According to the business daily, Lithuanians are designing new types of services and trying to exceed by being exceptional. Business consultants note that even when there are novelties in business ideas, the lack of businesses, which would create value and strengthen the country‘s competitiveness, still exists.

According to the Statistics Lithuania, 4,453 business subjects were registered in the country during the first six months of 2010, or 12.7 percent more than in the same period of 2009.

Most of the new enterprises were established in Vilnius district, and the smallest number of new businesses were registered in Taurage district.

However, there was a strong increase in the de-registering of businesses: a growth of 54 percent during last six months in comparison to the same period last year.

Verslo Zinios reported that entrepreneurship in Lithuania had not altered during the last year. According to the data from July 1, 2010 there were 82,018 active businesses entities – 43.3 percent of all registered subjects.

There are 56 active companies per 1,000 inhabitants in Lithuania.

The industrial output has grown substantially in several branches over the
year: manufacturing of electrical appliances, computers and electronics,
chemical substances and products, wood pulp and wooden products, textile
products, as well as metals and readymade metal products.

Svetlana Rusakova, Bank of Latvia Economics Expert, explained: “The recovery of the global economy along with the rise in the competitiveness of Latvian producers has been promoting the development of our processing industry and entrepreneur optimism for several months already. The domestic demand is also recovering gradually as evidenced by the positive dynamics of turnover and indices of new orders in some branches, the development of retail trade, and data on consumer moods. The assessment of July export orders as well as selling prices of production continued to improve in July. With regard to the third quarter, the entrepreneur assessment of the level of the use of manufacturing capacities is also growing. Thus we can expect production growth supported by foreign demand and competitiveness in the third quarter as well.”

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“The recession is over and on the basis of certain indicators it can be expected that in the second part of the year Latvia’s economy will regain growth in terms of both quarterly and annual indicators. This means a more positive gross domestic product, tax income, employment and other rates,” Latvian Prime Minister Valdis Dombrovskis said.

Statistics data indicates growth of the Latvian economy for the second consecutive quarter. In the first quarter, growth was 0.3 percent but in the second quarter, growth was 0.1 percent compared to the first quarter.

The indicators are good news for Lithuania, which has significant crossborder trade with Latvia. Also, many business people regard the region as a single unit, so the good performance of Latvia is a boon for Estonia and Lithuania economically.

Latvia experienced the worst recession in the EU in 2009, while Estonia shored up their finances to qualify for the euro. Lithuania’s economy also dropped by 15 percent, but is now showing signs of recovery too.

The sales of new automobiles grew visibly in Lithuania: in July 2010, there were 792 new vehicles registered, 30 percent more than in July 2009.

Stable growth in the sale of new cars shows that business clients are recovering.

The popularity of commercial automobiles has been growing steadily for fourth month in a row.

Volkswagen, Peugeot and Renault were the most popular personal car brands in Lithuania in July. Volkswagen was also leading in sales of commercial cars.

Some 62 percent of new cars were purchased with diesel engines, while 38 percent ran on regular unleaded petrol. All of the commercial automobiles had diesel engines.

“I am pleased with the results of the ongoing economic recovery, proving that we are on the right track, and that the Lithuanian economy is climbing out of the recession, and, finally, that our economic stimulus plan is working. It will certainly require our further steadfast efforts and time to tame current unemployment and budget deficit. Then, the bare statistic figures of growth will translate into palpable results for the population.”- said Prime Minister Andrius Kubilius.

According to the Prime Minister, unemployment, the lowest as it is among the Baltic states, still lingers high, and the Government is determined to continue promoting creation of new jobs, foreign investment and reducing red tape for business.

With reference to the above statistics, Advisor to the Prime Minister Mykolas Majauskas has pointed out that despite the economic recovery, the budget deficit remains very high and one of the largest in the EU, thus calling for further consolidation of public finances next year through a reform of state property management, which has revealed significant negligence; through fight against smuggling; and energetic efforts to boost small and medium-sized businesses.

Industrial production rose 4.8 percent year-on-year in June, faster still than the 3.2 percent growth seen in May, Statistics Lithuania reported in a press release.

Compared against May in monthly figures, industrial output in June grew by 5.9 percent.

During the month the country’s struggling manufacturing sector saw output grow 6.2 percent, while mining and quarrying output fell 2.1 percent.

Excluding refined petroleum products, manufacturing, one of the largest employers of all sectors in the country, grew by 8.9 percent in June. Production of electricity, gas, steam and airconditioning fell by 8.5 percent.

Production of intermediate and consumer durable goods increased during the month.

Not every recession-hit country in Europe is like wayward Greece, Portugal and Spain.

Recently Prime Minister Andrius Kubilius of Lithuania dropped by our offices to discuss his small country`s economic prospects. Unlike Greece, which has garnered headlines for its economic woes, Lithuania more than a year ago firmly faced up to the economic crisis and took stern measures. Government spending was slashed by 30%. Public-sector salaries were cut 20% to 30%. And pensions were knocked down an average of 5%. The prime minister himself took a pay cut of 45%. Yes, some taxes were raised, and the corporate rate was hiked from 15% to 20%. But then it was knocked back to 15% in January. And Lithuania`s flat tax–also 15%–was left alone.

Amazingly, Lithuanian unions went along with the government`s policies. There were no street riots à la Greece.

Lithuania is now showing positive growth again. In the years ahead its recovery should outpace that of most members of the EU because Lithuania isn`t wedded to slow-growth policies, as are most western European states. In fact, before the crisis the Lithuanian economy had been on fire. Lithuania was one of the pioneers of the flat tax, and it had also instituted a currency board to fight inflation. Today its currency is fixed to the euro, and the country hopes to formally adopt the euro in 2014.

Latvia, another Baltic country, is also a non-Greece. It couldn`t escape the clutches of the IMF, but it did stoutly and successfully resist intense pressure to ditch its flat tax, recognizing that its low-tax regime was the best way to ensure real recovery and greater prosperity in the future.
Neighboring Estonia has also tightened its belt. It was in a better position because during the boom years it had shown amazing spending restraint–so much so that in a few months it will likely win formal approval from the EU to join the euro zone. That`s sure proof that talk of the euro`s demise is much exaggerated.

The prospect of joining the euro bloc spurred these countries to pursue tough policies during the economic crisis. They know that being linked to the European and global economies is a ticket to greater prosperity.
Ireland is another nation that has taken stiff economic medicine. Like the Baltic states, it had become an economic miracle, with its business-friendly tax regime and enthusiastic welcome for foreign investment. And, as were Lithuania and Latvia, Ireland was hit hard by the global recession. But unlike Greece, Spain and Portugal, it didn`t wait for a collapse before taking tough structural measures, including public-sector pay cuts. Ireland also had to fight back efforts by the tax-loving EU bureaucrats in Brussels to sharply boost its corporate tax rate of 12.5%.

The Labour Exchange also informed that it has not received any announcements about group redundancies.  On 14-20 May some new 2.598 vacancies for employment have been reported, this is 520 per day.  In addition, some 4.252 people were employed with help of Labour Exchange last week.

Swedbank’s Economic Outlook in April predicted that Estonian GDP will rise 7% by 2011 compared with 2009, while in Lithuania it will be only 1,4% bigger and Latvian GDP will be 6,7% smaller then in 2009. And despite equally savage cuts and tax rises Estonian budget deficit in 2010 is 1,4%, while in Latvia deficit is 8,5% and in Lithuania 8%. So why are similar policies creating so different results in Estonia and its Baltic neighbors?

The answer lies in institutions. The following graph from autumn Eurobarometer shows remarkable differences between Estonia and its Baltic neighbors.

In fact, Estonians trust in institutions has risen during the crises while trust of Latvians and Lithuanians to their institutions has tanked. The ruling coalition in Estonia also has a good chance of getting reelected while in Latvian parliamentary elections in October some of their biggest parties face the danger of losing representation in parliament.

What has trust in institutions got to do with budget deficits? A lot, because it allows the government to collect more money from economy then it other ways could.

In fact, Estonian government expects this year to collect more money from economy in euros then Latvia and only slightly less then Lithuania, although Lithuanian GDP is twice as big as Estonian GDP.  Estonian state budget is also less dependent on EU subsidies then Latvia or Lithuania.

Estonia doesn’t have to borrow money to spend, it doesn’t even need to empty the Piggy bank (9% of GDP) and it still has twice as much of its own money to spend per inhabitant then Latvia or Lithuania, who need to rely heavily on EU structural fonds and borrowing to keep up. Estonia manages to get taxes from economy, this is stimulus Estonian-Style. This is why Estonia is already growing when Latvia and Lithuania are still in a recession. This also allows Estonia to start increasing government spending much sooner then in Latvia or Lithuania, who still need to cut spending or raise taxes.

Estonians pay their taxes because they trust that their money is reasonably well spent while Latvians and Lithuanians tend to avoid taxes, because they have little trust in institutions.

But why would Estonians trust their institutions even more then before after a 14% GDP plunge? Here’s a theory. For some irrational and unexplainable reason Estonians are very attached to the peg of their kroon to euro, although they are perfectly willing to trade kroon itself for euro in 2011. When crisis struck in spring 2008 Estonian population wanted only one thing from the government: “Keep the peg!”

Government responded by the only available way, by savagely cutting salaries, social spending and by raising taxes fully aware of the fact that employment will take the biggest hit. And in due course registered unemployment rose to above 14% (and real unemployment is likely a third higher), but because the peg was saved, nobody cares much. And everybody’s honestly paying their taxes. Its a bit like roller coaster ride, but Estonians are used to it. Give us volatility, baby!

Latvia and Lithuania started reacting to crisis later then Estonia and deliberately or not, but they copied Estonian strategy of internal devaluation. But they started with much weaker institutions and with considerably smaller popular trust then Estonia. Because evidently their populations didn’t place a similar  ultimate value in peg as Estonians, their populations lost patience and reacted to cuts and tax increases with attempts of dodging taxes and that not only from need, but also from a desire to get even to a government they thought doesn’t care about their wishes.

It appears that well-run countries where rulers respond to popular wishes can get away with unorthodox solutions to crises but when less well-run countries try to imitate it, they can easily fail. In hindsight Lithuania and especially Latvia should have devalued, because this is much easier to administer then price and wage deflation.

So where does it leave Grece? Its trust levels  are mostly on the same level as in Estonia, so they should have similar chances of tolerating the pain of cutting. But makers of Eurobarometer warn that Greece’s trust rating rose in autumn after a new government was elected.

And if they trust their institutions, then why don’t they pay their taxes? Maybe they trust their governments not to tax them? Or maybe people in Greece trust their government but government doesn’t trust them? No matter what the reason is, the government in Greece has only so much time until its trust level will reach Latvian levels and then its too late.

But if good institutions are needed to make internal devaluation work, then this is surely a bad news because building institutions is even harder then cutting deficits. This implies that good government has to imported to Greece if they fail to act on their own. This means a lot of tough love from EU and IMF.

[Vahur Koorits is an Estonian journalist and you can follow him through his articles on Postimees and his posts on his personal blog.]