A prospective analysis in the candidate countries report on latvia

beginning of nineties, then fluctuated around the amount 280 million EUR in the period 1995-

1999 (about 4% of gross value added), and then started to grow again in 2000.31 The growth

in the banking sector was stable (since 1995, after bank crisis). Total banking assets reached

8233.2 million EUR at end of November 2003, compared to 3202.1 million EUR at end of

1999 and 1133.7 million EUR at end of 1995.32 Banks serve as infrastructure elements

mainly, and despite growth in volume indicators, the share of financial intermediation in gross

value added stays at 4.5-5.5%. Nowadays the main banks in Latvia belong to foreign owners.

After a long stagnation period, security market improved slightly in 2000. At the end of

2002 security market capitalisation was 685.7 million EUR. Total turnover in 2002 was 509.6

million EUR33. Security market indicators improved significantly in 2003: market

capitalisation increased by 45%. Riga Stock Exchange price index RICI increased 2.33 times,

Dow Jones Riga Stock Exchange index - 1.42 times.34

The development of the commercial services, as well as trade and financial intermediation is

promoted by increasing income of people and enterprises, and bigger availability of lending

facilities. Mentioned service sectors (trade, financial intermediation, commercial services, at

some extent also transport services) are equipped with modern technologies.

Also the development of cultural and leisure services, as well as education services

increased in recent years on the basis of higher incomes of population.

The Ministry of Economics reports, that at least 2/3 of growth in the sector of transport and

communications triggered by the domestic demand that in recent years has gone up much

faster than the external consumption. This refers to supporting of auxiliary types of transport

28 Macroeconomics of Latvia in figures 2003, Central Statistical Bureau of Latvia, Riga, 2003, p.55

29 Macroeconomics of Latvia in figures 2003, Central Statistical Bureau of Latvia, Riga, 2003, p.57

30 Macroeconomics of Latvia in figures 2003, Central Statistical Bureau of Latvia, Riga, 2003, p.61

31 Macroeconomic indicators of Latvia, 2, 2003, Central Statistical Bureau of Latvia, Riga, 2003, p.31

32 Monthly Bulletin of Latvian Statistics, Central Statistical Bureau of Latvia, Riga, respective periods

33 Statistical Yearbook of Latvia 2003, Central statistical Bureau of Latvia, Riga, 2003, p.30

34 Monthly Bulletin of Latvian Statistics, 1(104), 2003, Central Statistical Bureau of Latvia, Riga, March 2003,

p.49, Monthly Bulletin of Latvian Statistics, 2(117), 2004, Central Statistical Bureau of Latvia, Riga, March

2004, p.45

A. National and Regional Economy

REPORT ON LATVIA 21

activities, such as development of warehousing, parking services, as well as services offered

by travel firms and other services.35

The share of health care and social work reached the very low level – 2.8% in 2002. In

2003, after the government decided to increase financing of health care, the share of the sector

increased to 3.0% of gross value added.36

The very low share of health care and social work and high share of trade in gross value

added is disproportion of the economic structure. Also the share of sectors producing goods is

not sufficient in the Latvian economy. International comparison shows that Latvia has the

lowest share of manufacturing among the EU accession countries37, and the share of

agriculture alone also is not high (2.9% in 2002 and 2.7% in 2003). On the other hand, decline

of real sectors has stopped, and industry has started to grow. The share of construction is high

(6.1% of gross value added in 2003), mainly because of better financing of Latvian economy

on the basis of loans. Loan expansion was significant in years 2002 and 2003 – credits to

domestic enterprises and private persons increased by 45% during the period December 2002

to February 2003.38

The share of value added in output of goods and services varies in years from 45.5% in 1996

to 42.9% (in 1998), and it was 44.2 in 200239. The share of high-tech industries in total

industrial output in Latvia is low – about 3-4%, the share of high-tech industries in exports

from Latvia does not exceed 10%.40 Economic activities related to production of goods and

services of IT41 in 2002 equalled to approximately 5,2% of GDP (compared with 3.23% in

1997 and 4.6% in 2001). In the sub-sector “Office equipment and computer production” the

value added created in 2001 equalled to 0.1% of GDP. In the sub-sector “Computers and the

related activities” the highest share (approximately 75%) belongs to software development.

The added value of this sub-sector in 2002 reached approximately 0.8% of GDP (0.5% of

GDP in 2001).42

Economic structure has remarkably changed. In general it corresponds to economic structure

of a small modern economy, yet some disproportions exist that may impact economic

development in future. We think that trade sector is oversized in GDP in connection with the

dramatic shrinkage of production sectors and comparatively weaker performance of some

high value added service sectors (ex. financial intermediation) and social services (health and

social work). Exaggerated trade sector is characteristic for countries with large export of trade

services (demand supported by tourists and visitors), but this cannot be observed in Latvia.

35 Economic Development of Latvia; Report of the Ministry of Economy of the Republic of Latvia, Riga,

December 2003 p.21

36 Monthly Bulletin of Latvian Statistics, 2(117), 2004, Central Statistical Bureau of Latvia, Riga, March 2004,

p.29

38 Monthly Bulletin of Latvian Statistics, 2(117), 2004, Central Statistical Bureau of Latvia, Riga, March 2004,

p.29,41; Statistical Yearbook of Latvia, Central Statistical Bureau of Latvia 2003, Riga, 2003, p.28

39 Macroeconomics of Latvia in figures 2003, Central Statistical Bureau of Latvia, Riga, 2003, p. 40

40 Latvian Development Plan. Draft project as to 03.09.2002, p.22

41 According to classificatory of the general economic activities (NACE), information technologies may be

attributed to such sub-sectors as “Office equipment and computer production” (from the “Manufacturing”

sector), “Telecommunications” (from the sector of “Transport, storage and communications”) and “Computers

and the related activities” (from “Operations with real estate, rent and other commercial activity”). Economic

Development of Latvia; Ministry of Economics of the Republic of Latvia, Riga, December 2002, p.96, June

2003, p.104

42 Economic Development of Latvia; Ministry of Economics of the Republic of Latvia, Riga, December 2004, p.

105,106

22 FACTORS AND IMPACTS IN THE INFORMATION SOCIETY

Trade driven economy is vulnerable to changes in purchasing power, what is provided by real

sectors. Besides labour productivity in trade is not among the highest.

Under sizing of health care cause substantial social consequences. Low public funding in

health care turns the sector into strongly commercial one. This impacts accessibility of health

care services to majority of population in Latvia, and leads to worsening of population health

and demographic situation. Under sizing of education sector is more connected with low

welfare level, as the share of education service in GDP is satisfactory, but the GDP level is

low.

Transformation of Latvian economy has promoted development of sectors and industries,

communication, trade, commercial and financial services, computer industry, export oriented

industries. This forms environment in which development of IS appears both necessary and

possible. Approximately 51% of value added is produced in sectors that use information as a

resource or are based on information systems and networks. In addition growing internal

demand reflects in increasing amounts of telecommunication, financial, commercial, transport

and education services, all based on use of IT and information systems.

A.2.3. Demand side of growth

We assume that demand components of growth determinate supply side of IS.

GDP by expenditure items is characterised in Table A4. Growth rates of main aggregates in

GDP expenditure are provided in Graph A3.

households together with consumption expenditure of general government made up 82.1% of

GDP in 2002. The share of consumption in GDP has declined compared with 1996, when it

was 89.5%, mainly because of reducing general government consumption.43 Volumes of

private consumption go up at a steady rate. The annual increase of wages of the employed,

and also by the ability of private persons to benefit from consumption credits and loans to

purchase and repair housing favourably influenced private consumption. Annual growth rates

of the private consumption do not exceed GDP growth rates.

The positive trend is significant increase of gross capital formation – from 18.3% of GDP in

1996 to 27.0% of GDP in 2001 and 26.4% of GDP in 200244. The reason of the low share of

investment in beginning of nineties was lack of investment resources, including FDI, and this

is connected with late privatisation. Although the fast growth of investment is one of the main

reasons for enlargement of the negative export-import balance, still it forms a stable base for

growth.

44 Macroeconomics of Latvia in figures 2003, Central Statistical Bureau of Latvia, Riga, 2003, p.82

A. National and Regional Economy

REPORT ON LATVIA 23

2000 2002

Structure Growth

rates

to the

Structure Growth

rates

Contribution

growth

Private

62.0 7.4 4.5 62.7 6.9 4.3

Government

consumption

19.7 -1.9 -0.4 19.4 1.5 0.3

Gross fixed

capital

formation

Changes in

inventories

0.5 - -4.5 2.1 - -1.9

Exports 45.6 12.0 5.2 45.5 6.3 2.8

Imports -54.3 4.9 -2.7 -56.1 4.5 -2.5

Source: Economic Development of Latvia. Report of the Ministry of Economics of the Republic of Latvia, Riga,

December 2002, p.19 (2000), December 2003, p.20 (2002)

0

20

60

80

120

General government finanl consumption expenditure Householders and non-profit institutions serving Gross fixed capital formation (investment) Source

: Macroeconomics of Latvia in figures, 2003, Central Statistical Bureau of Latvia, Riga, 2003, p.85

Exports of goods and services increase year by year, yet in the long-term period imports

increase faster. Since 1994, when Latvian foreign trade balance turned to negative, positive

impact on the GDP growth of net export-import was fixed just in 1995, 1997, 1999, and

negative contribution of export-import activities to GDP remarkably exceeded positive.45

45 Macroeconomics of Latvia in figures 2003, Central Statistical Bureau of Latvia, Riga, 2003, p.83

24 FACTORS AND IMPACTS IN THE INFORMATION SOCIETY

A PROSPECTIVE ANALYSIS IN THE CANDIDATE COUNTRIES

Analytical conclusion:

From the demand side development of Latvian economy is favourable for IS building.

Population and business income grow and this improves financing of IT use. As mentioned in

the previous chapter, the consumption of telecommunication services and information based

services increases. This means that population and business use some part of resources for

implementation of IT and in this way contributes to development of IS.

We assume that all aspects, concerning employment, unemployment and labour supply

determinate a human factor, that impact development of IS from the demand side. Higher

share of employed in information intensive sectors increases demand for IS both at business

and private use. Evidence suggests that persons who use IT at work are more motivated to

apply IT also in their private life (eBanking, shopping, communication via E-mail instead of

phone and mail).

Brief characteristic of employment situation in 2002 (latest available analytical data) is

provided in Table A546.

A comparatively low average employment rate – 54.4%, is connected with low employment

in early age groups (15 – 25 years old), what is a result of high share of students in the total

number of population in these groups. As table 6 shows, the share of economically active

people in this group is low. Lower employment in elder age groups (55-69 years old) appears

because employers give preference to younger employees that have better skills in modern

technologies. The situation may be explained from another side – among economically

inactive population, 29% are pupils and students, and 44.7% are pensioners.47 In addition,

table 6 gives rate of employed to the total population in the respective age group.

In international comparison, employment rate in age brackets 15-64 years old is 58.9% in

Latvia – it is about average among Central and Eastern European countries48. Employment

figures are even better when compared to working age population (which is lower than in the

mentioned international comparison) – 68.9%, or economically active population49 – 88.1%.50

46 Methodological footnote: From 1996 to 2001 employed persons are all working persons aged 15 years and

over, in 2002 employed persons are all working persons aged 15-74 years. For detailed evaluation of the

labour market, the Central Statistical Bureau of Latvia conducts regular labour force surveys twice a year since

November 1995 (in May and November). In this chapter all data for the period until 2001 are taken from:

Social trends in Latvia, 2003, Central Statistical Bureau of Latvia, Riga, 2003, p.40 – 51, and Statistical

Yearbook of Latvia, 2003, Central Statistical Bureau of Latvia, Riga, 2003.. Data for 2003 are taken also from

Monthly Bulletin of Latvian Statistics, 11(114), 2003, Central Statistical Bureau of Latvia, Riga, December

2003. Unfortunately, there is methodological change in employment statistics that makes employment data not

comparable in the long run. Beginning in 2002, the unemployment rate is recalculated using data from the

Labour Force Survey on the economically active population aged from 15 years to the retirement age.

Previously the number of economically active population aged 15 years and over was used. This change makes

unemployment rate higher.

47 Labour force surveys: Main indicators (in the III quarter of 2003), Central Statistical Bureau of Latvia, Riga,

December 2003, p.58

48 Employment and labour market in Central European countries 1/2003, EUROSTAT, p.58

49 Methodological footnote: Economically active population refers to persons of both sexes who in reference

period offered their work for the production of goods and services. Economically active population consists of

employed persons and non-working persons actively seeking a job ( both those who are registered with the

State Employment service and those who are not).

50 Macroeconomics of Latvia in figures 2003, Central Statistical Bureau of Latvia, Riga, 2003, p.22

A. National and Regional Economy

REPORT ON LATVIA 25

Latvian society is ageing, and this causes high dependency rates and the funding of the costs

thereof. However, the apparently low employment is not threatening, since people find jobs

after graduating from universities. As Table A5 shows, in the age groups 25 – 44 years old

(after university graduation age) the share of employed persons exceeds 75% of the total

population in the respective age group. It must be added that employment situation has

improved in 2003, compared with 2002, when employment rate was 49.2%, while

employment in age group 15-19 years old has worsened.

Total 61.8 68.4 56.0 54.4 59.6 49.9 12.0 12.9 11.0

15-19 15.2 18.8 11.5 10.1 13.6 6.5 33.7 27.8 43.6

20-24 66.2 73.2 58.8 54.6 61.8 47.2 17.4 15.6 19.8

25-29 82.2 91.9 72.2 72.4 79.6 64.9 12.0 13.4 10.1

30-34 87.1 92.3 82.1 78.4 83.6 73.2 10.1 9.4 10.8

35-39 86.2 89.7 82.9 76.7 79.0 74.5 11.0 11.9 10.2

40-44 87.8 88.4 87.2 76.2 74.3 77.9 13.2 15.9 10.7

45-49 86.5 87.3 85.9 79.3 79.5 79.2 8.3 9.0 7.8

50-54 83.8 85.1 82.8 74.2 72.5 75.6 11.5 14,8 8.7

55-59 64.9 75.1 56.9 58.1 65.9 52.1 10.4 12.3 8.5

60-64 31.1 41.3 23.8 28.6 37.5 22.2 8.0 9.2 6.6

65-74 12.7 18.2 9.4 11.7 16.7 9.4 7.7 8.0 7.4

* According to Labour Force Survey data.

Source: Statistical Yearbook of Latvia 2003, Central Statistical Bureau of Latvia, Riga, 2003, p. 59

The number of employed persons reduced significantly in the beginning of nineties, then

stopped and further varied between 940 – 993 thousand people.

In 2003, the number of employed persons increased; employment rate comprised 56.5% of

population aged 15-74 (65.1% and 52.2% for males and females respectively). The number of

employed persons reached 989 thousand persons in 2002 and 1003 thousand persons at end of

2003.51 Increase in number of employed persons is caused by larger demand of the growing

economy.

(60% of total employed), while manufacturing and construction accounted for 27.9% and

agriculture, hunting, forestry and fishery – 12.3%.52 It is expected that employment in

agriculture and fishery will further decline. Compared with other Central European countries,

in Latvia less share of employees are employed in industry, but more in agriculture.53

In 2002, compared with 1996, the average annual number of employed has decreased in

manufacturing (by 27 thousand persons), and agriculture (by 19.4%), and increased in

wholesale and retail trade, repair of motor vehicles, motorcycles and personal and household

goods (by 26.5%), construction (by 17.6%), real estate, renting and business activities (by

51 Labour force surveys: Main indicators (in the III quarter of 2003), Central Statistical Bureau of Latvia, Riga,

December 2003, p.12; Monthly Bulletin of Latvian Statistics, 2(117), 2004, Central Statistical Bureau of

Latvia, Riga, March 2004, p.49

52 Statistical Yearbook of Latvia, 2003, Central Statistical Bureau of Latvia, Riga, 2003, p.58

53 Employment and labour market in Central European countries 1/2003, EUROSTAT, p.58; Monthly Bulletin of

Latvian Statistics, 2(117), 2004, Central Statistical Bureau of Latvian, Riga, March 2004, p.49

26 FACTORS AND IMPACTS IN THE INFORMATION SOCIETY

A PROSPECTIVE ANALYSIS IN THE CANDIDATE COUNTRIES

29.5%), hotels and restaurants (by 50%). Compared with 2001, in 2002 remarkably more

people were employed in forestry, fishing, industry, transport and health care and social care,

less in construction, trade, real estate, renting and business activities.54 Some of these sectors

show fast growth trends. It may be admitted that since industry has started to grow in recent

years, it faces lack of qualified specialists.

61.5% of total are employed in private sector. The highest shares of public sector (62.2% and

58.6%) are in the less developed territories – Ludzas and Balvu districts.55

An increase in the proportion of females in the labour market is observed in Latvia.

The highest level of economic activity both for males and females is in the 30 - 54 age group.

At earliest age groups employment is less due to military service and studies, and bringing up

children until they reach 3 years of age.

Legislators, managers and senior

officials

9.9 10.0 6.4 8.9 10.5 7.3

Professionals 11.4 6.4 16.8 10.8 7.6 14.0

Technicians and associate

professionals

13.2 8.8 18.0 12.3 8.5 16.2

Clerks 4.7 1.6 8.1 5.2 2.2 8.2

Service workers and shop and market

sales workers

10.0 4.8 15.8 14.0 6.0 22.3

Skilled agriculture and fishery

workers

Craft and related trade workers 15.0 23.0 6.1 15.2 23.8 6.4

Plant and machine operators and

assemblers

12.6 19.2 5.3 11.2 18.2 3.9

Elementary occupation 14.0 14.2 13.8 13.9 14.4 13.4

Armed forces 0.02 0.03 0.0 (0.1) (0.1) …

Of total employed 100.0 100.0 100.0 100.0 100.0 100.0

employees 84.8 82.9 86.9 86.7 84.7 88.7

employers 2.9 3.9 1.7 3.7 4.9 2.5

self employed 7.9 9.0 6.6 5.9 6.7 5.1

unpaid family workers/relatives 4.3 3.8 4.9 3.7 3.7 3.8

Source: Labour force surveys: Main indicators (November 2000), Central Statistical Bureau of Latvia, Riga, March 2001,

p.42, 44, Labour force surveys: Main indicators (in the III quarter of 2003), Central Statistical Bureau of Latvia, Riga,

December 2003, p.17,21

The breakdown of employment by occupation (table 7) shows that craft and related trades

workers, service workers and shops and market sales workers, as well as elementary

occupations have the highest share. The breakdown of occupations by sex shows essential

differences. Females are mainly service workers, as well as technicians and associate

professionals and professionals. Males are more employed as craft and related trades workers,

plant and machine operators and assemblers, elementary occupations, as legislators, senior

officials and managers.

54 Statistical Yearbook of Latvia 2003, Central Statistical Bureau of Latvia, Riga, 2003, p.58

55 Statistical Yearbook of Latvia 2003, Central Statistical Bureau of Latvia, Riga, 2003, p.59

A. National and Regional Economy

REPORT ON LATVIA 27

Characteristic of employed persons by education qualification is given in Table A7.

In connection with development of ICT, new forms of employment are used. Having high

infrastructure costs employers support work at home. In most cases this mode of employment

is based on use of IT, or is organised as telework.