(Don't) try this at home
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talkpoliticsSurely, Latvia isn't accustomed to such great attention. The tiny Baltic country of 2 million that many would find difficulty spotting on the map, is suddenly in the thoughts and mouths of all economists who insist on having the last word in the debate on the Euro crisis. And the Baltic model is among the fave examples of the EU and IMF envoys, whenever they decide to wag a finger at Greece, Portugal, Spain and Italy, preaching that severe austerity does work and there's a bright future lying beyond all the pain.
Latvia has made a remarkable leap, and it's not alone. It's joined by its neigbours Lithuania and Estonia. While almost all other European nations are in the middle of a severe recession, or are desperately trying to avert it, the Baltic trio is topping all economic growth rankings. This is a result from bold reforms and resisting the temptation to untie the national currencies from the Euro (since they've been in a currency board regime for many years). So, Estonia even managed to enter the Eurozone at a time when that looked more like buying a one-way ticket for the Titanic. Latvia, too, is considering joining the zone through the official gate, come 2014, while Greece could already be at the back exit, leaning forward and waiting for the final boot on its butt.
But is the Baltic recipe of internal devaluation (slashing salaries and increasing productivity as opposed to external devaluation (depreciation of the national currency), also applicable to Greece? That's a tough question. As is the question if the price isn't too steep.
Christine Lagarde, IMF's new chairlady praised Latvia as "a story of success", which could "serve as inspiration for the European leaders who are now struggling against the crisis". She pronounced this high praise in Riga last month, when she attended a conference under the motto "Despite the obstacles: Lessons From Latvia And The Baltics".
It's those lessons that are at the centre of heated debates between the economists. One camp includes Paul Krugman, who argues that the Baltic countries had gone through a horrible crisis, with a much more disastrous prior GDP collapse and higher unemployment than the other European countries, and their experience is proof that internal devaluation doesn't work. Recently, Krugman even earned some angry diatribes in Twitter, written personally by the Estonian president Toomas Hendrik Ilves. The president was unhappy that Krugman was belittling the efforts of his country, and didn't really know what he was talking about. Meanwhile, in the other corner we see the apologists for the shock therapy, Baltic style. Like the Peterson Institute economist Anders Åslund, co-author of the book How Latvia Came Through The Financial Crisis (the other author being Latvian PM Valdis Dombrovskis himself).
Åslund argues that Latvia has carried out all the positive changes one could dream of. It introduced wide structural reforms, including in education and health care. It shrunk its administration and cut the salaries of the state employees with 30%+. It did a lot of deregulation, and it climbed from #31 to #21 in the Doing Business rankings published by the World Bank. It drastically cut the public expenditures (16% of the GDP within 3 years), etc.
More importantly, Latvia did this just in time, which allowed it to steer smoothly not just through the deepest recession it had ever experienced (its economy had shrunken by 1/4 within just two years), but through one of the most brutal austerity regimes in the history of the region. And that, without being tempted to go the easier road of currency depreciation, which many had so insistently urged them to pursue - including the IMF. That same IMF which now praises them for not doing it. But there's a more painful side to the story: violent street protests, at a time when the crisis was already marching across Europe along a carpet covered by the political corpses of former PMs and presidents. In those turbulent times when Europe was littered with finished politicians, Dombrovskis somehow managed to get re-elected twice in a row, and finish three uninterrupted terms. His country is Europe's champion in growth, with 6.9% for the first quarter of 2012, and one of the very few countries whose credit rating was recently raised, rather than dropped.
Åslund continues his ode to Latvia with the argument that speed and resolution allowed the government to fulfill all the economising plans and measures in 2009, and restore the confidence of its people and the investors after the collapse. And that's the key lesson for Southern Europe, he believes. He says the difference between those countries and the Baltic countries is that the former never had the guts to undertake serious reforms. "They did too little, too late. They raised the taxes rather than cutting expenses. Bad policy leads to bad results and protracted crises".
However, Åslund is convinced that Latvia is a unique exception from the general rule, so it can't be strictly emulated. It could only serve as a rough model, an inspiration. But the counter-argument is that the Baltic experience not only cannot be repeated in the southern periphery of the EU, but it could hardly be even interpreted as a real triumph. Why?
Well, the Baltic politicians might be bragging that they did epic heroism and achieved seemingly impossible things, and their economies are growing again after the terrible crisis. But the pain from the deeper collapse and the unemployment explosion is still to be felt everywhere. One of the sad ironies is that, while the Greeks are protesting on the streets, the Latvians are buying one-way tickets on Air Baltic. The economic stats could hardly encompass the human dimension of what is happening, but it's rather telling that unemployment keeps hovering well above 16% (thrice as high as it used to be before the collapse). And the immigration data is staggering. In the last decade almost 200,000 people (10% of the population) have left the country, and that indeed is one of the gloomiest demographic pictures in Europe, only comparable to that in Russia and the Balkans. After the fiscal tightening of the belts, the number of people leaving the country has increased from 16K to 40K annually, and it has remained so even through 2011 which was considered the boom of the growth (+5.5%). So, the fiscal numbers are telling one story, while the people, quite another.
In the meantime, despite the strong rebound of the Latvian GDP, it continues to be 15% lower than its pre-crisis levels. In fact the likes of Krugman clearly interpret the big growth with the fact that the economy had plunged way too low, and there's room for rapid climbing - which still doesn't make it a viable economy, when you think of it. The IMF forecasts say that the country would probably need at least another 5 years to return where it used to be back in 2008. Mark Weisbrot of the Center for Economic Policy Research says that "It is amazing to hear Lagarde, who almost certainly knows better, calling Latvia a "success." It is like calling the Great Depression a success -- after all, the U.S. economy did eventually recover from the Great Depression".
Besides, it would've been strange if the Baltic countries weren't growing faster than the average EU growth rate, given the fact that they're among the poorest in the region, and they have a bigger potential to catch up with the rest. That's something we cannot say about the countries in Europe's southern periphery. For them such a thing would've been immensely harder, it'd be difficult to decrease the expenses for labour as quickly as the smaller, more open and more flexible economies did.
Luck was also a factor for the Baltic turnover. Latvia & Co were fortunate to have some of the wealthiest and most successful neighbours around, like Sweden, Finland and Denmark, even Germany - all of them owning their banks, or at least actively trading with them. The big differences between Latvia and Hungary for example, are two. One, Latvia has done a lot more structural reforms. And two, Northern Europe is developing much more successfully, its economies are well balanced, and smartly managed, while the South is in a depression for so many reasons, not excluding poor "state management". In other words, it does matter if your neighbour is Greece or Sweden.
Granted, what Latvia and its two neighbours have achieved, deserves a lot of respect. But that could hardly be perceived as a universal model that could help the Eurozone to survive. And it could hardly be ever repeated in Southern Europe, where public debt is much larger, the economies are much clumsier, and at a very different stage of development; where political consensus is fragile, and the voters and the markets are at the edge of their nerves, exhausted and angered by the small but regular doses of austerity. And, given the bitter taste of the Latvian recipe, hardly anyone would blame the rest that they don't quite feel like walking that road.
Latvia has made a remarkable leap, and it's not alone. It's joined by its neigbours Lithuania and Estonia. While almost all other European nations are in the middle of a severe recession, or are desperately trying to avert it, the Baltic trio is topping all economic growth rankings. This is a result from bold reforms and resisting the temptation to untie the national currencies from the Euro (since they've been in a currency board regime for many years). So, Estonia even managed to enter the Eurozone at a time when that looked more like buying a one-way ticket for the Titanic. Latvia, too, is considering joining the zone through the official gate, come 2014, while Greece could already be at the back exit, leaning forward and waiting for the final boot on its butt.
But is the Baltic recipe of internal devaluation (slashing salaries and increasing productivity as opposed to external devaluation (depreciation of the national currency), also applicable to Greece? That's a tough question. As is the question if the price isn't too steep.
Christine Lagarde, IMF's new chairlady praised Latvia as "a story of success", which could "serve as inspiration for the European leaders who are now struggling against the crisis". She pronounced this high praise in Riga last month, when she attended a conference under the motto "Despite the obstacles: Lessons From Latvia And The Baltics".
It's those lessons that are at the centre of heated debates between the economists. One camp includes Paul Krugman, who argues that the Baltic countries had gone through a horrible crisis, with a much more disastrous prior GDP collapse and higher unemployment than the other European countries, and their experience is proof that internal devaluation doesn't work. Recently, Krugman even earned some angry diatribes in Twitter, written personally by the Estonian president Toomas Hendrik Ilves. The president was unhappy that Krugman was belittling the efforts of his country, and didn't really know what he was talking about. Meanwhile, in the other corner we see the apologists for the shock therapy, Baltic style. Like the Peterson Institute economist Anders Åslund, co-author of the book How Latvia Came Through The Financial Crisis (the other author being Latvian PM Valdis Dombrovskis himself).
Åslund argues that Latvia has carried out all the positive changes one could dream of. It introduced wide structural reforms, including in education and health care. It shrunk its administration and cut the salaries of the state employees with 30%+. It did a lot of deregulation, and it climbed from #31 to #21 in the Doing Business rankings published by the World Bank. It drastically cut the public expenditures (16% of the GDP within 3 years), etc.
More importantly, Latvia did this just in time, which allowed it to steer smoothly not just through the deepest recession it had ever experienced (its economy had shrunken by 1/4 within just two years), but through one of the most brutal austerity regimes in the history of the region. And that, without being tempted to go the easier road of currency depreciation, which many had so insistently urged them to pursue - including the IMF. That same IMF which now praises them for not doing it. But there's a more painful side to the story: violent street protests, at a time when the crisis was already marching across Europe along a carpet covered by the political corpses of former PMs and presidents. In those turbulent times when Europe was littered with finished politicians, Dombrovskis somehow managed to get re-elected twice in a row, and finish three uninterrupted terms. His country is Europe's champion in growth, with 6.9% for the first quarter of 2012, and one of the very few countries whose credit rating was recently raised, rather than dropped.
Åslund continues his ode to Latvia with the argument that speed and resolution allowed the government to fulfill all the economising plans and measures in 2009, and restore the confidence of its people and the investors after the collapse. And that's the key lesson for Southern Europe, he believes. He says the difference between those countries and the Baltic countries is that the former never had the guts to undertake serious reforms. "They did too little, too late. They raised the taxes rather than cutting expenses. Bad policy leads to bad results and protracted crises".
However, Åslund is convinced that Latvia is a unique exception from the general rule, so it can't be strictly emulated. It could only serve as a rough model, an inspiration. But the counter-argument is that the Baltic experience not only cannot be repeated in the southern periphery of the EU, but it could hardly be even interpreted as a real triumph. Why?
Well, the Baltic politicians might be bragging that they did epic heroism and achieved seemingly impossible things, and their economies are growing again after the terrible crisis. But the pain from the deeper collapse and the unemployment explosion is still to be felt everywhere. One of the sad ironies is that, while the Greeks are protesting on the streets, the Latvians are buying one-way tickets on Air Baltic. The economic stats could hardly encompass the human dimension of what is happening, but it's rather telling that unemployment keeps hovering well above 16% (thrice as high as it used to be before the collapse). And the immigration data is staggering. In the last decade almost 200,000 people (10% of the population) have left the country, and that indeed is one of the gloomiest demographic pictures in Europe, only comparable to that in Russia and the Balkans. After the fiscal tightening of the belts, the number of people leaving the country has increased from 16K to 40K annually, and it has remained so even through 2011 which was considered the boom of the growth (+5.5%). So, the fiscal numbers are telling one story, while the people, quite another.
In the meantime, despite the strong rebound of the Latvian GDP, it continues to be 15% lower than its pre-crisis levels. In fact the likes of Krugman clearly interpret the big growth with the fact that the economy had plunged way too low, and there's room for rapid climbing - which still doesn't make it a viable economy, when you think of it. The IMF forecasts say that the country would probably need at least another 5 years to return where it used to be back in 2008. Mark Weisbrot of the Center for Economic Policy Research says that "It is amazing to hear Lagarde, who almost certainly knows better, calling Latvia a "success." It is like calling the Great Depression a success -- after all, the U.S. economy did eventually recover from the Great Depression".
Besides, it would've been strange if the Baltic countries weren't growing faster than the average EU growth rate, given the fact that they're among the poorest in the region, and they have a bigger potential to catch up with the rest. That's something we cannot say about the countries in Europe's southern periphery. For them such a thing would've been immensely harder, it'd be difficult to decrease the expenses for labour as quickly as the smaller, more open and more flexible economies did.
Luck was also a factor for the Baltic turnover. Latvia & Co were fortunate to have some of the wealthiest and most successful neighbours around, like Sweden, Finland and Denmark, even Germany - all of them owning their banks, or at least actively trading with them. The big differences between Latvia and Hungary for example, are two. One, Latvia has done a lot more structural reforms. And two, Northern Europe is developing much more successfully, its economies are well balanced, and smartly managed, while the South is in a depression for so many reasons, not excluding poor "state management". In other words, it does matter if your neighbour is Greece or Sweden.
Granted, what Latvia and its two neighbours have achieved, deserves a lot of respect. But that could hardly be perceived as a universal model that could help the Eurozone to survive. And it could hardly be ever repeated in Southern Europe, where public debt is much larger, the economies are much clumsier, and at a very different stage of development; where political consensus is fragile, and the voters and the markets are at the edge of their nerves, exhausted and angered by the small but regular doses of austerity. And, given the bitter taste of the Latvian recipe, hardly anyone would blame the rest that they don't quite feel like walking that road.
(no subject)
Date: 18/7/12 18:58 (UTC)Just trying to clarify, is that mostly it?
(no subject)
Date: 18/7/12 19:08 (UTC)The other side outright dismisses anything that remotely resembles a positive argument in favour of said model.
And even in the former case, we could hardly talk of "success", when we're seeing 16% unemployment, an economy barely scratching the surface of what used to be the budget levels from 4-5 years ago, and a horrible demographic profile of the population. The latter is the most dangerous ticking time bomb in this case, because it means that social expenses will soon eat up the "hollow" growth of the recent years. And then Latvia will be standing at an even tougher choice, which no one dares to jump to at this point, but which everybody will be forced to resort to, whether they like it or not: raising the retirement age and possibly slashing pension funding as well. Now that is what I call a real crisis. And it hasn't come yet.
(no subject)
Date: 18/7/12 20:08 (UTC)I would say 16% unemployment is a sight better than the worse-off countries in the EU. Do European countries have different unemployment models like we do, ie, U3, U6, etc? Can we actually compare apples to apples across the board? I don't know this.
You didn't reference the demographics in your post (unless I missed it, which is possible). Links, or info? For retirement age, population age, etc., or I can look at wiki I suppose.
(no subject)
Date: 18/7/12 20:15 (UTC)In a nutshell: yes, it's most likely ideological.
Here (http://www.csb.gov.lv/en/notikumi/changes-age-structure-latvia-population-32046.html)'s a more detailed look into the recent Latvian demographic trends.
(no subject)
Date: 18/7/12 20:25 (UTC)(no subject)
Date: 18/7/12 19:00 (UTC)Sadly, with Paul Krugman still unapologetic about his gross mis-understanding of our current self-in- and deflating monetary system (http://www.nakedcapitalism.com/2012/04/scott-fullwiler-krugmans-flashing-neon-sign.html), the "other" side of this debate is woefully underrepresented by reality:
So, on one side we have the Peterson Institute people perhaps deliberately misrepresenting the impact modern banking has on Austerian policy, and on the other side guys like Krugman failing to understand the same. It's the blind debating their favorite colors.
Great.
(no subject)
Date: 18/7/12 19:10 (UTC)(no subject)
Date: 18/7/12 19:34 (UTC)(no subject)
Date: 18/7/12 19:41 (UTC)(no subject)
Date: 18/7/12 20:31 (UTC)(no subject)
Date: 18/7/12 22:47 (UTC)(no subject)
Date: 19/7/12 16:56 (UTC)(no subject)
Date: 19/7/12 16:59 (UTC)(no subject)
Date: 19/7/12 13:50 (UTC)So, how am I supposed to conclude anything other than austerity policies failing badly (thus agreeing with Krugman that it fucked up the region), causing huge unemployment and accompanying migration, reducing debt while the total economic output goes way below historical averages.
(no subject)
Date: 19/7/12 17:06 (UTC)(no subject)
Date: 22/7/12 23:49 (UTC)I think terms like "GDP" are too vague to illustrate an accurate picture of what's occuring in the baltic states. Those in politics have a conflicting self interest in claiming positive economic growth to support the concept their policies are "working".
IIRC, the United States hasn't enjoyed real economic growth in years. Most of what is claimed as economic growth is growth of the financial sector, real estate and perhaps the exploitive price hikes in healthcare and educational loans. The
conspiracy theoristskeptic** in me suspects misinformation and economic statistical inaccuracy may abound.......