Foundations for Growth and Competitiveness 2026

Lithuania

Labour productivity in Lithuania’s market sectors rose from around 25% of the level of Germany in 2000 to 50% in 2022, outpacing several regional peers. Lithuania is thus progressively catching up with Western European productivity levels, but a gap remains. While labour participation has increased significantly over the last decade, unemployment remains high in international comparison, especially for older-age workers. The working-age population is expected to decline significantly over the next years due to ageing. Therefore, boosting productivity growth and mobilising all available labour resources will be key to further improving living standards.

While product market regulations are the least restrictive in the OECD, the productivity benefits could be further enhanced by developing capital markets to alleviate firms’ financial constraints, improving health conditions, encouraging R&D investment by businesses, ensuring that adult learning is efficient, strengthening secondary VET education, and expanding the rail network.

Economic performance

Gaps to the average of the upper half of the OECD countries

Source: Panel A: OECD, Economic Outlook database; Panel B: OECD, Labour Force Statistics database; Panel C: OECD, Economic Outlook and Productivity databases; Panel D: OECD, Economic Outlook and Annual National accounts, GFCF by assets databases.

Selected policy gaps

Source: OECD calculations based on the Foundations for Growth and Competitiveness database.

Financial markets: Develop capital markets to alleviate firms’ financial constraints

Banks play a dominant role in the financing of Lithuanian firms, but around 15% of them report that they are financially constrained, which is twice as high as the EU average. Stock market capitalisation is limited, even accounting for the small size of the Lithuanian economy. Developing capital markets would support productivity growth by facilitating investment in intangibles, R&D and technological innovation.

Recommendations

✓ Continue developing pension funds and consider allowing them to invest in a wider set of assets, including unlisted Lithuanian firms.

✓ Foster financing through Fintech firms by providing adequate regulations, encouraging the development of digital payments, and improving digital financial literacy.

✓ Consider extending the stock market listing of State-Owned Enterprises (SOEs).

Health: Promote healthier lifestyles and strengthen prevention

Relatively poor health conditions in Lithuania lead to low life expectancy, especially for men, and also have a direct impact on productivity. One example is the number of days of absence from work due to illness, which is higher in Lithuania than in neighbouring countries. Poor health conditions are partly related to preventable diseases and behavioural factors such as poor diets, high alcohol consumption and low physical activity.

Recommendations

✓ Reduce the affordability of harmful substances such as alcohol and tobacco by raising taxes on these products.

✓ Use the additional fiscal revenues to finance prevention campaigns and preventive medicine.

Innovation: Strengthen public support for R&D and encourage studies in STEM fields

Business and overall expenditure on research and development (R&D) in Lithuania is well below the EU and OECD averages. Tax incentives for business R&D are generous, but their take-up is modest and mostly benefits large firms. Some key research-business collaborations exist, but they are largely confined to high-tech sectors. The numbers of researchers and doctoral graduates are limited, hindering innovation and digital adoption.

Recommendations

✓ Enhance the effectiveness of R&D tax incentives by clarifying the definition of R&D and improving awareness of the tax scheme.

✓ Provide R&D support through a more balanced combination of tax incentives and direct support to smaller innovative firms.

✓ Use financial incentives to encourage the completion of doctoral studies in Lithuanian universities, particularly in science, technology, engineering and mathematics (STEM).

Education and skills: Strengthen secondary VET education and adult learning

Participation in adult learning is low, especially among the less educated and elderly workers. Individual learning accounts and a dedicated online platform have been introduced in 2023-24 to support adult learning and career guidance. The share of people who attain upper secondary education in Lithuania is one of the highest in the OECD, but this education level only provides limited additional competencies, as measured by the OECD PIAAC Survey, especially for Vocational Education and Training (VET) graduates.

Recommendations

✓ Ensure adequate funding of the individual learning accounts system and consider increased targeting towards the groups that are most in need of training if current funding proves insufficient.

✓ Monitor course quality and evaluate their impact on the skills and employability of participants.

✓ Split VET education into one work-based programme with minimum requirements in general subjects preparing for the labour market, and another more technically-oriented pathway into technically focused employment or tertiary education.

Physical infrastructure: Densify the rail network and accelerate its electrification

The Lithuanian rail network is one of the most emission-intensive in Europe due to a low electrification rate. Electrification is under way, with the objective to electrify 40% of the rail network by 2030. This includes the new Rail Baltica track that is expected to connect Lithuania with Poland and Latvia by 2030 but is currently subject to delays and cost overruns. There is room to further densify the network, which is one of the least developed in Europe, as this would support growth and rail transport in Lithuania.

Recommendations

✓ Expand and electrify the rail network and facilitate interconnections between road and rail.

✓ Ensure that national co-financing expenditures related to Rail Baltica are adequately reflected in the national budget and that excessive delays do not lead to cuts in EU funding.

Recent progress on structural reforms

Product market regulations in Lithuania are the least restrictive in the OECD. The most significant reforms in recent years include the regulation of interactions with stakeholders, the governance of State-Owned Enterprises (SOEs), and the administrative requirements for creating businesses. The now more centralised model for co-ordinating SOE ownership is an effective way to separate the exercise of ownership rights from regulation activities and to exert a consistent governance across SOEs. All administrative requirements for creating businesses can now be found on a single website, which lowers barriers to entry for small firms. All these reforms support a more competitive business environment, which is ultimately beneficial to productivity.