Latvia yet to bounce back from economic shock therapy

If Latvia is the poster child for the benefits of austerity, IMF and EU bosses would do well to observe the huge social cost …

If Latvia is the poster child for the benefits of austerity, IMF and EU bosses would do well to observe the huge social cost of measures taken here, writes DANIEL McLAUGHLINin Riga

INTERNATIONAL FINANCE chiefs will gather in Latvia today to hail the recuperative powers of the bitter medicine taken by the Baltic state when it plunged into a dizzying recession.

If they stray from the VIP lane at Riga airport, arriving IMF boss Christine Lagarde, EU commissioner Olli Rehn and colleagues will meet plenty of departing Latvians ready to challenge the growing economic orthodoxy that this tiny nation is the poster child for the benefits of austerity.

“I would love to come back, but there is nothing to come back to,” said Inga (28) as she headed for her budget flight to Dublin, where she works as a cleaning supervisor in a hospital. “There are hardly any jobs here, the pay is terrible and so many friends have already left. Hopefully in two or three years I’ll be able to come home, but not now.”

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Janis (22), who lives in Longford but doesn’t want to say where he works, agrees.

“I’ll come back when there’s work but I can’t imagine when that will be. I’d do well to make 200 lats (€290) here. In Ireland I’m on €1,500 a month,” he says.

He smiles at his sister and her baby, who have come to see him off. Her husband is working in Norway.

Latvians have endured a rollercoaster decade, from the highs of a credit-fuelled boom and the optimism of EU accession in 2004, to a crushing 25 per cent economic contraction between 2008-10 and a €7.5 billion bailout from the EU and IMF.

When the crisis struck, the government chose not to allow the lat to weaken in the hope of stimulating Latvia’s exports, but retained the currency’s peg to the euro and pursued “internal devaluation” – slashing state spending through massive cuts to jobs, wages and benefits.

Officials say retention of the peg proved Latvia’s commitment to a key plank of its long-term economic policy and allowed it to remain on the road to adoption of the euro, while preventing the possible spread of “contagion” to neighbouring states.

Critics say the decision transferred all the pain of the crisis years from foreign and domestic banks on to the shoulders of ordinary Latvians.

However, as Greece writhes in the bonds of austerity, Latvia, and to some extent neighbouring Estonia and Lithuania, are portrayed as great beneficiaries of the short sharp shock.

Today’s IMF conference in Riga is entitled “Against the Odds: Lessons from the Recovery in the Baltics”.

“We didn’t procrastinate,” says Latvian economy minister Daniels Pavluts. “We front-loaded the austerity measures in the first and second year of the crisis. We didn’t really have other options – but then some other countries don’t have other options either.

“You have to behave responsibly towards your citizens and international parties and work in a way that improves the trust of financial markets. Now we are being rewarded for our responsible and consistent behaviour.”

Latvia returned to growth with a 5.5 per cent gain in gross domestic product last year and it is expected to grow by at least 3 per cent this year. It tapped the international bond markets in 2011 for the first time since the crisis and completed its IMF programme last December.

In the preceding years, the government sacked 30 per cent of public sector staff and lopped 40 per cent from the pay packets of those who were kept on; unemployment more than tripled to 21 per cent, while at the same time benefits were cut and taxes increased.

Yet Latvia witnessed only one night of violent anti-austerity protests, and the government of premier Valdis Dombrovskis was re-elected amid all this pain in 2010.

“Latvians vote with their flight tickets, that’s their ballot,” said Ilmars Mezs, head of the International Organisation for Migration in Riga.

“It would be very difficult for a socially responsible government to follow Latvia’s example . . .

“When tens upon tens of thousands of people are emigrating, it’s not a success story at all. We are only postponing huge problems and putting them on the shoulders of our children.”

More than 200,000 people – three-quarters of them under the age of 35 – have left Latvia since 2000, leaving its population at about 2 million. More and more children are living with just one parent or grandparents, while people of working age are hard to find in many villages in eastern Latvia.

The country’s birth rate is the lowest in the EU and it has the fastest ageing and fastest shrinking population in the bloc. Projections suggest that only 1.6 million people will be living here by 2030 unless the current dire trends are reversed.

Analysts say the economic crisis compounded two decades of tax and benefits policy that discouraged Latvians from having children. Some also blame the government for allowing austerity to override all other considerations.

“There is a huge exodus from the whole country,” says migration expert Mihails Hazans of the University of Latvia.

“The demographics are terrible. The government had a choice and it chose internal devaluation. If you look at demographics and the labour market impact, it is hard to imagine that it could be worse under any alternative policy.”

Officials say they want to encourage regional development, boost birth rates and lure emigrants home. Riga however is wary of spending too much too soon on incentives and tax breaks.

“The social cost of adjustment is the biggest thing that stops us being ecstatic about what happened,” Pavluts says of Latvia’s much-heralded resurgence.

“It is very large. How much it is reversible depends on how much we can grow – and we are growing very well at the moment.” With unemployment still at 16 per cent, experts say Latvia must take steps now to staunch a brain-drain that will undermine its recovery.

“We have to act now before it’s too late,” Mezs says. “The longer our emigrants live in Ireland or elsewhere, the less likely they are to ever come back.”