The Soviet era 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 1949-52 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. This changed after independence, when farm production dropped due to difficulties in restructuring the agricultural sector.

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. The road system is good. Border facilities at checkpoints with Poland were significantly improved by using EU funds, but long waits are still a frequent phenomenon. Telecommunications have improved greatly since independence as a result of heavy investment. The Telecom company had a monopoly on the market until the end of 2002, but now there are a number of cell phone companies to provide competition.

The economy of independent Lithuania had a slow start, as the process of privatization and the development of new companies slowly moved the country from a command economy toward the 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. Since the Russia crisis, the focus of Lithuania’s export markets has shifted from East to West. In 1997, exports to former Soviet states were 45% of total Lithuanian exports. Today, exports to the East are only 19% of the total, while exports to EU members and candidates are 71%. The government of 1999, which was led by Prime Minister Kubilius, managed to control raging budget deficits in the midst of the crisis, and all successor governments have maintained that fiscal discipline.

The last couple of years have been good for the Lithuanian economy. The 6.7% growth in GDP in 2002 went beyond even the most optimistic expectations, despite the slower developments in the neighboring markets after the September 11th terrorist attacks in New York and Washington, DC. The growth in Lithuania was mainly driven by private consumption and exports. The contribution of domestic market oriented sectors, especially construction, also was increasing. Growth was strongest in construction, financial intermediation, and processing and light industries. Inflation was low, the growth of the external account deficit stabilized, and the state finances improved noticeably with a fiscal deficit of 1.2% of GDP in 2002. Lithuania’s GDP grew 9% in 2003. Progress has been achieved in the areas of privatization and deregulation. Weaknesses remain in public policy development and structural and agricultural reforms.

The privatization of major state enterprises is expected to be completed in the next couple of years. Currently, 75% of the economy is in private hands. The share of employees in the private sector rose to about 70%. Recently, the Government of Lithuania completed banking sector privatization, with 89% of this sector controlled by foreign capital. The privatization of the national gas and power companies “Lietuvos Dujos” (Lithuanian Gas) and “Lietuvos Energija” (Lithuanian Energy) also is underway. However, the privatization of “Lithuanian Railways” has been postponed.

Inflationary pressures continue to be low. Annual deflation in 2002 stood at 1.0%. The deflation has been the result of sharp competition among retail trade chains and appreciation of the local currency against the U.S. dollar.

The minimum wage has not changed since June 1998 and stands at $107.50 per month, well below the poverty threshold. The average wage stands at $336.8 per month.

Exports to the United States make up 3.6% of all Lithuania’s exports, and imports from the United States comprise 1.4% of total imports to Lithuania. Foreign direct investment in Lithuania reached $3.9 billion at the end of 2002, which represented an increase of 24% compared to the previous year.

As of the end of 2002, the United States was the fifth-largest investor (8.7%) in Lithuania, behind Denmark, Sweden, Estonia, and Germany. In 2002, the current account deficit stood at 4.8% of GDP. More than 100% of it was financed by foreign direct investment.

On February 2, 2002, the government repegged the Litas from the U.S. dollar to the Euro at the rate of 3.4528 Litas for 1 Euro. The repeg, which went on smoothly, reflects a change in trade orientation and is to help Lithuania prepare for European Monetary Union. With the appreciation of local currency against the U.S. dollar, production costs to enterprises have been decreasing, but the higher exchange rate is not favorable to exports.