Increasing investment and lowering its price could boost Latvia's economic growth - economist

RIGA - Over the past 10 years, investments in Latvia have amounted to 22.6 percent of gross domestic product (GDP), but increasing the volume of investments and reducing their price could boost Latvia's economic growth by at least one percentage point per year, Bank of Latvia economist Oļegs Krasnopjorovs said.

Over the past 10 years, investment in Latvia accounted for 22.6 percent of GDP. In Estonia, it was 26.6 percent of GDP, and in Lithuania it was 21.4 percent of GDP.

Krasnopjorovs points out that, on the one hand, Latvia should certainly not aim for unreasonably high and arbitrary investment targets, and the amount of money invested cannot be an end in itself. On the other hand, if Latvia invests suspiciously little in an area compared to other European Union (EU) countries, this could point to problems that are holding back the realization of potentially profitable investment projects in that area.

The economist explains that removing these disincentives to investment can accelerate the accumulation of physical capital and boost Latvia's economic growth. Nine EU countries have had a higher share of investment in GDP than Latvia in recent years - Ireland, Estonia, Czech Republic, Hungary, Austria, Sweden, Romania, Belgium, Finland.

According to Krasnopjorovs, if Latvia were to invest the same share of GDP as Estonia, the Czech Republic and Ireland, this would mean additional investment of almost EUR 2 billion a year, which would significantly boost Latvia's production potential.

Increasing the share of investment in GDP to the level of the European Union's (EU) "top 6" countries (Ireland, Estonia, the Czech Republic, Hungary, Austria and Sweden), or to 26 percent, could accelerate Latvia's potential GDP growth rate by 0.6 percentage points per year.

Increasing the share of investment in GDP to the level of the EU top 3 (27.3 percent of GDP) could accelerate Latvia's potential GDP growth rate by 0.8 percentage points.

Krasnopjorovs also explains that investment in Latvia is more expensive than it should be, with more than half of all investment going into construction, which costs almost a fifth more than in other EU countries with similar income levels.

The economist argues that removing barriers to investment, by reducing their cost by 10 percent and investing the same money in investment, could accelerate Latvia's potential GDP growth rate by 0.4 percentage points per year.

"Thus, by increasing the volume of investment and reducing its price, Latvia's economic growth can be increased by at least one percentage point per year," Krasnopjorovs said.