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Printed: 21.07.2019.


PrintTackling Latvian economy and sustainability: OECD’s assessment

Eugene Eteris, European Studies Faculty, RSU, BC International Editor, Copenhagen, 03.06.2019.
Recent OECD assessments for Latvia (presented at the end of May in Riga) have been quite unique: the “pack” was instigated by the modern global double-trends concerning growth and climate change. Hence the OECD’s survey for 2019 consists of two reviews: on economic development and on the country’s sustainability issues; both represent some matters of concern for the Latvian governing establishment…

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It is well-known that economic growth in modern economies is based on new strategic components, including –among others- circular and bio-economy, as well as sustainability policy. Numerous international organisations and the EU institutions have recommended Latvian authorities most optimal ways to accommodate required changes.


For example, “Global Sustainable Development Report-2019” underlined high-level political, economic and science-policy interfaces in promoting sustainable development. See more in:

https://sustainabledevelopment.un.org/globalsdreport/2019

 

In this regard, the latest OECD Economic Survey of Latvia approaches both factors which underpin country’s ongoing economic growth and the sustainability challenges to maintain prospective development. Spec attention is devoted to optimal policies for boosting productivity, which is critical for improving peoples’ well-being and further country’s growth potentials.


Therefore, the OECD recommendations are not restricted to only economic issues; the second part of the survey is devoted to environmental, circular and sustainability issues.


OECD’s web-link at: http://www.oecd.org/economy/latvia-economic-snapshot/


Growth issues

OECD Secretary-General Angel Gurría presented first “economic report” together with Latvian Minister of Economics Ralfs Nemiro. The economic survey shows Latvia’s dynamic economy since it joined the OECD in 2016. The country’s leaders managed to sustain strong economic performance during last three years: with a sound macroeconomic policy resulted in 4-6 % GDP growth during 2017-19; consumption growth within 2-4 % and investments’ growth with 3-4%.


Nevertheless, Latvia’s per capita GDP is still only about a half of the average level of high income OECD countries; Latvia also faces one of the fastest declines in the working-age population in the OECD due to ageing and out-migration. Hence, “strong productivity growth is crucial for Latvia to ensure continued catch up of living standards with higher income OECD countries”, acknowledged the report’s authors.

 

Reference to: Naomitsu Yashiro, Latvian Desk, OECD Economics Department, in:

https://oecdecoscope.blog/2019/05/29/latvia-working-towards-stronger-and-more-inclusive-growth/

 

With Latvian growing labour productivity being among the highest in the OECD, it decelerated considerably after the crisis mostly due to a smaller contribution of investment. The Report underlines that the business-based innovations are quite weak and the use of digital technologies lags considerably behind other OECD countries despite existing Latvian high internet connection’s speed. Unemployment gradually reduced from over 10% in 2014 to about 6% presently.

 

However, according to OECD, a slow take-up of new technologies is due to shortages of qualified workers and a weak knowledge transfer from research institutions to firms.

 

Furthermore, the Report adds, “subdued bank lending, owing partly to low debt recovery in insolvency procedures and widespread informality, prevents productive firms from investing and growing larger”. Share of foreign deposits in the country’s banking sector (as % of the total) reduced since 2015 from 55% to about 30%.

 

Latvian governments implemented reforms to align education and training with labour market needs and promote science-industry linkages with support from EU funds. The country’s governing elites have been also working hard to strengthen the capacity of the judiciary and law enforcement agencies to combat economic crimes like tax evasion and money laundering.  This should help strengthen investor confidence and the ability of firms to better document their income to obtain credit.


The Report urges Latvian establishment to strengthen wellbeing and social inclusion. Building on a recent reform that lowers taxes on lower-income workers the “tax-and-benefit” system can be used more to reduce high income inequality.

Access to healthcare is highly unequal owing partly to exceptionally high out-of-pocket expenditure; thus the government’s efforts to boost healthcare spending need to continue. Its recent decision to suspend a reform that would have threatened universal healthcare is also welcome, adds the Report.


The regional gap in public service quality and economic opportunities is also large; Latvia is planning a territorial reform which is going to be -according to OECD - an excellent opportunity to merge municipalities, and improve the efficiency of municipal service provision.  


A shortage of affordable housing hinders labour mobility and better job matches; therefore, more public funding for affordable rental and social housing would help tackle the problem.


The 2019 Economic Survey of Latvia*) calls for more investment in skills, innovation and continued efforts to strengthen competition, in particular in sectors with a strong presence of municipal or state-owned enterprises.


*) More in the OECD “Latvia Economic Snapshots” in: http://www.oecd.org/economy/latvia-economic-snapshot/ assessed 31.05.2019.


Attention to productivity

The OECD economic survey acknowledges that productivity has been reduced in all three Baltic States, with average annual growth of meager 1-1,5% due to weak innovation and a lack of resources. The survey “hints” at the negative effect of the high level of public enterprises and state monopolies.  


Although the internet’s speed is high, the whole “digital economy” concept is lagging behind: e.g. modern management methods and e-sales are used by only 10-18% of enterprises in the Baltic States; almost half of Latvian working population lack basic digital skills.   


Weak debt recovery reduces corporate efficiency: about 40% recovery’s rate is noticed in the Baltic States, compared to about 80% in the Nordic states.  


Low adult learning reduces productivity as well: only 4 persons (per a thousand) goes through additional training (so-called vocational) courses compared to 8 in OECD and 15-16 in the Nordic states.


Hence, technology transfer is limited to 3% of innovative SMEs compared to about 25% in the Nordic states.


Green growth issues

The OECD Environmental Performance Review for Latvia (with 48 pages) was presented with the Minister for Environmental Protection and Regional Development Juris Pūce; it is the first of that type since Latvia joined OECD. The review assessed the country’s environmental progress since the mid-2000s and highlighted significant advancing opportunities towards a greener and low-carbon economy with special features on waste, circular economy, bio-diversity and renewables.


The review acknowledges Latvian improvements in environmental and nature protection: large investments (mostly from the EU funds) helped to increase energy efficiency, the use of renewables while reducing greenhouse gas emissions (GHG) with extended population’s access to clean water and waste management.


The review acknowledges that forestry and agro-sector are still the dominant “players” in the national economy, the factors that “exert increasing pressures on biodiversity”; however, the mainstreaming biodiversity’s considerations are not yet within major economic development planning guidelines.


It’s obvious that an accelerated transition towards low-carbon and circular economy’s directions, as well as waste prevention/management and recycling would require solid investment in sustainable strategies but all that shall be among the national main growth priorities according to the EU and global recommendations.   

For example, the use of fertilizers increased in Latvia by 20% since 2010; GHG emissions are growing in energy use and production, as well as in agro- and land-use. Bur renewables are on the rise in Latvia, particularly in hydro- and bio-fuels as well as in waste processing.


Heat consumption in Latvia and Estonia is still high: 14-15 kg of oil equivalent/sq.m, compared to 11 in Lithuania and in other Nordic states.  


Most vehicles in Latvia are 10-20 year old with CO2 emissions at 130 gr. CO2/km; the figures so much above a required level. Besides, the quality of roads shall be increased and transport infrastructure shall be modernized; all that has lead about 90% of Latvian population to excessive exposure to dangerous PM2.5 particles.

Public transport reduced in Latvia by 20% since 2008, while cars’ increased from 25% of the whole transportation “mix” to 70% during 2009-2015. 

 

The government has increase the share of “green taxes” in GDP from 2,5% in 2005 to about 4% presently. And the share of protected areas shall be increased: presently these areas and territories occupy only 18% of the total territory. 

 

Note: European Commission’s report on the implementation of the EU’s circular economy action plan presents the main results of the 3 years’ extensive efforts towards a climate-neutral, competitive circular economy (CE) with a reduced pressure on natural, freshwater resources and ecosystems in the member states. 


See in:  

http://www.baltic-course.com/eng/modern_eu/?doc=147848&ins_print  

 

Bio-economy’s share in Latvian GDP has reached already about 15 %. But the sector has huge potentials both in the national structural development and in its regional transformation. The bio-economy’s trend will go on: hence the attention to biomass’ exploration and management, as well as to educational issues in bio-economy and sustainability policy.


See more in: http://www.baltic-course.com/eng/modern_eu/?doc=149073&ins_print


Waste disposal

Some positive moves occurred in the waste management sector; for example, municipal waste processing is growing in Latvia: over 30% of materials and energy is recycled.


However, over 30% of wastes are dumped in so-called special landfills; still 25% of wastes is so far thrown into “regular landfills”.


The negative effect is quite simple to understand: waste per capita in Latvia increased from 800.000 tons in 2007 to over 100.000 in 2010 and to 1.150.000 presently. That has lead to an increased share of land-filled waste: in Latvia the share is 70% while in Estonia 10 and in Lithuania 30%.  


Note: both the economic survey and the environmental review for Latvia are available at the OECD website: http://www.oecd.org/environment/country-reviews/oecd-environmental-performance-reviews-latvia-2019.htm


Resolving challenges

The main aspect in Latvian growth pattern, according to the OECD review, is a still big share of population with income below the poverty level: in Latvia and Lithuania the share is about 17%, in Estonia 16, though in Poland –only 10%. The issue is closely connected to the household’s share in health expenditures: in Latvia it is about 45%, while e.g. in France 10-12%, in Denmark and Germany -14%; even in Estonia the health-care bills are about 22 and in Lithuania -30%.


Population’s aging is another big issue: about 30% of population in Estonia and Lithuania are over 50-60 year old, while in Latvia the figure is close to 45%. This factor makes the taxable household issue problematic: about 15% of household in Latvia feel the pressure, while corresponding figures in Lithuania and Estonia are 8 and 4%.   


Net immigration was greatest in Latvia during 2009-10 with about 35.000 yearly; in 20017-18 the figures reduced to about 5.000.


However, shadow economy is reducing (in % of GDP): from about 30% in 2010 to about 22% presently; almost the same figures are in Lithuania and Estonia with, correspondingly 23 and 24%, compared to 10% in Denmark and Germany, with the lowest in Austria -6%.


Finally, the review showed the level of trust: e.g. in government –about 25%, in judiciary -32%, compared to EU’s bottom of 11 and 12%, correspondingly. 


Bottom line: the new government- taking effect this spring- has plenty of work to deal with the modern challenges: the OECD analysis and recommendation have to be taken seriously…

 



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