Reinventing perished “Belgium of the East”: new estimates of GDP for inter-war Latvia (1920–1939)

The British Historian John Hiden once called pre-WWI Latvia “the Belgium of the East” due to its highly advanced manufacturing, serving the Russian market. The independent Latvian nation-state (1918–1940) lost this status together with the industrial equipment, evacuated in 1915–1916 to mainland Russia and never returned. Inter-war Latvia did attempt to “Denmarkize”, i.e., to become an internationally important exporter of food and to re-industrialize. Both its economic success and growth performance are severely contested. According to Roses and Wolf (in: Broadberry S, O’Rourke KH (eds) The Cambridge economic history of modern Europe, vol 2. 1870 to the present. Cambridge UP, Cambridge, pp 183–207, 2010), Latvia’s GDP per capita growth rate was the highest among the European countries in 1929–1938. According to the most authoritative expatriate Latvian account by Aizsilnieks (Latvijas saimniecības vēsture, 1914–1945. Daugava, Stockholm, 1968), the growth stagnated in the years of the authoritarian Karlis Ulmanis regime (1934–1940). Roses and Wolf estimates are indirect. Aizsilnieks grounds his conclusions in the methodologically outdated national income estimates from inter-war times. This paper resolves the controversy by providing direct supply-side time series of the gross domestic product (GDP) in 1920–1939, based on a benchmark estimate of Latvia’s GDP in 1935 by Norkus et al. (Cliometrica, https://doi.org/10.1007/s11698-022-00260-x , 2022). Main findings: The economic growth continued after 1934, but it was not Europe´s top growth performer in 1929–1938. However, in 1922–1938, its growth performance was the best, also due to a very low baseline after the extreme war-related economic destruction. The “Denmarkization” process was only partially successful because agricultural productivity remained low, and the re-industrialization was mainly import-substitution. We also did find that since 1936, Latvia’s GDP per capita grew with substantial stagnation of the sectoral share of agriculture and a re-shift from services to manufacturing.