Article in Diena by Hilmar Þór
Diena the Latvian language national daily newspaper in Latvia has published an article written by Hilmar Þór Hilmarsson professor at the University of Akureyri, School of Business and Science. The article criticizes the response of the Baltic States to the 2008/9 global economic and financial crisis, see attached.
Hilmar has lectured in many universities in the Baltic States over the last 10 years and worked in the World Bank’s office in Riga Latvia from 1999 to 2003 just before the Baltics become EU member states.
Currently Hilmar is writing a book on the subject entitled: Crisis Response and Post Crisis Result in the Nordic and Baltic Counties: Successes, Failures, Lessons Learned and Future Challenges.
The University of Latvia discusses the article on its website see: www.bvef.lu.lv/zinas/t/45948/
The article is in Latvian but an English translation is below:
“I lived in Riga from 1999 to 2003 just before the Baltics became EU member states in 2004. There was optimism that the Baltics would soon catch up with the richer EU15 countries. GDP growth rates were at or near 10 percent throughout the 2005 to 2007 period and exceeded 10 percent for at least one year in all three countries during this period. At this rate the economy more than doubles in size every decade. Unemployment fell sharply. In 2008/9 the global crisis hit the Baltics hard, especially Latvia. Decisions had to be made how to respond. All the Baltics chose fixed exchange rate policy. This was favored by the European Union and in effect a condition for euro adoption. This meant the drastic austerity programs had to be implemented with cuts in jobs, salaries, social programs, education and health expenditure. In Latvia the IMF recommended 15 percent devaluation of the lat to improve the countries’ competitiveness hoping for faster economic recovery. Foreign banks, mainly Swedish, opposed concerned over the impact of a devaluation on their portfolio. Many of their clients had borrowed in euro. The EU said no, concerned over potential regional spillover effects of a devaluation. The Scandinavian-Baltic interlinkages are extensive and continue to be dangerous for the whole region. GDP growth in the Baltics 2005 to 2007 wasn’t driven by fiscal imbalances; Estonia was in surplus, and Latvia and Lithuania were near balance. The growth was driven by excessive consumption and investment fueled by both foreign lenders/investors and domestic misperceptions. The banks were not made responsible for their behavior. Austerity was implemented in the Baltics that had among the highest proportion of people at risk of poverty, social exclusion and income inequality one can find in the EU. Foreign banks were put on welfare, not the most vulnerable people in the Baltics. I have sometimes wondered how the Baltics became so neoliberal, so extreme free market. In a Brussels Journal interview in 2005 Mart Laar, prime minister of Estonia in 1992 (shortly after independence) said “It is very fortunate that I was not an economist […] I had read only one book on economics – Milton Friedman’s “Free to Choose.” I was so ignorant at the time that I thought that what Friedman wrote about the benefits of privatisation, the flat tax and the abolition of all customs rights, was the result of economic reforms that had been put into practice in the West.” And Mart Laar implemented this policy despite warnings. No other country has implemented Friedman policies, not even his home country the USA.
Over the last ten years I have lectured in universities in all the Baltics and talked to students. Many of them have chosen to leave for richer countries. Baltic people are not accustomed to opposing bad government policies, but chose the exit option. Emigration has been especially dramatic in Latvia and Lithuania. It is sad to see the rather slow post crisis growth in the Baltics. At this rate they will not catch up with richer EU member states in a foreseeable future. And their young people are unlikely to return to lower salaries and weak welfare systems at home. But the Baltics have opportunities to reform. They can become more competitive with more investment in education, science and research, and infrastructure. They can broaden taxation with progressive tax rate to scale up income tax and introduce higher tax on capital and land. They can gradually strengthen the welfare systems and better protect their healthcare systems. The Baltics are now modern states and they can and should provide viable opportunities for their young people.