Home > The Economics Profession, The Economy > Austerity or prosperity? Or: does firing teachers lead to higher exports?

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)

Industrial production, EU countries, 2005 = 100

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.

Growth of industrial production, EU, last year and last six months

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.

  1. Merijn Knibbe
    May 25, 2011 at 12:20 pm

    A little bit more on the succes of Estonia (and my personal shibbolet: a modern market industry requires public as well as household as well as private investments and time and craftsmanship, not austerity and ever lower wages), in this case the rare earth business, which has roots in the Soviet economic system and especially in investments in human capital in those days. This succes has little if anything to do with low wages and austerity and everything with demand and human capital. I’m not a friend of soviet style economic systems – but even despite the injustices and waste of this system its investments in human capital pay off, forty years later, and enable (in a completely different institutional setting, of course, but still based on ancient ties with Russian mining companies)a modern maket oriented industry to reap a kind of wind fall profit:

    “In the early 1970s, the town of Sillamäe in the Ida-Virumaa region of Estonia had been taken off the map and, over time, given code names such as Leningrad 1 or Moscow 400. Closed off to the world, the Soviet Union began experimenting with a mixture of acids to try to separate rare earth elements. At the time little was known about how to extract these tight-knit elements and how exactly they could be used.

    Today, companies around the world are scrambling to get their hands on any number of the 15 or 16 elements which are essential in the production of high-tech gadgets such as iPods and green technologies such as wind turbines.

    ‘Outside of China, there are very few people who know about the hydrometallurgy of rare earths. I believe that the largest concentration of those people are right here in Sillamäe, Estonia,’ David O’Brock, CEO of the rare earth supplier, Silmet, said.”


  2. May 28, 2011 at 9:57 am

    It is really absurb to believe that the firing teachers and nurses and slashing government wages 35% would lead to an economic renaissance. However, all inhuman measures imposed now on Greece -and not only- are based on those absurdities

  3. Georg R. Baumann
    May 31, 2011 at 10:22 am

    I think it was back in 2008, when the somewhat conservative German Manager Magazin had a headline that triggered my attention, the chose the title global heist and not global financial crisis. I found this remarkable, and it emphasized my own view, I think they hit the nail.

    There is another analogy on my mind if I compare this with a school situation, and stuff like this happened, where teachers and students, both were faced with a handful of extreme Bullies that terrorized the normal school life, and they were helpless for some time to deal with that. The solution only came after all, teachers, students, and parents came together to find ways out of this. As the Bully-Club was located in one class, the solution was simple, they separated them, broke them up and assigned them to different classes. Of course there was resistance, the parents of the Bullies were in denial, but eventually it worked.

    Basel III is working from the inside. – FWIW, I don’t think it is even remotely enough. – However, it can not be considered as a deep structural reform. Instead of breaking up the unhealthy power of megalomaniac Bank Institutions, the result after four years is that we have an even higher concentration of capital now.

    Living in Ireland, I shall be forgiven to make the statement that I believe we witness the re feudalization of European societies. When I see how the EU-Commission now considers a Treuhand-Model for Greece, and recent ECB policies in conjunction, then I fear the right hand is not knowing what the left hand is doing.

    It is hard to predict, but I would guess that the EU/ECB/IMF shock troops underestimate the potential for civil war like scenarios in Greece. The somewhat dosile Irish are a different story. The correlation of geopolitical power shifts and prescribed EU/IMF policies is another aspect that is not very well reported on in the mainstream media.

    I think it is fair to say, you can not safe both, society and the banks, and it seems they made their choice, as ideologically locked in as they are.

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