A case of mistaken financial modelling?

19. novembris, 2007


Mark Case

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.

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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