The work the public sector in Latvia does to attract investments, according to foreign investors, received the lowest score since 2016 last year, says Stockholm School of Economics in Riga and Foreign Investors Council in Latvia (FICIL) Foreign Sentiment Index 2023 implementer Arnis Sauka.
What was done in Latvia’s public sector to attract investments in the past 12 months was given a score of 2.4 on a scale up to five, where a score of 1 is “very bad”.
Latvia’s score was lower than that only in 2016, when it was 2.3. In 2020, for example, the public sector’s efforts in attracting investments was scored with a 3.1.
Authors of the index stress that investors say there is a lack of action and motivation from the public sector, adding that
there is process-oriented, not results-oriented action, and that there is a lack of progress. Investors appreciate the most the cooperation with the Ministry of Economics (11 out of 66 investors mentioned cooperation is positive), the State Revenue Service (VID) (nine out of 66), and Investment and Development Agency of Latvia (LIAA). At the same time, 10 interviewed investors mentioned cooperation with VID as the least successful, followed by Riga municipality and institutions associated with it (10 out of 66).
Looking at the changes to the attractiveness of Latvia’s investment environment in the past 12 months, investors positively mentioned Latvia’s exporting capabilities and tax policy. The geopolitical situation is mentioned as a factor that affects the investment environment in the country the most.
Sauka explains the geopolitical situation is similar across all three Baltic States, Poland and other countries of the region. This is why a comparison of Baltic States can help provide the best image of which factors negatively affect the investment environment score the most. Foreign investors who participated in the study said Lithuania and Estonia have stronger, more focused policies when it comes to improving the foreign investment environment.
As for looking at the forces driving Latvia’s economic competitiveness when compared to the two other Baltic States,
the majority of foreign investors mentioned factors responsible for economic growth: innovation ecosystem, infrastructure, workforce availability, education and re-skilling opportunities, investment incentives, health systems, knowledge technologies and innovation, productivity.
Sauka says that without increasing investments, it is difficult to improve policies in these sectors or expect an economic breakthrough in Latvia. Also, the fact that the factors indicated by foreign investors as less competitive largely explains the lag in the development of the Latvian economy from the rest of the Baltic States. “The conditions are relatively similar for us, but the neighbors still find money for investments in development – either we will be able to do this, or at least in the next few years we do not have high hopes of catching Lithuania and Estonia in development,” says Sauka.
The study also analyzed the main challenges faced by investors – progress or backsliding over the past 12 months. The results of the study show that, in terms of the overall management of the reduction of the shadow economy, the tools for its implementation, 32 out of 66 investors surveyed responded with one or two (no or little progress), 16 with four, none with five, which would mean “significant progress”. About the tools – carrots to motivate the fairest taxpayers, 40 out of 66 investors indicated that there was no or little progress, five gave a score of four, none gave a five.
Generally foreign investors can see the smallest amount of progress was made in all human capital development sectors, modernisation of the public sector.
The biggest amount of progress, on the other hand, was accomplished in the field of digitisation in public administration, improvement of transparency in the work done by VID, reduction of grey economy in management, the quality of investment protection legislation and efficiency of courts of law.
In this year’s study investors were asked the name five main areas in which they face and excessive administrative burden. Results show that there is a large administrative burden in all business sectors, but more so in the construction and real estate sector, labour market, justice system, tax administration, state support reception and public procurements.
Investors believe administrative procedures are no ineffective because there is high bureaucracy,
there is a lack of cooperation between state institutions, there are no clear work efficiency indexes for workers of state institutions. There are complex regulations and procedures that can be differently interpreted. There is no no centralised data management system – weak data quality, as well as a shortage of political priorities and political management.
Investors also say that as a result of ineffective administrative procedures, workers have excessive workloads, investments, innovations and business development is slowed, and the prices of goods and services are inflated.
Sauka notes that investors have proposals to solve the problem of the excessive administrative burden: reduce the bureaucratic apparatus, introduce the centralisation of administrative procedures, improve cooperation and communication between policy-makers and economic operators, promote digitalisation and the flow of data between public authorities, formulate a clear strategy for state and municipal institutions in order to promote coordinated and worthwhile use of resources, as well as create results-based key performance indicators for public administrations to improve their accountability.
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