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Latvia Faces Challenges in Catching Up with Neighbours, Economist Warns
In a stark warning, Oleg Krasnoperov, an economist at the Bank of Latvia, has highlighted the need for immediate and significant changes in the country's approach to economic development. Krasnoperov's statement comes as Latvia grapples with a twenty-year income gap with its neighbors, Lithuania and Estonia.
Krasnoperov's prediction is based on the assumption that everything goes well, and if this is the case, Latvia may catch up with Lithuania and Estonia in terms of income in 15-25 years. However, he cautions against relying on statistically inflated growth, as was observed after Latvia joined the EU in 2004, which led to a collapse in 2009 due to a lack of a solid foundation.
To close the income gap within the desired 15-25 year timeframe, Krasnoperov suggests a comprehensive policy package centred on four main areas: education, investment policy, healthcare, and business environment.
In the education sector, Krasnoperov proposes emphasizing early childhood development programs similar to the U.S. Head Start model, which provides early education, health, nutrition, and family support. He also suggests improving allocative efficiency in education by aligning skills taught with labor market demands, especially fostering entrepreneurship and productivity growth in young firms.
In terms of investment policy, Krasnoperov recommends facilitating firm entry and growth by reducing barriers that keep new firms smaller and less productive for longer periods. He suggests efforts such as easing regulatory burdens, improving startup financing, and enhancing networks for young firms to scale faster. Additionally, Krasnoperov proposes implementing policies to attract foreign direct investment (FDI) with a focus on innovative and high-productivity sectors.
Regarding healthcare, Krasnoperov emphasizes the importance of prioritizing early childhood health and development to ensure a healthier, more productive future workforce. He also suggests investing in accessible, quality healthcare to maintain labor productivity and reduce income loss due to illness across the population.
Lastly, Krasnoperov recommends enhancing the ease of doing business by lowering administrative hurdles, improving labor market flexibility, and incentivizing innovation and productivity growth in existing firms. He also encourages promoting a competitive but supportive environment for startups to increase aggregate productivity.
Krasnoperov's statement underscores the importance of breaking away from the habit of lagging behind and adopting a more proactive and sustainable approach to economic development. He warns against using borrowed government spending to artificially inflate growth statistics, as this is not sustainable and will only last until the next elections.
The continued use of this approach may perpetuate the country's economic stagnation. Therefore, it is crucial for Latvia to implement these reforms to ensure long-term economic growth and catch up with its neighbours.
In his comprehensive policy package, Krasnoperov emphasizes the need to focus on business environment improvements, which includes lowering administrative hurdles, promoting labor market flexibility, and incentivizing innovation in existing firms to boost productivity.
To close the income gap with neighbors, Krasnoperov also suggests attracting foreign direct investment (FDI) specifically targeted at innovative and high-productivity sectors, as well as easing regulatory burdens and improving startup financing to facilitate firm entry and growth in business.
