Latvia: Why we need to go beyond the ‘Success’ of Fiscal Austerity

Latvia was the first country in Europe to join an EU and IMF supported programme in December 2008 to cope with the fall-out of the global economic and financial crisis. Policy-makers made a resolute commitment to defend the exchange rate peg between the Lat and the Euro given the aim to enter the Eurozone in 2014. They instituted a fiscal austerity programme of approximately 15 per cent of GDP between 2008 and 2011. Latvian authorities and their international patrons claim that the strategy paid off noting that Latvia became the fastest growing economy in the EU in 2011 registering a growth rate of 5.5 per cent. The current account and the budget deficit appear to be in sustainable balance. Latvia managed to return to international bond markets as borrowing costs came down appreciably.[1]

The IMF and EU officials met in Riga on June 5, 2012 to ‘celebrate the remarkable achievements of Latvia and other Baltic states over the past few years’.[2]  This ‘celebration’ might be premature.

The IMF projects that, between 2012 and 2017, the economy is expected to grow at an average rate of 3.2 per cent. This appears to be well below the long run growth potential of the economy. It is this moderate pace of recovery that perhaps explains why it will take another three years (2015) before the Latvian economy reaches the 2006-2007 pre-crisis real GDP level and why double digit unemployment rate is expected to prevail until 2017.[3]

The proportion of Latvian households having ‘great difficulty in making ends meet’ jumped from 13 per cent in 2008 to 24 per cent in 2010/2011. Those ‘at-risk-of-poverty’ rose from 33.8 per cent of the population to 40.1 per cent over the same period.[4] These increases in both material deprivation and economic insecurity are occurring in a country that is notable for its lack of a comprehensive social security system. The 2008-2010 recessions triggered some emergency social safety net measures, such as a public works programme, but the government appears reluctant to perceive them as part of a long term and comprehensive social protection system.[5]  The government will find it difficult to meet the Europe 2020 strategy of increasing the employment rate to 73 per cent of the work-force and reducing the numbers in at-risk-of poverty or in social exclusion by 121,000.[6]

Mihail Hazans, Latvia’s leading labour economist, has issued the apocalyptic warning that the country faces a ‘demographic disaster’. The Latvian population has been shrinking steadily in recent years. This is expected to continue reflecting a combination of high emigration, falling birth rates and rising death rates.

Hazans claims that 80,000 Latvians – equal to 3.7 per cent of the pre-crisis population – left Latvia between 2009 and 2011 for better economic opportunities abroad reinforcing previous trends of high emigration. More importantly, the emigrants are typically young and skilled with the consequence that Latvian society is experiencing a ‘brain drain’ and ageing at a faster rate than the rest of the EU.[7]

The current Latvian Prime Minister, and one of the architects of the fiscal austerity programme, correctly notes that ‘the main reason behind emigration is… lack of jobs and lack of well paid jobs’.[8] As the debate on the pros and cons of the fiscal austerity programme in Latvia continues in the blogosphere and in international policy-making circles, many thousands of young and skilled Latvians are not prepared to wait for an answer. They are voting with their feet. As they seek a better future abroad, they are ironically casting a shadow on the economic future of Latvia.