Remarks by Angel Gurría
29 May 2019 -Riga, Latvia
(As prepared for delivery)
Dear Ministers Nemiro and Pūce, Excellencies, Ladies and Gentlemen,
It is my pleasure to be back in Riga to present to you the 2019 Economic Survey and the first OECD Environment Performance Review (EPR) of Latvia. Together, these two reports chart a path towards a more dynamic, inclusive and environmentally sustainable future in Latvia. I would like to take this opportunity to thank the Latvian government for their co-operation in bringing both reports to fruition.
Let’s begin with the Economic Survey, starting with the good news. Thanks to sound macroeconomic policies and strong reform efforts, Latvia has achieved impressive economic growth rates above 4% in 2017 and 2018 that is roughly double the OECD average growth. Growth rates are set to moderate at 2.7% in 2019 and 2020.
Unemployment has fallen to 7.4% in 2018, from 9.6% in 2016 and 10.9% in 2014. Exporters enjoy rising market shares, while living standards and well-being are improving. Wages grew by 8% in 2018, and core inflation remains moderate at 2%.
These are impressive achievements, especially in the current global economic context of low growth, raising trade tensions and policy uncertainty. Our latest Economic Outlook projects that the Eurozone will grow at a meagre pace of 1.2% in 2019 and 1.4% next year.
In this context, it becomes ever more crucial for Latvia to address remaining challenges.
Let me briefly outline the most important ones – the closely interwoven dimensions of productivity and inclusiveness, or the inclusiveness-productivity nexus.
Latvia has one of the lowest levels of productivity of the OECD (with Mexico and Chile) and labour productivity growth is slower than pre-crisis levels . It is crucial to promote a strong productivity growth in order to continue convergence in living standards with top OECD performers and to attract talent. Adding to the pressures, the working age population is projected to decrease by 46% by 2050, compared to 2000 , due to ageing and emigration. Half of the population has no or low digital skills . Skills mismatches are high, with 35% of workers reporting that the required expertise at work does not match their field of study.
Boosting productivity requires more investments in skills, research and innovation. Offering more attractive wages and career prospects for researchers and strengthening their incentives to collaborate with industry would bolster technology transfer and innovation.
Strengthening the Competition Council and giving it more powers to intervene against anti-competitive behaviour of municipal enterprises would strengthen competition and economic efficiency. Economic crimes and the large shadow economy are holding back better access to credit, training and social protection. The government’s ongoing efforts to strengthen the capacity of the judiciary and law enforcing agencies are crucial to overcome this challenge. The government’s commitment to swiftly implement its action plan to strengthen its anti-money laundering and the combating of terrorism financing framework is particularly important.
The second challenge is the high levels of inequalities. Latvia is among the OECD countries with the highest inequalities in income, health and among regions. Addressing these dimensions of inequalities would also boost productivity. After taxes and transfers, the top 10% of income earners have 5.3 times more disposable income than the bottom 10% of earners, compared to the OECD average of 4.3 times . To reduce this disparity, the Survey recommends increasing the guaranteed minimum income and consider tapering its withdrawal further. In the longer run, we recommend bringing more progressivity in the tax system.
It is also important to build a more inclusive health sector. Out-of-pocket expenditure accounts for 45% of health spending, compared to 21% on average across the OECD . 10% of patients in the lowest income quintile skip doctors’ appointments because they cannot afford to pay the fees . The government has made a wise decision to suspend the reform that threatened access to the full set of healthcare services for parts of the population. A continued commitment to universal access to healthcare and to increase spending will be crucial. We recommend financing higher healthcare spending from general budget revenues rather than earmarked social contributions to simultaneously improve market labour outcomes and equity while simplifying the tax system.
Latvia experiences large disparities in income and employment between regions, with GDP per capita in Riga 40% higher than in other regions. The government’s planned territorial reform is an opportunity to merge small municipalities so that they can provide better education, transport and waste and water services, as well as economic opportunities. In addition, better coordination across municipalities is crucial for labour mobility and improvements in infrastructure.
Let me now pass to the first Environmental Performance Review (EPR) for Latvia.
Our Review highlights several impressive achievements where Latvia is making headway in green growth and tackling climate change. In recent years, Latvia has decoupled economic growth and greenhouse gas emissions, and is now among the OECD leaders in using renewable energy, which constitutes 40% of primary energy supply, compared to 10% on average in the OECD. This is impressive!
Moreover, the public can easily take part in decisions affecting the environment and has wide access to environmental information . Over the past decades , air quality as well as water and waste services, have gradually improved as Latvia brought its environmental regulations in line with European standards.
Despite these advances however, sustainability challenges persist. Although Latvia is on track to meet its 2020 climate mitigation target, it will likely miss the 2030 target . Our EPR calls for better aligning climate and economic policies through stronger price signals, as three-quarters of CO2 emissions face a low carbon price or are not priced at all.
The recent energy and carbon tax increases and the restructuring of the annual car tax based on CO2 emissions are welcome. However, several tax discounts result in large subsidies to fossil fuel use. We recommend that Latvia should: 1) diversify the renewables energy mix; 2) improve the thermal efficiency of the ageing multi-apartment building stock; 3) renew the old vehicle fleet and strengthen public transport; and 4) control greenhouse gas emissions from agriculture and forestry – two key economic sectors.
The transition to a sustainable and circular economy would also require better waste management. Latvia has made progress with recovery and recycling, but large amounts of waste still go to landfills. Municipal waste fees and landfill tariffs are too low to spur recycling and investment in alternative waste treatment technology. The planned increase in landfill taxes is a welcome development, but may not be enough to create the conditions for expanding the markets of secondary materials and recycled products.
Last but not least, Latvians are rightfully proud of the stunning beauty of this country, the pristine sandy beaches and the lush forests. Yet the condition of natural environments continues to decline. The government should step up efforts and dedicate more resources to better preserve and manage your extensive network of protected areas.
To tackle these challenges, our EPR recommends the rapid development of a national biodiversity strategy and more extensive use of economic and voluntary instruments for biodiversity management. This includes tax exemptions for private owners within certain areas of Specially Protected Nature Territories, as well as sustainable forest certification or green public procurement for timber.
Ladies and Gentlemen,
Latvia has come a long way since its accession to the OECD and we are proud to have been part of this journey. For example, in the 2017 Economic Survey we talked a lot about the need to expand affordable and quality housing in dynamic regions to enable labour mobility, to make sure people can find a good home close to where the jobs are. And today, we begin a collaboration with the Ministry of Economy to come up with concrete steps to address the issue. And we are also supporting Latvia through a National Skills Strategy project as well as the national Going Digital review. It builds on our across-the- organisation Going Digital project and new insights shared at our annual ministerial council meeting last week on harnessing digital transition for sustainable development. We are committed to supporting you in designing, developing and delivering better policies for better lives in Latvia. Thank you.