Open for investment
An irreversible process
The years since the restoration of independence have been marked by intensive economic reforms. As a result, Latvia now has one of the most open economic systems in Eastern Europe, and, moreover, the process of political and economic reform has become irreversible: the foundations of a legal state, a democratic society and a market economy have been laid.
The major task in foreign and economy policy now is further integration into the political, economic and security structures of Western Europe. In comparison with the other transition economies, Latvia has reached a relatively high level of macroeconomic stability. The rapid fall in GDP in the first years of reform was checked by mid-1993; by 1995 inflation was falling by 25 per cent a year. In 1996 inflation is not expected to exceed 18-19 per cent. Among Eastern European states this is the third lowest inflation index (after the Czech Republic and Hungary). This fall in inflation was achieved through the consistent economic and strict fiscal and monetary policies followed by the Government and the Bank of Latvia.
At the same time, it has to be noted that, compared with the other transition economies, Latvia had a different starting point. For the Central European states, the existing economic system had only to be altered in order to comply with the principles of a market economy. However, Latvia, like the other Baltic states, had to start building its national economy from scratch, which meant also having to create its national currency, budget and economic infrastructure.
Since 1993 Latvia has had a national currency, the lat, which is stable and secure through its ties with the SDR currency basket. In addition, the country's liberal currency exchange policy enables entrepreneurs to develop active external economic activities. An extensive financial system has been created, and, after the commercial bank crisis of mid-1995, the Government has imposed stricter conditions for the supervision of credit institutions. Several foreign commercial banks have started operations, thus developing and strengthening the Latvian banking sector and fulfilling the role of financial mediator between the East and the West.
Economic liberalisation, the external economic environment and the existing transport infrastructure offer favourable conditions for the development of transit services, for financial operations and for external trade. As a result, the economy can roughly be divided into two groups with a radically different course of economic development.
To the group of dynamic development belong transit services (port management, sea, railway and pipeline transport), external trade businesses, the banking system and sectors such as the timber industry, woodworking and furniture production, all of which rely on local raw material and cheap manpower resources. This sector has taken advantage of Latvia's favourable geographical position, between the West and Russia, as well as the other CIS states.
To the group of slow development belong those branches of the economy which by tradition have been oriented towards the internal market, and also those branches which have not yet established close ties with the external economic environment, for example agriculture, the majority of industry and internal transport.
The Government has outlined three related policy priorities: intensification of the privatisation process, promotion of entrepreneurship and attracting investment. The privatisation of state-owned enterprises and the enhancement of entrepreneurship activities cannot be carried out without attracting foreign and domestic capital. In its turn, the share of private property will increase considerably if a favourable environment for entrepreneurship is created.
The state has guaranteed the institutionalisation of private property. In the first half of 1996, 62 per cent of the population was employed in the private sector and, in 1995, more then half of GDP was produced there. Privatisation has caused radical changes in the property structure of the agricultural sector. The bulk of local governments' commercial, catering and service enterprises have been privatised. Considerable changes have occurred in the structure of branches of the national economy: the share of the service sector has considerably increased - in 1995 it reached 51 per cent.
In order to enhance the privatisation process, in 1994 the Government established the state-owned joint stock Privatisation Agency. In accordance with the Government's Privatisation Programme, the Agency holds the tenure of state-owned property, taxes the possessions of these properties, develops privatisation regulations and executes the privatisation process. It also drafts legislation governing the process and supervises the carrying out of contracts. The Agency uses several approaches in the privatisation of state-owned enterprises, among which are international tenders, direct sale or public auctions, the sale of enterprise shares by public offering and liquidation of enterprises.
The privatisation of major state enterprises has not met expectations; in 1996 the Government marked an economic turning point with its decision to start general privatisation of major enterprises, among them the joint-stock companies Latvenergo, Latvijas kuåniecìba, Ventspils nafta, and Latvijas Krâjbanka.
Encouraging exports is an extremely important goal because it is closely related to economic competitiveness. The EU's share in Latvia's external trade has increased in the last three years. In 1993 it constituted 30 per cent; in 1995, 47 per cent. Our major commercial partners are Russia, the US, Germany, the UK and Scandinavia. Basic export goods from Latvia are timber and woodworked goods, textile materials and manufactured goods, consumer goods, mechanical and electrical machinery and equipment and construction materials. Energy resources, chemical production and machinery and equipment are predominant exports. Latvia has developed commercial relations with many countries, and much is being done to remove obstacles to exports. Furthermore, the legislation on foreign trade and customs is being adjusted to the EU and WTO requirements. The Government plans to become a member state of the WTO to boost exports.
In 1996 Latvia, Lithuania and Estonia reached a free-trade agreement on agricultural products. Currently work is being done on developing a customs union between the three Baltic states, as lack of close co-operation may also be an obstacle to the integration of Latvia, Lithuania and Estonia into the EU. The Baltic Free Trade Treaty is the first step towards a free trade zone of more than 8 million consumers. This is an important development for both local producers and prospective investors because the goods supplied and services offered will have better access to the Baltic market.
However, to fully realise the country's export competitiveness requires extensive and consistent restructuring of industry, agriculture and the service sector. For this reason, attracting investment - both foreign and domestic - is of major importance.
Latvia has attracted a considerable amount of foreign investment (more than US$500 million). In terms of direct foreign investment (in 1995 US$86 per capita), Latvia currently occupies a midway position among Central and Eastern European transition economies. The major investors in the economy are the UK, the US and Germany. However, the present share of investment in GDP (15 per cent in 1995) is not sufficient - the amount of investment has to be increased at least threefold.
Government policy is to create a homogeneous environment for both domestic and foreign enterprises, with no specific privileges or restrictions for foreign business. Economic legislation is also being adapted to the requirements of the EU, given Latvia's expressed wish to become a member - an attractive proposition for foreign investors. Moreover, the Baltic States form a link between Western Europe and Russia, as well as the other CIS states: for the investors who have started their activities in this zone, broad possibilities are being opened both in the Western and Eastern direction.
Foreign investors in Latvia can establish new and wholly-owned industrial enterprises, or, in co-operation with local enterprises, start joint ventures. Privatisation of state enterprises is an essential means of attracting foreign investment to industry. With this in mind, the Privatisation Agency organises international tenders, listing those large and medium-sized enterprises which might be of interest to foreign companies.
To encourage the inflow of financial resources to the national economy, and in order to comply with the Foreign Investment Advisory Service, several amendments to foreign investment legislation have been made. Also, the procedure for acquiring rights to property and the procedure for registering foreign entrepreneurial activities have been simplified. Attracting investment will also be encouraged by the introduction of a specific economic procedure in several ports of Latvia and also by techno-parks.
The Latvian Development Agency
The Latvian Development Agency was created in 1993 to encourage foreign investment. The Agency provides information on possible investments, and also provides a one-stop-shop service and assistance in establishing business contacts with local entrepreneurs.
Given that the economy is in the midst of far-reaching structural and technological changes, investors are offered a wide range of choices - from banking to the recreation and tourism industry. However, the Government has outlined three branches - energy, transport and industry - as priorities for investment (transport and energy are closely related sectors: oil from Russia is piped to Ventspils - the largest Latvian and Baltic port - and from there to the West). Latvia has important gas industry infrastructure - a large underground gas storage system - which has been integrated into the uniform Baltic gas transport network. These structures need to be modernised, and modernisation is also necessary for the consumer goods transit structure.