Harbingers of a new false dawn?

Three newly-elected and sworn former political-emigré Latvian parliament or Saeima deputies met informally with other ex-diaspora (the new terminology) Latvians living in Riga on a Friday evening and spoke with general optimism about what they expected the new Saeima and government to achieve.

Rasma Kārkliņa of Vienotība/Unity (as were the others, Atis Lejiņš and Imants Lieģis) talked about her hopes for reforming and speeding up the system of justice and fighting corruption. The others (Lieģis, minister of defense in the previous government, arrived late because of another engagement) were also upbeat.

Atis Lejiņš took some mild flak for purporting to belong to two political movements at once – Vienotība and the Latvian Social Democratic Workers' Party (LSDSP in Latvian). Its glory days as an exile movement in Sweden under its then leader Bruno Kalniņš long gone, the LSDSP is a borderline crackpot (my personal view) party that ran and lost in the October 2 election as part of the Atbildība/Responsibility ticket. Atbildība plastered Riga trolley-busses with the image of a woman (one of their candidates) putting her head in a noose (because of mortgage debt). This prompted the observation – “ticket number 9 – for hanging yourself”.

Lejiņš said he hoped the LSDSP would elect new leaders in January and then be able to possibly join or align with the Sabiedrība Citai Politikai/Society for a New Politics, a “social democratic lite” member of the Vienotība alliance. We shall see if the younger members of the LSDSP succeed in unseating party leader Jānis Dinēvičs, featured in the election poster campaign dressed and made up as a homeless beggar.

Harking back to 2002

The whole scene reminds me of 2002, when the Vienotība member party (and the party of prime minister Valdis Dombrovskis), Jaunais Laiks/New Era got elected and off to a promising start, speaking of clean and efficient government. The new government's Minister of Health, “Mr. Golden Hands” (as an undeniably good spinal surgeon) Āris Auders was exposed as a double dipper who received state health insurance payments for operations while also soliciting gratuities from his patients.

The new government of Einārs Repše then went on to consolidate remuneration for government ministers in a way that looked like (unless carefully explained) granting a huge pay raise to all ministers without them having a,chieved anything to show that they merited this apparent raise. Things did not go well after that and the Jaunais Laiks-led government proved to be a false dawn for anyone hoping to see an end to corruption and incompetance in the governance of the country.

I bring this up because the euphoria surrounding the victory by Vienotība in the recent elections has been shattered (or should have been shattered) by revelations that Vienotība deputy Silva Bendrāte has been in the pay of Latvia's richest man, Ventspils mayor and oligarch Aivars Lembergs, who faces criminal charges for money laundering and other economic crimes. Among other things, Lembergs used Bendrāte as a straw man (lady?) to buy a radio station in western Latvia.

To be fair, Bendrāte got economically entangled with Lembergs in the the late 1990s, before it was glaringly obvious that he was probably accumulating/skimming/extorting millions from lucrative transit-related (oil, fertilizer) businesses in and around Ventspils. Lembergs is another long story, but as a millionaire mayor, he is anything but Latvia's Michael Bloomberg.

Economy still comatose?

The economy also got mentioned in the Friday night discussion, with discussion moderator and one of the editors of perhaps Latvia's last independent publication, Ir, Pauls Raudseps talking of many signs of recovery. Harvard graduate Raudseps basically quoted from his own column in Ir where he talks of a more than 40% rise in exports and a 10 % increase in retail sales as indicating that both the external and domestic segments of the economy were recovering.

I don't doubt Pauls' mastery of the figures, but it must be remembered that these figures come against a background of month from year-earlier-month declines in retail turnover of more than 30 % in September through December of 2009. So, at best, this is a bottoming out at a level well below that of 2008 (where, of course, we were experiencing consumer spending on crack). Nonetheless,  the Latvian central statistics agency website shows the curve significantly below 2006, which is before the party leading to the crash of the past few years was fully pumped-up. So it is nothing to get excited about, sort of like detecting slightly higher heartbeat, blood pressure and other vitals in a comatose patient. It doesn't really change the comatose state, does it?

Gray economy or anarchistic improvisation?

Another issue raised in the informal discussion with deputies Kārkliņa, Lejiņš and, later, Lieģis, was the problem of the “gray economy” and tax evasion. The very word “gray” defines the problem, because what we are talking about is economic activity that is non-criminal (not drug trading, laundering of stolen goods, fraud, counterfeiting) but fails to pay full taxes.

I think the reason why there is such a gray economy in Latvia goes to the core of my failed state thesis. As I have repeatedly written, Latvia is not a classic failed state, like Somalia where whacked-out gunmen careen through the streets in “technicals” randomly shooting automatic weapons at stray dogs and yelling the equivalent of “yee-haah” in the local dialect. Latvia is a failed state lite because the trust of the population in the state (not really there to begin with) has been irreparably broken by the behavior of those charged with governing the state and by the behavior of the socio-economic elite in general.

So what is the gray economy? Certainly, much of it, the big-money part of it is “grabbers” who simply are accumulating personal fortunes by breaking the law that says one has to pay taxes (I will spare you anarchist arguments on the legitimacy of taxation, because I don't believe these people are even aware of them). I think that another significant element of the gray economy is the spontaneous, chaotic formation of alternative structures to the state that has “failed” the population and lost its trust. In other words, many entrepreneurs evade taxes and pay their employees in envelopes because they know the money will be better used this way. It will not contribute to paying for the world's most expensive (per meter of span) bridge across the Daugava river or other boondoggles. It will not maintain largely useless and hostile bureaucracies, such as a State Revenue Service that (the example is a lady who spoke up Friday night) harass a small, tax-paying private child-care center over petty matters while millions in taxes are owed by the “grabbers”. To contnue paying taxes under such conditions is a form of law-abiding masochism.

In short, a good part of the gray economy is an anarchistic improvisation to make up for what the state cannot, will do, or is and will be incapable of doing for the foreseeable future.

I have previously brought up the concept of “return on taxation”, which, in Latvia, is negative and getting worse as public services are cut and underfunded. But this is a general case of everyone making economically-motivated decisions, even when it comes to obeying the law (at least in case of malum prohibitum – not doing forbidden things that are not evil in themselves). Thus, in breaking speed limits or jaywalking, we take a risk of a fine in exchange for getting somewhere a bit faster. We also pull out of poor investments to avoid economic loss. So it is also logical that we pull away from non-performing “assets” such as the Latvian state, even if there is some risk of penalty (against the strange background of – the larger the sum we rip off /or deny getting ripped off by the state, the less likely we are to suffer for it. The risk is greater being a day late with the pendanticly calculted social tax on four employees at a day care center).

At the end of the meeting with the three former exile Latvian deputies, it was agreed to give the new government 100 days to set its course before making a judgement. Fair enough. However, I have already drawn my own conclusions about the Latvian state and I will not be holding my breath for anything dramatic.