Embed This Data
- GDP (PPP):
- $34.9 billion
- 5.5% growth
- -1.7% 5-year compound annual growth
- $15,662 per capita
- Inflation (CPI):
- FDI Inflow:
Latvia’s economic freedom score is 66.5, making its economy the 55th freest in the 2013 Index. Its score is 1.3 points better than last year due to significantly improved scores in the management of government spending and labor freedom. Latvia is ranked 25th out of 43 countries in the Europe region, and its overall score is above the world average.
The global financial and economic turmoil took a heavy toll on Latvia, but the economy has gradually been recovering from the severe shock of the crisis, particularly since mid-2010, with determined budget-cutting measures. The political leadership appears to be committed to reform, and Latvia is now better positioned than some other countries in the region to achieve economic stabilization and regain robust levels of economic growth.
Latvia’s ongoing transition to a more dynamic and market-oriented economy has been facilitated by openness to foreign trade and the efficiency of business regulations designed to promote entrepreneurial activity. However, lingering corruption, exacerbated by a relatively inefficient judicial system, will undermine long-term competitiveness if left unaddressed.
Latvia regained its independence from the Soviet Union in 1991 and joined the European Union and NATO in 2004. A pro-Russia party won the September 2011 parliamentary elections, but Prime Minister Valdis Dombrovskis formed a center-right coalition without it. A referendum on making Russian an official language failed in February 2012, demonstrating Latvia’s deep ethnic divisions. The economy is developing its financial and transportation services, banking, electronics manufacturing, and dairy but was hit hard by the global financial crisis. Latvia is seeking membership in the Organisation for Economic Co-operation and Development. After losing a fifth of its output in the 2008–2009 crisis, the economy has resumed reasonable growth following an IMF-backed fiscal adjustment program. Formal-sector unemployment remains slightly below 16 percent.
The constitution guarantees the right to private ownership. The judiciary is constitutionally independent, but the court system remains inefficient and subject to long delays. A legal framework for the protection of intellectual property is in place, but enforcement is weak. Money laundering has been linked to tax evasion and the proceeds from Russian organized crime. Deep-rooted high-level corruption continues to cause concern.
The income tax rate is a flat 25 percent, and the corporate tax rate is a flat 15 percent. Other taxes include a value-added tax (VAT) and excise taxes. The overall tax burden amounts to 26.7 percent of total domestic income. Government spending is equivalent to 39.3 percent of GDP. The budget deficit, although declining, has been chronically high in recent years, and public debt is around 40 percent of GDP.
The overall regulatory framework is relatively efficient, and business start-up has been streamlined. Completing licensing requirements is less costly but still takes more than 200 days. The labor market lacks flexibility; non-salary costs of employing workers are high, and restrictions on work hours are rigid. Inflation has been declining. The government continues to influence prices through state-owned enterprises.
The trade-weighted average tariff rate is a low 1.6 percent as with other members of the European Union, and there are relatively few non-tariff barriers. Investment regulations are relatively transparent but slow in application. The financial sector has undergone regulatory adjustments since early 2009, with the government providing capital injections. The banking sector remains stable, and non-performing loans are declining.