Today (5 June) in Riga a high level conference is taking place organized by the Bank of Latvia and IMF and attended also by Mrs Lagarde, Managing Director of IMF „to discuss the policies that helped Latvia, Lithuania, and Estonia overcome the crisis, restore economic growth, and make progress toward—and in Estonia’s case achieve—the goal of euro adoption.“
Both IMF and World Bank officials on different occasions have recently described Latvia as a ‚star pupil‘, who, as they say, has extremely well managed the crisis. Also, Latvia’s Prime Minister, Mr Dombrovskis has already shared a recipe of recovery in his recent book (co-written with Anders Aslund) and has given numerous public lectures on this subject. Presumably, this conference is a logical culmination of this wave of positivism, where the ones tackling the crisis – a pupil and teachers – will pat each other’s back and will give the best marks to themselves (pupil – for doing properly his homework, teachers – for excellent teaching and supervision).
Conference speakers have been carefully selected, whose opinions can make a minimal harm to this vibe of positivism. Also attendance of this conference is strictly by invitation only, though a live online video of the conference will be provided. Without doubt, also the choice of the venue – the Great Guild – has been made very carefully matching with the mood of this success story (this time, I guess, facades of the Kalnciema street buildings were not repainted as it was done when the US president visited the country some years ago).
Anyway, that’s as a brief intro.
If I had a chance to speak at this conference, my points would be the following:
First of all, it would be interesting to understand according to what kind of criteria a diagnosis „crisis is overcome“ can be made? Is it because IMF has finished its country mission, Latvia has closed the programme and has stopped borrowing (though it will still be repaying the loan for some time)? Is it because the target (3%) for budget deficit (it doubled after bailing out Parex bank in 2008) reduction is almost achieved and Latvia is meeting almost all criteria for joining euro zone? Is it because the Standard and Poor has increased Latvia’s credit rating and now we look more attractive in the eyes of investors? Is it because after sleeping in coma for some time (20% GDP fall in 2 years) we are now able to wink an eye (5% GDP growth in 2011)?
Are not those 37% of Latvia’s inhabitants, whose monthly income is below 200LVL (290EUR), continuing to enjoy the crisis to the full with the increased VAT (from 18% then to 22% now), inflation (comparing to 2005, prices are up almost 50%) etc? Those 25% of Latvia’s inhabitants, whose income is between 200 – 300LVL, maybe can breathe a bit and wink their eyes, but if they have school-age children and a mortgage? For them this crisis is a continuous present. Also current 16,3% unemployment (which peaked 20,5% in 2010 Q1) and those 200 000 people who have left Latvia during the last 10 years is hard to be categorized as ‚normality‘.
Government, regarding overcoming crisis, maybe, similarly as elsewhere in the world, represents and associates itself more with the 1% of population on the top, who, in case of Latvia, with their income above 1000LVL (1400EUR) do possibly feel positive changes from the 5% GDP increase last year and for whom crisis is indeed over.
Sociologist Zygmunt Bauman has said that „the power should be measured by the quality of the society of its weakest members“. Therefore, in order to test the empirical quality of the thesis „crisis is overcome“, maybe this conference should have been organized somewhere at least 100km away from Riga to show Mrs Lagarde and Mr Dombrovskis (I wonder, how often he has a chance to go outside Riga?) the countryside of Latvia, its roads, prices in the shops and let them meet people who could tell directly about overcoming the crisis and amazing economic growth.
Next, one of the most obvious lessons during the last ten years is the fact that too fast, imbalanced economic growth contains one or another ‚bubble‘, which by reaching its maximum, bursts. However, Prime Minister’s announcements during the recent months with respect to Latvia’s priorities emphasize exactly the same thing, which to large extent let down Latvia’s long term development few years ago – fast economic growth. Wasn’t it enough with this fake, abnormal growth 3 years ago?
Moreover, government’s obsession with economic growth as the main goal is absurd; it is similarly as when driving a car, speed is more important than the actual purpose and destination of the journey, available amount of oil and passengers‘ safety. Economic growth can be only as a tool, not as a goal, however in government’s rhetoric an element of ‚how the aunty in Bauska town will benefit from it‘ is rarely to be found. Overall, of course, fiscal stability, discipline and budget consolidation are very nice things, but wait a minute – behind these are alive human beings who deserve some dignity and respect.
Last 20 years perfectly show that the economic growth as such does not mean much and can be actually counter-productive, if attention is not paid to the content, quality and sustainability of this growth. GDP and GDP per capita is not that important as its actual link with the real economy and society at large. It is important, in which sectors, how qualitative economic activities take place and what/ how big impact they make on society. In other words, it is not so important how big is the cake, but how it is shared among those around the table. If the cake is being baked bigger and richer year by year, but is eaten by a narrow circle of people, it is absurd to use the cake as the adequate description of the situation on the table and assume that everyone around it had a slice of it. From national development perspective baking of a bigger cake without increasing the chance of more people to get a slice of it, does not bring any good.
Economy should serve the people not the other way round, however today especially the poorest are forced to pay disrespectfully high price for the activities of irresponsible bankers and the cold-blooded Government’s decision to bail out these bankers. Moreover, typically orthodox IMF/EC conditions to receive the loan continue to constrain country’s social economic development even more. IMF is not only manipulating with country’s sovereignty, but also actively practicing double standards with respect to recommendations to different crisis-hit countries. In result of this, Latvia’s competitiveness is damaged, as it has to decrease its budget deficit to its minimum, while other countries like UK can freely operate with its 8% budget deficit.
If the main goal of Latvia’s government were eradication of poverty (all below minimum living cost – 175LVL per month currently) and provision of decent quality of life to its people (reference – Latvia’s sustainable development strategy for 2030), then its central attention would not be turned on higher, bigger, faster GDP, but Latvia’s place on Human Development index (now it is 43rd), World Happiness index (among the bottom 50 countries), suicide rank (5th place in Europe), Corruption index, global university ranking, etc. GDP is one of the many tools to achieve higher standard of living and welfare, however it is not by any means the only one or the absolutely the most important one.
Regarding the causes of the financial crisis, in addition to Parex bail-out affair (which was followed by IMF loan worth 3bn LVL (for comparison – the whole government’s budget in 2010/ 2011 was 4.5bn LVL!)) and well known conditions (structural reforms, debt and budget deficit reduction)), I would like to mention one more important element – inequality. Latvia unfortunately is the most unequal country in Europe (Gini index), which means the gap between the 20% richest and 20% poorest is the widest. Those, who are overtaken by neoliberal ideas, usually don’t consider this fact as important (Latvia has been champion in this discipline for quite few years now). This is well illustrated by our tax policy (story about never introduced progressive tax system), social policy and access to public services. Moreover, average economist generally is not bothered about inequality.
But, just very recently Michael Kumhof, IMF (!!!) economist analyzing the recent crisis around the world and Europe came out with a very strong statement: “Unless countries reduce income disparities the next financial collapse is inevitable.” Kumhof is not an average IMF economist, but, I guess, his courage to make an opinion in public which is not 100% matching with IMF’s official ideology and position, is a sign of certain disagreement and lack of consensus within IMF. Kumhof recommends to go beyond just crisis management (short term) and focus more on efforts to prevent crisis from happening again (long term) (p.s. prevention of crisis may not be in IMF’s interests because there will be then no one who to lend money; African countries are also less and less keen to do business together with IMF). Kumhof believes that income inequality is the central cause (and thus also a solution) of the crisis, which has been created by global competition, global trade imbalances, deregulated financial market, diminished role of trade unions and tax havens, which in one word we can be called as neoliberalism. Disregarding how it will further affect IMF and its approach to financial crisis, Latvia’s society and political elite should realize the damaging impact of inequality on country’s development.
And, last but not least, regarding economic recovery and growth, I would like to talk about another word in fashion – competitiveness. Latvia by being one of the most liberalized countries in the world (reference point – World Trade Organization) has in fact shot its own legs. None of the current most competitive countries has become such under free market conditions. Road to strong industries goes through protectionism (and I can go here even as far as colonialism, slavery etc), which is practiced today too only in a more refined, sophisticated way. Latvia, naively believing in market economy quickly, way too quickly back in early 1990s jumped over this period of possible protectionism, without giving a time to its local economy to develop, be nurtured and mature. If Latvia wants its own Nokia, Siemens, Danone, Ikea or Toyota, government should develop and support relevant industry policy. Beginning of competitiveness is its own national market which enjoys strong government support. However, if entrepreneurial environment favors foreign investors and entrepreneurs (via tax holidays, offshores and positive discrimination), then where else if not in Latvia, a local businesses can build their ‚muscles‘ to fight for their market share locally and eventually globally? (though, maybe indeed, a question who owns economy and economic resources is not essential anymore..) But, tell me, how absurd it is that it is cheaper to buy Polish or Spanish apples than Latvian apples in Latvia (hey, and think about carbon footprint!!)? Isnt it simply insane? Where is that threshold until which the conditions, when local businesses cant compete with import in their own country, can be justified? In name of what? Even under free market conditions, what are the obstacles to create positive advantages for local entrepreneurship? What is wrong with local producer having a preference in a local market to sell the goods thus providing jobs to local people and using local resources? This is a political choice of Latvian politicians: to defend their national interests or to be influenced by foreign market liberalists, who have their own national interests too, of course. Our Scandinavian neighbors are excellent masters of playing this double-game.
And, in conclusion about those who have left the country: in every society there will always be people who will go abroad where ever they would be born to find out what is behind that horizon line. However, today, most of the people, who leave, do it out of great desperation and simply in name of survival and opportunities for their own development. If the social contract between the state and its citizens does not work, Latvians are not like Spanish or Greek; they just leave. In silence, without riots and big protests. All, what is needed to keep people at home, is a political will to determine people and the quality of their lives as the central goal of all actions.
This is the meaning of democracy, I’m afraid.
Latvian version of this article is here