Sunday, March 22, 2009

Can Latvia's "golden age" be repeated?

There is an interesting blog post by a former commentator for the daily Diena, currently an economic analyst with Swedbank, Pēteris Strautiņš. He says that Latvia's post independence "golden years" were 2000 to 2004, when the country experienced balanced GDP growth of 6 - 8%, including steady growth of manufacturing. The post, in Latvian, can be read here.
The trouble, Strautiņš writes, started in 2005 as manufacturing growth stagnated and continued in 2006 and 2007, as the credit-fed boom took off (with double-digit growth). The Swedbank analyst believes there is a chance to restore balance and go back to the kind of economic growth seen in the "golden years".
Against this view stands the prediction by economics blogger Edward Hugh that Latvia could (will?) face a worst-case scenario where the economies of Europe undergo a "V" shaped recession (sharp drop, short time at the bottom, sharp rise), but Latvia goes into a "U" shaped recession. What this means is that Latvia experiences a sharp drop, stays "down" for a time, and then picks up again. But with much of the rest of the EU ahead of Latvia, the earlier recovery there will simply siphon off migrant workers from Latvia and the other "late recovery" economies.
To be sure, there will be harsh competition for these jobs, but Latvian migrants have a generally good reputation in places such as Ireland and the UK, perhaps Germany. So as Europe recovers and Latvia stagnates, as many as several tens of thousands of younger, educated or otherwise skilled workers could leave the country.
Experience hitherto shows that there are little or no incentives for Latvians in the  so-called "second emigration" to return. The "first emigration" -- my parents' generation, fled from the Soviet occupation. Their goal was to restore an independent Latvia. Emigration 2.0 are people -- I believe-- choosing not only higher wages and better economic conditions, but also better governance in their adopted countries and workplaces.  A significant signal was that even in 2006, as the boom in Latvia was taking off, only a few hundred of the tens of thousands of Latvians in Ireland (also then a booming economy) voted in the Latvian national elections. These people had turned their backs on Latvia as a political entity. Economically, they repatriated (and still repatriate) lots of money, and with Ryanair, are able to maintain family and essential social contacts with Latvia, but they have given up on being fully/politically part of Latvian society. 
If Edward Hugh's scenario plays out, then the number of emigration 2.0 Latvians will increase, the number of potential taxpayers in Latvia will fall, and the  "U" shaped recession could turn into an "L" shaped indefinite stagnation with a dwindling and less productive (the most productive having emigrated) labor force supporting an increasing number of "transfer consumers" (pensioners, the sick, children, the disabled and permanently unemployed). 
Maybe Strautiņš is right. But the second "golden age" may only come sometime in the mid-2010s, which is too late for anyone who sees quicker opportunities elsewhere and, like very many Latvians, deeply mistrusts the "system" in this country. That mistrust (a rational and experience based mistrust, I might add) is probably the most lethal of "poisons" circulating in the national bloodstream. 
I am of an age where recovery in 2015 or 2018 will technically have me out of the labor force. But people who are younger, in their 40s,  could hang on but for what amounts to the plundering of their future pensions by the present government, which has cut drastically contributions to the so-called second level pension funds. It is easy to calculate that this generation will have much lower pensions, so why not switch to a system that is more reliable-- Ireland, Sweden, take your pick. Also, there have been proposals to force these pension funds to invest in Latvia only, therefore depriving the fund beneficiaries of better returns on their pension capital in other markets and countries.
Yet another signal to thousands of Latvians that it is time to pack up and leave. 

3 comments:

Wannabe Sorosieši said...

I do tend to think that Pēteris is being overly optimistic, but then again that is part of his job!

Curiously, Merkel said something similar (though not specifically about LV) the other day. There is an upside to being a small economy, and that is how quickly changes can spread through the economy. Maybe Dombrovskis inspired changes will cause optimism and that spreads. Tough to say. The downside is that the same thing can happen in reverse- even small failures or disappointments from the new cabal can lead to a acceleration of the fall.

Kaare said...

Dear Mr. Kaza,

I'm a danish journalist workning for the newspaper Information (information.dk), one of the leading dansih newspapers.

I'm doing an article on Nordea and the other swedish banks role in the breakdown of the economy in the baltics.

Can I please call you? You can email your number to:
knp@information.dk

Sincerely,
Kaare Pedersenpant

Kaare said...

Dear Mr. Kaza,

I'm a danish journalist workning for the newspaper Information (information.dk), one of the leading dansih newspapers.

I'm doing an article on Nordea and the other swedish banks role in the breakdown of the economy in the baltics.

Can I please call you? You can email your number to:
knp@information.dk

Sincerely,
Kaare Pedersen