RIGA
- Finally, a top government
official has come out and
said what many 's from the
erudite analyst to the bewildered
consumer 's have been waiting to
hear about Latvia's irrational
economic boom, which is threatening
to propel the country into a
prolonged cold spell.
"Salaries have been growing at a
cosmic speed during the rule of the
present government," Prime
Minister Aigars Kalvitis told a public
private council on Aug. 15, referring
to the current 33 percent annual
rise in gross salaries.
"If pay rises continue at the
same rate, we will simply blow up
this country," he said.
Such illustrious hyperbole 's
Latvia "blowing up" thanks to a
time-bomb of skyrocketing wages,
high inflation, a labor market crunch
and easy credit 's is a far cry from official
rhetoric as recently as a year
ago.
Previously ministers bragged
about Latvia's double-digit GDP indicators
and shrugged off eurozone
membership deadlines, reiterating
that the primary economic goal was
to raise living standards to average
EU levels as quickly as possible.
As Finance Minister Oskars
Spurdzins said last December, "If we
do not maintain the growth rate [of 7
- 10 percent], then of course we will
not reach the average EU living standards
that soon, or we will probably
never reach them at all."
And so the ruling coalition continued
to compile growth-stimulating
budgets at a time when drastic
fiscal restraint was in order.
As
Valdis Dombrovskis, a member of
the opposition party New Era, told
the Russian language Telegraf
recently, the government's economic
policy has been "to push the pedal to
the metal."
The results are well known 's and
continue to haunt Latvia. On Aug. 17
Fitch, a major international ratings
agency, downgraded several of the
Baltic state's ratings. "The Latvian
economy is severely overheating,
and Fitch considers the policy reaction
of the government to be insufficient
to restore the economy to a sustainable
growth path," the agency
said in a statement.
The criticism echoes sentiment
in other agencies, banks and international
finance institutions such as
the IMF: Latvia's government hasn't
done near enough to combat overly
high economic expansion.
Arguably, the Kalvitis government,
which has been in control
since December 2004, made its
biggest mistakes when it compiled
pro-growth budgets for 2006 and 2007.
On Nov. 14, 2006, the Cabinet
announced a budget plan with a 1.4
percent (of GDP) deficit, which
Parliament eventually passed. With
that stroke the government's primary
lever of economic regulation 's
fiscal policy 's was thrown to the
wind.
In fact, as of last year a balanced
budget wasn't even seriously considered
in the country's medium-term
plans. Finance Minister Oskars
Spurdzins said on Dec. 11 that a zerodeficit
budget "could be achieved by
2010."
In the meantime, average annual
inflation reached 6.5 percent last
year, considerably above the government's
target of 5 - 5.5 percent set in
December 2005.
The Finance Ministry, in fact,
has consistently been way off mark.
In December the ministry predicted
inflation in 2007 would be 5.9 percent.
It is now clicking along at 9.5 percent
and breaking records on a monthly
basis.
Past mistakes aside, the question
now is whether the government has
the will to make the painful decisions
to prevent a meltdown. One idea that
is being floated is to link all wage
increases for state-sector employees
with productivity. But this is likely to
trigger a further exodus of doctors,
teachers, policemen, postal workers
and public transportation drivers
and intensify Latvia's labor crisis.
Shelving state-subsidized building
projects is another idea, and perhaps
the most crucial since public
demand is "squeezing out" private
demand, particularly in the construction
sector. Kalvitis told the
council last week that the government
could no longer invest in new
development projects, since budget
money is going to salary hikes. Yet
the Castle of Light, the grandiose
library project, is proceeding as
planned and will soak up some 11
million lats (15.7 million euros) this
year.
Even Bank of Latvia Chairman
Ilmars Rimsevics has warned about
the macroeconomic repercussions of
this project, but the demiurge behind
the library, Culture Minister Helena
Demakova, is a fellow party member
of Kalvitis. Construction is slated to
begin Nov. 18.
Transport Minister Ainars
Slesers is as equally keen on a new
international airport for Riga,
though the government has yet to
decide how to finance this.
Meanwhile, ministers also seem
to be changing their tune on guest
workers. In December Kalvitis said
the government did not plan to open
the country's doors to foreign workers
and that employers should be
encouraged to raise productivity and
to raise salaries.
"If borders are opened up, all
this [present growth] will be
destroyed, so the borders will not be
opened," Kalvitis said Dec. 13.
On Aug. 20, however, Slesers was
quoted as saying Latvia should
attract guest workers to fill the yawning
labor deficit. "In such an intensive
phase of development we simply
don't have the resources," he said,
suggesting that foreigners could be
invited to work on specific construction
sites.
Slesers, in fact, seems to have
taken the opposite standpoint from
Kalvitis on the question of rising
salaries. In an interview with Baltic
News Service, he said that the salary
increases are the only way of stopping
people from leaving Latvia, and
conversely, to get them to return.
"We have to create workplaces
enabling people to earn good money,"
said the minister, predicting that
Riga would become one of Europe's
most expensive cities.
