The Miracle of Baltic Austerity?: The Case of Latvia

The belief that austerity in the Baltic states has been “successful,” and that it is a sustainable path to growth is one of the most truly absurd things I have heard of late.

Let’s focus on Latvia here, which has implemented austerity and “internal devaluation” (or “wage and price deflation”). Let’s look at some figures: (1) GDP and (2) unemployment.

Latvia’s GDP
2008 Q1 -4.1
2008 Q2 -2.4
2008 Q3 -1.1
2008 Q4 -3.1

2009 Q1 -12%
2009 Q2 -2
2009 Q3 -3.7
2009 Q4 0.1%

2010 Q1 0.2%
2010 Q2 0.6%
2010 Q3 1.6%
2010 Q4 1.1%

2011 Q1 0.2%
GDP Growth, Latvia, Tradingeconomics.com.

In contrast to other countries that went big with Keynesian stimulus (like Australia), Latvia has suffered a massive depression in 2008–2010 where real GDP slumped by 30%.

Latvia’s GDP growth after the depression has not been that impressive: in two quarters growth has been 0.2% and in one quarter 0.1%. It has even fallen to 0.2% in Q1 2011. Its non-tradeable goods sector has contracted badly and remains subdued. The GDP growth has been accomplished by export-led recovery, but that growth path is unsustainable: austerity in European nations – Latvia’s trade partners – will hit Latvia hard, and derail their recovery. While Lithuania, Estonia and Russia are large trading partners of Latvia, it is also dependent on a number of EU countries for exports, as we can see in its trade partners by percentage of exports in 2010:

Norway 3%
Finland 3%
UK 4%
Denmark 4%
Poland 5%
Sweden 6%
Germany 9%.
Foreign Trade Statistics, Trade with Latvia.

Thus 34% of its exports are bound for EU countries where austerity will depress demand and reduce Latvian exports. Already a number of Baltic states have hit capacity constraints and will see their exports fall this year (see “Baltic Growth Set to Slow as Export Capacity, Demand Are Capped,” May 12, 2011). With no room for domestic stimulus, there may well be lower growth or a return to recession.

Latvia Unemployment Rate
Dec. 2007 5.5%
Jan. 2008 6.2%
Jun. 2008 7.5%
Dec. 2008 10.2%
May 2009 16.5%
Aug. 2009 18.7%
Oct. 2009 20.1%
Jun. 2010 19.3%
Dec. 2010 17.2%
Latvia Unemployment Rate.

Unemployment has fallen to 13.9% in April, 2011, but, despite the export-led GDP growth, double digit unemployment is still a catastrophe in Latvia: the country will have mass unemployment for years.

How has the voting population allowed this to happen? The answer is that the labour movement in Latvia is weak and its ethnic nationalism causes its majority Latvian citizens to vote for their own Latvian party, despite the unpopularity of that party’s economic policies. The social costs of “austerity” have also been a disaster, as Jeffrey Sommers and Michael Hudson have noted:

“But Latvia’s model is not replicable. Latvia has no labor movement to speak of, and little tradition of activism based on anything other than ethnicity. Contrary to most press coverage, its austerity policies are not popular. The election turned on ethnic issues, not a referendum on economic policy. Ethnic Latvians (the majority) voted for the ethnic Latvian parties (mostly neoliberal), while the sizeable 30% minority of Russian speakers voted with similar discipline for their party (loosely Keynesian) …. While the economic crisis was deep enough to drive even Latvia’s depoliticized population into the streets in the winter of 2009, most Latvians soon after found the path of least resistance to be simply to emigrate. Neoliberal austerity has created demographic losses exceeding Stalin’s deportations back in the 1940s (although without the latter’s loss of life). As government cutbacks in education, health care and other basic social infrastructure threaten to undercut long-term development, young people are emigrating to better their life rather than to suffer in an economy without jobs. Over 12% of the overall population (and a much larger percentage of its labor force) now works abroad. Moreover, children (what few of them there are as marriage and birth rates drop) have been left orphaned behind, prompting demographers to wonder how this small country can survive. So unless other debt-strapped European economies with populations far exceeding Latvia’s 2.3 million people can find foreign labor markets to accept their workers unemployed under the new financial austerity, this exit option will not be available.

Jeffrey Sommers and Michael Hudson, “The Spectre Haunting Europe, Debt Defaults, Austerity, and Death of the “Social Europe” Model,” http://michael-hudson.com, January 22, 2011.

If Latvia is a “success,” then one truly wonders what a failure would look like.

Latvia’s export-led growth will falter, and what is required is more domestic growth, but with continued austerity that will not happen. If one defines economic “success” as suffering a huge depression, mass unemployment, 12% of the whole population working abroad, a brain drain, falling birth rates, poverty, and unreliable export-led growth, then Latvia has “succeeded.” For anyone else not enslaved to neoliberal propaganda, Latvia is a miserable failure, a lesson in what not to do.

BIBLIOGRAPHY

Sommers, J. and M. Hudson, 2011. “The Spectre Haunting Europe: Debt Defaults, Austerity, and Death of the “Social Europe” Model,” http://michael-hudson.com, January 22.
http://michael-hudson.com/2011/01/the-spectre-haunting-europe/

Bill Mitchell, “The dead cat bounce – Latvian style,” Billyblog, December 27th, 2010.
http://bilbo.economicoutlook.net/blog/?p=12887