Crisis response and government ownership: International assistance or abuse of power in the cases of Iceland and Latvia?

• Main Author: Hilmar Þór HILMARSSON
• Format: Article in Journal/Newspaper
• Language: unknown
• Subjects: Iceland
• Online Access: http://store.ectap.ro/suplimente/International_Finance_and_Banking_Conference_FIBA_2016_XIV.pdf

The 2008 global economic and financial crisis hit hard in Iceland and Latvia. The response to the crisis was different in those two countries, yielding different results. At the time of writing Iceland is expected to reach its pre-crisis GDP level in 2015 and unemployment is around 4 percent. Latvia is still about 6 percent below its pre-crisis GDP level and unemployment remains around 11 percent. Prior to the crisis both countries had private banking systems. In Iceland the state owned banks had been sold to local investors. In Latvia the banks were mostly owned by international investors. During the crisis Iceland nationalized its largest banks. In Latvia the foreign owned banking system survived. Iceland experienced a large currency depreciation that boosted exports and mitigated GDP decline. In Latvia the national currency, linked to the euro, did not depreciate but Latvia suffered a large GDP decline with high unemployment. Thus privatization of the banking system prior to the crisis was very different as indeed was the response to the crisis. Both Iceland and Latvia received assistance from the International Monetary Fund (IMF) during the crisis. The IMF has labeled their reform programs as success stories, praising their governments as having had strong “ownership” over the actions taken during the crisis. This article will focuses on government ownership of the crisis response Iceland and Latvia. To what extent where local governments in charge exercising ownership and to what extend where external forces, such as international organizations and larger nations in charge of their reform programs? The ownership concept used and abused by the IMF appears to be elusive and it seems clear that Iceland and Latvia had little influence over their response to the crisis and where to a large extent victims of circumstances. External forces, international organizations and larger nations took control. Small states, Latvia and Iceland, global crisis, economic policy, privatization.