Competitiveness as the driver to Latvia’s economic growth

Competitiveness, education and productivity. These were the main concepts discussed by economists, politicians and the audience regarding the Latvian economy at the 18th Baltic Financial Forum, held on Sept. 21 in Riga. The meeting brought together leading representatives from EU and Latvian public institutions, academics, investors and venture capitalists. The aim was to discuss ideas about how Latvia can reach its ‘economic breakthrough’ at the European level. At the event, the experts took the opportunity to talk about the current options that Latvia has to grow its economy, and also the weakness which are still on the table.

The current situation in Latvia shows a recovery from the huge crisis experienced between 2008 and 2010. In 2012 the economy can reach growth of 3.5 percent of GDP over last year; however, the experts were more interested in looking at what is needed for building long term, sustainable growth.

There are still many problems that Latvia needs to focus on to get its economy on track. According to Paolo Paesani, a professor at Rome Tor Vergata University, Latvia faces the big problem of deflation, meaning a drop in prices due to a fall in demand. Deflation for an economy can be devastating, he says. But even worse is the high rate of unemployment, which was at 16.1 percent in the second quarter of this year. To these problems is added a negative trade balance.

“Latvia did what was needed with fiscal consolidation, but what it has to [come up with] now is a migration policy which calls back the people who have emigrated,” says Paesani. Despite a good business environment and labor mobility, what is really worrying is that the number of people in the country is predicted to decline. This means that, without a trained and skilled population, it becomes more difficult to improve productivity.

“It is impossible to control people movements because we live in the EU, where people can move about freely,” says Jonathan Faull, director general at Internal Market and Services at the European Commission, referring to the need for the Latvian government to design policies to attract people to return.

“We are lacking specialists: we need education to [train] these specialists,” says Ilze Aizsilniece, chairman of the board at Piena cels. She added that today’s education curriculum in Latvia is not in line with what is demanded by employers.

This coincided with calls by the speakers for the government to have more effective policies for creating a higher educational system centered on the skills needed today, including in areas such as innovation.

Morten Hansen, head of the Economics Department at the Stockholm School of Economics in Riga, lambasted the current state of politics in Latvia, in the way that vested interests are holding back Education Minister Roberts Kilis’ attempts at much needed education reform.

If education was one of the main themes at the Forum, another basic question was related to the necessity of investment funding. According to Faull, there is no excuse for banks not to loan money to businesses today. He says that “Banks are so conservative, so [companies need] to create products and expectations which can attract the interest for investment [from other sources].” He adds that small business will be important in getting the EU’s economy to grow again.

In this sense, the experts spoke about capital market borrowing, and creating facilities to make debt cheaper and more accessible. Latvia’s Minister of Economy Daniels Pavluts said the state needs to step in to support newly developed industries, and incubators.

Pavluts threw out a list of other ways for the state to assist the economic breakthrough, from investment into infrastructure (roads), to re-education and retraining programs for the unemployed, and support for regional development outside of Riga.

According to Juris Grisins, member of the board of Latvian Venture Capital Association, the last years have seen growth in investment in the energy and manufacturing sectors. Nevertheless, he notes the lack of large companies in Latvia.

Lastly, what the participants pointed out was the necessity for higher productivity and competitiveness in Latvia’s economy. These are the main issues for the next step out of the crisis. “Once you improve in production and competitiveness, you improve in growth, and it increases aggregate demand and consumption, increasing exports and gives a direct call to those who are [qualified] in the search for a job,” saids Paesani.

Is Latvia ready for the economic breakthrough? This was the motto of the Forum. Many responses were positive on this, some qualified. Indirect investments and local savings may be the key for beginning to improve competitiveness and productivity in Latvia, according to some of the speakers. However, what seems clear for the economists and public officials is that it is a long-term project to make a new economic model, based on a competitive and sustainable, high quality production system based on an entrepreneurial environment and high quality educational system, work. “Right now, we can just state that Latvia is ready to be ready,” said Hansen.