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Doing Business

Lithuania Reforms Tax and Pension Systems

In late June the Lithuanian Parliament adopted a law that consolidated the employer and employee base for social security contributions and significantly cut the rate of contributions. Labor taxes were consolidated on the employee’s side, but the gross salary (salary before tax) will be recalculated by increasing it 1.289 fold. The employer’s rate of social security contributions was cut from 31.18 to 1.47 percent, and the employee’s contributions rate was raised from 9 percent to 19.5 percent.

The idea of consolidating social security contributions was first put forward by the Lithuanian Free Market Institute in 2014. Two years later four major political parties adopted this idea in their election programs and eventually it was incorporated in the new administration’s work program. Importantly, the consolidation of social security contributions is a step forward in terms of taxpayers’ awareness raising and creates a platform to advocate for further reductions in social security contributions. Notably, this reform will also lift Lithuania’s Doing Business ranking in the category of Ease of Paying Taxes from the 18th to the 6th position and the country’s overall ranking from 16th to 13th.

Lithuania has also introduced a cap on social security contributions for income exceeding a sum of 120 average wages per year (which is 8,900 euros per month) and provided for a gradual reduction in the “capped” level of employment income (to 6.200 Eur in 2020 and 4.400 Eur in 2021). The cap on the application of the tax deductible income has been increased from 1.3 to 2 average wages (1760 Eur). Mandatory health care insurance payments will not be capped.

These amendments will help to ease Lithuania’s labour tax burden which presently is heavier than the OECD member states’ average (40 percent vs. 36 percent). It will benefit 1.3 mln working population in Lithuania. An economic survey released by OECD on the occasion of Lithuania’s accession to this organization states that, in order to secure inclusive growth, Lithuania must reduce social security contributions, especially for low-income workers, while ensuring that benefits and deficit targets are maintained.

Although a cap on social security contributions is a step towards a fairer tax system, the “capped level“ is still very high. By comparison, the neighbouring Poland caps social security contributions at 2.3 average wages. Even the Scandinavian welfare state of Sweden caps pension contributions at 1.2 average wage. Even after 2021 Lithuania will still have one of the highest levels of a social security contribution cap in the EU.

At the same time though, Lithuania has phased out its 24 year-old flat tax regime. The personal income tax has been raised from 15 to 20 percent (with the basic pension fund being transferred from the state social insurance fund to the state budget) and introduced income tax progressivity. A tax of 27 percent has been imposed on income exceeding 120 average wages per year, with this income level to be lowered in the years to come to the size of the income capped by social security contributions.

The progressive income tax will have a minor impact on the state budget. The expected revenue is estimated to amount to around 4 mln Eur in 2019. The progressive PIT will be the second smallest source of budget revenues and its introduction can be viewed as a meaningless step.

Those reforms are estimated to bring budget losses of 200 mln Eur in 2019, but the government is planning to offset those losses through anti-shadow economy initiatives and economic growth. According to EC and Bank of Lithuania, economic growth is forecast to remain strong but is expected to slow down from 3.1 % in 2018 somewhat to 2.7% in 2019.

Labour taxation in Lithuania:


Along with the tax reform Lithuania adopted a very unsustainable pension reform. Working people will no longer be able to transfer 2 percent of their mandatory social security contributions into the second-pillar pension funds (the previous law stipulated a gradual increase in this proportion). Instead, a new formula for pension accumulation has been adopted, 0%+4%+2%. Contributions into pension funds will now comprise 4 percent of personal income and a supplementary contribution of 2 percent of the national average salary paid for the participant out of the state budget. Basically this means that the goal of transforming the PAYG system into saving for retirement is being abandoned. The law also foresees a quasi-mandatory mechanism of involvement in second-pillar pension funds. Given a reduction in the working-age population, the adopted pension reform is a serious step backwards.

Another distressing amendment is that the State Social Insurance Fund Board will become the only payer of pension annuities. This means that contributions accumulated in private pension accounts will ultimately end up in a state annuity fund. There will be fewer options for deferred annuity and inheritance of unpaid part of annuity.

These policy reforms were discussed at a policy conference “Can we do more to boost Lithuania’s competitiveness” which the Lithuanian Free Market Institute co-hosted with the Ministry of Economy of Lithuania and the Heritage Foundation in Vilnius on July 9th. The conference featured Simeon Djankov, Director of the Office of the Chief Economist of the World Bank and co-author of Doing Business Index, Ambassador Terry Miller, Director of the Center for International Trade and Economics at The Heritage Foundation, and Anthony Kim, Research Manager and Editor of the Index of Economic Freedom of The Heritage Foundation.

Sound Policy Reforms Push Lithuania in Doing Business Rankings

Ranked 16th in the 2018 Doing Business report by the World Bank, Lithuania has forged ahead by five positions largely thanks to the reforms backed by the Lithuanian Free Market Institute (LFMI). The country has long been praised for its rankings in the categories of starting a business, registering property, and enforcing contracts, but until recently, it has also been criticized for a heavy administrative burden and red tape pervading the areas of dealing with construction permits, getting electricity, and paying taxes.

To address the issue, back in 2015 LFMI took a three-year challenge to reduce time and effort required to get a building permit, to streamline the procedure of connecting new users to the electricity grid, and to merge the social security payments by employer and employee into a single payment. Their strategic action plan for increasing the country’s ranking embraced meticulous research designed to build the case for policy changes, formulation of specific policy proposals and legislative packages, as well as extensive advocacy and communication activities, including coalition building, testimonies, briefings, expert discussions, and intense publicity and media campaigns.

Given the Government’s aspiration to perform well in the Doing Business Rankings and readiness to simplify regulation in the areas of getting electricity and construction permits, LFMI has successfully tapped into the policy agenda to get their reform ideas across the finish line. A coalition building strategy first paid off in March 2016 as LFMI gained passage for regulatory amendments thus reducing the number of days it takes to get a permanent electricity connection by 20 days. Then, a new construction legislation of July 2016 incorporated five major proposals from LFMI, removing two excessive procedures for getting construction permits and cutting the number of days required for getting a construction license by 34 days. Taken together, these amendments have pushed the country from the 20th to 16th place in the rankings.

However, the promotion of the unification of the tax base for social security contributions required a different strategy. Coalition building was no longer the most effective means of convincing opinion leaders and policy-makers. LFMI had to go all the way from reviving the very idea of a single social security contribution to offering an enforcement mechanism and convincing policy and decision makers that the reform is possible without increasing the tax burden. By choosing an agenda setting approach, LFMI has raised wide debates and have won important allies among opinion leaders, policy makers, prominent journalists and key stakeholder groups, building continuous pressure on the policy process and challenging decision makers to act. As a result,LFMI’s proposal to merge the social security contributions by employer and employee into a single payment has been included into 2016 election programs of all major political parties and has ultimately made its way into the program of the current government. This intent to reform and create a simple and transparent tax system will surely increase Lithuania’s prospects for a higher ranking in the years to come.

Importantly, all of the above did not only have a significant contribution to the business environment and competitiveness of Lithuania, but provided an example of how the right tools and the right approach taken by liberal-minded think-tanks help to attract people to their cause for a tangible impact. Nothing sells better than concrete solutions to concrete problems. Therefore, if the government has the same goals, a think-tank should deliver a reform; if not, a think-tank should set the agenda and position itself as the catalyst and architect of the reforms necessary.

Atlas Network: LFMI Wins Big on Policy to Benefit Consumers, Limit Excessive Government Interference

The creation and expansion of inefficient municipal enterprises in Lithuania puts economic strain on the taxpayers who have to support them, and hinders the development of innovations that could improve upon the services they offer. That’s why the Lithuanian Free Market Institute (LFMI) worked diligently to champion a policy requiring that any proposed establishment or expansion of a municipal enterprise be presented to a Lithuanian Competition Council. Now, before a proposal is confirmed, the Council must determine if the new enterprise is already provided by the market or could be more efficiently delivered by the private sector.

“[State Owned Enterprises] are very capable of convincing decision makers that they are in business not to earn profit, but for some ‘higher purpose,’” said Žilvinas Šilėnas, president of LFMI. “Therefore, preferential treatment vis-à-vis private enterprises is natural, unavoidable, and justifiable.”

LFMI held a briefing of more than 200 opinion leaders and key decision makers to outline the main arguments in favor of the competitive assessment procedure. The testimony was presented to the Lithuanian Competition Council, various Parliamentary committees, as well as state administration and local authorities. Its actions generated 268 media mentions of the project, helping to win over public support. This new policy takes a tremendous step in the right direction in terms of limiting unnecessary government inference of the market.

“The adoption of a competition assessment procedure for municipal companies will directly benefit private business companies by improving the competitive environment and conditions for private enterprise,” said Aneta Vaine, LFMI’s director of development and programs. “This will indirectly benefit consumers. Moreover, a competitive procedure will ensure a more effective use of taxpayers’ money as competitive forces are expected to bring more quality and cost-effectiveness in the provision of services by state and municipal enterprises.”


Find out more about the Atlas Network.

Atlas Network: Getting Your Reform Ideas Across the Finish Line

Encouraged by Atlas Network’s “Leveraging Indices for Economic Freedom” initiative, the Lithuanian Free Market Institute (LFMI) took up the challenge to implement three changes in Lithuania. First, to reduce time and effort required to get a building permit. Second, to streamline the procedure of connecting new users to the electricity grid. Third, to merge the social security payments by employer and employee into one payment. While this would not actually reduce the effective burden on employees, at least people will finally become aware that in addition to income tax, a third of their earnings are diverted into social security.

This project has provided four lessons for us at LFMI.

One. Pick the right tool for the right job. We always try to make government move to the right (pun intended) direction. But if a government is leftist or center-left, naturally they might not want to implement classical liberal policies. After all, why would a socialist be motivated by ideas of liberty?

However, all Lithuanian governments want to perform well on the World Bank’s Doing Business Index. Presenting policy proposals not through the lens of classical liberalism, but through international competitiveness creates a non-partisan appeal and enables all governments to enact correct reforms.

Two. Block the bad, but also support the good. Completely changing the direction of government is like trying to stop a fast-moving train by standing on the tracks. Plausible, if you are Superman, futile for mere mortals. Everyday government work is a busy station with trains going in all directions. Sometimes we have to throw ourselves on the tracks. Sometimes we should to climb into the driver’s cabin and convince the driver to go faster. Freedom-oriented think tanks surely create value in opposing the wrong policies. But there is also value in helping with the right ones.

Three. Liberty in practice, not just in theory. If you received a 3 a.m. call from the president asking to reform the country, would you know exactly what to do? We challenged ourselves to craft precise policy proposals. Merging of social security payments requires changing five additional tax rates? We need to calculate these precisely. Building electricity lines during winter takes three times longer than in summer? Find out why, find a solution.

We often talk about how to attract people to our cause. Nothing sells better than real solutions to real problems.

Four. Putting up a good fight is good, winning is better. If the government has the same goals as you, if there is no need to fight against public opinion, can we actually deliver a reform? We are so used to lose fighting against overwhelming odds that we tend to assume all odds are overwhelming. But maybe our plans were not good enough? Maybe we lacked proper execution? The mindset where all our wins are our achievements, and all our losses are the governments’ fault has no place on the market. Snap out of it, challenge yourselves. After all, isn’t this what market economy is all about?


Find out more about the Atlas Network.

Government Watch. On the Unification of the Tax Base for Social Security Contributions

The stability program by the Ministry of Finance delineates the following steps in improving the tax structure and optimizing the tax base in 2017:

  • the consolidation of the tax base for social security contributions by transferring the payment of social security contributions onto employees;
  • the consolidation of a pat of social security contributions that cover basic pension and the personal income tax;
  • an increase in personal income tax levied on work-related income from 15 to 21 per cent and a respective reduction in social security contributions.

The Lithuanian Free Market Institute has examined the proposed model for the unification of the tax base for social security contributions, identified its strengths and weaknesses and proposed an alternative model that would allow to achieve the aims of increasing the transparency of the tax system and creating incentives to pay taxes without increasing taxation and the complexity of the tax system.

A complete analysis and the alternative model proposed by the Lithuanian Free Market Institute (in Lithuanian) is available here.

Facts and Analysis. Comparing Labour Codes Based on Doing Business Methodology

The new Labor Code which was supposed to be flexible in balancing employee-employer interests is to take effect as of 1 July 2017. It was already approved by the previous government, but vetoed by the President. Therefore, its entry into force was postponed and so began the process of its improvement. The work was continued by the new government.

The Lithuanian Free Market Institute has compared the effective Labour Code with the new one based on the World Bank’s Doing Business Methodology and produced a comparative analysis, showing Lithuania’s labour relations in the context of ten other European states. As regards strictness of labour regulation, the study shows that the new Labour Code will only slightly affect 33 Wold Bank indicators, will not result in any change in 30 others and will provide for more flexibility in merely three of them.

The full research paper Facts and Analysis. Comparing Labour Codes Based on Doing Business Methodology is available here.

Lithuania Ranks 16th in the Worldwide Index of Economic Freedom

Ranked 16th in the annual Worldwide Index of Economic Freedom by Heritage Foundation, Lithuania surpasses Latvia, but falls behind Estonia. In fact, economic freedom in Lithuania is in a much better shape than it is in the neighboring Latvia (20th) and Poland (45th), but much weaker compared to Estonia (6th). According to the Index, economic freedom is expanding, but Lithuania has still fallen by three positions since the last report.

Clearly, it is not the time to rest on one’s laurels. We should realize that a relatively high position is not an achievement of the government, but rather the outcome of being in the EU. Positive evaluation in the areas of commercial freedom, court system and property protection is a direct result of implementing EU policies while our well-rated monetary policy is a success of the European Central Bank, but not the Bank of Lithuania.

Paradoxically, Lithuania received high scores for its effort in modernizing labor relations and introducing a new Labor Code which was supposed to enter into force from 1 January, but has been postponed by the new government. Empty populism seems to win over consistent and evidence-based policy making. Certainly, this is not the direction that our government should focus on to push the country to the top economies. Instead, it should concentrate on the areas where economic freedom is more theoretical than practical.

Taxation is among the most problematic. Lithuania has extremely high taxation on labor, covering personal income tax, social security payments, compulsory health insurance contributions, etc. Labor taxation may not seem that high at the first glimpse, but a deeper look reveals quite the opposite. In fact, it is higher than the EU average, but a part is hidden from the eyes of an average taxpayer and paid by his or her employer. This lack of transparency and clarity in labor taxation is a significant impediment to economic development and one of the drivers of undeclared labor that has to be addressed to achieve a higher position in the Index.

Reportedly, Lithuania also struggles to reform its public sector and curb government waste. Paired with a recent chain of political corruption scandals, inefficient management of state-owned enterprises and the resulting decrease in public trust in political parties, our inability to reform resulted in 106th position in the index. This is a clear call for a reduction in government spending and a comprehensive reform of the public sector.

Government’s ambition to expand its businesses is another huge concern. Even though state-owned enterprises are inefficient and result in a significant decrease in Lithuania’s ranking, government becomes more and more eager to engage in economic activity. Such policies are threatening our economy and international competitiveness by creating an impression of an unstable political and business environment.

Evidently, 16th is not the position we should be happy with. Be it the Worldwide Index of Economy Freedom, the World Bank’s Ease of Doing Business Index or any other international ranking. If actual reforms were to take place, Lithuania will certainly perform much better in the majority of economic indicators and potentially stand among the top ten most competitive and freest economies in the world.

Lithuania to Forge Ahead in Doing Business Rankings

Ranked 20th in the 2016 World Bank’s Ease of Doing Business Index, Lithuania has outstripped its closest neighbours Latvia and Poland. Yet, possibilities of forging ahead as one of the most business-friendly economies are not fully exhausted.

Indeed, Lithuania has high ratings for starting a business, registering property and enforcing contracts, but red tape and a heavy administrative burden related to getting construction permits and electricity connection kept the country back from better positions. “Entrepreneurs face state control and bureaucracy at almost every stage of construction. This is not only costly but also ineffective with respect to the actual construction process,“ LFMI’s policy analyst Julia Simionenko-Kovacs says.

However, the situation is about to change as Lithuanian Free Market Institute (LFMI) has recently gained passage for a package of free enterprise policy reforms for reducing bureaucracy and removing barriers to getting electricity and construction permits that would lift the country up among the world’s top economies.

Over the past year LFMI accomplished a comprehensive research and policy advocacy program that helped to build the case and support for needed legislative and regulatory changes. Following the release of LFMI’s research report on risk assessment and management deficiencies in construction and intensive talks with policy makers and other stakeholders, earlier this year the Lithuanian Parliament adopted a new construction legislation which incorporated five key proposals from LFMI for simplifying the procedures for getting construction permits. As a result, two excessive procedures were removed and so the number of days required for getting a construction license was cut by 33.5 days, from 103 to 69 days. These changes are expected to lift Lithuania’s construction permit ranking from the 18th to at least 7th position and the country’s overall position from the 20th to 17th place.

Likewise, LFMI produced a detailed set of proposals for accelerating electricity connection and paired it with an extensive advocacy campaign that secured the elimination of one excessive procedure stipulated in the electricity legislation. This has reduced the number of days for getting electricity connection from 95 to 75, and Lithuania is to see its ranking in the electricity connection category move up from the 54th to 23rd position and the country’s overall ranking, from the 20th to 16th place.

Taken together, these improvements in the electricity and construction indicators should lift Lithuania from the 20th to 15th place in the overall standing. According to project leader Julia Simionenko-Kovacs, this huge step in fighting overregulation and excessive administrative burdens and costs would not only raise Lithuania’s global ranking. More importantly, shorter time limits would also increase the country’s investment attractiveness, facilitate business development planning and make public institutions more efficient.

The Lithuanian Free Market Institute is also working to achieve the unification of the tax base for social security contributions and a reduction in the total tax rate that measures the amount of taxes and mandatory contributions payable by businesses.

 

Single social security contribution – a fair and simple tax system

The Lithuanian Free Market Institute (LFMI) has designed a model for merging the so-called employer social security contributions with the so-called employee social security contributions. In Lithuania, the former account for 30.98% and the latter for 9% of gross salary, adding up to 39.98% paid directly by the employer.

LFMI argues that although transferred by the employer, social security contributions are in fact paid by the employee. First, the employee is the one to receive the benefits of social security. Second, when hiring personnel, the employer evaluates all employment-related costs, including salary and so-called employer taxes.

Under the current system, 30.98% of gross salary is mostly invisible to the employees. If social security contributions were merged, the Lithuanian tax system would become simpler, fairer, and more attractive to foreign investors. In addition, the unification of the tax base for social security contributions would help fight the shadow economy as taxpayers will see a clear link between their contributions and the benefits of social security.

Under LFMI’s model, gross salary would increase by 30.98 percent while net earnings would stay the same. The difference between gross and net income will reflect the actual amount of tax paid by the employee. Therefore, the proposal is fiscally neutral.

You may read the full policy brief On the Unification of the Tax Base for Social Security Contributions (in Lithuanian) here.

labour costs 1

1. Current situation


labour costs 2

2. Situation after merging social security contributions

How to Streamline the Construction Process?

Obtaining construction permits is a complicated process for businesses in Lithuania. Excessive regulations prolong the construction process and create unnecessary administrative burden for builders.

According to the annual World Bank  “Doing Business” report, construction regulations require a firm to go through at least 12 different procedures, which last about 103 days, to build a warehouse in Lithuania.

After carefully analyzing construction process in the country, the Lithuanian Free Market Institute prepared proposals that would streamline the construction process and improve Lithuania’s position in next year’s “Doing Business” index:

  1. Cancel an obligation for a builder to provide information on the ownership rights to the land plot to the municipal administration when applying for ‘Special architectural requirements’ (SAR);
  2. Merge ‘project proposal approval’ and ‘SAR issuance’ procedures;
  3. Create a one-stop-shop for obtaining special requirements and technical conditions;
  4. Do not issue SAR when detailed plans are prepared;
  5. Supplement the category of ‘Simple’ structures with low-risk buildings from the ‘Non-exceptional’ structures category;
  6. Reduce the time limits for carrying out the construction completion procedure and the approval of the declaration of the completion of construction;
  7. Automatically transfer the certificate/declaration of the completion of construction to the Centre of Registers via IS “Infostatyba”.

If implemented, these proposals would improve Lithuania’s position in the next year’s “Doing Business” index. In ‘Dealing with Construction Permits’ Lithuania could rise from 18th to 7th place, in ‘Getting Electricity’ from 54th to 29th place, and in overall ranking – from 20th to 15th place.

You may read the full document in Lithuanian here.

J. Simionenko-Kovacs. Doing Business 2017: How to catch up with Estonia?

The latest “Doing Business 2016” report brought Lithuanians optimism. Lithuania outstripped its neighbors, Latvia and Poland, and once again was ranked among the top 20 countries in the world in terms of ease of doing business. But Lithuania’s competitors are not sitting around twiddling their thumbs, so last year’s achievement is not guaranteed for this year. Moreover, the 20th place is no miracle either. Lithuania moved up only by one position.

A high ranking in the World Bank’s report makes a country more attractive to foreign investors, but reforms are needed not only for the sake of international recognition. Less bureaucracy in the construction sector and faster connection to the electrical grid can produce better conditions for doing business. The Lithuanian Free Market Institute has put forward three proposals, which, if approved, would improve Lithuania’s business climate and international image. It will also allow us to catch up with Estonia in Doing Business 2017.

1. Information sharing

The problem of the administrative burden and the importance of information exchange are constantly highlighted in Doing Business reports. Despite the calls to reduce bureaucracy, this area remains a cause of concern in Lithuania, especially with regard to construction permits or getting electricity.

It is surprising that in this age of information and electronic communications public administration institutions still require submitting certain documents in person. For instance, in order to prove or to register property ownership rights one still needs to obtain and submit various certificates to and from the Centre of Registers. In western countries similar processes have long been performed online, without the need for customer participation.

A poorly functioning “one-stop-shop” is another headache. In theory, “one-stop-shop” should help the customer handle all matters in a single visit. In practice, this system does not function in all stages of construction or is not effective in areas where it has already been introduced. For example, to obtain requirements for electricity, water or sewage connections, an applicant must file separate requests with each utility. Even where “one-stop-shop” already exists, as in getting approval for construction or electricity design project, builders still need to visit several different authorities in order to obtain needed information in a timely manner.

The solution to these problems is simple: public institutions must exchange information rather than shifting the administrative hassle onto their customers.

2. Performance review

When assessing the time required to deal with construction permits or to obtain electricity connection, Doing Business authors often use the prescribed maximum amount of time in which regulatory authorities must carry out relevant procedures. This, however, does not necessarily mean that procedures can only be performed within the maximum time limits. Some institutions are doing the best to improve performance, which eventually results in faster procedures. Others, on the other hand, choose not to optimize their practices simply because they are not obligated to.

A great example is the latest reform by the electrical utility in Lithuania. Last year it officially reduced the maximum time limit to execute external connection works by 10 days. The statutory time limit has been reduced to 50 days but it could be shorter. According to AB ESO, it takes on average 40 days to connect business customers’ property to the distribution network. In Latvia the external connection works take only 30 days, so there is definitely room for improvement.

If it is found that public institutions can perform certain procedures faster than required by law, the time limits should be adjusted accordingly. Not only would Lithuania improve its global ranking, but shorter time limits would also increase investment attractiveness, facilitate business development planning, and make public institutions more efficient in the future.

3. Reducing over-inspection

In Lithuania state control occurs in almost every stage of construction. It is not limited to inspections of buildings or electrical wiring. Entrepreneurs have to deal with it when getting an approval for a building project, when applying for a construction permit and related issues.

Such a system is not only costly but also ineffective with respect to the actual construction process. Control takes time and prolongs the construction process. For example, due to limited government resources, a project approval non-exceptional type of buildings takes 28 days. Issuance of a building permit takes another 14 days. Inspection of a building and the issue of a construction completion certificate additionally require 15 days. This adds up to nearly two months for obtaining approvals and having various inspections done alone.

Countries with high Doing Business scores, such as the UK, Australia and New Zealand, have delegated the above-mentioned procedures to the private sector. Inspections in these countries can be performed not only by public institutions, but also by participants of the construction process or independent experts. Private sector specialists have sufficient knowledge, experience, expertise and resources to perform inspections in a timely manner. Unlike these countries, Lithuanian sticks to state control wherever possible.

In order to improve conditions for international and local businesses, the above three measures must be enlisted as priorities for 2016. If the government does not rest on our laurels, we could boast of outperforming Estonia in Doing Business 2017.

Atlas Network Features LFMI’s Record in Catalysing Reforms

BUILDING A LONG-TERM RECORD OF INFLUENTIAL FREE-MARKET REFORM IN LITHUANIA

When Elena Leontjeva was an eleven year-old girl in Vilnius, then a part of the Soviet Union, she saw a discarded gum wrapper for the first time. She had never tasted chewing gum, but as she pressed her nose to the sweet-smelling paper she could imagine what it might be like.

She had a similar experience years later, as a graduate student in 1990, the year that the independent Lithuania was reborn. Suddenly, freedom of speech and movement opened a new world of possibilities — but she could still only imagine what a market economy might be like, for it too was something beyond the realm of her own experience.

That year, Leontjeva joined the front lines of the battle of ideas, working with a team of young economists led by her professor, Kestutis Glaveckas, to establish the Lithuanian Free Market Institute (LFMI). With 25 years of hindsight, we can see how the post-communist experience for Lithuania has been more successful than most. Recently, Lithuania’s per-capita GDP has surpassed three quarters of the European Union average, and the country holds the 20th position out of 189 evaluated countries according to the World Bank’s “Ease of Doing Business 2015” index and 15th globally in the Heritage Foundation’s 2015 “Index of Economic Freedom.” We can also see the pivotal role that LFMI has played in this this tremendous growth, and the way it built up institutional strengths that have it poised for long-term influence.

“There was no doubt in our minds that it was time to contribute to building a new order; one based on individual liberty and limited government,” Leontjeva wrote in Freedom Champions: Stories from the Front Lines in the War of Ideas. “Many scholars and professionals joined us, excited by the idea of building a new Lithuania. I dropped out of postgraduate studies without regret and ventured into the newly established institute. We were privileged with only a month or two of academic serenity to sketch out the free-market principles before life provided a chance for us to jump into the reform-making process.”

The road to implementing practical market reform was never easy, with continual opposition from Lithuania’s central bank, scant organizational resources, an almost entirely volunteer staff, and LFMI’s stalwart opposition to accepting government funds. Still, LFMI met with early and repeated success. The organization’s proposal on banking principles and the role of capital allocation in markets won over the parliament’s economic committee. It also developed the legal principles and framework that led to the nation’s first commodities market, capital market, and stock exchange — the first of its kind in all the former nations of the Soviet Union.

Its work also brought about Lithuania’s currency board, eliminating an extraordinary amount of discretionary power from the nation’s central bankers and tied currency issuance to foreign reserve exchanges and vault-held gold. Currency expansions, devaluation, and other arbitrary interventions became nearly impossible.

“In our work to develop a system of institutions, our aim was to provide the impetus for the adoption of a minimum set of rules to protect private property, rather than giving way to interventionist regulations,” Leontjeva wrote. “Reflecting back on those times, I regret that we were not able to address all of the pressing issues of the day, yet I know that we always chose the most important ones that would result in a chain reaction.”

Since those early foundational days, LFMI has turned its formidable analytical power to an array of important topics, including privatization of social insurance and pensions, sunset laws, deregulation, eliminating barriers to market entry, school choice and competition, private-sector health care and insurance, public-sector corruption, infrastructure, energy, the effects of shadow economies throughout the Baltic region, and much more. Despite several changes in leadership over the years, the institution has held strong, retaining its bedrock mission of fostering liberty and free markets.

In recent years, LFMI has created new tools that bring information about government intervention and economic reasoning into the hands of people who need it the most — ordinary Lithuanian citizens. It launched a tax calculator in 2014 that familiarizes Lithuanian taxpayers with the amount they truly pay in taxes, clearly showing how the government spends their money. This became a model for a similar calculator launched the following year in Poland by Civil Development Forum (FOR). Think tanks in both Kyrgyzstan and Bosnia and Herzegovina are working to develop analogous tax calculators for their countries. LFMI also published a new economics textbook for Lithuanian students in 2015, Economics in 31 Hours, which “is aimed at establishing solid foundations of economic knowledge and enhancing pupils’ abilities to perceive and evaluate social realities critically.” It accompanied that with an innovative new online teaching platform for economics teachers to use as a supplementary resource in their classrooms and lesson preparation.

The Lithuanian Free Market Institute launched a tax calculator named “Mocu Mokescius” (“I Pay the Taxes”), that familiarizes Lithuanian taxpayers with the amount they truly pay in taxes and to see clearly how the government spends their money.

Perhaps the most notable of these useful tools is LFMI’s Municipal Performance Index, which builds the case for policy change at the local government level. When people are free to vote with their feet, moving from one city to another in pursuit of lower taxes, a more favorable regulatory climate, and greater economic opportunity, municipal governments have to respond with better policy. In order to make informed choices about where to live, though, people need quality information. The LFMI index provides its rankings in three overarching categories: municipalities for citizens, municipalities for investors, and municipal governance and administration. It has had such a phenomenal impact that it was awarded the prestigious $100,000 Templeton Freedom Award during Atlas Network’s 2014 annual Liberty Forum & Freedom Dinner.

Žilvinas Šilėnas of the Lithuanian Free Market Institute with Jennifer Templeton Simpson and the finalists for the 2014 Templeton Freedom Award.

“The performance index is an easy self-evaluation tool for municipalities,” LFMI President Žilvinas Šilėnas said. “As a byproduct of the index, we have been able to go to various cities and meet mayors, local entrepreneurs, and citizens to discuss issues and solutions related to their schools, taxes, or debts. So we not only present our self-evaluation tool, we actually help them to be clearly heard.”

First launched in 2011, and most recently updated with the latest annual information for 2015, the index comprises 65 indicators and anchors its evaluation criteria in the underlying values of freedom of choice, private ownership and initiative, free enterprise, efficient use of public resources, and transparent and accountable governance.

LFMI carried out exhaustive research to develop and compile the municipality index, and used it as a basis to frame a plan for needed policy change. Thus, alongside the municipality rankings, the index yielded a solid, evidence-based framework and benchmark for municipal policy reform that gave a new credibility to free market approaches, including consumer choice, private service delivery, tax cuts, reduction of government regulations and bureaucracy, privatization of municipal assets, and balanced budgets.

Since the launch of the index, LFMI has met with the municipal authorities of all major Lithuanian cities — Vilnius, Kaunas, Klaipeda, Siauliai, Panevezys — and visited numerous smaller cities. During such visits, LFMI met with local authorities, citizens, students, businesses, and the media.

“All these meetings helped to build up relationships both with authorities and local people,” Šilėnas said.

The 2015 edition of the Municipal Performance Index, the organization’s fifth annual edition, generated 100 media hits on the day of its launch, and another 100 over the next three days LFMI reported. This year, the capital city of Vilnius topped the ranking for the first time, taking the top spot from Klaipeda because it has created a better climate for business and outside investment, along with a low unemployment rate and increased population. Still, Vilnius is saddled with high public debt that could dampen its future prospects, Šilėnas pointed out. The Kaunas and Klaipėda regional municipalities outperformed the remaining 54 regional local administrations.

“This year’s index has revealed some positive aspects in the work of local administrations,” an LFMI release explains. “For one thing, the amount of people who have received entitlement benefits has lowered by a quarter. The 2015 index has also recorded an 8 percent increase in the number of economic entities per 1,000 people and a 1.3 percent increase in the number of construction permits per 1,000 citizens. Importantly, municipalities have also reported a 13 percent growth in the number of people who have obtained business licenses.”

LFMI president Žilvinas Šilėnas meeting the mayor of Taurage municipality in Lithuania.

The best think tank projects deserve to be replicated around the world, and LFMI is eager to share the methodology and mechanics of its index with other free-market think tanks, and explain how to adapt its evaluation metrics for the municipalities in other nations. LFMI is now assisting New Economic School Georgia in developing its own municipality index. Several other think tanks across the globe, including in Albania, Kenya, Egypt, Croatia, and the Philippines, are exploring the possibilities of launching a similar tool for their countries.

A guidebook for replicating the index is in the works, and LFMI hosted an in-depth webinar briefing in early 2015 to explain how it is reshaping the public policy landscape in Lithuania, and to show other think tanks how they can also create an environment that attracts investment and prosperity by setting benchmarks for measuring municipal freedom and effectiveness. In his introduction to the webinar, Atlas Network CEO Brad Lips shared a quote from the granddaughter of Sir John Templeton, Jennifer Templeton Simpson, from her presentation of LFMI’s Templeton Freedom Award.

“My grandfather, like many other philanthropists, was concerned about the impacts of poverty,” Simpson said. “But he found that, most often, philanthropic organizations were focusing on symptoms of current poverty, and not enough time was being spent on preventing future poverty. You prevent future poverty by creating a climate of economic opportunity, so individuals have the freedom to use their talents to create wealth, to satisfy customers, and help employees. I know this is what Atlas and its partners are working towards, and the Templeton Freedom Award is a wonderful celebration of these values that were so dear to my grandfather.”

Creating that climate of economic opportunity requires holding government accountable and limiting its power at every level, and citizens can use the index to have the greatest impact at the local level, or use it to seek better conditions elsewhere. City officials can use it to determine how they stack up in comparison to their municipal neighbors.

“In all the countries, the municipalities are more or less forgotten,” Šilėnas said. “We as think tanks always want to influence the prime ministers and the presidents, while that sector of local governments are ignored. I believe there is a niche market for that.”

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