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"Wall Street Journal" prints Pavluts' article opposing Krugman's view on Latvia's economic recovery

Daniels Pavluts. Photo: Edijs Palens.
 RIGA, Nov 23 - Today, the influential international business newspaper "The Wall Street Journal" published an article by Economy Minister Daniels Pavluts in which the minister opposes the economist Paul Krugman's opinion that Latvia's economic recovery cannot be considered a success story since the country's gross domestic product has not yet returned to the pre-crisis levels.
Pavluts points out that critics like Krugman challenge the foundations of Latvia's success. They assert that because Latvia's GDP is still 10 percent below its pre-crisis peak, the country's recent policies cannot be deemed a success.
"This criticism relies on the wrong benchmark. Latvia's supercharged growth in 2005-2007 was not representative. Massive inflows of cheap money worked as a performance-enhancing drug for our small and open economy. The result was full employment and windfall revenue for the state budget - and a real-estate bubble," explains the minister.
"During this period, wage and real-estate price growth peaked at around 40 percent annually, the current account deficit exceeded 20 percent of GDP, and inflation reached 18 percent. The economy overheated rapidly, with growth driven by domestic consumption and wage increases. Investment flowed into non-tradable sectors such as real estate, retail and internally consumed services, while manufacturing output and export revenues increased slowly. With the financial crash, credit stopped, the consumption bubble burst, and trade fell, pushing our economy into freefall," adds Pavluts.
Since then, smart austerity has effected a structural change in the Latvian government. Between 2009 and 2010, the number of state agencies was reduced to 97 from 148. The number of government employees has been cut by 24 percent since 2008, and government wages have been slashed by 30 percent. State-owned enterprises are better-governed, and with less political interference.
Other changes target private sector growth. Red tape has been strongly reduced for businesses and public administration. Incentives were introduced for entrepreneurship and employment, including relief on corporate income tax for certain businesses and faster refunds for value-added tax. Generous support has also been made available for business start-ups and development, employee training and export promotion.
"Unlike the boom that ended in 2007, Latvia's current economic growth is based on healthy diet and exercise, not steroids. I do not claim that policies that worked in a small and open economy such as ours will necessarily work in other countries. Flawed growth and austerity policies will fail everywhere. But smart policies that include elements of both growth - setting correct incentives - and austerity - getting rid of wrong and excessive spending - were a success beyond doubt in Latvia," writes Pavluts.
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