It had the worst recession in the European Union last year. It has the highest unemployment, with almost a quarter of working age people out of a job. And it has seen by far the largest fall in house prices, with average values down by two-thirds. It is an extreme example of economic decline.
Latvia had a remarkable boom. With hindsight, it is clear that the boom was caused by a surge in lending as foreign-owned banks - mainly Swedish-based - expanded into what they saw as an attractive growth market.The availability of credit for home-loans and property development pushed up house prices.That, in turn, made home ownership seem even more desirable, especially in a country which had many shoddy apartment buildings left over from the Soviet era. By 2007, Latvia found itself in the midst of an extraordinary boom, both for home prices and the construction industry.
"Real estate speculation was not taxed, which was adding to the problems," says the prime minister, who originally trained as an economist. "That was helping to divert money from the productive economy into speculation."
Learning lessons of latvia's losses
Learning lessons of Latvia's losses <br />Getter Schattschneider<br />
Latvia has set a lot of unwanted records<br />The highest unemployment<br />The largest fall in house prices<br />The worst recession (18%) in the EU<br />
Unemployment rates in the EUmarch 2010<br />1) Latvia 22,3%<br />2) Spain 19,1%<br />3) Lithuania 15,8%<br />4) Estonia 15,5%<br />...<br />25) Luxembourg 5,6%<br />26) Austria 4,9%<br />27) Netherlands 4,1%<br />Average: 9,6% of labour force unemployed<br />
Latvia has much to teach the rest of the world...<br />So what went wrong? <br />
Latvia had a remarkable boom<br />Swedish banks flooded the country with credit<br />Home-loans and property development<br />Latvians were borrowing irresponsibly<br />House prices went up<br />Boomfor home prices and the construction industry<br />
Huge amount of construction workers<br />Rising wages consumer spending boom<br />In 2008 foreign lending suddenly dried up!<br />Manufacturers looked for export orders<br />Latvian goods were uncompetitive<br />Deep wage cuts, massive redundancies<br />
Violent public protest<br />Blaiming the former government<br />Importance of governments running a budget surplus<br />
A wider lesson<br />The distorting effects of a property boom on the rest of the economy<br />Banks and governments - focused on controlling retail price inflation...<br />Asset price inflation can do a lot of damage to the rest of the economy<br />
Thank you for listening!<br />Choose a sustainable development path! <br />This presentation is based on an article<br />from BBC News<br />[http://news.bbc.co.uk/2/hi/business/8644386.stm]<br />