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.