Download PDF
Quick Facts
- Population:
- GDP (PPP):
- $50.6 billion
- 2.7% growth
- 2.7% 5-year compound annual growth
- $25,710 per capita
- Unemployment:
- Inflation (CPI):
- FDI Inflow:
Embed This Data
Latvia’s economic freedom score is 73.6, making its economy the 28th freest in the 2018 Index. Its overall score has decreased by 1.2 points, with a steep decline in the scores for government integrity and property rights overwhelming significant increases in the investment freedom and government spending indicators. Latvia is ranked 16th among 44 countries in the Europe region, and its overall score is above the regional and world averages.
Latvia is still dealing with fallout from a dramatic mid-2000s boom and bust. The government’s fiscal and monetary policies have contributed to emigration and expansion of the grey economy. Lack of institutional reforms and poor governance of and inefficiency in state-owned enterprises hinder the emergence of a more profitable private sector. Corruption continues to impede the attraction of foreign direct investment, increases the overall cost of doing business, and undermines government integrity and judicial effectiveness.
Background
Latvia regained its independence from the Soviet Union in 1991, joined the European Union and NATO in 2004, and joined the eurozone in 2014. Maris Kucinskis became prime minister in 2016 and heads a three-party center-right coalition that includes the Unity Party, the National Alliance, and the Union of Greens and Farmers. He replaced former Prime Minister Laimdota Straujuma of the Conservative Union, who stepped down in 2015. The pro-Russian Harmony party is the largest party in parliament. Latvia’s small, open economy relies on exports for more than half of GDP. Due to its geographical location, transit services are highly developed, as are timber and wood processing, agriculture and food products, and the machinery manufacturing and electronics industries.
Property rights and contracts are well enforced in Latvia. Although judicial independence is generally respected, the public views the court system as inefficient, politicized, and corrupt. There are significant concerns regarding the accountability of government. The law provides criminal penalties for corruption by officials, but the government does not consistently implement the law effectively.
The individual income tax rate is a flat 23 percent, and the corporate tax rate is a flat 15 percent. The overall tax burden equals 29.0 percent of total domestic income. Over the past three years, government spending has amounted to 37.0 percent of total output (GDP), and budget deficits have averaged 1.2 percent of GDP. Public debt is equivalent to 34.3 percent of GDP.
In 2016, Latvia improved access to credit information by launching a private credit bureau. The Law on Aid for Start-up Companies, which took effect in 2017, seeks to encourage startup ventures through favorable tax treatment. Latvia has a multilingual and highly educated workforce, and the culture promotes hard work and reliability. The government needs to improve oversight of its subsidized, state-owned enterprises for more efficient resource allocation.
Trade is extremely important to Latvia’s economy; the combined value of exports and imports equals 115 percent of GDP. The average applied tariff rate is 1.6 percent. Nontariff barriers impede some trade. In general, government policies do not significantly deter foreign investment. The financial sector has undergone government regulatory adjustments and capital injections. Banking remains stable, and the number of nonperforming loans is declining.