Capitalism failed Latvia…

from Merijn Knibbe

The discussion about the Baltic economies is flaring up again: did Extreme Austerity work, or did it fail? Krugman, Aslund and Hugh have joined the debate (see websites below). Can some historical and comparative analysis add someting to this clash of ideas? Yes. See the graphs below.

Any lessons? Yes. First: the Polish economy, which for a number of reasons can be compared with the Baltics, did so much better – the economic crises of the Baltic economies are not a ‘law of nature’.

Second: we should stat to treat highly flexible capital searching for yield which left the Baltics already since the beginning of 2007 as risk bearing investments: save the people, not the banks. Investors have to pay fines when they withdraw their capital (by the way: just like I have to pay a fine when I withdraw money from a long-run savings account: I’m already paying the Tobin tax to my bank, why shouldn’t banks and other financial be treated as they treat their customers). 

Third: I never did share the morbid neo-liberal preference for ever increasing private debts (mortgages, study loans, consumer credit, high business loans and the like). Good for the banks, not for the people. The Baltics show why my gut feeoling is right (see especially the post of Hugh). But where does demand have to come from, when an increase in private debt can’t fuel it anymore (and believe me: the pre-2008 developments did show that Baltic supply was able to handel a 7 to 10% yearly increase in demand!).

Some facts:

1. Latvian 2010 GDP was as high as in 1990 (graph 1, below).

Addendum – One can state that, as is not a Soviet style socialist economy anymore, 2010 GDP is a better metric of real prosperity. Well, I do  not now, one should ask the Latvians (though real Domestic Income is arguably much closer to any concept of prosperity than Domestic Production). But I do know that present unemployment is, with 16 to 20%, much higher than in 1990….which was not supposed to be part of the market economy deal. In 1990 there indeed might have been a lot of disguised unemployment – but at least you had some kind of income, and health care. Again, I’m not a friend of Soviet style economies – but a capitalist economy with uber uenmployment of above 12% (10%? 14%?) has failed, too.

 

2. Break neck productivity increase did not prevent the recent break down of the Latvia economy (graph 2).  

Addendum a. Productivity increase in the extremely neo-liberal Baltics was not higher than in less neo-liberal Poland

Addendum b. Poland, which had and took more financial and monetary independence, did, unlike the Baltics, not experience any kind of extreme production decrease

3. Productivity in the transition countries is still very low (graph 3)

Addendum a. This means that there still is ample space for break neck productivity increases. As Polish productivity continues to increase while Baltic productivity increase is stalling, it seems that Austerity leads to worse competitivess of the Baltics comapred with neighbouring Poland…

Addendum b. Often, ‘Unit Labour Costs (ULC)’ are used to investigate competitiveness of countries. When we look at the Eurostat definition of ULC (wage costs excluding self employed divided by GDP (including self employed)) it is however clear that (to name only one example) for instance a rise in the amount of paid labour and a connected decrease in the amount of self employed (like small farmers) leads to higher ULC. It’s in fact probable that 1811 ULC of the USA were lower (according to the Eurostat definition) than 2011 USA ULC, which however does not mean that the 1811 USA economy would in any way be able to compete with the 2011 economy (the Amish are, by the way, a real life experiment). Productivity can rise ten, twenty or even hundredfould (threshing in agriculture, to name one example)- and it are these increases which enabled out present high productivity economy. ULC, however, does not directly show these kinds of increases and is, without further investigation, a somewhat a-historical concept. It is important to know why ULC increased of decreased! Any way: productivity in the Baltics and many other economies rose much faster than in fabled Germany, as is shown in the nex graph.

 

4. The crisis hampered productivity growth in the Baltics, deteriorating their competitive position! (graph 4)

Graph 4. compound growth rate of productivity per hour, 2000-2007 and 2007-2010 (sometimes: 2009).

Addendum: Just compare the Baltics with Poland and Slovakia – the crisis led to a marked decline in productivity growth in the Baltics!

Fun fact: The Greek outperformed the Germans, when it comes to productivity increases. The Greek work, on average, much more hours too, than the Germans. In retrospect, Kohl was right, with his idea of Germany as a “Kollektiven Freizetpark” (Communal Leisure Park) and Merkel is wrong, with her idea about shirking, lazy Greek who do not know any better to do than to squander German money.

All data: Eurostat.

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