Three ways • IR.lv

Three ways

30
Foto: Reinis Hofmanis, F64
Morten Hansen

Scenarios for post–crisis economic growth

Gross domestic product (GDP) seems to have stabilized after its off–the–cliff experience between Q4 2007 and Q4 2009 where it saw a gigantic cumulative fall of just over 25%, see figure below. Q3 2010 figures are due very soon and are likely to show a small increase year–on–year indicating that the recession – but not the hangover – may be over.

GDP in constant prices, 2004 = 100, seasonally adjusted data:

""

Source: Central Statistical Bureau

But what about future growth? What can we expect? IMF working paper may cast some light on that issue and it does not provide all that optimistic reading – but it indirectly provides some lessons and that is not too bad.

In the figure below I have tried to employ my rather inferior drawing ability to sketch Latvia’s GDP development before the crisis and some post-crisis scenarios.

During the boom, 2004 – 2007, GDP grew at sometimes double-digits leading to a massive overheating of the labour market with actual growth (the ‘Actual GDP’ line) being above trend growth/outpacing potential growth. 2008 and in particular 2009 saw massive declines in GDP and the three scenarios, A, B and C suggest different recovery paths to be discussed below.

""

A is obviously the too–good–to believe scenario that would see swift catching–up to pre–crisis GDP via growth rates even higher than in the boom days. If you believe that scenario, please go and see a shrink…

B is more interesting – it suggests a return to a growth rate equal to the trend growth rate of the past, which at first seems very plausible but this is where the IMF research based on the experience of many countries that have suffered recessions suggests otherwise, instead arguing that the trend growth rate may be permanently lowered (a structural break as the econometricians would say) and that scenario C is thus more likely.

This is not the place for a long theoretical discussion of this so allow me just a couple of points that could suggest the plausibility of scenario C:
– A lot of business investment during the boom was in real estate (office space, apartments etc.) – this certainly added to GDP at the time but to the extent that these offices and apartments remain empty it won’t add to capital and thus not to future GDP. The third ''Panorama Plaza'' tower is a good example: The partial construction of it was an addition to GDP but the productive capacity of that skeleton is nil;
– Emigration as a result of the crisis is lost labour force that cannot contribute to future GDP.

Does this matter? Yes – let’s say that the economy’s trend growth rate is reduced to a still respectable 4%, then catching up to GDP of Q4 2007 will take another 7,4 years. Add to that the two plus years of recession and you have a lost decade. And such low growth may not reduce unemployment significantly fast, thus leading to further migration and a worsening of the problem.

Lesson? The powers that be must work even more eagerly to raise the trend growth rate of the economy through structural reforms – education, training, infrastructure, public sector efficiency and what have you. Yes; same old, same old you may say – but this little piece of analysis is yet another strong reason for why it is so important.

Morten Hansen is Head of Economics department, Stockholm School of Economics in Riga

Komentāri (30)

Andis Cēsnieks 10.11.2010. 17.05

Hi, Morten! Thank you for this note. It is true that emigration lowered labour force and so potential GDP. Actual emigration was much higher than official one implying that income convergence (GDP per capita) during 2004 – 2007 in fact was even faster than headline data suggest (and a 2008-2009 drop is not so deep in per capita terms as in total GDP terms). This point could be important if we want to link GDP growth paths before and after the crisis. Perhaps, to forecast GDP growth after the crisis we should not use GDP growth before the crisis but instead to decompose it to actual income convergence (per capita) and migration (including unofficial one).

+4
0
Atbildēt

0

melniite 10.11.2010. 16.53

An interesting question would be when will there be an incentive for highly qualified professionals to stay in Latvia rather than emigrate favoring wages n times higher i.e. whether the labour migration is a structural break or an ongoing trend.

+1
0
Atbildēt

0

andris 11.11.2010. 13.50

MH rakstīja- Emigration as a result of the crisis is lost labour force that cannot contribute to future GDP.

Nevaru īsti piekrist. Ārvalstīs nodarbināto naudas pārvedumi ir iespaidīgi un sasniedz jau 2,5 no IKP. Arī darbaspēks var būt eksporta produkts (ja mājās tam nav efektīva pielietojuma). Protams, tas nav ilgspējīgi, jo eksportētais darbaspēks agrāk vai vēlāk nogruntēsies mītnes zemēs, nodibinās ģimeni un uzsāks jaunu, citas valsts pilsoņa dzīvi.

0
0
Atbildēt

3

    andris > andris 12.11.2010. 11.33

    Par Molodovu, protams, piekrītu. To neviens nevēlas. Tomēr krīzes apstākļos tas ir labāk, nekā simtiem tūkstoši neapmierinātu bezdarbnieku. Naudas pārvedumi ļauj tomēr Latvijas ekonomikai izdzīvot: cilvēkiem maksāt parādus, uzturēt kaut kādu patēriņu u.tml.

    MH rakstīja: Forgive me but I did not understand the part of 2.5 and GDP?!?

    Te domāts pārvedumu apjoms salīdzinājumā ar šī paša perioda IKP. 2010. gadā apjoms veido 2,5% no IKP. Šis skaitlis nav domāts, kā kontribūcija pie IKP. Tikai apjomu salīdzinājumam.

    0
    0
    Atbildēt

    0

    daina_tabuna > andris 14.11.2010. 10.23

    @lbb
    Ja ar “pārvedumiem” bija domāti naudas pārskaitījumi no ārzemēm uz Latviju caur banku kontiem, tad tas nav nekāds rādītājs. Naudas pārskaitījums no privātpersonas privātpersonai ne vienmēr dalīšanās ar tur nopelnīto algu. Mēs dzīvojam atvērtā tirgū un ir ļoti plašas iespējas dažādiem saimnieciskiem darījumiem. Lielu daļu šīs plūsmas nodrošina tādi servisi kā eBay. Tāpat Latvijā ir diezgan plaša t.s. freelancers community. u.tt. Līdz ar to tie 2,5% nav gluži tādi, kas ienāk IKP grozā vienkārši tāpat “par skaistām acīm”.

    0
    0
    Atbildēt

    0

    Dzintars > andris 11.11.2010. 17.31

    I agree that they create GDP elsewhere but I also think we both agree that we don’t like to envisage this as country as a sort of “Moldova of the North”. Moldova has the highest share of remittances in Europe – some 35% of GDP.

    Forgive me but I did not understand the part of 2.5 and GDP?!?

    +2
    0
    Atbildēt

    0

@

Komentāri nav iespējoti šim rakstam

Saņem svarīgākās ziņas katru darba dienas rītu