In , growth rates accelerated. GDP grew by 3. The acceleration of growth was fostered by the improvement of the situation in the external environment, more intensive absorption of EU Structural Funds and increase in employment and wages. In , growth of the economy has become more moderate.
GDP has grown by 2. The deceleration of growth rates was underpinned by both internal factors the investments from EU funds have reached their maximum, developments in the financial sector, etc. Bolstering the social safety net should become the top priority.
The European Recovery and Resilience Mechanism and low interest rates offer a unique opportunity not only to mitigate the immediate consequences of the pandemic but also to enhance green and digital transition. Such investments should be complemented by measures that improve skills and facilitate the reallocation of labour and capital. Housing affordability and quality are pressing challenges in Latvia. While Latvian households spend, on average, less on housing than their OECD peers, many are stuck in poor quality housing.
Residential investment has stagnated since , and the housing stock has been insufficiently maintained. In the face of these challenges, public support for housing is limited and an underdeveloped rental market further limits affordable housing alternatives. Newspapers - all of them privately-owned - reflect a variety of political views.
Many titles have suffered declining circulations. Some key events in the history of Latvia:. After the Russian Revolution, Latvia fights to establish its independence against the Soviet Russian and German armies.
Mass deportations to Siberia and Central Asia follow. Some 70, Latvian Jews are killed by Nazi death squads and Latvian paramilitary units. Crimea crisis sharpens Latvia tensions. Latvia set on euro membership. BBC Languages- Latvia. Latvian government. An alternative view is that the economic growth that Latvia enjoyed between and was natural, as it was catching up with developed Europe in terms of income and productivity.
First, it seems that small and open emerging economies continue to represent a puzzle to economic professionals. In the case of Latvia, few of the pre-crisis prophecies turned out to be true. Some commentators hint that it was not a boom at all, rather a normal trend growth determined by a speedy catch-up in productivity level. The presumed loss of competitiveness due to an excessive rise in labour costs was one of the major pre-crisis concerns. The fiscal consolidation and liquidity squeeze in the economy were meant to push down wages and prices to the levels commensurable with productivity.
Finally, the economic growth which returned in the second part of was a result of neither fiscal consolidation nor internal devaluation. The real cause of recovery was the release of international liquidity assistance in June , 16 which assured the market that the devaluation and sovereign default had been avoided. Eventually, it was shortage of liquidity that mattered most, and the earlier release of that assistance tranche would have saved much suffering.
The scale and depth of the recent crisis is related to a disagreement between the Bank of Latvia and the government over macroeconomic strategy prior to the crisis. The Bank of Latvia had focused on the fixed exchange rate, but the government was not willing to sacrifice the speed of growth to the fiscal austerity required by a fixed exchange rate. Besides, the Latvian authorities had greatly encouraged the widespread euroisation of the economy up to 80 per cent of mortgages were issued in euros in , which ultimately limited the scope of action during the recession.
Third, Latvian society continues to suffer from entrepreneurial obsession also called capital dependency syndrome. Low taxes and a liberal economic regime were introduced in the early s with the aim of attracting foreign investment and promoting business growth. These policies were not revoked when the country was swamped with foreign capital after accession to the EU. In , Latvia had the third smallest government in the EU in terms of public expenditure to GDP and the third lowest level of capital and corporate taxes.
Yet, despite this business friendliness, the cumulative per capita level of foreign direct investment FDI in Latvia is still considerably lower than in Estonia. In a similar vein, the development of manufacturing is also considerably lagging behind the other Baltic countries see Table 2. Fourth, the Latvian government in particular and society in general has failed to bring the interests of people, such as the quality of education and health care, equity, decent living conditions, etc.
People were given wage increases, generous social benefits for the richest part of the population , and easily accessible mortgages and consumption loans.
Each consecutive crisis has added to this feeling of insecurity, alienating people from the state. The worst figures among the three Baltic countries are highlighted. The costs of adjustment have been immense. The expectations that FDI would deliver sustainable development have not materialised thus far. The latest crisis has made this challenge even more acute, as Latvia has become a much smaller economy, and is destined to become even smaller due to demographic decline and emigration.
A shrinking domestic market and pool of labour will hardly make Latvia attractive for investment. The expansion of public spending during the boom of created large expenditure overhangs when crisis struck. Without any corrective measures, the budget deficit would have reached 16 per cent in and 24 per cent in , which was not sustainable. The pace and scale of the fiscal consolidation was determined by two imperatives: first, no external currency devaluation; second, the membership of the eurozone as of 1 January Two-thirds of overall fiscal consolidation was achieved by cutting spending, and the remaining third by increasing taxes.
The good news is that fiscal consolidation was well targeted to make Latvia compliant with the Maastricht criteria in time for eurozone membership. Austerity also enabled cuts in a number of less efficient programmes, and fostered valuable reforms in the health and education sectors. The measures were cruel: the number of public officials was reduced by one-third and their remuneration bill was cut by 25 per cent.
Such measures had serious repercussions on the quality of public services and the social situation. With hindsight, it seems that this fiscal consolidation has failed on two counts. First, the Latvian public sector was not as bloated as it was often depicted the government is small, and the number of public sector employees had increased only by 11 per cent between and , which cannot be counted as a serious deflection of human resources from the private sector.
Second, the expected wage cut spill-over to the private sector did not happen. The scale of the consolidation had significance only to international lenders but not to the local market because of the small size of the public sector. Another major problem related to fiscal consolidation was the regressive nature of many measures taken.
The increase in value added and excise taxes, the decrease in the threshold for personal income tax allowance, and pension cuts these were later recalled following a ruling by the Constitutional Court without proper compensation were among the enacted measures. At the same time, the government refused to follow the advice of international lenders to consider taxes on real estate and capital gains.
As a result, the IMF had to admit that the burden of Latvian budgetary consolidation fell disproportionately on the poor. Despite sound economic gains, the Latvian economy still has not recovered to the level of pre-crisis development, and still exhibits some signs of its depressed state:. However, improvements in these areas will not ensure income levels commensurable with advanced European countries.
Without targeted policies towards business sophistication, and the creation of new products and technologies, Latvia will remain caught in the middle-income trap. The GCI also reveals that during the crisis Latvia has lost a good degree of advantage in financial sector sophistication. The soundness of banks, easiness of access to loans, and access to financing through local equity markets are still below pre-crisis levels.
On the other hand, Latvia has advanced considerably in the area of technological readiness, which was possible mainly due to the wide use of the internet and the availability of up-to-date communication technologies. Emigration represents the biggest problem.
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