Monday, June 04, 2012

4% Growth Is "Flat"?

Jason Rave argues that Estonia isn't an example of successful austerity since supposedly growth has been flat since late 2010 and since GDP is still well below the pre-crisis level.

But regarding the first point we should first of all notice that as Rave himself writes, the budget was balanced in early 2010, meaning that the extremely high 2010 growth numbers of 8-9% provide the best test of the effects of austerity policies.. While growth did in did slow down in 2011 and the first quarter of 2012 from those extraordinarily high levels, it was still 4% in Q1 2012, the third highest in the EU after Latvia and Lithuania.

While Rave is correct to note that the absolute level of GDP is still significantly below its pre-crisis peak levels, that isn't relevant for evaluating policies implemented after the initial slump.

A somewhat better argument for dismissing Estonia as an austerity success story is that they were in part lucky. Strong recoveries in Sweden and to a lesser extent also Finland helped boost Estonia's exports to those countries,. Yet even if you adjust for that, Estonia's performance the last two years have been strong.