Speech of Prime Minister Valdis Dombrovkis of Latvia to the OECD Council, 12 November 2013

 

Secretary General, Excellencies, Ladies and gentlemen!


It is a great pleasure for me to address the OECD Council today.

First of all I would like to express our gratitude that OECD member states appreciated Latvia’s efforts and OECD’s Ministerial Council decided to open membership talks with Latvia in 2013.


Latvia considers membership in the OECD as an opportunity for further enhancing structural reforms, implementing social and economic policies, improving services to its citizens and learning from on-going reforms in other countries. Simultaneously, Latvia regards membership in the OECD as a matter of strategic importance due to the opportunities of participation in the global economic agenda and share the experience and best practices. In a number of areas, Latvia has specific knowledge and experience which can be valuable both for the OECD and its member states.


I am sure that during Latvia’s technical accession process, relevant OECD Committees and member states will be able to evaluate and fully recognize Latvia’s maturity as an OECD member state in the nearest future.


Opportunities at the OECD


Latvia has already benefitted from the OECD analysis and guidelines in certain areas. To mention some:

  • fight against foreign bribery - by strengthening and bringing our legislation in compliance with the OECD Convention on Anti-Bribery;
  • education - by being able to asses our students internationally; 
  • reform of state owned enterprises [currently discussed in the Parliament] 


Within the context of accession we look forward to the thorough sectoral reviews mentioned in Latvia’s Roadmap for the accession to the OECD which are also of great importance to national agenda.


And look forward to the opportunities that full OECD membership would provide in that respect.


I would also like to commend OECD overarching projects like New Approaches to Economic Challenges (NAEC), Global Value Chains (GVC), Base Erosion and Profit Shifting (BEPS) and others that provide [or will provide] evidence and guidance for policy makers in rapidly changing environment and are of great interest to Latvia.


Latvian crisis experience


Secretary General, Excellencies, Ladies and gentlemen!

The economic crisis 2008-10 hit Latvia particularly hard, but Latvia has proved its capacity to reform by undertaking massive fiscal consolidation and implementing numerous structural reforms. The size of fiscal consolidation measures implemented between 2009 and 2012 amounted to 17,5% of GDP with one third comprising of revenue increases and two thirds – expenditure cuts. The ambitious and front-loaded fiscal consolidation was instrumental in anchoring confidence and in its way provided positive stimulus for economic recovery. Indeed, financial market pressures gradually eased and Latvia was able to return to the financial markets in early 2011, 2 years after we had lost access to them. GDP growth resumed already in the last quarter of 2009 right after the first round of large budget consolidation was implemented. As a result, budget deficit has been brought down from 9,8% in 2009 to well below 2% in 2012, public debt has been stabilized below 45% of GDP and economy has entered a new growth cycle.


Fiscal consolidation has been supported by structural reforms, particularly in education, healthcare and public administration. Product and labour market policies have been focused on improving business environment, promoting competition, boosting productivity in tradable sector and fostering labour market flexibility. As a result, we have achieved significant productivity gains, latest figure showing a 40% higher productivity than at pre crisis peak in 2008. Also, we have significantly improved in the Doing business ranking, standing at number 24 in 2014. And there are several important measures undertaken concerning insolvency and court system efficiency. Implementing these should considerably boost our standing in the ranking.


During the economic downturn particular attention of the government of Latvia was focused on new strategies for restoring competitiveness and long-term growth of national economy.


To promote further sophistication of Latvian economy based on an advanced micro level analysis and the provision of horizontal state support the Government has adopted guidelines for a new innovative Industrial policy of Latvia.


Already in 2010 Latvia adopted Sustainable Development Strategy 2030, where main principles for future national development, such as human capital, equal opportunities, education, innovative and eco-efficient economy, renewable and safe energy, sustainable management of natural values, territorial development and settlement, energy efficient and environmentally friendly transport policy, increase in the social capital value, were brought forward.


The National Development Plan 2020 (action Plan for the Sustainable Development Strategy 2030) contains three priorities: the development of national economy, human security and a territory supporting development.


One of the suggestions include ambitious plan to make Latvia the greenest country in the world by 2020 (currently – it is the second greenest according to the Environmental Performance Index).


Recent economic development


Secretary General, Excellencies, Ladies and gentlemen!


Allow me to briefly present the recent economic development in Latvia. On the whole, Latvia has emerged much stronger from the recent recession with improved competitiveness and balanced economy.


Latvia has recorded stronger-than-expected growth of 5,6% in 2012, led by private consumption, raising demand in service industry, expanding exports and investments. As of the 2nd quarter of 2013 Latvia has recorded a positive GDP growth for twelve consecutive quarters.


In 2012 Latvia had the highest GDP growth in the EU. As the Eurostat flash estimate (4 September 2013) shows, the high growth rate continues in 2013 – during the 2nd quarter Latvian GDP grew by 4,3% compared with the same quarter in 2012.


I would like to note that export volume at the end of 2010 exceeded the pre-crisis level and is strongly growing ever since. Exports are expanding, backed by solid economies of Latvia’s major trading partners, and in 2012 Latvia reached the 2nd highest export growth in the EU - Latvia’s export rose by 16% according to Eurostat. Exports will continue to be a cornerstone of the Latvian economic development, but it will be closely related to the trends in external demand – in the first half of 2013 exports share in total foreign trade volume has reached 44,7%. The Central Statistical Bureau of Latvia data for the first half of 2013 also show that the volume of goods exported at current prices has increased by 250,25 MEUR or by 6,2%.


Latvia’s economy is forecast to grow by 4,2% in 2013 and remain one of the fastest growing economies in Europe in coming years with a 4% growth forecast in the medium-term, provided by such growth drivers as domestic demand and exports.


Latvia’s sustainable fiscal position combined with strong macroeconomic performance has been recognized by international rating agencies and organizations. Latvia’s credit ratings have been reviewed upwards by all major international credit rating agencies. International credit rating agencies have assessed the Latvian economy as one of the most flexible and resilient economies in the EU, indicating Latvia’s progress in achieving solid and broad-based economic growth, cutting budget deficit and improving terms of market access.


The adoption of 2014 budget


Last week Latvian Parliament adopted budget for 2014 and medium-term budgetary framework for 2014, 2015 and 2016. There are three medium-term budget priorities – improving national competitiveness and the demographic situation, as well as reducing income inequality.


Currently, a discussion on competitiveness is among top priorities on the agenda of many developed countries. In a way, today it is a matter of national existence, particularly in the European countries, willing to ensure the so-called European social model also in the future. If there is no competitive economy, both the aforementioned funding for improvement of the demographic situation and measures for reducing inequality will remain only at the level of wishful thinking.


Here I would like to quote an excerpt from the book The World is Flat by Thomas L. Friedman: "Every morning in Africa, a gazelle wakes up, it knows it must outrun the fastest lion or it will be killed. Every morning in Africa, a lion wakes up. It knows it must run faster than the slowest gazelle, or it will starve. It doesn't matter whether you're the lion or a gazelle-when the sun comes up, you'd better be running".


Under conditions of global economy, the small and open economies like Latvia should follow their competitiveness indicators and be able to change dynamically – (they should be prepared to run). Latvian economy cannot rely solely on its internal market as a driving force of economy. Only competitiveness in the European and world markets will provide growth and prosperity.


The national competitiveness is a short-term and medium-term priority of the government of Latvia. Like high tide raises all ships, the improved national competitiveness will generate extra income at national level; it will have a positive impact on all residents of our country. This income will contribute to reducing social inequality and allow for transferring more resources to dealing with demographic issues, will help develop the infrastructure at both national and regional level, as well as invest funds in education, research and innovation.


As regards demography, for already the second year, a set of extensive measures to improve country’s demography is being implemented. Intended reforms are directed to diminish the risks of poverty incurred by families with children. Therefore, the demography support measures are focused on increasing the social support for families with children. Reduction of poverty and income inequality is a priority that is particularly marked during the years of crisis and post-crisis.


The euro


Finally, I would like to touch shortly upon a topic of Latvia’s entry into the Eurozone. On 1 January 2014 Latvia will become the 18th euro area member by joining a monetary union in which more than 330 million people use a single currency, the euro, in their financial transactions. Being invited in the Eurozone shows Latvia’s successfully implemented reforms towards stabilizing the country’s economy and is an addition stimulus for the country’s economy’s future growth, wellbeing, stability and regaining trust of foreign investors.


I’d like to emphasize that it will be a great benefit for the Latvian economy. Firstly, there is an array of practical gains like the lower interest rates for both: the public and private sector, easier transactions, savings on conversion cost, easier travel. Also, the euro would provide a much safer and more stable currency for Latvia. By adopting it we are certain to avoid a similar situation to what we experienced at the beginning of the crisis – as global financial crisis struck the small and unremarkable lats was immediately dumped by international markets thus sparking an immediate current account crisis.


Yet, I would also like to highlight another aspect of the reasons for joining the Eurozone. The implication of globalization is that in order to stay competitive countries and regions will have to pursue closer economic integration. It is particularly important for smaller countries and it is particularly important in Europe which consists of many relatively small countries. It is difficult to imagine how a fragmented Europe with tens of little independent currencies and separate strategies to increase competitiveness could successfully compete in the future. For this reason, the future of Europe is not imaginable without the Eurozone and it is in Latvia‘s best interest to be part of this union thus significantly increasing its long term growth potential.

 

Conclusion


To conclude, I would like to particularly stress that the recent economic success must not let us drift into complacency. There is concern that when the pressure wears out and economy is growing for the third consecutive year, we start losing caution. I would like to recall the saying: if you don't learn from history, it tends to recur. Famous Latvian writer R. Kaudzīte has an aphorism: “Be prudent in misfortune and even more prudent in happiness”.

 

Thank you!

 

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