Latvia Looking Ahead - the Remaining Challenges

Latvia Looking Ahead - the Remaining Challenges

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  LATVIA: LOOKING AHEAD– THE REMAINING CHALLENGES Agnese Bukovska, Mark Griffiths, and Bertrand Gruss International Monetary Fund Riga - June 5, 2012
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  A. Many Successes(Session I) 2  Fiscal adjustment  Recovery  Low interest rates  Current account deficit shrinks  Low inflation
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  Three Challenges 3 A. Joining the Euro B. Ensuring sustainable growth C. Making growth inclusive
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  Three Challenges 4 A. Joining the Euro B. Ensuring sustainable growth C. Making growth inclusive
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  B. Sustainable Growth– Why Important? (1) Income Levels Low 5 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
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  B. Sustainable Growth– Why Important? (2) Current Account and Competitiveness 6 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 (%)
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  B. Sustainable Growth– What is Needed? (1) More Investment in Tradable Sector 7 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
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  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
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  B. Structural Reforms Weak Rule of Law Deters Investment 9 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
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  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
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  B. Structural Reforms …Worsens Price Competitiveness 11 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
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  Three Challenges 12 A. Joining the Euro B. Achieving sustainable growth C. Making growth inclusive
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  C. Why InclusiveGrowth? High Rates of Poverty and High Inequality 13 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
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  C. Why InclusiveGrowth? High Unemployment Rates 14 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
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  C. Why InclusiveGrowth? Employment Still Well Below Pre-Crisis Level 15 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
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  C. Why InclusiveGrowth? Middle-Aged Unemployment High in Baltics 16 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
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  C. Policies forInclusive 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
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  C. Policies forInclusive Growth: (2) Enhance Active Labour Market Policies 18 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
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  C. Policies forInclusive Growth: (3) Increase Spending on Social Protection 19 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
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  C. Policies forInclusive Growth: (4) Improve Education 20 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
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  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