Outsourcing Production Opportunities in Latvia and the Baltics

Latvia and the Baltic countries after the entry into the EU in 2004 – 2007

Period of EU membership of the Baltic countries coincide with the beginning of active growth of the world and the European economy when the Baltic countries easily got high credit ratings and access to cheap credit money.

In 2004, the rate of loans in EUR was at favorable level and continued to fall in 2005 and 2006.

Since 2000 market of banking services was actively developing, as well as boom of credit cards entering, together with the growth of such services as overdrafts and credit line. It zips led growths of loaning and increased consumer credits value of the population.

This allowed the Baltic States to become a leader in sales of new premium class passenger cars.

At the same time with the development of mortgage lending actively grow prices in real estate and boom begins of a new building construction and reconstruction of the old housing and commercial buildings development.

The Baltic countries came into a leading position on the growth of GDP, which gives an occasion to talk about economic miracle. Baltics - Latvia, Lithuania and Estonia are beginning to frequently refer to as “Baltic Tigers”;

Nevertheless, nominally high grow of GDP was against of a minor increment of material production and strong durable prevalence of imports over exports.

This situation caused by following factors:

- The 1990s: a loss of ex-USSR markets, and breaking relations with  contractors, Latvia have closed down all major manufacturing enterprises *

* Before the 1990s, Latvia was the production centre of radio appliances, consumer electronics, robotics, railroad vans, cars, etc.

- Policy of maintaining a high rate of local currency (LVL) was chosen

- Beginning of 2000s marked by galloping inflation

- Costs of production increased considerably

- Salaries rising repeatedly exceeded growth of labor productivity

By 2006 these factors have done almost any Latvian production as non-competitive.

Therefore, the figure of GDP growth was based on enormous masses of speculative transactions and permanent loan funds re-investing.

Latvia during the world recession

World economic recession showed the unsuccessful policies of economic development of the Republic of Latvia in the period from 2000 that resulted in negative consequences and the need to apply for loans to such global organizations as the EBRD (European Bank for Reconstruction and Development) and the IMF (International Monetary Fund). The loan size is 7.5 billion Euros and it means for Latvia several painful measures and the loss of almost all social gains earned during the period 2004-2007.

Nevertheless, such cruel shocks have positive sustainability:

-  Stopped inflation

- Stopped growth of salaries exceeding the increasing of labor productivity.

- Production costs are returned to a level acceptable to ensure the competitiveness of the Latvian production

- Unbuilt land value is returned to the level that allows you to make profitable investments in the opening of new industries and infrastructure development

-  Energoresource costs decreased

- New economic situation returns to the focus in use of favorable geographical location of Latvia, the development of transit, the organization of production within the EU

Implementation of the strategy development

History gives second chance to small “new” EU members to find a place in global economic system, and the next 10 years should be determining for them.

 One of the main competitive advantages of Latvia

1. The geographical location:

- Large non-freezing ports on the Baltic Sea

- Single railway connection with Russia and CIS countries, Asia (Baltic Transit), and Europe

- Regular ferry services with Sweden, Germany, other major European countries

-Advanced road communication with Europe, Russia and CIS countries

2. Social factors:

- Relatively low labor costs in comparison with “Old Europe“;

- Relatively high level of education of the population

- Well-developed base of scientific and technical educational institutions capable in a short period to train staff for work and production services

3. Economic factors:

- A large number of territories, suitable for development and production

- Experience of Latvian entrepreneurs of doing business in EU, Russia and CIS

- The presence of four special economic zones

4. Political  factors

-The focus of the national Government to attract investment and development of production

Besides, the EU membership for Latvia and its full integration into the European Community, makes the country strategic platform for production setup for Companies from Asian and non-European Union.

In conclusion I would like to refer to the historical experience, when Latvia was integrated into the USSR.  For the country which was not possessing rich natural resources, but having a favorable geographical position and flat landscape, the role of the industrial centre of «Soviet Empire» was chosen. Manufacture of consumer electronics, household appliances, etc, meeting requirements of all Soviet Union and producing goods for export for the countries of the Warsaw contract has been concentrated.

In itself this fact speaks about strategic appeal of region and possibility to repeat successful historical experience, having expanded it on to the European countries, without forgetting about possibility to enter on the markets of Russia, Ukraine, and the CIS.