The Latvian Economy

The northern European country of Latvia is a former satellite of the Soviet Union that in modern times has emerged as having one of the fastest growing economies in the European Union. Latvia has been a member of the European Union since 2004 and the World Trade Organization since 1999.

Immediately following World War II, Latvia became economically, politically and militarily under the control of the Soviet Union. Its economy became largely integrated into the Russian economy and focused on serving the needs of the Soviet Union. Following the collapse of the Soviet empire in 1990, Latvia quickly began reorienting its economy towards serving as a major economic conduit between Eastern and Western markets. Timber and agricultural products are Latvia's major exports, and as the economy began serving local rather than Soviet markets the economy boomed. In the years of 2006 and 2007 the economy was growing at a rate of more than 10% yearly. By comparison, the growth rate of the United States is presently averaging about 1.5%.

It has not been a completely smooth rise. A major economic crisis occurred in 2007 and 2008 which caused a reversal in economic growth. However, major economic reforms that introduced free market principles to replace the remnants of the Soviet socialist system has resulted in a resumption of rapid growth. Latvia was helped to make this transition with aid from the International Monetary Fund and the European Union. As a condition of receiving that aid, Latvia was required to reform its economy along free market principles. Most of the state owned or controlled industries were privatized and the size of the public sector was reduced. By 2011, growth had resumed to over 5% and Latvia once again had one of Europe's fastest growing economies.

In many ways Latvia is one of the great post-Cold War success stories. Inflation, which was exploding at over 900% per year in 1992, is now around two percent. Latvia's remarkable growth is often pointed to as an example of how seemingly feeble economies can be brought back to life by introducing free market reforms. By controlling debt, reducing state controls and creating a more pro-business climate, steady economic growth has resumed. Latvia emerged from decades of stagnation after World War II under the Soviets, enjoying explosive growth after becoming independent that was interrupted only by a sharp contraction during the world economic crisis of 2007-8.

There is still more to be done. Some major industries, especially in the energy sector, are still not privatized. However, by making most of the necessary reforms, Latvia now has an economic infrastructure that encourages growth. Many of Latvia's European Union neighbors are still dragging their feet on making similar economic reforms that are necessary to their economic recovery. In the meantime, Latvia remains a shining examples of how those reforms can indeed revive an ailing economy.