Categories Uncategorized Olivier Blanchard: Lessons from Latvia Post author By Philip Lane Post date June 15, 2012 17 Comments on Olivier Blanchard: Lessons from Latvia See here for the VOX article. Essay Question: “Discuss similarities and differences between Ireland and Latvia.” Related ← The Future of Greece → Cocos for European Banks 17 replies on “Olivier Blanchard: Lessons from Latvia” Latvia crashed, and measured from the bottom has rebounded wel. The issue is : was the crash needed in that intensity? For an alternative view, see http://krugman.blogs.nytimes.com/2012/06/14/peripheral-performance/. From the peak, Latvia is still 15% below its peak, while Iceland is 5% below. It’s not clear we should all be Latvians. It’s a good essay question. Of the points made in the article, 6 and 7 stand out as being key difference with Ireland. If we had debt of around 40% of GDP then we would not have the prospect of a generation of debt servitude, which lowers future growth expectations. It we had benign foreign banks, obviously their debts would not have been heaped onto the sovereign. Furthermore, it is likely the banking system would be fully functioning at the this stage of the crisis creating a reasonably liquid property market and channelling much needed funds to SMEs. One thing that is not mentioned in the article is the difference in private debt levels between Ireland and Lativa. I do not have the figures for Latvia, but I assume it is well under the 300% or so of GDP that we have in Ireland. Private debt levels are a huge drag on consumption currently (and a cause of much hardship) but could result in an escalation of the banking crisis in Ireland, if and when the ECB starts to raise rates again. In Ireland we are essentially caught in a trap, because any recovery in the Eurozone is going to cause rates to rise and which will deepen the crisis here. Finally, the government in Ireland has to accept responsibility for some egregious policy errors, including, but not limited to: – the Croke Park argeement. – a refusal to tackle universal rights particularily for the large cohort of well-off pensioners. – a refusal to reform the apparatus of government – there is a complete lack of accountability in government and the public service, most evident in the DoF. – a refusal to countenance some sort of asset or wealth tax along the lines of the Swiss model. – abysmal negotiation strategies in dealing with the troika leading to the payment in full of unsecured bondholders (I do not accept the TINA argument). The only leason that I can see that we could perhaps have learned from Latvia (and Iceland also) is that the Establishment should have faced up to the depth of the crisis sooner. There were long period in 2009, 2010 and even at the beginning of last year, where the government/media/commentators/economists still though that things would be work out fine. If the Establishment had faced the facts in late 08, 09 or even after the new government was elected, then things could have been better. I think more front loading of the adjustment would have been appropriate and certainly the a greater willingness to deal with the bank crisis sooner rather than later, including the type of unilateral action that we saw Iceland take in dealing with bondholders. Ireland has opted for the scenic route on the slow boat to China, instead of declaring a casus belli on the gravy train riders. On Thursday, the Central Planning Bureau said triple-A rated Netherlands will endure 5 years of slow growth to 2017. Let’s be honest: it’s only the self-interested or fools would advocate the Croke Park dance of the seven veils farce as a means of cutting gains built on froth, out of the system. Even the ‘savings’ are contrived to exclude pension rises and include dodgy estimates of ‘efficiency’ gains from a base of out of control spending. We have bought industrial peace is the mantra of jellyfish from behind a white flag. Compared with Latvia, there is pain, cuts and high unemployment, but no hope. I wrote the following in June 2010: The rise in the Live Register by 6,600 to an all-time record high of 439,100 in May, in the same week that economists in a report on the economy issued by accountants Ernst & Young, said it will be 2022 before employment regains its 2007 level in the Republic, highlights the challenge in creating sustainable job creation. The vast majority of the workforce remain in employment and most of those with a grip on the public megaphone have not had the experience of being exposed to the hopelessness of people who may never work again or the visceral fear of running out of money in the modern economy. What is most distressing about the current situation is that policymakers and some economists appear to echo the Dickens character Micawber that “something will turn up,” which is the benefit of a recovery in the economies of Ireland’s trading partners. However, given the severity of the recession, the end to easy credit and the extent of the public debt in the developed countries, there will not be a return to the mainly high growth two decades that preceded the economic crash. This is a sobering graph: http://krugman.blogs.nytimes.com/2012/06/14/peripheral-performance/ So, I’m not sure we should be taking lessons from Latvia. In any case, in terms of the financial element of the crisis, the initial conditions here were most similar to those in Iceland. Perhaps we should have an essay question: “Discuss similarities and differences between Ireland and Iceland. @MH I agree with what you write, but the crisis in Ireland is mostly financial in origin and while Croke Park should be torn up, the long term viability of the state will only be secured through debt write-down. Not for the first time I’d like to push the Honohan & Walsh “Irish Hare” paper (link below), in this case for Blanchard’s lengthy comment. It seems to me he hasn’t needed to change very much his view of how small open economies work. It’s also much the same view as that held by Krugman, O’Rourke and numerous others AFAICT. Why doesn’t a sound, simple model that works win more adherents? The short answer of course is politics; the challenge is to understand the politics and sort them out as best we can. http://ideas.repec.org/a/bin/bpeajo/v33y2002i2002-1p1-78.html Is there any basis for the view, which I have seen somewhere, that experience of soviet life and the harsh transition which followed – having to make do with little, reliance on informal networks, dacha plots, barter and so on – extended Latvia endurance during the adjustment? Clearly there were and are external and internal factors that facilitated and supported Latvia’s adjustment process – and which do not apply in Ireland’s case. But what they did, which is completely the opposite of the approach in Ireland, is that they seriously got to grips with the challenges whose resolution was entirely within their control. While Irish policy-making is focused on hoping that something will turn up or that someone somewhere will provide a free lunch – and studiously ignores the problems that ireland can solve itself – the domestic economy will continue to sink in to the mire. Friendly foregin banks ? Jasus – did he ever get into a scrap with a Swede who thinks he is a Russian ? http://www.youtube.com/watch?v=ygQvB6OjHOU They dropped a economic neutron bomb on that country. Latvia is a even more pure expression of a colony in comparison to Ireland. Their people are almost absurdly stoic which works to the banks favour. @Philip Have you got recent domestic demand figures for that country ? Is it now a sign of success to transfer your wealth to the core ? These IMF aristocrats are something else boy… they merely change the metrics of economic success to suit their flawed arguments. If you listen to them for too long you kind of forget the purpose of economic activity. @ bazza I would argue that reckless misgovernance in a system of limited accountability (look no further than a bust developer getting at least friendly indulgence from socialist TDs) where the buck stops nowhere, is what paved the road to perdition. As for debt writedown, it would be foolish to expect it. @MH I am not optimistic that we will receive a debt write-down either, which is why we may have to leave the Euro if we want to recover (a big if, as many in the Establishment are happy with the status quo). Local reform will not deliver recovery on its own. Most productivity gains were already achieved in the 90s. @all Krugman has an interesting column in the NYT today. It is almost funny to think that the natural bedfellows for the German establishment come from the right wing of the GOP or the tea party. Blanchard has completely ignored the surge in EU transfer payments to Latvia, which account for approx 70% of the direct increase in GDP in 2011. @ michael burke GDP greew 6.9% yoy in March 2012. EU payments were suspended in Jan 2012. When you say ‘EU transfer payments’ you’re referring to grant assistance not bailout loans? @Michael Hennigan EU current and capital funds, including structural funds, cohesion funds, etc. Blast from the past. http://www.irisheconomy.ie/index.php/2008/12/02/a-new-policy-angle-on-resolving-the-financial-crisis/ I suppose we could throw all the economists in jail? BOH. “the bottom line is that no country with three times the unemployment rate that it had before the world recession, and Latvia’s huge income losses, should be considered even a qualified success story.” http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/wrong-lessons-from-latvia-for-the-eurozone Maybe the jury is still out on this one? Comments are closed.