Having been in business for more than 30 years, I have seen different approaches to economic policy and also the consequences of various experiments. Generations of entrepreneurs change and mindsets change. The recently published lending index of the Financial Industry Association in the business segment shows that the ability and desire of Latvian banks to finance entrepreneurs has grown over the last year, as well as the latter’s ability to borrow, but the desire to ask for a loan is growing much more slowly. Do Latvian entrepreneurs lack ambition? There is no easy answer, but I don’t think that the fault lies in a lack of ambition.
Now we are on a kind of boundary line, where the older generation of entrepreneurs would like to repeat the easy profit measures of the nineties, which are no longer allowed by banks and legislation, while the younger entrepreneurs are given wide opportunities, but they are very cautious about the risks they would have to take. To understand the prudence of today’s entrepreneurs, we need to look back.
After regaining independence, the “pedal to the floor” economic policy ended with a major financial crisis in 2008. In the nineties and the beginning of the new millennium, there was no shortage of so-called mud businessmen whose good acquaintances allowed them to “sort things out” in the true Soviet spirit – mainly in the field of denationalization and privatization. This contributed to the rapid development of the real estate industry, making it possible to make substantial profits quickly. State money was invested on a large scale – where it is easier to earn it quickly, and not in those industries where jobs are really needed and which would produce globally competitive goods, services or adventures.
That is why the fall experienced 15 years ago turned out to be very painful for many – people lost their properties, went through insolvency proceedings, were forced to go to other countries in search of a better life. The recovery from the expansionary lending spree proved so difficult that it took many years.
Of course, everyone has learned from it. The banking sector is no longer engaged in pawnshop-type loans: if before the great crisis the main criterion for issuing a loan was the value of the collateral, now the focus is on the reputation of the client, financial flow and its transparency – both for private borrowers and business clients. Such a banking model, which operated without problems in Latvia during the previous crisis, with a significant market niche occupied by financial institutions engaged in money laundering, is no longer possible. Since Russia, from where a large part of the dirty money flowed, has entered into a confrontation with the West, we cannot be in the middle – if we are on the side of the West, dirty money must be called dirty money.
Parallel to these events, a series of new institutions have been created since the 1990s – for example, insolvency administrators, which act as a mechanism for confiscating the hard-earned benefits of entrepreneurs, significantly reducing risk appetite. If there are active wolves in the area, it should not be surprising that the sheep are thin and there are not very many of them.
Entrepreneurs are undeniably cautious and do not rush for bank financing. Those who were competitive 20 or 30 years ago have been resting on their laurels for quite some time, waiting for better times and hoping for the opportunity to repeat easy profit activities. Figuratively speaking, they are looking for the cheese that no longer exists – the explosive development of an active, bank-financed real estate market. Those days are gone.
On the other hand, young entrepreneurs mostly choose to operate in the business of local consumption. Latvia does not create enough new companies that would go outside the borders of Latvia with a globally competitive product. You can already judge about the homestead mentality, even though only a few generations ago we were all farmers in Europe, this is not a situation specific to Latvia. And yet it is precisely in Latvia that the owner, upon reaching a certain size of the farm or starting to get bored, rather chooses to try something new on the local market than to cross the borders and learn the wide world with an already proven product. However, the reality of the 21st century is that if you have found a gold vein, you have to give up everything else – it is the only way to compete globally. Over-bureaucratization and over-regulation promotes single-family thinking in Latvia, i.e. see in the field of finance. At the same time, lowering standards would likely not be the solution if we do not want to fall back into a short-term credit-financed real estate price bubble. It would be very wrong to fan a fire and then burn in it.
Is this the right time to take a loan and invest in the growth of the company? Entrepreneurs make up around 8-10% of the entire society. These are people who are unreasonable optimists, decisive, able to act in conditions of insufficient information, people of action who do not wait, but take risks, endure stress, are able to get up if they happen to fall. For such people, every moment for growth is the best. If an entrepreneur has an idea and sees an opportunity in the market, action must be taken now. If you can get financing to implement your idea, you should do it, especially in a situation where inflation is still higher than interest rates, so when borrowing money, interest rates are negative. Yes, the appetite for borrowing in Latvia has changed: the events of 2008 have taught us that we borrow other people’s money temporarily, but give our own – and forever.
However, there is no basis for claiming that Latvian entrepreneurs lack ambition. Our entrepreneurs are simply more cautious than in neighboring countries. I think many people would be willing to take risks if they saw an opportunity to sell their company in case of failure and invest in a new business. Unfortunately, new businesses are emerging too slowly due to the lack of suitably qualified labor force, which in turn is a stone in the field of the education system. I think that there is no shortage of ambitious entrepreneurs in Latvia, but most of them realize themselves only to the extent that our business environment allows them to do so without unnecessary risk. What would be needed is less immersion in the memories of the cheese of the past and more thinking about how to compete in the global market and successfully earn money.
The author is a member of the board of the Latvian Chamber of Commerce and Industry (LTRK).
2023-04-28 03:30:10
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