Economic History

Latvian Economic History Before 1920

Up to the mid-19th century Latvia had a predominantly rural economy, based on agriculture, forestry, and fishing. There were small towns scattered across the country - the biggest of them being Rīga, whose citizens were engaged in trade and craftsmanship - but nowhere had the population ever measured more than a few tens of thousands. Over centuries the land had moved from one foreign control to another: German-run Livonia, Poland, Sweden, and Russia taking their turns and fighting over the place in an often very brutal fashion. The everyday life of Latvians hadn’t changed very much for centuries, aside from minor and very gradual changes in agricultural practices.

Around 150 years ago, however, sparks of industrial revolution began to fly. The construction of railways linked the Baltic shores to the heartlands of Imperial Russia, of which Latvia was then a part. That in turn led to a rapid growth of ports, shipping, manufacturing, finance, and what we now would call business services. In just a few decades Latvia became arguably the most sophisticated part of the Empire, aside from the major urban centers of Moscow and Saint Petersburg. Some of the industrial facilities set up in Riga, Liepāja, and other cities were truly first-rate. Modern manufacturing sectors like machinery, metallurgy, and the chemical industries boomed. After being serfs and servants of German landlords for ages, Latvian peasants gradually took control of their lives and land, by 1914 managing to buy out roughly half of the feudal estates. That, along with the introduction of early machinery and migration of surplus rural labor to cities, started to lift the living standards in the countryside as well. Following the initiative of the brilliant economic strategist KrišjānisValdemārs, a Latvian-owned-and-operated shipping industry was set up from scratch.

That was a period of unprecedented opportunity for Latvians, who for centuries were prevented from joining the economic, political, and intellectual elites. Now some of them were becoming seriously wealthy; thousands were sending their children to universities. This (economically) happy state of affairs lasted until the First World War.

At the same time there was still a lot of rural poverty, and conditions in working class areas of major cities were rather bleak. Social harmony was not helped by the gradually improving but still rather heavy-handed rule of the Tsarist monarchy. Outbursts of anger were suppressed in 1905, but in 1917 the old system, having been weakened by attrition of the Great War, fell apart. That presented an opportunity for liberalization and modernization, but in the ensuing chaos Russia succumbed to the comprehensive calamity of communism.

While some Latvian political activists, along with representatives of other ethnic minorities, played a significant role in setting up the totalitarian state in Russia, most people in Latvia came to their senses after just a few months of communist rule and threw them out. Having slipped out of Russian/Soviet rule after the proclamation of independence in 1918, and the independence war that lasted until early 1920, Latvia managed to stay out of the Soviet system for 20 years. That, in combination with the cultural imprint of Western Christianity, prevented Latvia from fully blending into the Soviet system after 1940 and preserved the chance for Latvia to return to Europe both culturally and economically.

The Latvian Economy, 1920-1940

It is hard to generalize about the Latvian economy in the period between 1920 and 1940, the era of the first independent state. While this period for obvious reasons was denigrated in the following Soviet era, this has led to opposite excesses now that are fully understandable but still not conductive to a balanced description of the period. The new state was born in very difficult conditions. Most of the industrial equipment was shipped to Russia during World War I hostilities, and there was also significant physical damage as front lines had split the country in half during most of 1914-1918. Also, many qualified workers and managers had evacuated along with their machines, or were dead because of the war or ensuing chaos. Moreover, the world in the interwar period was not an easy place for small countries, not only in security terms, but also in economic terms. Trade barriers went from high to crippling levels during the Great Recession. This was especially bad for countries with small internal markets like ours. Thus Latvia, a high-flying place in the first Golden Age of Globalization, had to resort to other opportunities. Small-scale agriculture boomed as feudal estates were divided and many landless peasants realized the dreams of generations. Manufacturing rose from the ashes, but was more small-scale and inward-oriented in general.

Given the difficult circumstances, achievements were quite remarkable. The monetary chaos of the transition period was overcome already in 1922, when a gold-based national currency, the lats, was established. The country became a major exporter of agricultural goods and timber products. Manufacturing employment increased five times, returning to the level of 1914. Most radios produced by VEF, the engineering giant of the time, were copies of foreign models, but there were also some genuinely local high-tech developments, like Minox photo cameras, the smallest in the world at that time. Further achievements were in the pipeline as the enrolment in universities per capita was one of the highest in the world

World War Two and the Soviet Era

However, the rulers of the neighboring totalitarian giants - the USSR and Nazi Germany - had something else in mind. Due to their bout of vicious friendship in 1939-1941, and following bloody clashes, Latvia was again set to lose many of its best people and capital stock. Moreover, for 45 years after World War II, the economy was subjected to the clumsy vision of Soviet planners, which suppressed entrepreneurial spirits and diluted work ethics. Productive resources were locked in the insular world of a centralized, top-down economy that was blind to customer needs and many global technological developments. It would be wrong to say that nothing good happened during that era. Industrial production grew rapidly, at least in quantity. Also, quality was sometimes not that bad, especially in the sectors with military applications. Many scientific research institutes were established, some of which still produce world-class results.

Even many of the best elements of the Soviet production system, however, were hopelessly intertwined with the universe held together by a doomed political system, which finally collapsed in 1991. Talking heads in Latvia still argue about the extent to which the halving of industrial and agricultural output in 1991-1993 was inevitable. It is painfully obvious that it was not desirable, at least not to such an extent. Besides hopeless cases, enterprises with high-grade equipment, qualified engineers, and even some good products were lost. The greed and sheer incompetence of factory managers or public officials may be blamed; however, there was an almost total lack of knowledge and experience in running a market economy in the early 1990s, and financial capital was extremely limited.

Post-Independence: the 1990s and 2000s

History being what it is, the country had to start largely from scratch again. In the mid-1990s, after the basic institutions of a market economy and monetary stability were established and the early banking troubles were resolved, the country entered a period of strong and accelerating growth. Despite the economy’s contracting by a quarter in 2008-2009, GDP in 2011 is 95% above the level of 1995. Pictures of our streets and people over the last 20 years tell an unmistakable story of growing affluence, modernity, and entrepreneurial dynamics.

Since regaining independence in 1991, the country has produced far more positive than negative surprises. That doesn’t prevent Latvians from being critical about their economic performance (or critical about almost anything). This is understandable; Latvia has clearly not fulfilled its potential so far. In many ways it is a “typical” European country - for example, the share of people with at least secondary education is actually higher than in almost any EU country. After all, Latvia is a place where literacy rates in 17th and 18th centuries were one of the highest in the world. Living standards, however, are significantly below Western and Northern Europe, which has led to a steady outflow of people. Parts of our infrastructure have been brought from deep obsolescence 20 years ago to being among the best today (Latvia has the sixth fastest internet in the world), but other elements are still in sub-par condition. A typical Latvian company has much less financial muscle, productive capital, and competitive products than a German or Nordic enterprise.

Given more time, the country will address its shortcomings and build on its strengths. Global economic circumstances are not easy at the time of this writing, but history has taught Latvians to be crisis managers. A lack of restraint during good times has been much more of a problem. More about that in the next section

© Text: Pēteris Strautiņš, Economic Expert of DNB bank, 2012

© The Latvian Institute

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