The Software Industry – a Potential Driving
Force for Latvian Exports
Juris Borzovs, president, Latvian Information Technologies and
Telecommunications Association
Ivars Puksts, general director, stock company DATI
Baiba Strautmane, economist
Guntis Urtāns, president, stock company SWH, Latvia, Baltic IT Review 4 '99
Estonian President Lennart Meri, speaking to his country’s businessmen recently, asked with
an accusatory tone: 'Where is Estonia’s Nokia?' Meri very clearly reminded his audience that
once Finland lost its market in Russia, it took a small wood processing company and, in a
period of time that was historic in its brevity, established an incomparable telecommunications
giant. Throughout history small countries have set very high goals for themselves,
restructuring their economies and using a certain amount of government support to reach the
goals very quickly, thus becoming world leaders in specific market niches. Latvia is standing
in front of just such an opportunity. Are we going to let it pass us by?
The existing situation
Since the restoration of Latvia’s independence, the information technologies sector, unlike many
others, has not permitted a massive brain drain to the West. In 1991 Latvian software designers
won a bid for tenders to set up an information system for the social insurance of artists in the
German state of Bremen. The work was done successfully, and this early achievement confirmed
the fact that Latvian specialists are entirely competitive in Western markets. From year to year,
the volume of information technology service exports to the West has grown, and in 1998
Latvia’s two largest software producers – DATI and SWH Tehnoloģijas – exported products
worth a total of Ls 5.3 million. The figure in 1999 should be around Ls 7 million. That may not
seem like much when compared to other sectors, but we must remember that nearly all of the
software industry’s output represents newly created value. What’s more, production in this sector
has nothing to do with purchasing raw materials or semi-finished products, processing them and
then selling them on. The source of value in IT services,
to paraphrase Hercules Poirot, is the 'gray matter' that is in
our heads. How valuable will it be? How will we be able
to use it? This doesn’t depend on any external factors; it
depends entirely on ourselves.
What do we hope to achieve?
The Baltic States are becoming a 'second IBM' – a unified
'concern' with 120,000 highly qualified specialists. Along
with India, the Baltic States will come to the world’s fore
as a powerful exporter of software services. The design
and maintenance of information systems and software
products – these are becoming a true "trademark" for the
Baltic States.
This is a goal that can realistically be fulfilled in 10-20 years.
Latvian IT companies, as a result of exporting their services, will reach turnover of Ls 4 billion
each year, while the three Baltic States in total can reach a level of Ls 12 billion. What’s more,
the exports will be aimed at the West, not the still-uncertain Eastern marketplace.
Given the enormous proportion of new or added value created by this sector, this is a very
promising area of the national economy when it comes to improving the overall situation and the
welfare of the people. Naturally, the budget of the Republic of Latvia will receive considerable
sums in taxes.
The IT sector is environmentally friendly, it requires no industrial raw materials, it does not
create any production waste, and it consumes little in the way of energy resources. Latvia and the
other Baltic countries will "import" only money, and this will stimulate increasing professional
qualifications. The sector will support the development of economically backward regions,
because software design workplaces can be put anywhere where there are available telephone
communications. Young people will be stimulated, because given the salaries in the sector,
employees will be able to live as prosperously in Latvia as they would anywhere else.
Are these empty fantasies?
Judge for yourselves. These visions of the future are based on a few fundamental considerations
that can easily be proven:
• First of all, demand for information technology services that is fully based in purchasing power
is rapidly on the rise in the world’s developed countries, and, paradoxically, this is happening
even as the number of people graduating from university with this particular specialty is
declining. According to various studies, there is a shortfall of between 130,000 and 500,000
software specialists in the world right now, and the deficit may increase to some 1 million people
over the course of the next 5-10 years.
• Secondly, when Latvia joins the European Union, the prices of goods and services will
inevitably even out. Because of the aforementioned labor deficit, and also because the stability
and product quality of Latvian IT companies is on the rise, the prices in the IT sector should
reach European levels even sooner. In the case of a few projects, this has happened already.
• Third, we believe that more and more young people will choose software design and related
professions in Latvia, and our universities will be able to educate everyone who wants to pursue
the field. The state will provide financial support to universities and students by increasing
budget financing, expanding the range of available credits for students, and by stimulating
businesses to invest in education and to create new jobs. Initially it would be enough if
universities were ready to accept the approximately 1,200 potential students who passed entrance
examinations this year, and if at least two-thirds of them managed to finish their studies on
schedule. Right now, however, universities are suffering from a lack of financing, facilities and
instructors, and they can accept only about one-half of those who apply. Furthermore, only some
one-third of students actually end up completing their degrees, probably because of economic
problems.
Fourth, we have proof that Latvia’s universities are capable of preparing computer specialists
and software designers, as well as other information technology and telecommunications
specialists, at a very high level. There are four computer manufacturers and two software
companies in Latvia that have already obtained the ISO 9001 certificate, and this provides
evidence of their conformity to international quality requirements.
We are convinced that all of the foregoing is entirely possible, but it cannot happen of itself.
Where to begin?
Because the cornerstone of software design is a well-educated and skilful engineer, while
computers and other equipment are simply necessary instruments that can do nothing by
themselves, it is clear that the main reason why we cannot reach our ambitious goals today is the
insufficiency of educated and motivated employees. this means that the first step must be a
radical increase in the educational opportunities that exist in this particular sector. The number of
university graduates in the IT field must be expanded rapidly – by three, or preferably by six
times.
Businesses in the IT field understand very well the
significance of a good education, and they support various
ways of obtaining that education. They pay scholarships to
the best students, they let their employees present lectures
at universities, they organize student conferences and
academic project competitions, and they support the
participation of Latvian schoolchildren in local and
international informatics Olympiads. The stock company
DATI and the Hansabank bank have recently begun to
provide loans to students. We cannot hope, however, that
Latvia’s companies will be able to shoulder the entire
financial burden associated with the education of specialists, because companies must invest all
of their free resources in expanding production and in creating new jobs. Our calculations
suggest that the state must provide 2 million lats more to the education of information
technology specialists than is the case right now. Another million is needed to provide loans for
students in these fields.
To do or not to do?
This is a question addressed to Latvia’s government, Parliament and young people. If the gradual
level of development that has been occurring so far is allowed to continue, then in the year 2020
we will have an IT sector in Latvia in which the number of export-oriented workers will be no
more than 1,000, and export income each year will be no more than about 160 million lats.
That’s not bad, of course, and the Latvian government doesn’t have to take radical steps which
may initially be unpopular and seem socially unjust in
order to structure the national economy and to specify
priority sectors. We can say, of course – and people
often say this – that there must be a level playing field
for all businesses, but the fact is that the country’s
budget resources are what they are, and if financing
remains at the low level to which everyone is
accustomed, it won’t be very good for anyone. It’s also
true that the establishment of Free Economic Zones in
Latvia has already eliminated total equality in business
activities.
Parliament and the Cabinet of Ministers will require
enormous economic wisdom and political courage
indeed to adopt a decision that is favorable to a
relatively narrow sector under conditions of an overall budget deficit, and to explain that
decision to society in an understandable way. The fact is, however, that there is no other sector in
Latvia – and it is quite possible that it will never have one – that can repay all of the investment
made in it in just a few years’ time, and in the future the sector will support other sectors and the
social sphere with growing tax payments. If we want to see Latvia as one of the developed
countries of Europe, one in which our successors will live, we must cast aside doubt, laziness
and cowardice, and with the harmonized efforts of legislators, the government, universities and
businesses, we must develop without any delay a sector through which Latvia and its sister
countries of Estonia and Lithuania will become known throughout the world. If we don’t waste
this opportunity, the export of software services in three to five years’ time will convincingly be
among Latvia’s eight leading export sectors, and in the year 2020 it will be an unquestioned
export leader, providing work to some 40,000 people and earning some Ls 4 billion each year.
The taxes paid by companies and employees in the sector will allow other sectors – culture,
education, health care and the pension system – to bloom.