Small States and Neoliberalism: LatviaÕs

Jeffrey Sommers


time is long overdue for a reassessment of Latvia’s economic development. A

decade after economic reforms, and nine years after independence, in Orwellian

fashion this Baltic nation’s failures are somehow presented as achievements,

as was the habit during Soviet times. Some things never change. Year after year

it is stated that it is in "transition." This is meant to deflect

criticism of neoliberal policy failures. Yet, a decade out we must ask is

Latvia, and similar CIS nations of the former Soviet Union, in transition? Or,

is the transition complete and Latvia’s tragic present its equally tragic



have been real achievements now, just as there were real achievements under

Soviet domination, yet we need to objectively weigh both the successes and

failures in order to make future sound economic policy. This must be done while

maintaining a commitment to democracy, yet while also rejecting the canard that

one particular model of economic development is congruent with a democratic

society. That is the public’s job to decide; not faceless bureaucrats at the

World Trade Organization; nor the most pampered intellectuals from the most

highly funded private salon think tanks; and certainly not the "Marriott

Brigade" advisors who have plagued East Europe in their triage policy

making made within the confines of luxury hotels.


can be at the bottom in economic performance (per capita GNP) of the list of 11

nations seeking EU membership (although some put it above mighty Bulgaria), yet

those in power herald its march toward "reform" a success. If we mean

have a few gained at the expense of the many, then yes, this has been a

"success." This is not to say that anyone who prospers does so at the

expense of others, but just as important is to recognize that some prosper on

speculation and destruction of value, rather than its creation. This nation was

predicted to be the future jewel of the Baltic upon independence, but instead

its slavish adherence to failed monetarist doctrine at the guidance of a

community of Georgetown University economists guiding it, has left it shattered.

Yet, to be fair, part of its capital, Riga, does sparkle, but as anyone who

knows the region recognizes, this is in part due to its function as an offshore

center to Russia, Belarus, and Ukraine. Like a beautiful mushroom feeding off

the dying trunk of these great fallen trees, the wealth created here is

parasitic, and not generated from productive economic development.


ill-gotten money from points East is not the only thing Riga traffics West. The

other major "commodity" of this transit center is women. A UN report

suggests Riga exports 15,000 women into the bondage of Western sex industries

annually. The women come from Latvia, and again, just as with the hot money that

flows through it, from Russia, Belarus, and Ukraine. In fact, a recent IREX

report shows that 500,000 women have from the CIS nations making up the former

Soviet Union have entered the Western sex industry. Many have been coerced into

it, and found themselves tortured, or worse, after entering it. As a historian,

this is what we used to call slavery, and for the millions of workers who have

not been paid in the CIS nations, it is what the eminent historian of Russian

history, Stephen Cohen, reminds was once called serfdom. Again, more victories

for the "transition" economies and their Washington Consensus



have been the winners in the "new economy;" which to many increasingly

resembles the old economy of the late 19th century? Largely some young to

approaching middle-aged men and the old nomenklatura who recognized they could

make out better under neoliberalism than communism in their revolution from

above. The losers are most women, most rural dwellers, most workers, most

industry, and most children. In sum, most people. This immiseration of the many

is a kind of gulag, and one which the current order must take some

responsibility for. Production has plummeted approximately 40% in ten years,

numbers the Soviets never even matched in their worst decade, the 1980s. By any

objective measure this has been an unmitigated disaster for Latvia. It is only

ideology, and I wish to stress the term ideology, which conceals the scope of

this failure. The ideology is neoliberalism.


this another tired call for a return to the past or a defense of the current

system (which for one recent letter to a Baltic newspaper from an Estonian,

could only muster a weak plea for the current order based on availability of

better beer, wine, and cars now)? No. This has always been part of the

ideological obfuscation of the real choices present: Soviet style communism,

versus neoliberal free markets. These false choices close off real debate.


we all know the Soviet system was not "Soviet" (for they almost

immediately suppressed the Soviet worker’s councils and a decade latter

executed most communists under Stalin’s purges), nor is neoliberalism about

"free markets" (for governments have had to heavily regulate and

manage any economy that has successfully developed). Nor is neoliberalism about

the prosperity enjoyed by the West from the end of WW II into the 1970s, and in

West Germany and Scandinavia through the 1980s under a Keynesian order. Nor was

it the system the Asian Tigers pursued in their successful path to development

up to the mid-1990s, and in China continuing to today. These successes were all

derived from successful mixed economies, where the collective actions of society

allowed individuals to prosper while growing the economy for the benefit of

many. Neoliberalism, by contrast, is merely a return to the economic precepts of

the mid to late 19th century, which were discredited by the Great Depression of

the 1920s and 1930s, and the rise of fascism, Stalinism, and the world wars

these liberal economic policies engendered. Neoliberalism’s return is merely a

return of that ideology’s hard-core adherents, who were discredited by

economic liberalism’s early 20th century disasters and the successes of

Keynesian embedded liberal approaches after World War II. They rose again during

the crisis embedded liberalism experienced in the 1970s, and brought the return

of 19th century economic orthodox thinking under the label "neoliberalism".


is time for people to begin asking who benefits from the current order and who

loses? This must be done without demagoguery. It will prove a most difficult

test for a nascent democratic society. The alternatives? As the famous Hungarian

economist, Karl Polanyi, living in Vienna during economic liberalism’s swan

song in the 1920s, warned, will be fascism and Stalinism. Society cannot

tolerate the economic dislocations caused by economic liberalism, or

neoliberalism as it is called today. It destroys society and democracy and

leaves a vacuum open for authoritarianism in its wake. As the conservative

social theorist and early advisor to Margaret Thatcher, John Gray, recently

cautioned, "we can know in advance the results of this radical experiment

in economic liberalism, under the new guise of neoliberalism, will be." He,

along with others who helped bring this system into being in the 1980s are now

warning they were horribly mistaken. They caution that its defenders are

strident ideologues who continue in its defense despite all the evidence showing

its harm. In this sense, neoliberals are not conservatives, as they call

themselves, but according to more traditional conservatives like Gray, dangerous

radicals in their destruction of more healthy mixed economies.


is time for a frank discussion of neoliberalism. Globally, it has produced

massive dislocations. It has been a disaster for Africa and Latin America.

Especially in Mexico where living standards are roughly only half what they were

before 1980. In the rich nations it has led to limited growth far below that of

the three decades following World War II and was rejected by the East Asian

Tiger economies, which prospered in the 1970s and 1980s. It has also led to

growing inequalities, and in the case of the US, worker incomes at 1960s levels

after adjusting for inflation. Lower wages have also come with longer work

hours, declines in pension and health benefits, and reduced job security. A

significant number have benefited by gains in a stock market all out of

proportion to the underlying fundamentals of economic growth. In other words, it

has been a simple redistribution of wealth from the public to finance and

multi-national capital. Wages have begun to rise in the US again these past 4

years, but even if these very modest gains continue it would take many years

just to return to inflation adjusted 1973 wage levels, while the previously

mentioned losses in social benefits remain. Manufacturing productivity has

stagnated and many think is even down, with the exceptions of the personal

computer and internet industries, both developed by the state (not the private)

sector; the first through the NASA space program, the second through the

military. No private industry would have the incentive to have developed these

two sole engines of growth in the real economy.


sum, no nation, and I stress the word nation as constituted by all its citizens,

has benefited from the neoliberal changes in the global economy consciously

undertaken by certain governments starting in the late 1970s. Only certain

groups of people have benefited. This is not to besmirch the reputation of

neoliberalism’s adherents. Many believe that eventually we will reach the free

market utopia bringing prosperity to all. We have been made promises by others

of prosperity being just around the corner. We need to weigh the evidence, not

buy into promises. We need candid discussion instead of genuflecting to ideology

and received wisdom. The regaining of independence from the clutches of Soviet

rule by nations such as Latvia, was truly a reason for all democratically minded

people to celebrate. It would be tragic if Latvia’s history of subordination

to the yoke of Soviet oppression caused it to merely react and embrace what

appeared to be the opposite ideology. Regardless of where we live we would all

be wise to heed lessons of the 20th century and the sage warnings put forth by

Polanyi and Gray about our present path. That future is indeed insecure, and not

what the resisters of Soviet colonization in the Baltic states so bravely

struggled for. The time for change is now!


Sommers World History Center Boston/Riga <www.whc.neu.edu>



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