Latvia - The Quest for Jobs and Growth : A World Bank Country Economic Memorandum, Volume 1. Policy Briefing
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As a strong reformer among the Central
and Eastern European Countries (CEEC), Latvia has recorded a
dramatic economic improvement recent years, with relatively
strong growth, increased investment rates, and clear signs
of easing labor market conditions. A stabilization package
designed around a fixed exchange rate regime, and prudent
fiscal policies, as well as structural reforms, have yielded
good results, although the current account deficit is still
high, and the fiscal stance has deteriorated somewhat since
2001. Unemployment has declined from its peak of almost 21
percent in the mid-1990s, to about 12 percent in 2002. Since
2000, youth and the elderly have been more active in the
labor market, while prime age employment is on the rise.
Factors explaining the decline in unemployment include:
changes in demographics; stronger growth and investment;
and, progress in structural reforms. Yet, some substantial
problems remain and must be addressed. Migration and
commuting between regions are impaired by high
transportation costs and underdeveloped housing markets;
incomes are low in rural areas nationwide; Latvia's
labor force features a skills mismatch; taxes on labor use
are relatively high, which includes high contributions to
social programs; and, investors have raised concerns on
factors that would prevent the development of
knowledge-intensive sectors. Convergence to European Union
(EU) income levels will take time - Latvia's per capita
income stands only at about 33 percent of the EU average in
purchasing power standards. The 2000 European Council of
Lisbon set ambitious targets for raising employment rates in
the EU, though in the short to medium term, implementation
of the remaining policy agenda, could help Latvia meet the
Lisbon targets. Furthermore, as Latvia becomes a member of
the EU in May 2004, and prepares to adopt the euro, its
flexible labor market will be key for sustaining
macroeconomic performance, and accelerating convergence. The
report proposes pursuing sound macroeconomic policies to
further job creation; reducing informality: a lower tax
burden on labor use is likely to have a fiscal cost in the
short term, but this must be weighed against the potentially
great positive effects of attracting business to the formal
sector; thus, pursuing structural reforms to continue
attracting foreign direct investment; improving skills for
low-wage, unskilled workers through training programs, and
the acceleration of reforms in the education sector.
Finally, within the social sectors recommendations suggest
changing the composition of social protection spending to
improve social assistance benefits for poor families, while
improving the rates of receipt of transfer payments across
social groups.
Palabras clave
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