LITHUANIA

Republic of Lithuania

Lietuvos Respublika

COUNTRY OVERVIEW

LOCATION AND SIZE.

An East European country bordering on the Baltic Sea, Lithuania has an area of 65,200 square kilometers (25,174 square miles) and a total coastline of 99 kilometers (62 miles). Lithuania is a mid-size country by European standards and is about the size of West Virginia. Lithuania's border countries are: Belarus, 502 kilometers (312 miles); Latvia, 453 kilometers (282 miles); Poland, 91 kilometers (57 miles); and Russia (Kaliningrad), 227 kilometers (141 miles). Vilnius, Lithuania's capital, is located in the country's southeastern part. Vilnius is also the nation's largest city with a population of about 600,000.

POPULATION.

The population of Lithuania was estimated at 3,620,800 in July of 2000 but the population is decreasing, that is the growth rate is negative (-0.29 percent). In 2000, the birth rate stood at 9.77 births per 1,000 while the death rate stood at 12.87 per 1,000, with suicide rates among the highest in the world. The nation's fertility rate is below replacement level with only 1.34 children born to each woman. In addition, Lithuania has an infant mortality rate with 14.67 deaths per 1,000 live births. The nation also loses population to immigration , a loss of 0.16 people per 1,000 members of the population. Life expectancy for males is 63.07 years and 75.41 years for females.

The Lithuanian population is close to 100 percent literate. The official language (Lithuanian) is related to the pre-Indo-European language Sanskrit, very archaic in its structure, and therefore studied around the world for comparative linguistic purposes. Polish and Russian are also widely spoken. Ethnic Lithuanians constitute some 80 percent of the population. The largest national minorities include Russians (9 percent), Poles (7 percent), and Belorussians (1.6 percent). Despite decades of the communist propaganda and persecutions, many religions survived in Lithuania, including Roman Catholicism (dominant), Lutheranism, Russian Orthodoxy, Judaism, and Islam. Reflecting average European levels of urbanization, most Lithuanians (68 percent) live in urban areas. By international standards, Lithuania's population is distributed rather evenly across the country with a population density of 56 per square kilometer (146 per square mile).

OVERVIEW OF ECONOMY

Lithuania is an economy in transition from the communist economic system to a Western-style market economy. During the years of communist control (1944-91), the economy was controlled by the government, and there were restrictions against the private ownership of property and businesses. Since the end of the communist era, Lithuania has become a regional trend-setter by aggressively pursuing economic liberalization programs.

Europe's largest country in the 16th century, Lithuania has a statehood tradition going as far back as the 11th century. However, Lithuania became part of Russia in 1795 and did not regain independence until after World War I (1918). Between World War I and the onset of World War II in 1939, Lithuania made substantial economic progress despite a lack of natural resources except for land. Predominantly based on agriculture, the economy developed rather close trade relationships with the Western world, especially Germany, United Kingdom, and Scandinavia. Lithuania exported agricultural products (mainly hog and poultry products) to these countries and imported advanced machinery and other industrial products from them. Lithuania's economic development level was well below that of the United Kingdom or Germany but was considered at par with some Central European and Scandinavian countries. Even during the Depression of the 1930s, the Lithuanian currency (litas) was strongest or second strongest in Europe. World War II and the Soviet occupation which began in 1940 interrupted Lithuania's independence until it was formally restored in 1990. The Soviets forced industrialization in a heavy, distorted way to the detriment of other economic sectors, especially production of consumer products and services. In 1990, the industry was dominated by 3 major branches: first, machinery and equipment including electronics; second, light industries; and third, food industries. Combined, these produced some 70 percent of the total industry output. Even if it brought some peculiar economic growth, the communist system imposed by the USSR slowed Lithuania's comparative economic development by at least 2 decades.

Postcommunist economies like Lithuania underwent a significant transformation recession coupled with the outburst of corrective inflation . On top of these systemic changes, Lithuania suffered trade disruption caused by the collapse of the Soviet Union which was and remains its main trade partner. In combination with the usual disruption stemming from the radical privatization and other transformation measures, this resulted in a drop in measured output. In all, there was a 40 percent drop in the officially measured GDP that Lithuania suffered in the first half of the 1990s. That loss of GDP was recovered in part by a subsequent growth as a result of radical economic reforms. However, Lithuania suffered again as a result of the Russian financial crisis of 1998. In 2000, economic growth exceeded 3 percent and will probably accelerate to about 5 percent in the near future.

Since independence from the Soviet Union, Lithuania has been attempting to radically transform the economy. This is being done by political and economic liberalization, macroeconomic stabilization, and privatization as the main elements of the transition strategy. In 1997 alone, some 200 state-owned companies were sold to private industry. By 2000, an additional US$725 million in government-owned companies were sold-off. By that same year, some two-thirds of the economy was in private hands and largely working according to the rules of a competitive market economy.

By 1998, Lithuania's economy closely resembled that of most other Western European countries. Agriculture accounted for 10 percent of the GDP, industry for 32 percent, and services for 58 percent. The country's main industries are metal-cutting machine tools, electric motors, television sets, refrigerators and freezers, petroleum refining, shipbuilding, furniture making, textiles, food processing, fertilizers, agricultural machinery, optical equipment, electronic components, and computers.

Over two-thirds of its economy is dependent on foreign markets, and Lithuania has sought to increase its attractiveness to foreign investors. By 1997, foreign capitalists had invested over US$1 billion in the Lithuanian economy, and in 1998, there was an additional US$510 million in new investments. The largest single foreign investor in Lithuania is the United States which accounts for about 18 percent of all foreign investment. The low labor costs and high level of education of the workforce, when combined with the country's geographic location at the crossroads of Northern Europe, account for the attraction that foreign investors have in Lithuania. Among the major foreign companies with operations in Lithuania are Amber Consortium (Sweden-Finland), Motorola (USA), Philip Morris (USA), SEB (Sweden), Williams, Inc.(USA), Royal Dutch-Shell (the Netherlands), and Coca Cola (USA).

Following independence in 1990, the Lithuanian economy grew rapidly during the first part of the decade (with average annual growth rates which exceeded 5.0 percent). However, following an economic crisis in Russia which began in 1998, Lithuania's GDP declined by 3 percent in 1999. Unemployment rose to 10 percent in 1999. In 2000, growth in the GDP returned with a rate of 3.3 percent. Inflation remains low at 3 percent, after reaching a high of 35.6 percent in 1995.

In 1999, the European Union (EU) agreed to initiate the process to allow Lithuania to join the regional trade and political organization, beginning in 2000. By joining the EU, Lithuania will be able to trade freely with the 15 members of the organization (a market of 350 million consumers). This should increase Lithuanian exports and make imports from the EU less expensive since tariffs and duties on imports and exports would be eliminated.

POLITICS, GOVERNMENT, AND TAXATION

After regaining independence and shedding the imposed communist system (1990), Lithuania is a fully functional parliamentary democracy. The chief of state is the president, and the head of the government is the premier (who is formally appointed by the president, subject to approval by the parliament). The president is directly elected by the people and serves a 5-year term. The parliament, known as the Seimas, has 141 members who are elected for 4-year terms. Of these, 71 are directly elected by the people while 70 are elected by proportional vote.

The current president, Valdas Adamkus, had lived in the United States for 30 years after World War II. The Lithuanian political scene is dominated by 3 groups or forces: right, left, and center. Widely credited with dealing a mortal blow to the Soviet Union and restoring Lithuanian independence in 1990, the Lithuanian Independence Movement (Sajudis) was led by the Lithuanian Conservatives with Vytautas Landsbergis at its helm. Landsbergis became the nation's head of state after independence.

In the fall of 1992, Lithuania set a new trend in the post-communist world as the right-wing forces (Conservatives) lost power to the ex-communist left (Lithuanian Democratic Party of Labor, LDLP). The people's hopes for improvements in living standards were dashed by the hard reality of disastrous and development-retarding communist legacies. In another trend set for the region, the Conservatives returned to power in 1996 but were replaced by the centrist New Policy bloc by 2000; in 2001, the left-leaning government was formed with the ex-communist Algirdas Brazauskas as its leader.

Since independence, all of the Lithuanian governments and political parties have supported the transition processes to markets and democracy. The right or conservative political parties are the Homeland Union and the Conservatives who have joined together in a coalition. These parties are more pro-business and pro-Western. The main centrist group is also a coalition of parties known as the New Policy bloc which includes the Center Union and the Democratic Party. The New Policy bloc supports policies that seek to balance business growth and social welfare programs. The left is made up of the former communist party, the LDLP, and genuine social democrats.

The LDLP is most resistant to transparent and rule-based privatization efforts, preferring the nomenklatura privatization instead. It has also supported increased taxation in order to expand government programs. Overall, due to privatization and other reforming efforts, the government plays a smaller and smaller role in the lives of Lithuanians. In 1997, the main privatization efforts began when the government sold the state-owned telephone company, Lithuanian Telecom. Additional privatization efforts have included the government-owned electric and utility companies. Overall, some 5,714 government-owned companies have been privatized. Still the government continues to own US$2.5 billion in property and businesses.

The government's budget in 1997 was US$1.7 billion, but it only had revenues of US$1.5 billion. The government deficit amounted to US$200 million or about 2.8 percent of the GDP. This situation marks a dramatic decline from the budget deficit of 9 percent of GDP in 1991. In 1999, the government spent US$181 million on defense or about 1.5 percent of the GDP. Lithuania seeks to join the North Atlantic Treaty Organization (NATO) and has worked to participate in NATO-led operations, including the peace-keeping mission in Bosnia. Lithuania receives foreign aid from a number of sources such as the EU and the United States. In 1995, foreign aid amounted to US$228.5 million.

The tax burden (mainly income and value-added taxes ) at some one-third of the GDP is moderate by international standards and will further be reduced as the liberalization progresses. Progress has been made in strengthening and improving the tax administration. This shift will result in the removal of tax arrears and an increase in tax revenue. Further training of staff and improved exchange and processing of information are also needed. While the accession process to the European Union does not involve full harmonization of taxes, still the EU is assisting Lithuania in this process. Tax revenues come from a variety of sources. Goods that are imported into Lithuania face import duties that range from 10 to 100 percent (but average 15 percent on most goods). The highest tariffs are on tobacco, automobiles, jewelry, and gasoline. Corporate tax rates are officially at 24 percent, but incentives designed to draw new companies to Lithuania allow these new firms to reduce their taxes by 70 percent for a period of up to 3 years. The personal income tax level is 33 percent with rates of between 10 to 35 percent on supplemental income from investments or interest dividends.

In an effort to anchor itself in the West and, therefore, ensure its autonomy from Russia, Lithuania has sought to join a number of West European organizations, including NATO and the EU. It is also a member of the World Trade Organization (WTO) which has reduced trade barriers and tariffs among member states. As a small country, Lithuania sees membership in these institutions as a way to protect itself from foreign influences and enhance its economy.

INFRASTRUCTURE, POWER, AND COMMUNICATIONS

Lithuania inherited a balanced transportation system (e.g. roads, aviation, merchant marine) from the Soviet period. However, the (broad gauge) railway system was

built to keep Lithuania integrated in the USSR and separated from the West. Privatization, modernization, and development of the priority transportation infrastructure is of particular importance for an east-west and north-south transit country like Lithuania, especially in view of the European Union accession process.

Lithuania has 71,375 kilometers (44,352 miles) of roads of which 64,951 kilometers (40,360 miles) are paved. There are 417 kilometers (259 miles) of expressways. All of the 2,002 kilometers (1,244 miles) of railways are broad gauge. Although Lithuania is a small nation, it has a substantial merchant marine fleet with 52 ships, including 23 cargo ships, 2 petroleum tankers, 3 passenger cruise ships, and 11 refrigerated cargo vessels. Lithuania has 600 kilometers (373 miles) of waterways that are navigable year-round. The nation's main ports are Kaunas and Klaipeda. Klaipeda is the largest port in the Baltics and handles 20 percent of all cargo imported to or exported from the region. In 1998, the port handled 16.1 million tons of cargo, and expansions will allow the facility to handle 30 million tons by 2004. There are 96 airports in Lithuania, but only 25 of them have paved runways. Vilnius, Kaunas, and Palanga have international airports. All told, Lithuanian Airlines carried 230,000 passengers in 1997. The United States supplied Lithuania with US$30 million to upgrade the airport at Siauliai which is now one of the largest cargo airports in Europe. Moreover, there are 105 kilometers (65 miles) of crude oil pipelines and 760 kilometers (472 miles) of natural gas pipelines.

The government is engaged in a variety of infrastructure improvement projects. By 2005, some 55 individual projects are scheduled for completion. These projects are in response to dramatic increases in land, sea, and air transport. For instance, since 1994, automobile traffic has increased by an annual rate of 15 to 20 percent per year. The nation's largest airport at Vilnius and the seaport of Klaipeda are both undergoing expansion and renovation projects. The other major project is the construction of the Via Baltica highway which will connect all the Baltic republics (Lithuania, Latvia, and Estonia). The EU would like to construct 2 major highways through Lithuania to allow the organization access to Russia and the other countries of the former Soviet Union. Although work has not begun on the road systems, the EU has already pledged aid for the projects.

Lithuania is also in the midst of constructing a power line to supply electrical exports to the West. Lithuania produced 15.58 billion kWh of electricity in 1998. Some 13 percent of this came from fossil fuels and 4.3 percent came from hydroelectric sources, but the overwhelming majority, 82.61 percent, came from nuclear power plants. The nation consumed 7.829 billion kWh of electricity in 1998 and exported 7 billion kWh while it imported 340 million kWh.

Lithuania's energy sector needs modernization as well. Post-Soviet Russia's supply network is unreliable and subject to political manipulations resulting in cuts of oil to Lithuania. The opening of the Butinge oil terminal on the Baltic Sea in 1999 allows Lithuania to diversify its supply of crude oil by sea. Currently, the nation has about 10 million barrels of proven oil reserves. Other sources of power, such as Ignalina nuclear power plant (of the Chernobyl type), are controversial for safety reasons. Electric power generation needs to be modernized and privatized, while new and profitable supply networks to Western Europe via Poland need to be established. Lithuania's power complex experiences substantial problems with generation, distribution, and sales. The capacity in the system is about 2 to 3 times higher than the national demand for power generation and gas distribution. As a result of inherited Soviet-style inefficiencies, losses amounted to about one-third of supply and were made worse by non-payment of debts by some clients, for example, in Belarus.

The telecommunications market in Lithuania is liberalized except for fixed-line telephony where Lietuvos Telekomas enjoys a monopoly until the end of 2002. A national fiber-optic cable system is nearing completion, and rural exchanges are being improved and expanded. By 1997, there were 1.1 million main telephone landlines in use. Mobile cellular systems are functioning and rather widely accessible. In 1997, about 297,500 mobile phones were in use. Access to the Internet is growing, and by 1999, there were 10 Internet service providers.

ECONOMIC SECTORS

After regaining independence in 1990, Lithuania underwent tremendous, regionally trend-setting changes in the sectoral structure of its economy as measured by the percentage of the individual sectors' contribution to the GDP and/or employment. As a result of the Soviet occupation and the imposition of the communist central planning, Lithuania's economy was distorted compared to Denmark, Finland, or other comparable, free Western countries. In 1990, agriculture still occupied a special place in the Lithuanian economy, providing about a quarter of jobs and about half of the GDP. Above all, however, Lithuania was industrialized in a heavy, distorted way reflecting the communist orthodoxy and Soviet imperialistic priorities which was to the detriment of services (especially modern services) and the modern welfare-increasing economic development in general. During the independence decade (1990-2000), the normal structure of a modern economy was largely restored in Lithuania, with the services dominating (58 percent) GDP, followed by industry (32 percent) and agriculture (10 percent). About 30 percent of Lithuanian workers are employed by industry, while 20 percent work in agriculture, and 50 percent work in services.

AGRICULTURE

With three-quarters of its labor force employed in agriculture, Lithuania was a predominantly agricultural economy in 1940. Half a century later, agriculture still occupied a special role in the Lithuanian economy, providing about a quarter of jobs and about half the national product. By 1990, Lithuania reached roughly one-fourth of the U.S. labor productivity in agriculture. Generally, Lithuanian agricultural production costs were 2 to 3 times higher than in Western countries at the end of the communist era.

Lithuanian agriculture remains inefficient by Western standards. Most small farmers do not have the capital or resources to acquire new equipment, and few utilize new forms of fertilizer and soil-management techniques. In 1998, agricultural production decreased by 4.3 percent, and in 1999, it decreased by 13.6 percent. However, increasing competition and access to new technology have slowly increased the efficiency of some farms (mainly the larger operations). In 2000, Lithuania had 67,800 family farms and 1,244 corporate-owned farms. Since 1990, about 2,000 family farms have gone out-of-business as unprofitable operations have been unable to survive the free market economy. Currently, the nation loses about 0.03-0.04 percent of its agricultural land each year. Agricultural workers are among the lowest paid laborers in Lithuania. In 2000, on average they only earned US$177 per month while the national average monthly wage was US$267.

About 3.37 million hectares are used for agriculture, and the average farm size is 12.6 hectares. In 1998, agricultural exports had a total value of US$564.1 million while imports totaled US$697.6 million. The main exports were butter, cheese, fish, milk, and pet food. Almost 80 percent of agricultural exports go to Russia. The main imports include processed foods and fruits. The main supplier of agricultural imports is the EU with some 52 percent of imports. The largest crops were potatoes at 1.7 million metric tons, sugar beets at 890,000 metric tons, and wheat at 837,000 metric tons. The main livestock products are beef and veal, chicken, lamb, pork, and horse.

INDUSTRY

During the period of Soviet control of Lithuania, the government tried to change the economy from one based on agriculture to one based on industry. However, in the post-Soviet era, industry has declined significantly in relation to the other segments of the economy. In 1999 alone, industrial production declined by 14 percent. There have also been deep cuts in employment in industry. For instance, in 1990 there were 25,000 workers in the electronics industry, but by 1997, that number had declined to 10,000. Lithuanian industry suffers from outdated equipment and a reliance on unstable markets in the nations of the former Soviet Union.

Industrial workers on average earn less than the national average of US$267 per month. Workers in manufacturing earn an average of US$260 per month, while construction workers earn about US$242 per month. Ironically, the low wages have been somewhat helpful for Lithuanian industry. Foreign companies have relocated manufacturing plants in the country precisely because labor costs are so inexpensive. Examples of such foreign industrial companies include Siemens of Germany, Sam-sung of Korea, Farimex of Switzerland, Shell Chemical of the United Kingdom and the Netherlands, and Wilhelm Becker of Germany. Hence while most areas of industry are in decline, there are several segments that have grown.

The chemical industry remains one of Lithuania's most profitable sectors. In 1997 it accounted for almost 10 percent of all Lithuanian exports. The main elements of the chemical sector include nitrogen and phosphate fertilizers which in 1997 made-up 41 percent of chemical exports. Other segments of the industry are pharmaceuticals, cosmetics and soap, and glues, oils and resinoids. Most chemical exports (about 50 percent) go to Russia and the former communist bloc nations of Europe. The textile industry also remains profitable. The segment has attracted US$40 million in foreign investment since 1990. In 1997, textiles accounted for 3.3 percent of the GDP and employed some 60,000 people in 100 large companies and 300 medium and small companies. About 75 percent of all textiles are exported. By 2000, almost 90 percent of textile production was done by either international firms or joint ventures between foreign companies and Lithuanian companies. Of the exports, 65 percent go to the EU and 20 percent go to the countries of the former Soviet Union. Although the electronics sector has declined, in 1997 it was responsible for US$120 million in revenue. Among the main electronic products are televisions, electronic measurement equipment, semiconductors, and other computer equipment.

Lithuania also has a significant wood and paper processing industry. In total, Lithuanian plants processed some 3 million cubic meters of timber. These products account for about 5.4 percent of exports. Some of the main wood-based products include furniture, cardboard, and printed boxes. The main export markets are France, Germany, and Denmark. Two international companies, Ochocco Lumber of the United States and Terminal Forest Products of Canada, have established several plants in Lithuania.

The rest of the industry produces diverse goods including consumer durables, e.g. refrigerators, consumer electronics, etc. There are small but growing and technologically advanced biotechnology, computer and Internet industries. Most of the industrial production is exported to the European countries.

SERVICES

Services now account for the bulk of the Lithuanian economy. Workers in this sector are among the highest paid in the country. For instance, workers in the financial service sector earn an average of US$517 per month while workers in general business and real estate earn US$375 per month. The low pay of Lithuanian workers has constrained the retail sector of the economy, since most workers have little excess money to spend on consumer items. However, the renewed economic growth which began in 2000 has already caused an increase of 5 percent in the retail sector.

FINANCIAL SERVICES.

The first private commercial banks in Lithuania since the period between World War I and II were established in 1989. The nation's banks underwent a period of consolidation in the mid-1990s during which several banks went out of business while others were acquired by larger banks through mergers and acquisitions. In response, the government passed a series of laws which placed additional regulations on banks in an effort to ensure their solvency . A number of international banks have a presence in Lithuania. These include Société Générale of France, Svedfund Financial Markets of Sweden, and DE GmbH of Germany. However, these banks only account for 3.1 percent of the banking market. About 42 percent of total banking assets were controlled by just 2 banks—both of them state-owned (al-though both are scheduled to be privatized by 2002). The nation's largest private bank, Vilniaus Bankas, is the largest bank among the Baltic nations. The insurance sector of Lithuania is vibrant with 31 different firms, including major multinational firms such as Lloyd's of the United Kingdom and Coris of France. From 1997 to 1998, insurance revenues increased by 40 percent.

TRAVEL AND TOURISM.

Since the end of Soviet control in 1990, tourism has increased significantly in Lithuania. Since 1996, tourist revenues have increased by 50 percent to over US$420 million in 1999. That same year, Lithuania received 3.7 million visitors or more tourists than there were people in the population. In 1997, tourism accounted for 4.2 percent of the GDP. The main tourist destination was the nation's capital, Vilnius, which received 58 percent of all visitors. This has led to the construction of 15 new hotels in the capital since 1996, including ones owned by Sheraton and Radisson. The increased number of tourists has led to a doubling of restaurants, clubs, and tourist shops since 1996.

INTERNATIONAL TRADE

For smaller countries like Lithuania, international trade and economic cooperation in general is of predominant importance for economic development. The forced reorientation of Lithuania's trade after its incorporation into the USSR resulted in a complete destruction of Lithuania's economic ties with the West (mainly United Kingdom and Germany). As a result of occupation, Lithuania was forced to forego multiple benefits flowing from foreign trade in general and the cooperation with the advanced market economies in particular. Only about 2 percent of its trade was with the West at the start of the post-Soviet independence in 1990.

With the international trade-to-GDP ratio at the level of some 90 percent, Lithuania is a strongly outward-oriented economy as of 2000. Its foreign trade is liberalized and regulated largely via market economy instruments known in the West and approved by the World Trade Organization (WTO) of which Lithuania is a member. The earlier licensing and foreign exchange surrender requirements have been repealed. Over two-thirds of the Lithuanian imports enter duty free; the rest face 5 to 15 percent duties, becoming more and more uniform as required by the WTO. By 2000, Lithuania maintained economic relations with over 160 countries. The country has bilateral trade treaties with 22 nations. However, accounting for almost one-quarter of Lithuania's trade turnover , Russia remains a major trade partner. Part of the Lithuanian output decline during transition was due to too slow a reorientation of trade away from the former Soviet Union (FSU) and towards the West. Foreign direct investment into Lithuania is still rather modest due to this and related factors having to do with instability in Russia and elsewhere in the FSU but also shortcomings of the Lithuanian reforms and some communist legacies.

From 1997 to 1999, the nation's imports increased by 27 percent, and its exports increased by 10.6 percent. Lithuania's main exports in 1998 included machinery and equipment (19 percent of exports), mineral products (19 percent), textiles and clothing (19 percent), and chemicals (10 percent). The nation's main export markets were Russia at 17.4 percent, Germany at 15.8 percent, Latvia at 12.7 percent, Denmark at 5.9 percent, and Belarus at 5.2 percent. In 1998, Lithuania's main imports were machinery and equipment at 30 percent, mineral products at 16 percent, chemicals at 9 percent, and textiles and clothing at 9 percent. In 1999, the country's major import partners were Russia with 20.4 percent of imports, Germany with 16.5 percent, Denmark with 3.8 percent, Belarus with 2.2 percent, and Latvia with 2 percent. Lithuania has consistently had a trade deficit . In 1996, the nation imported US$1.2 billion more than it exported, and by 1998 that deficit had increased to US$2.1 billion.

There seems to be a trend to go deeper into external debt . The external debt amounted to over US$2 billion at the end of 2000, balancing around the level of Lithuania's hard currency reserves. However, the increasing levels of foreign investment have helped offset the debt by providing inflows of capital for new investment. The Swedish-Finnish company, Amber Consortium, is the largest single investor in Lithuania with US$510 million in investments, followed by Williams International of the United States with US$150 million and Telia-Sonera, also a joint Swedish-Finnish firm, with US$66 million. By 2000, total foreign investment in Lithuania was US$2.66 billion. Investments in telecommunications accounted for 28.8 percent of total foreign investment while manufacturing accounted for 25 percent, and wholesale and retail trade accounted for 19.5 percent.

In an additional effort to attract foreign trade, in 1995, the Lithuania government established 3 free trade zones , located in Siauliai, Klaipeda, and Kaunas. Companies that locate themselves in these zones receive incentives of up to 30 percent of the cost of building or relocating to the areas.

The entry of Lithuania into the EU will greatly expand the nation's international trade. It will give Lithuania access to the markets of 15 countries which will also be able to use Lithuania as a gateway for entry into the markets of the former Soviet Union. Already, trade between Lithuania and the EU members has dramatically increased. Since 1997, exports to the EU have increased by 21.8 percent. Meanwhile imports from the EU increased by 13.3 percent. Lithuania is also a member of the Baltic free trade zone, a 1994 agreement between the 3 Baltic countries which abolished tariffs on all industrial goods traded among Lithuania, Latvia, and Estonia.

MONEY

As a result of Soviet legacies, Lithuania suffered rather severe price and monetary instabilities following independence in 1990. By 1995, inflation had reached 35.6 percent. In response, the Lithuanian government undertook a series of reforms that were assisted by the International Monetary Fund (IMF), an organization that lends money to governments to help them protect their national currency. By 1999, inflation had been reduced to 3 percent.

As part of the post-Soviet macroeconomic transformation, the Bank of Lithuania (B of L) was established as the main financial institution with both the currency exchange rate management and bank supervision functions. In 1994, Lithuania adopted a currency board

which means the value of the Lithuanian litas is fixed at the level of US$0.25 or 4 litai per U.S. dollar and guarantied by Lithuania's foreign exchange reserves . So the value of litas travels with the value of the U.S. dollar and no exchange rate policy is currently being conducted.

The Bank of Lithuania's main function is to protect the nation's currency. However, it also regulates the private commercial banks in Lithuania and sets interest rates. It also sells government bonds and treasury bills which help finance the debt. Interest rates vary between 6 to 10 percent per year. High interest rate levels largely reflect higher risk and volatility in the domestic capital markets. Foreign banks must receive approval before they are allowed to purchase more than 10 percent of the shares of a local bank.

Overall, the Lithuanian banking sector is rather small but operating smoothly as of 2000. It consists of 10 commercial banks, 1 special purpose bank, and 3 foreign bank branches. The share of the public sector in the capital of commercial banks continues to decline, to some one-third by 2000. At the same time, the share of domestic privately owned assets rose; the role of foreign private owners increased only slightly. The stability of the nation's banking sector was such that in 1996, Lithuania became the first country of the former Soviet Union to be granted a credit rating by such international firms as Standard & Poor's and Moody's. Because the government's bonds are rated as trustworthy by these firms, these bonds are more attractive to foreign investors.

The role of non-bank financial markets is still rather weak. While a relatively large number of firms are listed on the well-organized National Stock Exchange of Lithuania (NSEL) modelled after the Paris Bourse, trading is rather low and suffers from the shortages of liquidity , a condition affecting most stock exchanges in the post-communist economies.

POVERTY AND WEALTH

The legacy of Soviet control in Lithuania is one of poverty and deep disparities in income. Many Lithuanians have not adjusted well to the market economy. These

phenomena left most people of Lithuania quite poor at the beginning of the independence in 1990. True, nomenklatura lived well under the Soviets in the narrow material sense and the social security sense. But even nomenklatura were separated from the world and for that and other reasons were unable to make their lives richer in many respects.

In 1993, the wealthiest 10 percent of the population controlled 28 percent of the country's wealth, while the poorest 10 percent only controlled about 3 percent of the nation's wealth. Increases in Lithuania's unemployment rate have added to the nation's poverty. In 1996, unemployment was 6.2 percent, but by 2000, the rate had increased to 15 percent.

Those in Lithuania who earn or survive on US$28 per week or less are considered to be below the poverty line. In 1999, the poverty rate in Lithuania was 16 percent, but that wealth varies considerably. For instance, the rural poverty rate is 28 percent because of lower pay rates and higher unemployment rates among agricultural workers. Overall, some 55.1 percent of those living in poverty were aged 15 or younger.

The transition period is bringing its own opportunities and problems. An undisputed achievement of the transition period is the equilibrium on the consumer goods markets and the resultant wide choice of imported and domestic consumer goods available to those who can afford them. And the possession of some goods (e.g. cars, phones) increased tremendously compared to the Soviet period. As usual in a market economy, some people (younger, better educated) are able to live financially very well. Newly rich Lithuanians are not numerous but they are able to live lifestyles comparable to those of the average middle class members in the West or even better. However, some of Western ills (e.g. drugs) are making their way to Lithuania as well. Part of new wealth came from shadowy international dealings organized by the KGB (the notorious Soviet political police) and other

post-Soviet mafia. Other people (older, less educated or educated but more influenced by the communist system) suffer from higher levels of unemployment and the shortages of the social safety net. While they are able to subsist on usually rather small plots of land, most people living in rural areas are poor, old, and plagued by social ills (e.g. alcoholism) inherited from the Soviet period. They present one of the gravest problems. The Lithuanian government is trying to help people who find themselves below the poverty line, but the budgetary resources are very limited. The state provides unemployment insurance and both old age and disability pensions. It also provides limited assistance for housing. In addition, the efficiency of social assistance is low by international standards. It will take years of economic growth before the majority of the Lithuanian people are able to feel appreciable and broader-based improvements in their living standards.

WORKING CONDITIONS

There was nominally full employment in Soviet-occupied Lithuania except that there was some hidden unemployment and some forced "employment" characteristic of totalitarian regimes.

The Lithuanian constitution gives workers the right to establish and join unions, although there are limitations on the ability of security and law-enforcement personnel to strike. About 10 percent of businesses are unionized, and about 15 percent of workers belong to unions. Children may work at age 14 with parental consent or at age 16 with or without consent. The nation's minimum wage is US$107.50 per month. However, most workers earn more than the minimum wage, and wages vary considerably. Workers in the financial services sector earn an average monthly wage of US$517, while construction workers earn an average of US$242 per month and retail workers US$181. The standard work week is 40 hours, and there is overtime pay for hours worked in excess of 40. National laws mandate a minimum 28 days of vacation per year.

By 2000, unemployment reached 13 percent and is still growing. In 1999, the Lithuanian workforce numbered 1.8 million. About 18 percent of the workforce has a college degree, while an additional 44 percent have some specialized or technical degrees.

COUNTRY HISTORY AND ECONOMIC DEVELOPMENT

200 B.C. Baltic people settle in the area that is now Lithuania.

1200s A.D. The Lithuanian tribes become united in a loose political confederation.

1236. The Lithuanian state is founded by Duke (later king) Mindaugas.

1386-1795. Lithuania and Poland are united as a single country.

1387. Christianity is established in Lithuania.

1410. Teutonic knights are defeated by joint Lithuanian-Polish forces.

1569-1795. The Lithuanian-Polish Commonwealth (Lublin Union) occurs.

1579. The University of Vilnius (the oldest university in the Baltics) is founded.

1795-1915. Lithuania is under tsarist Russian rule.

1915-18. Lithuania is occupied by Germans during World War I.

1918. Modern Lithuania's independence is declared.

1921. Lithuania is admitted to the League of Nations.

1939. The Nazi-Soviet Pact divides Eastern Europe between Germany and the USSR.

1940. Lithuania is occupied by the USSR.

1941-44. Lithuania is occupied by Nazi Germany.

1944. Soviet occupation and re-imposition of the Soviet rule on Lithuania occurs.

1944-56. Armed resistance occurs against the Soviet occupation of Lithuania.

1957-87. Covert resistance occurs against communism with religious and secular dissent.

1990. Lithuania declares re-establishment of independence, a mortal blow to the USSR.

1991. Lithuania is admitted to the United Nations.

1993. Last Soviet troops withdraw from Lithuania.

1994. Lithuania becomes a member of NATO's Partnership-for-Peace Program; the nation becomes an associate member of the EU.

1997. The government undertakes a wide-scale privatization program.

1999. The EU agrees to initiate discussions to allow Lithuania to enter the organization.

FUTURE TRENDS

Despite a decade of determined and radical efforts at transforming the economy and society away from communism and other USSR-imposed distortions, Lithuania still faces challenges of further transformation to bring it into the European Union and NATO.

The so-called second generation reforms to be undertaken center on the modern role of the state in the European country and especially the interaction of public and private sectors in the process of economic development, given Lithuania's strategic economic interests and the nature of modern global economy.

Thus, further privatization of strategically important enterprises in the energy, transportation, and other infrastructure branches is required. Very important are the processes of enterprise exit of unviable enterprises from the Lithuanian economic system so they do not act as a burden to the state budget and release precious human and other resources for more productive uses, e.g. in the new economy. As of 2000, enterprise exit processes have been rather inefficient as about half of unviable firms in the bankruptcy stage stayed in that stage for 2 to 3 years, prolonging the negative consequences of the Soviet legacies. In the coming years, some 16,000 unviable enterprises will have to go bankrupt, hopefully using much more efficient processes. This will still be painful as some 180,000 employees need to be laid off in the process, temporarily pushing the unemployment rate even higher from its 13 percent level. These people will have to be either retired or trained for new jobs in the emerging modern economy.

The emergence of a modern economy will require liberalization of labor laws and other elements of the business environment so the new investments are attracted, especially from Western countries, and the enterprise entry is facilitated. In the digital age, new business models are emerging, and Lithuania badly needs to re-integrate the global economy using such modern approaches and Western investments. Further development of the Lithuanian market economy institutions (e.g. financial) is needed, especially in light of the transparency (e.g. in public procurement ) and other requirements of the European Union. Development steps should include the improvement of the social security finances and putting them on a more sustainable basis. This and other steps will help improve the efficiency of the social safety net and help fight poverty, a big problem especially in the rural areas. Above all, Lithuania needs to put a major effort into preserving and upgrading its very considerable human resources through appropriate reforms of health care and education. Last but not least, Lithuania needs to develop a strategy for long-term development of its competitive advantages within the European and global (digital) economies.

While during 1990-2000 Lithuania made valiant trend-setting efforts to shed the legacies of communism and the Soviet occupation, the next decade will be marked by no less determined efforts to join and work within the European Union, a totally different kind of union than the USSR.

DEPENDENCIES

Lithuania has no territories or colonies.

BIBLIOGRAPHY

Samonis, V. The Blueprint for Lithuania's Future: Main Premises. Toronto: University of Toronto, 1997.

—. From Dependence to Interdependence: Transforming Baltic Foreign Economic Relations. Indianapolis: The Hudson Institute, 1991.

—. Lietuvos Reformu Desimtmetis: Keliai, Klystkeliai, Problemos, Perspektyvos (Analize is Strategines Lyginamosios Perspektyvos). A Study for the Parliament of Lithuania, Vilnius, 1999.

—. "Lithuania's Economic Transformation." Osteuropa-Wirtschaft (Munich: Suedost-Institut), No. 2, 1996.

—. "Road Maps to Markets: Issues in the Theory of the Post-Communist Transformation," in Systemic Change in Post-Communist Economies, edited by Paul G. Hare. Houndmills: Macmillan Press Ltd, 1999.

—. State, Market and the Post-Communist Economic Transformation: A Macroanalytical Framework. Brussels: International Institute of Administrative Sciences, 1992.

—. Transforming Business Models in the Global Digital Economy: The Impact of the Internet. Bonn and Toronto: The Center for European Integration Studies and SEMI Online, 2000.

—, editor. Enterprise Restructuring and Foreign Investment in the Transforming East: The Impact of Privatization. New York: The Haworth Press Inc., 1998.

—, editor. Exit for Entry: Microrestructuring in Transition Economies. Amsterdam: Kluwer Academic Publishers, forthcoming.

Shen, Raphael. Restructuring the Baltic Economies: Disengaging Fifty Years of Integration With the USSR. Westport: Praeger, 1994.

U.S. Central Intelligence Agency. World Factbook 2001. <http://www.odci.gov/cia/publications/factbook/index.html>. Accessed September 2001.

U.S. Department of State. Background Notes: Lithuania. <http://www.state.gov/www/background_notes/lithuania_9801_bgn.html>. Accessed September 2001.

—. FY 2000 Country Commercial Guide: Lithuania. <http://www.state.gov/www/about_state/business/com_guides/2000/europe/lithuania_CCG2000.pdf>. Accessed September 2001.

—. 2000 Country Reports on Human Rights Practices: Lithuania. <http://www.state.gov/g/drl/rls/hrrpt/2000/eur/index.cfm?docid=691>. September 2001.

—Val Samonis

CAPITAL:

Vilnius.

MONETARY UNIT:

Litas (Lt). One litas equals 100 centas. There are notes in denominations of 1, 2, 5, 10, 20, 50, 100, 200, and 500 litas. There are 1, 2, and 5 litas coins, as well as 1, 2, 5, 10, 20, and 50 centas.

CHIEF EXPORTS:

Food products, textiles, consumer electronics, other manufactured goods.

CHIEF IMPORTS:

Oil, gas, machinery, equipment.

GROSS DOMESTIC PRODUCT:

US$15.5 billion (purchasing power parity, 2000 est.). [CIA World Factbook estimated GDP at purchasing power parity at US$17.3 billion for 1999.]

BALANCE OF TRADE:

Exports: US$4.033 billion (2000). Imports: US$5.043 billion (2000). [CIA World Factbook indicates exports were US$3.3 billion (f.o.b., 1999) and imports were US$4.5 billion (f.o.b., 1999).]