Transcript Possible development scenarios for the Latvian economy

Latvia: Political, economic and financial integration
– and then disintegration?
The Legacy of 1989, 9 November 2009, Copenhagen
Morten Hansen
Head of Economics Department,
Stockholm School of Economics in Riga
[email protected]
Latvia: Just a few facts
- on a per capita basis the most talked about country the past year
Population
2 254 000
GDP
App. 0.1% of World GDP
Economically the size of
North Dakota
GDP per capita
App. 50% of EU27 average
3rd 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 farsightedness, we have governed
our country poorly, indeed”
-5
-15
-20
-25
2009 II
2009 I
2008 IV
2008 III
2008 II
2008 I
2007 IV
2007 III
2007 II
2007 I
2006 IV
2006 III
2006 II
2006 I
2005 IV
2005 III
2005 II
2005 I
2004 IV
2004 III
2004 II
-10
2004 I
Latvian economic growth, 2004-I – 2009-II, year on year
Biggest boom turns to the (2nd) biggest bust…
15
10
5
0
Latvian GDP, quarterly, constant prices, seasonally adjusted
Bombed back 4 years….
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2400000
2200000
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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-by
arrangement
(35% of LV 2008 GDP – huge package)
•
•
•
Parex and other banks
Public finances
Balance of Payments
Maintain the fixed exchange
rate, opt for internal devaluation to
regain competitiveness – undoing the
wage 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
1 May 2004
21 Dec. 2007
NATO
EU
Schengen
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 west
No alternative to the EU
But:
Hitler >< Stalin
Nord Stream
2004:
The right(?) time to join politically
- but too early
from an economic perspective?
Massive income differences
will persist and be troublesome