Latvia can experience increased prosperity as well as efficient use of resources through productivity. It is crucial for Latvia to support its economic growth due to limited availability of resources as well as the increasingly global market competition (Porter 7). This essay will discuss the economic policies Latvia should adopt to improve productivity and as a result improve the standard of living.
Productivity on the micro, sectoral, as well as macro level, should be improved by the potential economic policies to be adopted. Among the primary conditions for balanced economics, the development includes the ability to reduce the productivity gap, maintaining wage increase rates that are high, while accomplishing the most rapid productivity convergence with the average of European Union. Although there is an uncertainty of investors, this can be achieved by attracting additional investments, increasing the total factor productivity, for instance, by improving the capacity of innovation, using resources efficiently, as well as developing a high-tech industry (Schwab 21).
The rate of saving as well as investment determines the rate of growth as well as the standard of living of the citizens of a country. The steady-state levels of capital, as well as output, is determined by the rate of saving. The Solow model argues that long-run living standards are determined by the rate of national saving. But this does not imply policymakers should increase the rate of saving. In the short run, more savings reduces the rate of consumption. There are several ways of increasing the rate of saving, for instance, reducing the rates of tax. When saving is taxed, the return to saving is reduced.
Also, the standard of living of the people of Latvia can be improved if there is a reduction in the personal income tax as well as business taxes. Cutting taxes promotes growth in several ways, for example, more people are encouraged to work hard, save as well as take more risks. More people are encouraged to invest in venture capital. Indexing tax brackets to inflation are essential apart from reducing the nominal tax rate. Incentives for the supply of labor, saving, as well as investment, is improved through lowering marginal tax rates.
The country should reduce non-plan revenue expenditure. Cutting business as well as personal taxes increases the aggregate supply and as a result, produces a real output growth that is non-inflationary. Additionally, the tax base is increased by such growth. This implies that the tax revenue is raised. Non-plan revenue expenditure needs to be cut in some areas, for example, in areas of housing as well as programs that support income to enhance reduction of public debts. The interest burden of such debt is reduced by a fall in the size of public debt.
The rate of productivity growth is the most critical factor that affects the living standards of the citizens of Latvia. The Solow model asserts that continued improvement in output, as well as consumption per worker, is enhanced by sustained growth in productivity. There are several ways of improving productivity, for instance, improving infrastructure, building human capital, entrepreneurship development, as well as encouraging research and development. The government should invest in infrastructure while the private sector invests in machinery as well as technology. The quality of infrastructure of a nation is strongly linked to productivity. Good transport systems reduce the cost of transportation as well as encourage industrialization. On the other hand, human capital enhances the ability of an economy to produce goods as well as services. Development of human capital is influenced by education policies, training of workers, as well as health programs. Also, when the government invests in scientific as well as technical research, the benefits spread throughout the economy. Research that is commercially oriented can improve the standard of living in the long run (Sweetman 12).
Works Cited
Porter, Michael E. "Enhancing the microeconomic foundations of prosperity: the current competitiveness index." The Global Competitiveness Report, 2001-2002 (2001).
Schwab, Klaus. "The global competitiveness report 2010-2011." Geneva: World Economic Forum, 2010.
Sweetman, Arthur. "Working smarter: education and productivity." The review of economic performance and social progress 2 (2002).
