A case of mistaken financial modelling? 3

I spent part of November 18th chatting to an economist about the state of Latvia's finances. This was not a conversation that I was well prepared for. A degree in environmental science and a career as teacher has left me very poorly equipped to discuss economic policies, and generally quite happily so. But I have been confused recently by the huge gaps between what Latvians say about their economy and what I read in the foreign press.

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It started a few months ago, when a visiting academic told me that his economist colleagues believed that Latvia could not retain its peg to the Euro. A little the worse for wine, he went on to advise me that as I am paid in Euros, I should borrow as much money in Lats as I possibly could, put it all in a Euros saving account and win both on the value of the currency, and on the cost of my repayments. I had no difficulties not taking his advice, but it did make me wonder how the local financial leaders could seem so confident about the economy.

The answer, or at least a clue to a possible answer, lies in the area of journalistic balance. This morning I have read through half-a-dozen or so articles from the last few months on the subject of devaluing the Latvian currency. They fall, fairly equally, into two camps. On one side there are articles that take the word of the economists as law and allow the locals who comment to appear misguided, or plain stupid. In the case of politicians, of course, this is not too hard - politicians the world over can seem stupid with very little help from the press. But they have also interviewed leading financiers, some of whom are definitely not stupid. The other articles seem to be written by more cynical writers, who are not quite so ready to believe anything they are told. These articles stand out because, while drawing attention to the worries, they solicit the opinions of local experts and actually seem to take them seriously, and these local experts use the real statistics of the country to paint a different picture.

So the true situation of Latvia's finances lies in two possibilities. Firstly, those reports that predict disaster are simply not conversant with the local situation, and are using models that have limited significance for Latvia. This is my favoured choice - after all the world has not really seen a post-Soviet economy emerge before and comparism models are probably not helpful (despite the keenness of some Latvian politicians to compare Latvia with Ireland, two countries that share little more than a lack of natural resources and the misfortune of being poor before joining the EU). The second possibility, while not impossible, is one better left for qualified conspiracy theorists - that Latvia is approaching financial crisis and everyone, EVERY SINGLE LOCAL EXPERT, who knows about these things is hiding the truth.

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Agnes Collins

I also read at http://hireessaywriter.org/order-an-essay.html that foreign financial specialists find it difficult to evaluate economic situation in the country. Despite I believe the fact the situation can be a little worse in the next few years if Latvia politic will be smart no crisis happen and moreover some invests in future development of the country in IT area can be easily made.

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mikelis 28.11.2007 14:54
mark, too often I've heard the refrain that latvia is a unique state and that foreigners dont understand whats happening here in terms of economics. Although as the economic indicators worsen even Kalvitis is now warning the people that things wont be this good in the near future, and new cars wont be bought or houses built a far cry from Krastins' an economic crisis is impossible.

The uniqueness argument is one designed to limit debate and dismiss criticism instead of actually looking at the facts. Its been around for a long time, before we joined the EU a common saying by some politicians was Eiropa mus nesapratis.

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DaceA 20.11.2007 16:49
Well, I guess, we'll be able to tell which one it is only in a few years time, when we'll see where the economy is going. But certainly right now for many living in Latvia it may be a little scary to think of a need to cut down on consumption because they won't be able to afford to consume as much as now... One aspect of this that interests me particularly is the black market that the state has not been able to decrease in size. These people consume more than they could, had they paid taxes on all their income, and the current inflation trends don't give much incentives to legalize this income, unless, of course, someone wants a loan from a bank... So I'm wondering how is this taken into account in the plan to cut the inflation? How do you give incentives to cut down on spending to those who spend more than they could anyway (and also use more than they should - not paying taxes for state-provided services)?

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