Economic Policies
#16Key Findings
Showing strong recent gains, Latvia falls into the upper-middle ranks (rank 16) in the area of economic policy. Its score on this measure has improved by 0.5 points since 2014.
The country had experienced a period of stable growth prior to the pandemic, generally exceeding the EU average. The outbreak of COVID-19 led to a significant decline in GDP, followed by a period of oscillation. Private consumption fell by 10% in 2020.
Latvia entered the pandemic with an unemployment rate of 6.4%, which then jumped to 8.6% in mid-2020, and remained above 8% in early 2021. The monthly minimum wage was increased to €500 in early 2021. The shrinking working-age population remains a concern, with a very high share of emigrants being highly skilled.
Pandemic-era support and stimulus spending led to a government deficit of 4.5% of GDP in 2020, rising to 9.3% in 2021. Total debt remains moderate, reaching 47.3% of GDP in 2020. The country’s corporate tax system is highly competitive. The country has made significant improvements in recent years with regard to cracking down on money laundering.
The country had experienced a period of stable growth prior to the pandemic, generally exceeding the EU average. The outbreak of COVID-19 led to a significant decline in GDP, followed by a period of oscillation. Private consumption fell by 10% in 2020.
Latvia entered the pandemic with an unemployment rate of 6.4%, which then jumped to 8.6% in mid-2020, and remained above 8% in early 2021. The monthly minimum wage was increased to €500 in early 2021. The shrinking working-age population remains a concern, with a very high share of emigrants being highly skilled.
Pandemic-era support and stimulus spending led to a government deficit of 4.5% of GDP in 2020, rising to 9.3% in 2021. Total debt remains moderate, reaching 47.3% of GDP in 2020. The country’s corporate tax system is highly competitive. The country has made significant improvements in recent years with regard to cracking down on money laundering.
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How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?
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Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
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Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
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Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
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1
Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Latvia’s economic policy was initially shaped by parameters accepted as the price of financial assistance provided by the IMF and the European Union. Even though this assistance has since been repaid and the conditions withdrawn, they have provided a framework in which the economy established fiscal discipline. For example, in 2013, Latvia introduced legislation that placed a cap on the public budgetary deficit and launched a multi-year planning cycle. The Fiscal Discipline Council (FDC) plays an oversight function, consulting with the government on fiscal planning issues and monitoring compliance with the budget deficit cap.
In the last decade, there have been no significant economic imbalances. The country has seen only moderate levels of inflation, with economic growth averaging around 3.5% (2.2% in 2019). The exception to was during the economic crisis triggered by the COVID-19 pandemic, which led to the activation of the EU Stability and Growth Pact’s general exemption clause, allowing the general government deficit to increase in 2020.
Until the outbreak of the COVID-19 pandemic, Latvia’s economic growth was stable, generally exceeding the EU average. GDP increased on average by 3.3% annually from between 2011 and 2019, and moderated in 2019. The pandemic has left a significant impact on the Latvian economy, with particularly strong effect on consumption, exports of goods and services, and the labor market. For example, private consumption was 10% lower in 2020 than in 2019.
Citations:
1. Central Statistical Bureau (2019), Growth Rate Indicators, Available at: https://www.csb.gov.lv/en/statistics/statistics-by-theme/economy/gdp/search-in-theme/416-latvia-statistics-brief-2020. Last accessed: 03.01.2022.
2. Central Statistical Bureau (2021) In 2020, general government budget deficit amounted to €1.3 billion, Available at: https://stat.gov.lv/en/statistics-themes/economy/government-finance/press-releases/7019-provisional-results-general, Last accessed: 07.01.2022.
3. OECD (2019), Budgeting and Public Expenditures in OECD Countries (2019), Available at: https://www.oecd.org/gov/budgeting-and-public-expenditures-in-oecd-countries-2018-9789264307957-en.htm. Last accessed: 03.01.2022.
4. Fiscal Discipline Council (2020) Fiscal Discipline Surveillance Report, Available at: https://www.fdp.gov.lv/en/media/2601/download, Last accessed: 03.01.2022.
5. Ministry of Economics (2021) Macroeconomic Review of Latvia, Available at: https://www.em.gov.lv/en/media/8918/download, Last accessed: 07.01.2022.
6. Ministry of Finance (2021) Latvia’s Stability Programme for 2021-2024, Available at: https://ec.europa.eu/info/sites/default/files/2021-latvia-stability-programme_en.pdf, Last accessed: 07.01.2022.
In the last decade, there have been no significant economic imbalances. The country has seen only moderate levels of inflation, with economic growth averaging around 3.5% (2.2% in 2019). The exception to was during the economic crisis triggered by the COVID-19 pandemic, which led to the activation of the EU Stability and Growth Pact’s general exemption clause, allowing the general government deficit to increase in 2020.
Until the outbreak of the COVID-19 pandemic, Latvia’s economic growth was stable, generally exceeding the EU average. GDP increased on average by 3.3% annually from between 2011 and 2019, and moderated in 2019. The pandemic has left a significant impact on the Latvian economy, with particularly strong effect on consumption, exports of goods and services, and the labor market. For example, private consumption was 10% lower in 2020 than in 2019.
Citations:
1. Central Statistical Bureau (2019), Growth Rate Indicators, Available at: https://www.csb.gov.lv/en/statistics/statistics-by-theme/economy/gdp/search-in-theme/416-latvia-statistics-brief-2020. Last accessed: 03.01.2022.
2. Central Statistical Bureau (2021) In 2020, general government budget deficit amounted to €1.3 billion, Available at: https://stat.gov.lv/en/statistics-themes/economy/government-finance/press-releases/7019-provisional-results-general, Last accessed: 07.01.2022.
3. OECD (2019), Budgeting and Public Expenditures in OECD Countries (2019), Available at: https://www.oecd.org/gov/budgeting-and-public-expenditures-in-oecd-countries-2018-9789264307957-en.htm. Last accessed: 03.01.2022.
4. Fiscal Discipline Council (2020) Fiscal Discipline Surveillance Report, Available at: https://www.fdp.gov.lv/en/media/2601/download, Last accessed: 03.01.2022.
5. Ministry of Economics (2021) Macroeconomic Review of Latvia, Available at: https://www.em.gov.lv/en/media/8918/download, Last accessed: 07.01.2022.
6. Ministry of Finance (2021) Latvia’s Stability Programme for 2021-2024, Available at: https://ec.europa.eu/info/sites/default/files/2021-latvia-stability-programme_en.pdf, Last accessed: 07.01.2022.
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How effectively does labor market policy address unemployment?
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Successful strategies ensure unemployment is not a serious threat.
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Labor market policies have been more or less successful.
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Strategies against unemployment have shown little or no significant success.
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Labor market policies have been unsuccessful and rather effected a rise in unemployment.
In 2021, approximately half of the population of Latvia was economically active, with economic activity mainly concentrating in Riga and the surrounding areas, where around 53% of the country’s population resides. The unemployment rate in Latvia fell from 20% in 2010 to 6.4% in 2019. However, the COVID-19 pandemic had an impact on the labor market, with the unemployment rate climbing from 6.2% at the beginning of 2020 to 8.6% in July 2020, and then remaining at 8.2% in early 2021, the highest unemployment rate seen in recent years.
The average monthly income reached €1,143 in 2020, which amounts to a 6.2% increase from 2019. Following increases in 2016, 2017 and 2018, the minimum monthly wage was further increased in early 2021 to €500. However, rising wages with labor shortages is indicative of a tightening labor market, a condition that has also been noted by the OECD (2019). One of the main labor market challenges for Latvia remains a rapidly shrinking working-age population. The population numbers in Latvia have been decreasing for a long time, declining by 474,000 between 2000 to 2020 (decreasing on average by 0.4% to 0.5% per year). Furthermore, internal migration from rural regions to the capital city of Riga and high rates of net emigration remain challenges. In addition, more than 40% of all emigrants between 2009 and 2016 were highly skilled, which continues to contribute to rising skill shortages.
According to the 2019 and 2020 OECD recommendations, future labor policies in Latvia will have to focus on reducing long-term unemployment, supporting discouraged workers, and expanding the menu of active labor market policies targeting disadvantaged groups. Key active labor market policies will focus on enhancing job-seeker mobility between regions, raising older workers’ skill levels, and supporting unemployed young people. Furthermore, it was recommended that the general operation of the State Employment Agency be improved through the establishment of new training programs, the promotion of regional mobility and efforts to make more effective use of existing employment data.
Citations:
1. European Commission (2021) Labour market information: Latvia, Available at: https://ec.europa.eu/eures/public/living-and-working/labour-market-information/labour-market-information-latvia_en, Last accessed: 03.01.2022.
2. Central Statistical Bureau (2021) In 2020, the average salary before taxes was € 1 143 per month, Available at: https://www.csb.gov.lv/en/statistics/statistics-by-theme/social-conditions/wages/search-in-theme/2944-changes-wages-and-salaries-2020, Last accessed: 03.01.2022.
3. Central Statistical Bureau (2019) Increase in Earnings, Available at: https://www.csb.gov.lv/en/statistics/statistics-by-theme/social-conditions/wages/key-indicator/increase-earnings-still-observed, Last accessed: 03.01.2022.
4. Ministry of Welfare (2021) Minimum Monthly Wage, Available at: https://www.lm.gov.lv/en/minimum-monthly-wage, Last accessed: 03.01.2022.
5. OECD (2019), Connecting People with Jobs, Evaluating Latvia’s Active Labour Market Policies, Available at: https://www.oecd.org/publications/evaluating-latvia-s-active-labour-market-policies-6037200a-en.htm, Last accessed: 03.01.2022.
6. OECD (2019), Economic Survey: Latvia, Available at: https://www.oecd.org/latvia/oecd-economic-surveys-latvia-25222988.htmf, Last accessed: 05.01.2022.
7. OECD (2021) Economic Policy Reforms 2021: Going for Growth: Shaping a Vibrant Recovery: Latvia, Available at: https://www.oecd-ilibrary.org/sites/3abc28fe-en/index.html?itemId=/content/component/3abc28fe-en, Last accessed: 03.01.2022.
8. Ministry of Welfare (2021) Labour Market Report 2021, Available at: https://www.lm.gov.lv/en/labour-market-reports-and-statistics, Last accessed: 03.01.2022.
9. Swedbank (2021) Macro Research Analysis: Latvia, Available at: https://www.swedbank-research.com/english/flash_latvia/2021/21-08-30/lv_labour_market_and_wages_q2_2021.pdf, Last accessed: 03.01.2022.
The average monthly income reached €1,143 in 2020, which amounts to a 6.2% increase from 2019. Following increases in 2016, 2017 and 2018, the minimum monthly wage was further increased in early 2021 to €500. However, rising wages with labor shortages is indicative of a tightening labor market, a condition that has also been noted by the OECD (2019). One of the main labor market challenges for Latvia remains a rapidly shrinking working-age population. The population numbers in Latvia have been decreasing for a long time, declining by 474,000 between 2000 to 2020 (decreasing on average by 0.4% to 0.5% per year). Furthermore, internal migration from rural regions to the capital city of Riga and high rates of net emigration remain challenges. In addition, more than 40% of all emigrants between 2009 and 2016 were highly skilled, which continues to contribute to rising skill shortages.
According to the 2019 and 2020 OECD recommendations, future labor policies in Latvia will have to focus on reducing long-term unemployment, supporting discouraged workers, and expanding the menu of active labor market policies targeting disadvantaged groups. Key active labor market policies will focus on enhancing job-seeker mobility between regions, raising older workers’ skill levels, and supporting unemployed young people. Furthermore, it was recommended that the general operation of the State Employment Agency be improved through the establishment of new training programs, the promotion of regional mobility and efforts to make more effective use of existing employment data.
Citations:
1. European Commission (2021) Labour market information: Latvia, Available at: https://ec.europa.eu/eures/public/living-and-working/labour-market-information/labour-market-information-latvia_en, Last accessed: 03.01.2022.
2. Central Statistical Bureau (2021) In 2020, the average salary before taxes was € 1 143 per month, Available at: https://www.csb.gov.lv/en/statistics/statistics-by-theme/social-conditions/wages/search-in-theme/2944-changes-wages-and-salaries-2020, Last accessed: 03.01.2022.
3. Central Statistical Bureau (2019) Increase in Earnings, Available at: https://www.csb.gov.lv/en/statistics/statistics-by-theme/social-conditions/wages/key-indicator/increase-earnings-still-observed, Last accessed: 03.01.2022.
4. Ministry of Welfare (2021) Minimum Monthly Wage, Available at: https://www.lm.gov.lv/en/minimum-monthly-wage, Last accessed: 03.01.2022.
5. OECD (2019), Connecting People with Jobs, Evaluating Latvia’s Active Labour Market Policies, Available at: https://www.oecd.org/publications/evaluating-latvia-s-active-labour-market-policies-6037200a-en.htm, Last accessed: 03.01.2022.
6. OECD (2019), Economic Survey: Latvia, Available at: https://www.oecd.org/latvia/oecd-economic-surveys-latvia-25222988.htmf, Last accessed: 05.01.2022.
7. OECD (2021) Economic Policy Reforms 2021: Going for Growth: Shaping a Vibrant Recovery: Latvia, Available at: https://www.oecd-ilibrary.org/sites/3abc28fe-en/index.html?itemId=/content/component/3abc28fe-en, Last accessed: 03.01.2022.
8. Ministry of Welfare (2021) Labour Market Report 2021, Available at: https://www.lm.gov.lv/en/labour-market-reports-and-statistics, Last accessed: 03.01.2022.
9. Swedbank (2021) Macro Research Analysis: Latvia, Available at: https://www.swedbank-research.com/english/flash_latvia/2021/21-08-30/lv_labour_market_and_wages_q2_2021.pdf, Last accessed: 03.01.2022.
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How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?
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Taxation policy fully achieves the objectives.
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Taxation policy largely achieves the objectives.
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Taxation policy partially achieves the objectives.
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Taxation policy does not achieve the objectives at all.
Overall, Latvia has one of the lowest rates of tax in the European Union. However, more than in many other EU member states, the tax burden has historically fallen disproportionately on wage earners, particularly low-income earners.
To address this issue, tax reforms were first undertaken in 2016 – 2018 to shift the tax burden away from low-income wage earners and increase the tax burden on the wealthy. The work on this has continued since. For example, the 2018 National Tax Policy Guidelines introduced progressive personal income tax rates and an increase of the differentiated nontaxable minimum as well as an increase of the allowance for dependents. An ex post evaluation of these measures indicates mostly positive outcomes. In addition, minimum social contributions were introduced to foster social equality.
However, the reforms have since been evaluated as insufficient by the European Commission and the OECD. Even though personal income tax has become more progressive overall, it has been lowered on average without labor tax measures significantly reducing income inequality or poverty.
Meanwhile, Latvia was ranked 2nd overall in the 2020 and 2021 International Competitiveness Index due to its competitive and neutral corporate tax system, which implicitly allows for unlimited loss carryforwards and carrybacks.
When it comes to ecological sustainability, effective tax rates on CO2 emissions from energy use in transport are low and fully exempt in other sectors, where emissions from fuel use are not taxed at all. An exception to this was introduced in 2021 for the use of peat in stationary technological equipment, as peat is not a renewable energy resource. A 2019 OECD report has recommended that Latvia increase energy taxation by eliminating all exemptions and taxing pollutants at the same rate across different fuels and sectors.
The natural resources tax was increased at several points in 2021, and a statutory rate increase is scheduled for 2023.
Citations:
1. Ministry of Finance of the Republic of Latvia (2019), Amendments to the Latvia’s Stability Programme for 2019 –2022, Available at: https://ec.europa.eu/info/sites/info/files/2019-european-semester-stability-programme-latvia-annex_en.pdf, Last accessed: 03.01.2022.
2. OECD (2019), Economic Survey: Latvia, Available at: https://www.oecd.org/economy/surveys/Latvia-2019-OECD-economic-survey-overview.pdf, Last accessed: 03.01.2022.
3. European Comission (2019) Country Report: Latvia, https://ec.europa.eu/info/sites/info/files/file_import/2019-european-semester-country-report-latvia_en.pdf, Last accessed: 03.01.2022.
4. European Comission (2018), The Effect of Taxes & Benefits Reforms on Poverty and Inequality in Latvia, Available at: https://ec.europa.eu/info/sites/info/files/economy-finance/eb039_en_0.pdf, Last accessed: 03.01.2022.
5. Tax Foundation (2021) International Tax Competitiveness Index 2021, Available at: https://files.taxfoundation.org/20211014170634/International-Tax-Competitiveness-Index-2021.pdf, Last accessed: 06.01.2022.
To address this issue, tax reforms were first undertaken in 2016 – 2018 to shift the tax burden away from low-income wage earners and increase the tax burden on the wealthy. The work on this has continued since. For example, the 2018 National Tax Policy Guidelines introduced progressive personal income tax rates and an increase of the differentiated nontaxable minimum as well as an increase of the allowance for dependents. An ex post evaluation of these measures indicates mostly positive outcomes. In addition, minimum social contributions were introduced to foster social equality.
However, the reforms have since been evaluated as insufficient by the European Commission and the OECD. Even though personal income tax has become more progressive overall, it has been lowered on average without labor tax measures significantly reducing income inequality or poverty.
Meanwhile, Latvia was ranked 2nd overall in the 2020 and 2021 International Competitiveness Index due to its competitive and neutral corporate tax system, which implicitly allows for unlimited loss carryforwards and carrybacks.
When it comes to ecological sustainability, effective tax rates on CO2 emissions from energy use in transport are low and fully exempt in other sectors, where emissions from fuel use are not taxed at all. An exception to this was introduced in 2021 for the use of peat in stationary technological equipment, as peat is not a renewable energy resource. A 2019 OECD report has recommended that Latvia increase energy taxation by eliminating all exemptions and taxing pollutants at the same rate across different fuels and sectors.
The natural resources tax was increased at several points in 2021, and a statutory rate increase is scheduled for 2023.
Citations:
1. Ministry of Finance of the Republic of Latvia (2019), Amendments to the Latvia’s Stability Programme for 2019 –2022, Available at: https://ec.europa.eu/info/sites/info/files/2019-european-semester-stability-programme-latvia-annex_en.pdf, Last accessed: 03.01.2022.
2. OECD (2019), Economic Survey: Latvia, Available at: https://www.oecd.org/economy/surveys/Latvia-2019-OECD-economic-survey-overview.pdf, Last accessed: 03.01.2022.
3. European Comission (2019) Country Report: Latvia, https://ec.europa.eu/info/sites/info/files/file_import/2019-european-semester-country-report-latvia_en.pdf, Last accessed: 03.01.2022.
4. European Comission (2018), The Effect of Taxes & Benefits Reforms on Poverty and Inequality in Latvia, Available at: https://ec.europa.eu/info/sites/info/files/economy-finance/eb039_en_0.pdf, Last accessed: 03.01.2022.
5. Tax Foundation (2021) International Tax Competitiveness Index 2021, Available at: https://files.taxfoundation.org/20211014170634/International-Tax-Competitiveness-Index-2021.pdf, Last accessed: 06.01.2022.
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To what extent does budgetary policy realize the goal of fiscal sustainability?
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Budgetary policy is fiscally sustainable.
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Budgetary policy achieves most standards of fiscal sustainability.
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Budgetary policy achieves some standards of fiscal sustainability.
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Budgetary policy is fiscally unsustainable.
Latvia’s budgetary policy has been recognized as prudent and fiscally sustainable by the European Commission, the IMF, and the OECD. Overall, the budgetary situation can be described as strong, with low public debt. The budgetary framework is based on transparent national fiscal legislation (Fiscal Discipline Law) and overseen by an independent fiscal council. The framework has previously been described as rigorous by the OECD (2017).
The current coalition has emphasized a commitment to addressing the country’s economic challenges, and its fiscal stance has been recognized by the IMF (2019) as reversing the past pro-cyclicality and ensuring continued fiscal prudence.
The budget framework and government-debt cap of 60% of GDP, prescribed by the Law on Fiscal Discipline, has been maintained, with overall debt reaching 47.3% of GDP in 2020. Latvia remains broadly compliant with the principles of fiscal discipline.
In 2020, the general government budget deficit was equivalent to 4.5% of GDP, rising to an estimated 9.3% of GDP in 2021. This was twice as high as had been planned in the budget law. The government has provided strong public support and stimulus packages during the COVID-19 crisis. In 2020, the support approved by the government for mitigating COVID-19 consequences had a price tag of €1.3 billion (4.5% of GDP).
Citations:
1. IMF (2018), Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Latvia, Available at: https://www.imf.org/en/Publications/CR/Issues/2018/09/05/Republic-of-Latvia-2018-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-46206, Last accessed: 05.01.2022.
2. European Commission (2021), Semester Stability Programme, Available at: https://ec.europa.eu/info/sites/default/files/2021-latvia-stability-programme_en.pdf, Last assessed: 05.01.2022.
3. European Commission (2020), Country-Specific Recommendations: Latvia, Available at:
https://eur-lex.europa.eu/legal-content/LV/TXT/PDF/?uri=CELEX:52020DC0514&from=EN, Last accessed: 05.01.2022.
4. IMF (2019) IMF Executive Board Concludes 2019 Article IV Consultation with the Republic of Latvia, Available at: https://www.imf.org/en/News/Articles/2019/08/06/pr19312-latvia-imf-executive-board-concludes-2019-article-iv-consultation-with-latvia, Last assessed: 05.01.2022.
5. OECD (2017), Economic Survey: Latvia, Available at: http://www.oecd.org/economy/surveys/Latvia-2017-OECD-economic-survey-overview.pdf, Last assessed: 05.01.2022.
6. OECD (2019), Economic Survey: Latvia, Available at: https://www.oecd.org/latvia/oecd-economic-surveys-latvia-25222988.htmf, Last accessed: 05.01.2022
7. Treasury of Latvia (2020) Government Debt Management: An overview, Available at: https://www.kase.gov.lv/sites/default/files/public/SSD/P%C4%81rskati/Gada%20p%C4%81rskats/VK_Parada_parskats_2020_LV_FINAL.pdf, Last accessed: 05.01.2022.
The current coalition has emphasized a commitment to addressing the country’s economic challenges, and its fiscal stance has been recognized by the IMF (2019) as reversing the past pro-cyclicality and ensuring continued fiscal prudence.
The budget framework and government-debt cap of 60% of GDP, prescribed by the Law on Fiscal Discipline, has been maintained, with overall debt reaching 47.3% of GDP in 2020. Latvia remains broadly compliant with the principles of fiscal discipline.
In 2020, the general government budget deficit was equivalent to 4.5% of GDP, rising to an estimated 9.3% of GDP in 2021. This was twice as high as had been planned in the budget law. The government has provided strong public support and stimulus packages during the COVID-19 crisis. In 2020, the support approved by the government for mitigating COVID-19 consequences had a price tag of €1.3 billion (4.5% of GDP).
Citations:
1. IMF (2018), Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Latvia, Available at: https://www.imf.org/en/Publications/CR/Issues/2018/09/05/Republic-of-Latvia-2018-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-46206, Last accessed: 05.01.2022.
2. European Commission (2021), Semester Stability Programme, Available at: https://ec.europa.eu/info/sites/default/files/2021-latvia-stability-programme_en.pdf, Last assessed: 05.01.2022.
3. European Commission (2020), Country-Specific Recommendations: Latvia, Available at:
https://eur-lex.europa.eu/legal-content/LV/TXT/PDF/?uri=CELEX:52020DC0514&from=EN, Last accessed: 05.01.2022.
4. IMF (2019) IMF Executive Board Concludes 2019 Article IV Consultation with the Republic of Latvia, Available at: https://www.imf.org/en/News/Articles/2019/08/06/pr19312-latvia-imf-executive-board-concludes-2019-article-iv-consultation-with-latvia, Last assessed: 05.01.2022.
5. OECD (2017), Economic Survey: Latvia, Available at: http://www.oecd.org/economy/surveys/Latvia-2017-OECD-economic-survey-overview.pdf, Last assessed: 05.01.2022.
6. OECD (2019), Economic Survey: Latvia, Available at: https://www.oecd.org/latvia/oecd-economic-surveys-latvia-25222988.htmf, Last accessed: 05.01.2022
7. Treasury of Latvia (2020) Government Debt Management: An overview, Available at: https://www.kase.gov.lv/sites/default/files/public/SSD/P%C4%81rskati/Gada%20p%C4%81rskats/VK_Parada_parskats_2020_LV_FINAL.pdf, Last accessed: 05.01.2022.
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To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?
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Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
Even though Latvia’s productivity growth has been solid, innovation performance remains average, with the total government budget allocation for R&D amounting to 0.7% of the GDP in 2020. The 2021 European Innovation Scoreboard noted that Latvia’s performance had increased strongly relative to the overall EU trend up until 2020, but then decreased in 2021, reaching a performance level 70% below the EU average. Latvia was thus ranked 25th out of 27 EU members in the 2021 scoreboard. The share of high-tech companies in the Latvian economy remains small, as is the private sector’s demand for R&D activities. In budgetary debates, innovation remains a low priority.
The OECD recognized Latvia for improving its research and development in 2017 and commended its innovation framework, the consolidation of research institutions, the introduction of quality-based financing models and the provision of incentives to boost research. However, in 2019 the OECD described innovation performance in Latvia as weak, especially in the business sector. At 0.14% of GDP, the rate of business-based research and development (R&D) expenditure is among the lowest in the OECD.
In Latvia, a high proportion of the population has completed tertiary education, which – paired with favorable business conditions – creates an advantageous climate for innovation-driven growth. As noted by the European Commission and the OECD, these conditions have not been sufficiently utilized, and business-sector collaboration with science remains insufficient despite the fact that so-called competence centers and clusters have successfully strengthened collaborations between research institutions and companies in some sectors.
In the coming years, the quality of public R&D has to increase. Links between academia and business need to be strengthened, more Ph.D. students should be attracted, and innovation capacity in the private sector should be further increased. Policies currently in place address some of these challenges, but most of the interventions rely on European Structural and Investment Funds (ESIF) that provide no more than short-term financial support.
Citations:
1. Eurostat (2021) Government Budget Allocations for R&D, Available at:https://ec.europa.eu/eurostat/web/products-eurostat-news/-/ddn-20211129-2, Last accessed: 10.01.2022.
2. European Comission (2021), European innovation scoreboard, Available at: https://ec.europa.eu/commission/presscorner/detail/en/QANDA_21_3050, Last accessed: 07.01.2022.
3. Ministry of Economics (2018) Competency Centers Continue to Develop New Products and Technologies, (In Latvian) AvaibleAvailable at: https://mk.gov.lv/lv/aktualitates/kompetences-centri-turpina-attistit-jaunus-produktus-un-tehnologijas, Last accessed: 05.01.2022.
4. OECD (2017) Going for Growth-Latvia 2017. http://www.oecd.org/eco/growth/Going-for-Growth-Latvia-2017.pdf. Last accessed 05.01.2022.
5. European Commission (2019) Specific Support on the Development of the Human Capital for Research and Innovation in Latvia: Background report, Available at: https://ec.europa.eu/research-and-innovation/sites/default/files/rio/report/SS%2520Latvia_Background%2520report.pdf, Last accessed: 05.01.2022.
6. European Commission (2020) Development of the Human Capital for Research and Innovation in Latvia (Specific Support), Available at:https://ec.europa.eu/research-and-innovation/sites/default/files/rio/report/SS%2520Latvia_Final%2520Report.pdf, Last accessed: 10.01.2022.
The OECD recognized Latvia for improving its research and development in 2017 and commended its innovation framework, the consolidation of research institutions, the introduction of quality-based financing models and the provision of incentives to boost research. However, in 2019 the OECD described innovation performance in Latvia as weak, especially in the business sector. At 0.14% of GDP, the rate of business-based research and development (R&D) expenditure is among the lowest in the OECD.
In Latvia, a high proportion of the population has completed tertiary education, which – paired with favorable business conditions – creates an advantageous climate for innovation-driven growth. As noted by the European Commission and the OECD, these conditions have not been sufficiently utilized, and business-sector collaboration with science remains insufficient despite the fact that so-called competence centers and clusters have successfully strengthened collaborations between research institutions and companies in some sectors.
In the coming years, the quality of public R&D has to increase. Links between academia and business need to be strengthened, more Ph.D. students should be attracted, and innovation capacity in the private sector should be further increased. Policies currently in place address some of these challenges, but most of the interventions rely on European Structural and Investment Funds (ESIF) that provide no more than short-term financial support.
Citations:
1. Eurostat (2021) Government Budget Allocations for R&D, Available at:https://ec.europa.eu/eurostat/web/products-eurostat-news/-/ddn-20211129-2, Last accessed: 10.01.2022.
2. European Comission (2021), European innovation scoreboard, Available at: https://ec.europa.eu/commission/presscorner/detail/en/QANDA_21_3050, Last accessed: 07.01.2022.
3. Ministry of Economics (2018) Competency Centers Continue to Develop New Products and Technologies, (In Latvian) AvaibleAvailable at: https://mk.gov.lv/lv/aktualitates/kompetences-centri-turpina-attistit-jaunus-produktus-un-tehnologijas, Last accessed: 05.01.2022.
4. OECD (2017) Going for Growth-Latvia 2017. http://www.oecd.org/eco/growth/Going-for-Growth-Latvia-2017.pdf. Last accessed 05.01.2022.
5. European Commission (2019) Specific Support on the Development of the Human Capital for Research and Innovation in Latvia: Background report, Available at: https://ec.europa.eu/research-and-innovation/sites/default/files/rio/report/SS%2520Latvia_Background%2520report.pdf, Last accessed: 05.01.2022.
6. European Commission (2020) Development of the Human Capital for Research and Innovation in Latvia (Specific Support), Available at:https://ec.europa.eu/research-and-innovation/sites/default/files/rio/report/SS%2520Latvia_Final%2520Report.pdf, Last accessed: 10.01.2022.
Graph View
To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?
10
9
9
The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
8
7
6
7
6
The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
5
4
3
4
3
The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
2
1
1
The government does not contribute to improving the regulation and supervision of financial markets.
In 2018, MONEYVAL published a report identifying shortcomings in Latvia’s anti-money laundering (AML) system and calling for actions to combat money laundering and terrorist financing. The report noted that the large financial flows passing through the country posed a significant money laundering threat.
Since then, Latvia’s AML/CFT framework has been strengthened significantly. In 2019, amendments to the anti-money laundering law were introduced, requiring foreign entities with branches or representative offices in Latvia to disclose information on their owners to the Enterprise Register. In addition, capacity and coordination mechanisms among AML institutions were enhanced; for example, the legal status of the Financial Intelligence Unit was modified, granting it more independence and powers, which resulted in thousands of Latvian companies with no declared beneficial owners. In addition, the Financial and Capital Market Commission supervised the termination of bank ties with 27,000 shell companies following the ban.
As a consequence of these efforts, the volume of foreign deposits in Latvia’s bank system has continued to decline, dropping by a total of 74% between 2015 and 2019, and accounting for 18.8% of all deposits at the end of 2020. The value of cross-border transactions has similarly declined – from €60.2 billion in incoming transactions and €50.1 billion in outgoing transactions in 2017 to €16.3 billion in incoming transactions and €11.2 billion in outgoing transactions in 2019.
In the light of these improvements, MONEYVAL has rerated Latvia as largely compliant with regard to its AML and financing of terrorism (FT) measures.
Overall, Latvia’s banking system is increasingly interconnected with the Nordic and Baltic regional system, requiring increased collaboration to address Nordic parent bank vulnerabilities and their spillover effects.
Citations:
1. Transparency International Latvia ‘Delna’ (2021) Money Laundering in Latvia and the Baltics, Available at: https://delna.lv/wp-content/uploads/2021/08/ML_LV-Bs_082021_FINAL_research.pdf, Last accessed: 10.01.2022.
2. Financial Intelligence Unit of Latvia (2020) National ML/TF/PF Risk Assessment 2017-2019 (Executive Summary), Available at: https://fid.gov.lv/uploads/files/2021/NRA_2017_2019_Executive_Summary%20%28002%29.pdf, Last accessed: 10.01.2022.
3. The Financial and Capital Market Commission (2020) Quarterly Reports, Available at: https://www.fktk.lv/en/statistics/credit-institutions/quarterly-reports/, Last accessed: 02.01.2022.
4. MONEYVAL (2019) Anti-money laundering and counter-terrorist financing measures: Latvia, 1st Enhanced Follow-up Report, Available at: http://www.fatf-gafi.org/media/fatf/documents/reports/fur/MONEYVAL%20Follow-Up%20Report%20Latvia.pdf, Last accessed: 05.01.2022.
5. The Financial and Capital Market Commission (2019), Transformation of Latvian banking sector, Q3, Available at: https://www.fktk.lv/en/news/infographics/infographics-transformation-of-latvian-banking-sector-q3-2019/, Last assessed: 05.01.2022.
6. IMF (2018), Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Latvia, Available at: https://www.imf.org/en/Publications/CR/Issues/2018/09/05/Republic-of-Latvia-2018-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-46206, Last accessed: 05.01.2022.
7. IMF (2021) Article IV Consultation – Press Release; Staff Report; and Statement by the Executive Director for the Republic of Latvia, Available at: https://www.imf.org/en/Publications/CR/Issues/2021/08/31/Republic-of-Latvia-2021-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-465002, Last accessed: 05.01.2022.
8. Council of Europe (2018), Anti-money laundering and counter-terrorist financing measures: Latvia, Fifth Round Mutual Evaluation Report. Available at: https://rm.coe.int/moneyval-2018-8-5th-round-mer-latvia/16808ce61b, Last accessed: 05.01.2022.
Since then, Latvia’s AML/CFT framework has been strengthened significantly. In 2019, amendments to the anti-money laundering law were introduced, requiring foreign entities with branches or representative offices in Latvia to disclose information on their owners to the Enterprise Register. In addition, capacity and coordination mechanisms among AML institutions were enhanced; for example, the legal status of the Financial Intelligence Unit was modified, granting it more independence and powers, which resulted in thousands of Latvian companies with no declared beneficial owners. In addition, the Financial and Capital Market Commission supervised the termination of bank ties with 27,000 shell companies following the ban.
As a consequence of these efforts, the volume of foreign deposits in Latvia’s bank system has continued to decline, dropping by a total of 74% between 2015 and 2019, and accounting for 18.8% of all deposits at the end of 2020. The value of cross-border transactions has similarly declined – from €60.2 billion in incoming transactions and €50.1 billion in outgoing transactions in 2017 to €16.3 billion in incoming transactions and €11.2 billion in outgoing transactions in 2019.
In the light of these improvements, MONEYVAL has rerated Latvia as largely compliant with regard to its AML and financing of terrorism (FT) measures.
Overall, Latvia’s banking system is increasingly interconnected with the Nordic and Baltic regional system, requiring increased collaboration to address Nordic parent bank vulnerabilities and their spillover effects.
Citations:
1. Transparency International Latvia ‘Delna’ (2021) Money Laundering in Latvia and the Baltics, Available at: https://delna.lv/wp-content/uploads/2021/08/ML_LV-Bs_082021_FINAL_research.pdf, Last accessed: 10.01.2022.
2. Financial Intelligence Unit of Latvia (2020) National ML/TF/PF Risk Assessment 2017-2019 (Executive Summary), Available at: https://fid.gov.lv/uploads/files/2021/NRA_2017_2019_Executive_Summary%20%28002%29.pdf, Last accessed: 10.01.2022.
3. The Financial and Capital Market Commission (2020) Quarterly Reports, Available at: https://www.fktk.lv/en/statistics/credit-institutions/quarterly-reports/, Last accessed: 02.01.2022.
4. MONEYVAL (2019) Anti-money laundering and counter-terrorist financing measures: Latvia, 1st Enhanced Follow-up Report, Available at: http://www.fatf-gafi.org/media/fatf/documents/reports/fur/MONEYVAL%20Follow-Up%20Report%20Latvia.pdf, Last accessed: 05.01.2022.
5. The Financial and Capital Market Commission (2019), Transformation of Latvian banking sector, Q3, Available at: https://www.fktk.lv/en/news/infographics/infographics-transformation-of-latvian-banking-sector-q3-2019/, Last assessed: 05.01.2022.
6. IMF (2018), Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Latvia, Available at: https://www.imf.org/en/Publications/CR/Issues/2018/09/05/Republic-of-Latvia-2018-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-46206, Last accessed: 05.01.2022.
7. IMF (2021) Article IV Consultation – Press Release; Staff Report; and Statement by the Executive Director for the Republic of Latvia, Available at: https://www.imf.org/en/Publications/CR/Issues/2021/08/31/Republic-of-Latvia-2021-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-465002, Last accessed: 05.01.2022.
8. Council of Europe (2018), Anti-money laundering and counter-terrorist financing measures: Latvia, Fifth Round Mutual Evaluation Report. Available at: https://rm.coe.int/moneyval-2018-8-5th-round-mer-latvia/16808ce61b, Last accessed: 05.01.2022.