Unidentified individual goes public on Latvian TV24, potentially causing a melancholic atmosphere
Oleg Krasnoperov, an economist at the Bank of Latvia, has highlighted the potential risks of relying on short-term solutions for long-term problems. His statement implies a criticism of Latvia's persistent inability to close the income gap with neighboring countries, such as Estonia and Lithuania.
Krasnoperov's prediction does not include catching up with Europe or Germany, as Latvia started alongside and on equal terms with Estonia and Lithuania in 2004 when it joined the European Union with the promise of eventual economic parity. However, waiting another 20 years to catch up with neighbors, as suggested by Krasnoperov, is no longer a strategy but a habit of lagging behind, disguised as moderate optimism.
To close the income gap with Lithuania and Estonia within 15-25 years and avoid past pitfalls, Latvia needs to implement comprehensive economic reforms focusing on enhancing productivity, fostering firm dynamics, and improving innovation capacity.
Key Reform Areas
- Boosting labor productivity growth: Recent IMF analysis shows that Baltic states, including Latvia, have experienced decelerating labor productivity growth. To address this, Latvia should focus on reducing barriers for new firms, enhancing firm entry and growth, and shifting the productivity distribution upward through better resource allocation and innovation support.
- Supporting young and scaling firms: Entrant firms tend to have lower productivity initially, but when supported well, their productivity improves over time. Latvia could foster entrepreneurship, provide better access to finance and market networks, and reduce regulatory burdens to help young firms grow and catch up with incumbents.
- Increasing allocative efficiency and innovation: Improving how efficiently resources are used across firms and boosting innovation-driven productivity will help overall economic performance. Latvia might prioritize investments in research and development, digitalization, and skills development, learning from Lithuania's and Estonia’s success in these areas.
- Sustaining stable macroeconomic and fiscal policies: Maintaining stable economic policies underpins investor confidence and long-term growth prospects.
- Capitalizing on tourism and wealth growth: Latvia’s tourism sector grew by 16% in early 2025, a positive sign for service sector expansion and income diversification. Additionally, Latvia experienced over 30% gains in real median wealth per adult recently, indicating potential for domestic demand growth if wealth is more equally distributed.
Ensuring Sustainable Growth
To avoid previous pitfalls, reforms must address structural obstacles such as rigid labor markets, inefficient regulations, and weak institutional frameworks that hinder firm dynamism and innovation. They must also ensure that growth is inclusive, addressing income inequality and facilitating broad access to education, credit, and ownership of productive assets. Finally, reforms should be implemented gradually but consistently, with clear measurable goals and monitoring to maintain momentum over the long term.
In summary, Latvia’s path to closing the income gap involves concerted efforts to enhance productivity through better firm dynamics and innovation support, stabilization of macroeconomic fundamentals, and inclusive growth strategies to ensure all population segments benefit over the next two decades. Krasnoperov warns against relying on borrowed government spending to artificially boost growth figures, as such short-term statistical manipulations are not sustainable, lasting only until the next elections. If these reforms are implemented, Latvia's economy may grow faster than usual by 1-2% per year. However, paying for artificially inflated growth figures will result in consequences after the elections.
In the pursuit of closing the income gap with Lithuania and Estonia, Latvia should prioritize reforms that focus on boosting labor productivity, supporting young firms, increasing allocative efficiency, sustaining stable economic policies, capitalizing on tourism and wealth growth, and ensuring sustainable growth. These reforms must address structural obstacles, promote inclusive growth, and be implemented gradually with clear goals to avoid previous pitfalls.
The business sector plays a crucial role in achieving these objectives, particularly in enhancing productivity, fostering firm dynamics, and improving innovation capacity, as suggested for Latvia's long-term financial stability and economic parity with neighboring countries. Krasnoperov's warning against relying on short-term solutions for long-term problems emphasizes the importance of these comprehensive business reforms for Latvia's sustainable growth and avoiding future pitfalls.
