Opinion: How to make Lithuania more prosperous

Kęstutis Eidukonis
DELFI / Kiril Čachovskij

I think all members of the commission will agree that one of the most important problems facing Lithuania is the massive emigration taking place today. Preservation of Lithuanian song, language citizenship and culture are all tied to improving the Lithuanian economy and energy sector, so that Lithuanian citizens would not only have a reason to stay, but those who left would have a reason to return. Creating good high paying private sector jobs is the key to stopping and reversing the depopulation of Lithuania.

I am sure that all of the members of this illustrious commission have their well thought-out opinions of what needs to be done to solve this problem, and I would be very interested in hearing those opinions. Interestingly enough, we are not all going to agree as to what needs to be done, but since we are a democratic republic, I feel very grateful that you have given me this opportunity to present my views. And maybe, just maybe, they may strike a cord and then be debated and acted upon higher up in this body.


As an observer of the Lithuanian Economic and Political Renaissance, I have been impressed by some of the steps taken by the government to improve the business climate in Lithuania. Over the last 25 years enormous progress has been made, but unfortunately it has been insufficient to pull Lithuania out of its economic doldrums. This problem is not unique to Lithuania but affects a large portion of the European Union, as well as portions of the United States. The economic downturns in Portugal, Italy, Greece, and Spain are very important lessons to us and need to be heeded. However, I think we in Lithuania are smarter than to simply study failures; we need to look at success and “borrow” those formulas by adopting them to our unique country and people.

In my management consulting career we used to have a saying that the definition of insanity is doing the same thing over and over again and expecting different results. The same rule applies to governments and other organizations. Lithuania is a unique and wonderful country that has not harnessed its full potential. The reasons for this are many. Have we slavishly tried to copy other countries’ economic policies? Are we trying to be them without having first accomplished what they have done over hundreds of years? Are Lithuanians the same kind of people as the Norwegians or Swedes? Do we have the North Sea resources? Do we have Saab and Nokia? Have we accumulated capital? Do we have the industrial background of Germany? Can we borrow our way to prosperity? The choice is not: should we adopt the Scandinavian model of socialism or should we go back to what some call “Wild Capitalism”?


I think there is a unique model of economics out there that will best fit Lithuania. The question is, however, does any political faction have the will to tackle head-on the real economic and monetary taxation problems that hold Lithuania back from becoming a true Baltic economic tiger?

If we want to be the economic leader of the EU — and maybe even the world — we have to examine honestly the factors in our country that are holding back rapid economic development and forcing our young people into exile in order to find jobs and escape from other factors which I call demotivators.


The government of Lithuania and the social safety net of Lithuania is too large for the population to support. With an approximate 35% of GDP – the size of the Government is a factor that needs to be addressed. Everyone agrees that there are too many governmental departments, but no one agrees on which ones to cut and by how much. It is true that there are a large number of dedicated civil servants, but it is also true that there are quite a few unnecessary, redundant departments staffed with wayward relatives who could not make it in the private sector. Lithuania has the population of a large city, but it has to support a military, a federal government, a plethora of small cities, regional government, educational institutions, historical sites, highways, social safety networks, medical systems, retirement systems, cultural treasures and all the accoutrements of a country without any apparent natural resources that favor other countries. Lithuania is trying to be Norway, but without the North Sea Oil Fields. Lithuania does have resources: the people of Lithuania and their industriousness, as well as the land of Lithuania. The problem is we are not fully utilizing these wonderful natural resources. We need to find a way of cutting the cost of government. I know that this has been tried many times but with very little success, but we need to slash this sector drastically. All political parties should be able to sit down and do this.

Closely tied to this is the tax burden on the Lithuanian people. In order to feed this system we have adopted the tax codes of the EU with an unbridled enthusiasm: VAT, profit tax, income tax, social security tax, gasoline tax, alcohol tax, and cigarette tax. Soon we will be taxing all property, automobiles, financial transactions, and any new tax the government can dream up. Meanwhile, as a counter reaction to all this, the shadow economy in this country is growing along with disrespect for the law, the government, and the corruption that goes with it.


The total tax rate on the Lithuanian people is way too high. I realize that, when compared to other EU countries, Lithuania is not that high, but keep in mind that the best stimulus that can be given to the Lithuanian economy is the incentive for companies to invest and for individuals to buy or to save. As the government continues to grab close to 35% of the GDP and still find budget shortfalls, the national debt will continue to increase and the cost of servicing the debt will continue to increase. These percentages do not include the payments all companies have to make to the Social Security System. If these payments are included, the burden on Lithuanians is even greater.

Lithuanian corporations pay the government more in taxes then they pay their employees. Some people also do not realize that corporations do not pay taxes; they merely collect them for the government. All taxes, including social security, are passed on to the average consumer in the price of the item or service being sold. This tax burden keeps the velocity of money low and unnecessarily depresses the GDP, thus slowing economic growth. It is interesting that a large number of uninformed politicians are calling for even more taxes, such as a tax on property, automobiles, and financial transactions. This kind of talk has a way of scaring away investors who need to plan in advance and need economic and political certainty. This periodic desire of politicians to squeeze the neck of the “Golden Goose” to extract even more eggs almost always backfires. All one has to do is to look at the “shadow economy”, which officially stands at 30%, but is estimated by some to be as high as 50%. It is an interesting paradox that decreasing tax rates increases state revenue dramatically, while increasing the tax rate does the opposite. The high tax rate also has a highly corrosive affect on people’s faith in the government. Because of these high taxes, most small firms and individuals in Lithuania cheat and lie on their taxes and in the sale of goods and services. I estimate that 50-60% of the economy of Lithuania operates “under the table”. This makes scofflaws out of most citizens in the country, thereby diminishing the respect for all organs of the government. It is also a widely accepted fact that if these firms and individuals operated “honestly” they would not survive. The government cannot arrest and prosecute 50-60% of the population, and thus bribery and corruption become an endemic way of life.


The high cost of energy is another huge drag on the economy. Every Lithuanian living near the borders who can gets his fuel outside the country. The cost of heating, transportation and energy for manufacturing is included in all products and services made in Lithuania. Without energy independence, we will continue to have a huge disadvantage in attracting investment, either foreign or domestic. The government is playing around with the Ignalina project and with other energy providers. This will result in increasing the costs to the point of the projects becoming uneconomical. Thankfully the LNG plant is up and running, but there is no substitute for having and being able to sell energy.

A few years ago we, the Lithuanian people and government, were having birth and growing pains, but now at 25 years of age, we should be getting over homo sovieticus. We should be mature enough to unite and accomplish major things for the State and people of Lithuania. I once worked for a general who told me never to bring him a problem without a proposed solution or two. I hope I can do that here.


I would like to take this opportunity to propose a few modest changes that I am sure would have a dramatic positive effect on the economy of Lithuania.

1. It is a very cynical thing to charge people 21% VAT on food. I think the entire population would be very grateful for either eliminating the VAT on ALL food or severely cutting it back. This would have the positive effect of helping not just pensioners, but all Lithuanian families. The funds saved would be used for either buying more food or other goods.


2. Lower the gasoline, alcohol and cigarette taxes to make them competitive to our neighbors. I don’t think I have met a single smoker who did not get his cigarettes from a contraband source. Quite a few people also get there gasoline from the same kind of source. This constitutes a loss of revenue to the state, plus the expense of hunting for violators. Some wise man once told me that 50% of something is better than 100% of nothing. I think we would have no one breaking the law if we did this. I realize that these taxes are mandated by the EU – but I believe our representatives should be able to convince the EU lawmakers that a country as poor as Lithuania should not be paying the same amount of taxes as Germany and France, whose per capita GDP is over 100,000 Euros vs Lithuania’s roughly 15,000 Euros. If I am making over 100,000 Euros per year, paying 70 Euros to fill my tank may not be much, but when I am making just 500 Euros a month and have to drive to work every day, this may be excessive for me.

3. Let us agree to start building the new Ignalina power plant. As soon as we do, we will see a drop in energy prices. Let us also help the Mažeikiai refinery by doing whatever is necessary to build a pipeline from there to the sea that would allow us to move product both ways.


4. The government should encourage the agricultural sector to form proper co-op marketing organizations to promote the branding and sale of Lithuanian Farm products. I have no doubt whatsoever that, properly done, Lithuanian agricultural products can be very competitive.

5. We need to change the tax system to encourage both domestic and foreign investments and business start-ups.


6. We need to do more to clean up corruption in the government. I know a lot of this is ongoing, but the results so far are unimpressive and too many high-profile cases remain unpunished. The problem of corruption is often sighted as one of the prime motivators for emigration by Lithuanians in the diaspora. Because most citizens in the country cheat and lie on their obligations to the government, they cannot hold accountable the various organs of government either. “How can I complain about someone stealing from the government if I am doing the same thing?” Thus we tend to tolerate corruption in government and actually normalize it. This leads to a decline in the moral underpinnings of society as well as demoralization of the citizenry. It also leads to a lack of shame and further immorality. “It cannot be bad if everyone does it!” It discourages love of country and fellow citizens. How can one love a country of crooks and cheats? Honest people are made to feel hopeless and powerless and thereby become apathetic. Those who do not feel like this become prime candidates for emigration.

7. We need to change the labor code to make it fair to companies and individuals. I know that the Seimas is working on it, but we must not make it worse by not anticipating the law of unintended consequences.


8. Last but not least, reeducate the citizenry and youth in citizenship, patriotism and the Judeo-Christian ethics. Lithuania should declare itself a Christian country which is also tolerant. The EU has become a secularly focused institution without a moral anchor. As anyone who has tried can tell you, the search for strictly material well-being is by itself an exercise in futility. Having worked with the Mennonite and Amish communities in the US, I can tell you that there is something to be said for the simple life. The most important values of God, Family and Country need to be reemphasized in our media and educational system.

Lastly, nothing I have mentioned here is very original or insightful, but putting them all together to work together is essential. None of the suggestion can work on their own. It is a systematic approach that has to be instituted to make it work. The Lithuanian government needs to have a five-year financial plan put together with the help of the diaspora and all parties in the Seimas. This needs to be done as soon as possible. I am constantly told that plans exist. Where are they? There is one with 244 priorities listed. This not a plan; it is a laundry wish list where all items are “priorities”. This is a useless political campaign paper. A good financial plan should be very short and understandable to the average citizen.


These are steps we should — and could — do fairly quickly, maybe even immediately. There are other steps we should take in the future that I would be more then glad to discuss with anyone who is interested.

In summary, if we want to stop the waves of emigration we need to turn the country around. The question is who has the will and the guts to do it?

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