Latvia: Government States Nation on Track of Recovery

The International Monetary Fund (IMF), the European Union (EU) and Riga all recently announced that Latvia’s economy is on the recovery track. Indeed, the IMF and EU have held up this turnaround as a testament to the success of the austerity measures supported by the Fund.

Latvia’s economy rode a credit-fueled boom before collapsing in 2008. This forced the government to institute austerity measures such as reducing spending by cutting support to schools and hospitals, and firing over 30 percent of its civil servants. The private sector followed suit and instituted similar measures, which were approved by the IMF and EU who provided $10 billion in bailout funds. Since hitting bottom – when the GDP shrank by 20 percent – the country’s economy has recovered and grew by about 5 percent in 2011; its budget deficit is down sharply and exports are soaring.

One interesting item about Latvia is that no one protested the austerity measures. Indeed, unlike the Greeks, Latvians re-elected the man who led these cuts, Prime Minister Valdis Dombrovskis. In fact, one could have a lengthy conversation on the reasons behind the absence of any such reaction that would include an analysis of the country’s history, how its citizens are used to living in harsh economic times and under autocratic governments, and a culture that emphasizes practicality over complaining.

Regardless, the fact remains the Latvian economy seems to be recovering but all is not rosy as some trouble spots remain. Bankruptcies, for example, remain excessive: They increased 30 percent in 2012 compared to the previous year. Another issue is the unemployment rate which, although down from 20 percent, remains at a high 14.2 percent.

Another potential problem is Latvia’s adoption of the Euro. Growing export levels, made possible because private businesses slashed wages, made the country’s labor force more competitive and supported the country’s recovery. However, if Latvia adopts the Euro, which it’s expected to do on January 1, 2014, this will increase these wages, decrease competitiveness and hurt exports.

Finally, the large percentage of the country’s population, 5 percent, has immigrated to other countries such as Britain and Ireland. There are no indications these people are coming back and, if this trend continues, it will hurt Latvia’s ability to compete on the global stage.

The bottom line is that while the Latvian economy is doing much better than it was, I wonder if the citizens would agree with the IMF that the economic turnaround was a success.