Page last updated at 17:00 GMT, Wednesday, 31 March 2010 18:00 UK

Latvia's spectacular boom and bust

By Nils Blythe
BBC business correspondent, Jelgava, Latvia

Jobseekers in Latvia
With unemployment soaring, many in Jelgava are struggling to find work

The boom years before 2008 were good for Juris Grikis.

His furniture factory in the industrial town of Jelgava thrived as foreign loans poured into Latvia.

Juris Grikis
We were all a little bit blind
Juris Grikis, Nakts Mebeles

Property prices soared, home owners felt rich and bought smart new furniture.

Mr Grikis' workforce grew to more than 200.

Market stimulus

Then came the crash.

Property prices have fallen by more than 60% from the peak. Demand for furniture has collapsed.

Juris' company, Nakts Mebeles, has survived, unlike many others in Latvia, but it has sacked 100 workers.

Mr Grikis blames the banks, whose easy credit policies pumped up the housing market and all the businesses which came to depend on it.

"The banks said 'take a loan, take a loan, how much do you want'. We were all a little bit blind," he says.

Going abroad

Employers all over this small Baltic republic have also been cutting jobs.

Of course it's boring
Dainis Vilcans

More than one in five adults in Latvia is unemployed. Among young people the rate is more than two in five.

Many Latvians have responded by going abroad to find work.

The number of Latvians arriving in the UK to work is estimated to have doubled last year.

Missing his family

Dainis Vilcans lost his job as a carpenter in Jelgava.

He now works at a food factory in Britain.

"Of course it's boring," he says.

Latvian Prime Minister Valdis Dombrovskis
Unemployment is the single most acute problem we are facing
Latvian Prime Minister Valdis Dombrovskis

His wife and young son are still at home in Jelgava and he hopes that one day they can live together again.

Brain drain

The shortage of jobs in Jelgava is evident at the State Employment Agency.

A handful of vacancies are being advertised, but they are vastly outnumbered by the queues of people registering as unemployed.

The manager, Marin Narvils, says that his staff give help and advice on how to look for work in the UK and other European countries.

The prime minister of Latvia, Valdis Dombrovskis, speaking in an interview with BBC News, says it was appropriate for a state agency to help the unemployed look for work abroad, but he is concerned about the long-term consequences of losing so many able people.

"We will need to stop this tendency and reverse it," he says.

"Unemployment is the single most acute problem we are facing. The real solution is only through economic recovery."

No choice

Latvia has already had to turn to the IMF for financial support and it has agreed to severely cut public spending.

Dainis Vilcans (far left) and fellow Latvian workers in Peterborough
Many young Latvians have come to the UK to look for work

State employees have had their wages cut by a quarter. Some doctors have seen their salaries fall by 70%.

The cuts in earnings have added to the pressure to emigrate, especially for skilled people such as doctors who can find jobs abroad.

But Prime Minister Dombrovskis insists Latvia has no choice other than to make drastic spending cuts to reduce government borrowing.

He has rejected suggestions that devaluing the Latvian currency, the lat, would help make its exports more competitive and end the recession more quickly.

Poisoned chalice

Last year, Latvia's economic output fell by almost a fifth, but Mr Dombrovskis believes the economy will start to grow again later this year.

Unemployment levels are now stabilising, he says, but will remain high through the rest of this year.

Mr Dombrovskis, 38, is an economist who came back from a European Union job in Brussels to become prime minister.

Latvians joke that he became prime minister because no-one else wanted the job.

He acknowledges there is some truth in this. "This job was relatively easy to take," he says with a laugh.

But doing the job has been tricky. Plans for the austerity programme agreed with the IMF were initially greeted with violent demonstrations, though many Latvians now seem to have accepted that the measures are necessary.

Internal devaluation

And there are some signs of life returning to the economy.

At his furniture factory in Jelgava, Mr Grikis has cut wages as well as jobs.

It has helped him reduce his prices to an internationally competitive level so he is hopeful that he can win some big export contracts.

Economists describe the shock therapy of forcing down wages to boost international competitiveness as an "internal devaluation".

It will be extremely painful for years to come, but the strategy might eventually prove successful.

In the meantime, more and more Latvians are deciding to take their chances abroad.

Print Sponsor

The BBC is not responsible for the content of external internet sites

Has China's housing bubble burst?
How the world's oldest clove tree defied an empire
Why Royal Ballet principal Sergei Polunin quit


Americas Africa Europe Middle East South Asia Asia Pacific