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Kalvitis admits government falls short on results

Feb 15, 2006
By Julia Balandina

RIGA - Prime Minister Aigars Kalvitis said last week that Latvia was no longer the poorest nation in the European Union, though he admitted that the government has failed in boosting the country's competitiveness.


Citing the U.S. magazine Forbes, Kalvitis told a press conference that Latvia had passed Poland and was no longer at the bottom of the EU25 list in terms of economic wealth. Latvia's economy was the fastest growing in the union last year, and Kalvitis said he wanted Latvia to keep moving up the list and take its place among Europe's 20 richest nations.

Since joining the EU in May 2004, Latvia has been the poorest member when measured by gross domestic product per capita.

At the same time, the prime minister admitted that the government had failed in implementing five key measures designed to increase Latvia's competitiveness - e.g., reducing red tape, creating a climate for investment and improving the educational system. The measures were part of the government's agreement when the new Cabinet took over at the end of 2004.

Declaring "competitiveness is a key to our success," Kalvitis said he was working with Economy Minister Krisjanis Karins to help open up key sectors to more investment and competition.

Last year, the prime minister blamed the overall lack of competitiveness in the economy as one of the main reasons why average annual inflation in Latvia was the highest in the EU 's 6.7 percent. While there have been attempts to cite high energy prices for the exorbitant price-rise, Latvia's inflation far exceeds its Baltic neighbors, who have had to cope with similar dynamics.

At the same time, the prime minister said he was dissatisfied with the government's performance in promoting Latvia's competitiveness, adding that he and Karins were both responsible. He said he was displeased with the lack of results in improving the country's business environment, which is the Economy Ministry's responsibility. Also, the introduction of e-government is behind schedule, and there are problems with property registration and liquidating enterprises, the prime minister said.

"I am not pleased with minister Karins' work in many areas. I make no secret of it," Kalvitis told Latvian State Radio on Feb. 10.

Kalvitis is a member of the People's Party and Karins of New Era. Both right-of-center parties have a history of friction.

Analysts agree with the prime minister's assessment of economic competitiveness.

"We have nothing left but to share the prime minister's concern about the state of Latvia's competitiveness in the future," said Zigurds Vaikulis, head of research Parex Asset Management.

Latvia is currently able to offer only one key advantage compared with other EU nations 's cheap labor and production costs, analysts say, and one must realize this "one-sided" approach to competition cannot go on forever. The effort, they add, should be directed toward the production of more value-added products and services, as well as investment in science and a pragmatic approach to education.

Kalvitis also pointed out that the government can't impede workforce migration and a "brain drain" from Latvia to other countries 's a rising trend among other new European Union member states. (See story on Page 16.) However, once admitted to the EU, the Latvian government has fought for its citizens' rights to work in other EU member states.

"So the government can't restrict the free flow of labor," Kalvitis said, adding that workforce migration could be, perhaps, reduced by leveling salaries within EU countries. The government has already considered this issue in developing next year's budget, according to which salaries would be increased for specialists in a number of sectors.

Meanwhile, inflation appears here to stay. "Judging from information currently available, we unfortunately fail to spot the reasons for inflation heading substantially lower this year," said Vaikulis. "Even assuming for a moment that the rise in world energy prices won't be there, fundamental factors such as extremely robust internal demand and long-term price convergence with the EU levels will not disappear," he added.

Vaikulis said that, given a number of planned hikes in regulated prices 's e.g., natural gas, postal services 's any forecast of average inflation in 2006 falling significantly below 5.5 's 6.0 percent levels (representing only a mild slowdown compared to last year's 6.7 percent figure) should be regarded "with a high degree of suspicion."

It should be noted that the expected levels are obviously way too high in order to fulfill the Maastricht criteria and introduce the euro on the previously set terms, i.e. at the beginning of 2008.
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