Latvia's Tiger Economy Loses Its Bite
In the '80s my mother became very active in the Independence Movement of Latvia. On January 13, 1991, she packed sandwiches, made hot coffee in a thermos and said, "We are going to defend Riga from the Soviet tanks." Thousands of farmers drove their tractors from across the country to use them as shields. Small fires flickered throughout downtown Riga at night, as my mother and I passed out hot coffee. On March 3 of that year, 70 percent of the Latvian public voted in a referendum to support independence, and on August 21 Latvia officially regained its independence. I was 14 then, walking around with an inflated sense of pride and self-importance. My mother and I had helped defeat Russian tanks without any guns.
At the time, Latvians feared that in a full democracy, the Russian-speaking minorities might elect Russian communists back to power. In Riga only about 40 percent of residents were ethnic Latvians; the rest were Russian-speaking minorities--Russians, Belarussians, Ukrainians and other ethnicities. In 1991 the party my mother supported initiated stringent citizenship laws, naturalizing only those who could prove their residence in Latvia before 1940, as well as their descendents. Under these laws, my mother, who had come from Ukraine in 1956, could not become a citizen. She felt betrayed. In 1994 she and I packed our entire life into two suitcases and came to the United States. In the late 1990s the Latvian government started gradually reforming its citizenship laws--and now they are similar to those of the United States--but for years citizenship laws that favored ethnic Latvians kept Russian-speaking minorities from joining the country's political elite.
In its drive to contain Russian influences, the Latvian government also prioritized entry into the EU and NATO, a policy goal that overshadowed other domestic priorities, like stimulating local manufacturing or supporting agriculture. As in most Eastern European bloc countries, Latvia's politicians looked to the West, and the United States especially, for economic models. The resulting reform strategy of the ruling Latvia's Way government during the '90s is often characterized by Western analysts as "soft shock therapy." Latvia has had a flat tax since 1997, and until this year progressive taxation has never been on the agenda of any ruling coalition. The Latvian government also refused to tax capital gains, which turned real estate trading into one of the most lucrative professions in the boom years. This unique confluence of nationalism and neoliberalism took Latvia from the extremes of communism to the extremes of capitalism in less than twenty years.
Nil Ushakov, the newly elected mayor of Riga, believes that Latvian nationalism has allowed politicians to pander to their base and ignore important economic issues. "What is easier, reading EU documents in French and English on how to protect our local sugar refinery, or talk about nationalism?" he asks. "What we have as a result is an economy that's based too heavily on transit, finance and imports, while our huge potentials, such as an educated workforce, manufacturing and agriculture, have been lost."
Unlike its neighbors Estonia and Lithuania, Latvian left-opposition parties have not been a part of the ruling coalition in Parliament since 1991. That has meant that neoliberalism has dominated Latvian politics virtually unchallenged since 1991. Two decades of this unchallenged center-right rule have also fueled high levels of corruption. From 2000 to 2002 several international studies found that Latvia had one of the worst corruption records among its high-ranking government officials in the post-Soviet states. In 2004, when Latvia joined the EU, it received more than $1 billion in "structural funds," aimed at developing Latvia's infrastructure--modernizing schools and building roads and bridges, among other things. But along with those funds came a resurgence of the old Soviet-era affliction of bribery.
Delna, an anti-corruption watchdog group, believes there are widespread but hard to trace kickbacks from contractors vying for lucrative government projects. In her stylish glasses and short, spiky hair, Delna's 26-year-old Aiga Grisane looks more like a musician than a legal analyst. Grisane sees direct connections between government corruption and the Latvian real estate bubble. When Grisane monitored land development for two years, for example, she discovered that there was essentially no government regulation of construction development. "In Estonia, if you are building a bunch of skyscrapers, you have to submit a plan for roads, kindergartens, stores. In Latvia, you could do whatever you wanted." Grisane believes such unregulated development inflated Latvia's real estate bubble more than in neighboring Lithuania or Estonia. She observed many cases in Jurmala, a small city near Riga, where city officials passed laws erasing regulation at the last minute without any public scrutiny.
Although the media cover government corruption scandals regularly, high-ranking officials are rarely caught or prosecuted. As a result, many Latvians don't feel like giving their taxes to arrogant and corrupt state officials. Grisane also believes that a widely accepted underground cash economy helped inflate Latvia's bubble. "Most of these construction workers were getting salaries under the table. That definitely contributes to inflation." A 2004 report by the European Commission estimated that about 20 percent of the Latvian workforce operates off the books, compared with only 9 percent in Estonia.
The economic crisis of recent months, along with the January protests and the resignations of two ministers, has been a boon for the left coalition party called the Harmony Center. It now holds the largest share of seats in Riga's City Council, the first time since Latvian independence that the most left-leaning major party has done so. And for the first time since 1991 an ethnic Russian, Nil Ushakov, is the mayor of Latvia's capital, home to 700,000 people, almost a third of the country's population.
The Harmony Center owes its success in large part to the charismatic 33-year-old Ushakov, who represents a new generation--young, progressive, cosmopolitan--with no record of scandals or corruption. A former journalist, Ushakov studied economics in Denmark and speaks five languages. "You can't run your country like a business; you have to treat your country like your family," Ushakov explained in campaign videos.
Ushakov's main opponent for mayor was Ainars Slesers, the millionaire entrepreneur who had coined the phrase gazi grida. Riga's residents--ethnic Latvians and Russian-speaking citizens--clearly rejected Slesers's philosophy of unregulated capitalism, and gave Ushakov's party twice as many votes (Slesers became deputy mayor). The People's Party, considered among Latvians the most corrupt, and For Fatherland and Freedom, the most extreme on issues of nationalism, suffered significant losses in the country's June 6 local elections. But the right-wing People's Party still holds the largest share of seats in Parliament, for which elections take place in October 2010.
These changes may signal a new era in Latvia, one in which ethnic divisions become less relevant, nationalism is not a campaign mantra, capitalism is tempered with regulation, and government helps stimulate local businesses while reducing red tape and corruption. In a sense, hope has arisen from crisis. "I like this crisis," says Dagnija Kamerovska, director of a homeless shelter. "People forgot that you need to produce something valuable to get paid. I hope it will change people's attitude toward labor." From entrepreneurs to teachers to farmers and the unemployed, a surprisingly high number of Latvians (about 80 percent) said in May that for the past five years, they've felt that their country was headed in the wrong direction. And despite the hardships of the past year, there is a sense that the current situation will "correct a lot of wrongs."