For Latvia and the other two Baltic republics, the period of development between 1920 and 1940 is regarded as a guide and a morale booster. Latvians know how wrenching the sudden changes were after World War I. Russia had removed almost all factory equipment, railroad rolling stock, raw materials, bank savings, and valuables to the interior. Almost none of these assets were returned. With the victory of Stalin and the sealing of the Soviet Union to the outside world, Latvia had to change its entire pattern of trade and resource buying. In other words, the Russian market, which had been the basis of the manufacturing industry, was no longer accessible. Moreover, the war had left deep demographic wounds and incalculable material damage. In six years of continuous war, with front lines changing from year to year and even month to month, more than one-quarter of all farm buildings had been devastated most farm animals had been requisitioned for army supplies and the land had been lacerated by trenches, barbed wire, and artillery craters. Even trees retained the legacy of war Latvian timber was dangerous for sawmills because of the heavy concentration of bullets and shrapnel.

Independent Latvia received no foreign aid for rebuilding. On the contrary, it had to squeeze the low incomes of its population to repay war debts incurred by the troops fighting for Latvian independence. In spite of all these obstacles, the economic record of the twenty years is truly impressive. Latvia successfully effected agrarian reform and provided land for hundreds of thousands of the dispossessed. Many of these farmsteads pooled their resources through an extensive system of cooperatives that provided loans, marketing boards, and export credits. The currency was stabilized, inflation was low, unemployment was much better than in West European countries even during the Great Depression years, and foreign debt was not excessive. Perhaps the most objective index of Latvia's economic status is evident from the 10.6 tons of gold that it placed in foreign banks before the invasion of the Red Army. Most Latvians who remember the period consider it a golden era. Many of its successful economic approaches are being raised in debates today.

The Soviet Period

The half-century of Soviet occupation started with the expropriation without compensation of almost all private property by the state. Within a few years, farms, which had not been nationalized immediately, were forced into collectives in the wake of the deportation of more than 40,000 mostly rural inhabitants in 1949. For many decades, in the struggle between rationality and ideological conformity, or between the so-called "expert" and "red," the latter consideration usually prevailed.

Between 1957 and 1959, a group of Latvian communist functionaries under Eduards Berklavs tried to reorient Latvia toward industries requiring less labor and fewer imports of raw materials. At this time, Pauls Dzerve, an economist and an academician, raised the idea of republican self-accounting and sovereignty. The purges of 1959 replaced these exp 1000 perimenters, and Latvia continued in the race to become the most industrialized republic in the Soviet Union, with a production profile that was almost wholly determined in Moscow. Latvia lost its ability to make economic decisions and to choose optimum directions for local needs. A broad-based division of labor, as seen by Moscow central planners, became the determining guide for production. This division of labor was highly extolled by the Soviet leadership of Latvia. For example, Augusts Voss, first secretary of the Communist Party of Latvia (CPL), summarized this common theme in 1978: "Today, nobody in the whole world, not even our opponents or enemies, can assert that the separate nations of our land working in isolation could have achieved such significant gains in economic and cultural development in the past few decades. The pooling of efforts is a powerful factor in increased development." The extolling of the virtues of a Soviet-style economy included an entire refrain of "self-evident truths," which were aimed at reinforcing the desire of Latvians not just to accept their participation in the division of labor within the Soviet Union but also to support it with enthusiasm.

People in the West often underestimated the effectiveness of the Soviet propaganda machine. The media reinforced the popular images of the decadent and crumbling capitalist economies by portraying scenes of poverty, bag ladies, racial tensions, armies of the unemployed, and luxury dwellings in contrast to slums. The discovery by Russians, and especially by their elites, of the much more nuanced realities of the outer world were important incentives for change and even abandonment of communism. Before that discovery, though, the barrage of propaganda had considerable effect in Latvia. But other factors tended to mitigate or counter its impact. One of these was the collective memory of Latvia's economic achievements during its period of independence. Another was the credible information about the outside world that Latvians received from their many relatives abroad, who began to visit their homeland in the 1960s. Twenty years later, many visitors from Latvia, often going to stay with relatives in the West, were able to see firsthand the life-styles in capitalist countries. During this period of awakening, the argument was clearly made and understood: if Latvia had remained independent, its standard of living would have been similar to that of the Baltic states' northern neighbor, Finland, a standard that was obviously significantly higher than that of Latvia.

By the late 1980s, the virtues of a division of labor within the Soviet Union were no longer articulated even by the CPL leadership. Together with the communist leaders in the other Baltic republics, the CPL leaders desired to distance themselves from a relationship that they were beginning to see as exploitative. Thus, on July 27, 1989, Latvia passed a law on economic sovereignty that was somewhat nebulous but whose direction was clear--away from the centralizing embrace of Moscow.

The shift toward Latvian control of the economy can be seen from the changes in jurisdiction between 1987 and 1990. Although the percentage of the Latvian economy controlled exclusively by Moscow remained about the same (37 percent), the share of the economy controlled jointly declined from 46 to 21 percent, and the share exclusively under Latvia's jurisdiction increased from 17 to 42 percent during this period.

The Soviet division of labor entailed, in the Latvian case, significant imports of raw materials, energy, and workers, as well as exports of finished products. Exports as a proportion of the gross national product (GNP--see Glossary) accounted for 50 percent in 1988, a level similar to that of ten of the other republics but not Russia, which had only a 15 percent export dependency. After the disintegration of the Soviet Union, rising energy prices and the lifting of price controls on many Latvian goods often made them too expensive for the markets of the former Soviet Un 418ion, butut the technological inferiority of these goods limited their marketability in the West (see Postindependence Economic Difficulties, this ch.).

Data as of January 1995