Tuesday, July 24, 2012

Baltic austerity "success"?

Two Baltic countries, Estonia and Latvia, have been recently touted as the poster children of austerity. Even Paul Krugman who tried to play down the success of Estonia has been chided in several twitter comments by none other than the Estonian President himself. For a president of a sovereign state to stoop so low is demeaning to the office of a president. Unless you take into account a few facts regarding that sovereign state.

To start with, the problem lies with presenting only half-truths which are quite common with statistics. Half-truths are in fact worse than outright lies. At least with lying, you know that the facts are false but with half-truths, the facts are, well, facts but only selectively disclosed. You don't know what's hidden and if you're like Krugman, you'll be stumped.

The Council of Foreign Relations has produced the following chart as evidence that the Baltics have performed better economically than Iceland and Ireland, two troubled states that are still recovering.

For Latvia, the Financial Times has an excellent op-ed piece, 'Latvia is no model for an austerity drive' written by Michael Hudson and Jeffrey Sommers. Sommers also has written a similar piece, 'Latvia's fake economic model' in the CounterPunch newsletter. We don't need to elaborate further on what they have written but there are other relevant facts that should've been highlighted to enable us to view the issue in the right perspective.

For this, I've summarised on the left the 2011 GDP, population size and GDP per capita of the two Baltic states that supposedly have successfully undergone the austerity regime plus those of the PIIIGS, that is, including Iceland.

Though both Estonia and Latvia are sovereign states, their population sizes are no more than that of a city. Worse, the three Baltics states, i.e., including Lithuania, have been suffering a population loss of more than 1.5 million or 15% since 1990. That loss is the fastest in Europe.

Now look at the GDP size. For both Baltic states, a 10% increase in GDP amounts to less than 1% of Greece's GDP. Even their GDP per capita is much less than that of the other economically problematic European states. With such low starting bases, it's easy to go up. Living next door to rich neighbours to their north and west, there's bound to be some economic spillovers from them, especially with the Baltics' relatively low labour cost. Simply plonking a few export generating factories can easily boost their GDP. Even any bailout fund is small change for their big neighbours.

If Iceland, another small state but with high GDP per capita, were to adopt the austerity regime instead of close to a 50% devaluation, the economy would have collapsed because the alternative would have been a 50% across-the-board cut in wages. Still, the foreign debts of its venturous and now collapsed banks remain unpaid. But at least with the devaluation the local debts can be easily managed or even paid off. That should've been the first step in any economic recovery process: whittle the debts through either debt write-offs or high inflation which is synonymous with currency devaluation.

In another related matter, Angela Merkel early this month commended Bulgaria for its fiscal virtue. Let's see how do Bulgaria's statistics rank with the others. Its 2011 GDP is $53.51 billion while its population is 7.476 million, giving it a GDP per capita of just $7,160. Comparing apple with orange may not be right but probably still acceptable. But this not even orange, it's peanut. Are the eurozone leaders taking us for monkeys?

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