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Lithuania: borrowing population is impossible | The transition to democracy in our region – Part III.

More than thirty years have passed since the dissolution of the Soviet Union, which left an enormous economic and political void in Central and Eastern Europe. In this series of articles, we explore the responses of the countries of the region to the new circumstances: how they could adapt to capitalism, how successful their democratization was, and what lessons they can learn from each other. We discuss Lithuania in Part III.

Our topic today is the last Baltic state: Lithuania. If you have already read the first two articles on Estonia and Latvia, you are probably familiar with the Baltic states’ situation under Soviet occupation, and you might remember what initial challenges these countries faced after their independence was restored. If you do not yet, we highly recommend reading it.  But if you want to start with Lithuania, here is a very brief crash course on the Baltic states’ contemporary history:

Firstly, when the Soviet Union collapsed, the Baltic countries were in a more advantageous position than the other post-Soviet states since their area was the most developed region of the USSR. Secondly, the traditionally agricultural region was experiencing massive industrialization during the Soviet occupation. Thirdly, the region is multiethnic due to the massive influx of Russians during the Soviet era. Fourthly, because of the economic transformation, the production of the agricultural, industrial, and service sectors has declined sharply, with inflation reaching 1000% in all three Baltic states.

Lithuania was larger in population and territory than its Baltic sisters when their independence was restored, and the situation is the same now. Lithuania had around 3.7 million inhabitants in 1990, compared to 2.7 million in Latvia and 1.6 million in Estonia. Compared to Estonia and Latvia, Lithuania’s ethnic heterogeneity is relatively low; only 20 percent of the country’s population are non-Lithuanians.

The country was the first Baltic state to gain independence from the Soviet Union in March 1990, but Latvia and Estonia followed their southern sister shortly after. Although the transition to democracy started earlier, Lithuania had worse macroeconomic conditions. The price increase of Russian raw material imports also had a more severe impact than in Estonia, which has its own raw material deposits. Lithuanians have experienced a massive drop in living standards, just like Estonians and Latvians.

In 1991 the Lithuanian government decided to use voucher privatization, and compensation procedures also began. In the following year, financial market liberalization started, making the free movement of capital easier. In September 1992, the two-tier banking system was introduced together with legislation on bankruptcy. The Vilnius Stock Exchange was established in 1993. As in Latvia, a temporary currency, talonas, was used between 1991 and 1993. In June 1993, the litas became Lithuania’s official currency, pegged to the U.S. dollar.

However, these measures alone could not tackle the high inflation. A little later than the other Baltic countries, in 1993, Lithuania also introduced a tight monetary policy, and by the middle of the year, inflation had fallen sharply. VAT was introduced in May 1994, and at the end of the year, export duties were abolished, fostering the country’s integration into the world economy.

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Privatization was completed by the second half of the 1990s, with smaller companies being privatized and most of the larger utilities and infrastructure companies being bought by foreign investors. The success is also reflected in the fact that by 1999, 70 percent of the country’s GDP came from the private sector.

Previously, the European Union comprised three pillars: the European Communities; the Common Foreign and Security Policy and the Police and Judicial Co-operation in Criminal Matters.

The European Communities ensured the free movement of capital and labor and established schemes to help the post-Soviet countries to catch up. Lithuania gained access to huge resources through these programs, which contributed significantly to developing many areas, including infrastructure, the private sector, public administration, education, the social sector, agriculture, environment protection, nuclear safety and security, and civil society.

In the first years of the 21st century, the country experienced strong economic growth, with a growth rate of approximately 8% every year between 2000 and 2007, an outstanding rate of catching up by international standards. But problems emerged soon: Following privatization, the initially very intensive foreign capital inflows have started to decline, and bank lending intensified. The Lithuanian current account deficit has also deteriorated.

Therefore, the country was already vulnerable before the global financial crisis hit. Nonetheless, Lithuania could respond quickly and effectively. The planned budget deficit was increased from 0.5 percent to 2.5-3 percent in 2008, and 4 percent in 2009, public sector wages and public institutions’ budgets were cut, and the government increased corporate tax, gambling tax, and excise duties. On the other hand, personal income tax was cut, which, together with other measures and government programs to stimulate investment after the crisis, helped to weather the storm.

Between the global financial crisis and the COVID-19 recession, the Lithuanian annual GDP fell only in 2015. In August 2014, Russia imposed an EU-wide import ban on products such as meat, vegetables, and dairy products, which affected the Baltic states, especially Lithuania, the most. There are no precise figures yet on the consequences of the COVID-19 pandemic on the Lithuanian GDP. Still, it is already apparent that the country could cope with the crisis well since, like in previous years, the economic growth will be higher than what the forecasts have suggested.

It is indisputable that the three Baltic states have followed a similar path since 1990. They have similar opportunities and identical problems, just the proportions differ. The first three articles of this series portrayed strong, independent states, but perhaps the region’s most pressing problem is population decline. Roughly 7.9 million people lived in the three countries in 1990, but only 7 million in 2009, and in 2020 the population of the region was just slightly above 6 million. There are two main reasons behind this negative trend: low birth rates and high negative net migration rates.

Lithuania is in a terrible situation since the country is experiencing one of the most severe demographic crises globally, with one of the world’s highest population decline rates, having lost almost a quarter of its population in 25 years since the early 1990s. In some regions, half of the population has disappeared. External migration is not the only explanation since internal migration is also significant as job opportunities are concentrated in a few cities, the capital Vilnius and, to a lesser extent, Klaipėda and Kaunas. Thus, many rural areas are full of vacant houses and empty schools, and the people who stay experience deteriorating public services. Internal migration and depopulation lead to segregation. Decent housing in the capital requires a high income since housing costs are sometimes almost as high as in Western European cities due to high demand and limited supply, while wages are just a third of Western incomes. Internal migration can therefore catalyze external migration.

We can learn from the contemporary history of Lithuania, Latvia, and Estonia that a country’s problems cannot always be measured in dollars, GDP growth, inflation rates, or annual budget deficits. Lithuania has successfully liberalized its economy, joined the EU, and is catching up with Western Europe, but in the last 30 years, the population declined by almost one million people. And borrowing population from the IMF is impossible.

We will explore Ukraine’s contemporary history in the next part.

The last part of the series is available here.

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