Lithuania: A fast-growing economy needs to boost inclusiveness

Lithuania2018surveyby Hansjörg Blöchliger and Vassiliki Koutsogeorgopoulou, Lithuania Desk, OECD Economics Department

Lithuania is one of the fastest growing economies in the OECD. After a strong rebound in 2017, growth is set to average more than 3% over this year and the next led by buoyant investment. Falling unemployment and rapidly increasing wages support consumption, although a shrinking labour force weighs on growth. Export growth remains solid, although below last year’s peak. Following 10 years of deficits and rising debt, the budget moved to a small surplus in 2016 and has remained positive since then. Lithuania is considered one of the most open and business-friendly economies in the OECD, and financial markets are stable.

Important challenges remain. Productivity is still about 30 percent below the OECD average, even if some recent pick up is encouraging. Export performance has improved but exports are concentrated in low-medium value-added activities and integration into global value chains is weak. Skills often do not match needs by businesses and collaboration between firms and research institutions is weak. Most disquieting, emigration – mostly of the young – continues, depriving the country of its most dynamic people and contributing to skills shortages.

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Inequality and poverty are high reflecting widespread labour informality and a pension system that leaves many elderly with low incomes.

 

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The “New Social Model” is Lithuania’s most impressive achievement of the past few years to enhance productivity and inclusiveness. The reform made the labour market more flexible, protects better the unemployed, and ensures sustainability of the pension system. The New Social Model is “inclusive” in the best sense of the word. The reform is also a showcase on how to achieve a large reform with a difficult political process, by creating a win-win situation.

Lithuania should continue its reform vigour to boost productivity and inclusiveness further. Reforms should focus on improving the business environment and making firms more dynamic, including through a more efficient insolvency regime, and by making the education system more responsive to labour market needs. More and better-quality jobs in the formal sector are key to well-being and reducing poverty. More effective support for those in need and active labour market programmes would also help combat poverty. Finally, easing the rules for highly skilled immigrants could help address the negative consequences of emigration, as could strengthening social and economic ties with the Lithuanian diaspora. These issues and policies to address them are analysed in the 2018 Economic Survey of Lithuania.

Further reading

OECD (2018), OECD Economic Surveys: Lithuania 2018, OECD Publishing, Paris.

 


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