Ministry of Economics Republic of Latvia ECONOMIC DEVELOPMENT OF LATVIA REPORT RIGA JULY 2007 Commentaries, questions or proposals are to be sent to: Ministry of Economics, Republic of Latvia Brīvības ielā 55, Rīga, LV-1519 Phone: 371-67013119 Fax: 371-67280882 E-mail: [email protected] Homepage: http://www.em.gov.lv The Report was prepared by: O.Barānovs (overall compiling, 1., 4.1.1., 4.4., 6.1.), G.Piņķe (3.1., 3.2.1., 3.2.2., 3.3.1., 3.3.2., 3.5., 4.1.2., 4.1.3., 4.3.1., 4.3.2., 5.1.), E.Gergelevičs (2., 3.2.4.), I.Freimane (3.1.), A.Bessonovs (3.2.1., 3.2.2., 3.4.), M.Kubliņš (3.3.1., 3.3.2.), I.Skribāne (3.2.3., 4.3.3., 5.2.), D.Dravnieks (3.3.3., 6.3.2.), J.Salmiņš (4.1.2., 4.1.3.), A.Krūze (4.1.3.), I.Šnīdere (4.2., 4.3.1., 4.3.2.), Č.Gržibovskis (5.1.), I.Krupenkovs (5.3.), I.Šulcs, G.Silovs, M.Jansons (6.2.1.), A.Gulbis, D.Klinsone, L.Stauvere, J.Zlēmeta, A.Ševčenko, G.Ābele, (6.2.2.), A.Laizāne, I.Eglītis, R.Bērziņš (6.2.3.), T.Grīnfelds (6.3.1.), D.Merirands, D.Eberšteina (6.3.2.), A.Liepa (6.3.3.), A.Andriksone, I.Grīnberga (6.3.4.), I.Beināre, I.Benga, I.Bloma (6.4.), U.Vanaga, V.Zeps (6.5.), L.Neiders, I.Eglītis (6.6.), E.Breča (6.7.), J.Linkeviča, M.Stenders, I.Tarvāne (6.8.), J.Miķelsons (6.9.), I.Ozoliņa (6.10.), L.Zemīte, K.Riekstiņa, B.Vītoliņa (6.11.), R.Ansone, E.Beļskis, J.Maurāns, V.Zvejs, M.Eberšteine (6.12.), K.Lore, D.Jirgena, B.Joffe, G.Vigupe (6.13.), I.Lipovska (6.14.), I.Bērziņa (6.14., 6.15.3.) Z.Kubuliņa (6.15.1.), I.Galiņa (6.15.2.). Translated by A.Liepiņš. All the numerical information and data unless otherwise indicated were provided by the Central Statistical Bureau of the Republic of Latvia. Data of the Bank of Latvia and the Financial and Capital Market Commission have been used in characteristics of the Balance of Payments and the banking and monetary indicators of Latvia. The Treasury of the Republic of Latvia data is used in the characteristics of financial indicators of Latvia. The Report was prepared under the guidance of K.Gerhards – State Secretary at the Ministry of Economics. Cover design: Ingmārs Usas Printed: SIA „ABC JUMS” Rūpniecības iela 3, Aizkraukle, LV-5101 Phone: 371-65122888, phone/fax: 371-67142383 ISSN 1407-4109 © Ministry of Economics, Republic of Latvia, 2007 Reference mandatory in case of reprinting and quoting. Dear reader, Experts of the Ministry of Economics have their competitiveness, encouraging awareness of society prepared the 26th Report on the Economic about the role of innovation in promotion of Development of Latvia. The first Report was competitiveness, promotion of co-operation of published in September 1994 and the following Reports industrial, educational and scientific sectors, transfer and since 1995 were published traditionally twice a year in commercialisation of knowledge, and fostering June and December. The present Report, just like the development of industries and rise of their productivity. previous ones, provides evaluation of economic Funding in the amount of LVL 464 million is planned situation in Latvia and progress of reforms as well as for implementation of these measures, int. al., attracting offers economic development forecasts. LVL 420 million from the EU Structural Funds. I want I note with satisfaction that rapid economic to stress that currently, working out criteria for use of growth continues protractedly in Latvia. GDP has EU funds, more and more attention is paid to the increased by 10.4% on average annually since 2004 and regional aspect. went up even faster in 2006 (by 11.9%). Also 2007 Among main challenges for the Ministry of started successfully for Latvian economy. GDP in the Economics in the next years will be implementation of 1st quarter grew by 11.2% in comparison with the energy development policy in order to raise safety of respective period of the previous year. Fast GDP energy supply and reduce dependence on imported growth certainly reduces our country’s backwardness energy resources. from the old EU member states and I am convinced For achievement of the set goals, we will continue that economic growth in Latvia will remain at a high the dialogue with our social partners (entrepreneurs level also in the next years. and non-governmental organisations representing We are satisfied with our success but also are clearly them). This is the only way how to ensure sustainable aware of the existing problems and are forming an growth in the long-term perspective. appropriate policy to solve them. One of the main risks In the Report, you will find information on both the for economic development in Latvia is constituted by development of main economic and social indicators, high inflation rate and large current account deficit due growth of national economy sectors, external economic to high domestic demand. environment, and government’s economic policy for Inflation rate of Latvia is determined by many promotion of growth and employment, foreign trade factors that sometimes are mutually unrelated, among policy, utilisation of the EU Structural Funds and the them structural changes pertaining to EU membership, Cohesion Fund, innovative and entrepreneurial policy and other economic reforms. In the conclusion, the rise of world prices for energy resources, changes of authors of the Report give recommendations for administratively regulated prices, etc. However, the improvement of the national economic policy. most essential factor is rapidly growing domestic The Cabinet of Ministers has not assessed all demand stimulated both by fast increase of wages and issues addressed in the Report hence many conclu- by rapidly growing volume of crediting. At the same sions on the economic development of the country time, it should be noted that inflation has not been an and proposals for further action reflect purely the essential obstacle to fast growth up to now. However, opinion of experts of the Ministry of Economics. the high inflation rate remaining already for three years I hope that the Report will be useful to eco- may pose a threat to stability and further growth of nomists and entrepreneurs and everyone interested in Latvian economy in the current conditions. That is the issues of the economic development of Latvia and why Latvian government pays special attention to will encourage exchange of opinions between public solution of this problem and, in March 2007, the institutions, various organisations and interest groups, Cabinet of Ministers approved the action plan to curb economists and other stakeholders. inflation, which is oriented to reduction of the I would like to express my gratitude to the authors domestic demand. of the Report. Priority for work of the Ministry of Economics is promotion of business activity and knowledge-based economy. By implementing the Action Plan for Improvement of Business Environment, Latvia improves its July 2007 global positions every year. In the World Bank survey “Doing Business in 2007: How to reform”, Latvian business environment takes the 24th place among 175 countries, which is by two positions higher in comparison with the previous year. In order to raise competitiveness of Latvia, the Cabinet of Ministers has approved the Entrepre- neurship Competitiveness and Innovation Promotion Programme for 2007–2013. The programme defines specific measures for improvement of business Jurijs Strods, environment, fostering access to finances, development Minister of Economics of new entrepreneurship initiatives and promotion of Contents Abbreviations ..................................................................................................................................................................... 6 1. Economic Situation: Brief Overview ............................................................................................... 8 2. Development of World Economy .................................................................................................... 12 3. Growth and Productivity .................................................................................................................. 15 3.1. GDP Dynamics and Productivity ....................................................................................................................... 15 3.2. GDP Expenditure ................................................................................................................................................. 17 3.2.1. Aggregate Demand .................................................................................................................................... 17 3.2.2. Private and Public Consumption ............................................................................................................. 17 3.2.3. Investment ................................................................................................................................................... 18 3.2.4. Exports and Imports ................................................................................................................................. 21 3.3. Contribution of Sectors ........................................................................................................................................ 25 3.3.1 Structure and Dynamics of the Economy .............................................................................................. 25 3.3.2. Manufacturing ............................................................................................................................................. 26 3.3.3. Energy Sector .............................................................................................................................................