TRENDS AND PRIORITIES IN THE DEVELOPMENT OF THE LATVIAN BANKING SERVICES IN THE CONTEXT OF EMERGING KNOWLEDGE BASED ECONOMY: CASE OF E-BANKING

Abstract

1. Introduction The concept of 'new economy' or the knowledge-based economy has recently become a very popular term. It is one of the main aims in the Lisbon Strategy - make Europe the most competitive and dynamic knowledge based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion by 2010 (Lisbon Strategy 2000). Development of the knowledge-based economy is especially important for the EU new accession countries as it will help to break through the transition period from centralized forms of economic organization (Final Report of the Knowledge Economy Forum 2002:5). Latvia is not an exception - as any other member state it has developed national Lisbon program for the years 2005-2008 where the creation of knowledge-based economy is among one of the priorities (Skribane, Neiders 2006). Thus, although Latvia has not yet achieved all goals set up in this program, it is possible to argue that the process of knowledge- based economy started to emerge here. The concept of 'new economy' in the financing sector is closely connected with changes in supply and demand in the service market caused by the usage of new technologies. Unlike traditional economy, knowledge-based economy is based not only on material values, but for mostly on information and knowledge as the main asset. Rapid development of IT and Internet are creating opportunities to perform more effectively and swiftly, stimulating rapid productivity growth as well as reducing entrepreneurship costs, which, in turn, lead to satisfying consumer needs and increasing the new type demand (Rifkin 2001). 'New economy' overall is characterised by a growing significance of the service-sector and an increase of the value added in this area of an inland economies. Latvia with her rapid development of market economy was not an exception: it was accompanied by an increase of value added in service-sector and its share in GDP. Changes of the GDP structure since 1996 display clearly that one of the main growth factors has been the increase of the service sector with an extension of input from 56.0[degrees]10 in 1995 till 72.9[degrees]10 in 2004 (LR Ekonomikas Ministrija 2004). Retail sector is a dominating branch in Latvian service industry. However, a special role in the expansion of service sector belongs to financing (banking, insurance, leasing deals and other services provided by finance firms). This special role is characterized not only by its share of GDP (>5%), but also by its nature. The uniqueness of financial sector is determined by several factors. For instance, financial services are provided not only to the end consumers (households that are not creating further value added in industrial and service sectors) but also to other entrepreneurships, thus being repeatedly involved in the value adding process. Moreover, financial services are stimulating stability and development of other national economy sectors (for example, lending services are providing reinforcement of other industries, while insurance services are safeguarding the security of transactions). Furthermore, stability of the financial sector is an indicator of the general economic development affecting foreign investors' decisions, thereby regulating investment flow and activities of the economical collaboration models, which are essential foundations for the conversion in retail, industry and construction branches. In the last years Latvia has reached a proportion between service and real sector in the total share of GDP (70:30), typical of many western countries, but it was mainly due to consistent and rapid expansion of retail (its share in GDP has reached 18.1 % and in 2003 it grew by 11.3[degrees]10). Growth of the real sector is smaller, beside that investment in R&D comprise only about 0.4[degrees]10 of GDP (EU average is 1.8[degrees]10). From these data it can be concluded that the backwardness of the real sector compared with the service sector and consequent structural imbalance will lead to the consistently growing share of service sector, wherewith new, growing needs of the real sector betterment emerge. …