Edited by Óscar Dejuán, Eladio Febrero and Maria Cristina Marcuzzo
Chapter 13: Manifestations of the Global Crisis in a Small Open Economy
13. Manifestations of the global crisis in a small open economy Ivars Brīvers 13.1 INTRODUCTION The extremely high economic growth of the economy of Latvia in 2002–07, which is now ironically called ‘the fat years’, was followed by a sharp decline in 2008. At the end of 2009 Latvia was close to insolvency and economic catastrophe. At the beginning of 2010 there are some signs of recovery, but the excessively narrow approach to the economy casts doubts that the recovery concerns figures not people. Could the current economic collapse be the result of those ‘fat years’? Latvia can be considered as the most striking example where rapid economic growth has been just the opposite of sustainable development. Normally GDP shows the volume of economic activities on the one hand and the income of population on the other hand. In the case of Latvia there was a significant gap between these two aspects, as its rapid economic growth was followed by a more dramatic increase in foreign debt. How can we explain the extremely rapid growth of GDP in Latvia? Was it based on technological innovations or a highly increased level of human capital? Could it be the result of a significant increase in the economically active population in Latvia? Not at all. Instead, approximately 10 per cent of the labour force has left Latvia, and even larger numbers of them are trying to leave the country in the near future. However, economic growth took place mainly in speculative...
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