By Jeffrey Sommers. Sommers is an associate professor at the University of Wisconsin – Milwaukee and visiting faculty at the Stockholm School of Economics in Riga. His book with Charles Woolfson, The Contradictions of Austerity: The Socio-economic Costs of the Neoliberal Baltic Model is available from Routledge.
It has become increasingly fashionable to compare the results of Greece and the Baltic States’ response to the financial crisis of 2008, most recently last month with the Financial Times’ column with John Dizard. This, however, is a classic textbook case of comparing apples to oranges. Greece’s crisis was chiefly a public debt crisis enabled by membership in the eurozone and the cheap loans extended to the state this enabled that amounted to 107.4 percent of GDP in 2007 in the run up to the crisis. By contrast, the Baltic states had paltry public debt to GDP ratios of only 4.4, 10.7, 18 percent respectively in Estonia, Latvia and Lithuania in 2007, before the financial shock. Their crisis was a private sector one as banking capital ran for the door after creating a property bubble that burst.
Greece and the Baltic states did share one common feature. Tax evasion has been the national sport in their respective countries. For the Baltics states (especially Latvia) and their offshore banks, this is big business which their economies depend on. The Syriza government in Greece is attempting to tackle this pernicious problem, albeit with unknowable results at present.
Additionally, there was a wide gap in wages between Greece and the Baltic states following the crisis. For example, in 2009 Latvia’s per capita purchasing power (PPP) was $14,307 (in 2013 adjusted dollars). By contrast that year in Greece it was $29,512. Thus, given the ultra-low wages paid in the Baltics, there was much incentive for investors to take advantage of wage arbitrage opportunities. The real wage gaps were larger still, given that Baltic inequality is more extreme than in Greece. Now that wages have increased in the Baltic states to levels close to Greece’s, economic growth is flatlining as the wage arbitrage between them and Greece is no longer significant.
Oil prices rebounded quickly after the 2008 shock and by 2009 CIS offshore cash was racing into the Baltics from the east. More still came in as problems emerged in Cyprus’ offshore banking industry in 2012 and 2013. Now that oil prices have declined offshore financial flows to the Baltics have declined and with that (and the EU sanctions against Russia) their economic growth has dramatically slowed. So the jury is still out on the longer-term economic consequences of the kind of brutal austerity that Greece and the Baltics share in common.
Furthermore, the Baltics did not cut taxes in response to the crisis. In fact, they introduced tax increases on the poorer sections of the population to repair their balance sheets. Immediately following the crisis, Latvia for example increased its VAT on many items (but not luxury goods). Some have praised the relatively flat tax rates of the Baltic states, but this doesn’t take into account the non-taxable minimum was cut dramatically in 2009, and represented the equivalent of a 7% tax increase on the bottom third of Latvians. In short, Baltic state taxes have been anything but flat, but have been regressive.
Meanwhile, the Baltic states have experienced new levels of mass poverty (40% of Latvia’s children were at risk of poverty in 2009). The results have been an exodus of the population with the highest levels of out-migration in the EU that threatens the longer-term sustainability of even the very partial recovery that has occurred. Also at risk given the magnitude of the emigration from Latvia and Lithuania, is their very demographic viability itself. Finally, many trumpet the virtues of ‘front-loading’ austerity cuts on the population, in line with the views of ‘shock-therapy architect’ Anders Aslund. Unlike Greece (at least until the Troika got to work), workplace rights and collective bargaining have all but disappeared in the Baltics. Up to 30 per cent of employees now exist within the informal economy in which workers have no rights whatsoever and if they are paid legal wages they are the legislated minimum, if not less. The Greek people are thus still in a more fortunate position compared to the Baltics and the push-back against austerity is growing. But here the comparison ends.