Two years in the Government: towards the sustainable development of Latvia!

Two years ago, when I assumed the duties of the Prime Minister, I knew that the
Government’s agenda will include tough and unpopular decisions. They were inevitable and
necessary to prevent national bankruptcy.

The previously experienced rapid economic growth and irresponsible fiscal policy had created
the illusion about eternal economic growth for a part of the society. The fundamentals of
economics – the theory of economic cycles, counter-cyclical fiscal policy were perceived only
as theoretical abstractions both in Latvia and in many other countries worldwide. However,
Latvia was notable even on the background of joint irresponsibility – a double-digit economic
growth, but the budget still has a deficit, a double-digit inflation, but the current account
deficit is above 20% of GDP, the credit volumes in economy have quadrupled within few
years, the real estate prices are higher than in the developed western countries. As a result,
when the global economic crisis started, Latvia was one of the countries most affected by the
crisis. The people could hardly believe that previously propagated achievements have turned
out to be just an empty bubble. The society had reasonable grounds to feel cheated, but the
responsible politicians tried to imperceptibly leave the public stage, leaving an open question:
which political power will be willing to take the political risk to head the government, but
most importantly – the responsibility for prevention of national bankruptcy?

Within two years, we have prevented the national insolvency risk and have overcome the
lowest point of economic crisis. We have attained the financial and economic stabilization.
We have returned to economic growth and have substantially changed the economic
structure - currently production and exports are the driving forces of economy. We have laid
the necessary foundations for the work on maximization of national competitiveness and
sustainable economic growth. We succeeded to accomplish this task without very serious
social tensions, although not without serious decisions in the social sector.

The work of the Government on overcoming the crisis is being carried out in three main
directions – fiscal consolidation, economy heating measures and social security network to
mitigate social tension.

During the previous two years the stabilization of public financing has undoubtedly been
the central issue on the Government’s agenda. During this period the amendments to the
2009 budget were prepared, as well as the state budget for 2010 and 2011 providing for
substantial decrease in the state budget deficit. The total state budget consolidation was made
in the amount of LVL 2.1 billion - LVL 1.3 billion on the expenditure side, while LVL 0.8
billion on the revenue side. Thus, almost two-thirds of total consolidation was made on the
expenditure side and one-third on the revenue side. This work should be continued also this

year and the Maastricht criteria – the budget deficit below 3% of GDP should be met in the
2012 budget. Accordingly, the budget 2012 will be the last to deal with fiscal consolidation.
At the time when the financial crisis is expanding in many EU countries Latvia is more and
more often mentioned as a positive example of overcoming the crisis. The stability has been
ensured in the financial market – the interbank interest rates are lower than before the crisis,
the demand for government securities in auctions exceeds the supply and the credit rating
of Latvia and its future outlook has improved. The further development of Latvia will also
depend on economic growth in the region and how the eurozone crisis will be solved. In
this context, the Government consistently supports more strict economic governance of the
European Union and the eurozone, by introducing control and sanction mechanisms for those
Member States which do not ensure the fiscal discipline.

By continuing the work on restoration of financial stability and economic growth it would be
short-sighted to avoid preventive measures with a view to eliminate in future the opportunity
for political dilettantism and irresponsibility to lead the country to bankruptcy and collapse
again. Therefore, the Government is working on the Fiscal Discipline Law aimed at
defining the fundamentals for fiscal policy drafting and maximum permissible budget deficit
considering the macroeconomic indicators. Such laws are successful in several EU Member
States, providing for greater financial stability.

Stabilization of public finances laid the foundation for restoration of economic growth. The
economic growth in annual terms resumed in the second half of last year and this year we are
planning the economic growth of 3.3%.

Furthermore, we have not only returned to economic growth, but have substantially changed
the economic structure. The internal devaluation that has been doubted over and over has
restored the national competitiveness. The production and export have proved to be the
driving forces of economy – the industrial output in 2010 increased by 14%, while export –
by 29%. These are already very significant growth measures.

The Government measures for economy heating also play an important role in restoration
of economic growth. We have reallocated the resources of the EU funds for the benefit of
entrepreneurship and export. We have simplified the procedures for acquisition of the EU
funds and significantly accelerated their acquisition.In 2010, LVL 454 million were disbursed
to beneficiaries of the funding of the EU funds’, which is well above the previous years’
figures. In 2011 we also plan to use every advantage provided by the EU funds – programs for
entrepreneurship and innovations, human resources and employment, as well as investments
in infrastructure. Other economy heating measures to be mentioned are introduction of
the export credit guarantee system, a support package for micro-enterprises and consistent
reduction of administrative burdens.

The work on attracting investments was initiated in new quality by establishing the council
for coordination of large and strategically important investment projects and by implementing
the investment attraction strategy ”Polaris” with the objective to effectively coordinate
the activities of state and local government institutions, as well as NGOs for attracting
investments. In order to more clearly define the objectives and tasks to increase the national
competitiveness, the assessment of national competitiveness will be performed and the
strategy for attracting direct foreign investments will be developed, by defining the incentives
for attracting investments within its framework.

One of the Government’s priorities is to combat the shadow economy. The responsible
institutions were given a task to increasingly implement the measures which would reduce the
proportion of illegal economy and reduce administrative burdens for honest entrepreneurs.

Last year the Government adopted a plan for combating the shadow economy including 61

measure in the area of tax policy and administration, reduction of administrative burdens,
increasing the capacity of controlling institutions and other areas. This year we plan to
provide for LVL 60 million of the above-plan tax revenues at the expense of combating the
shadow economy.

The social security network introduced in autumn 2009 plays an important role in ensuring
the social balance and stability. It includes a set of social security measures, including
increased guaranteed minimum income benefits and removal of restrictions on payment
terms, co-financing for local-governments to ensure the guaranteed minimum income and
housing benefits, involvement of the unemployed in temporary jobs with scholarships or the
so-called “hundred-lats” program, increased availability of health care services and medicine
for the poor, and the support to local-governments for implementation of educational reforms.

Unemployment, which is still high, is one of the most significant social problems. Even
though the unemployment level has been gradually decreasing since it reached its highest
level in March last year – 17.3%, it still remains high – above 14%. In 2010, 97 thousand
people acquired regular work - 37 thousand more than in 2009. In order to further reduce
unemployment a new strategy is required for transition from short term measures of the
labour market policy, which reduce the effects caused by the crisis to medium-term and long-
term measures of the labour market policy, including redistribution of the funding which is
necessary for implementation of active labour market policy measures. The policy changes
which have already been introduced provide the training for the unemployed and job seekers
in priority directions according to the labour market demand and training of the unemployed
according to a voucher method. However, the unemployment problem will not be solved by
using only social measures – the solution is based on sustainable economic development and
new job creation.

Disregarding the tough measures for reduction of budget deficit and unpopular
decisions, ”Unity” won the 10th Saeima elections. In my opinion, it is indicative of the fact
that the electorate voted for stability, successful accomplishment of stabilization of Latvia’s
economy and voted down the populism. At same time it is a credit of trust in the Government
which requires greater political accountability that should not be wasted.

The work of the Government should be gradually redirected from the measures for crisis
management to sustainable development. The work on structural reforms has so far been
more focused on implementation of austerity measures. Currently, the second stage has been
launched by implementing the reforms which will contribute to national competitiveness,
economic growth and efficiency of public administration. We have reached an agreement
in the Reform Management Group on future principles and directions of structural reforms
under which the ministries prepare their proposals. We will consider them together with the
social partners of the Government and will agree on the procedure and reporting mechanism
for implementation of concrete reform measures. The ministers should be aware that there
are no clear boundaries between my ministry and other ministries. There is a unified work
of the Government for the future of the state that will require reforms in the broadest sense
of that term. The main result of structural reforms is measured by the benefits to the society
– by providing the residents with qualitative and accessible public services, by increasing
effectiveness of public administration.

The objective of reforms is to ensure that the state performs its functions more effectively
and more qualitatively by using existing resources. However, the structural reforms are
not a magical tool that will instantly provide additional savings in the state budget. The
structural reforms are not quite the same as budget consolidation. In other words, the fruits
from reduction of the functions which are not characteristic to the state and more efficient
management of national resources will ripen gradually.

The provision of sustainability of the social system will be an important issue on the
agenda of the Government. The savings of the social budget will soon be exhausted, but the
expenditures continue to grow. Without sustainable and well-considered solutions the stability
of the pension system is endangered. It is not only Latvia’s problem. Demographic problems
affect the whole Europe -the proportion of people of retirement age compared to the number
of able-bodied persons is increasing. All countries of the European Union will have to solve
similar problems.

In 2010, the work on improvement of the management of government assets has started and
the in the nearest future it will make a positive impact on the state budget revenues. This
year the work should be continued by defining a future model for management of state-
owned companies including defining of business objectives and control over their attainment,
attraction of professional management through transparent recruitment of leaders, choice of
suppliers and cooperation partners.

In order to increase the national competitiveness serious work should be carried out: by
increasing productivity and ensuring ever increasing value added in the economy, which is
based on both, linkage of the science and research with production and direct foreign and
domestic investments in our national economy. In order to successfully address the issues
of national competitiveness, the work was started on the first comprehensive assessment
of national competitiveness. The first results of the assessment will appear already in
the first half of next year. This assessment will lay the foundations for the development
of a comprehensive system for supervision of national competitiveness. The economists
and sociologists, historians and the media who already have their opinion will assess the
importance and impact of the decisions made at the time that is so decisive for Latvia.

However, the real solution will be in the answer to the question: whether Latvia – a country
that has been most affected by the crisis, will in foreseeable future become a country with
successful and modern economy, educated society, highly qualified labour force and the place
where the most successful companies of the world are willing to invest. We face the historic
choice – whether to go back along the path of stagnation and backwardness or feel oneself as
a strong nation willing to live in Latvia – one of the most successful countries in Europe and
join for common work to pursue this objective.

I would like to thank everyone who has provided constructive criticism, who has cooperated
and supported!