Meanwhile, looking forward to 2010-11, the forecast prognosis from the financial sector is that Latvian GDP will return to the levels of 2006 or 2005.
Considering that Latvia entered the EU in May 2004, the return of GDP to the 2005 level within a year or so gives ground for significant doubt as to the efficiency of EU cohesion policy and raises a number of questions about the utilization of EU payments, compensations, structural funds and cohesion funds, the allocation of which has not – in the context of the current economic crisis - stopped Latvia from returning to the position it was in before receiving cohesion funds and EU resources.
No precise estimate is currently available as to the total application of EU funds. According to data from the Ministry of Agriculture, in the 2005–2007 period 229.19 million lats had been disbursed to farmers in the form of direct payments, of which 55.4% or 127.05 million lats were financed from the EU budget. Latvia also benefited from considerable export subsidies.
Cohesion policy was, in principle, ensured by EU Structural Funds and the Cohesion Fund. According to the 28th Report of Economic Development of Latvia published by the Ministry of Economics, the financing amount from the EU Structural Funds is 75%, while 25% comes from the state budget and budgets of the local governments.
Total financing accessible to Latvia under the framework of the Structural Funds programmes in 2004-2006 amounts to EUR 845 million (EUR 625 million from the EU Structural Funds and EUR 220 million from the state budget).
The total financing from the Cohesion Fund available for Latvia in the period 2000-2006 amounts to EUR 710 million, of which EUR 310 million comprise the financing for projects currently under implementation (former ISPA projects). EUR 435.9 million or 61.3% of the total financing from the Cohesion Fund had been requested from the by March 31, 2008.
This means that the total application of EU Structural Funds and Cohesion Fund financing, summed with additional financing from the EU and the Latvian state budget certainly exceeds 1 billion euros, not including agriculture support money export subsidies etc., the inclusion of which would make the sums far greater.
How then is it that Latvia is about to return to the same position it was in after entering the EU? What has happened, can it be defined as a cohesion policy crisis, and have the mechanisms that were supposed to facilitate the levelling-out of differences in regional development levels simply failed to work or perhaps even produced results contrary to those intended?
In 15 scientific publications between 2004 and 2008 the current author undertook a number of analyses of the principles of territorial distribution employed by a number of the structural funds. The results obtained show that the funding distribution approaches of Latvia and of the EU fundamentally differ.
Latvian state budget funding for investment in municipal infrastructure development for 2001 – 2004 was distributed evenly, allocating resources to both developed and less developed territories. State budget funding for investment in municipal infrastructure development in 2001 – 2004 was, however, aimed not at supporting all less-developed territories, but rather at supporting prospective development centres in the least developed parts of the country.
The distribution of funds for the programme, "Development of Water Management Infrastructure in Populated Areas where the Number of Residents is up to 2000" corresponds to a policy of financial support for less-developed territories.
Territories with nature protection among their development goals had greater opportunities to attract EU structural funds by using the programme, "Water management infra-structure development in settlements with population below 2000".
The grant scheme, "Support to investment in business development in specially supported territories" is used to increase support both to less-developed territories and to prospective centres of development in specially supported territories.
The territorial distribution of funding administered by the Latvian Investment and Development agency is aimed at increased support for the most highly developed territories of Latvia.
One of the conclusions reached after examining the principles of funding allocation was the low level of coordination between various program-mes, as a result of which the funds of some programmes are directed towards supporting less-developed territories, while those of others are allocated to the most developed part of the country, thus increasing regional disparities.
Research conducted during the period 2004-2008 was however focused on funding applications. It is necessary now however to inquire into the results of funding applications.
Why has cohesion policy in Latvia brought no significant results, even if it is to be admitted that EU support did indeed reach less-developed areas?
One of the answers has to do with the prevailing business and economic conditions in Latvia after EU accession. In 2004, Latvia witnessed a boom in real estate trading and construction. Real estate prices kept increasing by 20-30% per year.
A similar rise was to be witnessed in the costs of construction. Investment in real estate development in 2005 was bound to bring a profit rate of 100%. As a result, investment in less-developed territories resulted not in the attraction of additional finance for the development of the region in question but instead allowed the EU funding recipients to invest personal funds in real estate speculation in Riga and its locality.
The continuing investment in infrastruc-ture at a time when construction costs grew by tens of percentage points year on year however contributed to an even greater increase in demand and thus to the eventual overheating of the economy. To a great extent, the implementation practice of EU cohesion policy in 2005 – 2008 stimulated the overheating of the Latvian economy and the growth of the bubble in real estate speculation and credit. Now is the time to evaluate the cohesion policy. In the light of what subsequently transpired conclusions must be made and the support policy adjusted.
One of the first suggestions would be to minimize help in the form if direct payments. There is reason to think that such support, rather than contributing to investment in less developed territories, actually becomes an instrument for investing the funds made available in projects with a higher profitability rate. To some extent, this has already been experienced in programmes operative up to 2013 by increasing the amount of infrastructure projects.
The second recommendation would be to consider that the most appropriate time for implementing massive infrastructure improvement projects is one of economic recession (the counter-cyclical argument). The implementation of large-scale infra-structure projects during a construction boom only overheats the economy.
Thirdly, one of the aspects in which regional disparity is most highly visible in Latvia is in unequal access to information. Projects must be financed that help to breach these information and experience barriers by investing in educational development and in offering informational support to problematic regions as regards both national programmes and the opportunities offered by the EU.
By Juris Paiders, Dr.geogr, Deputy editor in chief „Neatkarïgä Rïta Avïze" (Independent Morning Paper).