OECD Economic Surveys: Lithuania 2018

Executive Summary

Abstract

GDP continues to converge

Boosting productivity and inclusiveness

Addressing an ageing society

GDP continues to converge

GDP per capita

Source: OECD Economic Outlook database.

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Since renewed independence in 1991 and transition from a centrally planned to a market economy, Lithuania has substantially raised well-being of its citizens. Thanks to a market-friendly environment the country grew faster than most OECD countries over the past ten years. The financial system is resilient, and fiscal positions stabilised after a long period of deficits and rising debt. Yet productivity has remained subdued due to stringent labour market regulations, informality and skills mismatch. Wage and income inequality are high, fuelling emigration. The population is ageing fast and declining, particularly because of emigration, putting pressure on the pension system. A wide-reaching labour market, unemployment benefits and pension reform entitled “New Social Model” implemented in 2017 is expected to reinvigorate inclusive growth and underpin the sustainability of public finances.

Boosting productivity and inclusiveness

The productivity gap remains large

Note: Labour productivity gap with respect to the OECD average.

Source: OECD Economic Outlook database.

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Catch-up and more inclusive growth will require raising productivity that still remains well below the OECD average, and has slowed down in recent years. In addition to the New Social Model, this calls for further easing regulations on the employment of non-EU workers, financial constraints for productive firms, and reducing informality. Moreover, continuing governance reforms would enhance the performance of state-owned enterprises. Recent reforms, such as more relaxed regulations for high skilled non-EU workers and a modernisation of labour relations are welcome. Greater inclusiveness also requires a better tailoring of education to labour market needs and more effective help for those out of work to find a good job.

Addressing an ageing society

Lithuania is ageing rapidly

Source: United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects.

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Rapid ageing and high emigration shrink the labour force by 1% every year, requiring a comprehensive approach to address the economic consequences. The pension part of the “New Social Model” strengthened the sustainability of the pension system, but did little to reduce old-age poverty. Health care is improving well-being of the elderly, but outpatient and long-term care remain hospital-oriented. The need to upgrade skills, especially of older workers, calls for a broad-based life-long-learning system. Better access to childcare would allow families to have more children and improve labour market opportunities for working parents. Migration policy, including a focused outreach to emigrants and a less restrictive approach to immigration, could help slow down the labour force decline.

 

MAIN FINDINGS	KEY RECOMMENDATIONS
Fiscal And Financial Policies To Support Inclusive Growth
High taxation of labour and of low-incomes reduce labour supply and contribute to informality.	Reduce social security contributions, especially for low-income workers, while ensuring that benefits and deficit targets are maintained. Increase immovable property taxation, while exempting low-income households
The public spending mix fosters inclusive growth, but spending efficiency is weak, especially in education and health care.	Assess spending efficiency by carrying out regular spending reviews.
Debt is stabilising but the fiscal framework allows for some fiscal slippage.	Set a debt target and establish a credible frontloaded path to reach it.
Low interest rates and growing credit fuel housing market activity and prices.	Actively use macroprudential measures once imbalances threaten to emerge.
Promoting productivity and inclusiveness
The business environment is good but foreign investment remains low, state-owned enterprises dominate many sectors and governance could be improved; firms face barriers to finance while weak insolvency procedures hold back business dynamism.	Strengthen the monitoring capacity of the Governance Coordination Centre, building on the recent increase in its budget. Simplify bankruptcy procedures and establish more favourable conditions for restructuring.
Innovation remains weak and collaboration between business and research sectors is limited.	Continue the implementation of the institutional reform of innovation policy by improving coordination, and consolidate agencies and support programmes where overlaps exist. Give more weight on collaborative research when allocating funds to public research institutions.
Skill mismatch remain high, weighing on foreign investment, productivity and inclusiveness. The low efficiency of the education system contributes to skill mismatch	Strengthen work-based learning, including by linking the length of apprenticeships to the level of acquired competencies. Provide differentiated awards for tertiary courses with skills closely linked to labour market needs. Continue with overall reform of the education system at all levels, addressing skill mismatch.
Protection for the most vulnerable is low	Further increase the level of social assistance, while ensuring strong work incentives. Increase investment in active labour market programmes upon a close monitoring of their outcomes.
Addressing an ageing society
The pension system is highly redistributive but not targeted at the poor. Social security contributions put a high tax wedge on labour contributing to informality.	Continue the shift of pensions from the pay-as-you-go system (“first pillar”) towards pension funds (”second pillar”), and make payments to pension funds compulsory. Fund the wage-independent basic pensions through the general government budget rather than social security contributions.
The health care system remains hospital-care centred, while outpatient and long-term care for the elderly lags behind.	Continue reorganising the hospital sector; and improve outpatient- and long-term care.
Life-long learning is modest. Older workers in particular do not take part in adult education.	Provide financial incentives for life-long learning, involving both firms and employees.
The workload for working mothers is high.	Extend and improve support for childcare.
Emigration is still high and immigration restricted, contributing to population decline and skills shortages.	Implement a well-integrated migration policy, including a focused outreach to emigrants and a less restrictive approach to immigration.