Economy and Trade
Today the largest and most populous of the Baltic States, the lands of Lithuania were first united in 1236. Over the next century, through alliances and conquest, Lithuania extended its territory to include most of present-day Belarus and Ukraine. By the end of the 14th century, Lithuania was the largest state in Europe. An alliance with Poland in 1386 resulted in the two states having a common ruler. Grand Duke Jogaila of Lithuania was crowned the King of Poland, which intensified Lithuania’s economic and cultural development, and oriented it toward the West. In 1569, Lithuania and Poland formally united into a single dual state, the Polish-Lithuanian Commonwealth. This entity survived until 1795, when its remnants were partitioned by surrounding countries. Lithuania regained its independence following World War I, but was annexed by the USSR in 1940. On 11 March 1990, Lithuania became the first of the Soviet republics to declare its independence, which was recognized by Moscow in September 1991. The last Russian troops withdrew in 1993. Lithuania subsequently restructured its economy for integration into Western European institutions; it joined both NATO and the European Union in spring 2004.
Economic Policy over 12 Months
In the second half of the 20th century, the Lithuanian economy underwent fundamental transformations. The Soviet occupation of 1940 brought Lithuania intensive industrialization and economic integration into the USSR, although the level of technology and state concern for environmental, health, and labor issues lagged far behind Western standards. Urbanization increased from 39% in 1959, to 68% in 1989. From 1949 to 1952, the Soviets abolished private ownership in agriculture, establishing collective and state farms. Production declined, and did not reach pre-war levels until the early 1960s. The intensification of agricultural production through intense chemical use and mechanization eventually doubled production, but created additional ecological problems.
The disadvantages of a centrally planned economy became evident after the collapse of the USSR in 1991, when Lithuania began its transition to a market economy. Owing to the availability of inexpensive natural resources, the industrial sector had become excessively energy-intensive, inefficient in its utilization of resources, and incapable of manufacturing internationally competitive products. More than 90% of Lithuania’s trade was with the rest of the USSR, which supplied Lithuanian industry with raw materials for production, and a market for its outputs. The need to sever these trading links, and to reduce the inefficient industrial sector led to serious economic difficulties. The process of privatization and the development of new companies slowly moved Lithuania from a command economy toward a free market. By 1998, the economy had survived the early years of uncertainty and several setbacks, including a banking crisis, and seemed poised for solid growth. However, the collapse of the Russian rouble in August 1998 shocked the economy into negative growth, and forced the reorientation of trade from Russia toward the West. In 1997, exports to former Soviet states were 45% of total Lithuanian exports. In 2006, exports to the East (the Commonwealth of Independent States, or CIS) were only 21% of the total, while exports to the EU-25 (European Union 25) were 63%, and to the United States, 4.3%.
Lithuania became a member of the World Trade Organization on May 31, 2001 and joined the European Union in May 2004. Despite Lithuania’s EU accession, its trade with its Central and Eastern European neighbors, and Russia in particular, accounts for a growing percentage of total trade. Privatization of the large, state-owned utilities is nearly complete. Foreign government and business support have helped in the transition from the old command economy to a market economy. It is bordered by Latvia to the north, Belarus to the southeast, Poland to the southwest, and Kaliningrad, a territory of Russia, to the west. It has 60 miles of sandy coastline, of which only 24 miles face the open Baltic Sea.
Economic Performance over 12 Months
Lithuania has grown on average by 8% per year over the last four years, driven by exports and domestic consumer demand. At the end of the third quarter of 2008, Lithuania had accumulated foreign direct investments (FDI) of US$12.8 billion. The current-account deficit in the second quarter of 2008 was 16.8% of GDP. However, preliminary figures show this dropping to 7.2% for the third quarter of 2008. The privatization of former state industries has gone well for the country. More than 79% of the economy’s output is generated by the private sector. The share of employees in the private sector exceeds 65%. The government of Lithuania completed banking-sector privatization in 2001, with 89% of this sector controlled by foreign—mainly Scandinavian—capital.
GDP growth: 3.2% (2008)
GDP per capita: US$17,700
CPI: 11% (2008)
Key interest rate: 6.86%
Unemployment: 4.8% (2008)
FDI: $16.43 billion
Current account deficit/surplus: −$6.775 billion (2008, est.)
Source: CIA World Factbook except where stated
The transportation infrastructure inherited from the Soviet period is adequate, and has been generally well maintained since independence. Lithuania has one ice-free seaport, with ferry services to German, Swedish, and Danish ports. Commercial airports at Vilnius, Kaunas, and Klaipeda operate scheduled international services. The road system is good.
Gross domestic product rose by 7.6% in 2005, and 7.4% in 2006. In 2007, Lithuania’s GDP grew by 8.9%. GDP is predicted to grow between 3% and 5% for 2008, but the economy is expected to fall in 2009. Lithuania’s economy began to slow before the worldwide financial turmoil developed in 2008, and the eventual effect of this turmoil upon the Lithuanian economy is not yet clear. In 2007, annual average inflation reached 5.8%, and the government’s budget deficit stood at approximately 0.5% of GDP. The government budget deficit is predicted to be 2.35% of GDP for 2008. Inflation reached 11% in September 2008, one of the highest levels in the European Union. Real-estate prices dropped by approximately 20% in 2008, by comparison with 2007. Greater development is needed in public policy, and further progress in structural and agricultural reforms. However, the recently elected center-right coalition has a fiscal austerity plan that may implement some of these reforms. Lithuania pegged its national currency—the litas—to the euro on February 2, 2002 at the rate of LTL3.4528 to €1.
Lithuanian income levels lag behind those of older EU members. Lower wages and high income taxes may have been factors that contributed to the trend of emigration to the wealthiest EU countries after Lithuania joined the European Union in 2004. In 2008, the flat income-tax rate was reduced to 24%. It may be reduced to 20% under the newly elected government’s fiscal austerity plan. Moreover, in 2008, the minimum wage increased to US$310 per month; the average wage now stands at US$820 per month, a 17.9% increase from the previous year.
The initial euro adoption target date of January 1, 2007 was postponed due to the high inflation rate of 2006. Achieving the Maastricht inflation criterion necessary to adopt the euro in 2010 will require significant fiscal tightening in Lithuania. Some commentators feel that euro adoption is unlikely before 2013.
Support for Inward Investment and Imports
The Lithuanian Development Agency deals with all inward investment. The country has free economic zones with tax benefits, and a one-stop shop service provided by the LDA.