Bill Black: Once a Poster Child for Austerity, Latvia Becomes a Hotbed of Corruption

In this Real News Network interview, white-collar criminologist and associate professor of economics and law at the University of Missouri, Kansas City, Bill Black discusses how  Latvia has emerged as a nest of banking corruption.

SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries coming to you from Baltimore. About two years ago, the financial press was busy promoting the tiny country of Latvia as proof that austerity works. For example, in May 2016, Bloomberg ran an article with the headline “Austerity Worked for Latvia.” Following the 2008 global financial crises, Latvia faced a serious crisis of its own and its economy shrank by 25%. The government responded by applying austerity measures, such as cutting the public workforce by 30%, raising sales tax, and introducing a flat tax. Its economy grew again quite steadily between 2011 and 2016. It was so successful, it was held up as an example and was admitted to the EU in 2014.

Now however, Latvia is in the headlines again, but this time for problems in the banking sector. The U.S. treasury’s Financial Crimes Enforcement Network (FinCEN) is accusing various banking officials of criminal activities, such as money laundering, violation of sanctions against North Korea, and of taking bribes. Joining me now to explore the Latvian case and whether its success is related to the banking sector’s shady activities is Bill Black. Bill is a white-collar criminologist, associate professor of economics and law at the University of Missouri, Kansas City. He’s the author of The Best Way to Rob a Bank is to Own One. Thanks again for joining me, Bill.

BILL BLACK: Thank you.

SHARMINI PERIES: Bill, first give us some background about the accusations that have been made against Latvian bankers and how serious these accusations are.

BILL BLACK: Well substantively, the allegations are very serious, and they fall into two areas, as you noted in your introduction. One is that Latvian banks, not just one, but now it is alleged at least three, were critical to helping North Korea evade financial sanctions and this was critical to their ability to produce their great advances that they’ve shown in ballistic missiles designed to be able to deliver nuclear weapons at extremely long ranges, including all of the continental United States. So essentially, pretty much the world.

The second has to do with the head of the Latvian central bank, who is particularly identified with the austerity regime where he is alleged to have sought a €100,000 bribe, was arrested and is out on bail. The U.S. sanctions have produced a liquidity crises at some of these banks in Estonia, so they are seeking of course … I’m sorry, Latvia. Emergency financial aid from the central bank for the central banker has been arrested and the EU has said, “We’re not going to provide you with a liquidity bailout.” So Latvia may be back in the kind of banking crisis it was in, in 2008.

So, key takeaways in all of this. Again, the 2008 financial crisis wasn’t just a crisis in the United States and the parts of the EU, like Greece and such. It was a devastating crisis and it was particularly devastating among other areas, in the Baltic States. The way that Latvia’s government reacted was to go whole hog into the most neoliberal program possible. You mentioned some of these elements. So they made the taxing system favor the wealthy and go after the poor and the working and middle classes. They also had had an enormous brain drain during the critical years of the crisis. If you were a university graduate in Latvia, you knew you couldn’t get a job in Latvia and you tended to go elsewhere. So the best and the brightest, and it turned out the most moral, frequently left. This meant that they created this perfect neoliberal, “Come on in,” to the worst elements of the society. Some native born Latvians and some who came from outside and some who had Latvian ancestry and came back to the country saying, “Boy, have you made this environment perfect for us to do all kinds of slimy things.”

So, Latvia also shares a border with Russia and is a major trading partner. So even while it was joining the European Union, it was actually very much in with the oligarchs in Russia who have been heavily involved for a long time in helping North Korea and Iran and such, evade sanctions. So, it’s no surprise that they moved in this direction.

SHARMINI PERIES: Now, some economists, Bill, have argued that Latvia is proof that austerity works. What is your response to this claim, and is the success of implementing austerity related to the recent accusation of criminal activity in Latvia’s banking sector?

BILL BLACK: Yes, indeed they have held Latvia up as the very model of what they call austerity that supposedly is going to produce recovery. Austerity didn’t produce recovery in Latvia. It produced the semblance of recovery, but of course the reality of this widespread corruption as well, was that they got rid of the rules and they did what’s euphemistically referred to as internal devaluation. Now what that actually means is that we crush labor and we crush wages. And wages go very low, and so we’re able to export. And indeed, Latvia was then able to export. And because it’s a very small country, those exports did produce an economic turnaround.

Now of course that’s still in a land where they had really severely repressed wages for the working class and for middle class, and continued to tolerate a fair degree of unemployment and underemployment for folks, as well. So, yeah it works really well for the oligarchs. And they do employ people. The unemployment rate drops, but the country invariably becomes extremely corrupt. And of course, if you’re a neoliberal and very conservative as well, then it’s your worst nightmare to have your very model of the modern austerity regime that’s a supposed success, is leading the way globally in trying to help North Korea develop the kind of ballistic missiles and miniaturized H-bombs even, not just atomic bombs, that could be delivered to the continental United States. That’s sort of the worst possible thing about your neoliberal regime coming back to bite you, and indeed the entire world.

SHARMINI PERIES: Bill, an analysis conducted by Paul Krugman a few years ago, he compares Latvia’s austerity responses to that of Iceland, which took an opposite approach, a Keynesian anti-austerity approach. Bill, you too have looked into the case of Iceland and Latvia very carefully. What can you tell us about this comparison and what kind of lessons can be drawn from these two different approaches to economic crises?

BILL BLACK: The Icelandic recovery was much better. It’s stronger and it helped the entire nation, and it ended up with a more ethical place. The Latvian could only be done in a very tiny country, only by severely repressing wages and inviting widespread corruption, and it’s a terrible response.

SHARMINI PERIES: I thank you so much for joining us, Bill.


And thank you for joining us here on The Real News Network.

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  1. YankeeFrank

    Bill mentions the brain drain from Latvia, but I seem to recall a quite massive general emigration from the country during austerity, which also helped to “reduce unemployment” as well. The neoliberal “methodology” for “showing economic success” is moral and economic bankruptcy masquerading as “science”. And wow. So we have Latvia to thank for the coming nuclear holocaust as well. A true neoliberal market miracle.

    Lambert’s two principles of neoliberalism are once again brought to mind:

    #1 Because markets.

    #2 Go die.

    1. McKillop

      If I may I’d ask you to amend your comment.
      First, the impending nuclear holocaust has been a long time coming, threatening our planet since before I was born. Second, like everywhere else, people responsible for the corruption and wrongdoing in Latvia are merely those few in power, It’s those few who deserve our “gratitude”.
      I say this because it is so easy to fall into the habit of blaming a country or any other group of people for various crimes although many people who live in the country are themselves, oftentimes, victims. By asking others to be aware I remind myself.

    2. Skip Intro

      All those ‘excess’ workers who left were helping keep wages low in the EU…
      In the sense that Latvia’s future productivity is sacrificed for short-term benefits on the books, it starts to look like another asset-stripping scheme, and the costs are borne by workers in the EU.

      1. The Rev Kev

        I think that you are onto something there with your comment. Before the Ukrainian putsch, they were doing interviews and one well-dressed British guy was saying that the EU will be able to look forward to hundreds of thousands of low-cost Ukrainian workers entering the EU workforce.
        This was before Brexit so I wonder if some people there in the UK wondered if instead of having heaps of Poles in the UK, that there would be soon arriving heaps of Ukrainians as well. I think that was quite an astute observation calling what happened to Latvia as an asset-stripping scheme by the way.

    3. ArcadiaMommy

      The brain drain began in world war 2 when a huge part of the ethnic Latvian population was murdered, sent to Siberia or forced out of the country.

      My husband’s family was forced to live in the woods for a winter. Two of my husband’s uncles died of starvation/exposure as small children. Many family members “ disappeared” to Siberia. What happened to the women is too graphic to discuss.

      Latvia is a tiny country, smaller than the US COUNTY that I currently live in with respect to size and population.

      Nazis on the left, Russians on the right. Who do you imagine is the dominant mind set left in the country? I don’t blame Latvians for wanting their little country to themselves. Have they completely screwed things up because of their fear of Russia? Yes. Let’s not forget the bigger wrong.

  2. The Rev Kev

    This is not the first time that Latvia has appeared on NC ( and probably won’t be the last. What is it about neoliberalism that that seems to have corruption as part of its DNA?
    Latvia already has one of the highest levels of poverty and income inequality in the EU and its population has dropped by about a fifth in the past 18 years which is a bit of a record considering that there was no war, that is, unless you count the neoliberal war on people. Some moved to the capital Riga but most bailed out of the country altogether and are not coming back. You can find whole blocks of empty buildings in some towns.
    But don’t worry. The Latvians are on the case. The head of the Latvian Central Bank detained for extortion and the Latvian Ministry of Defense both blame, you guessed it, Russia!
    Lambert’s two principles of neoliberalism may have to be updated. He already has
    #1 Because markets.
    #2 Go die.

    He may have to modify the second one to say
    #2 Go die or get the hell outta Dodge.

  3. Ian Perkins

    Sounds to me like the perfect poster child for austerity and neoliberalism.
    The rich get rich and the poor get more and poorer. Why would crooks and bankers care if they’re financing North Korean H-bombs? More opportunity for financing defensive measures, plus a way of selling their continued domination of the economy to the voters.

  4. DJG

    Now I may be prejudiced because the Gs came from deepest darkest Lithuania–and we’re talking out in the endless woods in a village along a lake.

    When people talk about population decline in Latvia, you are talking about part of the corruption. The native Latvians wanted a way of getting rid of the Russian population, many of whom are considered immigrants. So dropping 20 percent of the population means throwing out the Russians. When your “population policy ” is based on something like that, you can image what the country’s economic policies are like.

    In contrast–although Lithuania, too, has lost some 10 – 15 percent of its population since restored independence–the Lithuanians came to terms, imperfect terms, with their smaller Polish and Russian minorities. Nevertheless, the Lithuanians didn’t go whole-hog free-market fundamentalism. And when a recent president was found to be corrupt, they impeached him and threw him out.

    So you have different models for how to survive as a Baltic State. Latvia has made a mess of its “model.”

    1. McKillop

      So, no ‘meltin pot’ then, My, my, my.
      Perhaps the 450 Canadian soldiers will be able to instill the much vaunted ‘multi-cultural’ values for which Canada is so famous. That is, after the Latvians have been reassured by the troops’ presence on NATO soil,

      1. Jim Haygood

        My my my indeed …

        Canadian officers are adamant that [their presence in Latvia] is aboot deterrence.

        “We do not have an enemy,” stresses Army spokesman Capt. Dan Mazurek, a strapping 35-year-old. “There is not an enemy in Latvia and the Baltics.”

        Then chums … why don’t ye go home?

        If you ain’t got the do-re-mi, boys
        If you ain’t got the do-re-mi
        Well you’d better go back to your beautiful Moose Jaw
        Athabasca, Sherbrooke, Kamloops, Sudbury

        — Woody Guthrie, Do Re Mi

        1. Synoia

          Canadian officers are adamant that [their presence in Latvia] is aboot deterrence.

          What pray are they deterring from whom? Or whom from what?

      2. Alex V

        They may have been a little upset about the melting pot that was imposed on them by the USSR. Not saying it’s an excuse for discrimination, but certainly a contributing factor to feelings about Russians.

    2. Eclair

      We may be related, DJG; my grandparents left deepest darkest Lithuania when it was occupied by the Russian Empire (not the Soviets).

      Friday evening, we went to a presentation on bicycle touring through the Baltic states. The cyclist has Finnish relatives and started out his tour in Helsinki. His observations on the differences among the three Baltic states and then between them and Finland, were interesting.

      Lithuania seemed to be the least ‘developed,’ at least in terms of infrastructure, roads, public buildings, and he said that cycling there was the province of the poor, old and slightly demented. He also briefly discussed the attempted ‘Russification’ of the Baltics during the Soviet era (akin I would guess to the way the English moved the Scots and the Brits into Ireland to replace the barbarous Natives), and said that Lithuania had been more accepting of their Russian population. Maybe to atone for their horrible treatment of Lithuania’s Jews. He is a talkative type, speaks a couple of languages and so had long conversations with people he met along the way, owners of local B&B’s, hostels, etc. One factor, according to him, linked them all; they are terrified of being caught in the clash between ‘the Eagle’ and ‘the Bear.’

      His observations on Finland, where he started and returned; you left your touring bike and all your gear in the alley behind the house….unlocked. Why steal? Finns have free health care, free education and minimal financial worries.

  5. edmondo

    “Now of course that’s still in a land where they had really severely repressed wages for the working class and for middle class, and continued to tolerate a fair degree of unemployment and underemployment for folks, as well. So, yeah it works really well for the oligarchs. And they do employ people. The unemployment rate drops, but the country invariably becomes extremely corrupt.”

    Was he still talking about Latvia or did he switch over to the USA?

    1. kukuzel

      The same success is celebrated in Bulgaria.

      Less than 3% annual deficit – wohoo! But the average equivalent of social security is about $200 per month, and food and energy cost about the same or more than in the US.

      Only 10% unemployment – wohoo! But the country lost more than 2.5 milion, about 30%, of its population in the last 30 years. That is in one generation.

      Sofia is the entrepreneurship capital of the Balkans – wohoo! But Sofia University is closing it’s master’s and PhD programs in physical sciences because everyone is learning to code to make $1000 a month, and Bulgaria’s nuclear power plants are managed by foreign companies. Wohoo!

  6. Eustache De Saint Pierre

    Latvia also being part of that running sore which involves according to the US state department’s last global estimate, about 800,000 to a million victims per annum of people trafficking. Of which around 80% are female, with a not stated amount being children, used for both labour & sexual purposes.

    I suppose that it comes as little surprise that the 2 main flows of these commodities is from East to West & South to North.

  7. Scott1

    We have been cold & there was lots of beautiful wood from Latvia at the grocery story (Harris Teeter) we burned.
    I was reminded of OPGU labor camps selling wood & fish to the US during early Bolshevism, or by 1928 late since Lenin was gone & Stalinism, that thing of any means for the revolution that is past meaning once Stalin becomes their Dictator.
    So then Neoliberalism is a fine cover story for the use of labor to finance corruption of national purpose.
    All now is the uniting of oligarchs anywhere so they can put all in the name of some shell company & make off with it.
    Looks like that to me.
    I have to say Thanks to Real News, & naked capitalism for these stories. For some good news of nations that exist as persons I did find Uruguay.

  8. Synoia

    The motive is profit.
    The rationale is risk/reward.

    For high reward there has to be high risk. If an activity is high reward low risk, this changes rapidly as people enter the activity.

    Crimes are high risk. (Fines, death & imprisonment)

    Thus, Crime pays well (See drugs and Drug Cartels). Business, making a profit, is Amoral, and will do what’s profitable.

    If the only opportunity is crime, then we all become criminals, and eventually redefine the concepts of “crime.”

    Out current civilization is very, very good at creating new “Crimes” and thus new “Opportunities.” For example movement of people over the ages was mostly free of being a crime. Today it’s a crime, and the rewards for smuggling people high.

    The same is true of “illegal” drugs.

    And no I am not a Libertarian. I do believe in Darwin Awards.

  9. frequent

    If Latvia had to “cut public expenditures to stabilize private instituions (as in banks) and their shareholders” like in other EU countries I wonder whether the term “austerity” doesn’t fall short of what actually happened.

  10. Denise

    “The unemployment rate drops, but the country invariably becomes extremely corrupt.”

    This might be true, but I would appreciate more explanation, data, …? The ease of the implication raises fears of confirmation bias.

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