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The Latvian Laboratory?



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Daniel, it’s difficult not to be impressed by what Latvia has achieved so far (for what it’s worth, back in 09 I wrote here about the mess in which the country had found itself), but before cracking open the Rīgas Melnais balzams in celebration it’s worth noting the following:

1. As noted by the New York Times article you cited, a significant portion of the “surplus” labor has moved abroad, and often those who have gone have been the best, brightest and most enterprising, something that is difficult for a still poor, small post-Soviet nation to cope with. When, back in 2009, I asked an official at the Latvian central bank what aspect of the crisis he was most worried about, he cited emigration. Three years later a senior Latvian diplomat told me the same thing. It’s worth adding that in a country burdened with a delicate, and highly sensitive, demographic balance between ethnic Latvians and ethnic Russians, any inherently unpredictable shift in the population is a cause for concern. At the same time, the country’s population is so small that the emigration of some tens of thousands can make a real difference to the labor balance. That is not the case in Greece, let alone Spain.

2. Exports amount to some 60 percent of Latvian GDP. That meant that, as the global economy recovered after the slump, Latvia was, to a degree, taken along for the ride. By contrast, exports amount to roughly 25 percent of Greek GDP, or 30 percent of Spain’s.

3. Prior to the crisis, Latvia’s public finances (albeit boosted by an unsustainable boom) were fine. Debt-to-GDP stood at around 23 percent in 2008.  Compared with the dysfunctional shambles that was Greece, that put the country in relatively good shape going into the crisis.

4. Latvia’s banking system was effectively back-stopped by the Nordic banks that owned so much of it: that kept liquidity going far better than would otherwise have been the case.

5. The country was a substantial beneficiary from EU “structural funds.”

None of these facts take away from the Latvian achievement, but they do underline the fact that, like neighboring Estonia, it’s something of a special case.

In an article for NRODT last October about the impressive Estonian recovery I argued that Estonia was not a poster child for “austerity defenders.” What it was was “a poster child for Estonia: Its frugal, free-market, low-tax, and transparent democracy is indeed something to emulate. An Estonian-style tightening could never have ended Greece’s slump, but if the Hellenic Republic had earlier taken a path that was more Baltic than Balkan, it would not be in the mess that it now is.” There are considerable differences between the Latvian and Estonian economies, but the basic argument applies with regard to Latvia too.



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