Latvian ministries clash over state bankruptcy claim

"The state, in principle, is bankrupt...we are all living on debt. Education has been crushed between the millstones and teachers will be the first to feel it," said Mareks Gruskevics, state secretary of Latvia's Ministry of Education and Science speaking to educators in the western Latvian port city of Liepāja.

Wrong, retorted the Finance Ministry, saying that there was LVL 466 million in the state treasury as of July 16, with some EUR 1.2 billion expected to be paid in by the end of the month.

Gruskevics said that radical educational reforms were necessary, and would have to be executed in a couple of weeks, rather than over the years as had been the case in neighboring Lithuania and Estonia.

Media reports said that Gruskevics, apparently associated with the People's Party (TP), pointed out that TP founder Andris Šķēlē, a controversial businessman and reputed Latvian oligarch, had spoken of the necessity for educational reform ten years ago.

This could indicate that Gruskevics' harsh statement reveals an underlying conflict within the ruling coalition -- the Finance Ministry is run by Einārs Repše of New Era (JL). The TP is enormously unpopular and blamed for exacerbating the economic crisis under former Prime Minister Aigars Kalvitis and his "these are the fat years" attitude toward a debt driven, overheated economy.

At the same the daily Diena quoted Latvian surgeons as saying the suspension of elective cardiovascular surgery would annually condemn at least two thousand persons in Latvia to premature death or incapacitation requiring care. Latvia has made budget cuts and proposed the restructuring of hospitals that are widely seen as a de facto abolition of tax-paid health care as well as emergency care in several parts of Latvia, leaving citizens to fend for themselves. While many employers offer some form of private health insurance, there has been no official plan for a transition to private medicine and no cuts in taxes to make such private insurance more affordable. Leading Latvian businesspeople, meeting with government officials, have harsh criticized the possibility of further VAT and other tax increases as part of a deal under negotiation with the International Monetary Fund (IMF). The IMF, which has not yet approved its smaller loan (the EUR 1.2 billion is coming from the European Commission) to Latvia, is apparently demanding harsher conditions, including tax increases, than the EC.

Dazed and confused and swingin' that axe

Information has been reaching Latvian media about the government's so-called structural reform plans, but it is somewhat contradictory and confusing. It was announced that of 77 state agencies, 50 % would be eliminated. It was not clear why 50 % and not 25 % or 80 %. Nor were the selection criteria any clearer. Some of the changes would affect agencies that were, in fact, museums (like the one at ex-president Karlis Ulmanis* former country home), others were aimed at merging or reshuffling agencies related to the Ministry of Health. Something called the Pharmaceutical Pricing Agency and some other health-related agency would be merged into something called the Health Care Economics Agency (I translate loosely from the Latvian). Whatever any of that means...

What the point of this is evades me. It is clear that by this fall, there will be little or no government funded health care -- no elective surgery, many regional hospitals reduced to day health centers with little or no funding, no more emergency health care except for some remnants in bigger cities (without a national medical helicopter service, private or otherwise, victims of serious highway and other accidents are simply going to die more often.)

As opinion makers and experts queried by the national daily Diena pointed out, there are goals in terms of numbers and percentages for cutting this, that or the other thing (wages, staff, number of agencies) but no vision of why this is being done and what, exactly, it is that the Latvian institutions of governance are supposed to do.

I have raised the issue of reducing Latvia to a minarchy, which is where the reforms and massive budget and government salary cuts all point to, But there is no conscious plan and long term, socially responsible scheme for doing so. As I write, there are reports that the government (the Ministry of Economics) is looking into raising taxes -- imposing a new capital gains tax, a dividends tax and perhaps even raising VAT on top of one failed VAT increase earlier this year (VAT revenues are down). If you are going to completely gut such services as health and education, the right thing to do is to slash taxes and give people more money to buy these services on the private market or to toss their share into a cooperative and non-profit venture such as a cooperative school. It should also promote private health insurance and various mutual insurance schemes to fund what will be within a few months geographically limited pay-as-you-heal health care.

The US is not a shining example of publicly funded health care nor does the US system work all that well, but when my dad fell ill last year and passed away after nearly six months in various kinds of care -- hospital, home assistance, a rehabilitation home -- he didn't leave my mom with a mountain of debt. His private insurance and Medicare/Medicaid/ whatever took care of it.

According to one news report, some small enterprises are taking things into their own hands and switching from on-the-books, taxpaying mode to the grey/barter economy. When agents of Latvia's State Revenue Service raided an auto repair shop, they found it busy with people fixing cars, but no books or records had been kept for many months. Those questioned claimed they were swapping favors with friends. A mechanic working on a car said he was doing the job without pay because the owner of the car had just helped him weed and hoe his garden. If that was true (which it may not have been) what is the Revenue Service's problem? No money changed hands, there was no classic economic activity.

I see a distinct economic and social logic in the grey/barter economy. Why can't a cooperative of auto mechanics trade hours of work (of different complexity) for hours of medical care for their families or repair tractors in exchange for vegetables and milk? The medium of exchange is not money, though it can (and has in some experiments around the world) be reduced to a virtual currency equivalent. Tax that! And at the same time as there is no way presently to extract tax cash from standardized barter transactions (as far as I know) -- one hour of engine tuning = one tooth cleaning at the dentist's or whatever, this system can make up for state failure. The auto repairshop works on the cars of most of the health care workers in their area and, theoretically, builds up a surplus of doctor visit hours, which it can distribute to families of its staff or, as a gesture of solidarity and good will, pool into a "free" health care fund for the indigent in the local area. It is patchwork, but maybe better than the nothing the goverment is pushing toward.

It is really, really hot for a Latvian summer night, so I may be rambling here. Comments are welcome.

Foreign direct investment plummets in Latvia

Foreign direct investment (FDI) in Latvia totaled LVL 16.5 million in Q1 2009 , down almost 94 % from LVL 260.8 million in Q1 2008, but up from a decline of LVL 95 million Q4 2008, according to Bank of Latvia statistics available through the Central Statistical Bureau.

Looking at the Bank of Latvia's quarterly balance of payments bulletin, these seem to be net FDI figures, balancing an inflow of "equity and other capital" of LVL 149.9 million in Q1 2009 (up from LVL 143.9 million a year earlier) against losses by "direct investment companies" of LVL 133.4 million.

A bit confusing, maybe the real economists reading this can comment. To me it looks like FDI is falling, although investment inflow (according to Bank of Latvia) is slightly up. Netting against losses, it seems we are talking about some kind of a burn rate here, but then, the net for Q4 was negative. Is that better? Or simply a case of getting less, thereby burning proportionally less?

The BoL's Q4 report is not very enlightening, it states that FDI for all of 2008 totaled LVL 542.5 million, down 45.3 % from 2007. Whatever it is, it does not somehow look good. Add to that the statistically not very significant but symbolically damaging lowering of the Swedish flag-of-approval in the sale of the media companies Diena and Dienas bizness by media flagship Bonnier Business Press and you have reason to think that Scandinavian investors will shun new investment, if not start a slow retreat from Latvia. After all, the prestigious Bonnier flag still flies (with priority) in Estonia, Lithuania and reputed bandito-land Bulgaria's media scene. And do not Swedish/Scandinavian investors do as do their leading business media (Dagens industri, the mother of all East European business media but its recently abandoned Latvian daughter, as European languages formulate it)?

Cumulative FDI stood at LVL 5.607 billion in Q1 2009 , down from 5.66 billion in Q4 2008 but up from LVL 5.391 billion in Q1 2008 (due to an inflow of FDI during the first three quarters of 2008). Good or bad?

Val the pernicious anarchist

I am inspired on how to shorten the Latvian male name Valdis by my old friend Valdis in the US, who calls himself Val. But the Val I am referring to is Latvia's Prime Minister Valdis Dombrovskis. There has been some media comment, yet again, on the PM's remark some weeks ago that, in an economic crisis, the principle of legal reliance could be suspended.

He was referring to the principle that taxpayers, having been legally required (in effect, forced) to pay taxes, could claim entitlement to certain government and social services. Specifically, the issue at hand was the government's threats (since carried out) to cut pensions that had already vested, in effect reducing the income of pensioners whose employers had paid taxes in anticipation of a certain level of pension payment.

More than 1000 persons have already filed suits with Latvia's Constitutional Court asking that pension cuts be annuled as violations of the principle of legal reliance.

How does this make Dombrovskis Val the pernicious anarchist? If we analyze the situation from a "realist" libertarian viewpoint (big government can only go away slowly), what Val the Anarchist has done is to destroy the kind of grudging compromise that keeps democratic coercive states legitimate in they eyes of most of their citizens. In other words, the promise of services and entitlements for coercively taken taxes is largely kept. People get government pensions in Sweden, Germany, other EU countries. The police and other services are adequately staffed and respond when needed. Sure, there are inefficiencies and irrationalities in the system, but at least your child will not stand in front of a half-staffed school on the first day of school. That will probably be the case on September 1, when school starts in Latvia.

Val the Anarchist has certainly (though not deliberately) exposed the myth of the Latvian state as benevolent robber. In fact, it is a vicious robber, first taking a rather high social tax from employers, then taking away 10 % (70 % if you are working after retirement age) of the confiscated money you were supposed to be getting back. He has destroyed even the grudging legitimacy of the state, feeding a (perhaps primitive) anarchist analysis of state power. And people are acting on it, with anecdotal evidence as well as statistics indicating that tax evasion is flowering again. And why not? If you get nothing after paying two or three "handling fees" to Nigerians offering a slice of USD 50 million from a tycoon or minister who was eaten by crocodiles, you stop paying the Nigerians because they are and always have been a fraud. So why should you finance the state when it gives nothing in return (on a value for money basis) and when it breaks all implicit prior promises, some in a shocking manner -- like the cut-off of state funded elective surgery? It makes perfect logical and moral sense to dodge taxes in Latvia for the simple reason that paying tax is the same as tossing money into the sea.

So Val has inspired all of us to be anarchists. But why is this pernicious? As I have written before in earlier posts, dismantling the state apparatus in a haphazard, head over heels and desperate will leave hundreds of thousands of people bereft of their entitlements. From a purist viewpoint, these were the fruits of productive labor (money) confiscated from them and everyone else, but within the system, they were legitimately expected and cutting them off will cause a painful social disaster and possibly real "anarchy" in the streets.

This is why it is pernicious. If the goal (and, actually, the Latvian government is acting, but not saying that it wants to be a minarchy) is to reduce the state to a minimum, this must be done step by step, allowing a devolution of institutions to the private (both commercial, cooperative and voluntary) sector and deep cuts in taxes to leave private citizens the money needed to buy health, education and security on the market. In realistic terms, this could take a generation or more. Val the Anarchist is making it happen between 2009 - 2011, formally slashing LVL 1.5 billion in expenditures and, unwittingly destroying state revenues by much, much more, which in turn will force huge spending cuts.

The revenue reduction will result from a combination of tax evasion and refusal, as well as the deterioration of the tax base due to falling salaries and minimal corporate profits and the continuing plunge of Latvia's GDP. If GDP falls by 25 %, how can tax revenues, even where taxes are paid with robotic faithfullness, not decline by roughly the same amount.

Latvia's public health care to collapse in November?

Newly-appointed Minister of Health Baiba Rozentāle has told reporters that the public health care system in Latvia will run out of funds in early November unless the government allocates an additional LVL 90 million (around USD 180 million) to her ministry.
Rozentāle (of the People's Party/TP) immediately got into a row with Prime Minister Valdis Dombrovskis (New Era/JL), who said that she had known of the funding for her ministry when she took the job, replacing her party colleague and predecessor, a doctor who resigned fearing that he could not deal with the cuts and restructuring demanded of the public health care system.
Rozentāle said she had been promised 3.4 % of GDP as a funding base for health care. In fact, the present budget offers only 2.89 % of GDP, a figure said to be the lowest among all member states of the European Union.
Soon after this controversy, the Pauls Stradiņš University Hospital, one of the leading health care providers in Latvia, announced that it was halting all state-funded elective surgery, including heart operations. Earlier, the government suspended funding for elective joint surgery or so-called endoprosthetic operations effective July 1. Cardiologists have warned that the suspension of elective heart surgery will lead to a surge of mortality in a country where heart disease is already a leading cause of death.
Rozentāle has generated controversy by suggesting that Latvia's health care system could sell surgical services to Sweden in order to shorten queues for elective operations paid for by the Swedish national health service. The idea, in isolation, was seen as good, but there was public outrage on internet forums that "ordinary" Swedes would be getting surgery in Latvian hospitals that was no longer available to ordinary Latvians.
Meanwhile Latvia's President Valdis Zatlers, a surgeon himself, criticized what he called "chaos" in Latvia's health care system. One can only agree.
The country is moving rapidly toward a pay-as-you-heal system, which actually is nothing new. Since Soviet times, when doctors were vastly underpaid, patients have routinely tipped surgeons and other specialists with "gifts" of scare goods (under the Soviets) or cash (in present-day Latvia). So a patient-financed health care system has existed in parallel to the publically financed (but now rapidly declining) medical care system for many years.

Swedes, not Latvians may get Latvian medical care

Just days after Latvia cut off funding for so-called endoprosthetic operations (hip, knee and other joint replacements), the new Minister of Health Baiba Rozentāle said Latvia could offer surgical and medical services to Sweden in order to reduce queues for elective or planned surgery. Rozentāle said in an interview with the Latvian daily Diena that selling medical services to Sweden would be one way to increase revenues for the Latvian health care system

If implemented, the scheme would mean that Swedes, who are entitled to elective surgery such as hip replacements, could get the surgery done more quickly in Latvia and financed by Sweden's national health service, while Latvians with identical medical conditions would one have private care available. In many cases this would mean that poor, older Latvians would go untreated and, in some cases, end their lives bedridden rather than mobile and healthy after a joint replacement.

The bizarre aspect here is that one would see Sweden's publicly financed medicine become slightly more efficient by buying services in Latvia, while Latvia's once public-financed medical care is essentially being dismantled by budget cuts, leaving local patients with no alternative but medical care paid out of pocket.

In any other context, the export of medical services would be laudable, but it is more than ironic that Latvia hopes to earn money by replacing Swedish hips while cutting funds and allowing its own citizens and residents who cannot afford private operations to spend the rest of their lives as invalids.

Swedes pull out of Latvian print media

The Swedish Bonnier Group, pioneers in setting up business newspapers in the Baltics (Estonian Aripaev was set up before independence in 1989/?/), have sold the the Latvian daily Diena and the business daily Dienas bizness to a local company called Nedeļa, which is run by a former executive of Diena.
My quick take is that both papers (which have been losing money) were sold for a song in a move that basically takes Swedish investors out of the Latvian print media market. It is noteworthy that neither the Estonian business paper, nor the one in Lithuania were sold and remain among the subsidiary Bonnier Business Press priority investments.
It is also a significant signal that the owner of an authoritative business newspaper in Sweden, Dagens industri, is getting out of Latvia. If this is so, perhaps other Swedish investment may follow or at least slow down any plans to expand here. To my mind, regretably but rightly, the Swedes are labeling Latvia as the basket case of the Baltics and Eastern Europe.
On a personal note, I worked for Dienas bizness from 1995 to 2006 and enjoyed that time very much. It is sad to see the paper, developed under Swedish guidance and as part of a group of business newspapers owned by the Bonnier Group, is now cut loose and left on its own. Dienas bizness has been taking increasing desperate staff cuts and salary reductions as advertising revenues have declined.

Added later:

The buyer, Nedeļa, is owned by a Luxembourg finance company owned, in turn, by an Estonian entrepreneur Kalle Norberg and other private investors.

Casten Almquist, CEO of Bonnier Business Press, told this blogger that the sale was mutually advantageous, but the Swedish company, under present economic conditions, saw a somewhat greater potential for developing its assets in Estonia and Lithuania.

John Hedberg, a former Bonnier executive, who advised Nedeļa on the transaction, said that there would be no short-term changes at both publications. Measures to cut costs and restructure both businesses were showing some results, though one would have to wait and see how this played out in the medium to long term. He said Diena and Dienas bizness both were good brands with a good reputation

It ain't just me, babe...

Some people think I am too depressive and pessimistic writing that Latvia has basically destroyed all trust in state institutions and is heading for some form of failed nightwatchman government pretending to rule an increasingly alienated society drifting, at best, into some form of cooperative anarchy (organizing replacements of failed public services privately or by volunteer activity).
In fact, I was gently criticized for my pessimism by a Latvian academic (former "exile" Latvian) I met while grocery shopping.
Now, a prominent businessman/architect in Liepaja has said much the same in an interview with my former employer, the business newspaper Dienas bizness. Uldis Pīlēns says the way that the government has tried to react to the crisis has essentially destroyed public trust in fundamental democratic values -- the so-called legal reliance on getting a just return for taxes and social fees paid. Instead, pensions have been reduced, working pensioners driven from their jobs and teachers reduced to working for less pay educating future generations than Latvian janitors (sētnieki) ar paid for sweeping the streets with a broom made of twigs.
He also says that the behavior of the government in leaping to save the foundering Parex Bank with the first international loans it received, then acting chaotically to appear to cut the budget to get the next tranche (pensions won't be touched, then pensions are cut) has badly damaged Latvia's international image in the eyes of potential investors. A level of unemployment has been created that it will take 6 or 7 years to recover from. So Pīlēns, too, is saying that most of the next decade in Latvia is lost due to the cumulative mistakes and incompetance of several Latvian governments.

Ultranationalists fail to draw a crowd

Despite a widespread and diffuse feeling that Latvia "needs a strong hand", a rally by ultranationalists, including a group calling itself the heirs of Latvia's pre-war fascist Pērkonkrusts (Thunder Cross) movement, failed to gather more than 60 or 70 persons at a rally in front of the Cabinet of Ministers building.

The radical nationalists had hoped for at least 1000 people to gather to angrily protest the massive budget cuts that have left teachers on the minimum wage, public services gutted and many pensioners destitute. While there was simmering anger at a rally called by Latvian trade unions on June 18 to protest the same cuts. Fortunately for Latvian democracy (such as it is), the population is not ready to rally around populist authoritarian leaders -- yet.