Dr. Krišjānis Kariņš
Minister of Economics, Latvia
Welcoming address
Ladies and Gentlemen, distinguished guests!
It is a great honor and pleasure for me to address this distinguished audience at the Stockholm School of Economics.
It is difficult for most of us to imagine that just a short 15 years ago, Latvia was still an occupied country, bound into the Soviet Union and its planned economy. Today, Latvia is a full member both of NATO and the European Union, and has created a liberal market economy that is currently the fastest-growing economy in all of Europe. The pace of change for Latvia has been tremendous, but it is precisely this fast pace of change that is fueling our Baltic miracle.
In 2004, our GDP grew by 8.5%, and over that past four years has averaged well over 7%. We anticipate growth rates between 7%-8% over the coming years as well. We have attained these high rates of growth by opening up our economy and working on our laws to allow businesses to thrive, which they are indeed doing.
If growth has been attained through the liberalization of our markets, we attain sustainability through a combination of sound macroeconomic fundamentals, a highly successful monetary policy and a commitment to fiscal conservatism.
In Latvia we often remark with a smile that while other EU countries talk about the Lisbon strategy, we are actively and quite literally implementing it. If Europe wants to be competitive, it must fully open up all of its markets. We have seen that the more we opened up our economy, the faster our economy has grown.
Today, Latvia enjoys one of the lowest degrees of interference into business by the government in all of Europe. All of our laws fully guarantee the non-discrimination of foreign firms, and we have no restrictions on the ownership of companies or the redistribution of profits and capital.
Because of our policies, we have helped Latvia to become one of the most favorable countries for foreign direct investment (FDI). Since the early 1990's, FDI stock in Latvia has doubled every 3-4 years. Currently FDI stock in Latvia is around 30% of GDP or about 4 billion Euros. International credit rating agencies have granted Latvia investment grade credit ratings.
One of the key factors stimulating FDI in Latvia has been our stable macroeconomic environment and low budget deficit. We meet the requirements of the Maastricht Treaty and are on track to introduce the Euro as early as 2008. Indeed, the central government's total debt is currently under 14% of GDP. Until the introduction of the Euro, the Bank of Latvia's stable foreign reserves continue to guarantee the stability of our national currency.
FDI is important, because, as a number of studies have shown, incoming investment is what fuels future exports. That is why Latvia is keen to attract new foreign investment in the high-tech industry, especially those industries that have R&D functions. The foreign investment of today will be the GDP-growing export of tomorrow.
Unfortunately at first glance, Latvia's trade balance is negative. However, when examined more closely, we see that our consumption-based trade balance is at equilibrium or even positive. Our total trade balance is negative precisely because most of our incoming investment is purchasing capital equipment abroad and importing it. In addition to this, we have the import of raw and semi-processed materials for further manufacture and re-export.
What our government is keeping an eye on is to see that indeed the import of capital equipment translates into increased exports. An indication that this is starting to happen was seen in 2004, where we saw an increase of 45% in the exports of our machinery industry.
Thus we see the cycle begin: open markets mean incoming capital. This translates into increased manufacturing potential, which results in turn in increased exports. The more we open up, the more competitive we become.
The main sources of FDI in Latvia have been, and still remain, neighboring countries in the Baltic Sea region, with Sweden leading the way. To note just a few, Swedish Tele 2 and Telia have invested in the field of telecommunications, SEB – in the banking sector, and SAS – in civil aviation. Other important investment sectors include food production, trade, and the woodworking industries.
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But in Latvia, we are never content to see how things are going in the present, even if they are going very well. We are always looking to the future and planning how we can attain our goals. We understand very well that although our country is richly forested and has a thriving timber industry, our greatest resource is our people. And the way to capitalize on this resource is to invest in education and research today, so that we can build the knowledge-based economy of tomorrow. We understand that in order to become a wealthy nation, we must always work to increase our nation's competitiveness. And that is precisely what we are doing.
The main goal of Latvia's long-term development is to reach the average GDP per capita level of the EU member states over the next 20 years. And the key to attaining this goal is by increasing our overall competitiveness.
In Latvia today, most businesses are capitalizing on the rich availability of natural resources (notably timber), and the ready pool of relatively low-cost labor. This has resulted in a manufacturing sector that is based on low value-added products that is dependent on cheap labor costs.
However, by looking into the future not more than five years away, we see that as our GDP grows, so too, naturally, do our labor costs. And in a few years, the advantage of relatively low labor costs that we currently enjoy will slip away to countries further to the east, such as Ukraine, Russia, and Belarus. We are therefore implementing a strategy to increase the share of medium and high-tech sectors (with a high value-add) from today's 30% to 50% by 2010, and to match the EU structure by 2030.
The key to this change is the emphasis on innovation that our government is supporting. Through the utilization of EU structural funds, as well as financing through venture capital (VC) funds, our government is bent on helping our businesses make the changeover from low value-added to high value-added production. We have started multiple projects to increase innovative enterprises and stimulate highly productive enterprise clusters.
Of course, innovation does not necessarily entail high-tech. We fully understand that not only do we wish to see an increase in technology-based industry, but we also wish to encourage our traditional businesses to look for innovative ways to produce their existing products more efficiently.
Our government sees good growth potential in many existing sectors:
- The food industry (which is our largest)
- The timber industry
- The metalworking industry
- The transit business (East-to-West)
- The pharmaceuticals industry and biotechnology
- The light machinery industry
- Financial services
- The tourism industry (currently growing at over 20% a year)
Our goal is to complement our existing industries with a solid base in the high-tech sector. The groundwork for this has already been done. We currently have over 10,000 specialists working in the IT sector, and have an excellent pool of qualified engineers, biologists, physicists, and chemists.
One of the legacies of the Soviet Union is that while freedom of thought and expression was oppressed, the natural sciences flourished. We are beginning to capitalize on this advantage and are putting additional government funds into our educational system today in order to ensure the continued ready supply of qualified people tomorrow.
Latvia understands that by investing in education and science today, we are helping to ensure our future competitiveness.
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Coming back to the Baltic region, we have to note that the cornerstone of cooperation between Latvia and Sweden is the common commitment to develop the Baltic Sea region into a stable, economically active and secure region. With its strategic location and highly developed infrastructure, Latvia can become an important partner for future cooperation.
Today, Sweden is one of our major trade and business partners. In the last year alone, our bilateral trade volume increased by about one third. In 2004, Sweden was the third largest export market for Latvian products amounting to 13.6% of all exports or USD 393 million. During this same period, Swedish imports to Latvia reached USD 421 million (8.0% of total volume, ranking 6th). Although the trade volumes are quite substantial, we still see room for growth, especially stemming from the SME sector.
As our two countries move forward, we need to always think about ways in which we can become more competitive. Increased competitiveness would translate into increased trade volumes. Our experience has shown that one key element to increased competitiveness is open markets. As Europeans striving to fulfill the Lisbon agenda, we should keep in mind the ways that we can reach our common goal.
In conclusion, I would like to stress once more that it is indeed my honor to be here at the Stockholm School of Economics. Ten years ago Sweden made one of the most important investments in Latvia – the establishment of the Stockholm School of Economics in Riga. The education of a new generation of mangers for Latvia and the other the Baltic countries has been recognized as one of the best examples of Swedish – Latvian cooperation. Over the last decade over 700 highly skilled SSE Riga graduates have made an important contribution in the promotion of business leadership and entrepreneurship – a prerequisite for economic growth of this region. Let us continue the excellent cooperation that we have begun.
Thank you very much for your attention.