During the past decade, investments in Latvia have amounted to 22.6% of gross domestic product, but increasing the volume and reducing the price could boost Latvia’s economic growth by at least 1% per year, according to Bank of Latvia economist Oļegs Krasnopjorovs.

Against Latvia’s 22.6% of GDP investments, Estonia’s has amounted to 26.6% of GDP, while in Lithuania it was 21.4% of GDP during the past ten years.

Krasnopjorovs argues that Latvia should not seek unreasonably high and arbitrary investment targets, because investment sums cannot be an end unto themselves. On the other hand, if Latvia invests suspiciously little in an area in comparison to other EU member states, that might point to problems which are restraining the implementation of potentially profitable investment projects in the relevant area.

The economist explains that fewer disincentives against investment can accelerate the accumulation of physical capital whilst also boosting economic growth in Latvia. Nine EU member states have had a higher share of investment against GDP than Latvia in recent years – Ireland, Estonia, the Czech Republic, Hungary, Austria, Sweden, Romania, Belgium and Finland.

Krasnopjorovs says that if Latvia were to invest the same share of GDP as Estonia, Czechia and Ireland, that would mean additional investments of nearly EUR 2 billion per year, which out significant boost Latvia’s output potential.

Increasing the share of investment in GDP to the level of the aforementioned member states (~26%) could accelerate Latvia’s potential GDP growth by 0.6% per year.

If the share of investment were to rise to the level of the top three EU member states (27.3% of GDP), Latvia’s GDP growth might rise by 0.8% instead.

The economist argues that just an attempt to remove barriers against investment by reducing their cost by 10% and reinvesting the money in investments could boost Latvia’s GDP growth rate by 0.4% per annum.

“Thus, by increasing the volume of investment and reducing its price, Latvia can boost economic growth by at least 1% per year,” Krasnopjorovs says.

Source: BNS

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