The Situation in Latvia since the Financial Crisis in 2008: Focusing on its Background Factors

Abstract

The purpose of this paper is to examine why Latvia was affected deeply by the financial crisis among EU and other countries. In order to shed light on the situation before and after the financial crisis in 2008, we should at first point out the background factors. The wide-scale demonstration against the economic policy of the last Government in January, 2009 is still fresh in our minds. As a result of the demonstration, Prime Minister Ivars Godmanis was forced to resign and in last March, a young politician, Valdis Dombrovskis from Jaunas Laiks came on stage as the Prime Minister. As the cause of steep economic rise, Minister of Finance Einars Repse explained the 18% sharp decrease of GDP in 2009 resulting from the end of the bubble economy in Latvia. According to the survey by the European Commission, conducted in autumn, 2009, 97% responded that it was very bad or rather bad on the economic situation. The survey also shows that 88% of respondents distrust the Government. The author analyzes the background factors from the following three. First, there are still all kinds of legacy from past Soviet times. It is true that wide-scale social transformations had occurred since 1991, but we have to take into consideration Latvia’s historical background with Soviet times. Second, she had to make efforts to speed up to convert to a market economy and to develop it. It was because Latvia wanted to keep up with the current tendencies in Eastern Europe so as to enter EU membership. She was afraid of being left behind from the neighboring countries, like other Baltic countries or the Central European countries. Third, the Government gave priority to her external policy over her domestic policy after Latvia’s re-independence from Soviet Union in 1991. As a result, she could not sufficiently respond to a variety of demands and expectations of the people. She had to fulfill criteria for entering EU at first and at the same time the Government did not have the leeway to focus on internal issues. In particular, we must never forget the influence on the domestic issues at the time of becoming a member of EU and NATO are involved. To be sure, Latvia tended to depart from the economic tie away from her dependence on Russia, although they still have to rely heavily on Russia for energy. On the other hand, she accepted foreign investments from Scandinavian and other countries in a positive manner. After Latvia became a member of EU in 2004, foreign investment increased rapidly more than ever, although Latvia needed to develop the ability to achieve sustained economic growth on her own. Parex Bank’s rapid growth during the 1990s’ and the nationalization of Parex Bank in November 2008 after its bankruptcy shows us heavy Russian influence on Latvian economy. We have to continue paying attention to the invisible economic tie of Latvia with its influential neighboring country, Russia.