Successful implementation of economic reforms has boosted the Latvian economy, leading to strong growth, rising wages and solid public finances. Further policy action is now needed to accelerate productivity growth, create jobs, drive down poverty, improve living standards and ensure that everyone benefits from more inclusive growth, according to a new report from the OECD.
The latest OECD Economic Survey of Latvia points to the excellent performance of the Latvian economy, which is expected to grow by around 4 percent this year and next. It lays out a range of policy options that will help it sustain the current expansion and push forward income convergence with more advanced economies. Improving access to economic opportunities for all will be a key endeavour.
The Survey, presented in Riga by OECD Secretary-General Ángel Gurría and Latvian Deputy Prime Minister and Minister of Economics Arvils Ašeradens, identifies priority areas for future action, including policies to help Latvian firms better integrate into global value chains and actions to ensure improved access to the health services, housing and jobs that will make growth more inclusive.
“Economic reforms are driving Latvian growth and helping raise living standards,” Mr Gurría said. “The pay-off from reforms has been impressive, but there is still more to be done for Latvia to achieve speedier income convergence with its richer EU partners and ensure that everyone shares in the benefits.”
The Survey says that boosting future growth will hinge on improving export performance, notably through greater participation in global value chains and diversification of exports away from low value-added, natural resource-intensive products. Stronger integration into the global economy will boost productivity (currently at less than 50 percent of the top half of OECD countries), employment and wages in Latvian firms, as well as living standards for everyone.
Government policies that improve access to vocational and higher education, particularly for young people from low-income households, and widen access to credit will help Latvian firms seeking to enter global value chains. Further steps to promote tighter cooperation between businesses and research institutions will strengthen the capacity of Latvian firms to engage in more knowledge intensive activities. More investment in energy efficiency and steps to exploit the country’s potential for wind energy will help achieve strong growth and meet greenhouse gas emission targets.
The Survey recommends Latvia make stronger efforts to drive down poverty (high at 16.2%, as compared to the OECD average of 11.5%) and ensure that growth is more inclusive. Better access to affordable housing - and particularly rental housing - in areas with good employment opportunities would encourage mobility and help workers get better and more productive jobs.
Improving legal certainty would boost the supply of rental housing, as would simplified administrative procedures for granting of building permits. Better transport could also improve access to economic opportunities.
Access to health services needs to be improved through the reduction of out-of-pocket expenses especially for the low-income population, while operating costs in the compulsory private pension system could be reduced by introducing a low-cost fund as the default choice.
Fiscal policy needs to support these structural reform priorities. Steps to move undeclared economic activity to the formal sector are critical for the government to raise revenues for needed upgrades in housing, education, health and transport. The recent tax reform lowers the tax burden on employment, especially for workers with low pay, which is welcome. Efforts to generate more revenue from taxes on property and energy and by removing exemptions in business taxation could make room for further reductions of taxes on low salaries, the Survey said.
An Overview of the Economic Survey, with the main conclusions, is accessible at: http://www.oecd.org/economy/surveys/economic-survey-latvia.htm.
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