Latvia and Belarus again: why are we not richer?

Gints Turlajs
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Thanks a lot to Morten Hansen about the article “Lessons (if any…) for Latvia from Belarus’ 2011 devaluations” that says part of what I wanted to say for long! I agree that the devaluation was too far – inflation above a single digit is deemed to be harmful, as we often believe, and even have constructed a simple rule of thumb.

My opinion is that the fact that Belarus, with its should-be weak almost central planning economy, no significant natural resources, and even economic sanctions against it, is as rich as Latvia: free market democracy, with enormous inflow of EU funds as a gift, etc., is a notable fact. The IMF figures for GDP per capita at PPP for 2011 show: 15,448 for Latvia and 14,948 for Belarus. Belarus escaped negative GDP growth during the tough years that happened in much of anywhere else. The “success story” of Latvia with around minus 24% in a little more than a year is very interesting and can be compared not only to Belarus and Nobel laureate Krugman’s favorite Iceland, but also to the “failure stories” of Sweden, UK, USA, etc. The “success stories” of Greece, Spain, etc. are also very interesting. I believe the theories and practices of optimum currency areas might be useful to introduce here, to which many European institutions have finally woken up to. Fixed currency regimes not always consist only of “success stories” – after their wave of popularity swept across the world as a medium-sized tsunami, leaving some wrecks as Finland, Argentina, etc., they became rahter obsolete. Roubini predicted it long ago in 1998: http://www.dse.unive.it/summerschool/papers/rubini.htm Nowadays the cases of countries having fixed exchange rates are very few, I believe from those not aspiring to enter the eurozone we might come down to Denmark. I am not fully aware of the latest local events, but it can not be excluded that authorities hope for another referendum on the adoption of euro there.

To sum it up on Belarus – I believe the first devaluation was wise and we clearly see how well it worked. It was much more needed in Latvia that was hit much harder. The second, on on the other hand, was too much. It can not be done regularly and it should not be done by countries not hit hard, out of love for the neighbours. Devaluation contests should be avoided globally, however, those controllably doing it benefit. If we come down again to simple rules of thumb, I propose, devaluation should not be more than 30% maximum – this is what the civilised world would accept and inflation would not rise too much in this case.

Reasonably sized devaluation would clearly have done positive wonders to the Latvian economy, as IMF also believed. There are many details, of course, but too long for a single article. Regarding the fulfillment of Maastricht criteria, it clearly would not have harmed the exchange rate criteria, as this is only measured shortly before euro introduction. Regarding the inflation Maastricht criteria, it is not clear, however, we do not fulfill it anyway, and besides – these obsolete criteria are not based on the theory or practice of economics and should be changed or abolished altogether.

Our industry is too weak and too small to compete with the world, unlike that of Belarus, and the overvalued exchange rate is part ot the story. But, of course, Latvia reaching the world record in GDP fall is in itself also very fascinating and I fully understand that some might see it as a goal in itself.

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