What do International Ratings Unveil?

The 14th edition of the Economic Freedom Index covers 10 categories of economic freedoms. These are business freedom (it measures how free entrepreneurs are to start businesses, how easy it is to obtain licenses to close a business); trade freedom; fiscal freedom (it gauges the level of taxation); government size (it measures the cost of a government to its citizens); monetary freedom; investment freedom; financial freedom; property rights; freedom from corruption; and labour freedom.
It is useful to look not only at those components of Lithuania’s rating that have been evaluated positively, but also at the problematic areas that present opportunities to our country.
Lithuania’s rating has been pushed down by three factors analysed in the Economic Freedom Index – property rights (a score of 50 out of 100); freedom from corruption (48/100) and labour freedom (57.6/100). The other seven factors score between 68.3 and 86 out of 100.
Property rights
The property rights factor scores the degree to which the enforcement of laws protect private property rights; it also evaluates the operation of the court system and how efficiently courts secure the enforcement of contracts; it also measures the efficiency of intellectual property rights protection and the threat of private property expropriation. According to the Economic Freedom Index, accession to the EU has encouraged judicial reform, including strengthened independence and streamlined proceedings to clear the backlog of criminal cases. The authors of the Index say that investors cite weak enforcement of contracts. The report also highlights that Lithuania remains a transshipment point for pirated optical media products from the East.
We may conclude that even though Lithuania secured private property protection by laws and in the past seven years adopted new versions of principal laws – the Civil Code, the Penal Code, the Penal Procedure Code, the Civil Procedure Code and the Labour Code (i.e. it reformed the national law), the country still failed to build the foundations for ensuring private property rights (at least according to these foreign analysts). Only Romania and Bulgaria scored less than Lithuania (50), while neighbouring Latvia scored 55, Poland – 50 and Estonia – 90 out of 100. By the way, EU countries (10 countries) that rank higher than Lithuania (rank 26), except Belgium (a score of 80), gained a score of 90. It should be noted that measuring the property rights factor in this Index is puzzled as the main country report on Lithuania provides barely several sentences, while Economist Intelligence Unit, indicated to be as the main source of information, do not present their research publicly.
A heavy score of corruption
The Coruption factor relies on Transparency International’s Corruption Perceptions Index, which ranks Lithuania 46th among 163 countries. According to the Economic Freedom Index, with more than 50 governmental institutions regulating commerce, there are many opportunities for corruption. All of the ten EU countries, ranking higher in the overall list of the Index, scored more in the freedom from corruption factor as well.
Lithuania’s steady and dissatisfactory assessment in Transparency International’s Corruption Perceptions Index is signal that the country is being confronted with serious difficulties in fighting corruption. The period for raising motivation to reduce corruption and for potential breakthrough is over since Lithuania has joined the EU with an achieved satisfactory level of corruption, so the external pressure has diminished. Second, Lithuania has build an institutional framework for fighting corruption: the country has a strategy for combating corruption and an operating specialised institution (Special Investigation Service), however, it has failed to achieve breakthrough in corruption prevention and the quality and efficiency in disclosing violations.
It is expedient to underline several baselines of corruption prevention: the real corruption prevention recedes if, at government level, it is set as a grandiose task which continuously requires employees and finances and which bears an important, almost unattainable, but a holly mission. Rods for potential seedbeds of corruption are cast both in governmental resolutions of small calibre that specify new obligations for businesses or citizens (for example, a Government resolution of 2007, obliging beauty salons to keep registers and register all clients to whom permanent makeup procedures have been conducted) and through extensive regulations or even promises to regulate (for example, unceasing hints about possible regulation of supermarkets or the “pushing around” about alcohol advertising encourages the business community to search for measures to sidestep potential regulation).
The only sustainable and long-term measure to prevent corruption is to admit that every regulation invariably brings along an inseparable result – the risk that the level of corruption may increase. Drawing on this presumption, decision-makers need to evaluate all existing and future obligations to companies and individuals.
Low scores in the factors of freedom from corruption and property rights also speak about the cracks in the public administration system.
The load of labour regulation
The factor of labour freedom encompasses four major aspects – the minimum monthly wage, flexibility of working time, hiring and firing procedures and the financial cost of hiring and firing. The labour freedom factor in the Economic Freedom Index is based on the World Bank’s Doing Business study. In its 2008 study, the World Bank ranked Lithuania as low as 124th in terms of labour regulation.
The minimum wage component is calculated as a ratio of a fixed minimum wage to productivity. A higher minimum wage makes hiring unskilled workers more difficult. This has been stressed not just in this report but also in a number of studies conducted in Lithuania. The Institute of Labour and Social Research proposes lowering the minimum wage paid to social groups with meagre opportunities for employment as one of the key means to integrate them in the labour market.
The financial cost of hiring refers to social insurance contributions paid by employers. This indicator in Lithuania is 31 percent. Lithuania ranks among world “leaders” in this respect – only 13 countries of the world outstrip Lithuania in terms of the percentage of worker’s salary which makes up financial costs of firing, or, to put it simpler, additional costs for paying social insurance contributions. Among these countries are two communist states (Belarus and China), four wealthy Western countries (France, Sweden, Italy and Belgium) and two countries that apply markedly lower individual income taxes on the same income (Ukraine – 15 percent and Slovakia – 19 percent).
Recently, working time regulation has been a complaint not in Lithuania alone. Although the Labour Code has been reformed, working time regulation still remains rigid and inflexible. It is difficult to use flexible forms of labour organisation in practice; overtime is allowed only if it had been set forth in collective labour agreements and therefore only a small portion of Lithuanian workers and companies may embrace this opportunity.
Lithuania gained scores only for one component of the Index – whether the workweek can consist of more than 5 days. The other four component-questions were answered negatively: whether the workweek can extend to 50 hours or more for 2 months a year; whether night work is unrestricted; whether weekend work is unrestricted; and whether paid annual vacation is 21 working days or fewer.
It is false to believe that positive answers to these questions are possible only from countries whose labour regulation resembles the gloomy times of the early industrial production. For instance, Denmark, Ireland, Great Britain and Canada do not impose any restrictions on night work. The report shows that Lithuania is the only EU country where the workweek cannot extend to 50 hours or more for 2 months a year. The Lithuanian Labour Code specifies that the workweek may not extend to more than 40 working hours and to more than 48 working hours including overtime. However, overtime is usually prohibited (except exclusive cases laid down in the law or when it is fixed in collective labour agreements).
It’s worth to improve
Various indexes and studies measuring the business environment and the level of corruption are interrelated: they draw on each others’ data, and that is why it is possible to affect the results of several ratings, if the focus is placed on enhancing the factors of the major rating. The data from the World Bank’s Doing Business is used in the Economic Freedom Index carried out by the Wall Street Journal and the Heritage Foundation; the data from Transparency International’s Corruption Perceptions Index is incorporated in measuring the freedom from corruption factor in the Economic Freedom Index and Transparency International’s Corruption Perceptions Index itself is a derivative indicator based on other studies – Bertelsmann Foundation’s Transformation Index, Freedom House’s Nations in Transit and the World Economic Forum’s Competitiveness Index.
Living and business conditions in Lithuania need to be enhanced not for the sake of the rankings in international indexes. However, global rankings point to the measures that should be launched seeking to make lives of the people in Lithuania simpler. All situations are conducive to changes towards improvement – a country with a low ranking may move up more easily as there is room for advancement. For example, Georgia and Macedonia are considered to be reform champions of recent years. A country with a high ranking may find it “easy” to climb since it has all of the needed institutions and the understanding what and how to improve. For instance, the already “good” countries Canada, Switzerland and Denmark have essentially improved their position in the 2007 rating.