2009 Index of Economic Freedom

Quick Facts

Population:

• 3.4 million

GDP (PPP):

• $53.4 billion
• 7.7% growth
• 8.0% 5-year compound annual growth
• $15738 per capita

Unemployment:

• 3.5%

Inflation (CPI):

• 5.8%

FDI Inflow:

• $1.8 billion

Lithuania's economic freedom score is 70, making its economy the 30th freest in the 2009 Index. Its overall score is 1 point lower than last year, but the economy still scores well above the world and regional averages. Lithuania is ranked 17th out of 43 countries in the Europe region.

Reforms since the mid-1990s have made Lithuania an open and rapidly growing economy. The private sector accounts for about 80 percent of GDP and has driven steady economic growth of around 8 percent over the past five years. Open to global trade and investment, Lithuania enjoys high degrees of business freedom, fiscal freedom, and financial freedom. Regulation is relatively transparent and efficient. Foreign capital and domestic capital are subject to the same rules. The financial sector is advanced, regionally integrated, and subject to few intrusive regulations. The top income and corporate tax rates are competitive.

Key challenges to enhancing Lithuania's economic freedom are keeping government spending under better control, further strengthening the protection of property rights, and tackling corruption more effectively. The government has prioritized fiscal discipline and in mid-2008 approved a draft 2009 budget that strives for budgetary balance after years of persistent fiscal deficits. The unemployment rate is now under 4 percent, but more labor market flexibility would enhance employment growth.

Background Back to the top

Lithuania, the largest of the Baltic states, regained its independence from the Soviet Union in 1991. It is a member of the European Union and NATO, having joined both in 2004. Despite frequent parliamentary coalition changes, the country remains politically stable. With more than 80 percent of its enterprises now privatized, Lithuania has successfully made the transition from a command economy to a market economy. The economy, one of the fastest-growing in Europe, is highly diversified and particularly strong in construction, financial services, and retail.

Business Freedom 82.4 Back to the top

The overall freedom to conduct a business is well protected under Lithuania's efficient regulatory environment. Starting a business takes an average of 26 days, compared to the world average of 38 days. Obtaining a business license requires less than the world average of 18 procedures and 225 days. Closing a business is straightforward.

Trade Freedom 85.8 Back to the top

Lithuania's trade policy is the same as that of other members of the European Union. The common EU weighted average tariff rate was 2.1 percent in 2005. Non-tariff barriers reflected in EU policy include agricultural and manufacturing subsidies, import restrictions for some goods and services, market access restrictions in some services sectors, non-transparent and restrictive regulations and standards, and inconsistent customs administration across EU members. Additionally, government procurement is non-transparent and enforcement of intellectual property rights is weak. Ten points were deducted from Lithuania's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 87.6 Back to the top

Lithuania has a moderate income tax rate and a low corporate tax rate. The income tax rate is a flat 24 percent (reduced from 27 percent in January 2008), and the corporate tax rate is 15 percent. Other taxes include a value-added tax (VAT) and an inheritance tax. In the most recent year, overall tax revenue as a percentage of GDP was 20.9 percent. A new fiscal responsibility law requires authorities to aim for balanced budgets.

Government Size 65.3 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 34.0 percent of GDP.

Monetary Freedom75.8 Back to the top

Inflation is somewhat high, averaging 5.0 percent between 2005 and 2007. As a participant in the EU's Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. The government also regulates rents, electricity rates, and some energy prices and influences other prices through state-owned enterprises. Ten points were deducted from Lithuania's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom70.0 Back to the top

Foreign and domestic capital are treated equally and foreign investment is restricted in only a few sectors. Licenses and residency permits can be hard to obtain for foreign investors and regulations can be non-transparent and subject to corruption. Residents may hold foreign exchange accounts. There are no controls or restrictions on repatriation of profits, current transfers, or payments. Some capital transactions must be registered with the central bank, and there are limits on open foreign exchange positions by banks. The prohibition on foreign ownership of land for agriculture or logging is due to be phased out in 2011 in accordance with EU regulations.

Financial Freedom80.0 Back to the top

Lithuania's financial sector is well developed and competitive, offering a full range of financial services for dynamic entrepreneurial activities. The free flow of financial resources and the market allocation of credit are assured. There were nine commercial banks in 2007; the three largest account for about 70 percent of assets. Branch networks of Lithuanian commercial banks are well developed across the country, providing easy access to banking services. Lithuania's last state-owned bank was privatized in March 2002, and most commercial banks are now foreign-owned. Over the last decade, the share of capital held by foreign investors in Lithuanian banks has increased by over 450 percent. Banks may now offer investment funds to a wider array of clients. Foreign firms dominate the insurance sector. Capital markets are well developed but small.

Property Rights50.0 Back to the top

Accession to the EU has encouraged judicial reform, including strengthened independence and streamlined proceedings to clear the backlog of criminal cases. Investors cite weak enforcement of contracts. Lithuania remains a transshipment point for pirated optical media products.

Freedom From Corruption48.0 Back to the top

Corruption is perceived as significant. Lithuania ranks 51st out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Domestic firms report some requests for bribes, but large foreign investors report that senior government officials are helpful and honest. With more than 50 government institutions regulating commerce, there are many opportunities for corruption.

Labor Freedom54.6 Back to the top

Lithuania's relatively rigid labor regulations hinder employment opportunities and productivity growth. The non-salary cost of employing a worker can be very high, but dismissing a redundant employee is relatively easy. Restrictions on the number of work hours are rigid.