More Latvionomics

Debate of doubtful quality about what, not how

The economic-political debate is at times of rather doubtful quality and that certainly doesn’t contribute well to solving the economic problems of this country. There is a widespread tendency to state what should happen, but without the much more important how it should be achieved.

Take e.g. this one from a recent conference I participated in: “Latvia should grow 7% per year for the next ten years.” Fine by me but, hey, why not 9% for the next 15 years? Or 12% for the next 20 years? The statement is essentially a platitude, some pure drivel since it does not address how to achieve such growth.

But varying growth rates certainly matter. Below I have a few simple trajectories given various potential growth rates. Latvia’s GDP per capita in 2009 was 49% of the EU27 average. To think of that in 2010 being 48% is a proper estimate since the Latvian economic performance also this year will be below the average for the EU. Assume then that the union as a whole will grow on average 2.5% per year (pretty much in line with long stretches in the past) and then you have the red line in the diagram below.

Added to that are three Latvian growth trajectories with annual average growth rates of 7%, 5.5% and 4% respectively. Convergence with the EU income average would in these three cases happen in 2028, 2036 or 2061, respectively, showing (what we of course know) that growth rates that look not too dissimilar will nevertheless have vastly different impact in the long run.

It is thus of huge importance to investigate and debate what stimulates growth – but just stating that growth should be high is rather self-defeating – and perhaps helps explaining why GDP per capita is still so far behind here.
But Latvionomics has been around for a long time. Here is my favourite gem :
“In an ambitious effort to gain the favor of voters, the alliance of Latvia's First and Latvia's Way announced a bold goal – to raise Latvia's living standards to the level of Ireland within 10 years.”

That was in 2006…

PS: And I don’t think they meant catching up with an Ireland on its way down (and though Irish GDP per capita takes some really serious hits these years, much for the same reasons as Latvia’s, it will remain firmly ahead nevertheless).

PPS: And, no, this entry did not propose anything on how to achieve high growth either – that’s for later.

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