Until the middle of 2008, Latvia had the fastest developing economy in Europe. In 2003, GDP growth was 7.5% and inflation was 2.9%. Unemployment was 9% in 2003 - 2005; however, in 2009 it rose to 23% and is the highest in the European Union.[8] Privatization is mostly complete, except for some of the large state-owned utilities. On May 1, 2004, Latvia joined the European Union.

The Financial Crisis of 2008 is still affecting the Latvian economy, primarily as a result of the easy credit bubble that began building up during 2004. The bubble burst lead to a rapidly weakening economy, resulting in a budget, wage and unemployment crisis. [9] Latvia had the worst economic performance in 2009, with annual growth rate averaging -18%.

For centuries under Hanseatic and German influence and then during its inter-war independence, Latvia used its geographic location as an important East-West commercial and trading center. Industry served local markets, while timber, paper and agricultural products were Latvia's main exports. Conversely, the years of Russian and Soviet occupation tended to integrate Latvia's economy to serve those empires' large internal industrial needs.

After reestablishing its independence, Latvia proceeded with market-oriented reforms, albeit at a measured pace. Its freely traded currency, the lat, was introduced in 1993 and held steady, or appreciated, against major world currencies. Inflation was reduced from 958.6% in 1992 to 25% by 1995 and 1.4% by 2002. However by 2007, inflation was 16% – the highest inflation rate in the European Union.

After contracting substantially between 1991–93, the economy steadied in late 1994, led by recovery in light industry and a boom in commerce and finance. This recovery was interrupted twice, first by a banking crisis and the bankruptcy of Banka Baltija, Latvia's largest bank, in 1995 and second by a severe crisis in the financial system of neighbouring Russia in 1998. After 2000, Latvian GDP grew by 6–8% a year for 4 consecutive years. Latvia's state budget was balanced in 1997 but the 1998 Russian financial crisis resulted in large deficits, which were reduced from 4% of GDP in 1999 to 1.8% in 2003. These deficits were smaller than in most of the other countries joining the European Union in 2004.[citation needed]

The centrally planned system of the Soviet period was replaced with a structure based on free-market principles. Two-thirds of employment and 60% of GDP is now in the private sector.[citation needed] Recovery in light industry and Riga's emergence as a regional financial and commercial center offset shrinkage of the state-owned industrial sector and agriculture. The official unemployment figure held steady in the 7%-10% range.

Privatisation in Latvia is almost complete. Virtually all of the previously state-owned small and medium companies have been privatized, leaving only a small number of politically sensitive large state companies. In particular, the country's main energy company, Latvenergo remains state-owned and there are no plans to privatize it. The government also holds minority shares in Ventspils Nafta oil transit company and the country's main telecom company Lattelecom but it plans to sell those.

Foreign investment in Latvia is still modest compared with the levels in north-central Europe. A law expanding the scope for selling land, including land sales to foreigners, was passed in 1997. Representing 10.2% of Latvia's total foreign direct investment, American companies invested $127 million in 1999. In the same year, the United States exported $58.2 million of goods and services to Latvia and imported $87.9 million. Eager to join Western economic institutions like the World Trade Organization, OECD, and the European Union, Latvia signed a Europe Agreement with the EU in 1995 with a 4-year transition period. Latvia and the United States have signed treaties on investment, trade, and intellectual property protection and avoidance of double taxation.

With Lithuania, Poland, and Estonia, Latvia is considering participating in the Visaginas Nuclear Power Plant in Lithuania to replace the Ignalina Nuclear Power Plant.[10] Latvia faces a potential energy famine because in 2009 Lithuania will shut down Ignalina. Without any other policy, Latvia will have to rely more heavily on Russian gas and other sources of electricity.

The Latvian economy entered a phase of fiscal contraction during the second half of 2008 after an extended period of credit-based speculation and unrealistic inflation of real estate values. The national account deficit for 2007, for example, represented more than 22% of the GDP for the year while inflation was running at 10%.[11]

By August 2009, Latvia's GDP had fallen by 20% year on year, with S&P predicting a further 16% contraction to come. The International Monetary Fund suggested a devaluation of Latvia's currency, but the European Union objected to this, on the grounds that the majority of Latvia's debt was denominated in foreign currencies.[12] Financial economist Michael Hudson has advocated for redominating foreign currency liabilities in Latvian lats before devaluing, with possible some loss sharing with foreign creditors.

Paul Krugman, the Nobel Laureate in economics for 2008, wrote in his New York Times Op-Ed column for December 15, 2008:

"The most acute problems are on Europe’s periphery, where many smaller economies are experiencing crises strongly reminiscent of past crises in Latin America and Asia: Latvia is the new Argentina

Statistics

Household income or consumption by percentage share:
lowest 10%: 2.9%
highest 10%: 25.9% (1998)

Industries: synthetic fibers, agricultural machinery, fertilizers, radios, electronics, pharmaceuticals, processed foods, textiles, timber; note – dependent on imports for energy and raw materials

Industrial production growth rate: 8.5% (2004 est.)

Electricity – production: 4,547 GWh (2002)

Electricity – production by source:
fossil fuel: 29.1%
hydro: 70.9%
nuclear: 0%
other: 0% (2001)

Electricity – consumption: 5,829 GWh (2002)

Electricity – exports: 1,100 GWh (2002)

Electricity – imports: 2,700 GWh (2002)

Agriculture – products: grain, potatoes, vegetables; beef, milk, eggs; fish

Foreign direct investments in Latvia: Lursoft statistics on remaining amount of investments at the end of each year. [1]

Exchange rates: lati per US dollar – 0.44 (2008) 0.5402 (2004), 0.57 (2003), 0.62 (2002), 0.63 (2001), 0.61 (2000), 0.59 (1999), 0.590 (1998), 0.581 (1997), 0.551 (1996), 0.528 (1995)

Packet of 20 cigarettes: 0.70 – 2.00 LVL. Most Western brands (Marlboro, etc.) are about 1.50 LVL.