The largest but least known Baltic Republic begins to grow

Algis Avizienis

Director-General, Lithuanian Investment Agency

Rapid privatisation after independence

After regaining independence in 1991 Lithuania has carried out a massive overhaul of its economy, transforming an almost totally state-controlled economic system to one in which market forces now predominate. Today, three-quarters of all arable land is privately farmed. Over 90 per cent of the country's housing stock has been turned over to the inhabitants as private property. Over two-thirds of the workforce is now employed in the private sector. Inflation came down to an annual rate of about 25 per cent in 1995. And the national currency has been successfully fixed to the US dollar by a currency board for over two years.

Hard choices mean hard times

Executing such an abrupt economic about-face is never easy. That is why some countries in the region have hesitated or have been wracked by severe national or international discord as their citizens deliberate on which course to take. But in Lithuania the hardest economic choices have already been made.

The Government stood firm as price freeing led to an inflationary surge of over 1,000 per cent in 1992. The citizenry peacefully accepted painful declines in GDP of 13 per cent in 1991, 34 per cent in 1992, and 16 per cent in 1993 as state subsidies to industrial enterprises ended and as traditional trading partners in the East could no longer pay for Lithuanian exports. And Lithuanian workers discovered that market economics could mean temporary unemployment, which went from virtually zero to a current level of eight per cent.

Turnaround in 1994, growth in 1995

Lithuania, however, turned the corner in 1994. GDP growth resumed, and has been continuing at a 3.5 per cent rate in 1996. Real income began rising at about 15 per cent per year. Lithuania is now poised to join the economic upsurge which is sweeping such reform-oriented countries as Poland, the Czech Republic, Hungary and Slovenia.

The macroeconomic pieces have fallen into place. The population has re-oriented itself to accept the challenges and risks of market economics. Since 1991 Lithuanians have demonstrated their commitment to reform by leaving the state sector and establishing over 100,000 new private companies - a significant number for a country of 3.7 million.

More foreign markets and investment - the missing ingredients

What is needed now are more export markets in the West and more foreign direct investment to give the current recovery breadth and depth. Some Lithuanian managers have already succeeded in finding new markets, learning to adopt Western standards of quality and delivery, and have attracted considerable foreign investment. There are a number of recent success stories.

For example, Liteksas and Calw, a Lithuanian/German joint venture producing woven fabrics, has attracted US$12 million in investment. This JV's sales, mostly to the West, were up a third in 1995 - from 1.2 million linear metres in 1994 to 1.65 million in 1995, while output for 1996 is expected to be up by 70 per cent to 2.8 million.

Other examples include:

  • the Lelija clothing manufacturer, which more than doubled sales in the past few years and now produces over two million men's suits, jackets and coats per year: 90 per cent of its output is exported;
  • the Kraft Jacobs Suchard candy enterprise in Kaunas has drawn US$15.5 million in foreign investment and recorded the following growth statistics: 107 per cent in 1993/94, 43 per cent in 1994/95, with 36 per cent projected for 1996. In three short years Kraft Jacobs Suchard has captured 60 per cent of the Lithuanian market for candy bars. And nearly half of their output is now exported to neighbouring countries;
  • an American family-owned saw mill, Ochoco Lumber, which invested US$6 million in a Lithuanian timber mill, expects its sales to triple;
  • Motorola, which is providing mobile telephone service in Lithuanian, and competing with two other mobile phone companies, has seen rapid growth in Lithuania, and its investments may reach US$40 million at time of writing. The number of mobile telephone users country-wide has gone from 19,000 in November 1995 to over 32,000 a year later.

Recent results by industrial sector

Moving from individual cases to industrial sectors there is a strong recovery in textiles, leather, chemicals and wood products. Lithuania now exports over US$400 million worth of textile and leather products, US$325 million worth of chemical fertilisers and oil products, and US$175 million in wood products. The reason the entire economy has not shown such a strong growth is because the recovery has not yet extended to other sectors like machine building, electronics, construction and agriculture. But here too those enterprises that attract foreign investment tend to recover very quickly.

Take electronics, for example. The Lithuanian Ekranas enterprise, which produces television screens, is now 30 per cent owned by foreign capital. Ekranas works with Samsung and Gold Star producing and marketing television screens around the world: 2.5 million sets were produced in 1996. Another exception is the German Siemens plant in the port of Klaipeda. It produces a significant part of the electrical wiring systems of Renault's 'Megane' model and employment there is still growing: to around 1,000 people at the end of 1996.

Ship building, repair and maintenance is another sector which has recovered strongly. The Western Ship Repair Yards enterprise in Klaipeda will soon be working at near capacity as it services dozens of ocean-going ships from many countries. This company has been able to underbid competitors profitably by using quality, low cost labour. The Lithuanian ship repair workers earn an average of US$200 per month yet are gaining a strong reputation for quality in the Baltic Sea region.

Exports and re-exports surge

If we take a broader perspective and look at Lithuania's trade figures, readers may be surprised at how much it exports, even now, before its full recovery has unfolded. Lithuania's exports totalled US$2.7 billion in 1995, a 35 per cent increase over 1994. Figures for the first half of 1996 show that exports were 30 per cent higher than the total for the first half of 1995. About 20 per cent of those exports are re-exports, since the country's geographical position astride East-West, North-South trade routes and the large ice-free port of Klaipeda make it a good platform for exporting to the wealthy European Union markets and the huge CIS.

An association agreement with the European Union gives Lithuanian preferential access to EU markets; a free trade agreement with Poland was entered into on 1 January 1996; Lithuania has free trade agreements with other Baltic States; and Lithuania's most favoured nation trading status gives it continued access to Russia, which still remains its most important single trading partner. The share of EU trade, however, has jumped from two per cent of Lithuania's total trade turnover in 1991 to 36 per cent and rising.

Prospects for growth

The workforce

Surveys of investors in Lithuania consistently rank the workforce as one of the most attractive considerations of doing business in the country. Average wages are only about US$170 a month, although foreign firms generally pay several times that amount. But if salaries in foreign firms are higher than the national average, the employees of the foreign company generally are highly motivated and innovative, especially the younger workers.

Pent-up demand

Having lived through 50 dreary years of Soviet rule, the Western-oriented Lithuanians have a huge pent-up demand for Western consumer goods and services. One could literally say that their appetites are voracious. In May 1996, McDonalds opened the first of four planned restaurants in Vilnius; in the first month of operations the restaurants were inundated with customers - 115,000 in total.

The country had only one private restaurant in operation in 1991, and now there are hundreds in the capital alone. Lithuanian culinary tastes are developing along Western lines very quickly: Vilnius now has at least five Chinese restaurants, one Japanese, two Mexican, one American-style, four Italian, one French, one German, two Irish, and many traditional restaurants based on regional cuisines.

Another obvious indicator of demand is the boom in Western car sales with over 20 authorised car dealers selling new Volvo, Mercedes Benz, Audi, Volkswagen, Fiat, Peugeot and Seat models to Lithuania's emerging middle class. In fact, automobile ownership is rising at a brisk rate of ten per cent per year. The country has nearly 700,000 registered automobiles, or roughly one for every five inhabitants.

Given a few more years of economic reform, I believe Lithuania's hard-working nationals will raise living standards substantially, particularly if foreign direct investment flow picks up.

Foreign investment incentives

As of June 1996 there was US$390 million in foreign direct investment. Although the total is small, the general tendency is toward a much greater foreign business presence in Lithuania. Some 5,000 companies with registered foreign capital are in the country, as opposed to just a handful in 1990/91.

The Lithuanian Government provides tax holidays for investments totalling at least US$2 million. Lithuanian tax rates are somewhat lower than those of its neighbours. When all of the tax breaks and priority sector incentives are calculated in, the average profit tax rate stands at about 18 per cent for foreign companies in Lithuania. Foreign investors can purchase Lithuanian companies outright, build green-field projects or establish joint ventures. The leading bank in Vilnius, Vilnius Bankas, has issued Global Depository Rights, while there are domestic issues available on the National Stock Exchange as well. Recently a major impediment to investment was removed when the Lithuanian Parliament amended the Constitution to permit foreign land ownership.

The future

Although I do not want to minimise the problems investors face in emerging market countries like Lithuania, especially with bureaucratic red tape, the country is poised for a sustained period of growth as Lithuanians race to catch up with the living standard of Western Europeans.

Lithuanians like to point out that their standard of living was about at the level of the Finns' before the Second World War. Fifty years of Soviet social engineering held back their economy while the Finns surged ahead. Now Lithuanians are eager to work hard to achieve their high aspirations.