In 1990  six economists – Kęstutis Glaveckas, Nijolė Žambaitė, Petras Auštrevičius, Dainius Pupkevičius, Elena Leontjeva and Darius Mockus - who worked together on a  Lithuanian textbook “Market Economy and State Regulation,“ came up with the idea of establishing a think-tank that would become a centre for promoting the free market in a rising post-independent Lithuania. Shortly after the inauguration of the Lithuanian Free Market Institute on 20 November 1990, three groups - on law-drafting and legislative analysis, monetary and banking policy and privatization - were set up.

 

Before long the first two groups merged to take part in Lithuania‘s ongoing banking reform. The LFMI‘s team took an active part 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 foundations for normal banking activity were laid. As this objective was accomplished, LFMI focused on privatisation and economic liberalisation. Requested to draft the by-laws of a commodity exchange, LFMI did not see this as a formal task but did it best to bring together all rational groups interested in establishing a commodity exchange. At that time voucher privatisation was in full swing, so LFMI took up analysing and projecting issues relating to privatisation.

 

In 1993 LFMI started work on the legal foundations of Lithuania‘s stock exchange. Lithuania‘s securities market and stock exchange were instituted in accordance with a document called “Provisional Rules on the Issue of Securities, Public Trading and Stock Exchange“ which was drafted by LFMI‘s analysts in cooperation with other specialists. LFMI initiated a broad-based discussion on the development of the securities market in 2000 and on the need to privatise the National Stock Exchange in 2002.

 

In the first years of its activity LFMI made a significant input to the establishment of the Lithuanian Development Bank. Despite many difficulties and even the feelings of desperation at times, LFMI‘s drafted bill saw the light of day in October 1993. Approved by the government first and subsequently by the parliament, this 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. Concurrently LFMI was actively promoting the idea of private banking. LFMI provided consistent support for all initiatives aimed at liberalisation of Lithuania‘s banking sector. These were 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).

 

Back in 1991 LFMI came up with 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 a groundbreaking tax reform. In 1997 the removal of corporate income tax was even enlisted on 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 LFMI‘s concerted efforts. In 2005 the authorities heeded LFMI‘s drawn-out calls to lower the personal income tax and made the first small steps in this direction. Over the 19 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 1998 and 2000 administrations endorsed in their official programmes almost all of the LFMI‘s proposed principles of a tax system.

 

LFMI‘s analysts realized that for the tax burden to be systematically and rationally 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 a fundamental budget reform in 1996, lawmakers huddled with the LFMI team to develop a conceptual reform framework. In 1997, at the suggestion of 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 first applied in budget formation. A consolidated budget proposal found expression in the 2001 budget. Over twenty non-budgetary funds, except the privatisation, social security, health care and road funds, were included in the national budget.

 

In 1994 LFMI came up with the idea of private fully-funded pension insurance. Two years later LFMI‘s analysts drafted the first pension funds bill. In 1999, after a lengthy law-drafting process in state institutions and heated parliamentary discussions, voluntary fully funded pension insurance with private pension funds was signed into law. As decisions on pension reform got stuck in the corridors of government, LFMI proposed a compromise, voluntary second-tier pension insurance in private pension funds. This helped to break the deadlock in the policy making, and a 2002 law gave green light to Lithuania‘s long-awaited pension reform. LFMI‘s analysts keep advocating a faster increase in the proportion of socials security contributions designated for private insurance.

 

In order to promote a healthy business climate in Lithuania, in 1996 LFMI proposed lifting the bureaucratic burden on private business. This became one of LFMI‘s long-termed projects known as a business deregulation initiative in Lithuania.  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 amended many times, and LFMI‘s analysts had to step in to forestall government interventions in corporate business.

 

Over the past several years LFMI has been a major presence in policy debates on competition principles. LFMI has explained that free competition is threatened and destroyed not by private business but by state participation in the economy and by government largesse. A 1999 competition law lifted a number of legal restrictions of 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 interventions, the said competition law stands out not only in the European context but also on a global scale.

 

LFMI has played no small role in many other vital 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 proposing 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 a broad-based support, and a new cabinet formed in 1999 started its term by launching a Sunset Commission to get rid of unnecessary bureaucracies. LFMI proposed a strategy and an action plan for curbing bureaucracy and government functions. Another initiative, designed to improve Lithuania‘s business environment, was named Sunrise. LFMI played an important role in analysing how to simplify capital market, employment, land purchase and building regulations. Yet, as political will to carry on this business deregulation programme dissipated, LFMI withdrew from the Sunrise Commission regretting that a good initiative was allowed to go adrift.

 

Back in 1996 the LFMI team began to look into employment regulation, an area whose reform was widely considered a rigid taboo for a long time. As LFMI‘s analysts took part in drafting a new labour code, they realized how difficult it was to advocate such ideas 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 certain improvements, although it still fails to reflect all employer-employee needs.

 

In 1998 LFMI analysed 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 the government adopted a decree on revision of licensing regulations that was based on LFMI‘s research conclusions and proposals. The said document embraced all of LFMI‘s defined licensing principles, albeit with certain limitations and inconsistencies.

 

As information technologies were ushered in private business and government institutions, new concepts, „knowledge economy“ and „information society,“ supplemented the political lexicon. LFMI took an active part in creating the legal foundations for the IT sector from the first days when this work was commenced five years ago. Not only did LFMI‘s analysts participate in the task forces on almost all of the major legal documents. They were also key co-authors of the following legal acts: conceptual frameworks of e-government and e-business and online communications, a new version of the law on e-signature, 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. Quite a few attempts of allowing government participation in the IT sector were foiled, making it possible to promote private business and to prevent squandering of taxpayers‘ money.

 

Starting in 1997 LFMI began to focus on social security and health care, the systems in which the state had traditionally played a dominant role and conditioned a high level of redistribution. LFMI brought home to the authorities and the public that Lithuania‘s costly and ineffective system of social provision, inherited from the Soviet times, depleted enormous resources and posed the biggest drag on the market economy. Since 2000 LFMI‘s analysts have analysed closely 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 concerted efforts the ideas from LFMI are gaining a growing public support.

 

Lithuania‘s system of education funding also awaited a prompt and groundbreaking revision. In response, LFMI proposed the principle of a pupil‘s basket in the system of secondary education by which educational establishments are financed by the state in proportion to the number of pupils and the money follows pupils as these change schools. In 2002 this principle was adopted in secondary education, but a number of limitations were stipulated in allocating funding for various types of schools (e.g. rural and urban schools). Dissatisfied with this partial approach, LFMI‘s analysts urged the authorities to carry out a systematic reform of education funding based on competition, decentralization and private initiative.

 

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

 

As Lithuania was getting ready for EU membership, LFMI began to analyse and assess the implications of EU membership on Lithuania‘s economy and its specific branches and companies. Today, almost a year and a half after Lithuania‘s accession 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 the biggest benefits for Lithuania, while the adoption of mandatory standards has proved to be the biggest drag. As the day of EU membership approached, 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 scrutinise, to assess the implications of, and to 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 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 Economy to formulate Lithuania‘s position and conclusions on the EU Services Directive proposal. As Lithuania joined the European Union, LFMI began to analyse the policy-making process in the European Union and to expand the boundaries of its activities beyond Lithuania.

 

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. Since 1994 LFMI has published a periodical newsletter “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. Since 2000 Lithuanian students have been invited to attend LFMI‘s led course “Capitalism and Freedom“ in Lithuania‘s universities. In 2004 LFMI launched a writing contest “Liberty Studies.“

 

Over the 19 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 200 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. 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. Hardly a day passes at LFMI without a call from reporters or journalists. Every year brings about a hundred appearances in the press, on the internet and in radio and television.

 

Here we have mentioned LFMI‘s most prominent accomplishments, but the 19 years of work have embraced many more successes, maybe smaller but equally significant. We have never done research for the sake of research. We have never held back our visions of reform. Every single idea conceived at LFMI has been communicated to the people of Lithuania – to have it plant seeds and live in them...