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Latvia's Internal Devaluation: A Success Story?

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  • Mark Weisbrot
  • Rebecca Ray

Abstract

Advocates of an economic strategy of “internal devaluation” have recently pointed to Latvia as an example of successful macroeconomic policy. The Latvian economy is projected to grow by four percent in 2011. They argue that the Latvian government, along with the European authorities (including the International Monetary Fund ­ IMF), pursued the correct macroeconomic policies by maintaining Latvia’s fixed exchange rate and implementing pro-cyclical fiscal policies (that shrunk the economy further) and sometimes pro-cyclical monetary policies. They argue that these were the best policies ­as opposed to counter-cyclical, expansionary fiscal and monetary policies, accompanied by devaluation­ designed to promote a rapid economic recovery. The data, however, contradict the notion that Latvia’s experience provides an example of successful internal devaluation. This paper looks at the Latvian case and provides further evidence that this can be a very costly strategy and one that does not work. The social and economic costs in Latvia were enormous, and the loss of income much greater than most countries that had crisis-driven devaluations. Countries with crisis-driven devaluations also recovered vastly faster, on average, than did Latvia. Furthermore, net exports contributed little or nothing to Latvia's recovery, which seems to have been facilitated instead by the abandonment of pro-cyclical macroeconomic policies.

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Bibliographic Info

Paper provided by Center for Economic and Policy Research (CEPR) in its series CEPR Reports and Issue Briefs with number 2011-25.

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Length: 19 pages
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:epo:papers:2011-25

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Keywords: latvia; europe; devaluation; procyclical; countercyclical; imf;

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References

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  1. Anders Aslund & Valdis Dombrovskis, 2011. "How Latvia Came through the Financial Crisis," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 6024.
  2. Mark Weisbrot & Rebecca Ray & Juan Montecino & Sara Kozameh, 2011. "The Argentine Success Story and its Implications," CEPR Reports and Issue Briefs 2011-21, Center for Economic and Policy Research (CEPR).
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Blog mentions

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  1. Un débat et un dialogue
    by Alberto Bagnai in Goofynomics on 2014-03-04 21:11:00
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Cited by:
  1. Brigitte Granville & Dominik Nagly, 2013. "Determinants of relative bargaining power in monetary unions," Working Papers 47, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
  2. Kapitsinis, Nikolaos & Metaxas, Theodore, 2011. "Economic crisis and the role of state policies in current globalized economy. The case of Greece," MPRA Paper 43650, University Library of Munich, Germany.
  3. Brigitte Granville, 2013. "The Current Eurozone – an impediment to critical French reform," Working Papers 42, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
  4. Howard Stein, 2012. "The Neoliberal Policy Paradigm and the Great Recession," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 59(4), pages 421-440, September.
  5. Brown, Martin, 2013. "The transmission of banking crises to households : lessons from the 2008-2011 crises in the ECA region," Policy Research Working Paper Series 6528, The World Bank.

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