The rise of Digital Challengers How digitization can become the new growth engine for Latvia and Central and Eastern Europe (CEE)
Production Productivity Labor Capital (GDP) A L β K α Productivity GDP per hour Hours worked per Capital stock Capital expenditures Unemployment, Latvia, worked, 2017, EUR 1 year per employee, per employee, for fixed assets, 2017, % EUR mln 2 , 2016 2017 average growth similarly to in %, 2012-16 other CEE Northern EU markets, 64 6.1 1573 23 1.1 Digital cannot count Frontrunners 3 on traditional growth levers any more and 28 8.7 1875 4 -1.7 Latvia should look for the next growth engine Productivity lags behind Latvia has limited work capacity reserves – Economy in Latvia is under-capitalized Europe a declining unemployment rate, with working and the gap is growing hours above EU average 1 EUR current prices and purchasing power parities in current prices 2 Net assets per employee, at prices of 2010 3 Belgium, Denmark, Estonia, Finland, the Netherlands, Ireland, Luxembourg, Norway, Sweden SOURCE: Eurostat; OECD McKinsey & Company 2
Digital CEE Digital Frontrunners – EU Big 5 2 Latvia Challengers Sweden example Share of digital 6.5 6.5 6.9 9.0 economy 1 An acceleration is % GDP, 2016 needed for Latvia to catch up to Growth of digital 4.6 6.2 3.1 9.9 Europe’s Digital economy Frontrunners %, 2012-16 Growth of non-digital economy 2.2 2.6 1.2 2.2 %, 2012-16 1 Digital economy is calculated as sum of sectors: ICT, e-commerce and consumer spending on digital equipment (e.g., computers, smartphones, smartwatches) 2 Spain, France, Germany, UK, Italy SOURCE: Eurostat; Local institutes of statistics; McKinsey Global Institute McKinsey & Company 3
2025 Digital economy growth potential for the CEE Digital Challengers & Latvia in the aspirational scenario EUR bn 276 The digital 16% GDP +1 percentage point of GDP economy in growth each year 2025 can bring up to 200 billion 2016 +200 EUR in GDP in 6.5 76 CEE Digital CEE and 4.9 Challengers 6% GDP billion in Latvia, 18% GDP +1.4 percentage point of GDP growth each year adding up to 1.4 p.p. to GDP +4.9 1.6 growth per year Latvia Capturing digitization potential in business and public sector 1 6.5% GDP Acceleration of e-commerce 1 Productivity growth captured by increase of traditional ICT usage (software, hardware, telecommunications) to the level of Sweden – representation of Digital Frontrunners SOURCE: Eurostat; Local statistical offices; IHS; McKinsey Global Institute McKinsey & Company 4
Latvia Digital Challengers Sweden as a digital frontrunner benchmark Digitization level of selected sectors Low: <~3% Averagei 1 : 3-10% High: >10% Finance and insurance Latvia’s digital potential Manufacturing can be achieved Professional and by addressing business services gaps in the Energy, digitization Utilities level of private Wholesale trade and public and retail trade sectors Transportation and warehousing Government and other services 1 Average level of all sectors (excluding the most advanced ICT sector and finance) SOURCE: Eurostat; Local institutes of statistics, McKinsey Global Institute McKinsey & Company 5
Good overall quality of the primary and secondary education systems (mathematics, reading and science literacy PISA 1 average of 487, close to Digital Frontrunners’ score of 505) Well educated workforce entering the job market 4.8% of all graduates are ICT graduates, higher than Digital Frontrunners benchmarks Four strengths supporting Latvia’s Digital Challenger Well developed digital infrastructure status Approx. 98% of the population with 4G access, above the level of Germany and France A favorable structure of economic growth – Based on the competitiveness of work, openness to the development of new sectors and the implementation of ambitious goals in the area of digitization 1 Program for International Student Assessment (PISA) SOURCE: Eurostat, OECD McKinsey & Company 6
Gap to Digital Frontrunners Scores in Math, Reading, Science Literacy & English Proficiency, PISA (OECD) Synthetic scores, 2016 505 482 477 505 -4.6% Math Overall primary and secondary 507 education quality 488 473 507 -3.7% Reading gap between Latvia and digital frontrunner countries is very small 506 490 477 506 -3.2% Science Avg. Digital Challengers Avg. Digital Frontrunners 1 Digital Frontrunners: Belgium, Denmark, Estonia, Finland, Holland, Ireland, Norway, Luxemburg, Sweden SOURCE: OECD, PISA, World Bank McKinsey & Company 7
Information and Communication technology graduates, % of all graduates 4.8 4.5 3.9 3.7 3.6 3.6 3.0 Latvia has a relatively very high share of ICT graduates as part of 1.0 its student population Digital Digital Frontrunners Challengers Average 1 Average Number of STEM graduates 164 244 296 303 143 226 215 221 per 100.000 inhabitants, 2016 1 Digital Frontrunners: Belgium, Denmark, Estonia, Finland, Holland (data for 2015 assumed), Ireland, Norway, Luxemburg, Sweden SOURCE: Eurostat, Unesco Institute for Statistics McKinsey & Company 8
Gap to Digital Frontrunners Percentage of populated areas coverage by 4G – measured as the average coverage of telecom, % of the country -0.3% 98 98 87 In addition to fixed Household covered by the standard fixed broadband (availability) and mobile internet % of the households coverage in Latvia -5.10% 98 93 94 being on a par with Digital Frontrunners, the Share of ultra fast broadband subscriptions >= 100Mbps country exhibits % of the households +34.49% one of the highest 35 26 20 shares of ultrafast broadband subscriptions in Price index of broadband price (synthetic score) Europe 87 87 83 +0.3% Avg. Digital Challengers Avg. Digital Frontrunners SOURCE: DESI 2018, World Economic Forum McKinsey & Company 9
Development of digital and soft skills among the general population Additional work needs to be done The adoption of digital tools in public and private sectors in three major areas Support innovation and entrepreneurship developments and further ease of running a digital business McKinsey & Company 10
Citizens with advanced digital skills 1 by age groups, North EU 2 Latvia vs. Northern Europe 2 Latvia % 100 Across all age 80 groups in Latvia, 12% the percentage of 60 people with 24% advanced digital 40 47% skills is below 53% Northern European 20 benchmarks 50% 0 16-24 25-34 34-44 45-54 55-64 1 Advanced digital skills - analysis and data collection using digital tools, the use of online tools such as banking or e-commerce, use of online communication 2 Belgium, Denmark, Estonia, Finland, the Netherlands, Ireland, Luxembourg, Norway, Sweden SOURCE: Eurostat, McKinsey & Company analysis McKinsey & Company 11
Selected digital tools S L SME Large Corporates % of enterprises using the tool, 2016 Cloud Paying to The private Using CRM computing Selling advertise systems services online online sector in Latvia is less advanced in L 50 32 20 35 the use of digital Latvia 16 8 11 23 S tools than the countries of 48 31 31 34 L Northern Europe; Avg. Digital Challengers SMEs do not fully S 20 13 14 24 use the potential of digitization 67 63 43 43 L Digital Frontrunners 36 35 21 32 S 1 Belgium, Denmark, Estonia, Finland, Netherlands, Ireland, Luxembourg, Norway, Sweden SOURCE: Eurostat McKinsey & Company 12
Public sector Private sector 1 6 Build skillset for the future by developing a Actively adopt technology and innovation wide-ranging reskilling strategy, updating youth (e.g., adapt your business model to meet the education for the future and actively demands of the digital economy) counteracting brain drain 7 10 Embrace a pro-digital organizational 2 Support technology adoption in the public culture sector (e.g., speeding up the development of 8 online public services and its adoption) recommendations Invest in human capital (e.g., prepare your talent strategy for the digital economy) to digitize 3 Support technology adoption among Latvia businesses (e.g., promote digitization benefits and digital transformation) 4 Individuals Strengthen regional cross-border digital collaboration ( e.g., create a strong digital pillar within regional collaboration platforms) 5 9 Improve startup eco-system through e.g., Prepare for the digital economy – invest in improving entrepreneurial talent pool and life-long learning increasing access to capital) 10 Take advantage of digital tools in all aspects of your life McKinsey & Company 13
Digital economy annual growth in Sweden – Digital 10% Challengers countries and Latvia may aspire to such a growth dynamic in the future Additional GDP potential can be Faster growth of the Digital 5 The digital 2x achieved by digital economy in Economy compared to the bn Non-Digital economy opportunity euro Latvia by 2025 in Latvia – summary Adoption of digital tools in public and private sectors and development of digital skills among the general population are essential to fully realize the potential of the digital economy in Latvia McKinsey & Company 14
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