Why is Latvia becoming a «third world» country? 5 myths about Latvia’s economy

LATVIA – Economy

Every day the inhabitants of Latvia become poorer and poorer. We are asked to save money, to tighten our belts, and various reasons are given for this. Are they really such reasons? Or are they just myths? And what is the prognosis for the near future?

Andrejs ŽDAN is the head of the meat processing company Forevers, one of Latvia’s three largest producers, which, like all Latvians, has felt the crisis.

Why is Latvia becoming a «third world» country? 5 myths about Latvia's economy
Andrejs ŽDAN. Photo by bb.lv
MYTH №1. Salvation from poverty is in compensations

— We are living in times of record inflation, which in Latvia is comparable to Third World countries like Afghanistan, Nigeria and Rwanda. As a result we have all become poorer, except for those who sell gas and electricity, says Andrej Ždan.

Money is devaluing. The states are handing out ‘helicopter money’, increasing foreign debts, creating programmes of support and compensation for energy carriers and so on. But you have to realise that you have to pay for all of this. Including for the actions of other governments, for their ‘helicopter money’, which we did not get, but which pushed our inflation to record levels. Moreover, we are already paying an inflation tax for all these actions in the form of a depreciation of money. The money supply is growing in the economy, but there is no shortage of goods and services.

In addition, there is the so-called «inflationary expectation» effect, in which producers and sellers are forced to play it safe and build the risk of further price increases into their pricing plans. Thus, it turns out that the cost of goods has not yet risen, but the price is already rising.

PROGNOSIS: Because of inflation, price rises over the next 2-3 years will far outstrip income growth. It looks like money will continue to depreciate. I doubt that the EU and Latvian authorities will be able and willing to reduce inflation to a normal 2-3% level. I assume that the EU authorities will print new money to finance support programmes, compensations, etc. I think the EU authorities benefit from having an inflation tax. It is a hidden tax to discreetly increase tax revenues and devalue governments’ debts.

MYTH №2. Increased energy prices are to blame for all the woes

— Judging by energy prices, it seems that the EU authorities have built speculative rather than market-based mechanisms for buying and selling energy. While there might be an explanation for gas, I don’t think there is any explanation for electricity prices. Have we started to consume significantly more electricity and there has been a terrible shortage? No! Have the costs of generating electricity increased by 5-10 times? No! What is the fundamental difference between gas and electricity and oil, sausage, pork, salt, sugar, petrol, buckwheat? Nothing! Wasn’t there once a shortage of any of these products? There was! Were the prices going up 5-10 times? No! Is rising energy prices speculation? Yes! Is it market pricing? No! Who benefits from the current situation? Producers? Maybe, but not all. But speculators who resell energy products do!

I have a very good attitude to market relations, I think they have not invented anything better yet. But what is happening to the cost of energy is speculation, which is destroying market mechanisms.

PROGNOSIS: If energy prices do not fall substantially in the near term, it will push prices up. For example, our company has only offset a small part of the increase in energy costs in the price of its products; we have offset the rest with our profits. I assume that the other producers did the same.

No one can or will work in survival mode for a long time, compensating for the entire increase in costs at the expense of their profits. Some will have to withdraw from the market or reduce production volumes.

MYTH №3. EU authorities will intervene in the market and save us

— The great economist and Nobel laureate Milton Friedman wrote about the enormous damage done by politicians and bureaucrats at the expense of unnecessary regulation. Regulation is for the regulator, not the market and consumers. The market and consumers can work it out for themselves, without politicians or bureaucrats. Mention should also be made of the warnings of Friedrich von Hayek, another great economist and Nobel laureate, against excessive government intervention and socialist ideas, in his book The Road to Slavery. The book’s title speaks for itself.

PROGNOSIS: It seems that market mechanisms in Europe are already distorted and will continue to be distorted.

Why is Latvia becoming a «third world» country? 5 myths about Latvia's economy
MYTH №4. We pay exorbitant taxes

— This is not a myth, it is the truth. We pay a lot of direct and indirect taxes, often much more than in countries with a higher standard of living. For instance, the total amount of all taxes paid by a Forevers company is in the range of 1.1-1.3 million Euros a month, that is 13-15.5 million Euros a year. Generally speaking, it does not matter how much you pay. It does matter what you get for your taxes. In Latvia, the ratio of taxes paid to what we get in return in the form of quality education, medicine, security, urban infrastructure, etc. is heavily unfavourable to taxpayers.

In fact, medical care has become fee-for-service. The size of pensions is better left unmentioned. The quality of education is not up to date. Urban infrastructure in Riga, especially on Granīta Street, where our company is located, is simply non-existent. There are no pedestrian crossings, no street lighting and no pavements. There are many large taxpaying businesses on this street. It seems strange to me that having received several billion euros in taxes over the years of existence of these enterprises, the state cannot allocate 0.02-0.03% of the taxes received to ensure basic conditions. We have applied to Riga City Council many times. They came to us, looked at us, agreed, but… nothing has changed!

PROGNOSIS: If taxpayers continue not to get for their taxes what they are entitled to – infrastructure, grants, well-functioning state institutions, etc. everything that ensures good quality of life for people and attractive business environment for entrepreneurs it will inevitably prompt people, especially young and economically active ones, to leave Latvia for countries that can ensure it.

MYTH №5. The government has to intervene in a crisis situation

— It seems that the EU and particularly Latvian authorities are now turning towards socialist ideas about state intervention in market processes. As we know, the state is a bad steward.

Libertarians have an expression: «The state is the night watchman». This means that the function of the state should be limited to providing its citizens with an army, police and courts. It is a function to protect against fraud, arbitrariness, breach of contracts and obligations. As well as ensuring external security and the existence of fair competition.

Personally, I am in favour of the libertarian approach. However, it is clear that in wars and crises, the state must intervene to mobilise resources that business will never be able to mobilise. These are the ideas of the great economist Keynes.

But Keynes spoke of an active and intelligent involvement of the state in stimulating the market economy and was against socialist ideas in market relations.

PROGNOSIS: In fact, there is a possibility of state intervention in the market process. But if it is to intervene, it must be in large infrastructure projects which ordinary businesses simply cannot afford.

Data source: bb.lv

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