Lithuania

Launch of the 2016 Economic Survey of Lithuania

 

Remarks by Angel Gurría,

Secretary-General, OECD

15 March 2016

Vilnius, Lithuania

(As prepared for delivery)

 

 

Ladies and Gentleman,

 

I’m delighted to be here in Vilnius to share the main conclusions from our Economic Assessment of Lithuania. This is the first report of this kind for Lithuania, but one which should be the first of many, now that Lithuania has embarked on the process of accession to OECD membership.

 

The release of this report is a reminder that cooperation between Lithuania and the OECD had begun years before the country was invited to begin accession negotiations. The Lithuania Action Plan, under which this Economic Assessment was conducted, was launched back in 2013. The decision last April to take that cooperation further and begin the accession process is testament to the success of that Plan.

 

You may be wondering how Lithuania’s accession to the OECD will benefit the country. Allow me to answer this question by telling you briefly what the organisation does. The OECD has been aptly described as a “best practices club”. It brings together governments committed to democracy and the market economy, with the aim of sharing experiences in order to design better policies for better lives.

 

We achieve this through multilateral dialogue in which OECD members and an increasing number of non-member countries bring to the table their experiences in virtually all areas of public policy. We then process and enhance this expertise with the help of our Secretariat, producing international comparisons and making recommendations.

 

OECD membership will give Lithuania permanent access to this expertise. It will also enable Lithuania to compare its policies with best international practices in a wide range of sectors including taxation, health, education and many others.

 

Today’s launch of the economic assessment fits into this context. These assessments, which are called Economic Surveys for member countries, review a country’s economic policies and performance and identify key weaknesses and policy challenges, making recommendations based on best international practice.

 

Let me begin by highlighting some of Lithuania’s recent economic achievements:
 

  • The global crisis brought a deep recession to Lithuania, but the post-crisis period has been deftly navigated, allowing the country to enter the euro area in 2015.
     
  • Since the recession, annual GDP growth has averaged 3.3%, compared to only 1% in the European Union.
     
  • The unemployment rate, which peaked at 18½%, is now below 9%.
     
  • The budget deficit has been reduced from 9% of GDP in 2011 to around 1% in 2015. This has kept government debt at a moderate level, around 40% of GDP.

 

But despite these considerable achievements, major challenges remain.

 

First, if Lithuania is to converge on the living standards of the most advanced countries, it needs to boost productivity, which despite an impressive catch-up over the past 20 years remains around one-third below the OECD average. Strong productivity growth is particularly critical given the rapid ageing of the population – workers will be sustaining not only their own living standards but also those of a growing number of retirees.

 

One key to boosting productivity growth is a policy environment allowing high-potential firms to attract the resources to grow. Successive governments have shown a willingness to undertake tough structural reforms, but there are still some factors holding back the growth of high-productivity firms.
 

  • First, state-owned enterprises have a relatively large presence and many do not perform well. The governance of SOEs has improved, but further measures are necessary. For instance, the ownership and regulatory functions of SOEs should never be undertaken by the same institution. There should also be independent directors on all SOE boards.
     
  • Second, with Lithuania suffering the consequences of sustained outward migration, there are unnecessary barriers to employing those wishing to come and work in this country. Regulations on the employment of non-EU workers in Lithuania are more burdensome than in almost all other OECD countries.
     
  • Third, Lithuania’s large informal sector creates an uneven playing-field and may be impeding the growth of more productive formal sector firms.Apart from the need to foster the growth of high-productivity firms, policy can also help to raise productivity in all firms. Many employers complain about a lack of skilled labour, highlighting the need to improve the education system and to encourage life-long learning. Efforts to attract talented individuals to become secondary and primary school teachers should be a priority. 

 

A thriving education system can also improve the innovation capacity of Lithuanian firms, which is relatively low. Spending on research and development in Lithuania is just 1% of GDP, compared to an OECD average of 2.4%.

 

Increased participation in global value chains would help to reap foreign knowledge spillovers. A favourable regulatory environment and more efficient infrastructure are critical to attract the involvement of foreign firms in domestic production.

 

Raising productivity is therefore key. But with high levels of income inequality and nearly one in five Lithuanians at risk of poverty, the second main challenge is to ensure that higher productivity results in better living standards for all. Growth that is not inclusive will not be satisfactory and will ultimately not be sustained.

 

The authorities’ planned move towards a flexicurity system will be a welcome step in this respect. On the “flex” side, it would help to ease Lithuania’s comparatively strict labour code. An efficient employment agency and targeted active labour market policies would also help to smooth workers’ transition from one job to the other, especially if that transition features a spell of unemployment. Reducing the tax wedge on the low-skilled would help those most at risk of prolonged unemployment to improve their chances of getting work.

 

As for the security part of “flexicurity”, losing a job too often goes hand-in-hand with poverty: fewer than 1 in 5 unemployed Lithuanians are covered by unemployment benefits, and the level of income replacement is low. Increasing the level and coverage of unemployment benefits would reduce poverty risk and give the unemployed more time to find a job that matches their skills.

 

More generally, the social assistance system is not sufficiently effective at alleviating poverty, and its design creates “inactivity traps”: low incentives to take a job in some circumstances. Both the minimum income support and in-work benefits should be strengthened to address these weaknesses.

 

Finally, a successful inclusive growth strategy must involve improved health outcomes, which in some respects are relatively poor. Life expectancy for Lithuanian men, at 68 years, is nearly 10 years lower than the European average. Policies to promote a healthy lifestyle are critical. Strengthening health spending efficiency, notably by additional streamlining of hospitals and further promoting primary care, is also important.

 

Securing rapid productivity growth and ensuring inclusiveness are, then, the central policy challenges facing Lithuania, but they are not the only ones. For example, Lithuania’s energy intensity and greenhouse gas emissions are relatively high, and environmental taxation is low by OECD standards. Shifting incentives for consuming energy to be more in line with other European countries would not only contribute to the objectives set by the global community in COP21 but would also help to reduce air pollution and improve health outcomes in Lithuania.

 

Ladies and Gentlemen,

 

The OECD has been glad to have the chance to make its first assessment of economic developments and policies in Lithuania. With the accession process having now begun, we look forward to this becoming a regular exercise. We relish the prospect of helping the Lithuanian authorities deliver better policies for better lives in the years and decades ahead.