|For centuries under Hanseatic and German influence and then during its
inter-war independence, Latvia used its geographic location as an
important East-West commercial and trading center.
Industry served local markets, while timber, paper and agricultural products supplied Latvia's main exports. Conversely, the years of Russian and Soviet occupation tended to integrate Latvia's economy to serve those empires' large internal industrial needs. Comprising 40.1% of the populace, non-ethnic Latvians control almost 80% of the economy.
Since reestablishing its independence, Latvia has proceeded with market-oriented reforms, albeit at a measured pace. Its freely traded currency, the lat, was introduced in 1993 and has held steady, or appreciated, against major world currencies. Inflation has been reduced to a monthly rate of one percent or less. After contracting substantially between 1991-93, the eonomy steadied in late 1994, led by recovery in light industry and a boom in commerce and finance. A prolonged banking crisis and scandal involving what had been Latvia's largest commercial bank set the economy back in mid-1995 and 1996, causing budget deficits well beyond the 2% target recommended by the IMF. Nevertheless, Latvia's 1997 budget is balanced.
Replacement of the centrally planned system imposed during the Soviet period with a structure based on free-market principles has been occurring spontaneously from below much more than through consistently applied structural adjustment. Official statistics tend to understate the booming private sector, suggesting that the Latvian people and their economy are doing much better than is reflected statistically. Two-thirds of employment and 60% of GDP is now in the private sector. Recovery in light industry and Riga's emergence as a regional financial and commercial center have offset shrinkage of the state-owned industrial sector and agriculture. The official unemployment figure has held steady in the 7%-8% range.
Privatization in Latvia is almost complete. Virtually all of the previously state-owned small and medium companies have been successfully privatized, leaving only the politically sensitive large state utilities. Despite a bad image based on loosely controlled privatization efforts in the early days, as well as the difficulties of privatizing the utilities, Latvian privatization efforts have led t the development of a dynamic and prosperous private sector, which accounted for nearly 68% of GDP in 2000. In addition, recent developments indicate that Latvia is likely to fulfill its commitment to the IMF to sell its majority interest in the Latvian Shipping Company, and the remaining state shares in Ventspils Nafta and Latvijas Gaze by mid-2001. The main goal of the Latvian Privatization Agency was and is to created healthy companies.
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. 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.
power parity - $17.3 billion (2000 est.)
SOURCES: The World Factbook, U.S. Department of State
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