Presentation of the 2017 OECD Economic Survey of Latvia

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

2017Q1

2016Q3

2016Q1

2015Q3

2015Q1

2014Q3

2014Q1

2013Q3

75

2013Q1

75

2012Q3

80

2012Q1

80

2011Q3

85

2011Q1

85

2010Q3

90

2010Q1

90

2009Q3

95

2009Q1

95

2008Q3

100

2008Q1

100

2007Q3

105

2007Q1

105

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 Latvia

24

Euro area

24

2017Q2

2017Q1

2016Q4

2016Q3

2016Q2

2016Q1

2015Q4

2015Q3

2015Q2

2015Q1

2014Q4

2014Q3

2014Q2

2014Q1

2013Q4

2013Q3

0

2013Q2

0

2013Q1

4

2012Q4

4

2012Q3

8

2012Q2

8

2012Q1

12

2011Q4

12

2011Q3

16

2011Q2

16

2011Q1

20

2010Q4

20

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

10

Inflation

10

2017Q2

2017Q1

2016Q4

2016Q3

2016Q2

2016Q1

2015Q4

2015Q3

2015Q2

2015Q1

2014Q4

2014Q3

2014Q2

2014Q1

-4

2013Q4

-4

2013Q3

-2

2013Q2

-2

2013Q1

0

2012Q4

0

2012Q3

2

2012Q2

2

2012Q1

4

2011Q4

4

2011Q3

6

2011Q2

6

2011Q1

8

2010Q4

8

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

LVA

FRA

BRA

BEL

AUT

CHL

ISR

CHN

MEX

GRC

ITA

IRL

EST

CZE

NLD

DNK

DEU

IND

JPN

NOR

ESP

OECD

COL

USA

SWE

HUN

SVK

GBR

FIN

KOR

ZAF

NZL

CHE

PRT

POL

LUX

ISL

TUR

CAN

AUS

IDN

0

SVN

20

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 2010

2011

2012

2013

2014

0 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-Ă -vis the upper half of OECD countries % -45 -50 -55 -60 -65 -70

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

-80

1995

-75

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 %

%

LVA

LTU

EST

ESP

GRC

0

ITA

0

PRT

3

OECD

3

GBR

6

SVN

6

IRL

9

BEL

9

AUT

12

SVK

12

LUX

15

NOR

15

FIN

18

CZE

18

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

MEX

CHL

TUR

USA

GBR

ISR

LVA

NZL

EST

ESP

GRC

PRT

AUS

JPN

ITA

OECD

CAN

NLD

POL

IRL

CHE

FRA

KOR

DEU

HUN

0.0

LUX

0.0

SWE

0.1

AUT

0.1

BEL

0.2

FIN

0.2

NOR

0.3

CZE

0.3

DNK

0.4

SVN

0.4

SVK

0.5

ISL

0.5

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

0.8

Jobs and earnings

0.6

Personal security

Housing

0.4 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

5 5

0 0

-5 -5

-10 -10

% 10

2017M3

2016M12

2016M9

2016M6

2016M3

2015M12

2015M9

2015M6

2015M3

2014M12

2014M9

2014M6

Households

2014M3

2013M12

2013M9

2013M6

2013M3

2012M12

2012M9

2012M6

2012M3

2011M12

2011M9

2011M6

2011M3

2010M12

2010M9

2010M6

2010M3

2009M12

2009M9

2009M6

2009M3

Credit growth is still weak

Year-on-year percentage change of credit stock % 10

Non-financial corporations

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

1995-2005

2005-2016 Total

1995-2005

2005-2016 Manufacturing

1995-2005 2005-2016 Business sector services

0

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

Source: OECD (2013), Interconnected Economies: Benefiting from Global Value Chains, OECD Publishing, Paris.

17

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

EST

LTU

LVA

SVK

CZE

FIN

IRL

DNK

PRT

FRA

GBR

POL

0

SWE

0

HUN

10

AUT

10

ITA

20

GRC

20

BEL

30

NLD

30

DEU

40

SVN

40

ESP

50

LUX

50

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 %

%

Source: CEDEFOP (2016), “Skills Panorama” (http://skillspanorama.cedefop.europa.eu).

EST

LTU

LVA

FIN

CZE

SVK

IRL

SWE

GRC

HUN

POL

BEL

0

DNK

0

FRA

3

NLD

3

SVN

6

GBR

6

ESP

9

ITA

9

AUT

12

DEU

12

PRT

15

LUX

15

19

Few firms cooperate with research institutions The share of firms engaging in research cooperation 25

% of all product and/or process-innovating firms, 2012-14

%

% 25

AUT

FIN

SVN

BEL

ISL

NOR

EST

DEU

SWE

NLD

DNK

FRA

POL

SVK

0

CZE

0

HUN

5

LUX

5

GRC

10

CHE

10

PRT

15

LTU

15

LVA

20

ITA

20

Source: Eurostat (2016), Community Innovation Survey (CIS).

20

Low debt recovery hampers access to credit Average recovery rate from insolvency , 2016 % 100

80

80

60

60

40

40

20

20

0

0

TUR CHL GRC EST HUN LUX CHE LVA SVK POL ISR ITA CZE MEX OECD PRT SWE ESP FRA USA AUS AUT NZL DEU KOR ISL CAN IRL DNK GBR SVN NLD BEL FIN JPN NOR

% 100

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

Latvia

Estonia

Lithuania

Finland

0

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

Latvia

PierÄŤga

Riga

Vidzeme

Kurzeme

Zemgale

Latgale

0

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

Latvia

Riga

PierÄŤga

Kurzeme

Zemgale

Vidzeme

Latgale

0

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

Rent (private)¹

70

%

Rent (subsidized)²

80 70

DEU

NLD³

DNK³

SWE³

CHE

AUT

BEL

USA³

CAN³

FRA

LUX

FIN

GBR

KOR

ISL

AUS³

IRL

NOR

ESP

0

ITA

0

CZE

10 GRC

10 PRT

20

SVN

20

LVA

30

CHL³

30

HUN

40

SVK

40

EST

50

POL

50

MEX³

60

LTU

60

Source: OECD (2016), OECD Affordable Housing Database.

27

Spending on active labour market policies is low Public expenditure, % of GDP, 2015 or most recent

DNK

SWE

FRA

FIN

HUN

NLD

AUT

BEL

LUX

DEU

ESP

CHE

IRL

PRT

NOR

OECD

ITA

POL

CZE

KOR

NZL

0.0

LTU

0.0

SVN

0.4

CAN

0.4

GBR

0.8

AUS

0.8

SVK

1.2

EST

1.2

CHL

1.6

ISR

1.6

LVA

2.0

JPN

2.0

USA

2.4

MEX

2.4

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

Source: OECD (2017), OECD Health Statistics (database)

LVA

MEX

KOR

GRC

CHL

HUN

CHE

PRT

ISR

ESP

POL

ITA

EST

OECD

FIN

SVK

AUT

BEL

ISL

TUR

SWE

IRL

GBR

0

CAN

0

NOR

10

DNK

10

CZE

20

JPN

20

DEU

30

SVN

30

NLD

40

USA

40

LUX

50

FRA

50

29

Workers pay high fees for private pensions Operating costs of the private pension system % of assets under management, 2015

% 2.0

% 2.0

LVA

EST

CZE

ESP

SVN

SVK

TURยน

GRCยน

AUS

POL

CHLยน

CHE

HUN

NZLยน

ISR

CAN

AUT

BEL

0.0

NOR

0.0

ISL

0.4

PRT

0.4

GBRยน

0.8

DEU

0.8

LUX

1.2

NLD

1.2

DNK

1.6

FIN

1.6

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 the low-income population.

31

Using budget and tax policy to support inclusive growth

32

Government debt is low General government debt % of GDP, 2016

JPN

GRC

ITA

PRT

BEL

FRA

GBR

ESP

OECD

USA

AUT

CAN

SVN

HUN

IRL

DEU

FIN

NLD

POL

ISL

ISR

0

SVK

0

LTU

40

SWE

40

DNK

80

CZE

80

AUS

120

LVA

120

KOR

160

CHE

160

NOR

200

NZL

200

LUX

240

EST

240

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: Putniņť, 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

30

30

20

20

10

10

0

0

CHL NZL ISR MEX KOR CHE IRL AUS GBR CAN USA ISL NLD JPN LUX OECD NOR DNK POL TUR ESP GRC PRT EST FIN SVN SVK CZE ITA SWE LVA AUT FRA DEU BEL HUN

40

 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 Disclaimers: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

http://www.oecd.org/eco/surveys/economic-survey-latvia.htm

OECD Economics OECD 37