The trajectory began in 2004, when Latvia formally joined the EU after nine years of negotiations. Credit rating agencies blessed the deal, with Moody's upgrading Latvia from a "stable" to "positive" grade in 2005. According to the Bank Association of Latvia, loans and cheap credit quadrupled from 2004 to 2008, reaching 95 percent of Latvia's GDP by early 2008. Most investment went into the construction of new luxury condos and office buildings—rather than export capacity—under the assumption that real estate values would grow indefinitely. The rest went into buying imported goods, many of them subsidized, weakening Latvia's local manufacturing and export base. By 2007 Latvia had the second-highest trade deficit in the EU, after Bulgaria.
To make matters worse, the real estate bubbles in England and Ireland sucked away local labor. [In mid-decade], an estimated 1.5 percent of Latvia's labor force went abroad. Unemployment dropped to an unprecedented 5 percent in Riga, and from 2006 to 2008 the cost of labor doubled. As inflation tripled, Novikovs noticed that local clothing and food cost almost twice as much as in England. "Latvians were traveling to Germany and Finland to buy cheaper clothes and furniture," he recalls with outrage. In 2007 Latvians had the lowest household savings rate in the EU.
The Latvian government didn't do much to stop this economic transformation. If anything, it stepped on the gas. Riga's new deputy mayor and millionaire Ainars Slesers, who served in the Latvian Parliament during the boom years, coined a phrase that is sure to become a symbol of the prevailing government attitude at the time: gazi grida (pedal to the metal). Enabled primarily by foreign banks, Latvia's government created a bubble economy financed by debt without developing sustainable means to pay off these loans. Now Latvia's economy looks like a race car that has smashed into a concrete wall.
In its drive to contain Russian influences, the Latvian government also prioritized entry into the EU and NATO, a policy goal that overshadowed other domestic priorities, like stimulating local manufacturing or supporting agriculture. As in most Eastern European bloc countries, Latvia's politicians looked to the West, and the United States especially, for economic models. The resulting reform strategy of the ruling Latvia's Way government during the '90s is often characterized by Western analysts as "soft shock therapy." Latvia has had a flat tax since 1997, and until this year progressive taxation has never been on the agenda of any ruling coalition. The Latvian government also refused to tax capital gains, which turned real estate trading into one of the most lucrative professions in the boom years. This unique confluence of nationalism and neoliberalism took Latvia from the extremes of communism to the extremes of capitalism in less than twenty years.
Unlike its neighbors Estonia and Lithuania, Latvian left-opposition parties have not been a part of the ruling coalition in Parliament since 1991. That has meant that neoliberalism has dominated Latvian politics virtually unchallenged since 1991. Two decades of this unchallenged center-right rule have also fueled high levels of corruption. From 2000 to 2002 several international studies found that Latvia had one of the worst corruption records among its high-ranking government officials in the post-Soviet states. In 2004, when Latvia joined the EU, it received more than $1 billion in "structural funds," aimed at developing Latvia's infrastructure—modernizing schools and building roads and bridges, among other things. But along with those funds came a resurgence of the old Soviet-era affliction of bribery.
The economic crisis of recent months, along with the January protests and the resignations of two ministers, has been a boon for the left coalition party called the Harmony Center. It now holds the largest share of seats in Riga's City Council, the first time since Latvian independence that the most left-leaning major party has done so. And for the first time since 1991 an ethnic Russian, Nil Ushakov, is the mayor of Latvia's capital, home to 700,000 people, almost a third of the country's population.
The Harmony Center owes its success in large part to the charismatic 33-year-old Ushakov, who represents a new generation--young, progressive, cosmopolitan--with no record of scandals or corruption. A former journalist, Ushakov studied economics in Denmark and speaks five languages. "You can't run your country like a business; you have to treat your country like your family," Ushakov explained in campaign videos.
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