Panel V :

and Security

Chances for Achieving Stable Economic Growth in Lithuania

Eduardas Vilkas

Lithuania, like the other Baltic states, is too small to dream of splendid isolation. She must always look to her neighbours, especially Russia. According to Eduardas Vilkas, the Lithuanian economy is still dependent on Russia to a large extent. All the country's energy, and a substantial amount of her raw materials, come from Russia, who also swallows up most of her exports. Helping democracy and economic reform in Lithuania therefore means doing the same for Russia. The Lithuanian economy, though not in great shape, is on the right track. Double-digit growth is forecast for 1995, and there is great popular enthusiasm for reform. The country's ultimate aim is full membership of the European Union. This, Lithuanians are convinced, is the only way to guarantee economic and political security.

Professor Vilkas is Director of the Institute of Economics, Lithuanian Academy of Sciences, Vilnius.

In Lithuania, as in the other Baltic countries of Estonia and Latvia, liberalisation of economic activity and deregulation of prices took only a couple of years to approach the level enjoyed in Western countries. Since the liberalisation was followed by fast financial stabilisation, the transition to a market economy in these countries seems to be very successful.

At the same time, the problems of industrial restructuring, infrastructure modernisation and institutional changes are so immense that prospects of attaining a stable economic growth can hardly be seen as evident in the current situation of dramatic decline in production output. This paper will seek to address the major factors on which the success of transition policies decisively depends.

One factor must be stressed even at the outset. Lithuania and the other Baltic countries, because of their small size, can only develop as open economies and as such are extremely dependent upon the world economic situation. In particular, economic relations with their closest neighbours have a paramount effect on them. As a consequence of this, the investigation of achieving stable economic growth actually turns out to be guesswork, to the extent that external factors are hardly predictable.

Political Stability

The first two years of independence passed under constant military threat from the USSR and from its fifth column within the country. Therefore the initial conditions for political and economic reform were most unfavourable. However, five years after Lithuania's Declaration of Independence, the political situation can be characterised as reasonably stable.

First, the whole political process is on the track of democratic development. A new Constitution, adopted by referendum on 25 October 1992, recognises human rights in accordance with international standards and adheres to the other principles of Western democracy, including separation of powers. The Parliament has ratified the Human Rights Declaration and most of the protocols to it, as well as many other international conventions.

Second, not only has the country theoretical preconditions for democratic development but also practically, democracy and stability are becoming characteristic of everyday life. Indeed, the very same day the Constitution was adopted, a new Parliament (Seimas) was elected with an absolute majority of one party (Democratic Labour Party) which proclaimed and implemented the continuity of democratic change and transition to a market economy.

Barring any crisis, this government will probably stay in power for its entire four-year term. The President of the Republic elected by universal suffrage in February 1993, came from the same majority party, and until now enjoys support from more than half the population. His term ends in 1998. The country passed its most dangerous period of political confrontation in 1992 before the referendum on the Constitution; the experience of a peaceful solution of the country's problems contributed a lot to the formation of democratic traditions.

Thirdly, speedy integration into European political organisations allows the country to profit from the experience of Western democracies on the one hand, and to be observed by the European Union, on the other.

The preferential demographic situation (81 percent Lithuanians, 8.5 percent Russians and 7 percent Poles) made it possible to adopt a very liberal citizenship law in 1991, allowing every then permanent resident of Lithuania to apply for citizenship and automatically receive it. Thus Russia did not have any complaint on that question. This helped to solve the most sensitive problem of the withdrawal of Russian troops which was carried into effect a year earlier than in Estonia and Latvia. The communist forces tried to play the Polish card just after the declaration of independence and later on. However, it has lost all practical significance after the political treaty with Poland was signed in late 1994. Lithuania does not have a minority problem.

All this supports the conclusion that Lithuanian's interior political stability has been achieved; moreover, it can resist serious attempts to destabilise the situation from outside. This kind of danger cannot be ignored.

Political and Economic Relations with Neighbours

Despite the fears of most Lithuanians arising from the fact that the followers of restoration of the Russian empire enjoy very strong influence on the political processes in Russia, it is understood in Lithuania that helping democratisation and marketisation in Russia is helping ourselves. No iron wall on the Russian side would save Lithuania's independence. However, good neighbours and useful economic and cultural relations may help to reduce the influence of anti-reformers in Russian politics and the possibility of Russian military or economic aggression by the same token. It goes without saying that more reliable security for Lithuania can be achieved only through a system of European security in which Russia is, or could be, a member or at least a partner.

Besides the general impact on Russia's westernisation played by Lithuania as a close and understandable westernising factor, there are two other and perhaps more important circumstances in Lithuanian-Russian relations which can be used for increasing Lithuania's security: the above-mentioned very liberal policies regarding the Russian minority, and Kaliningrad region, to which Lithuania is the shortest transportation route from Russia. Poland and Ukraine can also sometimes improve Lithuania's bargaining position due to Lithuania's historical ties with these countries and common attitudes towards political independence.

As in the case of political security, Russia and only Russia may pose very serious economic problems for Lithuania, since Lithuania imports nearly 100 percent of its primary energy resources from Russia without any alternatives so far. Also, Lithuania imports other raw materials and many kinds of industrial production from Russia. These imports are, in general, cheaper than imports from elsewhere. As important as the supply of raw materials is the possibility to export Lithuanian goods and services to Russia on the same terms the other neighbour exporters have.

All this creates possibilities of economic pressure which was actually used by Russia several times in recent years. It is a strategic target for Lithuania to become less vulnerable to threats to cut supplies or close imports. Two projects serve this purpose: Butinge oil terminal for export-import of crude oil and the Klaipeda terminal for export-import of oil products. Implementation of both has started; completion is anticipated in two years.

Other very important factors are the strengthening cooperation with Baltic counterparts and the rapidly improving Polish-Lithuanian relations.

Investment and Economic Restructuring

Lithuania's economy has experienced a dramatic decline in all its sectors. The situation, of course, is much similar to the situation in other post-communist countries trying to adjust to drastic changes in prices of productive inputs, as well as to disintegration of economic area and loss of traditional markets as a consequence of this. In the case of Lithuania, the increase of prices is probably 90 percent responsible for this big drop of output. With the powerful energy sector working entirely on imported cheap primary energy resources and, as a consequence, also with a big part of industry developed as energy-intensive, Lithuania faced the problem of technologies becoming unproductive after manifold increase of energy prices to a greater extent than its neighbours.

Despite all the troubles, the economy is gaining momentum after a successful stabilisation and free market forces at work. Lithuanian official statistics on GDP in 1994 will be available a month from now; unofficial evaluations are around zero. According to World Bank data (Global Economic Prospects and the Developing Countries, 1995. A World Bank publication) Lithuania was the fourth fastest growing country (after Albania, Estonia and Poland) among countries in transition, with about 5 percent GDP growth.

One can expect that 1995 will be a year of unquestionable economic growth, even two-digit percentage increase is possible if the oil refinery works not far from full capacity or electricity export increases sufficiently. The Economist Intelligence Unit, a sister organisation of The Economist, published in this journal (25-31 March, 1995) a chart of growth prospects according to its composite index. Lithuania is the fifth after Slovenia, Czech Republic, Slovakia and Hungary. The evaluation supports the opinion that Lithuania has a good chance of fast economic progress.

Progress will depend greatly upon the pace of introducing new technologies which, in its turn, will depend on the availability of credits and direct investment. Up to April 1995 direct foreign investment in Lithuania amounted to $274 million while state borrowing from foreign sources reached $850 million, of which some $450 million have been used. The figures, no doubt, are too small compared with the country's GDP of more than $4 billion in 1994. However, the investment process is accelerating due to financial stabilisation (national currency - the Litasis - was pegged to $ as 1/4 of $1 from April 1994, inflation was 45 percent last year, etc.), signs of economic growth and completed privatisation of all state property, including residential dwellings and most of the land, but excluding the infrastructure of which privatisation is postponed, maybe to 2000.

Environmental Sustainability

The level of pollution in Lithuania was never as great as in Russian industrial centres, and in five years it has decreased significantly with a 70 percent decline in production output. What is currently the main concern is the completion of the wastewater treatment plants in many urban areas, first of all in Vilnius, Kaunas and Klaipeda. Scandinavian countries have made donations for these measures to reduce pollution of the Baltic Sea. There would be no reason to mention environmental sustainability at all if Lithuania did not have the largest nuclear power station in Europe, located in Ignalina. It produces cheap electricity and so is an economic necessity, at least at present, but it frightens the whole region while for Lithuania it poses a deadly danger. Many experts feel the maintenance of the nuclear power plant has been improved considerably in recent years. Nevertheless, improvements continue as the consequences of an accident would be terrible. Not only technical imperfections matter, but actions of terrorists are equally dangerous.

Social Restrictions to Reforms

It is mathematically proved that liberalisation of prices is most efficient if done in a manner of shock therapy, i.e. as rapidly as possible. However, anticipated worsening of the situation of some social groups - or the self-interest of populist opposition, popular movements, etc. - can sometimes make the implementation of sound economic policies impossible. Happily enough, Lithuania did not meet this kind of difficulty; moreover, the first years of transition demonstrated mass enthusiasm. Probability of strikes is negligible as both tradition of strikes and potential organisers are non-existent, also because improvement of the economy has started. Nonetheless, influential groups of agrarians and managers of large enterprises (their behaviour started to change after privatisation), nationalists and populist politicians, constantly try to make the parliament and government diverge from liberal economic policies. These attempts cannot be ignored because state paternalism is the decades-long experience of the population.

Integration into the European Union

Membership in the EU is Lithuania's vision of the future. This factor becomes most important in targeting economic and political reforms. It also is able to neutralise the negative influence of inexperience and other social restrictions mentioned above. Determination to integrate into Western Europe comes from two reasons: security and economics. Of course, the emotional factor of joining the family of democratic European countries has played an even greater role until now.

As mentioned above, Lithuania has no alternative except the European security system to keep its political independence. It would be excellent to know that there will be no Russian aggression in the future. Unfortunately, Russia does not behave in a way which would allow one to make this presumption. Suffice it to say that the situation there is not "aggression-proof". Ironically enough, Russia, most probably, would prevent aggression of any other country.

Economic reasons are obvious. They involve participation in the division of labour of a large and advanced region. Looking at the development programmes for the infrastructure of the Lithuanian economy to become an integral part of the European transportation, energy and communications systems, one can realise how great a stimulus it is for the development and modernisation of all economic sectors - that will follow from the implementation of these programmes. On the other hand, the very development of infrastructure, being a huge investment, may lead to an economic boom.


Transition period problems are numerous and serious. However, bearing in mind what has been achieved, the logic of economic development, and the availability of financial and technical assistance of developed countries, economic growth appears to be guaranteed. Lithuania's security will increase, as economic growth and the country's security reinforce each other.

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