MINISTRY OF LABOURFINLAND

Working Life Barometerin the Baltic Countries

2002

Juha Antila and Pekka Ylöstalo

247 LABOUR POLICY STUDIES

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Labour Policy Studies

No. 247

Juha Antila and Pekka Ylöstalo:

Working Life Barometerin the Baltic Countries2002

Ministry of Labour ISBN 951-735-742-7

Helsinki 2003, Finland ISSN 0787 - 9458

FOREWORD

The working life barometer describing the change in working condi-tions in the Baltic Countries will be published as a volume of LabourPolicy Studies, a series of studies of the Ministry of Labour. It contin-ues the barometer published in 1999.

The working life barometer was used as a help to compare the changein working conditions in different countries in 1996. Then the target ofthe study was Tallinn, St. Petersburg and Helsinki. The working con-ditions in the Baltic Countries change rapidly and therefore it is im-portant to gain accurate information on the changes now and in thenear future. The survey is a part of Finland´s co-operation with theneighbouring areas.

The data of this study has been collected with specialists in Balticcountries. The analysis and the report have been made by researchersPekka Ylöstalo and Juha Antila in the University of Helsinki.

Helsinki, March 2003

Harri Skog

Director-General

PREFACE

This research study is the second Working Life Barometer concerning theBaltic nations. The previous one was published in the latter part of 1999 andaroused great interest, not only in the countries under study but also elsewhere.The information in the barometer was utilised in the EU, the OECD and theWorld Bank, for example. The need to update the information was obvious,because in some aspects the barometer has been the only available source ofdata. The Finnish Ministry of Labour therefore decided to repeat the project.The framework of this report is made up of the same themes as the precedingone, so that it is now possible to compare the developments both within andbetween the countries. In addition, the barometer has been further improvedby including new themes. In the case of Estonia, this is the third barometeralready. The first Working Life Barometer to be carried out in Estonia was acomparative study of three cities (St. Petersburg, Tallinn, Helsinki) in 1997.

In Finland, the Working Life Barometer has been produced every year startingfrom 1992. Many of the themes examined and questions used in this Balticproject derive their origin from the Finnish barometer. We have not, however,set out to survey the working conditions in the Baltic countries merely from aFinnish context - rather, the questions have been discussed and modified to-gether with groups of experts in Estonia, Latvia and Lithuania. These workinggroups have been able to put forward their views and their proposals for im-proving the questions, as well as introducing completely new research issues.Furthermore, group members have given important assistance in interpretingthe responses. We are very grateful indeed to all the members of all the work-ing groups for their expert contributions! We would particularly like to thankMalle Kindel, Ineta Tare, Imants Lipskis, Aina Kromane, Gintare Buzinskaiteand Ramune Guobaite for acting as contact persons for the working groups,and for all their help in general. Without the significant part they have played,the project would not have acquired its present form. The essays on the differ-ent countries, in the first part of the report, were written by Toomas Piliste,Jevgenija Sviridenkova and Gintare Buzinskaite; a big thank-you goes tothem! We are also grateful to Sointu Häkkinen for her excellent co-operation.

Helsinki, March 2003Juha Antila and Pekka Ylöstalo

SUMMARY

This research study is the second Working Life Barometer concerning theBaltic nations. Its purpose is to examine the current state of Estonian, Latvianand Lithuanian working life and recent changes in it. The results of the ba-rometer are representative - that is, they reflect the overall working life situa-tion in each of the countries. Besides monitoring changes within the Balticnations and making comparisons between them, it is also possible to comparethe results with those for Finland. The study is part of the co-operation withneighbouring areas implemented by the Finnish Ministry of Labour.

The subjects of the survey were working people (both wage earners and entre-preneurs) aged 16-64 years in Estonia, Latvia and Lithuania. It covered 900working people in Estonia, 904 in Latvia and 909 in Lithuania. They were in-terviewed in their own homes for the survey. The questionnaire form used inthe interviews had been prepared in co-operation by the project researcherstogether with experts on working life from the countries under study. Localmarket research institutes were responsible for selecting the sample and car-rying out the interviews.

The research report is divided into three parts. The first part contains essayswritten by local experts with the purpose of giving an overall picture of thecountries to be examined. The second part is the actual Working Life Ba-rometer, which is based on the research data collected specifically for thisstudy. It comprises nine themes: unionisation and bargaining, salary andlivelihood, working time and contracts, stress factors, wage earners’ pos-sibilities of influencing their jobs, job satisfaction, telework and informationtechnology in working life, job-related training and development of workorganisations. The third part of the book is about current trends and futureexpectations.

On the surface, observed from afar, the Baltic countries appear similar, butthere are considerable differences in the practices that they follow in workinglife. In Estonia, the development in working life in recent years has been quitesteady and even; and it has, on the whole, been positive. The trend has beentowards ”normalisation”. This means, among other things, a decrease in ex-

cessively long working hours and thus in overtime; a decrease in work done inreturn for black income; fewer delays in salary payment; and a narrowing ofthe gap between men's and women's salaries. The relatively few possibilitiesfor wage earners to influence their own jobs constituted a significant problem,however.

In Latvia, the changes in the last few years have been rather few. Trade unionmembership is still more widespread in Latvia than in Estonia and Lithuania,though the trend is downward. Long working weeks are still common in theprivate sector, and the situation has not changed significantly in recent years.As to employment relationships, the situation gives cause for concern. Onlyslightly over half the working people have a permanent employment contractagreed in writing. Already in the previous survey this proportion was smallerthan in the other countries compared, and now it has diminished still further.Though various conflicts at the workplace have increased, the level of job sat-isfaction is still quite good. Furthermore, the working people consider thatthey have good possibilities of influencing their work tasks.

In Lithuania, a lot of changes have taken place in recent years. The develop-ments have been contradictory. Female private-sector workers experiencedworking life as arduous and problematic; the greatest disadvantages affectedthis group. In the public sector, on the other hand, satisfaction is considerablyhigher - although there also, the men's working pace especially has clearlyintensified. Positive factors of Lithuanian working life include reduced salarydifferences between men and women, increased possibilities for wage earnersto influence their jobs, and a decrease in illegitimate work agreements. Amongthe problems are long working hours in the private sector, uncompensatedovertime, delays in salary payment, a considerable increase in work intensity,and a low incidence of work-related training.

Keywords: The Baltic countries, quality of working life, transition of workinglife

CONTENTS

INTRODUCTION ....................................................................................1

PART ONECOUNTRY ESSAYS .................................................................................6

Estonia by Toomas Piliste ................................................................................ 7Latvia by Jevgenija Sviridenkova .................................................................... 22Lithuania by Gintare Buzinskaite ...................................................................... 46

PART TWOQUALITY OF WORKING LIFE 1998 – 2002 .....................................65

Unionisation and bargaining ........................................................................... 66Salary and livelihood ...................................................................................... 89Working time and contracts .............................................................................. 131Stress factors and conflicts .............................................................................. 150Wage earners’ possibilities of influencing their jobs .......................................... 171Job satisfaction .................................................................................................. 182Telework and information technology in working life ....................................... 193Job-related training............................................................................................ 209Development of work organisations .................................................................. 214

PART THREECURRENT TRENDS AND FUTURE EXPECTATIONS .......................220

In what direction is working life changing? ....................................................... 221Future expectations............................................................................................ 247

DISCUSSION: DIVERGING DEVELOPMENT TRENDS ...................254Summary of key findings................................................................................... 265

REFERENCES .................................................................................................... 268

APPENDIX ......................................................................................................... 272Regional profiles: Estonia, Latvia and LithuaniaData collection and sample designQuestionnaires in English, Estonian, Latvian, Lithuanian and Russian

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INTRODUCTION

Working life and the changes in it form a sensitive indicator of development ina whole society. The economic and social statistics that are often used as indi-cators, provide useful information on the macro level, but they seldom help inobserving single, quality-related changes within working life, not to mentionexpectations for the future. To meet this need, the Working Life Barometerwas developed in Finland. With the aid of the barometer, working life and thetransitions in it have been observed in Finland since the year 1992.

There are two key words in the Working Life Barometer, quality and transi-tion of working life. The quality of working life refers to all working condi-tions, from the basic safety to the relationships between the persons at work.By monitoring the transition, descriptive information can be obtained aboutthe recent development, present state and future expectations of working life.

In present-day working life, personnel matters are emphasised, and thereforeaccurate information about transition is needed. This will enable the develop-ment and regulation of working life to be based on reliable data instead of ongeneral beliefs. Versatile comparisons make it possible to locate problem anddevelopment areas as well as transition trends. The central idea of the Work-ing Life Barometer is to point out matters that need to be dealt with in depth,in the form of discussions and seeking further information. In this way, theWorking Life Barometer can promote the development of working life quality.

SHAPING OF THE WORKING LIFE BAROMETER

The Working Life Barometer is influenced by a so-called ‘tradition of socialindicators’ (see Lehto 1996). After the Second World War, a need for de-scribing the social reality of societies was born in the western industrial coun-tries. This social reality could seldom be seen in statistics. Various statisticalways of measuring this welfare - so-called social indicators - were developed.With the help of these social indicators, descriptions of the reality of life wereproduced in many different areas. These descriptions were also called socialreports. The main purpose of these reports was to form a tool for creating stateregulations (Hartikainen 1980, Allardt 1998). The increased regulation policy

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of the state was part of the development of a welfare state; the science of so-cial politics was developed to protect people against the negative side-effects

of capitalist growth. The idea was both to decrease social problems and to in-crease social cohesion and social capital in the society. Especially in the Nor-dic Countries, the social reports had a normative goal: to produce descriptiveinformation about the real situation so that the decision-makers could act toimprove the conditions.

The measurement of welfare is such a difficult and, in part, a controversialtask. What should be measured and how? The social indicators movement wasdivided into two groups, who emphasised different things. On one hand, therewas an objective school, which was strong in the Nordic Countries. It empha-sised the measuring of living standards and conditions (e.g. income, property,health) using data on the material and economical life of the population. In therest of Europe and in the USA, a subjective school was dominant. It empha-sised more the individual’s own experiences and opinions concerning his/herwelfare. Due to these differences, the harmonisation of social reports has notsucceeded (Vogel 1989).

A Finnish sociologist, Erik Allardt, has made a kind of compromise betweenobjectivity and subjectivity. He emphasised both points of view in his analysisof welfare (Allardt 1976). He drew up a fourfold table with standard of livingand quality of life on one axis (objective) and welfare and happiness (subjec-tive) on the other axis. From these combinations, Allardt formed three centraldimensions of welfare: having, loving and being. Having includes mattersconnected with the living standard, loving means social relationships, and be-ing indicates possibilities to express oneself. Allardt’s concept of welfare em-phasises both objective and subjective points of view. It takes into accountmaterial and economic basics, social relationships, and the individual’s possi-bilities of giving expression to his/her own ideas and activities (Roos 1998,25). Allardt’s idea is very versatile, and it can be summarised as follows: ‘Abeing needs all things which he/she feels bad without’ (von Wright 1984, 25-38).

Allardt’s concept of welfare forms the theoretical basis or a sort of a ‘metathe-ory’ for the Working Life Barometer. The Working Life Barometer studiesmatters concerning the standard of living (e.g. salary and livelihood), matters

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related to social relationships (e.g. unionisation) and matters concerningpossibilities to express oneself (e.g. possibilities to exert influence).

However, many themes of the barometer have been born out of a phenomenonin working life and have no connection with theories of needs.

WORKING LIFE BAROMETER IN THE BALTIC COUNTRIES

The Working Life Barometer now realised in the Baltic Countries is a part ofFinland’s co-operation with the neighbouring areas. In 1996, the Working LifeBarometer was extended to the neighbouring areas for the first time. At thattime, material was sampled from Finland, Estonia and the St. Petersburg area.As a final product, a comparative study of three cities (Helsinki-Tallinn-St.Petersburg) called ”Työelämän muutos Suomessa ja lähialueilla” (Rahikainen& Ylöstalo 1997) was published in addition to the Working Life Barometer ofFinland. The study attracted plenty of attention both in Finland and in Estonia.

In Finland, it was considered important to know more about working life in itsneighbouring areas. At the end of the 1990’s, it was decided in the FinnishMinistry of Labour to conduct a study featuring three Baltic countries. Thefirst Working Life Barometer concerning Estonia, Latvia and Lithuania waspublished at the end of 1999. The research report aroused a lot of interest, notonly in the countries studied and in Finland, but also in many institutions likethe EU, the OECD and the World Bank. On many research topics, there wasno other reliable information available except the barometer results. Largelydue to this fact, it was decided to make a new barometer after three years togauge what the situation is nowadays in these countries and what kind of de-velopment, if any, there has been.

In this report, Finland is only referred to as an example - it is not actuallystudied. The ‘Baltic barometer’ differs from the Finnish barometers in otherways also. Some themes have been changed; and the levels of generality of thephenomena are also clarified, in addition to the transition. Barometers oftenconcentrate on measuring changes. This is because people are very sensitive tochanges in phenomena and conditions. For instance, an increase in possibili-ties to exert influence, or in the threat of receiving notice, is seen very easily.But, for example, the facts of how significant the possibilities to exert influ-ence are, and at which level, are aspects that people have become accustomed

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to; and, in fact, it can be very difficult to estimate the degree of possibility toexert influence. Furthermore, it is almost impossible to interpret mere infor-

mation on transitions, if the level of generality and frequency cannot be esti-mated even roughly. A very rare phenomenon may increase very quickly andthe changes can be very big. Again, a very general phenomenon cannot multi-ply, even theoretically. Therefore, in the Working Life Barometer of the BalticCountries, the measurements of levels and changes in many of the aspectshave, for interpretative reasons, been dealt with for the different countries inparallel.

The change of study themes has, in part, been influenced by the needs of thecountries. In each of the countries, a local team of experts has participated inthe project. These teams have given ‘internal’ professional and currently rele-vant comments in the preparation stage of the research. The comments havebeen taken into account when formulating the questions.

COLLECTING THE RESEARCH MATERIAL

This is a quantitative research study. The sampling method was a structuredface-to-face interview, carried out at the respondents’ homes between Januaryand February 2002. Both the sampling and the collecting were carried out bylocal market research institutes: Saar Poll (Estonia), Latvijas Fakti (Latvia)and Baltijos tyrimai (Lithuania). The method was to form a nation-wide sam-ple created by multistage stratified sampling. The aim of the sampling was toget at least 900 answers in each country (reached sample). In Estonia, thenumber of answers was 900, in Latvia 904 and in Lithuania 909. The resultscan be generalised for the whole country in question. A more specific descrip-tion of the sampling, non-response and material representativeness is given inthe enclosed technical reports for each country (see the Appendix).

The target group consisted of working wage earners and entrepreneurs be-tween the ages of 16 and 64. Unemployed people were not interviewed. Sincethe question of language is very important in this kind of research, the ques-tionnaire form was translated into the national languages and into Russian.The original text was in English. The translations were checked by teams ineach country, and native speakers of each language checked the translations ofthe English and Russian versions. Naturally, the Russian version is the same in

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all three countries. All versions of the questionnaire form are enclosed in thereport.

STRUCTURE OF THE BOOK

The book consists of three parts. In the first part, background information onthe Baltic Countries is provided in essays about each country. The essays aremainly descriptive texts written for persons who do not know much aboutthese countries or about their present situation and transition. The essays in-clude information on economy, labour and income distribution, and their pur-pose is to form a basis for the analysis. The second part of the book is the ac-tual Working Life Barometer, which is divided into nine themes. The thirdpart is about current trends and future expectations. After these, there is a con-cluding discussion chapter. In the Appendix, there are regional profiles, tech-nical reports, and the questionnaires.

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PART ONECOUNTRY ESSAYS

7

ESTONIA

Toomas PilisteReseach fellow, Faculty of Economics and Business AdministrationTallinn Technical University

BASIC FACTS ABOUT ESTONIA

Location: Northern EuropeCapital: TallinnArea: total: 45,227 sq km

land: 43,432 sq kmLand boundaries: total: 682 km

border countries: Latvia 343 km, Russia 339 kmNaturalresources:

Forest, arable land, peat, oil shale, limestone, dolomite, clay, sandand gravel, sea mud, sapropel

Population: 1,361,242 (01.01 2002)Populationgrowth rate:

- 0.4% (2002)

Life expectancyat birth:

female: 76.0 yearsmale: 65.1 years

Ethnic groups: Estonians 67.9%, Russians 25.6%, Ukrainians 2.1%, Belarusians1.3%, Finns 0.9%

Religions: Lutheran, Roman Catholic, Russian OrthodoxLanguages: Estonian (official), Russian, Finnish, EnglishGovernmenttype:

Parliamentary Republic

Independence: 24 of February 1918Constitution: 28 of June1992Suffrage: 18 years of age; universal for Estonian citizensExecutivebranch:

chief of state: President Arnold Rüütelhead of government: Prime Minister Siim Kallascabinet: Council of Ministers nominated by the prime minister andappointed by Presidentelections: president elected by Parliament for a five-year term

Legislativebranch:

unicameral Parliament or Riigikogu (101 seats; members are electedby direct, popular vote to serve four-year terms)

Judicial branch: Supreme Court (judges appointed by Parliament)Inflation rate(consumerprices):

5.8 % (2001)

Labor force: 661 thousands (2001)Labor force - byoccupation:

agriculture 7%, industry 33%, services 60% (2001)

Unemploymentrate:

12.6% (2001); 9.1% (3.quarter 2002)

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Industries: Food, textile, wearing apparel, wood and paper, chemical,pharmaceutical, electronics, rubber and plastics, building materials

Agriculture -products:

Cereals, potatoes, vegetables, pork, beef, poultry, milk, eggs, (fish)

Exports -partners:

Finland 34%, Sweden 14%, Germany 7%, Latvia 7%, UK 4%

Imports -partners:

Finland 18%, Germany 11%, Sweden 9%, China 9%, Russia 8%

Currency: Estonian kroon (EEK)Exchange rates: Fixed , 1 EURO = 15,6466 EEK (01.01.1999)Fiscal year: calendar year

ECONOMY

Through the whole period of regained independence Estonia has beencontinuously pursuing liberal and open economic policy. In addition to the factthat the Estonian kroon is pegged to euro the characteristic features of thispolicy are balanced state budget and proportional income tax. Since 1995 theEstonian economy has been growing. Both in 1995 and in 1996 GDPincreased by 4% and in 1997 even by 10%. Rapid economic growth (7%)continued also in the first half of 1998. The Russian economic crisis thatbegan in summer 1998 brought about important changes in the economicclimate. In the second half of 1998 the growth of GDP was only 1–2% (in thefourth quarter already minus 1%), and the growth for the total year was 4.6%.The economic decline continued, and in 1999 GDP fell by 0.6%. This neweconomic decline was caused primarily by the Russian economic crisis and itseffect on the enterprises that exported mainly to the Eastern market (especiallythe food and chemical industries) and on the financial sector (three more banksdisappeared from the Estonian banking sector). In addition, the toughening ofthe general global economic environment resulted in rising interest rates,which curbed the growth in domestic demand. Economic growth was revivedin 2000, when GDP increased by 7.1%, and continued also in 2001, when thegrowth of GDP was according to preliminary estimates 5.4%. The decline inthe growth rate was caused by lower foreign demand. The main driving forcein the growth of domestic demand has been investments.

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Inflation, which slowed down after its very high level, has been increasingagain in recent years. While the consumer price index increased as compared

to the previous year by 11% in 1997, by 8% in 1998 and by 3% in 1999 thenin the year 2000 its growth was 4% and in 2001, 6%. The price rises of recentyears have been due to the rise in the administratively regulated prices of theclosed sector (electric power, heat, public transport) as well as of free-marketprices.

Privatisation as a political and economic reform has been in essencecompleted in Estonia. The basic change in the ownership structure was madein 1993–96. A lion's share of the state-owned enterprises were privatised in1994–95. The government participates in business only through infrastructurefirms (power engineering), but also in this sphere privatisation is underway. Inother branches of economy the share of the government is negligible.

At the beginning of 2002 Estonia had a population of 1.361 million. Theproportion of females was somewhat greater (54%) than that of males (46%).Estonians made up 68% of the population. Russians (26%) were the largestminority. About 2/3 of the population live in towns and 1/3 in the country.Rural dwellers are almost all Estonian. The majority of other ethnic groups areconcentrated in towns, mainly in the industrial regions of Northeast and NorthEstonia.

DEMOGRAPHY

The population number in Estonia has been decreasing over the whole periodof regained independence. At the beginning of the year 2002 it made up 88%of the peak level of 1990. In the first half of the 1990s the main role in thediminishing of the population number was played by migration processes(negative net migration reached a record high of 34 thousand persons in 1992),but afterwards the role of migration has fallen notably. The Statistical Officehas not published data on migration since the year 2000 because these data areincomplete and of low reliability. However, according to the last data madepublic the net migration was estimated at -2496 persons in 1997, -1131persons in 1998 and -616 persons in 1999.

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Since the beginning of the 1990s also the natural increase of the Estonianpopulation has been constantly negative. When in 1998 the number of

registered deaths was by 7.2 thousand greater than that of births thenafterwards the negative natural increase has been in the range from 5 thousandto 6 thousand a year (in 2001 for example 5.9 thousand). However, thedecreasing trend of births observed for more than ten years was replaced by anincrease in 1999 (12.5 thousand births against 12.3 thousand in 1998 ) andalso in 2000 (13.1 thousand births); still, in 2001 the number of births fellagain at the 1999 level.

In the 1990s a drastic change occurred in the distribution of births to legallymarried parents and unmarried parents. In 1997 the number of children bornout of wedlock was for the first time greater than that of children born tomarried parents. The difference has been increasing from year to year. In 2000children born to legally married parents made up 45.5% and in 2001 only43.8% of all births. This does not mean, however, that over half of the childrenwere born to one-parent families. Rather, this is a reflection of the situationwhere common law marriage is preferred to legally registered marriage.

Mortality has been high and rather stable in Estonia. While in 1998 a total of19.4 thousand persons died and the crude mortality rate was 14.0 then in 2001the respective figures were 18.5 thousand and 13.6. The main causes of deathare the same as those typical in developed countries. A factor contributing tothe high mortality rate is the ageing of the population – the proportion of 65-year-old and older persons in the total population has been continuouslyincreasing and that of 14 years old and younger has been falling. Acharacteristic feature of Estonia is a large difference between the average lifeexpectancies of men and women. In the year 2000 life expectancy at birth was76 years for women and only 65 years for men. While women's lifeexpectancy at birth in Estonia is about five years less than in Scandinaviancountries then men's life expectancy is more than ten years shorter.

Considering the small number of Estonian population, its constant decreaseand ageing mean a serious demographic crisis. However, as we know Estoniais far from being an exception in this regard. Although general improvementof the living standards and more efficient family policy may have some effect

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on demographic processes, in the longer perspective Estonia has to reckonwith serious problems on the labour market and hard choices.

Still, the number of working age population has been comparatively stable inEstonia in recent years. According to the Statistical Office, in 1998–2001 itdecreased only by 4 thousand persons. This tendency is influenced also by thestep-by-step increase in (women's) pension age, which by 2016 should be 63years for both men and women (men have already reached this). There havebeen discussions about a further rise in the pension age.

LABOUR MARKET - EMPLOYMENT

The most dramatic changes in the Estonian labour market took place in1993–99, when major structural changes occurred in employment, andunemployment emerged and reached a considerable level. A certainstabilisation followed in 1996–97 when the main indicators of the labourmarket changed very little. This meant completion of the transition from theplanned command economy to a market economy in Estonia. The Estonianeconomy and employment were seriously affected by the economic crisis inRussia that started in early summer 1998. The whole manufacturing sector inEstonia, but especially the food processing industry exporting mainly to theEastern market, was seriously hit. While at the beginning of 1998 about 640thousand persons were still employed in Estonia (by 200 thousand less than in1989) then the average number of employed persons in 1998 was 606thousand. In 1999 employment fell to 579 thousand, reaching the absoluteminimum level – 572 thousand – in 2000. As the economic activity of thepopulation practically did not change (in 1998 the labour force participationrate was 64% and in 1999–2001, 63%) unemployment increased. In 2001employment, which had been continuously decreasing, increased for the firsttime, reaching 577.7 thousand. However, of economic sectors only the tertiarysector witnessed an increase (2%) in employment in 2001. In the secondarysector employment did not change (although there was an increase inmanufacturing) and the primary sector had a 3% decrease. Employmentgrowth has continued also in 2002 and by autumn it had reached nearly thepre-Russian crisis level of 600 thousand. Still, the average yearly number ofthe employed is below 600 thousand in 2002. According to experts, positivedevelopments are expected to continue.

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As the number of working age population has remained largely unchanged,the trends in the absolute numbers of employed persons and employment rate(population aged 15-64) have been similar. From as high a level as 78% in1990 employment rate fell to 65% by 1996 and stayed at this level until 1998.The Russian financial crisis cut the employment rate in Estonia to 61.6% in1999 and to 60.7% in 2000. Increased employment in 2001 brought about alsoa higher employment rate – 61.1%. It is quite probable that employment ratewill reach again 64–65% in the near future.

The employment rate of men has been notably higher than that of women (in2001 respectively 65.2% and 57.3%). While in the first half of the 1990s thedifference between the employment rates of men and women decreased (in1990 men's employment rate was 83% and women's, 72%), then since 1996the difference has been almost stable.

The distribution of employment between economic sectors is increasinglyapproaching the employment structure of developed countries. The proportionof the primary sector (agriculture) is falling and the proportion of services isincreasing. The role of the primary sector in employment fell from 8.9% in1998 to 6.9% in 2001 (in 1990, 20%) while that of the tertiary sector increasedfrom 55% to 60% (in 1990, 42.5%). The proportion of the secondary sectorhas stayed around 33% (in 1990, 37.5%).

In 2001 the private sector accounted for 71% of employment. Its importancehas been constantly increasing; for example, in 1992 it employed 39% and in1998 69% of all those employed. In manufacturing the private sectoraccounted for as much as 98% in 2001 (in 1989, 9%). The role of the publicsector has been decreasing also in such areas as education and health carethough of course not at the same rate as in industry. However, in recent yearsthe growth in the importance of the private sector has slowed downsignificantly. Obviously the general decline in employment has played acertain role here.

Among all those employed in 2001 employees made up 91.7% while 8.3%were entrepreneurs (including unpaid family members). The largest part of theentrepreneurs were engaged in agriculture, which is where entrepreneurship

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started 10 years ago. Of all those employed in the primary sectorentrepreneurs (farmers) account for more than a third (38.7%), at the same

time in the secondary sector they make up only 4% and in the services sector7%. Over 60% of the entrepreneurs in the primary sector (agriculture) are self-employed persons with no hired employees and only a few use hired labour.The (unpaid) labour of household members is used more often. The proportionof entrepreneurs in employment has stayed practically unchanged during thelast five years.

LABOUR MARKET - UNEMPLOYMENT

The number of unemployed, the yearly average for which was 5.4 thousand in1990 (unemployment rate 0.6%), increased by 1996–98 to a stable level of65–70 thousand (unemployment rate 9–10%). As a consequence of theRussian financial crisis a new rise in unemployment started in the second halfof 1998. In 1999 an average of 80.5 thousand persons were unemployed(unemployment rate 12.2%) and in 2000 the number of unemployed was 89.9thousand (unemployment rate 13.6%). Unemployment reached the peak of theindependence period in the first quarter of 2001, when the number ofunemployed persons exceeded 100 thousand and the unemployment rate wasas high as 14.8%. However, as already mentioned, in 2001 the situationimproved and unemployment decreased. The average yearly number ofunemployed was “only” 83.1 thousand and the unemployment rate was 12.6%.Unemployment has continued to decrease also in 2002, being 60 thousand inautumn (unemployment rate 9.1%). The last numbers certainly have a seasonalcharacter, but it is quite probable that also the average yearly unemploymentrate will fall to 9–10% in the near future.

In Estonia unemployment is somewhat higher among men (theirunemployment rate was 12.9% in 2001) than among women (12.2%). At thesame time women are more active in searching for jobs through labourexchange than men are. In 2001, 54% of the unemployed women weresearching for jobs through labour exchanges while only 40% of theunemployed men did. These figures show that searching for a job throughlabour exchange is generally unpopular, especially so among unemployed withbetter education and higher qualifications. At the same time, the higher theeducational level of labour, the less experience with unemployment it has. In

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2001 the unemployment rate of the labour force having a higher educationwas 6% and with primary education 22% in Estonia. In this respect Estonia

does not differ from the rest of the world.

Another typical feature is that unemployment among the young is about twiceas high as the average. The unemployment rate among the 15–24-year-oldswas 12% in 1994, 16% in 1998 and 22% in 2001 (26% among women). Inmany cases young persons are not hired because of lack of skills orinsufficient command of the Estonian language. Often young persons becomeunemployed right at entering the labour market since potential employees arenot satisfied with their skill or there is no demand for a given speciality or theexpectations of the job seekers are too high. At the same time, however, theproportion of employees 30 years old or younger is very high in such highlypaid fields of activity as financial mediation and real estate.

Long-term unemployment has been constantly increasing in Estonia. When in1994 persons out of job for a long period made up 40%, then in 1998 already47% and in 2001 48% of all the unemployed. Long-term unemployment is anespecially serious problem in rural areas. It is a more serious problem amongmen than among women: in 2001 long-term unemployed men made up 52% ofall unemployed men, the relevant proportion of women was 44%. In parallelwith increasing long-term unemployment also the number of persons whohave given up searching for a job “due to having lost any hope of finding ajob”, i.e. of the so-called discouraged persons has increased. While the numberof discouraged persons was 15.3 thousand in 1997 and 18.9 thousand in 1999then in 2001 already 22.4 thousand. High long-term unemployment andhopelessness are becoming the most serious social problems on the Estonianlabour market.

There is an about 2-fold regional difference in unemployment rates in Estonia.For years unemployment has been the highest in Northeast and SoutheastEstonia where the unemployment rate is up to 20%. In recent years CentralEstonia has had also a relatively high unemployment rate – 14–17%.Unemployment is the lowest on West Estonian islands where it is below 10%.With certain allowances we can say that the farther we move from the sea thehigher the unemployment rate. In peripheral areas the problem ofunemployment has been constant. Very few new jobs are created in the areas

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that lost the greatest number of jobs in the course of economic restructuring.Agricultural employment is falling and investments are directed into other

fields. There is practically no regional policy.

In parallel with unemployment, which is on the average level of the EuropeanUnion, Estonia has shortage of qualified labour. Thus, in Estoniaunemployment is to a large extent structural. There is shortage of both highlyqualified white collar and blue collar workers. One of the reasons forstructural unemployment is that the educational system does not meet therequirements of the labour market. Reforms of the systems of vocational andhigher education have not yet yielded the expected results. The number ofyoung people striving for a higher education has been constantly increasing inrecent years. At the same time, however, the number of young persons whohave left school right after finishing primary school or even earlier has alsobeen increasing. The situation where there are 40 applicants for a post of asales manager and 4 applicants for a salesperson's post when a newsupermarket is searching for personnel has becoming ever more typical.

LABOUR MARKET POLICY

About half of the unemployed register themselves officially as job seekers atemployment agencies – in August 2002 for example 44 thousand persons didso. At the same time the average number of persons receiving unemploymentbenefits was 20 thousand. A person can receive an unemployment benefit fornine months (until 2000 for six months) and since 1999 the amount is 400kroons per month. The qualifications for receiving even this extremely modestbenefit have been tough in Estonia. From the beginning of 2003 a new systemof unemployment insurance based on unemployment fund will at last beestablished. The right to receive an unemployment insurance benefit isenjoyed by persons registered officially as unemployed and who during thelast 2 years have paid insurance contributions for at least12 months (thegovernment started collecting unemployment insurance contributions at thebeginning of 2002). Persons who have paid insurance for less than 5 years willget the benefit for 180 days – during the first 100 days 50% of the averagemonthly wage and later 40%. Income tax shall be deducted. It will take 10years for the system to be entirely launched – persons having paid insurancefor ten years will have the right to get the benefit for 360 days.

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In addition to unemployment benefits state employment agencies offer jobseekers also certain measures belonging to active employment policy: supportfor starting business (a single subsidy of 10 thousand kroons which thegovernment plans to raise to 20 thousand), training for labour market andlabour market support to employers (support for wages) who hire anunemployed person whose competitiveness on the labour market is relativelylow (disabled persons; persons in the age group 16–20, mothers of youngchildren; persons who will be eligible to old-age pension in five years or less;ex-convicts etc.). Quite a number of employers have found such support thelast means to save the business or an object of unethical manipulation. As thesupport is limited to one year attempts have been made to regularly andunlawfully replace less competitive labour force. The proportion of activelabour market measures in all expenditures made on the labour market (in2001, 270 million kroons) has stayed around 20% in recent years.

In 2000 the new pension act created a totally new kind of pension in Estonia –early old-age pension. This pension is meant for persons who have no job andhave less than 3 years to the regular pension age. Early old age pension islower than the regular pension by 0.4% for every month that the person retiresearlier and this reduction is permanent. In 2001 the new possibility of leavingthe labour market was actively used – 2400 persons retired early.

WAGE POLICY

The liberal wage policy chosen in Estonia during transition to marketeconomy has been constantly pursued. The government's interference in thewage policy of the business sector is very small being limited to theestablishment of the minimum wage and fulfilment of its obligations stated inthe labour legislation. The latter consists mainly in providing internationallyacknowledged guarantees to employees, the weaker party in the labour market.The state plays a more important role in regulating the pay of the employees ofthe government institutions and other public institutions (whose payrollexpenditures are established by the law on the state budget). At the same time,however, rules concerning their pay have had an ever decreasing role in theactual formation of their remuneration. In reality the salaries in the publicsector are often formed similarly to the pay in the business sector, which has

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increased the attractiveness and competitiveness of jobs in the public sectoron the labour market. During the last few years attempts have been made to

apply principles of management according to results? (performance bonuses)in the public sector. A general reform of the wage system in the public sectorhas been planned for the year 2003.

Since the beginning of 2002 the minimum wage for a full-time job establishedby the government is 1850 Estonian kroons per month. According to statisticsthis is the amount that 7% of the employees receive. Although as compared to1998, when the minimum wage was 1100 kroons, this means a 1.7-foldgrowth, the minimum wage makes up only 33% of the average gross wage inEstonia in 2001. The income tax free minimum per year has increased from6000 kroons in 1998 to 12 000 kroons in 2002 (that is to 1000 kroons a month)or doubled. As earlier there is a flat 26% income tax on all earnings above theincome tax free minimum. This is paid by the employee (deducted from thewages by the employer). In addition, the employer pays 33% payroll tax tocover the state pensions (the first pillar of pension insurance) and healthinsurance costs. Since the beginning of 2002 all employees pay 1% of theirgross earnings into the unemployment insurance fund, to which employers add0.5% of the payroll. The percentages of these taxes may change in the future.However, according to the unemployment insurance act they have to be in therange from 0.5 to 2% for the employees and from 0.25 to 1% for theemployers.

In 2001 the average wage in Estonia was 5510 kroons a month. In 1998–2001the average wage increased by 34% while the consumer price index increasedby 21%. As compared to the period 1995–98 the difference between thegrowth of the average wage and CPI has decreased more than three times.Wage increase, which decelerated until recently, has by today practicallystopped. While in 1997 the average wage increased by 18% and in 1998 by14% as compared to the previous year, then in both 1999 and 2000 the growthwas 10% and in 2001, 12%.

The gap between the wages in Tallinn and Harju County surrounding thecapital and the rest of the country is still great. In 2001 the average wage inTallinn and Harju County was 6570 kroons. This is 1.7 times as high as in thecounty with the lowest average wage; moreover, this is the only region where

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the average wage is higher than the average for the whole country. Theaverage wage is the lowest in the predominantly agricultural region of

Southeast Estonia: 3885 kroons in Põlva County and 3878 kroons in JõgevaCounty. The gap has been more or less stable for years due to the unevenregional economic development. Investments, especially foreign investments,tend to concentrate into Tallinn and its surroundings. Among other factors theabsence of a uniform labour market has resulted in the fact that people frompractically all areas of Estonia go to work in Tallinn.

Average wages in different fields of activity differ in Estonia about four times.The difference between agriculture, where the wage level is the lowest(average wages in 2001, 3239 kroons), and financial mediation, where thewage level is the highest (average wage in 2001, 12 249 kroons), has stayedpractically unchanged. The differences in the wages between sectors arehigher than they should be considering the differences between work andworking conditions. Also la perra vita in the sphere of education has notchanged. The average wage is lower than in education (where it was 4770kroons in 2001) only in hotels and restaurants (3771 kroons) and in agriculture(2823 kroons) and fishing (3936).

Certain fields of activity (especially construction and services) still pay asizeable part of the wages without paying taxes. The Statistical Officeestimates that the proportion of shadow economy is presently about 12–15%of GDP in Estonia. Thus, the importance of shadow economy has fallen inrecent years to some extent. No doubt, amendments to legislation made in1998 have played an important role here. The payroll tax collected waspersonalised, that is the future pension of the employee depends on the payrolltax paid on his(her) wages to increase the interest of employees in legal pay.Still, hidden incomes in Estonia are high. This means that we have to becritical about the above-presented proportion of employees earning onlyminimum wages.

WELFARE

In 2001 the average monthly net income per household member was 2289kroons in Estonia. Income from wage work was the greatest source of incomemaking up 63%. Next came transfers from the government – on average 25%.

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A household member spent on average 2321 kroons per month. A third(33%) of this amount was spent on food and 15% on housing. Obviously the

main explanation of higher expenditures than incomes is extensive use ofloans and leasing. As compared with 1996 the average income of a householdmember had increased 1.6 times by 2001; during the same period theconsumer price index increased 1.37 times. In 2001 a household consisting oftwo adults with no children had the highest income per member (almost by25% higher than the average) while households of one adult and children hadthe lowest income per member (77% of the average). The income of ahousehold member living in the country was 20% lower than in town. Thestructure of household incomes has changed little in recent years. However, inthe income structure of a rural household the importance of incomes fromwage work but also transfers has significantly increased. Incomes from self-employment (agriculture) have markedly fallen. As to changes in the structureof expenditures, the reduction of the proportion of expenditures on foodstuffsfrom 41% in 1996 to 33% in 2001 is worth mentioning (at the same time 1.2times more was spent on foodstuffs).

Inequality of incomes can be illustrated by the large difference between theincomes of the highest income decile (tenth decile) and the lowest decile (firstdecile). The difference between the first and tenth decile is 10-fold withrespect to total net incomes but with respect to incomes from wage work ashigh as 20-fold. The greater is the proportion of income from wage work, thehigher is the income decile to which the person belongs. Three quarters of thenet income of the 9th and 10th income deciles consists of income form wagework. Persons belonging to these deciles are typically (a) men below 65 yearsof age (especially 25–34 years old); (b) employees of Estonian origin; (c) towndwellers (mainly living in Tallinn and Harjumaa) and (d) with a highereducation and childless.

Estimates of poverty in Estonia may be quite different depending on thechosen criteria. Estonian social scientists have estimated that 25% of thehouseholds, 28% of all household members and even 38% of the children livein poverty. At the same time, if we consider the official poverty line (500kroons per household member after deduction of expenditures on housingfrom net income) only 2% of the households, 3% of the household membersand 4% of the children live in poverty. The state pays social security benefits

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proceeding from its economic opportunities to persons whose income islower than the official poverty line. In recent years the amount of social

security benefits paid has been on average 300 million kroons per year. Theneed for social security benefits differs greatly by regions, depending directlyon the level of unemployment and being thus the highest in the regions withthe highest unemployment (Võrumaa, Ida-Virumaa) and the lowest inHarjumaa. Of all households receiving social security benefits householdswith an unemployed member make up 55%. Over half of the householdsreceiving benefits have children. Thus, unemployment is the most importantpoverty risk. However, it seems that the so-called subjective poverty isgenerally declining in Estonia. The proportion of those persons who considertheir incomes quite insufficient is decreasing and that of the persons whoconsider their incomes sufficient is increasing.

EDUCATION

The structure of the educational system in Estonia was recently modified,especially at the secondary level, to bring it closer to the educational systemsof developed countries and harmonise it with the Bologna Declaration.Children start school at the age of 7, and it takes nine years to completecompulsory primary education. General secondary education is acquired atgymnasiums in three years. As a consequence of the reform of vocationaleducation, since the academic year 1999/2000 it is possible to continue studiesto obtain a secondary vocational education after completing primary education(3 years at vocational schools) or after secondary school (2 years). As tohigher education, professional higher education can be acquired atprofessional higher schools in 3 to 4 years and academic higher education atuniversities. The first level of academic higher education is bachelor's studies(3 years), which is followed by master's (2 years) and doctoral studies (4years). Until 2002 bachelor's programmes in Estonia were meant for 4 years.Since the academic year 2002/2003 new bachelor and master programmeswere launched based an an integrated 3+2-year system.

Estonia has joined the Bologna and Sorbonne declarations, which create auniform educational space in Europe, the Lisbon Convention on theacknowledgement of higher educational certificates and certificates enablingaccess to higher education in the European region and adopted an act on

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acknowledging professional qualifications obtained in foreign countries. Allthis guarantees that inhabitants of Estonia have equal ac

In the 1990s educational stratification in Estonia deepened: the number ofyoung people who had reached school-leaving age but had not obtainedsecondary education (or primary education) increased, simultaneously thenumber of those eager to acquire a higher education also increased. A drasticrise in the number of students at higher educational level could be regarded asthe most important tendency in the second half of the 1990s; partly this was aconsequence of the development of private higher schools and universities.While in 1995 Estonia had 7 universities with only one of them private then in2001 the number of universities was 16 of which 10 were private. In 1995 thetotal number of students at private higher schools was less than 5000, but in2001 already over 12 thousand. In addition in 2001 public-legal universitieshad over 17 thousand more students than six years ago and nearly 3000 morethan in 2000. The number of students at state universities paying tuition feeshas also been continuously increasing, and presently the total number ofstudents whose studies are not financed from the state budget makes up nearlyhalf of the total number of students. Higher education as a whole ischaracterised by an increasing tendency towards social sciences, business andlaw and deepening gender disproportions in favour of women. The reputationof vocational education has remained low regardless of the reforms.

SourcesEstonian Economy: 2001 in review. Ministry of Economic Affairs. April 2002Labour Force 2001. Statistical Office of Estonia 2002Social Trends 2. Statistical Office of Estonia 2001Statistical Yearbook of Estonia 2002. Statistical Office of Estonia

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LATVIA

Jevgenija SviridenkovaSenior Desk Officer of Public Sector Pay DivisionEconomy Analysis and Fiscal Policy Department, Ministry of Finance

BASIC FACTS ABOUT LATVIA

Location: Eastern Europe, bordering the Baltic Sea, between Estonia andLithuania

Capital: RigaArea: total: 64,589 sq km

water: 1,000 sq kmland: 63,589 sq km

Land boundaries: total: 1,150 kmborder countries: Belarus 141 km, Estonia 339 km, Lithuania453 km, Russia 217 km

Natural resources: peat, limestone, dolomite, hydropower, wood, arable land,minimal; amber

Population: 2,366,515 (July 2002)Population growthrate:

-0.77% (July 2002)

Life expectancy atbirth:

total population: 69 yearsfemale: 75.17 years (July 2002)male: 63.13 years

Ethnic groups: Latvian 57.7%, Russian 29.6%, Belarusian 4.1%, Ukrainian2.7%, Polish 2.5%, Lithuanian 1.4%, other 2%

Religions: Lutheran, Roman Catholic, Russian OrthodoxLanguages: Latvian (official), Lithuanian, Russian, otherGovernment type: Parliamentary democracyIndependence: 21 August 1991Constitution: the 1991 Constitutional Law which supplements the 1922

constitution, provides for basic rights and freedomsLegal system: based on civil law systemSuffrage: 18 years of age; universal for Latvian citizensExecutive branch: chief of state: President Vaira VIKE-FREIBERGA (since 8 July

1999)head of government: Prime Minister Einars REP_E (since 7November 2002)cabinet: Council of Ministers nominated by the prime ministerand appointed by the Parliamentelections: president elected by Parliament for a four-year term

Legislative branch: unicameral Parliament or Saeima (100 seats; members are electedby direct, popular vote to serve four-year terms)

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Judicial branch: Supreme Court (judges’ appointments are confirmed byParliament)

Internationalorganizationparticipation:

BIS, CBSS, CCC, CE, EAPC, EBRD, ECE, EU (applicant),FAO, IAEA, IBRD, ICAO, ICFTU, ICRM, IDA, IFC, IFRCS,ILO, IMF, IMO, Interpol, IOC, IOM, ISO (correspondent), ITU,NSG, OAS (observer), OPCW, OSCE, PCA, PFP, UN,UNCTAD, UNESCO, UPU, WEU (associate partner), WHO,WIPO, WMO, WTO

Inflation rate(consumer prices):

2.5% (2001)

Labor force: 1.1 million (2001)Labor force - byoccupation:

agriculture 15%, industry 25%, services 60% (2000)

Unemployment rate: 7.6% (2001)Industries: buses, vans, street and railroad cars, synthetic fibers, agricultural

machinery, fertilizers, washing machines, radios, electronics,pharmaceuticals, processed foods, textiles; note - dependent onimports for energy and raw materials

Agriculture -products:

grain, sugar beets, potatoes, vegetables; beef, pork, milk, eggs;fish

Exports - partners: Germany 17%, UK 16%, Sweden 10%, Lithuania 8% (2001)Imports - partners: Germany 17%, Russia 9%, Lithuania 8%, Finland 8%, Sweden

7% (2001)Currency: Latvian lat (LVL)Exchange rates: lati per US dollar - 0.6384 (January 2002), 0.628 (2001), 0.607

(2000), 0.585 (1999), 0.590 (1998), 0.581 (1997)Fiscal year: calendar year

Speaking about changes in the working life in Latvia and analysing thesituation in respect to the political, economic and social criteria, as well asassessing Latvia’s situation and prospects of human development, it isimportant to take into account that Latvia continues to harmonize itslegislation and fulfil the requirements for entering the European Union.

Good quality of working life together with promotion of employment andentrepreneurship are central to the Latvia’s employment strategy and socialpolicy reforms.

Latvia has made significant progress in the fight against corruption, whichremains a cause for serious concern. The legislative framework has been

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improved, the institutional set-up has been strengthened and publicawareness and involvement of civil society are rising.

Latvia continues to observe human rights and freedoms. Latvia hasencouraged further integration of non-citizens into Latvian society byremoving language requirements in the election law, and increasing support tofacilitate the naturalisation process, coupled with the activities of the SocietyIntegration Foundation in this area. As of August 31, 2002 about 514 298(22.0%) of the Latvian total population were non-citizens. The number of non-citizens is slowly decreasing (from 24.6% in 2000 to 22.0% in 2002).

By August 2002, more than 56 000 naturalisation applications had beenreceived and 55 439 persons had obtained Latvian citizenship since thebeginning of naturalisation in 1995. Altogether, 7 540 children had beengranted Latvian citizenship by August 2002.

ECONOMIC DEVELOPMENTS IN THE CONTEXT OFLATVIA’S INTEGRATION INTO THE EU

The preparation for participation in the EU internal market is well advancedand Latvia has achieved a good level in this area. As regards free movement ofgoods, the legal and institutional framework is generally in place. There hasbeen sustained development of the standardisation system. The reform of themarket surveillance system and its infrastructure, including on food safety andin the field of public procurement, however requires further strengthening. Theprocess of bringing Latvia’s legislation and structures in relation to the freemovement of persons into line with the acquis1 has developed satisfactorily,although further efforts are required, especially on mutual recognition ofprofessional qualifications as well as on strengthening institutional capacity. Inthe area of freedom to provide services, legislative alignment has advanced,notably regarding financial services and banking, but further work remainsnecessary regarding insurance and securities. In the area of capital movements,legislative alignment is well advanced, but the process needs to be completedas regards capital movements and payments.

1 The word “acquis” means the implementation of the European Union’s legislation, known as the“Acquis communautaire”.

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As regards customs, organisational restructuring and implementation needsto continue, as it does for taxation, where legislation needs to be completed

on direct and indirect taxation. For both areas, Latvia has committed itself tointroducing adequate information technology systems so as to allow theexchange of electronic data with the European Community and its memberstates. Significant further work is required as a priority for these systems to beoperational by the date of accession.

General taxation principles in Latvia are determined in the law “On Taxes andDues”. According to the law, the state or the municipality imposes dues. Thestate has rights to impose dues on a number of different objects.

The state taxes are:

1. Direct taxes:

� Corporate income tax, including withholding taxes;� Personal income tax;� Social insurance;� Real estate tax.

2. Indirect taxes:� Value-added tax;� Excise tax;� Customs duties.

3. Gambling and lottery tax.4. Natural resources tax.

Taxpayers are entitled to defer payment of the appropriate taxes for a period oftime from three months to one year subject to prior approval by tax authorities.Duly unpaid taxes are subject to a late-payment fee that is 0.05 % per each daybehind the schedule. In addition, the unpaid amount is increased by therefinancing rate determined by the Bank of Latvia. Late payment andrefinancing amounts shall be frozen when the total of both above-mentionedamounts reaches the basic debt amount.

The amount of tax penalties depends on the kind of tax non-compliance. Forexample, decrease of the taxable base is subject to a penalty of an amountequal to that of the unpaid taxes, but a failure to file the tax declaration issubject to a penalty double the amount of the unpaid taxes. The head of the taxauthorities may decrease the penalty down to 30%.

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Once a year a taxpayer is allowed to make voluntary corrections in theappropriate tax declaration. This results in cancellation of any penalties

pending for tax non-compliance.

Decision of the tax authority may be appealed with the Director of the StateRevenue Service within 30 days from the date the decision is received.

The macroeconomic policy mix has been adequate and managed to cope withexternal shocks. The monetary framework, defined by the peg of the lat, hasbeen stable and predictable. Fiscal policy has been responsive to thisframework, by adopting a prudent stance overall, translating into relativelylow deficits on average, and flexibility in times of adverse economic shocks.This was in particular the case in 1999 in the aftermath of the Russian crisis,when automatic stabilisers were allowed to play freely and some tax arrearswere extended, leading to a temporary sharp increase in the government deficitin 1999.

Price liberalisation was completed prior to 1997, and market forces determinethe majority of prices of goods and services. The proportion of items whoseprices are regulated has been the same for several years, at about 20% ofconsumer price index, CPI. It is mainly prices for the services of publicutilities that are still regulated; e.g. electricity, gas, water and telephoneservices. A cost-recovery mechanism is in place.

The share of the private sector increased rapidly up to 1998 and has continuedto increase since, but at a slower pace. Some 62% of GDP were produced inthe private sector in 1997, which had increased to 69% by 2001. In terms ofemployment, the percentage is slightly higher.

The land reform is close to being completed, and about 90% of agriculturallands are in private hands. A real-estate market exists and a system ofmortgage lending is fully operational. The privatisation of apartments isongoing. Of all apartments, some 95% are assigned for privatisation, and ofthese about 77% had been privatised by 31 October 2001.

The privatisation process is nearly completed, but some large companies arestill state-owned. Privatisation of small and medium-sized enterprises was byand large completed in mid-1998. However, the process has been slower since

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then. Nevertheless, some progress has been achieved, and only a few largeenterprises remain to be privatised. The privatisation of Latvian Gas was

carried out in several stages and successfully completed in February 2002,with two German and one Russian investors emerging as the majorshareholders. The conditions for the sale of the remaining state-owned sharesin Ventspils Nafta and the Latvian Savings Bank are being worked out. Thesale of Lattelekom is expected to resume as soon as the ongoing arbitrationcase, concerning the curtailing of Lattelekom’s monopoly, is settled. Animportant step forward was the sale of 83% of the shares in the LatvianShipping Company (LASCO) in 2002. The privatisation of LASCO startedmore than five years ago, but was interrupted several times. A large stake,close to 50%, has now been bought by Ventspils Nafta, which is itself partly(32%) owned by the state. This transaction might have an impact on the scopefor selling the remaining state share in Ventspils Nafta. In mid-2000, it wasdecided that the Latvian electricity utility, Latvenergo, should be temporarilyremoved from the list of enterprises to be privatised. Latvenergo, as well asthe Latvian railway company, Latvijas Dzelzcels, is currently underrestructuring.

No significant barriers to market entry or exit are present. In 1999, a long-termco-operation between the authorities and the business community, representedby the Foreign Investors’ Council In Latvia, began. The aim was to identifyand remove obstacles and administrative barriers in the business environment.Following the success of this work the co-operation has recently beenbroadened to incorporate a wider range of the business community. New firmshave been created every year at the average rate of about 7% of total firms.The rate is slowly declining, naturally as the total number of firms is steadilyincreasing, and in 2001 the rate was about 6%. A new bankruptcy law becameeffective in late 1996, and was followed by a peak in liquidations during 1997and 1998. Almost 10% of the existing companies were liquidated both years.Since then, about 2% of companies have been liquidated annually on average.However, the lack of administrative and judicial capacity is still a problem,and results in lengthy court proceedings and poor supervision of enterprises,which in turn makes life easy for tax evaders and those who do not obey lawsand regulations.

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The legal framework for enterprises is in place, although enforcement ofrelevant legislation still poses problems. Several important steps have

recently been taken to create a comprehensive legal system. In July 2001, thecomputerised national Land Book was introduced, strengthening the legalcertainty in the real estate market. In October 2001, a new unified utilitiesregulator, the Public Utilities Commission, started its activities. Finally, animportant and long awaited change in company law was the new CommercialCode that came into force in January 2002. The law simplifies legislation,makes it more transparent, and brings it into line with EU requirements.However, the business community still points at the lack of administrativecapacity, which undermines the enforcement of the legislation.

The financial sector is functioning well, although intermediation is still low.On average, domestic credit to the private sector has increased by some 46%annually since 1997. However, the increase has taken place from low levels.Thus it only amounted to 28.6% of GDP at the end of 2001, roughly doublethe ratio compared to that in 1997. 22 banks are currently operating in Latvia.Although some of them are very small and operating in market niches, thisrelatively high number of market operators guarantees a sufficient degree ofcompetition, as witnessed by the downward trend in spreads between interestrates on loans and deposits. The spread for short-term loans and deposits hassignificantly declined from 9.4 percentage points to 5.9 in 2001, and for long-term loans and deposits from 7.2 to 3.6. Foreign involvement in the bankingsector has been large and stable during the last years. The privatisation of thebanking sector is almost complete and state ownership amounted at the end of2001 to just 3.7% of total bank capital, whereas foreigners held 67.8%.

The financial sector has reached an adequate degree of stability. As a share oftotal loans, non-performing loans have decreased from 10.0% to 2.8%. Allbanks fully comply with the capital adequacy requirements. The capitaladequacy ratio was 16.2% on average between 1997 and 2001, but has beendeclining and was 14.2% at the end of 2001. Supervision of the capitalmarkets has improved significantly. In July 2001, the new Financial andCapital Market Commission started to operate. The commission unifies thesupervision of the financial and capital markets into one body, and has beengiven far-reaching independence, similar to that of the central bank.

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The non-bank financial sector is small, but slowly expanding. Stock marketcapitalisation has risen from 8.4% of GDP to 9.3%. A bond market did not

exist in 1997, and its capitalisation only amounted to 5.7% of GDP in 2001.Part of that rise is due to the issue of government securities aimed atdeveloping domestic financial markets, exceeding the budget financing needs.However, the introduction of the second pillar in the pension system in July2001 is expected to promote the expansion of the capital market in the comingyears.

In assessing the economical environment in Latvia it would be more expedientto start the analysis with the assessment of GDP. As we have noted above, theLatvian economy is steadily growing in the recent years. GDP, between 1998and 2001, has gone up by 5.2% in the average per year.

Only in 1999 did development deviate from this trend, as the economy was hitby the Russian crisis, but the economy succeeded in recovering rapidly.However, strong private consumption and investment have lead to a largecurrent account deficit. It has, nonetheless, been covered by foreign directinvestment (FDI) to a large extent. In 2001, FDI fell considerably, but that wasdue to a single transaction by a domestic enterprise and it should not be tooemphasised.

GDP of Latvia in 1996 – 2001 period has increased approximately twice fasterthan in the EU member states and one and a half times faster than in the EUcandidate countries. The reforms carried out in the last decade have started toyield results. However, there is still a lot to be done to reach the level of well-being of western counties. According to the data of Eurostat, GDP per capitain purchasing power parity in Latvia in 2001 equalled to 33% of average in theEU (26% in 1996).

The general government deficit has varied somewhat over the years, with apeak in 1999. Since then, however, it has decreased every year. Recenteconomic developments have, by and large, confirmed these trends, althoughthe weakening of external demand has started to influence exports. The budgetlaw for 2002 provides for an increase in the budget deficit to 2.75% of GDP.So far, however, the actual deficit has been much lower, than that and inagreement with the IMF, the target for the year has been set to 1.8% of GDP.

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The aim of economic policy of the government is to achieve sustainable,stable and balanced economic and social development. Current scenario for

macroeconomic development in the medium term is based on the assumptionthat the government will continue to implement the policy aimed atmaintaining that stability in the future. The cornerstones of this policy arestrict fiscal and monetary policies. The policy’s scenario envisages stablegrowth, which will insure gradual convergence of Latvian economy with themost developed European economies. In case of favourable conditionsLatvia’s potential for growth is even bigger; however, taking into account therisk that could imperil faster growth, the scenario envisages average GDPgrowth of 5.7% up to the year 2005.

Main economic trends

1998 1999 2000 2001 2002* 2003* 2004* 2005* Growth rates, % over the previous periodGDP 3.9 1.1 6.6 5.5 5.5 5.8 5.9 5.9Inflation 4.7 2.4 2.6 2.0 2.9 3.0 3.0 3.0Employment 0.6 -0.5 0.0 0.1 0.1 0.1 0.1 0.1Real personalincome 6.1 3.3 3.4 4.8 4.9 5.1 5.2 5.2 % of GDPCurrent accountdeficit -10.6 -9.6 -6.8 -6.4 -6.1 -5.8 -5.2 -4.6

* - forecast

Economic growth in Latvia has been achieved in conditions of stablemacroeconomic environment. The exchange rate of the lats (LVL) for manyyears remains stable against the SDR currency basket. This eliminatesuncertainty, reduces currency risk and provides businesses a stable base forplanning and price setting. The Bank of Latvia has decided to keep thiscurrency peg until the accession of Latvia into the European Union.

The average increase of consumer prices has not exceeded 3% for the lastthree years, and in 2001 it shrunk to 2.5 percent. Tendencies in changes ofprices of the last years show stabilisation of the overall inflation level, as wellas reflect the structural changes in the relative prices due to the observed EUconvergence processes.

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The most significant factors that affected inflation in Latvia during the lastyears are:

� monetary and policy implemented by the Central Bank;� dynamics of prices of imports;� changes in administratively regulated prices;� changes in fuel prices;� dynamics of population incomes.

Since the beginning of last year inflation was mainly affected by changes inprices of marketable goods, namely, the dynamics of prices of food products.In 2001 increase in food prices constituted about 80% of the total annualinflation. At the same time the increase in prices of services and non-foodgoods constituted only about 15% of the annual inflation. Rapid increase infood prices was mainly impacted by the growth of imports prices (sharpincrease in meat and vegetable prices in Europe in last spring), as well as thereduction of local supply due to unfavourable weather conditions.

Contrary to the tendencies observed during the previous years, the growth ofadministratively regulated prices did not seriously affect the total inflation.Last year increase of administratively regulated prices increased the overalllevel of prices only by 0.1 basis points and together with a more significantdecrease in fuel prices it ensured that the level of core inflation was higherthan the level of total inflation (core inflation is estimated by deductingindirect taxes, changes in administratively regulated prices and fuel prices).During the last months the core inflation did not exceed the total inflation,even though it came very close to the level of total inflation. The level of coreinflation was mainly determined by changes in food prices, which alsoexplains the fluctuations of the variable within the given period of time.

One of the most important factors restricting inflation within the group ofmarketable goods is a fixed exchange rate. In order to ensure price stability,the Bank of Latvia has chosen to peg the Lat to the SDR currency basket.Selection of a fixed exchange rate policy has several explanations: firstly, highshare of imports in the Latvian economy (imports are approximately half ofGDP). Second, consumer goods account for about 30% of imports and thus,prices of imports significantly influence the overall price level. Third, importsaccount for approximately 50% in the structure of production costs in industryand agriculture and in the structure of consumption. For that reason the fixed

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exchange rate ensures stable prices for imports and contributes to the overalldomestic price stability. Thanks to the strong trade relations with the EU

countries, and the fixed exchange rate, it is anticipated that the prices ofinternationally traded goods in Latvia will grow at approximately the samerate as in the EU countries. However, it has to be noted that the impact of pricechanges of marketable goods upon the total inflation may change in thenearest future, when the Latvian consumer prices adjust to the relative pricestructure of the EU.

As to the changes in service prices, it has to be noted that lately their impacton inflation has been much lower than several years ago when the growth ofservice prices was the decisive factor determining inflation level. Currentlyoverall service prices are rather stable, mainly due to slower growth rates ofadministratively regulated prices, and it can be expected that this tendency willprevail until the end of the year. In 2003 it is expected that the role of serviceprices in determining inflation will grow and that will be additionallystimulated by increase of excise duties, as well as introduction ofdifferentiated VAT rates on certain services. According to the law “On Value-Added Tax” VAT shall be charged on any supply of goods or services orimport of goods, as well as self-consumption. VAT rates are 18 % or 0 %.

New VAT rate will be enforced from 1st January 2003. There will be 9% taxrate for:

� supply of medicine and medicine goods;� training and science literature, juvenile literature;� mass media;� supply of hot and cold water, sewerage, garbage disposal;� supply of special products for infants;� burial services.

Administratively regulated prices will increase in line with the changes in thepurchasing power of the population and no significant price increase can beexpected within this group.

In accordance with the macro-economic development scenario, considering allthe above mentioned, the medium term inflation level will not exceed 3%, andgradual levelling of the Latvian and EU average and relative price levels canbe expected.

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So far economic development has promoted mainly the growth of the realwages and productivity and its impact on the growth of employment was

limited. It was to a large extent affected by the difference between demand andsupply in the labour market created in the transition process, as well assignificant regional divergences. As implementation of various reforms(mainly in the area of labour force training and regional development) requiresa longer period before these reforms will considerably influence labourmarket, it is forecasted that in the medium term economic development will bemainly ensured by the productivity growth rather than employment. However,it is expected that in a longer term the growth of economic activity will havean increasing impact on the growth of employment.

It is expected, that thanks to the growth of economic activity andimplementation of various economic policy measures (approximation ofvocational education to demand, stimulation of economic, social and regionalmobility of the labour force, measures to support small and mediumenterprises etc.) unemployment rate will decrease in the medium term. Thereare considerable unemployment rate differences in various regions of Latvia,and therefore, unemployment problems are closely related to the regionaldevelopment. Reduction of unemployment will be also promoted by variousregional policy measures of the government.

DEMOGRAPHIC CHANGES, MIGRATION ANDEMPLOYMENT IN LATVIA

The door to the 21st century has opened, and we have just passed the entranceof the new century. People will anticipate that future society will be quitedifferent from the 20th century. While we certainly hope that tomorrow will bebetter than yesterday, many still remain uncertain as to what will happen infuture. For instance, can globalisation contribute to the reduction of poverty inthe developing world? Amidst such uncertainty, some changes seem to beforeseeable with reasonably accuracy. That is “population changes”.

As a result of low birth rates, comparatively high death rates and negative netmigration, population in Latvia will gradually decrease. The population in2005, as compared with 2001, will shrink by 48 500 (-2.1%). The persistentlylow birth rate is one of the main reasons for the ageing of the population.Nevertheless, as the retirement age will be gradually increased, the working-

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age population will not fall that fast and the number of pensioners willincrease only slightly.

Demographic indicators in Latvia are among the worst in Europe. In the lastdecade natural growth of population was negative. According to thePopulation Census 2000, the population of Latvia as of March 31, 2000 was10.8% smaller than in 1989. As a result of migration, the number of peopleduring the period went down by 189 thousand persons.

At the same time the negative natural growth of population has decreased onlyby 8.3%. Lately, the negative growth rate again has a tendency to increase.The number of newly born in 2001 was by 2.9% smaller than in the precedingyear and the number of deceased – by 2.4% more. Thus, the negative balanceof natural growth of population during the year has gone up by 11.4%.

Birth rate in 2001 was the lowest among the EU candidate countries and deathrate – the highest among the EU member states and candidate countries.

There is an on-going trend of reduction of the average size of a family mainlydue to the dramatic decrease of the number of children. Almost half – 47.9%of all families are families with one child, 36.1% – families with two children.The number of incomplete (one-parent) families is rather high – 32.5%,consisting of a mother or a father with children.

To reach positive changes in demographic processes the Ministry of Welfaredeveloped the action program for improvement of demographic situation. Themain goal of the program is to secure a qualitative and quantitativereproduction of people. Strategic directions in implementation arestrengthening of families and promotion of birth rate, raising educational andcultural levels. Feasibility of the objectives is linked with economic growth ofthe country, increase of employment, perfection and further growth of thesystem of science and education.

The number of employed persons has not practically changed, howeverunemployment rate indicators have improved as the number of economicallyactive population has gone down mainly due to two reasons – decrease of thenumber of population and increase of the number of full time students.

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In general, there is a tendency in nearly all sectors of national economy thatgrowth does not have a great impact on employment. With the development

and strengthening of the private sector also competition becomes strongerforcing companies to look for ways of decreasing costs. With the improvementof management styles, many companies try to cut down labour costs, whichoften result in reduction of the number of workers. These processes areobjectively determined for the Latvian economy given its generally low levelof productivity. Therefore, also future growth will be mostly based on increaseof productivity rather than on the number of workforce.

Employment rate is considerably different in different regions and cities. It isthe highest in Riga region and the lowest in Kurzeme and Latgale.

Measures aimed at stimulating employment and growth of economic activity upto now have not resulted in the expected positive changes in many rural areas.The most difficult situation remains in Latgale (Latgale include the followingmajor towns: Balvi, Daugavpils, J_kabpils, Ludza, Kr_slava, Preili andR_zekne) where unemployment in some regions exceeds 20% of economicallyactive population. In Latgale GDP per capita is also the lowest. It is twice lowerthan in Riga region. This is because of concentration of industry in Riga regionand its surroundings. Therefore the economically stronger regions have more

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favourable conditions for investment and thus development, as theygenerally have better infrastructures, qualified labour, access to manifold

services, etc.

Growth of personal income is very uneven, polarisation of material well-beingis increasing. Average disposable income per household member in 2000equalled to 69.19 LVL. The lowest disposable income still is in households inLatgale – by 29% lower than average in Latvia.

Trying to find a long-term solution for poverty elimination the government in2000 approved the Strategy for Poverty Eradication. The Strategy sets the taskto improve quality of life of poor people and people with low income level andtill 2015 to bring down the share of poor people to 10% of the total Latvianpopulation. The basic benchmarks for poverty eradication were adopted,defining tasks and measures in the areas of economy, employment, regionaldevelopment and social welfare.

In February 2000 the Cabinet of Ministers approved the concept developed bythe Ministry of Welfare – “On Minimum Income Guarantees for Poor People”to ensure all people a guaranteed and uniform for the whole state minimumlevel of income of 21 LVL (initially). This provision is also included in thedraft law “On Social Services and Social Assistance”, which is being reviewedby Saeima (Parliament of Latvia). The draft law also outlines principles ofsocial work, social care and rehabilitation and rules for granting and receivingsocial assistance.

REGIONAL POLICY IN LATVIA

Historically Latvia was divided into four regions (Vidzeme, Kurzeme,Zemgale and Latgale), each characterised by specific ethnic and economicpeculiarities. At the moment the Latvian administration is divided into about594 local authorities on two levels:

1. 26 districts (rajoni) and 7 republic cities;2. 70 cities and towns and 491 rural communities (pagasti).

Although Latvia is a relatively small country, there are considerabledifferences between regions. These regional disparities are mainly evident in

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the concentration of industry and unemployment. As a rule, the south-east isless developed than the central regions. Urban structures mainly exist in the

capital city Riga, which is the biggest city (743 269 inhabitants in June 30,2002) in the Baltic states.

Regional development policy in Latvia should be paid more attention. Duringthe fifty years of Soviet occupation in Latvia, certain economic sectors weredeveloped under the auspices of the centralised planning system without anyeconomic justification and despite the fact that Latvia had neither necessaryproduction factors, nor a market for the goods that were produced. This led tothe creation of an artificial and deformed territorial structure for the economy;the most important consequences of which are the following:

1. an excessive concentration of residents and production processes in theRiga region;

2. a relatively low population density and poorly developed productionprocesses and infrastructure elsewhere in Latvia;

3. significant differences in the standard of living i