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Boom, Bust, Recovery Forensics of the Latvia Crisis

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Boom, Bust, Recovery Forensics of the Latvia Crisis

Brookings Institution Press,

5 min read
5 take-aways
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Is austerity the right way to return a failing economy to growth?

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Editorial Rating

7

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  • Innovative

Recommendation

In the wake of the Great Recession, economists, politicians and pundits have battled over how to address weak growth and declining prospects: by stimulus or austerity? IMF economists Olivier Blanchard, Mark Griffiths and Bertrand Gruss delve into Latvia’s recent economic history to understand austerity’s role in the nation’s return to growth. Their findings may not settle the argument once and for all, but getAbstract recommends this well-reasoned, well-researched investigation to readers on both sides of the economic debate.

Summary

Advocates of austerity cite Latvia as an example of the merits of making tough fiscal adjustments to rescue a faltering economy. Opponents say austerity hasn’t solved the Baltic state’s economic woes but has caused avoidable, long-term damage. As economist Paul Krugman noted, “The adulation over Latvia really tells us more about what the European policy elite wants to believe than it does either about the realities of Latvian experience or the fundamentals of macroeconomics.”

A former Soviet satellite, Latvia – a country of two million people with an open economy – saw its GDP skyrocket...

About the Authors

Olivier Blanchard is director of research at the IMF, where Bertrand Gruss is an economist. Mark Griffiths is the IMF’s Latvia mission chief.

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