Minister of Industry and Trade, Lithuania
Six years since the restoration of independence to Lithuania, it is now possible to assess the success of the first steps of the country's economic transition, to recall the barriers overcome and mistakes made, and to forecast further economic development.
This article will focus on the methods used in, and the results of, economic reform in industry. It will also assess industrial restructuring strategies and the prospects for industrial development.
In reorganising and modernising industry, the Government is seeking to establish a new, profitable manufacturing sector. The main provisions of the re-organisation are:
Nevertheless, industrial restructuring is only a part of the overall structural reform of the country's economy; its problems and development should be seen only in the context of overall economic reform.
Three elements of industrial reform are of particular importance: the formation of new forms of property; technological changes in the process of production; and shifts in domestic demand for output.
After the restoration of independence, all economic indicators, including individual and public consumption and investment, showed a rapid downturn. This downturn is the result of companies' weakened solvency, both in Eastern European and domestic markets, a reduction in the population's real income and in the state budget, Russia's customs policy, which was unfavourable to Lithuania, the absence of structures forming a demand and in many cases the negative effect of supply on demand.
One can trace two stages in the implementation of structural policy which have had a significant impact on aggregate demand. The first stage saw the creation of demand-forming structures, the second the elimination of the negative influence of supply on demand (in other words, the formation of supply structures). It is impossible to draw a clear division between these two stages, since both processes took place at the same time.
Under a planned economy, demand was formed in different ways than under a market economy. When the market economy was formed there was an urgent need to create a demand in Western markets for Lithuanian manufacturing and services, to restore economic relations in Eastern Europe, and to foster domestic demand to combat increasing competition from foreign products. Under the new conditions, the aggregate demand created should have ensured the maximum utilisation of Lithuania's economic, scientific and creative potential.
The above needs should have been met by new structures which sought out and investigated foreign markets, playing the role of intermediaries between producers and consumers, effecting payments among partners, supplying goods to consumers and advertising Lithuanian goods abroad.
Unfortunately, the goals of the first stage of structural reform have not yet been achieved, not all demand-forming structures have been set up due to a lack of funds, and the bodies already in existence (economic missions in foreign countries, chambers of commerce, industry and crafts, the Lithuanian Exhibition Centre 'Litexpo', the Lithuanian Export Promotion Agency and joint trade ventures with access to huge databases) are not yet sufficiently effective. Nevertheless, the reforms have increasingly reoriented Lithuanian industry towards the West. Exports to Western markets have grown from 12 per cent of total production sold in 1992 to 37 per cent in 1995; exports to the CIS have fallen from 47 per cent to 31 per cent in the same period.
Probably the greatest barrier to creating a significant shift in demand, especially in investment production, is the negative effect of supply. Therefore the goal of the second stage of structural reform is to alter the quality of supply and the structures forming it. This is the only way that the current demand/supply level of production can be raised to international standards, achieving the utilisation of industrial capacity.
Industrial property has been transferred to private ownership by the privatisation of state-owned enterprises or the establishment of new ones. Thus, by the end of 1995, over 7,000 enterprises had been set up in industry. Of these, 2,014 were joint-stock companies and closed corporations, 4,679 personal enterprises engaged in industrial activity and 400 non-industrial enterprise divisions engaged in industrial production. These comprise 175 joint ventures with foreign partners.
PrivatisationThe full privatisation of state-owned enterprises is to be implemented in two phases.
The first phase, which began in September 1991, was completed in September 1995. It was implemented according to the Law on the Initial Privatisation of Property and later adopted amendments. Under this law, two-thirds of state-owned property was slated for privatisation. In industry, this meant 904 enterprises, or US$3,010 million of state capital. Different privatisation methods were available, but the majority of state property was privatised by way of public subscription to shares (54.6 per cent) and tender (10.1 per cent). At auctions and for hard currency, 1.6 per cent and 0.6 per cent respectively of state capital has been sold in this phase.
By 1 September 1995, 91 per cent of state capital scheduled for privatisation had been privatised, ie 799 enterprises. Lithuania's privatisation rate was ahead of that of all East European countries and the republics of the former Soviet Union.
By the end of 1995 private capital in industry accounted for 56.1 per cent of total capital. The majority presently lies in the paper industry and its by-products (81.3 per cent), the chemical and chemical products industry (72.8 per cent), the machine building and equipment industries (75.6 per cent) and the electrical appliance industry (74.7 per cent).
But the first phase of privatisation was mainly carried out using vouchers. It has therefore not helped to solve certain problems: it has generated funds neither for the budget nor for enterprises to enable them to supplement their working capital. In addition, there has been no capital concentration; at the same time no real production skills have been mastered. Therefore the principal aim of privatisation - production efficiency - has not been achieved.
The above problems are to be solved by the second phase of privatisation, which began in early 1996 under the Law on State and Municipal Property Privatisation. Property is sold in national currency and Lithuanian and foreign citizens or organisations enjoy equal rights. This phase should bring significant economic changes and should secure the equilibrium of demand and supply, with a positive foreign trade balance.
From the technological point of view, Lithuanian industry, with a few exceptions, has inherited obsolete capital goods and outdated production technologies from the former Soviet Union. In 1990 depreciation of capital goods was 43.3 per cent, though over the next six years this indicator should significantly improve (as of 1 January 1996 depreciation was 38.2 per cent).
Following the Programme of Industrial Restructuring and the Change of Profile of Large-Scale Enterprises, launched in 1993, as well as the programmes governing the development of specific industries (over ten have been launched), a comparatively sustainable restructuring process had been scheduled for the major industries, since our main focus has been to attract foreign capital as loans or direct investments.
Unfortunately, the inflow of foreign capital has fallen short of expectations, and new projects have had to be funded from enterprises' own funds. The firms which lead in technological renovation are those which competitively manufacture products in demand in foreign markets (for example, chemicals and chemical products, textiles and knitwear, some branches of machine building and electronics). These companies have accumulated more funds for the rebuilding of their enterprises.
The importance of foreign investment
Foreign investment remains one of the basic sources of finance for industrial development. Lithuania has a favourable environment for investment: a convenient geographical location; a high-quality, active and inexpensive labour force; a well-developed marine, air, railway and road transport network; lower taxes than neighbouring countries; and access to the wide consumer market and large raw materials base in the countries located to the east, with which friendly relations are maintained. In addition, Lithuania's legislative framework for foreign investment is favourable. As early as 1990, the year of Lithuania's restoration of independence, the Seimas (Parliament) adopted the Law on Foreign Capital Investments. To create the most favourable conditions for foreign investment, the Seimas in June 1995 adopted a new Law on Foreign Capital Investments which better conformed with European Union requirements and secured the safety of foreign investments.
Recently the Seimas has adopted amendments to the Law on Foreign Capital Investments, granting additional investment credit for foreign investors in the sphere of, for example, taxes.
In June 1996 Article 47 of the Constitution was amended, making it possible for foreign investors to acquire plots of land for non-agricultural use.
On 4 June 1996 amendments the laws governing commercial banks were amended, allowing for foreign financial investments in Lithuania. A foreign bank is permitted to: establish, alone or in co-operation with other banks, an affiliated bank; acquire shares in an operating bank and, if allowed by the Bank of Lithuania, acquire a bloc of shares in an operating bank; and set up branch offices and representative offices of banks.
By 1 July 1996 Lithuania had signed Investment Promotion and Safeguard Agreements with 26 countries, including nine EU members (the UK, France, Germany, Sweden and others). Foreign investment reaches Lithuania in the form of foreign loans received in the name of the State or guaranteed by the Government, or direct foreign investment.
In 1991-95, US$459 million of foreign loans were received or guaranteed and allocated to investment projects in economic entities. The majority of the loans were received from Switzerland (US$20 million), Italy (US$19.6 million), Germany (US$17.1 million) and Sweden (US$7.4 million). They have been used in basic industries as follows: machine building - US$31.4 million; light industry - US$14.6 million; the wood industry - US$20.5 million; electronics and electrical engineering - US$2.18 million; the chemical industry - US$2.7 million; trade, services and other branches - US$3.72 million.
Direct foreign capital investment is realised by establishing joint ventures or foreign capital companies.
In 1991-95, 5,006 joint ventures and foreign capital companies were incorporated, in which foreign capital totalled US$227.5 million. Of these, 1,764 companies were joint ventures with EU countries; their foreign capital amounted to US$141.1 million. During 1995 804 companies were incorporated, with US$77.2 million foreign capital.
The biggest investors were: the UK - US$47.8 million; Germany - US$45.4 million; the US - US$35.06 million; Austria - US$9.925 million; Russia - US$9.9 million; and Sweden - US$9.9 million.
In the same period (1991-95), 175 companies engaged in industrial activities were established. They employ about 15,000 people.
In terms of companies, the main investors are: Shell (UK) - US$14.5 million in the oil industry; Calwer Decken und Tuchfabriken AG (Germany) - US$10.1 million in textile industry; Siemens (Germany) - US$2.75 million in electronics; Philip Morris (US) US$26 million in the tobacco industry; and Richard Hammerle Farberei und Appertur (Austria) - US$4 million in the textile industry.
To further restructure and upgrade industry in 1997-99, some US$750 million is needed, allocated as follows: US$75.1 million for machine building; US$69.8 million for light industry; US$41 million for the woodworking industry; US$23.6 million for the chemical, pharmaceutical and microbiological industries; US$47.3 million for electronics and electrical engineering; US$6.5 million for the peat industry; US$8.5 million for environmental protection; US$8.2 million for trade, services and other branches; and US$120 million for financing the Export Promotion and Working Capital Fund.
In general, Lithuania's industrial reform programme has been successful so far. However, its future success, and the terms of its implementation, depends upon the accumulation of funds from the activities of enterprises as well as foreign capital participation in reform. For that, Lithuania has already created quite a favourable environment, still to be improved in the future.