Latvia and the Baltics—a Story of Recovery
IMF News, June 5, 2012
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- Authors: Christine Lagarde
- Published: June 5, 2012
Crisis and recovery — context and outcomes
- Latvia "lost a fifth of its output in just two years, 2008 and 2009."
- Unemployment rose "above 20 percent," and "double this among young people."
- At the time of the speech, unemployment had been reduced but "remains far too high at around 16 percent."
- Budget deficits were lowered and "government debt ratios" kept "to some of the lowest in the European Union."
- Competitiveness was restored through "wage and price cuts."
- Confidence was restored and interest rates brought down through "good macroeconomic policies."
How they did it — key elements of the recovery
- Strong political will, ownership, and "impressive determination" were central.
- Recognition that pre-crisis spending "could not be sustained" and a decision to "bite the bullet" rather than spread adjustment over many years.
- Fiscal consolidation:
- "In the first year of its program, Latvia implemented fiscal adjustment of more than 8 percent of GDP."
- "Total adjustment for the whole program is even higher, at around 15 percent of GDP."
- Social protection measures:
- The government "agreed to protect the poorest and most vulnerable people by strengthening the social safety net."
- Latvia "expanded and improved unemployment assistance" as an emergency measure and the IMF recommended keeping social safety net protection "as long as the unemployment rate remains so high and poverty remains a problem."
- External support and cooperation:
- International partners provided a financing package of "€7.5 billion."
- Strong cooperation among "the European Commission, the IMF, the Nordic countries, a few other countries including Poland, as well as the ECB," with assistance from "the World Bank and the EBRD."
- Clear strategic goal: "Latvia also had a clear end goal—euro adoption."
The road ahead — priorities and policy recommendations
- Priority 1 — Deliver on euro adoption:
- "Latvia still needs to deliver on the program’s exit strategy of euro adoption."
- Expected benefits: "remove exchange rate uncertainty, reduce interest rates, and promote integration with the rest of Europe."
- Priority 2 — Structural reforms for competitiveness under a fixed exchange rate:
- "Product market reforms are central to higher productivity and growth."
- Labor market reforms to ensure "everybody who wants a job can find one" and that "the economy can readily adapt to the realities of the future."
- Fiscal discipline: "Fiscal policy also will need to remain disciplined—Latvia’s proposed Fiscal Discipline Law is a good step in the right direction."
- Priority 3 — Support social cohesion and reduce inequality:
- Income inequality: "In Latvia, the top 20 percent earns seven times more than the bottom 20 percent."
- Urgent need to create jobs "for young people, for the long-term unemployed, for those nearing retirement age who will find it difficult to re-train."
- Policy measures recommended: "smarter investment in education, a move towards more progressive taxation, and a stronger—but well-targeted—social safety net."
- Fiscal space for social spending: "Right now, Latvia spends only about half the EU average on social programs, so there is room to do more."
- Broader point: IMF research cited that "a more equal distribution of income is good for both macroeconomic stability and sustained growth."
Concluding assessment
- The speech expresses confidence: "I believe the future of Latvia is bright."
- IMF commitment: "Going forward, we will stick with you. We will continue helping the Latvian people walk the road you have chosen, which includes entering the door of the eurozone."
- Closing quote: As Rainis said, "The one who will endure is the one who is willing to change" ("Pastāvēs, kas pārvērtīsies").
Latvia and the Baltics—a Story of Recovery. By Christine Lagarde, Managing Director, International Monetary Fund. Riga, June 5, 2012. As prepared for delivery.