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Presentation by Dr. Anders Åslund, Senior Fellow, Peterson Institute for International Economics (USA) at Bank of Latvia conference ""Economic Adjustment under Sovereign Debt Crisis: Can Experience of the Baltics Be Applied to Others? Riga, November 2, 2012.
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Why Latvia Succeeded and Southern Europe Failed
Anders Åslund Senior Fellow
Peterson Institute for International Economics, Washington, DC
Bank of Latvia Riga, November 2, 2012
Political Preconditions 1. Immediate cause of crisis: External (liquidity freeze) 2. Big real output shock bred action 3. New government March 2009 4. Comprehensive & front-loaded crisis program
restored confidence early 5. Equity 6. Good salesmanship 7. Sufficient international support
Early, Radical Fiscal Adjustment
• Fiscal adjustment 9.5% of GDP in 2009 & total 16% of GDP
• More expenditure cuts than tax increases (2/3 in total)
• Confidence restored by June 2009
2.8 2.1 1.5
0.5
6.7
2.0
0.7
0
1
2
3
4
5
6
7
8
9
10
2008 2009 2010 2011 revenue expenditure
percent of GDP
16% of GDP Fiscal Consolidation, 2008-11
Credit default swap rates peaked in March 2009
0
200
400
600
800
1000
1200
1400
Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11
5-year, basis points
0
5
10
15
20
25
30
Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 RIGIBOR 3-month RIGIBOR 6-month RIGIBOR 12-month
percent per annum
Market interest rates peaked in June 2009
0
1
2
3
4
5
6
Jan-09 Mar May Jul Sep Nov Jan-10 Mar May Jul Sep
1st tranche of EC loan received 2nd tranche of EC
loan received
2nd tranche of IMF loan received
1st tranche of WB loan received
3d tranche of IMF loan received
3d tranche of EC loan received
4th tranche of IMF loan received
billions of euros
Foreign currency reserves bottomed out June 2009
Latvia Unemployment, 2008–2012
0
5
10
15
20
25
2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1
percent of labor force
Structural Reforms • Big, early expenditure cuts drove structural
reforms • Dismissed 29% of civil servants • Closed half state agencies • Deregulated & improved governance • Reduced public salaries by 26% & private
salaries by 10% in 2009
Equity • Maintained social safety net • Cut high salaries more than low ones and
social benefits • Increased indirect taxes, property taxes &
capital gain taxes • Prohibited double-dipping by senior officials • Action against corruption
Latvia: Set for Sound Growth since 2010
• Good governance • Competitive costs • Solid export expansion • Fast rising investment
Measures: Compare Latvia with PIG
• Budget deficit • Public expenditures • Governance • Labor costs
Latvia Brought Down Budget Deficit
-18
-16
-14
-12
-10
-8
-6
-4
-2
0
2005 2006 2007 2008 2009 2010 2011 2012E Latvia Greece Italy Portugal
Percent of GDP
Latvia: Public Expenditure as % of GDP Moderating
30
35
40
45
50
55
2005 2006 2007 2008 2009 2010 2011 2012E Latvia Greece Italy Portugal
Percent of GDP
0
10
20
30
40
50
60
70
80
90
Latvia Greece Italy Portugal Lower score indicates greater ease of doing business
Latvia: Best at Ease of Doing Business Ranking, 2013
Latvia: Sharply Falling Real Unit Labor Cost, 17%, 2008-11
80
85
90
95
100
105
110
2008 2009 2010 2011 Latvia Greece Italy Portugal
Index, 2008=100
Outcomes: Compare Latvia with PIG (2)
• Export expansion • Investment • Growth • Current Account
Rising Exports, Percent Change 2009 - 2012, yoy
-30
-20
-10
0
10
20
30
40
2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2
Perc
ent C
hang
e, y
oy
Latvia Greece Italy Portugal
YOY, Quarterly Statistics
Investment Recovering as % of GDP, Greece Just Falling
10
15
20
25
30
35
40
45
2005 2006 2007 2008 2009 2010 2011 Latvia Greece Italy Portugal
Percent of GDP
GDP Growth 2000-2012: Latvia Superior
-20
-15
-10
-5
0
5
10
15
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E
Latvia Greece Italy Portugal
Percent
Current Account Balance, 2007 & 2011: Latvia quick turn
-30
-25
-20
-15
-10
-5
0
5 Latvia Greece Italy Portugal
2007 2011
Percent of GDP
7 Lessons from Latvia for the World
1. Face reality and explain it! 2. Take early credible action to restore confidence =
measures depend on severity of crisis, 2-3 years 3. Early fiscal adjustment preferable 4. Better to cut public expenditures (2/3) than to
raise taxes
7 Lessons from Latvia for the World 5. Let expenditure cuts drive structural reforms 6. Make program equitable 7. Get sufficient international rescue financing up
front, but with conditions
Latvia: High Inflation Tamed, Only Brief Deflation
-4
-2
0
2
4
6
8
10
12
14
16
18
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E
Latvia Greece Italy Portugal
Average Consumer Prices, Percent Change