The vast majority of Latvian municipalities, both now and after the elections, need to take care of cash flow or attracting companies that would create jobs and pay good salaries to their residents, said Peteris Strautins, economist at Luminor Bank and author of the Luminor regional export study, in an interview with LETA. In addition, there are municipalities that currently resemble melting ice blocks, and attracting investment is a burning issue there. At the same time, it is evident that a number of municipal politicians live in a "different world" and think that they have no influence on the economic activity of their cities and municipalities, believing that it is the responsibility of the central government. For them, the functions of municipalities do not go beyond municipal issues and the "fountain as an extra", and they do not even ask themselves how other municipalities can develop more successfully under the same conditions.

Virtually all parties in their election programs promise to promote entrepreneurship and economic growth in their respective municipalities. If we look from the outside, how much influence do elected municipalities have on economic processes? Can they really contribute to, or perhaps hinder, the economic development of certain regions?

Local authorities can do a lot. They can work very directly to attract investors. The general attitude of municipalities can give businesses a sense of whether or not there is something worth doing there. Decisions related to spatial planning and building permits are up to the municipalities. Municipalities can also help investors in relations with the central government.

Municipalities can use their budgetary resources in very different ways. For example, there are politicians who feel that their mission is to create as many public sector jobs as possible. Unfortunately, the moment of truth came when the inflated public sector wage curve of Covid-19 intersected with the much slower rising tax revenue curve, and then we heard the news that museum staff were to be made redundant, four-day working weeks were to be introduced, and so on. Then there was the news that, for one such municipality, three quarters of the budget was going on wage payments, which is a road to nowhere from a development point of view. In some places you can understand that, because there are places where jobs are really scarce, whereas the fact that the municipality is building industrial parks, struggling with environmental impact assessments, building access roads and electricity connections, will only pay off in the long term.

It is very popular in Latvia to compare ourselves with Estonia and Lithuania. But comparisons between different places within Latvia are much more useful, and there you can really find out which municipal policies work and which do not work.

Where are the good examples, and where have local governments perhaps even hindered business?

I would like to start with municipalities outside Riga and the region, where economic activity is concentrated. It is not that Riga's municipality has been a good example of economic activity for a long time, perhaps even the opposite, but it has not been able to kill Riga's natural economic drive either.

If we start with Vidzeme, Valmiera is probably the most enduring story of successful regional development in Latvia. Smiltene is also a very good, but less well-known example, both as a successful regional center itself and as part of what we will call the Greater Valmiera Economic Area, to which Cesis can also be added. Valmiera is a success story because, first of all, the old was not broken and the Soviet-era production infrastructure, production skills, etc. were preserved better than in many parts of Latvia. Smiltene, on the other hand, according to 2022 data, is the region with the highest gross domestic product (GDP) per capita outside the economic Riga region, which includes the Riga statistical region and a few other neighboring territories. Moreover, the Luminor regional export study shows Smiltene with very favorable development dynamics in 2024, despite the fact that the municipality's economy is largely dependent on forestry and wood processing, a sector that has not fared well in recent years. It is very clear here that, even when the odds are against you, you can develop very well if you attract investment, because the attraction of investment has beaten the relative crisis in the main sector of the municipality's economy. Cesis, on the other hand, is better known for its urban environment and creative activities, but neither GDP data, nor Luminor's regional export survey data show a particularly bright picture for the municipality. However, Cesis is a very nice place to live.

And in the case of Valmiera, Smiltene and Cesis, I would say that the development is largely the merit of the local authorities. Somehow, in these municipalities, there has been a long-standing, highly rational and pragmatic note in local politics, and there has been good cooperation between the local political authorities and the business community. Politics has definitely played a role in the development of the economic core of Vidzeme.

In Latgale, the region which, according to Luminor research, is becoming one of the strongest in Latvia is Livani, where the development dynamics has been very strong over the last decade. It is true that the base of success is rather narrow - basically two fiber optic companies. I also do not know that well what the policy of the municipality of Livani has been. Perhaps it has contributed to this good result.

Also, although Livani has progressed very rapidly economically, it is a very small region. The future of Latgale will be determined by Daugavpils and also by Rezekne. The local politics of Daugavpils and Rezekne have been much talked about in the media, and the news has not always been encouraging. Whatever else has happened, Rezekne has made quite good progress in industrial development in the last decade. In Daugavpils, too, steps have been taken in the right direction, and an industrial park is finally being built. Daugavpils in general has huge Soviet-era industrial zones which could certainly be used, at least in part, but large areas have been unused for a long time, and one can certainly ask why this is so.

Of course, agriculture is a very important sector when it comes to Zemgale. This is especially true for the Bauska region. However, if we look at the volume of exports of goods and services produced in Bauska, the picture is not brilliant. This can be partly explained by the fact that Bauska is largely a place of residence and many of its inhabitants commute to the capital city for work.

Dobele is definitely the most economically developed municipality in Zemgale. It is a region with a highly developed agriculture, even by Zemgale standards, and a relatively large, diversified and technologically interesting industry in relation to its population. Moreover, like Valmiera, Dobele has a well-preserved industrial heritage. However, it is difficult for me to comment on the extent to which this has or has not been due to local politics. The neighboring region of Saldus, which is already Kurzeme, is similar in terms of economic structure and history. Dobele and Saldus are not like many other places in Latvia where, if you take away everything to do with trees and food production, there is not much left over. Dobele and Saldus stand out in this respect.

Moving on to Kurzeme, the most successful regional development story of recent years is Liepaja. It has had a really well-established development policy and the advantage of having a double administrative resource to deal with it - both the Liepaja municipality and the Liepaja Special Economic Zone. If we look at indicators such as GDP per capita and the dynamics of Luminor's regional export performance, the situation in Liepaja is favorable, but it is not as if it has been a growth superstar in Latvia. On the one hand, this is because the starting point of development has been quite high, because despite all the crises, Liepaja is an old industrial city. On the other hand, because the end of the old production model had a certain impact and the city was able to "swim against the wind". A decade ago, Liepaja was one of the most fragile economies in Latvia, because if there was a crisis - East or West - and because the industry was very dependent on products with fluctuating prices, such as steel. The last big volatility also put an end to Liepajas Metalurgs metalworking company. But overall, Liepaja is now performing very well.

The story of "swimming against the wind" is even more characteristic of Ventspils, the other major port city in Kurzeme, which has experienced the largest relative decline in prosperity in Latvia this century. Ventspils started the century with a GDP per capita that was twice the Latvian average, including in Riga. It is now below the Latvian average. This has happened despite the fact that Ventspils has one of the best thought-out and best-funded development policies. While manufacturing industry was almost non-existent in Ventspils in Soviet times and afterwards, interesting companies have now been created, especially in metalworking, mechanical engineering and electronics. But the impact of the downturn in the transit sector has been very strong, and the bad news may not be over yet. So, a lot of hard work has been put in, but the results are not entirely encouraging.

However, transit is linked to global developments and, in recent years, to the impact of the war in Ukraine. Is there anything that local government can do?

Yes and no. Probably in the last ten years, and especially in the last four years after the municipal elections, there was really nothing to influence. In the distant past, though, it was possible. If the industry had not had such a big appetite at the time when Ventspils still had a partial monopoly on the export of Russian raw materials, because Russia had not yet built alternative routes, then a lot could have been done differently. The actions of the time were very damaging for the future.

If we continue with Kurzeme, we should also mention the Kuldiga region, which has changed very rapidly in the last ten years. After the financial crisis, when walking around Kuldiga, one had the feeling that the town was in a coma and that everything was obviously decaying and looked very sad. In the last ten years, there has been an economic renaissance, largely due to one company, Stiga RM, which took over and restored plywood production in Kuldiga to a completely different quality. Maybe it is coincidence, maybe not, but other companies have also developed during this time.

And the neighboring region of Talsi... A nice place to live, but the economic progress has been one of the smallest ones. Decision-making there could be more active.

Kuldiga has also invested much in tourism.

Yes, but it is important to add here that tourism is very nice, but in Latvia's regional development it can be just the cherry on the cake. It cannot be the basis of the economy anywhere in Latvia.

Not even in Jurmala?

Jurmala has very little economy of its own at all, and economically it is almost entirely a suburb of Riga. It can live very well that way, and so be it, because nobody is going to build factories in Jurmala, and probably not office complexes either.

We have made a full circle and returned to Riga, how has the "coalition of change" fared in this term of the Riga City Council from an economic point of view?

I would say that there have been improvements in the work of the Riga City Council. It is obvious that suspicious situations in Riga are at least much less frequent. Yes, there was the well-known dispute that led to the Progressives leaving the coalition, but that dispute at least showed that somebody cares about these issues, that there is an understanding that this must not be done. Previously, however, there was no sign of the coalition partners trying to hold each other to high standards, although there was no shortage of headlines about expensive trams and strange, well-paid jobs at the time, and that was certainly one of the main reasons why Riga lagged behind the two largest cities in Lithuania, not to mention Tallinn, which was already ahead. So, I will say that there has been progress in the Riga City Council. This is also reflected in Riga's investment budget. In the past, however, Riga's budget was very much geared towards gaining quick popularity, which should not be the case. The experience of the most successful municipalities shows that if one third of budgets are earmarked for investment, then results can be expected. In Riga, it is still a long way from one third, but progress has been made.

However, public opinion polls show that the largest support in Riga is for Latvia First party, which is not currently in the City Council, and for the Progressives, which is currently in opposition. What does this mean? Do the people of Riga not see and are not able to grasp that progress in their everyday lives?

Politics, however, is not an entirely rational process. Moreover, it is not as if the words the Riga City Council, Riga governance, are already capable of creating positive emotions. There is a lot of talk, for example, that Riga is lagging behind Vilnius, and that is true. But one of the big problems with democracy is that the time between political decisions and the extra money going into people's pockets is long enough. As long as you invest in infrastructure, as long as somebody appreciates it and companies come and start new production, as long as it starts to have a positive impact on living standards, it takes time. Moreover, if the overall global news is unfavorable during this time, this inevitably spills over into consumer sentiment, because it is partly determined by objective reality and partly by the general news.

What would the main tasks of the new local authorities be?

The vast majority of Latvian municipalities have to take care of their cash flow. Not in the sense of the council's own cash flow, but in the sense of money circulating in the town or district, bringing in businesses that can generate cash flow for residents, create jobs, pay good wages. That means companies that already have the technology or the money to buy it, have markets. Everything possible must be done to bring such companies to the municipality. At the moment, however, there are very big differences in Latvia - there is the Marupe region, where there are 80 jobs per 100 inhabitants, and there are regions where the figure is below 30.

Entrepreneurship must be encouraged for everyone, but there are regions in Latvia, there are municipalities, where attracting businesses is an absolutely burning issue. There are regions and towns that are like melting ice cubes, and they are rapidly approaching a waterfall. There are municipalities where the population continues to decline by around 3 percent a year. This is population collapse. This means that these places are losing, at a rapid rate, what development resources there are left. I also fully understand that it is difficult to change anything in such places today, because the negative inertia is very strong. But we have to try!

In recent years, Riga has been speaking about the Local Government Equalization Fund, stressing that it needs money for investment, but every year the capital has to pay more than EUR 100 million into this fund to support others. What should be the model for the Equalization Fund if this changes?

I do not think there is much scope for change. When they say, 'Riga and its region need more money and then it will develop faster', everyone stands up and applauds. But then the question arises: who will support those municipalities with low incomes? Somehow, there is not much spare money in the central government budget at the moment. So, the question is, how can this contribution from Riga be compensated? I do not think that anyone will relieve the wealthy municipalities of the obligation to share a little with others.

Similarly, the municipal equalization fund is only a part, and even a smaller part, of all the transfers within Latvia, which are from the economic center to the rest of Latvia. If we were to ask what the salaries of teachers, the pensions of pensioners or the investment in road construction in Latgale would be if they were to be financed from the resources of Latgale's own municipalities, the answer would probably be rather harsh. Money is redistributed in all sorts of ways. We are one nation and we should be in solidarity, that is normal.

I do not know how much you have been able to study the parties' pre-election programs, but can you tell that the parties have come with proposals on how to solve the economic problems of the regions?

I think the last time I read party programs seriously was when I was a student, and now I have learned to assess what has been achieved so far and whether the people representing the parties understand anything of what they are talking about. It is a better source of information than party programs, which can tell anything.

I suspect that those municipalities that are already successful will become even more successful, and those municipalities that have major problems may become even worse. At the same time, it is not the case that the tide of history runs in only one direction; there are examples where there have been turning points in the economic development of cities and regions, such as Kuldiga, Livani, where companies or sectors that have gone through difficulties have entered a phase of rapid development and are reaping the fruits of their labor. But at the same time, there are those places in Latvia that I have already described as melting ice blocks. It is also clear why these ice blocks are melting - incomes are low, people are few and there are even fewer people left. At the same time, other places in Latvia are continuing to develop and will therefore attract even more people. The birth rate is low and this labor gap in the development centers will have to be filled.

If we go beyond the borders of Latvia, there is always the question of Riga's competitiveness, first, with the other large cities in the Baltic states, and second, in the Baltic Sea region as a whole. Has Riga, as a Baltic metropolis, fallen irretrievably behind the other major cities in the last? Is there anything that the local government can do?

They can. And it is already being done. If we look at the latest statistics, Latvia's service exports have increased by 19 percent in the first two months of this year, and since the downturn in the transit industry, service exports have been very much Riga's business. It is IT services, it is also tourism. So, the dynamics are good. The fact that Vilnius is a very successful city does not mean that Riga cannot develop.