When I was a child, I never saw bubblegum, only a wrapper, which somebody brought to school for our amusement. Yet I learned from an empty wrapper that the bubblegum must exist. In the same way I discovered there must be the market, even though there was no market in my environment. ‘Market’, the word itself, sounded sinful. No wonder! This was a time when socialism was being ‘developed’ and embraced as never before. Naturally, we did not know about such things as free choice, supply and demand, bubblegum and bananas. The content of a sweet-smelling bubblegum wrapper was beyond my wildest imagination when I was eleven, but when I was sixteen that all changed. My dream came true and I started working at a newly launched bubblegum production facility, the second one in the USSR. It looked as if the socialist state could catch up with the market.

While working at the conveyor belt, however, I witnessed striking social injustice and economic inconsistency, which led me to the question: what changes must be made to make the system work and prevent people from being pushed to one single solution – stealing from their workplaces? For a while I studied mathematical programming, economics and industrial planning, hoping that this would be the way to improve the system. Unfortunately, my work as a programmer did not make the country any better and made me feel disillusioned. I remember the day back in 1986 when I realised that socialism must be improved by way of market forces and I started to contemplate how exactly the market would alter the system. I was still expecting to reconcile the market with socialism, however, and it took me several years of personal perestroika to comprehend that the market implies private property and that the system will not be saved by increasing the ‘independence’ and ‘self-finance’ of state enterprises.

In 1990, Lithuania declared independence and thus broke the Soviet empire. Freedom of speech and movement allowed people like me to bring ideas into action. For five young economists led by Professor Glaveckas, this meant establishing a think tank which we called without compromise the Lithuanian Free Market Institute (LFMI). There was no doubt in our minds that it was time to contribute to building a new order; one based on individual liberty and limited government. Many scholars and professionals joined us, excited by the idea of building a new Lithuania. I dropped out of postgraduate studies without regret and ventured into the newly established institute. We were privileged with only a month or two of academic serenity to sketch out the free market principles before life provided a chance for us to jump into the reform-making process.

A new law on commercial banking came under consideration in parliament, and since we knew that a well-functioning market starts with capital allocation, we outlined a proposal on banking principles in Lithuania. Even though we were young and inexperienced, our proposal competed on an equal footing with the official draft of the central bank and even won the sympathies of the members of the Economic Committee of the parliament.

This was the start of our success, but also of continuous hardship. The central bank became our long-term opponent and made our lives truly difficult. At one point, our one-room office was taken away, but we persevered and continued to contemplate the future of banking while sitting in entrance halls and other unsuitable places. One of these places was a conference hall in the central bank, which we dared to use since it was always empty and had a table and chairs on the stage. Looking back, the situation seems rather ironic: the system attempted to push us out of the arena and, in response, we climbed on to the stage.

The allergic reaction of some statesmen towards us was understandable; we were a new ‘beast’ in public life: a non-profit private institution which instructed authorities how to run the country. We did not wish to be arrogant, but our mission required us to visualise where and how to move forward, to enlighten people and to steer those in power in the right direction. In addition, we vowed that we would not accept government funds, a principle that we followed strictly. This made the authorities worry: we had a state-level agenda, but no state affiliation. Yet, at that time, private funds were seldom available. As a result, our finances were uncomplicated and recorded in a thin notebook. This notebook did not reflect the most crucial donation: our efforts, which were donated for free to the free market cause. This was the key investment which formed the foundation of the Institute.

Despite all the difficulties that we faced during the early years of our think tank, it was a very precious time. There was no alternative to freedom in people’s souls and minds. Free trade and private property had no bona fide alternative. To be able to provide people with bread, not to mention sausages and bananas, former socialist states had no other solution but the free market.

Some countries realised this right away and others not until much later. Lithuania was the first in the former USSR to liberalise prices and started mass privatisation, around the same time as the Czechs. Lithuanians enjoyed the most freedom when the reforms were being commenced. Old socialist rules and regulations did not have moral support among the rulers or the general public.

Almost instantaneously people could trade without restrictions, do business without regulations, cross borders without customs and create wealth without paying excessive tax. This was the time when most of the initial capital in Lithuania was being created and, more importantly, when people were learning principles that they were never taught in their socialist schools. Responding to the needs of the day, we developed the legal framework for, and contributed to the founding of, the first Lithuanian commodities market. This gave people a platform on which to exchange goods at a time when there was a shortage of almost all goods and, more importantly, buyers and sellers did not have a mechanism for interacting with one another.

The next issue that needed addressing emerged from mass privatisation: almost all people became shareholders of former state companies, but they had no rights in the companies and no mechanism for trading their shares. Our response to this problem was to develop a set of legal principles for the capital market and the stock exchange. This not only allowed the trading of shares and bonds on the market, but also made it possible to raise capital and define shareholders’ rights. As a result of theses efforts, the first stock exchange in the former USSR was opened in Lithuania in 1993. The development of the Securities and Exchange Commission followed.

In our work to develop a system of institutions, our aim was to provide the impetus for the adoption of a minimum set of rules to protect private property, rather than giving way to interventionist regulations. Beginning in 1993, Western countries and donor institutions began to transfer their ‘know-how’ to our soil, and while they were often our allies in promoting a reform agenda, at other times we had to fight against their efforts to bring about more intervention and rent-seeking behaviour. It is well known that our region suffered from bank bankruptcies in the mid-nineties. The primary reason was that while donors worked hard to introduce capital adequacy and other sophisticated ratios into the banking system, nobody noticed that there was no proper mortgage system, so the same property could be used as collateral multiple times. I recall many more cases where shallow interventionist regulations preceded indispensable rules.

Reflecting back on those times, I regret that we were not able to address all of the pressing issues of the day, yet I know that we always chose the most important ones that would result in a chain reaction. The most vivid example of this is the introduction of the currency board in Lithuania. When Lithuania was getting ready to replace the Soviet rouble with its national currency, litas, we were promoting the idea that money should be separated from the state, although at that time it didn’t sound very attractive.

But when the new currency was introduced and the central bank launched harsh interventions that led to a remarkable appreciation of the young (or new) national currency, the economy was brought to a standstill. We felt the need to explain to people that it was not the market which made the national currency rise, but the central bank, which is a typical central planning authority. We told people there could be no genuine market if currency remained in the hands of central planners. Since many academic economists and public officials were great enthusiasts of the traditional (interventionist) central bank, it was crucial to show people that there might be an alternative. Only 50 years ago Lithuania enjoyed the gold standard and people still had memories of sound litas, so we appealed to people’s hearts and minds, explaining the benefits of gold and other sound money. The currency board model was a kind of a modern version of sound and relatively independent money. Explaining to people its essence, which is very simple, and which was called by opponents the ‘lavatory principle’, was only the first step. Let me give you the basics as well: the central bank can issue currency only in exchange for foreign reserves and gold, which must be kept in its vaults, and must exchange any amount of national currency at the fixed exchange rate and vice versa. This operating principle means that the hands of the central bank are tied – no credit expansion, no interventions, no relevance.

Sure, very few people shared the vision that turning the central bank into a ‘lavatory’ could save our freedom. Fortunately, among those few was the prime minister. We kept sending numerous policy papers to statesmen, appealing to people through the media and speaking to the business elite and politicians. Despite widespread scepticism and the hardcore opposition of the central bank, the currency board model was introduced on 1 April 1994 through the Litas Credibility Law. This law tied the national currency, the litas, to the US dollar at a fixed exchange rate and required that all money in circulation be fully backed by gold and foreign reserves. Despite critics’ prophesies that the currency board would not survive and that it was on the brink of crashing, thirteen years have passed and the system is still alive.

It has survived many crises as well as official political plans to dismantle it. Thanks to the currency board, people’s money was never devalued or used to cover bank losses, treasury shortfalls or to finance the grand plans of statesmen. For thirteen years people were protected from central bank interventions and currency fluctuations caused by the central planning authority. Needless to say, the currency board broke down artificial barriers that separated Lithuania from global money and capital markets, and interest rates decreased at a rapid rate that even we found surprising.

After the implementation of the Litas Credibility Law, there was no shortage of local and foreign critics who claimed that a developing economy would not survive without some currency devaluations and that such devaluations would help to promote exports. As the US dollar appreciated (yes, there were such times!) many began panicking and worrying that the devaluation of the litas was imminent. The interest groups lobbying for devaluation were so powerful that it is a miracle that the devaluation never actually happened. These groups were happy to support the euro as the new peg instead of the US dollar, since the euro at that time was steadily weakening. In 2002, this was done as part of national efforts to join the European Union. Unbelievably, from that time onwards the euro started to appreciate! It would be difficult for graph-lovers to counter my guess

that the currency which Lithuania chooses as an anchor is always strengthening and that this fact alone is responsible for developments on the Forex market. On a more serious note, our history is proof to evaluation devotees that it is still possible to prosper economically and to have fast-growing exports without this economic ‘remedy’.

Since the monetary system was now in order, we turned to other areas of importance. At this time, there was a lot of concern about the country’s competitiveness, so we provided comprehensive policy proposals and suggested that officials should focus on addressing the burden of the state: taxation, expenditure and regulation. Our fight on this front has been quite productive: personal income tax was set at a flat rate and remains flat despite many attempts to implement progressive rates. The property tax for individuals that has been on the government agenda for about a decade has never been introduced (except recently for commercial property). The discussions on the corporate profit tax have been varied. At one point, the idea of abolishing the corporate tax became so popular that it was included in the electoral programmes of two competing parties. Reinvested profits have not been taxed, which has helped to boost private sector development.

Unfortunately, owing to harmonisation pressure from the European Union, the Lithuanian government did not dare abolish the corporate profit tax and even returned to the old practice of taxing all profits by a universal tariff, which is currently at 15 per cent.

Our efforts to retreat from the pay-as-you-go social insurance system have been partially successful – the transition is et in motion and private pension funds have already become common. Needless to say, more radical steps need to be taken. Working at a think tank requires a lot of patience; there were times back in the 1990s when proposing the introduction of private pension insurance provoked harsh criticism and disbelief that it could ever be implemented. My highly esteemed Chilean friend, José Piñera, said that some people believe that a private pension system succeeded in Chile only because it is a very long and narrow country. If, in less than a decade, private pensions were successfully introduced in petite and heart-shaped Lithuania, tell me, what else is impossible?

What is noteworthy about LFMI is that life gradually required us to engage in an exceedingly wide variety of topics. How can one work on budget issues and not touch upon agriculture? How do you address agriculture and not tackle the most interventionist case: white sugar? These questions led us to get involved in almost every topic associated with economic and social policy. These topics included pensions, social redistribution and welfare, the functions of government and strategic planning, as well as a nationwide initiative on reducing the size of the state, which came to be known as ‘sunset’. We launched an assault on business over-regulation, known as ‘sunrise’, and engaged in the topics of competition policy, market entry and licensing. We introduced the concepts of education reform and vouchers and put forward the idea of the private sector becoming involved in health insurance and provision. The Institute developed solutions for fighting corruption and engaged in issues related to public administration, transportation, the energy sector and the knowledge economy. This is in addition to our own field: NGO regulations, philanthropy and the principles and procedures of law-making.

Although such wide-ranging engagement is common sense and frequently leads to good luck, it is tiring and consuming. People expect us to act on any issue that becomes hot in the public agenda. Journalists call us on matters that go far beyond our expertise.

LFMI is an interesting case since it is a truly genuine domestic initiative which, in the early years, had no helping hand from abroad and almost no access to foreign know-how. It was not until after 1993 that we developed relationships with foreign partners.

In addition, being one of the first think tanks in Lithuania also meant that there was no history of non-governmental organisations in the country or a tradition of private funding to support such initiatives, so we were leaders in defining what it meant to be a think tank. We were also pioneers in conducting independent research and advocacy, educating the public, engaging in nonpartisan policy efforts and actively fund-raising for our activities.

Every skill beyond our initial mission has been developed in response to daily demands, and we have learned to be inventive and very efficient. Our scope and our output always looked suspiciously big vis-à-vis our budget, and I have heard people say that we must employ at least one hundred people. We have become an incubator for countless statesmen and stateswomen, and LFMI staff have been highly desired, and from time to time recruited, as ministers, deputy ministers, state councillors, central bank board members and advisers to the president and prime minister.

Early members of the Institute currently hold top positions within private industry as well as finance and public administration. LFMI fellows teach at universities and publish widely in the press. Many of them become ‘celebrities’, since they frequently appear on television and radio.

It is not yet the right time to rest on laurels, however. Our homeland today is the European Union, and the many similarities between the EU and the Soviet Union make me worry. Lithuania’s accession to the EU and the transfer of the ideas of the welfare state from the West pushed us off the free market road on to what must be a ‘road to serfdom’. The ideological climate in Lithuania is deteriorating. After years of confidence in spontaneous order, many people started to presume that changes in the market could be foreseen and that instead of waiting until the market brought desired results, authorities could intervene and ‘take care’ of the changes. The massive transfer of EU subsidies makes our people believe that the ‘centre’, whatever that is, knows better about where to invest and whom to favour. The economy is being damaged by enormous central support and harmonisation, and it is increasingly difficult to find a genuine market around. All of this is a great misfortune, but we know from our socialist past that bad times are never for ever.

I will admit that it is not easy to address the infinite policy matters and countless institutions of the EU. We feel obliged to speak to people, however, about the vicious omnipotence of the Union and the principles that would make the EU downsize to a sound level. Dealing with this matter from just a utilitarian point of view is fruitless. We need to begin talking to people about faith and the moral foundations of liberty. If people are not ready to accept the spontaneous way of life, then the prospects of freedom are dim. Without a deep acceptance of spontaneity, people will always seek to set up institutions that attempt to provide certainty, which will most likely be institutions of serfdom.