Tuesday, February 5, 2013
Austerity in Small Places
February 5, 2013
Interest in small countries’ economic policies is usually confined to a small number of specialists. But there are times when small countries’ experiences are interpreted around the world as proof that a certain policy approach works best.
Nowadays, Greece, the Baltic states, and Iceland are often invoked to argue for or against austerity. For example, the Nobel laureate economist Paul Krugman argues that the fact that Latvian GDP is still more than 10% below its pre-crisis peak shows that the “austerity-cum-wage depression” approach does not work, and that Iceland, which was not subject to externally imposed austerity and devalued its currency, seems to be much better off. Others, however, have noted that Estonia pursued strict austerity in the wake of the crisis, avoided a financial crisis, and is now growing again vigorously, whereas Greece, which delayed its fiscal adjustment for too long, experienced a deep crisis and remains mired in recession.
Both sides in these disputes usually omit to mention the key idiosyncratic characteristics and specific starting conditions that can make direct comparisons meaningless.