Wednesday, November 18, 2009

A decade of stagnation ahead, looking to Latvia 100

It was the 91st anniversary of Latvian independence on November 18, a day celebrated in somber, but somewhat hopeful circumstances by Latvians outside Latvia for 50 years. For all those years, Latvians mourned the loss of their independence, but held on to hope that the country would regain its freedom. That happened in 1991 with the collapse of the Soviet Union.
Eighteen years have passed since then, and Independence Day is a good time to reflect on what has become of the country since then and what may await Latvia in the next few years. Will country be better off on its 100th anniversary in 2018 than it was on the 90th in 2008 or the 91st this year?
Unfortunately, a detached and rational analysis of what is happening does not leave much room for optimism. Latvia is being devastated by a global economic crisis about which it was repeatedly warned, and for which it failed to prepare (as did, for example, Estonia). Boosted by reckless lending and borrowing, the economy seemed to boom right after Latvia joined the European Union in 2004, and the government, deaf to warnings, spend money as recklessly (pedal to the metal) as some of the Swedish banks sharing the blame for events here.
The government had no plan for what would happen when tax revenues from an artificially overheated economy no longer sufficed to support an inefficient and bloated state administration. A depraved culture of corruption and cronyism flourished almost from " day one" of the renewed independence, but during rapid economic growth, its depredations were not dramatically visible. Now we see the Riga Children' s Hospital plundered (or, perhaps, used as "black treasury" from other corrupt activities) to the tune of LVL 700 000 (more than USD 1.4 million).
Now the country has faced a choice between state bankruptcy or budget cuts that amount to reducing Latvia, with no prior planning or warning, to a minarchy where the state can barely maintain such services as police, national defense, and the courts. By 2012, education, medical care and personal security will largely be services available commercially, not as a result of spending tax revenues. Personal incomes will not increase sufficiently for most Latvians to be able to afford these services on a pay-per-use basis and still pay taxes that will be largely spent to repay the national debt, offering taxpayers practically zero return on taxation.
Another way to express this odd sounding concept is efficient and effective governance. By joining the EU, Latvian citizens have a defacto choice of governance -- that is, they can move to countries that offer a better return on taxation, but less political representation (no or limited voting rights). In Sweden, a Latvian paying taxes only slightly higher than those proposed for 2010 by the Latvian government (with a soon to be zero return), obtains a return in the form of tax-supported (there ain't no such thing as a free anything) education, reasonably efficient tax-supported police, tax-supported medical care and better, less corrupt or simply less dumb-ass public administration.
So what do I see happening? Tens of thousands of Latvians are going to choose places to live with better governance and, probably, better jobs, wages and "general attitude" (a factor often cited by Latvian emigrants to other European countries, mainly Ireland or the UK, who have already realized that the monetary gains of emigration aren't spectacular). Those tens of thousands, perhaps as much as another 100,000 or more, on top of those already living abroad, will drain the labor force of much of its best and brightest workers and potential managers.
When the rest of Europe recovers, Latvia will lack the skilled labor needed to meet export orders from Europe because those who could fill them will already be out there in Europe. The Latvian state has shattered, permanently, any trust or reliance it had among its citizens. This was accomplished by almost two decades of half-assed misgovernance, corruption, idiocy, provincialism, nothing-specialism and pedal-to-the-metalism. It is valid observation, for many Latvians, both the young, who do not want to waste the life ahead for them, and the old, who don't rationally see any change in their lifetimes, that if they (those running the country) haven't gotten it by now (almost 20 years), they probably won't.
So what will we see? A lost decade of third-world-lite economic stagnation, an aging population with a dwindling tax-base to support them, an elite living off of its sleazewealth until even that runs out (but hey, we're OK now, Jack) and their foreign educated children refuse to come back to the backwater their parents created. The best and the brightest of the Latvian nation -- look for them in Dublin, London, Stockholm, Munich, Sydney, San Francisco -- and, if they live in Europe, as most will, dipping into Latvia for relatively cheap home visits on a low-cost airline. The lat, by 2018, will still be the national currency, but hey, it's preferable to pay in euro.
Latvian labor in Latvia will be cheap -- among the cheapest in Europe, but also not very smart or productive. Part of the reason will be that most who finished school after 2010 will have had an education that decreased in quality from year to year and never was that great to begin with. So labor will be rationally cheap -- rated by its quality and productivity. The best value for money will be those kids with Latvian sounding names finishing some of the better schools in Ireland, Britain, Germany or Sweden, and they will be worth the higher going rate as skilled workers or management trainees.
In short, Latvia, thanks to almost depraved misgovernance and a hapless population unable to dislodge its political elite, faces a gloomy and stagnant decade ahead. Yes, one should celebrate independence, but not to the extent of sacrificing rational analysis for feel-good patriotic false optimism.


Artis said...

PM Dombrovskis recently said smth like - the situation is harsh but not hopeless. I believe it's other way round - it's hopeless but not yet as harsh as it can get... We still got some bread to chew on =)

mxz said...

Gloomy. One can only hope that the entire emigrant generation will one day wake up feeling homesick and come back to the country of their fathers and mothers with nothing less than the intention of turning things for the better.

You needlessly accuse the government of depraved governance. You cannot possibly expect somebody who has been "starved" for years and years to be suddenly seated at a grand buffet table and then expect them to "not want a piece of the pie". This nation has been deprived of many things during it's history, I feel it's only natural that everyone will try and grab all they can. Because if they won't - somebody else will. Greed and envy are the key
motivators for people who run this country.

Only societies that have long lived in prosperity and peace can start working toward "the big picture" things like country, society, justice and equality. When you've got enough wealth or quality of life, you can start helping others. The trouble is, some people just can never have enough.

But we'll get there. Someday.

Wannabe Sorosieši said...

mxz -
Your acceptance of this incredibly corrupt and demeaning governance is beyond bizarre. Why should we have ever accepted this? Because if we don't, someone else will? WTF?

And, if your assumption is true (that people who have been deprived will act like greedy children), how in the world do you explain how much better off our Estonian neighbours are? It isn't great there either, but they did save for a rainy day and are nowhere near as harmed as we are.

mxz said...

I don't accept it, it's just that it doesn't surprise me that much.

Good point about Estonia. No idea how they came to be better off. Maybe it's because they are of a different origin. Weren't they under long Swedish rule in the 1600's? They are much closer to Scandinavia and not only in geographic terms. The language, the conservative way of life.

mikk said...

Juris, I recently compared avarage wage in Latvia and Estonia. (Disclosure, I am Estonian myself). There are are some clear differences.

Generally speaking, average wage in Estonia is about 20% higher than in Latvia and it correlates with the fact that GDP per capita in Estonia is about 20% higher than in Latvia. But what is intresting for me – in Latvia average wage in public sector was about 25% higher than in private sector and not just in 2008, but also in 2007 and 2006 and 2005 etc. In Estonia average wages in public and private sector have been more or less equal. In fact, 2008 was the first year when public sector average passed private sector – maybe public sector was not able to push on breaks so quickly. But years before, private and public wages have been equal, private wages usually eveb litlle bit higher.
And this is clear difference between Latvia and Estonia.

How to interprete this. Has Latvian state been more generous toi ts public sector workers than Estonia? Are thre some structural differnces what create that kind of wage disparity? I dont know, I guess there is a need for deeper analysis…

My larger point. From here it seems that Latvian public sector has lived a good life in expense of private sector, they are enjoying much higher wages than people in private sector, at the same time they have not been able to give better services. It seems thate tehere is lot of waste, lot of fat and lot of structural problems.

schtals said...


Baron Tornakalns said...

You generally coin an amusing neologism and in this case it's "sleazewealth." Nice.

Anonymous said...

It is really sad to see how unloving towards Latvia and Latvians you really are. Seems that today anybody who's not lazy can spew vitriolic hatred towards Latvia and Latvians. It is sad that you are dissing Latvia - a country and society that welcomed you and granted you so many opportunities over the years. You are not helping the situation, you are just bringing us even more down. Yes, the ruling elites made many terrible mistakes. Their biggest mistake was that they decided to serve the foreign investors and international capital instead of their own people who they completely abandoned already in 1993. Foreign investors were given preferential treatment here - of course, they put all their effort in making money off of Latvia, instead of investing in the real economy. It's sad that you fail to see this and bash the Latvian society instead. You should actually exalt Latvia because this is one country where the laissez faire ideology was put into practice - without the consent of the then traumatized and shocked populace. No need to compare LV to Estonia - LV is in a completely different geopolitical position. Estonia was never made the "financial center" of the region thus it's exposure to the international financial system was not as huge as in LV. Estonia never had a Parex. As a relatively young Latvian, who saw her parents experiencing the hardships of the 1990s and yet coming out of them through hard work, and as somebody has never taken out a single loan out of the international banks, I have one request - please, try to be less amoral when you write about the country of your ancestors and about people who live right next to you.

Juris Kaža said...

You are blaming the messenger for the message. Love has nothing to do with it. It is a matter of analysis, looking at the facts and figures. The Latvian economy has collapsed because of the political elite's incompetance and there is no way, given the extremely harsh demands of the international lenders, that the economy can recover.
Please name which foreign investors harmed Latvia. Most created jobs and brought in higher wages (with all taxes paid) and better conditions than local employers were able to provie.

Anonymous said...

Country will struggle but hope to have a better life will always persist in people minds. I would always say to stick to your fundamental goals and never give up but as long as you can control variables that affect outcome. If you have major force such as government tinkering with your life every now and then, then how can you plan for better life? You also have to question whether is it worth achieving anything when nearly everyone around you is corrupted, from officials to even people you consider friends which turn out to be con artists. At the end of the day I don't care how well off country is in its current state in economic terms because I believe that this is a short term problem. I'd like to see shift in mentality in people. More honesty, sense of responsibility, persistence, belief in future, more tolerance against each other when there is no reason to express rage and less tolerance against those who bully us whether it would be government or your neighbour. I don't want to live amongst savages and losers!

Robert said...

Juris, very accurate analysis of the situation.
My wife, latvian, just came back from a visit to Riga and she can validate the emigations desire amongst the latvian population. Almost everyone is talking of how to emigrate to something better in Europe or elsewhere.
Honestly I cannot see how the future of the latvian economy can improve any time soon. As you so accurate point out the young latvians living here in Luxembourg are looking for academic education in the UK, Germany or France. When they graduate I do not think they go to Latvia for work.

Lingüista said...

Anonymous, I basically agree with you. I don't want to blame Juris for the message -- but I think the message is not complete. Juris is right in claiming that the elite's irresponsible behavior is to blame for the current situation. But then again nobody can really predict the future (for all I know, maybe the world is really going to be destroyed in 2012...).

My country, Brazil, has a history of terrible social inequality that hasn't stopped even now that it seems to be lifting off (judging by the last cover of The Economist). Yet things are getting better, much to the surprise of analysts in the past who also "couldn't see" how the situation could ever improve, given our corrupt elites and their terrible grip on our country.

I for one remain optimistic about Latvia -- not because the situation forces me to (again, Juris is right, the situation is not really conducive to hope), but because Latvians are humans and humans are capable of all kinds of surprising things, even solving complicated problems.

Latvians survived centuries and centuries of domination. Other Baltic peoples didn't (I remember a historian saying that it would be interesting to understand why the Latvians still exist, while for instance the Old Prussians, Curonians, etc. don't.)

Let's indeed wait and see what 2018 will be like. Maybe Juris is right, but maybe he isn't. For the time being, Anonymous, let's work for the shift in mentality that you talk about -- with your children, friends, anyone. I hope there are more people like you in Latvia.

Inga said...

About the next generation Juris is right, I moved this summer to Canada with all my my family and we really think not to come back to Latvia for the next 10-15 years. Also I am looking forward to educate my child abroad, because in my opinion Latvia's educational system is hopeless. And I'll see if my child will choose to return back or stay abroad. Overall, I am really pesimistic about the changes of common sense and political culture in Latvia.

Jezgotājs said...

I think that journalists (or reporters, messengers, watchdogs, whatever) are to be blamed, too. They had to write about practical things yet they wrote about big politics, promoted luxury lifestyle.. take a look at Dienas Bizness - useless magazine. I know many young Latvians are desperate to make a business.. But from whom they can learn? From stock rates? From articles about big companies? Take a look at Times, CNN, other western media sites - all they have a section for small business. They tell stories that matter! Because they know that some of their responsibility is to build the society wealthy and happy.

Some other point. So called journalists often talk to the people which should be ignored. I become sick when reading about Andris Skele or Ainars Slesers, or other "hero".. In normal country journalists simply would ignore them. Journalists show they accept them as very fine people, no wonder they are elected again. Fill that space with something better.

If somebody asks me who is to blame I would like to say - journalists firstly. Its not about Juris. Maybe the biggest newspapers are owned by such people who just want such poor journalism. Another point - by selling Diena and DB Sweden said they don't care about us. They sold the channel through which they could build up the society. If they don't care now, did they earlier?

Or, "Klubs" - popular magazine.. was it writing about engeneers, honest people, education? No, it was writing about how beautiful are millionaires .. what a nice brainwash machine, a lot of students studied the "right" way of living from it.

Journalists are to serve the society. Yes, it requires much more skills than describing worst case scenarios or scandals, or reacting to the demand of masses (its easy to write about bathrooms on the real estate boom).

Still, right – write about the hole ahead. But don't take the audience as losers. Write also about how to get over that. Not how give up and run away.

I can't say my opinion is well structured... I just start to think that not only politicians are dumb-asses. Probably Latvian journalists are the same. Which part makes false belief that we are taking part in democracy? Maybe people move to the other country not only for better government, but also for better media?

And, oh, wait... were did they recently spent thousands to create cycling guide for policeman? Huge media coverage, how bad it all was... Wasn't that the dream island where Latvians are going to? :))

Sphinx said...

"...a hapless population unable to dislodge its political elite..."? I say - citizenship for all and let it rip.

Anonymous said...

The foreign investors were given preferential treatment over the locals. And they didn't create a real economy but poured into speculative areas or trade. Where is the investment in the productive economy? It is minimal. The EU was a terrible lie and it was a mistake to join it - it destroyed the last bits of our production and taxed us all with inflation. EU claims it is equalist and socialdemocratic - yet it allows the Latvian children and senior citizens to be robbed by bankers. The Latvian government does not serve its people, it has always served the international financial institutions and foreign investment (not all of it is bad, but the principle is wrong). The taxing system was complete idiocy - it only served the rich and the rich are not Latvians in this country. Very few. The foreign investors were given immense tax rebate while the local labour and small businesses were (and still are) overtaxed! All the tax on the labour while international speculators were not taxed at all - no tax on capital growth or real estate, it was exactly them who blew up the bubble. Prior to 2004 everything was "normal", it would have sufficed if Latvia had simply gotten rid of the budget decifit (btw, even big Western countries run deficits) and taken care of the current account, as well as channeled money into production. Instead it was made the "financial center" of the Baltics. Latvia's exposure to the financial systems was the biggest - hence the crisis the biggest in Latvia (same as Iceland).
KK Parex are not even Latvian and look at what they get away with while all of us tax payers and middle class are getting ripped off. Governments in bed with banking elites equals fascism.

So no.. it is not just the fault of Latvians themselves.. and by the way I think this is the end of the Latvian nationality. The demographic stats speak for themselves. I never thought I would ever come to live something like this. But unfortunately the price is too big. I don't see how Latvians could ever recover from this.

The original Anonymous

For Latvian speakers, here's an interesting text:

Griezeejs said...

Analytical/critical messages should be published and we should have a discussion up on possible development scenarios, including negative ones, unless we want to be caught by a surprise.

True that we might not always agree to these message, but it would be a mistake to ignore them ...

Some commented this to be too critical (negative), read for example how critical is Peter Schiff on the prospects of US economy and state of the US dollar.

investmentgardener said...


I was a bit disappointed with this last post. I feel you have provided some useful insight in the Latvian state of things in the past year, but this post is just a rehash of your frustrations. Perhaps you could try to be a bit more specific in your next post. Illustrate your points with real-life experiences, like you have done in the past.

I don't necessarily think you are wrong, but a naked rant is easy to dismiss. A documented rant, not so much.

peterkuck said...

There is nothing as precious as having freedom in your own country.
If there is not enough money to pay for the police, courts, and other bureaucartic functions then the "elected" or "appointed" elites should step up to the plate and work for their country with either reduced wages or for free.

Latvia will NOT be a "failed" state but it does risk having a Failed political elite. It is time to look ahead and plan for the future, not complain about the recent past. Your parents had it much worse in the 1940's.

Peter Kuck