Analytics, Direct Speech, Economics, EU – Baltic States, Financial Services

In his article "The Dismal Science of Baltic Bubblenomics", Dizard quotes several statements by American economist and Nobel laureate Paul Krugman and erroneous predictions about the Baltic economies.

"Economists flatter themselves by calling their trade “the dismal science”. Dismal, yes, science ... well, much of the time they are propagandists for one interest or another. Scientists test the predictive value of their hypotheses against results. Economists, in contrast, can refuse to acknowledge error, and just move from professional journals to the opinion pages," writes Dizard.

"So members of the general public, as well as investors, have to do their own tests of economic hypotheses against new data. In the case of what the trade calls “the Baltics” (as in the countries’ economies), those tests are not proving to be very supportive of the critics of their policy course since the start of the financial crisis," explains the commentator.

"In 2009, I thought the tough adjustment policies of the countries were following would not work. I was wrong, and admitted it."

"If, as an investor, you had followed the prognostications of some leading economists on the prospects for currency, equity or default swap markets, you would have either lost money or foregone substantial profit. Betting against the local currencies has turned out to be what they call a negative carry trade. On the other hand, since Krugman’s 2010 Nobel lecture, the Estonia’s stock market index has risen by 60%."

"The Baltics are not, actually, a puréed bunch of people with un-pronounce-able-to-Anglo-tongues names. They are three separate countries with different languages and ethnicities: Latvia, Lithuania and Estonia, that were in different economic and financial states at the beginning of the crisis and that have had different outcomes. What the three countries had in common at the start was a currency peg to the euro, which in the case of Estonia, has already turned into full euro-area membership. Their “adjustments”, to use the bloodless term, required cuts in state spending, many workers’ wages, rents and speculative private investment. All lost some population to emigration; Estonia the least, Latvia the most," points out Dizard.

"The latter effect is one of the points most frequently raised points raised against the “austerian” policies of the three states. But – perhaps I am missing something here – is not labor mobility supposed to be one of the benefits, and objectives, of European unity? Also, many of us in the US who are descended from European immigrants find our families have done better over time on this side. Or should, say, Irish Americans be considered a tragic failure as an ethnic group? The stats would say no," writes the commentator.

Several macroeconomic figures indicate improvements in each of the Baltic countries, adds Dizard.

"I do not think that all the policies in each of the Baltic states were good. For example, crony capitalism and oligarch-friendly bank restructuring and regulatory policies in Latvia have been bad. Social redistribution should do more to favor young mothers and workers, and less for older, more affluent, people. Education should be more responsive to what students need and less to legacy school establishments. Generally, there’s been too much macro policy adjustment relative to micro policy reforms. But that’s true of the rest of Europe, as well as the U.S."

"Krugman and his acolytes rarely note that the Baltics have the highest growth rates in Europe," emphasizes the commentator.

"The key missing component of the Baltic-bashers’ analyses, I believe, is the effect of initial debt levels and the long-term burden of compounding deficits. Estonia has had the easiest recovery of the three states, and had a very low level of state debt. Latvia did not just have higher levels of state debt, but that problematic bank restructuring. That has made economic and social recovery more difficult."

"The accepted view among U.S. and European economists is that the export-led recovery in the Baltic states would, if generalized, require Martians as net importers for the world. But those economists’ state-deficit-led recovery plans would require Martians as net lenders," adds Dizard.