A conversation with Didzis Šmits, a member of the 13th Saeima

Never has there been so much money… That is what people are saying now. Where will we get it in the future?

Yes, it just so happens that right now we have a lot of money, which we have borrowed! If we invest this money in things that will incur costs rather than earn profit in the future, then later on there will not be much money, but very, very little. Any crisis, including a pandemic, is an opportunity. The question is: do we know how to use it? During the financial crisis ten years ago, we used the slogan 'structural reforms' extensively. Unfortunately, it remained just a slogan. Now the refrain is 'we must support exports'! Very correct! But as long as we do not have a Prime Minister and, consequently, a government or team capable of fulfilling this slogan, we will continue to stagnate and lag behind... at best. Right now, I see that we will spend borrowed money on things that will not create profit opportunities for the future but will require additional funds for their maintenance.

What should be done? In my opinion, the borrowed money must be 'taken' to those who have proven they can multiply it, add extra value, and produce a product (good or service) that is in demand outside of Latvia, and is therefore export-capable! We must support an economy that 'channels money into Latvia'. And specifically directs it. Numerically, we are a small country with a not-too-large proportion of entrepreneurs. All the capable entrepreneurs are known. We must talk to each of them and understand what is needed to grow faster, capture new markets, and create additional added value. There are about 300 large companies in Latvia; if we exclude state and municipal enterprises, 200 remain that have proven their ability to produce export-capable products in significant volumes. This is who we need to work with! Constantly.

There are, of course, long-known things that must be done for the aforementioned 200 to develop and for at least as many more companies to emerge.

First, labor taxes or the non-taxable minimum. If you look at our region, it is currently the most expensive to work in Latvia. If we do not change this, our people will soon be working not in Great Britain, but in Lithuania and Estonia.

Second, production costs and—above all—the price of electricity. Currently, ours are among the highest in the European Union.

For comparison, we developed a model together with entrepreneurs: a factory, about 140 employees, a turnover of 12 million euros, an average salary of about 1,000 euros 'take-home', and we 'place it' (for comparison) in five countries (Latvia, Lithuania, Estonia, Poland, and the Czech Republic). We will be last of the five; the Estonians will be in first place. The difference with the aforementioned 12 million turnover will be 0.5 million per year! With completely equal starting positions. In Valka or Valga—that is a 500,000 difference per year!

With these self-created rules of the game, our backwardness is logical.

Third, the money we started our conversation with. Since we are a relatively young economy and do not have much accumulated capital, a company does not have sufficient financial capacity for an economic breakthrough to happen quickly enough. There is a series of companies that could and would like to grow faster, but a lack of capital slows them down. It is very clearly visible that foreign-owned banks are unable to provide this liquidity to the exporting sector. They are not interested in taking risks where it is vitally necessary for national growth. They do not understand the needs of the exporter, they do not understand the specifics of export markets, and even if they do understand, they do not want to take on that risk. The attitude towards export-capable entrepreneurs is like at a pawn shop. They value real estate, a little bit of movable property (equipment), while the long-term contracts concluded with large product buyers are not valued at all. The latter are the entrepreneur's greatest asset, which banks do not see or value! What is objectively most valuable to the entrepreneur is not important to the bank. If we compare two companies whose turnover and production are practically identical, both competing, one in Denmark, the other in Latvia. On a turnover of 60 million, the Latvian company can borrow about 7 million, the Danish one—about 30! There you go! In Latvia, working capital can usually only be borrowed for one year. Three months after the loan approval, the entrepreneur is already nervous about whether they will receive it next year.

That is why we vitally need a full-fledged state development bank. And we have a very good foundation upon which to build it—ALTUM. Right now, an ALTUM guarantee for an entrepreneur is the only guarantee that a bank will talk to them at all. Currently, ALTUM takes the risk, but the foreign-owned banks reap the profits. That must change!

The instability of a stable business environment.

Loans needed for working capital must be available for at least 5 years. We also need 'cheap and long-term money'. I heard the Bank of Latvia's objections to the idea of providing 'long money' for a 25-year term. They claimed it was a disproportionate time frame. Disproportionate to what? In forestry, that is 1/3 of a forest growth cycle. Maybe 25 years is a long time in the manufacturing industry, but, for example, for an educational institution—a university that wants to build a new branch? It will only just manage to 'get up to speed and develop'!

Have the 50 Soviet years left a bigger mark on Latvia than on Estonia or Lithuania?

Up to about the year 2000, all three countries were comparable in their development rates; the large gap formed after that, and this gap is increasing with a growing trend. There is no objective justification for this, except for 'what we cooked up ourselves'! When three compete, one wins, another ends up third. It is not worth thinking about how it was, but: how to catch up and overtake others tomorrow. As I said—as long as we do not get a Prime Minister and a government that understands the processes in the national economy and is capable of making decisions in the long term, nothing will change.

The European 'green' or 'over-green' course. Why, in your opinion, should Latvia and a few others pay for the sins of the 'old' Europe?

First of all, I think it is very great arrogance combined with stupidity to believe that we, humans, determine the fate of the world. We are rather much closer to an insignificant bacterium on the Earth's crust that formed when lava hardened on the surface. Very recently, we still thought that the Earth was flat, and not long before that, we were not particularly different from an ape. In the last hundred years, by studying the Earth's crust, we have been able to count at least ten ice ages, which have nothing to do with our actions. And... that does not at all hinder us from believing that we know what the 'correct' climate is on Earth and that we are capable of keeping it unchanged...

Regardless of my views, the 'green' course is here; the European Commission has set it, and we have to adapt and try to benefit from it. What to do?

First, we must realize our value in the new policy! We are a model for the whole of Europe! We have the greenest environment, the fastest population decline, and the least developed industry in the region. Therefore, we absolutely do not have to do anything we do not want to, but we must trade our 'success story'. For example, what stops us from making a decision to build buildings only from wood from now on? We will absorb CO2 as much as we can! Schools, social housing, kindergartens from wood! Historically, it happened that Pārdaugava had a pronounced wooden architecture. We start with Pārdaugava. First 'with us', then elsewhere in Europe! Second, we could become Europe's 'tree nursery'. Seriously! Let us set a goal that 50% of Europe's forest areas are afforested with tree seedlings cultivated in Latvia. If our peat already provides 33% of the peat used in horticulture in Europe, we can definitely do this. The 'green' course opens up huge opportunities for us, provided that there is enough brainpower to use it in Latvia's national interests. Here is the great opportunity for a breakthrough in the nation's prosperity. Right now, unfortunately, I see that thoughts are being directed towards the idea of 'buying electric cars manufactured in Germany'. What does that give us? Even if a person wants to be only 'green', and not 'green, smart, and prosperous', an electric car is a contradiction. If you want to be 'green', walk, if you need to go a further distance—ride a bicycle, if even further—use public transport, if there are circumstances where you cannot do without a car—buy an old car, use it until the end, because producing a new one means harming the environment. Not an electric car, but a drop in demand in the automotive industry would be the achievable result if we want to be truly 'green'.

Furthermore—both within the framework of the 'green' course and without it—we must take care that money, as much as possible, stays here—in Latvia! Currently, in various discussions, I hear about support for farmers; the idea of redistribution is swirling: give less to the large ones, more to the small ones. In my opinion, one of the biggest stupidities I have heard! Why? Large farmers compete in both European and world markets! To take away from those who are export-capable? Small farms need to be supported, but the method is completely different. First, it is taxes. '0%' for the small ones, and as they grow larger, tax rates would slowly increase. That is how it is in Austria, Poland, and elsewhere. Second, small biological farms have the opportunity to be 'given' a market! How? Kindergartens, primary schools, secondary schools, nursing homes, the army, etc. By ensuring procurement for local farmers, we will give them work and money! That would be about 200-300 million a year. That is a whole industry! In the European Union, it is allowed, and it will be a green (truly green) contribution to the industry. Finland is a good example: starting from the school desk, Finns are 'accustomed' to quality local produce. The benefits: money stays in Finland, people eat healthier, eat local, local farmers can develop production and their farms. A similar initiative was also planned here, but all the groundwork was simply and brutally cut by the current government by stopping state funding for the free lunch program. It does not need to be started from scratch, but remembered! It does not need large resources or work, just people who understand and are ready to act!

Bureaucrats... Surely they will have something to say about this...

I am not a bureaucrat-basher, because, upon receiving political directives from a leader who knows what needs to be achieved, bureaucrats 'head' in the set direction! We have very effective bureaucrats who are waiting for reasonable political leadership. The key to everything is in politics! Prisons and new concert halls during a crisis are a politician's invention.

We have excellent concert halls: in Liepāja, Ventspils, Cēsis, and Rēzekne. Are they full of listeners every night?

Economically beneficial and nationally correct would be to first fix the roads to Cēsis, Liepāja, Rēzekne, and Ventspils, because people, by heading there, will definitely make their contribution to the city's and the region's economy as well. By enjoying culture, we will support our regions! The main thing: to be able to get 'to the culture'!

Somehow it has happened that people who see the interconnectedness of things and see them in the long term stay 'at gunpoint's distance' from Latvia's political life. When that changes, events in our country will change.

Right now, people are pushing into and getting into politics for whom a deputy's salary (plus allowance and a faction car with a driver) is a great, perhaps even the highest achievement in their life, who enjoy their four years as a parliamentarian. Simply enjoy! People without their own opinion, easily manipulated. Even worse—who do not want to think, who are terrified by the possibility that someone will ask them: 'what do you yourself think about this?'.

We deliberately drove entrepreneurs out of politics back in the day. The ban on a Saeima deputy running their own company logically closes the door for an honest entrepreneur to participate in the political process and decision-making. And so it is that decisions that determine the development of the state's national economy are made by people with zero knowledge of economics and its laws. By the way, until 1934, the mentioned restrictions did not exist. Everyone worked in their own professions, including running their own companies. Saeima sessions often took place in the evenings, because during the day deputies worked in their profession. Of course, if the Saeima was considering a matter that affected a specific deputy's company or was directly related to it, the deputy did not participate in the vote. That was a logical principle of political ethics.

We still have many other restrictions on the democratic political process, created to hinder political competition. That will one day have to change!

The risk being discussed: the renewed emigration of the population...

The risk is great! The government's signal with downtime benefits and the elimination of the consequences of Covid-19 to the generation that had just finished high school and those slightly older was this: 'Young people, go work in public administration! If we experience similar hardships, nothing will change for you—your salary will be as usual, only you won't have to go to work! But if you choose private business, we will dump you and humiliate you!' On the other hand, to those who had already chosen to build their own companies and who would not go to work in public administration, we created anger towards everything associated with the word 'state'. These mistakes will have to be acknowledged and corrected. But those will be different politicians, a different government.

Your view on the future...

Optimistic! First there will be a hard fall, which will be followed by a new, positive path upward. Difficult, but upward. Every person, every nation has its own avoidable shortcomings. We in Latvia will not go anywhere and will be forced to change. The demand for changes in the management of the state is slowly reaching a critical mass, at which point they will also happen. One can pretend not to see it, but that is not a smart strategy. Events in Europe and the world also form a demand for independent thinking and the ability to run one's own country, instead of 'listening to Brussels or someone else'. The world is changing, and 'he who changes shall endure'!