History of LFMI

In 1990, six economists – Kęstutis Glaveckas, Nijolė Žambaitė, Petras Auštrevičius, Dainius Pupkevičius, Elena Leontjeva, and Darius Mockus – who had co-authored a Lithuanian textbook “Market Economy and State Regulation”, came up with the idea of establishing a think-tank with the aim of promoting the free market in an emerging post-independence Lithuania. The Lithuanian Free Market Institute was established on 20th November 1990, and divided its research into three main areas: law-drafting and legislative analysis, monetary and banking policy, and privatization.

LFMI took an active part in Lithuania’s banking reform and joined in drafting a bill on commercial banks Upon the adoption of the Law on Commercial Banks, the Bank of Lithuania relinquished commercial banking functions, and the foundation for private banking activity was formed. Later, LFMI focused on privatization and wider economic liberalization.

The LFMI also drafted the by-laws of a commodities exchange, and sought to gather all rational groups, who were interested in establishing an exchange commodity. At that time, voucher privatization was a major issue, and the LFMI undertook the task of analyzing and publicizing issues relating to privatization.
In 1993, LFMI started working on the legal foundations of Lithuania‘s stock exchange. Lithuania‘s securities market and stock exchange were instituted in accordance with a document, drafted by LFMI‘s analysts in cooperation with other specialists, entitled “Provisional Rules on the Issue of Securities, Public Trading and Stock Exchange“. LFMI initiated a broad-based discussion on the development of the securities market in 2000 and on the need to privatize the National Stock Exchange in 2002.

The Changes in Banking

In the first years of its activity LFMI had significant input into the establishment of the Lithuanian Development Bank. Despite many difficulties in drafting the legislation, the LFMI’s Lithuanian Development Bank Bill was approved by the government in October of 1993 (and subsequently passed by Parliament). The document provided the legal basis for Lithuania‘s first international bank, intended to grant long-term loans for small and medium-sized private companies and to invest in the securities market.

LFMI was actively promoting the idea of private banking in Lithuania. LFMI provided consistent support for all initiatives aimed at liberalization of Lithuania‘s banking sector. These included the introduction of financial disclosure by commercial banks (1994), the opening of the Lithuanian market to foreign banks (1996), the legitimation of commercial bank loans in foreign currencies (1997), the abolition of income tax on foreign loan interest (1999), and rejection of a “Bausparkassen“ system (2002).

Changes in Taxation

Back in 1991 LFMI initiated the idea of abolishing direct income taxes. Despite strong opposition, LFMI went on to foster the idea of eliminating the corporate income tax as the first step towards an essential tax reform. In 1997 the removal of corporate income tax was even included in the Lithuanian government’s agenda, while reinvested profits were made tax-exempt. Yet, the corporate income tax was only reduced from 29 to 24 percent in 2000 and to 15 percent in 2002.

The idea of progressive income taxes was vehemently promoted in Lithuania since 1995, but it was abandoned owing to concerted effort by the LFMI. In 2005 the authorities heeded LFMI‘s call to lower the personal income tax and made the first small steps in this direction. Over the years LFMI persistently called for abolishing the road tax and numerous tax breaks, for opposing the real estate tax and for tying the size of levies and dues charged on government services to the costs of service provision. The official programs of the 1998 and 2000 government administrations endorsed almost all of the LFMI‘s proposed principles in regards to taxation.

The Reduction of Public Spending

LFMI‘s analysts were aware of the fact that, for the tax burden to be systematically and sustainably lowered, tax reform had to go hand in hand with a revision of budget policy and public spending. After LFMI came up with a proposal for fundamental budget reform in 1996, lawmakers collaborated with the LFMI team to develop a conceptual reform framework. In 1997, following advice from the LFMI, the deposit compensation fund was separated from the state budget, borrowing with state guarantees by the deposit compensation fund was prohibited, and interest payment on restored deposits was outlawed.

In 2000, at the recommendation of the Sunset Commission, the principle of strategic planning was applied in budget formation. A consolidated budget proposal was expressed in the 2001 budget, as suggested by the LFMI. Over twenty non-budgetary funds (except the privatization, social security, health care and road funds) were included in the national budget.

Reforming the Pension Scheme

In 1994 LFMI began to pursue the idea of private, fully-funded, pension insurance. Later that year LFMI‘s analysts drafted the first pension funds bill. In 1999, after a lengthy law-drafting process in state institutions and heated parliamentary discussions, legislation involving voluntary fully funded pension insurance with private pension funds was drafted. In response to political challenges associated with the proposed pension reform, the LFMI proposed a policy compromise involving voluntary second-tier pension insurance in private pension funds. This helped to break the policy deadlock, and a 2002 law gave a green light to Lithuania‘s long-awaited pension reform. LFMI‘s analysts continue to advocate for a faster increase in the proportion of social security contributions designated for private insurance.

Improvement of Conditions for Private Businesses

1996 saw LFMI propose to reduce the bureaucratic burden on private businesses in order to promote a healthier business climate in Lithuania. This became one of LFMI‘s long-term projects, known as a business deregulation initiative. Back in 1992, LFMI took up the law on joint stock companies. LFMI‘s proposals, which were tailored to install the principles and culture of corporate governance, were legitimated in 1994. Later, the law was significantly amended, and LFMI‘s analysts intervened again to prevent excessive government intervention in corporate business.

Over the past several years LFMI has been a major presence in policy debates on competition principles. A 1999 competition law lifted a number of legal restrictions on competition and defined responsibility for violations of competition on the part of government authorities. The formerly government-controlled Competition Service became an independent institution. By providing effective measures against government intervention, this competition law stands out not only in a European context but also on a global scale.

LFMI has played an integral role in many other vital policy issues. To mention just a few, several attempts to raise the mandatory minimum wage were postponed after persuasive campaigns from LFMI and its allies. The introduction of mandatory certification of accountants and superfluous financial accounting procedures was prevented. In 1998, LFMI led a successful campaign against a draft law which proposed unjustified, discriminative penalties for enterprise managers without instituting court proceedings against them.

Being a strong opponent of government subsidies, tax breaks and other types of privileges for specific business groups, LFMI launched a project aimed at simplifying business conditions, removing regulatory barriers and reducing bureaucracy. These ideas gained broad-based support, and the 1999 cabinet started its term by launching a Sunset Commission to get rid of unnecessary bureaucracies. LFMI assisted by proposing a strategy for curbing bureaucracy and government functions. Another initiative designed to improve Lithuania‘s business environment was named Sunrise, which was supported by the LFMI, who played an important role in analyzing how to simplify capital market, employment, land purchase and building regulations. Sadly, this important initiative lacked the political support necessary to become law.

Employment and Licensing System Regulation

Back in 1996 the LFMI team began to look into employment regulation, an area where reform was widely considered to be impossible for a long time. As LFMI‘s analysts took part in drafting a new labour code, they realized how difficult it was to advocate ideas such as equal employer-employee relationships and partnership, free contracts, time employment agreements and others. LFMI‘s analysts substantiated and persistently explained the benefits of a free market in labour relationships. As a result, the new Labour Code brought in some improvements, although it still fails to reflect an ideal employer-employee situation.

In 1998 LFMI analyzed Lithuania‘s licensing system and submitted recommendations for its revision. Some years later, LFMI‘s analysts participated in a task force on licensing regulations and proposed principles for a consistent revision of the licensing system and prevention of eclectic and unfounded licensing policies. In 2004 March 15 the government adopted a decree on revision of licensing regulations that was based on LFMI‘s research conclusions and proposals. This document embraced all of LFMI‘s defined licensing principles, albeit with some limitations and inconsistencies.

The Legalization of Information Technologies

As information technologies became prevalent in private businesses and government institutions, new concepts such as, the “knowledge economy“ and “information society,“ emerged in the political lexicon. LFMI took an active part in creating the legal foundations for the IT sector from when the legislative issues became prevalent over five years ago. Not only did LFMI‘s analysts participate in task forces on almost all of the major legal documents, they were also key co-authors of the following legislation: conceptual frameworks of e-government and e-business and online communications, a new version of the law on e-signatures, and amendments to the telecommunication law.

Owing to LFMI‘s efforts, this new area of business was not obstructed with archaic requirements, and the prospects of its development and the opening of new niches were protected. Many attempts to allow government participation in the IT sector were obstructed by the LFMI, making it possible to promote private business and to prevent squandering of taxpayers’ money.

Reforming the Health Care System

Since 1997, LFMI has also focused on social security and health care: systems in which the state had traditionally played a dominant role and implemented a high level of redistribution. LFMI emphasized, to both the authorities and the public, that Lithuania‘s costly and ineffective system of social provision, inherited from the Soviet times, enormously depleted resources and created a huge drag on the market economy. Since 2000 LFMI‘s analysts have closely studied problems plaguing Lithuania‘s health care system. LFMI has been implementing a project to promote a viable health care system in Lithuania. As part of this project LFMI‘s analysts have drawn a vision of Lithuania‘s health care reform and specific reform proposals. Owing to significant ongoing effort, the ideas from LFMI are gaining traction and public support.

The System of Education Funding

Lithuania‘s system of education funding also requires significant overhaul. In response to the flawed existing system, LFMI has drafted a “voucher system” proposal for secondary education by which educational establishments receive proportional state funding based on the number of pupils they attract. The funding follows pupils if they change schools. In 2002 this principle was adopted in secondary education, but a number of limitations were imposed for various types of schools (e.g. rural and urban schools). Dissatisfied with this incomplete reform package, LFMI‘s analysts continue to urge the authorities to carry out a systematic reform of education funding based on competition, decentralization and private initiatives.

In 2002 LFMI produced a comprehensive study on financing of higher education as part of an international research project. A wide public awareness campaign was launched to promote a discussion on applying the principle of a voucher system in higher education and to highlight the need for a groundbreaking reform.

Lithuania joining the EU

As Lithuania was preparing to become a member of the EU, LFMI began to analyze and assess the implications of EU membership in relation to Lithuania‘s economy and its specific branches and companies. Today, far ahead from Lithuania‘s acceptance into the European Union, we are confident that LFMI‘s early assessments of the advantages and disadvantages of EU membership have been wholly justified: the common EU market has brought significant benefits for Lithuania, while the adoption of mandatory standards has proved to be the most significant drag. As Lithuania approached the point of joining the EU, the LFMI team reinforced efforts to explain to the society the implications of EU integration and the need to assess them.

Later, LFMI became the first group in Lithuania to scrutinize, assess the implications of, and initiate a discussion on the Lisbon agenda. In April 2004 LFMI launched research into economic causes of smuggling. The aim was to promote a discussion among law-makers and the public on the most effective ways to combat smuggling and to reduce the shadow economy in Lithuania and the wider European Union.

LFMI stressed that removing excessive regulations and licensing and lowering excise taxes at the EU level were the best solutions. In 2005 LFMI‘s analysts participated in an inter-agency task force under the Ministry of Economics to formulate Lithuania‘s position on the EU Services Directive proposal. As Lithuania joined the European Union, LFMI began to analyze the policy-making process in the European Union and to expand the boundaries of its activities beyond Lithuania.

The Educational Activities of LFMI

Educational activities are an integral part of LFMI‘s work. LFMI conducts surveys and opinion polls, organizes conferences, workshops and lectures, and publishes economic literature. During the years, increase in LFMI’s projects for young people has led to the creation of LFMI’s Education Centre in 2012, which is aimed at pupils, students, teachers and professionals.

LFMI has published more than 20 books. Since 1994 LFMI has published a periodical newsletter entitled “The Free Market”. Before the 2000 and 2004 national legislative elections LFMI published “A Handbook for the MPs and the Voters” offering a guide for policy makers in creating and implementing growth-oriented social and economic reforms. LFMI has also published a number of translations of prominent representatives of the Austrian School of Economics. From 2000 to 2004, Lithuanian students have been invited to attend LFMI‘s course “Capitalism and Freedom” in Lithuania‘s universities. In 2004 LFMI launched a writing contest “Liberty Studies”.

In 2015 LFMI has published an innovative textbook for teaching high school economics, “Economics in 31 hours”. Since 2009 LFMI has also organized an online course in economics for high school students, called Economics in Action. Starting 2008, LFMI has launched interactive courses in economics for students and professionals, called “Realistic economical analysis”. Every year it attracts famous international professionals.

Recognition and Communication

Over the years LFMI‘s independent and principled opinion has received recognition among local and international institutions. The IMF mission, started in 1999, has regularly consulted LFMI‘s analysts on Lithuania‘s economic and social issues. From 2000 through 2005 LFMI advised the World Bank on its anti-corruption strategy. In 2004 LFMI‘s work was acknowledged by the world‘s non-governmental community: LFMI won a Templeton Freedom Award for Institute Excellence. In 2016 LFMI was evaluated for Economics in 31 Hours textbook and received the prestigious Templeton Freedom Award from Atlas Network, award in the London Book Fair’s International Excellence Awards and the People’s Choice award for the best online educational tool from LOGIN, the annual gathering of Lithuania’s Internet culture. Lithuanian Free Market Institute was in a list of the top 50 places to study classical economics compiled by TheBestSchools.org and took the thirty-fifth position. Since 1999 LFMI has submitted conclusions on various pieces of legislation to the Constitutional Court.

Since its inception LFMI has co-operated with all political parties and administrations, and LFMI‘s team members have been invited to serve as counsellors to Lithuania‘s President and Government. During these years LFMI has become a valuable source of authoritative opinion and competent analysis for the media. Every years brings approximately 3 thousand media hits.

Here we have mentioned LFMI‘s most prominent accomplishments, but the years of work have embraced many more successes. We have never held back our visions for reform. Every single idea conceived at LFMI has been communicated to the people of Lithuania – to plant the seeds of the vision and live within them.