http://www.informationclearinghouse.info/article33528.htm
A Model for Europe and the US?
Latvia's Economic Disaster as a Neoliberal Success Story
By Jeffrey Sommers and Michael Hudson
January 04, 2013 "Information Clearing House" - A generation ago the
Chicago Boys and their financial supporters applauded General
Pinochet's anti-labor Chile as a success story, thanks mainly to its
transformation of their Social Security into Employee Stock Ownership
Plans (ESOPs) that almost universally were looted by the employer
grupos by the end of the 1970s. In the last decade, the Bush
Administration, seeking a Trojan Horse to privatize Social Security
in the United States, applauded Chile's disastrous privatization of
pension accounts (turning many over to US financial institutions)
even as that nation's voters rejected the Pinochetistas largely out
of anger at the vast pension rip-off by high finance.
Today's most highly celebrated anti-labor success story is Latvia.
Latvia is portrayed as the country where labor did not fight back,
but simply emigrated politely and quietly. No general strikes, nor
destruction of private property or violence, Latvia is presented as a
country where labor had the good sense to not make a fuss when faced
with austerity. Latvians gave up protest and simply began voting with
their backsides (emigration) as the economy shrank, wage levels were
scaled down, and where tax burdens remained decidedly on the backs of
labor, even though recent token efforts have been made to increase
taxes on real estate. The World Bank applauds Latvia and its Baltic
neighbors by placing them high on its list of "business friendly"
economies, even though at times scolding their social regimes as even
too harsh for the Victorian tastes of the international financial
institutions.
Can this really be a model for the United States or Europe's
remaining social democracies? Or is it simply a cruel experiment that
cannot readily be emulated in larger countries un-traumatized by
Soviet era memories of occupation? One can only dream
But the dream is attractive enough. In a page one The New York Times
feature article accompanying that paper's celebration of the Obama
Administration's Fiscal Cliff commitment to budget cutting, Andrew
Higgins provides the latest attempt to applaud Latvia's economic and
demographic plunge as the "Latvian Miracle." The newspaper thus has
fallen in line with the surrealistic Orwellian attempts to depict
Latvia's austerity and asset stripping as an economic success as
rendered in the brochures distributed by the Institute for
International Finance (the now notorious Peterson bank lobby "think
tank") and international financial institutions from the IMF to the
European Union banking bureaucracy. What they mean by "success" is
slashing wage levels and leaving the tax burden primarily on labor
and lightly on capital gains, without spurring a revolution or even
Greek style general strikes. The success is one of psy-ops and
engineering of consent Edward Bernays style, rather than of
successful economic policy.
Latvia is the country that has come closest to imposing the Steve
Forbes tax and finance model advanced during his failed Presidential
campaign: a two-part tax on wages and social benefits that are near
the highest in the world, while real estate taxes are well below US
and EU averages. Meanwhile, capital gains are lightly taxed, and the
country has become successful as a capital flight and tax avoidance
haven for Russians and other post-Soviet kleptocrats that has
permitted Latvia to "afford" de-industrialization, depopulation and
de-socialization.
Higgins' article nurtures two enduring misperceptions of the Latvian
Crash of 2008 cultivated by its government advisors picked from the
ranks of global bank lobbyists and austerity hawks. First, this star
pupil of the international financial community "proves" that
austerity works. Second, Latvians have accepted austerity at the
polls. A Potemkin Village of austerity progress has been built by
neoliberal lobbyists such as Anders Aslund for visiting journalists
and policymakers. In the main, these visitors have accepted this
Theresienstadt-like "tour" for reality.
Typically trafficked tales of Latvia as a Protestant morality play
(an image we presented in our June Financial Times article on Latvia)
depict plucky but stoic Balts confronting the crisis and wage
reductions not with Mediterranean histrionics, but by getting busy
with work. This idea appeals to certain smug middle-class prejudices
and stereotypes in countries whose populations have not had to suffer
economic experiments in neoliberal horror. While there is some truth
in the characterization of Balts as taciturn and slow to protest, the
cultural traits argument is a poor attempt at developing a short hand
for explaining Latvia's situation. They are authored by people bereft
of an on-the-ground understanding of what has happened to Latvia.
Meanwhile, "work" (employment) would be nice, Latvia's unemployment
remains high at 14.2% despite a significant portion of its population
having departed the country.
Anyone with actual experience in Latvia will see the dissonance
between myth and reality regarding the government's response to the
crisis. First, Latvians most emphatically did protest both the
corruption and proposed austerity following the fall 2008 crash. This
was most evident at the massive January 13, 2009 protest in Riga
attended by 10,000 people. This was followed by a series of protests
by students, teachers, farmers, pensioners and health workers in the
next months.
It is not in the character of neoliberal regimes to be sympathetic to
such protests, peaceful or not. Committed monetarists, they were not
going to yield on policy. So Latvians moved on to the next stage of
protest.
'No People, No Problem': the Great Latvian Exodus
A harsh austerity regime was imposed and protests did abate. What happened?
In a word, emigration. At least 10% of Latvians have left since EU
accession in 2004 and access to the Schengen Zone. This exodus
accelerated following the economic crash in late 2008. The problem
was evinced in one Latvian student protest placard that read, "the
last student out at the airport, please turn off the lights!"
Latvia's population is small enough for the bigger EU countries to
absorb its departing workforce. And on balance, the nation has been
experiencing emigration since its independence from the Soviet Union
in 1991, when neoliberal policies replaced a failing Soviet economy.
Yet, rather than lessening over time as one would expect, Latvia,
which can ill afford emigration, saw people leaving in ever greater
numbers nearly two decades out from independence.
Latvians were reproducing at replacement rates when the USSR
collapsed. Its 2.7 million population in 1991 dwindled to an official
2.08 million in 2010 through a combination emigration and a financial
environment too precarious to permit marriage and children. And, this
"official" number from the 2010 census is quite optimistic.
Demographic reports originally showed a figure of 1.88 million in
2010. Some Latvian demographers stated their belief that even this
lower number was inflated. They report government pressure on census
takers to come up with a number above the psychologically significant
2 million threshold. This success (yet another neoliberal Potemkin
Village illusion) reportedly was achieved, in part, by using a
government website to count Latvians as resident in the country even
when they were just visiting to see relatives or check on property.
Regardless of the veracity of the lower or higher numbers, both are
unsustainably low and represent a slow euthanizing of the country.
While many Russians quickly left at Latvia's independence, most
subsequent emigrants have done so for economic reasons. Within a
half-year of the initial protests, emigration accelerated and the
number of children born in the country plunged as Latvia's economy
crashed and its government intensified fiscal austerity.
Austerity's defenders rejoin that the country had two national
elections and could have changed course. But they spin the details
that explain just why Latvia's policymaking elite have managed to
remain remarkably constant over the past twenty years. Latvia's two
parliamentary elections both before and since the crisis have turned
on endless ethnic politics. Austerity policy has been associated with
mostly ethnic Latvian parties, while more social democratic
alternatives have been associated with ethnic Russian parties. To be
sure, both ethnic communities were divided over economic policy, but
it was mainly the ethnic framing of this policy that ensured
austerity would prevail in a country still traumatized by the Soviet
occupation and divided over what economic policy to take in the wake
of the 2008 crisis.
Latvia's economic collapse was the deepest of any nation when the
financial bubble burst in 2008. Hot money flows had inflated its
property markets to world-high levels, thanks to its neoliberal
minimal taxation of real estate that was the complemented by onerous
taxation of labor. Given how deep the plunge was, there was room for
the inevitable bounce up thereafter - hailed as a recovery.
When one looks at the details, the so-called recovery was centered on
four sectors. First, is Latvia's correspondent (offshore) banking
sector that attracts and processes capital flight. Already a site for
illicit transfer of Soviet oil and metals to world markets before
independence, Latvia became a major destination for oligarch hot
money. The Latvian port of Ventspils was an export terminal for
Russian oil, providing foreign exchange that was a Soviet and later
Russian embezzler's dream. Figures such as the notorious Grigory
Loutchansky of Latvia and his Nordex became notorious for money
laundering. Even Americans were involved, such as Loutchansky's
partner, Marc Rich (later pardoned by Bill Clinton) who later took
over the Nordex operation.
The Latvian government signaled its intentions to defend this
offshore banking sector at all costs (including imposing austerity on
its people) when it bailed out Latvia's biggest offshore bank, Parex.
European Commission and IMF authorities gave a massive foreign loan
for Latvia that in part enabled the government to function after
bailing out Parex and thus its correspondent (offshore) accounts and
continued payment of above-market interest rates to "favored" (read:
"well connected") customers.
Although not in the league with London, New York and Zurich as a
criminogenic flight capital center, Latvia has carved out a
substantial niche in the global money laundering system. According to
Bloomberg: "As non-European inflows into Cyprus stagnate, about $1.2
billion flooded into Latvia in the first half of the year.
Non-resident deposits are now $10 billion, about half the total,
regulators say, exceeding 43 percent in Switzerland, according to
that nation's central bank." These are big amounts in view of the
fact that Latvia has only about a quarter of Switzerland's population
and merely a tenth of its GDP. This activity may make many bankers
rich, but does little to develop Latvia's economy. Moreover, it
represents a beggar thy neighbor policy that permits Latvia to
benefit from taking capital out of neighboring post-Soviet countries.
Second, Latvia's emergency response to the crisis was to ratchet up
clear cutting of forests. Latvia inherited massive woodland reserves
from the Soviet policy of converting farmland to forest. Export
growth in this category reflects asset stripping post-Soviet style.
That patrimony is being drawn down. While significant, one must
remember that given Latvia's far northern latitude, it takes fifty to
a hundred years to replace trees to maturity. So this resource cannot
be indefinitely sustained. Moreover, the move to develop more
value-added processing of Latvia's forests has been frustratingly
slow. Promises by the chief consumers of Latvian logs (e.g., Sweden
and others) to process logs into timber, paper and other products,
have mostly been talk, with little action.
Third, the fact that Latvia's neoliberalized economy has been
de-industrialized over the past two decades means that nearly any
increase in post-crash manufacturing represents growth in percentage
terms. Latvia has nearly no effective labor protections, and only the
weakest unions to advocate for decent working conditions and salaries
(or even sometimes to be paid at all). Wages can be pushed down from
what already were poverty levels, while businesses deploy labor in
any fashion they see fit, without regulatory structures to protect
workers. Simultaneously, Latvia's labor costs are far higher than are
economically necessary, thanks to the punishingly high set of labor
and social taxes designed to keep capital gains and real estate taxes
comparatively low. Even so, wages and "flexibility" have made Latvian
labor cheap enough to encourage some enterprise. Yet, there are also
real centers of innovation and entrepreneurial talent, but they
mostly succeed in spite of Latvian government policy, not by support
from it.
Europe's recent star export performers on a percent basis have been
Latvia and Greece - a metric that makes sense only as a bounce up
from a big post-crash. Latvia's per capita purchasing power is well
below that of even Greece. The modest uptick in manufacturing and
exports is positive, but Latvia still is ranked last in Europe for
innovation and R&D investment as percentages of GDP. The lack of
investment in innovation, combined with anti-labor tax and finance
policy, thus limits manufacturing's potential for much faster growth
as Latvian labor costs are higher than needed, due to regressive
taxation.
Fourth, there has been growth in the previously underdeveloped
agricultural and transit sectors. This has been encouraged by
food-price inflation in recent years and better policy and planning
from the Ministry of Transportation. Although transit historically
has been among the most corrupt parts of the Latvian economy and
government, centers of excellence have emerged in that ministry that
have leveraged up Latvia's transit potential. Russia's agreement to
use its rail lines to permit supply of American troops in Afghanistan
via Latvian ports hasn't hurt either.
The most revealing part of the New York Times' mostly puff piece on
behalf of budget cutting that can be seen as a model for America to
grin and bear the coming austerity, only comes in the concluding
comments by economists in Latvia who reported: "The idea of a Latvian
'success story' is ridiculous." "Latvia is not a model for anybody."
"You can only do this in a country that is willing to take serious
pain for some time and has a dramatic flexibility in the labor
market." In short, it can't be done in any real democracy.
For governments able to ignore the will of the people (an expanding
trend in rich developed countries), the Latvian model can only be
applied if one's country is:
* Small enough, willing enough, and able to let at
least 10% of population emigrate, headed by the most talented and
multilingual freshly minted graduates;
* Demographically secure enough to see family
formation, marriage and birth rates plummet;
* An ethnically divided population that enables
politicians to play the ethnic card to distract population from
economic issues; and
* A depoliticized Post-Soviet population willing to
give up protest after short period.
Any larger country attempting this level of austerity would need to
find an outlet for the some 10% of its people leaving. For the United
States, that would mean countries willing to take 20 million American
workers. Last time the authors checked, neither Canada nor Mexico had
the willingness or capacity to take these numbers, and not enough
American students have yet studied Mandarin to do China's laundry.
Latvia still has a well-educated population with highly developed
design sensibilities. Its skilled workers are known for their
creativity and attention to detail. With better economic policy, less
anti-labor tax policy, less subsidy of real estate and finance and
more investment in innovation - the opposite of what The New York
Times celebrates as Latvia's success story - it could replicate the
successes of its Scandinavian neighbors. The alternative is for its
neoliberalized economy to produce "recovery" in a way reminiscent of
Tacitus' characterization, put in the mouth of the Celtic chieftain
Calgacus before the battle of Mons Graupius: Rome's victories "make a
desert and they call it peace." Neoliberals call austerity and
emigration "stability" and even economic growth and recovery, as long
as people don't complain or demand an alternative.
Michael Hudson was Professor of Economics and Director of Research at
the Riga Graduate School of Law. He is a research professor of
Economics at University of Missouri, Kansas City, and a research
associate at the Levy Economics Institute of Bard College. His book
summarizing his economic theories, The Bubble and Beyond, is
available on Amazon. His latest book is Finance Capitalism and Its
Discontents.
Jeffrey Sommers is visiting faculty at the Stockholm School of
Economics in Riga, and Associate Professor of Political Economy &
Public Policy at the University of Wisconsin - Milwaukee.
Sommers is co-editor and author with Charles Woolfson for the
forthcoming Routledge Press volume, The Contradictions of Austerity:
The Socio-Economic Costs of the Neoliberal Baltic Model, of which
Hudson has a contributing chapter.
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