EVENT

How Latvia Came Through the Financial Crisis

Valdis Dombrovskis, Prime Minister of Latvia
Anders Aslund, Peterson Institute

Peterson Institute for International Economics, Washington, DC

June 14, 2010


Valdis Dombrovskis, Prime Minister of Latvia, delivered a speech entitled “How Latvia Came Through the Financial Crisis” at the Peterson Institute for International Economics on June 14, 2010. Senior Fellow Anders Åslund, whose forthcoming book on the experience of Eastern Europe during the global economic crisis will include a chapter on the recent Latvian experience, led the discussion following Dombrovskis's speech.

Mr. Dombrovskis became Prime Minister of Latvia in February 2009 in the midst of the global financial crisis. He was a member of the European Parliament during 2004-09 and his country's Minister of Finance from 2002-04. By training as a physicist as well as an economist, he is the leader of the New Era Party, a free-market party focused on fighting corruption. Dombrovskis leads a center-right minority coalition government of four parties.

Latvia offers a fascinating and encouraging story of overheating, crisis, and turnaround. The Latvian economy experienced average economic growth of 11 percent growth in 2005-07 but overheated, and its likely decline will be 25 percent in 2008-10. The country concluded a stand-by agreement with the International Monetary Fund in December 2008, but Mr. Dombrovskis insisted on maintaining the peg to the euro and has carried his policies through successfully. Latvia's current account deficit of 23 percent of GDP in 2007 swung to a surplus of 9.4 percent of GDP last year, and the country is now about to return to economic growth. It appears to be a dramatic story of successful albeit quite draconian adjustment. A central question is how, compared with Greece and others, it was able to conduct such a policy without creating domestic political disruption.



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