Foundations for Growth and Competitiveness 2026

Latvia

Access to the EU market, less restrictive regulation and corporate tax incentives have supported FDI inflows. However, weak domestic investment, a shrinking working age population and slow digital adoption have slowed convergence towards higher living standards. Weak competition in the financial sector and shallow capital markets limit access to finance for firms. At the same time, informality and barriers to competition as well as skills shortages hamper business dynamism, innovation and productivity growth.

Listing minority stakes in large state-owned enterprises and strengthening competition in the financial sector would help deepen capital markets and improve access to finance. Reducing the labour tax wedge for low-income earners, strengthening tax enforcement and lowering costs of insolvency would help lower informality and improve the allocation of resources towards more productive firms. Strengthening competition enforcement and addressing skills shortages by improving access to and quality of training, and reducing dropout rates in tertiary education, would support business dynamism and innovation.

Economic performance

Gaps to the average of the upper half of the OECD countries

Source: Panel A: OECD, Economic Outlook database; Panel B: OECD, Labour Force Statistics database; Panel C: OECD, Economic Outlook and Productivity databases; Panel D: OECD, Economic Outlook and Annual National accounts, GFCF by assets databases.

Selected policy gaps

Source: OECD calculations based on the Foundations for Growth and Competitiveness database.

Financial markets: Strengthen competition and deepen capital markets

Limited access to finance has been a serious barrier to business investment, weighing on productivity growth. Despite rising deposits and high profitability, banks have been reluctant to lend. Low customer mobility and weak competition in the banking sector have led to high borrowing costs and collateral requirements, reducing corporate borrowing, especially for smaller firms. Moreover, shallow corporate equity and bond markets, as well as the lack of institutional investors, limit non-bank sources of corporate finance.

Recommendations

✓ Strengthen the legal and investigative powers and tools of the Competition Council to monitor anti-competitive behaviour in financial markets.

✓ List minority stakes in large SOEs to attract institutional investors into the stock market, and continue to improve the financial literacy of smaller firms to raise corporate bond issuance.

✓ Raise investment and concentration limits of second-pillar pension funds for single issuer assets, real estate and private investment funds, while ensuring appropriate risk management and governance processes.

Business dynamism: Facilitating the reallocation of resources towards more innovative and productive firms

Many firms in Latvia stay small, partly operate in the informal economy and have little access to funding for investment and innovation, including the adoption of digital technologies. At the same time, widespread informality distorts the level playing field between firms and hampers the reallocation of resources to more productive firms. Insolvency procedures are costly and burdensome, discouraging low-income small business owners from filing for insolvency. In addition, public funding for innovation remains low. Innovation support programmes are fragmented, administratively burdensome, and often lack comprehensive impact evaluation.

Recommendations

✓ To tackle informality, reduce the labour tax wedge for low-income earners and strengthen tax enforcement by improving data infrastructure and analysis as well as staffing.

✓ Reduce the cost of filing insolvency to eliminate upfront barriers faced by debtors, while compensating insolvency administrators.

✓ Further centralise innovation support in a single agency, evaluate existing programmes and scale up the most effective ones.

Competition: Create a more level playing field between firms

According to the OECD Product Market Regulation Index, entry barriers in services sectors with strong SOE presence are higher than in the average OECD country, reducing competitive pressures on incumbents to innovate and raise productivity. However, assessment of the impact of regulation and SOE presence on competition remains weak. Some SOEs have been excluded from the regular assessment of the rationale for state-ownership. Moreover, monitoring abuse of dominance in markets where SOEs and private companies compete is hampered by weak data transparency, particularly at the municipal level. Introducing a market investigation tool, as for example done in the United Kingdom, and further improving the staff and IT resources of the Competition Council would help levelling the playing field between firms.

Recommendations

✓ Increase the power of the Competition Council to conduct market investigations and initiate evaluations of regulations and state ownership rationales of SOEs to ensure competitive neutrality.

✓ Include all SOEs in the regular evaluations of the rationale for state-ownership, better define assets, goods and services of strategic interest, and conduct in-depth analysis on the presence of market failures.

✓ Require and dedicate the necessary resources to monitor the implementation of accounting separation between activities pursuing public policy objectives and commercial activities by all SOEs.

Education and skills: Improve access and the quality of vocational training, and reduce drop-out rates in tertiary education

The low level of digital and management skills hinders the adoption of digital technologies by Latvian firms and reduces their productivity and competitiveness. Nevertheless, Latvian firms invest little in training. This is related to the large number of small firms, which lack resources to provide training, and weak coordination among firms. The administrative burdens related to updating professional qualification requirements are high, hindering the timely adaptation of training content to skill needs in local labour markets. Moreover, high STEM dropout rates in tertiary education exacerbate skilled labour shortages.

Recommendations

✓ Establish a tri-partite training fund and improve cooperation in training design and implementation among firms and training providers.

✓ Facilitate the update of professional qualification requirements and accreditation procedures and give VET institutes more power to coordinate the content of VET courses with local employers.

✓ Incentivise increased graduation rates through university funding allocation, while controlling for quality standards and increase the means-tested financial support scheme to cover living costs for students.

Public governance: Modernise the public administration for greater efficiency and effectiveness of public policies

Digitalisation of public services has significantly improved, strongly reducing the administrative burden. However, the exchange and use of data for ex-ante and ex-post impact evaluation of policies remains weak. This reduces the effectiveness and cost-efficiency of public spending, for example in infrastructure planning and implementation or in the health system, weighing on the quality of infrastructure and public services. Procurement of standardised goods, for example IT equipment and software or medical supplies and equipment, is often decentralised, despite large possible efficiency gains of centralised procurement.

Recommendations

✓ Improve the data infrastructure and knowledge about methodologies for cost-benefit and impact analysis of policies and raise cooperation across the public sector.

✓ Incentivise municipalities to harmonise and digitalise administrative procedures and introduce mandatory IT standards and data formats.

✓ Consolidate existing purchasing bodies, improve their IT and staff capacity and reduce legal exemptions that allow to opt out of mandatory centralised procurement.

Recent progress on structural reforms

Recent reforms, including the establishment of a specialised Economic Court, have significantly improved insolvency procedures and strengthened the fight against money laundering and corruption. Newly introduced regulation has reduced the costs and time required for mortgage loan refinancing, with the aim to strengthen financial market competition. The establishment of an IPO fund will support initial public offerings and help deepen capital markets. The health budget rose by 16% in 2024 (0.4% of GDP), including additional funds to reduce out-of-pocket medical drug costs, strengthen the hospital network and improve its human resources.