2017 OECD ECONOMIC SURVEY OF LATVIA Boosting productivity and inclusiveness
September 15th 2017, Riga Latvia
http://www.oecd.org/eco/surveys/economic-survey-latvia.htm Main messages
• The Latvian economy is growing strongly, underpinned by progress with economic reforms.
• Deeper integration into international trade is necessary to catch up with high-income countries.
• Poverty and unemployment are still high. Access to jobs, housing and health services need to improve.
1 Growth has been strong
Real GDP, Index 2007 =100
110 110 Latvia Estonia Euro area 105 105
100 100
95 95
90 90
85 85
80 80
75 75 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1
Source: OECD (2017), OECD Economic Outlook: Statistics and Projections (database). 2 Exports have gained market share
Export performance indicator, moving average 2010=100
Source: OECD (2017), OECD Economic Outlook: Statistics and Projections (database).
3 Unemployment has fallen
Unemployment rate as % of labour force
24 Latvia Euro area 24
20 20
16 16
12 12
8 8
4 4
0 0 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2
Source: OECD (2017), OECD Economic Outlook: Statistics and Projections (database). 4 Wages have grown more than prices
Growth of labour compensation per employee and consumer price inflation
% %
12 12 Worker pay Inflation 10 10
8 8
6 6
4 4
2 2
0 0
-2 -2
-4 -4 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2
Source: OECD (2017), OECD Economic Outlook: Statistics and Projections (database). 5 Latvia is a top reformer
The 2017 Going for Growth reform responsiveness indicator
%
80
60
40
20
0 ISL IRL ITA FIN ISR IND IDN JPN BEL LVA NZL ZAF EST LUX NLD CZE CHL AUT FRA ESP PRT SVK POL BRA USA COL TUR SVN AUS DEU DNK CHE CAN CHN MEX HUN KOR GBR GRC NOR SWE OECD
Source: OECD (2017) Going for Growth 2017 edition.
6 Debt has fallen
Debt as % of GDP
% % 200 200
Households Non-financial corporations
160 160
120 120
80 80
40 40
0 0 2010 2011 2012 2013 2014 2015
Source: OECD (2017), OECD Economic Outlook: Statistics and Projections (database) and OECD National Accounts Statistics (database). 7 Important challenges remain
8 The gap in productivity remains large
Gap in GDP per capita of Latvia vis-à-vis the upper half of OECD countries
% -45
-50
-55
-60
-65
-70
-75
-80 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Source: OECD (2017), OECD National Accounts Statistics (database) and OECD Productivity Statistics (database). 9 Poverty is high
Share of population with disposable income below the poverty line, 2015 or latest
% %
18 18
15 15
12 12
9 9
6 6
3 3
0 0 IRL ITA FIN BEL LTU LVA LUX EST PRT AUT SVK ESP CZE SVN GBR GRC NOR OECD
Source: OECD (2017), OECD Social and Welfare Statistics (database). 10 Income inequality remains high
Gini coefficient, scale from 0 (perfect equality) to 1 (perfect inequality), 2015 or latest available
0.5 0.5
0.4 0.4
0.3 0.3
0.2 0.2
0.1 0.1
0.0 0.0 ISL IRL ITA FIN ISR JPN BEL NZL LVA LUX EST SVK CZE AUT FRA NLD PRT POL ESP CHL SVN AUS TUR USA DNK DEU CHE CAN HUN KOR MEX GBR NOR GRC SWE OECD
Source: OECD (2017), OECD Social and Welfare Statistics (database).
11 Higher income, better housing and better health would raise wellbeing
OECD Better Life Index, from 0 (worse) to 1 (best), 2016
Latvia OECD
Income and wealth 1.0 Subjective well-being Jobs and earnings 0.8
0.6
Personal security 0.4 Housing
0.2
0.0 Environmental quality Work and life balance
Civic engagement and Health status governance
Social connections Education and skills
Source: OECD (2016), OECD Better Life Index- Edition 2016. 12 Credit growth is still weak
Year-on-year percentage change of credit stock % % 10 10 Households Non-financial corporations
5 5
0 0
-5 -5
-10 -10 2009M3 2009M6 2009M9 2010M3 2010M6 2010M9 2011M3 2011M6 2011M9 2012M3 2012M6 2012M9 2013M3 2013M6 2013M9 2014M3 2014M6 2014M9 2015M3 2015M6 2015M9 2016M3 2016M6 2016M9 2017M3 2009M12 2010M12 2011M12 2012M12 2013M12 2014M12 2015M12 2016M12
Source: Bank of Latvia.
13 Seize opportunities in global markets to catch up with high-income countries
14 Productivity growth has slowed
% Average annual growth of labour productivity % 10 10
8 8
6 6
4 4
2 2
0 0 1995-2005 2005-2016 1995-2005 2005-2016 1995-2005 2005-2016 Total Manufacturing Business sector services
Source: OECD (2017), OECD Productivity Statistics (database).
15 Trade could boost productivity and income
Domestic value added per worker embodied in foreign final demand, 2011
Source: OECD/WTO (2016), Statistics on Trade in Value Added (database) and OECD (2016), "Trade in Employment: Core Indicators" in OECD Structural Analysis (STAN) Databases.
16 Latvia must move up the value chain to knowledge-intensive activities
17 Source: OECD (2013), Interconnected Economies: Benefiting from Global Value Chains, OECD Publishing, Paris. Many workers feel under-skilled at the time of hiring
Share of employees reporting lower skill level than required for their jobs at the time of hiring, 2014 50 50
40 40
30 30
20 20
10 10
0 0 ITA IRL FIN LTU BEL LVA LUX EST NLD AUT FRA PRT CZE ESP SVK POL SVN DEU DNK HUN GBR GRC SWE
Source: CEDEFOP (2016), “Skills Panorama” (http://skillspanorama.cedefop.europa.eu). 18 Skill shortages are holding back participation in global value chains
Share of employees reporting lower skill level than required for their current jobs, 2014
% %
15 15
12 12
9 9
6 6
3 3
0 0 ITA IRL FIN LTU BEL LVA LUX EST PRT AUT CZE NLD FRA ESP POL SVK SVN DEU DNK HUN GBR GRC SWE
Source: CEDEFOP (2016), “Skills Panorama” (http://skillspanorama.cedefop.europa.eu). 19 Few firms cooperate with research institutions
The share of firms engaging in research cooperation % of all product and/or process-innovating firms, 2012-14 % % 25 25
20 20
15 15
10 10
5 5
0 0 ISL ITA FIN LTU LVA BEL LUX EST PRT CZE FRA NLD AUT SVK POL SVN CHE DNK HUN GRC NOR SWE DEU
Source: Eurostat (2016), Community Innovation Survey (CIS).
20 Low debt recovery hampers access to credit
Average recovery rate from insolvency , 2016 % % 100 100
80 80
60 60
40 40
20 20
0 0 ISL ITA IRL FIN ISR JPN NZL LVA BEL EST LUX CHL CZE PRT FRA AUT NLD SVK ESP POL TUR USA AUS SVN CHE DEU CAN DNK HUN MEX KOR GBR GRC NOR SWE OECD
Source: World Bank (2017), Doing Business 2016: Measuring Regulatory Quality and Efficiency (Resolving insolvency database).
21 Infrastructure lags behind peer countries
Global Competitiveness Index, scale from 1 to 7 (best) 2016-17
7 7
6 6
5 5
4 4
3 3
2 2
1 1
0 0 Latvia Estonia Lithuania Finland
Source: World Economic Forum, "The Global Competitiveness Report 2016-2017".
22 Recommendations to seize opportunities in global markets to catch up with high-income countries
Provide more generous grants for students attending vocational schools who are from low-income families. Expand grants for university students and target them to students from low-income families. Increase government funding of innovation promotion programmes with strong evaluation results. Strengthen the specialisation of judges to improve the insolvency regime. Apply the same cost-benefit tests to large national infrastructure projects as are applied to EU-funded projects.
23 Improving access to jobs, housing, and health services
24 Unemployment is high in some regions
Unemployment as % of the labour force, 2016
% %
20 20
16 16
12 12
8 8
4 4
0 0 Latvia Pierīga Riga Vidzeme Kurzeme Zemgale Latgale
Source: Central Statistical Bureau of Latvia.
25 High unemployment keeps poverty high
Share of population with disposable income below 60% of median household income % %
45 45
36 36
27 27
18 18
9 9
0 0 Latvia Riga Pierīga Kurzeme Zemgale Vidzeme Latgale
Source: Central Statistical Bureau of Latvia.
26 Access to affordable rental housing is low
% Share of rental housing, low-income households, 2014 or latest year % 80 80 Rent (private)¹ Rent (subsidized)² 70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0 ISL ITA IRL FIN LTU LVA BEL EST LUX CZE FRA AUT PRT SVK ESP POL SVN CHE DEU HUN KOR GBR GRC NOR CHL³ NLD³ AUS³ USA³ CAN³ DNK³ MEX³ SWE³
Source: OECD (2016), OECD Affordable Housing Database.
27 Spending on active labour market policies is low
Public expenditure, % of GDP, 2015 or most recent
2.4 2.4
2.0 2.0
1.6 1.6
1.2 1.2
0.8 0.8
0.4 0.4
0.0 0.0 ITA IRL FIN ISR BEL JPN LTU NZL LVA LUX EST PRT ESP AUT NLD CZE FRA CHL SVK POL USA AUS SVN CHE DEU DNK CAN HUN KOR MEX GBR NOR SWE OECD
Source: OECD (2017), OECD Employment and Labour Market Statistics (database).
28 Out-of-pocket payments in healthcare are high
Household out-of-pocket expenditure, % of total current expenditure on health care, 2015
50 50
40 40
30 30
20 20
10 10
0 0 ISL IRL ITA FIN ISR JPN BEL LVA LUX EST FRA NLD CZE AUT ESP PRT CHL SVK POL TUR USA SVN DEU DNK CAN CHE HUN GBR KOR MEX NOR GRC SWE OECD
Source: OECD (2017), OECD Health Statistics (database) 29 Workers pay high fees for private pensions
Operating costs of the private pension system % of assets under management, 2015 % % 2.0 2.0
1.6 1.6
1.2 1.2
0.8 0.8
0.4 0.4
0.0 0.0 ISL FIN ISR BEL LVA LUX EST NLD PRT AUT CZE SVK ESP POL AUS SVN DNK DEU CAN CHE HUN NOR NZL¹ CHL¹ TUR¹ GBR¹ GRC¹
Source: OECD (2017), OECD Pensions Statistics (database). 30 Recommendations to improve access to jobs, housing, and health services Expand the mobility programme , which provides temporary support for relocation and transport to unemployed moving to a job. Provide more funding for low-cost rented housing in areas of expanding employment. Improve legal certainty in rental regulation and encourage out-of-court procedures. Simplify the administrative process for obtaining a building permit. Promote the provision of adult education by vocational education schools. Lower operating costs in the compulsory private pension system, for example by introducing a low-cost fund as the default choice. Reduce health care out-of-pocket payments especially for 31 the low-income population.
Using budget and tax policy to support inclusive growth
32 Government debt is low
General government debt % of GDP, 2016
240 240
200 200
160 160
120 120
80 80
40 40
0 0 ISL ITA IRL FIN ISR JPN LTU BEL NZL LVA EST LUX ESP FRA PRT AUT CZE SVK NLD POL USA AUS SVN CHE CAN DNK DEU HUN GBR KOR GRC NOR SWE OECD
Source: OECD Economic Outlook 101 database. National Accounts definition of government debt (not Maastricht).
33 Informality remains high
Estimated size of the shadow economy and underreported corporate profits and wages, 2016
Source: Putniņš, T. and A. Sauka (2017), "Shadow Economy Index for the Baltic Countries", Stockholm School of Economics in Riga.
34 Taxes on low wages are high
Taxation of labour income, 2016 % of total labour compensation, single person at 67% of average earnings without children % % 50 50 after tax reform
40 40
30 30
20 20
10 10
0 0 ISL IRL ITA FIN ISR JPN NZL LVA BEL LUX EST CHL NLD PRT CZE AUT FRA ESP SVK POL TUR AUS USA SVN CHE CAN DNK DEU HUN MEX KOR GBR NOR GRC SWE OECD
Tax reform approved in 2017 will reduce taxes on profits and wages from 2018.
Source: OECD (2017), OECD Tax Statistics (database) and OECD estimate of tax reform effect. 35
Recommendations for budget and tax policy to support inclusive growth
Raise spending to address pressing structural and social policy priorities. Make better use of information and communication technology for tax law enforcement. Strengthen the budgetary independence of the Corruption Prevention and Combating Bureau (KNAB). Remove political influence in the appointment of judges. Reduce taxes on low wages further. Raise more revenues from the taxation of real estate and energy. Broaden the base of business income taxation by removing tax exemptions.
36 For more information
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http://www.oecd.org/eco/surveys/economic-survey-latvia.htm
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