How Latvia Came Through the Financial Crisis

by Anders Åslund, Valdis Dombrovskis

Overview

Latvia stands out as the East European country hardest hit by the global financial crisis; it lost approximately 25 percent of its GDP between 2008 and 2010. It was also the most overheated economy before the crisis. But in the second half of 2010, Latvia returned to economic growth. How did this happen so quickly? Current Latvian Prime Minister Valdis Dombrovskis, who shepherded Latvia through the crisis, and renowned author Anders Åslund discuss why the Latvian economy became so overheated; why an IMF and European Union stabilization program was needed; what the Latvian government did to resolve the financial crisis and why it made these choices; and what the outcome has been. This book offers a rare insider's look at how a national government responded to a global financial crisis, made tough choices, and led the country back to economic growth.

Product Details

ISBN-13:	9780881326024
Publisher:	Peterson Institute for International Economics
Publication date:	05/15/2011
Pages:	200
Product dimensions:	5.90(w) x 8.90(h) x 0.40(d)
Age Range:	18 Years

About the Author

Anders Åslund was a senior fellow at the Peterson Institute for International Economics from 2006 to May 2015. He examined the economic policies of Russia, Ukraine, and Eastern Europe, as well as the broader implications of economic transition. Aslund served as an economic adviser to the governments of Russia in 1991-94 and Ukraine in 1994-97. He is a leading specialist on postcommunist economic transformation with more than 30 years of experience in the field.

Valdis Dombrovskis has been the Prime Minister of the Republic of Latvia since March 2009. He was also Minister for Regional Development and Local Governments (November - December 2010) and Minister for Children, Family, and Integration Affairs (March - July 2009). From July 2004 to March 2009, he was member of the European Parliament and head of the Latvian delegation in ETP-ED group. From November 2002 to March 2004, Dombrovskis served as Latvia's Minister for Finance. He was a founding member of the political party New Era in February 2002. He was elected to the Latvian parliament in 2002 and 2010. He worked at the Bank of Latvia as macroeconomic specialist (1998-1999), senior economist (1999-2001) and chief economist (2001-02).

Table of Contents

Preface ix

Authors' Note xiii

About the Authors xv

Map xvii

Introduction 1

Motivation 1

Key Lessons 3

Structure of the Book 4

1 Latvia's Post-Soviet Transition 5

A Bitter Struggle for Independence 5

Radical Transition to a Normal Market Economy 7

Evolution of Latvia's Democratic Politics 13

Notes 15

2 The Boom, 2004-07 17

EU Accession Crowning the Success of Transition 17

Capital Inflows Overheat the Economy 19

Politics of Complacency 30

Notes 31

3 Policy Choices and the Program of Crisis Resolution, 2008 33

Fall 2008: The Bubble Pops 34

Run on Parex Bank: Latvia Calls in the IMF 39

The International Assistance Package 42

Notes 47

4 To Devalue or Not to Devalue 51

Arguments for a Fixed Exchange Rate 51

Arguments for Devaluation 54

How Latvia Differs from Argentina 58

The IMF Verdict 60

Notes 63

5 Implementation of the Stabilization Program, 2009 65

Collapse of the Godmanis Government 65

Formation of the Dombrovskis Government 67

A New Stabilization Program Takes Shape 69

Devaluation Crisis, But Adoption of a New Budget, June 2009 78

Complicated IMF-EU Negotiations 85

Budget for 2010 88

Notes 90

6 The Healing Begins, 2010 95

Estonia Qualifies for the Euro, March-June 2010 96

October 2010 Parliamentary Elections: Popular Approval of Crisis Resolution 96

Budget for 2011 100

Economic Growth Returns 102

Notes 110

7 Latvia's Lessons for Itself and the World 113

Why Latvia Was Right Not to Have Devalued 113

Latvian Peculiarities 117

Lessons from Latvia for the World 118

Eyes on the Prize: Euro Adoption and European Convergence 121

Notes 123

Leading Latvian Officials 125

Chronology of Events 127

Index 133

Editorial Reviews

This is a fascinating story of a huge credit boom, the resulting bust and deep recession, and of an amazingly radical and brave fiscal consolidation coupled with structural reforms. The authors rightly stress that economic and political lessons of Latvian stabilization and reforms go well beyond Latvia. These lessons are especially relevant for the members of the eurozone, as Latvia successfully resisted nominal devaluation of its currency and the eurozone countries do not have this option.

Leszek Balcerowicz

Against all odds, the Baltic countries regained their national independence twenty years ago. They did so heroically and peacefully, and they acted in the same way during the financial crisis. With little doubt, future generations of Latvians will look to Valdis Dombrovskis as the hero that salvaged their nation from this serious threat, returning his country to economic growth in only two years. In this fascinating book, Dombrovskis and Anders Åslund tell us the incredible tale of Latvia's road to recovery.

Carl Bildt

The open and booming Baltic countries could do little to impede the flood of capital preceding the global financial crisis and they were hit hard, most of all Latvia. This timely and engaging book tells the story of how Latvia entered the crisis and how its government took the country out of this most severe crisis. Its essence is that good policy is possible, and that sensible voters reward such policies.

Toomas Hendrik Ilves