The Latvian Economy - October 2015
An alarm bell for cost competitiveness
  • Following the post-crisis gains, cost competitiveness has again deteriorated during the last couple of years
  • It seems that export market shares have levelled off
  • Productivity is the key to competitiveness, but how to enhance it?


Following the post-crisis gains, cost competitiveness has again deteriorated during the last couple of years
Wages have been growing faster than productivity in Latvia for a few years now. Until now, this has not damaged Latvian external competitiveness notably, and exports have continued to grow.

It seems that export market shares have levelled off

However, there are signs that this is starting to change. Export market shares that were growing after the 2008-2009 recession have been largely flat in the last few years, at least in Europe. In some of the major trading partners, these have started to fall.



Productivity is the key to competitiveness, but how to enhance it?

Falling unemployment rates, together with still-substantial income gaps vis-à-vis advanced EU countries (and, thus, emigration risks), are keeping wage pressures high. Wages need and will continue to grow, unless the unemployment rates go up. The key to competitiveness is stronger productivity growth. Unfortunately, the lower-hanging fruits have been already picked, and companies have already done what they can to increase efficiency and develop new products. To achieve stronger productivity growth than the current 2-3%, one should aim for the higher-hanging fruits on the tree; this requires also other instruments to be able to climb the tree. In other words, structural change from the authorities’ side is needed to boost productivity growth – something that we have been advocating for a few years now. This can be done in many ways, starting with education (e.g., commercialising ideas, bringing academia closer to business, and promoting innovations) and finishing with the tax system (e.g., reducing the size of the grey economy, which would help companies to get financing).

PDF The Latvian Economy - October 2015

For more information please contact Ms. Lija Strašuna, +371 6744 5875, lija.strasuna@swedbank.lv


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