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5 April 2013, Gateway House

Latvia: Economic miracle or mangled economy?

Subsequent to the global financial crises of 2007, while several countries were still struggling with economic problems, Latvia managed to dramatically decrease its public debt, and its GDP too grew at an impressive pace. How was this success achieved and at what cost to the people of the country?

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Latvia has often been praised for successfully implementing economic reforms after the financial crises of 2007. During a June 2012 conference organised by the International Monetary Fund (IMF) and the central bank of Latvia, IMF Managing Director Christine Lagarde said, “Latvia decided to bite the bullet. Instead of spreading the pain over many years, the country stood together and did what needed to be done up front.” [1] The European Commission and various European politicians have echoed these views. After a meeting with the Latvian Prime Minister Valdis Dombrovskis in October 2012, the President of the European Council, Herman Van Rompuy, said “Your experience should serve as inspiration for other member states.” [2]

Ireland too, like every small European country, went through a similar crisis in 2007. Its population of approximately 6 million is comparable to Latvia’s 2 million (that is, both countries have under 10 million people). The Irish economy too has recouped and the GDP growth in both countries has been comparable. The two countries, however, addressed their crises in very different ways. Latvia adapted severe austerity measures, while Ireland’s recovery has taken a more benign turn.

At a time when other countries of the European Union (EU) are dealing with another ongoing crisis by implementing controversial reforms, any apparently successful example must take into consideration a wide range of country-specific factors, as well as how that example compares to other countries. In any analysis of austerity measures, it is important to evaluate the sustainability of the reforms by looking at the cornerstones of the country’s economy – investment, housing, education, healthcare, employment and emigration.

Latvia, which was a part of the Soviet Union, experienced a drastic economic slowdown immediately after the fall of the USSR in 1991. This unleashed massive political and economic changes. But Latvia’s economy grew fast and steadily during the early 2000s and it joined the EU in 2004.

The financial crises of 2007 altered this trend and Latvia’s economy contracted by over 20%. Latvia turned to the IMF for help and in return implemented some of the strictest austerity measures in the EU. The GDP again grew by 5.9% from October-December 2012 as compared to July-September, and by 8.3% as compared to October-December 2011. [3] Latvia also managed to dramatically decrease its public debt. The positive GDP trend impressed international political and economic institutions.

How was this success achieved and at what cost to the people of the country? Latvia cut back investments in basic services: a two-fold decrease in investments in water supply, sewerage and waste management as well as professional, scientific and technical activities; a three-fold decrease in investments in accommodation and food service activities; and a four-fold decrease in investments in arts and entertainment between 2008 and 2011. Latvia also closed down a large number of educational and healthcare institutions, which resulted in a 25% fall in enrolment in higher education institutions and a 35% decrease in the number of hospitals between 2006 and 2011.

These measures brought the official unemployment rate to 13.9% in 2010 – bringing it close to the 1996 post-Soviet Union level – and a surge of emigration from Latvia, which increased by over 150% between 2007 and 2011. The absolute number of people leaving the country exceeded the numbers after the collapse of the USSR. In fact, Ireland is one of the most popular destinations for Latvian immigrants.

Many Latvians who chose to stay at home now struggle to secure affordable housing. The rate of households that could not afford to keep their homes adequately warm rose from 17.9% in 2009 to 24% in 2011. The rate of households that could not afford to pay arrears on mortgage or rent, utility bills or hire purchase instalments, more than doubled from 2006 to 2011. [4]

While the short-term aim of bringing back the positive GDP trend was achieved through cost-cutting programmes, it is unclear how the country will deal with the serious long-term issues of education, healthcare, housing, employment, and emigration, which have been caused by the austerity measures. A February 2013 survey by TNS, a global market research firm, and TV.net, a Latvian portal, says that 81% of Latvian families do not feel that the crisis is over or that the economic situation is improving. [5] Some sections of the Latvian internet community say their country has only one way out of the crisis – Riga International Airport.

In Ireland, on the other hand, the growth of the economy by 1.7% in 2012 as compared to 2011 was achieved without implementing Latvia-style extreme measures. [6] The total public health expenditure in Ireland almost reached the pre-crisis level with €14.3 million in 2011 from €14.1 million in 2007. [7] The number of primary school students increased by 8% from 2007 to 2011, while the number of university students increased by 15%. [8]

Instead of austerity measures, Ireland focused on strengthening its exports, almost doubling its trade surplus from €25.7 billion in 2007 to €42.8 billion in 2011. During this period, Ireland’s business with China grew by 20.4% and by 27.4 % with the U.S. The export of chemicals surged almost by 25%. Ireland also worked on other export categories such as pharmaceuticals, which increased by 45% from 2007 to 2011. Along with manufactures, these three categories now account for almost 80% of Ireland’s exports. [9], [10] In contrast, Latvia has a negative trade balance, with the total exports value reaching only 78% of imports value, in 2011. [11]

A more detailed comparative analysis of the historical, social, economic and political factors in both countries is necessary, but it is clear that there are ways of restarting economic growth without harsh reforms that harm a country’s education and healthcare systems and dramatically increase unemployment and emigration.

The “economic miracle” clearly has different definitions for institutions and for people.  It is necessary to comprehensively study the reforms in terms of their long-term effects before recommending similar measures to other countries in the EU. This will lead to context-specific solutions that are not based on inert economic indicators and institutional catchphrases that may not reflect the reality of people’s lives.

Gleb Zhukov is the Head of Business Research at Axience, a business services firm headquartered in Mumbai, India.

This feature was written exclusively for Gateway House: Indian Council on Global Relations. You can read more exclusive features here. 

For interview requests with the author, or for permission to republish, please contact Advait Praturi at praturi.advait@gatewayhouse.in or 022 22023371. 


References:

[1] IMF, http://www.imf.org/external/np/speeches/2012/060512.htm

[2] Official European Union portal, http://europa.eu/rapid/press-release_PRES-12-429_en.htm?locale=FR

[3] Central Statistics Office, Latvia. http://www.csb.gov.lv/en/dati/statistics-database-30501.html

[4] Central Statistics Office, Latvia. http://www.csb.gov.lv/en/dati/statistics-database-30501.html

[5] TVNET.LVhttp://rus.tvnet.lv/novosti/ekonomika/222037-tolko_16_zhitjeljey_latvii_oschuschajut_chto_krizis_prjeodoljen

[6] Central Statistics Office, Ireland. http://www.cso.ie/en/index.html

[7] Ireland, Department of Health.http://www.dohc.ie/statistics/pdf/stats11_health_exp_stats.pdf?direct=1

[8] Ireland, Department of Education.http://www.education.ie/en/Publications/Statistics/Key-Statistics/

[9] Central Statistics Office, Ireland.http://www.cso.ie/en/statistics/externaltrade/annualexternaltradem/

[10] World Trade Organisation.http://www.wto.org/english/res_e/statis_e/statis_bis_e.htm?solution=WTO&path=/Dashboards/MAPS&file=Map.wcdf&bookmarkState={%22impl%22:%22client%22,%22params%22:{%22langParam%22:%22en%22}}

[11] Central Statistics Office, Latvia;http://data.csb.gov.lv/Dialog/Saveshow.asp