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The Pillaging of Latvia

by JEFFREY SOMMERS and MICHAEL HUDSON

This past month’s economic data show that the global economic crisis continues to worsen, and by its duration and severity threatens to become known as the Great Depression II.  Yet, even though it is evident to most that our problems arose from finance run wild, commentators in several press outlets claim the fault lies with its victim, the public.  Instead of curbing finance they advise governments impose radical austerity measures. In this economy such a course  is tantamount to throwing the drowning victims an anchor, while tossing the perpetrators a life preserver in the form of cash.

From Robert Samuelson at The Washington Post, to several journalists for The Economist, the declared answer to the world’s crisis, mystifyingly (until one asks “cui bono?”), is to be found in one of the European Union’s smallest (and poorest) nations, Latvia; a country that has imposed one of the world’s most brutal austerity regimes on its people and whose policies have pushed it to near demographic collapse.

Latvia has a highly literate people and is next  to the world’s richest Scandinavia countries.  It is also blessed with world-class transit ports.  Yet, Latvia has the per capita purchasing power parity (PPP) of only half that of Greece and only marginally ahead of landlocked and politically isolated Belarus.  Yet, this is the model bankers and their proxies in government and policymaking circles want other countries to emulate.

Commentators advancing the Latvian solution, however, neither understand (or choose not to) the country, nor the outcome of its austerity policies.   Not only do they insist that Latvia’s austerity was necessary, but that it was the first place in which austerity policies were supported by a nation’s people.  The presumption is that electorates can be “mature” and “wise,” thus politicians need not fear imposing austerity on a properly “educated” public.  These assertions are both dangerous and false, yet are gaining currency nonetheless.  The reality in Latvia is that after experiencing the world’s greatest economic contraction from the 2008 crisis, it has now observed a modest bounce of the dead cat after its freefall finally ended with it hitting the pavement.  The modest uptick in growth is primarily a consequence of Swedish demand for Latvian timber; however, long-term economic prospects in the country remain poor.

Moreover, the airbrushing of Latvia’s recent history by Samuelson and other pundits claiming the population has supported austerity is contradicted by the massive protests early on in its crisis.  When these protests failed to bring about change, the public’s response was to vote with their feet and exit the country.  Indeed, when combined with its low-birth rate, this emigration from Latvia is creating a kind of demographic euthanasia that risks the very disappearance of this nation.  Furthermore, the political party that advanced the austerity program failed to win the September 17th election.  Given this cascading set of failures for Latvia’s austerity regimen, one has to ask, where did the perception of its economic success and public support of its policies arise?

Every crisis attracts carpetbaggers and every personal failure pines for Scott Fitzgerald’s “second act.”  With Latvia’s economic crisis, both have been found in the name of the banking industry-funded, traveling economic policy consultant, Anders Aslund, a man who was on his way to being forgotten until Latvia’s crisis came to the rescue. For those who don’t know recall his past, he was the Swedish economist who cheered loudest for shock therapy and macroeconomic stabilization policies for Russia and the former Soviet bloc in the 1990s. His policies at this time were destined for the same trash heap as late-stage historical materialism practiced by figures such as Konstantin Chernenko.

Latvia experienced the world’s greatest binge credit fueled boom in the run up to the Great Depression II and has experienced the crisis’s greatest fall as well.  The 2008 crisis hit hardest those countries that followed Aslund’s neoliberal brand of economic policies he trafficked in the post-Soviet bloc during the 1990s.  The 2008 crisis in Latvia, however, provided the opportunity for Aslund to resuscitate his reputation as a policy analyst and consultant, while simultaneously having found “doctors” in the country’s central bank and government willing to administer his toxic austerity medicine to address the economic crisis.

Aslund’s narrative depicts austerity as a success story – enough of one to provide a model for the rest of Europe and the Unites States to follow.  It has also introduced into the economics lexicon the term “internal devaluation.”  This policy is being presented to others in the euro zone as a way to keep the euro, and to prospective joiners as a means to reject depreciating their currencies toward future inclusion in the euro zone. Its advocates advise the driving down of labor’s wages and non-wage benefits, thus shrinking public spending.  This program maintains public and private debt overhead in place so that bankers do not have to suffer “haircuts”–another neologism coined by the bank lobby.  In short, the bankers get paid, while the public pays the bill.  This would seem a tidy solution to the problem for finance–make the public pay off the massive debt overhang on the economy through reducing their consumption.

Unfortunately, while this serves the banking sector, it kills the real economy through reducing demand, thus returning Latvians to a kind of debt serfdom—a condition they thought they had escaped in the early 19th century.

Remarkably, Aslund is taking his victory lap as the architect of this terrible program.  His “success” has taken the form of a book that has all the worth of Soviet rubles in 1992, but that commentators, such as Robert Samuelson, are accepting at face value as if they were gold South African kugerrands.  Aslund declares the long winter of economic crisis presided over by the PIGS (Greece, et al.) is at an end for Europe’s troubled economies. The BELLS (Latvia, et al.), according to him and his followers, have rung in a new season of hope, having shown the way out of economic crisis for Europe’s troubled economies; thus, sings Anders Aslund in his new book How Latvia Came Through the Political Crisis, published by the banking industry-funded Petersen Institute, and co-authored with Latvia’s austerity prime minister, Valdis Dombrovskis.

Their book has become a style manual of sorts for neoliberal economists trying to demonstrate that austerity works. The book, we dare say, however, would not have survived peer review in any legitimate academic press. We normally would forgo mention of this, but turn around is fair play, as Aslund hesitates not in dismissing his critics as coming from “left-wing” think tanks, rather than engaging them on substance.

To Aslund and Samuelson, and other neoliberal sectarians, countries should emulate the Latvian and Irish payments of debts to banks at the cost of seeing their economies stagnate and social structures collapse. Meanwhile, others, such as Icelandic voters, have rejected neoliberalism and find that membership in the eurozone has lost its bloom, while Greeks are mounting general strike urging withdrawal from the euro if that is the price that must be paid for avoiding debt servitude, austerity and forced privatization sell-offs to pay the foreign banker who have made what look like bad loans.  The neoliberals clearly have their preference on which path to pursue.

There are always two sides to every issue, and here we present the “Prosecutor’s statement” against Aslund in the trial over whether financialized austerity is a success story or a harbinger of depression. At issue is whether other political leaders can do to their countries what Latvia has done to its own?  It is quite a bold feat for writers to claim Latvia a success given the gallows’ humor on the ground there expressing, “last one to leave the airport, turn off the lights.”

Let’s interrogate what Latvia’s “success” means.   First, the banks are being paid. There has been no debt write down.  Thus, the answer to the question previously raised of cui bono?  Latvians are paying their private debts (largely to the Swedes, Aslund’s home country, thus ensuring Sweden faced no economic crisis).  The cost, however, came at 25 per cent GDP contraction of Latvia’s economy and public-sector salaries to driven down 30 per cent, with unemployment from public spending cutbacks driving down private sector salaries.  Meanwhile, the Latvian public will have to bear the cost of this program through the future debt payments required on the over 4.4 billion euros borrowed from the EU and IMF required to keep its government running on life support during the crisis.

The Latvian solution’s defenders argue that the economic contraction has ended and that modest growth has returned and unemployment has finally dropped below 15 per cent.  Yet, emigration has been part of the reason for the drop in unemployment, and meanwhile investment in manufacturing and savings is far too low to return the country to robust growth.  Unlike, say, Argentina, which rejected austerity, but saw its economy grow at 6 per cent annually for 6 of the 7 years following their crisis, Latvia shows no signs of posting these impressive numbers in the wake of its crisis given it has insufficient manufacturing and agricultural capacity to bring this about.

Second, in the prosecutor’s case is, Aslund’s claim that Latvians have supported austerity and will re-elect austerity governments as evidenced by the return of the austerity party, Vienotiba, to power in the October, 2010 elections. Anyone familiar with Latvian politics sees nothing of the sort.  Latvia’s election came down to chauvinism and nationalism (by both rethnic Latvians and Russians) pure and simple.  That election season had a promising start.  The sometimes center-left Harmony Center party put forward a Keynesian plan to rebuild the economy and unite ethnic Latvians and ethnic Russians together.  In the end, however, exaggerated fear mongering over links to the Kremlin (of which there may be some truth) by the austerity party, led to an election that was predictably split along ethnic lines in this country once occupied by the USSR.  Indeed, support for austerity, hurt, rather than helped, the Vienotiba austerity party.  But, ethnic division, given the still strong memories of a half-century of Soviet occupation, easily trumped this.

Since last year, the Latvia’s largely pro austerity-parliament has seen public approval ratings of roughly 5-15 per cent.  Hardly a ringing endorsement.  Moreover, in parliament elections slated for next week, the pro-austerity Vienotiba party from last year is running a distant third place. In short, Latvia’s people and long-term prospects have been greatly harmed by these austerity policies.

Thus,  the claim that Latvia’s public supported these policies is bunk.So, what to make of Aslund’s claim that any crisis country can follow Latvia’s lead?  Others seeking  to emulate this “lead” would have to: 1) Have a very small population that could permit significant percentages of its population to be absorbed as émigrés by West European nations—increasingly unlikely in today’s anti-immigrant climate. Latvia now has less than 2 million people.  This is down from nearly 2.7 million at the Soviet peak.  In 1987, 42,000 children were born in Latvia.  Last year, after austerity policies were introduced, only 18,000 were born, thus austerity policies might lead to demographic euthanasia in small states. 2) The nation must be a sufficiently substantial  economic contagion risk for the EU, IMF, and neighboring countries to be willing to bail it out.  Latvia only “survived” the crisis because of the huge bailout sums (loans/debt) were heaped on it. 3) Banks have to be primarily owned by rich foreign nations, so they can lobby to have EU, IMF, etc., to bailout the crisis nation to ensure the banks get paid their loans back. 4) The country needs to have a relatively depoliticized population as legacy from a Soviet past; a population which, after discouragement from protests netting no result, emigrates, rather than continues to protest.  Thus, no France, Greece, or Wisconsins need apply here. 5) Serious ethnic divisions must exist to politically divide the population and prevent voting out the austerity party.  Even if Latvia’s austerity was attractive, how many nations meet the above criteria to implement it?

Can the Latvian path be politically viable? Yes, but only under the rather demoralizing conditions described above and hardly under the socialist realist description of the “heroic” actions presented by Aslund in his book. Is Latvia on the way to recovery? Time will only tell, but initial signs look very bad. Demographically, the country’s very survival looks dim. Economically, according the internal devaluation proponents, the country will have to export its way back to health. Yet, as the economist Edward Hugh has shown, only 10 per cent of Latvia’s economy is from manufacturing, as opposed to the roughly 40 per cent for an industrialized economy like Germany’s. Thus, the very structural underdevelopment that Aslund’s policies have advocated from the start (no industrial policy, flat taxes, relying on FDI) have now left Latvia bereft of the economic base from which to recover.

The good news is that Latvians have begun to again protest the rule of oligarchs and continue looking for alternatives to austerity.  Now, if only they could get sound economic policy reflecting the people’s will, perhaps they might just survive and achieve the aspirations for which they so bravely struggled during the national front against Soviet occupation in the late 1980s.

JEFFREY SOMMERS is Associate Professor of Political Economy in the Department of Africology at the University of Wisconsin-Milwaukee.

MICHAEL HUDSON  is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy. He can be reached via his website, mh@michael-hudson.com

 

 

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