Maybe it is because a young friend of mine here in Barcelona has just come back from a holiday in Finland with an Estonian girlfriend, or something similar, but I am pretty sensitive at the moment to the comparisons which are being made between what is happening here and what is happening in Tallinin.
This article in the Baltic Times today about language teaching in Estonian schools (complete text at the end of the post) is typical of what is in my head.
Basically I don't know a great deal about the current language reforms in Estonian schools, but, going by our experience here in Catalonia, intensive teaching in the Estonian language in the schools is vital as a means of integrating the Russian speaking young people into Estonian society and the Estonian labour market.
First off a few facts concerning Catalonia. The population here is 7 million. This breaks down roughly as follows - Catalan speaking families 3 million, Spanish speaking families from the internal migrations of the 1950s and 1960s 3 million, recent - post 2000 immigrants - 1 million. So native Catalan speakers are a minority, yet Catalan is the predominant public language. And Catalonia doesn't even have a state, just regional autonomy, and control over the education system. Sometimes you can do a lot with just a little.
Now all of this becomes very important when you come to think about the economic difficulties facing the Baltic Economies at the present time, difficulties which can be summed up in just two words: labour shortages.
Now Catalonia - despite being a historically relatively low fertility area - has been able to grow into one of the richest and economically most dynamic regions of Europe quite simply by leveraging immigration. Just look at the numbers. It is obvious.
What is also important is that Catalonia has developed an immense capacity for assimilating migrants from a whole variety of different cultures, including those coming from its large Spanish neighbour.
And don't imagine it has been any easier for Catalonia to assimilate Spanish speakers than it will be for the Baltics to assimilate Russian speaking ones. Maybe Russia is associated with authoritarianism and totalitarianism for Baltic citizens, but remember that after nearly 40 years of Franco dictatorship Spain was also associated with precisely these images and feelings in the minds of the Catalans. But they have swallowed their bad feelings, and turned the situation around. And this is what the Baltic states must now do. Their very economic survival is at stake. Latvia, Estonia and Lithuania need to become migrant assimilation machines - a la Catalana. This is the only real way forward to guarantee their citizens the standard and quality of life which they have every right to dream of. Sometimes decisions in life aren't easy, but sometimes you need to bite the bullet.
President of EU Parliament visits Narva, praises language reforms
TALLINN - The President of the European Parliament Hans-Gert Poettering gave tacit support to Estonia’s schoolbased language reforms during an official visit from Aug. 14 - 17. Poettering, a German conservative, veered off the normal diplomatic path by visiting the eastern border city of Narva to talk with residents about language concerns. While he acknowledged the often-leveled claims of discrimination against Russian speaking residents, Poettering said wider study of the Estonian language was the only way forward. He praised the government’s school reforms, which will see one extra class delivered in Estonian at Russian-speaking schools from Sept. 1. Poettering said the program was the key to better integration.
“It will then be possible to move on. It is important that the two communities should communicate with each other,” he said, adding that such communication was only possible through the broader study of the Estonian language. He also called for Russia to deal with its own history, and to adopt a better understanding of Estonia’s misery under Soviet rule. “Life under the communist dictatorship has left a very strong mark on Estonians. It is connected with liberty. That understanding, I think, is not very widespread in Russia,” he said. When meeting with Russian community groups and public figures in Narva, Poettering said it appeared most residents of the border city considered themselves Estonian, no matter what language they spoke.
His working visit also included meetings with President Toomas Hendrik Ilves, whom he invited to address the European Parliament, and Prime Minister Andrus Ansip, who demonstrated Estonia’s highly praised e-government cabinet room. Poettering, who comes from a legal background, was elected president of the European Parliament in January this year.
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Tuesday, August 28, 2007
Thursday, August 23, 2007
A Welcome 'Slowdown' in Lithuania?
By Claus Vistesen
Cross Posted From Alpha Sources
Cross Posted From Alpha Sources
The CEE and Baltic economies are interesting; that much I think is certain. This is especially the case in the light of the recent financial market turmoil which have crippled liquidity conditions. As such, my suggestion as it has been in my previous (main previous entry!) notes on Lithuania and the CEE economies in general is to keep a weary eye on these economies since they might very well end being up at the forefront of any kind of rapid unwind of the current economic climate. Before we dig into the recent economic data I should direct your attention to the fact that my coverage of Lithuania forms a small part of a much wider coverage of the Baltic economies which is conducted alongside Edward Hugh who is running his Baltic Economy Watch
which is a poster blog covering the day-to-day evolution of these economies.
It has been while since the statistical office posted its estimate for Q2 GDP growth which came in slightly lower than the previous quarter. Generally, the GDP performance was narrated as a slowdown but in essence it is a very small one at that. In this way, Lithuania is still fairing at very high growth levels relative to the underlying and deteriorating capacity issues which are spelled out in my previous notes linked above. The graph below extents the GDP series to include Q2 2007 where growth nudged down ever so timidly to 8.0% from 8.3% in Q1.
As far as the other economic data which was treated the last time it is difficult to gauge a significant change. Regarding the CPI and PPI index my last figures already included Q2 and as last time we should be noting the steady upwards tick of CPI. Turning to labour costs and construction input prices only the latter seems to be updated relative to the last time we had Lithuania under the loop. The substantial y-o-y uptick in construction input prices suggest that activity in the construction sector by no means have cooled which indicates that the housing sector has not yet lost steam relative to what seems to be an obvious capacity ceiling. This further suggest, at least somewhat, that the risk of a sudden severe slump cannot yet be ruled out.
Another major thread in my analysis of Lithuania has been a rigorous analysis of the labour market as a proxy for assessing just what the underlying capacity issues were. Before we try to extent the analysis from where we broke off last time it serves to remember the inbuilt difficulties with securing adequacy in terms of analysing the human capital situation in Lithuania. The first issue relates to something which I have already briefly touched upon as it pits the data from the official Lithuanian Statistical Department against data from the Vilnius based Labour Exchange Office. The inbuilt downward bias in the data from the Labour Exchange Office suggest that capacity in Lithuania as measured by the unemployment rate and absolute number of unemployed persons is substantially lower than what is cited by Eurostat and the official statistical department. I cannot by no means give any indication as to which number to actually rely on but merely note that it is very difficult to provide a fixed point from which to make general analysis. However, what is very clear is that capacity in Lithuania is indeed declining and from already very low levels. The second point relates to general uncertainties regarding the population census which is well summarised in this small pointer from the Baltic Times.
Lithuania's state institutions do not know how many residents there are in the country, it has been revealed, with different bodies giving significantly differing estimates of the population. There are two offices subordinate to the Interior Ministry of Lithuania - the Migration Department and the Residents' Register Service. The names of the departments may give the impression that they keep track of population levels and how many passports have been issued, but this is not in fact the case, reports the Lietuvos Zinios newspaper. The Head of the Passport Division of the Migration Department,Danute Matareviciene,told the paper that she had no statistics on how many passports have been issued. The Residents' Register Service drew a balnk when asked as well.
The closest thing to an official figure can be found at the Department of Statistics. During the second quarter of 2007, 3,338,000 residents were registered in Lithuania, but only 3,162,879 have citizenship. Further confusion is created by data on official and unofficial emigration levels. Officially the number who left the country between 2003-2006 was 54,400. Unofficially the department puts the figure at 76,700, though other institutions suggest the number is actually as high as 500,000. Given the large number of Lithuanians working in other parts of Europe, and particularly the UK and Eire, this last figure seems far more realistic.
Apart from the obvious feedback mechanism with general labour market analysis this uncertainty also strongly affects my previous notes on net migration. Clearly, there can be no doubt that the trend is negative but when we think about this number of 500.000 cited as an unofficial estimate of net outward migration between 2003-2006 we also need to remember the inbuilt uncertainty relating to citizenship. More generally relating to the graphs I fielded in my previous main note the data is still more or less up to date. According to Eurostat the total amount of persons unemployed basically held steady in July at 75.400 compared to June's 75.300. This also translates into an unchanged unemployment rate at 4.7% in July 2007.
Lastly, and in connection with Edward's recent note on how Fitch downgraded Latvia foreign currency issuer default rating (IDR) to ‘BBB+’ from ‘A- as well as also downgrading the currency IDR to ‘BBB+‘ from A-. In this respect, Lithuania is still set on A and A+ respectively which reflects the fact that Latvia is showing stronger signs of overheating than its neighbour to the South. However, the recent move by Fitch on Latvia might be the first tentative sign that the current market turmoils will be followed by a more wide re-appraisal of risk. Especially in this light I will be looking closely at Lithuania and indicators such as labour costs, core inflation, and capital inflows since these indicators will be certain to raise the red lights quicker than they would have just a few weeks ago. Also, and since the genie now is pretty much out of the bottle in terms of coupling the current situation with the rumblings of 1998 the recent credit and capital inflows into the CEE economies should cause more than a few raised eyebrows.
As a final note I want to sketch out a bit where I am going from here on in my coverage of Lithuania and more generally the global economy. As such, I am thinking and collecting noted regarding a longer note on the rating agencies and their role in this whole debacle. On Lithuania, I will also try to look more closely at previously neglected areas in my analysis such as a detailed look at the balance of payment situation (i.e. source of funding) as well as the FDI stock which by no means is trivial. All this of course should be closely tied to the pegged currency and the strains this situation is set to be put in if the economy stays in its current high growth trajectory.
So in short, stay tuned.Wednesday, August 22, 2007
Migration and Latvia
Is Inward Migration A Solution To Latvia's Labour Shortages?
As has been repeatedly argued on this blog, given that a strategy of relying exclusively on fiscal tightening and strong deflation to address Latvia's overheating problem is fraught with risk, and may even in the best of cases fail to deliver the results anticipated, another possibility which could be be put under serious consideration would be the application of a determined policy mix involving both decreasing the pace of the present economic expansion and increasing the economy's capacity for expansion by loosening labour market constraints somewhat via the use of an open-the-doors policy towards inward migration. This would involve the active promotion and encouragement of a flow of migrants from either elsewhere in Eastern Europe or from points further afield. Such a move would seem sensible, and even viable given the fact that Latvia is a pretty small country. However, as Claus Vistesen notes here, this can only be thought of as an interim measure, since, as the World Bank has recently argued, all the countries in Eastern Europe and Central Asia are effectively condemned to face growing difficulties with labour supply between now and 2020 (so in this sense what is currently happening in the Baltics may be thought of as an extreme harbinger of the shape of things to come).
But given this proviso it is clear that a short-term inward migration policy may help Latvia escape from the vice within whose grip its immediate future seems condemned to lie. Such short term advantage may be important, since longer term solutions like increasing the human capital component in the economy and moving up to higher value activity, whilst important, need much more time to be able to have any noteable effect. You simply cannot take a 20 year old with a basic school leaving certificate and turn him or her into a high value technician overnight, and especially if you don't have that many twenty (or 15) year olds to play around with in the first place.
What is at issue here is transiting a fairly small economy from being locked onto an unsustainable path over onto a sustainable one.
As Claus notes in this post, Estonia has already taken some tentative steps in the direction of making access easier for external workers, and Estonian Economy Minister Juhan Parts is busy working on a set of proposals - which he is to put before the Estonian Parliament by November - which will attempt to address Estonia’s growing shortage of skilled workers. The quota of foreign workers will be doubled to about 1,300 and the bureaucratic paperwork is to be significantly reduced . Now it is true that Parts is still to bite the bullet of accepting the need for unskilled workers too, but in the present situation a start is a start.
Poland has recently being making more sustained efforts to attract workers from Russia, Ukraine and Belarus, but also from more distant lands like India, while the Czech Republic, which has already decided to introduce a kind of green card system for workers from other East European countries has representatives out in Vietnam. In this sense if Eastern Europe is to overcome the looming crisis, then she must certainly be imaginative, and be prepared to offer incentives and advantages to migrants, and not only to skilled ones, since if you have only a few children what do you really want them to do, the most menial jobs?
The last IMF staff report(September 2006) already drew attention to the fact that a number of Latvian economic analysts had been calling for an expansion in inward migration in an attempt to alleviate shortages and to dampen wage pressures. However, it seems that local policymakers generally have been taking the view that this would only have the effect of replacing domestic low-cost workers with imported ones, thereby holding down wages and promoting further emigration. The problem is that if the current wage-cost driven inflation continues then a hard landing will become inevitable, and with a hard landing their will most probably be another exodus of people driven out in search of work, so this is really no solution.
The IMF was, in fact, cautiously positive on the need to open up the labour market:
However being realistic, we need to note that Latvia certainly faces significant difficulties in introducing any kind of pro-migrant policy. One of these is evident, since any broad opening of the labour market may ultimately simply serve to put downward pressure on unskilled workers wages in a way which only sends even more of the scarce potential labour Latvia has out to Ireland or the UK or elsewhere. A recent report by the US Council of Economic Advisers made some of the issues involved relatively clear. The report cited research showing immigrants in the US on average have a “slightly positive” impact on economic growth and government finances, but at the same time conceded that unskilled immigrants might put downward pressure on the position of unskilled native workers. Now in the US cases these US workers are unlikely to emigrate, but in Latvia they may do.
Another difficulty which arises is the lack of availability of accurate data on the actual scale of either inward or outward migration in Latvia (this difficulty is noted by both the IMF staff team and the Economist Intelligence Unit).
As the IMF staff team note in IMF Selected Issues (2006) official statistics show that Latvia's population has declined markedly over the past 15 years, owing to both net outward migration and to a birthrate which has been well below reproduction rate since the early 1990s.
According to Latvian government data, Latvia had nearly 400,000 fewer residents in 2005 than it had in 1990. And according to the IMF calculations the population decrease is about equally explained by net outward migration (71 per 1,000) and by natural population decrease (births minus deaths, 75 per 1,000).
As the IMF comment:
"The fall in the population due to natural causes.......is also quite worrisome, as it continues unabated and will begin to exacerbate a shrinking labor market in a few years’ time."
According to the most recent estimate from the Bank of Latvia some 70,000 Latvians, or around 6% of the labour force, are currently working abroad - mostly in the UK and Ireland - but the true number is very likely considerably higher (IMF Selected Issues Latvia 2006, for example, put the figure at that point at nearer 100,000).
One of the difficulties that anyone trying to make an assessment of the labour shortage situation in Latvia faces is that official statistics measure only long-term migration, and, following the practices of Latvia’s Citizenship and Migration Board, long-term migration refers to "individuals who leave Latvia with the intent of settling in a new country for at least one year and who report this intention to an appropriate authority". As a consequence most of the data do not capture several important categories of migration:
a) illegal migrants who move permanently to another country without proper authorization from the receiving country,
b) permanent migrants to another EU country who do not report their change of residency, and
c) temporary migrants to another EU country who are not required to report their arrival in the receiving country.
The latter two categories would seem to be especially important in Latvia’s case, given that since EU accession, many Latvians have been moving to Ireland and the U.K. - either permanently or temporarily - to seek and obtain work.
On the other hand, if we look at the situation the other way round, in terms of arrivals in the UK or Ireland - as Latvian Abroad has in this post here (and this one) - then we may be better able to get a better idea of the numbers involved due to a difference in the quality of the statistics maintained. As Latvian Abroad points out, the numbers we actually find are somewhat below the normal headline-making level, but still substantial:
As Latvian Abroad also notes the numbers leaving for the UK and Ireland have been dropping steadily since 2006 (although in the Irish case it is not clear to what extent the slowdown in the Irish economy, and in particular in its construction sector, is responsible for this, in any event the Irish data can be found here, and the UK data here).
Several recent surveys also suggest that the potential for outward migration remains substantial. For example, a survey conducted by SKDS (Public Opinion on Manpower Migration: Opinion Poll of Latvia’s Population) in January 2006 revealed that about 22 percent of Latvian residents see themselves as being either “very likely” or “somewhat likely” to go to another country for work “in the next two years”. Based on the current estimated population, this translates into between 350 and 450 thousand residents (between 15 and 20 percent of the 2005 population). The survey also indicated that these respondents were significantly skewed toward the relatively young (15-35), which would significantly reduce the working-age population and labor force in the near future. These respondents were also slightly more likely to be male, less educated, low-income, employed in the private sector, or non-Latvian.
But the biggest problem which arises in the context of projected in-migration as a partial solution to Latvia's present difficulties is a cultural one, and is associated with the historic legacy arising from years of unwilling participation in the old USSR, namely the presence in Latvia of large numbers of Russophone Latvian residents who are non-citizens. The scale of the situation can be seen from the table below.
(please click over image for better viewing)
Essentially out of a total Latvia population of 2,280,000, only 1,850,000 are Latvian (and hence EU) citizens. Of the remainder the majority (some 280,000) are Russians. And these Russians are not recent arrivals, but live in Latvia as part of a historic Russophone population which build up inside Latvia during the period that the country formed part of the Soviet Union.
In fact, if we look at the chart below, we will see that during 2003 the rate of out migration from Latvia seems to have increased substantially, as membership of the European Union loomed.
(please click over image for better viewing)
But what happened in 2003/4 wasn't simply an increase in the volume of migration, it was also a change in the direction of migration, away from the CIS and towards the EU. The majority of the pre 2004 out-migration was actually towards the CIS - official Latvian statistics suggest that over half of the Latvian residents who left Latvia between 1990 and 2005 emigrated to CIS countries - and it is reasonable to assume that many of these migrants came from the Russian speaking population.
So obviously any attempt to revert the flows will confront Latvians with some awkward and difficult cultural decisions, but then these are in-principle no more complex than those which would be posed by following the Polish example and attempting to establish a significant Indian community, or the Czech one and looking to bring in Vietnamese. As I say, Latvia is a small country, and the numbers involved are not necessarily huge, but perhaps the leap in the mindset which is required in fact is. As such the sustained exit of Russophones back into the CIS may only have served to delay, and make more difficult, a process of reconciliation which now, above all, has become economically expedient for everyone concerned.
As has been repeatedly argued on this blog, given that a strategy of relying exclusively on fiscal tightening and strong deflation to address Latvia's overheating problem is fraught with risk, and may even in the best of cases fail to deliver the results anticipated, another possibility which could be be put under serious consideration would be the application of a determined policy mix involving both decreasing the pace of the present economic expansion and increasing the economy's capacity for expansion by loosening labour market constraints somewhat via the use of an open-the-doors policy towards inward migration. This would involve the active promotion and encouragement of a flow of migrants from either elsewhere in Eastern Europe or from points further afield. Such a move would seem sensible, and even viable given the fact that Latvia is a pretty small country. However, as Claus Vistesen notes here, this can only be thought of as an interim measure, since, as the World Bank has recently argued, all the countries in Eastern Europe and Central Asia are effectively condemned to face growing difficulties with labour supply between now and 2020 (so in this sense what is currently happening in the Baltics may be thought of as an extreme harbinger of the shape of things to come).
But given this proviso it is clear that a short-term inward migration policy may help Latvia escape from the vice within whose grip its immediate future seems condemned to lie. Such short term advantage may be important, since longer term solutions like increasing the human capital component in the economy and moving up to higher value activity, whilst important, need much more time to be able to have any noteable effect. You simply cannot take a 20 year old with a basic school leaving certificate and turn him or her into a high value technician overnight, and especially if you don't have that many twenty (or 15) year olds to play around with in the first place.
What is at issue here is transiting a fairly small economy from being locked onto an unsustainable path over onto a sustainable one.
As Claus notes in this post, Estonia has already taken some tentative steps in the direction of making access easier for external workers, and Estonian Economy Minister Juhan Parts is busy working on a set of proposals - which he is to put before the Estonian Parliament by November - which will attempt to address Estonia’s growing shortage of skilled workers. The quota of foreign workers will be doubled to about 1,300 and the bureaucratic paperwork is to be significantly reduced . Now it is true that Parts is still to bite the bullet of accepting the need for unskilled workers too, but in the present situation a start is a start.
Poland has recently being making more sustained efforts to attract workers from Russia, Ukraine and Belarus, but also from more distant lands like India, while the Czech Republic, which has already decided to introduce a kind of green card system for workers from other East European countries has representatives out in Vietnam. In this sense if Eastern Europe is to overcome the looming crisis, then she must certainly be imaginative, and be prepared to offer incentives and advantages to migrants, and not only to skilled ones, since if you have only a few children what do you really want them to do, the most menial jobs?
The last IMF staff report(September 2006) already drew attention to the fact that a number of Latvian economic analysts had been calling for an expansion in inward migration in an attempt to alleviate shortages and to dampen wage pressures. However, it seems that local policymakers generally have been taking the view that this would only have the effect of replacing domestic low-cost workers with imported ones, thereby holding down wages and promoting further emigration. The problem is that if the current wage-cost driven inflation continues then a hard landing will become inevitable, and with a hard landing their will most probably be another exodus of people driven out in search of work, so this is really no solution.
The IMF was, in fact, cautiously positive on the need to open up the labour market:
The mission saw a role for targeted temporary immigration of high-skilled workers to relieve growth bottlenecks, and cautioned that Latvia’s current labor shortages may be short lived if growth were to slow at home or in those countries where Latvians are currently working. To boost domestic labor supply while moderating demand, the mission recommended easing the pace of economic growth, improving productivity in the public sector to free up labor, and further increasing labor force participation by raising the untaxed minimum under the PIT.
However being realistic, we need to note that Latvia certainly faces significant difficulties in introducing any kind of pro-migrant policy. One of these is evident, since any broad opening of the labour market may ultimately simply serve to put downward pressure on unskilled workers wages in a way which only sends even more of the scarce potential labour Latvia has out to Ireland or the UK or elsewhere. A recent report by the US Council of Economic Advisers made some of the issues involved relatively clear. The report cited research showing immigrants in the US on average have a “slightly positive” impact on economic growth and government finances, but at the same time conceded that unskilled immigrants might put downward pressure on the position of unskilled native workers. Now in the US cases these US workers are unlikely to emigrate, but in Latvia they may do.
Another difficulty which arises is the lack of availability of accurate data on the actual scale of either inward or outward migration in Latvia (this difficulty is noted by both the IMF staff team and the Economist Intelligence Unit).
As the IMF staff team note in IMF Selected Issues (2006) official statistics show that Latvia's population has declined markedly over the past 15 years, owing to both net outward migration and to a birthrate which has been well below reproduction rate since the early 1990s.
According to Latvian government data, Latvia had nearly 400,000 fewer residents in 2005 than it had in 1990. And according to the IMF calculations the population decrease is about equally explained by net outward migration (71 per 1,000) and by natural population decrease (births minus deaths, 75 per 1,000).
As the IMF comment:
"The fall in the population due to natural causes.......is also quite worrisome, as it continues unabated and will begin to exacerbate a shrinking labor market in a few years’ time."
According to the most recent estimate from the Bank of Latvia some 70,000 Latvians, or around 6% of the labour force, are currently working abroad - mostly in the UK and Ireland - but the true number is very likely considerably higher (IMF Selected Issues Latvia 2006, for example, put the figure at that point at nearer 100,000).
One of the difficulties that anyone trying to make an assessment of the labour shortage situation in Latvia faces is that official statistics measure only long-term migration, and, following the practices of Latvia’s Citizenship and Migration Board, long-term migration refers to "individuals who leave Latvia with the intent of settling in a new country for at least one year and who report this intention to an appropriate authority". As a consequence most of the data do not capture several important categories of migration:
a) illegal migrants who move permanently to another country without proper authorization from the receiving country,
b) permanent migrants to another EU country who do not report their change of residency, and
c) temporary migrants to another EU country who are not required to report their arrival in the receiving country.
The latter two categories would seem to be especially important in Latvia’s case, given that since EU accession, many Latvians have been moving to Ireland and the U.K. - either permanently or temporarily - to seek and obtain work.
On the other hand, if we look at the situation the other way round, in terms of arrivals in the UK or Ireland - as Latvian Abroad has in this post here (and this one) - then we may be better able to get a better idea of the numbers involved due to a difference in the quality of the statistics maintained. As Latvian Abroad points out, the numbers we actually find are somewhat below the normal headline-making level, but still substantial:
It's actually Lithuanians who have been the quickest to leave their country. 3.3% of Lithuania's population has ended up working in UK or Ireland. (Since UK only registers those foreigners who work there, the percentage of working-age Lithuanians who have left is probably 5-6%.) Latvia is second, with 2.5% of population gone. Slovakia is third and Poland is fourth. That surprised me a bit, because there are so many newspaper stories about Poles in UK and hardly any about Slovaks. Estonia is fifth. The emigration rates from Hungary, Czech Republic and Slovenia are much smaller.
As Latvian Abroad also notes the numbers leaving for the UK and Ireland have been dropping steadily since 2006 (although in the Irish case it is not clear to what extent the slowdown in the Irish economy, and in particular in its construction sector, is responsible for this, in any event the Irish data can be found here, and the UK data here).
Several recent surveys also suggest that the potential for outward migration remains substantial. For example, a survey conducted by SKDS (Public Opinion on Manpower Migration: Opinion Poll of Latvia’s Population) in January 2006 revealed that about 22 percent of Latvian residents see themselves as being either “very likely” or “somewhat likely” to go to another country for work “in the next two years”. Based on the current estimated population, this translates into between 350 and 450 thousand residents (between 15 and 20 percent of the 2005 population). The survey also indicated that these respondents were significantly skewed toward the relatively young (15-35), which would significantly reduce the working-age population and labor force in the near future. These respondents were also slightly more likely to be male, less educated, low-income, employed in the private sector, or non-Latvian.
But the biggest problem which arises in the context of projected in-migration as a partial solution to Latvia's present difficulties is a cultural one, and is associated with the historic legacy arising from years of unwilling participation in the old USSR, namely the presence in Latvia of large numbers of Russophone Latvian residents who are non-citizens. The scale of the situation can be seen from the table below.
(please click over image for better viewing)
Essentially out of a total Latvia population of 2,280,000, only 1,850,000 are Latvian (and hence EU) citizens. Of the remainder the majority (some 280,000) are Russians. And these Russians are not recent arrivals, but live in Latvia as part of a historic Russophone population which build up inside Latvia during the period that the country formed part of the Soviet Union.
In fact, if we look at the chart below, we will see that during 2003 the rate of out migration from Latvia seems to have increased substantially, as membership of the European Union loomed.
(please click over image for better viewing)
But what happened in 2003/4 wasn't simply an increase in the volume of migration, it was also a change in the direction of migration, away from the CIS and towards the EU. The majority of the pre 2004 out-migration was actually towards the CIS - official Latvian statistics suggest that over half of the Latvian residents who left Latvia between 1990 and 2005 emigrated to CIS countries - and it is reasonable to assume that many of these migrants came from the Russian speaking population.
So obviously any attempt to revert the flows will confront Latvians with some awkward and difficult cultural decisions, but then these are in-principle no more complex than those which would be posed by following the Polish example and attempting to establish a significant Indian community, or the Czech one and looking to bring in Vietnamese. As I say, Latvia is a small country, and the numbers involved are not necessarily huge, but perhaps the leap in the mindset which is required in fact is. As such the sustained exit of Russophones back into the CIS may only have served to delay, and make more difficult, a process of reconciliation which now, above all, has become economically expedient for everyone concerned.
Tuesday, August 21, 2007
Hard Or Soft Landing in Latvia?
The Batic Times had an article during last week giving a summary of a recent report from Hansabank Markets (full text available here in event of link rot).
Now as Latvian Abroad points out in comments, neither the article nor the report it summarises really add anything new to the the extensive airing that this topic has already received in the economic and financial press. In this context see, for example, the Financial Times here and here, the Economist here, here and here, and EU Business here. EU Economy Commissioner Joaquim Almunia has also joined in the act, although he explicitly avoided direct reference to the hard landing possibility, as did the IMF staff economists in their last IMF "Mission to Latvia" statement. The same essentially goes for the widely quoted BICEPS report (caution pdf). Carsten Valgreen, who puts his finger on one part of the present problem judiciously avoids voicing an opinion about what exactly the future might have in store for Latvia.
Hansabank, however, is rather more explicit than most, and this explicitness isn't too hard to understand, since they come down on the more optimistic side of the fence.
The Estonian and Latvian economies are settling into the eagerly awaited “soft landing,” as Estonia’s growth in the first quarte of this year eases off a rapid 9.8 percent year-to-year increase, and Latvia’s slows from 11.2 percent, says a new report released by Hansabank Markets.
Perhaps this optimistic tone is not all that surprising, given the amount of money Hansabank have invested in the happy ending scenario. The report also touches on the rather more delicate issue of the currency peg, and what might happen to it. Again they are pretty positive.
Anxiety this spring of a possible devaluation of Latvia’s currency due to the rapidly deteriorating balance of trade figures has subsided as well. Chief Economist at Hansabank Martins Kazaks says, “The risk of devaluation is minor at the moment. Due to our very thin and virtually sealed-off financial markets, external speculative attacks are very unlikely to be of any important volume, but with no improvements in macro imbalances the current situation is not sustainable.”
The last phrase, we might note. does cover virtually any possible eventuality.
But, more to the point, what exactly are these macro imbalances they refer to? Well as I have tried to argue at some length here, they stem from a virtually unique set of circumstances (historically unique I mean, at the present time the underlying dynamic across all the East European EU member states is remarkably similar, with the possible exception of Hungary). In brief Latvia is facing, at one and the same time, a massive inflow of external funds, and a massive outflow of people. Put another way, demand side factors are increasing rapidly, while supply side capacity not only is unable to keep pace, it is actually shrinking (if we think about the number of people of working age).
So there are two problems to correct here, and they are both large and important. Essentially Latvia needs:
a) more labour supply, both skilled and unskilled
b) a lower rate of inflow of structurally distorting funds, whether these be bank credit, remittances, or even (possibly, this needs investigating further) EU funding for projects which Latvia cannot reasonably expect to carry through in the time horizon outlined.
c) more Foreign Direct Investment to create value creating jobs, especially in manufacturing and services areas with export potential
d) increased spending on education and training projects to upgrade the human capital of the existing population
In this sense the Hansabank statement that:
"The main risk.....is if governments continue expansionist policies, and in the process fuel ongoing consumer spending growth."
is not really to the point, since it is not government policy which is fueling the overheating, and indeed the government is already aiming for a budget surplus this year. In this sense the Hansabank report only reiterates what the IMF staff economists stated after their Article IV consultation discussions back in May 2007, to the effect that the Latvian government should aim for a 4% of GDP budget surplus in 2007, an order of magnitude which the Latvian government has so far resisted. So the Latvian government may be blamed for excessive complacency. The March 2007 measures (summarized by the Finance Ministry here, and by the National Bank here) certainly fall short of what is needed, but at the same time it needs to be understood that many of these problems are not of the Latvian governments own making, and even under the best possible package of policy options, Latvian would still be having major problems, as the BICEPS report authors indicate when they state that Latvia has more problematic parameters than policy instruments available. This is simply a technical way of saying that they are really rather at the mercy of events, and not their master.
The central point here is that the fiscal surplus proposal really a form of positive policy, it is a last line of defence move, implemented as a result of the fact, as the BICEPS report makes clear, that given the fact that the major imbalance issues (shortages of suitably educated and qualified working population, and inflow of remittances and bank funds) are de facto outside of the control of conventional monetary policy instruments, neither the central bank nor the government have adequate policy instruments available. This is the real issue, and this is the longer term problem we all need to be thinking about, not only in Latvia but far more generally.
But the measures mentioned above are longer term and structural, what about the present situation, is it manageable? This is a very difficult question to answer. It depends on what they call the "global conditions". The financial markets, as is now well known, are currently in turmoil, and it is hard to know where the snowball which has been put in motion will actually come to rest. But to really decide whether or not the Baltic states will have a hard landing we really do need to know, as a prior, the answer to this question. Meanwhile, we must simply bide our time, and watch and wait.
My general feeling is that while there are no easy or immediate solutions to Latvia's long term problems, Latvia on its own won't "unwind". Nor is it likely to precipitate a more general unwind. In part this is to do with what the Economist rather impertinently calls the "pipsqueak" factor.
But then we need to think about the general global risk appetite. Certainly this has been somewhat volatile of late. And for the time being it seems set to remain volatile.
The issue really is that the global economy may be reaching(or even we may now have passed) the peak of the current growth cycle. Signs of a slow-down are evident everywhere (except of course in Eastern Europe, although obviously the Baltics and Hungary are clearly slowing now, and the others may not be too long in following depending on how "hard" the global landing actually is). From the US to the eurozone and Japan it is clear that GDP growth rates in 2007 will be lower than those in 2006, and even China is giving some indication that she will need to pause for breath at some point (especially if the rapid growth rates of exports to the EU and the US cannot be maintained), and while India may well be on the development launch ramp, she is not sufficiently large (in GDP terms), or sufficiently integrated in the global economy at this point, to make any decisive difference.
The decline in the value of the dollar is also a factor which needs to be considered here. In Europe we are not especially noticing the oil price effect, but in the US it is surely now a drag. Add to this the US housing woes, and the fact that almost a majority of the population *believe* that the US is headed for a recession ("animal spirits" do matter here). As a result I think it is not unreasonable to imagine that the US will gradually (I hope gradually) slow in the second half of 2007.
If we reach a recession call point in the US then Bernanke will undoubtedly unlease all that ammunition he has been storing up, and start to lower interest rates (Of course the surprise move by the Federal Reserve last Friday is now an early indication of this possibility). This in and of itself will present the ECB with a big headache, given the "normalisation" course they have been trying to steer. Any attempt to continue the upward march in Eurozone interest rates will only send the euro once more sharply upward, and with the euro, of course, the Lat.
But it is more what will happen in financial markets at this point we need to be thinking about.
Once the ECB moves away from rate "normalisation" as a discourse (as I feel it will now have to), and once we get into the area of possibile rate reductions again, then the global financial system will enter a "delicate moment", simply because what financial markets like best is a consistent story, and this is what we have been having, up to now. In the last few years everything has been all about relative yield and the search for the differential. But when we get a change in the "zeitgeist", then there is always the risk of increased problems, if for now other reason than that market participants don't really know how to respond. This, I think is the worry in the back of the Economist's Buttonwood's mind in the recent articles (here, and here). As he says in the most recent installment - Cold Turkey - "WHEN investors get twitchy, developing countries are usually the first to pay the price."
So what can the Latvian government do? Well beyond tightening up credit regulations (which it has already done, but there are limits to this process in an era of financial deregulation) and being more aggressive on the fiscal tightening side, there is precious little they can do. Obviously steps need to be taken to try and facilitate the return of some of those migrants who are in the UK and Ireland (mightn't some of the EU funding be better used for this purpose?), and evidently it would be very positive to follow in the initial footsteps of Estonia and open the labour market up to migrants from elsewhere (indeed they need to be actively encouraged to come, and not subtly resisted), and of course the underlying fertility situation which is fueling the problem needs to be addressed (once more a leaf can be taken from Estonia's book). But all these measures are longer term in nature. In the short term we now have little remedy but to sit it out and wait, and oh yes, to keep our fingers crossed that the current problems associated with the US sub-prime mortgage market don't turn into a globalised and general "credit crunch".
Now as Latvian Abroad points out in comments, neither the article nor the report it summarises really add anything new to the the extensive airing that this topic has already received in the economic and financial press. In this context see, for example, the Financial Times here and here, the Economist here, here and here, and EU Business here. EU Economy Commissioner Joaquim Almunia has also joined in the act, although he explicitly avoided direct reference to the hard landing possibility, as did the IMF staff economists in their last IMF "Mission to Latvia" statement. The same essentially goes for the widely quoted BICEPS report (caution pdf). Carsten Valgreen, who puts his finger on one part of the present problem judiciously avoids voicing an opinion about what exactly the future might have in store for Latvia.
Hansabank, however, is rather more explicit than most, and this explicitness isn't too hard to understand, since they come down on the more optimistic side of the fence.
The Estonian and Latvian economies are settling into the eagerly awaited “soft landing,” as Estonia’s growth in the first quarte of this year eases off a rapid 9.8 percent year-to-year increase, and Latvia’s slows from 11.2 percent, says a new report released by Hansabank Markets.
Perhaps this optimistic tone is not all that surprising, given the amount of money Hansabank have invested in the happy ending scenario. The report also touches on the rather more delicate issue of the currency peg, and what might happen to it. Again they are pretty positive.
Anxiety this spring of a possible devaluation of Latvia’s currency due to the rapidly deteriorating balance of trade figures has subsided as well. Chief Economist at Hansabank Martins Kazaks says, “The risk of devaluation is minor at the moment. Due to our very thin and virtually sealed-off financial markets, external speculative attacks are very unlikely to be of any important volume, but with no improvements in macro imbalances the current situation is not sustainable.”
The last phrase, we might note. does cover virtually any possible eventuality.
But, more to the point, what exactly are these macro imbalances they refer to? Well as I have tried to argue at some length here, they stem from a virtually unique set of circumstances (historically unique I mean, at the present time the underlying dynamic across all the East European EU member states is remarkably similar, with the possible exception of Hungary). In brief Latvia is facing, at one and the same time, a massive inflow of external funds, and a massive outflow of people. Put another way, demand side factors are increasing rapidly, while supply side capacity not only is unable to keep pace, it is actually shrinking (if we think about the number of people of working age).
So there are two problems to correct here, and they are both large and important. Essentially Latvia needs:
a) more labour supply, both skilled and unskilled
b) a lower rate of inflow of structurally distorting funds, whether these be bank credit, remittances, or even (possibly, this needs investigating further) EU funding for projects which Latvia cannot reasonably expect to carry through in the time horizon outlined.
c) more Foreign Direct Investment to create value creating jobs, especially in manufacturing and services areas with export potential
d) increased spending on education and training projects to upgrade the human capital of the existing population
In this sense the Hansabank statement that:
"The main risk.....is if governments continue expansionist policies, and in the process fuel ongoing consumer spending growth."
is not really to the point, since it is not government policy which is fueling the overheating, and indeed the government is already aiming for a budget surplus this year. In this sense the Hansabank report only reiterates what the IMF staff economists stated after their Article IV consultation discussions back in May 2007, to the effect that the Latvian government should aim for a 4% of GDP budget surplus in 2007, an order of magnitude which the Latvian government has so far resisted. So the Latvian government may be blamed for excessive complacency. The March 2007 measures (summarized by the Finance Ministry here, and by the National Bank here) certainly fall short of what is needed, but at the same time it needs to be understood that many of these problems are not of the Latvian governments own making, and even under the best possible package of policy options, Latvian would still be having major problems, as the BICEPS report authors indicate when they state that Latvia has more problematic parameters than policy instruments available. This is simply a technical way of saying that they are really rather at the mercy of events, and not their master.
The central point here is that the fiscal surplus proposal really a form of positive policy, it is a last line of defence move, implemented as a result of the fact, as the BICEPS report makes clear, that given the fact that the major imbalance issues (shortages of suitably educated and qualified working population, and inflow of remittances and bank funds) are de facto outside of the control of conventional monetary policy instruments, neither the central bank nor the government have adequate policy instruments available. This is the real issue, and this is the longer term problem we all need to be thinking about, not only in Latvia but far more generally.
But the measures mentioned above are longer term and structural, what about the present situation, is it manageable? This is a very difficult question to answer. It depends on what they call the "global conditions". The financial markets, as is now well known, are currently in turmoil, and it is hard to know where the snowball which has been put in motion will actually come to rest. But to really decide whether or not the Baltic states will have a hard landing we really do need to know, as a prior, the answer to this question. Meanwhile, we must simply bide our time, and watch and wait.
My general feeling is that while there are no easy or immediate solutions to Latvia's long term problems, Latvia on its own won't "unwind". Nor is it likely to precipitate a more general unwind. In part this is to do with what the Economist rather impertinently calls the "pipsqueak" factor.
But then we need to think about the general global risk appetite. Certainly this has been somewhat volatile of late. And for the time being it seems set to remain volatile.
The issue really is that the global economy may be reaching(or even we may now have passed) the peak of the current growth cycle. Signs of a slow-down are evident everywhere (except of course in Eastern Europe, although obviously the Baltics and Hungary are clearly slowing now, and the others may not be too long in following depending on how "hard" the global landing actually is). From the US to the eurozone and Japan it is clear that GDP growth rates in 2007 will be lower than those in 2006, and even China is giving some indication that she will need to pause for breath at some point (especially if the rapid growth rates of exports to the EU and the US cannot be maintained), and while India may well be on the development launch ramp, she is not sufficiently large (in GDP terms), or sufficiently integrated in the global economy at this point, to make any decisive difference.
The decline in the value of the dollar is also a factor which needs to be considered here. In Europe we are not especially noticing the oil price effect, but in the US it is surely now a drag. Add to this the US housing woes, and the fact that almost a majority of the population *believe* that the US is headed for a recession ("animal spirits" do matter here). As a result I think it is not unreasonable to imagine that the US will gradually (I hope gradually) slow in the second half of 2007.
If we reach a recession call point in the US then Bernanke will undoubtedly unlease all that ammunition he has been storing up, and start to lower interest rates (Of course the surprise move by the Federal Reserve last Friday is now an early indication of this possibility). This in and of itself will present the ECB with a big headache, given the "normalisation" course they have been trying to steer. Any attempt to continue the upward march in Eurozone interest rates will only send the euro once more sharply upward, and with the euro, of course, the Lat.
But it is more what will happen in financial markets at this point we need to be thinking about.
Once the ECB moves away from rate "normalisation" as a discourse (as I feel it will now have to), and once we get into the area of possibile rate reductions again, then the global financial system will enter a "delicate moment", simply because what financial markets like best is a consistent story, and this is what we have been having, up to now. In the last few years everything has been all about relative yield and the search for the differential. But when we get a change in the "zeitgeist", then there is always the risk of increased problems, if for now other reason than that market participants don't really know how to respond. This, I think is the worry in the back of the Economist's Buttonwood's mind in the recent articles (here, and here). As he says in the most recent installment - Cold Turkey - "WHEN investors get twitchy, developing countries are usually the first to pay the price."
So what can the Latvian government do? Well beyond tightening up credit regulations (which it has already done, but there are limits to this process in an era of financial deregulation) and being more aggressive on the fiscal tightening side, there is precious little they can do. Obviously steps need to be taken to try and facilitate the return of some of those migrants who are in the UK and Ireland (mightn't some of the EU funding be better used for this purpose?), and evidently it would be very positive to follow in the initial footsteps of Estonia and open the labour market up to migrants from elsewhere (indeed they need to be actively encouraged to come, and not subtly resisted), and of course the underlying fertility situation which is fueling the problem needs to be addressed (once more a leaf can be taken from Estonia's book). But all these measures are longer term in nature. In the short term we now have little remedy but to sit it out and wait, and oh yes, to keep our fingers crossed that the current problems associated with the US sub-prime mortgage market don't turn into a globalised and general "credit crunch".
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