Strong growth creates policy flexibility; healthcare reforms overdue
Latvia’s economy has rebounded and, until recently, the country’s GDP growth rate ranked it among the fastest-growing economies in Europe and as the faster-growing economy among the Baltic States. Even though the indicators have slipped somewhat in 2019, this growth has created the fiscal space to shift focus to neglected policy challenges, including social inequalities, income disparities, and poor health and education outcomes. A recent reform package has shifted the tax system toward a progressive income tax and, while moderate in its scope, marks a welcome step in reducing the tax burden on low-wage earners. Ambitious education reforms have been announced, but their successful implementation remains far from guaranteed given the vocal opposition from teachers and local government authorities. A much-needed supplementary allocation to the healthcare budget was passed for 2018, but has not been implemented as promised in 2019, which has led to industrial action by medical practitioners. Overdue reforms of the healthcare system remain fraught with controversy as current drafts appear to prioritize tax collection over access to healthcare.
External threats to domestic security
The increasingly unpredictable international climate poses a continued threat to domestic security. Latvia has met its NATO defense spending goal of 2% of GDP in 2018 and 2019, although there has been some debate about the need to raise spending above the 2% mark. Contradictory pro-EU and pro-Russian narratives have been exacerbated by a lack of trusted, independent local media and tensions within Latvia’s bilingual population. The slow post-factum unveiling of Russian interference in European and U.S. elections raised questions about how Latvia would mitigate potential Russian interference in its own elections in 2018. Nevertheless, no significant interference was observed during the elections.
OECD-driven reforms being implemented
Latvia joined the OECD in 2016. Reforms advocated by the OECD are being implemented, including reforms to improve the management of state-owned enterprises, ensure political non-interference, and separate the state’s management and regulatory functions. While frameworks for the management of state-owned enterprises and for insolvency procedures have been improved, implementation remains a challenge. The Foreign Investors Council has identified issues undermining the foreign investment climate, including a lack of legal certainty in court decisions, tax policy, slow digitalization of services and demographic challenges to Latvia’s long-term immigration policy.
The government has significant strategic capacities. The Cross-Sectoral Coordination Centre (PKC) offers regular, quality assessments that feed into the day-to-day decision-making of government. However, the PKC has failed to establish its authority among the numerous voices in government decision-making, with the result that PKC analyses are often overlooked in favor of political expediency. Latvia’s governance system is increasingly open to evidence-based policymaking and external advice. While underfunded, the participation of academic experts and NGOs in policy development is increasingly the norm.
The parliament (Saeima) faces serious challenges in exercising executive oversight. In 2017, parliament established a parliamentary research unit. Its initial mandate, however, is quite narrow. The research unit provides several research products per year, defined and agreed upon via a collaborative process conducted during the preceding year. The limited scope of this mandate, as well as the small number of research staff, will prevent the research unit from having an impact on day-to-day legislative decision-making.
Citizens show low
trust in government
trust in government
Though Latvia has a stable democratic framework that protects civil rights, political liberties and democratic institutions, most citizens do not trust the government and are reluctant to participate politically. Only 22% of respondents to a recent public opinion poll agreed that they trusted the parliament and only 24% described the government as performing successfully. The government faces challenges in building trust, limiting the performance of the democratic system. Several reforms are necessary to improve governance, including protecting the independence of public broadcasting and rebuilding a solid anti-corruption institution.
Banking sector requires modernization
Latvia’s government must also rapidly modernize regulation of the banking sector, following the February 2018 report by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). The report accused ABLV, Latvia’s third-largest bank, of institutionalized money laundering. A few weeks after ABLV was prohibited from opening or maintaining correspondent accounts in the United States, ABLV went into liquidation. A similarly negative report from the Council of Europe’s MONEYVAL committee in August 2018 has stated that Latvia should be put on a “gray” list of countries if a long list of recommendations to reform banking regulation and oversight are not introduced within the next 12 months.