In the second half of the 20th century, the Lithuanian economy underwent fundamental transformations. The Soviet occupation of 1940 brought Lithuania intensive industrialization and economic integration into the U.S.S.R., although the level of technology and state concern for environmental, health, and labor issues lagged far behind Western standards. Urbanization increased from 39% in 1959 to 68% in 1989. From 1949 to 1952 the Soviets abolished private ownership in agriculture, establishing collective and state farms. Production declined and did not reach pre-war levels until the early 1960s. The intensification of agricultural production through intense chemical use and mechanization eventually doubled production but created additional ecological problems.
The disadvantages of a centrally planned economy became evident after the collapse of the U.S.S.R. in 1991, when Lithuania began its transition to a market economy. Owing to the availability of inexpensive natural resources, the industrial sector had become excessively energy intensive, inefficient in its utilization of resources, and incapable of manufacturing internationally competitive products. More than 90% of Lithuania's trade was with the rest of the U.S.S.R., which supplied Lithuanian industry with raw materials for production and a market for its outputs. The need to sever these trading links and to reduce the inefficient industrial sector led to serious economic difficulties.
The process of privatization and the development of new companies slowly moved Lithuania from a command economy toward a free market. By 1998, the economy had survived the early years of uncertainty and several setbacks, including a banking crisis, and seemed poised for solid growth. However, the collapse of the Russian ruble in August 1998 shocked the economy into negative growth and forced the reorientation of trade from Russia toward the West. In 1997, exports to former Soviet states were 45% of total Lithuanian exports. In 2006, exports to the East (the Commonwealth of Independent States--CIS) were only 21% of the total, while exports to the EU-25 were 63%, and to the United States, 4.3%.
At the end of 2008, Lithuania had accumulated foreign direct investments (FDI) of $12.1 billion, with U.S. investments amounting to $314 million, or 2.6% of FDI. The current account deficit in the third quarter of 2009 was 2.9% of GDP. Lithuania has privatized nearly all formerly state-owned enterprises. More than 79% of the economy's output is generated by the private sector. The share of employees in the private sector exceeds 65%. The Government of Lithuania completed banking sector privatization in 2001, with 89% of this sector controlled by foreign--mainly Scandinavian--capital. "Lithuanian Railways" and Lithuanian Post are the only remaining state-owned companies that may be offered for privatization in the near future.
The transportation infrastructure inherited from the Soviet period is adequate and has been generally well maintained since independence. Lithuania has one ice-free seaport with ferry services to German, Swedish, and Danish ports. There are operating commercial airports with scheduled international services at Vilnius, Kaunas, and Klaipeda, though air connections contracted in 2009 with the bankruptcy of national carrier FlyLAL. The road system is good. Telecommunications have improved greatly since independence as a result of heavy investment.
After joining the EU in 2004, Lithuania saw its economy boom, reaching a record 8.9% GDP growth in 2007. Strong growth continued through much of 2008, but a weak fourth quarter, as financial stress spread through Europe, slowed growth to 3.0% for the year. In 2009, the global financial crisis hit the Lithuanian economy hard. In the first three quarters of 2009, the economy shrank by 15.7% compared to 2008, which was the worst performance since comparable records began in 1995. Lithuania’s GDP is forecast to drop by 15.2% by year’s end, though a return to weak growth has been projected in 2010. By the end of 2009 unemployment reached 13.8% and is predicted to rise to 17.7% in 2010. Overall salaries of Lithuanians are likely to fall by 12.3% in 2009 and 5.2% in 2010. Growing unemployment and lower income contributed to some limited social unrest in early 2009, when thousands of Lithuanians held a protest around the parliament building, demanding action from the government to save the economy. To do so, the government approved heavy budget cuts and passed a U.S. $2.3 billion stimulus plan.
Lithuania pegged its national currency--the lita--to the euro on February 2, 2002 at the rate of LTL 3.4528 to EUR 1. The initial target date for Lithuania to adopt the euro, January 1, 2007, was postponed due to the high inflation rate of 2006. Some commentators feel that euro adoption is unlikely until 2013 at the earliest. Temporary spikes from the necessary excise tax increases and longer-term convergence forces will probably keep inflation above the Maastricht reference value. Throughout 2009 the government was able to finance its budget deficit through private sector credit, thus avoiding the need to adopt an International Monetary Fund (IMF) program.
Information by U.S. Department of State