O.Kehris: IMF does not care about people in Latvia

01.03.2011

In an interview to the business news portal BNN the Head of Economists Association 2010 Ojars Kehris criticizes the government’s inability to come up with an economic development plan, reminds about the benefits of the lat devaluation and urges to reduce the bureaucratic apparatus. O. Kehris also notes that the IMF is only concerned about how Latvia could repay the international loan in a medium term and, therefore, requires to tighten belts, without considering what would happen to the people. Kehris also recognizes that it is most likely Dombrovskis government will not be able to sell Lattelecom.

 Does the government take into consideration your opinion more after you invited the Prime Minister Valdis Dombrovskis to be the Member of Economists Association 2010 last October?

 Well, the role of Economists Association 2010 should not be exaggerated, especially in political processes, because we are not an authority. We can and try to tell the truth and are grateful to those who hear us out. We promote our ideas without spending money, because we do not have an access to the public sector funds. We had a several years long cooperation with Dombrovskis as the former Latvian Central Bank and the Ministry of Finance’s employee. Also, in carrying out student research. We waited until the elections passed so that his admittance would not be politicized. Immediately after the elections was a good time for him to formally become a Member of the Association. Unfortunately, Mr Dombrovskis does not have too much time to involve, but he has attended a couple of events. Our organized expert discussions could be beneficial for him.

 In one to ten points system, how would you rate Dombrovskis governments’s activities in improving the economic situation?

 Politicians are our steersmen. I believe that with the attained public confidence in him he has to be more decisive in setting the state’s next big leap for three or four years. It would be valuable for the Prime Minister’s own professional development and sense of duty. He also had to excite the ruling coalition and the entire society of Latvia. Because no reasonable politician would have resisted the initiatives of the popular Valdis Dombrovskis in the first months after the election. It appears that serious discussions with the coalition partner – the Greens and Farmers Union (Zaïo un Zemnieku savienîba, GFU) did not take place prior to the government formation. The GFU instructed the management of the most complicated ministries not to the most competent leaders. There are no grounds to trust that the GFU will be unified and obedient. It is risky that the Prime Minister does not have the necessary support from the co alition. The government’s first 100 days might be wasted.

 Why have we not heard about the economic promotion plan for Latvia?

 At the point when Ivars Godmanis’ government signed an agreement with the International Monetary Fund (IMF), stating in the first clause that the lat has to be stable, it meant we no longer could devote resources to the promotion of the economy. Those propagandists requiring a stimulus plan from the government take it out of Latvia’s context. I would have liked to await the government’s action plan for the next four years – regardless if it was «Dombrovskis», or «Dombrovskis and Lembergs Plan» or «the Unity’s Plan», or finally – «The New Economic Policy 2010–2014», which would seem credible to businessmen and the society. Lithuania signed an agreement with the IMF on higher loan interest, yet they have a much freer hand in managing their economic processes. Until 2008, we were slightly ahead of Lithuania, but this year we step down from this position, falling behind. It is a fabrication of the economic rescue if the government does not cut th e public expenditure by sectors in fear that Deputies will not approve the 2011 budget.

 Is there a «penguin philosophy» at the ministries, with bureaucrats standing back to back to pass the winter more easily?

 Yes, we could say so. However, my offers on the preferable merge of ministries should not be taken out of context and discredited. I really believe that the number of ministries is too large. In Estonia the joint Economy and Transport Ministry is functioning very well. We have the largest number of state administration employees in the European Union (EU), this is not excusable in the crisis situation. The Prime Minister was afraid to deprive his coalition partners a ministry, rather than selecting the optimal model of ministries and assessing the best candidates for the ministers post.

 Could we face such an economic stagnation as in Japan, Brazil or Argentina if Latvia does not change its economic policy?

 You see, the economic policy functions in a way it is not possible to come back and check what was the best option two or three years ago. Because the today’s reality is different, it is impossible to step twice in the same river. I am worried that on a large scale we have not done anything. Namely, we do not permit or fear to make mistakes, and thus do not take a step forward. The US is the best example, where all the economic problems are taken on board and dealt with constructively.

 Can the IMF help put Latvia’s economy in order by setting tasks to the government?

 If we are an independent country that has joined the EU and the World Trade Organization, the responsibility lies on us. The IMF analysts visit us and include recommendations in their reports. But we ourselves must take respective decisions. The IMF has learnt not to come up with specific suggestions to governments. They are only looking at whether Latvia will manage to repay the international loan in the medium term. Then the only possible option is to make us tighten our belts. The IMF does not care about what happens to the people in such a situation.

 We cannot close our eyes and pretend not to see that people are leaving the country and there is a huge unemployment. At the same time, the number of marriages and births is decreasing, while the number of physical entities and companies’ bankruptcies is growing. Banks are currently taking away the only dwelling place from those, who did not loose their homes in German or Russian times. Dombrovskis’ government would give hope to households if it started to deal with the problems I have just listed. I liked what the former US President Bill Clinton said at Davos Economic Forum. He indicated that the US always takes the right decisions, but only after it has tested out all the other options. I cannot tell if the proposed scenario by the Economists Association 2010 three years ago would have ensured a better economic situation in Latvia, but then we as a country would be in a different situation and could always adjust our actions.

 Þaneta Jaunzeme – Grende blames the governmen for not concluding a contract with McKenzie or other consultants on the state strategy development. Do you agree with that?

 Yes, she is right. If we have about 18% of unemployed persons, who will provide employment? Considering the demographic gap the number of teachers is too high. We will not increase the number of policemen either. The public sector will not grow. Jobs can only be provided by the business sector, represented by Þaneta Jaunzeme – Grende and the Latvian Employers’ Confederation (LEC). The government should gather all the businessmen and potential investors in Latvia and ask what is necessary to provide jobs for qualified unemployed persons. It is unprofitable and inefficient for the state to leave every fifth out of work. If McKenzie has to be hired for this, please, do so. It is often proved that small countries or communities need neutral experts to formulate fresh ideas. Economic ideas should be systemized. If we are spending hundreds of thousands of lats on various politician advisors, then why not invest and create a serious economic think-tank in Latvia, or even several competing ones?

 Should we expect a second wave of crisis?

 It is not rational to predict global trends for a period longer than few months. We do not know whether such contractions leading to a double-dip are expected. There is a good reason to take into account that the world’s business is overall optimistically-disposed. +5% growth is forecast. This is based on the main economic drivers – China, India, and to some extent the US as well. China has emerged from the largest producer as the key global financing provider. Europe is not the most dynamic region. It was valuable that the German and French political leaders expressed a clear standpoint that the euro will maintain. However, the way how the EU growth and development convergence will be attained creates concerns among analysts and investors. The EU should move from words to deeds – promoting greater competitiveness, free movement of labour, goods and services. How to balance this in regions, if Portugal and Latvia needs cheap money, while the German economy should pos sibly be slowed down with interest rates? What should the EU Central Bank do? George Soros’ suggestion of dividing the EU in two-speed regions – North and South – has often been quoted in Latvia. It is a pity that Germany rejected the idea of a common EU bond (Rescue Fund), hence the smaller and poorer countries have higher interest rates for the loans than the rich ones.

 Is export a solution for overcoming the economic crisis?

 Export-oriented companies do not provide as many jobs as necessary for Latvia. Export can help to level out the state’s external balance of payments to return the borrowed money to the IMF sooner. If there is no economic activity in Latvia, there will be no means to develop competitive and innovative export products. We need to buy foreign companies, instead of trying to apply protectionist methods and seclude ourselves in the domestic market. The capital will flow quite freely regardless. We must create conditions so that local entrepreneurs can flourish, or sell their companies to someone capable of expanding it further. Sometimes foreign investors buy a company to liquidate it, taking out the equipment and flooding the market with their own products, as it happened in case of Lîvânu stikls. Well, it is bad then. I have a different approach. Latvia is too small a country, so if all producers were united, it would facilitate their export. If it is so importan t that the new foreign product’s substitute is produced at all, scientific research institutes and transit have to be strengthened.

 The Bank of Latvia’s President has pointed out that we as a country are spending 2.5 millions lats a day, which we have not earned yet, which means – at the expense of future generations. Is there a light at the end of the tunnel?

 It is not wise to spend more than you earn. We have other major problems, not the budget consolidation. Neither the euro introduction nor the lat stability are realistic goals. I do not understand, if someone claims – there are instruments we should not use for economic recovery. One power centre says that pensions should not be touched, the Bank of Latvia insists that the lat should not be touched, while there is another very strong strata of officials who shout that their wages cannot be touched. The Prime Minister has to manoeuvre between these three blocks, and it is not possible to implement normal economic policy anymore. If we do not use all the levers affecting the economy, nothing will change for better.

 Did you really recommend the President Valdis Zatlers to raise a question at Davos Economic Forum on how Latvia could devalue the lat by 30% and unilaterally adopt the euro?

 Yes, I did, but it was a year ago … Look what Iceland, Norway or the US are doing – they do not hesitate to reduce the currency value. A year ago it was a good solution for Latvia, neither the state nor the EU would be the losers. Now we could have been in the eurozone like Estonia. Of course, the eurozone is not at its best state. It is not difficult to unilaterally adopt the euro – as it was done by Montenegro, Kosovo, etc. We have slipped behind Russia and Croatia in terms of GDP per capita. The currency is not the measure of the state’s wealth, but the economic blood flow, ensuring normal functioning of the economy. Without a doubt, our government has to play according to certain rules within the EU. If the world’s top financiers and we prove the benefits of devaluation, but the Bank of Latvia’s management strongly opposes due to bureaucratic excuses, then it is sometimes worth being a hooligan – at least in one’s own language, like many other count ries do. I regret that Estonia has outpaced us. At the same time we predict that Poland is not in a hurry to join the eurozone – it used the weakening of its official currency – the zlot – and now has a stable and productive economy. Moreover, Polish emigrants are starting to return back.

 Have you noticed that the government is fulfilling the orders of certain sector lobbies?

 Lobbying is always there. If you banned the pharmaceutical, oil or banking sector businessmen to lobby themselves, it would be illogical. Some time ago a proposal was made to legalize lobbying among the Saeima Deputies, like in the US Senate, only in that case, it must be stated in the annual income declaration. And then everyone would know which Deputy is building a private house for money donated by the tobacco business. Will he be re-elected? Maybe. The Prime Minister does not have enough efficient advisors, as well as the state lacks economic research centres. Dombrovskis is grounding on limited information and experience gained in his previous professional career. I assume that the commercial banks lobby is one of the most powerful and best organized in our country. This is not a criticism of them, though.

 Is it even possible to combat the shadow economy, if it amounts to 22–24%?

 Shadow economy forms a part of all countries. The fact that we were able to get through this crisis period with relatively few sacrifices is particularly due to the shadow economy. This is one of my lecture conclusions. If all the State Revenue Service’s (SRS) repressive power is aimed at introducing cash registers to the fresh and smoked fish traders in Lapmezciems, not allowing them to sustain themselves, then excuse me … However, if the shadow economy is a money laundering scheme worth millions, it is another question. The first part can only slow down the economy, if we suppress the individual economic operators and make them inactive. Those SRS’s employees, who prohibit small businesses from being busy, must be punished. The focus should be placed on bigger problems of tax evasion. Fortunately, the focus is there.

 How should Latvia improve its energy independency?

 Well, not by creating wind parks. When I had the honour of chairing Latvenergo’s Council, the interconnection with Estonia was set up. Unfortunately, to date it remains the only interconnection. Riga’s flooding threats have not been prevented, because Latvenergo is not making sufficient investments in Riga and Plaviòu water-power plant. If a number of failure factors coincide, threats for capital could become real. As long as we are raking up Latvenergo’s earnings to mend the state budget, we are borrowing from our future. State resources will have to be invested there anyway. If this was permissible during the difficult state renewal period in 1991–1993, now the situation is diametrically opposite. Why did we not invest slightly more money and lay the cables in the ground? This winter had disadvantageous conditions and Latgale region was left without electricity. We had a project with Mart Laar, Estonia’s Prime Minister at that time, on the merger of Latvia and Estonia’s energy companies. I am deeply convinced that it was of an economic significance, because it was suggested by McKenzie consultants. Only, in their view, it would be difficult to combine two countries’ companies. By carrying out privatization we could afterwards develop successfully. But now the Estonian Eesti Energia subsidiary SIA Enefit has already acquired 14% of the Latvian open market and around 6% of our total consumption; therefore, Latvenergo has grounds for concern.

 Is it a good time to sell Lattelecom?

 Most likely Dombrovskis’ government will not be able to sell Lattelecom, because industry lobbyists will activate, reminding that Nils Melngailis’ plan could have got more money. If we had sold the company during the fat years, this money would have been squandered. If we can preserve the services necessary for the society of Latvia and competitiveness, it would be good to put Lattelecom up for sale. If only the objective is the telecommunications sector development, not the maximum price to fill the dent in the budget.

Article taken from BNN-NEWS.COM - http://bnn-news.com, 01.03.2011