Latvia Says No to Populism

October 4, 2010 3:15 PM


Latvia carried out truly remarkable parliamentary elections on October 2, showing that populism is no longer popular. Despite an output fall of 25 percent in the last three years and unemployment of 20 percent, the voters reelected the incumbent center-right minority government, increasing its share of the 100 seats in the parliament from 45 in 2006 to 63 in free and fair elections.

The big victor is Prime Minister Valdis Dombrovskis, only 39 years old, an intelligent physicist and economist with a reputation of honesty. His free market Unity Bloc received 30.8 percent of the votes and 33 seats in parliament, almost doubling its performance from 2006. His party stands for clean and small government, fiscal discipline, free markets, and privatization. It entered the government in April 2009. All four current coalition parties are ethnically Latvian. Through mergers, they have now become three. Unity sets the tone, while the large Union of Greens and Farmers, with 19.4 percent of the votes, could join any government.

These elections are a textbook example of how a serious and competent government can win elections even with severe austerity policies, if it convinces the voters about its competence and honesty and that its predecessors had caused the crisis.

The Latvian government was criticized by two parties that posed the government alternative, the oligarchic Latvian party For a Good Latvia and the social democratic ethnically-Russian Harmony Center. Both pursued populist attacks on Dombrovskis' policies. Harmony Center increased its vote from 14.4 percent in 2006 to 25.7 percent, while the two oligarchs Ainars Slesers and Andris Skele suffered a devastating loss. They had been forced to merge their two parties to stay in parliament, but their combined vote fell from 28.1 percent in 2006 to 7.5 percent. Not only did populism take a big beating, but oligarchic populism suffered a devastating blow, rendering the remaining populism mainly social democratic in its philosophy.

The main battlefront in these elections was the economic crisis and its resolution—that is, the International Monetary Fund–European Union (IMF-EU) program of December 2008 of $10 billion. The two parties, For a Good Latvia and Harmony Center, attacked the government's austerity policy, the IMF, and the Swedish banks, advocating fewer public spending cuts and devaluation.

Dombrovskis has acknowledged the severity of the crisis but blamed his oligarchic predecessors. He has explained that the government therefore had to pursue appropriate austerity to save the country. Softly and seriously, he has explained and apparently convinced his compatriots.

His policy has not been for the fainthearted. In 2009, he cut public expenditures by about 10 percent of GDP. Like neighboring Lithuania and Estonia, Latvia focused on expenditure cuts aiming at profound structural reforms. Public wages were slashed by 30 percent. Half of Latvia's state agencies were abolished, half of the hospitals were closed, and thousands of public servants were laid off. But Dombrovskis refused to abandon the low flat personal income tax or raise the low corporate profit tax, though he accepted a hike in the value-added tax and various excise taxes as well as the property tax. Even so, the budget deficit this year is likely to be 8.5 percent of GDP.

The second reason for the demise of the oligarchs who have so long dominated Latvia's politics is that Slesers, one of the oligarchs, was subject to serious criminal allegations during the election campaign, and the journalist who presented the information was forced to flee the country because of anonymous threats.

The superior campaign financing and media access of the oligarchs and Harmony Center (seemingly richly financed from Russian sources) did not help. Not least, the democratic internet plays a major role in the Latvian news room.

These elections offer interesting conclusions. Dombrovskis summarized the outcome: "Voters have sent a quite clear message that they prefer stability and continuity."

Populism is not popular in this part of the world, while economic rationality is. This is also true of the recent parliamentary elections in Sweden, Slovakia, and the Czech Republic. The liberal center-right has never been as strong as it is now, and social democracy has never been weaker.

Ultimately, Dombrovskis is more credible as an economic manager than Harmony Center's Janis Urbanovichs, whose clips on YouTube showed him to be less than forceful.

The elections also confirm that Latvia, which has just returned to economic growth, has worked itself out of its severe economic crisis. Its IMF-EU program has proven a political success and will probably prove an economic one as well.

One corollary is that devaluation was neither necessary nor inevitable—contrary to the claims by many prominent American economists ranging from Paul Krugman to Nouriel Roubini and Kenneth Rogoff. "Internal devaluation," with cost and wage cuts instead of devaluation of the currency, has proven to be a viable alternative policy, and politically it is more popular.

Most of all, these elections were a blow to the Latvian oligarchs who have polluted the country's politics for many years. This was a vote for the rule of law, giving the government a strong mandate to strengthen lawfulness.

The patently serious Dombrovskis greeted his victory: "There is still serious work ahead."

Anders Åslund is the author of the book The Last Shall Be the First: The East European Financial Crisis.