Estonia, tiger that is jumping the wrong way

12.06.2012, 10:29

news2biz editor Aivar Õepa writes that economists can behave like animal trainers, telling the tigers which way to jump. But when the tigers jump the wrong way, the traineres could sometimes become angry and ironic at the tiger. No wonder then that the tiger may sometimes bite back.

In fact, Krugman has mocked the Baltic recovery for quite long in his NYT columns. Perhaps unintentionally, perhaps he treats the nations only as a scientist, as subjects of theoretical research, not thinking, thriving and most importantly, feeling communities, but nevertheless. He should be able to understand that even posting as mild mockings as quoting Tacitus' "they make a desert, they call it peace", while writing about the Balts' efforts on tightening their budgets, will insult the very same people who try hard to make the ends meet in difficult times.

Krugman is a hard-core Keynesian, and Keynesians believe that the government should add spending in crisis in order to revive the economy, and printing money for that purpose is an acceptable behaviour. Opposite is the Austrian school of economics, the representatives of which dominate the governments of the Baltic countries, who believe that spending must match the income in any time, and that the austerity is the way out of crisis.

I will not take a stance on possibility of success of some theoretical approach – it is likely that Keynesian approach works as well as the Austrian one, that both are just two sides of the same coin – but I will side with my president nevertheless. It is not fair to call the successful implementation of the opposite theory "a desert" or "wasteland".

Estonians (and other Balts) suffered a two-year drop in their salaries, social & community services, living standards, etc., as their leaders have told them that cutting government's spending is the way out of crisis. That very same crisis that emerged from the real estate boom and limitless borrowing, both incited by the Western banks and consumerists. And indeed, this has been the way out of the hole, in which the Balts dug themselves while listening to the Western serene song.

The economy is now far from a blooming state and the unemployment level is at the moment still above 10%, but there is certainly a light visible at the end of the tunnel. One cannot feel the careful rise of optimism when blogging from NY, but when living here, it is in the air. The unemployment has decreased by ten percentage points in 1.5 years, the output volume of the Estonian industry is near the all-time high, there are investments pouring in bringing along more jobs. Perhaps too slowly for someone on the other shore of the Atlantic Ocean, but fast enough to prove the locals here that the belt-tightening after the orgy of consumerism is a measure that brings results.

And then comes Paul Krugman, well-respected economist, the Nobelist, and says something like that: "Guys, I see you made an effort to prove that austerity works, but hey, I don't see any particular improvement. It is no achievement at all." No wonder we go ballistic on him. Nobody gives us crap, even a Nobelist or the President of the Universe – after we have sacrificed quite a lot for the better future. Nobody tells us this wasn't remarkable effort, and it didn't pay off.

What makes Krugman's case worse is that he tries too hard to fit Estonia in his theoretical model. The same graph, showing Estonia's GDP in 2007-2011 that he used in his recent blog posting is the perfect example of that. Find below the graphs with the progress of Estonia's GDP in 2007-2011 and 1996-2011. Spot the difference? In one case, there is indeed an "incomplete recovery". In the other graph, however, there is a steady growth, increasing the GDP fourfold in 15 years – with the little boom in the middle.