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A. Cepilovs: Fiscal austerity and the 2013 Riga Maxima case
More than a year has passed since the tragic event in Riga on November 21, 2013, when structural elements of a shopping mall built in one of Riga’s boroughs in 2011 collapsed, killing 54 and injuring 127 (data by Cross-sectoral Coordination Centre). While the criminal investigation is still ongoing, and a parliamentary commission has only very recently started its work on the issue, I think it is the right time to look back and examine at least some of the underlying factors, or mechanisms that allowed this to happen. While the criminal investigation will, hopefully, identify those responsible for the tragedy, here I’d like to focus rather on the structural preconditions that allowed this to happen. Günter Grass maybe best summarizes these in a quote: ‘Irresponsibility is the organizing principle of the neoliberal vision’*
Latvia as a neoliberal project
Some might disagree, but the entire project of the new Latvian republic is a neoliberal one. When Latvia broke off from the Soviet Union in 1991 neoliberal ideas had been dominating both economic and political discourse in the western world for over a decade, and even reached a point when those very same neoliberal ideas were implemented by people who claimed themselves to be ‘socialists’, such as Schroeder in Germany, Blair in the UK and Jospin in France.
For the sake of clarity I am referring to ‘neoliberalism’ here as a set of ideas and practices that involve faith in the primacy of markets in coordinating social life, reducing the state mandate, deregulation and privatization, as well as, and importantly so, primacy of individuals, and their choices and freedoms above everything else.
Introduction of neoliberal ideas was facilitated by the context, where almost everyone was against anything ‘social’, often perceiving it as a communist legacy and therefore something unwelcome. It was also facilitated by the new elites, such as Einars Repše, the former president of the Bank of Latvia, who were often educated in the US and thus had significant exposure to these ideas. And last, but certainly not least important, the introduction of neoliberal ideas into polity was greatly facilitated by the international financial institutions, such as the International Monetary Fund, the World Bank and the European Bank for Reconstruction and Development, through their technical assistance and a range of requirements for reforms that came as a necessary complement to financial assistance. This essentially was the context in which most of the institutions necessary for the functioning of a market economy were developed. Thus, one can say that regulatory environment, both in terms of regulations and formal institutions responsible for implementation of those regulations, was very lax to start with.
Then, in late 2008 the global financial and economic crisis finally reached Latvia. Contrary to Estonia, where participation of local capital in financial sector is relatively limited, one of the largest banks in Latvia in terms of assets, Parex bank, was domestically-owned. Following a liquidity crisis, the government of Latvia decided to take over Parex in order to ensure stability of the financial system. The bailout required the government to deposit close to 1.2bn Euros of treasury funds in the bank (click for official takeover plan). As a result of this, the government, facing significant fiscal pressures was forced to request financial assistance in the end jointly provided by the IMF, the EC and a range of other lenders.
What followed later was an assault on what had already been a rather weak state through a comprehensive set of austerity measures implemented across the board and at a rapid fire pace – without much discussion and reflection – some of those immediately relevant to the tragedy.
‘Common-sense’ neoliberal arguments of austerity
Fiscal crisis caused by the financial crisis and general economic decline provided an opportunity for the government to implement a range of what would otherwise be rather unpopular ideas, justifying those by a range of ‘common-sense’ arguments. Common-sense because, as politicians argued, those are widely shared across the population – something that everyone agrees with – something, that Hall and O’Shea** call ‘folk wisdom of the age’. What makes ‘common-sense’ arguments so persuasive is that they work intuitively, and don’t require reflection. What politicians do by referring to generally shared beliefs is they shape and influence popular opinion and so turn it in their favour. After all one is very reluctant to disagree with something that makes so much sense at the first glance.
One of the more prominent instances of such manipulation is the comparison of the state and the household, meaning that a responsible state needs to balance its books in the same way that a responsible household does. In a society that still shares some antagonism towards the state, as an aftertaste of the Soviet Union experience, and given the persuasiveness of the argument, the result is that over the years following the crisis the general attitude of the population towards government budget deficit is very negative, as the following chart suggests. Even if we distribute those who are unsure evenly across the remaining groups, we can see that the majority believes that the government has to run either balanced or even surplus budget.
Another ‘common-sense’ argument used was the traditional neoliberal argument of regaining competitiveness in the export markets. While there are different mechanisms for regaining competitiveness, the government chose the one that is most painful for the population – internal devaluation by putting pressure on the labour costs.
And last, but perhaps the most important in the context of this article, ‘common-sense’ argument is the ‘cutting the red tape and improving the business environment’ argument. The government was successful with pushing the story of big government that needs to be cut, particularly at the time when the general satisfaction with performance of public sector organizations was extremely low, with only 14% of the population viewing public sector organisations as efficient/effective.
Cutting red-tape, or accountability and control?
Similar to the Walkerton tragedy, when several people died in Walkerton, Ontario (Canada) due to contamination of municipal drinking water with potentially deadly bacteria (see Prudham 2004***), ‘Maxima’ tragedy in Riga, in November 2013, was a ‘normal accident’ of neoliberalism itself – a result of liberalisation of an already weak regulatory framework. The concept of ‘normal accident’ was developed by Charles Perrow**** to describe failures of complex systems with potentially catastrophic consequences, with these failures made inevitable by inherent characteristics of the systems (e.g. nuclear plants and nuclear weapons; DNA manipulations). Prudham adapted the concept to describe the ways in which neoliberalism creates pervasive risks of catastrophes of different kinds by making ‘organized irresponsibility’ at the core of regulatory systems. Prudham also suggested that ‘while the actual circumstances of ‘accidents’ are indeed important, these must not obscure the systematic production of probabilities that they will occur, nor the characteristics of neoliberal regulatory systems that shape the potential consequences when they do’ (2004 p. 345).
The intention here therefore is to locate the ‘Maxima’ tragedy in the broader context of neoliberal reforms, implicating austerity regime and those involved in imposing it, in the dreadful consequences to the safety and security of the population. While it is difficult to claim that dismantling the State Construction Inspectorate (henceforth SCI) was the only, or the main cause of the tragedy, it certainly was the last nail in the coffin of construction sector regulation.
Decision to close down the SCI was made in the heat of the fiscal crisis when government was imposing across-the-board cuts on all public sector organisations disregarding their functions. A number of agencies and public sector organisations were either closed down altogether or merged with other organisations, providing a reasonably simple and fast way to immediately cut spending. SCSA was perhaps one of the politically less sensitive organisations, closing which would not cause substantial public discontent. Thus, despite the fact that the projected savings resulting from the ‘reorganisation’ for the year 2010 were estimated at EUR 600 thousand (according to a report by the State Audit office were far from that, at around EUR 350 thousand), prime minister Dombrovskis and minister of economics Kampars still proceeded with the decision. Minister Kampars justified closing down the Inspectorate with the following arguments. First, he argued, the agency as it was in March 2009, was an inefficient bureaucratic institutions, some of the functions of which overlapped with the functions of the local municipalities. Second, some of the functions earlier performed by the SCI were delegated to other agencies and public sector organisations, such as Consumer Rights Protection Centre, the Public Utilities Commission, and the Ministry of Economics, which, he continued, meant that not a single function of the Inspectorate was abolished. Third, he went on, reorganisation of the SCI is just one of the planned steps on the way to improvement of construction process in the country, suggesting that according to the regulatory framework for construction sector, local municipalities are responsible for control and supervision of safety and security of construction. This is a rather typical neoliberal argument for devolution of responsibilities without the related budgetary assignations to perform the functions.
To counter these arguments, one needs to first describe the Inspectorate and its function at least in some minor detail. According to the provisions regulating the SCI, its main responsibilities include ensuring quality inspection in construction as well as oversight over compliance with relevant regulation in relation to quality of construction materials. More specifically the inspectorate was charged with:
- Supervision of compliance with laws and regulations relevant to construction by all parties (including civil servants within central and local governments);
- Construction inspections, including inspections of civil and structural design documentation;
- Control of compliance of construction materials with relevant regulations;
- Take part in supervision of construction works, as well as in inspecting finished works prior to initial operation. This applies to all works fully or partly financed from budgets of central or local governments and related agencies, as well as other cases specifically defined in other regulatory acts;
- Selectively inspect any construction sites (both publicly and privately owned);
- Taking part in commissions establishing the causes of accidents.
During the pre-crisis years when the construction industry was experiencing unprecedented growth, the Inspectorate was effectively squeezed by the amount of work it was supposed to carry out and by the lack of capacity, which was expressed in a 2006 report to the Cabinet, by the then Minister of Economics Aigars Štokenbergs. In this report minister Štokenbergs argued that due to a significant growth in demand for civil engineers and a substantial increase in wages in construction sector, at that particular moment in time, instead of 36 employees of the SCI, there were barely 20 left, which given the growth in construction sector undermined the ability of SCI to effectively perform its core supervision functions. In the same report he requested additional budgetary funding in order to strengthen capacity of the organisation. Three years later the SCI ceased to exist as such, its functions being delegated to a range of other organisations.
Delegating these responsibilities to municipalities is difficult for a number of reasons. First of all, most of the municipalities, apart from the larger cities, lack the necessary budget capacity in order to take on these functions. In some municipalities, there is only one inspector responsible for all the paper work as well as on-site supervision. However, it is perfectly possible that a chain store decides to build a local supermarket simultaneously with a municipality receiving structural funds for renovation of a school. Even in Riga, the largest municipality, and a place where most of the construction happens, 16 inspectors are responsible for both evaluation of all paperwork related to issuing construction permits, as well as on-site supervision. Therefore, the capacity of municipalities to effectively supervise construction works is already limited, before even more responsibilities are delegated to them. Second issue is potential conflict of interests. Inspectors employed by local municipalities were supposed to supervise safety and quality of works procured by the same municipality, thus putting experts under pressure to conform with the demands of their senior political leadership. Given the conditions of the labour market in construction industry after the crisis, one facing a possibility of unemployment will think twice before acting upon his supervision mandate.
Delegation of some responsibilities to the Consumer Rights Protection Centre (CRPC) did not play out that well either. While deciding to delegate some of the responsibilities for oversight of the construction materials to the CRPC, as part of the general cutback package Ministry of Economics cut budget of CRPC by 51 per cent in 2010, taking 2008 as a base year. Budget cuts naturally resulted in employee cuts, with 20 employees dismissed by 2010.
It is therefore difficult to imagine an agency with an already wide spectrum of other responsibilities prioritizing the new responsibilities given the budgetary situation.
All this was happening in a very specific regulatory environment already in place. Construction was one of the sectors where regulation and oversight was partially privatised and individuals or companies were responsible for direct supervision of both construction design documentation and construction works, with state authorities playing a minor role first, when issuing a building permit (mostly making sure that building satisfies all the formal requirements, such as zoning, height, parking spaces, etc.) and then when evaluating the building prior to granting an exploitation permit. Visits of state or municipal supervisors on construction sites were seldom, and mostly responding to signals, which is justifiable given their limited capacity. Direct supervision of construction works has been delegated to firms and private individuals certified to engage in these activities. However, given the lack of regulation as to how many construction projects can one individual or company supervise, one can assume that profit-driven individuals would take on as many contracts as they possibly can, and hope that nothing happens. Another reason for this is the lack of regulation that would define the minimum payment for such supervision, thus limiting the possibility for potential owners of buildings unconcerned with quality of construction works to shirk from paying for supervision services, which could, potentially also have positive effects.
There was a similar situation in examination of construction design documentation for public buildings (i.e. those that are supposed to serve more than 100 people at a time). While examination of structural design documentation for public buildings was required by law, it was effectively privatised. Company procuring architectural and structural design services, and subsequently the potential owner of the building according to the regulation is supposed to procure such examination services from a licensed engineering consulting company or a certified private individual. And yet again, the minimum requirements for quality of such examinations, as well as minimal required prices for such services remained unregulated, relying entirely on the laws of supply and demand and personal responsibility of individuals involved. All this is absolutely in line with neoliberal ideology focused on the role of autonomous responsible individual.
Scapegoating and overlooking structural issues?
More than a year has passed since the tragic event in Riga on November 21, 2013. The criminal investigation is still ongoing and first two suspects – civil engineer, author of the structural design, as well as another civil engineer who conducted the examination of the structural design documentation – have been arrested recently. Following the tragic events, a wide range of changes were introduced in the construction regulation, and the state supervision in construction was re-institutionalised by creating the State Construction Supervision Bureau. The deeply ingrained structural issues, however, remained unresolved to a large extent. And those responsible, even in part, for the dire consequences of their actions, are likely to remain unpunished, and even advance in their careers, like the current European Commissioner for the Euro and Social Dialogue Valdis Dombrovskis, who approved, while being the Prime Minister, the decision to dismantle the State Construction Inspectorate four years before the tragedy, later to resign ‘taking the responsibility’ for the tragedy.
References:
* Günter Grass, 2002. ‘The Progressive Restoration: A Franco-German Dialog’, New Left Review 14, p.71
**Hall, Stuart, and Alan O’Shea. 2013. ‘Common-Sense Neoliberalism’, Soundings: A Journal of Politics and Culture 55 (1): 8–24.
***Prudham, Scott. 2004. ‘Poisoning the Well: Neoliberalism and the Contamination of Municipal Water in Walkerton, Ontario’, Geoforum 35(3): 343–59.
****Perrow, Charles. 2011. Normal Accidents: Living with High Risk Technologies. Princeton University Press.
Aleksandrs Cepilovs is a Junior Research Fellow at the Chair of Innovation Policy and Technology Governance at the Ragnar Nurkse School of Innovation and Governance. This article was originally published in the Nurkse School Ideas Bank.
