The Real Story About Latvia Is How It Cut GDP By 20% Without Revolution

This article, by Dani Rodrik, describes the Latvian experience with severe austerity.  Latvia is often cited as example of a country that successfully used austerity to restore economic growth.  Lativia's economic problem was a severe trade deficit.  The IMF told them to devalue its currency to reduce the trade deficit.  They chose to retain the peg of its currency to the euro in order to enter the eurozone in 2014.  Consequently, they implemented austerity in order to reduce wages and make their products less expensive for export.  That has not happened.  Private wages proved to be "sticky' but public wages, which have nothing to do with the cost of  tradeable goods, did fall in response to austerity measures.  The imposition of austerity reduced GDP by 20%. The economy has started to grow, but GDP is still below the level it was at before the government imposed austerity.  Dani Rodrik cannot understand how Latvia could reduce output by 20% without creating the political problems that we have seen in other countries that have resorted to austerity measures.