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The Baltic states have similar backgrounds and are mostly supportive to each other. There is, however, a friendly competition in terms of the speed of their development, and Latvia lags behind.
The lost competition with the neighbors
The three Baltic States are often perceived as parts of a region. Investors tend to talk about the Baltic region, not Lithuania, Latvia, and Estonia separately. In politics, speaking in the context of Russia's invasion of Ukraine and in international politics in general, politicians talk about the Baltics, not about three countries, and in 2004 all three countries joined the EU and NATO on the same day. The Baltics have survived together hard times, such as the Soviet occupation, and are supportive with each other – and this goes beyond politics, as sport fans across the Baltics root for their neighbours’ athletes and teams.
However, there is also a competition between the neighbors, in which losing is especially painful. It has been actively discussed in Latvia for some years that “life is better for our neighbors than for us”. “Latvia's lagging behind Lithuania and Estonia really exists, because the most important indicator in our economy is GDP per capita, and currently in Latvia, it is 71% of the average EU level, while in Estonia it stands at 82%, and in Lithuania at 87%” Bank of Latvia Chief economist Olegs Krasnopjorovs told Veridica. In other words, in Latvia GDP is EUR 27 000 per year while the EU’s average is EUR 38 000. In Lithuania and Estonia, this figure was EUR 33 000 and EUR 31 000, respectively.
Also: the gross minimum wage is the lowest in Latvia – in the first half of this year it stood at EUR 700 per month, while in Lithuania and Estonia it was EUR 924 and EUR 820, respectively.
The roots of backwardness are deep
Latvia began to fall behind economically many years ago. Estonia has been economically ahead of Latvia since the 1990s, when it deliberately associated itself more with Northern Europe, especially Finland, then Lithuania rushed forward in 2007-2008, when Latvia fell into a severe economic crisis, points out Krasnopjorovs. Until then, the economic development rates of Latvia and Lithuania were similar.
The period from 2004 to 2008 is called the “fat years” in Latvia. They are characterized by easy bank loans, rapidly growing wages, and other economic aspects that characterize living beyond one's means. Economist Inna Šteinbuka recalls that in those years the GDP was growing by as much as 10% per year. The “fun”, as some experts said, ended in September 2008, when the salaries of those working in the public sector were frozen, and in November, one of the largest private banks in Latvia, “Parex”, went bankrupt. The real estate bubble also burst. To maintain the financial stability, the government decided to buy the bank. The situation was made worse by the global financial crisis. As a result, Latvia was forced to borrow EUR 7.5 billion from the International Monetary Fund, the World Bank, and the European Union. Of this amount, only EUR 4.5 billion was used. In addition, Latvia was forced to implement severe structural reforms, which led to bankruptcies, unemployment of almost 20%, and huge emigration, especially to Ireland and the United Kingdom. The other Baltic countries did not experience such a severe crisis.
But it was in those years that the pace of economic or GDP development in Lithuania became one percentage point higher than in Latvia, says Krasnopjorovs. After one year, the differences are invisible, but after several years it becomes noticeable: after 10 years, the difference in income is 10%, and in 20 - it can become at least 20%.
Small sectoral problems lead to significant backwardness overall
Moreover, backwardness should also be seen in a broad sectoral context. Krasnopjorovs says that Lithuania has a slightly superior, but Estonia has a significantly better higher education system than Latvia. Health care in the other Baltic countries is also of slightly higher quality than in Latvia. The same can be said for the business environment and other sectors.
The low quality of education in certain Latvian universities creates a workforce that does not know how to create goods with high-added value. As a result, Latvia exports a relatively large amount of low-quality goods and earns less income than if there was a higher proportion of high-quality export goods, says Krasnopjorovs. Other experts also emphasize the connection of innovation, technology, and human skills with the economy and its development. “Latvia's biggest challenge is innovation. Innovation requires research and development, as well as the improvement of people's knowledge and skills,” stress the Scientific Institute of Productivity of the University of Latvia “LU think tank LV PEAK”. In addition, the business environment also needs more support.
Thus, to change the situation, the Latvian economy needs deep structural reforms in many spheres. For example, better healthcare will increase life expectancy and social policies will bring the reskilled unemployed into the labor market.
The economic problems are also caused by the aging of the society, the small number of residents in the regions, problems with the use of EU funds, bureaucracy, the lack of big goals at the national and societal level, economic and social inequality. In addition, geopolitical conditions also have an adverse effect, as investors take into account Latvia's border with Russia and Belarus.
However, in spite of these problems and its lagging behind its Baltic neighbours, Latvia did go a long way since its independence, more than three decades ago. „Great success. I think that the example of Latvia could be written in economic history on how to develop the country from a planned to a market economy. The fact that Lithuania and Estonia developed even faster than us means that we are good, but we can do more. We don't know how to use the resources and population that we have,” Bank of Latvia economist Olegs Krasnopjorovs concludes.
