Latvia is awash in trouble. As if theongoing investigation into far-reachingbribery and corruption involving severalpresent and former lawmakers were insufficiententertainment, the country's entirejudicial system has been hung out to dry 'spublicly and thoroughly 's after a series oftranscripts involving judges, lawyers andbusinessmen was published in paperbackform this week. Latvians are lining up to buycopies. The transcripts, most likely theresult of an illegal wiretap, have smittenLatvia in one of its weakest spots: thecourts.Worse, the economy continues to sufferfrom prolonged growth spasms, yetthere doesn't seem to be a doctor in thehouse who would know how to heal thesick adolescent. One of the world's premierrating agencies, Fitch Ratings, downgradedLatvia for "a severely overheating economy"and "insufficient policy reaction" onthe part of the government.
The government, led by Prime MinisterAigars Kalvitis, a member of the TautasPartija (People's Party), continues to issueconflicting messages on the economy,which is disturbing since it means a) ministersaren't singing from the same songsheet, and b) the message that Latvia is indire economic straits isn't getting through.Admittedly, Kalvitis came out with hisstrongest assessment on the economy todate. If we [Latvians] keep raising wages andsalaries, he said,"we're going to blow up thecountry." Thus the notion that the wageinflationspiral is threatening to inflict lastingdamage, it would appear, has sunk in. Smallwonders never cease.But two days later Kalvitis, in an interview,deflected criticism of the coalition,which he has headed since Dec. 1, 2004, onthe grounds that inflation is "society's problem,"not the government's alone. "If welook at the government's role in raisinginflation, it is among the lowest, since it wasnot we who pegged the lat to the euro anddetermined Latvia's monetary policy, whichautomatically caused a price increase."This is shameless poppycock 's nonsenseonly a desperate politician could concoct.
First, Latvia entered the exchange ratemechanism on May 2, 2005 's under Kalvitis'watch 's and second, the 9.5 percent inflationLatvians are suffering now is the resultof macroeconomic policies and other factors,external and internal, witnessed in thepast 6 - 12 months.Almost all practitionersof the "dismal science" would agree.Whathappened nine quarters ago has no bearingon current inflation.The Achilles heel in Kalvitis' governmentis that no one knows how to listen.(Or alternatively, no one wants to listen.We'll leave it to readers to decide.) InOctober 2004, the World Bank warnedLatvia that inflation and the currentaccount deficit were problems that neededurgent attention. In May 2005 theInternational Monetary Fund told the governmentto reduce state spending for thesake of stability and to prevent overheating.
Again in June 2006, the IMF recommendedthat Latvia cut back government spending"to curb economic growth or risk erodingcompetitiveness."How does Kalvitis respond? By lightingthe dynamite he now says is about toexplode. In 2005 the government drafted abudget for 2006 with a 1.5 percent deficitand then, a year later, a budget for 2007 thatboasted a 1.4 percent deficit. Publicdemand (read: pork) has been superimposedon the private sector, and the chiefconsequence is price and wage growth.Unlike Estonia, Latvia's leadership has failedto use the one instrument of influence at itsdisposal 's fiscal policy 's to combat an ultrahoteconomy. And as a result, Latvians willpay a dear price. It is only a matter of time.