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ABSTRACT
Despite many initial similarities, Latvia and Poland represent two opposite extremes in terms of practical and theoretical approaches to the economic crisis. The Polish government applied a ‘pragmatic’ approach to fight the recession, based on expansionary fiscal policies and currency devaluation. Conversely, the Latvian administration opted for the Austerity and internal devaluation strategy. Consequently, the objective of this paper is to analyze, from the perspective of political economy, the strategies chosen for the economic crisis management and their effects in Latvia and Poland, in light of the main EU narratives about its causes and responses. The research contends that the economic performance of both countries during the crisis was due to their respective economic structures. On the one hand, Poland is a bigger, more diversified and industrialized economy, with fewer channels of vulnerability and could apply expansionary policies effectively. On the contrary, the economic model established in Latvia generated a high exposure to external shocks, in particular, with a double vulnerability in the banking sector. In this context, due to internal and external motives, the Latvian government decided to apply the austerity and internal devaluation strategy, worsening the economic decline and the subsequent recovery.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1. Eurostat, ‘Real GDP growth rate – volume. Code: tec00115. Percentage change on previous year’, available at: https://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=tec00115&plugin=1.
2. Ibid.
3. In 2009, only three voivodeships experienced slight recessions. These voivodeships were Kujawy-Pomerania, Opole, and Świętokrzyskie, with regional GDP declines of 0.7%, 0.9% and 0.5%, respectively. See: Eurostat, database ‘Real growth rate of regional gross value added (GVA) at basic prices by NUTS 2 regions – percentage change on previous year [nama_10r_2gvagr]’, available at: https://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=nama_10r_2gvagr&lang=en (accessed 20.06.2018).
4. Eurostat, ‘GDP and main components (output, expenditure and income) [nama_10_gdp]’, available at: https://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=nama_10_gdp&lang=en .
5. Sokol (Citation2011) states that the distinctions between the center and the periphery of the European economy are based on geographical location and level of economic development. In this way, the countries at the ‘center’ of the EU are Germany, France, England, Belgium, Holland, Denmark, Sweden, Finland, Austria, and Luxembourg. By contrast, the countries with lower GDP per capita at purchasing power standard (PPS) and located around this centre form the ‘periphery,’ including the new members of the EU incorporated since 2004. These countries not only have weaker economies, but also in general have shown the strongest signs of the impact of the crisis, reinforcing the patterns of centre–periphery inequality within the EU.
6. The countries that received financial assistance from the EU during the crisis were Cyprus, Greece, Hungary, Ireland, Latvia, Portugal, Romania, and Spain. See: European Commission, ‘EU financial assistance’, https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-financial-assistance_en .
7. Data from: European Central Bank, ‘Euro foreign exchange reference rates’, available at: https://www.ecb.europa.eu/stats/policy_and_exchange_rates/euro_reference_exchange_rates/html/index.en.html .
8. Data from: European Central Bank, ‘Euro foreign exchange reference rates’, available at: https://www.ecb.europa.eu/stats/policy_and_exchange_rates/euro_reference_exchange_rates/html/index.en.html.
9. Eurostat, ‘Unemployment rate – quarterly data, seasonally adjusted. Code: tipsun30’, available at: https://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=tipsun30&plugin=1 .
10. Eurostat, ‘Government deficit/surplus, debt and associated data [gov_10dd_edpt1]’, available at: https://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=gov_10dd_edpt1&lang=en.
11. Eurostat, ‘Key indicators [nasa_10_ki]’, Government investment to GDP ratio, available at: https://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=nasa_10_ki&lang=en.
12. Eurostat, ‘Key indicators [nasa_10_ki]’, Business investment to GDP ratio, available at: https://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=nasa_10_ki&lang=en .
13. Eurostat, ‘Government deficit/surplus, debt and associated data [gov_10dd_edpt1]’, available at: https://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=gov_10dd_edpt1&lang=en .
14. Eurostat, ‘Government deficit/surplus, debt and associated data [gov_10dd_edpt1]’, available at: https://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=gov_10dd_edpt1&lang=en.
15. Eurostat, ‘Key indicators [nasa_10_ki]’, Government investment to GDP ratio, available at: https://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=nasa_10_ki&lang=en.
16. Narodowy Bank Polski, ‘Interest rates (1998–2015)’, available at: http://www.nbp.pl/homen.aspx?f=/en/dzienne/stopy_archiwum.htm.
17. From February 1994 until that date, the Bank of Latvia pegged the lats to the IMF’s Special Drawing Rights. Many sources suggest that by the time of the new exchange rate parity, the Latvian lats was already overvalued and this situation worsened in the following years with the rise of inflation (IMF Citation2004; Åslund Citation2010; Blanchard, Griffiths, and Gruss Citation2013; IMF Citation2015; Blustein Citation2016).
18. IMF, World Economic Outlook Database, October 2017, available at: https://www.imf.org/external/pubs/ft/weo/2017/02/weodata/weoselco.aspx?g=2001&sg=All+countries .
19. According to Richard (Citation2013), €648.5 million flowed out of Latvian banks between 7 and 20 November 2008, most of it being Russian capital.
20. In addition to the above-mentioned shocks, Parex Banka also relied on short-term syndicated loans in the euro area markets. These markets, however, were severely affected by the GFC, putting even more pressure on Parex Banka (Epstein Citation2017).
21. See: European Commission, ‘Financial assistance to Latvia’, available at: https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-financial-assistance/which-eu-countries-have-received-assistance/financial-assistance-latvia_en.
22. Central Statistical Bureau of Latvia, ‘NBG081. Employed by economic activity and sex (NACE Rev. 2.)’, available at: https://data.csb.gov.lv/pxweb/en/sociala/sociala__nodarb__nodarb__ikgad/NBG081.px/.
23. See: State Revenue Service of the Republic of Latvia, https://www.vid.gov.lv/en/taxes.
24. Central Statistical Bureau of Latvia, ‘NB002m. Unemployed and unemployment rate aged 15–74 by sex and month’, available at: https://data1.csb.gov.lv/pxweb/en/sociala/sociala__nodarb__bezdarbs__isterm/NB002m.px/table/tableViewLayout1/ .
25. Central Statistical Bureau of Latvia, ‘IBG040. International long-term migrants by age and sex’, available at: https://data1.csb.gov.lv/pxweb/en/iedz/iedz__migr/IBG040.px/.
26. Eurostat, ‘Gross domestic product (GDP) at market prices – annual data’, available at: https://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=tipsau10&plugin=1.
27. Interestingly, Anders Åslund, who was one of the staunchest advocates of Latvia’s austerity and internal devaluation strategies, has also argued that the reason Poland performed well during the crisis was a flexible monetary regime and an expansionary fiscal policy, as referred to above (Åslund Citation2013).
28. When looking at the Cyclically Adjusted Budget (CAB), the differences in policy management seem clearer. According to the IMF’s World Economic Outlook Report for April 2018 (IMF Citation2018), between 2003 and 2007 Latvia’s balance remained below −1,5% of GDP. During the same period, Poland’s CAB balance fluctuated between −6% (2003) and −3% (2007) of GDP. In 2008, the Latvian deficit was 4.3% of GDP, and as of 2009 it remained below the 3% limit stipulated in the Maastricht criteria to join the Eurozone. For its part, the CAB of Poland produced deficits of 4.2% in 2008, 6.7% in 2009, 7.2% in 2010, 5.4% in 2011, 3.6 in 2012, and 3.2% in 2013 and 2014. Only as of 2015, the balance of the CAB remained below 3% of GDP. Thus, from this perspective, the expansionary Polish policy and the effects of austerity in Latvia are better reflected. Comparing more detailed quantitative estimates of budget consolidations, however, goes beyond the scope of this research, as there are numerous conceptual and methodological challenges. For a more detailed analysis of the public finances and fiscal policies in the Baltic states, see Staehr (Citation2010, Citation2016).
29. Although there were some changes in the composition of Latvian exports before and after the crisis, the structure remained relatively similar, with a predominance of primary goods, mostly wood and wood products, and base metals. In terms of manufacturing, after the crisis, the participation of machinery and electronic equipment increased but that of textiles declined commensurately, partly offsetting the improvement in the export of added value.
30. See the FKTK quarterly report, ‘Banking Activities in 4th Quarter of 2008’, available at: https://www.fktk.lv/en/statistics/credit-institutions/quarterly-reports/banking-activities-in-2008/.
31. Interestingly, in the last few years, these modifications have even been claimed by foreign banking institutions operating in the country (e.g. Swedbank Citation2015).
Additional information
Notes on contributors
Leonardo Pataccini
Leonardo Pataccini is a Research Fellow at the Johan Skytte Institute of Political Studies at the University of Tartu. His main research interests include International Political Economy, Financialization, Economic History and Transition Economies. He has published several articles and book chapters in academic journals and media outlets.
Raul Eamets
Raul Eamets is a professor of macroeconomics at the Faculty of Economics and Business Administration at the University of Tartu and he is the dean of the Faculty of Social Sciences. His research is focused on various aspects of labour market, including migration topics and education outcomes for labour market. He was guest editor in the International Journal of Manpower special issue on “Labour market flexibility and spatial mobility” (2014, vol 36, no 6). He has published several articles in the European Journal of Industrial Relations, IZA Journal of European Labor Studies, Energy Policy, Post-Communist Economies, among others.