Launch of the Economic Survey of Latvia
Remarks by Angel Gurría
Riga, Latvia, 15 September 2017
(As prepared for delivery)
Dear Deputy Prime Minister Ašeradens, Ministers, Friends from the press, Ladies and Gentlemen,
I am delighted to be in Riga to present the 2017 Economic Survey of Latvia: the first since Latvia joined the OECD last July! Since the start of the accession process we have worked together to foster inclusive growth and well-being in Latvia, and we have benefited from your experiences and perspectives on OECD work. Latvia has led by example in the OECD, standing out as the top reformer on the structural reform priorities in this year’s OECD’s Going for Growth edition.
I would like to take this opportunity to thank the Latvian government for their co-operation in bringing this Survey to fruition. I would also like to thank Deputy Prime Minister Ašeradens for hosting today’s launch.
Let’s begin with the good news. Latvia has been recovering steadily from the difficult years of the crisis. The OECD expects GDP growth to strengthen from 2% in 2016 to around 4% this year and next, nearly twice the Euro area forecast (which was projected at 1.8% in the June 2017). Fuelled by this growth, per capita real GDP has grown above the pre-crisis peak, despite a challenging international environment.
The government budget was in balance in 2016 and government debt is 40% of GDP, among the lowest in OECD countries. Private sector indebtedness has fallen to relatively low levels. Financial market confidence is strong. Administrative burdens to entrepreneurship have been reduced, the efficiency of the judiciary has been enhanced and efforts to boost tax revenue collection have born some fruit.
These are impressive achievements.
However Latvia continues to face important challenges. Productivity in Latvia is still less than fifty percent of the top half of OECD countries, and this gap is larger than for regional neighbors. Export performance is improving, but participation in global value chains remains concentrated in low-value-added activities.
Unemployment has fallen to 8.6% in 2017, and is already very low in the dynamic capital region, but mobility and skill barriers prevent the unemployed from other regions to take up jobs there. Poverty levels remain high (16%), and emigration flows, mostly of the young, contribute to skill shortages. Educational attainment is high, as almost all Latvians are educated at least to upper secondary level, but the quality and relevance of initial education is not keeping up, as evidenced by decreasing PISA scores in 2015, as compared to 2012.
Our study proposes several policy recommendations to develop Latvia’s full economic potential and to promote more inclusive and sustainable growth.
Firstly, Latvia needs to boost productivity by moving up global value chains. OECD data shows that Latvia is drawing less value added from global value chains than other countries in the region. Latvia can reap larger benefits by specialising in more knowledge-intensive activities.
For this, getting the right skills is key. Latvia has improved the quality of vocational training and tertiary education, making good use of EU structural funds. However, it is critical to ensure that all young people, including students from low-income households, can access these education pathways and improve their skills.
Innovation is another key driver of productivity growth and essential in capturing higher value added from GVC participation. However, in 2015, Latvia invested only 0.6% of GDP to research and development, among the lowest in the OECD countries (the OECD average was 2.4% in 2015). And here in Latvia, less than one-fifth of product and process innovations are completely new to the market. Latvia has undertaken several policy initiatives in order to boost innovation and co-operation between businesses and research institutions, including in the international context. This is welcome, but the Survey recommends that these be evaluated better to identify which ones are effective and most worthy of support.
Secondly, Latvia needs to boost inclusive growth by improving access to health services and affordable, quality housing. Few households rent their home. This reduces labour mobility and contributes to high unemployment in some regions. The Survey recommends improving legal certainty to help landlords and tenants rely more on formal rental contracts. Increased public funding for low-cost rented housing in areas of expanding employment would improve job opportunities for the unemployed and the poor.
Like better housing, affordable, quality healthcare is also vital for fostering well-being and inclusive growth. Life expectancy has risen in Latvia, but the gap in health status between rich and poor households is among the highest in the OECD at over 30%. Poor health outcomes and limited access to care undermines inclusion, employment and growth: according to Ministry of Health data, it is estimated that around 7% of the labour force were out of work in 2015 due to illness, injury or disability.
The Survey recommends developing key service quality and performance indicators for health care providers. The Survey also makes recommendations to improve access to healthcare, for example, by reducing out-of-pocket payments, which accounted for 42% of national healthcare spending in 2015, the highest across the OECD. As a result, 16% of the low income population in Latvia reported forgoing needed medical examination for financial reasons. This has to change!
Finally, the Survey underlines the importance of using fiscal policy to increase inclusive growth. Improving access to education, housing and health care requires additional government spending. While complying with EU’s fiscal rules, Latvia should make full use of available fiscal space to fund structural reforms. But Latvia also needs to ensure firms’ profits and workers’ salaries are fully declared. Undeclared activity lowers government revenue. It is also less productive, distorts competition and leaves workers unprotected.
The recently adopted tax reform is a step in the right direction, reducing personal income tax rates and exempting corporations’ retained profits from tax. However, reducing the tax burden on low-pay workers even further is particularly important, as it helps make work pay in the formal economy and reduces poverty.
Deputy Prime Minister, Ladies and Gentlemen,
Building on your achievements, now is the time for for a new generation of reforms to boost inclusive growth and put Latvia on a fast-track to converge to the living standards of the OECD’s best performers. We stand ready to support you and to work together to design, develop and deliver better policies for better lives in Latvia!