Volume 40, No.3 - Fall 1994
Editor of this issue: Antanas Klimas, University of Rochester 
ISSN 0024-5089
Copyright © 1994 LITUANUS Foundation, Inc.


University of Toronto

1. The Economic Transformation in Lithuania Prior to the Advent of the Postcommunist government

Taking advantage of whatever freedoms could be gained in the final period of the Soviet decline (perestroika), Lithuanian reformers prepared a blueprint for their country's economic independence in 1988. The blueprint outlined specific macro- and microeconomic steps designed to create a separate, market-based economic system of independent Lithuania via a one-time comprehensive action, a sort of big bang [Samonis 1990; Samonis & Hunyadi 1993]. When the Lithuanians led by the anti-communist President Vytautas Landsbergis started implementing their blueprint and declared formal independence from the USSR on March 11, 1990, the dying empire struck back with economic sanctions as well as the political and military power play which caused loss of life and lasted with varying intensity until its total disintegration in the aftermath of the August 1991 coup d'etat. When the real independence was regained in September 1991, Lithuania was well under way of institutional preparations for the introduction of a market economy. The fastest possible mass privatization (including restitution) formed the backbone of systemic change. In a scheme somewhat similar to the Czech one, investment checks (vouchers) were distributed free of charge among adult citizenry. They were used to bid for state property at auctions organized by the Privatization Department. Aiming at a speedy re-establishment of private farms, a restitution-based decollectivization of agriculture was firmly pursued by successive anti-communist governments as well. By the end of 1992, about half of the targeted two thirds of state property were passed into private hands, a large effort going into privatization of housing (some 95% privatized). Due to its radical, innovative privatization enfranchising citizens with property and, by extension, political rights as well as other vigorous reform measures (e.g. price liberalization), many international observers placed Lithuania in the first rank of the postcommunist transformation alongside or even surpassing Central Europe in 1991-92 [World Bank 1993; IMF 1993; Samonis 1993a; et al.].

2. Changes Introduced By the Postcommunist government

As a result of the inevitable Soviet trade disruption following the empire disintegration as well as other unanticipated, transformation-induced phenomena, a social perception of a large drop in output and living standards has developed. This perception formed a fertile ground for a massive anti-government propaganda campaign launched by the Democratic Labor Party (DLP), a successor of the Communist Party of Lithuania led by Algirdas Brazauskas. The Fall 1992 election produced the parliament dominated by the postcommunist DLP which formed the government. One of the first moves of the newly formed government was to stop privatization for over one month, pending the elaboration of "better, less socially painful" ways of carrying it out. The immediate effect of this move was the inflationary devaluation by some 50% of the temporary currency (talonas) used for bidding for enterprise shares alongside investment checks [Abišala 1993; et al.].

In the winter of 1993, privatization was officially resumed but never came any closer to regaining its pre-election character and momentum due to a shortage of political will from the highest echelons of power. According to some assessments, privatization stopped altogether, especially land restitution in agriculture which used to be of the farmer-type in the interwar period of independence. Based on a distorted. Soviet-type thinking "chem bolshe, tem luchshe" (roughly: big is beautiful), fanners who regained their land are often administratively pressured to lease it back to kolkhozes renamed joint stock companies. Reports on these and similar trends abound, see Gineitis 1993; Valatka 1993; Peleckis 1993; Dvi... 1993; et al. At best, the radical, mass, enfranchising-type of privatization was replaced with a confusing process exhibiting two main features.

One such a feature is an increased former communist nomenclature privatization, a.k.a. spontaneous privatization by old nomenclature (mainly state enterprise directors) experienced in Hungary and Poland in the first years of the postcommunist change 1989-1990. While it poses no theoretical problems on the grounds of neoclassical economics as long as transferability of property rights is assured, spontaneous privatization may cause (and has caused!) a backlash against privatization among the disenfranchised majority of the population. Besides, state enterprise directors have many characteristics one would like to avoid in privatization: in large part engineers, they have little knowledge of economics or outside world; they are molded by the Soviet command economy, etc. [Something... 1993; Samonis 1993 b; et al.]. The agricultural kolkhoz nomenclature had been "privatizing" into their own hands even before the 1992 election, taking advantage of the duality of political power persisting in Lithuania (anti-communist governments at the national level, local governments in the hands of former communists). National government efforts to put a stop on stealing of state property by old nomenclature and new mafia were in vain due to a sabotage by the judicial system influenced by these forces, especially nomenclature. The other feature of the changed law is the increased (from 30 to 50%) right of employees to acquire shares on a preferential basis. Labor ownership and other variations on the labor-managed socialism have been theoretically and practically proved much less efficient than solutions based on private property rights [Samonis 1990; et al.]. While 30% of the shares sold under this law are to be regular, 20% are to be with no voting rights. Such a provision will make it more difficult to create clearly defined, strong property rights thereby undermining effective corporate governance. Given that there are reports on informal and/or formal prohibition to resell such shares to outsiders, it seems that labor ownership is little more than a gimmick designed to consolidate the power of monopolistic action by nomenclature. Evidence of the monopoly power abuse is plentiful in Lithuania, especially in the interaction of monopolistic food processing enterprises with farmers [IMF 1993; Simenas 1993; Valatka 1993; Peleckis 1993; et al.].

The picture on the stabilization front is mixed at best. The new government resorted to old bad habits of inflationary wage increases and the budgetary subsidization of predominantly large state and collective enterprises, especially in agriculture. This generated more inflationary pressures on top of ones induced by the privatization stop [IMF 1993; et al.]. The macroeconomic stabilization picture could have been much worse if not for the (central) Bank of Lithuania (B of L) which is independent from the government. The long awaited permanent currency, litas, was introduced in June 1993. Mr. R. Visokavičius, the newly appointed B of L governor, adopted a tight monetary policy aimed at bringing inflation down and safeguarding the value of the litas. However, he was fired for alleged misconduct after about half a year in the office; his policy put him on a collision course with the DLP dominated parliament preferring "easy money" policy satisfying demands of nomenclature. As a result, in the Fall of 1993 inflation is on the rise again, even though the measured output continues to fall at only slightly slower rates. It remains to be seen whether the IMF-backed 1993-94 stabilization plan will achieve its goals. Also, there seems to be a trend towards going deeper and deeper into external debt, a substantial part of it aimed at propping up consumption levels [ELTA 1993; IMF 1993; et al.].

3. The Postcommunist Change "Hijacked"?

Generally, nomenclature seems to have fully engaged in rent-seeking activities made possible by the present "already not a plan but still not a competitive market" stage in Lithuania's postcommunist transformation. The emergence of this "renter class" providing economic underpinning for postcommunist parties has been observed in other semi-transformed economies [e.g. Havrylyshyn 1993]. This trend may lead to emergence of corporationist systems rather than competitive markets as the outcome of the postcommunist transformation. Some ways of such a "hijacking" of the postcommunist change by old nomenclature in Lithuania have been outlined above. Another "hijacker", not necessarily independent from the first one, is the new mafia. The symbiosis of nomenclature, mafia, and the postcommunist government structures is bound to lead to such pathological phenomena as rampant corruption and the economic polarization of the society (haves and have nots). Have nots would naturally be excluded from the economic process based not on competition but rather on the politicized, mono- or oligopolistic type of bargaining characteristic of corporatist systems. This would effectively prevent development of the middle class which is the main stabilizer of any ship of state. One can hardly expect any level of stability anchored in sustained economic development in countries which succumb to the above trends. At best, Eastern Europe becomes Latin America, not Western Europe or North America.

4. In Lieu of Conclusions: Is the Lithuanian Scenario About to be Repeated in Other Postcommunist Countries?

There is a growing evidence suggesting the possibility of repeating the Lithuanian scenario elsewhere in the postcommunist world. Two postcommunist parties won a decisive majority in the September 1993 parliamentary election in Poland. Whether the new left-of-the center government formed in that country will continue previous radical economic transformation, remains to be seen. According to the report of the outgoing solidarity government, after four years of transition Poland is in half-way house and change can still be "hijacked" by special interests [Tarnowski 1993; Baczynski 1993; et al.]. As outlined above, the Lithuanian precedent seems to put, at the very least, a big question mark on the ability and willingness of post communist governments to resist such temptations and continue the radical transformation benefiting society at large. Still, there is hope that governments and voters all over the postcommunist world can learn from this precedent.

5. References

Abišala, A. 1993. "Issues in the Post-Soviet Transformation in the Baltics: the Case of Lithuania". A presentation by Dr. Aleksandras Abišala, former Prime Minister of Lithuania, at the seminar at the University of Toronto, Canada, on March 2, 1993.
Baczynski, J. 1993. "Raport o stanie panstwa: w pol drogi". Polityka, No. 45.
"Dvi nuomonės". 1993. Savininkas, No. 27.
ELTA 1993. ELTA News Service of October 22, 1993.
Gineitis, A. 1993. "Politikai dar tik be liemenių, o pramonininkai — jau be kelnių". Litas, No. 43.
IMF 1993. Lithuania. IMF Economic Reviews, NO. 7.
Havrylyshyn, 0. 1993. On the Change in the Ukrainian Economy. Paper presented at the Symposium on Two Years of Ukrainian Independence, York University, Toronto, Canada, on October 8, 1993.
Peleckis, L. 1993. "Suplanuotas žemės ūkio žlugdymas". Lietuvos Aidas, October 19. 
Samonis, V. 1990. "The Blueprint for Lithuania's Economic Independence; A systemic Perspective". The European Journal of Political Economy, N. 6.
 Samonis, V. 1993a. "Economic Reforms in the Baltics: The Case of Lithuania", in: Krzysztof Tor, Editor, Privatization and Socioeconomic Policy in Central and Eastern Europe. Krakow: Krakow Academy of Economics. 
Samonis, V. and Hunyadi, Cs. 1993. Big Bang and Acceleration: models for the Postcommunist Economic Transformation. New York: Nova Science Publishers, Inc.
 Šimėnas, A. 1993. Personal Communication with Dr. Albertas Šimėnas, the first Prime Minister of Independent Lithuania, in Vilnius in June and October of 1993.
"Something has to give". 1993. The Economist, March 13. 
Tarnowski, p. 1993. "Po lewej stronie drogi". Polityka, No. 43. 
Valatka, R. 1993. "Seimo rudens sesija pradėjo šaltąjį sezoną". Lietuvos Rytas, No.178. 
The World Bank 1993. Lithuania: The Transition to a Market Economy. Washington, DC: A World Bank Country Study.