GO FOR GROWTH

  • 2006-06-28

cartoon by Jevgenij Cheksters

In a recent interview, Latvian Economy Minister Aigars Stokenbergs said that Latvia, which is distinguished for having Europe's fastest rising GDP and highest inflation, would focus on maintaining growth. The statement provides much-needed clarity, since it comes at a time when Latvia is under great pressure to bring inflation, which is over 6 percent and showing no sign of relenting, to sensible levels.

After all, the sooner the Baltic state can rein in price growth, the sooner it will be granted permission to introduce the euro. But as Stokenbergs explained, the government's long-term goal should be to achieve "sustainable growth" and the average economic level of EU member states.

He is absolutely right. Latvia is the poorest EU member in terms of GDP per capita, which at the end of 2005 stood at 46 percent of the EU average. Only by adhering to pro-growth policies will the Baltic state break out of the basement and climb up the ladder to achieve average European living standards. If the ascent takes place on the backdrop of a rampant consumer price index (inflation is unavoidable in ultra high-growth economies such as Latvia; add robust energy prices, and you have an unavoidable inflationary spiral), then that may be "the price the country will have to pay."

Strict monetarists, Chicago School disciples and Greenspan-ophiles will growl at such rationale, but it is arguable how applicable their theories are to a miniscule, post-Soviet economy that is relatively powerless in regulating its markets and monetary policies. As populist as it may sound, Latvia first and foremost needs "to play catch up" with the rest of the EU25, so to this end its government(s) should foster growth as much as possible. According to one analyst, it will take Latvia 18 's 24 years 's an entire generation 's to reach the average level of EU prosperity.

Meanwhile, the euro can wait. Too much importance has been attached to phasing in the common currency in the Baltics 's particularly in Estonia and Lithuania 's and not enough on securing the maximum amount of structural funds to improve poor infrastructure. (The seven other new EU members are much more subdued about introducing the euro 's they don't see it as a goal in and of itself.) Baltic politicians are desperate for symbolic victories and therefore yearn for the euro; they would be wiser, however, to strive for long-term growth first. The euro will make it to the region sooner or later; it is inevitable. For this reason, Stokenbergs said 2010 was a "realistic target" for phasing in the common currency in Latvia.

At the same time, Latvia's government must beware astronomic growth rates. Too much of a good thing can cause serious harm. The 13 percent registered in the first quarter of this year is out-of-control, a time bomb if you will, and will lead to difficulties in the future 's most likely a real estate bubble and a credit bust. Six percent inflation is also unnecessarily high, and the country's next government, which will materialize in November, will have to work harder to bring this down a couple percentage points.