In recent years, we have been living in an increasingly volatile world, shaped by the Covid pandemic, Russia's full-scale invasion of Ukraine, and global economic challenges, including a new technological revolution. Many Latvian entrepreneurs have realised this and have already reorganised their businesses to suit the new reality, reorienting export markets and adapting their logistics and product ranges.
The question of the public administration's ability to adapt to rapid change and help our economy become more competitive has now become a priority. As Minister, I have set myself an ambitious goal – to achieve 3% GDP growth this year, despite the 2% forecasts from the Bank of Latvia (LB) and commercial banks. And to achieve even higher growth rates in the coming years, a fundamental change of approach is needed, both in our budget and economic development planning, and in our attitude towards entrepreneurship and investment.
To achieve a breakthrough, we must look further afield
If we look at any of the major policy planning documents, such as the National Development Plan or the National Industrial Policy Guidelines for 2021-2027, it is obvious that they are tailored to the broad frameworks and specific requirements of the European Union (EU) Structural Funds and the EU Recovery and Resilience Facility. In reality, that is exactly why they were created – to allow Latvia to justify planned expenditure to the European Commission and its compliance with common EU policy during specific EU budget periods. Overall, EU funding has a significant positive impact on the Latvian economy, adding around 1-2 percentage points to our annual GDP growth. In the new 2021-2027 EU funding period, Latvia has the opportunity to receive around 5 billion euros from EU structural funds and a further 1.8 billion euros from the Recovery Fund. This is, of course, a great opportunity for Latvia, which we as a country must learn to use with maximum flexibility and speed.
However, first of all, this money is not enough for Latvia to achieve the much-touted economic breakthrough and catch up with even our Baltic neighbours. Secondly, it has to be spent in accordance with the major objectives and specific requirements and criteria set by the EU, which do not always precisely align with Latvia's needs. Therefore, I believe we also need our own national vision, for the implementation of which we must find ways to secure funding outside the framework of EU funds. Broad involvement from various sectors and the public is essential here, and we should perhaps also consider bringing in top-tier global experts. Our actions should be aligned with this vision, whether it concerns climate and energy, education, or the tax system. We cannot continue to base our daily work solely on EU fund conditions – we will not achieve the much-needed economic breakthrough that way.
The key factor – a change in attitude
Statistics unfortunately confirm that we cannot continue to live in the “old way”. In recent years, our lag behind our closest neighbours, Estonia and Lithuania, has increased, and reaching the EU average level is now starting to look like an unreachable dream. LB data shows that last year, Latvia's GDP per capita in purchasing power parity was 74.1% of the EU average, compared to 86.5% for Estonia and around 90% for Lithuania. Export volume per capita in Latvia last year was 14.5 thousand euros, compared to 20.6 thousand euros in Lithuania and 23.2 thousand euros in Estonia.
According to Eurostat, at the end of 2022, accumulated direct foreign investment in Latvia was around 18.6 billion euros, while in Lithuania it was around 26.6 billion euros, and in Estonia around 35 billion euros. In the first half of 2003, the net flow of foreign direct investment (FDI) attracted to the Baltic states totalled nearly 3 billion euros, but only about 20% of the volume of these transactions went to the Latvian economy.
By objective indicators, Latvia is an attractive country for investment, but we sometimes limit ourselves and put the brakes on our own potential. As both Latvian and foreign entrepreneurs have admitted to me in many meetings, the problem lies not only in socio-economic figures but also in such intangible things as attitudes towards entrepreneurs or the ability of public institutions to work together.
This must change. I consider a significant increase in the volume of both local and foreign investment to be one of my main goals for this year. On one hand, the availability of funding and a business-friendly environment are important; on the other, active work by the government, the Ministry of Economics (EM), and the Investment and Development Agency of Latvia (LIAA) is vital in attracting foreign investors and promoting Latvian exports. I intend to change the approach to large-scale investment projects by directly involving the Prime Minister, and the Ministers of Economics and Finance, in overseeing their progress. Investors in Latvia need to feel that they are being given the green light and that they are welcome here.
The year of public investment
In 2023, economic development continued to be affected by the geopolitical situation and uncertainty, high prices, and rising interest rates on loans. In the first three quarters of last year, GDP was 0.6% lower than a year earlier. A decrease in volume was observed in manufacturing sectors, largely due to deteriorating export opportunities resulting from a lack of growth in Latvia's traditional export markets. The Ministry of Economics believes that this year, provided external conditions are favourable and ambitious measures are implemented to attract investment and promote exports, growth could accelerate and GDP increase could reach 2-3%. I have already mentioned that my goal is to achieve 3% growth. I think that without setting such ambitions, we will not even reach the most modest forecasts.
It should be noted here that in 2024, 1.6 billion euros will be available for investment from EU funds – a very significant volume of funding. Our task is to invest this money as quickly, smoothly, and productively as possible. We will continue to provide significant support for increasing business productivity, digitalisation, energy efficiency, and export capacity. For example, the Ministry of Economics budget alone provides for 77.3 million euros this year, which will be directed towards industrial zones, the creation of new high value-added jobs, and export capacity support.
The Investment Fund for export-capable large projects (Altum loans with capital rebates) will also continue to operate; with the 152.5 million euros in funding available under the programme to date, the plan was to create more than 1,000 well-paid jobs and increase export volumes by 207.27 million euros per year. The government has decided to launch the next phase of the programme for 70 million euros, which will provide a further return of at least 500 jobs and an export increase of 100 million euros.
Small and medium-sized businesses will not be left behind either. These are precisely the companies that most often face a lack of funding, especially for working capital, and relatively long cash cycles, which is why state support is vital for them. At its meeting on 9 January this year, the government adopted amendments to regulations that will finally allow the provision of support from the 2021-2027 EU funding period to increase the productivity of small businesses through investments and working capital. The total funding for the support programme is 15.6 million euros.
I am committed to doing everything possible to ensure that these currently rather abstract investment figures turn into concrete projects and products without unnecessary delay or complication. An essential direction is reducing bureaucracy in real estate development and construction, where the process for approving and implementing projects in Latvia is significantly longer than in Lithuania and Estonia. This severely limits our competitiveness.
We will not get far without innovation
In the long term, competitive entrepreneurship is impossible without innovation, automation, and digital transformation, especially given that experts believe we are currently being affected by extremely rapid global changes, or the so-called Fourth Industrial Revolution. However, if we look at the share of GDP that the state spends on research and development, in 2022 it was only 0.74% in Latvia, or 14% of the EU average. The Latvia Productivity Report published by the University of Latvia in 2022 shows that our productivity overall was only 59% of the EU average, and 46% in manufacturing, which is so important for Latvian exports.
Innovation and digitalisation are key factors in increasing the productivity and competitiveness of Latvian companies. However, it is also essential to bring innovation—which in its initial stage is simply a clever invention—to a concrete piece of equipment, method, or product that changes how businesses work or our everyday lives, making them more productive. To achieve this, cooperation between universities, research institutes, state institutions, and companies is important.
Therefore, I am pleased to highlight that the government supported three new Recovery Fund support programmes for the implementation of research projects totalling 112 million euros at its meeting on 9 January this year, with the aim of promoting the development of innovation in Latvia. I believe this is a significant step forward in the state's purposeful involvement in creating an innovation-friendly environment and providing support to companies in developing new products and services. The talk about smart reindustrialisation is over; the state is finally starting to make real investments in the modernisation of our economy through innovation.
The untapped potential of the workforce
In meetings with entrepreneurs and business organisations, labour shortages are one of the main problems cited as a barrier to business expansion. To solve the problem quickly, we have started to ease the bureaucratic conditions for attracting foreign labour. At the same time, control over third-country nationals in Latvia will be strengthened to ensure their proper registration and supervision. Uncontrolled migration is categorically unacceptable.
EM estimates suggest that in the coming years, the shortage of labour in the Latvian economy could exceed 200,000. This is a huge challenge. In my opinion, first of all, we should think about how to help Latvian companies become more efficient, maximise the automation and digitalisation of work processes, and use innovation. Secondly, we have our own untapped labour resource: people of pre-retirement and retirement age, the long-term unemployed, people with disabilities, and young people who have not obtained higher education. Bank of Latvia calculations show that the country's internal labour reserves amount to at least 73,000 people who need help acquiring new skills.
Therefore, we have developed a Human Capital Development Strategy, which provides for the creation of a comprehensive system for adapting citizens' education and skills to the needs of the labour market throughout their lives. This requires a significantly broader and more precise approach than the previous State Employment Agency courses for the unemployed, involving entrepreneurs, local governments, and educational institutions as much as possible in its development. It is also important to address labour mobility, housing availability, and re-emigration issues.
There is a lot of work to do, and the year has started energetically for both the Ministry of Economics and the government as a whole. I believe that this is the last moment for Latvia to jump onto the departing train, to work to catch up with our neighbours in development, and to avoid falling into the so-called middle-income trap in the long term.
https://www.em.gov.lv/lv/jaunums/ilgtermina-izaugsmei-jaiziet-arpus-es-fondu-ramjiem