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.


Anonymous said...

you don 't have to worry about that - you have back up plan - you can leave LV and go back to US.
I don't think that SC or some other political power couldn't do better. All of them are planing to live from IMF money. They should optimize government spendings not only on working class people but also on government infrastructure, etc. As Kristopans said: "they had cut ~ 20% of government "machine" that means that every 5th house should be empty". With our Latvian salaries cuts in/on people are wrong chose, we cost nothing, like CH republic peoples... we are Banana republic.


Anonymous said...

pārāk pesimistiski, pat nožēloju, ka norīta izlasīju,
droši vakarā neko jauku ar nevar uzrakstīt

Labi ka ārā ir skaists saullēkts un debesis burvīgas, tas visu izlīdzina.

Anonymous said...

Pārāk pesimistiski!

Labi, ka šorīt skaists saullēkts un burvīgas debesis, tas visu izlīdzina.

Maris said...

I don't think he is being overly pessimistic. However, this is not just a problem that affects Latvia. The whole of Europe is a sinking ship as the BRIC countries slowly move to the fore. The UK has massive youth unemployment, housing is not affordable, mortgages and loans are hard to come by. We are about to endure a round of swingeing cuts. Blame it on the Chinese - it's their cheap money that caused this!

Anonymous said...

I figure Juris is in a rut and can't get out. His pessimism is absolutely incredible.I'd feel sorry for the guy but I think he enjoys wallowing in misery like a pig in mud!
Most of us in Latvia feel relieved that the voters have learnt not to be so gullible and are willing to look life in the face. They didn't fall a second time around for all the bunk that an expensive but obviously totally ineffective PR campaign tried to feed them about the future if they voted for the PLL party.

Juris Kaža said...

Where are the factors that point to a quick, stable recovery with both exports and domestic demand sustaining economic growth? Do we see EU funds going to sustainable, job creating project or simply being left unused?
Decreasing state spending for salaries and transfers (pensions, benefits) cuts disposable income, as does raising taxes.
This is not pessimism, this is not a rut, these are facts.
It has nothing to do with being pleased that completely irresponsible and corrupt idiots didn't win the election.

eternal optimist, what else is there said...

no juri, those are not facts and you know it.
at least not the full picture.
well written to start with but you start listing your nightmares again towards the end.
do you, or anyone, really believe that they now will "let the wreck drift for an undetermined period".
no, the very hard work of pointing the ship in the right direction and get the underdimensioned engines going will continue.
and you will see it.
there's no way back.
congrats latvia, you did well this weekend.
you made those in the lifeboats at least start looking over their shoulders.

Vid Beldavs said...

The government that has been elected has the strength of a significant victory and the also the strength of being at the edge of the abyss. It would be prudent for all stakeholders - whether the IMF, or the major banks, or even forces in Russia and China to look at how things can be realigned to lead to a stable recover. There are ways to do this in the present situation. The IMF should throw a bone - they cannot afford a disaster now any more than Latvia itself. The banks would benefit from more repaid loans even if on modified terms. But, much more can be done.

This is a great day for Latvia! Contrast this vote with the massive demonstrations in France where the public is attempting to derail the much needed adjustment of the retirement age from 60 to 62. The Latvians clearly have resolved to solve their problems. In the end they will be much stronger for it.

Izis said...

Boring. If I didn't already know you were Latvian I could immediately tell by your attitude: we're all going down on the Titanic, but I'm the smartest one here, because I saw the iceberg first.
I'm with the eternal optimist and and anonymous 4, even if we are just trying to melt the iceberg with our cigarette lighters.

Madara said...

Ok it looks like We are gonna have a some "good" politicians for 4 years, I mean “good” in the sense that they are not gonna be thieves (I hope so, we had enough of them). But is it enough? Is gonna change the economy and social policy? No, It's gonna be THE SAME (like almost last 20 years) that bring us this disaster. Too many people is leaving the country and despite our economy it’s gonna improve in macroeconomics, This is gonna be an illusion. The improvement we’ll be just because of privatizations. We will see real privatizations and hidden privatizations (like in educations and health-care), of course Latvian state will get some cash money and savings but Latvian state will become poorer and the most important thing, an important part of inhabitants they’ll be excluded for a good education which is like a economic suicide for the future… And for the next crisis we won’t have almost nothing for privatize and we will be so few people in the country… so…the future it’s out of Latvia. I’ll be off.

Miacek said...

@Madara ''But is it enough? Is gonna change the economy and social policy? No, It's gonna be THE SAME (like almost last 20 years) that bring us this disaster.''

You are totally correct! The fact that Estonia has been better run and there's somewhat less corruption here (and our politicians would boast about it), it's still in the same league with Latvia with no end of all of this in sight. There have been fundamental flaws in the line that our political leaders have chosen. I believe the author has a point, even though he's obviously skewed to the political left. It's quite clear that our tax policies do not encourage setting up new businesses or creating work places.

The more recent decisions of our leadership (since the crisis erupted), have just brought more pauperization and consequent loss of purchasing power.

*Miacek (Estonia)*

Anonymous said...

Miacek, if you buy into Hudson's "point" you are buying into Soviet mentality. Juris sees it and presents it for what it is - a russian approach to governance in the broad sense. It really is that simple, although for obvious reasons, Estonians, Latvians and Lithuanians are often unwilling to say it directly. If Latvians don't get their heads around the situation, they will disappear as a people, and will have nobody but themselves to blame. The old EU could care less - we are simply a market, not nations.

Anonymous said...

@Anon: you are very well-versed in post-Soviet Baltic political propaganda, I must say.

Any questioning of the government and their (socio-economic) course simply undone as ''pro-Soviet'' which of course is a ''Totschlagsargument'' in this part of the world. How very simple it is!