A prospective analysis in the candidate countries report on latvia

The authors of this report are solely responsible for the content, style, language and

editorial control. The views expressed do not necessarily reflect those

of the European Commission.

2 FACTORS AND IMPACTS IN THE INFORMATION SOCIETY

A PROSPECTIVE ANALYSIS IN THE CANDIDATE COUNTRIES

European Commission

Joint Research Centre (DG JRC)

Institute for Prospective Technological

Studies

© European Communities, 2004

Reproduction is authorised provided the

source is acknowledged.

Preface

The Institute for Prospective Technological Studies (IPTS) of the Directorate General Joint

Research Centre of the European Commission contracted the International Centre for

Economic Growth, European Centre (ICEG EC) to act as the coordinator of a consortium of

11 research institutes to carry out this project.

The main objective of the project was to provide a series of national monographs studying the

development of the Information Society (IS), including both the positive and negative

impacts, in each of the candidate countries. These monographs offer an assessment of the

strengths and weaknesses of each country regarding the development of IS, and a view on

their possible outcomes; both strongly rooted in factual quantitative data. They provide a

clear, contextualised, multi-factoral and multi-causal picture of the input factors that

contribute to the success or failure of IS developments, and the relevant output parameters

that support mid- and long-term impacts on economic growth, employment and other relevant

aspects of the future of each country. Each monograph concludes with a set of alternative

scenarios for the development of IS in that country.

This report was carried out by the Institute of Economics at the Latvian Academy of Sciences,

and aims to study the factors and impacts of the Information Society in Latvia. The report

reflects the research results, comments and opinions of the team of authors. It does not

necessarily reflect the opinion of the European Commission. It is organised around 9 themes

– economy, demography, government policies, industrial development and competitiveness,

relevant economic activity, IST penetration rates, institutional capacity and regulatory

background, education, and culture. The section on each of these themes concludes with a

specific SWOT analysis. Finally, a general diagnosis is made of Latvia’s potential for IS

developments, followed by a brief section on possible scenarios for the future and policy

recommendations.

A Synthesis Report was also prepared by the Project Coordinator, the International Centre for

Economic Growth, European Centre (ICEG EC), on the basis of all the country studies. This

offers an integrated and prospective view on the future outlook for the Information Society in

the Candidate Countries and can be found on the FISTE (Foresight in Information Society

Technologies in Europe) website: http://fiste.jrc.es/

REPORT ON LATVIA 5

A.1. Introduction.................................................................................................... 13

A.2. Economic Growth .......................................................................................... 13

A.2.1. Macroeconomic stability.......................................................................... 16

A.2.2. Supply side of growth.............................................................................. 18

A.2.3. Demand side of growth ........................................................................... 22

A.3. Labour market, labour productivity................................................................. 24

A.3.1. Changes in employment ......................................................................... 24

A.3.2. Changes in labour supply........................................................................ 28

A.3.3. Changes in labour productivity................................................................ 30

A.4. FDI inflows..................................................................................................... 32

A.5. Trade flows .................................................................................................... 35

A.6. Regional developments ................................................................................. 38

A.7. SWOT analysis .............................................................................................. 40

B.1. Institutional settings ....................................................................................... 41

B.2. Chronological description of national and regional IS policies ....................... 42

B.3. Implementation and assessment of IS policies.............................................. 46

B.4. Driving motivation of IS policies ..................................................................... 50

B.5. The institutional setting behind the IS policies ............................................... 50

B.6. The commitment of private and public actors, main actors and their tasks.... 52

B.7. SWOT analysis .............................................................................................. 54

C.1. Structural changes......................................................................................... 55

C.1.1. General situation..................................................................................... 55

C.1.2. Main regions of industrial production ...................................................... 57

C.1.3. Declining and rising sectors of industry and services.............................. 58

C.1.4. Changes in the structure of services....................................................... 59

C.1.5. Changes in investment ........................................................................... 60

C.2. The role of ICT industry ................................................................................. 62

C.2.1. Specific sectors’ market size and value .................................................. 62

C.2.2. International co-operation and competition ............................................. 63

C.2.3. Major sectors of innovation activity ......................................................... 66

C.2.4. Trade balance of ICT industry................................................................. 68

C.3. SWOT analysis.............................................................................................. 69

D. PRESENCE OF MOST RELEVANT ECONOMIC ACTIVITIES FOR IST

APPLICATIONS……………………………………………………………………………71

D.1. The most relevant potential spill-over effects of IST ...................................... 71

D.2. Level of IT investment ................................................................................... 72

D.3. Trends in innovation and R&D....................................................................... 73

D.4 R&D investment levels ................................................................................... 76

D.4.1. Expenditure on R&D ............................................................................... 76

D.4.2. Investment levels in the ICT sector ......................................................... 77

D.4.3. Technological innovations in different sectors ........................................ 78

D.4.4. Effect of massive investment in IST ........................................................ 79

6 FACTORS AND IMPACTS IN THE INFORMATION SOCIETY

A PROSPECTIVE ANALYSIS IN THE CANDIDATE COUNTRIES

D.5. Major players of the ICT sector ..................................................................... 80

D.5.1. Present and future development of ICT sector ....................................... 80

D.5.2. Role and presence of multinationals and/or foreign companies.............. 80

D.5.3. Contribution of multinationals and/or foreign companies to IST related

developments .................................................................................................... 82

D.6. SWOT Analysis ............................................................................................. 83

E. INFORMATION SOCIETY TECHNOLOGIES (IST) PENETRATION RATES...…85

E.1. General trends............................................................................................... 85

E.2. Penetration and diffusion of information society technologies ....................... 85

E.2.1. IST in enterprises.................................................................................... 85

E.2.2. IST in financial services .......................................................................... 88

E.2.3. IST in major services sector.................................................................... 89

E.2.3.1. Telecommunication.............................................................................. 89

E.2.3.2. Other service sectors ........................................................................... 92

E.2.4. IST in public services .............................................................................. 93

E.2.4.1. IST in health services........................................................................... 93

E.2.4.2. IST in educational services .................................................................. 94

E.2.5. IST in public administration ..................................................................... 96

E.2.6. IST in households ................................................................................... 97

E.3. SWOT analysis .............................................................................................. 99

F.1. Regulation of the major markets affecting IST industries............................. 102

F.2. Regulation in the main services and infrastructure sectors.......................... 103

F.3. Regulation of the IST based public information and services sector............ 104

F.4. SWOT analysis ............................................................................................ 105

G. EDUCATIONAL SECTOR……………………………………………………………107

G.1. Main characteristics of educational system ................................................. 107

G.1.1. Achievements in secondary and tertiary education............................... 107

G.1.2. Reforms in secondary and tertiary education ....................................... 112

G.2. Key educational trends................................................................................ 113

G.3. Domestic and international mobility of scientific personnel ......................... 115

G.4. Tertiary sector and research performance in IST related subjects .............. 116

G.5. ICT-related education.................................................................................. 119

G.6. SWOT analysis............................................................................................ 121

H. NATIONAL AND REGIONAL DEMOGRAPHY AND PROSPECTIVE………….123

H.1. General characteristics and trends .............................................................. 123

H.1.1. Age distribution ..................................................................................... 123

H.1.2. Population dynamics............................................................................. 123

H.1.3. Main economic and social effects of population dynamics.................... 125

H.1.4. Ethnic composition and minorities......................................................... 125

H.1.5. Migration ............................................................................................... 127

H.2. SWOT analysis............................................................................................ 129

I.1. Income distribution ........................................................................................ 131

I.2. Consumption patterns ................................................................................... 133

I.3. SWOT analysis ............................................................................................. 134

Table of Contents

REPORT ON LATVIA 7

I.Demand side..................................................................................................... 136

I.1 Economic development and structure ........................................................ 136

I.1.1. Macroeconomic framework .................................................................... 136

I.1.2. Economic structure................................................................................. 137

I.1.3. Impact of emerging economic structure.................................................. 138

I.2. Conditions providing development of information-based and high-tech

industries ......................................................................................................... 139

I.2.1. Financing of the economy ...................................................................... 139

I.2.2. Labour supply......................................................................................... 139

I.2.3.Education ................................................................................................ 142

I.2.4. Innovation............................................................................................... 143

I.2.5. R&D........................................................................................................ 143

I.2.6. Population income.................................................................................. 143

I.3. Conclusion: demand side of IS.................................................................. 144

II. Supply side ..................................................................................................... 144

II.1. National and regional IS policies and legislation ...................................... 144

II.2. Institutional setting.................................................................................... 146

II.3. Regulatory framework .............................................................................. 146

II.4. Driving motivation and actors ................................................................... 147

II.5. Access to infrastructure ............................................................................ 148

II.6. Information systems and networks ........................................................... 148

II.7. Development of ICT industries ................................................................. 149

SCENARIOS FOR FUTURE DEVELOPMENT………………………………………..151

Scenario - business as usual .............................................................................. 151

I. Public policies .................................................................................................. 151

I.1. Political issues........................................................................................... 151

I.2. Economic development policy ................................................................... 151

I.3. Sector development policies...................................................................... 152

I.4. Investment................................................................................................. 152

I.5. Social development ................................................................................... 152

I.6. Labour supply............................................................................................ 152

I.7. IS development policies and legislation..................................................... 153

II. Consequences of applied policies................................................................... 153

II.1. Political situation....................................................................................... 153

II.2. Economic development policies ............................................................... 153

II.3. Sector development policies..................................................................... 154

II.4. Investment................................................................................................ 154

II.5. Social development .................................................................................. 154

II.6. Labour supply........................................................................................... 154

II.7. IS development ........................................................................................ 155

I. Promotion of economic development............................................................... 157

I.1. Macroeconomic aspect.............................................................................. 157

I.2. Sector aspects........................................................................................... 158

I.2.1. Medium term intensive structural reforms............................................... 158

I.2.2.Investment............................................................................................... 158

I.2.3. Foreign trade .......................................................................................... 159

8 FACTORS AND IMPACTS IN THE INFORMATION SOCIETY

A PROSPECTIVE ANALYSIS IN THE CANDIDATE COUNTRIES

I.2.4. Innovation............................................................................................... 159

I.2.5. Labour supply......................................................................................... 159

I.2.6. Education ............................................................................................... 160

I.2.7. Research and development.................................................................... 160

I.2.8. Social issues .......................................................................................... 161

II. Promotion of IS development.......................................................................... 161

II.1. General policy measures.......................................................................... 161

II.2. Sector level............................................................................................... 161

II.2.1. Development of infrastructure ............................................................... 161

II.2.2. Development of information content ...................................................... 162

II.2.3. Education and development of skills ..................................................... 162

II.2.4. Increasing effectiveness of ICT application ........................................... 163

II.2.5. Institutional basis ................................................................................... 163

Country Profile

REPORT ON LATVIA 9

COUNTRY PROFILE

Latvia, one of the Baltic countries, is situated in North-East Europe, on the Eastern coast of

the Baltic Sea. It borders with Estonia to the North, Russia to the East, Belarus to the South-

East and Lithuania to the South.

Area, km2 64589

of which, land 62046

inland water 2543

Extension, km, from north to south 210

from west to east 450

Length of boundary, km 1862

of which, land boundary 1368

sea border 494

Resident population, thousand persons 2319,2

of which, urban, % 67.8

rural, % 32.2

Administrative territorial division:

cities and towns 77

counties 15

pagasts (civil parishes) 461

Population density (inhabitants per 1 km2 of

area)

National currency lats (LVL)

Source: Statistical Yearbook of Latvia 2003, Central Statistical Bureau of Latvia, Riga, 2003, pp.7, 36, 37,

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

p.46, population as of 1 January 2004

Latvia belongs to the small countries of Europe. The country on the whole is determined as

NUTS 2 region in the EU, and it is divided in five NUTS 3 regions (map 1).

In the past, the access to the Baltic Sea and its ice-free ports encouraged neighbours to invade

these territories. That is why Latvia was first proclaimed independent as late as 18 November

1918. The first independence period was not long – just 22 year later, on 17 June 1940, the

Soviet Army entered the territory of Latvia and the country lost its independence. It became a

formal member of the USSR on the 5 August 1940.

Latvia was one of the most developed republics in the Soviet Union. Within the so-called

production relocation schemes, Latvia and other Baltic countries were focused on knowledge

intensive industries. A number of large machine building, electronic, radio engineering,

pharmaceutics and chemical enterprises were located there, many of them producing for space

development and military industry. Almost all of them collapsed after break of the Soviet

Union that led to the total loss of former markets. Nevertheless focus on such kind of

industries continues in Latvia.

10 FACTORS AND IMPACTS IN THE INFORMATION SOCIETY

A PROSPECTIVE ANALYSIS IN THE CANDIDATE COUNTRIES