Latvia - Economy

Latvia has a relatively well-developed infrastructure and a diversified industrial base, which accounts for about 26% of GDP. Agriculture constitutes approximately 5% of GDP and centers around the cultivation of potatoes, cereals, fodder, and other crops, as well as dairy farming. The largest sector of the economy is the service sector, with wholesale and retail trade, transportation, financial services, communications, and real estate management the most important industries.

Latvia's GDP fell about 30% in 1992 due to a steep decline in industrial exports to Russia. However, by 1994, GDP rose by 2%. A banking crisis caused by the collapse of Latvia's largest bank (as well as some smaller commercial banks) inhibited economic growth in 1995. Difficulties in revenue collection and inadequate control over governmental spending led to a high budget deficit. As a result, GDP fell by 1.6% in 1995. GDP growth improved markedly during the mid-to late-1990s, but it slowed somewhat in 1999, due to the Russian financial crisis of the previous year. By 2001 it stood at 7.7%. It was forecast for5.2% in 2003 and was expected to reach 6% in 2004. Compared to a 960% inflation rate in 1992, inflation was down to 26.3% in 1994, 16% in 1996, and 4.7% in 1998. Inflation was forecast to be 2.4% in 2004. Unemployment during the early 2000s remained stable between 7–8%.

Since independence was achieved in 1991, Latvia continued with its privatization program and market reforms in the hope of qualifying for EU accession. By mid-2003, 98% of former state-owned industries had been sold, and the private sector accounted for two-thirds of GDP. Latvia joined the WTO in 1999, and was formally invited to join the EU in December 2002, with accession planned for May 2004. Latvian governments in the early 2000s implemented strict monetary policies and liberal trade policies, attempted to keep budget deficits low, and tried to provide for a more competitive economic environment. Latvia attracted a large amount of foreign direct investment since 1991; Demark was its largest investor. However, investors who shy away from Latvia often do so because of corruption, organized crime, excessive bureaucracy, and a need for regulatory reform.