In June 2006 LFMI launched a project on globalisation and free trade, supported the British Embassy in Lithuania, which aims at evaluating what impact freer trade has had and continues to have on the Lithuanian economy. The project also targets at debunking popular myths about globalisation and free trade.

As part of this project, LFMI is conducting a research with a view to dispelling the fallacies and myths related to free trade and globalisation. The research will be presented at a conference “How can Lithuania Survive on a Global Market?,“ organised in partnership with the  British Embassy in Lithuania on 14 September 2006 in Vilnius. The even will focus on the impact of free trade and globalization on Lithuania and address the opportunities and challenges that globalisation poses on Lithuanian businesses acting on the global market.

LFMI will be privileged to host Mr. Philippe Legrain, a British economist, journalist and writer, as the distinguished guest speaker of the conference. Mr. Legrain writes about globalisation and European issues. He was previously chief economist and director of policy for the pro-European pressure group, Britain in Europe, special adviser to WTO director-general Mike Moore, and trade and economics correspondent for The Economist. He has written for various newspapers and magazines, including The Guardian, The Independent, the Wall Street Journal Europe, the FT and the New Statesman. He is the author of Open World: The Truth about Globalisation and is currently writing his second book, on international migration. He is a major advocate of the euro and globalisation.

At present free trade and globalisation attract a lot of bad publicity in Lithuania. This is partly due to the pressure that the post-communist country experiences while adjusting rapidly to changes on the global arena, and partly due to the wide-spread anti-globalist feeling experienced throughout the world. Moreover, such sentiments are not alien to the European Union either (the recent example of the Globalization Fund). Because of a general lack of information on free trade and on how opening of the markets actually boosted the Lithuanian economy, the anti-free-trade moods are being widely exploited by anti-globalists, certain interest groups and those opposed to free enterprise in general. As a result, the media and policy makers are being influenced and swayed by this anti-free-trade propagation.

The conference held by LFMI will be attended by Lithuanian politicians, high ranking government officials, experts, political scientists and media representatives. LFMI expect that this event will introduce a more informed position on the effects of globalization, encourage public debates and promote the ideals of the free market.

The year 2006 marks the 125^th birth anniversary of Ludwig von Mises, one of the most prominent economists and philosophers of the 20^th century. To commemorate this occasion, LFMI is organising a writing contest for students dedicated to Mises’s works and is publishing a 2^nd edition of Mises’s Economic Policy. Thoughts for Today and Tomorrow.

On 29^th of September, the exact date of Mises’ birth, LFMI will hold a seminar for students and the academia to present the ideas of Ludwig von Mises. During the even LFMI will also launch the book Economic Policy and announce the winners of LFMI’s writing contest Freedom Studies.

LFMI will be honoured to host Prof. Hans Hermann Hoppe as the guest speaker of the even who will speak on Mises’s ideas and his role in the economics history. Mr. Hoppe is the author of eight books and more than one hundred articles in books, scholarly journals, and magazines of opinion. As an internationally prominent Austrian School economist and libertarian philosopher, he has lectured all over the world and his writings have been translated into twenty languages. Prof. Hoppe lectured in Lithuania several times, every time attracting enthusiastic audiences. 

Initiated by the Lithuanian Free Market Institute (LFMI), twelve business associations and trade unions signed and submitted an appeal to the Lithuanian Government and parliamentary parties, urging the authorities to launch a more significant reduction of taxation of labour without further delay.

The signatories welcomed the reduction of the personal income tax to 27 percent which took effect from 1 July 2006 but stressed this was not enough to increase the competitiveness of the Lithuanian economy and people’s welfare, as taxation of labour in Lithuania still remains one of the highest in the European Union. They pointed out that the current economic situation and growing budget revenues build conditions for more substantial tax cuts and proposed concrete steps.

Representatives from business associations, trade unions and policy analysts suggested lowering the rate of personal income tax to 20 percent not later than from 1 January 2008 and to 15 percent from 1 January 2009 (if GDP continues to grow by at least 5 percent in 2007). They also put forth a proposal (except the trade unions) to set an upper ceiling on social security contributions which would amount to five average wages in Lithuania.

In line with the proposed tax cuts, the signatories urged the authorities to revise budget expenditures and to ensure a more effective use of tax-payer money.

According to signatories, significant lowering of income taxes would kick-start the Lithuanian economy and attract investments; increased investments and a lower income tax would augment wages; and legalisation of the informal sector and intensified economic activity would generate more revenues to the national budget.

The appeal signed by a group of associations and LFMI was submitted to Lithuanian authorities on 29 June 2006.

On 21 June 2006 LFMI staged a seminar “Competition Law and its Application in Lithuania” to debate the existing situation with competition law in Lithuania, its application and tendencies. At the event, lawyers, policy analysts and government representatives searched for ways how to solve problems arising in applying competition law and analysed the interrelation of state institutions supervising competition in Lithuania. LFMI presented an in-depth study on competition law and its application in Lithuania.

The study conducted by LFMI shows that competition policy is directed towards modelling relations on the market and restricting the handling of private property and private settlements, rather than towards eliminating the genuine threats to competition and reducing government-erected constraints. Such practice, argues LFMI, undermines the underpinnings of competition and the market.

LFMI’s President and a co-author of the study Dr. Remigijus Šimašius highlighted that competition law and its rigid application often forces companies to adopt unsound decisions and to refrain from expanding their business activities, merging, reverting to other forms business organisation and coordinating actions even when it is crucial. “Business decisions are trapped under a magnifying glass, but the real roadblocks to competition – state privileges, regulations, various restrictions, government support and exemptions – remain our everyday life,”- commented Mr. Šimašius.

LFMI proposes to soften the rules of competition and allow the market itself to reveal the most effective solutions, rather than burdening businesses with additional regulatory and bureaucratic load. LFMI believes that it is especially important to revise the rules of ex ante regulation of specific markets (e.g. the telecommunications and the energy sectors) as they frequently create only an illusion of the market and forces it into stagnation.

The study on competition law done by the Institute presents an overview and evaluation of competition policy, regulation and the basic aspects of its implementation. It also analyses the functions of the Lithuanian Competition Council and the practice of how these functions have been performed. They include cartel agreements, supervision of concentration, control of dominating economic agents, market research and others. The study also provides recommendations regarding the principles of further regulation of competition. The study is written in Lithuanian only.

On 7 June 2006 LFMI staged a seminar “Solving the Problems in the Heating Sector: Market and Administration” to discuss economic problems in the heating market related with the heating price, relations with suppliers and consumers, models of cooperation between the government and the business, and opportunities of competition and the impact of regulation in the heating market. At the event LFMI presented formulated proposals on how to solve problems in the heating sector as well as regulation and prospects of cogeneration in Lithuania.

LFMI thinks that to amend the situation in the heating sector it is indispensable to open the door to competition and to relinquish price regulation, ex ante regulation and cross subsidizing. It is also necessary to continue privatization of the energy sector and the heating market, to separate social support from the heating market and abolish a VAT exemption for heating services, to remove legal obstacles to production of renewable energy sources and at the same time reduce ineffective support for this type of energy, etc.

In LFMI’s opinion, cogeneration (joint production of heating and electricity) can be competitive on the market in certain cases and would be quite effective in Lithuania. However, the Institute points out that extra support for, or protectionism of, cogeneration is unjustified and inexpedient and proposes not to grant any support or fix quotas, only where EU law requires so.

LFMI concludes that in general not deregulation, but re-regulation is talking place in the Lithuanian energy and heating sectors. However, to dovetail short- and long-term goals and achieve effectiveness in these markets, genuine deregulation of prices, standards, licensing and permits, zoning, etc. is needed. Deregulation would detach this economic sector from political decisions and instability. LFMI believes that the Lithuanian energy sector - competing on the market, with minimal government regulation and driven by economic rather than political logic – would be considerably safer, more flexible and credible than under the existing conditions.

On 25 April 2006 LFMI held a conference on migration strategies and presented a research and proposals regarding Lithuanian migration policy. Participants of the event – representatives from government, business and NGO sectors – debated the causes and effects of migration and the impact of various economic policy measures on people’s self-determination to emigrate and to comeback to Lithuania in the future. The event focused on government’s approach to, and potential decisions regarding, migration.

LFMI is of the opinion that Lithuanian government institutions should aim at creating conditions to accelerate the growth of wages in the country rather than at searching an unattainable panacea from migration. It is impossible, argues LFMI, to identify and set a finite list of migration causes as people view and react differently towards the same social, economic, cultural and other circumstances. LFMI points out that only several factors influencing migration decisions are within the competence of the government or can be affected by government-imposed tools.

The Institute proposes the Lithuanian government not to set a political goal to halt emigration by all possible means but rather treat migration as an expression of pursuit of personal happiness. LFMI highlights that migrants point to meagre income and unemployment as the core reason for emigration and that employment regulation at present is especially rigid and meticulous in Lithuania. Drawing on these facts, LFMI recommends the Lithuanian government focusing attention on eliminating economic causes of migration.

Specific means proposed by LFMI are a reduction of personal income tax to 15 percent, elimination of the controversial temporary “social” tax for companies, refraining from levying new taxes, creating conditions for individual, not collective, settlement of employment conditions between employers and employees and easing an overall administrative burden for businesses.

LFMI also calls for a speedier completion of the land restitution process and for reforming territorial planning by granting the owner the primary power to decide how the land will be used, taking into account neighbours interests. These tools would attract investments, argues LFMI, that have been languishing for several years now. In addition to that, the Institute stresses the need to overhaul the Lithuanian education system as it also has affects on migration.

The study will soon appear at LFMI’s website in English.

On 11 April 2006, the Lithuanian Free Market Institute initiated a petition against the efforts of the European Commission to create a Common Consolidated Corporate Tax Base (CCCTB), which was signed and disseminated by 30 European economic research institutes and individuals (the list is below). The Petition was submitted to the European Commission, the European Parliament and the Council of Europe as well as national governments and mass media of the member states.

The Petition came as a reaction to the Commission’s communicate on the progress made and the next steps proposed to be made towards creating the CCCTB. A group of European free-market oriented think tanks have undersigned the petition urging all EU member states to oppose this harmful initiative of setting uniform corporate tax rules across the EU as it would undermine the euro zone’s competitiveness in the global economy, pose enormous tax-compliance costs for all businesses without exception and in general fail to achieve the goals envisaged for tax harmonisation.

Given that the benefits of the CCCTB are questionable and the shortcomings are obvious, the signatories urged the European community to undertake the following actions. First, EU member states were called on to oppose the initiative towards the harmonisation of the corporate tax base and further moves aimed at creating a tax cartel among EU member states. Second, high-tax EU member states advocating tax harmonisation were encouraged to move their own tax systems closer to those competitive tax regimes that bolster economic growth. Third, the business community should bear in mind that harmonisation of the corporate tax base would not tackle, and would not even build preconditions to tackle, the defects of corporate taxes existing in national laws (which abound in all member states), but would inflict new administrative costs instead. Therefore, the business community was recommended not to endorse the idea of harmonising the corporate tax base, but use this opportunity to call on their national governments to eradicate the deficiencies of national corporate taxes and announce publicly its position on the harmonisation of the corporate tax base.

In addition to that, LFMI had prepared analytical material on harmonisation of the corporate tax base which looks into the goals set for corporate tax harmonization and discusses their justification and relevance. The study will also analyzes the arguments used to vindicate the proposed consolidation of the corporate tax base as the only suitable measure to reach these goals and will evaluate its appropriateness, effectiveness and potential negative implications. At the end of this document generalised implications of tax harmonisation, conclusions and recommendations are provided. The study is presented in English (www.freema.org | Tax policy | Research).

Currently, further preparation of the CCCTB legislation is taking place at the European Union. It is likely that supporters and opponents of this idea will have a long road before it comes into reality. As Gerrit Zalm, the Dutch finance minister, said asked to put a timeframe on the proposal for a CCCTB: “Not in ten years and I am being optimistic.”

In April 2006 LFMI released the 17^th survey of the Lithuanian economy presenting estimates of 2005 and forecasts for 2006 (updated).

According to the survey of market participants conducted by LFMI in January to February 2006, the economic situation in Lithuania will remain stable in 2006 and the coming year and will be better predicted previously. Economic indicators remain rather high; trade is continuing to grow, the financial situation of businesses is improving, and so is the financial situation of Lithuanian households.

In this survey greater attention was given to situation in the labour market. According to market participants, the average salary was growing very fast in 2005, and this trend is continuing into this year. The indicators of unemployment – to the contrary – have fallen radically over the last year, and this downward trend should continue in 2006. Rapid changes in market participants’ prognoses show their concern with emigrating workers, stagnated situation in the education sector, and harsh - and increasing - competition in the labour market.

Emigration, competition for labour, and fast economic growth are contributing to rapid salary growth. In turn, bigger monthly salaries, together with the money that Lithuanians working abroad are sending back to their families, contribute to improving financial situation of Lithuanian households. Greater income fuels consumption and expansion of internal market, which in turn stimulates economic growth. However, the consumption also contributes to an increase in prices, which have been growing considerably faster in the last couple of years.

Market participants’ optimism was also shadowed by the still high levels of shadow economy, high tax burden, negligible levels of foreign investment, massive emigration wave, also lack of strategic planning in the government, all of which could prevent the economy from keeping up high growth rate in the future. 

In June 2006 LFMI announced the results of a project conducted jointly with Lithuanian business associations, lawyers and journalists which aimed to monitor how EU law is and has been implemented in Lithuania. The project shows that the process of transposing EU requirements into the Lithuanian law fails to properly take into account the interests of Lithuanian society; crucial decisions between alternatives are adopted in haste and without detailed public debates; in certain cases EU law is used as a cover for pushing “needed” rather than required decisions; and more rigid provisions are transferred into the national law than required by EU law.

The project participants point out that implementation of EU directives has significant impact on the Lithuanian economy and citizens and thus urges the authorities to take measures towards overhauling this process. According to official reports, Lithuania scores best in writing EU requirements into national law: Lithuanian has not implemented only six EU directives, which accounts for 0.4 percent of the entire EU legislation.

More about the finding of the project – see a commentary by Dr. Remigijus Šimašius ‘Are We Listening to the European Union or Fooling Around?’ presented in this issue of ‘The Free Market.’

On the occasion of the second anniversary of the accession of the Baltic States to the European Union, on 12 May 2006 the Lithuanian Free Market Institute, in cooperation with International support foundation "Euroregion Livonia-Baltic“ and Friedrich Naumann Foundation, staged an international conference “The Baltic States in the European Union: Two-Year Experience and Prospects

The goal of the conference was to bring together experts, public leaders, political analysts, business people and politicians from the Baltic States and neighbouring non-EU countries to evaluate the Baltic countries’ experience in the European Union and their opportunities and threats. The conference was also aimed at promoting better policies of the Baltic States in seeking the best results from the EU membership.

The event drew about 50 participants, including members of the European and the Lithuanian parliament, government officials, ministry executives, business people and representatives of major business associations, international institutions, academia and mass media.

On 2 June 2006 LFMI‘s Vice President Dr. Guoda Steponavičienė took part in an informal discussion “Tendencies of Price Growth in Lithuania and possibilities to Curb it,” staged by the President’s Office of Lithuania.

Prominent Lithuanian economists, policy analysts and representatives from the Lithuanian Government and Ministries of Finance and Foreign Affairs debated what measures should be employed to ameliorate the current situation when seeking to join the euro zone. The participants also analysed the forecasts of inflation and its causes, what tools, compatible with the market economy, could be invoked to restrict price growth in the country and other issues.

In May 2006 the European Commission officially declared that Lithuania had failed to fulfil the Maastricht criterion set up for inflation, thus closing the door for Lithuania’s entering the euro zone from 2007 as planned.

In light of this situation and the ensued debate, LFMI issued a press release, urging the Lithuanian authorities to abstain from resorting to artificial, non-market solutions seeking to curb the rise of inflation. Instead, LFMI proposed specific and sound tools for that end and called the Lithuanian Government to trim budget expenditures in the first place.

At the moment Lithuania is debating another date that could be set for entering the euro zone.

According to the Lithuanian Free Market Institute’s (LFMI) annual calculations, Tax Freedom Day in Lithuania moved significantly later in the calendar and fell on May 11 this year. In 2006 the average Lithuanian taxpayer had to work 131 days to pay the total tax bill imposed by all levels of government. 

The Tax Freedom Day is a symbolic day in the year when the average income earner stops handing over all his income to the government and begins to make money for his own and his family’s welfare. It is an indicator of the tax burden in relative terms which shows what portion of the value created by the people is taken by the government to be distributed through the national budget and non-budget funds. 

LFMI calculates the tax burden as the ratio of projected total tax revenues to net national product (NNP), based on the methodology used in other countries as well (USA, Canada, UK, etc.). The tax burden, calculated according to this methodology, does not encompass money expenditures and time costs incurred related to tax administration. Government borrowing is not included either, while in Lithuania it is constantly growing and may become a tax burden in the future.

This year Tax Freedom Day in Lithuania arrived even six days later than in 2005. This increase in the tax burden is the result of 2.5 billion litas larger tax revenues in the state budget than in 2005, growing income of the Social Insurance Fund and the Mandatory Health Insurance Fund and also a slower growth of gross national product compared to taxes. The tax burden calculated as the ratio of total tax revenues and NNP will account for 35.9 percent in 2006, as compared to 34 percent last year.

LFMI started the tradition of commemorating Tax Freedom Day in Lithuania in 1993. Since 1993, when the Lithuanian taxpayers turned to the government everything they earned until April 13, Tax Freedom Day has moved later in the calendar. Starting from 2001, Tax Freedom Day came earlier every year: on May 15 in 2001, on May 4 in 2002 and on May 3 in 2003. In 2004 Tax Freedom Day started to recede again: it came on May 8 in 2004, on May 5 in 2005 and on May 11 in 2006.

On 9 May 2006, a joint meeting of the Lithuanian Free Market Institute’s (LFMI) shareholders and the Board elected Dr. Remigijus Šimašius LFMI‘s new President. Dr. Remigijus Šimašius has been with LFMI for eleven years. Since May 2004 he has served as the Institute‘s vice president and led the team of LFMI‘s analysts. As an expert on the Austrian School and legal theory, he has gained recognition in Lithuania and overseas.

In 2002 Mr. Šimašius was awarded a PhD from the Law University of Lithuania for a thesis on legal pluralism in which he combined, as in his other writings, economic, legal and sociological knowledge. Remigijus Šimašius is an active member of the lawyers’ community: he lectures on the theory of law at Vilnius University and chairs the editorial board of a journal of applied legal science “Teisės problemos“ (“Legal Issues”).

Being an authority on the operational principles of NGOs, Mr. Šimašius participated in creating the legal foundations for the non-governmental sector in Lithuania, led a working group to create a new culture of law-making in Lithuania and took an active part in defining provisions of Lithuania‘s pension reform. Throughout eleven years of activity, Mr. Šimašius’ expertise and advice have been instrumental in tax, budget and municipal reform and in promoting free market ideas in many other areas.

Mr. Šimašius has replaced Mr. Ugnius Trumpa who has been LFMI’s President since November 2001.

Calculating its 16th year of active performance, the Lithuanian Free Market Institute is a leading free-market NGO in Lithuania and one of champion thinks tanks in the region, recognised for its active participation and achievements in international debates. LFMI was the pioneer of independent policy advocacy in Lithuania and stood at the forefront of the country’s economic and social transition to the free-market economy. Differently from the bulk of non-profit non-political organisations in Europe, LFMI was founded as a result of private initiative alone and has retained its independence through support from private sources. 

On June 2, 2006, the Lithuanian weekly ‘Laikas’ (‘Time’) published an article “Many Institutes, Little Use” which looked at the work of scientific research institutes in Lithuania and evaluated their use to the state and society at large.

Much attention in this article has been given to the activities and achievements of the Lithuanian Free Market Institute. As the author of the article writes, “There are over 100 institutes of various types in Lithuania. Some are partly financed by the state, while others operate as non-governmental organizations and rely on donations from Lithuanian and foreign foundations. Institutes that are visible, demonstrate up-front attitudes and generate products that are useful for the society can be counted on one’s fingers, while establishments focusing on micro- and macro-economic issues are even fewer.”

Journalist Jūratė Nedveckaitė states in the article that „the young LFMI has even outstripped the Institute of Economics founded by grey-headed economic gurus.“ “Seemingly there is no proper counterbalance to these free-marketeers in Lithuania,” says the author and asks representatives from other scientific, but government funded institutes why LFMI was so popular…

With kind permission from the weekly, LFMI presents the translation of this writing: