Sunday, March 25, 2012

Latvia’s Recovery: A Sick Neoliberal Joke

It might be noted that I dealt with Latvia in a post here on June 5, 2011. Latvia was an economic and social disaster then, from the austerity implemented from 2008 and 2009. How is Latvia doing now? In particular, is there any justification for certain crowing neoliberals who proclaim the great success of Latvian austerity and Baltic austerity in general?

There is an excellent paper here from the Center for Economic and Policy Research (Washington, D.C.) by Mark Weisbrot and Rebecca Ray on Latvia:
Mark Weisbrot and Rebecca Ray, “Latvia’s Internal Devaluation: A Success Story?” Center for Economic and Policy Research paper, December 2011 (Revised and updated).
Their findings give the lie to any claim of “success” for Latvian austerity and domestic wage and price deflation.

We already know by the standard figures that Latvia suffered a depression from 2008 to 2009. You should note that the word “depression” is bandied about by many people loosely to refer to any recession or economic downturn. On my blog, I use the word “depression” in its technical sense of a fall in the value of a nation’s real output (that is, real GDP or real GNP) of 10% or more.

Even after the financial crisis of 2008 and global downturn, most nations have avoided depression: most simply had moderate to severe recessions. Even the US did not have a technical depression, just a severe recession.

What about Latvia? We now know the truth. On p. 3 of their paper, Mark Weisbrot and Rebecca Ray report that “Latvia experienced the worst loss of output in the world”: its GDP contracted by 24%. They also present a graph showing serious downturns in a number of countries over the past 20 years. Latvia’s depression was the worst of any nation. Latvia’s depression was so severe that it was almost as bad as America’s real GDP collapse from 1929–1933 (a contraction of 28.9%).

From Q4 2009 Latvia had a weak recovery, as can be seen here:
Given the depth of the collapse, it is surprising how weak growth was for the first three quarters of the recovery. Real GDP growth was apparently still negative in 2010. While the annual GDP growth rate in 2011 was 5.5% (touted as some great achievement by the cheerleaders of neoliberalism), this had little real effect on unemployment (see below), and occurred, as we shall soon see, after the government terminated its fiscal austerity program.

The apologists for Latvia assert that export-led growth via “internal devaluation” (or domestic wage and price deflation) from 2009 has been the key to success. Weisbrot and Ray report that even this is a myth – something which even I did not know.

Weisbrot and Ray conclude that “there is almost no increase in net exports since the economy began to expand at the beginning of 2010” (p. 14). Instead, the weak recovery from 2010 was driven by the failure of the government to implement the further draconian fiscal contraction demanded by the IMF (p. 15): while the Latvian government did not cut further in 2010, its “fiscal policy was neutral for 2010” (p. 13). That is to say, unlike 2008–2009, the Latvian government did not take an axe to its economy in 2010: there was not serious contraction, nor any stimulus. This, combined with a positive inflation rate in 2010 that caused real interest rates to fall, led to a weak monetary expansion.

In any case, even if Latvia had experienced some small degree of export-led growth in 2010–2011, this could have been achieved by currency depreciation with fiscal stimulus.

And, above all, the weak recovery is explained simply by the fact that the government did gut its domestic economy on the scale of the 2008–2009 cuts.

So what about unemployment? Official unemployment soared to over 20% in early 2010 in Latvia, as you would expect given the depth of the GDP contraction.

Now recently there has been a fall in official unemployment down to 14.3%:
That might seem like a steep fall, but Weisbrot and Ray show clearly that the “official” unemployment statistic grossly underestimates unemployment, a state of affairs not uncommon in many nations.

Weisbrot and Ray state:
“The official unemployment rate does not measure the full cost of this recession and weak recovery to Latvia’s labor force. If we take into account those who are involuntarily working part-time (because they could not find full-time work, or other economic reasons) and those who have given up looking for work, we get peak unemployment/under-employment of 30.1 percent in 2010, declining to 21.1 percent in the third quarter of 2011.”
Mark Weisbrot and Rebecca Ray, “Latvia’s Internal Devaluation: A Success Story?” Center for Economic and Policy Research paper, December 2011 (Revised and updated). p. 8.
That is to say, once we adjust the official unemployment figures for those who have simply stopped looking for work or have taken part-time work (though they still want full-time employment) unemployment was, up until late 2011, a shocking 21.1%.

I can of course anticipate what apologists for austerity will say: “what about the drop from 30.1% in 2010 to 21.1% in late 2011, isn’t that impressive!,” they might say.

Unfortunately, that drop was not caused by a massive surge in domestic employment. Again, Weisbrot and Ray show what happened:
“[sc. Official unemployment] … also does not include all the people who have left the country in search of employment since the crisis began. It is estimated that the net loss of population in 2009–2011 amounts to as many as 120,000 people, or 10 percent of the labor force. If not for this migration, the broader measure of unemployment could be as high as 29 percent in the third quarter of 2011, instead of 21.1 percent.”
Mark Weisbrot and Rebecca Ray, “Latvia’s Internal Devaluation: A Success Story?” Center for Economic and Policy Research paper, December 2011 (Revised and updated). p. 9.
Once we take account of the mass exodus of a significant part of the Latvian labour force (a situation that has also happened in Ireland), Latvian unemployment would have been something like an incredible, shocking 29% in late 2011. Once adjusted in this way again, it would perhaps be only slightly lower than this as of March 2012.

Any “success” in the area of a surge in domestic employment in Latvia is nothing but an utter delusion, another sick joke on the basis of (1) grossly unreliable official unemployment figures and (2) failure to net out the fall owing to emigration.

There is no Latvian employment success. This is a nation where 10% of the labour force has simply left the country.

That trend is accompanied by shocking demographic developments: falling birthrates, the Latvian countryside has been denuded of people, schools are closing, and some villages simply dying. While some of these trends are not uncommon in former Soviet countries (exposed not just to the terrible failure of communist command economies, but to neoliberal shock therapy from the 1990s), the scale of the disaster in Latvia has been made much worse by its austerity programs.

Social Costs
Weisbrot and Ray (p. 10) note the terrible increase in income inequality in Latvia, but I think a more eloquent piece of evidence from 2009 is this video below.

One wonders: who many excess deaths occurred just because of the cuts to the public health care system?

And all this so that they could have possibly the worst depression suffered by any nation in recent history, with a comparatively miserable recovery following, especially in terms of unemployment.

The “success” of Latvia, as I said in my title, is a sick joke. GDP growth since 2010 has been weak, an accidental product of the fall in real interest rates and the fact that the government retreated from further severe cuts in 2010. But even that recovery did very little for unemployment, which fell mostly because of emigration and the rise in discouraged workers.

One wonders how anyone can think that Latvia is a viable model for America, other European nations, or indeed any country at all.

Note on Estonia
At some point, I will do a similar post on Estonia. But I will be very surprised if many of the points made above do not also apply to Estonia.

First, it appears that Estonia relied on internal devaluation to a far lesser degree than the other Baltic nations. It also seems to be recovering comparatively better. Do I really need to point out what the lesson is?

Secondly, Estonia’s population is 1,340,194 (2010 est.). Its labour force is about 686,800 (2010 est.). I suspect that the fall in unemployment from 2010-2012 in Estonia is caused to some degree by the same factors as in Latvia: failing to take account of discouraged workers and to net out unemployed persons who have emigrated.

Emigration seems just as important in Estonia as in Latvia: in 2009, 3% of the Estonian labour force worked abroad, and around 14-19% in more recent years.


  1. Looking forward to the piece on Estonia!

    Going abroad is an epidemic. One example is state-funded med students who start to learn Finnish during their studies because they can't see a competitive future for themselves otherwise.

    Somebody summed up life in Estonia as "European prices, African wages" - it's meant as a joke to some extent, but it's what the austerity is doing.

    - a reader from Estonia

  2. Thank You for doing this. Neoliberalism is just propoganda, using economists bought and paid for by the rich to tell the rest of us what the rich want us to hear.

    Austerity is really about making sure the debt holders get paid.

  3. Estonia also supposedly had a series of tax rate reductions, so there was SOME stimulus, although it could have come from increased government spending as well.

  4. Why everyone is ignoring Lithuania? Please do report on its economy.

    1. An overview here:

    2. Thanks! This country is living in neo-liberal information area. This blog for critical economist is like new breath of frech area. Well done.

  5. Just a quick glance at data.

    They had a depression in 2009-2010:

    Official unemployment still looks terrible to me:

    It looks like mass emigration has hit Lithuania too. In 2010, 78,000 (or 2.4% of the total population!) emigrated:

    My immediate question is: how did this emigration affect the fall in unemployment? Probably a lot.

  6. LK -> "Their findings give the lie to any claim of “success” for Latvian austerity and domestic wage and price deflation."

    Before reaching this conclusion, we must ensure that confounding factors are controlled. Did you take into account the flexibility of the labor market? What about minimum wage and other regulations?


    This paper is a must-read. It seems that austerity was not a choice but a necessity. The same is true for Greece. The level of debt was already too high.

    "The increase in the indebtedness of Latvia’s NFPS prior to the crisis was the fastest among CEE countries and in Europe was only matched by Iceland and Spain. Credit to the NFPS — including borrowing from external creditors — increased by an average of 20 percent year-on-year between 2000 and 2007. As a result, Latvia’s indebtedness reached 116 percent of GDP in 2007 compared to under 35 percent of GDP in 2000."


    "A comparison with CEE countries with floating exchange rates suggests that the fixed exchange rate regime in Latvia contributed to the build-up in credit. Bakker and Gulde (2010) note that Latvia like many other countries in the region experienced significant capital inflows in the years prior to the crisis. In countries with floating exchange rates (i.e., Czech Republic, Poland, Romania, Slovak Republic, and Ukraine) monetary policy was tightened by allowing the exchange rate to appreciate. However, in countries with currency boards and fixed exchange rate regimes (i.e., Bulgaria, Estonia, Lithuania, and Latvia) capital inflows led to inflation, lower real interest rates, and a sharp acceleration in credit. In many of these countries, including Latvia, most of the borrowing was in foreign currency given positive interest differentials and the lack of perceived exchange rate risk."