Raising investment to support growth in Latvia

Weak investment has weighed on the convergence process of Latvia towards higher living standards. Limited access to finance coupled with high informality, costly insolvency procedures, skilled labour shortages and weak competition have hampered business dynamism and innovation, weighing on productivity growth. To reduce high credit costs, it is key to foster competition in financial markets by reducing information asymmetries and switching costs for bank customers and strengthening competition enforcement. As capital markets are shallow compared to other euro area countries, listing of large state-owned enterprises and facilitating greater exposure of pension funds to domestic securities could help attract investors and raise access to finance. Improving contract enforcement and fostering the reallocation of resources to more productive firms will require reducing the cost of filing insolvency, expanding the remit of the Economic Court and continuing to fight corruption. This will also help raise the low level of trust in institutions, which is key to reducing high informality. As training provided by firms is among the lowest across EU countries, better cooperation among firms and with training providers in the design and delivery of training is needed. Further strengthening the resources and investigative powers of the Competition Council would help improve the enforcement of competitive neutrality, reduce the high barriers to entry and competition, and foster business dynamism and innovation.