Latvia: Another Failed Neo-Liberal Experiment

Putin's image as projected in the West shows he embodies many neologisms befitting only the most diabolical: he is a neo: Stalinist, Leninist, Hitler, Breznhev (I haven't seen him described as a neo-Trotsky, but that maybe because the left still carry soft spots for Leon.) This neo-all-things-evil has accumulated an impressive resume. He has started a war in Ukraine, invaded Abkhazia and Crimea, shot down a civilian Malaysian airliner (MH-17), used Russia's large oil and gas resources as a geo-political weapon (unlike the House of Saud of course whose mild and gentle wahabbism feature humanitarianism beyond the reach of the KGB's star misanthrope). The anti-Putin narrative is so pervasive in the West that belief in it is a prerequisite for being enlightened. Of course the West has constructed this narrative without providing much supporting empirical evidence. Do they care? No. Because their brand of imperialism is served by robust repetition of lies to a degree necessary to pump life into their straw man. One small example though shows how deeply embedded their anti-Putinism (or Russia for that matter) has distorted their analysis of many events, including Latvia. That is right: Latvia.

Latvia moved toward the neo-liberal grace of westernization. It seemed destined to be another economic "miracle." Nothing slows momentum to the next miracle like a Russian diaspora. This diaspora damaged Latvia thus:

Of all the Baltic republics, Latvia has the highest percentage of Russian diaspora, and faces many similar problems to those Estonia now tries to deal with. The Russian-language PBK network, which is sold programs and news by Russia at low rates, is the second most watched channel in the country. Latvia’s role as a center for money laundering also makes it highly dependent on financial flows from Russia: half of the country’s investment comes from foreign depositors, largely from former Soviet states. In the words of the Guardian’s Luke Harding, Latvia has become “a playground for Russian interests: business, political and, above all, criminal. . . . The Kremlin’s agenda in Latvia is to slowly reverse the country’s strategic direction from pro-west to pro-Moscow.” And in this it has had some success. “I’m afraid of all this Russian capital,” Valeri Belokon, an important Latvian banker, told Harding. “Capital is influence. . . . The danger for a small country is that we become dependent on Russia. We definitely have to defend ourselves.” [1]

Latvian bankers need protection from "Russian capital."  We can infer that Russians inverted their Leninism and began a capital-induced imperialist expansion to reclaim what it lost in 1991. Right? Regardless how much Russian capital has invaded and conquered Latvia, its economic history since the Iron Curtain fell shows it fell victim to another delusion: neoliberalism.

Economist Michael Hudson describes Latvia's economy in 1991:

Latvia in 1991 had virtually no debt—zero government debt, zero personal debt, zero real estate debt, and zero business debt. In just twenty years it had debts but without a commensurate modernization of its agriculture and industry. Instead, debt was taken on mainly to inflate prices for homes and commercial real estate. [2]

This debt-free balance sheet positioned Latvia to be plundered. Latvia's lack of a modern banking system to issue credit created void soon filled as Michael Hudson states by Scandinavian banks. This should be seen as Scandinavia offering capital and credit to a post-soviet economy lacking the means to become another growth miracle. The Scandinavian solution didn't finance industrial development; rather, their loans financed a real estate bubble. Not exactly a solid foundation on which to build an economy benefiting for the masses who are transitioning from soviet communism.

Latvians were freed from oxymorons like "proletarian dictatorships" and "workers' paradises." The resulting conditions certainly qualify as "more free," but shouldn't the lessons learned from the God that Failed encourage their expecting more than shedding soviet dictatorship only to become debt peons to banks lending to create asset bubbles? The Latvians structured their economy to benefit foreign banks creating real estate bubbles who take most of the resulting gains while the fiscal burdens are imposed on the Latvian workers.

The historical paradox is that the soviet experiment conducted in the name of the workers only crushed them. But the paradox continued in Latvia upon their liberation. Also, rather than the state being a transitional institution pending the final creation of the workers' paradise, it became an integral enabler of neoliberalism's agenda to marginalize workers', establishing conditions to create asset bubbles. Latvia in 1991 was already serving neoliberalism's agenda:

After obtaining independence from Russia in 1991, Latvia barely taxed property at all—only a fraction of 1 percent, which is much less than the world’s developed nations whose industrial success Latvia hoped to copy. It rejected progressive income taxation in favor of a heavy flat tax on employment, and still has only a minimal property tax on real estate and natural resources, while taxing returns to capital at only 10 percent. [3]        

Low taxes on property and capital fuel asset bubbles but provide no foundation for workers to gain upward mobility. Consequently, the burden to maintain any semblance of fiscal health falls more directly on the workers:

The chief factor compromising Latvia’s competitiveness is that it has saddled its economy with one of the world’s heavier taxes on labor. Employers must pay a roughly 25 percent employment tax on wages, and a 24 percent social service tax (treating pensions and medical care as user fees rather than being paid out of the normal public budget), while wage earners pay another 11 percent. These three taxes add up to nearly a 60 percent ‘flat tax’5—increasing Latvia’s gross wage cost by one-third, making the nation’s industrial labor high-cost and hence less competitive. In addition, the austerity budget had a value-added tax of 21 percent (raised sharply from 7 percent after the 2008 crisis). These taxes to labor and consumption were devastatingly high for a country that has yet to converge on per capita GDP with the world’s richest nations. [4]

Of course neoliberals' accomplices like the Scandinavian banks never intended for Latvia to enter the OECD. This economic structure shows Latvia's economy faces more challenges than aggressive Russian bankers.

A vicious cycle ensued whereby asset prices rose which provided more leverage with which Scandinavian and foreign banks issued more credit. The bubble popped by 2008. Latvians learned that neoliberalism main pillars are claiming assets bubbles are the wealth creating alchemy of the market; but, the post-bubble creates debts whose sole responsibility to cover fall on the workers. Latvia experienced this lesson beginning in 2009 when Joaquin Almunia of the European Commission in a letter informed Latvia's Prime Minister :

Extended assistance is to be used to avoid a balance of payments crisis, which requires … restoring confidence in the banking sector [now foreign-owned], and bolstering the foreign reserves of the Bank of Latvia … if the banking sector were to experience adverse events, part of the assistance would be used for targeted capital infusions or appropriate short-term liquidity support. However, financial assistance is not meant to be used to originate new loans to businesses and households.

… it is important not to raise ungrounded expectations among the general public and the social partners … Worryingly, we have witnessed some recent evidence in Latvian public debate of calls for part of the financial assistance to be used inter alia for promoting export industries or to stimulate the economy through increased spending at large. It is important actively to stem these misperceptions. [5]

The Europe Commission expressed unequivocally to most Latvians that they are subjects of foreign banks. Notice the European Commission not Vladmir Putin wrote this condescending letter wherein they informed the Latvian people that their popular will is meaningless if it conflicts with the only agenda that matters which is pandering to foreign banks.

Establishment publications feature economists arguing that the neoliberal solution to asset bubbles is austerity. We can debate the success of austerity especially to the degree it was imposed on Latvians following their economic implosion in 2008. But, regardless of what economic policies offer the best opportunities for growth and prosperity for Latvia, whatever vulnerabilities exist affecting their economic independence are not reducible to an invasion of Russian capital.

1.Pomeranstev, Peter. "The Big Chill: The Battle for Central Europe." World Affairs. Jan/Feb 2015. http://www.worldaffairsjournal.org/article/big-chill-battle-central-europe

2. Hudson, Micahel. "Stockholm Syndrome in the Baltics-Latvia's Neo-liberal War against Labor and Industry." naked capitalism. posted by Yves Smth on May 09, 2014. http://www.nakedcapitalism.com/2014/05/stockholm-syndrome-in-the-baltics-latvias-neoliberal-war-against-labor-and-industry.html

3. Ibid. 

4. Ibid.

5. Ibid.

****For a detailed analysis of Latvia's economy from the onset of their asset bubble popping in 2009 to the present, see http://www.brookings.edu/~/media/projects/bpea/fall%202013/2013b_blanchard_latvia_crisis.pdf