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Latvia Looking Ahead - the Remaining Challenges
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Transcript of Latvia Looking Ahead - the Remaining Challenges
LATVIA: LOOKING AHEAD –
THE REMAINING CHALLENGES
Agnese Bukovska, Mark Griffiths, and Bertrand Gruss
International Monetary Fund
Riga - June 5, 2012
Fiscal adjustment
Recovery
Low interest rates
Current account deficit shrinks
Low inflation
A. Many Successes (Session I)
2
A. Joining the Euro
B. Ensuring sustainable growth
C. Making growth inclusive
Three Challenges
3
A. Joining the Euro
B. Ensuring sustainable growth
C. Making growth inclusive
Three Challenges
4
B. Sustainable Growth – Why Important?
(1) Income Levels Low 5
0
20
40
60
80
100
120
140
BG
R
O
Latv
ia
LT
PL
EE
HU
SK
C
Z
PT
MT
SI
GR
C
Y
ES
EU
IT
Eu
ro
FR
U
K
FI
DE
BE
SE
AT
IE
DK
N
L
GDP per capita (2010, PPS, percent of EU27)
Sources: Eurostat
B. Sustainable Growth – Why Important?
(2) Current Account and Competitiveness 6
1997
1998
1999
2000
2001 2002
2003
2004 2005
2006 2007
2008
2009
2010
2011
y = -0.7598x - 4.8226
-25
-20
-15
-10
-5
0
5
10
15
-20 -15 -10 -5 0 5 10 15 Cu
rren
t acco
un
t b
ala
nce (
% o
f G
DP
)
Real GDP growth (%)
Latvia - Growth and Current Account Balance (1997-2011)
B. Sustainable Growth – What is Needed?
(1) More Investment in Tradable Sector 7
0
5
10
15
20
25
30
35
40
45
50
RS SI Latvia RO LT PL BA MK AL SK CZ HR HU EE BG
FDI in the Tradable Sectors FDI in the Nontradable Sectors
Foreign Direct Investment (Stock/GDP, 2007)
Sources: Kinoshita (2011), IMF WP/11/123
B. Sustainable Growth – What is Needed?
(2) Structural Reforms to Boost Competitiveness 8
Areas of structural reforms:
Rule of Law / Business Environment
Stronger Product Market Competition
Improving Tax Administration
B. Structural Reforms
Weak Rule of Law Deters Investment 9
1
2
3
4
5
6
7
Property rights
Efficiency of legal framework in
settling disputes
Transparency of government policy
making
Ethics and Corruption
Favoritism in decisions of government
officials
Institutional Framework(GCI scores 1 to 7=best)
Latvia EU27
OECD Nordic
Sources: Global Competitiveness Report, WEF
B. Structural Reforms
Weak Product Market Competition… 10
3.0
3.5
4.0
4.5
5.0
5.5
CEE LT Latvia EU27 OECD EE US Nordic Japan Asian
Tigers
Goods market efficiency (GCI 6th pillar, 1 to 7=best)
Sources: Global Competitiveness Report, WEF
B. Structural Reforms
…Worsens Price Competitiveness 11
BG
RO
Latvia
Lithuania
PL
Estonia
HU SK
CZ
PT
MT SI
GR
CY
ES EU
IT Euro FR
UK
FI
DE
BE
SE
AT
IE
DK
NL
y = 0.4889x + 48.546 R² = 0.945
40
60
80
100
120
140
160
20 40 60 80 100 120 140 160 180
Pri
ce level
(EU
-27=
100)
GDP per capita (EU-27=100)
Income and Price Level (2010)
Sources: Eurostat
Three Challenges
12
A. Joining the Euro
B. Achieving sustainable growth
C. Making growth inclusive
C. Why Inclusive Growth?
High Rates of Poverty and High Inequality 13
AT
BE
BG
CY
CZ
DE DK Estonia
ES EU
Euro
FI FR
GR
HU IE
IT
Latvia
Lithuania
LU
MT
NL
PL
PT
RO
SE
SI SK
UK
10
20
30
40
50
3 4 5 6 7 8
Sh
are
of
po
pu
lati
on
at
risk
of
po
vert
y o
r so
c. e
xclu
sio
n
Income inequality (the S20/S80 decile ratio)
Latvia - Poverty and Inequality Levels Are High (2010)
Sources: Eurostat
C. Why Inclusive Growth?
High Unemployment Rates 14
EU27
0
5
10
15
20
25
Q1 2002 Q1 2004 Q1 2006 Q1 2008 Q1 2010
Latvia Estonia Lithuania
Unemployment
(in percent of active population, seasonally adjusted)
Sources: Haver Analytics
C. Why Inclusive Growth?
Employment Still Well Below Pre-Crisis Level 15
-200 -150 -100 -50 0 50
Total
Construction
Manufacturing
Other
Public administration and defence
Agriculture
Financial intermediation
Latvia - Change in Employment 2007Q4-2011Q4(Thousand of people)
Sources: CBS
C. Why Inclusive Growth?
Middle-Aged Unemployment High in Baltics 16
0
2
4
6
8
10
12
14
Latvia EE LT EU27
15-24 25-49 50-59
Unemployment-Population Ratio(Percent by age group, Q4 2011)
Sources: Haver Analytics
C. Policies for Inclusive Growth:
(1) Reduce Labour Tax Wedge (Low Income) 17
0
5
10
15
20
25
30
35
40
45
50
MT
IE
LU
UK
B
G
PT
PL
NL
GR
SK
FI
ES
DK
SI
EE
LT
CZ
EU
SE
Eu
ro
RO
A
T
Latv
ia
IT
HU
D
E
FR
B
E
Sw
itze
rla…
U
S
Jap
an
Tax wedge, single person without children (67% of average wage, 2010)
Sources: Eurostat
C. Policies for Inclusive Growth:
(2) Enhance Active Labour Market Policies 18
0
1,000
2,000
3,000
4,000
5,000
6,000
RO
MT
UK EE
Latv
ia LT SK
BG
CZ
HU SI
GR PL IT CY
ES
EU
Eu
ro PT IE DE
SE
AT FI
FR
LU NL
DK
BE
Spending on Active Labor Market Policies (AMLP) (PPS per person wanting to work, 2009)
Sources: Eurostat
C. Policies for Inclusive Growth:
(3) Increase Spending on Social Protection 19
10
15
20
25
30
35
10
15
20
25
30
35
Latv
iaB
GR
O SK EE
PL
MT
CZ
CY LT LU HU SI
ES
PT IE
GR
UK
EU IT BE
Eu
ro FI
NL
AT
DE
SE
FR
DK
Sources: Eurostat
Spending on Social Protection Benefits(Percent of GDP, 2009)
EU-27
C. Policies for Inclusive Growth:
(4) Improve Education 20
460
470
480
490
500
510
520
530
540
550
560
FI
NL
EE
DE
BE SI
UK PL IE
DK
OEC
D a
ve
HU
CZ
FR
EU
ave
SE
AT
SK
PT
Latv
ia IT LT
ESP
LU GR
Average scale scores, PISA(Average science, mathematics, reading; 2009)
Sources: OECD
Conclusion
21
Latvia’s “Mission Impossible” is over: well done!
Challenges remain:
Responsible macro / joining the Euro
Structural reforms for competitiveness and
sustainable growth
Reducing unemployment and inequality to
make growth more inclusive