Executive Summary

Growth creates
fiscal flexibility
Prior to the COVID-19 pandemic, economic growth in Latvia was persistently above the average EU rate, with the economy growing by an average of 3.3.% annually. The 2019 Global Competitiveness Index ranked Latvia 41st among 141 surveyed world economies. This growth created the fiscal space to shift focus to neglected policy challenges including social inequalities, income disparities, and poor health and education outcomes. For example, a pre-COVID reform package shifted the tax system toward a progressive income tax and, while moderate in its scope, marked 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.
Reform frameworks
in place
Latvia joined the OECD in 2016. Reforms advocated by the OECD have mostly been 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, aspects of tax policy, the slow rate at which services are being digitalized and demographic challenges to Latvia’s long-term immigration policy.
Improvements in the media sphere
Important improvements have occurred in the media environment, where a new Media Law has established a Public Electronic Media Council (to represent the public interest in the public electronic media sector) and a Media Ombudsman (to oversee the compliance of public electronic media services with their statutory purpose and operating principles, codes of ethics and editorial guidelines). These changes are expected to create a much clearer distinction between the political realm and media oversight functions.
Effective governance mechanisms
The government has significant strategic and planning capacity, and several improvements have occurred in the last couple of years in this regard. A new Legislative Portal has simplified interministerial cooperation during the development of legislation, and has made the process more transparent and collaborative. The Cross-Sectoral Coordination Center (PKC) offers regular, high-quality assessments and recommendations for improvement that feed into day-to-day government decision-making. Similarly, the State Chancellery oversees the compliance of policy documents and is effective in developing and implementing policy action plans.
Parliamentary oversight challenges
The parliament (Saeima) faces challenges in exercising executive oversight. In 2017, the legislative body established a parliamentary research unit. Its initial mandate, however, was quite narrow. The research unit produces 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, prevent the research unit from having an impact on day-to-day legislative decision-making.
Low levels of 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 16% of respondents in a recent public opinion poll agreed that they trusted the parliament, and only 17% trusted the Cabinet of Ministers. The government faces challenges in building trust, a fact that limits the performance of the democratic system. A number of reforms are necessary to improve governance, including protecting the independence of public broadcasting and rebuilding a solid anti-corruption institution.
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