Latvia

   
 

Key Challenges

Growth enables focus
on reform needs
The government has proven capable of focused and determined policy development. The growing economy presents opportunities to realign the tax burden, and focus on long-term drivers of economic performance and growth, such as education and innovation. It also permits a focus on long-neglected policy challenges, such as reducing social inequalities. Encouraging steps have been taken. The government must now follow through on measures that will shift the tax burden away from low-wage earners, improving health care access and quality, and reforming education. The needs in these challenges are enormous, but must be balanced with fiscal prudence.
Social inequality undermining public trust
If social inequality remains unaddressed, public trust will continue to slip, risking a further rise in emigration. The skills mismatch in the Latvian labor market has created high unemployment coupled with a qualified labor shortage in the past. Meanwhile, the more recent fall in the unemployment rate paired with rising wages indicates a tightening labor market. Negative demographic trends will exacerbate this situation in the future. The government should focus on policies that mitigate labor shortages, such as repatriation incentives and immigration policies specifically targeted to fill demand for high-skilled labor.
Addressing barriers to further development
The government should continue to address barriers to economic development, such as the slow court system, inadequate insolvency procedures and corruption. Policies adopted in preparation for OECD membership should be followed through to successful implementation. With the 2017 change in leadership at the Corruption Prevention and Combating Bureau (KNAB), there is now the opportunity for a long overdue repositioning and overhaul of the institution.
Russian activities pose diverse risks
Given international tensions stemming from Russia’s activities, Latvia must continue to fulfill its NATO defense commitments as well as mitigate the economic effects of the sanctions imposed on Russia by the European Union. Latvia met its spending commitment in 2018, which is a welcome development. However, resilience in the face of a hybrid war requires other types of spending. Strengthening the independence, quality and reach of public broadcasting will be key to addressing the contradictory pro-EU, pro-Russian media narratives that are circulating. The government should take advantage of the fiscal space generated by a growing economy to consolidate the financial independence of public broadcasting by providing resources that are not subject to annual budget shifts. With adequate funding, these reforms could free public broadcasting from relying on advertising revenue. Recent election interference by Russia in the United States and Europe raises the specter of similar interference in Latvia, where information warfare is common.
Parliamentary research unit’s mandate limited
The establishment of a parliamentary research unit in 2017 is a welcome step toward improving the parliament’s capacity for executive oversight. Unfortunately, the initial mandate for the research unit will have limited impact on day-to-day legislative decision-making. The research unit should be given a broader mandate, one that enables it to bring evidence-based analysis into the work of parliamentary committees.
Planning unit must
build its authority
Government decision-making is well managed, transparent and allows for stakeholder input. The practice of fast-tracking policy proposals undermines this process; further efforts should be made to reduce the use of fast-tracking. The Cross-Sectoral Coordination Centre (PKC) is well placed to support strategic planning in the new medium-term budget framework and to keep the government focused on long-term goals. However, the PKC must focus on building its informal decision-making authority so that its analyses can counteract the pull toward political expediency.
Expanding public consultation programs
The government should continue to create space for constructive civic engagement by building on innovative public engagement platforms already launched and channeling financial support to NGOs that engage in the policy process. While the government has offered significant support to some social partners, most NGOs remain dependent on rapidly declining foreign funding, as local funding has not filled the shortfall. In addition, the further decline in voter turnout (only 54.6% of the eligible population voted in the 2018 election) is a strong indicator that government communication with the public needs to be improved.
Fragmented coalition brings risks
Finally, Latvia will need to be mindful of the challenges it will face in the next parliamentary term. The 2018 election has brought new parties into the Saeima, but at the same time the coalition will now be very fragmented. As a result, given the different stances these parties have on (potential) key developments, a variety of internal coalition conflicts are likely to arise, which may seriously obstruct the work of the government and even lead to the early collapse of the new cabinet.
Banking regulation must be top priority
The government must prioritize regulation of the banking sector to avoid being placed on Moneyval’s “grey” list of countries, which could lead to Nordic banks closing their branches in Latvia, further starving the economy of access to capital.
 
The government needs to tackle territorial administrative reform, merging small, sparsely populated local authorities that fail to deliver qualitative services to their sparsely populated residents.
 

Party Polarization

Center-right, pro-European party dominance
In general, parties are able to reach agreements, although this in part due to the composition of the dominant coalition over recent years. Center-right parties have dominated, pursuing a pro-European stance, liberal economic policies and promoting an (ethnic) Latvian identity.
Polarization along ethnic, linguistic lines
Latvia has a multi-party system, which is somewhat fragmented and polarized, with polarization strongest along ethnic/linguistic lines (the ethnic cleavage cuts across the usual left-right divide). Parties are broadly perceived as either representing Latvian or Russian speakers.
Largest parliamentary party is isolated
The Saskaņa (Harmony) party, which has succeeded in consolidating the Russian-speaking vote, has been the largest parliamentary fraction since 2011. However, the party has never been part of a ruling coalition. No Russophone party has ever served in a coalition government in Latvia. This trend is likely to continue for the next parliamentary term, and was illustrated prior to and after the election in 2018, when most parties stated that they would not cooperate with Saskaņa. Consequently, Saskaņa will remain rather isolated, and will continue to serve a limited role and lack influence over decision-making. (Score: 6)
Citations:
University of Latvia, Social and Political Research Institute (2014). How Democratic is Latvia: Democracy Audit 2005 – 2014. Available at (in Latvian): http://www.szf.lu.lv/fileadmin/user_upload/szf_faili/Petnieciba/Demokratijas_aud its_2014_kopaa.pdf, Last assessed: 02.01.2019
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