Here is a pretty good post by Edward Hugh that is not to be missed:
G.D. 12.06.2009 08:54
About the governmet's recent package I agree but about the rest not too much.
First, I don't bleive in "deflationary spiral" in a small open economy like Latvia. Consider the usual explanation step-by-step. Exactly how it is supposed to work in an environment of free movement of capital and goods? Unemployment and wage decreases make export sector competitive very fast (which is the thing we actually see right now). And I think also that towards the mid-2010 we will see the existing banks resuming borrowing or new foreign banks entering Latvian market, considering the power of printing press in the US. Or will they miss the opportunity in Latvia (EU country with low wages and high unemployment)? I doubt it.
Second, sectoral adjustments does not happen "all the same". Using nominal devaluation drags lousy industries along and considering democracy (and from that - political pressure from all those sectors) it may go on and on for decades… The same with the state sector, you do not need to fire anybody if you devalue - that is the whole idea. "Less people are fired" is the usual argument, in other words, the whole idea of it is that sectoral adjustments DOES NOT happen. And I still beleive (hope) that for 2010 budget there will be real structural measures in the health and education sector.
Third, in the end, do we have problem of nominal wages if we have positive CA?
V Dombrovsky 11.06.2009 22:35
I think the problems of long-term growth must be addressed with appropriate policies. Plunging the economy into a deflationary spiral is not one of them. Take the recent 'structural reform' (e.g. progressive tax package). Can something hastily devised in just a few days be a solution to the long-term problems?
We're facing a short-term problem of adjustment in prices and wages. I think the appropriate solution is nominal devaluation.
As to sectoral adjustment, it will happen all the same. I find it hard to believe the construction and real estate boom would resume after devaluation.
G.D. 11.06.2009 09:48
Ok, I have some time, so I can spell out my point clearly. Lets say there is a country X, it is 4th quarter of 2009. And it is characterized by the following stylized facts:1) positive exports growth;2) positive CA;3) positive growth of industrial production;Then my questions are: is there any country healthier than that? What exactly is the problem? Competitiveness? Sorry, competitiveness is fine if we see positive CA, then what else? Ok, there is a slight catch. Yeah, one thing is missing in the picture: level of debt, is it sustainable? And that question straight away boils down to the long term growth level (the assumed "g" in all IMF debt sustainability calculations). And here we enter the shady land of "growth economics" where nothing much is proven. But we still may contemplate deflation vs devaluation scenarios. What is the difference? As many economists have rightly said, actually the scenarios are not so much different but sure deflation involves more unemployment and larger GDP contraction in terms of local currency. As to GDP contraction, that is usually misinterpretation as irrelevant variable is quoted, the relevant variable is not local currency GDP (which usually performs fine in devaluation scenario), but NOMINAL GDP IN THE DEBT CURRENCY is relevant and usually in terms of this, the scenarios are not much different. So the main difference left is actually unemployment, which, sure, is much higher under the deflation strategy. So let us think… If we want to increase productivity growth in the long term, this "g", what is good for economy? To preserve overemplyment for teachers? To preserve state sector enormous employment? To preserve inefficient health sector or emenormous employment in real estate? I think no, just the opposite. The main evil of devaluation for Latvia is that it preserves the current employment structure and that is wrong! Maybe devaluation strategy is fine for global leaders like Sweden in the 90ies, but for Latvia now: we need bankruptcies and we desperately need unemployment! It is simply necessary to change dominating culture from currently ruling pure US-style consumerism (which not sustainable in a small country) to something more like exporter-saver philosophy. Otherwise our future is moving from one crisis to another. And ok, there is another, European dimension (it is useful to think clearly year by year what will happen if we devalue now but other countries stay pegged and join eurozone which is very realistic now) but I will not dwell on that.
G.D. 11.06.2009 08:37
The answer is simple: y-o-y does not matter! And there is nothing "nonsense" about asking who pays for what as Slava rightly puts it in his blog (I do not see reasons why should it be referred only to one side), as far as I see the guy does not give any list of publications, no academic affiliation and I am not quite sure if he exists... ok, ok, I guess, there are people who had met him but what does he do for living? Nobody cares? Ok....
G.D. 11.06.2009 08:33
Ok, ok, its fine. Though it is always worth for motivation as you rightly noted in your blog.
V Dombrovsky 10.06.2009 11:23
What matters is that Edward is a well-trained economist, he is good in writing for popular audiene, and that he analyzes Latvia for free. Given the severe shortage of economists in Latvia (I am not counting the Soviet types), that is a great thing.
As to why he is doing it for free, believe it our not, it's been a subject of some discussion between myself and my colleagues at the school as well. What we cam down to is that ...well, as long as all this is for free, why should we care? :)
V Dombrovskis 10.06.2009 11:17
I am afraid that Edward's main argument is that deflation is not working fast enough, and that the exit strategy (euro adoption) look increasingly unattainable. It's not that the LV government is not capable of implementing the cuts. If they cannot do it, devaluation is a certainty. What I think Edward is saying, is that even if they will do, it is not the end of the story. His main argument is that the program is not working.
Gatis 09.06.2009 23:30
Laikam ar savu komentāru aizkavējos, jo 0,5 miljardi tomēr tiks nocirsti no budžeta. Tā ir laba zīme.
Gatis 09.06.2009 23:00
Rakstā nebija pietiekami daudz pārliecības, ka devalvācija būtu pareizais solis. Pats raksta autors atzinis, ka nākotnē grūti prognozēt par to, kas notiks ar Latvijas ekonomiku, bet katrā ziņā daudzkas esot atkarīgs no mūsu valdības spējas smazināt izdevumus. Ja viņi to nespēj, tad jādevalvē. Acīmredzot, autors ir jau zaudējis ticību mūsu valdībām un iesaka vienkārši padoties, jo īstenība mūsu pusē ir visa Eiropa.
Es personīgi esmu pārliecināts, ka valdībai tas ir jāspēj izdarīt un viņi to arī spēs, jo arī devalvācijas gadījumā tauta būs tikpat neapmierināta, cik samazinot izdevumus tādējādi JL reitingi cietīs jebkurā gadījumā.
JL tagad ir lielākie ķīlnieki šai situācijai, jo pa mizu viņi jau sāk dabūt tagad, kad jau lemj par par minimālās algas samazinājumu. Arī tas, ka viņi novilcinājuši paziņojumu par 0,5 miljarda budžeta samazinājumu, sāk radīt dažas šaubas par viņu vēlmi kautko būtiski darīt. Ja tuvākajās nedēļās Dombrovskis nespēs burtiski nocirst pus miljardu no budžeta, var teikt, ka devalvācija varētu ieiet autopilotā. Un tad JL ar Dombrovski tiešām sāks izpelnīties visīstākās tautas dusmas.
Līdzpilsoņiem es ieteiktu atbalstīt katru Dombrovska soli, ko viņš sper budžeta apgriešanā, jo tas būtu labāk nekā devalvēt latu.
a > G.D. 09.06.2009 17:55
"as CA is becoming positive"
Yeah, because we get pooorer and can't afford so much imports.
"industrial output increases"
It decreased by 16,9% in april (year on year).
"I bet that exports will rise in the last quarter of 2009 (seasonally adjusted, compared to the 3rd quarter)"
Well, that is surely possible, particularly taking into account that we can't be sure about tendencies in exports markets.
However, there is one thing I know for sure - you will see a dramatic decrease in 4th quarter year on year exports.
Oh, come on...
"and who pays for that"
Oh, come on... (one more time). Give your argumentation but please stop this nonsense.
G.D. 09.06.2009 17:04
Sorry, misspelled, not David Hughes but Edward Hugh :) Interesting guy, one may wonder what motivates a person to sit all day at a computer and analyze Latvian data and who pays for that...
G.D. 09.06.2009 16:52
Actually, I am pretty sure that already the 3rd quarter will look good for exports... But ok, I am a bit risk averse :)
G.D. 09.06.2009 16:50
Crap! It seems that guy is a bit confused in numbers as CA is becoming positive and industrial output increases (also, I suggest you to google for who is David Hughes). I bet that exports will rise in the last quarter of 2009 (seasonally adjusted, compared to the 3rd quarter), despite "worst of all worlds" and the rest of Keynesian crap. 20 lats on that! Agreed? :)
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