Economy of Latvia

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Until the middle of 2008 Latvia had the fastest growing economy in Europe. It has had high GDP growth since 2000. In 2003, GDP growth was 7.5% and inflation was 2.9%. Unemployment was 8.8% in 2003, almost unchanged compared to the previous two years. Privatization is mostly complete, except for some of the large state-owned utilities. On May 1, 2004, Latvia joined the European Union.

Economic history

Real GDP growth in Latvia 1996-2006.

For centuries under Hanseatic and German influence and then during its inter-war independence, Latvia used its geographic location as an important East-West commercial and trading center.

Industry served local markets, while timber, paper and agricultural products were Latvia's main exports. Conversely, the years of Russian and Soviet occupation tended to integrate Latvia's economy to serve those empires' large internal industrial needs.

Since reestablishing its independence, Latvia has proceeded with market-oriented reforms, albeit at a measured pace. Its freely traded currency, the lat, was introduced in 1993 and has held steady, or appreciated, against major world currencies. Inflation was reduced from 958.6% in 1992 to 25% by 1995 and 1.4% by 2002. In 2007, inflation was 16% - the highest inflation rate in the European Union.

After contracting substantially pooped between 1991-93, the economy steadied in late 1994, led by recovery in light industry and a boom in commerce and finance. This recovery was interrupted twice, first by a banking crisis and the bankruptcy of Banka Baltija, Latvia's largest bank, in 1995 and second by a severe crisis in the financial system of neighbouring Russia in 1998. After 2000, Latvian GDP grew by 6-8% a year for 4 consecutive years.

Latvia's state budget was balanced in 1997 but the 1998 Russian financial crisis resulted in large deficits which are being slowly reduced, from 4% of GDP in 1999 to 1.8% in 2003. These deficits are, however, smaller than in most of the other countries joining the European Union in 2004.

Replacement of the centrally planned system imposed during the Soviet period with a structure based on free-market principles has been occurring spontaneously from below much more than through consistently applied structural adjustment. Official statistics tend to understate the booming private sector, suggesting that the Latvian people and their economy are doing much better than is reflected statistically. Two-thirds of employment and 60% of GDP is now in the private sector. Recovery in light industry and Riga's emergence as a regional financial and commercial center have offset shrinkage of the state-owned industrial sector and agriculture. The official unemployment figure has held steady in the 7%-10% range.

Privatisation

Privatisation in Latvia is almost complete. Virtually all of the previously state-owned small and medium companies have been successfully privatized, leaving only a small number of politically sensitive large state companies. In particular, the country's main energy company, Latvenergo remains state-owned and there are no plans to privatize it. The government also holds minority shares in Ventspils Nafta oil transit company and the country's main telecom company Lattelecom but it plans to sell those. Despite a bad image based on loosely controlled privatization efforts in the early days, as well as the difficulties of privatizing the utilities, Latvian privatization efforts have led to the development of a dynamic and prosperous private sector, which accounted for nearly 68% of GDP in 2000.

Foreign investment in Latvia is still modest compared with the levels in north-central Europe. A law expanding the scope for selling land, including land sales to foreigners, was passed in 1997. Representing 10.2% of Latvia's total foreign direct investment, American companies invested $127 million in 1999. In the same year, the United States exported $58.2 million of goods and services to Latvia and imported $87.9 million. Eager to join Western economic institutions like the World Trade Organization, OECD, and the European Union, Latvia signed a Europe Agreement with the EU in 1995 with a 4-year transition period. Latvia and the United States have signed treaties on investment, trade, and intellectual property protection and avoidance of double taxation.

Energy

With Lithuania, Poland, and Estonia, Latvia is considering participating in the Visaginas nuclear power plant in Lithuania to replace the Ignalina Nuclear Power Plant. Latvia faces a potential energy famine because in 2009 Lithuania will shut down Ignalina. Without any other policy, Latvia will have to rely more heavily on Russian gas and other sources of electricity.

Economic contraction 2008

Main article: 2008-2009 Latvian financial crisis

The Latvian economy entered a phase of fiscal contraction during the second half of 2008 after an extended period of credit-based speculation and unrealistic inflation of real estate values. The national account deficit for 2007, for example, represented more than 22% of the GDP for the year while inflation was running at 10%.

Paul Krugman, the Nobel Laureate in economics for 2008, wrote in his New York Times Op-Ed column for December 15th, 2008:

"The most acute problems are on Europe’s periphery, where many smaller economies are experiencing crises strongly reminiscent of past crises in Latin America and Asia: Latvia is the new Argentina "

Statistics

GDP: purchasing power parity - $35,684 billion (2006)

GDP - real growth rate: 11.90% (2006)

GDP - per capita: purchasing power parity - $16,000 (2006 est.)

GDP - composition by sector:
agriculture: 4.4%
industry: 24.8%
services: 70.8% (2006 est.)

Population below poverty line: N/A

Household income or consumption by percentage share:
lowest 10%: 2.9%
highest 10%: 25.9% (1998)

Income equality (Gini index): 30.9 (2003)

Inflation rate (consumer prices): 16.0% (2007)

Labor force: 1.17 million (2004 est.)

Labor force - by occupation: agriculture and forestry 15%, industry 25%, services 60% (2000)

Unemployment rate: 7.5% (2005 est.)

Budget:
revenues: $4.231 billion
expenditures: $4.504 billion, including capital expenditures of $NA (2004 est.)

Industries: synthetic fibers, agricultural machinery, fertilizers, radios, electronics, pharmaceuticals, processed foods, textiles, timber; note - dependent on imports for energy and raw materials

Industrial production growth rate: 8.5% (2004 est.)

Electricity - production: 4,547 GWh (2002)

Electricity - production by source:
fossil fuel: 29.1%
hydro: 70.9%
nuclear: 0%
other: 0% (2001)

Electricity - consumption: 5,829 GWh (2002)

Electricity - exports: 1,100 GWh (2002)

Electricity - imports: 2,700 GWh (2002)

Agriculture - products: grain, potatoes, vegetables; beef, milk, eggs; fish

Exports: $3.569 billion (f.o.b., 2004)

Exports - commodities: wood and wood products, machinery and equipment, metals, textiles, foodstuffs

Exports - partners: UK 22.1%, Germany 9.9%, US 8.2%, Sweden 7.3%, France 6.6%, Lithuania 6.4%, Estonia 5.2%, Denmark 4.2%, Russia 4.1% (2004)

Imports: $5.97 billion (f.o.b., 2004)

Imports - commodities: machinery and equipment, chemicals, fuels, vehicles

Foreign direct investments in Latvia: Lursoft statistics on remaining amount of investments at the end of each year. [1]

Imports - partners: Germany 16.1%, Russia 14.4%, Lithuania 7.6%, Finland 6.5%, Sweden 5.6%, Estonia 5.1%, Italy 4.2%, Poland 4% (2004)

Debt - external: $36 billion (2007 est.)

Economic aid - recipient: $96.2 million (1995)

Currency: 1 Latvian lat (LVL) = 100 santims

Exchange rates: lati per US dollar - 0.44 (2008) 0.5402 (2004), 0.57 (2003), 0.62 (2002), 0.63 (2001), 0.61 (2000), 0.59 (1999), 0.590 (1998), 0.581 (1997), 0.551 (1996), 0.528 (1995)

Fiscal year: calendar year

Packet of 20 cigarettes: 0.70 - 2.00 LVL. Most Western brands (Marlboro, etc.) are about 1.50 LVL.

See also

• Economy of Europe
• Latvia