January 2013        

The Baltic Ireland?

Like Ireland, one of the EU’s most highly celebrated anti-labour austerity success stories is Latvia. Latvia is portrayed as the country where labour did not fight back but simply emigrated politely and quietly. No general strikes, nor destruction of private property or violence: Latvia is presented as a country where labour had the good sense when faced with austerity not to make a fuss.
     Latvians gave up protest and simply began voting with their feet as the economy shrank, wages were scaled down, and tax burdens remained decidedly on the backs of labour, even though recent token efforts have been made to increase taxes on property.
     The World Bank applauds Latvia and its Baltic neighbours by placing them high on its list of “business-friendly” economies, even though at times scolding their social regimes as too harsh even for the Victorian tastes of the international financial institutions.
     Pro-austerity gurus applaud Latvia’s economic and demographic plunge as the “Latvian Miracle,” depicting its austerity and asset-stripping as an economic success. What they mean by “success” is slashing wages and leaving the tax burden primarily on labour and lightly on capital gains, without spurring a revolution or even Greek-style general strikes.
     Latvia is the country that has come closest to imposing a tax and finance model that includes a two-part tax on wages and social benefits that are near the highest in the world, while property taxes are well below EU and American averages. Meanwhile capital gains are lightly taxed and the country has become successful as a capital-flight and tax-avoidance haven for Russians and other post-Soviet kleptocrats that has permitted Latvia to “afford” deindustrialisation, depopulation, and desocialisation.
     Latvians protested against both the corruption and the proposed austerity following the crash of 2008. This was most evident in the massive protest in Rīga on 13 January 2009, attended by 10,000 people. This was followed by a series of protests by students, teachers, farmers, pensioners and health workers in the following months.
     A harsh austerity regime was imposed, and protests did abate. What happened? In a word, emigration.
     At least one tenth of Latvians have left since the country became a member of the European Union in 2004 and of the Schengen Area (uniform immigration area). This exodus accelerated following the economic crash in late 2008. Latvia’s population is small enough for the bigger EU countries to be able to absorb its departing work force.
     And in fact the country has been experiencing emigration since 1991, when it broke from the Soviet Union and adopted neo-liberal policies. Yet the country, which can ill afford emigration, saw people leaving in ever greater numbers nearly two decades after independence.
     Its population of 2.7 million in 1991 dwindled to an official 2.08 million in 2010, through a combination of emigration and a financial environment too precarious to permit marriage and children.
     And this official number from the census is quite optimistic. Demographic reports originally showed a figure of 1.88 million in 2010, and demographers report government pressure on census-takers to come up with a number above the psychologically significant threshold of 2 million.
     Within six months of the first protests, emigration accelerated and the number of children born in the country plunged as the economy crashed and its government intensified fiscal austerity.
     Latvia’s unemployment remains high, at 14.2 per cent, despite a significant portion of its population having emigrated. Its economic collapse was the deepest of any country when the financial bubble burst in 2008. Flows of hot money had inflated its property market to world record levels, thanks to its neo-liberal minimal taxation of property, complemented by heavy taxation of labour.
     Given how deep the plunge was, there was room for the inevitable bounce thereafter, hailed as a recovery. When one looks at the details, however, the so-called recovery is seen to have been centred on four sectors.
     First is Latvia’s offshore banking industry, which attracts and processes capital flight. Latvia became a major destination for Russian oligarchs’ hot money. The government revealed its intention to defend this offshore banking at all costs, including imposing austerity on its people, when it bailed out the country’s biggest offshore bank, Parex.
     The European Commission and the IMF gave a massive foreign loan to Latvia that in part enabled the government to function after bailing out Parex and thus its correspondent (offshore) accounts and the continued payment of above-market interest rates to “favoured” and “well-connected” customers.
     Latvia has carved out a substantial niche in the global money-laundering system. According to the Bloomberg economic news service, “as non-European inflows into Cyprus stagnate, about $1.2 billion flooded into Latvia in the first half of the year. Non-resident deposits are now $10 billion, about half the total, regulators say, exceeding 43 per cent in Switzerland, according to that nation’s central bank.” These are big amounts in view of the fact that Latvia has only about a quarter of Switzerland’s population and merely a tenth of its GDP.
     Secondly, Latvia’s emergency response to the crisis was to step up the cutting of forests. It inherited massive woodland reserves from the Soviet policy of converting farmland to forest. That patrimony is being cleared. Given Latvia’s northern latitude, it takes fifty to a hundred years to replace trees to maturity, so this resource cannot be indefinitely sustained.
     Thirdly, the fact that Latvia’s economy has been deindustrialised over the past two decades means that almost any increase in post-crash manufacturing represents growth in percentage terms. Latvia has virtually no effective labour protection and only the weakest unions to campaign for decent working conditions and wages (or even sometimes to be paid at all).
     Wages can be pushed down from what were already poverty levels, while businesses employ labour in any fashion they see fit, without regulatory structures to protect workers. At the same time Latvia’s labour costs are far higher than are economically necessary, thanks to labour and social taxes designed to keep capital gains and property taxes comparatively low.
     Even so, wages and “flexibility” have made Latvian labour cheap enough to encourage some enterprise. While there are real centres of innovation and entrepreneurial talent, they mostly succeed in spite of government policy, not because of support from it.
     Fourthly, there has been growth in the previously underdeveloped agricultural and transit industries.
     Latvia still has a well-educated population, and its skilled workers are known for their creativity and attention to detail. With better economic policy, less anti-labour tax policy, less subsidy of property and finance and more investment in innovation the Latvian economy could be a success.
     In the meantime the political and policy-making elite call austerity and emigration “stability” and even “economic growth and recovery,” as long as people don’t complain or demand an alternative.
     Sound familiar?

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