Top Ministers: Estonia Does Not Fit Into Krugman's Model (33)

Published: 07.06.2012 15:12

Estonian President Toomas Hendrik Ilves
( Photo: Postimees/Scanpix )

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With emotions soaring after the Estonian president criticized Nobel Prize-winning economist Paul Krugman via Twitter, the Estonian Cabinet was quick to rally in support of the president, following the release of a statement in which the head of state defended his remarks.

"It was a sincere and offhand reaction in defense of Estonia's efforts in recent years,” President Toomas Hendrik Ilves was quoted as saying in a press release.

On Wednesday, Krugman published a New York Times blog post entitled "Estonian Rhapsody,” in which the Keynesian and Eurozone skeptic expressed doubt over Estonia's role as what he said was a poster child for austerity advocates. Ilves rebuked: "Let's write about something we know nothing about & be smug, overbearing & patronizing."

At a government press conference, Finance Minister Jürgen Ligi, praised internationally in some circles for being one of the key architects of Estonia's fiscal policies, gave the president his backing.

"This is a matter of principle and I strongly support the president. This person [Krugman] has become a hack writer and a champion of the [US] president's policies,” Ligi said, adding that Krugman received the Nobel prize because there is no such thing as a "Nobel Prize for journalism.”

“In reality, Krugman has to a great extent supported the system that created our poverty and which is now over - and which regulated and printed money according to their own interpretation of economic rules. In the US that is possible, but we cannot solve our porverty according to those recipes - by borrowing money and buying ourselves expensive things,” Ligi said.

Sitting in for the prime minister, Defense Minister Urmas Reinsalu said that Krugman's influence cannot be underestimated, but that the Estonian story is an unsolved puzzle for the economist.

"Above all, even his most voluminous writings assert that the public sector must grow, be indebted and foster state-sponsored jobs," Reinsalu said. "Estonia is a problem for Krugman because Estonia doesn't fit into his theoretical model."

Another person to take the president's side, a private banking strategist for SEB, called Krugman's blog post “absurdly superficial” and said it was time that someone bring the economist “back to earth.”

 


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Comments (33)

  • ameeriklane

    07.06.2012 15:19

    So instead of providing a counter-argument to Krugman's post, they just attack Krugman?

  • Mark.

    07.06.2012 15:21

    Please people, understand this: The amount of grants from the EU flowing into Estonia was greatly increased after 2008, this helped Estonia get into the eurozone. Without this surge in funds Estonia's budget deficit would have been to big. In 2011 net inflow of funds amounted to 5,2% of GDP. If the PIIGS would receive such support (transfers instead of loans) they also wouldn't be in such big trouble. According to the ministry of finance 20% of the budget consists of foreign aid. This means that if the Estonian government would not receive these funds, taxes would have to be raised or spending cut with 20% ! Estonia cannot serve as a fiscal model for other countries in trouble that don't receive such fiscal (p. (State budget strategy)

  • Mark.

    07.06.2012 15:45

    My references where not included in my last comment, but you can find them in the last Article IV staff report by the IMF (November 29, 2011, p.31) and the website of the Ministry of finance under budgetting/state budget strategy.

  • DC

    07.06.2012 15:57

    Krugman was going after the people who say that austerity delivers growth. In reality, the Estonian govt. was about as Keynesian as they could be under the circumstances. They could not borrow so they increased taxes and used reserves to fund the deficits. They maintained services and cut things like pension contributions that would not be spent now. They did not really cut spending (only about 2 or 3% from 2008 to 2009 in actual EUR terms), they accelerated EU transfers creating lots of stimulus cash (peaking at a net transfer of about 8.25% of GDP in 2010). Head counts declined in theory, but the reality was that many of this positions were vacant due to the labor shortages. Without this robust response, Estonia would me in a much worse situation than today. The govt. did a good job of saving something when times were good and maximizing their ability to spend during the crisis - this is the world according to Keynes.

  • Ship

    07.06.2012 16:16

    Instead of insulting Mr.Krugman and fighting a kind of ideological war, I would see these guys taking the problems in Estonia more serious. Krugman did provoke an uproar showing that the ruling elite in fact has nothin more then growth figures to point to. Where is the substancial improvement in any other field?

  • Ridiculous

    07.06.2012 21:21

    Really? It's just a small blog post!! Come on! Who do they think they are?

  • The Truth

    07.06.2012 23:49

    Good for Ilves! Krugman is a troll whose little Times missives aren't written with an objective voice but with the demeanor of someone who's a smug subjective stuffed shirt. It wasn't written to change minds but to be abrasive and divisive. It wasn't written with an objective tone but with an objectionable style.

  • avatar

    Knut_albers

    08.06.2012 00:30

    DC, Keynes is dead. Meanwhile it is true that currently 7% of Estonia's GDP is based on EU contributions, I don't think that this makes anything better here, but a country become more lazy when part of its economy is based on "free lunch" and always can demand for more if you're running out of cash. I mean, it's horrible and I do not believe that Estonia could not be better off without it. It's even not a real growth, as this is just taken away from other parts of EU's economies and re-distributed to them. Government is also unable to solve economic problems, but they can reform the country that would allow for a grow. But the only reform they were capable to manage since the crisis emerged (in Estonia already in late 2007), was the currency reform by joining the EURO. I would say, that's not the kind of reform one would expect during a major crisis in the first place.

  • rick

    08.06.2012 09:59

    Keynes is not dead - it's more that the exception of Estonia proves the rule. Still, the behaviour of Krugman et al has been shabby. And while Jürgen Ligi is talking out of his ass as usual, I agree with Reinsalu 100%. Exactly. It was also very funny to watch Naomi Klein in her book The Shock Doctrine last decade completely omit any mention of Estonia or Mart Laar, because after all it would have devastatingly undercut her indictment of Friedmanite economics. Cheap.

  • EU

    08.06.2012 11:10

    Knut, that's like saying the French agricultural sector is lazy due to its massive 'free lunch' as you call it. One of the big things about the EU is subsidies/structual funds etc. ALL member states benefit from them, so it is unfair to call anyone or any country's particular industry lazy.

  • Oke

    08.06.2012 11:42

    I agree, Ameeriklane. No use in relying on ad hominem as a logic for argument.

  • Mark.

    08.06.2012 13:09

    @ EU: France still contributes more than it receives. Estonia receives six times more per person than what it contributes, while France receives 'only' 70 % per person of what it contributes per person. But this is only normal as France is a much richer country. Estonia receives the most per inhabitant of all EU countries: 600 euros (Luxemburg excluded, but they get it because of the many European institutions). You can see it in this graph from The Guardian: (But probably ERR news does not allow links?)

  • Links

    08.06.2012 13:23

    are unfortunately deleted automatically by the system.

  • Mark.

    08.06.2012 13:38

    You can find the article using the search function of The Guardian. Type "where does the European Union get its money" using quotation marks. You can see that Estonia contributes 0,1 billion Euros while it receives 0,8 billion. France contributes 18,2 billion Euros but receives only 13,1 billion

  • CAP

    08.06.2012 14:09

    @Mark - But French farmers do not contribute all that money (the state does), but they receive the lion's share of subsidies the country gets, thus fitting the definition of lazy that Knut implied.

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