For the critics

Although internationally austerity measures taken in Lithuania (Latvia and Estonia)  was hailed as a good example of crisis management( Paul Krugman and Christine Lagarde praised the austerity measures in three Baltic states) many people I know, who take  keen interest in economics,  disagree with such statements. In their view years of economic indiscipline, which preceded the crisis and the tought years that followed are all products of flawed government policies. For example critics often point at inability to cope with budget and trade imbalances as a reason for financial default, however I don’t believe this judgment is entirely valid. In my view, broader social factors contributed to the severity of recession.

Lithuania before the financial collapse was a rapidly developing economy, very dependant on international capital inflows. Source 1 clearly illustrates that in the boom years borrowing from abroad was getting out of hand, however government responded by attempting to restrain credit growth unfortunately it failed and in 06 an 07 deficit continued to increase. I believe policies were ineffective simply because public refused to comply with them. At the time Lithuanians were very optimistic about the future. Property boom, which started in 2000 and the excessive borrowing clearly indicate that. Consequently, enormous trade deficit put Lithuania into vulnerable position making it unprepared for impending financial shock, although certain measures were taken to improve the situation public refused to support them.

Source 1: Eurostat

Staehr-Fig2

In 2009 New york times published a tear jerking article on the effects of fiscal consolidation in Lithuania. In it multiple citizens shared their stories how tax increases and spending cuts are pushing them into despair.  Compare these terrible experiences to those of Estonians. In their country government managed to balance the budget with limited effects on the domestic life of its citizens. This is another example critics like to use to stress the fact that austerity measures in Lithuania were ineffective considering the negative effects they had on society and the fact that Lithuania unlike Estonia failed to reach the desired balance  as illustrated by source 2. I disagree with this point. It would be wrong to put a blame on austerity measures when broader social factors like corruption and tax evasion played a role in undermining the budget.

Source 2:Eurostat

Staehr-Fig5

it is no secret that this country is plagued by corruption, various international organizations (like transparency international) rate Lithuania among the worst cases in European Union. How does it affect our budget?  Bribery or fraud reduces revenue and funds available to the government. K S Kibet in his article established private investment equation, which indicates that increase of budget deficit taking high corruption into account leads to decrease in private investment, suggesting that if corruption decreased there would be more funds available to the private sector, this would lead to more public resources and finally less pressure on the budget. Reported cases of corruption increased during the crisis( according to European Research Centre)

Finally,I mentioned tolerance towards taxation as an issue. Lithuanians always complain about having to drag around enormous tax burden, naturally some  refuse to bother and simply choose to evade tax payments. This fact is reflected in statistics, according to source 4 Lithuanians and Latvians cheat more compared to citizens of Estonia.

Source 4: European Values Study 2008

12-241e177c26

To conclude, I do not resent austerity measures taken in Lithuania, from economic point  of view government more or less did what it had to do, but it was not enough in the face of mounting social pressures like increasing corruption, tax evasion during the crisis and reluctance to comply with more restrictive measures during the boom years. In my view these problems made recession worse by stopping the attempts to improve the situation.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s