Road monkeys in Latvia (videoblog)

I have made two R-rated (for language) videodiaries of driving in Latvia that were shot while driving to the beach at the White Dune (Baltā Kāpa) in the Pabaži district of Saulkrasti, Latvia. To be fair, driving has improved somewhat and there are reports that the number of cases of "aggressive driving" have decreased by 68 %, according to the police. Were it so...

I suggest you click through to the YouTube site to get the best viewing experience.

Latvia's GDP plummets 19.6 % in Q2 2009

Latvia's gross domestic product (GDP) plummeted by 19.6 % in the second quarter of 2009 from Q2 2008, the Central Statistics Bureau reported.
This compares to an 18 % drop in GDP in the first quarter. In seasonally-adjusted terms, the second quarter drop was 18.2 %. Hardest hit were the restaurant and hotel business down 35 %, and retailing, down 28 %. Manufacturing's contribution to GDP was down 19 %.
Prime Minister Valdis Dombrovskis believes the economy is hitting bottom. Perhaps. But the figures that suggest a year-on-year drop of at least 20 % also mean tax revenues will shrink proportionately (at least), putting more pressure on the state budget, which faces cuts of an additional LVL 500 million for 2010. There has been some optimistic speculation of a reduction in the need to cut to LVL 260 million due to expected higher tax revenues (resulting from VAT and other tax increases). However, I think tax revenues will plummet due to GDP stagnating and citizens and enterprises moving to the grey market to avoid paying higher taxes for drastically shrinking government services.
The critical moment in terms of GDP is not what happens in Latvia, but whether there will be GDP upturns sufficient to generate new demand for labor in other EU countries. If that happens, expect a wave of emigration from Latvia as tens of thousands seek jobs and better governance in Britain, Germany, Ireland, Sweden, wherever... This will further shrink the tax base and extend the stagnation of the Latvian economy -- a situation in large part caused by the mindless budgetary and credit expansion of earlier years.
Somewhat better news is that inflation dropped to 2.5 % in July. But it is a statistic of mixed blessings. Are prices lagging after falling purchasing power, which in turn, is affected by lower revenues and wage cuts in both the private and public secor, which in turn lowers revenues for retailers again, which...? You get the point?
Deflation also increases the relative weight of euro-based loan repayments in family budgets, especially as wages fall as well. Devaluation would only aggravate the problem at this stage of the game.

Latvia: A clusterf**k at all levels?

I used to think that the reason this country is disintegrating is a combination of abysmal national politics unable to deal with the effects of a global recession. Now I have seen that the rot and ineptitude go down to the local level as well. All summer (and, apparently, starting in early spring), the municipality of Carnikava, north of Riga, where my summer cottage is located, has been expanding its municipal sewerage and water network to some of the summer cottage areas. Contractors have dug up the access road to my area, dug trenches, put in some kind of pipes and then repeatedly dug up, filled in and dug up some kind of connection point at the junction of the access road and the main road. I am not a sewerage and water works engineer, but it is obvious to anyone that someone here doesn't know what the fuck they are doing. There is no such thing as installing an expensive sewerage network by trial and error and repeatedly digging trenches and pits with heavy equipment, only to fill them in and dig them up again. And Carnikava is not the only place one sees this. In Riga, several of the main streets have been repaved only to be dug up again a few weeks later because now it is not the road surface that needs renovation, now it is some subsurface system -- water, sewerage, district heating, telecoms wiring, you name it. Irrational and wasteful digging is the rule, not the exception. That goes for Carnikava.

ADDED SUNDAY AUGUST 9

While detouring around this incredible mess, I noticed that this whole thing is being financed by the European Union's (EU) so-called Cohesion Fund. Cohesion means pulling together, but instead, it looks like EU funds have been wasted by idiots keeping me and many others separated from their summer houses by huge pits, fences and mazes of pipes of no obvious purpose. Maybe the EU should investigate WTF these people have been doing for months, with no end in sight, just the "false dawn" of paving the dug-up road again as if everything was almost finished and ready to return to normalcy... NOT!

Here is my video. To see it best, click through to YouTube and watch it in HD :):

The disaster continues...

I have just returned from being in the US for just over two weeks and, due to sporadic internet access, I have been following developments in Latvia sporadically. The main events/news/rumors concern the continued collapse or hapless reduction of health services, including emergency medical care. The so called First Hospital in Riga (Pirmā Slimnīca) is being reduced to a day clinic and private medical facility, with an apparent sharp reduction in emergency medical services. So don't fall ill or have an accident in downtown Riga, which the hospital used to serve. Some 570 medical and non-medical staff are being laid off, effective almost immediately. There are now stories circulating of Latvian physicians applying for seasonal harvest work in Great Britain (through a company in the news because of dubious recruitment practices).

A couple of years ago, I was informed of a Scandinavian-based project to set up a commercial, state of the art hospital in Riga (or buy one of the existing ones) to provide offshore care to foreigners as well as paid and pro bono care for locals. This seems to have come to naught, as a foreign acquisition could be one way to "save" the First Hospital or Hospital No. 1 (a better translation?). One wonders why the government isn't putting up most of Latvia's hospitals, especially the better equipped ones, for sale rather than turning them into skeleton-staffed clinics? Is the government ineptly covering up that it is, in effect, privatizing health care? So why not do it openly and say -- we are selling our "superfluous" hospitals in an international tender. concession or whatever. In other words, allow international health care corporations to bid for these hospitals with certain conditions for providing low cost care to all citizens (or setting up private insurance schemes) rather than closing or downgrading the places as day clinics and letting (some) heart surgeons pick vegetables in Ireland?

Some of the wildest rumors claim that the hospital will be torn down to make room for a casino, a story that could have been fueled by Riga mayor Nils Ušakovs reported statement that he would like to see "a little Las Vegas" in the Latvian capital (gambling and entertainment resorts for tourists, mainly from Russia where the casino business has been shut down or exiled to the edge of the Siberian tundra).

Meanwhile, there are reports that under the still-confidential new agreement with the International Monetary Fund (IMF), Latvia may be raising its value-added tax (VAT) again to 23 %. There are very optimistic predictions that additional tax revenues from this and possibly a progressive income tax should reduce the need for budget cuts in the 2010 budget to LVL 260 million from the previous assumption that LVL 500 million would have to be cut. OK, there is a report that tax revenues in recent weeks have been trailing planned amounts by only 1 %. But I firmly believe that further VAT hikes will not increase revenues and shift transactions in certain items to the gray market. Tax evasion is a normal and, I think, morally justifiable form of resistance to an inept government that has broken the promise of rendering basic services for the taxes it extracts from the population. The government, by suddenly and seemingly irrationally (state of the art hospitals closed or downgraded, pensions cut--although Sweden has done that, too-- other services attacked with a percentage-guided axe swung in the dark) reducing the return on citizen's taxes will inevitable decrease the tax base through salary cuts, unemployment, and tax evasion. The sums to be cut from future budgets will increase, rather than decrease as government revenues spiral downward, spurred by the government's own policies.

Latvian ministries clash over state bankruptcy claim

"The state, in principle, is bankrupt...we are all living on debt. Education has been crushed between the millstones and teachers will be the first to feel it," said Mareks Gruskevics, state secretary of Latvia's Ministry of Education and Science speaking to educators in the western Latvian port city of Liepāja.

Wrong, retorted the Finance Ministry, saying that there was LVL 466 million in the state treasury as of July 16, with some EUR 1.2 billion expected to be paid in by the end of the month.

Gruskevics said that radical educational reforms were necessary, and would have to be executed in a couple of weeks, rather than over the years as had been the case in neighboring Lithuania and Estonia.

Media reports said that Gruskevics, apparently associated with the People's Party (TP), pointed out that TP founder Andris Šķēlē, a controversial businessman and reputed Latvian oligarch, had spoken of the necessity for educational reform ten years ago.

This could indicate that Gruskevics' harsh statement reveals an underlying conflict within the ruling coalition -- the Finance Ministry is run by Einārs Repše of New Era (JL). The TP is enormously unpopular and blamed for exacerbating the economic crisis under former Prime Minister Aigars Kalvitis and his "these are the fat years" attitude toward a debt driven, overheated economy.

At the same the daily Diena quoted Latvian surgeons as saying the suspension of elective cardiovascular surgery would annually condemn at least two thousand persons in Latvia to premature death or incapacitation requiring care. Latvia has made budget cuts and proposed the restructuring of hospitals that are widely seen as a de facto abolition of tax-paid health care as well as emergency care in several parts of Latvia, leaving citizens to fend for themselves. While many employers offer some form of private health insurance, there has been no official plan for a transition to private medicine and no cuts in taxes to make such private insurance more affordable. Leading Latvian businesspeople, meeting with government officials, have harsh criticized the possibility of further VAT and other tax increases as part of a deal under negotiation with the International Monetary Fund (IMF). The IMF, which has not yet approved its smaller loan (the EUR 1.2 billion is coming from the European Commission) to Latvia, is apparently demanding harsher conditions, including tax increases, than the EC.

Dazed and confused and swingin' that axe

Information has been reaching Latvian media about the government's so-called structural reform plans, but it is somewhat contradictory and confusing. It was announced that of 77 state agencies, 50 % would be eliminated. It was not clear why 50 % and not 25 % or 80 %. Nor were the selection criteria any clearer. Some of the changes would affect agencies that were, in fact, museums (like the one at ex-president Karlis Ulmanis* former country home), others were aimed at merging or reshuffling agencies related to the Ministry of Health. Something called the Pharmaceutical Pricing Agency and some other health-related agency would be merged into something called the Health Care Economics Agency (I translate loosely from the Latvian). Whatever any of that means...

What the point of this is evades me. It is clear that by this fall, there will be little or no government funded health care -- no elective surgery, many regional hospitals reduced to day health centers with little or no funding, no more emergency health care except for some remnants in bigger cities (without a national medical helicopter service, private or otherwise, victims of serious highway and other accidents are simply going to die more often.)

As opinion makers and experts queried by the national daily Diena pointed out, there are goals in terms of numbers and percentages for cutting this, that or the other thing (wages, staff, number of agencies) but no vision of why this is being done and what, exactly, it is that the Latvian institutions of governance are supposed to do.

I have raised the issue of reducing Latvia to a minarchy, which is where the reforms and massive budget and government salary cuts all point to, But there is no conscious plan and long term, socially responsible scheme for doing so. As I write, there are reports that the government (the Ministry of Economics) is looking into raising taxes -- imposing a new capital gains tax, a dividends tax and perhaps even raising VAT on top of one failed VAT increase earlier this year (VAT revenues are down). If you are going to completely gut such services as health and education, the right thing to do is to slash taxes and give people more money to buy these services on the private market or to toss their share into a cooperative and non-profit venture such as a cooperative school. It should also promote private health insurance and various mutual insurance schemes to fund what will be within a few months geographically limited pay-as-you-heal health care.

The US is not a shining example of publicly funded health care nor does the US system work all that well, but when my dad fell ill last year and passed away after nearly six months in various kinds of care -- hospital, home assistance, a rehabilitation home -- he didn't leave my mom with a mountain of debt. His private insurance and Medicare/Medicaid/ whatever took care of it.

According to one news report, some small enterprises are taking things into their own hands and switching from on-the-books, taxpaying mode to the grey/barter economy. When agents of Latvia's State Revenue Service raided an auto repair shop, they found it busy with people fixing cars, but no books or records had been kept for many months. Those questioned claimed they were swapping favors with friends. A mechanic working on a car said he was doing the job without pay because the owner of the car had just helped him weed and hoe his garden. If that was true (which it may not have been) what is the Revenue Service's problem? No money changed hands, there was no classic economic activity.

I see a distinct economic and social logic in the grey/barter economy. Why can't a cooperative of auto mechanics trade hours of work (of different complexity) for hours of medical care for their families or repair tractors in exchange for vegetables and milk? The medium of exchange is not money, though it can (and has in some experiments around the world) be reduced to a virtual currency equivalent. Tax that! And at the same time as there is no way presently to extract tax cash from standardized barter transactions (as far as I know) -- one hour of engine tuning = one tooth cleaning at the dentist's or whatever, this system can make up for state failure. The auto repairshop works on the cars of most of the health care workers in their area and, theoretically, builds up a surplus of doctor visit hours, which it can distribute to families of its staff or, as a gesture of solidarity and good will, pool into a "free" health care fund for the indigent in the local area. It is patchwork, but maybe better than the nothing the goverment is pushing toward.

It is really, really hot for a Latvian summer night, so I may be rambling here. Comments are welcome.

Foreign direct investment plummets in Latvia

Foreign direct investment (FDI) in Latvia totaled LVL 16.5 million in Q1 2009 , down almost 94 % from LVL 260.8 million in Q1 2008, but up from a decline of LVL 95 million Q4 2008, according to Bank of Latvia statistics available through the Central Statistical Bureau.

Looking at the Bank of Latvia's quarterly balance of payments bulletin, these seem to be net FDI figures, balancing an inflow of "equity and other capital" of LVL 149.9 million in Q1 2009 (up from LVL 143.9 million a year earlier) against losses by "direct investment companies" of LVL 133.4 million.

A bit confusing, maybe the real economists reading this can comment. To me it looks like FDI is falling, although investment inflow (according to Bank of Latvia) is slightly up. Netting against losses, it seems we are talking about some kind of a burn rate here, but then, the net for Q4 was negative. Is that better? Or simply a case of getting less, thereby burning proportionally less?

The BoL's Q4 report is not very enlightening, it states that FDI for all of 2008 totaled LVL 542.5 million, down 45.3 % from 2007. Whatever it is, it does not somehow look good. Add to that the statistically not very significant but symbolically damaging lowering of the Swedish flag-of-approval in the sale of the media companies Diena and Dienas bizness by media flagship Bonnier Business Press and you have reason to think that Scandinavian investors will shun new investment, if not start a slow retreat from Latvia. After all, the prestigious Bonnier flag still flies (with priority) in Estonia, Lithuania and reputed bandito-land Bulgaria's media scene. And do not Swedish/Scandinavian investors do as do their leading business media (Dagens industri, the mother of all East European business media but its recently abandoned Latvian daughter, as European languages formulate it)?

Cumulative FDI stood at LVL 5.607 billion in Q1 2009 , down from 5.66 billion in Q4 2008 but up from LVL 5.391 billion in Q1 2008 (due to an inflow of FDI during the first three quarters of 2008). Good or bad?

Val the pernicious anarchist

I am inspired on how to shorten the Latvian male name Valdis by my old friend Valdis in the US, who calls himself Val. But the Val I am referring to is Latvia's Prime Minister Valdis Dombrovskis. There has been some media comment, yet again, on the PM's remark some weeks ago that, in an economic crisis, the principle of legal reliance could be suspended.

He was referring to the principle that taxpayers, having been legally required (in effect, forced) to pay taxes, could claim entitlement to certain government and social services. Specifically, the issue at hand was the government's threats (since carried out) to cut pensions that had already vested, in effect reducing the income of pensioners whose employers had paid taxes in anticipation of a certain level of pension payment.

More than 1000 persons have already filed suits with Latvia's Constitutional Court asking that pension cuts be annuled as violations of the principle of legal reliance.

How does this make Dombrovskis Val the pernicious anarchist? If we analyze the situation from a "realist" libertarian viewpoint (big government can only go away slowly), what Val the Anarchist has done is to destroy the kind of grudging compromise that keeps democratic coercive states legitimate in they eyes of most of their citizens. In other words, the promise of services and entitlements for coercively taken taxes is largely kept. People get government pensions in Sweden, Germany, other EU countries. The police and other services are adequately staffed and respond when needed. Sure, there are inefficiencies and irrationalities in the system, but at least your child will not stand in front of a half-staffed school on the first day of school. That will probably be the case on September 1, when school starts in Latvia.

Val the Anarchist has certainly (though not deliberately) exposed the myth of the Latvian state as benevolent robber. In fact, it is a vicious robber, first taking a rather high social tax from employers, then taking away 10 % (70 % if you are working after retirement age) of the confiscated money you were supposed to be getting back. He has destroyed even the grudging legitimacy of the state, feeding a (perhaps primitive) anarchist analysis of state power. And people are acting on it, with anecdotal evidence as well as statistics indicating that tax evasion is flowering again. And why not? If you get nothing after paying two or three "handling fees" to Nigerians offering a slice of USD 50 million from a tycoon or minister who was eaten by crocodiles, you stop paying the Nigerians because they are and always have been a fraud. So why should you finance the state when it gives nothing in return (on a value for money basis) and when it breaks all implicit prior promises, some in a shocking manner -- like the cut-off of state funded elective surgery? It makes perfect logical and moral sense to dodge taxes in Latvia for the simple reason that paying tax is the same as tossing money into the sea.

So Val has inspired all of us to be anarchists. But why is this pernicious? As I have written before in earlier posts, dismantling the state apparatus in a haphazard, head over heels and desperate will leave hundreds of thousands of people bereft of their entitlements. From a purist viewpoint, these were the fruits of productive labor (money) confiscated from them and everyone else, but within the system, they were legitimately expected and cutting them off will cause a painful social disaster and possibly real "anarchy" in the streets.

This is why it is pernicious. If the goal (and, actually, the Latvian government is acting, but not saying that it wants to be a minarchy) is to reduce the state to a minimum, this must be done step by step, allowing a devolution of institutions to the private (both commercial, cooperative and voluntary) sector and deep cuts in taxes to leave private citizens the money needed to buy health, education and security on the market. In realistic terms, this could take a generation or more. Val the Anarchist is making it happen between 2009 - 2011, formally slashing LVL 1.5 billion in expenditures and, unwittingly destroying state revenues by much, much more, which in turn will force huge spending cuts.

The revenue reduction will result from a combination of tax evasion and refusal, as well as the deterioration of the tax base due to falling salaries and minimal corporate profits and the continuing plunge of Latvia's GDP. If GDP falls by 25 %, how can tax revenues, even where taxes are paid with robotic faithfullness, not decline by roughly the same amount.

Latvia's public health care to collapse in November?

Newly-appointed Minister of Health Baiba Rozentāle has told reporters that the public health care system in Latvia will run out of funds in early November unless the government allocates an additional LVL 90 million (around USD 180 million) to her ministry.
Rozentāle (of the People's Party/TP) immediately got into a row with Prime Minister Valdis Dombrovskis (New Era/JL), who said that she had known of the funding for her ministry when she took the job, replacing her party colleague and predecessor, a doctor who resigned fearing that he could not deal with the cuts and restructuring demanded of the public health care system.
Rozentāle said she had been promised 3.4 % of GDP as a funding base for health care. In fact, the present budget offers only 2.89 % of GDP, a figure said to be the lowest among all member states of the European Union.
Soon after this controversy, the Pauls Stradiņš University Hospital, one of the leading health care providers in Latvia, announced that it was halting all state-funded elective surgery, including heart operations. Earlier, the government suspended funding for elective joint surgery or so-called endoprosthetic operations effective July 1. Cardiologists have warned that the suspension of elective heart surgery will lead to a surge of mortality in a country where heart disease is already a leading cause of death.
Rozentāle has generated controversy by suggesting that Latvia's health care system could sell surgical services to Sweden in order to shorten queues for elective operations paid for by the Swedish national health service. The idea, in isolation, was seen as good, but there was public outrage on internet forums that "ordinary" Swedes would be getting surgery in Latvian hospitals that was no longer available to ordinary Latvians.
Meanwhile Latvia's President Valdis Zatlers, a surgeon himself, criticized what he called "chaos" in Latvia's health care system. One can only agree.
The country is moving rapidly toward a pay-as-you-heal system, which actually is nothing new. Since Soviet times, when doctors were vastly underpaid, patients have routinely tipped surgeons and other specialists with "gifts" of scare goods (under the Soviets) or cash (in present-day Latvia). So a patient-financed health care system has existed in parallel to the publically financed (but now rapidly declining) medical care system for many years.

Swedes, not Latvians may get Latvian medical care

Just days after Latvia cut off funding for so-called endoprosthetic operations (hip, knee and other joint replacements), the new Minister of Health Baiba Rozentāle said Latvia could offer surgical and medical services to Sweden in order to reduce queues for elective or planned surgery. Rozentāle said in an interview with the Latvian daily Diena that selling medical services to Sweden would be one way to increase revenues for the Latvian health care system

If implemented, the scheme would mean that Swedes, who are entitled to elective surgery such as hip replacements, could get the surgery done more quickly in Latvia and financed by Sweden's national health service, while Latvians with identical medical conditions would one have private care available. In many cases this would mean that poor, older Latvians would go untreated and, in some cases, end their lives bedridden rather than mobile and healthy after a joint replacement.

The bizarre aspect here is that one would see Sweden's publicly financed medicine become slightly more efficient by buying services in Latvia, while Latvia's once public-financed medical care is essentially being dismantled by budget cuts, leaving local patients with no alternative but medical care paid out of pocket.

In any other context, the export of medical services would be laudable, but it is more than ironic that Latvia hopes to earn money by replacing Swedish hips while cutting funds and allowing its own citizens and residents who cannot afford private operations to spend the rest of their lives as invalids.

Swedes pull out of Latvian print media

The Swedish Bonnier Group, pioneers in setting up business newspapers in the Baltics (Estonian Aripaev was set up before independence in 1989/?/), have sold the the Latvian daily Diena and the business daily Dienas bizness to a local company called Nedeļa, which is run by a former executive of Diena.
My quick take is that both papers (which have been losing money) were sold for a song in a move that basically takes Swedish investors out of the Latvian print media market. It is noteworthy that neither the Estonian business paper, nor the one in Lithuania were sold and remain among the subsidiary Bonnier Business Press priority investments.
It is also a significant signal that the owner of an authoritative business newspaper in Sweden, Dagens industri, is getting out of Latvia. If this is so, perhaps other Swedish investment may follow or at least slow down any plans to expand here. To my mind, regretably but rightly, the Swedes are labeling Latvia as the basket case of the Baltics and Eastern Europe.
On a personal note, I worked for Dienas bizness from 1995 to 2006 and enjoyed that time very much. It is sad to see the paper, developed under Swedish guidance and as part of a group of business newspapers owned by the Bonnier Group, is now cut loose and left on its own. Dienas bizness has been taking increasing desperate staff cuts and salary reductions as advertising revenues have declined.

Added later:

The buyer, Nedeļa, is owned by a Luxembourg finance company owned, in turn, by an Estonian entrepreneur Kalle Norberg and other private investors.

Casten Almquist, CEO of Bonnier Business Press, told this blogger that the sale was mutually advantageous, but the Swedish company, under present economic conditions, saw a somewhat greater potential for developing its assets in Estonia and Lithuania.

John Hedberg, a former Bonnier executive, who advised Nedeļa on the transaction, said that there would be no short-term changes at both publications. Measures to cut costs and restructure both businesses were showing some results, though one would have to wait and see how this played out in the medium to long term. He said Diena and Dienas bizness both were good brands with a good reputation

It ain't just me, babe...

Some people think I am too depressive and pessimistic writing that Latvia has basically destroyed all trust in state institutions and is heading for some form of failed nightwatchman government pretending to rule an increasingly alienated society drifting, at best, into some form of cooperative anarchy (organizing replacements of failed public services privately or by volunteer activity).
In fact, I was gently criticized for my pessimism by a Latvian academic (former "exile" Latvian) I met while grocery shopping.
Now, a prominent businessman/architect in Liepaja has said much the same in an interview with my former employer, the business newspaper Dienas bizness. Uldis Pīlēns says the way that the government has tried to react to the crisis has essentially destroyed public trust in fundamental democratic values -- the so-called legal reliance on getting a just return for taxes and social fees paid. Instead, pensions have been reduced, working pensioners driven from their jobs and teachers reduced to working for less pay educating future generations than Latvian janitors (sētnieki) ar paid for sweeping the streets with a broom made of twigs.
He also says that the behavior of the government in leaping to save the foundering Parex Bank with the first international loans it received, then acting chaotically to appear to cut the budget to get the next tranche (pensions won't be touched, then pensions are cut) has badly damaged Latvia's international image in the eyes of potential investors. A level of unemployment has been created that it will take 6 or 7 years to recover from. So Pīlēns, too, is saying that most of the next decade in Latvia is lost due to the cumulative mistakes and incompetance of several Latvian governments.

Ultranationalists fail to draw a crowd

Despite a widespread and diffuse feeling that Latvia "needs a strong hand", a rally by ultranationalists, including a group calling itself the heirs of Latvia's pre-war fascist Pērkonkrusts (Thunder Cross) movement, failed to gather more than 60 or 70 persons at a rally in front of the Cabinet of Ministers building.

The radical nationalists had hoped for at least 1000 people to gather to angrily protest the massive budget cuts that have left teachers on the minimum wage, public services gutted and many pensioners destitute. While there was simmering anger at a rally called by Latvian trade unions on June 18 to protest the same cuts. Fortunately for Latvian democracy (such as it is), the population is not ready to rally around populist authoritarian leaders -- yet.

More devaluation talk

Blogger Edward Hugh has yet again returned to the subject of devaluing the lat, something he notes has also been urged by former IMF chief economist and Harvard professor Kenneth Rogoff. Prof. Rogoff spoke at a traditional Swedish political shindig on the island of Gotland, known as Almedalsveckan. This has been a traditional forum for political and economic debate since the late 1960s and gets considerable attention in the Swedish and Nordic press. The Harvard economist said that Latvia should devalue as soon as possible, but probably wouldn't.

At this point, my view is that devaluation, while perhaps inevitable, would trigger a worst of two worlds scenario. Key elements of the public sector have already been gut-shot with both barrels by massive budget and salary cuts. More cuts are coming and, as I wrote in an earlier post, Latvia is unintentionally bumbling its way toward being not only a failed state, but a failed minarchy (a place where rag-tag remnants of a police and court system, a scattering of skeleton-staffed schools, and a largely black market health care system are all that remain of former state functions). Good minarchy, of course, is possible through a long-term, planned transition, but that is another story.

There is much speculation about where the lat would go if it were cut loose. Some say that a devaluation could be as bad as 50 % or more. The conservative variant is that the lat is allowed to float in a plus/minus 15 % corridor. Both scenarios would boost inflation , reduce imports and cripple the ability of enterprises to retool. Swedish banks would write off huge losses, turn distressed assets over to management companies that have already been formed, and declare (0r effectively continue) an indefinite lending moratorium. Many Latvian salaries would, effectively, fall to Third World levels (at 50 % devaluation, plus likely 2010 budget cuts, we could see teachers making under $150 a month). While the prospect of labor at devalued rates might attract some foreign investors, it will also be a great incentive for Latvians to emigrate to take any minimum wage job in any other "Old European" country. I met an American who has a small business teaching English. A few years ago, most of his students were taking English to deal with foreign customers and correspondence, or to study abroad for a year. Now more than half are taking English as preparation for emigration. In other words, the cheap skilled labor will be gone. As soon as the recovery starts elsewhere, thousands or tens of thousands will leave, making not only a choice of economic advantage, but also a choice of better governance (as I have written earlier)

The ultimate clusterf**k?

Latvian media are reporting that because of administrative and reporting delays, so-called working pensioners who quit their jobs in June because of new laws cutting their pensions by 70 % will receive neither their salaries nor full pensions in July.

Apparently, this is the result of a combination of cut-off dates for preparing pension pay-out lists and reporting delays to the appropriate social services agencies. In some cases, the disparity (being treated as a 30 % pensioner when one has, in fact, quit work) may extend into August. In any case, a number of people who drew both a salary and a full pension they had earned legally earned until retirement age will be effectively destitute for several weeks this summer. Even the State Social Insurance Agency admits this will happen. Those with mistakenly reduced pensions will be compensated in August.

This is an event that adds insult to both the insult and injury of the 10 % pension cuts mandated for all pensioners as well as the 70 % cut for those still working. There is reason to regard pensions as entitlements equivalent to a personal property interest and the reductions amount to a confiscation (without compensation or recourse) of vested property rights.

It is something that further deteriorates the already badly shaken remnants of public trust in the Latvian government and the state as an institution. It will stimulate further tax evasion and recourse to non-state means of financing one's "retirement" (saving from an off-the-books salary, registering a young relative as working while the retired person, in fact, continues to work and collect a full pension). Under present circumstances, there is no "moral" reason to condemn any means by which people affected by these measures retaliate by ripping off the state. One can only say-- Right On!

Bumbling toward minarchy in Latvia

I have always been interested in libertarian politics and consider myself a libertarian on most issues -- decriminalizing drugs, legalizing gay marriage, striking victimless crimes from the law books, abolishing compulsory military service, etc. Broadly speaking, libertarians are divided into two camps -- minarchists, who favor a small, night watchman government, and anarchists, who prefer to let society self-organize without a state.

Without going into that debate, an interesting observation on the topic of this blog is that with the massive, rushed and hectic budget cuts that Latvia is undertaking, the country is, in fact, bumbling and stumbling in the worst possible scenario toward becoming a minarchy. When the LVL 1.5 billion are cut from the government budget over the three years 2009-2011, and when the real effect of the formal cuts on tax revenues (and tax evasion) take hold, it is likely that Latvia will be able to finance little more than a skeleton police force, a small professional military and some kind of court and criminal justice system. At least on paper.

The problem is that states, especially states with bloated bureaucracies and massive inefficiency in public administration such as Latvia, have created dependencies and reliance by the population that is very painful to cut and betray in the kind of series of short and desperate actions that the Latvian government is taking.

Employers have been compelled to pay social taxes on behalf of employees, among other things, for their pensions, and these pensions (some have argued, with considerable merit, that they are the vested private property of pensioners) are now being confiscated, all expectation of any benefit from the compulsory diversion of income has been shattered.

If Latvia were seriously moving toward minarchy, an essential step would be to cut social taxes and leave employees with more income to divert to private pension insurance schemes. Younger employees could have the option of spending some of their income to support sick or elderly parents or grandparents.

Since the government is, essentially, gutting the state health care system, it should also cut taxes to allow individuals to buy private health insurance and do nothing that would inhibit the rapid formation of private hospitals and other medical care facilities, where private insurers would pay most of the bills.

Education is another area that has been bulldozed by the government, making teaching the lowest legally paid "profession" in the country, assuming that one cannot be paid below the (reduced) minimum wage in the public sector. However, no steps have been taken to encourage the creation of private and cooperative schools and of "informal" education.

By late summer, it will become clear that the schools in Latvia will not open on September 1 (there may be a "stay-away" strike on the first day) and will be seriously depleted of teaching staff if they do open. So the issue of alternative, non-state education will be acute by fall. Creative solutions may have to be found, such as, perhaps, gathering pupils at library internet access points for instruction by internet video (rural children could be charged a small fee to watch lessons at private schools in Riga).

The police will also be severely affected by the cuts, with the result that the ability of the police to prevent and investigate crime will deteriorate, bribe-taking will increase and the police force will continue to lose its best and brightest to emigration and private sector work.

Little has been done to create an alternative system of private law enforcement by expanding the role of private security companies (perhaps allowing certain areas of the country to invite tenders for private law enforcement coverage).

In short, Latvia has unwittingly started on the path to minarchy, but has nothing resembling a transition plan, nor any substantial analysis of how this can be done. Indeed, the government is still projecting the illusion, to the public, that its current path of budget cutting will somehow lead to a system that still provides state-funded pensions, health care, education and law enforcement when, in fact it is (unintentionally) reducing these government entitlements and services to a completely inadequate and disfunctional level. The Latvian population will, over the next 18 months, be forced into the worst kind of minarchy. It remains to be seen if civil society can somehow improvise around this process.

Latvian union rally June 18

Here is my video shot at the June 18 rally called by the Latvian Association of Free Trade Unions to protest the drastic budget cuts that will affect working pensioners (a 70 % pension cut), teachers (a 50 % salary cut) and ordinary pensioners (a 10 % cut).

Budget cuts and "futuricide"

I am personally not feeling the Latvian budget cuts, yet, because I work in the private sector, am healthy and completed my formal education many years ago. I can see some bad scenarios where the someone in the government decides that every ministry, every department and every Dog Welfare State Agency doesn't need their own subscriptions to LETA times dozens. Instead, the government makes one offer that cannot be refused to each news and information provider (we compete with Baltic News Service/BNS), for one megasubscription that costs, say 60% less than the sum of all previous subscriptions. And then we are f**ked...
But before than happens, I am thinking that my then 14-year old will have to go back to school on September 1 (his birthday is August 31), and the teaching profession in this country will have had its salaries slashed by 50 %, getting paid a reduced minimum wage and will face another likely 20 % or more cut just as the school year warms up and the government has to prepare its budget for 2010. I think the school may be empty on opening day.
To be fair, there are probably too many teachers for too few pupils in Latvia, and also too many small schools. What this would mean in a rational world is to make a skills/effectiveness assessment of all teachers and early-retire, train/upgrade or gently dismiss those who cannot be better utilized. It would mean having a nation-wide school bus network to bring pupils to magnet schools in almost any weather, also upgrading rural roads in the medium term. It would mean implementing online teaching to make the best of the best teachers... etc. etc.
Almost none of this is being done in Latvia. Instead, the government is creating an irresistable disincentive to remaining in any teaching job. Any young, able-bodied, English-skilled teacher would be a fool not to emigrate or, alternatively, to find any work that pays more than the sinking minimum wage. And that is very likely to happen if the economies of Western Europe pick up, as they will, ahead of Latvia.
Education is the basis for the competitiveness of any modern society, or any society, for that matter. We don't see too many remnants of societies that, say, didn't teach using the plow or the bronze axe from one generation to the next. Back in 15 000 BC, the tribe that cut back the piece of prime mammoth steak fed to the wise man who taught spear-throwing to the young didn't eat mammoth steak in the next generation. It was back to roots and berries and mushrooms, and when they had to save on paying the mushroom teaching medicine man with the best of crop berries -- well, the story about you can eat all mushrooms but some are eaten only once played out. The tribe that scrimped and saved on education, in effect, killed itself in its own future, committing futuricide.
Latvia, whatever its intentions, is effectively committing futuricide rather than rationally reforming its educational system. Instead, it simply won't have one, nor much of a future.

Budget cuts pass, more to come and is disaster accellerated?

The Latvian parliament, the Saeima, approved budget cuts of LVL 500 million (around USD 1 billion) on June 16, practically sparing no one in the general population of painful reductions of living standards. Hardest hit are pensioners and teachers. Working pensioners will see the pensions they earned in their working lives up to retirement age reduced by 70 %. Teachers' salaries will be slashed by almost half and they will be paid (per teaching load, most have more than one) barely over the reduced minimum wage for public sector employees. Other pensions will be slashed by 10 %, government employee salaries by yet another 20 %.

But that is only the beginning. Next year's government budget will also have to be cut by an estimated LVL 500 million, followed by another similar cut in 2011. In other words, one scenario is where there are further salary cuts and reduction of minimum wage, or there are massive lay-offs of public sector employees, something that has been partly avoided by across-the-board wage cuts.

It is reasonable to say that these estimated budget cuts are based on optimistic assumptions about tax revenues, not taking into account (although Minister of Finance Einars Repše seemed to say in a radio discussion show that tax base deterioration was taken into account) the impact of mass unemployment, reduced purchasing power (less VAT revenue), drastic falls in corporate tax revenues and rapid growth of the grey and black economies. People, seeing that the taxes they have paid up to now are either wasted or result in no entitlements (pensions, health care, education), will simply evade paying taxes as a waste of their rapidly declining income. Others (tens of thousands, if economies outside Latvia recover first) will become economic migrants, most never to return, thereby leaving the Latvian tax base.

I can see how the 2009 cuts were, somehow, pulled off, although I suspect, by September 1, I will have to start thinking about home-schooling my son, since the public education system in Latvia is being de-facto abolished. What I don't see is how the other cuts can be made on top of what has already been done. A public sector can be drastically slashed or abolished if the population, at the same time, is given a sufficient increase in purchasing power to afford private, competitive alternatives and such alternatives (modest cost private/cooperative/non-profit education) can be started and up and running as state-financed institutions wind down.

What is likely is that when the "real" figures on which the 2010 budget cuts must be based come out, the deficit (due to tax base deterioration and lower revenues) will have increased by several hundred millions and the downward spiral toward disaster and economic stagnation will continue and accellerate.

The Prime Minister Valdis Dombrovskis, on a morning TV show as I write, says that the EUR 1.2 billion in international loans will be entirely spent on keeping the government running, not a cent for economic stimulus. This will be left to the EU structural funds, caught in a bureaucratic log jam or used (hitherto) for such interesting projects as a laser show in Latgale, the rural eastern part of Latvia.

The 4.8 % solution and fish with socks?

Pauls Raudseps, a senior commentator specializing in economic matters with Latvia’s leading daily Diena and I got into a discussion about whether Latvia could recover from its present economic crash. It started on a new Latvian television talk show and continued afterwards. Both on air and later, Pauls pointed to a 4.8 % rise in Latvia’s industrial production in April from March. His argument was that this was the beginning of a turnaround in the Latvian economy that would lead to the real start of an export-led economic recovery in six months.

Pauls also said that he believed Swedish economist Anders Åslund’ s prediction that East European economies (including Latvia?) would recover faster than the West, thereby precluding a scenario where recovery in the West leads to mass labor emigration (based on widespread and rational “no future” expectations) and permanent stagnation in Latvia.

I have looked at what I believe are the same statistics that Pauls uses. The April month-on-month rise seems mainly to have come from increased production of clothing (+14.6 %) pharmaceuticals (+ 11.6 %), and chemicals (+9.7 %). These are seasonally adjusted figures. In laymen’s terms, a mathematical formula has been applied to even out surges of certain kinds of production related to the seasons – wood is easier to harvest and process when the forests are dry and the access roads are clear, etc. The other statistical comparison is adjusted for working days (holidays on workdays, etc.) on a year-to-year (April 2009 compared to April 2008) basis, which showed production plummeting by 16.9 % from April 2008, and by 18.7 % when manufacturing alone is measured. So no glimmers of hope there.

The April statistics are not broken down proportionately, but there is a proportional breakdown of exports, which Pauls and others think should be the motor re-igniting the Latvia economy. I don't disagree-- in theory. These figures are disastrous. Exports are down 30.9 % from April, 2008 and have plummeted in all of the largest export groups. Food products, comprising 18.8 % of total exports, fell 6.8 %, forest industry exports (15.7 % of total) plunged 40.7 % and textiles (including clothing) at 5.5 % of the total were dowm 31.1 %. Only knitted goods, which include socks, I suppose, were up 0.9 %, while a fast rising export (except for re-exported fuels) was fish, up 16 % and just behind pharmaceuticals, up 19%.

The thing is that fresh, frozen and smoked fish comprise only 1.7 % of Latvia’ s exports, about the same as “socks”, at 1.8 %. Even the seemingly rising rocket of pharmaceuticals makes up 5.6 % of total exports. I also suspect that a large percentage of pharmaceutical exports are contract-manufactured pills made by Grindex and other companies for a market with relatively steady demand. Finally, in the month of April alone, on a working days adjusted basis, the production of textiles as a whole (a larger category than knitted goods), was down 59.8 % from the year before.

I find it hard to see how the 4.8 % uptick in industrial production and seeming higher exports of fish and socks (and pills) are serious indicators of an upturn and the green shoots of recovery. It still looks to me like the Latvian economy is crashing. The accelerants of the crash, such as rapidly diminishing domestic purchasing power, a total lack of affordable financing for new businesses (or any business), deflation and an uncertain tax environment (several contradictory plans in one day and tax hikes still looming on the horizon) and the certainty of increased workforce emigration at first opportunity, are all there. The massive cuts in public spending and the even harsher cuts we can expect i 2010 and 2011 will increase unemployment and further cut or "export" the purchasing power of Latvians (with only some showing up in national accounts as expatriate labor remittances).

At some point things will “bottom out” in a kind of prolonged stagnation for the better part of the next decade. It doesn’t look like there is more to hope for than that. Any hopes should be placed on how the flows of repatriated earnings from up to 500 000 Latvians working abroad by 2015 (my wild guess) will be spread in the local economy.

A week or summer of unrest ahead?

This week, Latvia's parliament, the Saeima, will vote on approving the drastic LVL 500 million (USD 1 billion) budget cuts for 2009, that be followed by equal if not harsher cuts for 2010 and following years. Parliament will apparently be in session Monday, June 15 to conduct regular business and will resume an emergency session on June 16 to deal with the budget matters. The final vote may take place on June 17, a historically dark day when Soviet forces moved in to occupy Latvia in 1940. Just coincidence, but somehow ominous.

The budget cuts will go across the board, slashing government salaries by another 20 %, as well as reducing pensions by 10 %, but slashing the pensions of those still hold jobs (mainly out of economic necessity or because they enjoy their work and are able to do it) by 70 %. The proposed progressive income tax will not be implemented this year. One of drafts that popped up during a hectic and confusing Cabinet of Ministers meeting proposed starting the scale of higher (marginal?) tax rates at LVL 300 per month. This caused an uproar.

In short, the austerity package will have a massive direct and indirect impact on living standards and it is no surprise that the Free Trade Union Federation of Latvia has called for protest rallies in Riga and several other Latvian cities on June 18. It could be the largest public gathering since the pro-independence demonstrations of the late 1980s, where up to 250 000 people rallied on the 11th November Shoreline (11. novembra krastmala -- named differently back then?), a section of roadway between Riga's Old Town and the Daugava river. It will also have a considerable potential for degenerating into unrest, as happened with a political rally on January 13.

My prediction is that there will be some kind of violence -- stoning and attempted storming of public buildings, almost with the certainty "of an amen in church" (kā āmen baznīcā) as the Latvian saying goes. Needless to say, there is nothing that can be changed by this, but it will happen simply because many people feel desperate and angry. The unions most certainly don't want to provoke a riot, but they will not cancel their protests (even though they signed the austerity packages -- with reservations-- along with other representatives of society).

I don't think June 18 will be the tipping point -- probably there will be spontaneous gatherings on June 16 and 17. People will simply flock to the Saeima building in the Old Town, called by internet appeals, Twitter, SMS messages and, possibly, old-style leaflets, which I have not yet seen. I don't exclude the possibility that unrest could start on these dates and that the government could order the Saeima to be cordoned off by the police and military. This, of course, would create a no-win situation, since the spectacle of thousands of security forces blocking off the parliament of a democratic country in crisis would bring international media attention and an even larger and angrier local crowd. But to take minimal security measures, as happened on January 13, would put the Saeima (with parliamentarians and staff inside) at risk of unpredictable actions by a much larger crowd than the few hundreds or 1 000 that gathered on January 13. These actions could range from a non-violent siege of the building, letting no one out, to a repeat of the January stoning that could escalate to a storming and possible trashing of the entire building.

In any event, this may be the "hottest" week in Latvia since the late 1980s and 1991. Foreign media (and local reporters)covering these events should take precautions such as protective clothing (helmets, eye protection), gas masks, first aid supplies and provisions for emergency legal/consular assistance. Since any hostility is likely to be directed primarily at political targets, it should be safe to wear large (but removable) PRESS or TV emblems on clothing, so that security forces will at least know who they are hitting, gassing, shooting with rubber bullets or spraying with high-pressure water.

Whether the police force will actually use force for a sustained period against large (and, as is often the case when hooligans and streetfighters blend with gatherings) non-violent numbers of people remains to be seen. The police have been subject to some of the harshest budget cuts and may feel that they are more on the side of the demonstrators (there have been calls for police labor actions) than the government.

Minister of Finance Einars Repše, who admitted responsibility for delaying dealing with the budget cut for several months, has made one valid point -- that rioting "will not earn a single lat" and that the cost of broken windows will be borne by the already ravaged state budget. Moreover, mobs generally have n program, even if they reflect, in the specific context, a justifiable political anger. The only "alternative" that could be forced on the government by a state of endless unrest is to let the country default, something that may be even worse (though probably not fantastically worse) than the collapse of education, health care and other public services that will be triggered by the budget cuts.

As to what will happen after the dust settles and any broken glass is swept up and replaced -- I see the economic downward spiral accellerating. Wage deflation will reduce the tax base in tandem with what I see as microeconomically logical tax evasion (why give good money for non-existent, at best shambolic services?). As government revenues fall, next year's massive cuts will be even more massive. One also has to reckon with the fact that even if Latvia were populated by Swedes or Finns who pay all taxes with robotic regularity, the plunging GDP (probably 25 % this year) as well as the lack of company profits would suffice along to slash the tax base to where LVL 500 million in cuts in 2010 will be far too little.

I believe other European countries will recover ahead of Latvia, triggering a massive wave of semi-permanent emigration, taking away both the best and brightest and those barely bright enough to get the picture and leaving the country in economic stagnation for the next decade. The blame rests largely with a post-Soviet political elite who spent 20 years putting rent-seeking through state capture ahead of nation building on the opportunity of restored independence.

The unavoidable train wreck...

Some fine-tuning details of the plan to cut Latvia's government budget by LVL 500 million have emerged (additional cuts of this size will have to be undertaken in 2010 and 2011), but these do not really change the direction or speed of a country headed for a train wreck.

Supplementary pensions (LVL 0.70 per year worked) will be cut only for those who retired after 1996. Pensions over LVL 500 per month will be limited to that amount, with any sum in excess withheld as a compulsory loan to the government. Teacher's salaries will be cut to the minimum wage per "shift" or teaching load, though it is unclear whether the old minimum of LVL 180 or the new LVL 140 will apply. This, in effect, means the public education system will collapse -- the only question is how fast. Younger teachers interviewed on evening television indicated they would, at the first opportunity, quit their subsistence-paying jobs and emigrate.

An ongoing TV discussion (as I write) is discussing whether any plan or priorities exist as to what to do next -- apparently there is no plan or vision. Also, there appears to be no funding (other than substantial EU structural funds, that are log-jammed somewhere in the bureaucracy) to stimulate the economy at a time when virtually all macroeconomic indicators are in free fall. It appears that we have a situation where the budget deficit is feeding off most efforts to cut the budget deficit by impacting purchasing power, raising unemployment and further deteriorating the remaining shreds of trust in the government.

I think that is the fundamental problem -- no one trusts that the present political elite and the government can solve the problem. It is no surprise that in a telephone vote, more that 5200 callers say it is time to take to the streets (whatever than means -- although the January 13 riots were a hint). There is a near-total breakdown of the social contract -- at least along these lines. The CEO of my workplace, LETA, Una Klapkalne, whose previous work was in government raised this issue at a brainstorming session with Prime Minister Valdis Dombrovskis and other ministers present. She said that whatever plans were drawn up, whatever schemes were sketched, it was all against the background of massive mistrust of the government by society.

Even if the government and the Saeima (parliament) succeed in approving the budget cuts and get the next payments from the International Monetary Fund (IMF), the EU and other lenders, the funds will merely prevent a government default. It will not inject a single santim (1 LVL = 100 santims) into the collapsing real economy.

My scenario -- a temporary boost if the Saeima approves what, at this point, amounts to cutting the carotid artery of the public sector with a resulting impact on the economy, quickly followed by a realization that things will spiral out of control again very soon. The international credit will simply pump more blood into the spurting artery (and, given the inefficiency and corruption of the government and ruling elite, much of the huge sea of billions of "liters" of blood will be sucked by parasites). When this is obvious to the financial markets, pressure on the lat and the "big tail" of the Swedish krona that this little animal can wag -- will increase. The Bank of Latvia, which says it has the entire supply of lats backed by foreign reserves, will come closer and closer to literally buying every lat on the market to keep the peg (effectively Euro-izing the bank accounts of those domestic actors selling lats.) Interbank and domestic interest rates will soar past the present 22 % and short-term funds will rush in to grab some of the shrinking pool of lats (possibly causing a bizarre spectacle of a seemingly strong but actually dead-but-not-fallen-over little mouse Latvian lat alongside a wildly swinging lat-surrogate krona). When the mouse falls dead, it is anybody's guess what happens -- probably freefall for the lat, a frightening dive for the krona and tremors across the Baltic and Eastern Europe.

Post-election "surprise" -- another 500 million LVL cut

In a "surprise" move after Saturday' s municipal and European Parliament elections, the Latvian government announced that it would have to cut an additional LVL 500 million from the state budget and raise some taxes. Finance Minister Einars Repše said that, for all practical purposes, "nothing" had been done up to now to reduce government spending in line with the requirements of the International Monetary Fund (IMF) and other lenders.

The latest round of cuts proposed by the Finance Ministry crosses some "red lines"  by cutting pensions by 15 % and eliminating so called supplementary pension payments (for years worked). This, according to documents leaked to the daily newspaper Diena.

According to the Diena story and other media reports, the government is also proposing eliminating the minimal income tax deduction of LVL 90 per month and reducing the public sector minimum wage to LVL 140 (from the current LVL 180?). The austerity package would also raise the excise tax on beer and impose a capital gains tax as well as make the presently flat income tax progressive.

The cuts will almost certainly contribute to the drastic decline in purchasing power (retail sales have been plummeting, shopping centers have cut back opening hours) and will accellerate the wage-cut, tax revenue spiral (people with lower salaries pay lower taxes under ideal conditions and, in Latvia, many in the private sector will move into the gray economy paying little or no taxes on "unofficial" cash remuneration).

Raising taxes can only have a significant impact on state finances in a stable or growing economy, but Latvia's GDP appears to be heading for a decline of 18 - 25 % this year, with sharply rising unemployment (and the  drain on state funds this creates), so any tax changes will have no effect. With deflation setting in and property prices plummeting, it is hard to imagine how anyone could record a capital gain. This tax reform is several years too late. If a capital gains tax is adopted according to Western models, there should be a provision for offsetting losses, so that the next few years of near-depression and economic collapse should provide an opportunity for accumulating losses against future gains that may pick up again toward the middle or end of the next decade.

On driving in Latvia, present and recent past

I have started driving more again as summer arrives and I go back and forth to the family summer place in Carnikava for various reasons. I get the feeling that recent habits, which seem to have faded(slightly but noticeably) in the last few years, are re-emerging. Another striking fact is that at  almost every red light in central Riga, you can see around  three to five SUVs (sports utility vehicles, Latvians tend to call them jeeps) among the 10 to 15 cars that usually line up at an intersection. This seems like a high proportion, especially since I was at a gathering recently where a Swedish businessman said that his Latvian partner had driven around 1000 kilometers in Sweden and was surprised to have seen only a handful of Porsche Cayennes. Still another person who runs an auto parts and repair business said that one should look at the tires of the Latvian SUVs. Many still have winter tires because they cannot afford new summer tires at 200 LVL per tire. 

I think the high proportion of SUVs is a sign that the middle classes (who own "ordinary" cars) are driving substantially less than before. For those driving the "jeeps" it may also be a last gasp and a badge of economic success that will not be given up until the bank comes for it. Latvia already is said to be a buyer's market for late model, high-end repossessed vehicle.

I also found the draft of an article that was published in Tallinn' s (now defunct?)  City Paper  four years ago. There have been some changes for the better since, but a lot is still true.

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Building a new road for the insane

by Juris Kaza

 

            If it were only the statistics that counted, I would say Latvia has a come a bit of a way from 1991, when more than 900 people were killed on the roads, with far fewer cars than are registered currently. Today, with luck, the annual contribution of Latvia’s highways and byways to cemetery tenancy will be considerably less. However, for the visitor to Latvia, it is what one sees in day-to-day behavior and not abstract figures that count.

            If you have to drive in this country, then you will be among the most savage, barbarian drivers in Europe. Boorish, too – and this, as one would say of perverted computer software, is a feature and not a bug.

             I kid you not. Do not drive into Latvia with a loaded automatic weapon or even a baseball bat on the “death seat” next to the driver. You will not only be tempted, but also probably morally justified to use one, either or both on many of your fellow drivers.

            There is no typical Latvian driver –rather a varied menagerie of the reckless, loutish, egotistical and thoughtless. You can watch them zooming, whizzing, passing in three different directions – to the right, to the left and some improvised direction in between (this can, perhaps, be done on a S-curve where you start the overtake on one side and finish on the other). 

            Inevitably the moment comes when some huge Scania or Volvo truck appears looming in the rearview mirror. You may notice an imitation license plate in the cab window with a name like “TARMO” embellishing it. As the juggernaut grows still larger in the mirror – tailgating is also a Baltic truckers’ hobby – you face the imposing menace of the Estonian monster truck. These things simply go. It is you and other drivers with an exaggerated attachment to life and limb who move. Tarmo, for all we know, is an inflatable propped on the seat of a machine driven by satellite guidance.

            However, once you subtract the trucks from the wheeled zoo on Latvia’s roads, you are sort of left with the world as it was when the dinosaurs were on the decline. All that other traffic, swirling and parting as Tyrannosaurus Estonicus lumbers along at a relatively lethargic 100+ kph is the furry mammals that supposedly scampered at the feet of the great lizards. But that comparison breaks down – the smaller vehicles and their drivers are nothing like the predecessors of the many warm and cuddly species we enjoy in the contemporary animal kingdom. Drivers in Latvia are the creatures from the Gremlins movies of the 1980s, the screeching rat-bat mutants who took a satanic delight in malicious mischief.

            Alas, even that comparison breaks down, because the average Latvian driver (male) is almost as expressionless –either stone-faced or shitfaced (your guess is as good as mine)—as our pal Inflatable Tarmo. The women – often sleek trophy wives piloting combat-vehicle-sized SUVs with horsepower four times the woman’s kilogram weight – have a bit more written on their visages, along the lines of “I’m dumb, blonde and shouldn’t be driving a left-foot roller skate”.

            Since I spend my summers in Carnikava just north of Riga,  I experience most of the antics of Latvia’s highway Huns (speaking of whom, we’ll get to the Germans later) on the stretch of one of Latvia’s laboratories of the “let’s dig something up every summer” school of experimental highway building, the so-called Via Baltica. Mostly it is the segment between Adazi and the posh, by Latvian standards, suburb of Baltezers.

            Here on any day, you can see all the vices of the Latvian road – reckless passing, high speeds, sudden, startling unsignalled lane shifts and the favorite sport of tailgating. Apparently such things as the physics of stopping a vehicle aren’t taught in the driving school classrooms, or if taught, simply dismissed and forgotten. The reassuring thing about Latvian tailgaters is that they probably won’t hit and run should something happen, they’ll hit and sit (next to you, the driver in the front car) after flying in though your rear window.

            I want to interject here that I, who learned to drive in the reputedly bad-road manners Boston (USA) area, sincerely believe that I drive as one of the few who are sane. I do sometimes express my opinions of the other drivers until my wife says that I shouldn’t say “monkey brained moron” and the like when our nine-year-old is in the car.  I actually think, but do not articulate, far worse things: Yo, motherfucker, your Lexus SUV is very fast and yes, only your funeral will be bigger than your fucking car.

            The strange thing is that the often brand new and extravagant vehicles drag racing down the Adazi-Baltezers stretch are probably not, for the most part, purchased by the quick and shady big money that rolled through Latvia in the early 1990s  like a tsunami from the burst bellyful of ownerless post-Soviet assets. A lot of them are bought on the installment plan, leased and otherwise financed from some kind of regular employment or steady business and an above-average income.

            So what we have here are middle and upper income folks Mr. Hyde-ing it as soon as they put the key in the ignition of that BMW. Sudden, apparent prosperity, a caricatured Soviet presumption of how “capitalists” should consume, and the lingering, paranoid inferiority complex of the post-Soviet personality all, perhaps, come into play. It is not possible for all of us to simply drive to work, trusting and respecting other drivers. It is so much easier to hit the gas pedal, come what may and pretend that the entire commute, from home driveway to dumping the monster SUV in a handicapped space to buy cigarettes to the final parking spot by the office is one big thrill-ride.

            When I lived in Germany in the late 1970s, I observed something similar. On the Autobahn, there was always someone flashing super-nova bright high-beams and tailgating at 180 kph until you moved over and let the Teutonic schaefer-hellhound whiz by. Then I thought that Fritz (as Latvians sometimes call Germans) was getting a little Macht Frei (very loosely translated as “making/taking liberties) after three decades of post-war Arbeit (labor). It was also a time when more and more Germans could afford big, fast cars, and the no-speed limit Autobahn was a place to act out being a berserker in contrast to the Ordnung of the workplace and everyday life. Somehow, too, the traces of the totalitarian experience (especially since they largely brought it on themselves, voting for Adolf in ’33) were then still part of the German mentality. Things have probably improved – though I haven’t driven the Autobahn recently– but it took decades.

            For drivers in Latvia, I wonder if some kind of victimhood in reverse is behind this behavior. It is self-assertion on methedrine from a bad and dirty drugs lab. I also suspect it spills over into other aspects of life – the ugly, raving, sometimes Bible thumping mob that wanted to assault Latvia’s first gay and lesbian pride march. They literally wanted to beat and tear these people apart for Christ (who, when I last looked, was called the Lamb, not the Wolverine of God). Put these people in fast cars, and they’ll attempt a few killings for their own personal wolverine, which takes over their brain as soon as the tires start turning.

            This is the really scary aspect. Though I’m no sociopsychiatrist, mob-shrink or whatever they call those who diagnose diseases of the spirit affecting large parts of a society, I see links between the behavior on the roads and the dark undercurrents of homophobia, racism, xenophobia and what is wonderfully described in Latvian as karojoša tumsonība – crusading ignorance (though tumsonība has a pernicous twist, it ain’t just being dumb…)

 

   In late summer, they closed down and detoured the mad raceway segment of the Via Baltic that runs past Adazi north of Riga. When, eventually, a sign is put up explaining to what purpose (but not why), yet again, this segment of Latvian highway is being torn up and rebuilt, I would vote for having the text say, “Building a new road for the insane.”

 

Latvia will devalue-- Swedish press

The Swedish business newspaper Dagens Industri reports that a devaluation of the Latvian lat is drawing ever closer and that the Swedish central bank, Sveriges Riksbank was borrowing 100 billion SEK to bolster its foreign currency reserves ahead of the likely move by the Latvian central bank, which would probably be followed by devaluations in Estonia and Lithuania.
Latvia's central bank governor gave a bizarre hint at a devaluation by saying that if Latvia didn't get international loans, it would have to issue some kind of scrip (taloni--literally, coupons) instead of paying salaries to public sector employees. This would effectively be a second currency with which to buy food and pay rent and would undermine the current legal tender, the lat.
According to Dagens Industri, a devaluation would hit hardest at Swedbank, which has SEK 217 billion in lending to Baltic borrowers, most of it in the form of euro-based loans. The level of distressed debt has been rising even without a devaluation (or because of the domestic devaluation due to drastic salary cuts). The newspaper says Swedbank may have to raise at least SEK 10 billion in new capital. Both Swedbank and SEB (Baltic exposure SEK 186 billion) share fell on the Stockholm Stock Exchange, but SEB is seen as sufficiently capitalized for the moment.
A devaluation in the near future will effectively subject Latvia to the worst of both worlds -- wage cuts and mass unemployment that have slashed purchasing power to the minimum, and a further cut in living standards when the inflationary effects of a devaluation are passed along.

Bank of Latvia governor's bizarre "coupons" idea -- to scare the government?

Bank of Latvia governor Ilmārs Rimšēvics recent suggestion that the Latvian government would have to issue debt "coupons" instead of paying salaries was intended to "scare" the government into pursuing spending cuts so that it can get international loans.

The head of the central bank was essentially saying that the country would have to adopt a dual legal tender system amounting to a murky quasi-devaluation of the lat, but many people saw it as an alarming warning that the ration coupons of the late 1980s would return.

Rimšēvics said that if Latvia doesn't get  funding from the International Monetary Fund (IMF), the government would have no money to pay wages later this year and would have to issue debt paper that he called by the ambiguous Latvian term taloni (the plural of talons, a term most people in Latvia associate with ration coupons issued when certain consumer goods were scarce in the last years of the Communist system in the late 1980s).

There are anecdotal reports that people who misunderstood what was meant by taloni in the present day context have been hoarding salt, flour and the like. During the late 1980s, ration coupons were issued for a number items, including soap, laundry powder, milk for infants etc.

What Rimšēvics meant was that instead of depositing salaries to employee bank accounts (as is the normal practice) state and municipal agencies short of funds would issue IOUs that could be used as legal tender for purchasing goods and services (assuming merchants accepted them or were force to accept by some emergency law or regulation). In effect, Latvia would have a dual currency system with the lat circulating in parallel to lat-denominated debt paper issued in lieu of salaries. Inevitably an exchange rate would arise between "real lats" and taloni. It is difficult to believe that taloni would not be deeply discounted in a free market. Tens of thousands of public sector employees would try to unload their government-printed paper for "real" currency rather than test the local grocery store's or their landlord's readiness to accept taloni as payment.

A simple guess on the value of taloni can be made by comparing them to, say, a two or five year (non-Latvian :) ) treasury bill. If the debt instrument has a maturity value of, say 100 EUR, then it's present value can be calculated (i.e. the sum one would have to put in the bank to have 100 EUR, including accumulated interest, in two or five years). That could be, say, 95 or 90 EUR, but since, unlike the fixed maturity of the treasury bill, no one knows when an insolvent Latvian public sector would recover, the discount would have to  be very deep --anywhere from a substantial double-digit figure to -- worthless. 

 At the same time, confidence in the lat would be undermined and may have been undermined even if the whole mention of taloni was a bluff. It is, nonetheless, a signal that the Bank of Latvia is entertaining the idea of altering the value of the lat. Is it a hint of the devaluation that many serious analysts have been speculating about? The fact that the central bank governor floats wacko ideas about dual legal tender systems is also a sign that probably nobody really knows what to do next. The informal unwritten nod by the IMF to a 7 % of GDP deficit has already been undermined by calculations that even with the drastic spending cuts currently proposed (and likely to wreck the education, health care and law enforcement systems) will create an 11 % deficit.

As things now look, Latvia may well be heading for a double-devaluation in the form of an internal devaluation by drastic public sector salary cuts (and their impact on purchasing power, the domestic private sector and tax revenues) followed later this year by a real devaluation (letting the lat float and printing more of them to cover public sector expenditures and somehow make it through the winter)

It is not f**king Copenhagen, dear Riga cyclists

Bad times and a bit of green consciousness are making more and more people in the Latvian capital ride bikes. At my workplace, the security guard, who is responsible for locking up bikes in a downstairs storeroom, says there are at least 25 and almost no room for them. Last year there were just a few. Two of my department colleagues ride to work. Good for them, sort of...

The problem is that most bike riders I encounter whizz by on the sidewalk, no bell, no horns, no warning. This is often scary, about one near miss every day Almost no one wears a helmet, so that a collision with a pedestrian would hurt both parties.

There is no other place for them to ride. Bike paths have been built here and there, for some ridiculous but typically Latvian price. They are still few and far between.

The street and the highway are no place to ride. A few years ago, the answer would have been simple. A great many Latvian drivers simply are animals. Period. Now, of course, the animal count has fallen, maybe due to self-elimination by fatal accidents (these have also declined). But the average driver is still a borderline asshole, talking on a mobile phone and driving with one hand while turning  a street corner  where pedestrians are crossing. Just a few days ago a big jeep tried to pass me on a curved access ramp and nearly collided with a car on the main highway. Typical. And one reason why I will feel some emotional satisfaction if and when social unrest expresses itself in the burning of SUVs. To quote the Bloodhound Gang : "burn, motherf**ker, burn!" 

To sum up, the main reason I have mixed feelings about the increase in cycling in Riga and Latvia generally is that this society is not civilized enough for this development to be safe and beneficial to all. Riga is not Copenhagen or Amsterdam. The society here is not the Dutch, it is a a semi-savage (when it comes to road habits), alienated, reckless rabble. And it is not likely to change in the foreseeable future. So cycle at your own risk and at risk to pedestrians (I have seen cyclists talking on their mobiles, weaving with one hand down a sidewalk with shopping bags on each of the handle bars)

A slight look on the bright side...

I went for a walk with my video camera on Sunday, May 24 and recorded some ordinary stuff in Riga. This is just to show that the impending economic collapse is not very visible when the weather is fine and people still take to the streets and parks. The charity event that I mention at the start of the video raised some LVL 270 000 for a group of kids in need of special medical care, mainly from small contributions using phone-ins and collections on the street.

Othewise, even the Foreign Investors Council in Latvia (FICIL) has been saying that the economy could shrink by 20 % (the most recent figure was 18 %). Ilmars Rimševics, the governor of the Bank of Latvia, said in an interview that if international loans do not come through, there could be some kind of ration coupon system by the end of the year (!?). Rationing usually happens when there is a shortage of good, no sign of that. However, some towns in Latvia are providing social welfare in kind by allotting small gardens and vegetable seeds to the poor instead of cash payments. The idea is kind of reasonable, but also a symptom of the impending collapse of the social safety net in this country.

Anyway, here is the relatively happy video:

Q1 GDP down 18 %, collapse draws closer

Latvia's GDP fell by 18 % in the first quarter of 2009 compared to Q1 2008. Industrial output as a component of GDP fell by 22 %, retail sales were down 25 % and the hotel and restaurant sector declined by 34 %. This is further evidence that the country is on its way to economic collapse, with a complete disruption of public services now determined no longer by demands of the International Monetary Fund (IMF), but by a shrinkage of the tax base that will make even the drastic budget cuts now being proposed insufficient -- because even that level of public spending will be unsustainable. More in this video commentary

The final countdown continues...

Latvia's GDP dropped 18 % in the first quarter from a year ago. That tops official guesses of some 16 %, bad enough. Unemployment hit 11 %, with many of those discovering that, because of social tax issues, they are not eligible for unemployment benefits.

It now looks like the economy may nosedive by 20 - 35 % for all of 2009. A total economic collapse, sending the country back into the 1990s.  Industrial production plummeted 22 %, the hotel and tourist business by 34 % (brilliant move boosting hotel VAT sharply to 21 %).

Unemployment will probably go past 20 %. Tax revenues will shrink drastically, undermining any sharp budget cuts. It will no longer be an issue of whether the International Monetary Fund (IMF) thinks the cuts are sufficient, it will be a matter of no revenue available for public service. The government' s tax revenues will push the public sector salary cuts beyond the 20 to 30 % already decided. 

Even the slightest glimmer of opportunity for work anywhere but Latvia will send thousands packing their bags (remember, too, the choice of governance issue). What will be left by 2010 0r 2011 is a sad basket case of a country, where the least skilled workers, through a hopelessly inefficient and understaffed tax system support a skeleton social services and pension system for the old and infirm. 

Time to really, really seriously think about a Plan B.

If you can't get it together in 20 years since independence, you probably won't...

Tarnishing Lattelecom's image

My video comment on how the appointment of former prime minister Aigars Kalvitis to the supervisory board of Lattelecom is a symptom of state failure in Latvia and damages the brand and reputation of the telecommunications greoup.

Latvia: IMF! IMF? ...I'M F **KED??

The last day of April was a merry one for my one time journalist rival from Diena, Baiba Rulle, who broke a story that, according to  "unofficial sources", the International Monetary Fund (IMF) had agreed to let Latvia get away with a 7 % public sector budget deficit this year, retreating from earlier demands that the deficit be cut to 5 % or less.

The story appeared in Diena's internet portal -- the print rag (all due respect, that's journalist slang) carried a hockey (what else) story on page one. Within hours, the Minister of Finance, Einārs Repše, was 1) denying the Diena story and calling it journalistically irresponsible and 2) announcing that the budget, having cut most public services to ribbons and tatters, would have a deficit of 7 %.  What a coincidence!

As for 1) what journalist doesn't go over the top at one time or another or as Latvians say -- to whom does it not happen? (kuram negadās?). But 2) --without the sanction of the IMF-- is saying that the government will be bankrupt by the summer and all bets are off. In other words, woo-hoo, I'm driving the whole f**king economy over a cliff and flying back to my own planet!

UNLESS... Baiba's story is true, and our minister from the Red Planet did, in fact, get a very strong but possibly informal nod from the IMF that this time, we can get away with 7 %, get our billion (EUR?) from the IMF and keep the wolf away from the door for a few more months.

I think Baiba was right. I don't cover this stuff day to day, but some of my "channels" indicate that is what happened---the IMF, preferring to see a state collapse later rather than soon (I think the cuts needed for 7 % will destroy public services like medicine and education anyway, and hey, what did a police officer look like?) said to Repše -- go ahead, make a budget based on 7 % and assume we will look the other way and sign the check.

But that is not the end of the story, there is allegedly a bigger story, one that is not really a plan B, but follows from the " 7 % solution" which, (like Sherlock Holmes, was it, 7 % solution of cocaine, or am I wrong?) will only keep the collapsing state alert for a short time.

That is the one in which all bets are off, we do the d-word, print cash to make it through the night, and then maybe not pass Maastricht and go straight to Euroland.  Likely or unlikely??