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2017 OECD Economic Surveys: Latvia 2017

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Latvia’s economy has grown robustly in recent years on the back of a strong track record in implementing structural reforms, despite a challenging international environment. Rising wages have supported household consumption. After a severe setback in 2008-09, catch-up with higher income OECD countries may have resumed. Government finances are solid and financial market confidence in Latvia is strong. Private sector indebtedness is now lower than in many OECD economies. Export performance, including diversification of products and destinations, is improving, but Latvia’s participation in global value chains is modest. Latvia’s exports still rely heavily on low value-added, natural resource intensive products, reflecting in part skills shortages and weak innovation. Unemployment remains high, although it has fallen. Many young Latvians emigrate. Informal economic activity is still widespread.

High long-term unemployment, weak social safety nets and high labour taxes for workers on low pay contribute to widespread poverty. Many low-income households are inadequately housed. High out-of-pocket payments limit access of low-income households to health services. Improving access to housing, health care, education and training would improve economic opportunities for low-income households and requires additional government spending.

SPECIAL FEATURES : MOVING UP THE GLOBAL VALUE CHAIN; ECONOMIC AND SOCIAL INFRASTRUCTURE

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Making the most of economic and social infrastructure

Latvia has expanded infrastructure in transport networks substantially, supported with European Union structural funds. Further investment projects are ongoing, in part to improve connectivity with infrastructure networks within the European Union, as trade has largely switched from Russia to European Union countries. The quality of health services has also improved. Yet important challenges remain to make the most of economic and social infrastructure to boost opportunities for economic activity, reduce poverty and improve wellbeing, helping to make Latvia a more attractive place to live and work. Project selection and cost-benefit analysis need to be more consistently applied when selecting transport infrastructure investment projects. Although road accident rates have fallen they remain unusually high. The Riga metropolitan area is a key driver of economic growth and hosts an important international transport hub. It boasts growth in knowledge-intensive services and low unemployment, and rich natural assets. It could play an important role in retaining young people in Latvia. Yet insufficient access to affordable housing, growing spatial segregation as a result of urban sprawl and weak public transport hold back the contribution Riga could make to inclusive growth. More effective redistribution of tax revenues and stronger governance arrangements could make more of Riga’s potential. Low-income households continue to face substantial difficulty in accessing health services, especially in rural areas. More resources are necessary to improve access, coupled with more efforts to reinforce efficiency of provision. Policies to boost energy efficiency investment and wind energy would help maintain strong inclusive growth while helping to achieve greenhouse gas emission reductions.

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