Presentation Transcript

1. Baltic Tiger or Paper Tiger?

   Associate Professor Jeffrey Sommers ‘Latvian Miracle’ or Unraveling Social Europe?
2. Latvian GDP
3. Inflation Tamed
4. Latvian Unemployment Down at 14.3%
5. ‘No people, no problem’: self deportation as means for addressing unemployment
6. Net emigration from Latvia, 2000-2011 EU Accession
7. Population change in the Baltics, 2000-2011 (% of the inititial population migrating)
8. Latvia’s Population
9. Live Births Peak in 1987 (42k)Lowest point in 2010 (19k)
10. European Unemployment: a Great Depression Reprised ‘Old Europe’ unemployment levels in many countries comparable to average unemployment rates in Europe’s largest economies in the Great Depression ‘New Europe’ unemployment rates multiples of average rates of the largest European economies during the Great Depression Greece & Spain with unemployment numbers larger than US’s during the Great Depression
11. Jacques Delorsand the Idea of a ‘Social Europe’ Idea in 1986 of making a more competitive European economy while maintaining the features of social inclusion & sustainability created after WW II Attempt to reconcile social stability with increasing liberalization
12. The Financial Crash & Austerity Causes in Europe: Maturing capitalism and reduced investment opportunities Development asymmetries in EU (rich & poorer nations mixed in union) Insufficient mechanisms for recycling capital between rich and poor countries in EU (structural funds the strongest) Euro and lack of national monetary (currency) adjustment tools Opportunism: using crisis and Lisbon goals to roll back Social Welfare states
13. Social Europe & Its Discontents: Latvia Rescues Austerity Austerity’s results, mostly underwhelming….
14. An austerity “success” must be foundLatvian austerity to the rescue! Tabula Rasa. Small place that people don’t know much about. Provides a frictionless opportunity for people to impose narratives on.
15. Anders Aslund The architect of Latvia’s austerity model and chief economic advisor to Latvia’s Prime Minister writes: Latvia’s internal devaluation and austerity has been a huge success and an example for other European states to emulate
16. Christine Lagarde In May 2012, head of the IMF stated in Riga: Latvia “could serve as an inspiration for European leaders grappling with the economic crisis”
17. Olivier Blanchard Mea Culpa! Thought austerity would be a “disaster” but has reverted to course by supporting what in effect is structural adjustment version 2.0 “Long live structural adjustment!” Latvia criticized IMF from the right, arguing it needed more austerity than IMF counseled.
18. Chrystia Freeland “The harsh Latvian plan worked because the whole country was committed to it.” Reminds one of the Red Cross inspections of the Theresienstadt showcase concentration camp, who shown orchestras and clean conditions announced, “everything in order here!”  
19. 1991 and “Latvia 2000”“…the reform has to continue despite changes in government” Tight monetary policy Pegged currency at high exchange rate Regressive Taxation: high labor tax no capital gains
20. Latvia, uniquely,criticized IMF from the right, arguing it needed more austerity than IMF counseled As State Department cables from Wikileaks reported negotiations over Latvia’s 2010 austerity budget: “The telephone conference did not go very well, according the Assistant Secretary of State, with the IMF and EU expressing serious concerns about the income distribution profile of the proposed budget cuts. The EU and the IMF urged the Latvian government to reconsider the measures, but Repse[Finance Minister] defended the budget proposal….”
21. Latvia and the “Spatial Fix” The Late Soviet Union and the Age of Corruption
22. Nordex: Money, Metals, Oil & the Spatial Fix Marc Rich (Vice-Rector) GrigoriLouchansky
23. Correspondent Banking (Tax Evasion) “Wealth Management” “Tax Optimization” Lucy Edwards, Bank of New York
24. 2004 Transition (Inflating the Bubble): NATO and EU Accession Global liquidity Japanese Carrying Trade Alan Greenspan’s credit Keynesian turn Capital inflows to Latvia (2004) EU Structural Funds Commodity inflation and Russian money Swedish banks and the Viking Reprise Balance of payments imbalance 25%. Massive import-based consumption paid by borrowed cash.
25. A Ponzi Economy: Asset Inflation and Collateralizing Latvia’s previously Debt Free-Property: The return of (debt) Serfdom SEB Swedbank
26. Impact of Credit Crisis At the peak of the real estate bubble in 2007 real estate consumed 71.8% of the credit extended in the country (non-productive sector). After purchase of properties, the capital gains made on the sale of property fueled growth of consumer goods (mostly all of foreign manufacture) that now will require years of repayment.
27. Sartrean ‘No Exit’ for Latvian Borrowers Latvians not allowed to walk away from mortgages. Law requires full payback of loans regardless of collapsed property prices. Banks can go after borrowers and any family members that co-signed for property. A kind of neo-serfdom (no exit).
28. The 2008 Crisis: Largest decline in GDP of any country (roughly 25% Unemployment soars over 20% Extreme inequality: GINI index shows inequality at roughly US levels, but not controlled for massive non-reporting of income. Alternative methodologies using auto registrations show inequality levels at Sub-Saharan African Levels.
29. ‘What we’ve got here is a failure to communicate…’Keynesianism for Rich: Monetarism for the Poor Joaquin Almunia, head of European Commission, sends letter to Latvia’s Prime Minister and Finance Minister on January 26, 2009 His letter states that bailout funds of Latvia are to be used: “to avoid a balance of payments crisis…restoring confidence in the banking sector, and bolstering the foreign reserves of the Bank of Latvia [Central Bank].” “Further, the letter state what the funds are not to be used for: “worryingly, we have witnessed some recent evidence in Latvian public debate of calls for part of the financial assistance to be used inter alia for promoting export industries or to stimulate the economy through increased spending at large. It is important to actively stem these misperceptions.”
30. What is to be done? Double down on austerity Internal devaluation (drive wages down): Reject devaluation of currency Drive working hours, for those with jobs, up Slash social expenditures Hospitals & clinics closed Schools closed Export way out of crisis. Export what? Timber. Clear cutting accelerates. Sell residency permits to CIS: Gives access to Shengen Zone (has resulted in CIS oligarchs pouring money into Latvian real estate) Correspondent banking
31. Protestant Morality Play, Plucky, Stoic Balts:“The harsh Latvian plan worked because the whole country was committed to it.” Carefully scripted Latvian Government narrative for export at odds with facts on the ground Latvians much divided on austerity
32. Huge protests following crisis:January 13, 2009: 10,000 demonstrate in Riga
33. Students and Pensioners March
34. Farmers
35. Dickens Reprised Comparative poverty rates: Poverty: Latvia (41%), Greece (27.7%) Children’s poverty: Latvia (42%), Greece (28.7%) Extreme Poverty: Latvia (33%), Greece (11%)
36. ‘No People, No Problem’Voting with feet: Exit Latvian population roughly at reproduction parity at end of Soviet period Population 2.7 million Demographic collapse: people stop having children (European-wide problem, but worse in Latvia) At first people flee both east and west as situations permit EU accession in 2004 opens door to continued emigration West Accelerates with 2008 crisis: births and marriages decline 1987 peak Soviet-Latvian births, 42,1359 2011 low mark from crisis births, 18,825 2010 census initially delivered result of the politically unacceptable 1.88 million (real number possibly less) “Tools & Repairs” applied to methodology to deliver more acceptable (over 2 million) figure of 2.08 million
37. In short, there was no consensus for austerity People protested (intensely, but briefly) People then emigrated Elections: population was divided on ethic lines Austerity advocates played the ethnic card: ‘vote for us or the ethnic Russians take charge’
38. Latvian Austerity as Global Model to Emulate?: ‘You should not try this at home’ To succeed: Small enough, willing enough, and able to let at least 10% of population emigrate (14% of working age population) Demographically secure enough to see reproduction rates plummet Ethnically divided population that permits ethnic card to distract population Depoliticized Post-Soviet population willing to give up protest after short period
39. Macro-economic ‘success’ Current Account Balances Brought back to acceptable limits Wage growth halted for population with per capita incomes already well below Greece’s Logging exports up Wheat exports up Offshore finance growing (especially after Cyprus economic crisis) Manufacturing up (over extremely low levels) Economic growth, but economy still smaller than 2008 Unemployment dropping (at 14.3% presently)
40. Offshore banking surging Bloomberg notes: As non-European inflows into Cyprus stagnate, about $1.2 billion flooded into Latvia in the first half of the year [2012]. Non-resident deposits are now $10 billion, about half the total, regulators say, exceeding 43 percent in Switzerland, according to that nation’s central bank These are big amounts given that Latvia has roughly a fourth of Switzerland’s population and only a tenth of its GDP
41. A Global Model of Social Exclusion? Very hard to replicate given highly specific local conditions ‘Destroyed the village in order to save it’? Too early to tell….