Main Industries

The structure of Latvian economy is best seen in numbers, aka, sectors in % of total ecomomic activity:

Tourism as a sector cannot be easily distilled from the overall hospitality sector, however, if you look at trips as a criterion, they comprise 1,8% of the total economic activity.

2010 2011
Agriculture, forestry and fishing 4.3% 4.2%
Other industry (mining, energy, utilities) 4.3% 4.1%
Manufacturing 12.8% 13.4%
Construction 6.1% 6.3%
Retail and wholesale, repair services 19.4% 19.9%
Transports and storage 14.0% 14.3%
Hotels and restaurants 1.3% 1.4%
Information and communications 4.1% 4.0%
Finance and insurance 3.1% 2.9%
Real estate 10.7% 9.9%
Professional, technical, scientific activities, administrative and other services 6.5% 6.5%
Government and social security 6.1% 5.8%
Education 3.6% 3.5%
Health and social work 2.3% 2.2%
Art and entertainment 1.5% 1.5%

Exports

You can tell a man by his friends and tell a country by its exports, especially if it is a small country. Consumer needs are not that different, especially among countries with comparable income - everywhere on earth you find banks, hairdressers, and auto repair shops. In contrast, export-product portfolios of countries can be very different indeed. There is likely to be a vast difference of income between a country deriving most of its foreign revenue from a single agricultural product and one that exports a broad “portfolio” of machinery, electronics, chemicals, processed food, and modern services like banking and transportation. Latvia fits much better with the second description. It suggests that while the country is definitely not among the most affluent in the world at the moment, it has the potential of becoming so.

You can tell a man by his friends and tell a country by its exports, especially if it is a small country. Consumer needs are not that different, especially among countries with comparable income - everywhere on earth you find banks, hairdressers, and auto repair shops. In contrast, export-product portfolios of countries can be very different indeed. There is likely to be a vast difference of income between a country deriving most of its foreign revenue from a single agricultural product and one that exports a broad “portfolio” of machinery, electronics, chemicals, processed food, and modern services like banking and transportation. Latvia fits much better with the second description. It suggests that while the country is definitely not among the most affluent in the world at the moment, it has the potential of becoming so.

Latvia’s exports are quite diversified. Looking at goods and services in total, no single category represents more than one-seventh. At the top, but not far ahead of the others, come the timber industries and transport services. These are followed by food, metals, machinery, and equipment. Other important money earners for the country are tourism, chemicals and pharmaceuticals, and the textile and apparel industries. So, while Latvia isn’t like Sweden or Germany, it is not a “banana republic” either, largely depending on a single cash crop or copper mine.



The principal Latvian export markets according to their proportional share:

EU, of which 71.6%
Lithuania 16.2%
Estonia 13.5%
Germany 8.7%
Sweden 6.3%
Poland 5.0%
Denmark 3.9%
United Kingdom 3.5%
Finland 3.2%
The Netherlands 2.3%
Italy 2.0%
France 1.6%
Spain 1.1%
CIS,of which 14.9%
Russia 10.6%
Belorussia 2.1%
The Ukraine 1.1%
Norway 2.8%
The US 1.4%

Agriculture and Forestry

The primary sectors in the Latvian economy play a greater role than in a typical European country; this is likely to remain so, given the low density of population and the fact that virtually all the country is fertile land. Agriculture and forestry thus will continue to provide a basis for the growth of food and timber processing, which along with engineering are the leading manufacturing sectors in Latvia.

The backbone of agriculture in this country is family farms; there are very few enterprises where the number of employees is measured in more than single digits. Sometimes, or rather quite often, small scale means inefficiency; but there is an increasing number of very modern enterprises with the most powerful machinery money can buy. While for thousands of people agriculture is still more like a lifestyle, winds of change are gradually sweeping away the last vestiges of the “traditional” Latvian approach to food production, clearing the way for an increasing number of refurbished holiday country houses owned by affluent urbanites.

The main products of Latvian agriculture are grain and milk, currently representing roughly two-thirds of total output. Despite the strong recovery of agriculture in the previous decade, about a third of all agricultural land is still used very little or not at all; yields too still have room to rise

Manufacturing

While Latvians have traditionally associated their country’s identity with agriculture, Latvia is in fact an “old” manufacturing country that industrialized more or less at the same time as Germany.

Where Latvia differs from most European countries is in the high share of processing stuff that comes directly from land and sea - food and timber. Together these account for close to half of all manufacturing. While there is nothing inherently wrong with this - high productivity can be and is often achieved in these sectors - in the future growth is likely to come from engineering and chemicals sectors, both because these offer more room for generating higher income and do not depend on the volume of local source material, which is inherently limited.

Food

This is a rough generalization, but the output of the Latvian food processing industry can be classified either as branded output mostly for regional markets – the Baltics, other former USSR countries - and “bulk” products for global commodity markets: milk powders, butter, etc. The first group is far more important. Latvia is the leading producer of canned fish in its region. Numerous fish processing enterprises in towns and villages dotted along the shores of the Riga Gulf produce enough fish cans to cover the distance from the Latvian-Russian border to the Pacific Ocean and back. But it is not just a question of quantity; this is probably the only business in which switching to Western markets leads to lower quality, as no one can appreciate truly delicious sprats (Rīgas šprotes) as well as Russians. Also, Latvian specialty milk products are widely known in the region, first and foremost the outstanding cheese curd snack Kārums. The biggest branded product for Western markets is vodka sold under the Stolichnaya and Moskovskaya brands. Latvian companies like Laima and Pure Food make delicious sweets - chocolates and fruit jams that are establishing a foothold in exotic markets like Middle East and China.


Timber

The timber industry is the nation’s main exporter of merchandise. While its share has fallen compared to levels 10 years ago, the timber industry still accounts for around 15% of total exports of goods and services. Though often generalized as a “low value added” business, it is actually quite knowledge- and capital-intensive. The strongest element of this sector traditionally has been the production of plywood. Latvian output doesn’t represent 10% of the global total any more, as it did in the 1930s, but at least it is bound for high-level applications, including critical elements in liquefied natural gas tankers.

Metal-Based Industries

The engineering and metalworking sectors have experienced a rollercoaster ride that has reflected the violent turns in Latvia’s history. The large-scale and globally oriented industries of the pre-WWI era were swept away, and history was again repeated in a way in the early 1990s, when much of Soviet-era manufacturing collapsed (see the section on history). The first ten years of independence were mostly about survival and putting together bits of the smashed previous glory. These efforts were not spent in vain; output since 2000 has multiplied, racing ahead of other manufacturing sectors. The manufacturing of automotive components for large European multinationals has emerged literally from nowhere. The building boom of the middle of the decade boosted structural steel production, which was quickly diverted to export markets in 2008-2009. Bits and pieces of previous ages remain and even flourish. Liepājas Metalurgs is the largest steel producer in the Baltics, and recent years have seen the emergence of several small but nimble producers of industrial metals. The electronics industries probably suffered more than any other in the 1990s, but the industries have also staged a rapid recovery and are quite strong in broadband radio transmission equipment. Mikrotīkls (international brand name: MikroTik) is one of the leading suppliers of Wi-Fi solutions, in cooperation with Hanzas Elektronika, which does most of the actual manufacturing.

Textiles & Apparel

Like in almost any country, manufacturing in Latvia began with the textile industry, which dates back to the late 18th century. Textile and apparel production (light industries) have seen their share fall, but it would be at least premature to write them off completely. The Western town of Liepāja houses a cluster of 50 lingerie producers, probably the largest remaining competence center in Europe which refused to give way to China. There are also a number of less specialized companies making a wide range of products for Hennes&Mauritz and other European retailers, providing not just manufacturing but also design, to set themselves apart from countries with lower labor costs. Making small runs of specialized garments on short notice is an important niche to hide in from the race to the bottom in terms of pricing.

Other Sectors

Pharmaceuticals is regarded as one of the most promising areas of manufacturing in Latvia. While the industry is very small by global standards, it has manufacturing competence as well as R&D potential from arguably the best scientific establishment in Latvia, the Institute of Organic Synthesis.

Cosmetics producer Dzintars was one of the leading companies in the Soviet era. The company is still in business and has been joined by marketing-savvy upstarts like Stenders, Madara, Attirance, and others that specialize in bio-cosmetics and all sorts of things you need to create a cozy home environment. History condemned Latvians to live in poverty for a large part of their history; they love their nature, but often get tough love in return, as you would expect from a place located around the 57th parallel. Therefore Latvians have learned to create a pleasant living environment, despite their modest means. This is something the resource-restrained world will need more and more.

While Latvia lacks industrial quantities of the most prized minerals, like hydrocarbons and metal ores, the country is endowed with limestone of a variety that is really “sweet” for producers of building materials. So the country exports at least 4 tons of cement for every one ton that it consumes. Also, products from clay, such as tiles and bricks, are mostly made for foreign consumption. This says something about their quality, as these are rather bulky items to carry around.

Transport

The Baltic states are special in many ways. One of them is the very high importance of railways in their economies. The Baltics are the only countries in the EU where most cargos are carried on iron tracks. Locally generated business accounts for just a few percent of railway turnover, almost all of the 50-60 million ton annual turnover comes from abroad, mostly Russia and Belarus, but also countries like Kazakhstan. Goods from much of Eurasia’s vast landmass are finding their way to Baltic shores, that’s why this place has been so coveted by so many in the past.

While 10 years ago almost all transport service export revenue was generated by the value chain of railways and terminals in the three main ports of Rīga, Ventspils, and Liepāja, today the picture is much more diversified. AirBaltic has come from almost nowhere before EU accession to become a regional competitor, linking large and medium destinations in Northern Europe and the CIS. Another success story is road transport, as growing markets in the CIS countries suck in more and more consumer goods.

Tourism

Latvia is a distinctly multicultural society. No religion can claim to represent the majority of the population; far from it. The Lutheran church claims the largest number of followers, but is closely followed by the Catholic and Orthodox churches. While most Latvian-speaking people (a slight majority) are Lutherans or Catholics, and most Russian speakers (most of the rest) are Orthodox, it can also be vice versa.

Latvia has a lot of churches, as even many small villages need places to cater to different spiritual needs. Accordingly, these churches are small, but who cares if size is inversely correlated to charm, as is often the case? Add to this the appealing medieval and art-nouveau heritage of Riga, the idyllic wooden districts of many smaller places as well as the suburbs of Riga itself, an intense cultural life with an internationally renowned Opera and you get an attractive package for tourists with very diverse interests. If that is not enough, the vast and largely empty countryside offers many opportunities just to get away and relax.

Advertising slogans are only successful if they say something important about the product, so it is unsurprising that “Best Enjoyed Slowly,” the new leitmotif for Latvia’s tourism industry, has been awarded top prizes in international surveys

Information Technologies

While the Soviet era is not usually remembered fondly here, it had some (partially) redeeming features, one of them being good education programs in science and mathematics, as well as the absence of astrology and other forms of witchcraft from public discourse. This has created a basis for a small but thriving software production business, among other things. Estonia’s Skype might be much better know, but the largest software operation in the Baltic states is Tieto Latvija, as its products are actually intended to make money. Almost literally, by the way, as it is one of the main global providers of software that runs card-payment and cash-withdrawal systems of commercial banks. Serving the needs of the financial sector is a key competence of Latvia’s IT cluster, whose members also include Nexum Insurance Technologies, Exigen Services and others. Another company, Tilde, has created one of world’s best translation software packages.

Medical Services

Countries in Central Europe like Hungary and Czech Republic have had a head start in the medical services sector, but now ambitious doctors in Latvia are catching up. They have set up an organization called Baltic Care, which acts as a marketing representative for their efforts. These include not only the staple stuff of medical tourism - namely, all sorts of enhancements to female (and male) bodies, as well as dentistry - but also eye surgery and other services. People have said that one of the leading doctors even offers flights in his private plane as a bonus.

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

© The Latvian Institute

This fact sheet can be freely printed from homepage of the Latvian Institute, distributed and cited, on condition that the Latvian Institute is acknowledged as the source. The Latvian Institute promotes knowledge about Latvia abroad. It produces publications, in several languages, on many aspects of Latvia.