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It’s the Economy… (Sept.2010)

Back in 1992, Bill Clinton won the U.S. presidential election because his top campaign advisor James Carville made everyone in the Clinton campaign repeat one sentence every morning when they woke up: “It’s the economy, stupid”.

This was an internal campaign theme intended to remind everyone that the number one priority of the election and the country was the economy, and how to make it better.

One way a country like Latvia makes its economy better is by attracting foreign investment. But to attract foreign investment you have to be attractive, and since 2008 Latvia has been Europe’s ugly economic duckling.

These days, however, Prime Minister Valdis Dombrovskis is describing Latvia as another kind of bird, more like a phoenix rising from the ashes. He is convinced that he has all the macroeconomic indicators he needs to back that up.

GDP is growing, production is increasing, exporters are exporting more and the consumer price index indicates all kinds of good things. If you want all the facts and figures behind Latvia’s historic internal devaluation, you can check the web pages of the Latvian Institute or Ministry of Finance, or ask the International Monetary Fund and EU. Or just read Bloomberg and Reuters. (Eventually this will all be in college text books, but that comes later.)

Latvia and its international lenders have been in this together since 2008, trying to pull Latvia out of Europe’s deepest hole. Unlike the marketing-man-made “meteorite” of last summer, this crater was for real. But the consensus now seems to be that Latvia is coming out of it: slowly, deliberately and cautiously, but coming out without a doubt. Some still say it’s not fast enough and others are looking for new pitfalls ahead.

But the international community is watching Latvia closely, and be they economists, diplomats or journalists, they are all keenly interested in the outcome. Latvia is trying to do what has never been done before, and in a country where caution is a national obsession, this is quite a leap of faith into an unknown future.

Then again, the future is equally unknown in Europe, the U.S., China and Ecuador, so we are not alone in this. Everyone is flying blind and hoping that the steps they took last year will lead to better results next year.

The people who lent Latvia the money it needed to overcome the crisis are generally pleased with the way the Latvian government has handled things. Lenders like responsible debtors. So do investors. While not everyone in Latvia is pleased with the pace and many are still waiting to find jobs, many entrepreneurs are capitalizing on the changes and producing new business. The government is doing what it can to help.

Mark Allen, senior IMF representative for Central and Eastern Europe thinks that “what has been done here” is pretty impressive. Last week Reuters reported that Latvia and its other Baltic neighbours “had turned the corner” on the crisis. The President of the Czech Republic Vaclav Klaus recently told Latvia’s President Valdis Zatlers that Latvia could serve as a good example to others on how to cope with a crisis.

A recent Bloomberg report on the first successful post-crisis auction of five-year Latvian government bonds says that Latvian financial markets “are showing signs of stabilization”. The last time Latvian bonds were on sale, in June 2009, no one would buy. If you’re wondering what a difference a year can make, it’s $21.7 million. That’s what buyers paid just days ago for the five-year notes.

While some in Latvia still don’t have confidence in the rebirth of their economy, there are many foreign investors who do. And that is something worth noting. It’s easier to believe in yourself when you know that others believe in you. And when those believers happen to be investors with real money that can develop new business and create new jobs, you better believe something good is happening.

So when a guy like me wakes up in the morning and wonders what cheerful things I can say about the country I love, I hear a little voice telling me, “It’s the economy…”. (You can fill in the rest.)

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