There are fears that the observed moderation of growth rates in Latvia suggest it may soon be stuck in a Middle Income Trap. No uniform understanding has been reached as to what a Middle Income Trap is and what signs testify to its existence. In order to avoid the danger of this trap structural reforms will be necessary which together with higher quality investment could raise Total Factor Productivity.

Between 2008 and 2010 Latvia – a small country on the Baltic Sea coast and a member of the European Union (EU) – lost a huge 21.7% of its real gross domestic product (GDP). It is one of the largest recent GDP falls not only in the history of the EU, but also globally. But the crisis described in this article is not the classical ‘boom and bust’ cycle-type crisis: Latvia had to face cyclical, structural, financial and global problems simultaneously. This article briefly describes the anatomy of the crisis in Latvia.