Lithuania: a road between misery and austerity

For the last two years, the Baltic states have been role models for pro-austerity organisations such as IMF or EU. But there is an increasing and urgent need to deflate the myth of the austerity success story and tackle growing economic fractures. 

Lukas Mikelionis
27 December 2012

Recently, popular media economists such as Paul Krugman have written increasingly about the success of austerity economics in Estonia and Latvia, generally ignoring Lithuania. Would the facts show that Lithuania is recovering and that austerity really works?

Clearly not. One can discuss what Lithuania (and other Baltic countries) should have done in order to avoid a massive budget deficit. Export oriented economies whose currencies are pegged to the Euro cannot sustain big deficits, but the extent and effect of the Lithuanian government's austerity measures are truly astonishing- and not in a good way.

Misleading figures

After the economy went bust in 2009 and contracted by 14.8%, thanks to the government, Lithuania’s economy expanded by 5.9% in 2011. This ought to be a key argument to show that austerity programmes actually work. But this is just one side of the story. Unlike Greece and other southern European countries which, according to IMF, must commit to internal devaluation in order to restore competitiveness, Lithuania already had relatively cheap labour. According to Eurostat, in first quarter of 2010 Lithuania’s labour costs were reduced by 11.3% compared with 2008 and by another 6.7% by late 2011. Unemployment has gone down from 17.8% in 2010, 15.4% in 2011 to 13.8% in 2012. Though this should be a fairly pleasing result and so-called victory for austerity, the truth is that current unemployment rates are decreasing alongside large increases in emigration.  

This didn’t stop the government from continuing cynical and destructive policies, moving next to liberalise the labour market. It will now become even easier for employers to lower labour costs further, since unemployment is still high. Social exclusion has risen by almost 6% in the two years following 2008 and reached 33.4% of total population.

Ignoring income inequality

Income inequality is very serious problem with growing visibility. Occupy movements and social movements all over the world have demanded the reduction of inequality. The demand is not purely ideological or, as some people want to make us believe, socialist dogma. It is a fact that inequality reduces economy potential and naturally, growth.

Despite some marginal fluctuation, Lithuania has a huge inequality of income distribution. It arose after a big tax reform in late 2008 by the conservative and liberal government. The ratio of total income received by the 20% of the population with the highest income to that received by the 20% of the population with the lowest income rose from 5.9 in 2008 to 7.3 in 2010.

But the problem is not taken seriously. Progressive taxation is viewed as a populist idea by the media and traditional mainstream parties. They argue that the idea of taking and re-distributing wealth is a bad thing, even when inequality is one of the biggest challenges in the developed world.

Minimum wage and minimal concern

The last conservative-led coalition government, rather than finally ending business subsidies and significantly increasing minimum wage, only raised it by a meager 15 Euros in July 2012. This increase is hadly enough to provide either a decent living for workers nor stopping harmful private sector protections. Currently, the monthly minimum wage is 246 Euros, third from the bottom in the European Union. However, the recently elected government, which consists of centre-left leaning parties, immediately raised minimum wage to 289 Euros per month, but according to various experts, due to high taxation on work, the latter wage is still too low to end that detrimental practice.

People who earn minimum wage (about 20% of the labour force) are also entitled to benefits from social security. It comes in the form of compensation for utilities like water or heating. By paying minimum wage, businesses are forcing the state to pay for the lack of investment in productivity and capital, even though profits are already at pre-crisis levels.

The government reaction is truly bizarre. The refusal to lift people out of employment-related poverty and remove the burden from the budget costs a lot. Firstly, people who claim benefits and compensations are created into a group dependent on the state for support and continue to lose their dignity. Secondly, as the government imposes austerity measures to fight the budget deficit, the public sector is reduced and continues to result in unemployment. Meanwhile, businesses can continue to exploit workers at state expense.

Given the leading myth of the success of austerity, we can only continue to publicly expose the real situation in Lithuania, which questions the current austerity consensus between all major parties that misgovern the country with protective policies for the wealthy and remain destructive for everybody else.

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