Tuesday, May 30, 2006

Challenges of Success

There is little doubt that Latvia at the moment is doing very well.

But with elections coming up in October, there are discussions on where the country is heading in the future.

Prime Minister Aigars Kalvitis is at the moment heading a minority government, but will remain in office until the elections.

What happens thereafter is anyone's guess. But fears that money-rich groups around the interests running the profitable oil transit in Ventspils were to launch themselves on the political scene seems to be receding. Their man is too bogged down in legal problems due to his past.

The probability is then high that we will see continued centre-right stability in terms of the policies of Latvia. And that should be good news to everyone concerned.

But Prime Minister Kalvitis is setting his sights on the future.

With costs rising as the country moves on, he speaks about the need to develop the scientific and educational base of the country, and sees this as key to safeguarding and improving the competitiveness of the country in the coming years.

There is of course a certain disappointment here over the attitude taken by certain of the old EU members against the new ones. While the markets of the new countries are completely open to the products of the older, the markets of the older are not completely open to the services of the new.

There is an imbalance that is seen as unfair in these arrangements. And the new EU service directive is of course the concrete expression of this.

But Latvia is also looking towards its Eastern opportunities. Riga has always been a city at the centre of the trading relationship between the East and the West.

Now Riga is coming back as an important service center for important parts of the CIS markets. There are developing links with the countries of Central Asia, and there is talk of developing a new Silk Road using the rail transport possibilities between China and the Baltic Sea, thus cutting transport times from East Asia to Western Europe substantially.

And when one listens to the politicians of Latvia, there is certainly no intention to abandon the successful flat tax model. Today, the income tax in Latvia is 23 %, which is even lower than the 25 % in Estonia and 24 % in Lithuania.

Some politicians are even taking about taking it down further. It is important to attract back all those Latvians who during the last two years have gone abroad to work in other countries, very many of them heading for Ireland. Latvia will benefit from their talent as they are coming back.

So, things are not that bad.

That the economy shows signs of overheating is obvious. The Riga property market looks crazy. The next government will have to firm up the macroeconomic policies by increasing the budget surplus.

But these are the problems of success.

Once upon a time Riga airport was a hub of the Soviet Air Force. Now it's a key destination for Ryanair.

Things have changed.