Austerity and emigration: the case of Lithuania (graphs)
The Baltic countries (Estonia, Latvia, Lithuania) were, after a huge bubble and severe slump caused by large inflow and subsequent outflow of Swedish capital, the first countries to embrace austerity and internal devaluation (2009). External devaluation, proposed by the IMF, was obstructed by Swedish banks. Internal devaluation policies led to an even deeper slump and skyrocketing unemployment. But also to a massive outflow of people. Statistics Lithuania happens to have excellent and up to data information about this.
In Lithuania, with about 3 million inhabitants the largest of the three states, net emigration increased from 8.000 in 2008 to 78.000 in 2010 (2,4% of the total population), to decline to a still impressive 39.000 in 2011 (source: Statistics Lithuania). Graph 1 and 2 show gross (!) emigration per age group (i.e. only the people who leave, not counting immigrants). Clearly, especially the young (healthy, dynamic and probably well-educated) people are leaving. The irony: the Lithuanians invested in this ‘human capital’, the Swedes and Germans will use it.
And yes, an 8% emigration rate is very, very high. As the total number of immigrants in 2010 was about 5.000, gross emigration is a reasonable approximation of net migration per age group (in 2010!). Data per age group are not yet available for 2011.
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Real-World Economics Review Blog 
This problem dates back to 1991. In Estonia, property which had been expropriated in 1938 was returned to the descendants of the previous owners. This was very nice for a very few, who found themselves in possession of extremely valuable real estate. Whilst some form of reparation was reasonable, this was not the right way to do it. Estonia, I believe, introduced some form of land value tax but not enough to prevent the growth of the property bubble referred to, financed by the Swedish banks, who ought to have known better following their experiences a decade earlier. By 2006 this was approaching bursting point, even though there remained many derelict buildings even in the centre of the capital, Tallinn.
Much the same was evidently the case in Latvia, where again, there are numerous empty and derelict buildings in the capital, Riga. Latvia also suffered from the collapse of obsolescent Soviet-era industry, even though much is still in operation, such as the antiquated coal shipping dock at Riga.
A further factor in the Baltic equation is that there is much cash-in-hand business. There appears to have been some kind of land distribution at some time in the Soviet period, as small scale agriculture is much in evidence, with the produce being brought to market by family market traders. This in itself is an excellent thing, since it provides a substantial proportion of the population with their own means of livelihoods without having to rely on companies to provide them with jobs. It is also good for consumers as there is a good supply of fresh and varied food of good quality. But it is a nightmare if the government is trying to rely on taxes on wages, goods and services as its main source of revenue. It impossible to keep track of what people are doing and it discourages people from doing anything – so they emigrate.
Having regard to these circumstances, whoever advised the Baltic governments to impose taxes on sales and wages were idiots, since the only reliable way they can raise revenue is through a tax on land values.
Ironically, Sweden too is suffering from its tax system, with 8% unemployment and over 20% in the 16 to 25 age group. The Swedish government should also know better, since it actually has a little bit of land value tax, enough to discourage owners from leaving valuable city centre properties vacant for extended periods.
The conclusion to be drawn is that the Baltic countries should phase out their tax systems in favour of LVT because conventional taxes cannot raise the revenue and discourage economic activity, whilst Sweden should do the same because the present tax system is an exercise in self-harm.
A good example of modern colonialism
Hardly colonialism. The Baltic governments were badly advised, the Swedish banks lent foolishly and the people swallowed the false idea that land is wealth.
If there is any blame to be placed anywhere, it is amongst academic economists who teach bad theory and bad philosophy. The churches could do a better job, too, by reminding everyone that usury is a sin. It says so in the bible and the popes re-stated the position regularly.
Really interesting, the people are clearly disillusioned with the countries ability to supply work, do you know what the unemployment figures are for these countries?
Did a similar piece on Spain’s youth unemployment http://economicinterest.wordpress.com/2012/02/20/spains-current-problem-with-youth-unemployment/
The concept of a country’s ability to “supply work” is based on a misconception. The amount of work that needs to be done in the former Soviet colonies is effectively unlimited. But as I pointed out in an earlier post, the capital cities are blighted by vacant land and derelict buildings which the owners do not put on the market, thus is not available for people to use. It is not so much an inability to supply work as a lockout from opportunities to do what needs to be done. On the other hand, both Estonia and Latvia have an unusually large sector engaged in small scale agriculture, which gives some people excellent work opportunities. The picture is mixed. In some ways, these countries come close to the Chestertonian “three acres and a cow” idea.
Much as I enjoy fresh thinking in Economics, much of it shows itself to be the result of lazy thinking and lack of research.
A couple of thoughts:
The emigration figures shown here are those of residents that officially discontinue their residence in Lithuania. Many Balts living and working abroad maintain their residence in the region. In 2010, the Lithuanian government introduced a nominal flat rate for health care on Lithuanian residents that did not pay social security through their employment (we’re talking small amounts here, about 20 Euros per month). This led to a spike in the number of people turning up at their local registry offices to have themselves crossed of the register. This is not necessarily a direct effect of the so called austerity measures, but generally shows the number of people leaving because of lack of infrastructure, prevalence of corruption, etc.
(The Latvian government is introducing a similar charge this year – wait for its effect in official emigration numbers in the next months).
Anecdotal evidence suggests that it’s not primarily the best educated that leave the country, but manual labour from rural areas. The local (tertiary) education system has little to offer, thus the brightest youngsters leave for abroad to study these days. Quite a few do actually return after some years.
Those that do remain abroad support their relatives in the region, but not to the tune of 25% of national income, as reported here:
rwer.wordpress.com/2012/02/25/unemployment-in-lithuania-a-study-about-debt-and-the-economics-curriculum/
This probably shows more the prevalent lack of understanding of macro economics: http://123.emn.lt/en/emigration/how-much-money-emigrants-send-home, using concepts such as net national income.
Eurostat shows NNI as 84,3% of GDP in 2010, when GDP stood at 27,5 b Euro. The mentioned 4,1 b Litas translates into 1,2 b Euro, so we’re talking 5% of NNI (4% of GDP).
Much more remains to be said about who insisted on remaining the currency peg. Swedish banks certain benefitted, but the local populace foolishly understands them as guarantee of their wealth and local pride…
I quite appreciate Henry Law’s first comment above – proves the IMF isn’t always wrong.
Thanks for the comments – and we seem to agree about the IMF which initially suggested devaluation for the Baltics! Remember that, back in the good old days before the Euro, Germany revaluated the Mark every seven or eight years…
About income: thank you for cross checking the data. The source I mention is an official EU publication. Checking Statistics Lithuania it does, however, not seem impossible that the EU mixed up quarterly NNI data with yearly remittances data.
About emigration and immigration and the like: I’m not yet entirely convinced. There is of course a difference, especially in the case of migration statistics. Even then, the data point to massive emigration of especially people younger than 35.
Dear Gvidas,
thinking about your comment:
What I’m going to do (as the readers of this blog have to be able to trust the data, or at least have to know where these are coming from):
* I’m as a rule not going to cross check official statistics, like emigration, from official sources like Statistics Lithuania or Eurostat or scientific articles. In depth information about them is of course always welcome.
* I will however either cross-check statistical data from non-scientific sources (newspapers and the like) or mention that I haven’t cross checked them.