Latvia's Tiger Economy Loses Its Bite
"It just doesn't look to me like the top is making the same sacrifices while they squeeze the bottom," Dagnija Kamerovska, the director of a local homeless shelter, said in May. The Latvian state controller, Inguna Sudraba, came out with a preliminary report in September that found that most large state bureaucracies, which swelled in the boom years, hadn't made the required 20 percent cuts in their salaries.
In the meantime, budget cuts are affecting areas like education and healthcare. On September 6 more than 400 protesters blocked two bridges to oppose the closing of the only hospital in Bauska, a rural city about an hour away from Riga. "Bauska's hospital has been here since the nineteenth century. It lived through both wars, all regime changes.... I don't understand why we have to close it," Bauska's City Council chairman, Valdis Veips, told the Latvian newspaper Diena. Instead of explaining the closure, government officials sent in a special unit to break up the protest. A Bauska newspaper reported the next day that city residents had received a government fax stating that financial support for the hospital, though reduced, would continue.
As Latvia prepares to receive the third installment of the $10 billion package from the IMF and the EU, the British Telegraph reported on October 5 that Sweden's finance minister, Anders Borg, had told banks secretly to prepare for the collapse of international talks. According to the Telegraph, Latvia's government had failed to deliver a 20 percent cut to pensions and a 15 percent cut to public wages, as requested by the lenders.
Meanwhile, the pain and suffering in Latvia continues. Unemployment has already doubled this year, and the IMF reports that more than 10 percent of Latvia's borrowers are over ninety days late on their mortgage payments. Although banks have resisted evicting homeowners, they haven't been totally idle; in June, on an unused airstrip at the Riga airport, more than 500 cars, trucks and bulldozers sat idle, all repossessed by the banks.
Since my mother and I emigrated from Latvia to the United States in 1994, I have visited my homeland every year. As I traveled around Latvia in May, I wondered, How did it get so bad? How did Latvia go from being one of the most developed regions in the Soviet Union to an area experiencing one of the worst depressions in the world?
The trajectory began in 2004, when Latvia formally joined the EU after nine years of negotiations. Credit rating agencies blessed the deal, with Moody's upgrading Latvia from a "stable" to "positive" grade in 2005. According to the Bank Association of Latvia, loans and cheap credit quadrupled from 2004 to 2008, reaching 95 percent of Latvia's GDP by early 2008. Most investment went into the construction of new luxury condos and office buildings--rather than export capacity--under the assumption that real estate values would grow indefinitely. The rest went into buying imported goods, many of them subsidized, weakening Latvia's local manufacturing and export base. By 2007 Latvia had the second-highest trade deficit in the EU, after Bulgaria.
To make matters worse, the real estate bubbles in England and Ireland sucked away local labor. At the same time Valdis Novikovs left for England, an estimated 1.5 percent of Latvia's labor force went abroad. Unemployment dropped to an unprecedented 5 percent in Riga, and from 2006 to 2008 the cost of labor doubled. As inflation tripled, Novikovs noticed that local clothing and food cost almost twice as much as in England. "Latvians were traveling to Germany and Finland to buy cheaper clothes and furniture," he recalls with outrage. In 2007 Latvians had the lowest household savings rate in the EU.
The Latvian government didn't do much to stop this economic transformation. If anything, it stepped on the gas. Riga's new deputy mayor and millionaire Ainars Slesers, who served in the Latvian Parliament during the boom years, coined a phrase that is sure to become a symbol of the prevailing government attitude at the time: gazi grida (pedal to the metal). Enabled primarily by foreign banks, Latvia's government created a bubble economy financed by debt without developing sustainable means to pay off these loans. Now Latvia's economy looks like a race car that has smashed into a concrete wall.
While economic indicators are a crucial part of Latvia's story, they don't fully explain why its bubble was the biggest in Europe or why its citizens so fully embraced extreme, gazi grida neoliberalism. Latvia's Soviet legacy still drives much of its politics. For centuries, the territories where Latvia, Lithuania and Estonia are located served at best as stable colonies and at worst as bloody battlegrounds where major Western and Eastern empires like Germany, Sweden and Russia fought for control. The Soviet occupation of Latvia in 1940 is the most recent and painful scar. As many as 200,000 Latvians were imprisoned or deported to Soviet gulags, and for the next fifty years Russian was made the sole official language in all political and economic spheres. In this context independence often took the form of cultural resistance--language, traditions and cultural heritage. My family celebrated summer solstice and Christmas in secret.
I grew up in the small, rural city of Livani, about 100 miles south of Riga. My late father, Peteris Rizga, helped build a new factory, Livanu Majinas, in the early 1970s that helped move Soviets from bloc apartment buildings into modern, single-family houses. My Jewish mother, Fruma, worked in the glass factory Livanu Stikls, which produced some of the most coveted vases and glass in the Soviet Union. Thanks to these and other new factories, rural Livani was transformed into an industrial center. A similar trend of Moscow-driven strategic industrialization took place across Latvia, absorbing laborers and military personnel from other Soviet republics. These waves of migration changed the Latvian share of the population from 75 percent in 1935 to 52 percent by 1989. Today, Latvia has the highest proportion of Russian-speaking minorities in the Baltic states, raising the fear of cultural extinction more acutely than in neighboring countries.