Latvian economy is thriving, but boosting productivity, improving social protection and transitioning to a low-carbon productive model are vital for sustainable and inclusive growth

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The Latvian economy is thriving, with strong job growth driving convergence with more advanced economies. Efforts should now focus on reducing inequality, responding to the challenges posed by population ageing and making growth stronger, inclusive and greener, according to two new OECD reports.

The latest OECD Economic Survey of Latvia says the broad-based upswing underway has been largely driven by domestic demand. It projects robust growth of 2.7% in 2019 and 2020, even as world trade weakens and investment slows. The Survey underscores the importance of boosting productivity growth to ensure fast catch up with living standards in advanced OECD countries, as Latvia’s working-age population declines. “Thanks to sound macroeconomic policies and strong reform efforts, Latvia has achieved impressive economic growth over recent years,” said OECD Secretary-General Angel Gurria, presenting the Survey alongside Latvian Minister of Economics Ralfs Nemiro and Minister for Environmental Protection and Regional Development Juris Pūce.“Unemployment is falling, living standards and well-being are improving, and Latvia has decoupled economic growth from greenhouse gas emissions, through trail-breaking use of renewable energy. To build on this performance, it is critical that Latvia continues economic reforms that make growth more robust, inclusive and environmentally friendly,” Mr Gurria said (read the full speech). Stronger productivity growth is needed to improve living standards and thus make Latvia more attractive for foreign investors and domestic workers alike. This will require more investment in skills, research and innovation, as well as greater competition across the economy, particularly in sectors where state-owned or municipal enterprises have large weights. Ongoing efforts to strengthen the capacity of the judiciary and law enforcement agencies are crucial to fight economic crimes and the large informal economy, which is holding back better access to credit, training and social protection. To improve well-being and reduce large regional inequalities, Latvia should ensure universal access to healthcare and affordability of housing. Planned territorial reforms that merge or better coordinate small municipalities will ensure better provision of public services, including public transport, waste management and water, according to the Survey. Sustained economic growth is likely to drive up environmental pressures in Latvia, according to the first OECD Environmental Performance Review of Latvia. The country has implemented the EU environmental acquis and has come a long way since the mid-2000s in bringing its environmental performance closer to the OECD average, but it still has work to do, according to the Review. Latvia has made progress in reducing high levels of air pollution and has improved access to and quality of water. Its use of biomass as its main energy source places it among the OECD’s leaders in renewable energy. Yet more needs to be done to reduce the air pollution, which still affects nearly 90% of the population, to improve recycling and energy efficiency in houses, and to move towards a low-carbon economy, in line with the 2015 Paris Agreement. A priority should be agriculture and forestry, which play key economic and social roles but are a growing source of greenhouse gas emissions and pressures on ecosystems. The Review recommends Latvia use stronger price signals to reduce environmental pressures. It also calls for increased investment in environment-related innovation, infrastructure and services like waste sorting and recycling, and protection of natural habitats and biodiversity. EU funds should be complemented with public and private investment.