Mike Collier in Riga -
"It was a mistake - Prime Minister Dombrovskis should never have gone there," an insider in Latvia's financial sector tells bne with a shake of the head. "I don't know who was advising him, but it was a big mistake."
The main cause of the "big mistake" is an unlikely-looking troublemaker. US economist and newspaper columnist Mark Weisbrot, who, clad in a suit slightly too big for his lean figure, managed in a few minutes' speaking at the University of Latvia to prompt countless pages of commentary, a backlash among bloggers and even a special press release from the Latvian Finance Ministry re-stating that devaluation of the lat "will not be considered."
Weisbrot is co-director of the Washington-based Center for Economic and Policy Research. That's not to be confused with the London-based Centre for Economic Policy Research - though some suspect that is precisely the mistake Dombrovskis' people made when they agreed to the PM's attendance at a conference titled "Latvia on the Edge."
Dombrovskis was in the audience on January 13 after delivering his introductory speech and sat impassively as Weisbrot tore a strip off the very policies he is trying to sell to the Latvian people as the best available "exit strategy". In one memorable quote, Weisbrot predicted Latvia's recession would ultimately surpass the Great Depression to become "the worst two years in the recorded history of the world in terms of output," with a third of the economy destroyed.
Don't cry for me, Latvia
Weisbrot began with a familiar theme: the parallels between Latvia's economic crisis and the crisis experienced by Argentina in 1999-2002, a subject which has become a popular talking point for world economists including Nobel laureate Paul Krugman, who described Latvia as "the next Argentina."
Weisbrot's central observation is that after a similarly catastrophic economic collapse, once Argentina ditched the peso's peg to the US dollar, the economy started recovering much more quickly than anyone predicted. However, the idea that a fixed exchange rate, such as the lat's to the euro, tends to prolong a recession was just a launch-pad from which Weisbrot launched a stinging attack on a range of targets, principal among them being the International Monetary Fund (IMF) and the €7.5bn loan it helped broker on Latvia's behalf.
bne spoke to Weisbrot as he left the lecture podium and asked why he had such a problem with the IMF, which many argue is helping to put some order into Latvia's chaotic financial landscape. "The IMF has always had a double standard when it comes to lower-income countries versus the high-income countries," Weisbrot says.
"In the high-income countries, they pretty consistently call for counter-cyclical policies in any kind of downturn or recession. That means in a recession in the US, Western Europe or Japan, they call for stimulus programmes: increasing government spending, including deficit spending, lowering interest rates, expansionary monetary policy - whatever is necessary to get the economy going," he explained. "In lower- and middle-income countries, they very often have the opposite and that's the kind of conditions you have here in Latvia."
Far from helping out distressed nations, the IMF is really about protecting the interests of western governments and financial institutions, Weisbrot thinks. "The realpolitik of it is that the IMF is run by the US Treasury Department with some input from Western European governments. They don't hear the voice of the victims of their policies - they're just not represented. It's exactly a case of 'Do what I say', not 'Do what I do'."
But perhaps Weisbrot's most interesting theory - or conspiracy theory - is that the IMF's newfound clout is all due to recent events in Central and Eastern Europe. "Regarding the hundreds of billions of dollars that the IMF has raised in the last year and a half, I think it's very clear that money is for potential losses of Western European banks in Central and Eastern Europe. There's no other imaginable catastrophic events that could require that kind of money," he said. "They're not going to use that kind of money to save countries like Latvia. They're going to use it if it gets to the Swedish banks when they need a bailout. When the government of Sweden needs a bailout and the government of Austria needs a bailout, that's what that kind of money is for."
But what really started the jitters in Latvian government circles was Weisbrot's assertion that in the long run, unpegging the lat might be worth the short-term pain it would cause. He concedes the EU has been the main bulwark propping up the lat/euro peg and the IMF has been less enthusiastic about it. But even the prospect of a "domino effect" with countries across CEE following suit after a lat devaluation holds no real fears for Weisbrot. "That would help their economies as well. The record of trying to adjust to this situtaion under a fixed exchange rate is a very bad record," he said.
"I don't see that this country has a better chance of entering the Eurozone under the present programme than they would under a devaluation, because even the IMF projects that if they do everything in the programme - and the IMF's not even expecting that - and continue all the way to 2014, public debt would be 90% of GDP, which would disqualify Latvia for the euro in any case."
If that proves to be accurate, it makes the Latvian government's aim of adopting the euro in 2014 look hopelessly optimistic. However, perhaps aware he'd already done plenty to spoil Dombrovskis' day, Weisbrot refused to say if he thought the prime minister was living in cloud cuckoo land. "Well... er... I can't speak for him..." he said with belated diplomacy.
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