Latvionomics…

Representing the organization of entrepreneurs Par labu Latviju, Ieva Plaude-Rēlingere suggests, according to Dienas Bizness, that average wages should be 3000 EUR per month in 2020.

That is a great suggestion and the only “minor” problem is that won’t happen as it is totally, fully and completely unrealistic. The content of the suggestion is 0% economics and 100% Latvionomics – that is suggestions with no attachment to reality.

Very simple math shows this so why do these people not check this out before making such statements?

But here are the calculations in case you are interested. According to the Central Statistical Bureau average wages were 465 LVL per month in December 2009 (latest available data). That is equivalent to 664 EUR so the increase over the next ten years would be 352%. But it is more interesting to check the annual increase needed to go from 664 to 3000 in ten years. Assuming, realistically, that wages will form a constant part of GDP then wages and the economy should grow equally fast and the annual growth rateof GDP would thus have to be 16.3% and not even during the most overheated days of the credit boom did it grow that fast (the highest growth rate was about 12%, in itself actually stunningly high).

Ah, wages are in reality higher, you may say e.g. because of some argument about the grey economy! Even if wages were 1000 EUR per month on average now it would take annual growth of 11.6% to reach 3000 EUR in ten years, also not doable.

As I understand the organization would like to see Latvia develop into the best small economy in Europe. It is a laudable goal but rings very hollow with these ‘pie in the sky’ “projections”. Getting the numbers right would be a good start.

Morten Hansen is a Head of Economics Department, Stockholm School of Economics in Riga