Will Latvia catch up with the European average, and what speeds it up?
About 15 min read
The short answer
Most of the way Latvia goes on its own, if productivity keeps closing on the European average as it has so far. Income per head rises from 71 % of the EU average today to 82 % in 2040 if nothing changes. A balanced policy adds 3.8 points on top of that. It combines foreign investment, research support, a smaller shadow economy and education, and no single one of them adds more than a point or two.
Three of the four cost the budget. Research costs the most, about 1.8 points of GDP over 2028–2045. A smaller shadow economy earns, which is why the balanced policy earns overall. Wages rise under every package. Pensioners fall behind under all but the shadow-economy one, because pensions follow contributions, not wages.
Why it matters
Between 2005 and 2025 Latvia's income per head rose from 49 % to 71 % of the EU average. That is a lot, and yet Estonia and Lithuania went further over the same years; the Baltic comparison page explains why. The question on this page is different: what carries Latvia further, and how much of that is in policy's hands.
The answer to the first half is productivity, that is, how much one worker produces. On the base path productivity rises from 66 % of the EU average in 2025 to 85 % in 2040, and that is almost the whole source of convergence. The number of people in work falls by an eighth over the same years, and that pulls the other way: income per head grows more slowly than productivity. So Latvia's convergence is a productivity story, not a population story. That is why this page is about firms, investment and knowledge rather than migration; the workforce page covers that.
Why it matters beyond the number. Income per head in today's money, that is, at 2025 prices, rises on the base path from about 23,100 euro a year to 33,000 euro in 2040, and the average wage from 1,860 to 2,610 euro a month. That is what keeps people in Latvia, pays for pensions and lets the state spend on defence without cutting everything else. Almost every other question on this site becomes easier if this number is larger.
GDP per head relative to the EU average
Latvia's output per person compared with the EU average, adjusted for price levels.
Recorded data
Base path
Uncertainty band
The grey band shows how far the base path moves when the two most important assumptions are varied across their plausible ranges.
On the chart the dots are the recorded data and the line is the model's base path. The grey band is wide, from 76 to 89 % in 2040, and honestly so: it shows how far the path moves when the two assumptions that matter most are varied across their ranges. They are how fast productivity grows on its own, and how easily firms replace workers with equipment when workers get scarce. The model gives 72 % of the EU average for 2025; the recorded figure was 71 %. On the productivity row the model is a few points above the record for 2025, and the section "What to keep in mind" says what that means.
What drives it
Three feedbacks, two reinforcing and one balancing, and the balancing one matters most.
Catching up: a balancing circle. A country that lags can adopt technologies and ways of working that have already been tried elsewhere, and so grows faster than those ahead of it. The closer it gets to the European average, the less there is to adopt, and the slower convergence becomes. It is a circle that corrects itself. It is why Latvia has grown faster than Germany so far, and why it cannot grow that fast for ever. How strong this circle is, that is, how fast the gap closes each year, is the most important assumption on the base path.
The catch-up feedback. Plus means "the more of one, the more of the other", minus means the opposite. One minus in the chain means the circle balances: a larger gap produces faster growth, which shrinks the gap. That is why convergence slows down over the years.
Exports and learning: a reinforcing circle. Firms that export face more competition and a larger market, learn faster and become more productive; more productive firms can export more. The larger the share of firms that export, the faster productivity grows across the economy. This is the circle that the foreign investment and export support policies rely on.
Wages and people: a reinforcing circle. Higher productivity means higher wages, higher wages less emigration and more return, and a larger workforce a larger market and more investment. It is the same circle that the workforce page describes from the other side, and it is why productivity policy and workforce policy reinforce each other. In the 2030s it also has a cost: a labour market that tightens quickly lifts wages before productivity follows, and the economy cools for a few years. The public finances page says what that does to the budget.
Over the next fifteen years the catch-up circle dominates. It is what makes most of the journey happen under today's rules, and what makes each policy's gain a few points rather than tens. Policy can affect how fast firms adopt what is known, and how much of the economy is visible in the statistics and the tax base at all.
What can be done
Four policies, one per channel, all at one scale: not at the same cost, but at the same ambition. For each, the page says what it delivers in 2040 compared with the base path, what it costs the public budget, and how fast it acts. The cost to the budget is the package's own effect on the budget balance, added up over 2028–2045 in points of GDP. The difference in government debt in 2040 is shown beside it. Under the EU fiscal rules a package that spends is mostly paid for by cuts the rule forces elsewhere, and a package that earns lets the rule cut less, so the debt figure is smaller than the cost.
Foreign investment
What it is
attracting foreign firms one and a half times as actively as now, about six more medium and large firms a year.
What it delivers
income per head in 2040 0.9 points of the EU average higher; the average wage 0.8 % higher. Foreign firms are more productive and export more, and that pulls the others along.
What it costs
about 0.8 points of GDP over 2028–2045 before the rule responds, the least of the four. Government debt in 2040 unchanged, 0.0 points, because the rule's cuts elsewhere cover the cost and a larger economy pays part of it back. The pensioner poverty risk is 0.4 points higher, because wages grow faster than pensions.
How fast it acts
visible from 2034; building up a stock of firms takes years.
Research support
What it is
public support for business research and development twice today's.
What it delivers
income per head 1.6 points higher, the most of the four on its own; productivity 1.4 points; the average wage 1.3 % higher.
What it costs
about 1.8 points of GDP over 2028–2045 before the rule responds, the most of the four that cost. Government debt in 2040 +0.3 points, because the rule cuts elsewhere to pay for it and the larger economy carries the rest. The pensioner poverty risk 0.6 points higher.
How fast it acts
visible from 2031; knowledge accumulates slowly but durably.
A smaller shadow economy
What it is
the tax authority's ability to detect undeclared activity one and a half times stronger, and the tax burden on low wages a sixth lower, so that declaring pays.
What it delivers
the shadow economy, that is, economic activity hidden from the tax authorities, 6.1 points of GDP smaller in 2040; income per head 0.7 points higher; the average wage 0.4 % higher. The only one of the four that lowers the pensioner poverty risk, by 4.1 points, because declared wages mean pension contributions.
What it costs
it earns rather than costs: about 20 points of GDP for the budget over 2028–2045 before the rule responds, more than any other package on this page. The revenue builds up over the years, and the rule uses most of it to cut less elsewhere, so government debt in 2040 is 6.4 points lower. That number rests on an assumption that has not been measured in Latvia; the section "What to keep in mind" says what that means. Those who work in the shadows today pay.
How fast it acts
in the shadow economy at once, in income per head from 2032.
Education
What it is
teachers' pay a fifth higher, a quarter more university places, adult learning one and a half times as wide, and a reform of what is taught.
What it delivers
income per head in 2040 0.2 points higher, the least of the four, because children who start school in 2028 are still in education in 2040. The gain comes later, which is an argument not against education but against delaying it.
What it costs
about 2.0 points of GDP over 2028–2045 before the rule responds. Government debt in 2040 +0.4 points, the rest absorbed by the rule's cuts elsewhere.
How fast it acts
visible from 2040, the slowest of every policy on this site.
What the packages do
Five packages, all from 2028 with a three-year phase-in. Four are single policies; the fifth is a balanced policy: all four plus two more, export support and access to credit, at the same time. Three more packages have been calculated and are listed in the table below the charts, among them foreign investment together with the profit tax from the public finances page.
Foreign investment. attracting foreign firms one and a half times as actively.
Research support. support for business research twice today's.
Smaller shadow economy. enforcement one and a half times stronger and a lower tax burden on low wages.
Education. teachers' pay, university places, adult learning and what is taught.
Balanced policy. all four plus export support and access to credit.
Income against Europe. On the base path Latvia is at 82 % of the EU average in 2040. The balanced policy gives 86 %, 3.8 points more, which is roughly the sum of the separate policies. They do not get in each other's way, but neither do they reinforce each other enough to see by 2040. Separately, research gives 1.6 points, foreign investment 0.9, the smaller shadow economy 0.7, education 0.2.
GDP per head relative to the EU average
Latvia's output per person compared with the EU average, adjusted for price levels.
Productivity shows the same picture with slightly larger numbers, because productivity grows faster than income per head when the number of workers is falling. The balanced policy lifts productivity in 2040 to 88 % of the EU average against 85 % on the base path.
The gain for people. Convergence with Europe is not a goal in itself; the goal is what people feel of it. The average wage in today's money, that is, at 2025 prices, rises on the base path from 1,860 euro a month in 2025 to 2,610 euro in 2040. The balanced policy lifts it to 2,690 euro, 3.1 % more; the separate policies by about one per cent each, education nothing before 2040. A more productive economy pays higher wages, and that is the most direct gain this page can show.
Average wage
The average gross monthly wage, with price rises taken out.
But not everyone gains equally. Pensions in Latvia follow contributions, not wages, so when wages grow faster, pensioners fall behind: foreign investment and research raise the pensioner poverty risk in 2040 by 0.4 and 0.6 points. The smaller shadow economy is the only one that lowers it, by 4.1 points, because declared wages mean contributions. That is why the balanced policy lowers the risk overall, by 4.6. The old-age income page explains why pensions fall behind wages even without these policies.
Pensioners at risk of poverty
Share of people aged 65 and over whose income is below 60 % of the national median.
The shadow economy. On the base path the shadow economy does not shrink by itself: it stays at about 22 % of GDP, 22 % in 2040. The shadow economy package is what moves it: 6.1 points of GDP lower in 2040, and the difference is still widening at the edge of the page. The other policies barely move it.
Shadow economy
Economic activity hidden from the tax authorities, as a share of GDP.
The price. Government debt was 47 % of GDP in 2025. On the base path it rises to 61 % in 2040; why it rises is explained on the public finances page. Before the EU rule's response, research costs the budget about 1.8 points of GDP over 2028–2045, education 2.0, foreign investment 0.8. The smaller shadow economy earns about 20 points, which is why the balanced policy earns overall, about 32 points, despite containing three policies that cost. The rule absorbs most of this. By 2040 government debt is 6.4 points lower under the smaller shadow economy and 12 points lower under the balanced policy, while the three policies that cost leave debt within half a point of the base path. The shadow economy figure is the number to trust least, and "What to keep in mind" says why.
Government debt
What the state owes, as a share of what the country produces in a year.
GDP per head relative to the EU average 2040, points
Government debt 2040, points
Firms and exporters
Export support one and a half times larger and the administrative burden a fifth lower: more firms exporting and more firms founded.
+0.9
−5.7
Credit and capital markets
Credit guarantees one and a half times larger, more competition among banks, a deeper capital market and a larger share of pension funds invested in Latvia.
+0.1
+0.3
Foreign investment with a profit tax
The foreign investment package together with a 15 % tax on retained profit (the capital package on the public finances page).
+0.2
−0.8
Assessment
Package
Income vs EU 2040, points
Productivity vs EU 2040, points
Average wage 2040
Pensioner poverty 2040, points
Budget cost 2028–2045, points of GDP
Government debt 2040, points
Who gains, who pays
Confidence
Foreign investment
+0.9
+0.7
+0.8 %
+0.4
−0.8
0.0
workers and exports gain; the budget pays a little; pensioners fall behind
medium
Research support
+1.6
+1.4
+1.3 %
+0.6
−1.8
+0.3
workers and firms gain; the budget pays; pensioners fall behind
medium
Smaller shadow economy
+0.7
+0.4
+0.4 %
−4.1
+19.7
−6.4
the budget, pensioners and honest firms gain; those who work in the shadows pay
low
Education
+0.2
0.0
0.0 %
0.0
−2.0
+0.4
those who are still young in 2040 gain; the budget pays now
medium
Balanced policy
+3.8
+3.0
+3.1 %
−4.6
+31.8
−11.8
almost everyone gains; the budget and debt columns rest on the shadow economy assumption
medium
Income, productivity, pensioner poverty and debt: difference from the base path in percentage points. Average wage: difference in per cent. Budget cost: the package's own effect on the budget balance before the EU rule's response, added up over 2028–2045 in points of GDP; a cost reads negative, an earning positive. Confidence: how sure the direction and size of the result are, given the assumptions it rests on.
The table says three things. First, no policy on its own speeds convergence much: one or two points each, against about ten from the base path. The big number is the productivity assumption, not policy. Second, together they give roughly the sum, and only the sum is large enough to notice. That is an argument for a package, not for one chosen tool. Third, the gain is not shared equally. Wages rise under every package, but pensioners fall behind under foreign investment and research, and only the smaller shadow economy turns that around.
For a decision-maker three things follow. Attracting foreign investment is the cheapest route to productivity, and a profit tax cancels most of it: the table below the charts shows that the same package with a tax on retained profit delivers only 0.2 points. Research is the most expensive, but the largest single gain. And education has to start now precisely because it delivers almost nothing before 2040.
What to keep in mind
The base path's big number is an assumption. That Latvia is at 82 % of the EU average in 2040 rests on productivity continuing to close on the European average at the pace of 2005 to 2025. If convergence slows, as it tends to for countries approaching the European average, the base path is closer to the bottom of the band, 76 %. The policies' gains, measured as differences from the base path, change little with that. After 2040 the base path reaches 85 % in 2045, and the balanced policy adds 4.9 points then; those years rest on more assumptions than the years before, which is why the page prints 2040.
The 2030s are not a straight line. The labour market tightens by 2030, wages rise before productivity follows, and the economy cools in the middle of the decade; the public finances page shows what that does to the deficit. Convergence slows for a few years and then resumes. The band on the chart covers most of that, because one of its two assumptions is how easily firms replace workers with equipment, which sets how deep the dip is.
The model gives higher productivity for 2025 than the record. Recorded productivity in 2025 was 66 % of the EU average; the model gives 70 %. On the income per head row, the page's main one, the fit is good, but the productivity line starts a few points too high.
The budget effect of a smaller shadow economy rests on an assumption that has not been measured in Latvia. How strongly declared activity responds to stronger enforcement is taken from studies of other countries. If the response is half as strong, the budget gain is roughly half as large, and so is the balanced policy's, in both the budget column and the debt column. The effect on income changes little.
The European average moves too. Every number is against an EU average that is itself growing. Latvia converges only if it grows faster than the average, and the base path assumes that it does. If Europe grows faster than assumed, the same growth in Latvia's productivity delivers less convergence.
Education's gain is beyond the edge of the page. Children who start school in 2028 with better teachers and better content are only starting work after 2040. This package's numbers are small not because education does not work, but because twelve years is not enough to see it.
The uncertainty band covers two assumptions, not all of them. They are how fast productivity grows on its own, and how easily firms replace workers with equipment. Assumptions about how fast the gap to Europe closes, how productive foreign firms are, how much firms learn from exporting and how much of the workforce moves to more productive sectors are not in the band, and they all pull one way: if they are too optimistic, convergence is slower.
The 2028 start is an assumption. Every package starts in 2028 and reaches full strength in 2030. A later start shifts everything to the right; the relations between the policies stay the same.