How to Trade Economic Independence for Political Sovereignty

Example of the former Soviet Union country Latvia

The Republic of Latvia is a small country situated on the Baltic coast, in Eastern Europe. The estimated population of 2012 slightly exceeds 2 million. 60% of the population is ethnic Latvians, while a significant part, i.e. 27.3%, is Russian, demonstrating the legacy of the past (Eurostat, 2012).

Just slightly over 20 years ago, Latvia was under the Soviet rule and Communists were the ones who had the power to make decisions. The nation itself experienced the Soviet economic and political system. Even though the productivity of the agricultural sector was high, all harvest was transported to other Soviet territories. Nevertheless, industrial capacity was significantly improved, employment was high, education was for free, and most of the basic needs of the nation, such as housing, were satisfied.

Latvia’s de facto sovereignty was recognized in 1991, and the first years of independence were spent developing a functioning state. When a political stability was reached and reforms initiated, the nation became increasingly concerned about the preservation of its statehood, so in 1995 the Latvian authorities adopted a statement defining foreign policy goals. They argued that the sovereignty can be strengthened through early integration into the European and world-wide security and political and economic structures. Latvia became a member state of the UNO in 1991, and joined the EU and NATO in 2004.

However, clear existence goals for the country were absent for the first decade of independence. While political sovereignty was at the top of the agenda, the majority of the society believed that the continuous increase of average human wellbeing and a long-term conservation of cultural heritage and Latvian language should be the goals. Even though the initiated reforms increased individual freedom and protected rights, many question whether these reforms improved human well-being only.

The Human Development Index, published by UNDP, assesses the long-term progress of human development regarding a long and healthy life, access to knowledge and a decent standard of living. The overall human development value in Latvia has been positive as the HDI value has risen from 0.693 (1990) to 0.805 (2011). Hence, the statistics rank Latvia among other high human development countries.

The majority of indicators, compared from 1990 through 2010, have followed a positive trend. Very often, the development was slow during the first years of independence when the reforms were launched. Years later, in the 21st century, especially after Latvia’s accession to the EU, human well-being improved more rapidly until the crisis in 2008, which resulted in its decrease. Nevertheless, improved absolute numbers should not be overestimated.

The previously centralized health sector has experienced notable reforms in the last 20 years; thus, the health condition of the inhabitants of Latvia has improved. At the same time, more and more people are unable to afford the health care services due to the growing prices.

Despite advancements and reforms in the health care system, demographics are in recession, which is a serious threat to the country’s succession. A natural decrease of population due to lower fertility rates and a considerable migration outflow (especially within the first years of the collapse of USSR and after Latvia’s accession to the EU) has contributed to the fact that the population has decreased from 2.67 million in 1990 to 2.24 million in 2010. As a consequence of a smaller number of new-borns and rising life expectancy, the population is aging, which imposes an increasing burden to the economically active part of the population to finance the retired people.

Unfortunately, not only is financing the retired people a serious issue, but also a complete burden to costs of primary goods, which have increased. Even though the absolute income has increased, the amount of people earning less than the subsistence minimum is rising, especially in the rural areas. It has to be mentioned that the content of Latvia’s subsistence basket has not been revised since the first year of renewed statehood; thus, in reality, it does not contain all goods and services required for living decently.

Furthermore, since the accession to the EU, prices have risen rapidly. For instance, total housing costs have increased significantly— in the USSR the rent and public utilities were highly subsidized by the government, whereas in 2005 the average housing costs amounted to 80 US dollars and 170 dollars in 2009. The situation is even worse, considering the fact that the proportion of overcrowded households is one of the highest within the EU.

The EU has provided significant advantages to the Latvian population, especially the youth, which is now eligible to study permanently or temporarily at foreign universities, enjoying the same terms and conditions. Also, to the people who are entrepreneurial, open-minded and have a certain understanding of how to take an advantage of new business opportunities. The EU has also contributed to the modernization of hospitals, schools and the infrastructure. On the other hand, the Soviet government paid for housing, education and health care thus more resources were available for food items, leisure time, clothing, and also the employment ratio in the Latvian SSR was close to 100 percent- compared to the 16 percent unemployment level in 2009 Therefore, there are people who believe that the communism times ensured better well-being.

Lessons from the past should be learned. One of the main arguments for Latvia entering the EU was the economic advancement. Nonetheless, skeptics argued that not every person residing in Latvia would benefit. Citizens who benefited the most would be young people, as they would enter better-paid jobs, whereas the pensions of retired people would not increase as rapidly as the prices of goods and services. Latvian farms would face serious hardship due to a surplus in the market resulting from foreign competitors that are subsidized by their own governments.

They were right. The EU has suppressed the Latvian economy as a result of shutting down industrial plants, uncontrolled FDI inflows, enabling cheap credits, a significant inflation and price increase, and foreign companies creating a competition which small Latvian companies and farmers cannot defeat. The smaller economy led to an increasing budget deficit, external borrowing and, finally, budget cuts demanded by the IMF and the EU, which have harmed the population as their adjusted income is not as high as living costs. One can say that Latvia traded a part of its economic sovereignty in order to ensure its political independence and the population is paying the price.

However, the people living in Latvia have been willing to pay this price for the sake of Latvia’s sovereignty. In a survey, carried out by the national news portal TVNET in 2004 it was asked what the biggest threat to Latvia’s sovereignty is. 53 percent of the 5311 respondents indicated Russia and unknown money influx as the biggest danger. On the contrary, just seven percent perceive integration into the EU and NATO as imminent danger to Latvia’s independence. On one hand, if Latvia had not joined the EU, the threat imposed by a money influx would have been limited, but political independence would have been significantly less insured.

If Latvia had not joined the EU in 2004, it could have taken its time to develop the industries, which correspond to the society’s interests, not to the EU regulations. In addition, the migration outflow would have been smaller; therefore, people who are desperately needed in Latvia to cultivate the economy would have been available. In this case, Latvia would have experienced a slow and stable economic and social welfare growth. However, at some point in time, say 10 years later than the original accession date, Latvia should have joined the EU, as it is too small to be acting alone on the global stage. Latvia does not have significant raw materials or highly developed industries; thus, it lacks international power. Its needs and ideas are heard and pushed forward only in cases when stronger partners share the same interests. The EU is a platform where Latvia can find like-minded countries; therefore, it can find “allies” and together strive for developments and economic and political stability.

As for the Latvia’s situation in the EU, in 2014, opinions whether the country really needs to adapt the euro vary. In September 2012, the public opinion on the euro adoption was all-time low, as only 13% of Latvians support the idea. Being a member of eurozone would further disable Latvia to control its monetary policy and raise the prices, which would not correspond to the income earned by a less productive workforce and industries compared to the ones in other EU states. Therefore, many experts believed that Latvia should postpone its adoption of the euro until the future of the eurozone is clearer and Latvia recovers from the economic recession and advances its production regarding productivity and value added.

Eva Maurina

Eva Maurina is a CFO in an Austrian smarthome company and a Master student of the Vienna University of Economics and Business.

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