On January 12, 2006 the Lithuanian Free Market Institute (LFMI) staged a round table discussion “Lithuania in the 2006 Index of Economic Freedom: whom to look up to?” which took place at the Presidential Palace in Vilnius. This was the first presentation of the Index of Economic Freedom in Lithuania, released by the Heritage Foundation and the Wall Street Journal. During the event, Lithuania’s President Valdas Adamkus delivered a welcome speech and Dr. Marc Miles, one of the Editors of the Index and director of the Centre for International Trade and Economics at the Heritage Foundation, presented a key presentation. Other speeches were delivered by Dr. Ramūnas Vilpišauskas, Advisor to President of Lithuania, Algė Budrytė, Deputy Chief Economist from the leading bank in Lithuania SEB Vilnius Bank, and Dr. Guoda Steponavičienė, Vice President, LFMI.

The discussion drew more than one hundred participants – MPs, ministers and high ministerial workers, ambassadors, business leaders and representatives from business associations, business and finance analysts, academics, students, and media representatives. In 2005 the Heritage Foundation, a pre-eminent US-based organization, invited LFMI to be one of the seven partners in Europe to help prepare and disseminate the Index of Economic Freedom, published and announced annually with the Wall Street Journal. In addition to this event, LFMI’s President Ugnius Trumpa took part in a meeting with Prime Minister Algirdas Brazauskas, January 20, and Speaker of the Parliament Artūras Paulauskas, January 19, and presented the book with the latest study in person. A leading business daily Verslo Žinios published an exclusive interview with Dr. Marc Miles, January 16, about the Index and lessons for Lithuania.

The goal of the LFMI’s discussion was to present the results of the latest study, the 2006 Index of Economic Freedom, and to debate which countries’ lead Lithuania should follow and what should be done to achieve higher ratings of economic freedom.

The 2006 study shows that economic freedom made impressive gains throughout North America and Europe in general; however, Lithuania’s situation remained unimproved, while Estonia and Latvia posted sharp declines.

According to the survey, the level of economic freedom in Lithuania remained virtually unchanged: Lithuania ranks 23^rd, the same as in the previous study, although the country’s score slightly improved, by four tenths to 2.14. Lithuania remains in the group of “mostly free” countries. The country’s overall score is higher in the current index as the figure for fiscal burden of government is better this year; however, it is still driven down by vast bureaucracies and corruption, insufficient confidence in courts and price controls.

Neighbouring countries suffered a sharp drop in economic freedom: Estonia moved from the 4^th place to the 9^th, but still remains among the “free” countries, and Latvia plummeted by 33 positions to 39^th place. According to the authors of the study, rising government spending and the adoption of EU trade policies worsened Estonia‘s Index score. Latvia was pushed down by increased fiscal burden and inflation.

In general, the regions of North America and Europe saw an impressive rise in economic freedom. From the western end of the region, where the United States rejoined the world’s 10 freest economies, to the middle, where Germany joined the ranks of “free” economies for the first time, to the eastern end, where Romania improved more than any other country worldwide except Pakistan, the North America-Europe region widened its worldwide lead in economic freedom.

In his welcome speech at the LFMI’s discussion, Lithuania’s President Valdas Adamkus rejoiced that in this year Lithuania managed to retain a high ranking at 23^rd among the 157 measured countries throughout the globe. “It is a very important achievement for our country and it should encourage us to be even more persistent in ensuring increasingly better results in the coming year,” - said Mr. Adamkus.

 

However, Lithuania’s President regretted that Lithuania remains in the group only of “mostly free” countries and has not yet entered the group of the twenty economically “free” countries. But he said he was optimistic about the prospects of the country’s economic freedom in the future and enumerated several reasons for that. First, in 2005 Lithuania launched a tax reform which incorporated a reduction of the personal income tax. Second, Lithuania is pursuing a sound monetary policy and envisages its overhaul by finally adopting a methodology of programme budget formation and evaluation. Third, the business community and the government have recently started a close dialogue to find ways to increase Lithuania’s competitiveness.

Mr. Valdas Adamkus expressed his strong belief that Lithuania, while adopting laws and fixing rules, had to raise a question whether these decisions would make the country more competitive. “We cannot forget that increasing competitiveness is one of three priorities for our country. Competitive, free and advancing economy is an essential condition to achieve other priority goals,” - stated the President. 

While presenting the 12^th Index of Economic Freedom, Dr. Marc Miles, a co-author of the study, said that Lithuania had real opportunities to become one of the world’s “free” countries and that it was already leading other nations and setting trends for tax systems. According to the speaker, Lithuania should be proud of its low corporate profit tax rate and an ongoing reduction of the personal income tax.

Dr. Marc Miles highlighted at the discussion that creation of wealth is strongly dependant on economic freedom in the country. “A recipe for reducing poverty is clear and simple – the more economic freedom, the greater the well-being, the more economic freedom, the more rapid economic growth,”- explained the author of the research. The study shows that average income per capita is twice higher in “free” countries than in “mostly free” (Lithuania is in the group of “mostly free” countries). Countries with constricted economies are among the poorest ones.

According to the latest study, worldwide, the scores of 99 countries improved and 51 declined.

Algė Budrytė, Deputy Chief Economist from SEB Vilnius Bank, concluded that in terms of economic freedom, Lithuania was neither an outsider nor a winner. “The good news is that economic freedom in Lithuania has been increasing, albeit modestly, since the very launch of the index,”- she commented. Ms. Budrytė pointed that the stability of the financial sector, secured through one of Lithuania’s most successful reforms over the past fifteen years, the monetary reform, had undoubtedly contributed to this achievement. She also mentioned an important fact that currently Lithuania had one of the lowest inflation rates among the EU newcomers. 

However, Ms. Budrytė regretted that Lithuania still had unsolved problems which did not allow the country to break the barrier of “mostly free” countries and join the group of “free” nations. This shows that the country has much to accomplish yet. According to the analyst, economic freedom is being inhibited the most by such law-and-order-related phenomena as entrenched corruption, bureaucratic barriers to business and an insufficiently credible judiciary.

Banker Budrytė stated the Heritage Foundation’s Index of Economic Freedom is quite credible and representative because analogous studies of other authoritative institutions, such as the Fraser Institute in Canada and the Harvard Institute for International Development, give very similar trends. According to her, this Index pinpoint to the existing policy “cracks” in Lithuania and forces the country’s authorities to search for ways how to “cover” them.

Advisor to President Dr. Ramūnas Vilpišauskas agreed with Ms. Budrytė, as regards the credibility of the Index of Economic Freedom, and added that “such studies are useful as they help to look critically at both ourselves and others.” He noted that Lithuania had made the least changes in the fields where EU’s regulatory impact is minimal – the education and the health care systems and procedures of land use. In his opinion, a lack of reforms in these particular areas is a primary roadblock to enhancing Lithuania’s competitiveness.

 

 

As LFMI’s Vice President Dr. Guoda Steponavičienė said at the event, Lithuania could improve its results in the Index by reducing tax rates and the budget deficit. She pointed out that judging from the study there are no formal restrictions on foreign investments in Lithuania, but the statistics shows that the country manages to attract only very negligible investments. “It seems as if we were overestimated,”- she commented.

Ms. Steponavičienė highlighted that Lithuania has the poorest score in the category of “informal economy activity.” However, she pointed, a reduction of the shadow economy is a long-term process related with confidence, tradition, and business and administrative culture, therefore quick improvement can hardly be attained in this area.

Since 1995, this Index of Economic Freedom, prepared by the Heritage Foundation, an influential US-based non-government organisation, together with the Wall Street Journal, measures economic freedom in 161 countries throughout the world and analyses basic factors that determine economic growth. The Index ratings reflect an analysis of 50 different economic variables, grouped into 10 categories: banking and finance; capital flows and foreign investment; monetary policy; fiscal burden of government; trade policy; wages and prices; government intervention in the economy; property rights; regulation; and informal (or black) market activity. For 12 years the Index has been internationally acclaimed for its comprehensive, data-rich summary of prevailing economic conditions around the globe. An indispensable resource for investors, academics, and policymakers, it answers why some countries are rich, why some are poor, and why some are stagnant... The study can be found online at: www.heritage.org/index.

Celebrating the 15^th year of activity, the Lithuanian Free Market Institute (LFMI) presents a new website which was launched on January 16, 2006.

One of the most visible changes in LFMI’s website are a new design and the introduction of a third, horizontal, menu. The third block shows four strategic areas that are currently analysed by LFMI. The rest of the topics can be found in the directory “Other areas.”

The vertical menu of the new website is similar to the former one, although certain changes were made. The contents of the directories of the old version “Programmes, projects” and “Research, analysis” were moved to directories “Research” of the horizontal menu according to the topic. The former directory “Articles, papers” was renamed as “Newsroom” and expanded.

One of the innovations of LFMI’s website is a tool to order LFMI’s news online. Visitors interested in attending LFMI’s events from now on will have a possibility to register online to LFMI’s public events.

Other changes are an enhanced search system, a site map, and tools for reading and printing texts.

The old version of LFMI’s website can be accessed at: http://www3.freema.org/.

LFMI hopes that visitors will find LFMI’s new website more convenient and functional.

 

The Lithuanian Free Market Institute (LFMI), with a group of European partners and a coordinating institution “ICEG European Centre,” have won a second tender announced and financed by the Institute of Prospective Technological Studies (IPTS), one of the seven scientific institutes of the European Commission's Joint Research Centre, Seville. Its mission is to provide customer-driven support to the EU policy-making process by researching science-based responses to policy challenges that have both a socio-economic and a scientific or technological dimension.

Within the framework of this international project, 10 partner-organisations will conduct separate country-reports, and based on those, a comparative synthesis report will be prepared later by the “ICEG European Centre.” Project partners are organisations from Hungary, Malta, Latvia, Lithuania, Estonia, Slovenia, the Check Republic, Slovakia, Poland and Cyprus.

The first study that will be made by the Lithuanian Free Market Institute, a representative of Lithuania, is entitled “Next Steps in Developing Information Society Services in the New Member States: the Case of eGovernment and eHealth.” The aim of this research is to collect relevant qualitative and quantitative data in the areas of eGovernment and eHealth, analyse it and develop a meaningful assessment of both areas state and trajectory of development, and derive relevant conclusions in terms of policy and research. The study will analyse the quantitative and qualitative description of the current institutional, policy framework as well as underlying trends and developments in Lithuania and focus its attention at the future policy options and R&D related challenges specific to eGovernment and eHealth. The study will clearly indicate the overlapping domains and issues common for both eGovernment and eHealth, while being specific in both topics.

The aim of the second study, called “Next Steps in Developing Information Society Services in the New Member States: the Case of eLearning,” is to collect relevant qualitative and quantitative data in the field of eLearning in Lithuania, analyse it and develop a meaningful assessment of the areas state and trajectory of development, and derive relevant conclusions in terms of policy and research. In this study LFMI will look into the factors inhibiting the development of eLearning in Lithuania, identify those factors which would promote its development and formulate recommendations.

Both studies will be completed by December 2006. The life of the entire international project will be 14 months, followed at the end by an extensive dissemination campaign at the EU level.

 

In 2003-2004 the Lithuanian Free Market Institute participated in an international research project “Factors and Impacts in the Information Society: a Prospective Analysis in the Acceding and Candidate Countries” financed and coordinate by the same institutions. During this project, LFMI conducted a study on factors and impacts in the information society in Lithuania (the study is posted online…).

 

 

Seeking to promote reforms in individual transport sectors, the Lithuanian Free Market Institute carried out two comprehensive studies in 2005 and presented them at a press conference and a conference “Will Lithuania’s Seaport and Railways Serve the Consumer?” The event aimed at debating the prospects for, and the guidelines of, further development of the Klaipeda Seaport and the Lithuanian Railways.

LFMI’s study “Reforms in the Lithuanian Railways: how and when?” draws the guidelines for structural reforms in the country’s railway sector, discusses the existing problems and needed changes, and presents the ways how to solve these problems and institute changes. The study presents an overview of EU transport policy, discusses the transposition of the railway acquis into the Lithuanian law, speaks about the carriage of cargo and passengers, analyses the pricing and the tariff policy conducted by the state company Lithuanian Railways and international agreements regarding railway carriage.

LFMI concluded that Lithuania is seriously lagging behind other EU countries in liberalising the railway sector and calls Lithuanian authorities for reforming this sector without further delay. LFMI proposes the following steps in overhauling the Lithuanian railway system. First, to separate completely the track from the carrier and to create conditions for competition among the carriers, and to privatise public carriers and the approach roads after the reform. Second, to define explicitly the funding of social functions and the infrastructure from the budget. Third, to minimise the loss-making services and the services of public infrastructure net, to renovate the infrastructure by ensuring conditions to enhance quality in the remaining profitable and perspective itineraries. And fourth, Lithuania’s transport policy should be formed by the Lithuanian Government and parties, not the state-run company Lithuanian Railways.

LFMI believes that the reform of the railway sector in Lithuania would help cracking other issues that are currently not targeted at the state level, such as the tariffs of carriage and the approach roads.

In the study “Management of the Klaipėda Seaport: Challenges, Ways and Solutions” LFMI analyses the main policy factors, responsible for the Klaipėda seaport’s difficulty to compete on the international markets and to attract as many cargoes as it otherwise could, presents an in-depth analysis of problems provoked by these policy regulations, and proposes recommendations for regulation and administration of the Klaipeda Seaport. The study focuses on the main aspects of the seaport management and regulation system, land ownership and economic issues.

The central conclusion made by LFMI in this study is that privatisation of the management of the Klaipėda Seaport would increase its competitiveness and attractiveness on the market. This step would also ensure the seaport’s autonomy from political pressure and maximum efficiency.

 

On November 29, 2005, the Lithuanian Free Market Institute (LFMI) staged a conference “Market or Politics in the Energy Sector?” to debate the prospects of the energy policy in Lithuania. The goal of the event was to direct the ongoing discussions over the energy issues from interest-seeking to finding proper solutions which would help build a consumer-friendly and viable energy system in Lithuania.

At the conference LFMI presented a study “The Energy Policy: Measures, Possibilities and Directions” which defines and evaluates systematically the problems of the Lithuanian energy sector, presents economic arguments needed to estimate currently debated political proposals and provides recommendations regarding the course of the state’s policy and solutions to the most pressing problems in the energy sector.

At the bottom of LFMI’s recommendations for the energy policy lie the necessity to create conditions for competition and possibilities to deregulate this sector. If principles proposed by LFMI were fully implemented, all monopoly privileges would be eliminated, allowing the energy prices to fall where possible. The implementation of LFMI’s principles would allow maintaining an ultimately low general price level, without inflicting upon the viability of the energy sector and the security of the consumer-preferred energy supply. LFMI’s proposal would help open up new opportunities in those areas where energy prices are artificially reduced today, allowing using the energy resources most efficiently, while social issues would be tackled more expediently than they are today.

The energy policy is one of the strategic fields of LFMI’s activity in 2005-2007. This study was also submitted to relevant official institutions and business associations.

In December 2005 LFMI’s Vice President Dr. Remigijus Šimašius was invited by the Lithuanian Ministry of Economy to take part in a renewed commission to draft a national energy strategy. Headed by the Ministry’s Vice Minister Nerijus Eidukevičius, the commission consists of 20 members – ministerial workers, academics and scientists specializing in the energy issues, representatives from the energy companies and supervisory institutions. The draft of the strategy is planned to be ready until April 15, 2006.

 

In November 2005, the Lithuanian Free Market Institute (LFMI) released the results of the 16^th survey of the Lithuanian Economy, presenting forecasts for 2005 (updated) and 2006.

According to market participants polled by LFMI in August to September 2005, the economy in Lithuania will continue to grow both steadily and rapidly in 2005 and 2006. Economic indicators, although noticeably worse than a couple of years ago, remain rather high and economic growth seems to have finally reached the general population – both monthly income and household income are on the increase, people save, invest and spend much more than in the previous years.

However, there is reason to believe that the country‘s economy may start loosing momentum as no firm foundations to bolster further and long-term growth are being created. The Lithuanian government is not pursuing a migration policy whatsoever, the education system remains unreformed and there is no political will to cut tax rates significantly and to conduct a strict budget policy.

The LFMI survey shows that the growth of income is being stimulated by both fierce competition in the labour market and an improving economic situation. Bigger monthly salaries, together with the money that Lithuanians working abroad send back to their families, contribute to improving financial situation of Lithuanian households.

The financial situation of businesses is also improving, while the rate of unemployment is still on a continuous decline. Economic growth is being further bolstered by an expanding internal market and the removal of the last barriers to trade which, together with improved export conditions, prompted rapid export growth after EU accession; brighter expectations of both companies and people, leading to increased consumer consumption, also contribute to growth.

On a more pessimistic note, it should be pointed out that the level of the shadow economy is not falling – on the contrary, it is on the rise, and the same goes for the tax burden. The optimism over steadily decreasing unemployment is shadowed by a wave of emigration and a non-existent immigration policy as well as a high level of structural unemployment and a lack of the qualified labour force.

Overall, after joining the EU fewer leaps in the forecasts of market participants have occurred in the survey - their estimates have been much steadier since then. Market participants hope for steady employment, continuous growth of income, investments and foreign trade, but do not project any big changes caused by external factors.

A full summary of the results of the 16^th survey of the Lithuanian economy can be found online (click here…).

Launched in 1997, the LFMI survey is aimed to provide estimates and forecasts of economic variables in Lithuania based on the opinion of market participants, to analyse factors that influence the outlooks of market participants, to compare the survey results with official statistics and data from other sources, and to offer interpretations of the most distinct differences.

The LFMI survey is based on the expert consensus paradigm originating from the theory of rational expectations. This theory states that, if a connection exists between an economic variable and certain processes in the economy, market participants will use all available information to make estimates and forecasts.  

Forty-eight respondents participated in this survey. The survey was funded by “Ergo Lietuva gyvybės draudimas,“ “Kappa Packaging Baltic,“ “Ragutis,“ “Santa Monika Networks,“ Ūkio bankas and “VST.“