Latvia Is A Better Story Than The NY Times Will Tell

Latvia was one of the counties that, in 2008, everyone knew was an economic basket case. Now they are recovering while many other countries in Europe are still flailing.

The New York Times reported that

“in just four years, the country has gone from the European Union’s worst economic disaster zone to a model of what the International Monetary Fund hails as the healing properties of deep budget cuts. Latvia’s economy, after shriveling by more than 20 percent from its peak, grew by about 5 percent last year, making it the best performer in the 27-nation European Union. Its budget deficit is down sharply and exports are soaring.”

Of course, the whole point of the New York Times article is to preach to readers that Latvia is an anomaly. This is repeated in more than one way, including the last line of the article, “The lesson of what Latvia has done is that there is no lesson.”

Now, in fairness to the New York Times, it is true that the Latvians did tolerate a great deal of deprivation, and refused to vote back into power the same people who had put them in the mess. They re-elected the Administration that caused them pain because they trusted them. If Greeks or anyone else vote only for the politicians who promise no posterity then Latvia “won’t work” for them. But the issue, then, is not economics but politics.

However, what the story leaves out is that the 2009 Latvian government did not simply submit to outsiders and impose their austerity in order to be granted the privilege of going further in debt (dubbed a “bailout”). Instead, it proposed a plan that would truly get their economic house in order:

“From the outset, it was clear that this program could resolve the crisis within three years if carried out properly, and confidence was restored by June 2009, as reflected in swiftly falling market interest rates and rising international currency reserves. For Greece, no viable stabilization program has been presented as yet, so no confidence has been restored, and growth—which normally reappears after a couple of years—is not in sight.”

I suspect that, in the case of Greece, there is no solution but default and exit from the EU. That is not politically acceptable to the EU or the IMF, so they are going to keep trying to “fix” the problem in ways that torture the Greeks forever but never let them recover.

Latvia, on the other hand, despite getting praise from the IMF, rejected their blueprint. They refused to impose a “progressive” tax and kept their flat one. While they did add some consumption taxes, they made most of their changes in spending:

“One-third of the civil servants were laid off; half the state agencies were closed, which prompted deregulation; the average public wage was cut by 26 percent in one year. But this was a socially considerate program. Top officials were hit more, with 35 percent in wage cuts, while in the end pensions were not cut. In particular, public servants were no longer allowed to sit on state corporate boards and earn more than from their salaries, a malpractice that is still common in many European countries. The government exposed high-level corruption. Yet, many schools and most of the hospitals were closed.”

So the pain was real, but it came from slashing expenditures. As the economy recovers, I will be interested to learn how the private sector responds to the need for hospital and schools.

There is freedom and prosperity ahead.

Latvia really ought to be classified with Iceland as an all-too-rare example of a country that ignored the “advice” of the international bankers and reset their economies. May God have mercy on us and grant us that their tribe increases.