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- GDP (PPP):
- $37.3 billion
- 5.6% growth
- -2.6% 5-year compound annual growth
- $18,255 per capita
- Inflation (CPI):
- FDI Inflow:
Latvia’s economic freedom score is 68.7, making its economy the 42nd freest in the 2014 Index. Its score is 2.2 points better than last year, reflecting broad-based improvements in eight of the 10 economic freedoms, notably business freedom, labor freedom, investment freedom, and freedom from corruption. Latvia is ranked 19th out of 43 countries in the Europe region, and its overall score is above the regional and world averages.
Over the 19 years during which it has been graded in the Index, Latvia has advanced its economic freedom score by nearly 14 points, a top-20 improvement. Score increases in seven of the 10 economic freedoms have been driven by trade liberalization, privatization, implementation of competitively low tax rates, and modernization of the regulatory environment. Recording its highest economic freedom score ever in the 2014 Index, Latvia’s economy remains “moderately free.”
Latvia’s transition to a more dynamic and market-oriented economy has been facilitated by openness to global commerce and efficient regulation designed to promote entrepreneurial activity. However, continued reforms, particularly to strengthen the independence of the judiciary and eradicate corruption, are needed to ensure progress toward greater prosperity.
Latvia regained its independence from the Soviet Union in 1991 and joined the European Union and NATO in 2004. After the October 2011 early elections, the Unity party, a center-right coalition led by Valdis Dombrovskis, formed a coalition with the pro-Russian Harmony Center and the Reform Party, allowing Dombrovskis to remain prime minister. A referendum on making Russian an official language failed in February 2012, reflecting Latvia’s deep ethnic divisions. Financial and transportation services, along with banking and electronics manufacturing, are developing despite the 2008 economic crisis. Given its International Monetary Fund–backed fiscal adjustment programs and compliance with Maastricht criteria, Latvia is planning to adopt the euro as its currency in 2014.
Corruption exists at every level of government. Despite laws strengthened in 2009, money laundering continues, linked especially to tax evasion and the proceeds from Russian organized crime. Judicial independence is generally respected, but inefficiency, politicization, and corruption remain problems. A legal framework for the protection of intellectual property is in place, but enforcement is weak.
The top individual income tax rate has fallen to 24 percent, and the top corporate tax rate is 15 percent. The individual rate is set to fall incrementally to 20 percent by 2015. Other taxes include a value-added tax (VAT) and excise taxes. The overall tax burden is 27.2 percent of gross domestic income. Government spending is 39 percent of GDP. Public debt is below 40 percent of gross domestic income.
The efficient regulatory framework supports entrepreneurial activity. Business formation and operation take place without bureaucratic interference. Despite some progress, the labor market lacks flexibility; non-salary costs of employing workers are high, and restrictions on work hours are rigid. To prepare for adoption of the euro in 2014, the government reduced its budget deficit in part by cutting state spending on subsidies.
EU members have a low 1.1 percent average tariff rate and, in general, few non-tariff barriers to trade. Latvia provides a relatively favorable environment for foreign investors. The financial sector has undertaken significant regulatory adjustments since early 2009, and the government has supported the sector through capital injections. New legislation has accelerated the process of liquidating ailing banks.