At the recent business forum dedicated to wind energy, the economist found time to answer questions from our newspaper not only about wind farms, but also about the economy in general.
You participated in the business forum in Ventspils, which was dedicated to renewable energy, including wind energy. Why should the residents of Ventspils be happy about this, considering the ambiguous attitude of society towards wind turbines?
– Not everyone likes the effect of wind farms on the landscape, although in my opinion it is a matter of taste. For example, I like wind turbines as a kind of symbol of progress. It is important to note that Latvia can deploy offshore wind turbines with a total capacity of 15 gigawatts (GW). This is about ten times more than Latvia would need, as already now, as soon as the wind blows, the price of electricity falls. In addition, there are also many places on land where wind generators can be installed. So there is an option to choose where these turbines are least disruptive. If wind farms are built in the sea, there will not be a big impact on the landscape, although the impact on sea birds must be taken into account. I think that offshore and onshore wind farms can be combined. Offshore wind turbines have higher power and load, smoother operation, while onshore turbines require lower costs.
Do you think the residents will benefit more than harm from wind turbines?
– For the economy as a whole, there are more benefits from turbines than losses. Since our prosperity is determined by the economy, the citizens also benefit from wind energy more than they lose. Of course, there will always be infrastructural objects needed by the society as a whole, which are not liked by the residents of the specific places. This applies to roads, railway infrastructure, power lines, farms, factories. However, it all needs to be located somewhere, and wind turbines are far from the most problematic part of the infrastructure.
Analyzing macroeconomic processes, one cannot fail to notice that this year the revenue part of the state budget is not fulfilled. What are its reasons and possible consequences?
– This is an unusual situation. Usually the budget overflows. The main reason people like it is low inflation. We actually have no inflation this year. The draft budget anticipated inflation of 2% or more. The forecast turned out to be too optimistic. But the lag is not big. Should something be started? I think there is no urgent need to change anything. If one year the budget deficit turns out to be slightly larger than planned, so be it. How will this affect budgeting in the coming years? If we look at this year’s budget, we see an increase in wages by about a fifth in the public sector. This is great in a situation where prices have practically not changed! Wage growth significantly outpaces economic growth as a whole! It is clear that this cannot continue for a long time, and spending will have to be significantly slowed down in the coming years.
The influence of external factors on our economic situation cannot be overlooked. For example, stagnation in the construction and real estate market in Scandinavian countries negatively affects business in Latvia. How long will this last?
– The situation in the export markets will continue to remain moderately unfavorable this year. It won’t get worse, but we can’t expect any quick improvements in the other Baltic countries, Scandinavia and Germany, where our main export markets are located. This significantly limits the economic growth of our country, which will be around 1% this year. Thats not much. However, this does not mean that the entire economy is growing at such a pace this year. I have already mentioned wages, which are growing very rapidly this year. But for most people, the salary increase is the most important thing. And if the salary increases, then the situation can be called good, however, with one caveat that the real salary in the country decreased by 9% last year, but increased slightly last year. This year we have returned to wages at the 2021 level and slightly exceeded it. I am talking about the real wage, which reflects the purchasing power of the population. In monetary terms, salaries are increasing every year.
Your comment is comforting, but many entrepreneurs are still losing orders and volumes of work in the Scandinavian housing markets.
– The housing market in Scandinavia has effectively stopped, that’s how it is. Export markets, like domestic ones, are always subject to risk, and if there is an opportunity, it is better to diversify them. I understand that this is easier said than done. In any case, the situation in the Scandinavian markets will not worsen.
As for local markets, the investment climate in Latvia has significantly deteriorated. Experts say it has never been as bad as it is now. One of the reasons is the proximity of the war zone. How to ensure economic and social stability in this situation?
– From a purely psychological point of view, the investment environment is really not favorable. Although last year, investments have increased and, what is especially important, the volume of investments in industry has increased significantly. In the export sector, where production has declined, investment has nevertheless increased, even in monetary terms it seems to me that it was higher than ever. In addition, investment is stimulated by the seven-year cycle of the European Fund plus the Recovery and Resilience Program or the so-called covid money earmarked for pandemic relief. So, in parallel with the unfavorable investment environment, there are also favorable factors.
When can we expect domestic and export markets to revive?
– Everything depends on internal demand in Latvia, which in turn is largely related to the availability of European funds. As for the export markets’ demand for our building materials – building modules, wooden structures, which are also produced in the Ventspils region, metal structures – then it is related to the cyclicality of the housing industry in the Nordic countries and Western Europe, which is currently at its lowest point. It will not be at this point forever, and the situation can be expected to improve as early as next year. Lending interest rates will also start to decrease. The symptoms of the housing market bubble in the Nordic countries will be cured. The fact that the bubble was inflating, especially in Sweden, had been talked about for several years, and the unpleasant developments associated with it were expected. It was not a big surprise, but still unpleasant.
There is another problem related to the geopolitical situation – Latvia is rapidly losing transit. As if everyone knew about it, but it turned out that they were not prepared for it. What can be replaced by transit?
– I wouldn’t say that we weren’t ready for it. The role of transit in the macroeconomic scale is currently insignificant. In general, the volume of transit services in exports currently accounts for around 2% or less than one percent of the total volume of exports of goods and services. Transit is still an important industry for two big cities – Ventspils because of the port and Daugavpils because of the railway. Well, also for Rezekne. There are also ports in Riga and Liepāja, but in these cities transit does not affect the economy so much and is not the only thing that the ports deal with. Ventspils, where the role of transit was particularly large, began to implement the industrialization policy after the restoration of the country’s independence. Even then, Ventspils realized that transit is not only a source of income, but also an economic risk. It was enough to shut down the oil pipeline to realize that the transit could run out. And in the early 2000s, Ventspils started reorienting its economy and export sectors, investing in industry and creating the corresponding infrastructure. It gave its results. For instance, Bucher Municipal production plant, which is now one of the largest mechanical engineering companies in Latvia. Other industries are also developing in Ventspils. So much has been done, but there are still risks. If we look at income from exports through the prism of wages, then transport and storage were the main export industry in Ventspils until recently. The industry is growing rapidly, but has yet to reach a level where it can replace income from transport and storage. The industry should not be expected to disappear entirely, but the risk of further decline remains. So all that remains is to wish Ventspils to continue the industrialization policy, which has brought good results so far.
How does the Ventspils economy look against the background of other Latvian regions?
– The income of the residents of Ventspils is still relatively high compared to other regions, but it is clear that Ventspils is no longer as rich against the background of the whole of Latvia as it was before. Ventspils started to lose its superiority when the port was still doing well, in 2014, 2015 and 2016. Since then, the city has been losing good-paying jobs in the transit industry. It is not easy to replace them equally. Today, the gross domestic product per capita in Ventspils is lower than the average in Latvia, but if you don’t take into account Riga and Pieriga region, this indicator does not look bad. A lot of effort is being made to develop the economy, good results have been achieved, but the tasks ahead for the city are extremely difficult. Because such a sector as processing industry in Ventspils was very small after the collapse of the USSR. I think that the main opportunities for Ventspils are related to the continuation of industrial development. In addition, a new export service has appeared – programming and IT, which brings diversity to the population’s employment and well-paid jobs.
What are the economic forecasts for Kurzeme in general?
– The economy of the region, as before, is negatively affected by the decrease in transit and export opportunities. However, in general, the forecasts for Kurzeme are quite optimistic compared to other regions. Both port cities are developing industry. Industrial territories with a variety of production plants are also developing in Saldu – metalworking, mechanical engineering, light and food industry, production of building materials, woodworking. Saldus County has a fairly strong agricultural sector. The district of Kuldīga, which ten years ago was quite backward, has made great progress and in terms of development rates is currently showing the fastest progress in the region.
What will stimulate the economic development and prosperity of Ventspils region in the coming years? Really wind farms?
– Development in no region depends on only one industry. That would be quite risky and undesirable. Different options should be used. Ventspils county has large territories, large forest areas and low population density. Therefore, opportunities for residents of Ventspils region are related either to work in Ventspils, or to the development of logging, woodworking and agriculture. These industries will continue to form the basis of the county’s economy.
Many associate the possible migration of people from the capital with the development of the regions. Will we feel the impact of migration on the population in Kurzeme in the coming years?
– The migration of people from Riga is unlikely to be the main source of employees for Ventspils, because the income level and diversity of jobs are significantly higher in the capital. However, an influx of residents from counties and regions with slower economic development, as well as from other countries, can be expected. Although our income level is lower than the European average, it is twice the world average. No more than one and a half billion people live in countries with a higher income level than ours. But the population of the entire world is roughly eight billion. All of Africa, most of Latin America, much of East and Southeast Asia are worse off than we are. In addition, you can buy a house quite cheaply in Latvia, even compared to neighboring Baltic countries. So you can expect an influx of people from different parts of the world.
Along with your work as an economist, you also write books. What will your next book be about?
– My first book was called Living in Latvia is interesting, the other could be that Latvians are interesting. I haven’t started writing a new book yet, I have thoughts, but the thoughts are getting more and more intrusive.
What exactly are Latvians interested in?
– Latvians are creative people who are easy to get along with. At the same time, Latvians are undeniably a nation quite emotionally traumatized by the past. Our public discourse is largely an attempt to deal with these traumas, consciously or unconsciously, and this manifests itself in many ways.
