Saturday, February 18, 2012

The Baltic States Do Not Exist According To The Economist

The writer "G.I." at The Economist claims that:

"I would go further and say most, if not all, resolutions of balance of payments crises involve devaluation. For Greece to pull this off without devaluation will require a brand new template."

Except that the baltic states did in fact pull it off. In 2007, Estonia had a current account deficit of 18% of GDP (an even bigger deficit than Greece ever had) yet by 2009 they had turned it to a surplus. Latvia and Lithuania had deficits similar to Estonia's relative to GDP in 2006 and 2007, yet by 2009 they too had surpluses. And all of them did it without devaluations.

The reason why they were able to do it so quickly is because unlike the deeply dysfunctional Greek society where all too many seems to think that strikes and vandalism is the path to prosperity, people in the Baltic states have focused on trying to produce more and to the extent they can't they simply stopped spending money they were unable to earn.


Blogger Ralph Musgrave said...

If an EZ country is running a balance of payments deficit and budget deficit, it can always cut both by a tax hike or a public spending reduction. But that just raises unemployment, which is not much of a solution.

A solution to that unemployment is for citizens to get jobs abroad, which is actually what Baltic states people did in large numbers, though I don’t have the actual figures.

In short, would I be right in thinking that the “Baltic state” solution is not for the relevant STATES to produce more, but for Baltic state CITIZENS to produce more (in other countries)?

6:49 AM  
Blogger Andis said...

Thank you for noticing :)
People from Baltics.

7:54 AM  
Blogger stefankarlsson said...

Ralph, yes, emigration from the Baltic countries increased significantly because of their economic crisis. If you (and others) search for numbers you can find it here. It was primarily Lithuania that had significant emigration, but there was also significant net emigration in Latvia while there were little signs of that in Estonia.

In any case, these facts have no relevance to the conclusion that austerity as well as decreased private dissavings solved their balance of payments crisis. The fact that some moved abroad was probably for the best for them and their employers in their new countries.

8:42 PM  
Blogger flute said...

There is another important difference. When the Greek circus started at the end of 2009, their public debt to GDP ratio was around 120%.
Latvia at the end of 2008 (when their circus started) had a ratio of around 20%, Lithuania around 16% and Estonia around 5%. That made their situations more manageable. Even though their public debt to GDP ratios have risen a lot since then, they are still at reasonable levels: at the end of 2010 it was 45% for Latvia, 38% for Lithuania and 7% for Estonia.

8:37 PM  
Blogger stefankarlsson said...

Flute: yes, the Baltic countries had a lot lower government debt (and in fact surpluses before the crisis started), but they had far bigger housing bubbles and private indebtedness, so it doesn't affect the principle that it is possible to reduce excess spending.

7:59 AM  
Blogger flute said...

Of course you can reduce government spending, but it's a lot harder to balance the government deficit when the government has a very large debt as in Greece, where increasing interest rates on the government debt will make debt service grow faster than you can reduce other spending.
I agree with you though that there are many other problems involved in the Greek case, e.g. the dysfunctional society.
This of course does not make what the baltic countries did less impressive. I for one believed in 2009 they wouldn't make it, but I was proved wrong.

5:52 PM  

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