RIGA - Latvia's economic future lies in the production of high-quality niche products and services and as a springboard into Russia, international representatives of the Latvian Investment and Development Agency said last month at a major gathering with over 200 members of the local business community. Whether Latvia can pull it off, however, remains to be seen.
The Dec. 16 - 17 meeting - the second since May - was the first real chance for LIDA's mission leaders, who have opened five offices in the EU since late 2003, to present their assessment of Latvia's strengths and weaknesses post-EU accession. One of those strengths is the country's skilled, polyglot workforce.
"Latvian workers have a high level of education and motivation and are able to react quickly to their clients' changing needs," said Ginta Petra, head of LIDA's German office. "They have good language skills: many IT workers, for example, are trained in German."
Gints Janums, who is in charge of the Danish office, agreed. "We're moving away from the idea of Latvia as low-cost to Latvia as high-quality. Employers want good employees, and we have them," he said. Another strength is Latvia's logistical network. "If a Norwegian businessman wants to visit his business in Latvia, he can be here in an hour and a half," said Ivo Urbanovics of the Norway office. "And Latvian producers can deliver products to market rapidly and reliably." s Petra pointed out, "Latvia has daily flights and regular ferry services to several German destinations. That means Latvian businesses can offer just-in-time delivery via Rostock and Luebeck to any location in Germany."
Latvia's third advantage is its Russian heritage. "Latvia has a direct border with Russia and experience of trading there, while offering investors EU stability," said Janums. "Businesses that base themselves in Latvia can use their Latvian employees' knowledge and experience to trade on into the CIS.
"Harolds Celms, who heads LIDAâ's office in France, echoed this point. "A Swedish businessman once said that even if every person in Sweden learned Russian, they'd never understand business in Russia. Latvia doesn't have that problem." The problem Latvia does have, LIDA representatives agree, is size. The country is simply too small to compete on equal terms in the largest European markets. Sixty percent of Latvia's total wood production is exported to Britain, which is barely 10 percent of U.K. demand.
The same would be true for new products, as Indra Freiberga of LIDA's U.K. office said. "Latvia would love to supply biodiesel to the U.K. market, but we simply can't produce
enough to become a major player there." "Latvia is too small for the giant German market. If we want to succeed there, we will have to be a niche producer of specialized wares," Petra added. LIDA's policy is based upon these calculations. Its strategy is two-pronged: to promote the country's identity as a niche producer of high-quality, high value-added goods
for the European market, while highlighting it as a safe production base for EU companies wishing to trade with Russia. Both goals are attainable and indeed complementary, but two
other factors may spell trouble for the double dream. The first is cost base. No matter how much LIDA stresses the quality of Latvian services, the brutal fact is that Western companies will only buy them if the price is right. Latvia's - and hence LIDA's - current policy is to present the country as "value for money." In the short term, that is accurate, but since Latvia's long-term goal is to reach EU living standards, costs will inevitably rise. When this happens, the only way for Latvia to maintain its value-for-money sales-pitch will be to make its products not just as good as - but better than - its rivals'. Competition will be key. Latvia was not the only postcommunist country to join the EU in 2004. Seven other states did so, and they, too, dream of high-tech, value-added economies. LIDA's official line is that
competition between the eight is friendly, healthy and balanced by systematic cooperation. While this approach is necessary for diplomatic reasons, it obscures the fact that ultimately all eight states are fighting for the same investment in the same areas - and with the same weapons. Latvia offers a skilled, motivated, multilingual workforce, but so do the other seven, and the European Commission's recently published report on national standards of
innovation rated Latvia 29th out of 33, lower than any of the postcommunist EU states except Poland. Steps have been taken on several levels to address the problem, but the fact remains that Latvia is playing catch-up in the innovation race while it is trying to outmarket its East European competitors. If Latvia's cost base reaches EU levels before Latvia's standards of production and research do, foreign investors will look elsewhere. That will not leave Latvia on the bottom of the EU25. The other half of LIDA's strategy - the springboard to Russia - will remain. But if the country is to become something more than Europe's waiting room to Russia, Latvia's economic leaders had better face reality: life in the enlarged EU is not about convincing investors that you are good. It is about convincing them that you are better than anyone else. With LIDA restrained by diplomatic considerations on that subject, it is one message Latvian industry will have to work out for itself.