Latvia’s economy is part of the EU’s economic community, and the country also has strong ties with Russia and the other former Soviet states. Exports make up more than half of gross domestic product. Forestry and agriculture, alongside the production of metal products and electronics, are some of the most important spheres. Due to its location, transit services are also important.
After Latvia was annexed by the Soviet Union, central planning was introduced, and the country was closely integrated into the Soviet economy. The transition to a market economy after independence in 1991, including privatization of former state-owned enterprises and trade liberalization, did not take place without difficulties with, among other things, hyperinflation, high unemployment and a decline in the gross domestic product.
In the first period after independence, Latvia also had difficulties establishing new trade relations, which among other things led to a large shortage of fuel and raw materials, and many businesses were closed down. Both the industrial sector and agriculture had to go through a restructuring process, and for many rural residents, the development also meant increased poverty. From the mid-1990s a cautious economic upturn began, and by the early 2000s, both inflation and unemployment had fallen.
Latvia has in recent years had one of Europe’s highest growth rates. The growth has contributed to the rapid modernization of the country. It is a goal of the government’s economic policy that Latvia should reach the EU’s standard of living as quickly as possible. The Latvian economy is heavily dependent on capital imports, and thus very exposed to fluctuations in the international financial market.
The international financial crisis in 2008 also had consequences for Latvia. On November 8, 2008, it was announced that Latvia’s second largest bank, Parex Banka, had to be rescued by Latvian authorities to avoid a banking crisis in the country. In 2009, the gross domestic product fell by 18 percent, but has again had an increase after 2011 which has been higher than the EU average. Latvia implemented a successful economic policy that included, among other things, major cuts in public spending. In 2014, Latvia became part of the Eurozone and has been a member of the OECD since 2016.
Agriculture and forestry
Before World War II, Latvia was largely an agricultural country, with 65 percent of the working population employed in agriculture and forestry. Agriculture was privately owned, with the cultivation of grain and fodder crops, and the export of flax, butter, veal and live pigs to Western Europe.
Since then, employment in agriculture and forestry has declined sharply. Under Soviet rule, almost all agriculture was collectivized. After independence, some of the large state and collective farms were converted into joint-stock companies, otherwise the land was divided into many smaller uses. In recent years, there has been an upturn in agriculture, thanks in part to efficiency measures and EU subsidies.
About 30 percent of the land area is used for agricultural purposes today, and the area is fairly evenly distributed between grazing land and cultivated land. There are around 83,500 farms in the country. Cereal production has grown rapidly in the last 15 years, partly thanks to greater cooperation between farmers in cooperatives, which has made it easier to make investments. In addition, rapeseed, beans, potatoes, flax and sugar beets are grown. Due to environmental measures, rape production in particular has increased in recent years.
About a third of the total agricultural production is related to animal husbandry, and especially dairy products. Dairy products account for 2 percent of gross domestic product, and just under 45,000 people are employed in milk production. Otherwise, there is the feeding of cattle, pigs and poultry.
The forest covers just over half of the land area and has almost doubled since 1923. This area is expected to increase as land used for farming is growing again. Around 55 percent of the forest in Latvia is coniferous forest, and about 30 percent is birch forest. Up until the Soviet era, pine forests were planted and during the Soviet era the planet was spruce, which means that the age of the pine and spruce forests is often different. Around 69 percent of the growth is raised annually. The largest forest manager is the state-owned company Latvijas Valsts Meži. Wood forms the basis for the paper, furniture and veneer industries.
Fishing accounts for approximately 0.7 percent of Latvia’s gross domestic product and accounts for 1.8 per cent of exports, especially to Russia, Sweden, Denmark and Germany, as well as neighboring countries Lithuania and Estonia. The species of fish that are fished most are sprat, mackerel and herring. Latvian fishmongers have been hit by import bans from Russia for some time.
Latvia has very limited mineral resources and depends on imported fuel. There are deposits of peat, limestone, plaster and amber. The peat is mostly used for horticulture, and 95 percent of the peat, about 1.3 million tonnes, is exported.
The production of electrical energy in Latvia consists mainly of hydropower (about 60 percent) and thermal power (about 37 percent). About a third of the heat power is based on the use of renewable energy (bioenergy). The total share of renewable energy in power generation is thus around 75 percent. To cover its own consumption, the country has had to rely on importing power, especially from Lithuania and Estonia, but in 2017 consumption was covered with its own power generation.
Petroleum and petroleum products are mainly imported from Russia and Lithuania. Latvia exports wood fuel. Latvia is among the countries in Europe with the highest share of renewable energy resources (about 40 percent), especially thanks to hydropower and forest resources.
The Riga area has the bulk of the industry. Chemicals and pharmaceuticals, textiles and clothing, wood and metal products as well as food and electronics are manufactured. Metal products account for 27% of Latvia’s exports (2015). The IT sector plays a significant role, accounting for around 5% of gross domestic product. Latvia is among the countries in the world with the highest internet speed. Many foreign companies, including Norwegian, have flagged customer care services and the like to Latvia due to language skills, and generally high levels of education combined with lower pay levels and smaller cultural differences than countries outside Europe.
During the Soviet era, a large part of the country’s most important industries were controlled from Moscow, and were rapidly developing until about 1980. For example, the Republic was among the Soviet Union’s largest producers of woolen goods, processed timber, paper and fertilizers. From the beginning of the 1990s, among other things, shortages of raw materials and fuel led to a sharp decline in industrial production and several industrial enterprises had to be closed or closed down. Similarly, parts of the defense-related electronics industry were closed down, while other parts of production were changed. The production of consumer goods was largely better.
Latvia’s main trading partners are Germany, Russia, Estonia and Lithuania. Latvia exports most to Lithuania, Estonia and Russia, and imports most from Lithuania, Germany, Russia and Poland. According to Countryaah, the main export goods are timber and timber products, textiles, food and agricultural products, machinery and metal industrial products. The main import goods are mineral products, machinery and chemical products.
Transport and Communications
Latvia has good communications, and transit trade is of great importance in the economy. There are about 2,300 kilometers of railroad and about 72,000 kilometers of roads. Latvia has three ice-free ports: Riga, Liepāja and Ventspils. There are passenger ferries between Riga and Stockholm, between Liepāja and Travemünde and between Ventspils and Nynäshamn. There is Riga International Airport, which has just under a hundred destinations, including several Norwegian cities. The airport is also the main base for the national airline airBaltic, in which the Latvian state is the main shareholder. There is domestic air service between Riga and Liepāja.