Loss of Latvian competitiveness?

Komentāri (31)

nikolajs0305 13.07.2011. 22.43

After reading comments and your answers to them – I would like to add – no serious RTD and Innovation policy that would boost private sector to invest and get more competitive has been put in place in Latvia. Yes, we have RTD priority documents and even quite a modern Law on Science and Scientific institutes and organizations have been re-reorganized and adjusted. However only few biggest companies are investing in research or making the research triangle (oh, so loved in EU – meaning research-education-innovation) to work.
My point is – no competitiveness can be achieved without serious investment in RTD and Innovation. So I was very happy to hear that Mr. Dombrovskisa after meeting with EU Research Commissioner on 6th of July promised to rise RTD spendings by 2020. Let’s hope this money will be well spent and really promote knowledge transfer. With greetings from Tunis, first and only Latvia’s Science attache (Brussels 2004-2010) Mrs Signe Martišūne-Schwagrowski-Buyse (wordpress.smartbsolutions.com)

Atbildēt

Dzintars > nikolajs0305 14.07.2011. 17.46

Fully agree – not least on the hope of money well spent!

Atbildēt

eapelis > nikolajs0305 17.07.2011. 17.45

Another slow but steady investment seeking to develop innovation and an educated nation at the grassroots level is Iespējamā misija (Mission Possible), a non-profit organization that recruits Latvia’s best and brightest university graduates to become teachers in Latvian schools.

While we hope our leaders find faster ways to develop innovation and education, this organization’s work is here, now, taking on the responsibility for the generational change that is necessary.

http://www.iespejamamisija.lv

Atbildēt

nikolajs0305 > nikolajs0305 17.07.2011. 17.56

“generational change” – quite a statement! but of course your activities are really nice and will change at least the ones that are taking part in them. at least I hope so. good luck!

Atbildēt

menedžeris 13.07.2011. 15.16

Morton, I think you might want to edit your explanation of the increase in REER. If wages increase by 10% and production by 7% then wages/production increases by 10/7 or roughly 1.42%, not 3% as you claim.

Atbildēt

Dzintars > menedžeris 13.07.2011. 15.31

I know….

(1.10/1.07 – 1)x100%….

But it´s summer, OK?

Atbildēt

RitvarsPavlovs > menedžeris 13.07.2011. 19.16

Mr. Hansen,

you are too kind :)

Atbildēt

kreëstliv 13.07.2011. 15.15

The actual debate should NOT be on devaluation (or similar policy by-products), but on how to implement in Latvia a functional social democracy à la Scandinavia, Germany & Co?

Germany has a social market economy – something a bit different but everything starts from how to generate wealth and only afterwards how to redistribute it. Germans are not the best example for industrial policy because their success comes from something else, the opposite of picking the winners story – they call it Ordungspolitik. Some neighbouring countries like Slovaks and Tschechs were trying to do the same, during boom times it was told that they are too slow but seems that now it is paying off.

To start with there is a need for something like Ordungspolitik in Latvia – a great deal of it is competition policy, the other part – corruption fighting and then some other supply side economic issues – including education system – to generate the wealth.

Devaluation/deflation is however a key discussion – deficit spending is only possible if somebody is lending money for this purpose or if there are some accumulated reserves, don’t see that Latvian people themselves would be OK to finance it and more so – somebody from abroad. Devaluation might have been the better choice and would be for Greece currently if it was possible.

Atbildēt

kreëstliv 13.07.2011. 15.01

Have heared of some leaving the country exactly because of the REER story – serious production companies with German investment among those. Those companies were not making a big deal out of it, there were countries that needed investment in production more. Production workers demanding a wage like a scientist or Government official in Germany was a no go zone for them. Those were really funny stories how they were trying to find somebody (even for a rather good wage) dealing with their production machines here.

Issues like corruption are of importance here as well but are constantly downplayed. Germany is currently the only country were the business has so much ressources available for investment and countries are happy to get German investment and know-how – even China – but seemingly not Latvia. The response to the complaints of the German Embassy was too vague and at the end of the day seems that the only answer was – that’s your problem.

Atbildēt

Andžs 13.07.2011. 12.37

Indeed, when the Bank of Latvia pegged the lats to the euro at the end of 2004, it did so at an undervalued rate. Just recall the dollar-euro interplay in the period preceding December 31, 2004 and the fact that the lats was pegged to the SDR: the lats fell from around 0.55 per euro to just 0.70, if I remember correctly… This served as more oil to the fire soon thereafter in terms of inflation. However, the lats actually became overvalued by the time the crisis hit. Thus, devaluation was a legitimate argument at that time.

Just to add one more aspect. The article seems to ignore the fact that there was a big change in Latvia’s trade openness in 2004 – i.e. Latvia joining the EU. This certainly played a significant role in boosting trade, be it exports or imports.

Putting these two things together, it seems to me that the growth in exports at the start of the “fat years” may have been also due to the overall EU accession dynamics, which was very quickly dampened by the soaring rise in costs.

Atbildēt

alazoda 13.07.2011. 10.00

An interesting and concise article, but in its brevity it misses multiple factors related to the competitiveness of economies beyond REER and ULC. Germany’s competitiveness in global exports is also based on the quality of the products and services of its SMEs and industry, and the infrastructure in education and internationally competitive science underlying them. Government policy in fostering these developments is also important. Latvia ‘s weak showing in multiple innovation indexes can lead us to ask, what would it take to make our country a place where new ideas flourish and where they are applied successfully in practice (innovation)? The framework conditions include tax policy and procurement policies conducive to innovation, public and private investment in research and education, an innovative consumer, transparent and open competition, and the removal of barriers to entrepeneurship and initiative. These points may go beyond the scope of the article but are some essential elements for long-term competitiveness.

Atbildēt

Dzintars > alazoda 13.07.2011. 11.26

This kind of article has to be relatively short… :-)

True, and as also minkens points out, Latvia is bottom of the barrel in terms of innovation. It is a problem in itself but in a way a bigger problem (as I see it) is that this has been discussed for many years without anything much having changed (it´s a bit like discussing competitiveness, corruption, how to attract investment – it´s being discussed now but it was also discussed when I first arrived, many many moons ago. We should perhaps ask: Why so little action/change?)

Atbildēt

kaps > alazoda 13.07.2011. 13.12

Simple, because all/most of the people responsible for change in this country are corrupt and not interested in doing anything for the better good of society, only their own interests prevail. Just look look at our minister of economy, can you even imagine someone like him being in the same position in Denmark?

Atbildēt

unamii 13.07.2011. 09.33

if the decline in competitiveness did not lead to decrease in exports (remained somewhat stable) that being due to undervalued latvian lat – then why at all discussions on devaluation?

Atbildēt

Dzintars > unamii 13.07.2011. 11.21

Exactly…. :-)

Except if one wants to argue that it would have helped exports even more.

But it could never have avoided a big recession – so much demand left consumption and investment that it is completely unrealistic that exports could “just” have taken over.

Atbildēt

vitinija 12.07.2011. 23.43

According to the official EU data, that tracks how countries implement Lisbon strategy on competitiveness and innovation, Latvis it the least innovative (or one can say it with more rude terms) country not only in EY27, but in Greater Europe as well – i.e. Latvia ranks behind even Turkey and namely, Russia as well:
http://www.proinno-europe.eu/inno-metrics/page/innovation-union-scoreboard-2010

Another numerical indicator is World Economic Forum (Davos) Competitiveness rank, Latvia dropped from the 54th place it had when Mr. Dombrovskis started his tenure to the miserable 71th place at the start of this year. This drop can be the real cause why Predident Zatlers decided not to go to Davos this year. Latvia has only miserable 77th place in Davos innovation index, Latvia is behind at least 4 African countries.

And that is apparently, why it has happened. Simple economics state that you should have 1) capital and 2) human resources and only then you can build enterprise and create some output.

Latvian politicians has presented “new economics”. Dombrovskis internal devaluation policy predicted that it is sufficient to adpot harsh measures for unemployed people and then everyone will start to be more productive and to learn new skills. Latvia’s structural unemployment shows that it is not working. And some research, e.g. in Journal of Development Economics, shows that the opposite view is more towards reality.

And about access to capital. Mr. Dombrovskis himsel recently in Latvian Forbes acknolwedged that there has not been the increase of foreign direct investments despite the budget tightening and much appraisal from right wing international monetary institutions and right wing governments. It is so funnay that Latvia is receiving so much good but worthless words and no private investore is betting on the future of this country under the leadership of Mr. Dombrovskis. And yes – 5% interest rate on USD load is no argument against the prevailing picture sketched above, it is rather proof of it, if we compare USD and EUR yields.

So – without capital and human resrouces there in no productive companies, no production capacity and potential GDP goes to zero and that creates inflation. So – inflation is another proof that you are not allowed to tight belt so far that it hinders development – that is not allowed in this century. Latvias future will be sound proof. Pleasure to see this.

-1

Atbildēt

domatvajag 12.07.2011. 23.01

Pagaidām izskatās, ka Latvijas gadījumā, jebkuras darbības: ārējā/iekšējā devalvācija, strukturālās reformas utt., kombinācijā ar ārējā parādā pieaugumu un hroniski negatīvu eksporta/importa bilanci, mūs neglābjami ved pie atlikušo valsts aktīvu privatizācijas – līdz ar to arī valsts neatkarības zaudēšanas “de facto”.

-2

Atbildēt

Dmitrijs Soldat_nko 12.07.2011. 22.31

Morten,

Do you think scenario of Iceland for Latvia would have been better? Currency devaluation and letting Parex go bankrupt?

It looks like Iceland was hit not as hard as Baltic countries, which have chosen not to devalue.

Atbildēt

Ivars Anševics > Dmitrijs Soldat_nko 12.07.2011. 23.30

Boriss, you should read this:
http://www.ir.lv/2010/12/31/iceland-latvia

Atbildēt

Dzintars > Dmitrijs Soldat_nko 13.07.2011. 11.32

Yep, cba (below) has a good point…. :-)

Atbildēt

Atis Bille 12.07.2011. 21.41

Regarding your questions 1-3: any debate on devaluation is unproductive if it lacks a context of industrial policy. And this is a real disaster: after 20 years of independence a state has developed NOTHING along these lines! Where are the multilevel development banks? Where are savings and loan banks? Where the guarantee institutions (cooperative bodies)? No liberal government has ever cared to creating functional programs. As a result we have a socially destructive and nasty “internal devaluation” imposed by Godmanis/Dombrovskis liberals upon a WHOLE NATION (instead of the foreign banks responsible for the mess), and leaving it decimated. The actual debate should NOT be on devaluation (or similar policy by-products), but on how to implement in Latvia a functional social democracy à la Scandinavia, Germany & Co?

-1

Atbildēt

Dzintars > Atis Bille 13.07.2011. 11.31

I am personally not so happy with industrial policy if it means promoting certain industries. Some talk of eg more high tech but how do we know if Latvia is good at that?

I am also keen to see the supply side develop – Latvia´s ability to produce is still very limited (3rd poorest country in the EU and all that…), here we have absolutely no disagreement except most likely on methods.

It´s a bit like some comments I have below to peteris_zilgalvis: My perhaps main disappointment is how little has sometimes really changed: We still discuss many of the same issues that were discussed 15 years ago.

-1

Atbildēt

Atis Bille > Atis Bille 14.07.2011. 11.52

Your NOT being happy with industrial policy “if it means promoting certain industries” is a simple matter of ideology. Actually, normally the right-wing economists like yourself are not happy with ANY industrial policy at all. Just look at the success of Poland and the reaction on it from the EU right-wing: constant accusations of being egoistic, anti-European, etc. pp.

“Some talk of eg more high tech but how do we know if Latvia is good at that?”

We DO know it exactly, because Latvia has a long historic TRADITION in high tech production. Not only glorious radio-electronic giants VEF and RRR, but also the most recent development with SAF Tehnika’s success in Brazil shows that Latvia even in highly hostile monetary/fiscal setting can excel in internationally competitive high tech production.

“Latvia´s ability to produce is still very limited”

It’s very limited not because of lack of the resources, but because of lack of the supporting infrastructure. Weak private sector can NEVER recover without strong public sector involvement. It was the case in Singapore, it was the case in Sweden and Finland, and most recently in Poland and Czech Republic, it MUST be the case in Latvia. Neoliberal policies are highly inhibiting and anti-productive in underdeveloped economy. They might be considered for implementation again in 30-40 years, when Latvia’s standard of living and private sector capacity has reached the average European levels, but in no case earlier.

-1

Atbildēt

Dzintars > Atis Bille 14.07.2011. 18.06

In many countries industrial policy consists of ´picking winners´ – this a) treats other industries unfairly, b) might not pick the right industries ie the ones that the country has a comparative advange in and c) in some countries one sees overlap between chosen industries and personal business interests of politicians. I don´t say that would happen here but I think experience tells us to be careful….

I also believe in a competent and efficient public sector to help foster a thriving private sector – I am from Scandinavia after all… But if it is not present we should address why (just like the ever-recurring questions of corruption, competitiveness etc).

And just one thing about your labels (right wing, neo-liberal and all that). I think of myself as a conservative Keynesian with respect for monetarism (doesn´t sound so fancy perhaps, definitely isn´t as tongue-in-cheek as neo-liberal) – I believe that fiscal policy is a powerful tool, should be used countercyclically but with respect for runaway deficits and debt – AND must be financed via taxation or borrowing, not via the “credit-debit wizardry” you propose and the idea of which my Krugman reference in a previous post took to pieces.

PS So why not use countercyclical fiscal policy in LV right now? Because Latvia committed the cardinal sin of heavily procyclical fiscal policy in 2004-07 ie spending every santim coming into the coffers instead of creating a budget surplus that could act as a cushion when the crisis struck. Latvia violated sound Keynesian fiscal policy in the good times, to make a long story short, a case I have complained about on several occasions.

Atbildēt

arturs_kucs > Atis Bille 15.07.2011. 15.25

Agreed, Morten, there was a procyclical policy, but the tipping point of the crisis (at least according to Godmanis) was committing the taxpayer to bailing out the private debts of Parex.

Indeed, regarding the discussion of the causes of and solutions to the crisis, I miss a discussion here about the nature of the global financial world. It is all very well debating the nuances of policy at a national level (I understand this is aimed at a national audience), but if the system IS rigged (manipulated markets, issuance of credit to financial institutions by central banks at almost zero interest, yet a targeting of nation states’ assets due to the reluctance of said financial institutions to take “haircuts” etc, etc…) then, … well the idiom I guess is that “we are not seeing the elephant in the room.”

Atbildēt

Komentāri nav iespējoti šim rakstam