Luke Judge

The capital of Estonia, Tallinn is likely one of the most enchanting cities I have every visited. A mix of medieval and modern building, narrow cobble stone streets set beneath spires, domes and churches built in the 12, 13 and 14th centuries. The city is clean and safe, there were many tourist, although not as many as I was expecting. Tallinn is a stop for Baltic cruise ships, usually only for a few hours. It is also a popular destination for stag parties..go figure, cheap booze and great bars. We actually saw a group of young guys drink absinth at 9:00a.m. (Fraser and Salgado would approve).

Yesterday was spent the day visiting museums, churches, cathedrals and eating at some quaint little restaurants. It was only 8C and there was drizzle all day, no heavy rain. Sure, it would have been nice to see the sun but when it rains, tourists stay in their hotel room and cruise ship people don’t leave their buffet lines. As a result, we had the city to ourselves. The main square was empty and the bistros too. Had it been sunny, the place would have been packed and lines would have formed to get to the must-see sites.

A highlight for me was the Occupation museum. Estonia was invaded by Russia in 1939 and the fall into the Soviet sphere was not a happy one (as you can imagine). It was so bad that when Nazi Germany invaded in 1941, they were greeted with cheers of joy. By 1944, the Russians has bombed Estonia badly, destroying most of the cities and Germany retreated. After WWII, tiny Estonia was annexed to the Soviet Union and between 1945 to 1989, the percentage of native Estonian dropped from 97% to 62%. For a series of poignant films on this topic, go to the museum’s website right here.After the insightful visit, we started seeing the city through a different lens. For example, St. Olaf Church’s spire (the tallest of the city) doubled as the KGB’s surveillance centre, 250 steps straight up, feel the burn. Old russian cars were probably owned by some of the city’s most prominent communist party members. The way Estonians serve Russian tourists, you can tell the difference (or at least that’s what I thought).

Would I recommend a visit to Tallinn or that you add it to the top 10 must sees in your lifetime. For sure, I know that we’ve been here for three days and would love to stay longer. Get here soon before the rest of the world does!

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Mark Weisbrot and Rebecca Ray of CEPR have  written a wonderful paper (HT: WSJ Economics Blog) on woes and performance of Latvian economy.

What is shocking is how much Latvia has contracted:

The Latvian economy went into recession at the beginning of 2008 and has since lost an estimated 25.5 percent of GDP, making it the worst two-year decline on record. Figure 1, adapted from Reinhart and Rogoff (2009), shows the Latvian loss of output in comparison with past economic crises. The Great Depression downturn of 1929-1933 in the United States is steeper at 29 percent, but that is over a four year period. The IMF is now projecting that Latvia’s GDP loss will be 30 percent from peak to trough, which would be worse than the loss of output for United States for 1929-1933.

It is worth noting that the recession that comes closest to Latvia’s 2008-2009 loss of output, although it took nearly four years, is that of Argentina in 1998-2002. As can be seen in Figure 1, GDP in Argentina during that time collapsed by 22 percent. During that time, Argentina was pursuing a similar policy: in response to external shocks, it attempted to maintain an overvalued exchange rate, with the peso fixed at one peso to one dollar. As discussed below, adjustment under the peg proved impossible; instead, the pegged exchange rate eventually collapsed after three and a half years of recession.

This paper argues that the difficulties associated with adjustment under a fixed exchange rate regime has in Latvia – as in Argentina – deepened the recession and made recovery extraordinarily difficult.

Latvia was a typical case of credit boom, financed by foreign capital inflows leading to consumption boom.

The authors argue that letting the currency depreciate would involve a lot of pain but would be lesser than the cost of current fixed exchange rate. They point to the evidence of Argentina whose economy improved after allowing Peso to depreciate. This was contrary to expectations as exchange rate depreciation had created havoc in South East Asian economies leading to higher costs of foreign debt.

Good insights on Latvian economy.

This entry was posted on February 10, 2010 at 4:56 pm and is filed under Academic research & research papers, Central Banks / Monetary Policy, Economics – macro, micro etc, Economist, Financial Markets/ Finance, Policy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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