ĢIRTS RUNGAINIS PARTNER AS IBS PRUDENTIA ĢIRTS RUNGAINIS PARTNER AS IBS PRUDENTIA LATVIA HAS REGAINED INDEPENDENCE BUT HAS FORGOT HOW COUNTRIES BECOME RICH LATVIA HAS REGAINED INDEPENDENCE BUT HAS FORGOT HOW COUNTRIES BECOME RICH

Thesis and the Question  Purpose of Latvian state should be to ensure the best conditions in the world for people of Latvia.  Cornerstone of prosperity is developed economy.  Why we have failed to develop? 2

Implications of prosperity  Prosperity means high average income per capita and relatively even distribution of it: low inequality.  High average income and low inequality means high salaries, wages and income for around 80% of working age population and high means among the highest in the world comparing PPP.  That in turn means companies with high paying jobs which not only can but for which it makes sense paying because they are producing globally and locally competitive products and services.  For city-state of Riga, Latvia, which can only be self-sufficient in very limited product and service range in modern world, it means that engine of economy can only be businesses producing for export, high added value products and services in increasing return industries. 3

Why we are as rich as we are?  Geography and transport: Latvia has benefited from Riga at the Daugava which has been a major trade hub and transit route trough the centuries and the main difference with Estonia and Lithuania and why we have the only city with regional potential.  End of 19th and beginning of 20th century Latvia bordered Germany and Riga was the biggest de facto German city in Russia which because of Russia’s protectionist policies, import barriers and being main export port became a major industrial centre and at the time third largest city in Russia. During that time beautiful Art Nouveau Riga and many other things were built and developed. 4

Why we are as rich as we are? (cont.)  So the people who lived here 100 years ago knew how to be rich – trough protectionism, industrialization, industrial policy, export and trade.  The fact is if we look up in economic history – rich countries open to free markets only after they have industrialized and nurtured their industries and become rich and competitive and then they force other countries to open up their markets to “fair” competition. 5

Lessons from 20th century  We have been de-industrialized three times in 20th century and in terms of relative number of inhabitants, quality of work force, general education level, quality and availability of infrastructure, geopolitical competition are positioned significantly worse than a century ago.  We have specialized in poverty. We are a newly developing country in the club of developed countries.  So we have been returned this beautiful and rich city and country and for centuries other and different people knew how to be rich here being part of Europe.  What should we do now?  So-called “free” market almost does not exist; we should have learned it by now. Virtually all markets that allow selling higher value added products are regulated, protected, with entry barriers. 6

Increasing return industries  Answer – reindustrialization with 21th century and increasing return industries:  biotech and life sciences related,  IT, artificial intelligence and robots,  nanotech and material sciences related.  Using coherent and targeted industrial policy to encourage creation of companies in these industries in Latvia.  Establish and support:  physical  transport  human resource  legal framework  intellectual, educational, innovation, entrepreneurship, R&D  and financial infrastructure necessary to promote creation and successful development of these industries. 7

Preconditions for far-reaching changes  To successfully industrialize Latvia after joining of WTO, EU and without it’s own currency, we basically have two instruments 1) tax policy and 2) direct state investments.  Necessary preconditions are adopting far-reaching changes:  to arrest a collapse of the country because of low birth rates and mass emigration,  achieve long-term sustainability of pension system and  drastically improve quality and make-up of education 8

The role of state-owned enterprises in industrial policy  Role of the state should be to provide stable, efficient and competitive infrastructure and framework for business and households to support creation of globally successful operations and improve quality of life.  State-owned companies are not necessarily less efficient than private enterprise.  In economy of size of Latvia in many cases state-owned companies, if properly governed, will be more efficient provider of services for clients than fragmented private competition.  Implications:  In some cases we should consider instead of divesting of assets use the companies as centre for cluster of new start-ups for emerging industries like Finland did it with NOKIA.  For example:  Lattelecom and/or LMT as centre for new technological developments in IT, telecommunications, artificial intelligence, etc.  Latvenergo as centre for new developments of clean and green energy solutions, etc. 9

Some interesting thesis  When the missionaries came to Africa, they had the Bible and we had the land. They said "let us close our eyes and pray." When we opened them, we had the Bible, and they had the land. —Desmond Tutu  When the market missionaries came to Latvia, they had God of Market and we had the assets. They said “let us close our eyes and pray for Washington consensus”. When we opened them, we had the Free Market, and they had the assets. 10

Some interesting thesis  worship of free market or any other fad is counterproductive,  No one is going to make us rich but ourselves trough smart and balanced use of all appropriate policies 11

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