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The invisible side of Latvia’s ‘Success’ story: Life with ‘God’s mercy and the goodness of others’

Oct 31, 2012
By Kristine Rizga, Re:Baltica

The invisible side of Latvia’s  ‘Success’ story: Life with ‘God’s mercy and the goodness of others’
TROUBLED TIMES: Zane Valdmane and daughter Made represent the 1 in 5 people in Latvia that are at risk for poverty.

Latvia’s painful austerity program and recent economic growth is presented to the world as a
success story and a model for other struggling countries resisting cuts. Re:Baltica’s investigation
finds that Latvia has some of the highest poverty, unemployment and income inequality rates in
the EU. What can other countries learn from Latvia to avoid the high human costs of its political
choices?


When Zane Valdmane opens the door to her apartment, holding her two-year-old daughter Made
in her arms, the chronic lack of money in this household is invisible at first glance. 36-year-old
Zane’s athletic body and striking face, with tiny wrinkles around the corners of her lips, radiate
health and joyfulness. The family’s small apartment in the city of Saldus, where Zane lives with
her daughter and 13-year-old son Arturs, is orderly, calm, and filled with the light scent of a
burning candle.

But as we talk at the small kitchen table set in a narrow kitchen, this idyllic family picture
slowly dissipates. Two toothbrushes sit in a cup near the kitchen sink. There is no shower in this
apartment. Made and Zane wash themselves in a small bucket in the kitchen. Arturs uses showers
at his soccer gym. There is no refrigerator. Zane can’t afford to buy one or pay for electricity to
run it. The kitchen walls are covered with wallpaper from three different rolls that Zane bought
thanks to a church donation.

As a single mother, Zane is a part of the largest group at risk for poverty in Latvia. Overall,
425,000 people – or one out of every five people in Latvia – are poor. The monthly income of
each household in this group is about 215 euros or less.

These families often don’t have enough money to cover rent, heat, or buy food. Sometimes, these
homes don’t have running water, a phone or a TV. Last year, 100,000 Latvians lived on less than
65 euros a month.

The biggest pride and joy of Zane’s life —her children—turned out to be her biggest trial. Poor,
single mothers like Zane have a harder time raising children in Latvia than in any other country
in the European Union (EU). This is largely because Latvia spends less on social benefits that
target the poor than almost any other EU country. The World Bank’s experts note that the Latvian
government supports children from middle- and high-income families more generously than most
European countries, but it invests the least amount of resources in children like Made and Arturs,
who live in poor, single-parent homes.

Even after a significant expansion of the social safety net in the aftermath of the recession,
Latvia’s spending on social protection programs for the poor was still among the lowest in the
EU. For example, when the country faced the world’s deepest recession in 2009, only Bulgaria
and Romania spent less on social protection programs. Estonia spent 40 percent more per capita
than Latvia, Lithuania spent 33 percent more.

Today, Zane’s monthly income is much higher than it was in the past two years because she
recently won a child support court case. Now her monthly income is 231 euros: 100 euros as a
stipend for attending job training classes, largely sponsored by EU funding, 11 euros as a state
Family Benefit, and 107 euros in child support from Artur’s father, which is late this month, as it
is almost every month.

Zane’s small, two-room apartment in Saldus costs 86 euros a month. She pays 30 euros for
firewood she uses for heat and utilities. With the remaining 116 euros – or 3 euros a day – Zane is
struggling to feed her children. For two years now the family can’t afford to buy clothes, go to the
dentist, buy school supplies or send Arturs on field trips with his classmates.

In Zane’s flat there is neither washing machine nor refrigerator, as she cannot afford even
the electricity to run them.

How does Zane survive on 3 euros a day? “A part of it is my creativity, a part of it is God’s
mercy and the goodness of other people. German families affiliated with our church donate
something. My friend who works at the Red Cross asks for my help to translate some materials
for a Swedish delegation. Swedes donate something.” At least three times a month, Zane asks her
friends to donate 7 euros. “I don’t have any issues asking for donations anymore. How else can I
survive? And that’s how we live from month to month. Each time, I have no idea how we’ll make
ends meet.”

But hunger and calls for donations is nothing compared to the judgement of your
children. “Arturs is having a really hard time with our situation. He is angry at me—not at the
world or his father—but specifically me. That adds the heaviest burden,” Zane adds in a quieter
voice.

But that’s OK, says Zane. She is doing much better than other single mothers in her Saldus
community. “When you are able to get paid job training or work in the “100 lats program,”
[temporary government jobs] that’s considered glamorous here,” Zane adds. Most of the single
moms with children Zane knows through the local “Baby College” provided by the local
government receive only a job training stipend like Zane, but not child support. “I don’t
understand how they survive,” Zane explains. The government doesn’t allow people to work and
get government assistance at the same time.

Until the beginning of 2010, when Zane became pregnant with Made, she always worked, paid
taxes and earned a good living. “We never lived in luxury, but I never had to ask for donations,”
Zane explains. In the ‘90s, Zane was a rising star in the Latvian women’s hockey league. Later,
she played and lived in Switzerland and Germany. After she returned to Latvia in 2000, Zane
broke into journalism and worked as an editor and reporter with local radio stations. In the
beginning of 2008, Zane supplemented her income with private ice skating and ballet
classes. “We lived better than ever back then. I made about 574 euros each month. We had
enough for rent and three meals a day. We could afford a visit to the dentist, after-school
programs and field trips for Arturs. Once a year we could travel in the Baltics.”

Back then Zane was luckier than most Latvians. The data from the Latvian Ministry of Welfare
shows that, even in the roaring, pre-recession years, the number of people living in poverty was
increasing. This happened despite the overall growth of the income bubble and low
unemployment. From 2004 to 2008, the poverty index in Latvia increased from 19 to 26 percent
and was one of the highest among EU countries. That means that income growth was unequal.
The Gini coefficient, which measures income inequality, is the highest in Latvia among all EU
countries.

After the global economic meltdown, which was the deepest in Latvia according to International
Monetary Fund (IMF) estimates, a growing number of economists agree that income inequality is
bad for democracy and capitalism. English researchers Richard Wilkinson and Kate Pickett
compared large sets of data among developed countries and discovered surprising similarities: the
greater the income inequality within a country, the more crime, prisoners, mental illnesses, drug
addictions and alcoholism there is. In addition, there are higher mortality rates, low social
mobility and lack of trust for the government. This research also shows that in the countries with
high income inequalities these factors impact people across all income groups.

Income inequality and poverty are often presented as inevitable consequences of capitalism, but

both phenomena are influenced in large part by political decisions. Government can impact these
factors the most through tax policy: countries with more progressive tax systems that redistribute
more income like Denmark and Austria have lower poverty rates. Countries with lower
redistribution like the U.S. and Latvia have higher numbers of low-income people and less social
mobility. Tax experts in Latvia have noted that the country has had very conservative tax policies.

In the life of Zane this has meant that she paid a higher share of her income in taxes compared to
other people with comparable incomes in Europe. That is because the greatest share of Latvian
government revenue is collected through indirect taxes, primarily sales taxes (value added tax or
VAT) that is added to the cost of food, clothing, or medicines. People with low incomes spend
most of their money on such expenses. In the countries with more progressive tax systems,
governments collect more from people with higher incomes through direct taxes on things like
real estate, capital gains, and dividends.

The government is broke, everyone must tighten their belts

This approach – which puts a relatively greater burden on the working poor—intensified
during the recession years in Latvia. When the real estate bubble collapsed at the end of 2008
and unemployment jumped to 21 percent a year later, people who attended Zane’s ballet and
ice skating classes started to lose their jobs. Fewer and fewer people came to Zane’s tutoring
sessions.

In these difficult years, everyone felt the pain of deep austerity measures. The government added
some limits to the amounts that can be paid out in family and unemployment benefits. For the
first time since Latvia regained its independence, the government started collecting taxes on
dividends, capital gains, and real estate. But the heaviest burden fell on the shoulders of the poor,
again, analysis by the World Bank and the IMF found.

When Zane was still working in 2009, the government raised the income tax rate for the self-
employed from 15 to 25 percent. The threshold for the non-taxable minimum for people with low
incomes was reduced from 129 to 50 euros. The IMF estimated that this regressive policy raised
taxes by seven percent for the third of the Latvian population with the lowest incomes. VAT or
sales taxes increased from 18 to 21 percent.

Last year, tax changes significantly increased the cost of heat and hot water. All of these
government decisions make a bigger dent in the thinnest wallets and have pushed many Latvians
into poverty.

In 2009, Zane learned that she was pregnant. “Made came into my life in the moment when
people said that this is not the right time to have a child.” Even the closest relatives suggested
abortion to Zane, but she’d always dreamt about a daughter and resisted their pressures.

Made’s father lives in Russia and their relationship had ended. Child support for Arturs hadn’t
started yet. The family often lived on 1.50 euros a day. “My pregnancy was the hardest time of
my life,” Zane reluctantly admits. Most meals at the time consisted of oatmeal with dried milk
that came from the free food boxes sent by the EU. On other days, the young mother and son
went to eat at the soup kitchen in a local church.

During these difficult years, the Latvian government often called on everyone to tighten their
belts. There are simply no less painful budget trimming options, the officials often said. But many
facts do not corroborate this assertion.

In emails from 2009 that are available through Wikileaks, it is clear that the lenders - the EU,
IMF and Swedish government -lobbied for different approaches to public expenditure cuts. One
of the Wikileaks reports refers to a phone call between the then Finance Minister Einars Repse,
the IMF, the EU and the Swedish government. Repse was strongly advised to raise property taxes
or to introduce a progressive tax on the wealthy, instead of lowering the minimum non-taxable
threshold. Repse replied that this was not possible, because this decision was not politically
viable.

Reading the Wikileaks along with the World Bank and IMF studies, it is evident that international
lenders expressed the greatest concern about the high cost of the budget cuts to people with low
incomes. They also suggested specific alternatives that would have cut government expenses and
protected the most financially vulnerable children and families.

For example, the universal state Family Benefit, which is 8 lats per child, eats up about a third of
the total social benefits budget. This budget is set aside for the most vulnerable groups and is
already among the lowest in the EU. The World Bank report expressed surprise that Latvia offers
this universal benefit to everyone regardless of people’s income, in addition to other generous
maternity and paternity benefits. Some Latvian residents don’t even bother to sign up for this
program, the study found. The World Bank advised the government to redistribute these eight lats
to the families with the lowest incomes. Even with a relatively high threshold, such as targeting
40 percent of the least wealthy among all Latvian households, the government could save about
17.3 million lats.

The Welfare Ministry says it has not reformed the state Family Benefit due to the high
administrative costs. When Re:Baltica asked how high these costs would be, officials responded
that no actual calculations have been made. The government has decided to continue this program
and added more funding to continue the program without changes.

Latvia mostly supports its poor residents through the co-financing of the minimum guaranteed
income (GMI) and housing allowances. These benefits are primarily financed through municipal
governments, which in 2011 paid out three times more of these benefits than a decade ago.
According to the World Bank, only 3 percent of the total population receive GMI, which is a

lower number than the average in the EU, and most receive significantly less than the maximum
allowance which until recently was 65 euros per person.

The World Bank analysis shows that an unusually large part of the GMI and housing allowances
went to wealthy households. Experience in other countries shows that this happens when national
authorities insufficiently monitor local governments and the World Bank recommends that the
Latvian Ministry of Welfare oversee and administer these benefits. This would mean that all
municipalities would give out the same benefits, and not be dependent on the whims of local
government workers. But in an interview with Re: Baltica, the ministry confirmed that it is
moving in the opposite direction. State co-financing of the GMI and housing allowances will be
cut by 2013.

The World Bank experts didn’t think that Latvia could afford its generous Parental Benefit –
which subsidized families with higher incomes more than the poor – in the years of the crisis
either. In 2005, the government started correlating this parental benefit with individuals’ income
level resulting in wealthier families receiving more money than poorer ones. But unlike similar
benefits such as pensions, the government didn’t collect any additional income to subsidize this
benefit until 2011. The World Bank advised reducing parental benefit during the crisis years up to
143 euros per month in the first year of child and 43 euros in the second, saving 70 million euros.

Although in 2010, the Latvian government actively participated in the ‘European Year for
Combating Poverty and Social Exclusion,’ and Latvian officials frequently mention the relief of
poverty as a state priority, but none of the major recommendations by the World Bank have been
implemented.

On the contrary, the recent tax changes will only increase the income gap in Latvia. Recently, the
government reduced the GMI maximum allowance from 65 to 50 euros, and refused to lift the
non-taxable minimum for income tax to 129 euros.

The poor don’t need government handouts; let them go to work

“No,” Zane responds to the question whether she feels that things are improving and that Latvia
is moving out of recession. That is contrary to the government’s assertions that the crisis is over,
as it generously doled out more than 287 million euros in extra revenue this year to different
programs.

Reports by the Latvian Ministry of Welfare, as well as interviews with its officials, make it
hard to understand the justification for these recent government decisions. On the one hand, the
officials report that poverty in Latvia is getting deeper, and on the other hand, they call for a
reduction in the country’s social safety net for the poor.

The reports also highlight the significance of the temporary government job program called “100
Lats Program.” Every sixth participant found a job within six months after completing the
program. But despite one of the highest unemployment rates in Europe, this program has
been discontinued in 2012, and similar temporary public works program this year received
significantly less funding.

Why such a difference between the stated intentions to help the poor and policies that are

reducing the role of the state? “The crisis is over,” says Minister of Welfare Ilze Vinkele (Unity
Party). “Overall trends are improving. While jobs are insufficient, people can find work,” the
minister said, explaining the philosophy of her Party.

Next spring the Ministry is awaiting the results of another study by the World Bank that
aims to analyze the changing labor market, the unemployed, and the needs of the poor better.
Meanwhile, “people need to go to work even in a Maxima [supermarket]. State-subsidized jobs
will end, but Maxima work will be available for years. It’s better for us to help cover the costs of
the transportation to help these people to get to work,” explained Vinkele.

Ilze Kurme, the office director of the Ministry of Welfare adds: “Business people across the
country are yelling at us that they can’t find unskilled labor to fill their jobs, and blame the
government’s ‘100 lats’ job program, GMI and child benefits for that.” Kurme partially agrees
with this position, “If I have a family with children and can collect 300 lats in benefits, why
should I go to work?” Both officials believe that the welfare system in Latvia has created too
many dependent people who are abusing the system and don’t want to work.

When Re: Baltica asked whether the Ministry has data demonstrating such abuse, officials
responded that there is no data. Perceptions of abuse are widespread among local government
employees and social workers. International studies have investigated these claims but have
found no data to validate this view.

Meanwhile, this September, the Saldus branch of the State Employment Agency (SEA) offered
Zane 69 job openings. Twenty seven unemployed people in Saldus are competing for every one
of these jobs. Re:Baltica called two companies that had the most openings to see what kind of
jobs are available for people like Zane.

The first company, IMS, located about an hour and a half away from Saldus, is a fish processing
plant. They are looking for people to pack cartons and seal containers. The pay depends on how
many cartons are processed and the size of the box being packed. If the worker can do 1.5 shifts,
it is possible to make more than 287 euros per month. Since Zane lives over 100 km away, the
manager promised a bus ride. There are hostels at the processing plant too, but workers will have
to pay to stay in them. Another company, Bears Ltd. is looking for cookie bakers, but openings
are only in the night shifts. Each shift is 12 hours, and pay is about 2 euros an hour.

There are also some openings in grocery stores, but Zane already tried this route when she
worked for a local butcher, and there was little gain. Work hours were from 9 a.m. to 9 p.m. The
employer refused to sign a contract, offer sick leave, or vacation. Salary: 215 euros under the
table. After Zane paid a babysitter, she ended up with less money than even the meager state
benefits she currently receives. In 2010, most of the job growth occurred in positions that offered
wages below 287 euros.

That’s why Zane is considering either emigration or getting back to self-employment as the only
options to improve her family’s lot.

Every day Zane goes to a course for the unemployed, where she learns about
commerce.

She often considers leaving Latvia. “But I already lived in Germany. I understand what it means
to live in my own country, my own home, and among my compatriots. I love Saldus, this small
community, the way the air smells here, my people. I feel love and patriotism toward this small
community.”

This November, Zane will try to get a job in radio again. If she doesn’t get lucky there, she’ll try
to revive her private classes again or work part-time so that she can have enough money for rent,
food and a few hours a day to spend with Made and Arturs. “My children are the main project of
my life. I want to raise them with my values: honesty, openness, respect for others despite their

financial situation or assets. I want to show my children that we can live very good lives without
greed.

Children are Zane’s priority, therefore she tries to spend more time with them, teaching
them the values of kindness, respect and trust, because money is not what is most
important to her in life.

“If we can find value in a modest lifestyle, rather than strive toward these excessive inequalities
that we see in Latvia, then our community would have a lot more respect and trust for each other.”

Meanwhile, the same reports by the Ministry of Welfare that call for a reduction in Latvia’s
social safety net for people like Zane, include data indicating that poverty is deepening and life
for the poor won’t improve that much. Surveys show that businesses are not planning to hire that
many people. Unemployment is slowly going down, but the number of job seekers is still very
high: there are seven times fewer job openings compared to 2007. Unemployment is still the third
highest in the EU. Last year, 50 people competed for every job opening.

When a country like Latvia is slowly recovering from a deep recession, high unemployment is
inevitable and it could take several years for the job market to pick up again. But despite that, the
government is already planning to reduce the overall social safety net spending to 8.9 percent of
GDP next year. In 2007, when unemployment in Latvia was three times lower, welfare spending
was 10.7 percent.

The maximum allowance for GMI has already been cut from 65 to 50 euros before the World
Bank’s report with recommendations has been submitted. That means that the government is

Speaking to Zane and her social workers it becomes obvious that even low state benefits help
single mothers and the most needy households to survive difficult periods without leaving their
homeland. The early child development research of the past ten years also tells us that the first
two years in a child’s life in a stable home with consistent caregiver is among the most effective
ways in which the state can invest in productive and educated future citizens, and reduce costly
consequences to taxpayers later such as chronic illness, drug and alcohol addiction, and higher
crime rates. A strong safety net for the poor also acts as state protection against enterprises that
sometimes take advantage of high unemployment to pay without a contract, cut wages, or
increase working hours without compensation.

For now, the current government policies make it seem like there is no place for low-income
families and children in Latvia. State officials highlight increasing birth rates and decreasing
emigration as a priority, but in reality the government supports children and families with middle
or high incomes, often redistributing scarce state resources to families that don’t even need them.
At the same time, the unemployed and the working poor live on incomes that trap them in
poverty.

Zane tries not to think about this. She knows that one day she’ll get to the 430 euros that she is
dreaming of earning. Right now, she is learning a lot in job training classes for the unemployed
where she is studying commerce.

A few months ago, in her review of macroeconomics, a lecturer proudly told the class how well
Latvia is doing: the GDP is growing more than in any other EU country, exports are going up,
unemployment is not that bad. Prime Minister Valdis Dombrovskis is traveling around the world
to present Latvia’s approach to austerity as the right model for overcoming economic malaise.
The faster a country’s GDP grows, the better everyone is doing, including the poor. Those who
are not doing well in the times of growth need to try harder.

Zane’s classmates looked at each other and laughed. “That’s just absurd,” Zane remembered, as
she looked outside her kitchen window. “Ordinary people understand that things are very
different. But I’m not waiting for anything from this government. Right now, I survive off of the
fact that I love this city, respect many people, including our Saldus social workers, who are all
helping me a lot. And I try to give back as much as I can.”

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