OREANDA-NEWS. April 25, 2008. Public sentiment in Latvia can be assessed using two indexes. One is the index of consumer sentiments that provides scenarios of consumer behavior; however, it has not yet widely tracked by economists. The second is business activity index – the Parex Index, reported the press-centre of Parex banka.

 Since 2004 it has been carried out on a quarterly basis by Parex banka in collaboration with the marketing and public opinion research centre SKDS. I have no doubt about the necessity of this index, its independence and credibility. I have met Arnis Kaktins, the director of SKDS and appreciate his high level of professionalism.

Since its establishment the Parex Index has never experienced such a dramatic fall (47,47). This is the first time that entrepreneurs have provided such a sharp assessment of the current economic situation; within the first quarter the index dropped by 7,5 points. The most significant fall of the index was observed among large enterprises, in the production, trading and construction sectors. The positive fact is that indices evaluating number of employees and investment volumes have not drastically fallen this quarter. It proves that middle size enterprises are more flexible and are better equipped to adapt to variable market conditions.

It is interesting to observe that enterprises with shared foreign capital usually show too much optimism during the economic boom and are far too pessimistic during an economic downturn. Dealers executing transactions at the Bank's trading desk prove this trend. When comments concerning devaluation of the Latvian lats or “hard landing” of the economy appear, we can achieve a greater profit due to nervous foreign market participants. The trends of Parex Index allow us conclude that domestic market participants use it to evaluate the situation in the country more closely. Therefore, it is not always reasonable to rely on panic raised by foreign experts.

The overall economic activity in the country and economic situation of each respective sector were evaluated more skeptically. Nevertheless the future outlook is still slightly positive. Substantial differences between present and past assessments provide us with evidence that entrepreneurs believe that the economy will stabilize over the next few months. The majority of entrepreneurs forecast a “soft landing” for the economy.

Is it possible to challenge the figures? The annual inflation rate reached 16,8% and GDP grew by 10.3% in 2007, but this year it is forecasted to grow by 5,5%. During 2007 fuel prices grew by 22.5% and food prices by 22%. When we gave inflation rates forecast last year (which turned out to be correct), we took into account growth in food prices and energy resources all over the world. Obviously these external objective factors have caused a slowdown of the Latvian economy. However we should not assume that our country is powerless towards global threats. There is always a country that is able to withstand global crises more easily and a country that is placed at a disadvantage.

The pessimistic evaluation of the economic situation given by entrepreneurs actually marks the activity in the governmental sector. Business conditions are largely determined by government, as the main role of entrepreneurship is to make profits and pay taxes. The state administration affirms that it is impossible to influence capital inflow. However last year I wrote that it is necessary to find a proper balance between loans issued by banks in Latvia and raised deposits. If inflow of foreign capital suddenly ceases, it will cause shockwaves throughout the state economy.

Politicians understand the consequences. That's why the parties represented in Saeima always emphasize in their policies the need to reduce bureaucratization across the business sectors. By paying taxes Latvian entrepreneurs and inhabitants maintain 16,5 thousand officials with a total wage bill of more than LVL 200 million per year. Are these resources well – handled? For example, in order to commission a newly built house approximately 30-40 different approvals need to be collected from various institutions. Usually the requested information is already at the disposal of state institutions. As an example, it takes a minimum of three years to formalize the transformation of agricultural land to industrial land. And this is a good rate as in Riga this process wont be executable until 2018. As a result, entrepreneurs are simply not able to react fast enough to changeable market environments.

Most laws are vague and incomprehensible. An excellent example is The Protective Zone Law. Each lawyer read this law would interpret it differently. I remember one more episode, when the ex-president of Latvia wanted to rent land in Jurmala and turned to KNAB to get help in the law interpretation she had once proclaimed.

Unfortunately, the State is not ready to bear responsibility for the activities of officials. For example, the government suspended fulfillment of its obligations for border construction; therefore, causing losses for entrepreneurs. The harbor development plan and regional development plan in Kekava were suspended; thus, negatively influencing entrepreneurship. Many development projects in Jurmala have also been frozen as well, and again entrepreneurs have incurred costs. People have invested capital relying on State responsibility. They acted legally, but the State has not compensated for losses as a result of postponement or delays. Each entrepreneur has a right to consider that State officials work in accordance with legal relevance, as private enterprise is powerless without the observance of this principle.

Unequal relationships have developed not only between officials and entrepreneurs, but also between entrepreneurs and the judiciary. I would like to mention an example from my experience. In 2003 Jurmala City Municipality submitted the petition to the Constitutional Court of the Republic of Latvia to evaluate the activity of officials from the Ministry of Regional Development and Local Government.

The officials suspended several development projects a year after the entrepreneurs have already works on the project and had obtained building permits. A year ago these projects received approval from Ministries and other State institutions and came into force as stated under law. Imagine the judicial decision of the Constitutional Court. Were the officials that violated the law punished? Or maybe they have off set the losses? No. According to the Court decision the mistakes had been made in the planning process and the entrepreneurs were left to cover their losses. The situation with Riga Harbor proves that we have to have faith, but cannot rely on decisions made by the Constitutional Court and any consequences thereof.

Let me recall one more case that happened recently, which had great international resonance. The case in question concerns an entrepreneur's shares for more than ten million lats that were seized by the Chamber of Civil Cases of the Supreme Court without levy of state tax. The Senate – the highest instance for such complaint processing, took up the cudgels for judge that had made such visible mistake.

I am able to mention many examples when several “fellows” submit petitions to courts. As a result, courts simply suspend business projects for several months or even years. Nothing prevents this litigation either because of inertia or for latent blackmail purposes, and the complainant has nothing to lose. Laughing through the tears we have discussed the case when an aged lady struggling for esoteric ideals had submitted 200 absurd complaints to the Administrative court. The judge did not enquire about this lady's health status and has simply accepted these complaints for reconsideration. There are a lot of examples when abstract interests of prosecutors cause huge losses to particular entrepreneurs.

A little bit about European funds. It seems that foreign funding should be divided by society, not by State administration. Does it happen here? For example, the Ministry of Education and Science has adopted policies that do not allow private schools to be financed from European funds. In fact the funding is divided among officials for officials, however the private education is no worse than a public one. Money that the state spends for one young man education could be transferred to private schools as well.

How could the State help us in this complex economical situation? Firstly it should be responsible for its decisions. We can do most things by ourselves to improve the entrepreneurship environment in our state. We have to understand that both employee and investors can avoid the crisis. We should help the entrepreneurs, by promoting entrepreneurship and value added products in Latvia and in doing so we can ride out inescapable bouts of instability in global markets

I believe, that in the future my other colleagues will take an active part in Parex Index output analysis and comment it. Your opinions are warmly welcomed!