The Baltic Times
February 21, 2007
Too much of a good thing will always turn out bad – it doesn’t matter if it’s food, exercise, vintage wine or, say, a robust economy. If you overindulge, you’ll end up suffering. Unfortunately, the neophytes in Latvia’s government – specifically, Prime Minister Aigars Kalvitis and Finance Minister Spurdzins – have clearly demonstrated that they believe hyper-growth is blissful and the state should not intervene. Now that the party has begun – annual GDP growth of 12 percent – they want to let the good times roll. The negative wrinkles, they believe, will iron themselves out.
Recently an expat economist working at the Stockholm School of Economics opined – first in The Baltic Times and then in the daily Diena – that the current trends in the Latvian economy were unsustainable and that, if unaddressed, the government could be forced to consider devaluing the local currency. The lat, Morten Hansen said, is quickly losing its competitiveness. With inflation running at 7 percent per year and wages increasing some 20 percent, he’s right.
Understandably, his words were misinterpreted by an ill-informed public and mistreated by an ill-minded government. Rumors of an imminent collapse of the lat have set the country ablaze with fear-mongering. The best response of Kalvitis, who apparently has lost touch with economic reality, was that currency speculators out to make a fast buck are to blame for the panic. He has even called on a high law enforcement agency to investigate who started the rumors.
First, if Kalvitis’ team wouldn’t have been sleeping since re-election last October, they would’ve seen numerous reports by internationally renowned entities warning that the Latvian economy was about to overheat, and that Mr. Hansen’s article contained virtually nothing new.
Second, Kalvitis has been promising for months to do something about inflation, and supposedly somewhere some commission is convening to address the problem. Yet still no report has materialized. Considering the extent of the crisis – many analysts agree that inflation could even rise further this year – this is rotten leadership.
Third, Standard & Poor’s just lowered Latvia’s outlook to negative due to “clear signs of overheating.” The Finance Ministry, the agency stated in so many words, has failed to implement sufficiently tight fiscal policy. (We wonder: will Kalvitis ask investigators to interrogate S&P?)
In other words, during a time of high-growth, the government should save, not spend. Estonia has been running a budget surplus and still has high inflation. Latvia, by contrast, seems content to spend like there’s no tomorrow.
The truth is that Hansen hit the government in a sore spot. Kalvitis and company are doing nothing about the economy – they’re too busy worrying about who’s mayor in Riga and whether they can restructure the country’s law enforcement agencies. Hansen’s article was a wake-up call, one the government didn’t want to hear. He deserves an award, not scorn.
At least the clueless ministers are on the defensive, and it’s up to all commonsensical analysts and economists to keep them there until they take immediate action to cool the boiling kettle that is Latvia’s economy.