How the Latvian economy works

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:48

After the collapse of the USSR and the implementation of significant reforms, the Latvian economy has been rapidly rising in all respects for some time. In the 2000s - by about five to seven percent per year until 2008, when the crisis began. In 1990, the Latvian economy ranked 40th in the world in terms of GDP, and in 2007 it was in third place among the post-Soviet countries. Only Armenia and Azerbaijan were ahead of her.

Statistics

In 2006, per capita GDP was 12.6%, and in 2007 - 10.3%. In 1992, the currency was introduced - the Latvian ruble, and from 1993 it was gradually replaced by the Latvian lat. Restitution and privatization were carried out, as a result, the share of industry in the Latvian economy decreased to 12% (and in 1990 this share was 30%). Already in 2008, it was Latvia that became the leader of the European Union in terms of the number of poor people - twenty-six percent of the population lived below the poverty line. And finally, in 2009, GDP in the Latvian economybecame the worst indicator in terms of GDP dynamics in the world.

In general, the development of the B altic countries from 1992 to 2007 was called a phenomenal success in the transition from transformation to growth and the creation of modern market institutions. However, now Western scientists from the economic sector are inclined to see in this growth only residual effects of the Soviet legacy - it was then and precisely in the B altic States that industry and infrastructure were especially well developed, and voluminous human capital was also accumulated. The economies of Estonia, Latvia, Lithuania rose only thanks to residual resources and only in the first few years. In 2010, Latvia's GDP continued to fall, but in 2011 it rose by five and a half percent. Having left the USSR, Latvia became a member of the World Trade Organization, and in 2004 joined the European Union. The euro was only used here in 2014.

Foreign trade

The economy of Latvia after joining the EU is kept afloat thanks to exports. The main commodities are metal in bars and iron, which is just over eight percent of the total production, followed by equipment and electrical machines with six percent, lumber is four percent, textiles and knitwear are three and a half, pharmaceutical products are three percent, slightly less for round timber and two and a half percent for wooden products. These goods are exported to neighboring Russia, Lithuania and Estonia, as well as a little to Germany, Sweden and Poland. But imports come to Latvia from much morecountries.

In 2015, the external debt of the Ministry of Economy of Latvia amounted to 8.569 billion euros. In previous years, it fluctuated very little. A little earlier - in 2000 - the share of the total Latvian external debt was more than sixty percent of its GDP, and in 2007 it jumped to one hundred and thirty percent of the country's GDP. In 2009, the debt was over one hundred and eighty percent. What does it say? How does the Latvian economy work? Mostly bankrupt.

Structure

The priority in the sectoral structure of the Latvian economy is the service sector - almost seventy percent of GDP comes from there. Five percent comes from forestry and agriculture, twenty-six percent from industry. Until 2003 (that is, before joining the EU), Latvia's industrial production grew slightly - by about five percent a year, and despite the fact that the country's own resources are extremely insignificant for the development of, for example, energy (Riga CHPP No. 1 uses local peat, the rest of the industry need imported raw materials).

Specialists estimate oil reserves on the shelf of the B altic Sea at thirty million tons, not too much for successful production. The rivers, too, due to their flat nature, do not have a large hydro potential. Latvia produces only 3.3 billion kilowatt-hours of electricity, while it consumes 5.2 billion. HPPs produce 67% of it, the rest is thermal power plants, for which fuel must be purchased. Electricity is mainly imported from Russia and some from Estonia and Lithuania.

Wood and textiles

Practically all woodworking is exported. The Ministry of Economy of Latvia considers plywood producers in Kuldiga, Daugavpils, Liepaja, Riga, as well as paper producers in Ogre and Jurmala, to be the main enterprises. There is a lot of handicraft woodworking, small entrepreneurs are ubiquitous both in cities and in rural areas. They serve mainly tourists, making various souvenirs for them. But the textile industry is much more developed. It is supported by approximately sixty large and well-known companies, some of which have up to thirty million dollars in annual turnover. Their products can compete quite easily with those in Sweden, Germany and England. It should be noted that almost all goods from Latvia are sold abroad not under their own brands, but partner companies.

The production of textiles is oriented only for export, leaving less than seven percent of manufactured products in Latvia. For example, in 2002, a variety of textiles worth three hundred and fifty million dollars were sold abroad. As a member of the EU, Latvia is forced to impose from three to seventeen percent of import duties on all imports from third countries, including raw materials for the textile industry. And raw materials are purchased almost completely, including semi-finished products - in Uzbekistan, Belarus, Ukraine, and most of all - in Russia. As a result, finished products are becoming more expensive: both fabrics and clothing produced by Latvia. The country's economy has suffered significantly. Competitiveness is rapidly falling, and even from this industry, which has always been successful, the country has less and less benefits.

Food industry

This industry has always flourished here under the Soviet regime. The Minister of Economy of Latvia, the well-known chess grandmaster and politician Dana Reizniece-Ozola, who took the ministerial chair in 2016, believes that the current stagnation in the food industry sector must be overcome in every possible way. Indeed, only the only factory in Latvia is flourishing, where the famous "Riga Balsam" is produced. This alcohol still has a fairly stable sales today, and the company is in the top three largest taxpayers.

The rest is much worse. Of the fifty-six dairy processing enterprises, only eight have certificates of conformity for European products from the veterinary service, which give the right to import dairy products into Europe. The catch of fish and its processing have decreased three times, since the European quality requires a radical modernization and reconstruction of almost all enterprises. Unless small producers are able to provide an exclusive product.

Agriculture

Reforms and land privatization have led to a significant reduction in the main sown areas. And the restitution returned a lot of land plots to people who are not at all interested in their cultivation or do not have any opportunities for this. Arable land previously accounted for twenty-seven percent of the structureland fund, and now they have completely decreased. Meadows and pastures previously covered thirteen percent, and forest about forty percent. Now the production of grain and potatoes has been halved, the number of livestock has decreased by twenty percent, respectively, and milk and meat have become smaller, that is, those industries that supported the basis of Latvian agriculture have almost died.

Cattle breeding cannot even satisfy domestic needs today. Subsistence farming is not able to feed the people, farmers lack financial resources, they are very poorly provided with fertilizers and agricultural machinery, and they still have little experience in agribusiness. And most importantly, everything they produce in Europe is practically uncompetitive.

Services: tourism

Latvia is rich in historical monuments. On its territory there are about a hundred interesting castles and palaces. The resort area of the Riga seaside strip is famous for its mineral waters (hydrogen sulfide) and therapeutic mud. However, not everything is in order here either. Previously, there was no end to tourists and vacationers in Latvia. And now there is a conclusion of European experts: the Riga seaside cannot be used as a recreational area, since full-scale clean-up works are needed. And that is why today such attractive in the past and exceptionally lively campsites, resorts and beaches are empty and mostly idle.

The entire recreation infrastructure in Latvia was created under Soviet rule in the middle of the last century, therefore it is clear that without the contribution of many efforts andlarge finance, this system will increasingly degrade. This is an astonishing figure: tourism in Latvia, a country that seems to have been created for vacationers, accounts for only 2 percent of GDP. Under the USSR, almost seven hundred thousand tourists visited the seaside every year, now there are exactly twenty times less of them. People come to rest mainly from Belarus and Russia, and quite a bit - from Germany and Finland. Europe promises to help Latvia revive the industry, and the Latvian government already has a long-term tourism development plan, but so far the country has the lowest rates in Europe.

Transportation

The Latvian economy generates up to thirty percent of its income thanks to the leading industry - the transit of goods. Cargo is predominantly Russian. This is twenty-seven percent of the total volume of exports of services and goods. Rail transport prevails (up to fifty percent of the freight turnover), pipeline transport is in second place with thirty percent, water transport gives fourteen percent and road transport seven percent. The routes run both from west to east and from north to south. The largest port in the eastern part of the B altic Sea is Ventspils, it can receive any ships and handle any cargo. Even tankers with a displacement of up to one hundred and twenty thousand tons come here. The port's cargo turnover is forty million tons, a world-class export terminal. The port of Riga can handle up to ten million tons, and Russian companies provide up to eighty-five percent of transit cargo through the container terminal. Pipelines, of course, are also Russian. Latvia's own fleet hasonly fourteen vessels, their total displacement is less than sixty thousand tons.

How the Latvian economy worked

Now we can state with certainty that GDP indicators in the pre-crisis period were driven by the banal sale of state property to foreign investors, as well as EU subsidies and pumping of loans. Commercial banks were the first in this process: in the five years up to and including 2008, many billions of euros were issued to the population of Latvia almost without any control for housing construction, land purchase, renovation of existing residential areas, for the purchase of expensive cars, televisions and washing machines. Loans were issued for up to forty years at one and a half to two percent per annum.

Thus began life on loan. And then the cataclysms of the global crisis in the euro area so weakened the country's solvency that Latvia was ahead of the rest in the impoverishment of the population. The EU statistics will not deceive: after 2012, 38% of the inhabitants of Latvia fell below the poverty line. The able-bodied population was forced to massively travel abroad to work. The number of inhabitants of Latvia decreased by two percent a year. During the "Soviet occupation" it nevertheless increased sharply: before 1945 it was 2.7 million people, and in 1985 it was already 3.7 million. From 1991 to 2005, about twenty percent of the population was lost, and the crisis of 2008 exacerbated this process.

Income and taxes

From the beginning of 2017, the minimum wage in Latvia (gross,i.e. before taxes) was set at 380 euros per month. This is a lot. The average salary (also before taxes) is 810 euros, in state structures - 828 euros, and in private sector - 800.

After taxes, 828 euros of the average salary turns into 611 euros. However, this is not the whole picture. In 2016, 177,800 workers received significantly lower wages than the minimum wage. In 2015, there were 173,400 such workers, that is, more than twenty percent of all workers in the country. The population of Latvia, according to 2015 data, is 1,973,000 people (and it was 3,700,000 under Soviet rule). The working population is now 969,200, the unemployment rate is almost ten percent.