Over the years, there have been plenty of initiatives for Latvia’s future growth. One current example is the National Development Plan of Latvia for 2021 – 2027, another this one from the Economics Ministry.
Fine, but increasingly it is my feeling that the focus is somewhat wrong: Instead of focusing entirely on priorities for Latvia, it might be fruitful to look at a) what has perhaps not been done or b) what may have been done wrong.
This view of mine comes from looking at the Lithuanian economy. Lithuania has simply been performing significantly better than Latvia and has done so for a very long time.
But why? I don’t know all the answers but I think a Latvian focus on this might be useful.
Some statistics to support my view will follow below.
When Latvia and Lithuania joined the European Union in 2004, Lithuanian GDP per capita was 8.3% higher than in Latvia, see Figure 1. 20 years (and a bit) have passed since then and the difference has grown to a gap of no less than 23.2%, putting Lithuania way ahead of Latvia by now.
Figure 1 shows that Latvia almost caught up with Lithuania in 2007 during the big credit boom but since then it has steadily fallen behind.
I really think policy makers should ask themselves why this is so. What has been lacking in Latvia and/or been done better in Lithuania?
Figure 1: GDP per capita, constant prices at Purchasing Power Standards, 2004 = 100 for Latvia
Source: IMF and own calculations
Another way of portraying this development is to look at growth rates over this period. As mentioned, both countries joined the EU on 1 May 2004 after which 81 quarters have passed and a closer look reveals the uneven pace of growth, see Figure 2.
Given Figure 1 it is not strange that Lithuania more often has been the fastest growing of the two countries but the difference is still stark: 50 of 81 quarters saw Lithuania grow faster than Latvia while for only 29 quarters was it the other way round.
Figure 2: Quarterly growth rates in Latvia and Lithuania, 2004 Q3 – 2024 Q3
Source: Eurostat and own calculations
Note: The time span adds up to 81 quarters – but two of those produced ties between the two countries.
Why is Latvia such a laggard? And what has Lithuania managed that Latvia hasn’t?
Just one more statistic to highlight the significance of these questions: Latvian GDP for 2024 will reach a figure of about 40 bill. EUR. Had we had the level of income per person enjoyed in Lithuania, GDP would have been some 9 bill. EUR bigger and tax revenue from this some 3 bill. larger, which would have come in very handy in these times of high demands for spending on defense, health, education etc.
Morten Hansen is Head of Economics Department at Stockholm School of Economics in Riga and former Vice-Chairman of the Fiscal Discipline Council of Latvia.
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