Why Lithuania Suddenly Became Richer than Latvia – Four Reasons 0 15

First of all, let's look at how Latvia has fared this year. At the end of November, the Central Statistical Bureau reported that the GDP growth rate in the third quarter was 2.5%.

Meanwhile, the European Central Bank assessed the development of the Latvian economy more modestly: according to its data, in the third quarter of this year, its growth was 1.8%, which is still slightly above the eurozone average (1.4%) and significantly higher than Estonia's figures (0.9%). Nevertheless, Latvia is still lagging behind Lithuania in terms of growth rates, where GDP grew by 2.1%.

The Lithuanian Phenomenon

Lithuania's economy has developed better than those of the other Baltic states in recent years. What has caused this, and what can neighbors learn from Lithuania?

First, it is important to consider the differences in demand structure. Lithuania's export market is more diversified and closely linked to Central Europe. Its key export destinations are Latvia, Poland, Germany, and the Netherlands, with France also playing a significant role in service exports.

In contrast, Estonia's more significant export partners include Northern European countries, including Finland and Sweden, as well as Latvia.

At the same time, Latvia's exports are primarily focused on the Baltic countries and Germany.

Second, Lithuania has a more diversified economic structure and more large companies than Latvia and Estonia. Although service exports in Lithuania are not as focused on high-tech sectors as in Estonia, their volumes are significantly larger, providing substantial added value and turnover.

Third, in the context of the Baltic states, Lithuania stands out for its high productivity and diversified economic structure, where the information and communication technology sector plays an important role alongside a developed chemical and oil industry. Estonia is also strong in this regard, distinguished by its largest investments in research and development, with a focus on supporting startups, especially in high-tech sectors. Latvia appears pale in comparison.

Fourth, Lithuania is much bolder than its neighbors in experimenting with tax policy. Significant government investments allow for the provision of tax benefits to the population and other improvements. The country also successfully utilizes European Union structural funds, forming a strong technological base for the manufacturing industry.

Where Salaries Are Higher

Economic growth is undoubtedly influenced by the labor force and its cost. Data from the Central Statistical Bureau shows that last year, compared to 2023, labor costs in Latvia increased by 8.3%.

Nevertheless, Latvia's figures remain among the lowest in the European Union: according to Eurostat, in 2024, labor costs in Latvia were €15.1 per hour, while in Lithuania, they were €16.3, and in Estonia, €19.6 per hour.

The rise in wages itself is not a problem if it is accompanied by an increase in labor productivity. Enterprises in the Baltic states have sought to adapt to increased pressure by improving the quality of products and services, reducing the workforce, and investing in automation and digitalization.

As a result, Estonia's previous advantage over Lithuania in manufacturing productivity has diminished, and currently, productivity levels in both countries are similar, while Latvia continues to lag behind.

Risks for the Economy

What awaits Latvia in the coming year? It must be acknowledged that the economic stability of recent years is gradually weakening, and clouds are gathering on the horizon, promising new challenges. As a country with an open and export-oriented economy, Latvia needs to closely monitor the situation and rely on its own research. Two main risk factors – a slowdown in growth in leading export markets and a deepening of structural problems in the eurozone – require proactive, rather than reactive, actions.

On December 4, the Latvian Saeima approved the state budget for 2026. We see that historically the largest budget for defense has been allocated in the Baltic states – €2.2 billion in Latvia, €2.4 billion in Estonia, and €4.9 billion in Lithuania. This, in turn, contributes to an increase in the budget deficit.

Data shows that by 2029, Latvia's debt burden will increase to 56.4% of GDP, Lithuania's to 52.9%, while the forecast for Estonia is more favorable – 34.4% of GDP. Therefore, such an approach is not sustainable.