The Economy of Latvia

Basic Economic Data 1996 GDP: $5.3 billion.
Growth rate: 3%. Inflation rate: 13%.
Unemployment: 7.1%.
Average annual wages: $2,276.
Natural resources: peat, limestone, dolomite, gypsum, timber.
Agriculture/forestry (10% of GDP): Products-cattle, dairy foods, cereals, potatoes.
Cultivable land--1.36 million hectares, of which 60% is arable, 18% meadow, and 13% pasture.
Manufacturing (14.3% of GDP): light electrical equipment and fittings, textiles and footwear, technological instruments, construction materials, processed foods.
Public services--11%.
Construction--5.3%.
Energy/water--4.5%.
Financial services--3.5%. Rents-2.7%. Other services-34%. Miscellaneous-14.7%.
Trade:
Exports--$516 million: transhipment of crude oil; wood/wood products 32%; metals 7%, textiles/apparel 17%, machinery/equipment 10%, food products 10%, chemicals 5%, vehicles 3%.
Major markets--Russia 20%, UK 16%, other CIS 9%, Germany 14%, Sweden 7%.
Imports--$803 million: energy 46%, minerals 16%, machinery/equipment 18%, chemicals/plastics 12%, food products 8%, textiles/apparel 8%, wood/wood products 4%, metals 3%.
Partners--Russia 18%, Germany 15%, Sweden 6.5%, other CIS 4%.
Official exchange rate: .580 Lat = U.S. $1.

Economic Conditions 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 supplied 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. Comprising 40.1% of the populace, non-ethnic Latvians control almost 80% of the economy.

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 has been reduced to a monthly rate of one percent or less. After contracting substantially between 1991-93, the eonomy steadied in late 1994, led by recovery in light industry and a boom in commerce and finance. A prolonged banking crisis and scandal involving what had been Latvia's largest commercial bank set the economy back in mid-1995 and 1996, causing budget deficits well beyond the 2% target recommended by the IMF. Nevertheless, Latvia's 1997 budget is balanced.

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% range.

Other than privatization of the food processing and dairy industries, the pace of privatization of large industrial enterprises has been slow. The government has privatized about 1,000 enterprises (260 in 1996), and plans to privatize virtually all remaining state-owned businesses by 1998. Nonetheless, the process has been extremely slow and complicated. Structural reform has proceeded most rapidly in agriculture and in the privatization of small enterprises. More than 58,000 private farms have been established and most remaining collective farms transformed into private joint stock companies. However, many of Latvia's new farmers are operating at subsistence levels stemming from a lack of financial resources and credit. Urban andrural property is slowly being returned to former owners, but the legal mechanisms for title registration, sale and mortgaging of real property are not fully developed. By early 1997, only 20% of the population lived in private houses or apartments, and only 8% of state-owned apartments had been privatized.

Foreign investment in Latvia is still modest compared with levels in North-Central Europe. A law expanding the scope for selling land, including to foreigners, was recently passed. Representing 19% of Latvia's total foreign direct investment, American companies have invested $68 million. Kellogg's is the largest U.S. investor. In 1996, the U.S. exported $165 million of goods and services to Latvia and imported $99 million. Eager to join Western economic institutions like the WTO, OECD and EU, Latvia signed a Europe Agreement with the EU in June 1995 (with a four-year transition period). Latvia and the United States have signed treaties on investment, trade and intellectual property protection, and avoidance of double taxation.