Economy until 1918
Traditional farming, forestry and fishing dominated Latvian economy up to the Industrial Revolution. Most locals became serfs after the Crusades in the 13th century. Many lived in single-family farmsteads, while some inhabited small towns scattered all over Latvia. Trade and craftsmanship prevailed among the townspeople. Roman and Arab coins found in Latvia illustrate the extensive historical trade connections.The backbone of transport was the River Daugava and its ports. The Baltic Sea provided maritime connections with the rest of the world. Trade routes between Scandinavia and Byzantium, as well as Western Europe and Russia, went through the territory of Latvia. Several medieval Livonian cities belonged to the Hanseatic League.
Serfdom was abolished in 1817 (Kurzeme), 1819 (Vidzeme) and 1861 (Latgale). Many liberated peasants went on to work in cities. Labour mechanisation and urbanisation of workers improved the living standards in the countryside, too. Latvian peasants took over control of their land and life, buying out half of the feudal estates by 1914. Economic strategist Krišjānis Valdemārs set up a shipping industry owned and operated by Latvians.
Railways brought the Industrial Revolution to Latvia at the second half of the 19th century. Ports, shipping, manufacturing and finances boomed. A highly qualified local workforce made Latvia an excellent location for heavy industry. Local machinery, metallurgy and chemical industries achieved world-class level.
Latvians achieved unprecedented opportunities between the Industrial Revolution and World War I. They were previously prevented from joining the economic, political, and intellectual elites. Some became rich and many sent their children to universities. They formed the pillars of Latvian society who built the new Latvian state and its economy.
Economy of Latvia 1918-1940
The new Republic of Latvia had a lot of willpower and little of anything else to start with. Most of the industrial equipment was evacuated to Russia during the WWI and was not returned afterwards. Constant warfare had destroyed most of the infrastructure. Many qualified workers and managers left due to the ensuing chaos.
Given the complicated circumstances, Latvian economic achievements were remarkable. Introduction of gold-based national currency Lat finished the monetary chaos by 1922. Manufacturing rose from the ashes and found export markets in the West. Small and medium scale agriculture boomed as feudal estates were redistributed between landless peasants and the veterans of the War of Independence.
Latvia persisted through the Great Depression thanks to the strong background in agriculture. The country exported bacon, beet sugar, milk products and textiles to Western Europe. Latvian timber export formed 10% of the global market in the 1930’s. The first hydroelectric power plant was built on the River Daugava at Ķegums at the end of 1930’s.
The primary resource of Latvia stayed the rich human capital, having the highest enrollment in universities per capita in the world. Local high-tech developments as radios by VEF and Minox photo cameras competed with European and American products of the kind.
Under Occupation 1940-1991
The Soviet Union and Nazi Germany ravaged Latvia during World War II. Hundreds of thousands were killed, died or fled the hostilities and persecution. Property and infrastructure were either destroyed or nationalized. Many resources and valuables were expropriated by both Nazis and the Soviets, including swathes of forests, valuable metals and machinery.
Latvia was rebuilt according to the centralized planning of the Soviet Union, which proved to be less effective than a free market economy. The Latvian economy served the political and military interests of the Soviet ruling elite. 176 factories in Soviet Latvia provided between 10 to 100% of their producing capacity towards military purposes. 80% of production in VEF, the largest factory of around 20000 workers, was military procurement.
Centralized planning created wide shortages. Collectivized farming never produced more than 45% of what the private farmsteads did before. Heavy industrialization followed by the need for migrant workers primarily served political purposes. Unrealistic production targets served propaganda, but distorted the market. Lack of environmental concern is responsible for pollution issues that affect Latvia to this day.
The Soviet economic system could not compete with the global free market. It collapsed at the end of 1980’s, shutting down many factories and leading to mass unemployment and the crash of the financial system.
Economy since regaining independence
In early 1990s Latvia experienced an unprecedented change from planned economy to a market-oriented one, as well as liberalised the prices. Basic institutions of a market economy and monetary stability were established by the mid-1990’s. Early banking troubles and the regional economic crisis in 1998 was followed by a strong and accelerating growth. Euro Atlantic political integration resulted in increasing links with the Western markets.
Latvia joined the European Union in 2004 and the Schengen Area in 2007, becoming an integrated part of the single largest common market in the world. The economy of Latvia grew increasingly since 2004.The country was severely affected by the global financial crisis of 2007-2008. In 2009, GDP decrease was almost 18%, and the European Union, the International Monetary Fund, and other international donors provided substantial financial assistance to Latvia as part of an agreement to defend the currency's peg to the euro in exchange for the government's commitment to stringent austerity measures. In 2011 Latvia had achieved GDP growth by 5.5% and thus again was among the fastest growing economies in the European Union. The IMF/EU program successfully concluded in December 2011.
Latvia today is a typical European country. The share of people with at least a secondary education is actually higher than in almost any EU country. Parts of our infrastructure have been brought from deep obsolescence 20 years ago to being among the best today, such as the internet speed.
The country is addressing its shortcomings and builds on its strengths. History has taught Latvians to be crisis managers. The current fiscal discipline has made Latvia an example to the Western World. As a result, Latvia was welcomed to the Eurozone in 2014 and joined OECD in 2016.
© The Latvian Institute 2015; All photography copyrights reserved © Eduards Kraucs - UNESCO/Museum of Energy - Latvenergo, Latvian National Library, Swiss Camera Museum