Latvia is awash in trouble. As if the
ongoing investigation into far-reaching
bribery and corruption involving several
present and former lawmakers were insufficient
entertainment, the country's entire
judicial system has been hung out to dry 's
publicly and thoroughly 's after a series of
transcripts involving judges, lawyers and
businessmen was published in paperback
form this week. Latvians are lining up to buy
copies. The transcripts, most likely the
result of an illegal wiretap, have smitten
Latvia in one of its weakest spots: the
courts.
Worse, the economy continues to suffer
from prolonged growth spasms, yet
there doesn't seem to be a doctor in the
house who would know how to heal the
sick adolescent. One of the world's premier
rating agencies, Fitch Ratings, downgraded
Latvia for "a severely overheating economy"
and "insufficient policy reaction" on
the part of the government.
The government, led by Prime Minister
Aigars Kalvitis, a member of the Tautas
Partija (People's Party), continues to issue
conflicting messages on the economy,
which is disturbing since it means a) ministers
aren't singing from the same song
sheet, and b) the message that Latvia is in
dire economic straits isn't getting through.
Admittedly, Kalvitis came out with his
strongest assessment on the economy to
date. If we [Latvians] keep raising wages and
salaries, he said,"we're going to blow up the
country." Thus the notion that the wageinflation
spiral is threatening to inflict lasting
damage, it would appear, has sunk in. Small
wonders never cease.
But two days later Kalvitis, in an interview,
deflected criticism of the coalition,
which he has headed since Dec. 1, 2004, on
the grounds that inflation is "society's problem,"
not the government's alone. "If we
look at the government's role in raising
inflation, it is among the lowest, since it was
not we who pegged the lat to the euro and
determined Latvia's monetary policy, which
automatically caused a price increase."
This is shameless poppycock 's nonsense
only a desperate politician could concoct.
First, Latvia entered the exchange rate
mechanism on May 2, 2005 's under Kalvitis'
watch 's and second, the 9.5 percent inflation
Latvians are suffering now is the result
of macroeconomic policies and other factors,
external and internal, witnessed in the
past 6 - 12 months.Almost all practitioners
of the "dismal science" would agree.What
happened nine quarters ago has no bearing
on current inflation.
The Achilles heel in Kalvitis' government
is that no one knows how to listen.
(Or alternatively, no one wants to listen.
We'll leave it to readers to decide.) In
October 2004, the World Bank warned
Latvia that inflation and the current
account deficit were problems that needed
urgent attention. In May 2005 the
International Monetary Fund told the government
to reduce state spending for the
sake of stability and to prevent overheating.
Again in June 2006, the IMF recommended
that Latvia cut back government spending
"to curb economic growth or risk eroding
competitiveness."
How does Kalvitis respond? By lighting
the dynamite he now says is about to
explode. In 2005 the government drafted a
budget for 2006 with a 1.5 percent deficit
and then, a year later, a budget for 2007 that
boasted a 1.4 percent deficit. Public
demand (read: pork) has been superimposed
on the private sector, and the chief
consequence is price and wage growth.
Unlike Estonia, Latvia's leadership has failed
to use the one instrument of influence at its
disposal 's fiscal policy 's to combat an ultrahot
economy. And as a result, Latvians will
pay a dear price. It is only a matter of time.
