Are things really that bad in Latvia?

Some friends of mine from Latvia are now living in the UK, having migrated here for a seemingly better life.  I often wondered why anyone would go through such upheaval to move to the UK seeing as the economy here is so dire and the weather so abysmal.  Curious to know more I decided to do some research to understand if things were really as bad in Latvia as I was being led to believe.

Many people don’t know much about Latvia so here are a few facts.  Latvia is a small country of 2.5 million people that shares land borders with Estonia to the north, Lithuania to the south and both Russia and Belarus to the east.  It is separated from Sweden in the west by the Baltic Sea.  The country is slightly larger than Denmark, the Netherlands or Switzerland.

Latvian is the official language of Latvia although Russian is by far the most widespread minority language and is spoken or at least understood by large sections of the non-Russian population.

The country’s capital, Riga, has about 650,000 inhabitants and is the largest city in the Baltic States and home to more than a third of Latvia’s population.  Riga is one of the key economic and financial centres of the Baltic States. Roughly half of all jobs in Latvia are in Riga and the city generates more than 50% of the country’s GDP as well as around half of Latvia’s exports. Riga is experiencing a new renaissance as the capital of Latvia and many large-scale restoration projects on old buildings have made Riga one of the most attractive cities in Europe.  In 2014 Riga will be European Capital of Culture along with Umea in Sweden.

Latvia has a troubled history of being occupied both by Nazi Germany and Soviet Russia before being restored as an independent republic in 1991.  The country became part of the WTO in 1999; it also joined NATO and the European Union in 2004.  The country is on a mission to abandon its local currency, the Lat, and become part of the Euro in 2014.

Latvia’s economy grew by 50% between 2004 and 2007 leading it to be labelled as one of the “Baltic Tigers”.  However, growth was cut short in 2008 when the economy plunged into a catastrophic slump that was triggered by the collapse of its second largest bank, Parex, which wiped out many people’s savings. Problems quickly mushroomed causing GDP to plummet by 18%.  The European Union, the International Monetary Fund and other international donors had to provide substantial financial assistance in exchange for the government’s commitment to stringent austerity measures.

Politically, the state was in turmoil. Many Latvians took to the streets to protest their declining living standards and a 20% unemployment rate. The ruling coalition collapsed and a new six-party coalition government was elected in 2009.  The new regime decided the only way out was to cut government programmes, departments and wages. One-third of the civil service was fired. Those who remained including bureaucrats, teachers, even the soldiers took 30% pay cuts.

However, austerity appeared to work. The economy grew by 5.5% and 4.5% in 2011 and 2012 respectively and Latvia was the fastest growing economy in the European Union. In late 2012, Latvia even repaid the IMF in full, several years early.

The new economy is being built, once again, on natural resources including timber and wood-processing, agriculture and food products, as well as machine and electronic manufacturing.  Economic growth is expected to hit 4% in 2013 and accelerate to 4.5% in 2014.

Public sentiment is continuing to improve and there is a growing resurgence in confidence. Opinions about job opportunities in Latvia and the government’s performance are also improving, according to local sources.

Meanwhile, Prime Minister Valdis Dombrovskis is gallivanting around the world proclaiming success and IMF Managing Director Christine Lagarde is showcasing Latvia as an example of what austerity can achieve.   On the surface it sounds like a fantastic success story.  Certainly this is how it is being portrayed.

However, if you probe a little deeper you soon find out that the pain of many ordinary people continues. This explains why over 300,000 Latvians have left their home country in recent years for a better life abroad. Incidentally, as a percentage of the total population this is a huge number and an indictment of how bad things really are in Latvia. Latvia also continues to have one of the highest suicide rates in the world.

Let’s also put things into perspective.  Economic growth of 5.5% and 4.5% in 2011 and 2012 may be a stellar performance.  However, it pales into insignificance compared with the 18% decline in 2009.  Indeed, the economy is still behind its 2007 position and even now has a long way to go before it catches up.

Latvia also has one of the highest levels of poverty and income inequality in the EU, according to the Baltic Centre for Economic Policy Studies.  Overall, 425,000 people – or one out of every five people in Latvia – are poor. The monthly income of each household in this group is about 215 euros or less. These families often don’t have enough money to cover rent, heat, or buy food. Sometimes, these households don’t have running water, a phone or a TV. Last year, 100,000 Latvians lived on less than 65 euros a month.

Adding to the economic malaise is another sore for 300,000 people who are refused Latvian citizenship because they arrived on Latvian soil during the Soviet occupation when Latvia was part of the USSR.  These “non-citizens”, as they are known, still reside in Latvia but do not possess Latvian or any other citizenship. This creates a dilemma for the country. In its desire to rid itself of its Soviet past, Latvia is systematically excluding its Russian population. Language and education have become the keys to success for ethnic Latvians and these are increasingly being used to discriminate against the Russian population.

In the education system dual-language schools have been in existence for decades. The two largest ethnic groups spoke their own languages, yet learned enough of each other to get by in their daily lives. However, recently Latvia has instituted a Latvia-only language for the state without a realistic transition for its other ethnic populations. Faced with such rejection this is prompting people to leave and find new lives abroad.

It seems that Latvians are used to hardship and my friends are no different. Yet it is rare that I see them complain.  And the quality I most admire in them is that they always seem to find a ray of sunshine in their lives, despite their sometimes difficult, depressing circumstances and the gloominess that torments them.   This surely has to be human nature at its best.

I read about the story of a man who had to fire his staff one by one from his architectural company as the recession hit, eventually leading to the closure of his company.  But instead of taking to the streets to protest at the cuts he bought a tractor and began hauling wood to heating plants that needed fuel.  As the economy spluttered back to life he returned to architecture and today he employs 15 people, 5 more than he employed before.  You have to admire these fighting qualities when many others would give up.  There has to be a lesson here somewhere for the rest of us.

Opponents to austerity believe that a more equitable way out of Latvia’s troubles would have been a devaluation of the currency, an option that was closed to Greece that is part of the Euro.  However, in preparation for an entry into the single monetary system, Latvia kept its currency pegged to the Euro putting itself in much the same straitjacket as other Eurozone nations.  I am curious as to why Latvia is betting its future on a currency at a time that others are proclaiming the Euro’s demise and whether the timing is right here?

Most people will agree that Latvia has made great progress integrating itself into Europe since its independence from the Soviet Union.  This is likely to ensure prosperity for future generations to come.  In the meantime, people should not fall for the hype being staged by the country’s leaders and the IMF.  By virtually any measure the Latvians are massively worse off than they were previously.  You only have to talk to normal Latvians, including those living in the UK, to understand their suffering first hand.