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Europe > Latvia, Republic of

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Cover IMF Working Papers
A Tale of Two Sectors: Why is Misallocation Higher in Services than in Manufacturing?
Daniel A Dias
,
Christine J. Richmond
, and
Carlos Robalo Marques
Recent empirical studies document that the level of resource misallocation in the service sector is significantly higher than in the manufacturing sector. We quantify the importance of this difference and study its sources. Conservative estimates for Portugal (2008) show that closing this gap, by reducing misallocation in the service sector to manufacturing levels, would boost aggregate gross output by around 12 percent and aggregate value added by around 31 percent. Differences in the effect and size of productivity shocks explain most of the gap in misallocation between manufacturing and services, while the remainder is explained by differences in firm productivity and age distribution. We interpret these results as stemming mainly from higher output price rigidity, greater labor adjustment costs and more informality in the service sector.
Keywords:
WP; service sector; Misallocation; productivity; firm-level data; structural transformation; Gelbach decomposition; productivity shock; efficiency gain; TFP distribution; factor share; productivity distribution; balance-sheet data; industry classification; industry level; manufacturing sector industry; output price rigidity; ol tne; output wedge; Services sector; Total factor productivity; Manufacturing
Cover IMF Staff Country Reports
Russian Federation: Financial Sector Assessment Program: Detailed Assessment of Observance Basel Core Principles for Effective Banking Supervision (BCP)
International Monetary Fund. European Dept.
This paper evaluates observance of the Basel Core Principles for Effective Banking Supervision in the Russian Federation. The legal framework currently in place provides the Central Bank of Russia (CBR) with necessary powers and responsibilities. The CBR may authorize banks, conduct ongoing supervision, oversee compliance with laws, and undertake corrective action to address safety and soundness. Major new reforms increase many aspects of the CBR’s duties and powers, although implementation has not yet been tested in all cases. The Russian licensing regime for banks appears exhaustive. However, the legal regime for major acquisitions was found to be weak.
Keywords:
ISCR; CR; credit institution; risk management; bank group; business strategy; internal audit; risk profile; Correspondent banking; Credit; Internal controls; Bank legislation; Anti-money laundering and combating the financing of terrorism (AML/CFT); Global
Cover Staff Discussion Notes
Emigration and Its Economic Impact on Eastern Europe
Mr. Ruben V Atoyan
,
Lone Engbo Christiansen
,
Allan Dizioli
,
Mr. Christian H Ebeke
,
Mr. Nadeem Ilahi
,
Ms. Anna Ilyina
,
Mr. Gil Mehrez
,
Mr. Haonan Qu
,
Ms. Faezeh Raei
,
Ms. Alaina P Rhee
, and
Ms. Daria V Zakharova
This paper analyses the impact of large and persistent emigration from Eastern European countries over the past 25 years on these countries’ growth and income convergence to advanced Europe. While emigration has likely benefited migrants themselves, the receiving countries and the EU as a whole, its impact on sending countries’ economies has been largely negative. The analysis suggests that labor outflows, particularly of skilled workers, lowered productivity growth, pushed up wages, and slowed growth and income convergence. At the same time, while remittance inflows supported financial deepening, consumption and investment in some countries, they also reduced incentives to work and led to exchange rate appreciations, eroding competiveness. The departure of the young also added to the fiscal pressures of already aging populations in Eastern Europe. The paper concludes with policy recommendations for sending countries to mitigate the negative impact of emigration on their economies, and the EU-wide initiatives that could support these efforts.
Keywords:
SDN; CESEE country; CESEE emigration; labor force; CESEE emigrant; migration flow; Emigration; remittances; growth; convergence; Eastern Europe; EU migration scenario; remittance inflow; Migration; Income; Labor force participation; Baltics; Western Europe; Europe; EU policy scenario; UN migration scenario; income convergence; impact of emigration; emigration from CESEE; Skilled labor
Cover IMF Staff Country Reports
Republic of Croatia: Selected Issues
International Monetary Fund. European Dept.
This paper mainly examines fiscal decentralization, credit-loss recovery, and unemployment in Croatia. The degree of expenditure and revenue decentralization in Croatia appears limited relative to its peers. At about 16 percent of general government spending, subnational government spending in Croatia is modest compared to other southeastern European countries and to the EU-28 average, and particularly low compared to the most decentralized countries in the EU. Croatia’s recovery since late 2014 has been moderate. Croatia’s recession lasted six years and was thus the longest among the new EU member states. Croatia’s structural and cyclical unemployment rates are very high, at about 11.5 percent and 5 percent respectively in 2015.
Keywords:
ISCR; CR; government; local government; wage; cyclical unemployment unemployment rate; unemployment trap; Subnational government; government structure; city authorities; reservation wage; Unemployment rate; Unemployment; Public employment; Nonperforming loans; Wages; Central and Eastern Europe; Global
Cover IMF Staff Country Reports
Republic of Latvia: Selected Issues Paper
International Monetary Fund. European Dept.
The aim of this paper is to examine selected issues related to Latvia’s economic development. Latvia experienced a large macroeconomic adjustment in the aftermath of the crisis in 2007. The adjustment was characterized by internal devaluation via a combination of wage restraint and productivity gains. Latvia’s creditless recovery has taken unusually long to turn compared to international experience. Although lack of credit has not undermined recovery so far, support from the financial sector will be crucial for its continuation going forward. Emphasis on resuscitating credit growth is key to maintaining recovery. Focus should be on facilitating access to credit for small- and medium-sized enterprises and first-time borrowers, where market failures are the largest.
Keywords:
ISCR; CR; firm; Latvia; lending; export orientation; firms TFP; firm level difference; NRD bank; credit growth; risk model; firm productivity; oriented firm; Credit; Total factor productivity; Productivity; Labor productivity; Bank credit; Baltics; Global
Cover IMF Staff Country Reports
Republic of Latvia: 2016 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Latvia
International Monetary Fund. European Dept.
This paper focuses on the key issues related to the economy of Latvia. Growth picked up somewhat last year despite a weak external environment. GDP growth rose to 2.7 percent, up about ¼ percent over the previous year. However, growth is expected to slow slightly in 2016 to 2½ percent. While Latvia continues to make steady economic progress, a key challenge will be to generate the growth necessary to sustain the pace of income convergence with Western Europe. Structural reforms will be required to improve state-owned enterprise governance and strengthen the business environment, upgrade public infrastructure, and modernize legal systems.
Keywords:
ISCR; CR; growth; staff appraisal; adjusted basis GDP; Latvia; authority; Q1 GDP; IMF staff estimate; EU rule; Non-resident deposits; Credit; Income; Minimum wages; Wages; Europe; Global; Western Europe
Cover IMF Staff Country Reports
Cross-Country Report on Minimum Wages: Selected Issues
International Monetary Fund. European Dept.
This paper provides a cross-country report on minimum wages. In the past few years, many countries in Central Eastern and Southeastern Europe (CESEE) have increasingly turned to minimum wage policies. Throughout the region, statutory minimum wages had been in place at least since the early 1990s, but they were typically set at relatively moderate levels and affected relatively few workers. Minimum wages have risen sharply relative to both average wages and labor productivity. Minimum wages often affect relatively more workers in CESEE than in Western Europe. Governments are the key players in the minimum wage determination in CESEE countries.
Keywords:
ISCR; CR; minimum wage hike; wage growth; minimum-to-average wage ratio; wage distribution; minimum wage policy; Minimum wages; Wages; Wage adjustments; Employment; Income distribution; Western Europe
Cover IMF Staff Country Reports
Republic of Estonia: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper analyzes income convergence and medium-term growth potential for Estonia. Estonia’s potential growth is projected to average some 3 percent over the next five years and 2.75 percent over the next two decades, implying continued income convergence with European Union levels, albeit at only half its historical pace. A number of policy enhancements could lift growth above this central projection. These include a greater operational policy focus on raising productivity growth, scaling up a number of envisaged pro-growth programs, supporting the upgrading of traditional industries as a second leg of innovation policy, and fully restoring Estonia’s high investment.
Keywords:
ISCR; CR; TFP growth; labor force; potential GDP; structural unemployment; capital stock; unemployment rate; Total factor productivity; Aging; Productivity; Western Europe; Europe; Central and Eastern Europe; Global; growth record; FDI inflow; R&D expenditure; staff team of the International Monetary Fund; qualification mismatch; Labor force participation
Cover Policy Papers
Balance Sheet Analysis in Fund Surveillance
International Monetary Fund
Balance sheets convey vital information about economic prospects and risks. Balance sheet analysis captures the role that financial frictions and mismatches play in creating fragility and amplifying shocks. This is key to understanding the macroeconomic outlook, identifying vulnerabilities, and tracing the transmission of potential shocks and policies. This paper reviews the use of balance sheet analysis in the Fund’s bilateral surveillance and introduces some practical examples of how it can be deepened. Recent evaluations of IMF surveillance––including the 2014 TSR––have emphasized the importance of strengthening balance sheet analysis and coverage of macro-financial issues. This paper is a first step that highlights useful examples of such analysis conducted by staff over the last decade, documents the data and tools that have been used, and mentions some limitations. In addition, it discusses recent improvements in the coverage and quality of balance sheet data through initiatives launched in the wake of the global crisis, as well as key remaining gaps, addressing which requires international collaboration.
Keywords:
PP; economy; asset; balance sheet; market; balance-sheet analysis; private sector; BSA matrix; sovereign bond; banking system; central bank; exchange rate; foreign exchange; interest rate; economic activity; mutual fund; credit risk; Financial statements; Balance sheet analysis; Financial sector; Emerging and frontier financial markets; Foreign currency exposure; Global; balance sheet data; B. addressing data gap; balance sheet analysis in fund surveillance; IMF surveillance; Sta team; balance sheets; Currencies
Cover Staff Discussion Notes
A Strategy for Resolving Europe's Problem Loans
Mr. Shekhar Aiyar
,
Mr. Wolfgang Bergthaler
,
Jose M Garrido
,
Ms. Anna Ilyina
,
Andreas Jobst
,
Mr. Kenneth H Kang
,
Dmitriy Kovtun
,
Ms. Yan Liu
,
Mr. Dermot Monaghan
, and
Ms. Marina Moretti
Europe’s banking system is weighed down by high levels of non-performing loans (NPLs), which are holding down credit growth and economic activity. This discussion note uses a new survey of European country authorities and banks to examine the structural obstacles that discourage banks from addressing their problem loans. A three pillared strategy is advocated to remedy the situation, comprising: (i) tightened supervisory policies, (ii) insolvency reforms, and (iii) the development of distressed debt markets.
Keywords:
SDN; book value; unsecured debt; expected return; profit sharing; NPL ratio; NPL resolution; bank capitalization; area bank; real GDP; bank profitability; capital buffer; Nonperforming loans; Distressed assets; Loans; Solvency; Debt restructuring; Europe; Global