On Thursday, April 19, at the conference "Financial Crisis in Latvia. Analysis. Lessons. Recommendations" organized by the Association of Economists 2010, Prime Minister Valdis Dombrovskis emphasized that in the coming years more rapid growth is expected in Latvia than in Southern Europe.
In his lecture, Prime Minister V.Dombrovskis analysed the progress of the financial crisis, the accomplishments in overcoming the crisis and compared Latvia’s experience with the results in Greece, Italy and Portugal. He stressed that a striking contrast can be observed between the national growth models of Latvia and countries in Southern Europe: from 2000 - 2007, Latvia experienced a tremendous boom during which the average development amounted to 8.8%, but the annual growth in Italy and Portugal was only 1.5%, while in Greece – 4.3%. The 18% decline in GDP that Latvia experienced in 2009 was strongly felt, while the Italian economy lost 5.5%, but Portugal and Greece – only 2.5%. In 2010, even a slight growth could be observed in Portugal and Italy, while a constant and severe recession started in Greece that has lasted for already five years and the total drop amounts to the volumes experienced in Latvia. The recession is back also in Italy and Portugal. Latvia has not returned to the previous, very rapid growth rate that was enhanced by excessive credit growth; however, in 2011, its growth reached 5.5%. In the coming years, Latvia will undoubtedly have significantly higher growth than Southern Europe, stressed the Prime Minister.
Even though the crisis differs by country, the ultimate goal is to regain competitiveness and investors’ confidence.
In many areas, in terms of structural reforms, Latvia has already achieved more than other countries at similar level of economic development – the first unit of measurement of structural reforms is the assessment in the World Bank’s Doing Business Index, where Latvia ranks the 21st among 183 countries. Latvia also ranks the 60th in the world according to GDP per capita adjusted to purchasing power parity and it is indicative of significant opportunities for future growth. Comparatively – Italy ranks the 87th, while Greece the 100th.
The Prime Minister mentioned that the export dynamics play an important role in overcoming the crisis –from Q2 2010– Q3 2011, the export has increased from 18- 32% each quarter, compared with the same quarter of the previous year. The export volumes of Portugal and Italy grew by 15%, while Greece lagged behind other countries. Gross product recovered in all countries under the influence of export growth and it was enhanced by equally rapid growth of production.
The Prime Minister emphasizes that the countries with fixed exchange rates implemented more extensive fiscal adjustment and structural reforms, which resulted in and the result was a more rapid increase in exports and gross product. These conclusions are useful for those euro area countries, which need structural improvements. “The statement that devaluation is needed to improve national competitiveness is not true,” says V.Dombrovskis.
In 2011, the investment ratio of Latvia already reached 23% of GDP and it will, most likely, continue to rise. "The investment ratio in Southern Europe is very low; Greece and Portugal have significantly reduced it, however, the investments of these countries should recover to experience appreciable growth again," says V.Dombrovskis.
In May, 2008, the inflation in Latvia reached its highest point – 17.9%, but afterwards, under conditions of global recession and affected by the ruling deflation, the inflation dropped as a result of credit reduction. Since Southern European countries experienced neither boom nor "overheating", they had low inflation ranging from 2-4% per year.
In 2011, most countries retained low inflation – 3-4%. The impact of deflation and deflation cycle was greatly exaggerated – in 2009; Latvia experienced a slight inflation of 1%. Prices remained at the previous level, because in such a small and open economy many prices are set internationally. The inflation amounting to 4.4% in 2011 that is still the highest potential obstacle to Latvia's plans to join the euro area in 2014 turned out to be much more dangerous. The government plans to reduce inflation to 2.4% this year.
At the conference, the experts and economists were introduced to the premium edition of the book "How Latvia Came through the Financial Crisis" in Latvian in electronic form published for Latvian students and pupils by the Association of Economists 2010. The authors of the book are V.Dombrovskis, Prime Minister and Anders Åslund, economist at the Peterson Institute for International Economics (Washington).
"In the financial crisis-torn Europe, Latvia serves as an example for other countries. We believe that such result has been achieved due to two reasons: first, Latvia simply had no other option under conditions of external liquidity crisis; second, the country adopted and implemented a number of sensible decisions," acknowledge the authors of the book and mention the phenomena which contributed to overcoming the crisis in Latvia.
1. A real sense of crisis can be very helpful. The deeper the crisis, the more people are aware of its existence and it is more likely to implement structural reforms.
2. The crisis may lead to a new way of thinking with new, clearly defined principles. The ideas which came to the fore during the crisis in Eastern Europe were mainly related to public spending cuts and improvement of public sector efficiency and were not new; however, they contradicted selfish interests of previously ruling oligarchies.
3. To overcome the crisis, there is a need for new government. During the crisis, Latvia changed government twice. The leaders who had leaded the country to crisis were not able to implement radical changes. Crisis management requires the opposite approach, i.e., new ideas and commitment.
4. Under conditions of solving the crisis, the knowledgeable policy makers come to the fore.
5. A comprehensive and operational reform program is usually being developed immediately after the formation of a new government. Under conditions of crisis, leaders should focus on key problems, not wasting time on other issues, which do not allow focusing on the essentials.
6. The Parliament's support is needed, but the targets can be achieved also if the government has only a slight majority in the Parliament.
7. Measurements are an extremely important prerequisite to prevent the policy's deviation from the main goals. All that is measured can be achieved. For instance, the World Bank – International Financial Corporation Index (2011), which reflects the quality of business environment, helped Latvia reduce the bureaucratic obstacles.
8. International support and adequate funding is an important factor. The most important institutions for the international loan program of Latvia were the International Monetary Fund and the European Union.
9. Justice also matters. Latvia developed its adjustment program so that greater burden was imposed on the shoulders of the wealthy, at the same time taking care of social security.
10. Also the social pact or cooperation with representatives of the employer's organization, trade unions and local governments is useful. The representatives of all these parties agreed on painful budget cuts, thereby helping maintain the social equilibrium.
11. The most important point is quick and decisive implementation of the anti-crisis program. The reform government rapidly began the reforms, clearly showing the society that the paradigm has changed, and thus gained its trust.
12. The opportunity assigned to the country to monitor the crisis management program is important. The Latvian authorities insisted that they maintain currency stability, although the IMF objected it. Thus, Latvia took the lead of the stabilization program and that was a clear advantage.
13. Ability to present and transparency. Crisis leads to rumours and suspicions; therefore the government program should be accessible for everyone, clear and comprehensible.
Information about the book "How Latvia Came through the Financial Crisis": http://www.mk.gov.lv/en/aktuali/zinas/2011/05/270511-mp-01/
CV of the Prime Minister of Latvia: http://www.mk.gov.lv/en/mp/?lang=1
For the photos of the conference please visit: http://www.flickr.com/photos/valstskanceleja/sets/72157629487878008/
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