University of Limerick

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1 University of Limerick The Economic Performances of Ireland and Latvia from 1990 until To what extent a similar development, so called Irish miracle can be possible for Latvia? Dina Ibragimova, ID: , European Studies

2 Table of Contents Abstract 1. Introduction 2. Literature Review 3. The Economic Performance at the National Level in Ireland and Latvia 3.1 The Growth in the Output and the Living Standards The Gross Domestic Product The Gross National Product The Government Accounts 3.2 The Employment and the Unemployment 3.3 The Income Inequality 3.4 The Inflation and the Consumer Prices The Purchasing Power Parities 3.5 Exports, Imports and the Trade Balance 4. Reasons behind The Celtic Tiger 4.1 The Driving Factors behind the Celtic Tiger and Irish Success The Foreign Direct Investment Labour supply (population change, fertility rate, immigration, education level) 4.2 To what extent the Economic driving Factors can be implemented in Latvia 5. Performance in the Public Sectors 5.1 The Health Services 5.2 The Education Services 5.3 The Pensions

3 5.4 The Child Care benefits 6. Conclusion 7. Research Methodology 8. Research Findings 9. Conclusion 10. Bibliography 11. Appendices

4 Abstract This project aims to show the economic performances of Ireland and Latvia from 1990 until Rapid economic growth in Ireland began in the 1990s and during this time Ireland transformed from the poorest European Union member into one of its wealthiest (Hansen, 2006:3). This project is an attempt to show to what extent a similar development may be possible for Latvia which is currently the European Union s poorest member. It is important to understand the driving factors behind the Celtic Tiger and whether the reforms implemented in Ireland could be introduced in Latvia. Economy doubled in size in Ireland in 1990s and this project aims to show if similar economic success is possible in Latvia (National Development Plan, :4). This project argues that the most important reasons behind the Irish success were the fact that Ireland is an English speaking country and the significant amount of Foreign Direct Investment from the United States was invested in Ireland despite geographical location. Latvia regained its independence in May The breakaway from the Soviet Union and the overall transformation from planned economy to a market economy was a hard lesson for Latvia. It led Latvia to an output collapse and the high inflation rate. From 1994 the economy started to grow again and this project attempts to compare economic performances and aims to explain to what extent Latvia has reached Ireland s economic performance level. The entire project will conclude that there is no Irish economic model to follow for Latvia. It is the Irish growth miracle that shows a pessimistic picture for Latvia as several driving factors behind the Celtic Tiger were unique to Ireland (Hansen, 2006:13). The types of sources this project will engage with are mainly books, surveys, journals and country economic reports. I this project primary and secondary sources in English, Latvian and Russian will be used. Moreover a lot of data and statistical information will be used. Graphs will be included in the project using data mainly from epp.eurostat.ec.europa.eu, and and Latvia s Bank home page. Books will be accessed from library and some books will be accessed from Latvia. Interview is planned with Roberts Zile vice-chairman for Union for Europe of the Nations Group and a Member of European Parliament. Data will be described using

5 quantitative analysis and qualitative analysis. Descriptive statistics will be used to analyse data. Patterns of the data that show influence of history will be analysed.

6 Introduction This project will focus on the economic performances in Ireland and Latvia at the macroeconomic level. This project aims to compare the economic development in Ireland and Latvia since the 1990s and it will conclude weather it is possible for Latvia to achieve the same economic success as Ireland did. Firstly this project will show the economic performances at the national level in Ireland and Latvia. Therefore the Gross Domestic Product, the Gross National Product and the Current Account will be discussed in both countries. Ireland emerged as the fastest growing economy in the western world in the late 1990s and Latvia has grown at a remarkable pace since 1995 reaching the best performance in Europe in The transition period since the breakdown of the Soviet Union has been remarkably difficult for Latvia but the available data shows that the growth continue in Latvia. This chapter will also show the employment and the unemployment situation in both countries at a comparable level. It will address the issue of the income inequality between the two countries as a major issue of the difference in the living standards. The inflation and the consumer prices change in the period from will be discussed. Data shows that since joining the European Union Latvia has experienced the highest inflation in Europe. The rapid economic reforms has influenced Latvia s economic situation positively and negatively. Latvia has benefited from the liberalisation of the markets, the intensive inflows of the foreign direct investment and the institutional changes that resulted in more transparency. On the other hand Latvia s agricultural sector has diminished and net trade balance has been negative since the breakdown of the Soviet Union. Imports have increased dramatically but Latvia does not have the comparative advantage in the trading sector. The overall question is whether the recent impressive growth performance can be sustained over the medium long term and whether Latvia s economy will follow the Irish Growth Miracle. This project argues that Latvia is not competitive enough in the World Market and that she needs to increase exports to stay compatible in the World Market. Ireland is competitive in the World Market because she has experienced impressive increase of the Foreign Direct Investment that led to the amazing economic transformation from the poorest economy to the richest economy (Hansen, 2006:3). In the late 1990s Ireland has become one of the world s leading exporters

7 of the software and the fastest growing economy in the western world (Róisín Ní Mháille Battel, 2003:94). This chapter shows that the Irish success was an economic miracle and there is no Irish economic model that Latvia could follow to gain the same economic success (Hansen, 2006:3). Data show high difference between the two economies and the next chapter shows reasons for the rapid economic growth in Ireland. The economic driving factors behind the Celtic Tiger were unique to Ireland In the last 15 years Ireland has grown into the stable and the strong economy and this chapter aims to show if Latvia will follow the same Irish success. The good news for Latvia is that in reality there is no Irish economic model to equal the Asian Tigers and Ireland does not have a worldclass industrial system like Japan or Taiwan (O Sullivan, 2006:80). Therefore if Latvia implements a combination or a system, of pragmatic, business-friendly policy making, supported by a healthy supply of labour, the framework of European economic convergence and positive global trends in investment and interest rates she might succeed the same as Ireland did (O Sullivan, 2006:98). This project will aim to show that since joining the European Union Latvia has highly increased employment in service sector and has attracted the Foreign Direct Investment despite the decrease in the trade in manufacturing, agriculture and fishery. Employment and the labour productivity in manufacturing in Ireland is a lot higher than it is in Latvia. Moreover since the breakdown of the Soviet Union Latvia has gone through the privatisation and private sector started to develop only since the independence. It proved to be a difficult transformation from the planned economy to the market economy. This chapter shows that Latvia has developed the economic performance since the breakdown of the Soviet Union despite the corruption, the liberalisation and the high competition from the West. Latvia is highly underdeveloped in the rural areas because farms were not competitive and productive enough in the comparison with the Western farms. Latvia still has the high number of the small farms and agriculture has decreased since joining the European Union. On the other hand employment in the services sector has increased dramatically. Following chapter shows weather market economy actually has improved public service in Latvia and if social conditions are better under market or command economy.

8 The following chapter will compare the performances in the public sector in both countries. Firstly this chapter will argue that in Ireland health service is more effective because it is more developed and is accessible for all inhabitants but in Latvia some people are denied medical aid because of the lack of means. Mostly pensioners suffer in Latvia as they have the lowest income and are able to cover only basic needs from their income. There is still a high belief between the older people that the Soviet Times were a lot more prospective for them because health system, education system and employment were provided by government. In the planned economy full employment, free healthcare and free education was provided, but in the market economy this is not longer possible and large amount of believe that standard of living was a lot higher during the Soviet times. This chapter will argue that the higher education is not available for all inhabitants in Latvia because the living expenses are too high due to the inflation and in the rural areas there is a high employment rate therefore people from country are not able to afford the higher education for their children. Government spending should be increased for the public services to achieve economic performance as Ireland did. This project will conclude that toward the end of the twentieth century, the unexpected occurred: the coming together of a number of historical, social, political, economic, and technological factors, both external and internal, some planned and some fortuitous that stimulated the Irish economy into a spectacular growth (Róisín Ní Mháille Battel, 2003:100). On the one hand this project argues that Latvia has developed its economic performance since joining the European Union and has increased its competitiveness and productivity but on the other hand Latvia still stands far from the economic performance that Ireland experienced during the Celtic Tiger. This entire project will conclude that there is still a high gap between the living standards in Latvia and Ireland. Factors that could reduce this gap should be still completed and they are: the expansion of capital, macroeconomic stability, liberalization, established property rights, institution building and stable rule of law, reduction of inflation and the prevention of corruption and increased government spending on education and health services. If Latvia successfully implements those factors she can achieve better economic performance and follow the Irish economic miracle.

9 Literature Review In recent years more and more academic writers analyse whether Irish successful economic experience could be implemented in the New Member States. This project engages with the literature where Irish and Latvia s economic situation is described and analysed. Examining the literature and the data available this project will describe whether the same economic development can be possible for Latvia. Majority of authors argue that Irish economic performance can be considered as The luck of Irish and that Ireland s economic growth was due to a fortunate confluence of events and this economic miracle was unique to Ireland and not possible for Latvia or any other New Member State to implement (Hansen M., 2006:3, Haughton, J., 2008:145, Battel R.N.M., 2003:94). On the one hand this project disagrees that economic miracle is not possible for Latvia. Reason behind this argument is that from 1973 up to 1986 Ireland did not perform well and the national debt to GNP ratio rose by almost 90 per cent and was per head of population three times higher than Mexico s and inflation reached 20 per cent (Battel R.N.M., 2003:99). If we compare this to Latvia, it is just 4 years since Latvia joined the European Union but Latvia is not experiencing as high inflation or national debt as Ireland did therefore positive picture for Latvia s further development. This project agrees that one of the major factors for the Irish economic success was increase of the Foreign Direct Investment in the 1990s (Ruane F., Ugur A., 2008). One can state that the oil shock in Western countries responded with the boom in the energy-saving computer based technological innovations from which Ireland benefited dramatically ( Campos N. F., Coricelli F.,2002). On the other hand rapid increase of the Foreign Direct Investment could also result in a rapid decrease in the economic growth during the world economic crisis therefore focus should me made also on the national investment. Some authors assert that Ireland is still far behind Northern European countries and that economic transformation in Ireland since 1994 was not all that remarkable (Mc Aleese D., O Hagan J., Haughton J., Cantillon S., 2008). Sara Cantillon argues that Ireland is still experiencing consistent poverty and gap between rich and poor has increased (Cantillon S., 2008: ) Anna Nolan contends that despite huge rise in the health expenditure complaints about the health system appear to increase (Nolan A.,2005) This project suggests that Latvia

10 should be compared to Ireland as it is a good example how to achieve economic development. Economic Ministry of Latvia argue that overall integration in the European Union has positively influenced economic development in Latvia therefore investment, income and employment has increased and the main trade partner is the European Union (Latvian Economic Ministry, 2007). On the other hand Economic Ministry of Latvia does not include negative impact on agriculture and it does not mirror the gap between rich and poor. Moreover Coricelli and Campos discuss the transition period in Latvia and contend that there was a massive output fall during the 10 years and the low productivity rates, no investment and in 1990s growth rates declined dramatically (Campos N.F., Coricelli F.,2002). Balance of the government budget is improving but at the same time inflation and the current government deficit is very high (Latvian Economic Ministry, 2007). Moreover net export has been negative since the breakdown of the Soviet Union (Latvian Economic Ministry, 2008:9). Positive factors are that the Gross Domestic product has increased remarkably since 1995 and Latvia has experienced economic growth since joining the European Union despite the fact of economic transformation (Central Statistical Bureau of Latvia, 2007:51). Also Gross National Product has increased but if it is compared to the GNP in Ireland dramatic gap between two economies can be proved (

11 Performance at the national level in Ireland and Latvia

12 Growth in output and living standards Gross Domestic Product Firstly this project will aim to compare Latvia s and Ireland s performance at the national level. This chapter aims to show the performance in the Gross Domestic Product in Latvia and Ireland. GDP is defined as a total market value of all final goods and services produced within a given country in a given period of time. Since the breakdown of the Soviet Union Latvia experienced rapid growth in the domestic demand, the consumer spending and the investment. Latvia is situated on a vital east-west trade and the energy transit routes between the West Europe and Russia. Latvia is a member of the European Union and NATO since 2004 and World Trade Organisation since 1999 and at the end of 2007 she has joined the Schengen zone. Despite the strategic location of Latvia performance of export has not been spectacular in Latvia as in the last 3 years it has been negative (Latvian Economic Ministry, 2008:9). Latvia experienced high growth rates since 2004 but since 2007 the growth rates has diminished due to the decrease in the domestic demand and some external economic factors that had influenced not only Latvia. Those factors are: United States instability, inflation in oil prices and inflation in the consumption products. Trade, construction and the housing market has slowed down not only in Latvia but even to a higher degree in Ireland. Despite the fact of economic slowdown, Ireland is performing well above Latvia and high economic transformation is needed for Latvia s economy to reach the same economic performance as Ireland has. Firstly this project will compare economic performance in the Gross Domestic Product. Ireland has experienced dramatic increase in the GDP since 1995 but the fact that the GDP is not really a good indicator of affluence has to be considered. Reason for this is that not all goods and services produced in Ireland accrue to Irish citizens, for example, profit that is repatriated does not contribute to local incomes and a more satisfactory measure is Gross National Income (Haughton J., 2008:147). Ireland had a very high investment during the Celtic Tiger as many firms invested in Ireland and she experienced high profit outflows. This was achieved despite the fact that the national sector was not impressive enough in the world market. For example in 1960 GNI was six per cent higher than GDP but in 2007 it was sixteen per cent lower than GDP (Haughton J., 2008:147).

13 GDP at market prices (euro per inhabitant) Source: The graph above shows Ireland s economic success in the 1990s and the increase in Latvia s GDP since the collapse of the Soviet Union. Increase in the GDP in Latvia can be explained with the opening to the free market. The Celtic Tiger that Ireland experienced in the 1990s slowed down in 2001 but Ireland still remains as a strong economy comparing to Latvia. This project argues that Ireland experienced rapid GDP growth due to three factors: Employment rose at a historically unprecedented rate of 3.8% annually; Output per worker continued to grow rapidly An increase in the proportion of adults in the population which can be explained with the baby boom of 1970s (Haughton, 2005:125) This project argues that both countries benefited from joining the European Union. In Latvia after the breakdown of the Soviet Union in the early 1990s GDP fell in both agricultural and industrial production. Despite the economic transformation in 1994 GDP started to increase and in 2003 it had increased by half. Moreover GDP continued to grow after joining the

14 European Union and the economy did not slow down. Ireland s case was different because she benefited from the high investments from the USA which made immediate effect on the output, the employment and the exports. In Ireland the exports had risen to 94% of the GDP in 2002 (Haughton, 2005:127). Moreover since Ireland joined the EU in 1973 she received net inflow under the Common Agricultural Policy and farms received subsidies. Latvia has a high number of small farms that serve just for domestic trade or private needs and she is not receiving the CAP subsidies to a high level. This entire graph proves the recent impressive growth performances in the both countries. The question is whether Latvia is able to develop and reach the same level of the GDP as Ireland has. It is also important to understand weather it is more important to increase the GDP or the GNP. To reach better economic performance Latvia has to focus on labour, capital and increasing productivity and foreign direct investment. Latvia can not focus only on increasing the FDI because the fact that Ireland received so high FDI from the United States was unique.

15 Gross National Income As this project mentioned before the Gross National Income characterises income from economic activities of residents and is more important to measure the performance of the national economy. Gross National Income equals the GDP plus the property income, the compensation of employees and the subsidies receivable from the other countries, less the property income, the compensation of employees and the taxes from the production and the import payable to the other countries (Central Statistical Bureau of Latvia, 2007). Gross na(onal income, current prices, millions of euro Source: This graph shows Latvia s poor performance comparing to Ireland s performance. Reason for this is because Latvia was performing under the Command Economy prior 1990s and since the breakdown of the Soviet Union Latvia had to transform the whole economy. Establishing the administrative institutions, privatising the state companies and establishing the

16 competitive private market was highly difficult task for Latvia s economy. Therefore this graph shows that from 2005 to 2008 Latvia has increased thegnp but to a very low degree comparing to Ireland.

17 Government accounts Deficit (-) or surplus (+) shows general government ( the sub sectors of the central government, local government and the social security fund) net borrowing or net lending. This is the net result of the use of resources that are available to the general government (Central Statistical Bureau of Latvia, 2007:79). General government deficit (-) / surplus (+) (Millions of euro)

18 General government deficit and debt notification is a report submitted by the Member States of the European Union to the European Commission on the surplus or deficit of government finances and on government debt ( General Government Gross Debt (millions of euro)

19 General government (excluding social security) expenditure on health refers to expenditures incurred by central, state/regional and local government authorities, excluding social security schemes. Included are non-market, non-profit institutions that are controlled and mainly financed by government units ( General Government Expenditure (millions of euro)

20 Employment and Unemployment The goal for every economy is to reach the high employment and the low unemployment it also has been proved that the full employment is not possible in the market economy. This graph shows the relationship between Ireland s and Latvia s employment from 1992 up to For Latvia data is available only from This chapter argues if the investment and the jobs can flow rapidly into Ireland they can leave quickly too. Therefore economy can not rely only on a high proportion of foreign companies that provide jobs. Ireland experienced the 10 years of the rapid growth, with the unemployment rate having been brought down from some 14 per cent to around 4 per cent (OECD, 2001:1). Ireland highly depends on the Foreign Direct Investment and is highly vulnerable and influenced by the global economy. For example in 2007 there were 292,000 jobs in industry; yet since 1970an estimated 274,000 industrial jobs have been lost (Haughton J., 2008:171). This chapter argues that Latvia should not rely only on the FDI jobs only but she should also focus on the National Investment to ensure employment also from the domestic companies. Employment annual averages Source: This graph shows that employment has increased dramatically in Ireland since 1992 and it has continued to grow but in Latvia there is only a small increase of the employment since

21 1998. Ireland has doubled the employment level since 1992 but Latvia in 2007 has the same level of employment as Ireland had in Therefore Latvia is 15 years behind in the employment level comparing to Ireland. Latvia, as the transition economy suffered the increase of the unemployment since the breakdown of the Soviet Union as no longer the centrally planned economy existed and no longer was the employment provided by the state. This resulted in the capital shortage and the breakup of the large monopolies required the encouragement of the private businesses (Turnock,1997:136). Market economy was completely new to the Latvian society and the transition was very hard to overcome. Moreover the command economy controlled the international trade and the currency exchange rates whereas the market economy meant the development of the private sector. Moreover the market pricing and the higher spending and printing more money brought also higher inflation and stimulated demand of Western goods (Turnock, 1997 : 137). The Soviet Union factories were closed down or privatised but just after a short time investors understood that all production has to be changed as it was not adequate to the Western standards. Therefore employment has grown comparably slow in Latvia because of the economic reform that had to be implemented. To provide employment all state owned enterprises had to be privatised or restructured and that could not be done overnight.

22 Unemployment annual avarages Source: The unemployment situation in both countries looks positive. Ireland and Latvia has decreased their unemployment level significally. This graph shows that Latvia in 1998 had the same level of the unemployment as Ireland had in between 1991 and The unemployment level had decreased dramatically and in 2007 it differed only by 1.4% whereas in 1998 it differed nearly by half which was 6.8%. Latvia has changed dramatically only in 9 years. The major decrease in the unemployment may be explained because of Latvian people emigrating to the West and the increase of the Foreign Direct Investment that has created more employment and stabilised the private sector. Also this project argue that since joining the European Union Latvia has become more open for tourism, the FDI, the labour movement and the international trade. All those factors have decreased unemployment significantly. Latvia has reached nearly the same unemployment level as Ireland has.

23 Income Inequality This part aims to show income inequality between Ireland and Latvia. There is a major difference between the minimum wage in both countries. Under the Soviet system minimum wage was very low but prices where highly lower than in the West and the real wage had higher value. People were able to buy more for the same income. The Minimum Wage ( ) Source: This graph shows that minimum wage in Latvia in 2000 was 10.9 times smaller than in Ireland. In 2007 minimum wage is still 8.3 times smaller than in Ireland. From 1998 till 2007 Latvia has increased its minimum wage by 97.3 euro and in comparison with Ireland it is 5 times smaller increase than in Ireland from 2000 till In 2008 Ireland has increased its minimal wage just by 30 euro but Latvia has increased its wage by euro. Data shows the higher increase for Latvia but the gap between the minimum wage in Latvia and Ireland in 2008 is still euro. This is an amazing difference and this project argues that to achieve the standard of living that Ireland has today will take at least 20 years.

24 Proportion of full time employees with earnings on the minimum wage (%) Source: This graph proves that the wage situation in Latvia is very pessimistic comparing to Ireland. For example in 2001 full time employees with earnings on the minimum wage were 7.6 times higher than in Ireland. With the data available one can argue that significant decrease of full time employees with earnings on the minimum wage happened in Ireland from 1999 to Proportion had decreased by 11.5%. The reason for this was the Celtic Tiger that Ireland experienced in 1990s. As a result employment and income increased in a private sector. Latvia has decreased its proportion since 2000 by 4.71% but the percentage employed on the minimum wage is still proportionally very high.

25 Inflation and Consumer Prices Inflation is a rise in the general prices of goods and services over the period of time. This chapter aims to show inflation from 1997 to 2007 in Latvia and Ireland. There is no data available from 1990 to 1997 in the euro stat database. One can argue that the price inflation is not proportional to the minimal wage increase. This project argue that Latvia has not increased the standard of living for the minimum wage receivers but it has increased the standard of living for entrepreneurs and for those who do not depend on the minimal wage income. Overall Latvia was experiencing high inflation, especially in 2007 it reached 10.1 per cent and if this is compared to Ireland or the overall world economy it is dramatic number. In the global context inflation throughout the world has been low and averaged 2.3 per cent in the advanced economies and 5.3 per cent in the developing economies (Shelburne R.C., 2007:1). Infla(on/Annual average rate of change in Harmonized Indices of Consumer Prices (HICPs) Source: This graph shows inflation situation in Ireland and Latvia. This graph addresses the issue of the high inflation since Latvia joined the European Union. Latvia has benefited a lot from the European Union but she has also brought the economic costs to the country. This graph

26 proves that the inflation rises year after year and especially in 2007 there was an increase of 3.5 per cent in the Consumer Prices. In 1997 Latvia had 6.8 per cent higher inflation than Ireland did, but in 2007 it is 7.2 per cent higher than in Ireland. This graph shows that the highest inflation that Ireland had was 5.3 per cent in 2000 during the Celtic Tiger. This project argues that the economic development also increases inflation and when economy has stabilised the prices stay stable. In Ireland inflation stays under 3 per cent but in Latvia it has increased dramatically and has reached 10.1 per cent in 2007.

27 Purchasing Power Parities (PPP) and comparative price level indices Purchasing power exchange rate equalizes the purchasing power of different currencies in their home countries for a given basket of goods. Using the PPP basis is arguably more useful when comparing differences in living standards on the whole between nations because PPP takes into account the relative cost of living and the inflation rates of different countries, rather than just a nominal GDP comparison (Source: Purchasing Power Parities Source:

28 Exports, Imports and Trade Balance Exports Source: Imports Figure 1 Source:

29 Trade Balance (Exports-Imports) Source: The external balance of goods and services is the difference between exports of goods and services and imports of goods and services. If positive, the economy exports more goods and services than it imports, and vice versa. External Balance of Goods and Services, Current Prices, Millions of euro Source:

30 Current account quarterly trade in goods (millions of euro) Source: The balance of payments is the statistical statement that systematically summarises, for a specific time period, the economic transactions of an economy with the rest of the world. The Balance of Payments is broken down into three broad sub-balances: the current account, the capital account, and the financial account. Current account - goods: Goods cover general merchandise, non-monetary gold and, goods for processing, repairs on goods and goods procured in ports by carriers. The most important component, general merchandise, includes all movable goods whose ownership is transferred from a resident to a non-resident and vice versa.

31 Current account trade in services The balance of payments is the statistical statement that systematically summarises, for a specific time period, the economic transactions of an economy with the rest of the world. The Balance of Payments is broken down into three broad sub-balances: the current account, the capital account, and the financial account. Current account - Services: The production of a service is linked to an arrangement made - between a particular producer in one economy and a consumer or group of consumers in another economy - prior to the time that production occurs. Thus, international trade in services is closely linked to international production of services, as the production process itself involves a resident and a non-resident. The main breakdown of services includes three sub-items: transportation, travel, and other services. Source:

32 The external balance of goods and services The external balance of goods and services is the difference between exports of goods and services and imports of goods and services. If positive, the economy exports more goods and services than it imports, and vice versa. Source:

33 Reasons behind the Celtic Tiger

34 Driving factors behind the Celtic Tiger and Irish success Foreign Direct Investment The primary focus of Ireland s strategy to attract Foreign Direct Investment is to create the favourable economic and the fiscal environment which is supportive to the industry. The forces of the growth in Ireland are firmly embedded through the favourable demographics, the rising human capital formation and the high rate of the technology oriented investment (OECD, 2001:1). This should be a strategy for Latvia as well to attract the Foreign Direct Investment. Ireland has established Industrial Development Authority (IDA) which is attracting the FDI in Ireland. IDA is supporting many companies from the different countries. Ireland is one of the most popular and profitable locations for the multinational companies wishing to invest in Europe. Data below shows that the most companies supported in Ireland are from the United States. Origin of IDA supported Companies 1% 3% 5% 17% 4% 11% 11% 48% United States Germany United Kingdom France Rest of Europe Japan Rest of Asia Pacific Rest of World Why Ireland is one of the most profitable locations for multinational companies? Ireland has a low corporation regime and the high skill levels of the workforce. One of the reasons why many companies chose Ireland is also that Ireland is an English speaking country whereas in Latvia main languages are Latvian and Russian. Ireland have been focusing on attracting the FDI through the industrial policy since 1950s and she experienced the high investment in the

35 1990s because of the tax incentives (10% corporate tax rate), the available grants (80% companies have been granted) to attract the FDI, the favourable climate and the outward looking approach (Organisation for Economic Cooperation and Development, 1994: 7-34). Moreover grants were not repayable and the OECD average corporate tax rated during the same time was 30-35%. The only problem for Ireland is that the indigenous companies were lagging behind the international companies because Ireland in 1990s was giving 50 million pounds a year to the foreign firms. Despite the high dependence on FDI especially originating in the United States Ireland performed strongly during the slowdown in the technology sector in mid 2000 (OECD, 2000:23). Since joining the European Union 70% of the manufacturing companies have been set up in Ireland and export has increased dramatically (Organisation for Economic Cooperation and Development, 1994). In comparative economic indices, Latvia in 2007 has progressed or regressed moderately and according to World Economic Forum data, Latvia is placed only 54 th in the World in the Business Competitiveness Index (Ministry of Economics, 2007:1). Moreover Latvia has not launched any reform programmes compared to other regional neighbours as Estonia, which is firmly performing better (Ministry of Economics, 2007:1). In the view of business, particularly worrying are such areas of macroeconomic magnitude as: inflation (82 per cent), tax rates (71 per cent), labour sufficiency (64 per cent), changes in legislation (59 per cent), and infrastructure costs (49 per cent), shadow economy (39 per cent), competitive pressures (36 per cent), corruption in the state sector ( 34.9 per cent) and corruption in the municipal sector (27.1 per cent) (Ministry of Economics, 2007:2). Therefore this project admits that Latvia has to work very hard on macroeconomic stabilisation to increase her economic performance.

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