San José State University
Department of Economics
Thayer Watkins
Silicon Valley
& Tornado Alley

The Economy and Economic History of Latvia

For Brigita:
Gone but not forgotten.


Latvia and the other Baltic Republics when viewed in comparison to gigantic Russia seem to be mini-states, but they are in fact larger than several Western European countries. Latvia is about the same area as the U.S. state of West Virginia. Its population 2012 of 2.2 million is somewhat larger than that of West Virginia's 1.8 million.

The Latvians and Lithuanians are descendents of the ancient Balts, a branch of the Indo-Europeans, who occupied the region of the eastern coast of the Baltic Sea for millennia. The name Latvia comes from a particular tribe of the Balts called the Latgalians.

The names of rivers and lakes, hydronyms, indicate that the Balts occupied a far more extensive region than the present countries of Latvia and Lithuania. The territory of the Balts was taken over by other Indo-European peoples such as the Slavs and by Finno-Ugric peoples such as the Estonians. There was a Finn0-Ugric people called the Livonians who occupied what is now the northern part of Latvia, but the Livonians were assimulated into Latvian culture.

From ancient times until the 14th century the Latvians were unorganized and therefore not unified for defense against outside aggressors. The German barons came and conquered the separate Latvian kingdoms and ruled for several centuries. Those German conquerors formed a social class of the nobles. Later various nation states conquered the region, namely Denmark, Prussia, Poland-Lithuania and Sweden. There was an interesting episode during the 17th century when the Duchy of Courland in what is now Latvia tried to establish a colonial empire. The Duke of Courland, Jacob Kettler, encouraged and promoted the building of a fleet of merchant ships. His fleet made trading voyages to the Western European nation and went on to the Caribbean and to West Africa. In 1637 a Courland expedition established a settlement on the island of Tabago off the coast of South America. The first settlement did not survive but a second settlement was created in 1639. Later Courland became even more adventuresome and established a colony called Fort Jacob on St. Andrews Island at the mouth of the Gambia River. The Gambia River is a special site in that oceanic ships can travel up the river a couple of hundred miles. This resulted in more extensive commercial development there than in other rivers of western Africa. The Courland colony in Gambia was moderately successful, exporting a number of agricultural crops, but was lost to Courland while he was involved in a war with Sweden and held captive by the Swedish army. The British took control of the Gambia settlement but some of the streets continued to go by Latvian names. The Tabago colony was taken but later returned to Courland, but did not prove to be economically viable and was abandoned in 1666. The Duchy of Courland settled back into a preoccupation with merely regional concerns.

Finally, in the 18th century, Russia under Peter the Great conquered Latvia. When the Russian empire began to grow economically in the late 19th century Latvia benefited from the extensive trade flows that passed through its principal city of Riga. Riga became the third largest port of the Russian empire, surpassing Saint Petersburg in trade volume. Large scale factories were established in Riga which employed not only a Latvian labor force but an immigrant Russian labor force as well.

The social upheavals connected with the population making a transition from an agricultural rural life to an industrial urban life produced dissatisfactions. The discontents with political, social and economic conditions led to the development of a Latvian national cultural consciousness. Nonviolent protests in Latvia in 1905 were violently and brutally suppressed by the Russian imperial troops. The resulting strikes by workers and violent reactions in the countryside led to the shooting of several thousand people and the exiling into Siberia of many Latvians. In the ensuing period between 1905 and the revolutions of 1917 many Latvians became radicalized. The disruptions and privations that occurred during World War I were particularly hard on the Latvians. When the elections came in September of 1917 many Latvians voted for the Bolsheviks. The Bolsheviks controlled Latvian for only a short period of time. Local Latvian forces were able to drive out the Red Army.

The Glorious Period of Latvian Independence

The political leadership of Latvia declared independence in November of 1918 but for nearly two there was warfare between the Latvian forces and the Red Army. Some Latvian radicals did fight on the Red's side. In August of 1920 the Bolshevik government signed a peace treaty with Latvia renouncing all rights over the people and territory of Latvia. For more information see the Baltic Miracle of 1918.

The Latvians fighting for the Reds left Latvia and migrated to Russia where they became important in the Red Army. Joseph Stalin made particular use of them as executioners of Russians in his rise to power, but in the 1930's he turned on them and had them shot.

The major nations recognized Latvian independence. In the 1920's the new Latvian state managed its affairs quite successfully. It established a Latvian currency and managed the money supply conservatively. Inflation was moderate and industrialization proceeded successfully. The one problem that developed was a notable degree of political instability. Latvia had a legislature whose representatives were selected by proportional representation based upon party votes. There were forty different political parties with, for example, 28 of them having representatives in the legislature of 1931. None of them got enough of the vote to run the government without complicated coalitions. These coalitions could easily breakup bringing an end to a particular regime. Latvia had 18 different governments in 14 years. Finally in 1934 Karl Ulmanis, a former prime minister, took control of the government and ruled by fiat.

Ulmanis tried to avoid offending either Germany or the Soviet Union in the late 1930's. Of course that policy was disastrous because if Latvia was going to be taken over either of the two would be offended by the lack of Latvia's support in the power struggle in the region.

The Occupation and Annexation of Latvia

After six years of antagonism the two totalitarian states of Nazi Germany and the Soviet Union surprised the world by entering into a Non-Aggression Pact on August 23, 1939. The secret protocol accompanying the pact called for a division of the Baltic States. Estonia and Latvia were to be in the Soviet sphere of influence and Lithuania in the German sphere. However in following month the Nazi and Soviet government re-negotiated the division and Lithuania went to the Soviets in return for gold and territorial concessions elsewhere. Shortly thereafter, in the beginning of October 1939, Stalin forced Latvia to accept a Pact of Defense and Mutual Assistance which involved the stationing of thirty thousand Soviet troops in Latvia. Stalin imposed the same arrangement on Estonia and Lithuania and tried to impose it on Finland.

A bogus election was staged by the Soviets in which Latvians were given a slate of candidates consisting of only Communists. To make matters even more bogus the elections results were merely fabricated. The Communist authorities shamelessly reported that there had been a 90 percent turnout and that 97.6 percent of them voted for the Communist slate of candidates. In June of 1940 the supposedly elected government declared that was the Latvian Soviet Socialist Republic. Furthermore they petitioned to join the Soviet Union. The Soviet authorities then graciously granted the request. Karl Ulmanis and tens of thousands of other Latvians were deported to the Soviet Union where many, including Ulmanis, died. Altogether there were about 35,000 Latvians killed by execution in Latvia or by way of deportation to the Soviet Union.

The nations of the West refused to recognize the Soviet annexation of Latvia, Estonia and Lithuania. This became politically significant fifty years later when the Soviet Union broke apart. It meant that in terms of international law Latvia and the other two Baltic States were not succeeding from the Soviet Union. They were merely asserting their prior and still operative independence.

The Soviet occupation in 1940 was temporarily ended in June of 1941 when Nazi Germany attacked the Soviet Union. Joseph Stalin was so shocked that for about three days he was traumatized and did not issue the orders for the Soviet forces to defend themselves. Large sections of the Soviet Union including the Baltic States were occupied by the German forces.

The German occupation was harsh but less so than the Russian occupation. This is revealed by the fact that when at the end of World War II when the Soviet Army was poised to reoccupy Latvia, 200,000 of them fled as refugees to the West.

The Soviet Reoccupation of Latvia

People in the West consider that their countries won World War II, but in fact the totalitarian state of the Soviet Union defeated the totalitarian state of National Socialist Germany and gave Joseph Stalin an empire that Adolph Hitler only dreamed of. The racial policies of a master race that Hitler advocated were implemented surreptitiously by Joseph Stalin. Areas like Latvia became lebenraum (living space) for the master race of ethnic Russians. From the viewpoint of the eastern Europeans totalitarianism won World War II. There were many who saw Joseph Stalin as the far greater evil and looked upon the alliance of America with the Soviet Union as the action of a big, dumb kid.

The Soviets broke all resistance to their occupation by rounding up forty thousand people and shipping them off to Siberia and similar desolate places. During the Soviet occupation Latvians had to watch while all the decision-making power for Latvia was transferred to Moscow and 500,000 immigrants from the Soviet Union were brought to live in Latvia. Since there were only about a million ethnic Latvians the migration policy amounted to something in the nature of cultural extinction. While this is not quite as bad as genocide it is close to it.

Fluency in Russia was necessary for the ethnic Latvians and they learned to speak Russian. The Russian migrants did not learn to speak Latvian. What was probably devastating for the ethnic Latvians is that the non-Russian immigrants, such as ethnic Poles and Lithuanians, were adopting the Russian language and culture rather than that of the Latvians.

Conditions improved somewhat after Stalin's death in 1953. Latvian Communist Party members began slowly to try to thwart the Russianification of Latvia. They also tried to direct economic development toward local industries dependent on local labor and resources rather than the gigantic projects the planners in Moscow favored. One of those leaders was Eduards Berklavs. For his efforts he was finally expelled from the Communist Party of Latvia and exiled from country. There were altogether some two thousand Communist Party members in Latvia who were expelled in a purge of nationalists. Eventually Berklavs was allowed to return to Latvia but was not taken back into the Communist Party nor given any position of power during the Soviet occupation. He did however enter politics during the movement for Latvian independence.

Not all of the Moscow planners' actions in Latvia were detrimental. It did make economic sense to locate in Latvia some industries which could serve an international as well as a Soviet market. Being on the border between those two markets and having access to sea transportation offered Latvia a better opportunity for success.

The living standards in Latvia were higher than the average for the Soviet Union, but that is not the relevant comparison. Latvia probably always had a higher standard of living than the regions in the interior of Russia and Siberia. The question was whether Latvia would have had a higher or lower standard of living if it had been independent. I do not think anyone has any serious doubt that the living standard would have been higher if there had been no Soviet occupation.

Latvia has very little in the way of mineral resources and its agricultural land is subject to water-logging. The major non-agricultural resource is timber.

Demography of Latvia

The Ethnic Background of
the Population of Latvia (2009)

First Language of the
Population of Latvia (2000)

Religious Identification of
the Population of Latvia (2006)

Gender Demographics
of Population
Median Age37.6 43.7

Economic Statistics

The estimated Gross Domestic Product (GDP) of Latvia in 2011 expressed in dollars at the official exchange rate was $27.4 billion, but using Purchasing power Parity for the conversion it was $34.6 billion. That is about $15.4 thousand per capita. The estimated growth rate of real GDP in 2011 was about 4 percent, up from a negative 0.3 percent in 2010 and a negative 18 percent in 2009. The unemployment rate of Latvia 1.2 million labor force was still 13 percent in 2011 but this substantially better than the 18 percent unemployment rate in 2010.

The Trade Partners of Latvia (2010)
CountryShare of
Share of

Financial Statistics

The government of Latvia in 2011 took in $9.7 billion in revenue (35.3 percent of GDP) but spent $10.8 billion. The deficit of 4 percent compared with GDP is of concern because Latvia wants to join the European Monetary Union. It hopes to reduce the deficit ratio to 3 percent in 2012. Latvia has been a member of the European Union and NATO since 2004. The rate of inflation in 2011 was 4.3 percent and the prime lending rate was 8 percent, down from 9.6 percent in 2010. The rate of inflation in 2010 was a negative 1.1 percent. Thus Latvia went from a real interest rate of about 10.7 percent in 2010 to 3.7 percent in 2011.

(To be continued.)

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