"Success Stories" Differ: Latvian and Estonian Austerity Models by Martins Vargulis "Success Stories" Differ: Latvian and Estonian Austerity Models

Author: Mārtiņš Vargulis, Master's degree student of Riga Stradins University, Faculty of European Studies The report in this publication does not represent official position of the Friedrich-Ebert-Stiftung on any of the issues reflected in the text. The author is responsible for the content and information in the report. Electronic version available www.fes-baltic.lv and www.liia.lv

October 2012 A working paper “Success Stories” Differ: Latvian and Estonian Austerity Models

Introduction perspective of foreign investors the The experienced a troubled Estonian approach has also been evaluated transition period from the communist as successful and quite attractive for 2 planned economy to an open market liberal investing in the country. Although economy through the 1990s, and success- economic indicators from both countries fully acceded to the common market of the over the last two years have significantly (EU) in May 2004. The improved, the approach used by the Latvian aftermath of EU accession has demonstra- government in many ways differs from ted economic developments worthy of Estonian policies. both criticism and acclaim. The trajectory of Therefore, among other questions raised in economic developments have taken the this article, there is an analysis of Latvian and countries from being called the ‘Baltic Estonian economic development up to the Economic Tigers’ to becoming fastest falling global financial crisis in 2008, a look at the economies in the world, and then again to countries’ experiences, an analysis of the being the fastest growing economies in the economic challenges during the recession, EU, within little more than seven years. an overview of adopted policies and Nevertheless, there are some obvious solutions, as well as an exploration of differences – in addition to the similarities – opportunities for further development, in the policies that were implemented by which from the perspective of some well both the Latvian and Estonian govern- known economists – like, for instance, Paul ments. These differences determined the Krugman – has been questionable.3 unequal readiness of the countries to overcame challenges that were presented by the global financial crisis. and its policies of avoiding economic recession Estonia and are presently perceived by various representatives of international Estonian economic indicators like GDP, the institutions and economists as success unemployment rate, wages, and others stories, thanks to their specific approach to from the period after Estonia joined the EU until the eve of the crisis in late-2008 overcoming the economic crisis. For obviously improved. Estonia was a very instance, IMF Managing Director Christine dynamic economy, with a GDP growth rate Lagarde recently announced that the of 8.2% per year on average from 2004 to Latvian government's economic policy is a 2007. The unemployment rate decreased "success story", and that it "could serve as an continuously throughout this period to inspiration for European leaders grappling 1 reach 4.7% in 2007, its lowest level since the with the crisis”. Moreover, from the transition to a market economy in Estonia4.

1 Mark Wesbort, IMF Chief Praises Latvian "Success Story" -- A Scary Speech for the , http://www.huffingtonpost.com/mark-weisbrot/imf-chief-praises-latvia_b_1587723.html, 13.06.2012,12:40 pm. 2 Edition.cnn.com, March 29, 2012, Estonia’s success: Liberal regulation, strong work ethic, http://edition.cnn.com/2012/03/29/business/marketplace-europe-estonia-quest/index.html 3 Investors.com, Baltic Tiger Takes A Bite Out of Paul Krugman, http://news.investors.com/ibdeditorials/ 060812-614335-estonia-teaches-paul-krugman-a-lesson.htm#ixzz27wjDs3E5, 08.06.2012. 4 Levasseur, S. Labour market adjustments in Estonia during the global crisis. – OFCE, December 2011. - p.2. - http://www.ofce.sciences-po.fr/pdf/dtravail/WP2011-25.pdf

3 However, as was found during the crisis, econmic pillar that not only contributed to these indicators weren’t based on a stable the economic growth of the pre-crisis framework. An economic breakthrough period, but could also protect Estonia from similar to that of Latvian was built on the deeper recession during the crisis by basis of widespread credit for households improving the balance of payments. The and very high wages, which were the main fourth aspect of the Estonia’s economic contributing factors to GDP from 2004 till development was related to it’s export 2007. Estonia’s very rapid economic growth growth, which was based on financial flows and large investment volumes were rather than on real production. One of the supported by both an increase of loans major stumbling blocks for the Estonian issued by the banking sector and the active economy in the pre-crisis period was low operation of foreign investors in reinvesting competitiveness. For instance, in 2007, the 5 profits earned in Estonia. At the same time, manufacturing sector contributed only 9% many factors that supported the country's to GDP growth, while construction, development have had a fairly short impact wholesale & retail trade, financial and there was reason to doubt their intermediation, and real estate contributed sustainability. This raises the question of a total of 63%7. Last but not least, the why Estonia stepped into economic Estonian economy was positively recession and what guaranteed Estonia's stimulated by the benefits of EU successful way of overcoming the crisis. membership: various funds, the elimination The economic development of Estonia from of trade restrictions, a bigger trade market, 2004 to 2007 could be described by the five attractiveness for investors, foreign tourists, main pillars upon which the Estonian etc. economy was built: increase of the demand, Except FDI, and to some extent the benefits increase of the government sector, active from the EU, all other aspects that FDI, export growth, and the impact of contributed to the development of Estonia’s accession to the EU. The strength/weakness economy were artificially created without a or sustainability/unbalance of these pillars stable base and resulted in other economic set the future direction of the country’s problems. For instance, after joining the EU economic policy. First of all, accession to the there were widespread legitimate concerns EU in 2004 decreased the level of risk among entrepreneurs about the migration premium, which obviously stimulated the of skilled workers to other EU countries. To process whereby Estonia received an influx retain highly skilled employees, most of cheap money. Finland and other companies significantly increased wages. Scandinavian countries were eager to offer From 2004 – 2007, the average salary was cut-rate mortgages and build new homes. increased by 64%. This high growth of The result was a real estate bubble, wages exceeded the increase of labor artificially stimulated economic growth, and 6 competitiveness and productivity. For malinvestment. example, in 2006 the Estonian GDP per Secondly, the increase of demand in the capita amounted to only 22% of the relevant government sector contributed to the indicators of the five wealthiest European extremely high speed of growth in the state Union states (42% if considering the level of 8 budget, which was funded through the prices). The low level of productivity taxation of domestic demand as a result of affected the competitiveness of Estonian the loan boom. FDI in Estonia was an companies in the region, whose price of goods and services increased.

5 Urmas Varblane, The Estonian Economy Current Status of Competitiveness and Future Outlooks, Eesti Arengufond, , 2008, http://www.arengufond.ee/upload/Editor/English/ty_raport_eng.pdf, p.13. 6 The WealthCycles Staff, Estonian Austerity Models Healthy Economic Correction, July 27, 2012, http://wealthcycles.com/blog/2012/07/27/estonian-austerity-models-healthy-economic-correction 7 Levasseur, S. Labour market adjustments in Estonia during the global crisis. – OFCE, December 2011. - p.2. - http://www.ofce.sciences-po.fr/pdf/dtravail/WP2011-25.pdf 8 Urmas Varblane, The Estonian Economy Current Status of Competitiveness and Future Outlooks, Eesti Arengufond, Tallinn, 2008, http://www.arengufond.ee/upload/Editor/English/ty_raport_eng.pdf, p.11.

4 When the bubble burst in 2008, in order to provided an opportunity for companies to continue the successful development that report their taxes online to minimize time Estonia had implemented after its accession consumption and procedures. The main to the EU the Estonian government was goal was to provide an easy, understand- forced to choose between two main options able, and competitive business field. And – austerity versus a devaluation of the obviously the Estonian government has national currency; a hard decision that has succeeded in this. At the worst point of the been made by many countries during the crisis, in 2009, Estonia was ranked 22nd out of crisis. Instead of devaluation the Estonian 183 countries on the World Bank’s Ease of government chose austerity and developed Doing Business Index13. It held the highest policies. Rather than attempting to reflate position of all three Baltic States. its economic bubble via a flood of new, un- In 2010 Estonia became the 17th member of backed kroon and massive spending the eurozone – the first ex-Soviet state to packages, the Estonia’s government slashed adopt the EU single currency. The greatest spending sharply. It froze pensions, cut advantage that countries hope to obtain as government salaries by 10% (and ministers’ a member of the eurozone is an increase in salaries by 20%), and raised the value-added 9 FDI. Compared to the pre-crisis period of tax by 2%. The Estonian government stuck early 2008, foreign direct investments had with its 10 year plan to join the eurozone, increased by 15% by mid-2011. According which pegged the kroon first to the German to the data, the export of Estonian goods mark, then to the euro. was 47% higher during the first nine months The result of these reforms was painful. of 2011 than during the same time the year There were plant closings, layoffs, and before. More than 70% of Estonian exports building project shut-downs. Unemploy- go to other member states of the European ment rose to 16%; gross domestic product Union, and therefore it is important that 10 (GDP) fell by 14%. Many skilled workers left foreign investors are not threatened by 14 the country for jobs elsewhere. The annual exchange risks. The euro has given Estonia average unemployment rate in Estonia reliability. reached 16.9% in 2010, but already dropped 11 In 2009 Estonia’s main export commodity to 12.5% in 2011 . Overall, wages fell was machinery and appliances at almost slightly in 2009 and 2010. 20% of the total.1 5 Goods and services in this Nevertheless, while most European Union particular field have already found their countries are still suffering from the place on the international market. More- economic crisis Estonia is going in the over, investors from around the world opposite direction. Estonia demonstrated already appreciate Estonian IT products and the fastest growth rate in the EU in 2011 at specialists, whose goods and services have 8.3%12. There are several factors that provided a significant input to Estonian promoted economic growth. One of the development. Most investors who actively main keys to success in economic operate in Estonia have a positive attitude stabilization was policies adopted by the toward operation in Estonia. For instance, Estonian government to facilitate the general manager Vesa Kandell of a local creation of domestic and international plant for ABB, a Swiss industrial group that is companies. The Estonian government one of Estonia’s biggest investors and

9 The WealthCycles Staff, Estonian Austerity Models Healthy Economic Correction, July 27, 2012, http://wealthcycles.com/blog/2012/07/27/estonian-austerity-models-healthy-economic-correction 10 The WealthCycles Staff, Estonian Austerity Models Healthy Economic Correction, July 27, 2012, http://wealthcycles.com/blog/2012/07/27/estonian-austerity-models-healthy-economic-correction 11 Statistics Estonia, Real GDP per capita, growth rate and totals, http://www.stat.ee/29958 12 Statistics Estonia, Real GDP per capita, growth rate and totals, http://www.stat.ee/29958; date of publication? 13 The World Bank, International Finance Coorporation, Ease of doing business in Estonia, http://www.doingbusiness.org/data/exploreeconomies/estonia 14 Andrus Ansip at Estonian Export Directory, http://www.estonianexport.ee 15 Estonian Export Directory, http://www.estonianexport.ee/?page=b6&lang=eng

5 operates four factories employing 1,000 Estonian ties during the economic crisis, the people, argues that Estonia has become an next chapter will evaluate Latvia’s economic important high-tech production hub for position in the pre-crisis period and analyze ABB during its two decades in the country. the policies adopted and implemented by Mr. Kandell explains that in Estonia there is a the Latvian government during the crisis. well-educated engineering workforce as Latvia, the ‘Fat Years’ and Austerity Burden well as well-educated hard working people for factory operations. He adds that the Just as a feast usually requires dieting business environment in Estonia is very afterward, the Latvian economy needed modern and liberal. It’s not as cumbersome austerity to balance its economic excesses. 16 as many other countries. These and similar Prime Minister Aigars Kalvītis (2004-2007) ideas that can be heard from a number of infamously promised the biblical ‘seven fat investors who operates in Estonia, and such years’ for the Latvian people during his attitudes would not be possible if the reign. At the end of the day there were only Estonian government were not oriented three years with economic increases and toward business development and viability. poverty afterward. After the difficult experience of the 1990s, Latvian society was Estonian economic sustainability relies on looking for possibilities to improve living tight ties with other Scandinavian countries, conditions as quick as possible. Hence, mainly Sweden and Finland, which slight euphoria about the newly achieved combined make up one third of Estonian EU membership, an inflow of financial exports. Moreover, the main foreign assistance from EU funds, and most investors into Estonia are Finland and importantly the growing availability of Sweden. Nearly half of foreign investment in 17 lending from resident banks enhanced the 2012, for example, came from Finland . rapid growth of GDP and economic activity. During the crisis exports to Sweden and The economic situation after Latvia joined Finland didn’t change significantly due to the EU was marked by positive and rapid stable demand from the Scandinavian growth in economic activity, internal countries. Estonia’s economic strength to consumption, and income, as well as falling some extent is determined by the economic unemployment numbers. Annual GDP strength and sustainability of its partner growth was averaging 10%. The main countries. Estonian exports during the contributor to GDP, however, was the crises didn’t change dramatically because rapidly growing internal consumption – the main destination countries didn’t mainly in the construction sector, retail experience economic problems. trade, and distribution, due to government Last but not least, the final aspect that expenditure and the inflow of money from prompted the downturn of the Estonian various sources outside. economy was it economic connections with The unemployment figures were falling. As Latvia. After Finland, Sweden, and Russia, the economy expanded, people were able Latvia is the fourth largest foreign trade to find a second or third job, while others partner. During crisis, Estonian exports to entered the job market for the first time. Latvia significantly reduced. In 2009, for Unemployment figures were dropping not instance, exports to Latvia were reduced by only because of increasing economic 17%. The decrease of demand for Estonian activity and an increasing number of goods and services in Latvia played, and still businesses (from 46,634 in 2004 to 63,741 in plays, a significant role in the Estonian 200818), but also because of workforce economy. To fully understand Latvian-

16 Edition.cnn.com, March 29, 2012, Estonia’s success: Liberal regulation, strong work ethic, http://edition.cnn.com/2012/03/29/business/marketplace-europe-estonia-quest/index.html 17 Enterprise Estonia, Last year foreign investments in Estonia grew, February 15, 2012, http://www.eas.ee/en/eas/news?option=com_content&view=article&id=4327 18 Ekonomiski aktīvās statistikas vienības statistiskajos reģionos, republikas pilsētās un rajonos, 2004. - 2008.g. – Riga: Central Statistical Bureau of Latvia, 2012. - http://data.csb.gov.lv/Dialog/SaveShow.asp

6 emigration trends. After Latvia joined the 165.4% of GDP in 201020. The banking sector EU, ‘old member-states’ that immediately was enticing the population into borrowing, opened their labor market – like Ireland or and approximately 158,000 households21 the United Kingdom – became very had mortgages or other loans with the attractive destinations for Latvian workers. banks. The main reason for leaving was wage differences, and the emigrants left available Growing internal consumption, increasing workplaces for the remaining workers in real estate prices, and growing wages Latvia. Among the many sectors that naturally accelerated the inflation rate. The demonstrated growth and an increased inflation rate was considered by some to be shortage of labor, the construction sector a normal characteristic of a growing econo- stood out as the most attractive one. The my and was not seen as an immediately reason for this, of course, was the high solvable problem. In 2008 alone the demand for modern houses and inflation rate reached 15.4%. By the end, the apartments, which ultimately resulted from high inflation rate not only reduced the the promise of rapidly increasing wages. relative growth in income, but also temporarily closed the door for Latvia’s Wages grew on average by 15-20% in all entrance into the eurozone. The high sectors. Encouraged by growing wages and inflation rate and the pegged exchange rate the ability to find additional income made it possible to preserve the through another job, the people of Latvia competitiveness of Latvian goods on the EU became economically more self-aware. and world markets. Hearing the promises and encouragements of politicians, media, leading experts and At the same time, the external trade deficit officials, and most importantly the banks, of Latvia over the 2004-2008 period people increased their consumption rates. averaged 15%. Latvia was importing a Domestic demand grew faster than in other significant number of consumer goods from countries in the region before quickly countries like Germany, Estonia, , collapsing in 2009. Purchasing power, Sweden, Finland, and, of course, energy though, was not fueled only by increasing resources and raw materials from Russia. wages. A large proportion was contributed Rapidly growing internal consumption, by emigrant workers sending capital to facilitated by necessity and a willingness to relatives in Latvia. Some polls found that improve the conditions and achieve the 68% of income earned while working ‘promised’ average Western living standard, abroad was spent in Latvia, mostly on made demand for car and construction housing19. material imports more keen. The current account balance, however, did demonstrate The second and more influential aspect was some trends of improvement, which was the expansion and increased exposure of bolstered by the export of services. the banking sector in Latvia. In particular, Sweden's SEB and Swedbank, along with This unbalanced economic structure in the local PAREX bank, became notoriously Latvia gradually led to a situation where it aggressive in their marketing policies and collapsed. As with all economic bubbles, competition. A lack of political will among this situation was not sustainable and the elite and economic sense among eventually had to burst. The unwillingness banking officials in limiting excessive of the Latvian government to apply fiscal crediting to private businesses and and monetary principles and the populist- individuals led to the creation of a real estate driven misuse of public revenues led to the bubble and net external debt that reached deepest economic crisis in the world in

19 Pētījums: Īrijā strādājošie lielāko daļu naudas tērē Latvijā// Apollo.lv, 19.09.2007. - http://www.apollo.lv/zinas/petijums-irija-stradajosie-lielako-dalu-naudas-tere-latvija/364515 20 Pastušenko, J. Explaining the difference between Latvia's gross and net external debt.// macroeconomics.lv, 28.02.2012. - http://www.macroeconomics.lv/explaining-difference-between-latvias-gross-and-net-external-debt 21 Mājsaimniecību finanšu apskats. – Riga: SEB, 2010. – p. 8.

7 2009. Liberalization and deregulation financial problems started, other smaller principles were followed by the govern- banks mostly survived or experienced a ment, which maintained budget deficits wave of mergers. More and more experts (approx. -0.6% of GDP22) even during the started to stress that the financial sector in accelerated growth years 2004-2007.State Latvia exceeds the capacity of the real revenues were not only spent on increasing economy. The dream to become the social benefits (including maternity financial center of the Baltic region was not benefits). The state budget was spent on the achievable without a strong export and expansion of the bureaucratic sector as well. production based real economy. Increasing employment possibilities along Growing budget expenses, the volatility of with growing wages and social benefits the financial sector, dependence on foreign encouraged the population to consume banking capital, the real estate bubble, an more and borrow more from the banks. increasingly emigrating workforce, low Mortgages concluded for 30-40 years productivity, a loss of competitiveness, and became a new trend in the Latvian economy permanent trade deficits led to the crisis and society. Many people could use the that Latvia experienced at the end of 2008. opportunities to try out their business idea The decision to bail out PAREX was the last or to buy an apartment, which would be drop in the ocean of unsustainability that almost unimaginable in different the Baltic Tiger had turned into. conditions. Austerity was the first and most obvious In spite of an active and capable workforce choice for Latvian politicians. Reforming the in which having two or even three different tax system, healthcare and educational jobs became a norm, productivity did not systems, the state apparatus, and many grow as fast as wages did. It balanced out at other sectors that had become large and around 50% of the EU average. Imported inefficient became the central political products dominated the market and the argument of the forthcoming governments exporting industries produced less capital led by Valdis Dombrovskis. The main goal of intensive, and thus less expensive, products. all these reforms was to consolidate state Instead of turning to innovation, future budget expenses, and from 2008-2011 this planning, and increasing efficiency, many goal was achieved in the amount of 16.6% of companies satisfied themselves with GDP. growing internal demand and the possibility to increase prices on their The first round of consolidation touched on products. Some even turned to the real the reorganization of the state apparatus. estate business or started trading property A number of subordinated agencies dealing as one of their business segments. with limited and specific issues under the ministries were reduced from 138 to 80. The banking sector grew. Not only had the A similar reduction of the number of Swedish banks accumulated more and institutions was performed in the case of more loans, Latvian local banks did the – same. The infamous PAREX was the first of ministries themselves the number was the Baltic banks that was able to borrow a decreased from 17 to 12. Moreover, a large syndicated loan within international number of vacant and filled places in the financial markets. This was the same loan public sector were liquidated altogether. that it was not able to repay, and as a result Around 17,000 (25%) of public sector jobs 23 had to be nationalized to save the country’s were terminated in the years 2008-2011 . financial system from a bank run. After the This left many public sector workers jobless,

22 Vispārējās valdības sektora galvenie rādītāji. – Riga: Central Statistical Bureau of Latvia, 2012. - http://data.csb.gov.lv/Dialog/Saveshow.asp 23 The number of officials working in the central government institutions was estimated around 68 thousand people in 2011. For more please see Pašlaik valsts pārvaldē mazākais nodarbināto skaits pēdējos 12 gados. – Riga: State Chancellery of the Republic of Latvia, 26.08.2011. - http://www.mk.gov.lv/lv/aktuali/zinas/2011gads/08/260811-vk-02/

8 and many of these found jobs in the private goals pursued by the multiple governments sector. Some of them retired, some ended of Valdis Dombrovskis. The implementation up back in other state institutions and are of the Maastricht criteria and eurozone dealing with similar issues as they did membership in 2014 was set as the central before. political and economic goal for the state. Because the goals were so clear, they were In order to save money, the government 24 reduced pensions and managed to stop attractive to general public . Among the their indexation, but after the Constitutional first steps to stabilize the financial system Court ruled in favor of pensioners the was borrowing from the International decision was reversed and the money Monetary Fund (1.1 billion EUR), the reimbursed. Similarly, ‘more successful’ European Commission (2.04 billion EUR), attempts were made in the case of the World Bank (400 million EUR), and The European Reconstruction and Develop- unemployment benefits and maternity 25 benefits. Instead of six months of full wage ment Bank (100 million EUR) . As is unemployment payments, this was reduced traditional, the lending came with secret to one month full, followed by two months conditionality principles. The conditions not at three-quarters wages and then by 45 Lats only affected decisions made by the Latvian for the next six months. After some research, authorities and approved by ‘the Lenders’, ‘ceilings’ were introduced to maternity but also provided the government with ‘a benefits, thus reducing the benefits for scapegoat figure’ in their communication young moms and dads who had received with society. around the full net wage for a year after the Stabilization of the financial system through child was born. Additionally, several other the injection of borrowed money into the tax rebates were suspended or abolished, banking sector, as well as overall govern- while value added tax and personal income ment expenses, allowed the government to taxes increased and the tax base, in general, regain trust within international financial broadened. markets, and later to refinance some portion Reform plans were introduced in the of the debt by issuing government bonds. healthcare system and the educational Stabilization of the financial system and system. Like other spheres, both these faced core economic indicators was seen as the a consolidation of expenses, in many cases prime necessity during the economic crisis. mechanically rather than in accordance 'Macroeconomic stability first', became one with an outlined plan. Naturally, the of the main characteristics of the Latvian government’s desire to limit social and Austerity Model (LAM). The second feature political protests during the consolidation of LAM is an ‘internal devaluation’, which period affected the way that cutting involved wage flexibility instead of expenses was performed. Much of the mechanical devaluation of the national consolidation was done by limiting currency. This naturally allowed the state to available resources while leaving the sector preserve its competitiveness. generally unreformed. This reduced To preserve and increase competitiveness, resistance from professionals, especially the several sectors were liberated or supported high-ranking ones, and gave the ministers by tax incentives. Among these were the the necessary stability to perform cuts that forest industry and exports of raw wood, the later appeared in the macroeconomic financial and banking sector, and most situation of the state. importantly the industrial sector and Macroeconomic indicators and the stability exporting businesses. The prioritization of of the financial system were the central the exporting industries – like food

24 Bukovskis, K. Latvia’s Austerity Model in the Context of European Austerity versus Growth Debate//The Rīga Conference Papers 2012. Collection of essays and articles. – Riga: Latvian Institute of International Affairs,Latvian Transatlantic Organization, 2012. – p. 14. 25 Latvija šogad SVF atmaksājusi 112 miljonus latu. – LETA, 09.09.2012. -http://www.leta.lv/news/latvia/0D19FE17-DB61-4EF4-99BE-172C462DFD18/

9 production, the timber industry, and the than by real and competitive production. metal industry – went hand in hand with The level of imported goods and services a dynamically growing pharmaceutical was higher than exports. The increase of industry and the value of producers of GDP was based on construction, wholesale electronic and optical goods. The exporting & retail trade, financial intermediation, and industries became the driving force of the real estate. These are the areas that Latvian recovery, but their stability and contributed to the bubble, which collapsed capacity, again, is strictly tied to demand on and caused the economic crisis in both the international market. Nevertheless, countries. The Estonian and Latvian exports were able to substitute falling tax economical models were unable to face the revenues, which were hurt by decreasing challenges of the global crisis, which led to internal consumption. As a result, the real the need for strict austerity policies. estate market and domestic service sectors, From 2008 till 2011, both Latvia and Estonia including retailers, were among the most experienced a significant economic hurt industries by the crisis. The banking recession and implemented a list of sector experienced losses in 2009-2011 in economic policies to develop their the amount of 1.868 billion EUR. But the economies. In contrast with Latvia, during data shows a return to profits of 128 million 26 the crisis Estonia paid more attention to EUR during the first seven months of 2012 . promoting production rather than reducing Thus, it can be concluded that hesitancy social payments. The tax system remained with the implementation of necessary fiscal unchanged and the government adopted and monetary policy led to the unavoidable amendments in legislation that promoted austerity measures and the damage to some the development of business in Estonia. The of the industries that were mainly percentage of FDI in Estonia from 2008 - responsible for causing the structural 2011 didn’t decrease significantly. For economic unbalances in the first place. The foreign businessmen, Estonia was still quite real estate sector, banking, and the attractive. construction sector, as well as everyone employed in those sectors and their clients, One of the main factors that put Estonia in a were hit the most severely and directly or more favorable position than Latvia was the indirectly dragged the whole country and banking bail out factor. There wasn’t any its population down with them. bank in Estonia during the period of global financial crisis that experienced bankruptcy and demanded additional funds from the CONCLUSIONS Estonian government. The Latvian bank On the eve of the global financial crisis, Parex, which announced its bankruptcy in neither Latvia nor Estonia were ready for the 2008, was the main factor that distorted the economic turbulence that prompted them Latvian budget, causing the economic crisis to take tough decisions during peak hours and forcing the country to borrow money of the global crisis. The implemented from the International Monetary Fund and economic policy of the Estonian govern- European Commission. The rescue of Parex ment after EU accession until the eve of the directly and indirectly (through govern- global financial crisis is quite similar to the ment deposits, guarantees, and investment policy provided by the Latvian government. in the bank’s capital) cost more than 1 billion After accession to the EU, both countries lats, or 20% of its annual budget. This enjoyed obvious economic growth. But this situation forced the country to adopt more economic growth in both countries was strict austerity measures than Estonia. more stimulated by the real estate boom

26 FKTK: Komercbanku kopējā peļņa šogad pārsniegs 100 miljonus latu. – LETA, 06.09.2012.

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