Rungainis: Instead of redistributing the economy - the creative economy

DB.LV, Riga, 29.06.2021 The current socio-economic system, which is familiar to many people - everything is cheaply made in China and inflation is kept relatively low - is in its final stages, the US and the EU confrontation with China will increase, but Latvia needs to change its attitude towards entrepreneurs, as the investment climate is much worse than in neighbors countries and it is not surprising that Lithuania is already ahead of us, but Estonia is even further, and without doing anything, Latvia will continue to lag behind.


Prudentia partner and council member Ģirts Rungainis discusses these issues in an interview with Dienas Bizness. In his opinion, it is necessary to change the economic attitude in Latvia and create a creative economy instead of a redistributive economy, because by dealing mainly with redistribution, nothing is created and there is less and less to redistribute. In turn, the attitude of public administration and domestic politicians towards entrepreneurs could be changed by the growing activity (investments) of Lithuanian and Estonian entrepreneurs in Latvia and their quandary of why Latvia has a “different” procedure than their home countries, even though the whole Baltics are part of the EU.

What changes has the crisis caused by the Covid-19 pandemic brought about?

Although the “closure” of national and even regional borders caused by the coronavirus contributed to isolationism, the level of development of microelectronics allows many services to be provided remotely, to solve various economic tasks without being at the office. I assume that without the invasion of Covid-19, such a big step towards the digital economy would not have been possible in Latvia, Europe or the whole world. The situation "forced" everyone: governments to adopt appropriate regulations, where they allow work from home, employers - to accept such remote work and to transfer in-person meetings to the virtual environment, as well as all training. People need socialization, so many are happy to go to work in the office to meet their colleagues offline after a break of many months. In the 21st century, Covid-19 is the first pandemic, although such events have hit humanity in previous centuries, for example, the so-called Spanish flu more than 100 years ago, and before there were epidemics of typhus and plague, but there are always those who survived and also those who died. This time it will be exactly the same.

What and how has changed in the world this year?

Regardless of the crisis, the agenda of the currently the most powerful global players still include geopolitics and the redistribution of spheres of influence. Any crisis does not in itself create new trends, but accelerates and reinforces the existing ones. The crisis is acting as a kind of stimulus: for some to close down quickly, while for others, on the contrary, to start up even faster. In calm - and stagnant - times, these processes take place slowly and gradually. This axiom has not changed for many decades. This was the case both during the USSR and during the recession of 2008-2010, as it is in the current situation of Covid - 19. After World War II, the most powerful economy, the United States, established its relationship with China only in 1972, when the two leaders met, which, together with global market liberalization, cost-cutting and “cleanliness” pressures, as well as other factors, resulted in transfer of manufacturing from the USA to China. Before that, Japan had used this opportunity, later South Korea repeated exactly the same path. All these countries saw comparatively rapid development. The “opening” of communist China to the developed world was based on a premise: it doesn't matter what color the cat is, the most important is that it catches the mice. In a way, it was communist China's abandonment of socialist - re-regulated - economic activity, focusing on the capitalist - market - economy. Over the course of many decades, China became the factory of the world, a country that had not previously been considered a workforce in the global economy, and it was this increase in the number of available labor in developed countries that kept inflation to a minimum. Over time, the socialist bloc collapsed, the USSR collapsed, and people living in Eastern Europe, including the Baltics, became workers in the global market. Russia later joined the system, at least in part. At the same time, the world's total population grew, and in many other countries, women who had previously taken care of the home and their families “gained” the right to paid employment. All these decades have led to an era of prosperity - more and more goods (mostly produced in China) at relatively low prices - without significant inflation. This era is currently in its decline or might even be over. Why? China is no longer cheap, there has been a significant increase in wages, because in economically powerful regions they are the same or even higher than, for example, in Latvia. Of course, there are regions in China where wage levels are still very low, but production must include the “long distances” and the high transport costs involved. Moreover, a few years ago, China stopped “accepting” various wastes from Europe and recycling them, so now Europeans themselves, including Latvia, will have to recycle them. (As Latvia is one of the least populated areas in the whole EU, then logically in these empty areas it would also be possible to recycle waste from other EU member states, and what cannot be recycled must be stored for disposal. I doubt whether the people of Latvia and especially friends of the environment would accept the import and recycling of waste, because some of them will simply have to be burned in special furnaces. In any case, the waste was, is and will be big money).

It is also the Chinese authorities' position to live by their own conditions, not by any other conditions - rules - and to control the region in which they are geographically located. Thus, everything in the vicinity of this country is under threat, such as Taiwan and other countries. This means that the United States and the whole developed world cannot move problems and solve problems by ignoring China's position. For example, in the past, almost all of the production of chips and more sophisticated microelectronic products was relocated to China's Southeast Asian region of interest, and last year and this year we saw the problem of the shortage of so-called chips. This means that we can no longer organize things like we did before, otherwise, one day the entire developed world would stop receiving any microelectronic products (without which no smart device, production equipment, transport, communications etc.) from this region. Especially, it should be noted that China has become not only the world's factory, the second largest economy, but also the largest army in the world and has its own interests, and thus it has become a competitor of the United States and the entire developed world, to say the least. It is clear that technologies created by developed countries will no longer be returned to China and there will be a very serious fight for the supply and / or theft of such technologies. In any case, China will have to invent and create its own system (as Paxamericana once did), innovate with its own inventions and provide income for 1.5 billion people. There is and will be a struggle between the competitive and the uncompetitive of the world, and this applies not only to people, companies, systems, countries, but also to blocs of countries. At the same time, the US and the EU differ on how to deal with this situation. Just one example: For steel produced in China, the EU has set both an import quota and an import duty, while there are no such quotas for those who produce and sell metal products in China to the EU, thus essentially undermining the competitiveness of domestic producers in the internal market. Of course, most of the world's metal factories are located in China, but does that country and its manufacturers accept the same EU green course that is MANDATORY for all manufacturers, including metalworkers? No, they do not. This means that the EU will only have to choose between caring for the environment and making EU producers uncompetitive, or imposing a CO2 emission or import duty on imports from third countries, so that domestic producers who meet all the conditions do not lose out to competitors from China or another country where such conditions relating to emissions need not be fulfilled.

What place does Europe have in this puzzle?

In Europe, the big theme for the last 2,000 years has been the united states of Europe, or historically the Roman Empire. Why is China so strong? Because it has long been established as a unitary state. In Europe, there have been several attempts in recent centuries to form a united empire with the dominant country being France (Napoleon) and then Germany (Hitler). Currently, there is the European Union, but it is not unitary and its strength has been in this aspect, because the competition of different countries (including ideas) (from an external point of view, which can be seen as fragmentation) provides greater opportunities for development, innovation and experimentation. At the same time, in the global context, Europe must be a single bloc, because even European powers such as France, Germany or the United Kingdom are small units in the global context that cannot really stand alone against the huge China. All the more so if even the global superpower of the United States often joints its efforts with Canada and even Mexico. It can be concluded that there is a kind of world of national blocs at the moment, and although the internal movement in these national blocs may even be the contrarian or even chaotic, in general, they will take one common direction in solving larger issues. Of course, there are also those like the Great Britain, which withdrew from the EU and believes that it will be able to play successfully in the world on its own, as it was 100-150 years ago. There are estimates that Britain will lose when it leaves the EU, but it is not known what the country could gain from such a move. Europe, especially Germany, was a world leader in technology and innovation before World War II, but the war not only destroyed half of Europe but also the global nationalization of Germany's intellectual potential, with most science and education potential shifting to the United States. Europe was not only destroyed but also demoralized after the war, so the resistance to the USSR could only be provided with the help of the USA. Europe has settled in its pacifism, unlike Russia, which has ambitions to regain the influence of its predecessor, the USSR or even tsarist Russia, and would be happy to sell its natural resources and “provide protection” to Europe. In the new world, the technological, innovative and even military dominance of the United States is shrinking, and this must be understood not only by the United States, but also by Europe, which has been under the US umbrella for the last 70 years.

Where is Latvia in this puzzle?

Latvia was and is the dividing line (in the times of the USSR in the west, now in the EU - in the east) between two civilizations - Europe and Asia (Russia is the westernmost Asian country). Therefore, at various times, Latvia has been both part of Russia and outside it. This fact hides part of the answer as to why Latvia is economically where it is, why people living here think the way they do. Of course, we can infinitely compare ourselves with Lithuania and Estonia and conclude that in the first 20 years (after 1990) Latvia lagged behind Estonia more and more, then in the last five years we also lagged behind Lithuania more and more. In terms of purchasing power parity, Estonia has further distanced itself from Latvia in recent years, but Lithuania has been able to overtake Latvia. Unfortunately, Latvia is the last in the Baltics. This is the first time in the last 1000 years. I hope that in some time Latvia will catch up and overtake Lithuania.


What is the recipe for success for Lithuania that allowed to overtake Latvia, or what are Latvia's problems?

In short - understanding of the essence of things in the economy, attitude towards business, potential investors, historical heritage, contribution of emigrants - compatriots - to the economy. And socialism has already proved that milkers cannot run a country because it requires knowledge, understanding and experience.

Lithuania and Estonia do not experience as severe consequences of the Second World War and the Soviet legacy as Latvia - emigration or deportation of the brightest minds of Latvians, replaced by a large amount of migrant workers from entire Russia who stayed here and “passed on” their attitude to us. Latvia has inherited from the Soviet era many relatively valuable assets and so many resources, neither our southern nor northern neighbors had to use energy for their acquisition and redistribution. It's like the once popular story from the US of two mice who find cheese, but when it's eaten, one goes to look for cheese elsewhere, and the other performs all sorts of rituals to get the cheese back. There are still groups of influential people in Latvia who want to benefit from the redistribution or control of non-self-generated assets, rather than creating and building new competitive companies. One vivid example: the “hobby club” who found or created a loophole-filled insolvency system, in which not only domestic entrepreneurs, but also foreign investors have gotten some bruises and some have even broken their necks. But how much did we lose as a result of such a system, the number of jobs we already had, and how much time did it take to put this system in some meaningful framework? The numbers are probably impressive! At the same time, all the time redistributing and creating nothing new, less and less also remains what can be redistributed.

And unlike Latvians, Lithuanian emigrants from their new home countries brought many more business ideas to Lithuania. The implementation of these business ideas of Lithuanian emigrants has also boosted the speed of development of the Lithuanian economy. Of course, a Latvian domestic entrepreneur is relatively poorer than businessmen from the neighboring countries. In any case, the answers to Latvia's backwardness can be found in the decisions made by our public administration and politicians, as well as in the unfounded expectations of the general public, which are unreasonably uplifted by politicians. At the moment, when transit cargo volumes in Latvia are shrinking, there are politicians who continue to maintain the myth that as soon as the people elect them, they will immediately resume transit cargo flow, but in the current geopolitical conditions and order in Russia, without changing the location of Latvia in the EU - it is not possible, but there are still people who believe it.

Another example is that Latvia, with its energy potential, cannot expect energy-intensive production facilities to be located in this country. There are many countries in the world where not only electricity, but the prices of all energy resources are many times lower than they are in Latvia, especially if fossil energy resources are used. And if we want to smelt aluminum in Latvia, then we have to ask the question, where will the relevant raw material be obtained? As far as I know, there is no mining of bauxite (aluminum raw material) in Latvia, and the amount of aluminum scrap is not enough to be used on its own - thus imports are necessary, but this means additional transport costs. Thus, the most important question is the competitiveness of this manufacturer in a market where aluminum or its products cost as much as they do and cannot be sold at a price this manufacturer requires. In the modern economy, the most important thing is not the cost of raw materials or energy resources, but labor costs, because everyone (both the state, municipalities and people) want to receive high wages, which return to the economy through purchases and services, and experiences. In turn, high salaries can be obtained only by creating high value-added goods, services (experiences).


Latvia has developed a completely different relationship between the state and the public, including entrepreneurs. The difference between the attitude of Latvia and Estonia, and Lithuania towards investors can be seen with the naked eye, because in Latvia, for example, building a factory, warehouse or shop requires much more coordination and bureaucratic procedures, i.e., more time, than in Lithuania or Estonia and is much more expensive. In one municipality near Riga, several entrepreneurs have been waiting for permission to build a business complex for four years, one of them got tired and built it in Lithuania instead. Strange, but at the same time the municipality wants people to live in its territory, so it can receive their personal income tax. What can we say, if the coordination of a single plant (repair after a fire) in Latvia takes as much time as building and launching of a large, new production site in Estonia? In Lithuania, there is also a public discussion of the construction plans, where everyone - pensioners, students, workers, competitors, illiterates, friends of the environment and hunters - can express their opinions, but decision-makers make a decision that is favorable for the project applicant - the business. In addition, often the investor in Latvia has to build a public infrastructure - communications - road, electricity, water, sewerage networks, etc. - at his own expenses, in addition to the fact that he builds his own factory. All the mentioned factors deter investors from Latvia, but in the neighboring countries the same investors are welcomed with open arms and all their wishes are fulfilled in regard to the necessary infrastructure or even workforce training etc. What kind of prosperity and growth can we talk about, if we often treat potential investors in Latvia as potential criminals or even worse? And then there is the paradoxical situation that all the Baltic states are the EU, which sets the same rules for all countries, but local interpretation and implementation together with the “hangover after the financial party” makes Latvia a kind of an outcast with whom it is better not to get involved in any business. Who wants to live in a house or invest in a country that is constantly being overhauled, as is the case in Latvia in the recent years? Who will want to build something if there is a risk that after some time someone can come with a bulldozer and level everything? First there was the “pedal to the metal” in mortgage lending, then politicians decided and implemented the key principle - you can no longer pay the mortgage - return the keys to the bank and you owe nothing more and as a result mortgage lending fell sharply, as the down payment increased significantly but no new residential houses were built - so there was less work for builders, manufacturers of building materials, developers of real estate projects had to either freeze the implementation of projects that had not yet begun or hope for miraculous “clarity” of legislators, changing the principle of returned keys. The judicial system also shows surprising statistics, as the lion's share of disputes between the state (municipality) and private companies, the court's decision has been in favor of the public sector, although a 50:50 would be a more logical result. There are tens of thousands of options for disrupting and destroying business, and unfortunately Latvia has developed technology based on such solutions - how to disrupt, how to forbid, or drive through the labyrinth of bureaucracy, rather than take the most important step to help business realize its intention. If we continue like this, then after a while we will not be masters in our land, but servants (employees) to foreign masters.

British Prime Minister Winston Churchill once said that the United States always makes the right decision when it has tried all other possible solutions. I think the attitude of public administration and domestic politicians towards entrepreneurs could be changed by the growing activity (investments) of Lithuanian and Estonian entrepreneurs in Latvia and their quandary of why Latvia has a “different” procedure than their home countries, even though the whole Baltics are part of the EU, as well as by the position of Latvians who have already created renowned competitive global products and services. I do not see any other solution, because the economy of resource redistribution as practiced in Latvia entails future risks of existential nature. Unfortunately, billions of EU Structural Funds money will continue to sustain a redistributive economy, where the initial benefit may be significantly less than the damage done in the future.