LITHUANIA Today & …

1. LITHUANIA Today & … • Environment • Globalisation, inflation and Monetary policy • Effect of Globalization on Policy Improvement Mykolas Romeris UniversityEugenija Martinaityte, 28 05 2010

3. FINANCIAL GLOBALIZATION 80-90 • economic crisis • liberalization • Emerging markets’ integration into EU financial system

4. TYPES OF GLOBALIZATION ECONOMIC CULTURAL POLITICAL TECHNOLOGICAL SCIENTIFIC ETC. Globalization –is a process…

5. MAIN FEATURES • MOBILITY OF RESOURCES, INFORMATION DATA BASE • BARRIERS NOT EXIST: PHYSICAL, ECONOMICAL, FINANCIAL, LANGUEGE,LEGAL,ACCESSABILITY, SPEED, OVERSEASE

6. LEVELS OF GLOBALIZATION • cross-border transactions • open-border transactions • transborder transactions

7. FACTORS OF GLOBALIZATION • (1) –INTERNATIONAL COMPETITION BECAUSE OF TECHNOLOGY • (2) – INOVATION PROVIDES FLEXIBILITY • (3) – STARATEGIC ALJANSES AND TRANSNACIONALIZATION

8. GLOBALIZATION AND INTEGRATION • ECONIMIC INTEGRATION (theory of economic integration developed by Bela Belassa, 1960) • EU and Euro zone are most integrated areas

9. Trend in the Progress of Globalization World Trade Volume Number of concluded FTAs Cumulated number Goods and services exports / GDP

10. Currency exchange models

11. Lithuania in the world • Territory: 65,300 km2 • Common borders with: Latvia Belarus Poland Russia (Kaliningrad Region) • Population: 3.4 million (84% of Lithuanians, 7% Poles, 6.5% Russians ) • Capitalandbiggestcity: Vilnius (population: 542,000) • State language: Lithuanian • State Government: Democratic Republic • Religion: 80% of Roman Catholics, 5%Orthodox

12. International business presence • Member of the EU, NATO and Schengen area • Crossroads of three huge markets BSR - 110 million EU - 340 million CIS - 250 million

13. Half of the Baltic States’ economy Source: Lithuanian Department of Statistics, www.stat.gov.lt

14. Lithuanian economy at a glance * exports/imports including services Sources: Lithuanian Department of Statistics, www.stat.gov.lt,Ministry of Finance, www.finmin.lt, Bank of Lithuania, www.lb.lt

15. Major countries investors,2009 Source: Lithuanian Department of Statistics, www.stat.gov.lt

17. The Effectiveness of Monetary Policy Increase the risk of policy error • Systematic policy error in which excessively low inflation rate and low interest rate policy can occur by underestimating the price decreasing effect due to globalization. (Borio and Filardo 2007) • If the increase in global supply is not considered, inflation can be lower than expected. • If global inflation is not evaluated properly, the risk that inflation aggravates also remains.

18. Effectiveness of Monetary Policy • Due to globalization, the effect of monetary policy such as long-term real interest rates on the domestic financial condition weakens. (Rogoff 2006) • The increase in correlations btw. long-term interest rates in developed countries signifies in the influence of foreign factors.

19. Boom-bust Cycle due to Foreign Capital Flow (1) • In a small open economy, the rapid flow of foreign capital following globalization is likely to function as a constraint in operating monetary policy. - Impossible trinity (difficulty of choice among exchange rate stability, capital liberalization, and independent monetary policy) problem.

20. Boom-bust Cycle due to Foreign Capital Flow (2) - The large-scale inflow of foreign capital may cause overheated domestic demand and a drastic increase in asset price, and vice versa • However, this risk is considerably attributable to errors of macro policy and the failure of recognition of risk in the private sector, apart from the rise in opening by globalization.

21. Effectiveness of Monetary Policy (2) • However, the dominant view is that globalization does not considerably reduce the effectiveness of monetary policy. Bernanke(2007), King(2006a), (Faust et al. 2007) • There is consensus that the effect of globalization needs to be considered in order to establish the effective monetary policy, and  more analysis should be made since the impact of globalization has not been fully examined.

22. Effect of Globalization on Policy Improvement (1) • The country where globalization makes progress has the improved performance indexes in various public policies. • In general, developed countries stand high rankings in classification of four groups depending on the degree of globalization. (based on the globalization index of AT Kearney/Foreign Policy)

23. Effect of Globalization on Policy Improvement (2) • Globalization accompanies 1) inflation rate decreases, and 2) the degree of freedom of trade and 3) the degree of opening of capital market increase. (1)    (2) (3) Group I II III IV Group I II III IV Group I II III IV

24. Effect of Globalization on Policy Improvement (3) And: • 1) the degree of government's intervention in firm's activities declines, • 2) the regulation's qualitative improvement is achieved, and • 3) the support policy for innovation such as R&D is improved.

25. Effect of Globalization on Policy Improvement (4) • In addition, 1) the property protection is strengthened, and 2) government's efficiency such as credibility of government measure and qualitative level of public service and 3) anti-corruption policy are improved. 1)        2) 3) Group I II III IV Group I II III IV Group I II III IV Note: Average CPI growth rate during 2004～06

26. Globalization and Other Pubic Policies Argu: • Does globalization induce public policy improvementfor gaining international competitiveness - by making policy competition alluring freely-moving production factors among countries inevitable? - and thereby functioning as market discipline of public policy in each nation?

27. Effect of Globalization on Policy Improvement • The fiscal policy is also not noticeably improved Government Size Fiscal Balance Per GDP, % Group I II III IV Group I II III IV Note : 1) Highest point = 10, Lowest point = 0 (the lower the government size, the lower taxrate, close to the highest point)2) Average during 2003～05

29. EU Securities Markets

30. IMF & LT

33. GDP

35. UNENPLOYMENT

39. Lithuania’s foreign trade, EUR bn Source: LithuanianDepartment of Statistics, www.stat.gov.lt

40. Lithuania’s major exports destinations, 2009 Source: Lithuanian Department of Statistics, www.stat.gov.lt

41. Wages, 2009 4Q Source: Lithuanian Statistics Department, www.stat.gov.lt

42. Main business taxes, 2009 * 0% tax on dividends applies when an investor controls at least 10% of voting shares in the enterprise for the period of at least 12 months.

43. Excellent infrastructure and communications network •The European Union has recognized Lithuania as the prime transport centre in theregion linking the EU with the East • Crossroads of international transport routes – two EU- priority transport corridors •International airports (located in Central, Eastern and Western Lithuania) withdirect routes to most European cities •Northernmost and only ice-free seaport on the eastern shore of the Baltic Sea – Klaipėda State Seaport

44. Bank Risks rates according to BOL, 2006-2009 . Šaltinis: LKapital Adequacy

45. Thank you