Latvia - ECONOMY

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Latvia - Economy

The Latvian economy, much like that of other former Soviet republics in the 1990s, is going through an extremely difficult period of adjustment and rapid change. Hence, all statistics and assessments are subject to dramatic change.

Historical Legacy

For Latvia and the other two Baltic republics, the period of development between 1920 and 1940 is regarded as a guide and a morale booster. Latvians know how wrenching the sudden changes were after World War I. Russia had removed almost all factory equipment, railroad rolling stock, raw materials, bank savings, and valuables to the interior. Almost none of these assets were returned. With the victory of Stalin and the sealing of the Soviet Union to the outside world, Latvia had to change its entire pattern of trade and resource buying. In other words, the Russian market, which had been the basis of the manufacturing industry, was no longer accessible. Moreover, the war had left deep demographic wounds and incalculable material damage. In six years of continuous war, with front lines changing from year to year and even month to month, more than one-quarter of all farm buildings had been devastated; most farm animals had been requisitioned for army supplies; and the land had been lacerated by trenches, barbed wire, and artillery craters. Even trees retained the legacy of war; Latvian timber was dangerous for sawmills because of the heavy concentration of bullets and shrapnel.

Independent Latvia received no foreign aid for rebuilding. On the contrary, it had to squeeze the low incomes of its population to repay war debts incurred by the troops fighting for Latvian independence. In spite of all these obstacles, the economic record of the twenty years is truly impressive. Latvia successfully effected agrarian reform and provided land for hundreds of thousands of the dispossessed. Many of these farmsteads pooled their resources through an extensive system of cooperatives that provided loans, marketing boards, and export credits. The currency was stabilized, inflation was low, unemployment was much better than in West European countries even during the Great Depression years, and foreign debt was not excessive. Perhaps the most objective index of Latvia's economic status is evident from the 10.6 tons of gold that it placed in foreign banks before the invasion of the Red Army. Most Latvians who remember the period consider it a golden era. Many of its successful economic approaches are being raised in debates today.

Latvia

Latvia - Economy - The Soviet Period

The half-century of Soviet occupation started with the expropriation without compensation of almost all private property by the state. Within a few years, farms, which had not been nationalized immediately, were forced into collectives in the wake of the deportation of more than 40,000 mostly rural inhabitants in 1949. For many decades, in the struggle between rationality and ideological conformity, or between the so-called "expert" and "red," the latter consideration usually prevailed.

Between 1957 and 1959, a group of Latvian communist functionaries under Eduards Berklavs tried to reorient Latvia toward industries requiring less labor and fewer imports of raw materials. At this time, Pauls Dzerve, an economist and an academician, raised the idea of republican self-accounting and sovereignty. The purges of 1959 replaced these experimenters, and Latvia continued in the race to become the most industrialized republic in the Soviet Union, with a production profile that was almost wholly determined in Moscow. Latvia lost its ability to make economic decisions and to choose optimum directions for local needs. A broad-based division of labor, as seen by Moscow central planners, became the determining guide for production. This division of labor was highly extolled by the Soviet leadership of Latvia. For example, Augusts Voss, first secretary of the Communist Party of Latvia (CPL), summarized this common theme in 1978: "Today, nobody in the whole world, not even our opponents or enemies, can assert that the separate nations of our land working in isolation could have achieved such significant gains in economic and cultural development in the past few decades. The pooling of efforts is a powerful factor in increased development." The extolling of the virtues of a Soviet-style economy included an entire refrain of "self-evident truths," which were aimed at reinforcing the desire of Latvians not just to accept their participation in the division of labor within the Soviet Union but also to support it with enthusiasm.

People in the West often underestimated the effectiveness of the Soviet propaganda machine. The media reinforced the popular images of the decadent and crumbling capitalist economies by portraying scenes of poverty, bag ladies, racial tensions, armies of the unemployed, and luxury dwellings in contrast to slums. The discovery by Russians, and especially by their elites, of the much more nuanced realities of the outer world were important incentives for change and even abandonment of communism. Before that discovery, though, the barrage of propaganda had considerable effect in Latvia. But other factors tended to mitigate or counter its impact. One of these was the collective memory of Latvia's economic achievements during its period of independence. Another was the credible information about the outside world that Latvians received from their many relatives abroad, who began to visit their homeland in the 1960s. Twenty years later, many visitors from Latvia, often going to stay with relatives in the West, were able to see firsthand the life-styles in capitalist countries. During this period of awakening, the argument was clearly made and understood: if Latvia had remained independent, its standard of living would have been similar to that of the Baltic states' northern neighbor, Finland, a standard that was obviously significantly higher than that of Latvia.

By the late 1980s, the virtues of a division of labor within the Soviet Union were no longer articulated even by the CPL leadership. Together with the communist leaders in the other Baltic republics, the CPL leaders desired to distance themselves from a relationship that they were beginning to see as exploitative. Thus, on July 27, 1989, Latvia passed a law on economic sovereignty that was somewhat nebulous but whose direction was clear--away from the centralizing embrace of Moscow.

The shift toward Latvian control of the economy can be seen from the changes in jurisdiction between 1987 and 1990. Although the percentage of the Latvian economy controlled exclusively by Moscow remained about the same (37 percent), the share of the economy controlled jointly declined from 46 to 21 percent, and the share exclusively under Latvia's jurisdiction increased from 17 to 42 percent during this period.

The Soviet division of labor entailed, in the Latvian case, significant imports of raw materials, energy, and workers, as well as exports of finished products. Exports as a proportion of the gross national product (GNP) accounted for 50 percent in 1988, a level similar to that of ten of the other republics but not Russia, which had only a 15 percent export dependency. After the disintegration of the Soviet Union, rising energy prices and the lifting of price controls on many Latvian goods often made them too expensive for the markets of the former Soviet Union, but the technological inferiority of these goods limited their marketability in the West.

Latvia

Latvia - Economic Sectors

During the postwar era, industry supplanted agriculture as the foremost economic sector. By 1990 industry accounted for almost 43 percent of the gross domestic product (GDP--see Glossary) and for more than 30 percent of the labor force (see table 24, Appendix). Aggressive industrialization and forced relocation of labor, particularly in the 1950s and 1960s, reduced agriculture's share of the labor force from 66 percent in 1930 to about 16 percent in 1990. Agriculture accounted for 20 percent of GDP in 1990; transportation and communications, about 8 percent; construction, less than 6 percent; and trade, services, and other branches, about 20 percent.

Industry

In 1990, 38.9 percent of all industrial personnel in Latvia were employed by the engineering industry (including machine building and electronics) and 17 percent by the textile industry. Other important industries included food (12.7 percent), wood and paper (9.6 percent), chemicals (5.7 percent), and building materials (4.6 percent). Latvia, the most industrialized Baltic state, accounted for all electric and diesel trains produced in the Soviet Union, more than one-half of the telephones, and more than 20 percent of the automatic telephone exchanges, refrigeration systems, and buses.

Because of its deficiency in natural resources, Latvia relies heavily on imports of fuels, electric power, and industrial raw materials. Energy is generated domestically by three hydroelectric power plants on the Daugava River, which have a total capacity of 1,500 megawatts, and by two thermal power plants near Riga, which have a total capacity of 500 megawatts (see fig. 9). In 1991 about 43 percent of total electricity consumed was imported from neighboring states. The country's natural resources are primarily raw construction materials, including dolomite, limestone, clay, gravel, and sand.

Agriculture

In 1990 Latvia had 2,567,000 hectares of agricultural land, 32 percent less than in 1935. More than 1 million hectares of agricultural land, much of it abandoned, were converted to forest under Soviet rule. Of its nearly 1.7 million hectares of arable land, about one-half was used for growing fodder crops, more than 40 percent for grain, 5 percent for potatoes, and approximately 2 percent for flax and sugar beets together.

The Soviet authorities socialized agriculture, permitting only small private plots and animal holdings on the vast state and collective farms. By 1991, when Latvia regained its independence, a network of more than 400 collective farms, with an average size of almost 6,000 hectares, and more than 200 state farms, averaging about 7,300 hectares in size, had been created. Private household plots, despite their small size (0.5 hectare, maximum), played a significant role in the agricultural sector by supplementing the output of the notoriously inefficient state and collective farms. In 1991 some 87 percent of all sheep and goats were held on private plots, as were approximately 33 percent of dairy cows and more than 25 percent of cattle.

Under Soviet rule, Latvia became a major supplier of meat and dairy products to the Soviet Union. From 1940 to 1990, livestock production nearly doubled; by contrast, crop cultivation increased by only 14 percent, despite major investments in soil drainage and fertilization projects. In 1990 Latvia exported 10 percent of its meat and 20 percent of its dairy products to other Soviet republics, in return for which it obtained agricultural equipment, fuel, feed grains, and fertilizer. As the centralized Soviet system collapsed, however, a shortage of feed and the rising costs of farm equipment took a toll. From 1990 to 1991, the number of animals on state and collective farms in Latvia fell by up to 23 percent. Consequently, the output of meat, milk products, and eggs from these farms declined by 6 to 7 percent (see table 25, Appendix).

Transportation and Telecommunications

Transportation is a relatively small but important branch of Latvia's economy. The infrastructure is geared heavily toward foreign trade, which is conducted mainly by rail and water. Roads are used for most domestic freight transport.

In 1992 Latvia had 2,406 kilometers of railroads, of which 270 kilometers were electrified. The railroads carried 31.8 million tons of freight and 83.1 million passengers. Most railcars are old, with some having been in service for twenty or more years. Train service is available to Moscow, St. Petersburg, and Warsaw.

Of the 64,693 kilometers of public roads, 7,036 kilometers were highways or national roads and 13,502 kilometers were secondary or regional roads in 1994. Latvia had a fleet of 60,454 trucks and 11,604 buses; private passenger automobiles numbered 367,475. Many, if not most, trucks were more than ten years old. Despite the growing number of automobiles, commuters continued to rely mainly on trains and buses, each of which accounted for 5 billion to 6 billion passenger-kilometers per year in the early 1990s. Bus service was provided between Riga and Warsaw.

Latvia's location on the Baltic Sea has provided the country with one of its major economic moneymakers for the future. The three large seaports of Riga, Ventspils, and Liepaja are particularly promising for future trade because they can be used during all seasons and because a dense network of railroads and roads links them with many of the landlocked regions of neighboring countries (see fig. 10). For many years, Riga was the end point for Japanese container traffic originating in the Russian Far East, primarily the port of Nakhodka. This traffic was mostly unidirectional from east to west. With the expected opening up of Japan to incoming world trade, however, European exporters may find that Riga is the best route for their containers bound for Japan or even China.

Ventspils is the end terminal for a Volga Urals crude oil pipeline built in 1968. Its port has the capacity to service three large ocean tankers simultaneously. The American Occidental Petroleum Company constructed an industrial chemical complex there providing for the processing and export of raw materials coming from Russia and Belarus.

The port of Liepaja has not yet been involved in major economic activity because until May 1992 it was still in the hands of the Russian armed forces. The port, which ranks as one of the Baltic Sea's deepest, was restricted for many decades because of its military orientation. Much capital investment will be required to adapt this port for commercial use. With careful development, Liepaja could become an active commercial port. A dozen or so smaller ports that have been used mainly for fishing vessels could also be exploited for the distribution of commercial products.

Riga, Ventspils, and Liepaja together handled about 27.2 million tons of cargo in 1993. That year 16.3 million tons of petroleum exports from Russia passed through Ventspils, one of the former Soviet Union's most important ports. Grain imports account for most of the freight turnover at the port of Riga, also a Baltic terminus of the petroleum pipeline network of the former Soviet Union. Liepaja, a former Soviet naval port, became a trade port in the early 1990s. Also during this period, steps were taken to privatize the Latvian Shipping Company, formally separated from the former Soviet Union's Ministry of the Maritime Fleet. The Maras Line, a joint venture with British interests, began to operate between Riga and Western Europe. Latvia's fleet consisted of ninety-six ships, totaling nearly 1.2 million deadweight tons: fourteen cargo, twenty-seven refrigerated cargo, two container, nine roll-on/roll-off, and forty-four oil tanker vessels.

The country's main airport is in Riga. Latvian Airlines, the national carrier, provides service to Copenhagen, D�sseldorf, Frankfurt, Helsinki, Kiev, Minsk, Moscow, St. Petersburg, and Stockholm. Baltic International Airlines, a joint Latvian-United States company, operates flights to Frankfurt and London. Service to <"http://worldfacts.us/Norway-Oslo.htm">Oslo, Berlin, and Amsterdam is offered by Riga Airlines Express, a joint venture between two Latvian joint-stock companies and a Swiss enterprise. Other carriers include Finnair, Lufthansa, SAS (Scandinavian Airlines), LOT (Polish Airlines), and Estonian Air.

The country's telecommunications network is undergoing reconstruction as a result of the privatization of the telecommunications system in 1993 and the sale of a 49 percent share to a British-Finnish telecommunications consortium in 1994. A new international automatic telephone exchange was installed in Riga, and improved telephone and telegraph services became available at standard international rates. The long-term development plan of Lattelcom, the privatized telecommunications company, calls for the creation of a fully digitized network by the year 2012. In 1992 Lattelcom had about 700,000 telephone subscribers, over half of whom were in Riga. Unmet demand because of a shortage of lines was officially 190,000. The unofficial figure, that of potential customers not on the waiting list, was believed to be much larger. There were an estimated 1.4 million radio receivers and 1.1 million television receivers in use in 1992. By early 1995, Latvia had more than twenty-five radio stations and thirty television broadcasting companies. Radio programs are broadcast in Russian, Ukrainian, Estonian, Lithuanian, German, Hebrew, and other foreign languages.

Foreign Trade

In the early 1990s, Latvia succeeded only partially in reorienting foreign trade to the West. Russia continued to be its main trading partner, accounting for nearly 30 percent of the country's exports and more than 33 percent of its imports in 1993 and for about 28 percent of its exports and nearly 24 percent of its imports in 1994. Overall, more than 45 percent of Latvia's exports were destined for the former Soviet republics (mainly Russia, Ukraine, and Belarus), and about 38 percent of its imports came from the former Soviet Union in 1993. Among Western countries, the Netherlands received the largest volume of Latvia's exports (8.2 percent), followed by Germany (6.6 percent) and Sweden (6.5 percent). The primary sources of imports from the West were Germany (11.6 percent) and Sweden (6.2 percent).

The main import was oil, followed by natural gas, machinery, electric power, and automobiles. Oil products, wood and timber, food products, metals, and buses were the main exports (or, in the case of oil products and metals, reexports). In 1994, according to Western estimates, Latvia's foreign trade deficit was LVL141.1 million, about three times higher than that in 1993. The balance of trade deteriorated in 1994, particularly because the strength of the lats made Latvia's exports too expensive.

A total of about US$73 million in humanitarian aid was received in 1992. (Reliable estimates of total aid flows in 1993 were unavailable.) In 1993 Latvia received aid in the amount of ECU18 million (for value of the European currency unit--see Glossary) from the European Union (see Glossary) through its Poland/Hungary Aid for Restructuring of Economies (PHARE) program. Of a US$45 million import rehabilitation loan from the World Bank (see Glossary), about US$21 million had been used in 1993. In 1994 the European Investment Bank (EIB) granted loans of US$6.4 million for financing small- and medium-sized companies. For this purpose Latvia also received a US$10 million loan from Taiwan. In addition, Latvia obtained a US$100 million joint financing credit from the European Bank for Reconstruction and Development (EBRD) and the Export-Import Bank of Japan.

Latvia

Latvia - Postindependence Economic Difficulties

The Latvian economy began to falter in 1991 and took a nosedive in 1992. Industrial production declined by 31 percent in 1993, a relative improvement compared with the previous year's decline of 35 percent. Especially hard hit was the engineering industry, which was not able to sell most of its production. By January 1994, the official unemployment rate had reached a high of 5.9 percent. (The actual rate of unemployment, including the long-term unemployed, approached 14 percent.)

International trade also plummeted. Most of the trade with the former Soviet republics is conducted using world prices. One of the key areas of change is in the price of energy, which increased seventy-five times between 1990 and 1992. The average prices of imports in these two years increased forty-five times, whereas prices of exports increased only about thirty-three times. With such price hikes and the general economic chaos prevailing in the whole post-Soviet region, exports in the 1990-92 period decreased by 44 percent, imports by 59 percent, and energy imports by 52 percent. Despite moderate improvement in 1993, Latvia continued to face the challenge of modernizing its production equipment and improving the quality and qualifications of its work force. To do that, it needed international credit and investment. Foreign investment, estimated to be about US$130 million in November 1993, was still small, mainly because of political uncertainty. The greatest influx of foreign investment was from Germany (US$31 million), followed by the United States, Sweden, Russia, Switzerland, and Austria.

There is, nonetheless, evidence of considerable progress in economic reform. In 1991 most, or 88.2 percent, of Latvian exports went to the former Soviet Union, and 3.2 percent went to Western countries. One year later, more than 20 percent of exports went to the West. In 1993 West European countries accounted for about 25 percent of Latvia's exports and 17 percent of its imports. Moreover, there has been a positive shift in the distribution of economic sectors, away from industry and toward services. By 1994 the services sector accounted for more than 50 percent of Latvia's GDP; industry, about 22 percent; and agriculture, 15 percent. Another major achievement has been in the stabilization of the Latvian currency. Latvia used the Russian ruble as legal tender until May 7, 1992, when it introduced the Latvian ruble as a coequal currency. On July 20, it made the Latvian ruble the sole official mode of payment. On March 5, 1993, the new Latvian currency, the lats, was introduced to be used with the Latvian ruble. The lats became the sole legal tender in October 1993. The Bank of Latvia has scrupulously followed the directions of the International Monetary Fund (IMF--see Glossary) by restricting the printing of money and credits. By strictly controlling the money supply, it was able to wrestle inflation down to 2.6 percent in December 1992 and to keep it at an average of less than 3 percent a month through December 1993. The annual inflation rate was reduced from more than 958 percent in 1992 to 35 percent in 1993 and 28 percent in 1994.

In Latvia, as in Russia, managers of state-owned production plants pressed the government through early 1992 to increase credits, but failed. The strength of the Latvian currency has contributed to price increases, making it difficult to export Latvian products to the former Soviet Union. Exporters called for a devaluation of the currency and a lowering of interest rates. Despite low inflation and a strong currency, annual interest rates exceeded 100 percent, making it difficult for enterprises to obtain loans.

It is indicative of the struggles waged by different sectors of the economy, state structures, and other institutions that the 1993 state budget was introduced and accepted only in February 1993. At almost 29 percent, the biggest item in the projected budget was pensions. Unpaid taxes and unanticipated expenditures on pensions and other social benefits that year contributed to a deficit of LVL54 to LVL55 million (3.2 percent of GDP). To raise additional revenue, the value-added tax (VAT--see Glossary) was increased from 12 percent to 18 percent in November. In December the government also began to issue short-term promissory notes. The budget crisis abated in 1994, with an estimated deficit of LVL36.7 million (1.6 percent of estimated GDP). According to the Economist Intelligence Unit, with a projected revenue of LVL476 million and expenditures of LVL516 million the 1995 budget would run a deficit of about LVL40 million (1.5 percent of estimated GDP).

Privatization

One of the most difficult aspects of economic reform in Latvia is the process of privatization. By the end of 1992, only six out of the more than 2,000 state-run enterprises had been privatized. Of the 703 enterprises slated for privatization in 1993, only nineteen had been privatized by mid-October. An agency charged with the privatization of enterprises was not established until November 1993. By January 1994, about thirty state-owned firms had been sold. It had been widely assumed that Latvia would be one of the leaders in privatization because of its experience with a market economy as an independent state from 1920 to 1940 and because of a latent antipathy to communism. Many factors have hindered the privatization process, however.

Until the early 1990s, no major initiatives in this realm could be made because of unclear jurisdiction. As early as 1990, Moscow had prepared a privatization plan for Latvia, which assigned 51 percent of the shares of industries to their workers, with the remainder to be divided between Latvia and the rest of the Soviet Union. Such a move was vetoed by Latvia. One of the primary reasons for the slow pace of privatization was the attempt to honor the claims of previous owners or their descendants. The right to make such claims was extended to the end of 1993. By January 1, 1993, there had been 14,958 requests for buildings, of which only 2,614 had been reviewed. In addition, more than 10,000 apartments had been denationalized, and more than 50,000 claims to city land had been received. A number of owners have been reluctant to make early claims because they would be liable for large costs, especially in buildings with high tax, heating, lighting, and repair bills. Meanwhile, rents have been strictly controlled, and tenants cannot be evicted for seven years unless an equivalent apartment is provided elsewhere.

Potential private owners reclaiming their rightful properties face other obstacles as well. There are legal confrontations between previous owners and a variety of squatters or other claimants. Before independence, many properties were leased or sold to cooperatives. Property law in Latvia has a curious clause that allows so-called "jurisdictional persons" to keep their contracts or properties if the acquisitions were made out of ignorance or "goodwill." In most of these cases, the former owner is then granted compensation by the state, which is usually a small fraction of the worth of a property.

An important psychological aspect of privatization is that many Latvian citizens are afraid of selling off Latvia for a pittance. On the one hand, a belief widely held by leftists--former communists--is that the IMF is trying to wreck the Latvian economy in order to lower purchase prices for foreign firms. On the other hand, rightists charge that the old managers are sabotaging production to lower the value of firms and allow themselves and their Moscow-based mafia allies to once again dominate the Latvian economy. Of particular note is the widespread belief among ethnic Latvians that the main beneficiaries of privatization will be non-Latvians. There is a common perception that about 80 percent of private economic activity is in the hands of other ethnic groups. In private interviews, many reasons are given for this economic breakdown: other groups are more active and willing to take risks; they have better contacts in the old party nomenklatura (see Glossary); they have more links with organized crime; they live mostly in cities where the economic action is; and business has not traditionally been highly regarded in Latvian culture. The predominantly Latvian state bureaucracy, which can affect the rate of privatization, is afraid of losing its power and the concomitant benefits involved in the control of industries.

As in other formerly socialist states, there has been an innate difficulty in estimating the value of industries or buildings. An auction could help overcome this problem, but other considerations, such as job retention and the ability of different bidders to compete in future markets, have become important. In effect, only 9.5 percent of the 295 privatization sales held in Latvia by January 1, 1993, had been accomplished through auction. Most of the privatization undertakings were bids to lease commercial sales establishments for up to five years. In most cases, the leasing of commercial sales establishments requires that the newly private entrepreneurs continue the same line of business as before. Even this kind of relatively mundane transaction was plagued by jurisdictional squabbles. For example, in the lease of the Minsk, one of the largest department stores in Riga, it was discovered after the contract had been signed that the city district that organized the lease had no right to do so because the Minsk is actually under the jurisdiction of the city of Riga. This case illustrates just one problem such initiatives can engender. There were also public charges about favoritism, the involvement of family members of the Cabinet of Ministers, the undervaluation of existing stock, and so on.

A few foreign investors had started up new firms or enterprises, but initial investments were cautiously small--in most cases well below US$1 million. In 1992, for example, total capital investments involving United States enterprises amounted to less than US$13 million. The many problems slowing down foreign investment include the limited title to land (at best a ninety-nine-year lease); the unreliability of contracts with government representatives or ministries, which can be broken; the expectation in some instances of favors or bribes by government contracting or signing parties; the presence of organized crime and, in some localities, its demands for protection money; the widely reported stealing and pillaging of private property; and the variable quality of workers. Other problems involve communications difficulties, a dearth of adequate housing for Western staff, the deficit in knowledge of foreign business language, the lack of Western-trained management, and even the question of safety in the streets. These problems are also reflected in other former Soviet republics. Latvia appears to be tackling them with vigor and determination, however, and major improvements in the investment climate have already been achieved.

Until 1993 one of the key variables blocking a resurgence in economic activity was the erratic and unstable local banking and financing system. More than forty banks in Latvia had an average capitalization of less than US$1 million. Interest rates varied considerably, and services had yet to meet Western standards. The Bank of Latvia, which is the country's central bank, operated forty-eight branches and a specialized foreign branch.

Although much remains to be done, some progress has been made in reforming the financial sector, particularly in privatizing commercial operations. Twenty-one former branches of the Bank of Latvia were merged in 1993 to establish the Universal Bank of Latvia, the privatization of which was to be completed in 1995. The Latvian Savings Bank also was to be restructured and privatized by the end of 1995. As the central bank, the Bank of Latvia assumed a supervisory role, guiding and monitoring the country's banks. To facilitate payments, many banks have joined the Society of Worldwide Interbank Telecommunication (SWIFT), the international fund transfer system, and some have begun to offer credit cards, cash advances, and other services.

Progress toward privatization has been made in agriculture as well. By January 1, 1993, some 50,200 farmsteads encompassing 21 percent of farmland had been given over to individual ownership. By late 1993, the number of private farms had grown to 57,510, compared with 3,931 at the end of 1989 (see table 26, Appendix). At the same time, another 99,400 families were assigned private plots averaging 4.4 hectares, which provided a significant buttress to their economic survival. The major thrust for this privatization came from the program of denationalization, which returned farms and land to former owners or their relatives. Aspects of this privatization could cause problems in the future, however. Although imbued with idealistic expectations, the new farmers have little equipment and inadequate housing for themselves and their animals. Also, many of them have never farmed before. Their farms are usually small, averaging seventeen hectares each. Not all collective farms were dismembered, but where they did split up, the leadership of these farms was able in many instances to buy out equipment and animals at preinflation prices. This apparent unfairness has left a legacy of bitterness.

In November 1992, a law providing vouchers for privatization was passed. The law came into effect on May 1, 1993, and the distribution of vouchers began in September. The law provides for the distribution of vouchers according to one's length of residence in Latvia, with one year worth one voucher, or about US$42. Other factors are also taken into account. For example, those who can lay claim to Latvian citizenship prior to the Soviet occupation in June 1940 and their progeny are entitled to an additional fifteen vouchers as compensation for so-called "ancestral investments." Refugees who left Latvia because of World War II may also obtain one voucher for each year lived in Latvia before December 31, 1944. Those forcibly deported from Latvia in the past receive a differentiated number for each year of confinement in prison camps or in exile. Finally, people are allotted vouchers on those occasions where private claims on property cannot be realized because of conflicts with squatters or because compensation is chosen in lieu of property. An estimated 87 percent of vouchers are to be granted to Latvian citizens. Of the total of 113 million vouchers in circulation, an estimated 2 million are expected to be used for purchasing farmland, 40 million for city land, 43 million for apartments, and 28 million for state enterprises.

Public opinion is an important consideration in policy making. Popular attitudes toward privatization differ somewhat between Latvians and others but not between men and women or between urban and rural areas. A random poll revealed the greatest split between individuals thirty-four years and younger and those thirty-five and older, and this difference may portend increased support for privatization.

Consumption Patterns

One of the main effects of the 1991-92 economic changes and dislocations has been a change in the pattern of consumption. According to family budget studies, food claimed only 29.4 percent of expenditures in 1990 but rose to 37.8 percent in 1991 and to 48.8 percent in 1992 (January-September). (In the United States, an average of 15 percent of income goes to food purchases.) The share of other commodities in the budget decreased from 37.6 percent in 1990 to 24.1 percent in 1992. Services, taxes, and other expenses declined only marginally as a proportion of total spending.

In the third quarter of 1992, the average monthly wage was 5,054 Latvian rubles, and the minimum wage was set at 1,500. According to the calculations of the Ministry of Welfare, the minimum "crisis survival basket" was determined to cost 3,010 Latvian rubles, and a minimum noncrisis basket of food and services cost 4,120 Latvian rubles. To purchase one kilogram of beef in September 1992, a person employed in the state sector had to work 180 minutes; for one kilogram of pork, 309 minutes; one liter of milk, thirty-six minutes; ten eggs, 110 minutes; one kilogram of sugar, 159 minutes; a man's suit, ninety-four hours; a man's shirt, 520 minutes; one pair of men's socks, fifty-two minutes; one pair of pantyhose, 110 minutes; and a pair of women's shoes, twenty-four hours. The price of one kilogram of bread was equivalent to 15 percent of a day's wages.

The decrease in real wages and the increase in the cost of goods resulted in a decrease of 45 percent in retail sales between January and September 1991. The volume of purchases of many items decreased by well over 50 percent.

However, retail sales do not reflect total consumption. Many individuals started their own garden patches; relatives availed themselves of their farm connections; and farmers, of course, grew their own food and exchanged it for other goods and services. A survey of family budgets found that in comparing the first nine months of 1991 and 1992, meat consumption de-creased by 13 percent, milk and milk products by 18 percent, fish and fish products by 24 percent, and sugar by 19 percent. Bread products consumption increased by more than 10 percent, however. Total calorie intake decreased by 5.9 percent, and fat intake fell by 11 percent.

Although the purchase of new manufactured goods de-creased significantly, there is still a considerable availability of household goods likely to last well into the 1990s. In 1991, for example, for every 100 families there were 143 radios, 110 televisions, ninety-nine refrigerators, eighty-nine washing ma-chines, seventy vacuum cleaners, and thirty-seven automobiles.

Latvia