Summary: While Latvia had one of the world’s fastest growth rates before the recession, it has lost about a quarter of its GDP since the recession hit. Although the economy is now growing at a good pace, the projections of the ministry for economic affairs suggest that, at best, it will not be able to reach its pre-recession level before 2015. The basic reason for this is that the country’s development was based not on industrial production but on an influx of cheap and readily available foreign capital, which was invested in consumption in the form of loans granted by the commercial banks, thus creating an illusion of growing and sustainable prosperity. A boom in construction and real estate transactions boosted trade and imports of goods, and led to a surge in inflation and a rise in wages in a general trend that continued until capital stopped flowing into the country because of the worldwide recession. When construction activity and domestic trade suddenly dried up, the other sectors of the economy were not strong enough to provide the country with sufficient revenue, which is why the recession was so severe and painful.
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ISBN: 978-92-830-2015-8
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