I got a few cranky emails after my post suggesting the United States should copy the Baltic nations and implement genuine spending cuts. These less-than-friendly pen pals were upset that I favorably commented on the fiscal discipline of Estonia, Lithuania, and Latvia while failing to reveal that these nations were suffering from high unemployment.
From the tone of this correspondence, my new friends obviously think this is a “gotcha” moment. The gist of their messages is that the economic downturn that hit the Baltic nations is proof that the free-market model has failed, and that I somehow was guilty of a cover-up.
That’s certainly a strange interpretation, especially since I specifically noted that the three nations had suffered from an economic downturn. There’s no questioning the fact that unemployment spiked upwards because of the global financial crisis, which was especially damaging to the Baltics since they all had real estate bubbles.
But let’s deal with the bigger issue, which is whether this downturn is proof that the free market failed (and, for the sake of argument, let’s assume that all three Baltic nations are free market even though only Estonia gets high scores in the Economic Freedom of the World rankings).
If you look at the IMF’s World Economic Outlook Database, it does show that the Baltic nations had serious economic downturns. Indeed, if we look at the data from 2008 to the present, the recession was far deeper in those nations than in Western Europe and North America.
So at first glance, it seems my critics have a point.
But what happens if you look at a longer period of data? The IMF has data for all three Baltic nations going back to 1999. And if we look at the entire 12-year period, it turns out that Estonia, Latvia, and Lithuania have enjoyed comparatively strong growth. Indeed, as seen in the chart, they even surpass Hong Kong.
In other words, the Baltic nations may have suffered larger-than-average economic downturns, but they also enjoyed stronger-than-average booms. And the net effect is that they are now in much better shape than the nations that had smaller recessions but also less-robust growth.
A sophisticated critic may look at this data and say it’s meaningless because convergence theory suggests that middle-income countries almost always will grow faster than rich nations. That’s a fair point, so let’s now compare the three Baltic nations to three other nations that were at the same level of development at the turn of the century.
As you can see, the Baltic nations are doing substantially better than other middle-income nations. By the way, skeptics should feel free to peruse the IMF data to confirm that I didn’t cherry-pick nations to make my point (indeed, I deliberately picked Thailand since it was emerging from the Asian financial crisis and is an example of a nation that enjoyed very good growth in the 2000-2011 period).
The point of this post is not that the Baltic nations are perfect. Estonia is ranked 12th in the Economic Freedom rankings, which is impressive, but Lithuania is 33rd and Latvia is 55th. Those aren’t bad scores considering that these nations are recovering from communist tyranny, to be sure, but Hong Kong isn’t in any danger of being dethroned.
Instead, my argument is that the Baltic nations are making slow but steady progress, and I’m quite confident that the recent decisions by these nations to reduce the burden of government spending will help put them back on an above-average growth path.
That is something America should emulate.
Excellent post. But sadly both the Fraser Index (mentioned by Mr. Mitchell) and the Heritage Economic Freedom index promote oppressive tax hells by giving too little weight to tax financed government spending and it is crystal clear that the weight of government slows growth and there are too lots of cases where REDUCTIONS in government go along with HIGH growth (for instance in former communist countries that underwent a dramatic reduction in government)
In fact PREDICTABLE inflation -like under a crawling peg to a super currency- may not be a problem and it is absurd to give the same weight to inflation than to tax financed government spending, but both Heritage and Fraser may do that mistake. I think government spending as a % of the GDP is the best simple figure to measure serfdom in democratic societies and european tax hells are very oppressive societies. But the Heritage Index tells us that tax hell Denmark -more than 50% of GDP government spending- is Nr 8 in economic freedom while Denmark growth is one of the lowest in the world, at least in the 2002-08 period that I computed while the baltic countries have an outstanding growth in that period.
Denmark growth is destroyed by its enormous government, but Heritage fails to adequately see this fact and puts Denmark, where people are serfs of government, as a paradigm. It is sad to see libertarians promoting tax hell serfdom
If you take China it has one of the highest growths in the world but its position in the Heritage Freedom Index is practically unchanged in recent years so an increase in freedom cannot be alleged as the cause of China success. But China has spectacular growth. Why? Because China has a government that is NOT enormous -while it DO is enormous in western european tax hells like Denmark- and China too has very very high capital formation. So Heritage is recommending to our “less developed” countries to become stagnated european tax hells like Denmark, a recommendation that clearly destroys a lot of freedom and prosperity
I think there is a huge bias IN FAVOR of tax hells and AGAINST tax havens in (keynesian) GDP figures because of the way in which they account exports and substract imports and do not take into account capital gains and, moreover, in (keynesian) GDP figures government spending appears roughly twice. So super exporter China growth may not be as spectacular as GDP figures show, but even accounting for that China’s growth is spectacular.
[...] default – Yes, the Baltic nations have shown it is possible to make real spending cuts and restore fiscal stability, but I don’t expect other European nations to learn from those success stories. So the only [...]
[...] he really wants to improve the French economy, he should copy the Baltic nations and dramatically reduce the burden of government spending, while also replacing a punitive tax [...]
[...] responded to the recent economic crisis by imposing genuine spending cuts, which helps explain why that nation’s economy has bounced back while other nations are [...]
[...] there’s a short-term cost when labor and capital get redeployed to more productive uses, the Baltic nations are now in much better shape that the European nations that have floundered because they limited themselves to the no-win choice [...]
[...] there’s a short-term cost when labor and capital get redeployed to more productive uses, the Baltic nations are now in much better shape that the European nations that have floundered because they limited themselves to the no-win choice [...]
[...] there’s a short-term cost when labor and capital get redeployed to more productive uses, the Baltic nations are now in much better shape that the European nations that have floundered because they limited themselves to the no-win choice [...]
[...] Simply stated, we need role models. Not only role models to show the effects of good policy (like Estonia and Hong Kong), but also clear-cut examples of nations that do the wrong [...]
[...] Simply stated, we need role models. Not only role models to show the effects of good policy (like Estonia and Hong Kong), but also clear-cut examples of nations that do the wrong [...]
[...] this happened, particularly since they also had their versions of a real estate bubble. But, as I’ve already argued, I think the “cold turkey” or “take the band-aid off quickly” approach has [...]
[...] This is similar to my recent analysis, and Veronique also is kind enough to cite my analysis of how the Baltic nations have done the right thing and cut spending. [...]
[...] This is similar to my recent analysis, and Veronique also is kind enough to cite my analysis of how the Baltic nations have done the right thing and cut spending. [...]
[...] implementing genuine spending cuts. I’ve argued that Estonia is showing how a government can reignite growth by reducing the burden of [...]
[...] genuine spending cuts. I’ve argued that Estonia is showing how a government can reignite growth byreducing the burden of [...]
[...] for implementing genuine spending cuts. I’ve argued that Estonia is showing how a government can reignite growth by reducing the burden of [...]
[...] Krugman also produced a chart showing Estonia’s economic performance from 2007-present. This deceptive chart made it look as if Estonia’s economy was stagnant. In reality, the nation’s long-run economic performance is quite exemplary. Economic output has doubled in just 15 years according to the International Monetary Fund. Over that entire period – including the recent downturn, it has enjoyed one of the fastest growth rates in Europe. [...]
[...] I then pointed out that Estonia’s long-run performance has been admirable. …the nation’s long-run economic performance is quite exemplary. Economic output has doubled in just 15 years according to the International Monetary Fund. Over that entire period – including the recent downturn, it has enjoyed one of the fastest growth rates in Europe. [...]
[...] This is similar to my recent analysis, and Veronique also is kind enough to cite my analysis of how the Baltic nations have done the right thing and cut spending. [...]
[...] there’s a short-term cost when labor and capital get redeployed to more productive uses, the Baltic nations are now in much better shape that the European nations that have floundered because they limited themselves to the no-win choice [...]
[...] The Baltic nations of Estonia, Lithuania, and Latvia also deserve some credit. They allowed spending to rise far too rapidly in the middle of last decade – an average of nearly 17 percent per year between 2002 and 2008! But they have since moved in the right direction, with genuine spending cuts (unlikely the fake cuts that characterize fiscal policy in nations like the United States and United Kingdom). Yes, the Baltic countries did raise some taxes, which undermined the positive effects of spending reductions, but at least they focused primarily on spending and preserved their attractive flat tax systems. No wonder growth has rebounded in these nations. [...]
[...] The Baltic nations of Estonia, Lithuania, and Latvia also deserve some credit. They allowed spending to rise far too rapidly in the middle of last decade – an average of nearly 17 percent per year between 2002 and 2008! But they have since moved in the right direction, with genuine spending cuts (unlikely the fake cuts that characterize fiscal policy in nations like the United States and United Kingdom). Yes, the Baltic countries did raise some taxes, which undermined the positive effects of spending reductions, but at least they focused primarily on spending and preserved their attractive flat tax systems. No wonder growth has rebounded in these nations. [...]
[...] lead lawmakers to think they can impose some real fiscal restraint, as we’ve recently seen in countries like Estonia and in the 1990s by nations such as Canada and New [...]
[...] lead lawmakers to think they can impose some real fiscal restraint, as we’ve recently seen in countries like Estonia and in the 1990s by nations such as Canada and New [...]
[...] result? Growth has recovered and these nations are doing much better than the European countries that decided that big tax hikes and/or Keynesian spending binges were [...]
[...] Same story more recently in Baltic states such as Estonia. Estonia dramatically cut spending – genuine cuts that reduced the overall amount government was spending – and saw its economy outpace even Hong Kong’s. [...]
[...] lead lawmakers to think they can impose some real fiscal restraint, as we’ve recently seen in countries like Estonia and in the 1990s by nations such as Canada and New [...]
[...] Baltic nations deserve credit for imposing genuine budget cuts several years ago, a policy that has yielded big dividends since they’re now growing while most other European nations are mired in economic [...]
[...] Estonia, Lithuania, and Latvia are enjoying impressive growth while the nations that raised taxes seem stuck in perpetual [...]
[...] Estonia, Lithuania, and Latvia are enjoying impressive growth while the nations that raised taxes seem stuck in perpetual [...]