2009 Index of Economic Freedom

Quick Facts

Population:

• 2.3 million

GDP (PPP):

• $35.1 billion
• 11.9% growth
• 9.0% 5-year compound annual growth
• $15350 per capita

Unemployment:

• 5.7%

Inflation (CPI):

• 10.1%

FDI Inflow:

• $1.6 billion

Latvia's economic freedom score is 66.6, making its economy the 45th freest in the 2009 Index. Its score decreased by 1.7 points, reflecting lower scores in seven of the 10 components of economic freedom. Latvia is ranked 23rd out of 43 countries in the Europe region.

Latvia's transition to a market-oriented economy has been facilitated by such reforms as trade liberalization and privatization of inefficient state-owned companies. The top income and corporate tax rates are competitive, and the transparency of business regulation promotes dynamic entrepreneurial activity. Foreign investment is welcome with a few restrictions. Latvia has achieved solid economic growth of around 9 percent over the past five years, and its unemployment rate has fallen to under 6 percent from double-digit rates in earlier years.

Latvia faces some ongoing challenges to overall economic freedom and continuing steady economic growth. Credit expansion has been very rapid, and macroeconomic imbalances are on the rise. The government needs to strengthen its efforts to keep public finance management under better control. Latvia also has room for improvement in securing strong property rights and tackling corruption. The judicial system is independent but subject to delays.

Background Back to the top

Latvia regained its independence when the Soviet Union collapsed in 1991. It joined the European Union and NATO in 2004, and its political system has remained stable despite regular changes of ruling coalitions. The economy, including financial and transportation services, banking, electronics manufacturing, and dairy, is developing quickly, and GDP has grown rapidly as a result. The currency and foreign investment flows are strong. Latvia's May 2005 admission to the European Exchange Rate Mechanism has further aligned its economy with that of the euro zone, and the country plans to adopt the euro between 2010 and 2012. A thriving private sector represents about 70 percent of GDP.

Business Freedom 73.8 Back to the top

The overall freedom to start, operate, and close a business is relatively well protected under Latvia's regulatory environment. Starting a business takes about half the world average of 38 days. Obtaining a business license takes less than the world average of 225 days. Closing a business is relatively straightforward.

Trade Freedom 85.8 Back to the top

Latvia's trade policy is the same as that of other members of the European Union. The common EU weighted average tariff rate was 2.1 percent in 2005. Non-tariff barriers reflected in EU policy include agricultural and manufacturing subsidies, import restrictions for some goods and services, market access restrictions in some service sectors, non-transparent and restrictive regulations and standards, and inconsistent customs administration across EU members. Ten points were deducted from Latvia's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 82.3 Back to the top

Latvia has a moderate income tax rate and a low corporate tax rate. The income tax rate is a flat 25 percent, except for self-employed individuals, who are subject to a 15 percent rate as of January 1, 2008. The corporate tax rate is 15 percent. Other taxes include a value-added tax (VAT) and a real estate tax. In the most recent year, overall tax revenue as a percentage of GDP was 30.4 percent.

Government Size 58.5 Back to the top

Total government expenditures, including consumption and transfer payments, are high. The budget deficit has been moderate. In the most recent year, government spending equaled 37.2 percent of GDP. In July 2008, the government passed a supplementary budget and ordered layoffs of 5 percent across all ministries to hold down expenditures.

Monetary Freedom71.1 Back to the top

Inflation is high, averaging 8.9 percent between 2005 and 2007. As a participant in the EU's Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. It also regulates rents, utility rates, transportation, and energy prices and influences prices through state-owned enterprises. Ten points were deducted from Latvia's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom70.0 Back to the top

Foreign investors receive national treatment and may invest in most sectors. Except for acquisitions of former state enterprises through the privatization process, there are no performance requirements for a foreign investor to establish, maintain, or expand an investment. Bureaucracy can be non-transparent, and resolution of commercial disputes can be slow. Residents and non-residents may hold foreign exchange accounts. There are no restrictions or controls on payments, transactions, transfers, or repatriation of profits. Foreign investors may own land subject to a number of restrictions.

Financial Freedom60.0 Back to the top

Latvia's modern financial sector includes substantial foreign participation that has improved the efficiency and institutional capacity of banking. Regulations are transparent and focus on accounting and financial standards, minimum capital requirements, restrictions on exposure, and foreign exchange. There were 21 commercial banks and four foreign bank branches as of mid-2008. Banking accounts for about 90 percent of total financial sector assets. Foreign banks receive domestic treatment. The one government-owned bank accounts for over 4 percent of assets. Efforts to combat money laundering have progressed slowly. There were about 20 insurance companies in 2004. The largest insurer is majority foreign-owned. Capital markets are not fully developed. The Riga Stock Exchange, part of a regional network that includes Nordic and most Baltic countries, remains small.

Property Rights55.0 Back to the top

The judiciary is constitutionally independent, but court hearings and the enforcement of decisions are inefficient and subject to long delays. Some judges are not well trained. The constitution guarantees the right to own private property, and there is a land title registration system. In an effort to meet EU and WTO requirements, Latvia has established a legal framework for the protection of intellectual property.

Freedom From Corruption48.0 Back to the top

Corruption is perceived as significant. Latvia ranks 51st out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Bribe-taking ranges from low-level bureaucrats in a position to delay or speed up procedures to high-level officials involved in awarding government contracts. Sources of laundered money primarily involve tax evasion but also appear to include criminal proceeds from Russian organized crime.

Labor Freedom61.6 Back to the top

Latvia's labor market regulations could be improved. The non-salary cost of employing a worker is high, and dismissing a redundant employee can be difficult. Restrictions on the number of work hours remain rigid.