Latvia Economic challenges and opportunities
Regaining independence in 1991, Latvia made aggressive economic accessions abandoning the planned economy and embracing a free market economy (Keteles & Porter, 2007). The concurrent political and economic integration was met with challenges and optimism.
By 1993 a mass privatization program was launched converting public enterprises into privately owned enterprises. The expanded market winded opportunities to exploit economies of scale (Helm, pg.287). A law to eliminate barriers for foreign direct investment (FDI) had been enacted in 1991, and import tariff rates were brought down to the range of 15% to 30% (Ketlels & Porter, 2007). Although FDI and a decrease on the import tariff allowed opportunities to expand on goods and services available to Latvians, the real GDP dropped as a result in 1991 by 13% and by another 32% in 1992 (Ketels & Porter, 2007).
Furthermore, the Latvians national currency, the Lats, was brought back into circulation in 1993 and was quickly made fully convertible for international transactions. The downside to the Lats is that it was tied to the special drawing right (SDR), the accounting unit to the IMF. This limited the exchange on trades. Latvia closed in on an optimal currency area years later. In 2005 Latvia pegged its currency to the euro. It was the Maastricht Treaty signed in 1991 which committed EC members to adopt the euro as common currency. The benefits of the common currencies are: 1) cost savings from having to handle one currency rather than many, 2) lower foreign exchange, 3) hedging, and 4) making it easier to compare prices (Helm, pg. 289).
Although benefits of the common currency align with Latvia’s economic accessions, impediment to integration arise from concerns over national sovereignty. The drawback, for some, of a single currency is the national authorities have lost control over the monetary policy (Helm pg. 290).