The 6^th Nordic – Baltic Conference in Regional Sciences

Nordic – Baltic Sea Region on the Eve of 21^st Century

October 5, 2000, Riga, Latvia 

THREE INVESTMENTS ESSENTIAL TO LATVIAN DEVELOPMENT 

Gundars Keninš King, Ph.D., Dr. Habil. Oecon., Professor
Dean Emeritus, School of Business, Pacific Lutheran University
Tacoma, Washington 98447, United States of America
Tel.: (253) 531-0666, Fax. (253) 536-5137
E-mail: KingGA@PLU.edu

 

I. Introduction.

Three images characterize the potential strengths and regional capabilities of Latvian economy. The first is seen primarily in Riga, one of the greatest financial, international trade and manufacturing centers of the Czar’s empire. This cooperative and competitive, industrious, multi-national community was enriched by large capital investments attracted by Count Sergei Witte’s economic reforms. A great, regionally important, technical university, the Riga Polytechnic Institute served this community. The city of hundred banks, it was the place where airplanes, automobiles, and railroad equipment was made in the most modern factories of that time. Former farmers were an excellent labor force. This era ended in World War I when this industry, laboratories, and libraries were taken in a thousand trains to Russia.

The second image is that of independent Latvia rebuilt after the destruction of World War. With very limited resources and opportunities, the nation’s economy was reoriented to family farming. The nation emerged confident and optimistic, even prosperous in a decade when almost everyone was at work or in school. Latvia (together with Estonia) witnessed the highest student enrollment in Europe. Labor productivity was doubled in two decades. The standard of living was higher than in Finland. This era ended with the horrors of World War II when the Latvian leadership was decapitated, the local Russian community decimated, the Jewish minority destroyed, and the Baltic Germans removed.

The third is the bleak image of a Soviet workshop community. Local entrepreneurship was rooted out. With Soviet materials, machines and a million Soviet men and women, Latvian agriculture and industry, as well as educational and research institutions, were integrated with Soviet economy to serve essentially Soviet needs. It was a dependent nation, a pair of working hands of a larger Soviet body. That era went with the collapse of Soviet rule. It left Latvia with an odd lot of specialized factories, a very limited teaching and research capacity, and an obsolete mix of passive values and outdated working procedures.

The conflicting values and attitudes today, inherited from these three periods, are part of Latvian policy foundations and economic practices. Better mindsets are needed.

II Review of Recent Performance.

It is my intent to present a broad review of issues related to Latvian development. In a sense, I plan to relate them to industrial policy in a very broad sense, and in a narrower sense to national reconstruction and development. My basic assumption is that economic progress in cooperation with other regional partners in the Baltic region requires a broad policy approach with a focus on four national economic goals. According to Peter G . Peterson in Gray Dawn, the tasks to accomplish these goals are urgent. This urgency is dictated by rapid aging of population, slow progress in technological innovation to develop new opportunities and to increase productivity, weak overall economic performance, and inadequate essential investments. At the present rate of growth, Latvia will not be able to maintain the currently modest standard of living in the future. Expanded and well managed investments, more optimally structured and integrated with each other, are needed the upgrading and expansion of traditional capital resources, education and training, and the work values of the nation.

Modest progress is taking place. Still crippled, Latvia is halfway in its transition to a vigorous market economy and a democratic civil society. This progress is, however, inadequate to advance the national economic abilities and performance. The national potential remains undeveloped and unused locally and regionally. Further progress calls for a greater regional cooperation in building up the total resources of the Latvian nation. Both higher level and better allocation of investments, in a traditional and a larger sense, are required.

In other words, there is persuasive evidence that business assets of land and capital and in the physical infrastructure of the country are way out of balance with outdated and undercapitalized intellectual resources and institutions. More serious is the uneven and slow change in values held both by national leaders and business managers, and, indeed, a seriously depressed general population. They require a more rapid change.

Until recently, the sole economic goal was survival. What emerged was an alternate uncertain choice, a movement toward a market economy. For better focus, I was privileged to offer, together with Professor Nicholas Balabkins of Lehigh University, four fundamental economic goals. They are: (1) A conservative Bank of Latvia monetary policy, and a thrift regimen in the Latvian treasury. (2) Vigorous exports. (3) Maximum private sector employment. (4) Productivity gains, with a concentration on high value goods and services. The only goal successfully met is that by the Bank of Latvia. It offers a solid financial base for a reasonably dynamic growth, perhaps at a five to seven percent annual rate. Keeping in mind that a seven percent return would double an investment in ten years, the opportunity cost of lesser progress is clear to any casual observer. Today, large investments are held abroad by residents of Latvia.

Today, "Dow Jones" and the "Heritage" foundation rate Latvian business ethic in economic freedoms well behind those of Scandinavian countries. A more aggressive Estonia matches the pragmatic values of the West. My own studies show that the more passive Latvia and Lithuania lag behind in value change. Latvian statistical reports and assessments by the United Nations Development Programme show a low standard (among the lowest for European Union candidates) of living for the majority of population. Imports are well in excess of exports, the increase in private employment is very modest, and there is a chronic shortage of traditional business capital and knowledge. This shortage of social, intellectual, and traditional capital is interrelated. Leaders, as well as ordinary folk tend to think about what is advantageous for them. Their interactions with others reinforce their views. They act accordingly. Conversely, they do poorly when asked to do what they do not believe in.

More than anything, this aspect of Latvian values needs much adjustment. Fortunately, younger Latvians from families with strong middle class values, are what at Stanford University are called strivers. They value education. They fill a brand new model institution, the Riga Graduate School of Law. They want to be successful and productive at work. The Stockholm School of Economics in Riga, and to a lesser degree the Riga Business School, lead the way in pioneering education that is pragmatic in orientation, skilled in new teaching processes, and firmly committed to values of cooperation and trust. The American sociologist Francis Fukuyama in his Trust calls them the hallmarks of a society with much social capital.

Students flocking to these new schools, as well as to the older and more traditional University of Latvia and Riga Technical University are starting an avalanche of student enrollment, and explosion that may well double the number of students in Latvia in a few years.

At the present, however, Latvian institutions cannot and do not accommodate this increase. Funding is among the lowest found in Europe. With these problems unresolved, Latvian universities and scientific research increasingly fall on the shoulders of an aged and underpaid faculty. Students depend on family help and work full time to scrape together tuition. In the process, they think more of more credentials than their own education. Inadequate funding for high technology is deplorable as universities are micro-managed by external agencies. Moreover, the principal center for technology transfer pays far more in taxes than it receives from the government. Thus, the Riga Technical University is said to graduate only about a dozen of world class computer programmers annually. This supply does not begin to meet the demand already present. Consequently, the Latvian economy does not pick up much desired speed in the employment of highly valued experts in information technology. Moreover, students in other fields do not learn to integrate their knowledge with that of new technology.

The public neglect of education and science reinforces mindsets that relate economic performance to autocratic power relationships, the maintenance of steep, secretive and arbitrary management structures, and much personal privilege. There is much, too much distrust, especially when it comes to the political leaders, their promises, and their miserable record, especially in the abatement of corruption. It is not likely that positive managerial, student and faculty values can change under these most makeshift and defective arrangements.

 

III Investment Imperatives.

 

If Latvia is to develop the capability to maximally engage the nation in useful, productive and valuable work, it has to build up social, intellectual, and traditional capital. New employment opportunities are not found in the mere expansion of work done for the Soviets. Rather, progress is tied to the emerging entrepreneurs, joint ventures and less formal partnerships, and other new, innovative organizations. Change requires more education and more pragmatic values.

The usual priority of Latvian power elite and economic functionaries has been to seek traditional capital. Interestingly enough, even successful capital projects of this kind have done little to improve either the business climate or economic benefits to Latvian society. Apparently, loans controlled by the government have been given to the well connected and not necessarily the most desirable borrowers. At the same time, costly regulations, as well as clearly excessive requests for notarized certificates and other documentation for the simplest business activity, strangle entrepreneurship, especially in smaller firms. It is fair to say that one of the best ways to help improve profitability, productivity, and retained capital in Latvia is to cut down bureaucratic busy work.

Returning to the investments made in traditional capital only, it is obvious that they can have a return where capital can be combined with intensive use of mostly land. Few local human resources are likely to be employed in the contemplated pulp and paper mill near Jekabpils. It will employ even fewer highly educated and skilled Latvian workers. This investment in fixed capital does not support a change in values to improve the quality and reduce costs of goods. For a small return in local taxes, this very large investment will use up mostly forest resources.

Latvian light industries face increased competition from less developed nations. Still, with better marketing and higher value products, they provide opportunities for increased employment. They alone cannot accommodate an expected surplus of farm population.

Clearly, the first priority in Latvia is to build social capital. Without it, nothing much has been done, and not much will be done. It will be best to combine this process of value changes with investments in education, research, and training. Integrated with these processes, new investments of traditional capital will be more profitable. International investors will have an important role. Successes of relatively sophisticated ventures range from the carefully nurtured operations of "ABB" to the rejuvenated "Aldaris" brewery. In all such cases, there is a sensitive indoctrination in company culture, much training across traditional disciplines to new systems, and more socially responsible management. They are among the best models for international investment in Latvian future. Latvia is too small to have ready made, skilled teams for everything. Such cooperation needs a larger, multi-cultural base for optimal cooperation with partners from the whole Nordic and Baltic region.

One way to improve intra-regional cooperation is to include Latvian manufacturers in larger industrial systems. Latvian industry has supplied component parts, instruments, and larger assemblies to the Soviet economy before. This is important experience. However, two Swedish observers, L. Grahm and L. Koenigson, noted some time ago in Baltic Industry,

Industry in the Baltics does not know, in the context of an open market economy, how to buy and how to sell, how to bid and how to bargain. It does not know how how to budget and how to finance, how to bankrupt and how to reconstruct. Above all it doesn’t know how to organise and manage when the rules that apply are of the market and not of the plan.

This is still true of much Latvian industry today, even as it supplies precision parts for Russian rockets. When FIAT representatives recently sought Latvian suppliers of parts they found only one qualified maker of loudspeakers. The rest of the parts makers did not yet have a good understanding of the quality requirements in modern industry, were not familiar enough with cost reduction programs, and were not accustomed to deliver on time and on short notice.

Only thanks to industry support for technical education and training, Latvian universities are expanding enrollments in computer science and information technology. With more sophisticated junior managers, learning new principles, policies and practices, Latvian industry is in an excellent position to explore subcontractor relationships in the larger region. The choices will be different from each other, just as the investors differ from each other in their business practices and sophistication, and in their own values. The best rewards are available to Latvian and Scandinavian entrepreneurs who can learn to work together across disciplines.

The big break will come when Latvian society puts its house in better order. True, cooperation comes with trust, and yet trusting relationships cannot evolve independently of a cooperative, larger environment. For all practical purposes, this requires serious Latvian efforts and results in the abatement of corruption in transactions approved by government officials, and in the reduction of personal power of privilege in economic relationships. Values change slowly. The change can be best accelerated by exemplary behavior in a clean house.

The President of the republic, Vaira Vike Freiberga, has done more than anyone Latvian to increase social capital in Latvia. A retired psychology professor of the University of Montreal and a distinguished scholar of Latvian folklore and values, Dr. Freiberga has used her knowledge effectively to demand to represent the nation ably and competently. She has become the most trusted public person in Latvia. With the strong support of her immediate family, she has reached out within the nation and abroad, she has strengthened old partnerships for the nation. She has gained new friends. She has given hope and confidence to a nation in search for goals and guidelines, and their own, individual ways to make the investments we have discussed.

Many years ago, the Latvian writer Janis Ezerinš suggested that a major task of a good government is to integrate moral standards with practical realities. The Parliament is in the process of revising the laws on corruption. At present, the new Chancery Director of the Ministers, Gunta Veismane, is reviewing contracts and replacing tainted officials. Bribe takers on the highest level have been arrested and now wait for their court dates. These actions have an immense potential for Latvian national rejuvenation and economic development.

While it is too soon to make a reliable assessment of these examples, there are other role models of Latvian investors who have returned to their native land with education and experience to make what I view as integrated investments essential to Latvian future. The strong family of Vilis Vitols, long known for close ties to Latvian academic circles and support for humanistic research, have established the Maras Banka to help finance investments in real estate. Indeed, this family owned bank has financed the reconstruction of many homes in Riga where international executives now live.

The descendents of Kristaps Bergs are a family deeply involved in rebuilding a high class shopping center in the Riga. Their watchwords are quality, beauty and traditional values. The family’s support of cultural life is associated with international exchanges and the Latvian opera.

Latvians abroad, most of them too old to invest in business, are tending to the intellectual and the social capital on their own. They make scholarship endowments managed by the Association for the Advancement of Baltic Studies, and many support family-oriented programs sponsored by the American Latvian Association. Other examples of international investments in intellectual and social capital are, among others, those of the Soros and the Mellon foundations.

Increasingly, their lead is followed by local business enterprises. Their support ranges from the sponsorship of public events and the reimbursement of educational expenses of their employees.

With help from abroad, Latvians are discovering the dimensions of social responsibility and the many ways to make essential investments in Latvia.

Here is a short list of making investments of social, intellectual, and traditional capital:

1. Support, in all possible ways, a return to Latvian values of individual initiative and responsibility. Help the building of strong families.

2. Fight corruption.

3. Raise the level of education.

4. Develop closer relationships with Latvians and new friends abroad.

5. Ask for quality, stimulate competition, and insist on timely delivery.

6. Judge employees, partners and suppliers on performance.

7. Make or help others make investments in a more innovative and productive society.

8. Help make investments optimal. Help in education and training.

9. Be of exemplary behavior.

10. Help others integrate investments in social, intellectual and traditional capital.

Clearly, the investments essential to Latvian development is the mutual obligation of  of the whole Latvian nation, and an unusual, international opportunity to others. Once there is a visible and tangible progress, others will follow.

At present, there is no single institution or organization to help formulate appropriate plans, policies and procedures to direct the investments desired. The tasks are beyond those expressed in ordinary industrial policy. They are beyond legislators and government agencies; they are beyond any single individual or group. They are not beyond the whole community or the larger region.

No doubt, there will be organizational efforts to help the nation rebuild. Recently (August 8, 2000), Nellija Locmele of the newspaper Diena reported that the Soros foundations are considering support for a think tank to help the government. In many ways, her report sketched an outline of a useful organization. In others, the idea of national development may be perceived too much as a governmental program. To me, an effective institution would include the representatives from the whole larger region, from the public and the private sectors, from the cultural leadership, and from Latvian and other universities, model schools in Riga, and from experienced organizations abroad.  

 

Selected References.

 

Fukuyama, F. Trust: Social Virtues and the Creation of Prosperity. New York: Free Press, 1995.

Keninš Kings, G. Moderna apgade. Labak, letak un laika. [Modern Supply: Better, Cheaper, and on Time]. Riga: Valters un Rapa, 2000.

Keninš Kings, G. Uznemibu! Latviešu uznemejs parmainu laikos. [Entrepreneurship! Latvian Entrepreneur in Transition]. Riga: J na Rozes apg ds, 1999.

King, G., J. T. Barnowe, and D. Pauna. " The New Managerial Generation in Latvia: The Nature and Role of Values," Journal of Baltic Studies, XXXI.2, Summer 2000.

Peterson, Peter G. Gray Dawn: How the Coming Age Wave Will Transform America – and the World. New York: Random House, 1999.