Houdini and immigration: Latvia's solution for economic development

Mar 18, 2010

A very strong characteristic of the Baltic people is how they are united about preserving their cultural heritage, language, and society resulting in a specific form of nationalism. Immigration is a very sensitive part of this: more foreigners mean, proportionally, less indigenous people. As a result, the indigenous language, culture, and society are threatened. Most of Baltic politics have been subordinated to such sentiment. For example, why is there no metro in Riga? Because Latvians were against it. Facing low birth rates and years of all forms of ethnic cleansing by the Soviet Union, Latvians were worried that the immigration of workers from other parts of the Soviet Union could decrease even more their share in Latvia’s social fabric. In 1988, a wave of protests with slogans like “No - metro, No - immigration,” showed the real motives of the dissatisfaction among Latvians.

This month, immigration is again on spot. On March 13, President Valdis Zatlers returned to the Latvian Parliament a polemic amendment on the Immigration Law. In summary, the amendment aims to ease foreign investors possibilities to obtain a temporary residence permit for up to 5 years. Thus, two kinds of investors are contemplated: (a) anyone investing 25,000 lats (35,700 euros) or more, employing at least 5 EU citizens, and paying no less than 10,000 lats in taxes; and (b) anyone with at least 100,000 lats to invest in real estate. Strangely, it has been presented as a real chance for Latvia to recover its economy. This idea is naive.

In the first case, the line of thought is simple: easier requirements for granting a residence permit will make foreign investors more interested in Latvia, boosting the amount of Foreign Direct Investment - FDI to Latvia. Unfortunately, a residence permit isn’t the main determinant of FDI. Instead, economic theory and reality show that three main elements must be taken into consideration: (a) macro-economic stability (growth, inflation, exchange rate risk); (b) institutional stability (policies towards FDI, tax regimes, transparency of legal regulations, and level of corruption); and (c) political stability and level of democracy (political freedom, press freedom, liberty of expression). Latvia has tremendous problems in all these benchmarks, making this measure irrelevant.

The question of real estate is also problematic. The idea is that less bureaucratic requirements for investors to get a visa and enjoy their properties will boost the real estate market, thus Latvia’s economy. There are two problems. First, this opens Latvia’s and Schengen area’s doors to any individual with money, representing a very serious threat to Europe’s security. With Latvia’s level of corruption, this is a very serious issue. Second, there is the economic question.

Although in the medium and long run investment in real estate is really a good option, very often what prevails is short term speculation, with professionals in the field helping to fuel the illusion of easy money. Speculation with real estate, or ‘easy money,’ has a significant role in determining crises. The Great Depression of the 1930’s, Sweden’s and Finland’s crises in the 1980’s and 1990’s, the Asian crisis, just to cite a few, were heavily influenced by speculation with real estate. The same applies to Latvia: speculation with real estate is one of the most important factors explaining the current depression. One important lesson in macroeconomics is that in a country, there is no place for ‘easy money,’ but for productive investments creating sustainable employment.

It is necessary to create an environment to help real business to flourish. It is time for politicians to understand that the only solution for Latvia’s economic problems is the development of real and sustainable business, resulting from FDI. Although there is no magic in economics, just hard work to be done, politicians are still thinking they are Houdini here.

The opposition to this amendment is mainly based on nationalism against immigration. It should be different, as the problem is different. With the current economic crisis, the average Latvian is leaving the country trying to achieve a normal and dignified life. In practice, this has the same effect as immigration: there will be fewer Latvians in Latvia. Thus, it’s necessary to find ways to stop emigration and to bring these people back. The key is economic development. Without Latvians, there is no Latvia. Latvian culture and language survived Swedes, Poles, Germans, and Russians. It seems they will not survive Latvian politicians and ‘honest’ businessmen.

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