How to foster competitiveness through structural reforms: The Latvian example

How to foster competitiveness through structural reforms: The Latvian example

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The economic reality of each country will demand some changes at some point. It is commonly mentioned in the topic of development; especially when it comes to Latvia and the Eurozone. In order to achieve positive results in the competitiveness rates, the implication of structural reforms is tremendously stressed by the European Commission and the OECD. Those organizations have insisted in the positive effects of structural reforms and they have stated that it is a possible way to face the actual demand crisis, since it ensures a maintainable growth. Latvia will increase its GDP in the long term by a ten percent thanks to an arrangement of some structural reforms.

CONCEPT OF STRUCTURAL REFORMS

Image courtesy of Matt at Flickr.com
Image courtesy of Matt at Flickr.com

Structural reforms are a commonly mentioned notion. Governments and International Organizations use to mention them every time a crisis is going on, but the understanding of the concept has several variations. Because they are commonly divided into many categories, the concept of structural reforms has become widely broad. There are three main types. The first one is product market reforms, and they are about the promotion of competitiveness in the product market, as the name suggests. The second one is labor market reforms: they are a series of measures that a government take in order to promote a flexible labor force and, of course to raise employment in times of crisis. The third one is human capital reforms, and their objective is focused in the promotion of human capital in sectors like healthcare, education and pensions.

PRODUCT MARKET REFORMS

The main goal of them is to foster economic competition and activity. By developing an environment friendly to business and by reducing the impact of state owned enterprises, product market reforms cause positive effects to market liberalizations. They do it through a series of measures that include an obstacle lifting to entrepreneurs, the reduction of the state owned impact and the support for foreign investors, in order to make the country attractive for them.

The regulation of the product market reform in Latvia, for example, it’s a little bit over the average of really strict countries of the Eurozone, like Germany; nevertheless, it lags in a significative way behind the states with the deepest product market regulations rate of the EU.

PRODUCT MARKET REFORMS IN LATVIA

Image courtesy of Clinton at Flickr.com
Image courtesy of Clinton at Flickr.com

Impediments for starting new businesses have negative consequences on a country’s economy. They make it harder for enterprises to access the local market, but it increases all kind of costs for the country’s consumers and foreign investors. Because those impediments increase prices to an unbearable level, the abolition of that kind of obstacles means a tremendous reduction of time and money that entrepreneurs and investors require for starting new businesses, and, subsequently, for increasing the competitiveness of the country itself.

This connection is explained through econometric techniques. The main conclusion is that the amount of new projects is particularly affected by the time they have to wait for permissions, and, especially, because of the Kafkaesque amount of procedures involved that State institutions ask for taking any step.

The question is: how can governments reduce that sort of obstacles and, in consequence, bringing others the opportunity of starting new businesses? One of the ways is, for instance, to accomplish a transition from manual systems of business registration to electronic ones. Another solution is to link the records of diverse public institutions in order to reduce procedures. A third possible way is to ease the stamp and signature standards. Another is to successfully reduce the charges of commissions. In the Baltic Country, the ease of starting businesses have had special attention, and it has been one of the measures behind the economic success of the beginning of the current decade. Also, the efficiency decisions that the Latvian government has taken about the law system, arbitration and bankruptcy regulations. The 2015 EC Report on Latvia concluded, among other points, that the needed time for successful dealing with court procedures is unnecessary long. Today, the Baltic Country finds itself in the low side of the innovation ranking of the whole Eurozone. Hence, the Latvian government will put into action a series of national reforms that will let the country to reach better levels of innovation and investment.

The short distance from border lines in different pointers is a confirmation that has been studied in the product market reforms area. It also has been detected on the international level where the Baltic Country has shown a positive reaction in terms of structural reforms. However, as months and years go on, the learned lessons from the 2008 crisis remain far in the past every time. Simultaneously, the intention of implementing reforms that go against the popular desires has been decreasing. Latvia is a case that shows how progress can be reached by this means that frighten other countries.

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