The diverse role of the construction industry in economic development of Latvia

Olga Feldmane
Construction Policy Department, Ministry of Economics of the Republic of Latvia

When measuring the role of a certain industry in the overall economy of a country, we usually consider different statistical indicators, e.g. industry turnover, number of employees, number of acting companies, export volumes, value added.

In Latvia, as most probably in any other country, construction industry constitutes an important part of the economy. Construction industry turnover in recent years grew steadily, mirroring stable development. Stability was not shattered even during the first year of Covid-19 pandemic, despite of the global turbulence and ruptures faced all over the world. In 2021 and 2022 Latvian construction industry experienced essential decrease, which might be a short-term consequence of Russian military aggression in Ukraine or might be an evidence of more deep recession. Statistical data for 9 months of this year show approximately 12% decrease in construction industry turnover. In order to understand the real effect the decrease may cause, we need to understand the true role of construction industry in economic development and percept how deeply it permeates processes.

First of all construction industry is a genuine mirror of the country’s economic development pace. Any complications or problems faced by business, or lack of confidence within the society, will be reflected in the construction indicators. The Covid-19 pandemic clearly demonstrated this inextricable connection. When pandemic hit Europe, and despite the fact that construction sector in Latvia was one of the less influenced, industry signalized of the immediate impact, predicting approximately 30% decrease in production. Also less noticeable fluctuations within the construction industry may be the evidence of more global problems. Proper analysis of the fluctuations of the volumes of construction, can help to draw objective conclusions regarding the true state of the economy and identify actions needed in order to facilitate economic development.

Secondly, construction industry is quite suitable for “heating the economy”. It interacts with the wide range of other industries, forming essential financial flows and making the business work. During economic recession, public investments in infrastructure may perform as a trigger that launches a purposeful chain reaction and activates connected industries with a spider web effect. In 2020, the government of Latvia injected additional investments of around 500 million euros in high readiness public infrastructure projects, in order to propel economic processes.

And last but not least, construction is a key instrument for the evolution of living environment and development of any other industry. Productivity, competence and abilities of the construction industry, as well as the administrative procedures related to the construction processes directly influence the decisions of any other business on making investments. This is more true within the common market of the European union where we are free to switch from one country to another, investing money in necessary structures in countries with the most favorable circumstances. Surely the decision on where to invest is based on various considerations, such as tax policy, availability and qualification of labor force, availability of resources necessary for the business, logistics solutions, however the “maturity” of the construction industry is of fundamental importance as well as the state imposed administrative procedures. In case of Latvia, where there are strong connections with the neighboring countries and similar business environment, the level of development of construction industry and the level of bureaucracy of administrative procedures may prove to be decisive.

When evaluating or rating investment environment, first of all we consider transparency, simplicity, costs and time consumption of the administrative procedures. Though these are of a high value, the level of development of construction industry is essential. Competent and qualified performance of each party of the construction process helps to reduce significantly risks faced by the owner, e.g. inconsistencies and defects of the building, violations of deadlines, inability to fulfill obligations. When deciding what country to give the priority for investments, mature, competent, responsible, modern and technologically developed construction industry will be one of the basic factors that will influence the decision making process.

Undoubtedly, the government through a targeted and purposeful policy should establish competitive processes for the development of real estate. Likewise, governmental policy may facilitate the establishment of the mature construction industry. The construction policy in Latvia during the past few years was directed towards strengthening responsible and competent construction industry.

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