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Michael Hudson/Jeffrey Sommers: Latvia is No Model for Austerity

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By Michael Hudson and Jeffery Sommers, a distinguished professor at the University of Missouri-Kansas City and associate professor at the University of Wisconsin-Milwaukee respectively, who have both advised members of Latvia’s government on alternatives to austerity. They are also contributors to the forthcoming book by Routledge Press: The Contradictions of Austerity: The Socio-Economic Costs of the Neoliberal Baltic Model. Cross posted from the Financial Times by permission of the authors

Austerity’s advocates depict Latvia as a plucky country that can show Europe the way out of its financial dilemma – by “internal devaluation”, or slashing wages. Yet few of the enthusiastic commentators have spent enough time in the country to understand what happened. Its government has chosen austerity, its people have not. Finding no acceptable alternative, much of the labour force has elected to emigrate. This is a major factor holding down its unemployment rate to “just” 15 per cent today.

Latvia is not a model for austerity in Greece or anywhere else. Both the impression that neoliberal policy has been a success and the claim that Latvians have voted to support this failed model are incorrect.
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Latvia’s one year of solid economic growth since its economy plunged by 25 per cent in 2008-10 is billed as a success. Then, unemployment soared above 20 per cent as the shutdown of foreign capital inflows (mainly Swedish mortgage loans to inflate its real estate bubble) left Latvia with a deep current-account deficit. It had to choose between devaluation or maintaining the euro peg.

It chose the latter in order to proceed towards euro accession. To meet the eurozone criteria it cut public sector wages by 30 per cent, driving down overall wage levels and consumption to match its low labour productivity. The doctrine was that this shock therapy and poverty would soon restore prosperity.

What enabled Latvia to survive the crisis were EU and IMF bailouts – whose repayments will soon fall due. Relatively low public sector debt (9 per cent of gross domestic product at the start of the crisis) also provided some protection from bond traders. Latvia’s problem was mostly private sector debt, especially mortgage debt, which is secured not only by property but by the personal liability of entire families of joint signatories. The bank insurance agency insisted on this measure as it saw unaffordable housing prices being inflated by reckless bank lending. (Its job was to protect the banks, not the economy.)

The resulting austerity programme is anything but popular. Latvia’s parliament often polls approval ratings in the single-digits. Yet the government has survived two elections. How is one to read this?

Chiefly by ethnic politics. The biggest party opposing the austerity programme (Harmony Centre) largely represents ethnic Russians and had no chance of winning given its focus on rights for Russian speakers. The smaller parties run by post-Soviet oligarchs also are seen as being in league with Russia and are widely resented for fiscal imprudence during the boom years, when oligarch-controlled parties were part of the governing coalition. So the only political force left is the “austerians”. While most voters dislike their economic policy, a majority are convinced that they are best able to resist Russia’s embrace. All other issues come a distant second for Latvian voters.

That said, Latvians have protested against austerity. In January 2009, in the dead of winter, 10,000 protested in Riga. Teachers, nurses and farmers held demonstrations of their own. The police were called to suppress protests over the closure of a hospital. After these protests subsided, Latvians resigned themselves and began to emigrate. Demographers estimate that 200,000 have left in the past decade – nearly 10 per cent of the population – at an accelerating rate that reflects the austerity being inflicted.

Why have so many left Latvia if it is such an economic success, with such popular support for austerity as the advocates claim? Birth rates fell during the crisis – as is the case almost everywhere austerity programmes are imposed. Only now is Latvia seeing the social effects of austerity. It has among Europe’s highest rates of suicide and of road deaths caused by drink driving. Crime is high because of prolonged unemployment and police budget cuts. There is less accessible, lower-quality education and there is a soaring brain drain alongside blue-collar emigration.

The moral for Europeans is that a Latvian economic and political model can work only temporarily, and only in a country with a population small enough (a few million) for other nations to absorb émigrés seeking employment abroad. Such a country should be willing to have its population decline, especially its prime working-age cohort. In Greece, this could only worsen an already serious demographic challenge.

Politically, it helps to be a post-Soviet economy with a fully flexible, poorly unionised labour force. Above all, the population needs to put an almost blind faith in “free market” central planners. Ethnic divisions can distract voters from complaints against austerity. Only under these political conditions can austerity be considered a “success”.

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33 comments

  1. Daniel de Paris

    “Its government has chosen austerity, its people have not. Finding no acceptable alternative, much of the labour force has elected to emigrate. This is a major factor holding down its unemployment rate to “just” 15 per cent today.”

    You are mixing economics and social issue here.

    Yes, going broke can and does create pain. From a pure macro-economics point of view, emigration within a common work zone is an effective solution. And, by the way, please do not compare the situation of a latvian citizen working in, say, Germany or Northern France or Italy with the one of a latino in Texas…

    I am quite glad to hear that there are alternatives to pain when handling broke households, broke corporations and broke countries at some stage. Sure. When situation has changed, it about time to start SOUND investing again. But I’ll never buy the idea that there are alternative to wall-crashing when a country specifically runs into it full speed.

    Faulty behavioural patterns (spend vs thrift, work vs other activities, speculation vs investment…) only change after bankrupcy and decent asset pricing levels are found. Not before.

    The US is emmmitting reserve money and find thrifty partners in Asia and a couple of other places to buy their pay-back promises? It is one of the richest land in the world, per capita. Still a “land of plenty”. Are US citizen aware that most countries are certainly not!

    In this situation, are their own liberal academics convincing when they deliver lessons in painless economics to others? I believe not.

    Are they convincing when they call for justice and prosecution of fraud? Most certainly! That is the reason why I read that blog. Not creative post-mortem economics.

    1. j.grmwd

      Faulty behavioral patterns ? Never in a million years will I understand why the man on the street is so hot for the collective punishment of entire nations whose average citizens are just trying to do their best with the shit sandwich handed to them by globalization – wage suppression, and hot money more interested in bubble blowing than productive investment.

    2. LeonovaBalletRusse

      Pushing Freidman’s fraud: “emigration within a common work zone” meant voluntary self-deportation to China to compete for the iPad posts unto suicide? Let’s call it: Friedman was a dirty dog, lapping up Marx’s vision of Late State Cap for Global .01% profits extracted from blood under the Iron Heel.

    3. Eric

      it’s funny that American economists are quick to lecture Europe that the reason why the dollar works is because it’s more of a perfect currency zone with labor mobility.
      Well, in the EU/eurozone people can migrate freely too!
      But in the case of Latvia labor mobility is suddenly portrayed as a social cost because of the neoliberal model!

      1. Working Class Nero

        The emigration argument is indeed weak. I mean think about it; in 2004 Latvia, which has a per capita GDP only slightly higher than Mexico’s, joined the EU. This move instantly gave their citizens the right to freely move to such wealthy societies as Germany, Sweden, and the Netherlands. And over a decade only 200,000 have chosen to do so.! If Mexicans were given the right to legally move to the US do you think the percentages that choose to take up this option would be so small?

        On the flip side the Euro-haterz love Iceland and are constantly going on about what a great success story is to be found there. Of course they never mention the high emigration rate fleeing Iceland since the crisis, mostly due to their lack of a hard currency.

        Which isn’t to say that austerity is the greatest thing since sliced cheese. But former Marxists like Dr. Hudson need to show a slight bit of humility — it was after all their disastrous policies that put Latvia in the economic crater that their people are still trying to crawl out of. And sure, emigration wasn’t such a problem back then during the Communist days. But let’s all try to remember exactly why people were hesitant to try to climb those walls and dodge bullets through the no-man’s lands that separated the Marxist utopias from the evil West.

      2. sidelarge

        …? Moving from Alabama to Massachusetts is utterly different from moving from Latvia to the Netherlands precisely because there is no United States of Europe. What “labor mobility” entails in the former is hence very different from what it does in the latter, regardless of the EU citizens’ ability to move to another EU country (which alone does not at all make the whole EU/euro zone suddenly a federation). So, of course, you have to make very different arguments for each. There is nothing dishonest or wrong about it.

        I think you are caught in this euphoria of being clever that you failed to see your smarty-pants argument is simply a*s-backwards.

        1. Eric

          why is this so different? I think the cultural gap of someone moving from rural Alabama to New York city is bigger than someone moving from Latvia to Germany, Sweden or any Nordic country as cultures are quite similar.
          But the main point remains: a Latvian citizen moving abroad for a better future is not different from any other labor migrant looking for a better future. This has nothing to do with any neoliberal agenda. If you think it’s all about the Latvian crisis, look at neighbor Poland: despite the fact that the Polish economy is a succes story, hundreds of thousands of Polish people migrated to other EU countries for the simple reason they can earn more money than at home.

  2. vlade

    One of the reasons for maintianing the peg (and moving towards EUR) instead of de-pegging was politics too – Latvia saw it as part of closer EU ties and thus being futher away from Russia (which they have good reasons to be wary of).

    1. rkka

      @vlade: “Latvia saw it as part of closer EU ties and thus being futher away from Russia (which they have good reasons to be wary of).”

      When “Soviet genocide” ended, there were 2.65 million people in Latvia. There are now less than 2 million, and deaths now exceed births by over 1.5 to 1.

      OTOH, Russia’s birth rate has *risen* since 2008, as has life expectancy:

      http://ftalphaville.ft.com/blog/2012/04/27/978171/from-more-russians-with-longer-life-expectancy

      So… Latvians should be wary of Russians??? I’d be more afraid of FreeMarketDemocraticReformers, considering the data of the last 20 years.

      1. Hehee

        Better free and hungry than fed and imprisoned. Soviet Union was a nasty prison and people do not want it back. EU is not yet at the level of Soviet Union.

        1. rkka

          Spare me, Hehe.

          On independence, Latvia had zero foreign debt. Latvians now pay almost 30% of GNP in foreign debt service. The Latvian government sold their people into debt bondage so that reckless Nordic bankers could enjoy bonusses rather than taking haircuts.

  3. Max424

    MH: “…free market” central planners.”

    Giggle.

    Only an oxymoron if you’re a moron who ingests oxys (I’m thinking of course of former oxycotten addled Rush Limbaugh).

    Austerity works for the austerians, I think that’s what we “anti-austerians” are sometimes missing, or won’t admit. Austerity, as centrally designed, has proven a highly successful pogrom.

    The idea is, shake the huddled masses (aka “the labor force”) loose from their foundations, and get the motherfucking losers on the move.

    And not on the move like cattle in a controlled drive from hither to tither, either. You want the m-fers ranging far and wide, and roaming very wild, much like a giant herd of African wildebeest.

    Now, wherever those tired, dusty wildees slow to rest and congregate, that’s were you will find your cheapest source of labor.

    It’s a temporary thing, of course. One minute the cheap labor is in China, the next its in Vietnam, and the next thing you know you’re a plucky Pole working in Ireland as a dishwasher, thinking, “This new country is falling into a worse predicament than my old. Oh, Saint Somebody! What if I get fired from this most excellent job? Where would I go? What other country could possibly need my not-so-highly-advanced skills?”

    But the good news for us, we the peripatetic losers, unlike capital, at least we are free!

    You see, we are free to uproot ourselves, at any chosen moment, for a highly speculative journey to a probable random place, where they are likely to give us a shittier job than we’ve ever known before –if they don’t outright enslave us upon entry (like they do in the U.A.E.).

    Note: Mr. Market is not free, because in the “wildebeest-on-the-trek scenario,” even though Mr. M creates the migration (out of nothing!), it’s still compelled do the chasing.

    1. JTFaraday

      “MH: “…free market” central planners.”…Only an oxymoron if you’re a moron”

      “Neoliberal central planners” works well for me and it isn’t even an oxymoron. Certainly, MH’s own work very clearly shows neoliberals actively occupying and exploiting governments and bullying populations all over the globe, despite their anti-government “free market” rhetorical deceptions.

      This is what distinguishes neoliberals from philosophical “libertarians,” (should someone actually discover such a beast roaming the forest somewhere with the philosophical anarchists).

      I even like “neoliberal nomenklatura” (to borrow a term from one of our right wing visitors).

      http://en.wikipedia.org/wiki/Nomenklatura

      1. F. Beard

        Neo-liberals seem to be mostly concerned with defending the rights of usurers. A true libertarian would be in favor of allowing non-usury based money forms equally.

    2. rick

      They’re talking about macro economic policy, not its consequences (desperation emmigration). It takes planning to, as you say, “shake the huddled masses from their foundations”. The policy is simple. Destroy any kind of government guaranteed safety net that provides any economic stability in the lives of working class people and they will resort to desperate measures to survive, including emmigrating.

  4. LeonovaBalletRusse

    MONEY QUOTE: “especially mortgage debt, which is secured not only by property but by the personal liability of entire families of joint signatories.”

    Thanks for the FT cross-post on NC LINKS. The above CRUCIAL point was made also in Michael Hudson’s presentation at the INET Plenary Conference in Berlin 2012: Paradigm Lost.

    This is the Despotic Dynastic Power that the Global .01% Nobility Reich craves, and WILL use by force–the “financial” or “military/police” force of its .99% SS Agents the “Finance+Pols Storm Troopers”–against We the People globally, in order for current and future generations of 1% DNA to secure global “Lebensraum” in perpetuity. The Latvians have left the country in order not to be captured and thrown into debtors prison by the “family” group. Get it?

    Now Friedman’s Chicago Neoconlib Mafias are bringing this “Shock Doctrine” Homeland-to-Roost. The Plan: same as Hitler’s: 99% DNA dead or in bonds.

    NOW Do.You.Gittit?

    “Chicago, Chicago, that criminal crown.” PERVERSE “water from the rock.”

  5. Eric

    so what is the alternative? Devaluation? We have seen in other eurozone countries that people may not like austerity, but don’t want to exit the eurozone and devaluate either.
    No wonder, since devaluation gives inflation, decreases value of savings and basically lower the living standard.
    Hey, we all want growth, but I am still waiting for the magic solution.

    1. F. Beard

      Hey, we all want growth, but I am still waiting for the magic solution. Eric

      The optimum solution is co-existing government and private money supplies per Matthew 22:16-22.

      But short of that, killing credit creation or at least removing all government privileges for it is a good start.

  6. Glen

    ” …post-Soviet economy with a fully flexible, poorly unionised labour force. Above all, the population needs to put an almost blind faith in “free market” central planners. Ethnic divisions can distract voters from complaints against austerity.”

    Success! A ready pool of cheap labor debt slave that can make cheap shit for the Middle class consumers.

    “It has among Europe’s highest rates of suicide and of road deaths caused by drink driving. Crime is high because of prolonged unemployment and police budget cuts. There is less accessible, lower-quality education and there is a soaring brain drain alongside blue-collar emigration.”

    One of the side effects of making the cheap debt slave labor, it’s not a bug, it’s a feature!

    You know, the only problem with this business/labor model is you destroy the Middle class consumers that are supposed to buy the cheap shit. It’s not like Jamie Dimon or the other MOTUs are going to buy tens of millions of iPhones and iPads so who is?

    1. F. Beard

      You know, the only problem with this business/labor model is you destroy the Middle class consumers that are supposed to buy the cheap shit. Glen

      Yep. Whocouldanode that a money system based on theft of purchasing power would do such a thing?

      “The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.” The Rothschild brothers of London writing to associates in New York, 1863. from http://www.themoneymasters.com/the-money-masters/famous-quotations-on-banking/

      The sad thing is that apparently no one ever gets rich enough that they can spare some time to reform the system,

  7. billg

    ok ill bite the solution that works and keeps people home and happy is . . . lemme guess – more government spending? it works so well elsewhere

    1. j.grmwd

      Sure does. If you haven’t already, visit Japan. Note how well-dressed and prosperous the people look. Note how well the public services work. Get a medical check-up while you’re there. It won’t cost you much. You might come away thinking that 1-2% a year growth supported by massive government spending does more for a country than 4-5% supported by financialization and real estate speculation.

  8. doug of North Texas

    Wow – ethnic issues overriding economic ones – Why do I see the same thing with the Tea Party – fronting as demanding smaller government and austerity, but really about the white fear of becoming a minority and suppressed anger of letting the banks getting away with the 2008 meltdown that they caused

  9. FRauncher

    “Its government has chosen austerity, its people have not. Finding no acceptable alternative, much of the labour force has elected to emigrate.”

    Yes, that’s how rebalancing is supposed to work. When you can’t devalue your currency you devalue your people. Too bad about the spouse and kids left behind. And too bad that when you reach the wealthy “host” country, they still want to pay you Latvian wages.

  10. tiebie66

    Is it perhaps premature to call the ‘game’? What are the figures of merit that ought to be used to determine “success” or “failure” and when should they be applied? Lastly, should we compile a list of countries deemed “successes” and “failures” to get a better handle on the decision criteria and how others view them? I’m troubled by what I perceive as a tendency to discount every counterexample as an exception (e.g. Zimbabwe’s failure and Latvia’s success) and don’t want to engage in that myself (I’m not moralizing, I just think it is ultimately uninformative).

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