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Ahem! "Lessons from Latvia" Blogging

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Olivier Blanchard:

Lessons from Latvia: Os it a success?  The economic and social cost of adjustment has been substantial.  Output further contracted by 16% in 2009, and is still 15% below its 2007 peak.  Unemployment increased to more than 20% and still stands at 16% today, far higher than any reasonable estimate of the natural rate.

Was there another, less costly, way of adjusting, through floating, and a slower fiscal consolidation?   The truth is we shall never know.   What is true though is that the adjustment looks likely to succeed under the peg, something that many of us thought nearly impossible, that the economy is growing, and that there is optimism in the air—a feeling quite unusual in Europe these days.

This surely satisfies some definition of success.

But we do know.

All of the East Asian countries in 1997-8 experienced larger shocks than Latvia did in 2008-9. None of the East Asian countries has as long a downturn, as persistent a depression, or as slow a recovery as Latvia is having.

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