Restructuring the Latvian food industry: problems and perspectives

The food industry is one of the most important sectors in the Latvian economy. However, due to its close links to agriculture, the structural crisis in the processing sector is the main obstacle to increasing output, productivity and profitability in the entire agricultural sector. Based on the structure-conduct-performance framework developed by the economic theory of industrial organisation, the objective of the present discussion paper is to identify those economic conditions that are giving rise to the low degree of competitiveness in Latvia´s food industry. For this purpose, the paper analyses the impact of the macroeconomic environment, the change in demand and input supply conditions, and the privatisation process on the development of the food industry. The analysis shows that, although major progress has been made in macroeconomic stabilisation, privatisation and institution building, the efficiency and performance of this important part of the Latvian agrofood chain are far from perfect. Current problems of the Latvian food industry that result in low profitability are increasing input costs, low labour productivity, low domestic and foreign investment activities and excess capacities. The main causes for these are unfavourable interest rates on bank loans, ineffective corporate governance in privatised firms, and deficiencies in the building and implementation of institutions.