This Survey is published on the responsibility of the Economic and Development Review Committee of the OECD, which is charged with the examination of the economic situation of member countries.

The pandemic has hit the economy hard, but catch-up in per capita incomes has continued. Initial containment measures and restrictions were lifted in mid-2021, but a subsequent surge in case numbers following slow vaccination led to a three-month-long state of emergency and a short shutdown, weakening the pace of recent growth. Targeted fiscal support is being prudently maintained while pandemic restrictions are still in place. Increasing vaccination rates should lessen the need for such restrictions.

Like most other people around the world Latvians have suffered considerably from the COVID-19 pandemic. After having had few infections in the first wave in the spring of 2020 but a severe second wave, a new wave began to build in mid-summer 2021 (). Vaccination has been slow until recently, with only about 67% of the population fully vaccinated in mid-January 2022 (Panel C), below the OECD average rate, and with substantial internal geographic variation (Central Statistical Bureau, 2021[1]). Earlier containment measures were largely lifted at end-June, boosting economic activity, but a state of emergency was imposed for three months on 11 October following the summer resurgence of cases.

As a small economy with a shrinking population Latvia needs to rely on external markets to foster productivity and growth. Nevertheless, Latvia’s export performance has been weak in the last two decades. This may be attributable to its industrial structure, which is still dominated by low- and medium-low-tech firms, so that exporters rely on low labour costs rather than innovation. Business R&D spending as a share of GDP is low and has remained static. Insufficient workforce skills, weak incentives to invest in innovation activities and poor transport infrastructure restrict the ability of Latvian firms to compete, innovate and grow. To promote export growth and diversification, Latvia should improve the business environment for all firms and the governance of state-owned enterprises, intensify managerial skills, strengthen business networks and concentrate its export support on firms entering new markets. Enhancing work-based learning would help unleash the potential of the current pool of employees and facilitate the transformation to more complicated production processes. Increasing financial aid for graduate students, giving schools more flexibility in setting wages, exposing more students to advanced curricula, targeting especially students from poor socioeconomic backgrounds and enabling more non-EU citizens to work in Latvia would all help boost the number of entrepreneurs, innovators and high-skilled workers.