No Strangers to Economic Hardship, Latvians Accept Austerity


Yesterday, The New York Times ran a piece on Latvia's experience with austerity and the lack of serious opposition to budget cuts and salary reductions. While so-called "austerity" has been greeted with protests in Greece, Italy, Spain, Portugal, and the U.K., in Latvia the response has been different:

But in Latvia, where the government laid off a third of its civil servants, slashed wages for the rest and sharply reduced support for hospitals, people mostly accepted the bitter medicine. Prime Minister Valdis Dombrovskis, who presided over the austerity, was re-elected, not thrown out of office, as many of his counterparts elsewhere have been.

The cuts calmed fears on financial markets that the country was about to go bankrupt, and this meant that the government and private companies could again get the loans they needed to stay afloat. At the same time, private businesses followed the government in slashing wages, which made the country's labor force more competitive by reducing the prices of its goods. As exports grew, companies began to rehire workers.

The Latvian government's economic program has yielded positive results; Latvia's unemployment rate has fallen (though it remains high) and GDP growth rate has remained positive in all quarters since 2010, something that cannot be said of Greece, Spain, the U.K., Italy, or Portugal.

This is not to say that Latvia is without economic problems or that Latvians are not enduring tough times. A chaplain interviewed for the article remarked on the lack of opposition to austerity in Latvia, citing the acceptance of hardship:

"It is really shocking," added Mr. Calitis, who runs a soup kitchen at his church in Riga's old town. Latvians, he said, "should be shouting in the streets," but "there is an acceptance of hard knocks."

Latvia has certainly had plenty of those, enduring Soviet, Nazi and then renewed Soviet rule, learning that discontent is best kept quiet. After Moscow relinquished control in 1991, decrepit Soviet-era plants shut down, gutting the industrial base. The economy contracted by nearly 50 percent.

Latvia's history of oppression and its lack of an influencial and organized labor movement make it a unique place to look for lessons of austerity, as was noted at the end of the article:

But Latvia's high pain threshold and unusually open economy set it apart, enabling a relentless squeezing of wages, said Morten Hansen, head of the economics department at the Stockholm School of Economics in Riga.

"You can only do this in a country that is willing to take serious pain for some time and has a dramatic flexibility in the labor market," he said. "The lesson of what Latvia has done is that there is no lesson."

For lessons on European austerity one doesn't have to look just at Latvia. Estonia and Iceland both provide examples of how planned and unplanned short-term pain can benefit economies. 

Mercatus Center economist and Reason contributing editor Veronique de Rugy spoke with Nick Gillespie about European austerity in May last year: