The Latvian Crisis

November 1, 2009 11:07 AM

Latvia's Tiger Economy Loses Its Bite: Less than a year after Latvia joined the E.U. in 2004, its growth rate topped all of Europe. As global stock markets overheated and competition for investment opportunities intensified, Scandinavian banks showered Latvia with cheap credit. Now, with the highest unemployment in Europe, and propped up by $10 billion in IMF loans, Latvia's economy struggles to stay afloat.
posted by HP LaserJet P10006 (14 comments total)

Upon preview, please not that the third link ("by $10 billion in IMF loans") is to a recent Guardian piece about the loans Latvia still owes the Scandanavian banks, and not specifically about the IMF loan of $10 billion that Latvia was provided with.
posted by HP LaserJet P10006 at 11:11 AM on November 1 [1 favorite]

Oh no not a loan from the IMF!
posted by elpapacito at 11:20 AM on November 1 [1 favorite]

Who could have guessed that crazy neocon-style deregulation combined with letting companies like Goldman Sachs go wild on your economy could have had any downsides!?
posted by delmoi at 11:58 AM on November 1 [5 favorites]

That unemployment rate btw is almost the same as in Spain...
Good god, almost 1 in 5
posted by jouke at 12:23 PM on November 1 [1 favorite]

Another basket case for the German economy to support. I wonder at what point Germans get well and truly fed up with underwriting the economic disaster areas of Europe...
posted by rodgerd at 12:33 PM on November 1 [2 favorites]

I'm sure a similar dynamic is at play in the US between states.
posted by jouke at 12:36 PM on November 1 [3 favorites]

That first article (the Nation piece by Kristina Rizga) is really excellent. For the tl;dr crowd, here's the heart of it:

The trajectory began in 2004, when Latvia formally joined the EU after nine years of negotiations. Credit rating agencies blessed the deal, with Moody's upgrading Latvia from a "stable" to "positive" grade in 2005. According to the Bank Association of Latvia, loans and cheap credit quadrupled from 2004 to 2008, reaching 95 percent of Latvia's GDP by early 2008. Most investment went into the construction of new luxury condos and office buildings—rather than export capacity—under the assumption that real estate values would grow indefinitely. The rest went into buying imported goods, many of them subsidized, weakening Latvia's local manufacturing and export base. By 2007 Latvia had the second-highest trade deficit in the EU, after Bulgaria.

To make matters worse, the real estate bubbles in England and Ireland sucked away local labor. [In mid-decade], an estimated 1.5 percent of Latvia's labor force went abroad. Unemployment dropped to an unprecedented 5 percent in Riga, and from 2006 to 2008 the cost of labor doubled. As inflation tripled, Novikovs noticed that local clothing and food cost almost twice as much as in England. "Latvians were traveling to Germany and Finland to buy cheaper clothes and furniture," he recalls with outrage. In 2007 Latvians had the lowest household savings rate in the EU.

The Latvian government didn't do much to stop this economic transformation. If anything, it stepped on the gas. Riga's new deputy mayor and millionaire Ainars Slesers, who served in the Latvian Parliament during the boom years, coined a phrase that is sure to become a symbol of the prevailing government attitude at the time: gazi grida (pedal to the metal). Enabled primarily by foreign banks, Latvia's government created a bubble economy financed by debt without developing sustainable means to pay off these loans. Now Latvia's economy looks like a race car that has smashed into a concrete wall.

...

In its drive to contain Russian influences, the Latvian government also prioritized entry into the EU and NATO, a policy goal that overshadowed other domestic priorities, like stimulating local manufacturing or supporting agriculture. As in most Eastern European bloc countries, Latvia's politicians looked to the West, and the United States especially, for economic models. The resulting reform strategy of the ruling Latvia's Way government during the '90s is often characterized by Western analysts as "soft shock therapy." Latvia has had a flat tax since 1997, and until this year progressive taxation has never been on the agenda of any ruling coalition. The Latvian government also refused to tax capital gains, which turned real estate trading into one of the most lucrative professions in the boom years. This unique confluence of nationalism and neoliberalism took Latvia from the extremes of communism to the extremes of capitalism in less than twenty years.

...

Unlike its neighbors Estonia and Lithuania, Latvian left-opposition parties have not been a part of the ruling coalition in Parliament since 1991. That has meant that neoliberalism has dominated Latvian politics virtually unchallenged since 1991. Two decades of this unchallenged center-right rule have also fueled high levels of corruption. From 2000 to 2002 several international studies found that Latvia had one of the worst corruption records among its high-ranking government officials in the post-Soviet states. In 2004, when Latvia joined the EU, it received more than $1 billion in "structural funds," aimed at developing Latvia's infrastructure—modernizing schools and building roads and bridges, among other things. But along with those funds came a resurgence of the old Soviet-era affliction of bribery.

...

The economic crisis of recent months, along with the January protests and the resignations of two ministers, has been a boon for the left coalition party called the Harmony Center. It now holds the largest share of seats in Riga's City Council, the first time since Latvian independence that the most left-leaning major party has done so. And for the first time since 1991 an ethnic Russian, Nil Ushakov, is the mayor of Latvia's capital, home to 700,000 people, almost a third of the country's population.

The Harmony Center owes its success in large part to the charismatic 33-year-old Ushakov, who represents a new generation--young, progressive, cosmopolitan--with no record of scandals or corruption. A former journalist, Ushakov studied economics in Denmark and speaks five languages. "You can't run your country like a business; you have to treat your country like your family," Ushakov explained in campaign videos.

Thanks very much for the post.
posted by languagehat at 1:29 PM on November 1 [6 favorites]

It's a difficult place to live, especially on a middle-class income. Just about one in five Latvian working-age adults can't find a job right now.

In 2007-2008, when I was living in Riga for a year, the cost of everything from a liter of milk to an apartment seemed to spiral ever upwards. Bus tickets went from Ls 0.25 to Ls 0.40 over a few months. Prices for consumer goods not produced in Latvia - everything from blenders to coffee cups to headphones - rivaled the highest prices you'd pay anywhere else in Europe. I struggled to make ends meet living thriftily because inflation was so high, even with free rent, partly because winter heating bills in the communist-era blocks in the suburbs of Riga where I lived - many of which lacked double-glazed windows - consumed a quarter of my paycheck. How pensioners and the poor made ends meet, I do not know to this day: handouts from family? Working the allotment really, really hard in the summer and living on preserved vegetables over the winter?

Riga itself is the biggest city in the Baltic states by far - Vilnius and Tallinn are quite a bit smaller - and the economic engine of Latvia in a way that seemed more significant than other "primate cities" - London is the "center" of the UK economy, but not in the way that Riga dominates Latvia.

Absolutely everything of any importance internationally in Latvia happens in Riga, which is also the center of the vast majority of the country's media, corporations, and financial organizations; the second biggest city in Latvia is Daugavpils, far from major international ports or transit routes, and only has about 125,000 people. As the country is so small, huge numbers of people commute into Riga every day, on overcrowded trains and buses, or sitting in traffic jams on two-lane roads. A seven-kilometer commute took up to an hour on a dilapidated, overcrowded trolleybus which had to cross one of only a few bridges into the city center.

So as the crisis unfolded and those jobs in Riga left, people from the surrounding cities and towns - Jurmala, Jelgava, Bauska, Ogre...essentially half the country lives within an hour of Riga - couldn't just pick up where they left off a bit closer to home, as there was simply no other comparable place to work: Sigulda doesn't have a stock exchange, Talsi doesn't have a university. Less Riga-earned money being spent in the provinces means less money going to local shops and businesses in small cities and towns across the country, which means fewer local shops and businesses, which means more people have to trek from their lower-wage hometowns (if, that is, they're earning a wage at all back home) to Riga to get a car seat for their toddler or take cello lessons or find a new alternator for their car or do the kinds of things which would be easier to do in a Polish or French or Greek city or town of comparable size to their hometown.

It's a painful cycle, and while Rigans have to compete against each other for the few jobs out there, they've still got the knowledge that their hospitals and police department and fire services and schools will probably remain open, or at least functional. Not so for regional centers.

Of course, the rest of the country has always been some distance behind the Riga area economically, and did, indeed, have a lot of catching up to do, so it's not as if the high growth rates after the end of Soviet rule were all smoke and mirrors; things needed to be built up. And in the transition to a market economy, of course a few companies aren't going to make it, of course people are going to lose their jobs. No one argues that this shouldn't have happened.

But Latvia isn't Poland, which has multiple large urban centers and a huge domestic economy and a long border with Europe's biggest economy in Germany, or Slovenia, in the Euro zone and in Munich and Vienna's backyard. Indeed, the Latvian countryside may as well have been in the middle of Paraguay or Congo for all its connectedness and access to markets within the EU. Roads are so overcrowded and underdeveloped in the region that driving from Riga to Berlin - a distance of 1250 km - takes about the same time (about 16-17 hours) as driving from Los Angeles to Seattle, or New York to Orlando, both pairs of which are over 500 km further apart. There's one airport - in Riga, again - with more than a few international flights of any significance.

So with only two million-odd people, it's not just hard to compete in the EU - it's always been hard to just stay above water. Latvia has about the same number of people as Liverpool or Amsterdam and their metropolitan areas, is quite a bit more than a comfortable drive or ferry ride from the eastern border of the pre-2004 EU, and has one of the lowest population growth rates on Earth.

Getting jobs out to the regions, improving the education system, and developing better infrastructural links will all help transition Latvia to a more stable economy, but those measures take time, and many people will be left out of the benefits if things move at their current rate; I wonder how long they'll survive, literally, once their unemployment benefits begin to run out and the heating bills come due this winter.
posted by mdonley at 3:38 PM on November 1 [18 favorites]

After taking all those S.H.I.E.L.D. grants, the collapsing economy just means that more people will support Doom's coup.

Oh, LATVIA.

Nevermind.
posted by klangklangston at 4:13 PM on November 1 [3 favorites]

Man, Doctor Doom is going to be pi...

Whats that? Klang? Several hours ago? MOTHERFUCKER!
posted by Artw at 7:24 PM on November 1 [3 favorites]

Note to EU Members: Don't let your economy be likened to a tiger.

If this inspires Dr. Doom jokes in you, you should read The Illustrated Biography of Lord Grimm. Not on-line; would involve acquiring one of those flip-page books.
posted by Zed at 11:07 PM on November 1

Note to EU Members: Don't let your economy be likened to a tiger.

Not just EU Members.
posted by Skeptic at 7:51 AM on November 2

I wonder at what point Germans get well and truly fed up with underwriting the economic disaster areas of Europe...

Is it any worse than having to deal with trade barriers? The power of a large free-trade zone is apparently enough to offset the fact that parts of that area are economic backwater. Perhaps the Euro parliament hasn't dismantled enough trade barriers - it Latvia is the, I dunno, Mississippi or Utah (lowest per-capita GDP states) of Europe then factories should be moving there like they do in the US. How come Latvia isn't more attractive to investors if they have such cheap labour (unless labour costs don't go down when unemployment rises and I'm missing some macroeconomic principle)

I'm sure a similar dynamic is at play in the US between states.

If they re-wrote the California constitution the state's residents might notice that they're keeping several third-world economies afloat. As it stands there's a third-world government running the eighth largest economy in the world. That's probably not the case for Germany.
posted by GuyZero at 11:22 AM on November 2

Who would have thought an economy built on Strip Clubs, Stag Parties and buying over priced designer goods would collapse.
posted by remo at 9:34 AM on November 3