The Directorate-General for Economic and Financial Affairs (DG ECFIN) of the European Commission is organising together with the Bank of Latvia a one-day seminar on the Latvian economy on 1 March 2012 in Brussels:
"EU balance-of-payments assistance for Latvia: Foundations of Success" (working title).
The aim of the seminar is to evaluate the Latvian economy's past and prospective economic performance: accumulation of imbalances in the boom period by the end of 2007, economic reforms and correction of imbalances driven by the EU/IMF financial assistance programme in 2009-11, as well as future developments in the areas of growth potential, structural reforms and competitiveness. The analysis of the successful implementation of the financial programme, including the use of internal devaluation policies for correcting imbalances and restoring competiveness, is expected to contribute to academic debates and policy guidance for other countries facing similar economic challenges.
The Latvian economy was the fastest growing in the EU from 2000 to 2007 reflecting convergence prospects and foreign financial inflows contributing to strong domestic demand. However, many imbalances were accumulated in the boom period. Consequently, the economy experienced the steepest contraction in the EU in 2008-09 on combination of productivity drops and adverse external shocks. During that period, real GDP contracted by 25% from peak to trough. The recession led to a rapid increase in unemployment and a fall in wages. The economic crisis also took a heavy toll on public finances, as the general government deficit widened from 0.3% of GDP in 2007 to 4.2% in 2008 and 9.7% in 2009. To address the crisis, in December 2008 the country reached an agreement with the EU and the IMF on a medium-term financial assistance programme. The national authorities and the international lenders agreed on a comprehensive adjustment programme that included substantial fiscal consolidation, a wide range of structural reforms, and a strengthening of social safety nets to protect most vulnerable. The economy moved back to growth and job creation in 2010 at a pace exceeding initial expectations and the government successfully re-entered the international bond markets in 2011, well ahead of schedule.
Much of the accumulated imbalances have been corrected and competitiveness of the economy has been regained in the course of implementation of the financial programme. The economy is clearly moving in the right direction but nevertheless a number of challenges remain, such as high structural unemployment and income inequality that is among the highest in the EU. Further on, inflation risks and remaining structural bottlenecks may continue to weigh on competitiveness while unfavourable demographic trends pose threats to potential growth and fiscal sustainability in the long run.
With a view to improving our understanding of these issues and derive policy implications for Latvia and other member states, the Commission invites the submission of contributions addressing (one or several of) the following questions:
What have been the main factors behind the rapid growth of the Latvian economy until the end of 2007 and what have been the reasons for accumulation of imbalances and the hard landing in 2008-09?
In order to satisfactorily explain Latvia's economic performance before and during the crisis period, the contributions need to address main developments in the real, financial, fiscal and external sectors of the economy and to separate structural growth determinants from both domestic and global cyclical factors. Authors are encouraged to analyse in greater detail key economic factors and policy decisions that have contributed to the overheating of the economy with the aim of deriving lessons for future policy decisions. Possible topics of discussion in this direction encompass EU convergence effects before and during the crisis, fiscal policy, credit dynamics, property market, current account balance, debt and non-debt external financial flows, debt sustainability in the private and public sectors. Structural aspects of the economy should be seen from the perspective of their effects on the country's competitiveness, identifying existing bottlenecks and generating ideas for policy actions.
What have been the fundamentals of the successful internal adjustment of Latvia during the crisis and what policy recommendations can be derived for other countries facing similar economic challenges?
The Latvian experience with the correction of imbalances and restoring competitiveness shows that internal devaluation in countries with fixed exchange rate or no independent monetary policy is not only possible but in some cases could even yield better results in comparison with the alternative approach of nominal devaluation. However, the questions remain what are the pre-conditions for successful internal devaluation and to what degree do they also apply to other countries. These pre-conditions need to be seen in the context of the size and openness of the economy, currency denomination of debt, price and non-price factors of competitiveness, confidence effects, flexibility of the economy, including price and wage adjustment mechanisms, institutional framework and interaction among major economic agents, as well as labour market and social policy specifics. Contributions could emphasize the pros and cons of different adjustment policies for restoring external competitiveness and to link them to the debate on the policy adjustment in members of the eurozone.
What are the preconditions of a successful EU/IMF financial assistance programme?
Contributions are expected to focus on the political economy of international assistance and financial programming. This should include a brief review of core areas of policy conditionality (fiscal, monetary, financial sector policies and structural reforms), policy action and interaction with political circles. In addition to taking stock of the evolution of programme design and implementation in Latvia, comparisons with EU assistance programmes and procedures in other countries, including the role of the IMF and other lenders, should be prepared. Conclusions should focus on lessons for handling of crises in other EU members and what can be learnt from the negotiation process rather than on the economics.
How can Latvia sustain the process of recovery and what policy actions are needed in order to achieve sustainable growth and improve social indicators?
The Latvian economy is expected to grow by more than 3% in 2011 and to maintain an annual growth of about 4% in 2012-14, according to the government convergence programme. However, the country still has a high unemployment rate, inequality is high and social indicators are weak, and a number of structural deficiencies are still in place. Contributions should point out the main policy issues for the country on the way forward such as the plans for euro adoption and measures to ensure sustainable growth, competitiveness, and a sound external position as well as necessary structural reforms (e.g. education, labour mismatch, business climate). The papers could also analyse factors affecting growth potential and long-term fiscal sustainability under the constraints of negative demographic trends and strong dependence on external markets in terms of both export demand and import prices.
It is expected that 4 papers are to be presented by the respective authors during the day of the seminar, followed by comments of discussants and a general exchange of views among participants.
The final papers should be original work created in response to this call for papers and be roughly 15,000-20,000 words in length.
Selected authors will be required to send electronically a full draft of their paper to DG ECFIN by 31 January 2012 and to present it at the seminar. The final version of the paper should be submitted electronically by 15 April 2012.
In accordance with the conditions of the purchase order , the Commission intends to pay a fee of € 3,000 per paper. The Commission will arrange and pay for travel and accommodation as well as to provide a daily allowance for one speaker per paper to present it at the seminar in Brussels, irrespective of whether the paper is authored or co-authored. The travel and accommodation arrangements will be made via a travel agency, acting on behalf of the Commission.
We invite the submission of abstracts or annotated outlines (one to two pages) of preliminary papers related to any one of the four above mentioned issues. Papers can be co-authored (proxy form co-author ).
Draft outlines should be submitted together with
to the e-mail address [email@example.com], clearly mentioning the topic of the paper in the subject line of the e-mail. The above mailbox is reserved solely for submissions. Submissions sent to other mailboxes or to Commission staff cannot be accepted. No other communication should be addressed to this mailbox.
Deadline for submission: 30 September 2011 (20:00 CET)
The evaluation of the papers will be based on the following criteria:
(i) explains how the topic will be addressed,
(ii) discusses the theoretical and empirical techniques that will be used to analyse specific issues, and
(iii) explains the policy relevance of this analysis.
The submissions will be evaluated and ranked with a view to select about 4 proposals. The selection procedure is expected to be completed by mid-October 2011. Candidates will be informed by end October 2011 of the outcome of the procedure.
Conditional on their quality, papers are intended to be published in a volume collecting the seminar proceedings. Copyright will be governed by the provisions specified in DG ECFIN's Special Conditions attached to the purchase order. The Commission will retain the copyright.