Transformation of Latvian economy is the way to overcome structural backwardness - Levits

  • 2023-06-22
  • LETA/TBT Staff

RIGA - A transformation of the Latvian economy is the way to overcome its structural backwardness, President Egils Levits said in an address to lawmakers at the last plenary of the parliament's spring session.

The outgoing president noted that in the short term it means regaining competitiveness, but in the long term it means promoting Latvia's sustainable development in the context of the European and global economy. In the president's view, sustainable development is the key to reducing inequities.

"Inequality in Latvia is significantly higher than the European average, but a redistribution of the existing gross domestic product is not a solution. It can only be a band-aid. The solution to inequality can only be a significant increase in gross domestic product, and this must happen faster than in our Baltic neighbors and faster than in Europe on average," the president said.

Levits said that this is only possible by carefully working on each of the elements and their interconnections. These elements are school education, higher education, science, research, innovation, production and exports. The president stressed that it is in this order that the end result is a continuously growing GDP.

"Unless these elements are fixed and in consistent with each other, no progress towards prosperity will be possible. Immigration would also be a pseudo-solution. It may solve the problems of a few specific companies, but it will create new problems that will be much, much more complex," the president warned.

He noted that the "cartload" of the Latvian economy is "moving too slowly" and that, in relative terms, Latvia is sliding backwards. In his address, the president focused on the obstacles that, in general, make up Latvia's "culture of backwardness".

The first, in Levitas' view, is the time factor. Reforms are only started when it is already almost too late. This applies to streamlining the school network, grading of hospitals and other reforms. According to Levits, these reforms have long been overgrown with moss. The same applies to employment policy, where there is a growing mismatch between labor market demand and labor supply.

The second factor is the perception of complexity. The president stressed that serious reforms are complex. The European Green Deal, the National Development Plan or any long-term program requires linking various reforms and activities of different ministries in a single, consistent chain.

Levits pointed out that he had spoken a lot about increasing funding for science, research and innovation. The government has committed to doubling it from 0.7 percent to 1.5 percent of GDP in four years. When this is achieved, the European average will approach 3 percent, though.

"We have a number of good scientists and research institutes, but innovation and its transfer to the economy is lagging. Sometimes it turns out that we have very brilliant, even ingenious solutions, but our capacity to tackle complex, structural problems is unforgivably weak. This is our country's negative feature against the background of Northern Europe," Levits said.

In his view, the third obstacle is ambition. The president stressed that reforms cannot be successful if there are no clear objectives and no successive paths to them. The National Development Plan approved by the government envisages that by 2030 Latvia will be a much more developed country than today, when it will have already come very close to, and in a number of indicators exceeded, the European Union (EU) average. The government's action plan, approved in December, contains more than 700 points, and people in Latvia would indeed live much better if these goals are achieved, but it is clear that the country's limited financial and human resources will not allow these goals to be achieved at the same time.

"Does the country have a clear road map of which goals should be prioritized and how far, which ones should be reduced, which ones should be postponed and which ones should perhaps be dropped altogether?" the president said.

The fourth factor mentioned by the president is Latvia's outdated governance structure. According to Levits, public administration is fragmented. It is unable to keep up with the constantly increasing complexity of society and the economy. He noted that the 14th Saeima had taken a step in the right direction by creating the Ministry of Climate and Energy.

According to Levits, it is impossible to achieve significant progress in areas such as demography, employment, digitalization, science and innovation if the scattered responsibilities of different ministries are not "pulled together" and overseen by a politically accountable official.

The fifth factor hindering national development is bureaucratization. The president stressed that bureaucracy is necessary. He acknowledged that it is unpopular, but it is a set of rules and procedures that provide predictability, rule of law, stability and clarity about how the state functions. However, the "original sin" of bureaucracy is the tendency to expand and hide behind the letter and lose meaning.

"We are wasting time and money, for example by failing to inject European structural funds or recovery funds into the economy on time. Bureaucratic constipations hinder the transfer of innovation. The procurement process is already tragically inefficient. And I could go on this way for a long time," said the president.

He stressed that he has called for a de-bureaucratisation unit in the public administration, which would review and eliminate unnecessary bureaucratic procedures. This would counterbalance the natural tendency of bureaucracy to expand.

The sixth obstacle mentioned by the president is the lack of reform practice. Levits stressed that one needs to know how to implement the reforms. They are often painful - if they are not painful, they are usually not reforms, but tinkering. In the president's view, reforms require not only good and correct ideas, but also the skills and knowledge to implement them.

"We need to be able to anticipate future needs and problems. Flexibility must be programmed into reforms. It must be possible to attract supporters and anticipate resistance. You have to be able to reassure those who will be the losers, you have to give them opportunities to not be such big losers," Levitt told the Saeima.

He explained that it is necessary to be able to put all the stages of the reform in a logical sequence without losing sight of the long-term goal. The reform in question must be part of the country's overall development plan. According to the president, a typical example of a reform with a good goal and a dilettantish implementation is School 2030.

"A badly done reform discredits a good goal. Reform performance, colleagues, is a science in itself. In Finland, Sitra, an independent reform institution, has been working since the 1960s to help the country reform. [...] I believe that Latvia also needs such an institution," said the president.

Taken together, these obstacles are causing reforms in Latvia to fail, furthering a "culture of underdevelopment", Levitas said. He told the Saeima that it was within the power and responsibility of lawmakers to remove these obstacles.