Sunday, September 19, 2010

Latvian Elections will lead to Premature Minarchisation

Whoever wins the Latvian elections will face the unavoidable issue of drastically cutting the government budget and basically taking a great leap toward the perhaps unintended end result of the international lending program of reducing Latvia to one of Europe's first minarchies.

A minarchy is a state which has the absolute minimum of government, basically just police, some kind of state dispute arbitration or court system, and a minimal, volunteer defense force. All other services that we expect from government today are delivered in a minarchy by the private sector, as a business, a cooperative non-profit enterprise, or as charity.

If Latvia makes the budget cuts of around another LVL 900 million over the next two years, it is hard to imagine it as anything but an improvised and unplanned leap into minarchy. There will be further reductions of government salaries and staffing, leading to further claims for unemployment and to emigration by state employees pre-empting their inevitable dismissal.

To use a Latvian expression -- like "amen" in church" -- we will see whatever new government is put together after October 3 (the elections are on October 3) sooner or later announcing drastic cuts in spending for education, health care and pensions. Education and health will be pay as you go, probably with no tax deductions, and pensions, if all else fails, will simply be cut to just around subsistence minimum with the retirement age quickly raised to 65 or 67.

A true minarchy is a generational project requiring a gradual reduction of entitlements from government, shifting these to non-state institutions (pension and health insurance companies, cooperatives, charities). This, in turn, presumes that society becomes prosperous, that the wealth and value consumed by taxation and the state can put to other purposes, and that the society generates steady economic growth and increased innovation.

In Latvia, there are virtually no signs of the kind of economic recovery that could create the basis for any kind of prosperity in the foreseeable future (before the 2020s). Latvia's export statistics simply show that this country is chopping more trees (the forestry sector) and exporting more foodstuffs.  The high tech, high value-added part of the export pie is miniscule.

The terms of the International Monetary Fund (IMF) and European Union loans to Latvia preclude any kind of economic stimulus, and efforts to spend EU matching funds have been slow, ineffective, and hampered by spending cuts that prevent the government from matching even existing EU funds on offer.
Larger economies, such as the US (not an EU member) have been spending at a "devil may care" rate (or as Latvians would say " uz velna paraušanu"), with mixed results. Latvia may feel a slight indirect effect of larger nation stimulus and/or recovery in an increased demand for lumber and, of course, labor.

There has been, to be sure, crazy talk of ditching the entire lending program or re-writing it, which ignores the fact that Latvia's budget deficit cannot be covered by lending on any better financial terms (interest rates) than the IMF and EU package. No bank, no buyer of government securities is likely to give better financial terms.  But that does not solve the problem of a stagnant economy and emigrating skilled labor force that Latvia faces for the next five years, at least.  Nor does it restore, to my mind, the irreparably broken trust in political institutions.

Here, one could say, at least some Latvians are ready, ideologically, to accept a minarchy, since the government/state has done nothing and will do nothing for them, has broken promises and withdrawn entitlements (not all of which were wisely granted) and will break more promises and take away almost all tax-financed entitlements in the near future.

That, naturally, poses the question of how to deal with such issues as education, health care, even public safety (as police forces lose their best and brightest, of which there were not many to begin with). The easiest way out is to go where these services exist as a reasonable "return on taxation"  and where the salaries from which taxes are taken are much higher than in Latvia. In other words, emigrate, and as Europe recovers, tens of thousands will do so.

Those remaining will probably tolerate a gray economy approach. If paying taxes gives no tangible return and "pays" for vanishing entitlements, then pay in cash in envelopes, especially if you know that your workers, who are not drunks or spendthrifts, will use the cash wisely -- to support their elderly grandparents, to educate (for pay) a child, to pay a doctor for good health care.

Since the gray economy is technically illegal, there will be little opportunity to create formal structures such as education cooperatives (funded by "envelope earnings) or health cooperatives, never mind hiring private police. Seeing cash diverted for economically rational reasons (getting something rather than nothing for one's money) to such informal, grey economy structures will bring down what remains of the State Revenue Service and other repressive structure, who will be increasingly blunt, dumb and brutal in their activities (having lost any educated, sophisticated staff to Ireland or elsewhere). The same people who hound mushroom and berry picking old ladies for LVL 30 monthly licences in lieu of tax, will hound the teacher who advertises " will teach for cash."

The end result of processes in Latvia set in motion by the credit boom of the mid-2000s will be that, after all the budget cuts are made, will will have a "minarchy of poverty", more or less the Third World kind of minimal government where a poor, poorly educated population keeps a primitive, subsistence economy cranking along, unable to generate a wealth surplus sufficient to either capitalize the innovation and entrepreneurship needed to lift the economy out of stagnation, nor to fund a state that can provide some of the tools (education, health care, security) for being able to do so.


VID said...

How sadly that you are one of few people who truly understands the scale of Latvia`s problems ...
Please keep posting!

Dynamo girl said...

Minarchy is what you get after years of the type of policy that was cultivated. There is nothing surprising or "unintended" about it. Repse started it in the 90s. Overtax the labor, put a flat tax on everybody, discriminate against the local producer (in favor of foreign banks and businesses), do not tax capital or real estate or luxury. That's what happens.. it's the kind of a libertarian dystopia that people who were (and still are) in power (as well as their Western advisers) have been propagating for years. Such a system does not need a local population, quite the opposite. Latvia never had a chance to establish the kind of a system that the Western countries enjoy. Sweden and Germany would NEVER allow the type of measures against their populations that the Latvians were subjected to. A Swedish model should have been adopted. But who wants that in Latvia? Certainly not the big guys with the money and not the foreign investors.

Anonymous said...

Juri Estam writes. To suggest another alternative to Dynamo girl's ideas (with the Swedish model we run into exactly the same problem at the outset that Juris refers to - where do we get the cash to prime the pump?), there is another model that the Baltic States might have tried. That would have been an autarchic free enterprise model. The sickness that has struck us - I'm writing from Estonia, where the situation is only nominally better - is a sickness imposed by open borders neoliberalism, where rich countries enjoy an advantage and poor ones cannot dig themselves out of the hole. We have the same problems as much of Africa! Had we done the protectionist thing and nourished free enterprise in three independent and Western but nonetheless partitioned Baltic States, we would have had a better effect. Free enterprise on the national level, with the more resilient small and medium firms incubated until they gather strength - that would have been my preference. There is much to be said for the systems of Finland and Sweden, if we could only rid them of the nanny state mentality. Of forcible income redistribution. I wish we had kept some of the cooperative traditions of Baltoscandia of the old days. Look to Israel and their old sabra mentality too, and the start-up attitudes of the present.