Time to learn from mistakes!

Currently there are many discussions regarding the problems caused by the economic crisis among entrepreneurs who are looking for ways to overcome them. However, one of the causes of the current problems is the imbalance between pay and productivity, which should be particularly emphasized, because 1) there is a risk of recurrence; 2) this can be prevented or minimized by entrepreneurs themselves.

One of the most dangerous signs of the “fat years” (i.e. years leading up to the global crisis) in entrepreneurship was the inadequately growing labour costs. For example, in the manufacturing industry, the growth of average gross wage between 2004 and 2008 outpaced the growth of productivity, i.e. wages grew approximately 2.2 times, while productivity only grew 1.7 times. All this resulted in a situation, where export-oriented companies gradually lost their competitiveness in foreign markets, where these companies had and still have the status of price acceptors, while companies that focused on internal consumption were forced to raise prices.

This imbalanced development was due to labour shortages during the “fat years”, because due to the rapid growth, which, as we can now see, was based on an economic “bubble”, there was a lack of available sufficiently qualified employees and the unemployment rate decreased from 11.5% in the first quarter of 2004 to 5.3% at the end of 2007. Another problem was labour rotation, as employees were easily able to find vacancies in this situation, if the current employer was not able to offer what the employee required. Therefore, businesses were forced to pay more to employees without an adequate return of growth in productivity.

At the moment, the opposite process can be observed, i.e. companies have reduced their activity volumes and performed optimisation measures, mainly related to the reduction of the number of employees. And naturally, this has resulted in the growth of the unemployment rate. Besides, as the supply in the labour market grows and the demand decreases or stagnates, the level of pay starts to decline. It may seem that entrepreneurs now have a great opportunity to attract cheap labour at a low cost and thus improve the company’s competitiveness. However, it would be wrong and potentially dangerous in the long term to return to the image of “a state with cheap labour force”.
Although the current economic crisis is deep and serious, the low levels of pay will not remain too long. Latvian labour market is part of the EU common labour market. Furthermore, the market is becoming more liberal and the labour force mobility is growing. Therefore, it will become necessary to raise wages again soon due to objective reasons. This will happen even if the economic crisis in Latvia lasts longer, because the current wage levels in Latvia significantly lag behind the levels of the more developed EU countries, and the labour force mobility will continue to grow.

Therefore, in order to ensure long-term competitiveness and avoid the situation of the previous years, it is now important to establish an enterprise development model which reduces dependence on cheap labour. Therefore, it is worth to consider the following solutions:

• Innovations – both at the level of technologies and processes, as well as products. There is a lot of talks about the necessity of a “Latvian Nokia", however, this can serve as a solution only to a relatively small portion of enterprises.
• Segmentation of products – this could be especially important for exporting enterprises. In most cases, we are suppliers of “no name" products to global players who can replace us with an alternative supplier offering a lower price at any time. Therefore, we must become at least somewhat special, find a unique edge and assign additional values/properties to standard products, thus ensuring competitiveness and irreplaceability.
• Reasonable use of the scale effect – advised investments by balancing investments with the volumes of one’s own activity in such a way as to operate with maximum productivity and minimum cost per unit.

All of the three solutions are related to investments. However, under current conditions, external financial resources are very limited, crediting has practically stopped, and experts project some progress in this field only towards the end of the year. Under such conditions, co-financing of State programmes and the European Union Structural Funds can be applied as an additional instrument for the use of external financial resources. Our experience comprising over 100 projects shows that attraction of these funds significantly facilitates discussions with credit institutions at the stage of initiation of the project and substantially reduces the credit burden after its completion. Therefore, active project development and attraction of co-financing could provide some contribution in the long-term development of many enterprises.

Alberts Auziņš
Andris Lismanis