Lithuania - 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.