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Latvia, Economy

rublis, rubber footwear, pig breeding, Liepaja, hydroelectric plants

Latvia was a constituent republic of the USSR from 1940 to 1991. As such it was fully absorbed into the Soviet economic system. The country was forcibly industrialized, resulting in environmental degradation and rapid urbanization as people from across the USSR were resettled in Latvia to work in the factories. Since achieving independence Latvia has aspired to reintegrate with Europe. This widely held goal allowed the country’s leaders to early on initiate economic reforms intended to establish a market economy such as found in western European nations. These policies allowed prices for goods to be set without government involvement; restrained government spending; and privatized agricultural land, small businesses, and banking institutions.

The transition to a European-style economy was not smooth, however. The first difficulty was a severe shortage of fuels and raw materials, caused by the disruption of trading relationships resulting from the breakup of the Soviet Union. This forced Latvian enterprises to cut back or cease production, casting many of the workers into unemployment. After a sharp decline, the gross domestic product (GDP), which measures the value of all goods and services in the country, did not start growing again until 1994. A year later a banking crisis swept the country. Unwise loans and lax government oversight created conditions in which the nation’s largest bank and some of its smaller institutions failed and were unable to pay depositors the money they had entrusted to the bank. The government restored confidence by creating a stricter regulatory system to oversee banking practices.

Today the economy of Latvia is among the healthiest of the former Soviet republics. The GDP was increasing in the mid-1990s. Inflation was contained and the national currency was stable, both of which encouraged international trade and economic growth.

Latvia’s gross domestic product was $7.2 billion in 2000. Industry contributed 25 percent of GDP, a smaller proportion than in earlier years because of a sharp drop in industrial production following Latvia’s independence from the Soviet Union in 1991. Agriculture, fishing, and forestry contributed 4 percent of the GDP, and the broad services sector, which includes trade and financial activities, produced 70 percent.

Nearly all of Latvia’s agricultural land was gathered into collective or state-managed farms during Soviet rule. Since independence a government privatization program is returning the farmland to private ownership. Principal agricultural activity is dairy farming and pig breeding. Leading crops include potatoes, barley, sugar beets, wheat, and cabbages. The Latvian fishing fleet sails from Riga and Liepaja to search the Baltic Sea and Atlantic Ocean for mackerel and herring. Some 47 percent of Latvia is forested, and timber cutting is a significant economic activity. Agriculture, forestry, and fishing employs 15 percent of the workforce.

The processing of raw materials from Latvia’s farms and forests accounts for much of the country’s industrial production. The leading manufacturing branches are food products, particularly goods made from milk and sugar refined from beets; textiles and clothing, notably leather and rubber footwear; wood products, such as plywood and paper; and transportation equipment, primarily buses. Industry, including manufacturing, construction, mining, and power generation, accounts for 26 percent of the workforce.

Latvia, a country with few natural resources, must import all of its natural gas and oil and one-half of its electricity. The imported electricity comes from neighboring Lithuania and Estonia. Of that generated inside Latvia, three-quarters is produced in hydroelectric plants and the remainder in facilities burning fossil fuels.

Latvia’s principal exports are forestry products, textiles, prepared foodstuffs, and machinery and equipment. Leading imports are mineral products (notably fuels), machinery and equipment, and textiles. Russia is the country’s chief trading partner, buying nearly one-quarter of Latvia’s products and supplying one-fifth of its imports. Other important export purchasers are Germany, the United Kingdom, Lithuania, and Sweden; other sources for imports are Germany, Sweden, Finland, and Lithuania.

Latvian officials promoted economic independence by abandoning the Russian ruble. The Latvian ruble, the rublis—which was first issued in May 1992 as a transitional currency designed to compensate for shortages of Russian rubles in the country—became Latvia’s official currency in May 1993. Later the same month, the lat, the country’s new currency, began replacing the rublis as the sole legal tender (0.61 lati equal U.S. $1; 2000 average).

Newspapers and periodicals flourished in Latvia after the first nongovernment-controlled publications appeared in the late 1980s. Since then, however, rising production costs and consolidations have reduced the number. In 1996 some 24 daily newspapers were published. Commercial radio and television broadcasting began in Latvia at the time of independence; 25 radio and 30 television broadcasting companies were in operation by 1995.

Latvia is a member of the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (World Bank), and the European Bank for Reconstruction and Development (EBRD). In mid-1995 the country became an associate member of the European Union (EU). It subsequently submitted an application for full EU membership. In December 1997 Latvia and Lithuania were among five Eastern European countries invited to join the EU as part of its second round of expansion; no timetable was set for that expansion. Estonia was invited at that time to join the organization in its first round of expansion, with talks beginning in March 1998.

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