Latvia - Economy

Economy

Latvia is a member of the World Trade Organization (1999) and the European Union (2004).

Since the year 2000 Latvia has had one of the highest (GDP) growth rates in Europe. However, the chiefly consumption-driven growth in Latvia resulted in the collapse of the Latvian GDP in late 2008 and early 2009, exacerbated by the global economic crisis and shortage of credit. Latvian economy fell 18% in the first three months of 2009, the biggest fall in the European Union. According to Eurostat data, Latvian PPS GDP per capita stood at 56 per cent of the EU average in 2008.

This latest scenario has proven the earlier assumptions that the fast growing economy was heading for implosion of the economic bubble, because it was driven mainly by growth of domestic consumption, financed by a serious increase of private debt, as well as a negative foreign trade balance. The prices of real estate, which were at some points appreciating at approximately 5% a month, were long perceived to be too high for the economy, which mainly produces low-value goods and raw materials.

Latvia plans to introduce the Euro as the country's currency but, due to the inflation being above EMU's guidelines, the government's official target is now January 1, 2014.

Privatization in Latvia is almost complete. Virtually all of the previously state-owned small and medium companies have been privatized, leaving only a small number of politically sensitive large state companies. The private sector accounted for nearly 68% of the country's GDP in 2000.

Foreign investment in Latvia is still modest compared with the levels in north-central Europe. A law expanding the scope for selling land, including to foreigners, was passed in 1997. Representing 10.2% of Latvia's total foreign direct investment, American companies invested $127 million in 1999. In the same year, the United States exported $58.2 million of goods and services to Latvia and imported $87.9 million. Eager to join Western economic institutions like the World Trade Organization, OECD, and the European Union, Latvia signed a Europe Agreement with the EU in 1995—with a 4-year transition period. Latvia and the United States have signed treaties on investment, trade, and intellectual property protection and avoidance of double taxation.