Latvia Looking Ahead - the Remaining Challenges

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Presentation by Mark Griffiths, Mission Chief for Latvia, IMF at International Conference: "Against the Odds: Lessons from the Recovery in the Baltics" organized by the International Monetary Fund and the Bank of Latvia.
Riga, June 5, 2012

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Latvia Looking Ahead - the Remaining Challenges

  1. 1. LATVIA: LOOKING AHEAD –THE REMAINING CHALLENGESAgnese Bukovska, Mark Griffiths, and Bertrand GrussInternational Monetary FundRiga - June 5, 2012
  2. 2. A. Many Successes (Session I)2  Fiscal adjustment  Recovery  Low interest rates  Current account deficit shrinks  Low inflation
  3. 3. Three Challenges3 A. Joining the Euro B. Ensuring sustainable growth C. Making growth inclusive
  4. 4. Three Challenges4 A. Joining the Euro B. Ensuring sustainable growth C. Making growth inclusive
  5. 5. B. Sustainable Growth – Why Important? (1) Income Levels Low5 GDP per capita (2010, PPS, percent of EU27) 140 120 100 80 60 40 20 0 PL CZ PT GR IT AT BG LT SK EU Euro FR DE NL RO MT FI EE HU SI CY ES SE IE UK BE DK Latvia Sources: Eurostat
  6. 6. B. Sustainable Growth – Why Important? (2) Current Account and Competitiveness6 Latvia - Growth and Current Account Balance (1997-2011) 15 Current account balance (% of GDP) 10 2009 y = -0.7598x - 4.8226 5 2010 0 2011 -5 2000 2002 1997 1999 2001 -10 1998 2003 2008 2004 2005 -15 -20 2007 2006 -25 -20 -15 -10 -5 0 5 10 15 Real GDP growth (%)
  7. 7. B. Sustainable Growth – What is Needed? (1) More Investment in Tradable Sector7 Foreign Direct Investment (Stock/GDP, 2007) 50 45 FDI in the Tradable Sectors FDI in the Nontradable Sectors 40 35 30 25 20 15 10 5 0 RS SI Latvia RO LT PL BA MK AL SK CZ HR HU EE BG Sources: Kinoshita (2011), IMF WP/11/123
  8. 8. B. Sustainable Growth – What is Needed?(2) Structural Reforms to Boost Competitiveness8 Areas of structural reforms:  Rule of Law / Business Environment  Stronger Product Market Competition  Improving Tax Administration
  9. 9. B. Structural Reforms Weak Rule of Law Deters Investment9 Institutional Framework (GCI scores 1 to 7=best) Property rights 7 Latvia EU27 6 OECD Nordic 5 Favoritism in 4 Efficiency of legal decisions of 3 framework in government 2 settling disputes officials 1 Transparency of Ethics and government policy Corruption making Sources: Global Competitiveness Report, WEF
  10. 10. B. Structural Reforms Weak Product Market Competition…10 Goods market efficiency (GCI 6th pillar, 1 to 7=best) 5.5 5.0 4.5 4.0 3.5 3.0 CEE LT Latvia EU27 OECD EE US Nordic Japan Asian Sources: Global Competitiveness Report, WEF Tigers
  11. 11. B. Structural Reforms …Worsens Price Competitiveness11 Income and Price Level (2010) 160 DK 140 y = 0.4889x + 48.546 R² = 0.945 Price level (EU-27=100) FI 120 IE SE FR BE IT Euro NL DE 100 Estonia GR ES EU UK AT Latvia PT CY 80 CZ MT SI BG SK HU 60 PL RO Lithuania 40 20 40 60 80 100 120 140 160 180 GDP per capita (EU-27=100) Sources: Eurostat
  12. 12. Three Challenges12 A. Joining the Euro B. Achieving sustainable growth C. Making growth inclusive
  13. 13. C. Why Inclusive Growth? High Rates of Poverty and High Inequality13 Latvia - Poverty and Inequality Levels Are High (2010) 50 Share of population at risk of poverty or soc. exclusion BG RO 40 Latvia 30 HU Euro IE Lithuania PL GR IT PT ES EU CY UK MT 20 SK BE DE SI Estonia FI FR DK AT LU SE NL CZ 10 3 4 5 6 7 8 Income inequality (the S20/S80 decile ratio) Sources: Eurostat
  14. 14. C. Why Inclusive Growth? High Unemployment Rates14 Unemployment (in percent of active population, seasonally adjusted) 25 Latvia Estonia Lithuania 20 15 10 EU27 5 0 Q1 2002 Q1 2004 Q1 2006 Q1 2008 Q1 2010 Sources: Haver Analytics
  15. 15. C. Why Inclusive Growth? Employment Still Well Below Pre-Crisis Level15 Latvia - Change in Employment 2007Q4-2011Q4 (Thousand of people) Financial intermediation Agriculture Public administration and defence Other Manufacturing Construction Total -200 -150 -100 -50 0 50 Sources: CBS
  16. 16. C. Why Inclusive Growth? Middle-Aged Unemployment High in Baltics16 Unemployment-Population Ratio (Percent by age group, Q4 2011) 14 15-24 25-49 50-59 12 10 8 6 4 2 0 Latvia EE LT EU27 Sources: Haver Analytics
  17. 17. C. Policies for Inclusive Growth: (1) Reduce Labour Tax Wedge (Low Income)17 Tax wedge, single person without children (67% of average wage, 2010) 50 45 40 35 30 25 20 15 10 5 0 Switzerla… EU BG Japan SK Euro RO DE FR PT PL GR LT CZ AT IT LU NL FI EE SE HU US IE SI Latvia BE MT UK DK ES Sources: Eurostat
  18. 18. C. Policies for Inclusive Growth: (2) Enhance Active Labour Market Policies18 Spending on Active Labor Market Policies (AMLP) (PPS per person wanting to work, 2009) 6,000 5,000 4,000 3,000 2,000 1,000 0 FI FR BE CY Euro RO EE GR PL IE SI UK SE LU HU Latvia DE NL PT DK SK MT CZ AT BG LT ES EU IT Sources: Eurostat
  19. 19. C. Policies for Inclusive Growth: (3) Increase Spending on Social Protection19 Spending on Social Protection Benefits (Percent of GDP, 2009) 35 35 30 EU-27 30 25 25 20 20 15 15 10 10 FI FR CY BE Euro EE RO GR PL IE SI LU HU UK NL SE DE SK Latvia PT DK MT CZ AT BG LT ES EU IT Sources: Eurostat
  20. 20. C. Policies for Inclusive Growth: (4) Improve Education20 Average scale scores, PISA (Average science, mathematics, reading; 2009) 560 550 540 530 520 510 500 490 480 470 460 FR FI ESP BE EE PL GR IE SI UK HU LU NL DE SE SK Latvia PT DK AT CZ LT OECD ave IT EU ave Sources: OECD
  21. 21. Conclusion21 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

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