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Tuesday 20.02.2018 | Name days: Smuidra, Vitauts, Smuidris

Economist: government’s implemented belt-tightening policy hinders economic recovery

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Economist Uldis Osis

The main problem of the government’s implemented economic policy is that the belt-tightening policy compresses the already depressive domestic market demand, accordingly slowing down the economic recovery, asserts the economist Uldis Osis. To his mind, several indicators create the illusion of an upturn, yet it rather happens regardless of the government’s policy.

Will hard times await the eurozone? How will this affect Latvia?

Post-crisis stagnation awaits the eurozone at least for the following 2-3 years. Its growth prospects are more dependent on the Eastern economic growth than from the domestic development forces. This can be explained by the fact that the Western global market is saturated with most products and services, the standard of living is high; however, there are very few new products whose consumption could stimulate the demand. Therefore, the Western economic development will continue to be based on the usual reproduction, when the product modernisation and service improvements mainly takes place.

While in the East a large proportion of the population is only now starting to engage in modern society formation process, consumption becomes more complex, new cities are emerging, and industrialisation process takes place in the manufacturing sector, which the Western countries underwent at the beginning of the 19th- 20th Century. This creates a large demand, which further propels the Western export.

Of course, this is beneficial for Latvia, because, although its production volumes are too insignificant to export something to the huge Eastern market, demand in Europe fuels Latvia’s exports and minimal economic growth.

However, there are also signs that the Eastern market begins to overheat and if similar bubble burst occurs as it happened here, a similar crisis will stroke. In this case, the world and also Latvia could lapse in a very heavy and prolonged recession.

How is Latvia’s competitiveness in the global market currently?

Latvia’s competitiveness level in the global market is still one of the lowest in the EU. In order to increase it reforms in the education system should be carried out, paying more attention to practical knowledge and skills, developing the vocational education, substantially reducing the number of education institutions, and concentrating resources on the remaining ones.

Are the current improvements in the Latvian economy partly seasonal or is it possible to talk about the economic recovery?

I would characterise it as partial unsafe economic stabilisation with series of very conflicting trends. For instance, the industrial production and also the export is increasing; however, the import is growing even faster. Consequently, the trade balance remains negative, which also means that Latvia’s competitiveness is not rising.

How soon could the economic upturn start in Latvia?

The economic upturn is not so much a question of time, as the result of the above mentioned internal and external factor combination. For example, if any problems occur in the Eastern economy, the development in Europe will also reduce, but relatively less competitive Latvia’s economy with its extensive development model could again get into serious difficulties.

How effective, in your opinion, is the government’s currently implemented economic policy? What are the mistakes?

Government’s economic policy is ineffective. The key problem is that the belt-tightening policy «crushes» the already depressive domestic market demand and accordingly hampers the economic recovery. Economists have named such policy as pro-cyclic, namely, aggravating even more the crisis period of economic cycle.

Nevertheless, several indicators, such as the domestic trade turnover growth, create the illusion that things are getting better. Yet, rather, this happens irrespective of the government’s policy, as the external factors contribute more to the economic stabilisation. External transfers – money transfers to Latvia by those working abroad – should also be mentioned, as they are becoming an increasingly important economic factor for the country in general.

Moreover, the government’s policy regarding reforms is also quite unprofessional. In most cases it is limited only to mechanical expenditure cuts, and not linked to reorganisation and restructuring, searching for the most reasonable state administration and public service delivery models. In many cases, instead of saving up the funds, this practice leads to their loss, and even damages the country’s prestige.

There are talks that in order to gain funds for 2011 budget several taxes will be increased. Will this attain the awaited effect?

This is yet another aspect of government’s flawed economic policy, which makes the current relative economic stability even more risky and threatens to unsettle it. Consequently, the tax raise in such situation may result in adverse effects – instead of decreasing, budget revenues and deficit will rather increase.

The amount of shadow economy this year has reached 32% of GDP, could it be reduced?

Reducing the shadow economy would be the most reasonable alternative to the budget cuts and tax increases. The estimates indicate that reduction of Latvia’s shadow economy at least by 10% is possible, if there is a political will and corresponding professionalism. This means that the planned budget deficit reduction next year, in theory, could be carried out only by actively combating the shadow economy, not by reducing the budget expenditure and raising taxes.

Does the «100-lats programme» damages the country’s economy?

In the crisis conditions, the «100-lats programme» is a useful short-term solution for 3-6 months, not more. I believe that at the present moment, when the most critical point is over, greater attention should be paid to involving the unemployed persons in a regular job. Thus, the «100-lats programme» should be discontinued.

Is the retirement age raise in Latvia inevitable? Why?

The retirement age raise is unavoidable due to the demographic situation in Latvia. The proportion of population of working age is still declining. Of course, there are alternatives, such as attracting labour force from other countries. However, as shown by several European countries’ experience, this causes other social and political problems.

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