Greece, Iceland, Latvia

[mindstalk]

When it's pointed out how well Iceland recovered with a floating currency, vs. long lasting euro depression, people sometimes object that it's a tiny country we can't extrapolate from. True, it is small. But then, when people talk about Latvia allegedly recovering despite austerity policies, let's remember its own oddities.

2013 Population (source: googling population iceland, etc.)
Iceland 0.323 million, peak in 2013.
Latvia 2.013 million, peak 2.667 million in 1989; 2.2 m in 2007, so 10% shrinkage in 6 years
Greece 11.03 million, peak 11.19 in 2009

GDP per capita (for comparison, 2013 US is $53k) (source same, Google's graphs)
Iceland: peak $68.8k in 2007, nadir 40.3k 2009, 47.5k 2013
Latvia: 13k 2007, peak 15.5k 2008, nadir 11.4k 2010, 15.4k 2013
Greece: 28.5k 2007, peak 31.7k 2008. nadir 22k 2013 and falling.

So yes, Iceland is small. Latvia is 7x bigger, but still 5x smaller than Greece.

Iceland is growing in population, Greece has shrunk 1.4% from its peak, Latvia has been continually shrinking since 1989 and has dropped 10% just in the crisis. (I don't know how much was deaths > births and how much was emigration. Kind of doesn't matter here: whether retirees or unemployed youth, they probably weren't contributing to GDP.)

Iceland was filthy rich at least on paper, and bottomed out at still 1/3 richer than Greece's peak wealth and almost 3x Latvia's peak. In turn, Greece was more than twice as rich as Latvia in 2008, and even in crashing is 2x richer than Latvia's nadir and 42% richer than Latvia's peak. So if you to throw up your hands and say Iceland is too different, we can't learn from it, then the same can be applied to Latvia's recovery: a small country, poor enough to still have lots of economic catch-up, and with massive population loss. Greece is more developed so has less room for rapid improvement, and where should 1.1 million unemployed Greeks go? Germany?

Picking at it more, Latvia's 2013 GDP/capita is 35% higher than 2010. Impressive! Iceland's 2013 is 18% higher than 2009, or 14% higher than 2010. But if Latvia lost 10% of its population who weren't contributing to GDP, then only about 23% (1.35/1.1) is actual productivity improvement. 7% annual growth in GDP/capita is very impressive, especially for a country that's not super poor (e.g. China is still under $7k) and for austerity, but again, given the baselines... it's not a good role model for a much richer country.

***

The other poster child for sudden devaluation is Argentina, which defaulted and dropped its peg to the dollar in 2001.

Population: 41.45 million in 2013, has been steadily if slowly increasing like Iceland's.

GDP per capita: old peak was $10k in 1998. Slid to 8.7k in 2001, crashed to 3.3k in 2002. Three years later back to 5.8k, or 75% improvement. 2013 (latest data in graph) was an all-time peak of $14.7k. 2008 was the first year above the 1998 peak, at $10.2k.

This is a country 4x the population of Greece, about the size of Spain, but still poorer than Latvia. So devaluation has worked well for a tiny country and a big (among those we're talking about) country, for a rich country and a poor one. One might start thinking it works well in general... just like good economic theory tells us it should.

One retort is that Argentina is a commodity exporter that lucked into a commodity boom. That might explain some of the sheer magnitude of the recovery. But there's no reason to think that's all of it. And the usual implication, if not statement, is that Greece doesn't export anything and therefore can't benefit from devaluation. That's simply bullshit: Wikipedia lists its 2014 exports as 27.2 billion euros, vs. a GDP of $238 billion nominal or $284 billion PPP. (Yes, it uses both euros and dollars.) Either way, we're talking exports of at least 10% of GDP (about the same as the USA!). Imports were 47.8 bn euros. Big trade deficit, but still a big export market that could benefit from devaluation.

One wrinkle is that almost 40% of that trade is refining imported oil: crude oil comes in, products go out, and a floating drachma wouldn't make imported crude any cheaper. Still, over 60% is other stuff. And conversely, tourism isn't listed as an 'export', though it's basically exporting experience to visitors, and totally benefits from a cheaper drachma. (The really big GDP sector is shipping; I have no idea if that benefits from a cheaper local currency.)

Conclusion: devaluation is still a good bet, and a better one than staying on gold the euro, and Latvia doesn't have a lot to teach countries that don't want to kill off or drive out 10% of their population in a few years.