Vitas Vasiliauskas: Harnessing investment and innovation: getting
on the fast track
Welcome speech by Mr Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania, at
the (virtual) Economics Conference of the Bank of Lithuania , 6 November 2020.
* * *
Good morning, dear colleagues and representatives from the academia, the private and public
sectors.
I am sincerely happy to see you all joining in.
And I am definitely much less happy that we have met in this particular - remote - way.
Unfortunately, in spite of our utmost wish to invite you for a face-to-face conversation, we have to
abide by the uncompromised demands dictated by the second wave of the coronavirus.
Tensions continue to run high, as does the uncertainty related to both public health and the
economy. Such circumstances call to focus first and foremost on how to survive safely through
tomorrow or the nearest quarter.
However, even in such circumstances, it would be unwise not to reflect on the post-pandemic
world, which will be different - and we will have to adapt to it. Now is the time, therefore, to take a
look at the long-term outlook, including Lithuania's economic development in the long run.
Before the pandemic, the pace of economic convergence in Lithuania was among the most rapid
across the European Union (EU). The rather rapid economic growth was underpinned by the
lower value-added economic activities. For some time, such growth is, to a certain extent,
inevitable, as conveyed in economic textbooks.
However, sustainable and long-term convergence is not something to be taken for granted.
Sooner or later, all readily available resources are used up and economic growth decelerates
substantially.
Two options are available upon reaching that point. The first option is to do nothing and make do
with the status of, at best, an average performer. The second option would be to take resolute
measures that would transform the structure of the economy.
I assume that the option of the average performer appears less attractive to most people here
and therefore propose to explore the second path in more depth today.
The blow dealt by the pandemic to our country has been less severe, at least thus far, compared
to the majority of EU countries. This provides us with a relatively solid starting position, from
which we could forge ahead into the top league on the racetrack.
By far the most important section on this route deals with investment and innovation, which you
have been invited here to discuss in particular. Both these factors are closely interrelated and
interdependent - almost like the chicken and the egg. There can hardly be innovation without
investment. And without innovation, there can be no technological progress, which is a source of
continuous productivity growth. It is essential to capitalise on that source if we want to move
towards the production of goods and services of higher added value.
Such a shift would open up a prospect of higher long-term growth. This would allow to catch up
with the average EU standard of living and, perhaps, exceed it in the long run. Consistent
economic growth would simultaneously imply broader possibilities for investment in the most
productive sectors of the economy.
Is it the right time to talk about that now, in an environment of global uncertainty?
I think it is, given that the crisis is an opportunity and, perhaps, a historic chance to transform
Lithuania's economy. The pandemic can be a catalyst for significant changes in investment and
innovation, provided that we take a well-targeted approach.
I will substantiate this thesis by discussing two types of investment - foreign direct investment
and general government investment.
Dear colleagues,
Foreign direct investment is important in that it can help the state "import" new technologies and
innovative process management solutions.
In Lithuania, foreign direct investment, as a share of GDP, is among the lowest in Central and
Eastern Europe. Almost every country in the region - either Montenegro, Estonia, Serbia, or
Bulgaria - has accumulated a larger stock of foreign investment, which, in some countries, is
twice or even three times as great as that of Lithuania.
If we want to attract more foreign investment, we need to consider one important fact - a likely
wave of deglobalisation in the post-pandemic world. Countries and regions declare their aim to
repatriate the production of strategically important goods. Europe will strengthen its economic
autonomy. This is where new possibilities emerge: even though global value chains will get
shorter, they will be open to new participants.
If we took bold and ambitious action, we could use these global shifts to our advantage - to
attract foreign capital to our country and to step up our participation in value chains. In this
regard, it is important to make targeted use of new possibilities and to attract investment
specifically in the activities of higher added value, for instance, in the creation of product design
instead of assembly or production.
And the conditions we have created for foreign investors are rather good. Lithuania's business
environment has earned good scores in global rankings: we rank 11th in the World Bank's Doing
Business ranking and are the first among Central and Eastern European countries.
However, this is not enough. Of course, the increasing transparency of regulation and the
lightening burden of bureaucracy are significant achievements, but are not a panacea.
One of the essential challenges in competition for foreign investment is the relatively low labour
productivity, which has been growing at a twice slower pace compared to wages. Real wages in
Lithuania have increased by 54% over the past decade, as opposed to an increase of just 25% in
productivity.
I am convinced that the solution to this problem requires a consistent and firm public policy
intervention. I am therefore very happy that Professor Marcel Fratzscher, President of the
German Institute for Economic Research, will deliver the keynote speech soon. The professor is
among the loudest voices in Germany highlighting the importance of public investment in
enhancing potential economic growth.
It is the targeted and strategically planned long-term public investment that can help transform
Lithuania's economy and provide a strong positive impetus to the growth of labour productivity
and, consequently, the economic potential.
And precisely now is the right time to harness public investment for the implementation of real
change. Firstly, the pandemic has triggered a structural shock to the global economy and it is
therefore likely that it will anchor interest rates at current lows for some time. Economic logic
dictates that cheap money should be used wisely.
Secondly, public investment has gained importance as we live in a state of uncertainty. The
pandemic forces businesses to shelve investment decisions: for instance, we estimate that
private sector investment will decrease by more than 13% in Lithuania this year.
I am also concerned about that as a euro area monetary policymaker, given that sluggish
business investment dampens the efficiency of accommodative monetary policy measures.
Hence, the general government should take much stronger action once we step into an unknown
territory. According to the latest analysis by the International Monetary Fund, public investment is
much more effective in periods of uncertainty compared to ordinary times, both as a driver of
gross domestic product growth and as a catalyst for private investment.
And, nonetheless, I would like to emphasise quality instead of quantity in this regard. Public
investment should be targeted and measured as well as conducive to the functioning, growth and
investment of the private sector. Otherwise it will crowd out, rather than attract, private
investment.
Hence, even if we have agreed that investment is necessary, we must weigh, calculate, and
carefully estimate the returns and other potential consequences. Lithuania's debt will reach
record highs this year.
This may imply that we live at the expense of the future, in particular if we concentrate on one-off
payments that are "eaten away" and do not contribute to the solution of the most persistent
problems of the economy. However, if we use these funds prudently and wisely, this may also
imply that we are building the country's economic future.
Therefore, let's invest, after measuring thrice, in the areas that can steer the ship of our economy
in a new direction that would ensure the growth of potential GDP. If we manage to do this, we will
pay our debts back without much pain. Lithuania's Plan for the DNA of the Future Economy, in its
current shape, earmarks most investment for infrastructure, which is an important area.
Infrastructure is, and will continue to be, the foundation of sustainable economic growth. Of
course, this is only if it implies green, digital infrastructure, let's say, 5G networks, rather than
renovation of paving tiles in city squares. However, infrastructure is not the only area we should
focus on. We should concern ourselves far more with the qualifications of the workforce - given
a mismatch between the skills of more than one-third of workers and the labour market
requirements. It is a narrow bottleneck that also impedes the flow of foreign direct investment.
Meanwhile, the pandemic will certainly speed up the processes of digitalisation and job
automation as robots have the advantage of not spreading the virus (at least COVID).
Therefore, technological progress necessitates investment in workers' skills, education and
lifelong learning programmes. And the purpose of that is not merely to enable workers to keep
their jobs.
Investment in modern infrastructure requires the availability of highly qualified workforce to be
truly meaningful and to allow to fully benefit from digitalisation.
A higher level of human capital would facilitate the creation of research centres and the
strengthening of engineering and pharmaceutical industries. The more rapid growth of these
sectors would allow starting the engine of innovation, given that these particular sectors invest
most heavily in research and development. Now we are as much as halfway behind the EU
average in terms of investment in this area.
Dear colleagues,
The new reality has also led to tectonic shifts in the EU economic policy.
The creation of the EU recovery fund is a historic step towards European economic integration
and financial solidarity. The fund earmarks nearly €2.5 billion in grants for Lithuania.
The resources of the fund will be distributed in the light of the objectives elevated in Europe to the
top political level: digitalisation and the Green Deal. The creation of the fund also implies a
historic opportunity for us. Targeted use of the fund's resources will not only let us contribute to
the European cause. The objectives set by Europe provide a good compass if we want to lay a
new foundation for a more rapid long-term growth of Lithuania's economy.
That is why I mentioned in the beginning of my speech that the issue of investment and
innovation is, indeed, timely. We are witnessing structural changes and new plans for investment
that can alter the reality of our economic life for decades ahead.
Today's discussion has brought together a large number of competent professionals from
Lithuania and abroad. I believe that our conversation can provide an impetus to make better use
of the emerging opportunities. Lithuania, meanwhile, begins a new political cycle and, perhaps,
some of the ideas that will be put forward will resonate with decision makers.
Thank you for your attention and I wish you a meaningful discussion.