ECONOMY
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 U.S.S.R., 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 ruble 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--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%. At the end of the third quarter of 2008, Lithuania had accumulated foreign direct investments (FDI) of $12.8 billion, with U.S. investments amounting to $294 million, or 2.3% of FDI. 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.
Lithuania has privatized nearly all formerly state-owned enterprises. 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. The government has also
completed privatization of the national gas and power companies with "Lithuanian Railways" and Lithuanian Post remaining state-owned.
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. There
are operating commercial airports with scheduled international services at
Vilnius, Kaunas, and Klaipeda. The road system is good. Telecommunications have
improved greatly since independence as a result of heavy investment.
The last few years have been good for the Lithuanian economy. 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, with recession predicted for 2009. Economic growth was largely driven by private consumption. Lithuania's economy began to slow before worldwide financial turmoil developed in 2008, and the eventual effect of this turmoil upon the Lithuanian economy is not yet clear. The contribution of domestic market-oriented sectors has also increased. Growth in 2007 was strongest in construction, retail and wholesale trade, processing and light industries, and agriculture. 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. In 2008, inflation reached 11% in September, one of the highest levels in the EU. Construction activity decreased markedly in 2008, with this sector and real estate experiencing the brunt of the economic slowdown. Real estate prices dropped by approximately 20% compared to 2007. Greater development is needed in public policy and further progress in structural and agricultural reforms. However, the newly 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 LTL 3.4528 to EUR 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 $310 per month; the average wage now stands at $820 per month, a 17.9% increase from the previous year. Income tax reduction wage growth and global economic recession are starting to result in the return of some emigrants; in early 2006 emigration was 30% lower than in 2005, and in 2007 it dropped by approximately 4.7%.
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. Temporary spikes from the necessary excise tax increases and longer-term convergence forces will probably keep inflation above the Maastricht reference value. Credit growth has slowed, but Lithuania has yet to exhibit any signs of financial instability.
GDP (2008, third quarter): $13.3 billion.
Annual growth rate (2007): 8.9%.
Annual inflation rate (November 2008): 10.9%.
Unemployment rate (2008, third quarter): 5.9%.
Per capita income (2007): $11,348.
Natural resources: Limestone, clay, sand, gravel, iron ore, and granite.
Major sectors of the economy (2007): manufacturing 20%, wholesale and retail trade 17%, transport and communications 13%.
Trade: Exports (January-September 2008)--$15.9 billion: mineral products 26.5%, machinery and mechanical appliances 10.4%, vehicles and transport equipment 10.5%, chemicals 10%. Major export partners--EU 61.1%, CIS 24.6%. Imports (January-September 2008)--$20.8 billion: machinery and equipment 14.1%, mineral products 30.5%, transportation equipment 12.5%. Major import partners--EU 56.5%, CIS 35.0%.
