You Think Greece Has Problems? Latvia's Road to Serfdom

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You Think Greece Has Problems?
Latvia's Road to Serfdom

By MICHAEL HUDSON and JEFF SOMMERS

February 15, 2010 "Counterpunch" -- While most of the world’s press
focuses on Greece (and also Spain, Ireland and Portugal) as the most
troubled euro-areas, the much more severe, more devastating and
downright deadly crisis in the post-Soviet economies scheduled to join
the Eurozone somehow has escaped widespread notice.
No doubt that is because their experience is an indictment of the
destructive horror of neoliberalism – and of Europe’s policy of
treating these countries not as promised, not as helping them develop
along Western European lines, but as areas to be colonized as export
markets and bank markets, stripped of their economic surpluses, their
skilled labor and indeed, working-age labor generally, their real
estate and buildings, and whatever was inherited from the Soviet era.

Latvia has experienced one of the world’s worst economic crises. It is
not only economic, but demographic. Its 25.5 per cent plunge in GDP
over just the past two years (almost 20 per cent in this past year
alone) is already the worst two-year drop on record.  The IMF’s own
rosy forecasts anticipate a further drop of 4 per cent, which would
place the Latvian economic collapse ahead of the United States’ Great
Depression The bad news does not end there, however. The IMF projects
that 2009 will see a total capital and financial account deficit of
4.2 billion euros, with an additional 1.5 billion euros, or 9 per cent
of GDP, leaving the country in 2010.

Moreover, the Latvian government is rapidly accumulating debt. From
just 7.9 per cent of GDP in 2007, Latvia’s debt is projected to be 74
per cent of GDP for this year, supposedly stabilizing at 89 per cent
in 2014 in the best-case IMF scenario.  This would place it far
outside the debt Maastricht debt limits for adopting the euro. Yet
achieving entry into the eurozone has been the chief pretext of the
Latvia’s Central Bank for the painful austerity measures necessary to
keep its currency peg. Maintaining that peg has burned through
mountains of currency reserves that otherwise could have been invested
in its domestic economy.

Yet nobody in the West is asking why Latvia has suffered this fate, so
typical of the Baltics and other post-Soviet economies but only
slightly more extreme. Nearly twenty years since these countries
achieved freedom from the old USSR in 1991, the Soviet system hardly
can be blamed as the sole cause of their problems. Not even corruption
alone can be blamed – a legacy of the late Soviet period’s
dissolution, to be sure, but magnified, intensified and even
encouraged in the kleptocratic form that has provided such rich
pickings for Western bankers and investors. It was Western neoliberals
who financialized these economies with the “business friendly reforms”
so loudly applauded by the World Bank, Washington and Brussels.

Far lower levels of corruption obviously are to be desired (but whom
else would the West trust?), but dramatically reducing it would
perhaps only improve matters up to the level of Estonia’s road into
euro-debt peonage. These neighboring Baltic counties likewise have
suffered dramatic unemployment, reduced growth, declining health
standards and emigration, in sharp contrast to Scandinavia and Finland.

Joseph Stiglitz, James Tobin and other economists in the West’s public
eye have begun to explain that there is something radically wrong with
the financialized order imported by Western ideological salesmen in
the wake of the Soviet collapse. Neoliberal economics certainly was
not the road that Western Europe took after World War II. It was a new
experiment, whose dress rehearsal was imposed initially at gunpoint by
the Chicago Boys in Chile. In Latvia, the advisors were from
Georgetown, but the ideology was the same: dismantle the government
and turn it over to political insiders.
For the post-Soviet application of this cruel experiment, the idea was
to give Western banks, financial investors, and ostensibly “free
market” economists (so-called because they gave away public property
freely, untaxed it, and gave new meaning to the term “free lunch”) a
free hand in much of the Soviet bloc to design entire economies. And
as matters turned out, every design was the same. The names of
individuals were different, but most were linked to and financed by
Washington, the World Bank and European Union. And since the West’s
financial institutions were the sponsors, one hardly should be
surprised that they came up with a design in their own financial interest.

It was a plan that no democratic government in the West could have
passed. Public enterprises were doled out to individuals trusted to
sell out quickly to Western investors and local oligarchs who would
move their money safely offshore into  Western havens. To cap matters,
local tax systems were created that left the traditional two major
Western bank customers – real estate and natural infrastructure
monopolies – nearly tax free. This left their rents and monopoly
pricing “free”  to be paid to Western banks as interest rather than
used as the domestic tax base to help reconstruct these economies.

There were almost no commercial banks in the Soviet Union. Rather than
helping these countries create banks of their own, Western Europe
encouraged its own banks to create credit and load down these
economies with interest charges – in euros and other hard currencies
for the banks’ protection. This violated a prime axiom of finance:
never denominate your debts in hard currency when your revenue is
denominated in a softer one.

But as in the case of Iceland, Europe promised to help these countries
join the Euro by suitably helpful policies. The “reforms” consisted in
showing them how to shift taxes off business and real estate (the
prime bank customers) onto labor, not only as a flat income tax but a
flat “social service” tax, so as to pay Social Security and health
care as a user fee by labor rather than funded out of the general
budget largely by the higher tax brackets.

Unlike the West, there was no significant property tax. This obliged
governments to tax labor and industry. But unlike the West, there was
no progressive income or wealth tax. Latvia had the equivalent of a 59
per cent flat tax on labor in many cases. (American Congressional
committee heads and their lobbyists can only dream of so punitive a
tax on labor, so free a lunch for their main campaign contributors!)
With a tax like this, European countries had nothing to fear from
economies that emerged tax free with no property charges to burden
their labor with taxes, low housing costs, low debt costs. These
economies were poisoned from the outset. That is what made them so
“free market” and “business friendly” from the vantage point of
today’s Western economic orthodoxy.

Lacking the power to tax real estate and other property – or even to
impose progressive taxation on the higher income brackets, governments
were obliged to tax labor and industry. This trickle-down fiscal
philosophy sharply increased the price of labor and capital, making
industry and agriculture in neoliberalized economies so high-cost as
to be uncompetitive with “Old Europe.” In effect the post-Soviet
economies were turned into export zones for Old Europe’s industry and
banking services.

Western Europe had developed by protecting its industry and labor, and
taxing away the land rent and other revenue that had no counterpart in
a necessary cost of production. The post-Soviet economies “freed” this
revenue to be paid to Western European banks. These economies –
debt-free in 1991 – were loaded down with debt, denominated in hard
currencies, not their own. Western bank loans were not used to upgrade
their capital investment, public investment and living standards. The
great bulk of these loans were extended mainly against assets already
in place, inherited from the Soviet period. New real estate
construction did indeed take off, but the great bulk of it has now
sunk into negative equity. And the Western banks are demanding that
Latvia and the Baltics pay by squeezing out even more of an economic
surplus with even more neoliberal “reforms” that threaten to drive
even more of their labor abroad as their economies shrink and poverty
spreads.

The pattern of a ruling kleptocracy at the top and an indebted work
force – non- or weakly unionized, with few workplace protections – was
applauded as a business-friendly model for the rest of the world to
emulate. The post-Soviet economies were thoroughly “underdeveloped,”
rendered hopelessly high-cost and generally unable to compete on
anywhere near equal terms with their Western neighbors.

The result has been an economic experiment seemingly gone mad, a
dystopia whose victims are now being blamed. Neoliberal trickle-down
ideology – apparently being prepared for application to Europe and
North America with an equally optimistic rhetoric – was so
economically destructive that it is almost as if these nations were
invaded militarily. So it is indeed time to start worrying about
whether the Baltics may be a dress rehearsal for what we are about to
see in the United States.

The word “reform” is now taking on a negative connotation in the
Baltics, as it has in Russia. It has come to signify retrogression
back to feudal dependency. But whereas feudal lords from Sweden and
Germany ruled their Latvian manors by the power of landownership, they
now control the Baltics by their foreign-currency mortgage loans
against the region’s real estate.

Debt peonage has replaced outright serfdom. Mortgages far in excess of
actual market values, which have plunged by 50-70 per cent in the past
year (depending on housing type), also are far in excess of the
ability of Latvian homeowners to pay. The volume of foreign-currency
debt is far beyond what these countries can earn by exporting the
products of their labor, industry and agriculture to Europe (which
hardly wants any imports) or other regions of the world in which
democratic governments are pledged to protect their labor force, not
sell it out and subject it to unprecedented austerity programs – all
in the name of “free markets.”

Two decades have passed since the neoliberal order was introduced, and
the results are disastrous, if not almost a crime against humanity.
Economic growth has not occurred. Soviet-era assets have simply been
loaded down with debt. This is not how Western Europe developed after
World War II, or earlier for the matter – or China most recently.
These countries pursued the classical path of protection of domestic
industry, public infrastructure spending, progressive taxation, legal
prohibitions against insider dealing and looting – all anathema to
neoliberal free-market ideology.

What is starkly at issue are the underlying assumptions of the world’s
economic order. At the core of today’s crisis of economic theory and
policy are the all but forgotten premises and guiding concepts of
classical political economy. George Soros, Stiglitz and others
describe a global casino economy (which Soros certainly enriched
himself by playing) in which finance has become detached from the
process of wealth creation. The financial sector makes increasingly
steep, even unpayably high claims on the real economy of goods and
services.

This was the concern of the classical economists when they focused on
the problem of rentiers, owners of property and special privilege
whose revenues (with no counterpart in any necessary cost of
production) led to a de facto tax on the economy – in this case, by
imposing debt on it. Classical economists recognized the need to
subordinate finance to the needs of the real economy. This was the
philosophy that guided U.S. banking regulation in the 1930’s, and
which West Europe and Japan followed from the 1950s through the 1970s
to promote investment in manufacturing. Instead of checking the
financial sector’s ability to engage in speculative excess, the United
States overturned these regulations in the 1980s. From a bit below 5
per cent of total U.S. profits in 1982, the financial sector’s
after-tax profits rose to an unprecedented 41 per cent in 2007. In
effect this zero-sum activity was an overhead “tax” on the economy.

Along with financial restructuring, the main item in the classical
tool-kit was tax policy. The aim was to reward work and wealth
creation, and to collect the “free lunch” resulting from “external”
social economies as the natural tax base. This tax policy had the
virtue of reducing the burden on earned income (wages and profits).
Land was seen as supplied by nature without a labor-cost of production
(and hence without cost value). But instead of making it the natural
tax base, governments have permitted banks to load it down with debt,
turning the rise in land’s rental value into interest charges. The
result, in classical terminology, is a financial tax on society –
revenue that society was supposed to collect as the tax base to invest
in economic and social infrastructure to make society richer. The
alternative has been to tax land and industrial capital. And what tax
collectors have relinquished, banks now collect in the form of a
rising price for land sites – a price for which buyers pay mortgage
interest.

Classical economics could have predicted Latvia’s problems. With no
curbs on finance or regulation of monopoly pricing, no industrial
protection, privatization of the public domain to create “tollbooth
economies,” and a tax policy that impoverishes labor and even
industrial capital while rewarding speculators, Latvia’s economy has
seen little economic development. What it has achieved – and what has
won it such loud applause from the West – has been its willingness to
rack up huge debts to subsidize its economic disaster. Latvia has too
little industry, too little agricultural modernization, but over 9
billion lati in private debt – now at risk of being shifted onto the
government’s balance sheet, just as has occurred with the U.S. bank
bailouts.

If this credit had been extended productively to build Latvia’s
economy, it would have been acceptable. But it was mostly
unproductive, extended to fuel land-price inflation and luxury
consumption, reducing Latvia to a state of near debt serfdom. In what
Sarah Palin would call a “hopey-change thing,” the Bank of Latvia
suggests that the bottom of the crisis has been reached. Exports
finally have begun to pick up, but the economy is still in desperate
straits. If current trends continue there will be no more Latvians
left to inherit any economic revival. Unemployment still stands at
more than 22 per cent. Tens of thousands have left the country, and
tens of thousands more have decided not to have children. This is a
natural response to saddling the country with billions of lati in
public and private debt. Latvia is not on a trajectory toward Western
levels of affluence, and there is no way out of its current regressive
tax policy and anti-labor, anti-industry and anti-agriculture
neoliberalism being imposed so coercively by Brussels as a condition
for bailing Latvia’s central bank out so that it can pay Swedish banks
that have made such unproductive and parasitic loans.

Albert Einstein stated that “insanity [is] doing the same thing over
and over again and expecting different results.” Latvia has employed
the same self-destructive anti-government, anti-labor,
anti-industrial, anti-agricultural “pro-Western” Washington Consensus
for almost 20 years, and the results have become worse and worse. The
task at hand now is to liberate the economy Latvia from its neoliberal
road to neo-serfdom. One would think that the path selected would be
the one charted by the classical 19th-century economists that guided
the prosperity we see in the West and now also in East Asia.   But
this will require a change of economic philosophy – and that will
require a change of government.

The question is, how will Europe and the West respond. Will it admit
its error? Or will it brazen it out? Signs today are not promising.
The West says that labor has not been impoverished enough, industry
has not been starved enough, and economic the patient has not been
bled enough.

If this is what Washington and Brussels are saying to the Baltics,
imagine what they are about to do to their own domestic populations!

Michael Hudson is a former Wall Street economist and now a
Distinguished Research Professor at University of Missouri, Kansas
City (UMKC), and president of the Institute for the Study of Long-Term
Economic Trends (ISLET). He is the author of many books, including
Super Imperialism: The Economic Strategy of American Empire (new ed.,
Pluto Press, 2002) and Trade, Development and Foreign Debt: A History
of Theories of Polarization v. Convergence in the World Economy. He
can be reached via his website, mh at michael-hudson.com

Jeffrey Sommers is co-director of the Baltic Research Group at ISLET,
and visiting faculty at the Stockholm School of Economics in Riga.  He
can be reached at jeffrey.sommers at fulbrightmail.org

http://www.informationclearinghouse.info/article24688.htm

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