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