Increasing Latvia s competitiveness Dana Reizniece-Ozola 29th April, 2015
Fifty shades of our economy
Challenging factors Every third child lives in poverty
Challenging factors Our society is aging
Challenging factors 2,4 2.38 Number of inhabitatns, million. 2,3 2.29 2,2-15% 2,1 2.02 2,0-5% 1,9 1.96 1.93 1,8 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 The number of people decreasing Number of inhabitants decreasing The sharpest decrease expected in working age 5 5
Challenging factors Labour shortage 1200 1150 Unemployment rate 2007 6,1% Labour Supply Labour Demand 1100 1050 1000 950 900 850 800 750 Unemployment rate 2010 19,5% Unemployment rate 2020 6,4% 700 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Labour demand will continue increasing in the medium term, however, it will be more moderate At the same time, labour supply will decrease In medium-term the shortage of labour may become a critical issue 6
Challenging factors Number of prepared specialists in humanitarian and social sciences notably exceeds the demand Demand for engineering sciences and Information and communication specialists notably increases the supply. 140 120 piedāvājums pieprasījums 2013.g. prognoze 100 80 60 94 Izglītība 85 91 Humanitārās zinātnes un māksla Sociālās zinātnes, komerczinības un tiesības 135 122 104 Dabas zinātnes, matemātika un informācijas tehnoloģijas The quality of workforce not sufficient Inženierzinātnes, ražošana un būvniecība The quality of workforce insufficient Lauksaimniecība 98 Veselības aprūpe un sociālā labklājība 79 Pakalpojumi 7
Challenging factors IMBALANCES BETWEEN HIGHER EDUCATION SUPPLY AND LABOUR MARKER DEMAND The surplus of specialists in humanities and social sciences will increase in the coming years (in 2020 surplus of ~20 thsd), while the shortage could be in natural sciences, ICT and engineering professionals (in 2020 shortage of ~20 thsd) SHORTAGE IN LABOUR WITH SECONDARY PROFESSIONAL EDUCATION Over past 10 years, the economically active population with secondary professional education has dropped by a fifth, a similar decrease will be observed in the future LARGE PROPORTION OF YOUNG PEOPLE ENTERING THE LABOR MARKET WITHOUT ANY PARTICULAR SPECIALTY AND SKILLS About 30% of secondary education graduates do not continue their studies in higher education, while the demand for such labour falls LARGE SHARE OF LOW-SKILLED WORKFORCE In 2013 approximately 10% of the economically active population have primary or lower education level, and it is not expected in the near future their share could fall
Challenging factors External balance of goods and services is worst in EU
Challenging factors Plato in exports, growth ensured by internal consumption 170 160 150 Eksports IKP Iekšzemes pieprasījums 140 130 120 110 100 90 80 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015p
Challenging factors RU is our third biggest trade partner
Challenging factors High dependancy on external factors Export change divison, using regular market share analysis (LV export to the EU, structural changes in %) +29.4% +28.8% +12.1% -21.0% +3.7% +2.2% Ārējā pieprasījuma efekts Konkurētspējas efekts 2009 2010 2011 2012 2013 2014
COMPETITIVENESS HAS BEEN IMPROVED BY INCREASE OF PRODUCTIVITY AND LOWER LABOUR COSTS IN TIME OF CRISIS 440 390 340 290 Nominal unit labour cost based on persons, % chenges (right axis) Real labour productivity, 2000 = 100 (left axis) Labour costs, 2000 = 100 (left axis) 75 60 45 240 30 190 140 90 15 0 40 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014-15 13
Challenging facotrs: PRODUCTIVITY LEVEL IS RISING; STILL REMAINS AT THE RELATIVELY LOW LEVEL 70 60 Value added per employee, thousand EUR (at the price level of 2010) EU-28 LV LV / EU-28 (%, RHS) 50 40 30 20 10 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 14
Challenging factors Low share of manufacturing in GDP
Challenging factors «MIDDLE INCOME TRAP» Structure of manufacturing by technological level (%) Latvia Sweden, Denmark, Finland 5 11 29 55 14 35 26 26 High-technology manufacturing Medium high-technology manufacturing Medium high-technology manufacturing Low-technology manufacturing Economic advantages of Latvia are mainly in cheap labour and low technology sectors Rise of labour costs is inevitable due to increasing economic activities and open labour market conditions Latvia can loose competitiveness in a low segments faster than gain advantages in production of products with high value added Structural reforms are needed to facilitate transition from low to medium-high and high technology sectors 16
Challenging factors Low expenditure on research and development FI DE US AT EU-28 UE EE HU 2012-2013, % of GDP by source of finance ES MT SK Business financing State, university, NGO funding Foreign financing LT LV BG CY 0,0 1,0 2,0 3,0 4,0
Challenging factors Effects of previous policies in electricity sector - energy efficiency, costs of distribution and «MPC» 40,0 35,0 30,0 25,0 EUR/MWh 20,0 8,0 9,4 10,1 13,2 13,9 13,8 15,0 14,6 14,6 13,6 Subsidy_other Subsidy_LE 15,0 3,0 3,3 4,1 7,7 7,2 6,3 RES Other gas CHP 10,0 5,0 2,0 1,6 2,8 2,0 5,5 5,7 4,1 4,7 4,8 9,2 8,7 8,5 11,2 10,2 10,4 8,2 5,4 8,5 4,4 7,6 7,1 5,4 4,6 6,0 6,2 5,1 7,1 4,2 9,0 LE TEC 0,0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Encouraging factors GDP is growing GDP changes in EU 2014 vs. 2010, % 15 10 5 0-5 -10-15 -20 GDP dynamics, % 8,9 10,2 11,6 9,8 5,0 4,8 4,2 2,4 2,0-3,2-2,9-14,2 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015p n EM p p rognosis LV EE LT PL MT SK RO IE LU GB DE SE HU BG AT FR BE CZ DK NL FI SI ES CR IT PT CY EL -17,4-10,0-2,5-3,9-4,1-5,4-0,2-0,5 0,8 0,1 8,3 8,3 7,6 7,6 6,8 5,7 5,6 5,1 5,1 4,4 3,1 3,0 2,8 10,9 12,1 17,6 17,4 17,2-20 -10 0 10 20
Encouraging factors World Bank prognosis - steady growth of GDP
Encouraging factors GDP is growing indeed
More jobs Encouraging factors
Encouraging factors More well paid jobs in all regions of Latvia
Encouraging factors We are expecting more jobs in manufacturing
Encouraging factors Production ensures 2/3 of exports 14 12 10 Pakalpojumi Preces Transportation Tourism Construction Financial services, insurance Communiication IT, Services 8 6 4 Agriculture and Food production Wood and wood products Machinery Metal and metal products Chemical products Mineral prodcuts Manufacturing products Vechicles 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Encouraging factors Export gets more diversified Markets, % Product groups, % 100 100 14 15 20 23 23 Pārējās valstis 15 20 21 23 23 Pārējās preces 80 60 9 5 8 15 14 15 14 16 15 13 12 NVS valstis 80 60 6 13 11 15 13 14 16 16 11 9 Mehānismi, ierīces; elektroiekārtas Metāli un to izstrādājumi 40 16 16 17 18 Igaunija 40 37 22 19 16 17 Koks un koka izstrādājumi 20 0 65 40 35 31 32 2000 2007 2010 2013 2014 Lietuva ES-15 20 0 5 5 5 7 10 11 10 15 10 8 14 18 20 20 6 2000 2007 2010 2013 2014 Vieglās rūpniecības preces Ķīmiskās rūpniecības preces Lauksaimniecības un pārtikas produkti
LATVIA S POSITIONS IN VARIOUS COMPETITIVINESS REPORTS Latvia Estonia Lithuania Global Competitiviness report 42 29 41 Index of Economic Freedom 37 8 15 Doing Business 23 17 24 Recent trends have showed that main factors affecting global competitiviness are: Productivity and labour costs Energy costs Ease of doing business 29
FDI INFLOWS IN LATVIA Net inflow of foreign direct investment in 2014 reached 355.2million euro or 1.5% of GDP Source: Bank of Latvia Date, place The title of the presentation 30
FDI STOCK IN LATVIA BY SECTORS (in million euros) 12000 10000 8000 Not allocated economic activity Other services Transport and storage 6000 Trade and accommodation Construction 4000 2000 Other industry Manufacturing industry Agriculture 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 31
INVESTMENT PROJECT SUCCESS STORIES (LIAA only) 32
My policy key points More well paid jobs in all regions of Latvia Rise of manufacturing sector Favourable business environment
My policy key points National Industrial Policy & Smart Specialisation Strategy sets directions of support for : Labour availability, appropriate educational offer Access to finance, development of industrial zones Improving innovation capacity Export promotion, increasing the exports profitability Effective use of resources, including ensuring competitive energy prices Favorable tax policy Goals: 40% Productivity growth in manufacturing in 2020 compared to 2011 20% GDP share of manufacturing in 2020 1.5% Expenditures on R&D in % of GDP in 2020 73% Employment level in 2020 40% Increase of export volumes in 2020 compared to 2011
My policy key points INTERNAL CONSUMPTION + CHEAP LOANS EXPORT ORIENTED GROWTH COMPETITIVENESS EXPORT SECTORS GROWTH RELATED SERVICES SECTOR GROWTH CHEAP LABOUR INCOME GROWTH PRODUCTIVITY WELFARE Getting out of low cost economy
What we have done already Improved EU SF programmes Access to finance still topical
What we have done already Micro-enterprise tax 9% Improvements in construction sector Improvements in corporate income tax relief program for investments over 10 million EUR; tax exemptions for investment in technological equipment and R&D 70 annual measures for business environment improvements Improvements in quick loans market Opening the gas market and introducing OIK compensation for energy-intensive companies
Way to go in energy policy Reduction of the MPC for processing industry (July 1) By introducing the German system (compatible with the EC Guidelines) the reduction of the MPC to its level of the year 2012 for energy intensive companies of processing industries. Open questions till submission to the Cabinet of Ministers - the reduction threshold 1-30GWh, electricity intensity 16-20%, refund in the current account / at the end of the year. Support for the implementation of the new industrial connections (January 1, 2016) In addition to the rules of effective capacity use (in force from 2012) to reduce connection costs for new companies through full recovery from the Distribution network and not to apply the distribution network tariffs (variable components) during the repayment period of the capital costs. Modernization of the distribution tariffs (January 1, 2016) Gradual transition of the distribution tariff to connection capacity fee, that would provide incentives for more intensive industrial capacity usage. Decrease in the variable part of the tariff will reduce the average electricity costs per connection. Liberalisation of the gas market Rules of the use of the Incukalns underground gas storage and natural gas transmission system, unbundling of transmission and storage from Russian suppliers. The objective is gradual linkage of the wholesale prices to NBP (and other European gas hubs) similar to Nordpool Spot in electricity. Energy efficiency Focus on the alternative measures of the Energy Efficiency Directive to reduce the need to introduce a mandatory obligation scheme (avoiding a general increase in prices for consumers). Energy audits in industry. Energy efficiency terms in the fund support programs. 38
in solving the labour shortage/aging problem Way to go in primary and secondary education natural sciences and mathematics learning quality strengthened dual professional education development (new tax relief initiatives) highly qualified labour force attraction: share in highest education (5% 10%); easier immigration procedures for highly skilled workforce
Thank you!