Why is the IMF sending $1bn to Belarus as the country is falling deeper into repression and authoritarianism? The short answer is that Belarus, together with 189 other countries, is a member of the IMF and the institution has decided to make a $650bn allocation of SDRs to its members in proportion to their quotas in the IMF. Belarus has a quota of 0.14 and will thus receive an injection of around $1bn to its reserves. In other words, this is not a decision to support the Belarus government as such but a general decision by the IMF members to support a global recovery after the Covid-19 pandemic. That said, it still means that the leaders of Belarus are given an asset worth $1bn that can be used without conditions, but the underlying reason to support the recovery in low- and middle-income countries still makes this palatable.
On August 2, 2021, the board of the IMF approved the largest-ever SDR allocation to its 190 member countries. Belarus is one of the members that, by this decision, will get a boost of reserve assets of almost $1 billion. This has raised the question in some circles of “why is the IMF giving money to Belarus”. This brief provides a short background on IMF SDR allocations; how this may be used by the autocratic regime of Belarus; and why the general SDR allocation still makes sense.
For most people, an IMF “SDR allocation” is just another mysterious acronym that means very little. Therefore, a short introduction to the concept is warranted. SDR is short for Special Drawing Rights and is the IMF’s own reserve asset and unit of account, with a value that was first linked to gold but is now based on a basket of other currencies (IMF 2021). More specifically, the value of the SDR is based on a basket that consists of the U.S. dollar, euro, yen, pound sterling, and Chinese renminbi (since 2016). Table 1 shows the amounts of each currency and the value of the SDR based on exchange rates for August 26, 2021. In short, on that date, 1 SDR was worth approximately 1.42 U.S. dollars. Since the cross-exchange rates in the basket vary over time, so does the value of the SDR (see Figure 1).
Table 1. The SDR basket
Figure 1. SDR valuation
The next issue is how SDRs are allocated among the IMF members. This is determined by the IMF’s Articles of Agreement and is done to provide reserve assets to its member countries. A new SDR allocation requires an 85 percent majority in the board to pass, and SDRs are then allocated to members based on their quotas. IMF quotas, in turn, are basically the stake the different member countries have in the Fund and are roughly based on the size of the economy of the country relative to other members. Since several countries joined the IMF after the general SDR allocations in 1981, a special allocation was done in 2009 to allow new member countries to join the SDR Department on more equal terms. There was also a large general allocation in 2009 during the global financial crisis and in 2021 in response to the COVID-19 pandemic (Figure 2). The latter one is by far the largest and given the exchange rate in Table 1, the SDR456.5 billion is equivalent to around $650 billion.
Figure 2. SDR allocations
The final issue to address in this section is why the SDR allocations matter at all. The answer is that SDRs can be exchanged for other currencies that, in turn, can be used to buy goods and services in international markets, including vaccines, other medical equipment, services, or food. When countries use the SDRs in this way, there is a cost in terms of the interest rate countries pay on SDRs. However, this interest rate is very low compared to other types of borrowing, so it is a cheap way of getting more foreign currency to spend (see Figure 3). In other words, for countries lacking access to foreign exchange at reasonable costs, the SDR allocation is a very welcome addition to their spending power.
Figure 3. Interest rate on SDR
Belarus and the IMF
Belarus became a member of the IMF in July 1992, shortly after the dissolution of the Soviet Union. Its quota in the IMF is SDR 681.5 million (or a share of 0.14 percent of total).
Belarus has had two IMF programs so far, the first in the early 1990s and the second in the wake of the global financial crisis in 2009. In the latter program, the IMF board approved a $2.5 billion loan “in support of the country’s efforts to adjust to external shocks” on January 12, 2009 (IMF, 2009a). The loan was then increased to a total of $3.5 billion in June 2009 (IMF, 2009b).
Despite the need for reforms and external funding, Belarus could not reach an agreement with the IMF on continued funding and instead repaid the loans to the Fund between 2012 and 2015. At the heart of this was the fact that for a country to get financial support in a regular Fund program, conditions will apply and will not always be stated explicitly, including on how to deal with human rights issues that are outside the Fund’s mandate. Therefore, the previous money from the Fund to Belarus was fundamentally different from the general SDR allocation described here, which is money without strings attached.
As the Covid-19 pandemic hit economies across the globe, Belarus approached the Fund in March 2020 to seek financial assistance. According to various reports, Belarus could not reach an agreement with the IMF due to conditions on how the pandemic was to be handled (IMF, 2020).
The new SDR allocation is however NOT subject to any conditionality but distributed to IMF members in proportion to their quotas. For Belarus, this means a new SDR allocation of 0.14 percent of the total SDR 456.5 billion, equivalent to around $900 million. As explained above, the SDR allocation can be exchanged for dollars, euros, or other currencies that can then be used to buy whatever the regime in Belarus likes. It could be vaccines, food, and medical equipment, but it could also be guns, ammunition, or tear gas to the security forces. In other words, this is money that can be spent in any way the government decides and the only price for this is a very small interest charge (see Figure 3) that comes with not keeping the SDRs as a reserve asset.
The IMF is a member institution with 190 countries that is governed by its Articles of Agreement. This dictates that a new general SDR allocation should be distributed to its members according to their quotas. New SDR allocations are rare but have been used before to handle global economic crises. The current SDR allocation is designed to help low- and middle-income countries to deal with the economic side of the Covid-19 by making more foreign exchange available at a low cost. Helping countries with limited reserves to deal with the crisis and ensure that they can secure imports of vital goods and services makes perfect sense. The fact that this general support in certain instances will go to regimes like the one in Belarus that we currently think do not warrant the support of the global community is unfortunate. In a perfect world, the IMF would be able to impose conditions on human rights and democracy for any type of financial support, but this is not the world we live in. Therefore, the conclusion is not to stop helping a global recovery but to do more to support the alternatives to autocratic regimes across the world with other instruments.
- IMF, 2020, https://www.imf.org/en/News/Articles/2020/09/10/tr091020-transcript-of-imf-press-briefing
- IMF 2009a, https://www.imf.org/en/News/Articles/2015/09/14/01/49/pr0905
- IMF, 2009b , https://www.imf.org/en/News/Articles/2015/09/14/01/49/pr09241 ).
- IMF, 2021, https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-Right-SDR
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Recent studies document that emerging markets are rather similar in their growth patterns despite profound differences in starting conditions and productivity fundamentals. This challenges the common view on productivity as the main growth engine. The crucial role of the external environment for emerging markets emphasized by numerous studies adds to this doubt. I argue that productivity fundamentals still matter and remain the core driver of sustainable growth. However, external factors are crucial for understanding deviations from the trajectory of sustainable growth, i.e. episodes of growth accelerations/decelerations.
Challenges for Understanding Growth in Emerging Markets
As we enter the 4th decade of economic transition in Central and Eastern Europe (CEE), the causes and directions of causality of long-term growth in emerging markets might need to be reconsidered. Some recent studies emphasize that growth trajectories in emerging markets are pretty similar, i.e. average growth rates do not differ too much, while jumps and drops in growth rates are synchronous for the bulk of emerging economies (e.g. Fayad and Perelli, 2014). For instance, a decade ago the level of GDP per capita (in 2011 international $) in Macedonia was roughly 45% of that in the Slovak Republic, which likely reflected the productivity (measured through the Global Competitiveness Index) gap between them. During the last decade, Macedonia has roughly closed this productivity gap. Growth theory would postulate that this should have transformed into faster output growth in Macedonia vs. Slovak Republic closing well-being gap. However, the two countries’ had throughout the decade roughly equal average output growth and the well-being gap today is still the same as it was ten years ago.
Such observations seem to conflict with existing theoretical views. First, this is a challenge to the well-being convergence concept that results from growth theory. Moreover, if we measure growth in terms of the speed of closing the well-being gap with respect to the frontier (the US economy), one may argue even for divergence. For instance, Figure 1 presents a scatter-plot for a sample of emerging markets relating the initial conditions – well-being level in 1995 (GDP per capita relative to one of the US economy) – and the average speed of well-being gap (vs. the US economy) closing throughout 1996-2017 (measured in p.p. of corresponding gap ).
Second, the evidence that productivity gains do not automatically trigger output growth challenges a common view that productivity is the major driver for sustainable growth.
Figure 1.Starting Conditions and Well-Being Gains
Source: Own computations based on data from World Development Indicators database (World Bank).
What are possible explanations for the observed similarity in growth rates of emerging markets?
A study by the IMF (2017) suggests a response: growth in emerging markets is similar and synchronous due to the external environment. This study emphasizes the crucial dependence of medium-term growth in developing countries on the following factors: growth of external demand in trade partners, financial conditions, and trade conditions. Moreover, it states that these factors are dominant in explaining the episodes of growth strengthening/weakening.
Does this explanation change the growth nexus for emerging markets? Can one state, that while external factors are crucial for growth and growth in developing countries is rather homogenous, the productivity gains are not so important anymore?
I would say no. First, for better understanding of growth patterns we must clearly compare the relative importance of productivity gains vs. external factors in affecting the growth schedule. Second, we must separate relatively short-term fluctuations in GDP growth from sustainable growth.
Detecting Relative Importance of Growth Drivers
To answer the question about the relative importance of productivity fundamentals and growth factors, I study a panel of 34 emerging market economies (EBRD sample netted from 3 countries for which the data is not available) for 11 years (2007-2017).
To evaluate the relative importance of productivity and external factors, I use a standard approach of running panel growth regressions with fixed effects. At the same time, I make a number of novelties in the research design.
First, for measures of productivity, I engage a unique database – Global Competitiveness Indicators by World Economic Forum (WEF). Although this database provides an insightful perspective on productivity fundamentals at the country level, it is rather seldom a ‘guest’ in economic research. From this database, I extract a number of individual indicators in order to detect which ones among them that have the strongest growth-enhancing effect. For an alternative specification, I use principal components of 9 individual indicators from this database as proxies for productivity gains.
Second, for external factors, I use an approach similar to the IMF (2017) and calculate variables representing external demand growth, trade conditions, and financial conditions (such as a measure of capital inflows) for each country. Moreover, in respect to external demand growth, I use different competing measures (based on either imports of GDP growth of trade partners) and choose the best one in each individual equation. By doing so, I allow this dimension of the external environment to be represented in each model to the largest possible extent.
Third, I depart from using output growth as the only measure of economic growth and response variable in growth regressions. I argue that for international comparison purposes it is worthwhile to consider also the speed of closing the gap towards the frontier (the US economy). On the one hand, this measure is strongly correlated with the traditional output growth rate. On the other hand, this measure, in a sense, nets out the growth rate of a country from global growth, thus capturing something more unique and peculiar just to individual countries’ gains in well-being. Furthermore, I argue that in the discussion about the factors behind growth, one should distinguish between relatively short and long term growth. Annual growth rates, especially at relatively short time horizon, are too dependent on fluctuations, which may be interpreted in terms of growth rate strengthening/weakening. However, to emphasize the property of growth sustainability, we should get rid of ‘unnecessary noise’. For this purpose, I also introduce a trend growth rate measured in a most simple way as the 5 year moving average (following the discussion in Coibion et al. (2017), show that the bulk of measures of ‘potential’ growth are not good enough to get rid of demand shocks and these measures are pretty close to simple moving average measures).
I apply this definition of trend growth both to ‘standard’ GDP growth rate and to the speed of closing the gap towards frontier. So, finally I have 4 response variables: ‘standard’ growth rate, the speed of closing the gap to frontier, and two corresponding measures of trend growth.
Sustainable Growth Mainly Depends on Productivity
Having short-term (annual) growth rate as response variable (either ‘standard’ or the one in terms of closing the gap) provides results close to those in IMF (2017). It may be interpreted in a way that the external environment is more important than productivity factors. If dividing all regressors into two broad groups of factors – external and productivity – the former is responsible for up to 70% of the growth effect, while the latter for about 30%. Among external environment factors, the most important one is financial conditions. Its relative importance is roughly 50% of the group of external factors’ total.
Among productivity fundamentals, an important contributor to short-term growth is the quality of the macroeconomic environment. According to the methodology of WEF (2017), this indicator encompasses the fiscal stance, savings-investment balance, the external position, inflation path, debt issues, etc.
When refocusing from short-term growth to the growth trend as a response variable, the relative importance of the factors behind growth changes. Productivity fundamentals in this case drive up to 80% of growth effect, while external factors are responsible for the remaining 20%. It is worth noting here that the proportion in favor of productivity factors is higher for the concept of closing the gap to frontier rather than for ‘standard’ trend growth rate. This evidence may be interpreted as additional justification for treating this measure of growth as ‘good’ at reflecting individual properties of a country in a global landscape.
Furthermore, the role of individual variables also changes. Among external factors, the most important role in driving sustainable growth belongs to trade conditions and external demand growth, while the role of financial conditions is either miserable or insignificant at most. Among productivity factors as drivers of trend growth, the quality of the macroeconomic environment seems to play a special role, as well as the efficiency of the goods market and the financial system.
The evidence showing rather similar and synchronous growth in emerging markets and recent evidence on the crucial importance of external factors for emerging markets should not lead us to incorrectly believe that productivity fundamentals do not matter anymore. Productivity fundamentals are still the core driver of sustainable growth. At the same time, we should keep in mind the important role of the external environment for emerging markets. However, changes in the external environment are more likely to generate relatively short-term growth rate fluctuations, while having a modest impact on the sustainable growth trajectory. Hence, a country aiming to secure sustainable growth should still first of all think about productivity fundamentals.
- Coibion, O., Gorodnichenko, Y, Ulate, M. (2017). The Cyclical Sensitivity in Estimates of Potential Output, National Bureau of Economic Research, Working Paper No. 23580.
- EBRD (2017). Transition Report 2017-2018, European Bank for Reconstruction and Development, London, UK.
- Fayad, G., and Perelli, R. (2014). Growth Surprises and Synchronized Slowdown in Emerging Markets—An Empirical Investigation, IMF Working Paper, WP/14/173.
- IMF (2017). Roads Less Traveled: Growth in Emerging Markets and Developing Economies in a Complicated External Environment, in IMF World Economic Outlook, April, 2017, pp. 65-120.
- World Economic Forum (2017). The Global Competitiveness Report 2017-2018, Geneva: World Economic Forum.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
It’s increasingly being acknowledged that gender inequality is not just a human rights issue, but of first order importance for economic development. It is also an issue of high priority for the Swedish government, with the feminist foreign policy gaining a lot of attention worldwide. This policy brief shortly summarizes presentations held during a full day conference at the Stockholm School of Economics on June 1, 2018. The event focused on how gender discrimination negatively impacts the productivity of low and middle income economies, but also how reforms and specific initiatives can better the situation. The perspective was both long term, how norms and laws governing women’s rights have evolved over time, and short term, illustrating the current challenges women and societies face, with a particular emphasis on the situation in Eastern Europe. This was the 7th installment of SITE Development Day – a yearly development policy conference organized with support from the Swedish Ministry for Foreign Affairs.
From Research: Causes, Costs and Remedies
Cross-country differences in gender equality are often explained by variation in formal institutions such as laws and policies, and informal institutions such as social norms, religion and culture. A recent literature has focused on understanding the underlying drivers behind the variation in gender norms, arguing that these norms themselves may be functions of predetermined fundamentals such as geography, language and external shocks such as wars, revolutions or the slave trade. An influential line of research has emphasized that certain agricultural conditions have given prominence to technologies that require more muscular strength (the plow), whereas in shifting agriculture, hand-held tools like the hoe and the digging stick, require less upper body strength, are more labor intensive and easier to combine with child care. The former conditions are therefore associated with a stricter gender division of labor that generated a norm that the natural place for women is in the home. That these differences still linger have been empirically shown looking at cross-country variation in outcomes such as female labor force participation, political representation, inheritance rules, polygamy, parental authority and women’s freedom of movement. The variation is also found among second generation immigrants, where the attitudes from the parents’ ancestry are reflected also among those born and raised in western societies with more equal gender norms.
There has been an increasing emphasis on trying to estimate how gender inequality inhibits economic development, and to put numbers on the foregone economic development and growth from continuing inequality. A key indicator of inequality in this respect is the gender gap in labor force participation. There has been progress globally in this respect, but we are still far from equality and outcomes vary dramatically across regions and countries. Traditional approaches to estimate the benefits of increased female labor force participation (flfp) has assumed perfect substitutability between men and women. New evidence suggests that this may not be true, that men and women are complementary, which implies that increased flfp increases production beyond just the fact that more people are put to work. This also means that more women in work increases the productivity of men, in other words a win-win situation. This complementarity effect can take place at the workplace (think of diversified company boards), but recent research suggests that this is particularly true at the macro level. This is likely because men and women tend to work in different sectors and occupations that are themselves complementary, yielding the additional benefit at the macro level. Estimates of welfare gains of eliminating barriers to female labor force participation to levels seen in the US, suggest improvements of on average 22 % in South Asia and 18 % in the Middle East and North Africa region.
One important policy tool to influence gender outcomes, and sometimes also gender norms, is tax and benefits policy. These sets of policies are almost never explicitly gender biased, but the impact of details of policies in areas such as inheritance law, parental leave, pensions and taxes all affect the incentives that men, women and couples face. It is also important to understand that these policies often operate in an environment that is far from being without a gender bias, suggesting that there may be motivation for government intervention to correct outcomes and also lead the way to slowly change norms. As models of household decision-making suggest that partners may not operate as a unitary actor maximizing joint welfare, and women typically have lower bargaining power within the household, policies that leave discretionary power to the couple may lead to highly unequal outcomes. Instead policies may need to be individualized, such as tax policy and parental leave policy.
The conference also contained a panel specifically focusing on Eastern Europe. The communist legacy meant that these countries, in some dimensions such as flfp, started from much more equal levels than other countries at comparable levels of income in the 1990s. The most immediate gender crisis in some ways was on behalf of men, whose life expectancy dropped dramatically. This crisis for men also created externalities in the form of domestic violence and orphaned children. Since 1990, there has therefore been some reversals in gender outcomes, and in some areas, such as political representation, the region on average performs quite poorly. Individual countries also face very different challenges. In Georgia the sex ratio at birth increased dramatically in the 1990’s as economic hardship and conflict coincided with the introduction of new technology to determine the sex of a child in utero. In Belarus inequality strikes both ways, with men having more than 10 years lower life expectancy, have higher retirement age and are drafted to military service. On the other hand women are under-represented in politics and largely responsible for unpaid homework, partly due to a very generous 3 year-long paid maternity leave policy. The tradition of bride kidnapping in parts of Central Asia (as high as 10-25 % of women in parts of rural Kyrgyzstan) was brought up, and research showing birthweight losses of children to kidnapped mothers equivalent to those measured elsewhere in conflict zones (100-200 g) suggest that this is indeed a real violation of these women.
To Action: Policies for gender equality
The SDG 2030 agenda and the concurrent finance for development process both emphasize the importance of having all sectors of society onboard in the quest of achieving the new development goals. The event therefore included representatives of both the private, public and civil societies, and featured a range of different initiatives across these sectors. A sector in which many women work for foreign companies in developing countries is textile. Here foreign companies can lead the way through initiatives beyond direct wage and employment policies that improve women’s welfare, such as information campaigns devoted to personal hygiene or policies that transfer salaries directly to the personal account of the employees (an approach that matters when there is unequal bargaining power within the household, as shown through research). Also initiatives to reduce harassment and support female careers can make a difference. A sector on the other side of the spectrum is the telecommunications sector, which is very male dominated. This bias typically start from an early age, and is reinforced by gender stereotypes. Active work in the community to early on reaching out with tech programs explicitly targeting girls can make a difference, and so can making people aware of unconscious biases.
Aid agencies and NGOs also play an important role in promoting gender equality in partner countries. Research shows that women in relative terms tend to spend resources in ways that benefit the family more, and discrimination can be counteracted through policies specifically targeting women and trying to strengthening their situation both outside and inside the household. Initiatives that give women access to credits, and foster collective action and political engagement have been tested on large scale in for instance India. Aid financed investment funds target female entrepreneurs, and engage in programs to integrate women into the investment process. Investors also have the leverage to stress the importance of partner companies investing in their female employees, for instance though education, safe transportation and separate changing rooms. A major player like Sida can engage in a dialogue also with partner governments to incentivize them to live up to commitments made in conventions and treaties, but also empower change agents that can put pressure on patriarchic structures. In the health sector, priority is given to sexual and reproductive rights, but beyond targeted interventions it is also important to mainstream a gender perspective into all types of projects and programs. It’s acknowledged that measuring impact is a challenge, and some partners are perceived as more receptive than others, but the perception is that attitudes are changing.
A Government Perspective
From the Swedish government’s side it was emphasized that gender equality is a goal in itself, as well as a prerequisite for economic development. The by now well-known feminist foreign policy is based on three R’s: that all women and girls should have access to rights, representation and resources. The policy is backed up by an action plan with clearly expressed goals in areas of peace and violence, political representation, economic empowerment and sexual and reproductive health rights. These goals will be evaluated for results (a fourth “R”) and, due to international demand, the foreign ministry is currently preparing a handbook for feminist foreign policy to document the process and the lessons learned. In the collaboration with Eastern Partnership countries, gender equality became part of the summit declaration in 2015. There’s an increasing willingness to talk about gender in the partnership countries, but many challenges remain, as also exemplified by recent experience from working in the government of Ukraine. Swedish initiatives are often a catalyst for change, though, with EU politicians and administrators slowly following pace. It was emphasized that to argue for the case of women and girls, data and research is crucial, so the FREE initiative to create a center of excellence in gender economics (FROGEE) was received with much appreciation.
To get more information about the presentations during the day and references to the data and literature discussed above, please visit this page.
Participants at the conference
- Ann Bernes, Ambassador for Gender Equality and Coordinator of Sweden’s Feminist Foreign Policy, Ministry for Foreign Affairs.
- Raphael Espinoza, Senior Economist, IMF.
- Paola Giuliano, Associate Professor of Economics, UCLA, Anderson School of Management.
- Michal Myck, Director at CenEa, Poland.
- Anna-Karin Dahlberg, Corporate Sustainability Manager at Lindex.
- Richard Nordström, General Director at Hand in Hand.
- Karin Kronhöffer, Director Strategy and Communication at Swedfund.
- Anne Larilahti, VP Head of Sustainability Strategy at Telia.
- Jesper Roine, Deputy Director, SITE.
- Charles Becker, Research Professor of Economics, Duke University.
- Tamta Maridashvili, Researcher, ISET-PI, Georgia.
- Lev Lvovskiy, Research Fellow, BEROC.
- Elsa Håstad, Director at the Department for Europe and Latin America at Sida.
- Inna Sovsun, Vice President at Kyiv School of Economics (KSE), Ukraine.
- Anna Westerholm, Sweden’s Ambassador for the EU Eastern Partnership.
- Carin Jämtin, Director General at Sida.
- Torbjörn Becker, Director at SITE.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Latvia’s government is zealously preparing for accession to the Euro Zone. Prime Minister Valdis Dombrovskis is expected to request the European Central Bank (ECB) and European Commission (EC) prepare their respective convergence reports on Latvia’s readiness to enter Economic and Monetary Union (EMU) within the next two months. The expectation is that Latvia will join on 1 January 2014. Indeed, the three-party coalition government has long been readying for the technical changeover to the euro. The Cabinet of Ministers adopted a detailed national euro changeover plan in September 2012 and appointed a high-level steering committee to manage the process. The government has launched a controversial multi-million euro advertising blitz aimed at winning over Latvia’s skeptical public. Parliament passed the law on euro adoption in a 52-40 vote on 31 January 2013.
What could possibly go wrong? Although unlikely, a referendum or the collapse of the Dombrovskis coalition government could yet derail Latvia’s euro ambitions.
Latvia and Europe
All Latvian governments have steered a steady pro-Western course in the two decades since the fall of the Soviet Union. International recognition was followed by membership of the Council of Europe, World Bank and the other minor and major international organizations that make up the international community. However, the big attractions were the Western clubs – NATO and the European Union. Membership of both was achieved in the two ‘big bang’ enlargements of 2004. In all the giddy excitement of finally joining the Western world and seemingly slipping away from Russia’s bear-hug, Latvia initially aimed to quickly join the Euro Zone, setting a target of 1 January 2008.
However, the government proved half-hearted in its efforts, preferring to enjoy the low-hanging fruit of a cheap credit-driven booming economy rather than balance the budget. Both government and public entered a period of rabid consumption and spending that resembled nothing so much as sailors in a pub after a year at sea. Unsurprisingly, Latvia rapidly slipped far away from meeting the Maastricht criteria on inflation. Accession to the Euro Zone was quietly dropped from the political discourse.
However, euro adoption returned as a frontline government initiative after the dramatic economic collapse of 2008, and the advent to power of Valdis Dombrovskis, the Baltic Angela Merkel. Dombrovskis will soon have been in power for four years, a lifetime in Latvian politics where, prior to Dombrovskis, the average prime minister served for less than a year. He has overseen harsh austerity measures of tax hikes and spending cuts, but remains surprisingly popular (not least because his party was in opposition during the post-2004 economic bubble years). He has twice been re-elected to office, proving once again that Latvians favour monochrome technocrats over colourful populists.
Despite a return to growth (in 2012 Latvia recorded the highest GDP growth in the EU), the government has maintained tight control over spending. Indeed, it has even perhaps been over-zealous, with both the IMF and EU recently chipping in with criticism of the social spending cuts that Latvia has made to its 2013 budget. Nevertheless, Latvia is now applauded as a model of austerity and frequently used as a positive contrast to Greece.
Moreover, Latvia is now on the cusp of meeting the Maastricht criteria for accession to the Euro Zone. A January 2013 IMF staff report argued that Latvia meets the public debt and budget deficit criteria, although inflation and interest rates may be a hurdle depending on the EU member states used for the reference value calculation (will Greece be treated as an outlier?). The informal political signals from both the EC and ECB are clearly positive. However, euro accession could still be derailed by either a referendum or a change of government.
Let the People Decide?
The biggest potential hurdle remains the threat of a public referendum. The EC and ECB will not contemplate Latvia’s accession to the euro zone with the Damocles Sword of a referendum hanging over the process. Moreover, public support for the euro remains low, with just 8% of the public wanting the euro introduced quickly and 41% being absolutely opposed to the currency. A vote would be a real throw of the dice.
A citizen’s initiative aiming to delay euro adoption, by demanding a vote on the timing of accession, was submitted to Latvia’s electoral authority (by the awkwardly named Latvia’s Social Democratic Movement for an Independent Latvia, a fringe party that has never been elected to parliament) in late 2012. The Central Election Commission must make a final decision on whether to allow the initiative to go ahead by February 3. However, the legal opinions provided by scholars, the Latvian ombudsman’s office and the Latvian parliament’s legal advisers indicate that the initiative is likely to be rejected because:
- Latvians effectively voted to join the euro when voting on accession in 2003;
- The Council of Ministers is the only institution authorized to choose the date of accession to the euro zone, thus any initiative specifying a date (or conditions that need to be met) is not legal;
- The text of the initiative conflicts with the constitution.
While the ruling could be challenged in Latvia’s Constitutional Court or a reworded initiative submitted to the Central Election Commission, the weight of the legal opinions already delivered indicates that these efforts would be unlikely to succeed. At worst, the uncertainty could delay euro adoption past January 1, 2014 (and the Latvian legal system can certainly be ponderous at times). The same is true of any parliamentary attempt to initiate a referendum by having a one-third minority of deputies force the president to sit on the euro adoption law while citizens sign an initiative. Indeed, legal opinions cited by the President state that because euro introduction is a treaty obligation, a majority of parliamentarians (51 of 100) would need to sign any initiative attempting to call a referendum. The opposition will not be able to rustle up a majority of parliamentary deputies (although the legal haggling could delay the date of euro adoption).
The other risk is a collapse of the government coalition. While the Reform Party and the prime minister’s Unity Alliance are firm supporters of euro adoption, the third coalition member – the radical right populist National Alliance is more torn. Its rank and file membership is largely against the euro, primarily for nationalist reasons (they see the Latvian Lat as a symbol of sovereignty and national identity). One NA parliamentarian even broke coalition ranks and voted against euro adoption. A motley conglomeration of far right radical groups and nationalist intellectuals has begun speaking out against the ‘commercialization’ and ‘westernization’ of Latvia, and sees the euro adoption battle as the opportunity to draw a final line in the sand. They are likely to put the National Alliance’s ministers and parliamentary deputies under severe pressure.
Indeed, the National Alliance already played the ‘euro card’ in November 2012, successfully extracting budgetary concessions for pet projects from Prime Minister Dombrovskis. They may well play it again, as they seek a greater number of ministerial portfolios. However, as Dombrovskis pointed out, opening up of the coalition agreement could well lead to the collapse of a government already creaking at the edges.
Conclusion: After Dombrovskis
There is strong political resolve to lever Latvia into the Euro Zone. Moreover, the unusual confidence emanating from both government officials and the Bank of Latvia indicates that certain reassurances have been made in Brussels and Frankfurt. Indeed, Latvia’s glowing current reputation as the poster child of austerity gives it a once-in-a-decade political momentum. Latvia’s entry into the euro on schedule on January 1, 2014 is more likely than not.
However, looking to the future, one pertinent question needs to be addressed. Which Latvia will we see in the Euro Zone? The grey, serious, disciplined almost Teutonic Latvia of Valdis Dombrovskis? Or the reckless drunken sailor, that has marked much of Latvia’s post-communist era?
Naturally, Dombrovskis holds the key to this question. He is expected to leave domestic politics after the October 2014 parliamentary election, probably to cash in his international political capital with a well remunerated European post (the timing is right for a 2014-2019 European Commissioner portfolio). At best, if re-elected, he might be persuaded to stay on to oversee Latvia’s presidency of the European Union in 2015. In any case, while Latvia has been reborn as a paragon of economic virtue under his watch, these assets have not been institutionalized. Dombrovskis will leave behind the same old fractured, frail and quarrelsome parties, politicians and oligarchs that he inherited. Recent international criticism of disequilibrium in government welfare and tax policies hints that political backsliding has already begun.
Latvia is at its strongest when its political, economic and administrative elite units in pursuit of some concrete target. Independence from the Soviet Union, then NATO and EU accession, followed by harsh austerity measures and now even Euro Zone accession were achieved far quicker than many observers had believed possible. International conditionality has made up for the absence of ideology and ideas as moral and political compasses in Latvian politics. However, when left to their own devices, Latvian politicians have tended to run amok. After Latvia enters the Euro Zone it will be left without an all-encompassing political plan. Quite frankly, that is rather worrying.
- Aslund, Anders (2013) ‘Why austerity works and stimulus doesn’t’.
- DNB Banka (2012), ‘Latvijas Barometrs: Eiro ieviešana Latvijā’.
- Eglitis, Aaron (2013), ‘EU joins IMF in criticizing Latvian cuts to tax, social spending’. Bloomberg news.
- IMF Staff Report No. 13/28 (2013). Available at: http://www.imf.org/external/np/sec/pn/2013/pn1311.htm
- Pettai, Auers and Ramonaite (2011), ‘Political Development’ In Marju Lauristin (ed.), Estonian Human Development Report 2010/2011: Baltic Way(s) of Human Development: Twenty Years On. Tallinn: Eesti Koostoo Kogu. 144-163.
- Swedbank (2012). ‘Fulfilling the Maastricht Criteria – mission possible for Latvia and Lithuania?’.
 See the Latvia euro changeover site. Available at: http://www.eiro.lv
 Pettai, Auers and Ramonaite (2011), ‘Political Development’ In Marju Lauristin (ed.), Estonian Human Development Report 2010/2011: Baltic Way(s) of Human Development: Twenty Years On. Tallinn: Eesti Koostoo Kogu. 144-163.
 Aaron Eglitis (2013), ‘EU joins IMF in criticizing Latvian cuts to tax, social spending’. Bloomberg news.
 Anders Aslund, an ardent cheerleader of Latvia’s austerity programme, puts the country’s success down to ‘front loading’ reforms, particularly fiscal adjustment . See Anders Aslund (2013) ‘Why austerity works and stimulus doesn’t’.
 IMF Staff Report No. 13/28 (January 2013). Also see Swedbank Analysis (1 August 2012). ‘Fulfilling the Maastricht Criteria – mission possible for Latvia and Lithuania?’
 Although another 42% had a positive attitude towards the euro, but did not want to see it hurriedly introduced. See DNB Banka (November 2012), ‘Latvijas Barometrs: Eiro ieviešana Latvijā’.
 The legal opinions can be found on the Central Election Commission’s homepage.
 See Article 1, paragraph 3 in the law on referendums and initiatives.