Latvia: Turbulence Ahead

Business Week
Eastern Europe
January 11, 2008
Pauls Raudseps

With their country on the verge of an economic downturn, Latvians prepare for a bumpy ride as a prime minister from leaner years, Ivars Godmanis, returns

The new year finally brought some bracing winter weather to Latvia after a gray, muddy Christmas. It also saw the return to the prime minister’s office of Ivars Godmanis, one of the leaders of the Latvian independence movement, after almost 14 years in political limbo. Time for Latvians to fasten their seatbelts.

Godmanis’ first term as prime minister from 1990 to 1993 came during one of the most exciting and at the same time difficult periods of Latvian history, when the country broke away from the Soviet Union and weathered the first, traumatic years of the transition from a planned economy to market capitalism. For many Latvians, Godmanis — with his craggy features, intense personality, and emphatic oratorical style — is the most vivid symbol of that time of freezing apartments, exploding prices, and growing unemployment.

Now, with the country on the verge of an economic downturn, he’s back, and people are worried. In a recent survey by the polling firm SKDS, only 19 percent think that 2008 will be better than 2007, and 33 percent think it will be worse, the most pessimistic result since polling on this question began in 1999. As the new prime minister himself said in a televised address on New Year’s Eve: “A lot of people are thinking: Well, what’s Godmanis going to scare us with this time?”

Quite apart from the symbolism of Godmanis’ return, there are real reasons for concern. The property market, one of the main drivers of Latvia’s EU-leading economic growth over the last three years, is starting to contract, and nobody knows how low it will go or how much of the economy it will pull down in its wake. Many foreign economists are predicting a hard landing, and even the relatively sanguine president of the Bank of Latvia, Ilmars Rimsevics, is predicting that the coming year will be painful for the retail, real estate, and construction sectors.

Yet even as the country is hit by an economic slowdown, inflation continues to rise. It recently reached its highest level in over a decade, 13.7 percent year on year in November, and the central bank is predicting that it will continue at 12-13 percent in 2008.

The coming economic pain will do nothing to soothe a public increasingly disenchanted with the country’s political class. Two large demonstrations in October and November against attempts to fire the head of the anti-corruption agency KNAB forced the previous prime minister, Aigars Kalvitis, to resign, and political rhetoric during the last weeks of 2007 was dominated by talk of regaining society’s trust.

In this unsettled atmosphere, Latvian President Valdis Zatlers made it his goal to nominate a new prime minister who could steer the ship of state through what Godmanis took to calling the coming time of turbulence. Zatlers, a surprise choice foisted on the public by Kalvitis’ People’s Party (TP), even got up the nerve to reject TP’s second mystery candidate in less than six months, Edgars Zalans. Support had already been lined up among all the old coalition parties for this young, inexperienced mayor of a small town in western Latvia. Much to TP’s chagrin, Zatlers nominated Godmanis of the small Latvia’s First Party/Latvia’s Way instead, citing his experience and sense of responsibility. Godmanis’ government was duly confirmed by Parliament on 20 December. Moreover, the Latvian president, whose constitutional authority is very circumscribed and who plays no direct role in the executive branch of government, took the highly unprecedented step of laying out a political program for the new cabinet that, in his opinion, would allow it to regain the trust of the population.


But whatever Zatlers might hope for, the Godmanis cabinet is hardly a clean break from the discredited policies and personalities of the past. A half-hearted effort to get the opposition Jaunais Laiks (New Era) party to join the coalition failed. Consequently the “new” government is not only made up of the same four parties as the old government, but 16 of 19 ministers are back in office, including Godmanis himself, who was minister of the interior under Kalvitis. Aside from promising to try harder to explain his policies to the people and listen to their concerns, Godmanis doesn’t have any fresh policy ideas to offer. In particular, he has shown little enthusiasm for taking steps to reassure the public that this government is not going to impede the increasingly effective work of the KNAB and the prosecutor’s office in cleaning up the corrupt nexus between influential “oligarchs,” political parties, and the bureaucracy.

Progress on strengthening the ability of law enforcement agencies to fight corruption is intimately linked to the government’s ability to weather the coming economic difficulties. The public will not be willing to take any bitter economic medicine if the government is not able to restore some modicum of trust in itself. If Godmanis proves to be nothing more than Kalvitis with a bearded face, the focus of public discontent will certainly turn to a proposal by the labor unions to amend the Latvian constitution, allowing the parliament to be dismissed by a referendum initiated by the voters. The procedure for implementing such changes in the constitution involves gathering the signatures of 10 percent of eligible voters, followed by a vote in parliament itself, and, if the legislature rejects the changes, a referendum.

The changes are popular, as is the prospect of dismissing the present parliament, a move backed by 62 percent of the voters, according to the Latvijas fakti research company. True, the amendments themselves would not lead immediately to early elections, but support for the changes will be seen by many as a tangible way of expressing their opposition to the government. The very fact that this process will be drawn out almost guarantees that it will be at the top of the political agenda for the first half of 2008, just when inflation is expected to peak.

Turbulence indeed.