Commission Report (2002): Latvia

• Progress since the last Regular Report
• Overall assessment
• Conclusions

Chapter 15: Industrial policy

Progress since the last Regular Report

Since the 2001 Regular Report, progress has been made in this area. Latvia has confirmed its new approach to industrial policy, but only limited progress has been made in terms of implementation. As in previous years, the Government has focused on investment promotion. Limited progress has been made to strengthen administrative capacity.

As regards industrial strategy, the reflection on ways to promote competitiveness has further advanced. Latvia has confirmed the shift away from a sectoral approach towards the promotion of growth-generating activities and cluster development. However, policy documents, including the industrial policy guidelines, have not been updated and are still very vague on delivery mechanisms, responsibilities, resources and timetable, thus not allowing for proper monitoring.

The Ministry of Economic Affairs and the Latvian Development Agency, which has been reorganised into a state agency, are playing an increasing role in the promotion of industrial clusters. The business dialogue has been strengthened through the involvement of the business community (industrialists, professional associations and bankers) as well as of academic and research institutions in the cluster pilot projects. The dialogue has been particularly fruitful in the IT and forest-based sectors. However, it is not yet clear how these initiatives will be continued especially with regards to the preparations for structural funds.

Government policy has continued to focus on investment promotion, in particular through the simplification of legal and administrative procedures as well as the introduction of several tax incentives. In 2001 the steady growth in both domestic and foreign investments was confirmed. The real growth rate of gross fixed capital formation was 17.0% and the share of gross fixed capital formation in GDP reached 27.3%. non-financial investment increased by 8%, and machinery and equipment accounted for almost half of it. The manufacturing sector continues to attract foreign direct investments, although at lower levels than before (17% in 2001 against 20--25% in previous years). The good investment performance in Latvia can be attributed mainly to the stable macroeconomic environment, the reduction of interest rates, the expansion of the banking sector, and the improvement of the business environment (see also Chapter 16 -- Small and medium-sized enterprises).

Since last year, privatisation and restructuring have made further progress. In the manufacturing sector the share of private companies in gross value-added now exceeds 90% (see also Section B.1.2. -- Economic criteria).

Overall assessment

Latvia has further developed its industrial strategy. The Government is starting to implement a pro-active innovation policy, which is crucial in a small open economy where technology-driven industries still account for less than one tenth of exports. It has engaged in cluster development with a view to enhancing industrial competitiveness, delivering focused state support and structuring the dialogue with the business community. However, efforts to base industrial policy on an effective strategic planning system and to introduce an effective monitoring and evaluation system should continue in the context of structural funds.

Latvia has achieved a lot in terms of investment promotion. Continued improvement of the business environment to foster investment should remain a priority. Efforts should be sustained with a view to confirming the increase in investment diversification.

The necessary administrative structures are in place, but are still weak. The central body responsible for the formulation and co-ordination of industrial policy is the Ministry of Economy. The Ministry still has to better define its role, including in the preparations for structural funds. The main implementation body is the Latvian Development Agency (LDA). In addition to its new role in cluster promotion, the LDA will take over most of the responsibilities of the Latvian Privatisation Agency, which is about to be liquidated. The LDA needs to be strengthened to ensure that it can play its role as an integrated agency for enterprise development efficiently. The other agencies and governmental bodies involved in the implementation process include the Competition Council, the Latvian Standards Organisation, the Regional Development Council and the Latvian Technological Centre.

Over the past years, Latvia has witnessed increasing activity by business associations and significant improvement in their dialogue with the Government. The strengthening of professional associations should continue and the links between the various consultative mechanisms should be tightened. This will be facilitated by the merger of the secretariats of the Foreign Investors` Council (organisation leading the process of simplifying the business environment) and the National Economy Council (Ministry of Economy`s consultative body representing the interests of the local business community) under the auspices of the LDA.

It should be noted that an important element of any industrial policy is the control of state aid and the compatibility of support schemes with EC rules (see also Chapter 6 -- Competition policy).

Conclusions

In its 1997 Opinion, the Commission concluded that Latvia would be able to cope with integration into the EU in this area, provided that it strengthened measures to foster domestic capital formation and continued to encourage positive trends in privatisation, enterprise restructuring and attracting foreign direct investment.

Since the Opinion, Latvia has continued to make good progress in most areas, and Latvia`s policy towards industry generally complies with the concepts and principles of EC industrial policy, i.e. it is market-based, stable and predictable.

Negotiations on this chapter have been provisionally closed. Latvia has not requested any transitional arrangements. Latvia is generally meeting the commitments it has made in the accession negotiations in this field.

In order to complete preparations for membership, Latvia's efforts now need to focus on further implementing the principles set out in its industrial strategy and co-ordinating its administrative structures, as well as further enhancing competitiveness in the enterprise sector so as to achieve full integration into the Single Market.

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