Journal Issue

Latvia on the Way to the European Union

International Monetary Fund. External Relations Dept.
Published Date:
January 2001
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Having met most of the criteria for membership in the European Union, Latvia is addressing a few remaining challenges. These include closing the income gap and achieving structural, fiscal, and monetary convergence.

Roberts Zīle and Inna Šteinbuka

As It Enters the third millennium, Latvia is poised to become a member of the European Union (EU). In mid-December 1999, the Helsinki summit approved Latvia as a candidate for membership, and detailed negotiations for its entry are under way. Latvia’s first decade of transition was marked by a substantial reorientation of its economic and institutional focus toward Western Europe; in the coming decade, formal accession to the European Union is likely to be a significant milestone.

Topping Latvia’s political and economic agenda, EU accession has become one of the driving forces behind the country’s adjustment and reform efforts. To achieve European integration, Latvia must meet specific conditions and implement specific policies. EU accession has also served as a primary goal, helping to break political deadlocks and counterbalance the destructive activities of lobbies. For instance, Latvia was the first Baltic country that, despite tough opposition, adopted anti-money-laundering legislation and set up a disclosure office.

The European Union is not the only “outside anchor” for domestic policies in Latvia. Economic policy programs and loan arrangements with the IMF, as well as lending programs with the World Bank, continue to serve as external anchors. Also, the goal of joining the World Trade Organization (Latvia became a member in February 1999) unquestionably influenced policymaking because the conditions associated with membership provided targets that helped policymakers reach consensus on launching and sustaining politically difficult reforms designed to liberalize the economy and trade.

The European Commission (EC) has determined that Latvia largely meets the general, so-called Copenhagen criteria for EU membership. These provide broad guiding principles in the political, economic, legal, and institutional arenas. They require, for example, the existence of a well-functioning market economy and the ability to compete in Western European markets. According to the latest EC progress report, Latvia has broadly met this requirement.


IMFC Meeting Endorses IMF Crisis Prevention Efforts

Meeting in Washington on April 29, the IMF’s International Monetary and Financial Committee (IMFC) gave its strong support to proposals by the IMF’s Managing Director, Horst Köhler, to strengthen the IMF’s crisis prevention mechanisms. The committee stressed in the communiqué issued following its meeting that “strong and effective crisis prevention is a top priority.”

Welcoming the Committee’s support, Köhler said that the Committee’s endorsement of recent moves to refocus the IMF would “hasten our progress toward an IMF that is more effective, especially at crisis prevention and promoting financial sector stability.”

Specifically, the IMFC said that it welcomed the Managing Director’s decision to establish an International Capital Markets Department as part of the effort to deepen the IMF’s understanding of and judgment on international capital market issues; to improve its early warning capabilities; and to strengthen crisis prevention. The Committee called on the IMF to move ahead with its work on early warning indicators of potential crises, both in individual countries and in international financial markets. It also noted the progress that the IMF had made in a number of earlier initiatives in crisis prevention, including the development of financial standards and codes, the establishment of data dissemination standards, initiatives on transparency, and the strengthening of financial sector surveillance.

IMFC Chairman Gordon Brown (right) and IMF Managing Director Host Köhler meet with the press following the meeting.

IMF in the process of change

The IMFC had received a report from the Managing Director on the IMF in the process of change, and it said in its communiqué that the IMF is appropriately focusing on

• promoting macroeconomic and financial stability as a precondition for sustained economic growth;

• promoting the stability and integrity of the international monetary and financial system as a global public good; and

• helping its members to develop sound financial sectors to protect against vulnerability, to mobilize financing for productive investment, and to take advantage of the opportunities of global financial markets.

World economy

In a review of prospects for the global economy, the IMFC noted in its communiqué that, although the short-term prospects for global economic growth have weakened significantly, it is also likely that the current slowdown will be short-lived.

• There has been a marked deceleration of economic activity in the United States. While the Committee considered that the easing of U.S. monetary policy in recent months is timely and welcome, it said that monetary policy should remain directed at restoring growth potential while maintaining price stability.

• The introduction of a new monetary policy framework in Japan was welcomed by the Committee, which underscored the importance of a commitment by the authorities to an expansionary policy stance until the risk of deflation is eliminated.

• Growth in the euro area has been relatively well sustained, and the IMFC underscored the importance of further deepening and accelerating structural reforms to boost longer-term growth potential.

• Other countries were adversely affected by both the slowdown in growth in the advanced economies and the deterioration of conditions in international financial markets. At the same time, the Committee noted, growth is expected to be relatively well maintained in China and India.

• The IMFC expressed particular concern that the slowdown in global growth could have an adverse effect on the poorest IMF member countries. This risk, it said, requires both adequate amounts of official development assistance and carrying forward the Heavily Indebted Poor Countries (HIPC) Initiative to deliver sustainable debt levels and open the markets of the advanced economies to the exports of developing countries.

Underscoring that open markets are important to strengthen the global economy, the IMFC urged all countries—both developed and developing—to find common ground for the launch of new multilateral trade negotiations in 2001. The Committee also expressed its unanimous view that a “recourse to protectionism would be the wrong response to the global economic slowdown and the attendant difficulties in particular sectors.”

The text of the IMFC communiqué and the texts of all other communiqués, press briefings, and statements issued during the April meetings are available on the IMF’s website at

The IMF’s Role in Poverty Reduction

Stanley Fischer

The IMF’s Research Department sponsored a two-day workshop in April 2001 on Macroeconomic Policies and Poverty Reduction, bringing together experts from academia and international financial institutions. The following article is excerpted from remarks delivered at the workshop by the First Deputy Managing Director of the IMF.

When the IMF and the World Bank were created at the Bretton Woods conference in 1944, the economic challenges facing poor countries were not at the forefront of the founders’ minds. But with the breakup of colonial regimes and the spread of independence, the developing world began to assert itself more vigorously within the institutions. As the number of developing country members increased in the following years, so too did their borrowing. As it did so, familiar criticisms surfaced—particularly, that the IMF was addressing long-term problems by requiring unnecessarily demanding short-term solutions.

From the late 1970s onward, low-income and emerging market countries have been the main borrowers from the IMF. We in the IMF began lending to them on concessional terms in 1986, via the Structural Adjustment Facility, which was later expanded to become the Enhanced Structural Adjustment Facility, and we do so today through the Poverty Reduction and Growth Facility. Hence, we have become increasingly involved in what some deride as “the poverty business.” Some observers question whether we should remain involved in the poorest countries, and in poverty reduction, at all. I disagree, for several compelling reasons:

First, the IMF must be active in all of its 183 member countries. Much of the strength and cohesion of this institution and of its Executive Board derive from the fact that it is a universal institution in which all member countries have rights and obligations. Most of the countries the IMF lends to are poor countries, where the problem of poverty reduction is central to the entire policy debate. So, in conducting surveillance of those countries, and in lending to them, the IMF has to analyze the impact of policies on poverty.

But shouldn’t the IMF concentrate on helping countries achieve macroeconomic stabilization and leave it to others to worry about poverty reduction? After all, isn’t stabilization good for everyone? Stabilization is ultimately good for everyone, but its effects are not spread uniformly. Cuts in fiscal expenditures or changes in tax policy, for instance, have different effects on different groups. We need to know what these effects are likely to be and to make sure that the policies we support are, as far as possible, helping to reduce poverty and increase social welfare.

Similarly, it has taken many years of argument about the impact of inflation on poverty to get to the point where it is now generally accepted that high inflation is bad for the poor. So our advice on monetary and fiscal policies also requires some knowledge of the impact of those policies on poverty.

In any country with a well-developed capacity for policy analysis, it can be left to the government to figure out and take into account the distributional impacts of policies. But the IMF is also involved in many countries that do not have that capacity, and we need to have the analytical and empirical bases to provide the right advice and technical assistance.

A second, closely related point was driven home during the Asian crisis: the impact of stabilization policies on poverty depends on the institutional structures in place. For example, if a stabilization program is going to have a particularly adverse impact on unemployment, health, or the access of the poor to basic foods, the IMF staff needs to know how to advise the country what to do when the program goes into effect. Typically, if the country needs help in developing institutions, others—such as the World Bank or the regional development banks—will provide that assistance. But the IMF cannot be ignorant of what is needed, or avoid some of the responsibility for helping ensure that what is needed gets done.

Third, we know that sustained poverty reduction requires sustained growth. But the links between growth and poverty are complicated. So it is not enough to leave it at “growth is good for the poor,” even though that is true. We need to know which pro-growth macro policies are most effective in reducing poverty, and we need to promote them.

That is the intellectual basis for why we should be centrally involved in the war on poverty. But for those who are not persuaded, let me offer a political and pragmatic argument. First, policies will not be sustainable—in all countries, rich or poor—if they are not perceived as broadly equitable. So, if we want the stabilization policies we support to be sustained, we need to take account of their distributional impact. Second, the IMF will not enjoy public support in the countries that finance our lending if we are seen to be supporting policies that damage the poor.

Of course there is another reason to focus on the poverty aspects of macroeconomic policies: it is the right thing to do. But since some people are more comfortable with arguments grounded in realpolitik than in morality, it is worth establishing that both considerations point in the same direction.

If we accept that the IMF should take the impact on poverty into account in its policy advice, to what extent should it also be involved in research on poverty? Let me start with three basic propositions. First, the great bulk of research on poverty will be done elsewhere than in the IMF, for example in the World Bank and in academia. Second, the great bulk of research in the IMF will be on topics other than poverty and should continue to concentrate on the good, old-fashioned macroeconomic issues. And third, the IMF is in the process of focusing its conditionality on its main areas of expertise, which do not include poverty reduction. Our research agenda should reflect this fact.

Notwithstanding these propositions, if we do care about poverty—as I have argued we should—we will need to carry out our own research on the links between the policy environment, our policies, and poverty. Whether we are consciously aware of it or not, every institution operates on the basis of an intellectual framework. But no such framework is ever complete; it has to be updated all the time. If our macroeconomic framework does not acknowledge its inter-linkages with poverty, it will become less and less relevant to many of our member countries.

Of course, much of this work will be done by outsiders. Outsiders can examine issues free of our institutional blinkers. But, at the same time, we must have the capacity to absorb the research they produce and to apply its insights to the work we do. For that reason, we have to have a research capacity on poverty-related issues within the IMF.

IMF Acts to Streamline and Focus Conditionality

Timothy Lane

The conditions applied to the use of the IMF’s financial resources, known collectively as “conditionality,” are one of the most important aspects of its relations with its member countries. The IMF’s financing and the policy reforms that a member country undertakes are, in effect, two linked aspects of a collaborative response to external balance of payments imbalances.

The logic of conditionality is quite simple. The IMF provides its financing in successive installments or “tranches,” which are delivered if certain agreed conditions are met. The intention is to safeguard the IMF’s resources, by ensuring that they continue to be disbursed only as long as key policies remain on track, and to assure the country that it will continue to receive financing provided that it meets the conditions.

Conditionality has evolved substantially and, as a consequence, it must periodically be reviewed by the IMF. A degree of conditionality has been attached to IMF financing since the mid-1950s, but its scope has expanded over the years, particularly since the early 1980s. In the process, there can be tensions between the IMF’s need to monitor those policies that are central to carrying out a program and the recognition that such monitoring should not intrude unduly into national decision making. Against this background, the 1979 Guidelines on Conditionality underscored that the criteria used to judge the performance of a country’s program should be limited to the minimum required to enable the IMF to evaluate whether policies that are necessary to ensure the achievement of the program’s objectives are being carried out. The guidelines also stressed that the IMF should pay due regard to a country’s social and political objectives, economic priorities, and particular social and economic circumstances.

The most recent review was conducted by the IMF’s Executive Board in March 2001. The Board agreed that while conditionality remains indispensable, there is a need to streamline and focus it, so as to leave maximum scope for countries’ policy choices while ensuring that essential policies are implemented. The timing of the latest review was given added impetus when Horst Köhler took office as IMF Managing Director in May 2000. Early on, he indicated that he saw the streamlining and focusing of IMF conditionality as a priority. He outlined this approach in his speech to the IMF-World Bank Annual Meetings in September of last year, and it was also endorsed by the International Monetary and Financial Committee, which comprises finance ministers (or others of comparable rank) representing the IMF’s member countries.

In its March 2001 discussion, the Board identified several important issues that it would consider in the period ahead:

• where to draw the line between measures that are critical to a country’s program objectives, which would continue to have conditionality associated with them, and those that are relevant but not critical, to which conditions would be applied more sparingly;

• how to improve coordination with other agencies, such as the World Bank, on measures outside the IMF’s core areas of responsibility, including various aspects of structural and social reform;

• what the IMF should do when its financial support is requested by a country that lacks a strong commitment to policies needed to achieve a sustainable external position;

• whether there is scope for results-based conditionality, whereby the IMF would provide its financing only after specific policy results have been achieved (rather than on the basis of progress toward such results); and

• whether the IMF might play a more supportive role in helping countries build ownership of sound policies.

In addition, the Board endorsed efforts to clarify the bounds of IMF conditionality more precisely. For example, Letters of Intent, in which governments set out their overall policy programs in connection with their use of IMF resources, often have a broader scope than conditionality.

Recognizing that public comments on the subject of conditionality would be particularly useful in guiding the IMF’s work, the Board decided to release to the public the IMF staff’s papers that were the basis for its discussion and to invite public comment. These present an overview of the issues, review the expansion of conditionality over the past several years, and discuss approaches to streamlining conditionality. The papers have been posted on the IMF’s website ( Copies are available free of charge from the Public Affairs Division, International Monetary Fund. Washington, D.C. 20431, U.S.A.

Timothy Lane is Chief of the Policy Review Division in the IMF’s Policy Development and Review Department.

IMF Publishes Second Volume of Policy Papers

Paul Robert Masson

The IMF has published the second volume of its International Economic Policy Review (IEPR). The IEPR, published once a year, makes available to the general public selected nontechnical papers explaining the analytical background of IMF-supported programs in member countries and outlining the full range of policy choices open to ministries and central banks. The papers are written by IMF staff and consultants.

The first paper in Part I, “Economic Growth, Inflation, and Poverty,” argues that sub-Saharan Africa’s unsatisfactory growth performance, the root of the region’s low living standards and widespread poverty, is due to economic distortions and institutional deficiencies that have scared off potential investors and depressed total factor productivity growth. The second paper examines the causes of rural poverty, including macroeconomic instability, policy biases, and structural problems, and proposes a strategic framework for alleviating rural poverty.

Strategies for managing the low-income country debt crisis are the subject of the third paper, which traces the evolution of policy responses from the 1980s to the present, starting with non-concessional reschedulings and new lending and concluding with the recent Heavily Indebted Poor Countries (HIPC) Initiative. The fourth paper in this section examines the IMF’s role in improving governance and combating corruption in the Baltic countries and the Commonwealth of Independent States. The last paper, which examines the real effects of high inflation, finds that episodes of high inflation are associated with strong contractionary effects and lead to a significant decline in real wages.

Part II, “Capital Account Liberalization and Financial Sector Vulnerability,” covers an area of increasing importance for the IMF. Against the backdrop of recent financial crises and their effect on macroeconomic performance, the first paper discusses different analytical approaches to assessing financial sector vulnerability. The second paper deals with the economics of trade policy in financial services. The section closes with a case study of capital flight from Russia, from which the authors draw some conclusions for future policy.

Part III, “Exchange Rate Relations of Advanced Transition Economies,” focuses on issues concerning the Central and Eastern European countries that are, or soon will be, candidates for membership in the European Union. The three papers in this section debate the question of how these countries can achieve a smooth transition to monetary union with the euro zone.

Paul Robert Masson is a Senior Advisor in the IMF’s Research Department.

Latvia: Key economic indicators
Percent over the previous year
Consumer price index4.
Percent of GDP
General government budget fiscal balance−0.9−4.2−2.71−1.7
Current account balance−10.6−9.6−6.8−7.0
Exchange rate (Latvian lats per U.S. dollar)0.5900.5850.6060.60
Unemployment (percent, at end of year)
Source: Republic of Latvia, Ministry of Economy, 2001, Macroeconomic Review, No. 1 (6).


Source: Republic of Latvia, Ministry of Economy, 2001, Macroeconomic Review, No. 1 (6).


By anchoring its economic, political, and institutional structures to those of advanced Western European nations, Latvia is likely to be viewed as a more secure place for doing business. Such a perception should help reduce the risk premiums associated with the Baltic countries and foster further investment, stronger trade flows, and other forms of convergence. However, it will take decades to close the income gap between Latvia and the rest of the European Union. An adequate policy mix should continue to be implemented to accelerate convergence of incomes.

The three most important issues facing the Latvian authorities in designing adequate policies are

• how and when the income gap between Latvia and the European Union can be closed;

• how to stay on track to achieve fiscal and monetary convergence; and

• how to accelerate structural convergence and create a fully competitive market economy.

Real convergence

Achieving real convergence is the most difficult task Latvia faces. Per capita GDP is one of the main indicators used for measuring real convergence and involves comparisons over time and between regions. In Latvia, per capita GDP measured according to purchasing power parity ($5,893 in 1999, according to the IMF’s World Economic Outlook, October 2000) is lower than in European Union member countries. Given that output statistics in transition economies are deficient in several ways, however, growth might be understated. In Latvia, where these deficiencies are due not to the weakness of statistical methods used for drawing up the national accounts but to the large informal sector in the economy, the official data exaggerate GDP decline and show recovery occurring more slowly (Åslund, 2001).

Even taking into account the underestimation of GDP, it will be difficult, over the medium term, to close the large income gap between Latvia and the European Union. Factors that will enhance growth should help reduce this gap: the expansion of capital, macroeconomic stability, liberalization, and other macro policies, as well as established property rights, institution building, the rule of law, and the prevention of corruption. Real convergence in terms of per capita GDP is an outcome of, rather than a precondition for, EU membership. Lessons from the enlargement of the euro area—in particular, as demonstrated by Greece, Ireland, and Portugal—have shown that rapid real convergence can take place after a country has joined the European Union.

Nominal convergence

The Maastricht criteria, which specify the measures of macro-economic convergence required for membership in European Economic and Monetary Union (EMU), could be used to assess the nominal convergence of EU accession countries. These criteria set quantitative limits on inflation, long-term interest rates, the general government budget deficit, gross government debt, and exchange rates. In general, countries joining the European Union must be able to meet the fiscal and monetary convergence criteria relatively soon after joining if they also want to become part of EMU. With respect to convergence with the Maastricht criteria, Latvia has made clear progress (see table). The inflation rate has dropped below 3 percent, the exchange rate peg is credible, the budget deficit is under control, and public debt is very low.

Inflation, as measured by the consumer price index, was 2.6 percent in 2000. It is projected to be maintained at a similarly low level over the medium term, although it may slightly outpace Western European levels for several more years as Latvia adjusts domestic prices to the level of international prices. This is a general problem for all transition and accession countries. Although there is scope for price adjustments in the nontradable sectors, particularly transport services, housing, and energy, rapid convergence achieved exclusively through tough deflationary measures would seriously restrict Latvia’s growth and depress employment levels.

Latvia’s fiscal deficit exceeded 3 percent in 1994 (owing to increases in net lending), in 1995 (owing to the banking crisis), and in 1999 and 2000 (owing to the Russian crisis). Under Latvia’s fixed-peg exchange rate regime, the fiscal system is the main line of defense against a negative external shock; given the large current account deficit, fiscal policy should be prudent and needs to be tightened over the medium term. Some potential sources of pressure on the fiscal position also need to be recognized. External pressures have arisen as Latvia has begun to adopt the environmental and other standards of the European Union. Some experts have estimated that extra spending required for EU accession could be as high as 5 percent of GDP for a number of years in all candidate countries, which may also incur costs in complying with the requirements of the North Atlantic Treaty Organization (NATO). Ongoing reforms of the health, education, and pension systems have created domestic pressures. A medium-term fiscal framework is absolutely essential and will highlight the difficult trade-offs Latvia faces between the need for fiscal discipline and the need for extra spending. However, it would not be appropriate at this stage for Latvia to tie its fiscal policy to an inflexible (Maastricht) target.

At the end of 1999, Latvia’s government debt amounted to 13.1 percent of GDP. It will be maintained at a reasonably low level in the years to come. Interest rates and exchange rates are harder to evaluate. For example, it is difficult to apply the Maastricht interest rate criterion to accession countries because their markets for long-term debt are not well developed. The criterion for exchange rates, strictly speaking, does not apply to these countries because they do not share a regional exchange rate arrangement.

We believe that the degree of nominal convergence necessary for Latvia to accede to the EMU should not be overemphasized prior to EU accession. Once Latvia becomes an EU member, the prospect of subsequent currency integration through EMU provides another anchor both for monetary policies and for ongoing structural and institutional reforms.

Structural policy convergence

Latvia liberalized its economy quickly, freeing prices at the beginning of its transition. The economy was opened to the world, allowing not only goods and services to flow freely over its borders but also capital, implying full currency convertibility for most current and capital account transactions.

Latvia’s privatization scheme got off to a slow start for at least two reasons. First, the manufacturing sector was dominated by large producers of specialized goods (electronics, for example) destined for the countries of the former Soviet Union. Large companies are more difficult to privatize than small and medium-size firms. Second, the country’s tight fiscal policy represented a serious impediment to privatization, with restructuring implying fiscally costly layoffs of redundant labor.

According to an assessment by the World Bank, with gradual privatization and slow bank restructuring, Latvia had completed about 80 percent of structural reforms by 1995. Only four transition countries—the Czech Republic, Estonia, Hungary, and Poland—did better, completing about 90 percent of structural reforms by 1995. Currently, almost all large companies in Latvia have been privatized, and about two-thirds of GDP is produced by the private sector. Latvia has implemented some of the most stringent banking regulations in Eastern Europe, and a sound and profitable financial sector is beginning to emerge.

Although Latvia has successfully completed many structural reforms, many challenges remain. The economy still needs substantial adjustments in product, capital, and labor markets. There is also a need to continue strengthening the institutions that support market activities. Key policy priorities include modernizing the civil service, streamlining the role of subnational governments, and completing pension reform.

Foreign assistance for transition

Foreign assistance to Latvia has gradually increased, keeping pace with the country’s transition. In the mid-1990s, the European Commission extended to Latvia a special assistance program for advanced transition countries (PHARE). The international financial institutions (the IMF and the World Bank, the European Investment Bank, the European Bank for Reconstruction and Development, and others) also became major actors in assisting Latvia in its accession to the European Union.

Latvia has benefited significantly from this assistance. First, financing for, and investments in, different industrial and infrastructure projects and human development were crucial in the initial stage of transition, when domestic resources were limited. The grant element in assistance, particularly for investments and training, provided a strong impetus to healthy growth. Second, EU assistance accelerated Latvia’s progress toward integration. Third, conditionality for the loans extended by the international financial institutions strengthened the continuity, consistency, and credibility of reforms.

Turning to some problems associated with assistance, we would emphasize that the different international institutions lacked coordination and consistency in establishing programs and setting conditions for various lending and assistance agreements. Often, coordination among the donors and creditors was fundamentally impossible because of the different and even conflicting mandates and interests of their institutions. While donor coordination is beyond Latvia’s control, the goal of the current system for coordinating foreign assistance programs in Latvia is to increase efficiency in using foreign financing in line with political, economic, and social priorities.

As the transition in Latvia nears completion, we are convinced that private investment will gradually replace official multilateral and bilateral help. In other words, as Latvia becomes a “normal” market economy, assistance will gradually decrease until it is no longer needed. However, at this stage, international assistance remains important.

The IMF has been and will continue to be the main controlling agency in the field of macroeconomic stabilization while helping to implement “transition packages” of structural reforms. Latvia’s new economic program (the Memorandum of Economic Policies was approved by the authorities on March 13, 2001), supported by a Precautionary Stand-By Arrangement, is fully consistent with its EU accession strategy. As an integral part of this strategy, the program provides a credible framework that will enable Latvia to meet the economic criteria for EU membership. The program is designed to reduce external imbalances by administering “strong medicine” comprising tight fiscal policies and structural reforms, especially public sector reforms. The government’s core challenge is to achieve two rather controversial goals simultaneously: (1) maintaining a broadly balanced fiscal position over the medium term, and (2) supporting substantial fiscal costs related to accession to the European Union and NATO. To meet these goals, Latvia must improve the way it prioritizes and manages public spending.

The involvement of the IMF will decrease over the medium term, and the European Union will provide key foreign assistance. During 2000–2006, the EU’s PHARE program will be supported by two other financial instruments, which will have a sectoral focus—one concentrating on building transport and environmental infrastructure and the other on investment in agriculture and rural development—while PHARE will generally continue to provide broad support for accession across all sectors.

Aid prior to accession can reach 4 percent of GDP, and its effectiveness is contingent on Latvia’s ability to identify its true priorities. In the years to come, EU cofinancing, in addition to projected national and private funds, will be guided by the medium-term National Development Plan. The availability and potential benefits of EU funding are difficult to quantify at this stage because it is unclear when Latvia will be invited to join the European Union and whether it will be included in the first or second wave of enlargement. However, under any scenario, aid prior to accession will give new impetus to growth through investment in economic sectors and regions, including in training, and reduce the income gap between Latvia and the European Union.

Roberts Zīle (left) is Latvia’s Special Minister for Cooperation with International Financial Institutions.

Inna Šteinbuka is Advisor to the Executive Director, Nordic-Baltic Office, IMF and Professor of Macroeconomics at the University of Latvia.

This article is based on two publications: Inna Šteinbuka, 2000, “Alignments of Latvian Economy in the Context of European Integration,’ Journal of Baltic Studies, Vol. 31, pp. 193–203; and Roberts Zīle, Inna Šteinbuka, Remigijs Pocs, Juris Krūmiņš, Helmuts Ancäns, and Uldis Cêrps, 2000, Latvia Entering the XXI Century: Economy, Finances, Integration (Riga: Nacionalais Medicinas Apgads).


    AndersÅslund2001The Myth of Output Collapse After Communism,CEIP Working Paper No. 18 (Washington: Carnegie Endowment for International Peace).

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