvia and EU, and it twice exceeds the share of total deficit
in total turnover. This fact also shows the superiority of EU’s import flows
over the flows from other countries. Such deficit occurred due to factors
described above as well as factors which will be described in the next paragraphs. The most importance
ones are low competition ability of Latvian products, limited access to EU
markets and high demand for import of technological equipments.
Thus, also partly due to above mentioned negative
factors Latvia has such huge trade deficit, especially with EU (see table 6).
It is a number of factors apart from
above mentioned, which explain causes of current account deficit in Latvia. For
example growth of deficit in the current account in 1998 was predetermined by
two main factors: drastic lowering of external demand and growth of imports in
private consumption (Ministry of Economy of Latvia, 1999).
The deficit in the current account is created when the
domestic demand goes up faster that GDP. This means that the internal saving –
investment balance continually goes down. Increasingly bigger share of foreign
saving is used to cover investment. Such process when the domestic demand goes
up faster than GDP is typical of almost all countries in transition.
Data of the table placed in the appendix 3 shows that
in 1998 all candidate states had deficit in trade with EU. This basically is
determined, on the one hand, by the objective need to restructure production
requiring an accelerated process of investing and consequently the domestic
savings may turn out to be too small to take care of this process. On the other
hand, the active privatisation ensures attraction of foreign resources to
economy mainly in the form of foreign direct investments. From this perspective,
growth of deficit in the current account is fully justified and it should not
result in far-reaching negative consequences for the equilibrium in the external
sector since with time investments create the opportunities for faster growth
of GDP. Yet, in Latvia the reduction of the domestic saving – investment
balance was influenced not only by the speedy growth of investments but also by
the decrease of saving (see Figure 4).
As
seen in Figure 4 growth of deficit in the current account in 1997 was mainly
caused by the fast growth of investment and in 1998 – to a greater extent by
reduction of savings. Reduction of saving in 1998 was mainly linked with the
narrowing of exports due to the
Russian crisis at the end of the year considerably declining industrial
output.
*Estimation of the Ministry of Economy.
Figure 4. Current Account,
Investment and Saving , (% of GDP) Source: Ministry of Economy of Latvia, Reports, 1998, 1999
As it was explained in theoretical
overview the deficit of current account should be covered by capital inflow,
thus making balance of payments (current account is a part of balance of
payments) positive. The balance of payments of Latvia since the beginning of
1990s is positive that is foreign assets of the Bank of Latvia is going up. This means that the incoming
financial flows into Latvia are bigger than outgoing. Balance of
payments in Latvia is presented in the appendix 4. Analysis of the accounts of the balance of
payments of Latvia show that there are certain typical trends retained for
already several years. Balance of the current account from clearly positive at
the beginning of 1990s turned into expressly negative in 1996-1998. Balance of
the financial and capital account during the same period stayed positive and
fully offset the negative balance of the current account. However capital flows
keep reducing with every year. Moreover, the structure of the incoming capital
changes. One the one hand – the share of short term capital flows go up in the
structure of net capital flows, on the other hand – the debt forming part of
flows goes up. The mentioned trends caused deterioration of the basic balance
(the current account of the balance of payments and the net balance of long
term capital).
Lessening of saving may also be caused by the
excessive growth of imports when domestically made products due to their low
competitiveness are ousted out from the domestic market by foreign goods. In
that case import of consumer and intermediate consumer goods grow faster than
private consumption and output of goods and services. Then it may happen (in
the absence of the corresponding growth of export of goods) that not only
investments but also current consumption is financed from foreign saving. This
phenomenon was observed in 1998 in
Latvia when private consumption went up by 10.6% yet import of consumer goods –
by 26.9%. In this case, with the narrowing of the markets of domestic products
also the potential output goes down. As a result also the GDP becomes smaller
and finally also savings, in turn stimulating growth of the deficit in the
current account (Ministry of Economy of Latvia, 1999, December).
As mentioned
above the deficit in the current account is quite normal for transition
economies. The reduction of the deficit in the current account of the balance
of payments of Latvia will mainly depend on how fast Latvia succeeds to
restructure industry and increase competitiveness of Latvian producers both in
the domestic and external markets. This process requires a certain period of
time. At present, one of the main tasks of economic policy is to offset deficit
with such capital flows that minimize risk of fast change of these flows. To
preserve the equilibrium between the deficit of the current account and the
flows of incoming capital measures of fiscal, monetary and structural policy
should be co-ordinated. Not less important than attraction of external
resources is efficient use of these resources. Therefore structural policy
plays a decisive role to maintain the balance of payments in equilibrium in the
long run.
The deficit in
trade as well can be explained by the low value per ton of export (because it
is mainly raw materials and other low-value goods) and high value per ton of
import (because it is mainly capital goods and knowledge-intensive goods).
Table 7 presents export values per ton in countries of The Baltic Sea Region.
Table 7 data proves above mentioned
statement: export value in industrialized countries is much higher than for
example, in Latvia, Estonia and Poland. Such low export value in Norway can be
explained by low oil prices – the main product of Norwegian export.
Table 7. Export value in ECU per
ton, mid 90’s
|
Country
|
ECU per ton
|
|
Switzerland
|
5850
|
|
Germany
|
1900
|
|
France
|
1260
|
|
Portugal
|
1009
|
|
United Kingdom
|
950
|
|
Sweden
|
810
|
|
Finland
|
720
|
|
Belgium-Luxemburg
|
650
|
|
Netherlands
|
420
|
|
Latvia
|
220
|
|
Poland
|
210
|
|
Norway
|
170
|
|
Estonia
|
140
|
Source: Strömquist and Åberg, 2000
Now we
will present the
analysis of Latvian
export and import by groups of commodities.
The analysis gave us the results as we expected. These
results are common for developing countries: they export their abundant natural resources and import capital goods.
In Latvia this abundant resource is wood. Forests cover 45% of the territory.
From the appendices 5 and 8 data we can see that in 1998 the share of export of
wood and wood products in total export
compiled 46% and about 20% in total trade turnover. In 1992 the shares compiled
relatively 1.87% and 1%. The share of wood export in GDP increased 25 times
over the period 1992-1998 (see appendix 7). Thus, awareness of the comparative
advantage led to impressive growth of the share. However, example with wood
export characterizes quite slow process of transition from primary export to
secondary one. Wood is exported mainly in unwrought condition. Furthermore,
while wood export is growing impressively the growth of paper products import
from EU is occurring as well (see appendix 6). The share of paper products
import in total import tripled, but the share of such import in GDP increased
ten times the amount. Finally, the share of two-way trade is only 4% (see
appendix 9). Thus, forward links in this sector are not set up yet in
Latvia.
Latvia also is relatively rich with such mineral
resources as sand, clay and stone, but not so much as with forests. As results
the export share decreased in total export (from 78% to 21%), in total trade
turnover (from 57% to 9%), in turnover of this group of commodities (from 99%
to 71%) as well as in GDP (from 19% to 5%). However, mineral products form the second largest share of Latvian export.
The third largest share belongs to textile and textile
products. This labour-intensive industry
is traditional for Latvia. The share of such export increased from 2% to 12% in
total export, from 1% to 5% in total turnover, from 57% to 60% in turnover of
the group, and from 0,4% to 3% in GDP.
As we expected Latvia mainly imports from EU capital
goods. Import of machinery and electrical equipment increased from 17% to 25%
in total import, from 1% to 7% in GDP, from 4% to 14% in total trade turnover.
The share in the turnover of this group compiles about 95%.
The similar tendencies we can see analysing the second
largest group of import – vehicles (the figures relatively are 13%-14%,
0.8%-4%, 2%-7% and 97%).
Besides the capital goods, EU exports to Latvia quite large amount of products of chemical industry. The share of such import
has increasing dynamics as well: from 5% to 10% in total import, from 0.5% to
3% in GDP, from 1% to 6% in total trade turnover and from 50% to 90% in the
turnover of the group.
Analysing data we can see that in 1998 Latvian wood
export share is almost equal with the share of capital good import.
In our opinion the proportion between export and
import flows of certain group of commodities best of all can be described by
such indicator as share of two-way trade. As we expected the level of two-way
trade for the main import and export goods is low. It is common for trade
relations between industrialized country and developing countries: export flows
compile mainly natural resources and labour-intensive goods, while import flows
compile mainly capital goods. This theory can be as well proved on Latvian
example: the share of two-way trade for wood is 4%, for machinery and
electrical equipment – 10%, for vehicles – 6%. However, the level is very high
for textile and mineral products. In our opinion it could be explain by large diversity
of the goods within the group. In the group of mineral products Latvia exports
mainly sand and stone, but imports mineral fuels and oils. The high two-way
trade level within textile goods group can be explained by large assortment of
such goods.
Specific situation occurred regarding such industries
as chemical (with decreasing of the two-way trade level from 98% to 20% over
the period 1992-1998), leather (with increasing from 15% to 80%), plastic and
rubber (with decreasing from 80% to 17%), footwear (with decreasing from 92% to
57%), metallurgical industries (with increasing from 9% to 96%). In our opinion
it could be explained as follows. Latvia has specific historic-economical background. Being a part of the USSR, Latvia
was highly industrialized part of it. Soviet Union implemented the policy of
setting up plant and factories in Latvia. The policy was based not on
principles of economics, but as a part of politics. As a result factories
produced their goods using raw materials and spare parts delivered from
hundreds places within the large USSR. As a result of dissolution of the Soviet Union these relations between
producers and the delivers of input resources gradually (1992-1995) was
destroyed. The hard process of searching for new origins of raw materials, new
markets for their goods as well as the process of industry restructuring,
competitiveness improving for Latvian
industries was started. Some of them (metallurgical, leather industries) deal
with this quite successfully, while another (chemical, plastic and rubber,
footwear industries) still try to find salvation for their problems. As a
result the shares of export of their products in total and group export,
turnover and GDP fluctuate.
Specific situation occurs with food products as well.
For export of agricultural products EU implements quota policy, while Latvian
market for EU import is opened. Despite this fact the level of two way trade
for vegetable products increased from 0.41% to 17% over the period 1992-1999.
The share of vegetable products in total export increased from 0.02% to 0.26%,
in GDP from 0.01% to 0.36%, in total turnover from 0.02% to 0.11%, in the
turnover of this group from 0.21% to 8.5%, while these shares for EU import
decreased.
The shares increasing for both the partners in trade
with live animals and animal products is observed
Concerning food industries products the level of
two-way trade increased from 8% in 1993 to 13% in 1998. Latvian export share in
trade turnover of the group increased from 4% to 6%.
In our opinion the increasing of Latvian food export
accompanies with yearly increasing of quotas for the Latvian import. It was already mentioned that each Latvian
food exporter should get special quality licence issued by EU authority. We
suppose that Latvian food industry is quite developed and produces qualitative
products. Some of them (Riga’s Black Balsam and green cheese) have no analogues
in the world. We consider that the
process of Latvian integration into EU will lead to increasing of Latvian food
export.
4 Trade and Growth in Latvia
The aim of this chapter is to find out how does
the theory about close link between both growth in GDP and trade complies with
Latvian reality. Empirical researches in countries all over the world show that
2.5% growth in trade gives 1% growth in GDP. In table 8 we will compare growths
in GDP and trade in Latvia as well we will extend our analysis by such GDP
expenditure elements as individual and national consumption and capital
formation.
Table 8. Growth in GDP and growth in trade in Latvia over the period
1994-1999
|
|
1994
|
1995
|
1996
|
1997
|
1998
|
1999
|
|
Growth in GDP
|
2.2
|
-1.6
|
3.3
|
8.6
|
3.6
|
0.1
|
|
Growth in
total trade turnover
|
-5.1
|
32.1
|
25.8
|
23.2
|
15.5
|
-7.4
|
|
Growth in
trade turnover with EU
|
26.6
|
56.3
|
25.7
|
33.6
|
25.0
|
-1.0
|
|
Growth in
total export
|
-18.4
|
24.4
|
15.5
|
22.2
|
10.0
|
-5.7
|
|
Growth in
export to EU
|
-3.2
|
40.3
|
18.1
|
33.1
|
28.0
|
6.0
|
|
Growth in
total import
|
8.7
|
38.2
|
33.2
|
23.8
|
18.9
|
-8.4
|
|
Growth in
import from EU
|
65.0
|
68.5
|
30.5
|
33.9
|
23.4
|
-5.1
|
|
Individual
consumption
|
0.2
|
0.6
|
10.3
|
5.0
|
5.8
|
1.0
|
|
National
consumption
|
4.7
|
7.7
|
1.8
|
0.3
|
5.3
|
1.6
|
|
Forming of
capital
|
4.9
|
8.7
|
22.3
|
20.7
|
11.1
|
5.1
|
Source: Central Statistical Bureau of Latvia, 2000; Statistics Yearbooks
of Latvia, 1998
As we can see the direct link
between growth in trade and growth in GDP exists only in 1996-1998. Also we can
note that there is not a strict
proportion between growth in trade and GDP. Analysing growth in trade with EU
and total growth in trade it is clear that trade turnover, export and import between Latvia
and EU grew much faster than the total one, as well as decreasing in 1995 and
1999 is much less. Situation in 1995 shows that all indicators including
consumption and forming of capital
increases, while GDP decreases. To explain this we should take in account
Harrod-Domar production function according to which there are four sources of
growth: K - stock of capital, L - size of labour force, R - natural resources, A - increases in the productivity
or efficiency with which inputs are used (Gillis, 1996). Besides above
mentioned factors also these ones impact GDP growth. We suppose that in 1995
these four factors emphasized GDP
increasing.
Furthermore, Latvian statistical
data does not prove the theory that there is a direct link between the growth of
GDP and the growth of net barter terms of trade. If ITT in 1995 =100, then in
1996 it is 92, in 1997 – 90, in 1998 – 93 (World Bank, 2000). Thus, ITT declined, but as we have seen above GDP
grew in Latvia over this period.
Thus, we cannot find strong direct
correlation between growth in trade and growth in GDP in Latvia. However, it is
obviously that trade growth positively impacts growth of GDP. Differences in
tends can occur only as result of strong negative impact from the side of other factors which
influence GDP. We did not find direct link between growth of GDP and
growth of ITT in Latvia.
5 Conclusion
The empirical analysis showed the
tend of permanent increasing of both EU’s import to Latvia and Latvian export
to EU, while Russian share rapidly decreased. Thus, trade reorientation from
east to west, which complies with the process of Latvia’s integration into EU,
takes place.
Empirical analysis complies with
theory: as it is common for developing countries Latvian export mainly consists
of primary export (raw materials, mainly wood), while it imports from EU mainly
capital goods. EU exercises significant surplus in trade with Latvia. It is
explainable by number of factors: low competition ability of Latvian export,
limited access to EU markets, low Latvian export value per ton, industry
restructuring process asks for time, as well asks for time the process of entering to new markets and
adaptation to requirements of these markets, Latvian export non-stimulating
national currency rate.
In our opinion the process of
transition from primary export to secondary export is quite slow. The main
element of Latvian primary export – wood mainly - is exported in unwrought
condition. The process of setting up of industries, which use wood as input,
does not take place. At the same time share of imported paper products is
growing. Thus, the process of import substitution is slow also.
Empirical analysis showed that
there is not a strong direct link between growth in trade and growth in GDP in
Latvia because of strong influence from the side of other factors. However, no
doubt trade positively impacts growth
The studies of the gravity model
for The Baltic Sea region show that Latvia does not use all its potential in
trade relations. Latvia has favourable link attributes (especially with Sweden
and Germany) for the extending of trade relations. According to the Strömquist and Åberg study the process of
Latvia’s integration into EU is significantly important.
References
Central
Statistical Bureau of Latvia, (www.csb.lv)
Central
Statistical Bureau of Latvia, Statistics Yearbook 1998
Comext,
CD Database
Cypher,
J.M., Dietz, J.L., (1997), The Process of
Economic Development, Routledge, London
The Economist Intelligence
Unit, (1999), The Baltic States, EIU Country Report
Ekholm, K., Södersten, B., (1999),
Growth and Trade vs Trade and growth
Eurostat, (2000), EU Enlargement:
Key Data On Candidate Countries
Europe
Agreement Between Latvia and The EC, (1995)
Gillis, M., Perkins, Roemer,
Snodgrass, (1996), Economics of
Development, 4th ed., Norton, New York
IMF, (1998), Directions of Trade,
Statistics Yearbook.
Johansson, B., Hacker, S. The
Gravity Model For The Baltic Sea Region, Material on course European Economic Integration
Mole, W., (1997), The Economics of European Integration –
Theory, Practice, Policy, 3rd ed., Aldershot: Ashgate
Ministry of Economy of Latvia,
(1998, December), Economic Development of Latvia, Report
Ministry of Economy of Latvia,
(1999, June), Economic Development of Latvia, Report
Ministry of Economy of Latvia,
(1999, December), Economic Development of Latvia, Report
Nafziger, E.W., (1997), The Economics of Developing Countries, 3rd
ed., Prentice Hall
Nilsson, D., (1999), Modelling
Aggregate Trade Between Estonia, Latvia, Lithuania and Sweden, Master Thesis
Strömquist, U., Åberg, P., (1998), Trade and Modal Change in The Baltic Region:
Scenarios to 2015, Division of
Regional Planning
World Bank, (1999), Latvia at Glance
6 Appendices
Appendix 1
External trade, 1998
|
|
Bulgaria
|
Cyprus
|
Czech Rep
|
Estonia
|
Hungary
|
Latvia
|
Lithuania
|
|
EU share of
total imports (%)
|
45.0
|
61.9
|
63.3
|
60.1
|
64.1
|
55.3
|
50.2
|
|
EU share of
total exports (%)
|
49.7
|
50.4
|
64.2
|
55.1
|
72.9
|
56.6
|
38.0
|
|
|
Malta
|
Poland
|
Romania
|
Slovakia
|
Slovenia
|
Turkey
|
|
|
EU share of
total imports (%)
|
69.3
|
65.9
|
57.7
|
50.4
|
69.4
|
52.4
|
|
|
EU share of
total exports (%)
|
52.8
|
68.3
|
64.5
|
55.8
|
65.5
|
50.0
|
|
Source: Eurostat
Appendix 2
Candidate
country share of total extra-EU trade, %, 1998
|
|
Bulgaria
|
Cyprus
|
Czech Rep
|
Estonia
|
Hungary
|
Latvia
|
Lithuania
|
|
Candidate
country share of total extra-EU trade
|
0.3
|
0.2
|
2.2
|
0.3
|
2.2
|
0.2
|
0.3
|
|
|
Malta
|
Poland
|
Romania
|
Slovakia
|
Slovenia
|
Turkey
|
|
|
Candidate
country share of total extra-EU trade
|
0.2
|
3.1
|
0.8
|
0.8
|
0.8
|
2.5
|
|
Source: Eurostat
Appendix 3
Balance of trade with
EU, Mio ECU, 1998
|
|
Bulgaria
|
Cyprus
|
Czech Rep
|
Estonia
|
Hungary
|
Latvia
|
Lithuania
|
|
Balance of
trade
|
-607
|
-2354
|
-2198
|
-1376
|
-2409
|
-1232
|
-1858
|
|
|
Malta
|
Poland
|
Romania
|
Slovakia
|
Slovenia
|
Turkey
|
EU15
|
|
Balance of
trade
|
-742
|
-16792
|
-3154
|
-2045
|
-936
|
-16359
|
+19200
|
Source: Eurostat
Appendix 4
Balance of Payments of Latvia
(% of GDP)
|
|
1998
|
1999
|
1996
|
1997
|
1998
|
||||
|
|
I
|
II
|
III
|
IV
|
I
|
II
|
|
|
|
|
A. Current account
|
-5.7
|
-7.8
|
-13.0
|
-17.2
|
-8.1
|
-9.6
|
-5.5
|
-6.1
|
-11.1
|
|
Trade
balance
|
-13.1
|
-16.7
|
-18.5
|
-21.8
|
-11.6
|
-14.6
|
-15.6
|
-15.1
|
-17.6
|
|
Exports
|
34.9
|
34.0
|
30.0
|
27.3
|
30.1
|
29.5
|
29.0
|
32.6
|
31.5
|
|
Imports
|
48.0
|
50.7
|
48.5
|
49.1
|
41.7
|
44.1
|
44.5
|
47.7
|
49.1
|
|
Non-factorial
services, net
|
6.7
|
5.9
|
2.7
|
2.4
|
4.3
|
4.0
|
7.5
|
6.6
|
4.4
|
|
Factorial
services, net
|
-0.4
|
1.7
|
1.4
|
0.5
|
-2.1
|
0.1
|
0.8
|
1.0
|
0.8
|
|
Transfers,
net
|
1.1
|
1.2
|
1.3
|
1.6
|
1.3
|
0.8
|
1.8
|
1.4
|
1.3
|
|
B. Long term capital, net
|
8.1
|
12.1
|
4.8
|
5.8
|
4.9
|
14.7
|
8.5
|
12.3
|
7.7
|
|
Basic balance (A + B)
|
2.5
|
4.3
|
-8.2
|
-11.4
|
-3.2
|
5.1
|
3.1
|
6.2
|
-3.4
|
|
C. Short term capital, net
|
0.0
|
-4.6
|
2.2
|
9.3
|
2.6
|
2.4
|
2.0
|
-5.9
|
1.8
|
|
D. Net errors and omissions
|
0.6
|
7.1
|
1.2
|
1.2
|
3.6
|
2.3
|
-0.9
|
1.6
|
2.6
|
|
Total balance (A + B + C + D)
|
3.1
|
6.8
|
-4.8
|
-0.9
|
3.0
|
9.8
|
4.1
|
1.8
|
1.0
|
Source: Economic Development of Latvia, Report,
December 1999
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