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Lithuania, Economy

principal asset, collective farms, state farms, mineral fuels, important economic activity

Lithuania had a primarily agricultural economy before the USSR annexed the country in 1940. In the next 50 years the USSR fully integrated Lithuania into the Soviet system. The Soviets abolished private ownership in agriculture, replacing it with collective or state farms. They also forced rapid urbanization by relocating workers from other parts of the USSR to Lithuania, where they built massive factories to produce industrial goods for the entire Soviet bloc. The rapid reorientation of trade relationships following independence in 1991 sent the Lithuania economy into depression. The gross domestic product (GDP), which measures the value of all goods and services, decreased sharply every year until 1994. Price deregulation and higher costs for imported energy produced massive inflation. Yet by the mid-1990s, Lithuania ranked among the better performing economies of those transitioning from the old Soviet system to a free market.

A country without abundant natural resources, Lithuania possesses a highly skilled workforce and a developed infrastructure. Its strategic location is a principal asset, with an ice-free port on the Baltic Sea and its largest city a rail and highway hub connecting Russia, Belarus, Ukraine, and other parts of Eastern Europe. Since independence, the country’s leadership has directed the transfer of state-owned enterprises to private hands and adopted measures such as reforms of the legal system to encourage foreign investment.

Lithuania’s GDP in 2000 was $11.3 billion, the largest of the Baltic states. Industry, which in 2000 was again expanding after the contraction following independence, contributed 33 percent of GDP. Agriculture, forestry, and fishing together produced 8 percent. The broad services sector, which includes trade and financial activities, produced 59 percent.

Livestock breeding and dairy farming are the dominant agricultural activities in Lithuania. The principal crops are potatoes, grains such as barley and wheat, and sugar beets. The collective farms of the Soviet era were divided and privatized as part of the country’s economic transition, resulting in many small and inefficient farms. Forests cover nearly one-third of the country, and the cutting and processing of timber is an important economic activity. The Lithuanian commercial fishing fleet catches mackerels, sardinellas, and herring. Agriculture, forestry, and fishing accounted for 24 percent of employment in 1995.

Based on the value of output, the most important manufactures in Lithuania are processed foods, petroleum products, and textiles, clothing, and beverages. Mineral resources include large reserves of peat and materials used in construction such as limestone, gravel, and clay. Lithuania has small deposits of petroleum and natural gas. In 1995 industry—including manufacturing, construction, and mining—accounted for 28 percent of employment.

Lithuania has a well-developed system for generating power, allowing it to export electricity. In 1999 the country produced 73 percent of its electricity in the Ignalina nuclear plant, 23.89 percent in thermal facilities burning petroleum products, and 3 percent in hydroelectric facilities. Lithuania supplies gas and electricity to the Kaliningrad Oblast of Russia. In 1997 the European Bank for Reconstruction and Development (EBRD) began pressing for closure within ten years of the Ignalina plant, which it considers unsafe.

Russia is Lithuania’s main trading partner for both imports and exports. Other leading buyers of Lithuanian goods are Germany, Belarus, Latvia, Ukraine, the Netherlands, and Poland. Other leading suppliers of imports are Germany, Poland, Italy, Denmark, and Finland. In terms of value, leading exports are machinery and transportation equipment, mineral fuels and metals, and consumer goods. Lithuania, Latvia, and Estonia established a Baltic free trade area for agricultural goods in 1997.

After gaining independence, Lithuania began making plans to introduce its own currency, the litas, to replace the Russian ruble in circulation. Lithuanian officials decided to first introduce coupons to supplement rubles, which were in short supply. The talonas (Lithuanian for “coupon”) was issued freely, because it was assumed that a wide circulation of the coupons would aid Lithuanian consumers, with minimal negative economic consequences. But with energy price shocks and a policy of indexing wages and pensions, inflation became rampant, and the value of the talonas dropped steadily. The litas was introduced as the sole legal tender in 1993, after which the litas supply fluctuated. In March 1994 the parliament passed legislation that fixed the litas to the United States dollar at a rate of 4 litas per U.S.$1.

Lithuania is a member of the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (World Bank), and the European Bank for Reconstruction and Development (EBRD). In May 1995 the country became an associate member of the European Union (EU). It subsequently submitted an application for full EU membership. In December 1997 Latvia and Lithuania were among five Eastern European countries invited to join the EU as part of its second round of expansion; no timetable was set for that expansion. Estonia was invited at that time to join the organization in its first round of expansion, with talks beginning in March 1998.

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