2024-05-11 06:39:38
If the economic progress observed so far continues in Lithuania, by the end of this decade we would not only surpass Italy in terms of GDP per capita, but also reach the EU average. Unfortunately, it would be too optimistic to expect such growth to continue. However, there are a number of reasons why further convergence will be much more difficult or may even stop altogether.
The experience of many countries shows that after reaching the current level of development of Lithuania, the country finds itself in the so-called middle income trap. For example, Slovenia‘s GDP per capita in 2004 was 87 percent. EU average. Two decades later, it remains unchanged. Typically, a country finds itself in such a trap when labor costs are rapidly increasing, and productivity growth is no longer catching up, leading to loss of competitiveness and loss of export markets.
Such stagnation, unfortunately, is not even the worst possible scenario. At the beginning of this century, Italy’s GDP per capita was 122 percent. The EU average has now fallen to 97 percent. Two decades ago, Greece’s GDP per capita was equal to the EU average, now it is less than 70 percent.
Insufficient investments, economic policy mistakes, non-progressive reforms promoting competitiveness and dynamism or, even worse, populism that scares away foreign capital – all this is not a theoretical possibility, but something that we can observe in many EU countries. How to avoid this and encourage further growth of productivity and personal income?
Liquid investments and spotty education
The country’s productivity in the long term is mainly determined by the quality of state institutions, human capital and the physical capital of companies – investments. Unfortunately, during the last decade, average Lithuanian business investments did not reach 13%. GDP was not only lower than in neighboring countries, but also lagged behind the euro zone average. Industrial investments alone during this decade amounted to 53 million. euros per thousand employees, lagged behind the EU average and were approximately 6 times lower than in the Nordic countries.
Bearing in mind that the accumulated capital of Lithuanian companies per employee still sometimes lags behind the most advanced EU countries, this is still a low-hanging fruit that allows investment in production automation, robotization, and the application of artificial intelligence not only in industry, but also in service sectors. It is important to mention that there is no shortage of resources for investment growth – they are encouraged by tax incentives, many companies have a considerable amount of accumulated equity, and the ratio of corporate debt to income remains one of the lowest in the EU and is almost three times lower than the euro zone average.
Multiple attempts to reform and improve the education system show that strengthening human capital is a more difficult task, but it is not insurmountable. Although the abilities of Lithuanian schoolchildren do not differ much from the OECD average, keeping up with the average at this stage of development is not a high enough bar. Why have we not risen above this bar in the last 20 years, unlike Estonia?
Looking at the achievements of students from the best schools, one could almost exude optimism – there is no shortage of those who can become both top-level scientists and creators of unicorns (although their share is smaller than in the countries we are chasing). But the biggest stain on education and the anchor of the “average student” is at the other end of the spectrum.
The results of the OECD study of the ability of schoolchildren show that even a quarter of fifteen-year-olds in Lithuania do not exceed the minimum ability bar (2 out of 6 level) in mathematics, natural sciences, and reading. This problem is mostly found in small regional schools (where there are still joint classes in the 21st century!) and where the main language of instruction is not Lithuanian (and not English). Many people probably have no doubts about what to do with these schools.
The Three P’s Problem
These long-standing gaps in the education system leave a quarter of young people not only with very limited career opportunities, but also without financial literacy, without critical thinking, without the ability to distinguish fact from opinion. In such a society, it is easier to spread propaganda, political debates are aggravated by populism, people’s weaknesses are catered to, and their anger and fears are fueled. These three P’s – populism, propaganda, appeasement – have always been and will be in politics, but they penetrate the eyes and ears especially before the elections.
According to one definition, populism is a popular proposal for solving very complex problems with simple means. For example, the war in Ukraine is very wrong, but this problem is proposed to be solved without war, because “we are for peace”. In the same way, it is possible to propose how to solve the global problem of 800 million starving people – they should eat. Another example of populism is the increasingly frequent attack on “big capital” in Lithuania – rhetoric or higher taxes. This attack does not solve any problem, on the contrary, in the long term it can deter foreign investment, harm job creation and the growth of the population’s income. But some voters like the peeling of such scapegoats.
Recently, it has become very popular to promise to increase pensions without offering a sustainable financial source. Is it possible to increase pensions by using the accumulated “Sodra” reserve? It is possible to increase it for a short time, but from what would the pensions be paid after the reserve is used up and in the future in the face of an economic recession and a decrease in Sodra’s income? The purpose of funds accumulated in residents’ pension funds is to help ensure the well-being of future retirees; consuming these funds would not solve the problems of the current pensioners (that is why the Constitutional Court did not suggest that everyone spend well, but withdraw from the savings only in exceptional circumstances).
This problem of the three P’s is serious not only because in some cases the political forces representing a very narrow interest (and sometimes even the interests of external states) can take over the authorities, starting to destroy the rule of law, the independence of the courts and the media, or even democratic processes. You can make sure that this is not just a theoretical possibility by looking at the events of the last decade in Poland and Hungary. A society impervious to propaganda, populism and appeasement means that it is much more difficult for governments to implement unpopular (such as taxation) but long-term necessary reforms.
Aging, defense, green transformation
The further growth of Lithuania will be more complicated due to the fact that we are currently facing problems that have not darkened the horizon too much so far. Until recently, there were 1 pensioner for every 4 working people in Lithuania. By the end of this decade, this ratio will be halved, with one pensioner for every two working people.
Perhaps the problem of lack of workers can be avoided with the help of new technologies and immigration. However, the pace of immigration observed in recent years is not natural, and in the medium term, the positive economic benefits may be outweighed by its negative side effects. Unfortunately, in recent years we have seen insufficiently diverse and mostly low-skilled immigration. Lithuania became rich enough to attract foreign immigrants; now you have to choose and manage their streams wisely.
In any case, it is clear that these demographic changes will require more funds for social and health care. Along with them, we also have the need to constantly invest more in national defense and energy production – we are still too dependent on imported energy resources. According to the calculations of the International Monetary Fund (IMF), only due to the aging of the population, the need to increase the financing of national defense and to invest in energy production and infrastructure, the rich EU countries will need to allocate at least 3% of their budget every year until the end of the decade. GDP additional funds. For countries that are rapidly aging, do not produce enough electricity and are closer to the Eastern Front – probably twice as much.
Happiness is not (only) in money
Finally, one should not forget that as the population’s income grows, so do their non-material needs. Two decades ago, it was important to ensure physical security and avoid poverty and severe material deprivation. Now, equal opportunities, self-realization, personal rights and freedoms are increasingly important to many. It is in these areas, in contrast to the economy, that we have had a harder time progressing. Lithuania remains one of the few Western countries that has not legalized same-sex partnerships and jails people for what is legal or at least decriminalized in all Western countries.
One can look at the impressive achievements of the past and expect that the curves of productivity, income and quality of life will continue to climb steadily. However, an objective assessment of the external circumstances, but the experience of other countries shows that faith and hope alone will not be enough this time. Less populism and polarization, more compromises, reforms and investments can allow Lithuania to preserve its position as a growth leader.
2024-05-11 06:39:38