Land is an asset that must be put to work in the national economy, producing goods both for consumption at home and for export. It sustains jobs and keeps regions populated, particularly rural ones, and it generates tax revenue for the state budget — which is why any policy of restrictions must be not only sensible but also compensated.

These were among the conclusions voiced in a video discussion titled “Tax policy challenges – economic development and the land resource sectors”, hosted by the magazine “Dienas Bizness” and the Latvian forestry and related industries portal zemeunvalsts.lv. Land use and land management sectors are the principal employers in rural areas, and in turn they create demand for goods and services from other spheres, while directly and indirectly generating tax revenue for the state budget — the source of funding for the services society needs. What is needed first is the rational and meaningful use of Latvia's resources, and only then the fulfilment of all manner of requirements, restrictions and prohibitions, including the minimum programme of the Green Deal.

The significance and weight of the land sectors

“The forest sector, together with farmers and food producers, would find it interesting to learn what representatives of the state authorities actually think of them. At times we hear in discussions that the forestry and food sectors belong to a ‘banana republic' and are a disgrace to Latvia's economy as a whole, even though together they account for close to 60% of total goods exports,” says Kristaps Klauss, Vice-President of the Latvian Forest Industry Federation, adding that, alongside this, the sectors are reproached for low productivity — although wood industry is the third most productive branch of manufacturing, while in cooperation with the education sector the food industry is the leader by a wide margin, with the wood industry second.

A resource has to be used

“Land is a fundamental resource that has to be used — to grow food for people and animals, to grow forests or to use it, for example, for extracting mineral resources. Capital-intensive spheres, with a few exceptions, are mostly based in the capital or its surroundings,” stresses Rolands Feldmanis, Chairman of the Board of the Latvian Agricultural Cooperatives Association. K. Klauss draws attention to the fact that over the past four years the wood industry has invested more than one billion euros in production buildings and technology, mostly in rural areas, and food processors have done much the same. “If we want people to live in the countryside, we need both agriculture and forestry and processing industries – woodworking, food production – as well as other manufacturing sectors. Manufacturing is the only thing that is difficult to take away from Riga,” K. Klauss judges, while acknowledging that woodworking companies mostly cluster around development centres. “The wood industry is one of the pleasant exceptions that builds production outside Riga, since roughly two thirds of GDP is created in Riga and its surroundings,” R. Feldmanis reminds.

Land feeds us

“I like this discussion, because if we carry on with it we will arrive at the foundations of classical economic theory, which holds that value arises from the land – extractive industry, agriculture and forestry, followed by food processing and woodworking,” concludes Jurģis Miezainis, Parliamentary Secretary of the Ministry of Economics, stressing that the part of the theory holding that every region and populated place has its own role in the national economy is equally correct. “Theory says it and practice confirms it – the more remote regions depend on extractive industry, agriculture and forestry – the classic land sectors, complemented by the manufacturing that goes with them,” J. Miezainis explains, noting that resources arise either by growing something (agricultural produce, forest) or by extracting mineral resources.

“Thanks to policy initiatives, an additional resource is secondary (repeated) use – that is, we use what we perhaps have not used before, which is part of the circular economy,” J. Miezainis reminds, adding that K. Klauss has already stressed the impact of the land sectors on the economy and employment. “You cannot remove one link from the value chain and expect everything to go on functioning as before without collapsing,” J. Miezainis sums up, explaining that one cannot assess a given sphere very narrowly, for instance by seeing a contribution of 0%, or 0.001%, or 2% of GDP. Its cumulative effect is far greater. Woodworking is a field that generates billions of euros in export revenue.

“The food industry is a strategically important sector that is essentially fed with subsidies, because nobody can do without food, but in the event of global upheaval a ‘sea' of serious risks opens up for countries that lack sufficient agriculture and food processing. In emergency conditions, those without food will be forced to pay any price to secure it. Food is usually what is most strongly ‘dragged along' by inflation,” J. Miezainis stresses. R. Feldmanis is quick to add that subsidies to farmers are in a sense compensation for the fact that farmers comply with the requirements, restrictions and prohibitions set out by the Green Deal and remain competitive against products made in third countries (where the high EU requirements do not apply).

“Land in Latvia could be used more intensively, raising its yield, but produce is grown in line with the conditions society wants. Of course, there is always the question of whether the whole of society really wants farmers to produce using precisely these methods (restrictions, requirements, prohibitions),” R. Feldmanis judges, noting that farmers could, for example, stop using mineral fertilisers, but then they have to reckon with lower yields. “The same applies to the forest, because it can be felled not when the landowner wishes but when it has reached the felling age set by the state,” R. Feldmanis adds, calling for forest growing to be assessed in financial terms. “On average, the volume of wood grows by 3-4% a year depending on the land the particular forest grows on, on the tree species, and on whether drainage exists and works, and alongside that the risks of windthrow, insect outbreaks and fire remain. By putting money into a share index, you can earn on average 6-8% a year on the exchange. The logical question is why one should be in the business of growing forest at all, all the more so when a forest will never be as liquid as a share portfolio, and when nobody has guaranteed that after some time the stand in question will not be subject to restrictions or even barred from being harvested,” R. Feldmanis assesses.

He points out that a forest owner in Latvia is placed in a considerably worse position than someone who invests money in share portfolios on the exchange. “If restrictions or prohibitions are imposed, it would only be fair that they were covered (in fact – they must be covered) by appropriate compensation to forest and land owners. After all, other countries have far more aggressive agricultural support policies, understanding that the sector has and will have strategic importance,” R. Feldmanis explains. Kristaps Klauss draws attention to the fact that forestry and the wood industry receive no subsidies whatsoever yet comply with Green Deal requirements; unlike farmers, the forest sector has not managed to demonstrate what this actually costs, because the response is always other arguments (“that doesn't count”, “it has to be done differently”).

A lack of understanding

“Unfortunately, a large part of society does not understand what added value, profit, employment (wages paid, taxes) and depreciation are, so it is a sad conclusion that added value is often associated only with deeper (further) processing. The result is this – an expensive product means high added value, a raw material means low added value. Yes, you can play that game with a product, but you cannot do it with the process by which the product in question comes about, because in the primary processing segment businesses are often able to pay higher wages than those working in the so-called deeper processing segment,” K. Klauss explains. As an example, he cites the reproaches voiced by part of society against large farmers over highly automated systems that allow them to operate successfully with a small number of employees, and allow those employees to earn very good wages.

“At the same time, almost everyone loves home producers, who in society's view create far higher added value. One thing should be remembered: home producers are often unable to earn themselves a wage. So one has to ask whether, and how correctly, we understand what added value is. The conclusion: we love things but we do not understand processes,” says K. Klauss. He suggests that Latvia once harboured expectations and hopes that wealthy foreigners would arrive with enormous capital and know-how and set up production facilities. “That did not come to pass in agriculture, forestry, the wood industry or the food industry, because development was built on domestic capital. In the wood industry, for example, until quite recently two thirds of net turnover and profit, as well as of employment, came precisely from companies with local capital,” K. Klauss says. He urged people to remember what means were available in Latvia in the mid-1990s (how much money could be invested). “There was a time when a single truckload of logs was traded for a chainsaw, and nobody imagined that, say, 10,000 German marks of that period could be freely invested; by the turn of the century capital had already accumulated, and an investment of USD 10 million was an enormous event on a national scale, which “Dienas Bizness” covered on its front pages. Today individual companies have investment plans exceeding 100 million euros. Yet even with investment on that scale a single investor cannot afford to build a pulp mill, which costs more than one billion euros,” K. Klauss judges, stressing the need for patience.

“Much as one might demand that a first-year pupil understand higher mathematics, wood industry people are often treated the same way – as in, you should have achieved in 10-15 years what other countries have achieved over 100 years or more. That does not happen, even though woodworking in Latvia is growing far faster than competitors abroad, on average,” K. Klauss stresses. All that is needed is time and undisturbed development.

The anatomy of the Green Deal

“The European Union, a major economic centre, had drawn up a business plan on the assumption that, by using its purse, it would be able to dictate the rules to the whole world. That is, Green Deal technologies would be created in Europe and sold to the rest of the world. The result was that the EU imposed very high requirements on its own producers, while most of what was needed to meet them was manufactured by companies in China (solar panels, electric vehicle batteries, the cars themselves and so on). Viewed through the logic of business, the Green Deal has been a colossal failure that nobody wants to admit, while producers in Europe continue to be held to far higher standards, which drives up costs and at the same time allows third-country producers (who do not meet the requirements imposed on producers in the European Union) to operate in the European market and outcompete local producers. The picture for the competitiveness of Europe-based producers is even harsher in sales markets in other regions of the world,” K. Klauss says.

He stresses that this is precisely why wishful thinking and the Green Deal have failed so thoroughly, and why a shift to realpolitik is needed. “Voters, and unfortunately some policymakers too, often do not know how things work, so there is a constant urge to delegate something to others. For a long time we lived under the illusion that others would guarantee our external security; now there is shock that we have to pay for it ourselves. For a long time we thought we could delegate energy to somebody else; now there is shock that, having disconnected from BRELL, we have to pay for balancing electricity ourselves. It is sad that even from senior officials at the Bank of Latvia one hears a wish to delegate forestry, agriculture, food processing and the wood industry to ‘somebody else', without understanding the risks that arise if borders close, as we recently experienced during the Covid-19 pandemic,” K. Klauss analyses. He stresses that what most hinders development at present is precisely this urge to delegate “something, or anything” to others.

Obstacles for our own, not for outsiders

“The most significant obstacle is the restrictions on using the resources Latvia has, whereas China, for example, faces no such restrictions. Unlike in Latvia, in many parts of the world development is faster and capital has already been accumulated,” says R. Feldmanis, noting that it is thanks to the economic activity of the land management sectors that there is a network of infrastructure that in many places would otherwise not exist. “Road infrastructure serves not only as the transport artery for the produce of the land sectors and as a link between remote settlements and larger development centres, but also makes it possible to travel around our country,” R. Feldmanis offers as an example. He points out that jobs in rural areas create demand for culture, libraries, kindergartens, schools, medical aid posts, shops, pharmacies and so on. “For instance, the business value of the cooperative society “Straupe” is 3-4 million euros, but its socio-economic contribution is already 5-6 million euros, because a distinctive cluster and corresponding infrastructure have grown up around this company, and they will not be able to exist in that particular place without it.” R. Feldmanis acknowledges that the economy alone – with its jobs, export revenue and profit that provide the money for development – is not enough for society.

Part of society wants to live green and consume organic food, while at the same time the pressing question is who pays for it and what such a wish costs. “Are we going to turn the country into a park where we are not the masters, because it will be bought up by foreigners with capital accumulated over decades or centuries?” R. Feldmanis asks critically. In his view, far too little has been explained to Latvian society: what things cost and who pays for what. “That people want to live green is self-evident, but the question is whether everyone who wants it is prepared to pay accordingly. A landscape has to be paid for; abroad they understand that, and in Latvia too we have to be able to say what a particular landscape costs and, most importantly, precisely who maintains and pays for it.” R. Feldmanis notes that every bird's nest has a price, and if there are a great many of them, the question arises whether the birds living there have a sufficient food base, and whether we can pay for this landscape while also providing services that matter to society, such as education. “Wealth is founded on land resources and their adequate use, including the accumulation of capital. Latvia already has experience with so-called itinerant foreign capital, where one set of foreigners is replaced by another, all of them wanting to profit from a share of the land resources located in Latvia.”

A fragile balance

Decision-makers have to be able to reconcile three different and conflicting positions – Latvia must be allowed to develop, natural values must be preserved, and people's wish to live green must be respected. J. Miezainis acknowledges that dialogue with society is one of the most essential aspects: “The wood industry has support too – for capital investment specifically in the processing part, which is the route to creating additional added value here in Latvia and reducing the export of raw materials.” He acknowledges that an export product (or service) brings a euro into Latvia, and that euro begins its life cycle in our country, because the exporter has to pay wages and taxes and has to buy various services, such as accounting, or raw materials. It should be borne in mind that, beyond those direct services, money brought in by exports reaches those who provide services or sell the goods needed by the service provider or the raw material supplier in question.

“We have no time; priority No. 1 at present is security. All the money the state distributes is tax money generated by businesses, plus the taxes paid by residents,” says J. Miezainis, stressing that even in difficult circumstances the country has preserved an investment budget, which is channelled into raising added value in Latvia. “The state has only a few instruments for influencing (regulating) the economy; the two most significant are fiscal and monetary policy. Monetary policy is currently shared across the whole eurozone, which means what remains is fiscal (tax) policy, which can do a great deal to motivate a reduction in raw material exports,” J. Miezainis explains. In his view, the benefit of reducing raw material exports is new production facilities and new jobs, but the state must not create an excessive burden, so that businesses do not end up disillusioned and asking why they should be in business at all rather than putting their money into, say, the stock exchange.

“There are also support mechanisms – subsidies from the EU, which are not free money, because it is the money of all EU taxpayers, granted according to set conditions – compensating for certain losses (forgone income) caused by one policy or another; organic food, for example, reduces output by around 20%, while the gain on the other side might lie in replacing technology so that more can be done in a single pass,” J. Miezainis explains. In his view, it is very difficult to strike a balance between growing economic potential, implementing national priorities, and being able to say that priorities have changed, just as the world changes. “A few weeks ago, at the European Council of Ministers, Latvia seized the opportunity and secured a pause in the climate discussions, because security is more important and other matters cannot be given as much attention, or as much funding, as would be needed,” says J. Miezainis.

Depleting the spirit of enterprise

“One of the most essential resources is the spirit of enterprise, which in Latvia has been thoroughly depleted by assorted restrictions, prohibitions, taxes and the like. If there are no enterprising people, resources will count for nothing,” stresses R. Feldmanis. He acknowledges that we export both raw milk and roundwood, which we could process here in Latvia. “A good example is the agricultural cooperative society “Latraps”, which is building a pea protein plant that will increase export revenue, but favourable conditions need to be created for everyone planning or already carrying out such projects.” R. Feldmanis stresses that Latvia needs to create an environment in which companies can emerge that are competitive by comparison with the Baltic states and Poland, and this can also be achieved through tax policy or various support mechanisms.

“If, on the other hand, everything has to be ‘greener', the opposite will happen – it will be cheaper to export unprocessed produce (the permits needed for a processing plant will be hard and time-consuming to obtain) or not to grow it in Latvia at all,” R. Feldmanis concludes. In K. Klauss's view, the greatest problems are caused by bureaucracy: for example, in a rainy year (like this one), when a great deal of value is “under water”, an environmental impact assessment is demanded for existing ditches, which means work for the relevant specialists, but the time available for carrying out the work is limited; by calculations, in Latvia's state-owned forests alone several million euros a year could be saved.

“When the state sets procedures, the question always arises: why is there such a difference in the time it takes (to build a shop, for instance) between Latvia and Lithuania, where such processes move much faster. It means one thing – we have driven ourselves into a jungle of bureaucracy. Priority No. 1 is reducing it,” says K. Klauss. J. Miezainis acknowledges that needs exceed possibilities, because there is no magic wand or lucky charm or pot of money to dip into for as much as one might need, so the only option is to earn the money ourselves.

The video of the discussion is available here: https://www.youtube.com/watch?v=sv1P_Ra3FIQ

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