In the beautiful Town Hall Square in Vilnius, the foreign luxury boutiques of Burberry, Zegna and Armani are clustered together. With an average monthly salary of about €550, few of the customers are Lithuanians. Instead, wealthy Russians happily shop. The manager of Burberry confirms that 40 to 50 percent of sales can be attributed to Russian tourists who, despite the decline in the value of the rouble, find their way here.
For Lithuania, Russia represents both threats and opportunities.
The entrepreneurs, economists and politicians who I met do not consider the military threats particularly acute. Their main concern appears to be that foreign players may become worried and hesitate before investing in the country.
However, the sanctions imposed by the EU and the Russian embargo on certain goods is a reality that suppresses trade with Russia, which represents 20 percent of Lithuania’s total exports.
On the other hand, Russia presents a great opportunity for Lithuania, which is often called Europe’s gateway to Russia. When Russia stabilises and trade barriers are overcome, there will be a clamour to do business through Lithuania.
But far more important than the capricious politics of its neighbour is Lithuania’s ability to grow using its own power.
Lithuania is extremely inexpensive in every way, and its policy is correct.
Wage costs are equivalent to about one-fifth of the Swedes. The low wages in emerging countries in Asia and Africa can be explained largely by their limited productivity due to low levels of education. But Lithuania is different. Unskilled labour in industry is still dominant, but this is changing rapidly. In just a few years, Lithuania has been moving up the food chain. The country now attracts an increasing number of start-ups in areas such as IT and biotechnology.
But the more traditional industries should not be underestimated; something some Swedish companies have taken advantage of. It is no coincidence that Ikea produces much of its furniture in Lithuania.
In the city of Ukmergé, I met the president of the Swedish company Systemair in Lithuania, Mindaugas Martisius, who told me about the company’s expansion. It is an impressive journey for the company. Their Lithuanian factory supplies all sorts of fans and air conditioning systems to, amongst others, Norway, Sweden and Germany. The limited bureaucracy, low labour costs, and favourable geographical location were the deciding factors when Systemair decided to locate part of their production here 10 years ago. The most remarkable thing is that more companies have not done the same.
The country now hopes to attract new business. It is likely to succeed.
Corporate tax is between zero and 15 percent, and the income tax is a flat 15 percent for all – regardless of income: a tempting offer for tax-burdened companies, entrepreneurs, and wage earners from other countries.
The recession in Lithuania during the financial crisis was as deep as in Greece. Unemployment rose from four percent in 2008 to an unimaginable 18 percent two years later, when the overheated economy with excessively cheap money woke up to a new reality after the Lehman crash.
In an office building that has seen better days, I met Minister of Economic Affairs, Evaldas Gustas, who told me about his policies during the financial crisis:
“There are only two roads. One is the one we Baltic States chose: to reduce wages, pensions and expenses. Now it turns out that this was the right road. The other road is to increase domestic demand by stimulating the economy. But that’s very risky. ”
Despite being criticised by authority figures such as Nobel laureate Paul Krugman, Lithuania decided to stick to its chosen strategy, and the people rallied behind the policy decision during the parliamentary elections in late 2008.
Since its peak, unemployment has fallen to just over eight percent, and the increase in public debt has been limited. Lithuania’s total debt now stands at 40 percent of GDP. This is in line with Sweden, and less than half of that of the rest of the euro zone.
It is still not harvest time, and all is not gold and green forests in Lithuania, but the country is on the right track with its favourable combination of an attractive corporate environment, low taxes, and an explicit strategy to take that step up in the food chain.
It will take time before Lithuania reaches Sweden’s standard of living, but there is no doubt that Lithuania is on the right path.
Shareholders in SEB, Swedbank, and Nordea are to be congratulated for believing that their gamble, despite all the difficulties from 2008 to 2010, would pay off.
Hats off to the people of Lithuania.
And to friends of fiscal doping – there are no short-cuts.