Austerity or prosperity? Or: does firing teachers lead to higher exports?
from Merijn Knibbe
About 6 months ago, Anders Aslund, IMF-economist, published an article in which he stated that Austerity was succesful, especially in the Baltics: http://www.project-syndicate.org/commentary/aslund25/English. Firing teachers and nurses and slashing government wages 35% would lead to an economic renaissance (read the article, I’m not being ironic). This leads to the question: did laying off government employees and slashing government wages by up to 35% free domestic resources for exports? At the time, he seemed to have a small point. Industrial production was increasing again, though it was still way below historical levels. Did this surge continue? Let’s look at the facts (graph 1)
Graph 1. Industrial production, EU countries, 2005 = 100 (data: Eurostat)
As we can see, except for Estonia the Baltic countries do not compare to well with other transition countries in a long term perspective. In fact none of the present austerity countries do well, a situation which except for Ireland and Spain was already visible in the beginning of 2008. When we look at more recent data a comparable pattern emerges (graph 2).
Graph 2. EU countries, growth of industrial production, March 2010 – March 2011 (dark blue) and last six months, yellow (anualized). Data: Eurostat.
Graph 2 shows the percentage growth of industrial production during last year (march 2010-march 2011) and the last six months (annualized rate). As we can see, Aslund had a little point six months ago – but at the moment production in Latvia and Lithuania is declining and developments are among the worst of the entire EU. It does not take unemployed teachers and nurses and extremely low wages to increase export production, it takes a modern industrial sector. And it takes time to build such a sector. Estonia is a case in point. A new Ericsson mobile phone factory greatly adds to production and exports – and Ericsson has been active in Estonia for ten years. The Baltics need investments, in physical and human and social capital and in good houses and perfect roads and higher wages (productivity is about 40% of the average EU level, wages about 20%), not austerity. I believe in working hard, and saving and investing – but unemployed and underpaid people do not work, or save, or invest. They emigrate.