Lithuania ranks 16th in the Index of Economic Freedom

Lithuania improves its ranking from the 21st to 16th in the Heritage Foundation’s 2020 Index of Economic Freedom. Lithuania has regained its ranking from 2016 after four years of backsliding, the index shows.

“This high ranking of economic freedom confirms that Lithuania is quite well prepared to withstand economic challenges, even in such unprecedentedly difficult circumstances as we are witnessing today. In recent years, Lithuania has demonstrated fiscal discipline, accumulated reserves and secured particularly high international credit ratings and one of the lowest levels of government debt in the European Union. This distinguishes Lithuania as having more room for manoeuvre,” says Indrė Genytė-Pikčienė, Senior Expert of the Lithuanian Free Market Institute (LFMI).

Although Lithuania is above the average by many indicators, the authors of the Index emphasize the need for greater progress in fighting corruption and changing public perceptions about its justification. They also call for greater efficiency and accuracy in government spending and higher labor productivity. Another area of concern is the tax system where Lithuania has deteriorated in the last years.

“It is important to point out that experiments with the tax regime are extremely costly. Unjustified and frequent changes to tax rules inflict direct costs on both businesses and government. They also damage the country’s reputation. International companies carefully consider the level of economic policy stability when making overseas investment decisions. In a rapidly changing environment the risk and uncertainty of doing business is so abundant that the stability of the tax system is a great asset,” Indrė Genytė-Pikčienė observes.

Recent improvements in Lithuania’s ranking are attributed to higher scores in the category of labor regulation and specifically to a recent revision of the Labor Code and simplified hiring and redundancy rules.

According to LFMI experts, liberalization of the labor market during the 2009 crisis helped Estonia to minimize the effects of the economic downturn and to recover more rapidly compared to Lithuania and Latvia. Lithuania did not have such levers at the time and its labor market picked up  much more slowly. This confirms that the Labor Code must be adjusted not only for good times.

“Economic freedom and flexibility to adapt are key factors that can help in volatile times. This applies to all areas, given that crises create temptations to usher in new regulations and restrictions for long. This should be avoided by all means. Firstly, it will inevitably bring negative consequences. Secondly, reputation must be protected under such circumstances just as carefully as in normal times,” LFMI’s President Elena Leontjeva says.