Presentation by Kārlis Bauze, Head of Monetary Policy Department of the Bank of Latvia at Country workshop: "EU Balance-of-Payments assistance for Latvia: Foundations of Success" organized by the European Commission, Directorate General for Economic and Financial Affairs, and the Bank of Latvia. Brussels, March 1, 2012

1. Roundtable: Lessons from
Latvia and the way forward
Karlis Bauze
EFC Member
Bank of Latvia
March 1, 2012

2. Labour market has been rather flexible,
unit labour costs have adjusted downwards
significantly
Unit Labour Cost index (2000 Q1 = 100)
-23%
-27%
Source: Eurostat data; Bank of Latvia staff estimation

3. Unemployment approaches its natural
level (unemployment was stable at ~10%
during pre-boom years)
Unemployment rate, % of economically active population
Source: State Employment Agency and Central Statistical Bureau data

4. Unemployment increase partly was driven
by layoffs in the public sector (1)
Number of job seekers and number of jobs in the public sector, ths.
Source: Central Statistical Bureau data

5. Unemployment increase partly was driven
by layoffs in the public sector (2)
Job seekers and the number of terminated jobs in the public sector , ths.
Number of
job seekers
Source: Central Statistical Bureau data

6. Economy has shifted from non-tradable to
tradable sector
2006-2007, average growth, % 2008-2009, average growth, % 2010-2011F, average growth, %
Source: Central Statistical Bureau of Latvia

7. Lessons learned for Latvia and other
countries
• For small, open and flexible economies internal adjustment
can be done and works well
• Fix where the problems are (fiscal, credit supply and wage
increase) and leave the right things intact (currency peg)
• Preconditions for internal adjustment:
o flexible labour market;
o willingness to do reforms;
o speed.
• More fiscal consolidation during early years to avoid reform
fatigue
• Reforms should be front-loaded
• The end of programme does not mean the end of reforms