Lithuania Skips Recipes for Success

1999 was not an easy year for Lithuania. The sharp economic downturn hit all of us, one way or another: some had their salaries slashed, some lost their jobs and faced compulsory lay-offs, corporate profits fell. Everyone experienced what the poor economic indicators now remind us about: a declining output, rising unemployment and shrinking earnings. 1999 was not easy for our Baltic neighbours either. Sadly enough, it has already become a tradition that Latvians and Estonians enjoy a better standard of living than Lithuanians.
In previous years, when the global economic situation was more favourable, these countries were performing much better than Lithuania. Now that the economic situation in the world has deteriorated, the economic life of our neighbours has not been impacted as severely as ours. To make a comparison, Lithuania’s GDP went down by 4.1 percent in 1999, while Estonia’s fell by 1.1 percent. Likewise, retirement benefits are the smallest in Lithuania. Lithuania is hopelessly lagging behind in international affairs too: it has failed to join the WTO, whereas Estonia and Latvia have already become members. Foreign analysts forecast that in 2000 the economies of Estonia and Latvia will grow more rapidly than that of Lithuania.
These comparisons of the three Baltic States are not new. Nine years ago the three states were at a roughly equal starting position, but later Latvia and Estonia took off and has remained in the lead. Isn’t Lithuania fed up with being at the tail end of the three Baltic States? Aren’t we sick of telling ourselves that we’re good too, but simply don’t know how to advertise ourselves? What does Lithuania need to do to become at least like its neighbours?
The first answer that comes to mind is to do exactly what Latvia and Estonia are doing. We cannot say that the examples set by our neighbours are ignored, but Lithuania is a very unique country. It is unique because of its amazing ability to find and follow the most unsuitable examples its neighbours and other countries offer. The business environment in the neighbouring countries is not ideal; they have a lot of flaws of their own, but Lithuania will soon become a collection of other countries’ fallacies.
This can be illustrated by several examples. First, Lithuania chose not to follow Latvia into a free international banking system – a perfect stimulus to economic growth. However, it “plagiarised” Latvia’s destructive and discriminative taxation of payments to offshore companies. Nearly all business transactions with enterprises registered in tax havens were hit with a 29 percent turnover tax.
Another example refers to Estonia. Lithuania is debating a new bill on charity and support, and discussions on introducing a government-approved list of recipients of charity and support returned with renewed force. If enacted, this list would allow charitable donations to be given only to those non-profit organisations that are sanctified by bureaucrats. Obviously, such regulations expand bureaucracy, discourage private initiatives, confer more power on the state, and provide an open invitation to corruption. Lithuania used Estonia as an example of where a list such as this had existed. Mind you, “had existed,” because Estonia abolished the corporate income tax altogether as of January 2000, with all regulations related to it. Why then has Lithuania, which was the first to consider the removal of the corporate income tax, scrapped these plans? In the meantime, Estonia chose to act rather than simply debate. We mimic Estonia’s bad past, while Estonia implements our innovative ideas.
Yet another example: if a Lithuanian company wants to use the word Lithuania in its name, it must obtain permission from government authorities. This regulation has been copied from the United Kingdom, the only country in the EU that applies such a requirement. But why not follow the UK’s unique experience in liberalising the tax system?
The adoption of the EU acquis provides especially many examples of how Lithuania imitates bad policies. Progressive initiatives for ensuring privatisation of transportation and creating conditions for free competition are being delayed, while time and resources are being squandered on establishing all kinds of regulatory institutions. This list of bad policies adopted by Lithuania is endless. It include the Tripartite Council representing employers, employees and the government, special accounting documents, mandatory bills of lading, to name just a few.
All this shows that Lithuania has not learned lessons from foreign experience. Instead of selecting the best and most effective decisions, Lithuania adopts the worst examples. In fact, it is hazardous to rely on foreign experience: different countries adopt different actions because they have specific needs and conditions at that moment, and their measures are tailored to iron out specific problems that are unique to these countries. Such problems may not exist in Lithuania at all or they may be solved by other different measures. Therefore blind reliance on foreign practices, without taking notice of the roots of a problem, is unacceptable. Using foreign evidence as an argument is equally fallacious, because one is sure to find examples somewhere in the world that will justify the need for some opposite decisions.
So what shall we do to make ourselves happier and wealthier? What principles shall we follow in making our decisions? We can draw on the surveys of economic freedom that are conducted in the U.S. and Canada. One of them is the Economic Freedom of the World index published by the Frazer Institute, Canada. Lithuania ranked the lowest of the Baltic States and 62nd out of 123 countries covered by this survey. But it’s not the ranking that matters. What is most important is that the survey findings confirm the direct link between economic freedom and prosperity and life expectancy. In other words, the more economic freedom people enjoy and the smaller the government and bureaucracy, the wealthier they are and the longer they live.
So, if we want longer and wealthier lives, we need to free businesses, to lift restrictions on market relationships, to reduce business regulations and bureaucracies, and to privatise state property and functions. Economic theory explains the correlation between freedom of businesses and people’s welfare. Practical observations explicitly confirm this correlation. Therefore, politicians who seek to enhance people’s well-being should pursue reforms that would limit governmental powers. Any delays in launching such reforms will cost us not only points in the freedom ratings but also Lithuanian people’s and enterprises’ welfare.