Latvia's Macroeconomic Options in the Medium Term: Fiscal and Monetary Challenges of EU Membership

Latvia's Macroeconomic Options in the Medium Term: Fiscal and Monetary Challenges of EU Membership

Latvia's experience over the past decade shows that economic growth and real convergence can no longer be assumed to be exogenously driven processes determined by given technological improvements and relatively higher factor returns. Instead,...

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Bibliographic Details
Main Author:	Monga, Celestin
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, D.C. 2013
Subjects:	ACCOUNTING ADMINISTRATIVE PROCEDURES AGGREGATE DEMAND AGRICULTURE AUDITS BALANCE OF PAYMENTS BALANCE SHEET BANK OF LATVIA BANKING SECTOR BANKING SYSTEM BUDGET DEFICIT CAPITAL MARKETS CAPITAL PROJECTS CAPITAL REQUIREMENT CD CENTRAL BANK COMMERCIAL BANKS COMMUNISM COMMUNIST COMPETITIVENESS CONSOLIDATION CONSUMER PRICE INDEX CORRUPTION CPI CROWDING OUT DEBT DEFICITS DEMOCRACY DEMOGRAPHIC TRANSITION DEPOSITS DISTRIBUTION OF INCOME ECONOMIC ACTIVITY ECONOMIC DEVELOPMENT ECONOMIC EXPANSION ECONOMIC GROWTH ECONOMIC HISTORIANS EMPIRICAL RESEARCH EMPIRICAL STUDIES EXCHANGE RATE EXPENDITURE EXPENDITURES EXPORT GROWTH EXPORTS EXTERNAL SHOCKS FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIATION FINANCIAL MARKETS FINANCIAL SECTOR FINANCIAL SYSTEM FISCAL FISCAL ADJUSTMENT FISCAL BALANCE FISCAL DEFICIT FISCAL DISCIPLINE FISCAL POLICY FISCAL RESTRAINT FISCAL RULES FISCAL SITUATION FISCAL STANCE FIXED EXCHANGE RATE FOREIGN ASSETS FOREIGN BANKS FOREIGN BORROWING FOREIGN DIRECT INVESTMENT FOREIGN INVESTMENT FOREIGN TRADE FORESTRY GDP GDP PER CAPITA GOVERNMENT DEBT GOVERNMENT OFFICIALS GOVERNMENT REVENUE GOVERNMENT REVENUES GROSS DOMESTIC PRODUCT GROWTH RATE GROWTH RATES HOUSING IMPORTS INCOME INCOME LEVELS INFLATION INFLATION RATES INFORMAL SECTOR INSTITUTIONAL CHANGE INSTITUTIONAL DEVELOPMENT INTEREST RATE INTEREST RATES INTERNATIONAL COMPETITIVENESS INTERNATIONAL INVESTMENT BANK LABOR FORCE LABOR MARKET LABOR PRODUCTIVITY LAWS LEGAL REFORM LOCAL GOVERNMENT MACROECONOMIC PERFORMANCE MACROECONOMIC POLICIES MACROECONOMIC STABILIZATION MACROECONOMICS MATURITIES MINISTRY OF FINANCE MONETARY POLICIES MONETARY POLICY NATIONAL CONSENSUS NATIONS OIL OIL PRICES PENSION FUND POLICY DECISIONS POLITICAL CONSENSUS POLITICAL POWER POLITICAL UNCERTAINTY PRICE INCREASES PRICE STABILITY PRIVATIZATION PRIVATIZATION AGENCY PRODUCTIVITY PRODUCTIVITY GROWTH PRUDENTIAL REGULATIONS PUBLIC DEBT PUBLIC ENTERPRISES PUBLIC EXPENDITURE PUBLIC PROCUREMENT PUBLIC SECTOR REAL EXCHANGE RATE REAL GDP REAL INTEREST RATES REAL SECTOR REAL WAGE REFERENDUM REGULATORY FRAMEWORK SAVINGS SHORT-TERM DEBT SOCIAL SAFETY SOCIAL SAFETY NET STATE ENTERPRISE STATE ENTERPRISES SUSTAINABLE GROWTH TAX ADMINISTRATION TAX BURDEN TAX POLICY TAX RATES TAX REFORM TAX REVENUES TAX SYSTEM TELECOMMUNICATIONS TERMS OF TRADE TOTAL FACTOR PRODUCTIVITY TRADABLE GOODS TRADE BALANCE TRADE DEFICIT TRADE FLOWS TRADE REGIME TRANSITION ECONOMIES TRANSPARENCY UNEMPLOYMENT UNEMPLOYMENT RATE VALUATION WORLD TRADE ORGANIZATION WTO MACROECONOMICS ECONOMIC MODELS TAX REDUCTIONS PRICE STABILIZATION EUROPEAN UNION NORTH ATLANTIC TREATY ORGANIZATION
Online Access:	http://documents.worldbank.org/curated/en/2004/05/4101916/latvias-macroeconomic-options-medium-term-fiscal-monetary-challenges-european-union-membership-latvias-macroeconomic-options-medium-term-fiscal-monetary-challenges-european-union-membership http://hdl.handle.net/10986/14111

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Summary:	Latvia's experience over the past decade shows that economic growth and real convergence can no longer be assumed to be exogenously driven processes determined by given technological improvements and relatively higher factor returns. Instead, it is an endogenously driven process led by many variables, including policy variables. European Union membership clearly brings enormous economic benefits to Latvia. However, it also brings important challenges on the macroeconomic front, especially prior to the adoption of the euro. Substantial progress has been made toward fiscal consolidation since the mid-1990s but several risks remain. Given the facts that domestic demand remains buoyant and that Latvia will have to accommodate the expenditure commitments associated with NATO and EU membership while simultaneously aiming to fulfill the medium-term goal of a balanced budget, a more prudent fiscal policy should be the main short-term policy objective. The authorities should therefore reassess their current medium-term budget framework and strengthen their fiscal rules so that off-budget spending is eliminated and controls over spending ministries and local government finances are reinforced. They should also rethink any further tax reductions until a clear strategy is designed for compensating for projected losses in government revenues. Monetary policy can contribute to sustainable growth and job creation in Latvia in the medium and long term by providing an environment for price stability. It will have to be complemented by further microeconomic reforms and prudent wage developments aligned with productivity growth.

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