G. Šimkaus kalba Lietuvos banko metinėje ekonomikos konferencijoje „Produktyvumas, konvergencija ir konkurencingumas Europoje: dėmesys mažoms atviroms ekonomikoms“

Lietuvos bankas konferenciją šiemet organizavo bendradarbiaudamas su Konkurencingumo tyrimų tinklu (CompNet). Konferencijos metu diskutuojame apie bendrą konkurencingumo padėtį ir produktyvumo pokyčius Europoje, strateginį mažų ekonomikų vaidmenį stiprinant ekonominį atsparumą ateities iššūkiams.

Daugiau informacijos apie konferenciją.

Pranešimas skaitytas anglų kalba, šis tekstas nėra kalbos nuorašas.

Distinguished guests, dear colleagues, ladies and gentlemen,

welcome to the annual economic conference organised by Lietuvos bankas. This is already the 9th time we have gathered in Vilnius to discuss the acute economic issues that we face.

The event last year was dedicated to celebrating the 10th anniversary of the euro introduction in my country.

We discussed how the euro, the second-most important currency in the world, acts as a shield, increasing the resilience of the European economy against external shocks. Today, it’s clear that the protection offered by this shield is increasingly in demand, and the monetary union continues to grow.  

We also learned that monetary integration alone is not enough: in what is an economic and monetary union (EMU), we need both economic and monetary integration.  

Dear colleagues,

Returning to the present, I see today’s conference as a continuation of what we discussed last year. The difference is that today we focus on small open economies, but defining this group of countries is a context-dependent matter. For instance, Lithuania is a small open economy, but so are many other countries – especially if we consider them in relation to global GDP or compare them to the United States.

What matters more is the way we think about small economies. Too often, the word “small” implicitly carries the idea of weakness or disadvantage when compared to larger countries.

A small economy imports foreign monetary policy and takes global prices as given. Likewise, openness can imply vulnerability to foreign shocks and a lack of control over one’s own macroeconomic stability.

In my view, these perspectives are not nuanced enough, because being small also implies agility. This feature is essential if we want growth and productivity not to be derailed, especially in a rapidly evolving world.

Dear guests,

Small open economies in our region have experienced rapid growth, rising competitiveness, and sustained gains in productivity since joining the European Union. In Lithuania, we are undergoing an economic transformation, moving steadily toward a more capital-intensive and knowledge-driven economy. This progress has been powered, of course, by inflows of foreign investment, and by deeper economic integration more broadly.

But that’s not all. Another important and often overlooked reason for our prolonged growth is the ability to quickly adapt to a newly unfolding environment. In other words, agility.  

In Lithuania, we were quick to respond to the dire consequences of the global financial crisis, and we were among the first in the EU to adopt measures preventing debt-driven overheating.

This adaptability has been equally evident in more recent shocks. During the pandemic, Lithuanian manufacturers leveraged their flexibility, leaning on just-in-time production methods to swiftly adjust to changing circumstances. As a result, instead of facing a structural slump, industrial production is currently around a quarter higher than pre-pandemic levels.

We also faced a huge shock when the brutal russian invasion of Ukraine caused a surge in energy prices. But again, accelerated investments in renewable energy have put us on a firm path towards greater energy self-reliance. For instance, in the second quarter of 2025, Lithuania managed to generate almost all of its electricity needs from domestic resources. By comparison, in 2019, 70 percent of the electricity consumed was imported.

This distinguished audience will know that agility is not a default feature of a small economy. Many small countries remain trapped at the same level of development for prolonged periods, or struggle to implement the reforms they need. With this in mind, I would like to turn my remarks to the key enablers of such flexibility.

This list, which is by no means an exhaustive, first involves inclusive and competent institutions. Second, we turn to human capital. Third, the common market and the ability to think beyond internal markets.

Turning to inclusive and competent institutions. Nobel Prize in Economics last year was an acknowledgment that institutions are the primary drivers of economic growth and productivity.  They are the mechanism that determines economic incentives and constraints. When incentives are shaped in an inclusive way, nations prosper; when they are extractive, nations fail.

Let me explain. Inclusive institutions create opportunities by empowering many, ensuring broad access to markets, fostering education, and protecting property rights. Extractive institutions, by contrast, concentrate resources and decision-making in the hands of the few, suppressing innovation and discouraging investment.

Lithuania was forced to exist under a set of extractive institutions for a long time. But since the 1990s we have chosen to adopt an inclusive structure. To see the differences between these two systems, we don’t have to consult complicated economic indicators – we can simply look out of the window, where the country’s change for the better is visible in a very literal sense.

In Lithuania, external anchors – EU, NATO, euro area, and OECD membership – were pivotal in building inclusive institutions: they established commitments that steered reforms and deterred backsliding.

The distinction between inclusive and extractive institutions is fundamental. But having inclusive institutions is not a sufficient condition. For countries to remain adaptable in a rapidly changing economic environment, their governmental bodies must also be forward-looking. As was discussed in a research paper yesterday, governments also need the ability to swiftly implement reforms; for example, those that create conditions for labour to move towards the most productive sectors. In this respect, small open economies typically enjoy an advantage: with leaner bureaucracies and closer links between decision-makers, they are often able to act more quickly and decisively.

The second factor that enables the agility of small open economies is human capital. The economic literature is very clear on this: the quality of human capital – which is measured by actual skills such as literacy, numeracy, and problem solving – has a strong impact on productivity and prosperity. So, the policy message is very clear – investing in high-quality education and the development of lifelong skills is not just a social good; it is one of the most effective levers for sustained economic growth.

However, we also know that the returns on this kind of investment are not immediate. Therefore, the extent and sustainability of a country’s investment in human capital depend on how attractive this is relative to other forms of investment. I would argue that small economies have structurally stronger incentives to invest in human capital. This is simply because, very often, it is the only resource that they truly possess.

The third and final enabler is the common market and the ability to think beyond internal markets. Mario Draghi; Enrico Letta; last year’s conference – all came to the same policy conclusion: if we are to address the challenge of productivity in the EU, a deeper single market holds the key. This line of argument also featured in our discussions yesterday.

Despite this consensus, the common market remains fragmented.

In financial services, for example, the tariff-equivalent barriers to internal trade calculated by the IMF could stand at nearly 100 percent, disproportionately hurting small economies. Even though the regulation for financial institutions is harmonised across the EU in many respects, relevant national specificities such as insolvency laws also play a role.

The lack of a large domestic market is a structural disadvantage for small economies. As a result, these countries have no choice but to think beyond their borders from the very start. About global markets. In other words, they must think big.

Lithuania’s exporters have repeatedly shown the ability to adjust after shocks, rapidly bursting into new markets and adapting their business models to changing global conditions. I believe that with tomorrow’s challenges so uncertain, these qualities matter now more than ever.

Ladies and gentlemen,

For years, the success of small open economies rested on global stability, rules-based regimes, and reliable international institutions.

Today, these tailwinds are turning into headwinds. Geopolitical risks are rising, and the very foundations of the international system are being tested. In this context, investing in defence and reinforcing our security alliances is not option – it is essential.

But history also reminds us that geopolitical necessity can give rise to economic opportunity. During the Cold War, the United States responded to external threats by investing heavily in defence. What began as a military imperative soon became the engine that drove innovation and productivity. The internet, GPS, the personal computer, and laser technologies all grew out of defence efforts, demonstrating how security policy can fuel economic progress.

Europe today faces its own moment of necessity. Concerns about defence can not only strengthen security, but also provide an impulse for more strategic and common action. Joint defence procurement, joint borrowing for defence, common investment into strategically important projects – these are not just examples of common action; they show how defence concerns can reduce European fragmentation. And this could provide a powerful boost to the growth of Europe’s productivity.

I will stop here. Many thanks.