Once a Poster Child for Austerity, Latvia Becomes a Hotbed of Corruption
Austerity didn’t produce recovery in Latvia, it produced the semblance of recovery, says white-collar criminologist Bill Black. It also led to rampant criminal activity in the banking sector, such as money laundering, taking bribes, and violating sanctions against North Korea
SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries coming to you from Baltimore. About two years ago, the financial press was busy promoting the tiny country of Latvia as proof that austerity works. For example, in May 2016, Bloomberg ran an article with the headline “Austerity Worked for Latvia.” Following the 2008 global financial crises, Latvia faced a serious crisis of its own and its economy shrank by 25%. The government responded by applying austerity measures, such as cutting the public workforce by 30%, raising sales tax, and introducing a flat tax. Its economy grew again quite steadily between 2011 and 2016. It was so successful, it was held up as an example and was admitted to the EU in 2014.
Now however, Latvia is in the headlines again, but this time for problems in the banking sector. The U.S. treasury’s Financial Crimes Enforcement Network (FinCEN) is accusing various banking officials of criminal activities, such as money laundering, violation of sanctions against North Korea, and of taking bribes. Joining me now to explore the Latvian case and whether its success is related to the banking sector’s shady activities is Bill Black. Bill is a white-collar criminologist, associate professor of economics and law at the University of Missouri, Kansas City. He’s the author of <i>The Best Way to Rob a Bank is to Own One.</i> Thanks again for joining me, Bill.
BILL BLACK: Thank you.
SHARMINI PERIES: Bill, first give us some background about the accusations that have been made against Latvian bankers and how serious these accusations are.
BILL BLACK: Well substantively, the allegations are very serious, and they fall into two areas, as you noted in your introduction. One is that Latvian banks, not just one, but now it is alleged at least three, were critical to helping North Korea evade financial sanctions and this was critical to their ability to produce their great advances that they’ve shown in ballistic missiles designed to be able to deliver nuclear weapons at extremely long ranges, including all of the continental United States. So essentially, pretty much the world.
The second has to do with the head of the Latvian central bank, who is particularly identified with the austerity regime where he is alleged to have sought a €100,000 bribe, was arrested and is out on bail. The U.S. sanctions have produced a liquidity crises at some of these banks in Estonia, so they are seeking of course … I’m sorry, Latvia. Emergency financial aid from the central bank for the central banker has been arrested and the EU has said, “We’re not going to provide you with a liquidity bailout.” So Latvia may be back in the kind of banking crisis it was in, in 2008.
So, key takeaways in all of this. Again, the 2008 financial crisis wasn’t just a crisis in the United States and the parts of the EU, like Greece and such. It was a devastating crisis and it was particularly devastating among other areas, in the Baltic States. The way that Latvia’s government reacted was to go whole hog into the most neoliberal program possible. You mentioned some of these elements. So they made the taxing system favor the wealthy and go after the poor and the working and middle classes. They also had had an enormous brain drain during the critical years of the crisis. If you were a university graduate in Latvia, you knew you couldn’t get a job in Latvia and you tended to go elsewhere. So the best and the brightest, and it turned out the most moral, frequently left. This meant that they created this perfect neoliberal, “Come on in,” to the worst elements of the society. Some native born Latvians and some who came from outside and some who had Latvian ancestry and came back to the country saying, “Boy, have you made this environment perfect for us to do all kinds of slimy things.”
So, Latvia also shares a border with Russia and is a major trading partner. So even while it was joining the European Union, it was actually very much in with the oligarchs in Russia who have been heavily involved for a long time in helping North Korea and Iran and such, evade sanctions. So, it’s no surprise that they moved in this direction.
SHARMINI PERIES: Now, some economists, Bill, have argued that Latvia is proof that austerity works. What is your response to this claim, and is the success of implementing austerity related to the recent accusation of criminal activity in Latvia’s banking sector?
BILL BLACK: Yes, indeed they have held Latvia up as the very model of what they call austerity that supposedly is going to produce recovery. Austerity didn’t produce recovery in Latvia. It produced the semblance of recovery, but of course the reality of this widespread corruption as well, was that they got rid of the rules and they did what’s euphemistically referred to as internal devaluation. Now what that actually means is that we crush labor and we crush wages. And wages go very low, and so we’re able to export. And indeed, Latvia was then able to export. And because it’s a very small country, those exports did produce an economic turnaround.
Now of course that’s still in a land where they had really severely repressed wages for the working class and for middle class, and continued to tolerate a fair degree of unemployment and underemployment for folks, as well. So, yeah it works really well for the oligarchs. And they do employ people. The unemployment rate drops, but the country invariably becomes extremely corrupt. And of course, if you’re a neoliberal and very conservative as well, then it’s your worst nightmare to have your very model of the modern austerity regime that’s a supposed success, is leading the way globally in trying to help North Korea develop the kind of ballistic missiles and miniaturized H-bombs even, not just atomic bombs, that could be delivered to the continental United States. That’s sort of the worst possible thing about your neoliberal regime coming back to bite you, and indeed the entire world.
SHARMINI PERIES: Bill, an analysis conducted by Paul Krugman a few years ago, he compares Latvia’s austerity responses to that of Iceland, which took an opposite approach, a Keynesian anti-austerity approach. Bill, you too have looked into the case of Iceland and Latvia very carefully. What can you tell us about this comparison and what kind of lessons can be drawn from these two different approaches to economic crises?
BILL BLACK: The Icelandic recovery was much better. It’s stronger and it helped the entire nation, and it ended up with a more ethical place. The Latvian could only be done in a very tiny country, only by severely repressing wages and inviting widespread corruption, and it’s a terrible response.
SHARMINI PERIES: I thank you so much for joining us, Bill.
BILL BLACK: Thank you.
SHARMINI PERIES: And thank you for joining us here on The Real News Network.