Atslēgvārdi:

What now? 23

This post is an effort to sum up some random thoughts on where we are headed, both in the short-term and in the long term.

Iesaki citiem:

Of course, the major short-term challenge is to balance the budget. In spite of substantial cuts and tax increases, we're still living wildly beyond our means. Donors' life-support amounts to nearly 823 million LVL in the 2010 budget. Thus, according to the memorandum of understanding with the EC/IMF, the government needs to implement fiscal adjustment of around 700-800 million LVL over the next two years. Most likely, the 2011 budget needs to be consolidated by around 500 million LVL. These are not peanuts. To get a sense of perspective, the revenue from VAT, one of the most effective taxes, for the 2010 is projected to be around 690 million LVL.

Where would the consolidation come from? It would probably be hard to rely on mechanic across-the-board cuts in the public sector salaries alone, given the magnitude of such cuts over the last year. I am also skeptical about the so-called "structural reforms". As I've stressed many times, such reforms require time and competence - both seem to be in very short supply in the public sector. There is little doubt that the government, having learned the lessons of June, will again try to cut a little bit of every expenditure and raise a little bit of every tax, so as not to risk the wrath of some powerful special interest group. And yet, it is not clear whether this would do the trick - there need to be some 'drivers' of consolidation. When it comes to taxes, I think the only plausible venue is to drastically increase the real estate taxes. This is not such a bad idea, as I've stressed elsewhere. Real estate tax is nearly impossible to evade - even VID (State Revenue Service) should be able to collect it. When it comes to expenditures, it's hard to imagine how such a consolidation would not affect the social budget, which accounts for about 31 percent of total government spending. In fact, I think pensions need to be cut, regardless of what the Constitutional Court thinks about it. It would also make lots of sense to make deep cuts into the generous payments to farmers.

Then I would stress three long-term challenges. First, the 'internal devaluation' does not appear to be very effective. By and large, the firms seem to have preferred to cut their costs by shedding labor, rather than reducing wages. Most importantly, we have not seen substantial reductions in prices. What this means is that domestic demand substitution towards locally produced goods is taking place too slowly. Thus, recovery is likely to be painfully slow. Second, we will have to get used to live with substantially higher levels of public debt. Another result of internal devaluation is a rather long period of adjustment, implying the need to accumulate substantial levels of debt. In just a few years time we're likely to have levels of external public debt close to 60 percent of GDP. Soon, this debt would need to be re-financed in the private markets, i.e. at substantially higher interest rates. Naturally, taxpayers will incur the costs of servicing the debt. Third, high unemployment level is likely to have pushed many unemployed to seek jobs abroad. Many migrants are unlikely to return in the near future, especially given the slow recovery. The practical significance of this to those who stayed is that the total tax burden of servicing things like the public debt, pensions, etc. is higher for each remaining tax payer.

All in all, these are serious challenges to fiscal sustainability. Even when the crisis would end, there would be no going back to the old ways of doing things. Talking about what needs to be done is beyond a blog post, but I think there is one thing that needs to be understood. This is that solutions require lots of thinking and hard work. Too many people in this country seem to think that producing solutions is only a matter of organizing another "panel of experts" or having a few hours of brainstorming. This notion is ludicrous.

However, we also have the 'advantage of the follower'. The problems we face are extremely serious but not unique. There are many various policy solutions in the developed world so we don't need to start from the scratch. However, adapting these solutions to Latvia's circumstances is not always straightforward. It requires careful thinking, time, and hard work.

Iesaki citiem:
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Komentāri (23) secība: augoša / dilstoša

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govs from Latvia 13.03.2010 21:59
Good, you have now approximately the opinion I had a year ago!

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Milwaukee Bucks 07.03.2010 15:39
facts about the real-estate bubble.
Kalvitis as premier resisted the pressure from Moodys, from the EU commision, from other international agencies who put pressure on Kalvīts to PUT A TAX ON REAL ESTATE SPEKULANTS.
so what happened, real estate when up about 10-20 percent per year untill a soviet union build apartment went from 3000 lats to 60,000 lats.
and now the apartments can't be sold for 14,000 lats.
facts are facts and the TP,LPP/LC, ZZ, TB/LNNk coalition are to be blamed for their stupidity.
the public should sentence these and other parties in the parlament to the shi* hole of history.

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Dean Memminger 07.03.2010 15:39
facts about the real-estate bubble.
Kalvitis as premier resisted the pressure from Moodys, from the EU commision, from other international agencies who put pressure on Kalvīts to PUT A TAX ON REAL ESTATE SPEKULANTS.
so what happened, real estate when up about 10-20 percent per year untill a soviet union build apartment went from 3000 lats to 60,000 lats.
and now the apartments can't be sold for 14,000 lats.
facts are facts and the TP,LPP/LC, ZZ, TB/LNNk coalition are to be blamed for their stupidity.
the public should sentence these and other parties in the parlament to the shi* hole of history.

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Milwaukee Bucks 07.03.2010 15:34
Why are people leaving latvija?
Why have more people left latvija now then during world WW2.
answers are black and white. just read the newspapers and you will come to the same conclusion.
Godmanis as premier the first time singlehandedly wiped out manufacturing by not accepting 50 million offer from Samsung (of South korea) for a part of VEF.
Samsung which has 230,000 employees world wide wanted to manufacture products in VEF, but Godmanis didn't agree because Godmanis wanted to sell off the VEF factories for 20 samtim certifikets. yes, the interview in Klub magazine proves the facts, in black and white Godmanis said that he didn't accept the offer on his desk.
it was his to accept of reject.
facts are facts.
the man, Godmanis was a chekist agent for the kommunists. and he has already admitted that.
one question, why did latvians vote for him?
or is it actually the situation which Stalin said, it is not who votes, it is who counts the vote?

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meinhardt 24.02.2010 15:31
From my point of view - it is hard to see why BoL are saying that they had not been able to do both things at once - keep currency peg and tame real estate price bubble (with its pressure on inflation). They had some options. E.g. BoL could make differentiated reserve requirements - if commercial bank was borrwoing from parent company (directly or indirectly, e.g. if bonds were hold by parent), then they should put aside greater percentage of reserves on those liabilities. That could have levelled the playing field among local commercial banks and those owned by foreign banks. Beside - it coudl have some rationale - we now can see that the risks of borrowing from the parents were understimated. And BoL is really comfortable about differentiated measures as one can see from the decisions a year ago - different interest rates (for borrowing from central bank) are applied to those who choose to borrow more frequently from the central bank and not from the interbank market. Another important tool that BoL could posses is asset-based reserve requirements. It is a bit innovative for central banking, but nevertheless - if BoL executives had more insight and courage (if they had PhD's then this could be true; it is shame for BoL president not to have PhD) they could apply it as well.

I guess, the honest and courageous BoL policy would have been rather unpopular but it certainly would have created honest debate what is the responsibilty of central banks and government. This could have been real pressure on government to look for some solutions in that time, but Rimsevices had decided to lie and do everyting to keep his office.

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V Dombrovsky 24.02.2010 14:36
1. Internal devaluations result in longer adjustment periods. I think even IMF told you that a year ago.
2. Lets just leave it there.
3. The point is that economic agents will find profit opportunities and employment, regardless of what you know of internatinal trade theory. The problem is you push people into unemployment because you think they have no chance. And what if you're worong (and you are)? Sleeping well at night?
4. Ah.. I was waiting for this. The crown jewel of BoL reasoning... That doesn't come from undergrad textbooks, does it? In fact, I am extremely curious where you took this from. Why don't you face the truth? You have little idea where productivity gains come from - that'sjust not part of your standard macro training. Your job is to take these things for given, as they are in the short run. You were supposed to be worried about the short term-stuff. Deviations from potential output, those kind of things. Yet you have fully removed yourselves from this behind your keep-the-peg-at-any-cost faith. Instead of smoothing business cycle, you're saying deviations are good because they motivate to increase productivity. Yeah, "increase the productivity" is the advice you dispense to the others. "Crisis is good because it makes everyone think harder on how to increase the productivity", right? If that's what you believe, fine. The question is: why do we need a central bank? Friedman once said a monkey can run the Fed? Well, it doesn't not take so many well paid people to just keep the peg no matter what, because hey, crises are so good!
Go tell it to all those unemployed and hope you can run real fast.

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An obvious disaster 24.02.2010 13:55
1. In latvian case, it's 800 mil. in 2 years. Longer adjustments? come on!
2. You are wrong on this one. Simple as that.
3. Your idea of int. trade - people happily working in industries that compete with China. Except that they are not... because this implies abverage wage level of 200LVL... If people are OK with that, no problem. But again - they were emigrating even in the good times... because 200 is not gonna cut it.. so down goes your argument... again...
4. the argument here is that the productivity shift will not happen automatically. So you need crisis-> shed labor-> increase productivity. same labor, higher productivity - long run yes, short term - keep dreaming...

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V Dombrovsky --> Obvious disaster 24.02.2010 12:38
1. Larger deficits are also a result of longer adjustment periods. Simple logic, too. Don't need to be an economist.
2. Of course it does matter.
3. If you haven't noticed, there are many people employed in many industries - in spite of booo.. CHINA. Sorry, but your idea of international trade is at the level of scary tales for children. A bit primitive.
4. Yes it does. I hope you can still understand that an increase (or decrease) in production factor will increase (decrease) output at any level of productivity. The only thing you're right about here is that it's undergraduate micro.

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An obvious disaster 24.02.2010 12:20
1. larger debt burdens are result of larger deficits, which is the result of expansionary fiscal policies.. That's just simple logic, even economists should understand that....
2. Internal prices matter if domestic market is relevant.. which it isn't in case of Latvia
3. Where would they be employed? In industries competing with China? If that's the case, let them emigrate. it's better for them, and for the economy...
4. production functions? How about "productivity" - does this ring any bells? So if productivity goes up (because labor is used more efficiently), one can produce more with less. Sorry, undergarduate macro here...which I believe you should be familiar with...

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Slava -> Obvious disaster 24.02.2010 11:56
1. Re adjustment: deflations result in longer adjustment periods so public sector would accumulate larger debt burdens with internal devaluation. It has everything to do with this. This is the price for the "stability" that you crave so much. Sorry - that's just textbook stuff.

2. You're too fixated on exports and international competitiveness. What matters (maybe more) is adjustment in internal relative prices. Export sector alone won't take care of all these unemployed in the near future. So, even if you're using PPI, the drop is not that impressive. And now it's rising again, doesn't it?
3. Some unemployment is inevitable. But a devaluation would not produce as much unemployment as internal devaluation. Sorry - textbook stuff again.
4. "It doesn't matter among how many people [debt burden] is shared"??! When was the last time you've read about production functions? What happens when you have less of one production input?

"If income go up". Right... It's a very big "IF", if you ask me. And what will bring it up, may I ask? "Stuctural reforms"?

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An obvious disaster 24.02.2010 11:22
And finally, migrants who might not return... Screw them if they don't. Debt burden? It doesn't matter among how many peope it is shared, but what is the total income which supports that debt. So if incomes go up (log term), debt is not a problem even if there are less people around.. If not, we're doomed.. But you don't have to be an economist to already know that...

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An obvious disaster 24.02.2010 11:17
As for thereduction of prices, if you look at CPI, yes, seems a bit small. But CPI is not the right thing to look at. Export prices are more relevant, and they are down by much more...

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An obvious disaster 24.02.2010 11:11
"Another result of internal devaluation is a rather long period of adjustment, implying the need to accumulate substantial levels of debt".

Sorry Slava, but this is just BS. Private sector in Latvia is deleveraging, so private debt, if anything, is declining. Public debt is rising, but this is because public spending >> public revenues. And this is the result of public sector in Latvia living beoynd its means. And what has the discussion of internal vs external devaluation to do with it? Absolutely nothing...
As for the wage reduction vs labor shedding - doesn't matter for competitiveness how you do it, as long as ULC go down... And this is precisely what's happening. Unemployment rising, but that's inevitable - too much labor producing nothing of value previously, now has to relocate...would be the same under any strategy...

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@ G.D. 24.02.2010 11:05
Perhaps he already has set-up a new business! :)

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Jaņdžs 24.02.2010 09:31
So how do you propose Latvia will survive? All the writers here, I am guessing, are urban residents. The best Šlesers can come up with is to turn Riga into Las Vegas; Šķēle has no ideas whatsoever; Lembers neither. To talk about restructuring is to play with the rubic cube, while Rome burns.

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@ 24.02.2010 06:50
Atvainojiet par pārrakstīšanās kļūdu :)

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@ reality 24.02.2010 06:49
Klau, kas tu viņiem izmainīsi domāšanu? Lektori tagad būs vainīgi pie tā, ka cilvēki neapdomīgi ņēma kredītus un pie tā savu bijušo studentu uzskatiem? Beidz smīdināt.

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G.D. 24.02.2010 02:49
"However, adapting these solutions to Latvia's circumstances is not always straightforward. It requires careful thinking, time, and hard work."

Well, that is an extremely good idea! That is exactly what economists are for, aren't they?

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reality 23.02.2010 23:57
'' This notion is ludicrous'' - PAR ŠO situāciju jau sen rakstīja viens loģiski domājošs zinātnieks:
(..)(..)Возникают проблемы, решение которых требует совершенно нового “поворота мозгов”. Так называемыми интеллектуальными штурмами тут ничего не сделаешь. Да и кто у нас интеллектуальная элита? Одни и те же люди. Что они скажут – заранее известно. Страна погрузилась в чудовищное словоблудие. В советский период были сдерживающие начала, тогда “не пускали” идеи, выпадавшие из базового русла. Теперь интеллектуальное поле засеяно сорняками. Говори кто хочет и что хочет. К процессу мышления подключились миллионы дилетантов. Если за проблему, которую один человек может решить, берутся два – начинаются трудности, три - еще хуже. А если десятки - проблема становится неразрешимой. Я считаю, что в России имеет место эпидемия интеллектуальных болезней.
Александр Зиновьев: Не плестись в хвосте у Запада

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reality 23.02.2010 23:54
''Too many people in this country seem to think that producing solutions is only a matter of organizing another "panel of experts" or having a few hours of brainstorming. This notion is ludicrous.'' - TIE 'TOO MANY'' NAV ar prestižu augstskolu dimplomiem kabatā ? Nav tie Vj.Dombrovska vai M.Hansen skolotie, kas tagad svensonu bankās par savu 'thinking'/domāšanas veidu - kredītpolitiku 'treknajos gados' joprojām domā ?

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Krabe -> xi 23.02.2010 23:22
Īpašuma tirgus ir jānobeidzina, lai cilvēki varētu beidzot normāli dzīvot, nevis atdot milzīgu procentu algas par īri vai apsaimniekošanu.

Bet ko vajadzētu veicināt lai izietu no krīzes, ir dzimstību. Ja sāktos masīva kampaņa seksot un ģimenēm dzemdēt bērnus, pirmais rezultāts būtu jau pēc 9 mēnešiem. Parādītos pieprasījums pēc bērnu precēm. Ja šīs bērnu preces ražotu tepat Latvijā (ap 9 mēneši varētu uzsākt), tad sāktos ekonomikas atveseļošanās.

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xi -> meinhardt 23.02.2010 21:44
Cilveeki no Latvijas masveidaa brauc prom, bet Tu iesaki celt jaunus maajokljus. Galiigi gribi nekustamaa iipasjuma tirgu nobeidzinaat?

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meinhardt 23.02.2010 20:39
Piekrītu par pirmo punktu, ka 'iekšējā devalvācija' nav nostrādājusi. Jēlīši bija paredzējuši, ka tiks samazinātas algas, tā vietā tiek atlaisti darbinieki, algas tiek atstātas tādas pašas (vai šī gada sākumā pat palielinātas, lai darbiniekiem 'kompensētu' IIN palielināšanos). Lai būtu rēcīgāk, tie, kuriem vēl ir darbs, naudu taupa nebaltām dienām un pie tam vēl izvēlas to turēt ārvalstu valūtā un katrā ziņā vienā no nedaudzajām ārvalstu banku filiālēm, kas darbojas Latvijā un kurās noguldījumi tiek aizsargāti atbilstoši Somijas vai Dānijas noguldījumu garantiju likumiem (Latvijas noguldījumu garantiju likumā, kā es to saprotu, ir caurums - ja noguldījuma nepieejamība iestājas un tuvākā mēneša laikā LB devalvē latu, tad noguldītājs zaudē atbilstošo daļu no ārvalstu valūtā veiktā noguldījuma; protams - ja devalvācija nenotiek un lats kļūst spēcīgāks, tad noguldītājs sanāk ieguvējs) un kopumā izskatās stabilākas, jo ir ārvalstu banku filiāles un nevis atsevišķas Latvijas bankas, kurām ārvalstu banka ir tikai īpašnieks (bet ne atbildētājs). Tātad nauda tiek ne tikai izņemta no Latvijas ekonomikas, bet varbūt pat sūtīta prom uz citām valstīm.

Otrais punkts nozīmē, ka katru gadu no ekonomikas vismaz 0.04*60*GDP, t.i. vismaz 2.4% GDP vajadzēs atdot kreditoriem par procentu maksājumiem vien. Labi, ja kreditori būs Latvijas pensiju fondi, bet var sanākt, ka tie ir ārvalstnieki.

Par trešo punktu par piezīmēt, ka jēlīšu valdības politika noteikti būs palielinājusi NAIRU bezdarba līmeni un pazeminājusi Latvijas potenciālo GDP, kas nozīmē, ka ja atsāksies Latvijā izaugsme, tad inflācijas draudi Latvijā būs daudz, daudz lielāki nekā kaimiņvalstīas. Te vēl ir jāņem vērā, ka Zviedrijā, Somijā u.c. valstīs ir gadu desmitiem investēts industrijās. Krīzes laikā šīs investīcijas netika veiktas, bet tas šīm valstīm nerada problēmas, jo gadiem uzkrātās ražošanas jaudas varēs izmantot pēckrīzes periodā. Latvijā bija savādāk - investīcijas gāja uz burbuļsektoriem un Latvijai nav lieku ražošanas jaudu citos sektoros - kas nozīmē, ka pēc krīzes tas būs papildus spiediens uz inflāciju.

Risinājums bija ļoti vienkārš - Latvijai vajadzēja krīzes gadus izmantot lai pa lēto iepirktu šajā laikā maz pieprasītās kapitalpreces. Otrs pasākums būtu pieejamu mājokļu būvniecība. Tos pat varētu celt valsts uzņēmumi, kuri tos sākumā izīrētu un pēc pāris gadiem varētu pārdot ar labu peļņu un nomaksāt valsts parādu, kas būtu uzkrājies būvniecības un citu nozaru atbalsta dēļ.

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