latvia: political, economic and financial integration – and then disintegration? the legacy of...
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Latvia: Political, economic and financial integration – and then disintegration?
The Legacy of 1989, 9 November 2009, Copenhagen
Morten HansenHead of Economics Department,
Stockholm School of Economics in [email protected]
Latvia: Just a few facts- on a per capita basis the most talked about country the past year
Population 2 254 000
GDPApp. 0.1% of World GDPEconomically the size of North Dakota
GDP per capitaApp. 50% of EU27 average3rd poorest in the EU
President of the Republic of Latvia, Valdis Zatlers
Speech to the
Latvian parliament
(Saeima), 18 June 2009:
“The question is really before us:
Will the Latvian state, will our country exist or not exist?”
“We have lacked political will, we lack economic and entrepreneurial far-
sightedness, we have governed our country poorly, indeed”
Latvian economic growth, 2004-I – 2009-II, year on yearBiggest boom turns to the (2nd) biggest bust…
-25
-20
-15
-10
-5
0
5
10
15
2004
I
2004
II
2004
III
2004
IV
2005
I
2005
II
2005
III
2005
IV
2006
I
2006
II
2006
III
2006
IV
2007
I
2007
II
2007
III
2007
IV
2008
I
2008
II
2008
III
2008
IV
2009
I
2009
II
Latvian GDP, quarterly, constant prices, seasonally adjustedBombed back 4 years….
10000001200000140000016000001800000200000022000002400000
1st
2nd
3rd 4th
1st
2nd
3rd 4th
1st
2nd
3rd 4th
1st
2nd
3rd 4th
1st
2nd
3rd 4th
1st
2nd
3rd 4th
1st
2nd
3rd 4th
1st
2nd
3rd 4th
1st
2nd
3rd 4th
1st
2nd
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Then: The Baltic Tigers A quick “What happened for Dummies”
Biggest credit boom in Eastern
Europe
Biggest property boom
Biggest consumption boom
Biggest overheating (wages,
inflation)
Strongly procyclical fiscal policy
The wish for fast income convergence
Why Latvia stands out
• Credit booms in all three Baltic countries
- but biggest in EE and LV
• Procyclical fiscal policy in LV and LT
World financial crisis • Domestic financial crisis in
LV; nationalization of Parex Bank
IMF/EU, Sweden, Denmark, Estonia, Czech Republic, Poland, World Bank, EBRD – strong solidarity
7.5 bill. EUR, 27-month Stand-byarrangement(35% of LV 2008 GDP – huge package)
• Parex and other banks• Public finances• Balance of Payments
Maintain the fixed exchangerate, opt for internal devaluation toregain competitiveness – undoing thewage excesses of the past
Commissioner Joaquin Almunia:“Just tighten (pull) enough and you will get the money”
Tough but necessary measures:• Cut public sector wages• Cut pensions• Close hospitals• Close schools
20-40% wage cuts in the private
sector not unheard of
A tale of reforms that were
not done in the
“years of abundance”
Lessons from transition
Fast transition:• Market economy• Trade integration
Slow:• Income convergence – but it is the overriding objective
Overlooked:• Financially uneducated population – exacerbates the credit boom
Downplayed:• Reform fatigue, advisor fatigue• Poor governance• Demand side effects vs. supply side effects
Latvia and EU integration
1 April 2004 NATO1 May 2004 EU21 Dec. 2007Schengen
2014(?) Euro adoption
• The EU may not be overly popular (but where is it?) but no alternative is envisaged
No going back…
NATO more important….
Some conclusions and comments
Firmly anchored in the westNo alternative to the EU
But:Hitler >< StalinNord Stream
2004: The right(?) time to join politically - but too early from an economic perspective?
Massive income differences will persist and be troublesome