News2020.01.22 15:00

Is Lithuania catching up with Europe?

Lithuania is fast approaching the income level of the European Union, but statistics may be hiding as much as showing.

Lithuania's GDP per capita has reached 81 percent of the EU average, the country's central bank jubilantly shared at a press event on Tuesday.

Overall, the Baltic states have enjoyed the fastest convergence in the EU since they joined in 2004. Over the last quarter-century, Lithuania cut the gap by half.

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“We are no longer a middle-income country, we are a high-income country,” said Gediminas Šimkus, the director of the Economics and Financial Stability Service at the Bank of Lithuania.

The convergence, he added, was in purchasing power parity, meaning that the figure accounts for the fact that lower incomes in Lithuania are partly compensated for by lower prices compared to Western Europe.

However, growth has not been equally distributed across the country. The Bank of Lithuania admits that there are “three Lithuanias”.

Kaunas and Klaipėda, the country's second and third biggest cities, are close to the national average. People in Vilnius are already enjoying incomes above the EU average, while the rest of the country is still well behind.

“The gross domestic product, as it is turned into people's incomes, is distributed very unevenly,” says the economist Romas Lazutka. “As we know, income inequality is very high in Lithuania and a lot of people certainly do not enjoy standards of living that are 80 percent of the EU average.”

Economists give different views on what is to be done. For Lazutka, reducing income inequality is the main concern. Šimkus, meanwhile, believes that Lithuania should work to attract more skilled workers. Last year, of the some 20,000 work permits issued to migrants, only 407 were for high-skilled positions.

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Shrinking labour force is another challenge, as the boomer generation is retiring and the young are entering the market in much smaller numbers.

Nerijus Mačiulis, a chief economist at Swedbank, insists that inadequate education is also holding back the country's further economic development.

“Every fourth school graduate is programmed to be kicked out of the labour market,” he says, explaining that many students graduate without the basic skills that would allow them to find employment or pursue further education.

“Even for an optimist, it is difficult to expect that the progress of the last decade would continue at the same rate,” according to Mačiulis.

Public investment from the EU has greatly contributed to Lithuania's economic growth, but European convergence funds are very likely to be cut in the next financial perspective.

Raimondas Kuodis, deputy board chairman of the Bank of Lithuania, says the loss may not be so dramatic, since EU funding can be “a doubled-edged sword”. Having invested the European money into sometimes unnecessary infrastructure, Lithuania has to spend its own money to maintain it.

“We all have heard about building waterworks in deserted villages or renovating schools that are then closed down,” Kuodis says. “This kind of European money weighs the economy down.”

However, if Lithuania does things right, it can expect its GDP to catch up with the EU average by 2042, according to the Bank of Lithuania.

Other economists maintain that the progress is far from assured. Moreover, Lithuania's relative position improves not just because of its own good performance, but also due to economic woes of other EU member states. Italy and Greece, for instance, have suffered from a decade-long stagnation or even recession.

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