19 Nov 2015

Measuring Policy Success: Latvia's Recovery from the Financial Crisis

Olivia writes*

Scholars and politicians have criticized the widespread use of and goal-setting through a country's GDP, yet it still happens. One such example is the case of Latvia's recovery after the financial crisis of 2008: while Latvia is hailed as a success, the economic growth does not tell the whole story, and other indicators are often overlooked in the discussion. I want to add some nuances to the discussion of Latvia's austerity measures in this blogpost – but let's start at the beginning.

When its economy was hit severely by the 2008 financial crash, Latvia turned to the IMF and the European Union for support. Latvia agreed to austerity measures – mainly fiscal policies, cutting down on social benefits and reducing the size of the public sector – to bring its economy back on track. When GDP soon started to grow again, Latvia was hailed as a success: it provided proof that the widely criticized austerity could work (see graph below).

Data from World Bank

However, looking at Latvia's GDP cannot be enough to mark it as an example of austerity success. Critics of the success-story have raised two main concerns. First, comparing the economic indicators beyond country level shed a different light on Latvia. For example, Mark Adomanis compares Latvia to its neighbor Russia – and typical economic indicators like GDP and unemployment show that actually Russia has performed better than Latvia since the economic crisis. This should already raise concern about the media's definition of success, but there is another interesting point in Latvia's story: the population.

Data from World Bank

Latvians have been leaving their country. While several critics pointed this out, the overall population decrease might not be related to the crisis specifically: the world bank data above shows that the trend started before 2008. The economy and the austerity measures are most likely not the reason why the population is declining overall. Yet a part of the trend was set off in 2008: the decline in labor force (see graph below). While after the economic crisis, GDP has grown again, unemployment rates have improved, and so on, the labor force has consistently decreased. These data give reason to think beyond economic growth when measuring policy success: the decline in labor force does not only distort widely used data (such as the percentage of unemployed people or GDP per capita), but adds another dimension to the effects of Latvia's austerity policies. Latvia should only be hailed as success, when the population trends agree with this statement.

Data from World Bank

Bottom Line: When discussing the success of austerity measures, economic growth might be the goal - but policies should not be hailed as success when some indicators tell a different story.

* Please comment on these posts from my growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.