In Estonia - waiting for the crisis to hit
So the New Year is fast approaching, but you look around and you don’t see anyone with a smile on their face (ok, they are Estonians, but still). You get a sense of apprehension on everyone’s faces. As if 2009 has already started with the wrong foot, and there’s not much you can do about it. The coming year will be bad, it is already bad and it hasn’t even started yet!
Most people fear a devaluation of the Kroon. An unlikely scenario, given the recent Latvian bailout, that promises to keep a dying currency stable. Most people have their loans in Euros and get their salaries in Kroons, a devaluation would be quite frankly a big burden on most Estonian families.
At the same time everyone is looking at Latvia, the Baltic neighbor whose worries are far bigger than the Estonian ones. At least that’s what everyone seems to think. In the time of high GDP growth everyone was competing for a higher percentage, even though everyone was already at double digit growth. They (the Baltic nations) all stood so proud, like the best students in the class, competing with each other for the title of Baltic Tiger. Each was quicker than the other to talk about their “success” and why they had such a high GDP growth. They claimed it on productivity, innovation, education, competitiveness, tax incentives for investors, salary growth and low unemployment. Everything seamed to be the work of a g ood government. Now, the crisis has settled in and the same governments that were so quick to point out their country’s virtues (and indeed their own) are even quicker to point out to the outside for blame. Indeed for them the crisis is not at all their fault, it is the “Global turmoil” that we live in, or the US housing boom. The media didn’t help, fueled by nationalistic pride, few were those in the region that dared to call for a cool down and a down to earth approach to the GDP growth.
Of course there’s much to be said about the global crisis and how it affected the Baltic Economies, specially since they are dependent on foreign demand and investment. Latvia’s main trade partners are Germany and Russia, who were both badly hit by the crisis (Russia may soon find itself in a renewed crisis if the oil prices keep going down). But for Estonia the main trade partners are Finland and Sweden (a factor that reflects this little nation’s more Nordic connections) and thus far both these countries have been able to weather the storm.
Either way, the outlook is not good, and I hate myopic politicians and the people who vote for them.
I wrote a short paper on why the peripheral economies of the (then 15) EU had different fates, Ireland and Finland prospered, while Greece and Portugal failed. In it I mentioned that Geography plays a role in economics too, but I probably forget to mention that the nation’s culture, the way it faces working also plays a role.
Take a look at the Estonian Statistics Office data for Labor productivity and compare the data for all 3 Baltic nations. The data is until 2007. At the same time that the productivity was growing by marginal amounts, labor costs were increasing. This was mainly caused by demographic pressures. Namely the fact that no one is having kids in the Baltic states, and that after they all joined the EU, money was coming in, while talent was going out. Leaving the unqualified people here with more money to earned while not producing much more. A pretty good recipe for failure.
Now Latvia is getting a whole lot of money from the EU, the IMF, Sweden, Estonia (but not Russia), and what is needed is a competent government capable using this money wisely.
Bellow are some of the comments from a recent article on the Economist “The Baltic Brink” It’s certainly worth reading
One comment says:
“Latvian Minister of Finances, Mr. Atis Slakteris, has acquired a degree in mechanisation at the Agricultural University of Latvia in year 1980.
His interview to Bloomberg TV chanel a couple of weeks ago clearly demonstrated his "enormous” competence in finances, as well as his “superb” English skills.
There should be no illusions anymore about competence of Mr. Slakteris (and, actually, the same can be easily referred to a number of other members of the Government).
It is questionable whether a bunch of totally uncompetent and uneducated ministers will be able to lead the country through the crisis successfully.“
You can see the video interview of the Latvian minister of Finance to Bloomberg. Every country has its share of incompetent politicians, but in a time of crisis you’d expect the best to stand up and do something. I really wonder how the Latvian people feel about having such a clueless politician running their money…
Another comment:
"The Prime Minister disqualifies himself from job by failing to tackle corruption. There’s no use trying to repair a broken country if the nuts and bolts of legislature and the executive are rotten. A corrupt country will not benefit from the loan, because funds will be channelled from productive uses to lining the pockets of the crooks that, alas, we ourselves have elected. Investors will remain scared of doing business in Latvia where bribes and kickback are the norm.
He privately admits not only that the incompetence of some ministers (notably the Minister of Finance) verges on mental disability, but also that others (notably the Minister of Transport) are crooked in a way that would make Silvio Berlusconi proud. Publicly, he’s praising everyone. Yet, trying to save the coalition is short-sighted and counter-productive in the longer term.
What the Prime Minister should do is use the public outrage at where the successive crooked governments have left us, and let the anti-corruption authority do its job by putting a dozen or so of the most notorious kleptocrats behind bars. Only then his economic salvation plan will stand a chance of success.”
And yet a very insightful remark:
“But the issue at stake here is a different one and it has to do with the financial and economic situation in Latvia.
An elusive culture of closure, diffidence and complacency is apparent in Latvia for anyone who has the opportunity to relate with latvian people on a different approach than mere touristic purposes.
This much trumpeted "Latvian Pride” has more to do with nationalistic symbols, local celebrations and ancient tales than with a constructive, civilized and committed respect of civic values and public interest.
Nowhere else in the world I have noticed such a manic, compulsive greed for branded clothes and flashy cars as in Latvia. “Bagehot” would have defined ineluctable the “invisible hand” guiding Latvians at the dawn of free market when buying (fake and outdated) branded italian clothes in Riga at 2 or even 3 times their real price.
One of the highest political figures in Latvia earlier this year declared to be “The Godfather” is favourite book.
It strikes me how, at any social and cultural level, so many latvians are irresistibly attracted to the myth (sic) of italian mafia stories and characters.
Latvian politicians just resemble very much the fabric of latvian society. I am aware of the triviality of this observation, but in Latvia I found it excptionally applicable. In other countries people do complain about government shortcomings because of the effects on society at large.
In latvia it seem that people complain because they are excluded from the institutional posts that would allow to enrich themselves.
I don’t ever recall wealthy business people (well connected to the establishment) in Latvia being afraid or concerned about the economic situation.
I have met some very responsible, efficient and honest civil servants in latvia, but they were almost ashamed of their own rectitude as surrounded by crooks and incompetent people. The Constitutional Court of the republic of Latvia is a surprising exception of reliability and one of the few solid institutional harbours within the latvian apparatus, but generally speaking, many of the civil servants chairing important departments and government offices in Latvia wouldn’t be employable even in Uganda as street cleaners.
With reference to the “imported” presidents, Vaira Veika Freiberga (sorry for mispelling) has given Latvia not just the prestige of the primate of a woman appointed as Head of State, but even a widespread positive opinion about her activity during those difficult years chairing such a young independent state towards European membership.
I guess many Latvians have been missing so far her decency, elegance and sense of balance.
On a very light tone, I notice how this prestigious magazine did not take exception signing the article.
It would have been at least inconvenient for The Economist to deal with an imprisonment request of the correspondent by the Latvian security police.
Less Dolce & Gabbana, Mercedes, Sex and the City, mafia movies and more openness towards foreigners, russians residents (involuntary leftover of russian attempted etnic cleansing), would be for sure a good recipe for a more stable future.
Financial and economic wiseness has a lot to do with people’s culture (not to be strictly intended as eagerness to attend ballets and opera events).“
Another comment:
"The truth is that all Eastern Europe is in a very bad shape. There are virtually no exceptions. And the pattern is everywhere about the same - overheating economies with huge current account deficits, real wages growth outpacing productivity growth by a wide margin. The latest theory I read trying to explain the situation is a combination of demographic and economic factors. Eastern Europe is at the forefront of the demographic meltdown facing the West. The working age population is already shrinking in many places which makes these economies more prone to overheating and overreaching their short term production capacity.
This trend was exacerbated in recent years by the integration into the EU which produced two movements in the opposite directions - foreign capital in, local labor out. Many regional economies were progressively thrown off balance and inflated by these flows until the global crisis has arrived and sent them to the bottom.”
One funny thing, is that someone tried to post translated versions of the comments in the Latvian website delfi.lv and the comments were deleted!