Allocative Efficiency, Firm Dynamics, and Productivity in the Baltics: Republic of Estonia

Labor productivity growth has decelerated in the Baltic economies during the past two decades, with the downturn accelerating in recent years. This Selected Issues Paper analyzes the roles of allocative efficiency and firm dynamics in productivity growth. Our results suggest that the lack of allocative efficiency has hindered productivity growth, while the contribution of firm entry and exit has been limited. The findings underpin the need for structural reforms to improve allocation of capital and labor, ease the bottlenecks faced by young innovative firms, and facilitate the exit of unviable firms.