Sunday, October 31, 2010

Latvia patches together a two-party coalition government

Outgoing and incoming Prime Minister Valdis Dombrovskis Vienotība or "Unity" party alliance has managed to patch together a two-party coalition government that clearly reflects the emerging political tensions inside both the alliance and the coalition as a whole.
Vienotība will get seven of thirteen ministries, including Defense, the Foreign Ministry, the Ministry of Interior and the Ministry of Finance, with the remaining posts going to the Zaļo Zemnieku/Green Farmers alliance, a political faction strongly influenced by Ventspils mayor Aivars Lembergs, an oligarch under criminal investigation for money laundering, bribery and other crimes.
The two-party coalition was formed after effectively pushing aside the nationalist Visu Latvijai/Tevzemei un Brīvībai LNNK (All for Latvia/Fatherland and Freedom) alliance, which was included in coalition talks immediately after the election. This was a result of internal conflicts in Dombrovskis' alliance, with the centrist Sabiedrība citai Politikai/Movement for a Different Politics objecting strongly to the present of what it considered radical nationalists in the government.
This development confirms predictions this blogger has heard for months that once in power, "Unity" would soon dissolve in "disunity" as latent political and personal ambitions rip apart the fragile electoral alliance. It is also unclear to what extent Lembergs, threatened with prosecution for numerous economic crimes (but still the Green/Farmer choice for Prime Minister in the recent election campaign), may use his influence to disrupt the new government. A "worst case scenario" could be that the Green/Farmer coalition deserts Dombrovskis to ally with the second place, pro-Russian Saskaņas Centrs/Harmony Center, leaving (dis?) Unity in opposition with its spurned partner, the nationalists and the Par Labu Latvija/For a Good Latvia alliance representing oligarchs Andis Šķēle and Ainārs Šlesers.
The choices for ministers that have come to light so far are not impressive. Despite tens of thousands of negative (minus) votes, Linda Mūrniece has been nominated to continue as Minister of Interior. In the outgoing government, she angered police unions, sent the riot squad against protestors in Bauska and was caught driving her children to school in a government car.
Artis Pabriks, a former foreign minister, has been suggested as minister of defense, replacing the otherwise competent British-Latvian Imants Lieģis, who, after working hard on reforms and spending controls at the ministry, is now returned to a seat in the parliament or Saiema, thank you very much... Ģirts Valdis Kristovskis, a former nationalist and former defense minister, has been nominated for the post of foreign minister.  Artis Kampars, whose English-language skills proved second only to "Nothing Special"  former finance minister Atis Slakteris,  has been nominated to continue as minister of economics a outward facing ministry if anything.
The emerging government also faces its first major scandals. The website "" (meaning "Enough, already") led by hatchet-job journalist Lato Lapsa, has disclosed that Silva Bendrāte, a "Unity" parliamentarian, has been secretly financed by Lembergs, who used here as an intermediary to buy a radio station in the western Latvian district of Kurzeme. Bendrāte says she didn't know of Lembergs' possible criminal activities when she agreed to the deal some 13 years ago, having perceived the Ventspils mayor as a dynamic, capable politician.
Also under attack from ""  is newly-elected "Unity" candidate Lolita Čigāne, a former head of the anti-corruption group Delna (the Latvian affiliate of Transparency International). Čigāne and her husband Nils Students, who own a boutique in Riga, paid an administrative fine several years ago for bringing items such as kerchiefs and other textiles from Turkey through customs without paying import duties. Čigāne says this was inadvertent and the matter was settled after she paid a fine, Moreover, the fact of having an administrative violation does not create a dependency on outsiders, as may be the case with Bendrāte's relationship with Lembergs.
"" is a strange website, using the skills of investigative journalist (formerly of Diena) Baiba Rulle and Agnese Margeviča, as well as the controversial Lapsa. The site publishes copies of documents backing its allegations of corruption, duplicity and incompetence, and it seems to show no political favoritism, especially considering Lapsa's almost foaming-at-the-mouth editorial attacks on Bendrāte and Čigāne. He accuses both women of ethical depravity and calls them liars.
This is a bit harsh -- I would give the benefit of the doubt to Bendrāte's claims that, back in the late 1990s, Lembergs was not seen as an evil, manipulative oligarch. If Lapsa's harsh judgement of Čigāne were to be applied across the board, then no one with a parking ticket, a speeding violation or a youthful citation for public drinking or littering should every run for elected office. "" is doing a remarkable job of publishing documentation of corruption and depravity -- it is a sort of Latvian "Wikileaks", but its editorializing crosses the line as far as being fair, balanced and giving some leeway to  the possibility that people in politics can make honest mistakes.
As for my take on the new government -- it is starting to look a bit half-assed, to use an American term, and I don't see it lasting the next four years. Dombrovskis faces the almost impossible task of cutting another LVL 1 billion from the budget over the next two years, turning Latvia into a nightwatchman state at best, with drastic cuts (public statements notwithstanding) in pension, medical care, education, as well as sharp tax rises just around the corner.
The government still believes it can join the Eurozone in 2014. I think this is highly unlikely. 2020, perhaps. The pauperization of the population by wage cuts and unemployment will negate any effect from tax increases (who can afford them?) and the targets for a reduced budget deficit will not be met. Emigration is on the rise -- official statistics indicate that over 7700 Latvians left the country in the first nine months of 2010, which is probably only the tip of the iceberg (I would guess that in reality, two or three times as many have left and will not return in the foreseeable future).  There is also an economic logic to tax avoidance or evasion -- the population has experience and will continue to experience a drastically falling "return on taxation" -- more taxes, worsening public services.  So why, purely in terms of economic calculation, should anyone make an effort to pay?
The new government, most likely, will be formed in the next few days, but it will continue to preside over a failing state lite. I see nothing that will change that.

Sunday, October 03, 2010

Latvia: Re-electing the "best" crew for the Titanic

The Latvian election has ended in victory for the current coalition and defeat for the attempt by Latvia's oligarchs under the banner of “For a Good Latvia” (Par labu Latviju-PLL), leaving them only eight seats in the 100-seat Saeima or Latvian parliament.
The sitting Prime Minister Valdis Dombrovskis' alliance “Unity” (Vienotība) will have 33 seats in the Saeima, the opposition Harmony Center (Saskaņas Centrs) 29, the current coalition member, the Greens/Farmers' Union (Zaļo un Zemnieku Savienība) 22 seats and the nationalist alliance All for Latvia/Fatherland & Freedom/Latvian National Independence Movement (Visu Latvijai/Tēvzemei & Brīvībai/LNNK) eight seats.
This looks good to a lot of people – continuity, stability and the like. However, one mustn't forget that some central issues were discussed very little or not at all, namely the economy, which is only showing some tentative green shoots of recovery. Exports and industrial production are up, consumer spending, too, from the bottom of a deep, depression-level pit. Economic indicators seemed to be bumping along the bottom, bouncing up a little. Second quarter seasonally-adjusted GDP was up 0.1 % from the first quarter, but still down 3.9 % from the second quarter of 2009, when the economy was already in free fall.
Non -financial investment, which sounds much like capital investments of the kind made in buildings and production facilities, fell just over 42 % in the first half of 2010 from a year ago. Investment of this kind is both a bet on the long term future based on current and recent past conditions, and the basis for the future expansion of production and economic activity.
That all would look bad enough, but it now looks like next year's budget cuts – between 350 million and 440 million LVL, depending on whose statistics you believe, will be at the top of the new government's agenda. These are spending cuts, which essentially means the government will transfer less money to someone, whether it be government employees (further salary cuts or dismissals), lower payments to pensioners and benefit receivers, or to those selling goods and services to the state (less public sector purchasing). Broadly speaking, these massive cuts amount to corresponding reductions and/or reallocations of purchasing power in society.
Simply put, police, teachers and other public sector employees facing another double-digit income cut or unemployment, meaning they will be reduced to subsistence spending on food and shelter. They will become minimalist consumers, which will impact on domestic demand for goods and services provided by the private sector, leading to revenue cuts for companies, lower profits or even losses, and possible staff and/or salary reductions in private companies. The vicious circle will continue.
As for Latvia's so-called export boom, it is great news for lumberjacks (tree harvester operators), sawmill staff, people in the food and metal-smelting industries. There is simply more demand for lumber in export markets and Latvia is supplying it. Not a value added product. Food? Someone has to stir the yoghurt vats. And yes, we import, melt, and re-export lots of junk metal as intermediate metal products, reinforcing rods and some metal gadgets. There are no real, innovative, high-value added Latvian products on global markets, at least not on a sufficient scale.
In order to create and sustain such innovative, high-value-added industries, the country needs productive, educated skilled labor. The pool of such labor is being depleted in at least two ways. First, skilled and educated people (not just country folk wanting to pick mushrooms for a better hourly rate) are leaving the country, frustrated and disgusted with politicians and the corrupt and incompetent system they have created. They are making the easy of choice of governance afforded by the European Union (EU). These emigrants have lost faith in and hope for Latvia, and they have the skills and willingness to learn and adapt, but also the possibility to come “ home” for the weekend for under 50 EUR. Their disillusionment is the product of 20 years of what, in some young adults, would be called “ a failure to launch” - the inability to find a place in life and get on one's own feet.
The pool of skilled labor will also be depleted by the underfinancing of an already dodgy educational system (teacher salaries cut, ageing university professors). The number of students able to afford a higher education (never mind whether they chose the right fields of specialization) will be decreased and those remaining may seek and education abroad and remain there.
The Dombrovskis government created none of these problems, but it took them over as a “fall guy” for the gross mistakes and folly of previous governments, namely, the governments formed by the politicians behind the PLL. That he was rewarded by re-election for not “falling” (bankrupting the country) doesn't mean that things are no longer falling.
On Twitter, I have called the win by Vienotība a re-election of the crew of the Titanic. To be more precise, instead of electing those who would have crashed the ship into a second iceberg, we now have people trying to run the economy who will at least let most of the lifeboats get lowered, then let the wreck drift for an undetermined period.
In other words, there were no choices with any good consequences in this election, just some with less disastrous ones. One thing that is not in the cards is any kind of recovery for several years, probably most of the decade. The Latvian economy will muddle along, stagnating, capital starved, bleeding brains and skills, barely able to pay off what it borrowed because of the folly of governments up until 2009. Chopping trees, melting junk into reinforcing rods and exporting food will not suffice to restore domestic demand, and further cuts in public spending, even if unavoidable (something I don't dispute), will lead to both increased pauperization of the population and emigration of those who refuse this fate. The hardest burdens will fall on those unable to avoid them by emigration – pensioners.