Industries leverage and structural development of the Baltic States’ economies

Abstract

Sustainable economic development is based on the favourable and stable business environment that promotes business competitiveness. Commercial banks have an important role on the growth and successful functioning of the state's economy. Development of any industry is not possible without the raised debt capital, most popular forms of which are bank loans and leases. Commercial banks facilitate the capital flow from the less efficient sectors of the economy and businesses to more competitive industries and enterprises. Additionally credits have another significant role in the economy of each country, because they substantially increase the purchasing power of consumers and industries, which leads to the GDP growth. Baltic countries’ GDPs grew faster than in Central and Eastern Europe (CEE) countries and in Europe could only be matched by Iceland and Spain, before the crisis of 2009. Volume of loans - including loans from foreign creditors have increased in average of 20 percent over the previous year in the period from 2000 to 2007. Still the debt was low compared to the average level in euro area but was above the level of most CEE countries.

The purpose of the research is to analyze the dynamics of Baltic States’ GDPs during the years 2005 - 2010 and to test the GDP correlation with domestic commercial banks issued loans to the businesses. The principle results of analysis provide evidence about the leading and influencing factors in GDP and issued loans mutual relations and develop proposals for faster recovery of Baltic States’ economies after meltdown in 2008. Empirical research provides the facts that the leading factor between the two variables – GDP and lending is GDP, because the changes in the lending follow after changes in GDP. Granger test analysis, performed for aggregate GDP and lending figures, as well as for 6 industries, which comprises more than 50% of GDP in each Baltic State: Agriculture, Manufacturing, Construction, Wholesale/Retail, Transportations/Logistics and Operations with Real Estate, provides controversial results and indicates that some industries output has mutual relationship with availability of financial resources, but business sector development leads to the increase of credits granting by this insuring particular sector future development.

Authors conclude that the lending in Baltic States restarts only when its economy shows growth in some consecutive quarters, not vice versa. As another option to restore the credit granting would be by support of government to encourage banking sector to antagonize the effects of the previously found correlation - to ensure lending to the economy also during periods of recession, in this way supporting the credit granting to the businesses. The availability of credit resources is essential for successful growth of companies, industries and GDP overall. These industries with better development pace have better access to credit resources.

The methods of the research are systematical, logical and comparative analysis, analysis of statistical data, expert method and generalization as well as econometric method of Granger causality test.