BTI 2018 Country Report Lithuania This report is part of the Bertelsmann Stiftung’s Transformation Index (BTI) 2018. It covers the period from February 1, 2015 to January 31, 2017. The BTI assesses the transformation toward democracy and a market economy as well as the quality of political management in 129 countries. More on the BTI at http://www.bti-project.org. Please cite as follows: Bertelsmann Stiftung, BTI 2018 Country Report — Lithuania. Gütersloh: Bertelsmann Stiftung, 2018. This work is licensed under a Creative Commons Attribution 4.0 International License. Contact Bertelsmann Stiftung Carl-Bertelsmann-Strasse 256 33111 Gütersloh Germany Sabine Donner Phone +49 5241 81 81501 [email protected] Hauke Hartmann Phone +49 5241 81 81389 [email protected] Robert Schwarz Phone +49 5241 81 81402 [email protected] Sabine Steinkamp Phone +49 5241 81 81507 [email protected] BTI 2018 | Lithuania 3 Key Indicators Population M 2.9 HDI 0.848 GDP p.c., PPP $ 29966 Pop. growth1 % p.a. -1.1 HDI rank of 188 37 Gini Index 37.7 Life expectancy years 75.1 UN Education Index 0.904 Poverty3 % 2.7 Urban population % 66.5 Gender inequality2 0.121 Aid per capita $ - Sources (as of October 2017): The World Bank, World Development Indicators 2017 | UNDP, Human Development Report 2016. Footnotes: (1) Average annual growth rate. (2) Gender Inequality Index (GII). (3) Percentage of population living on less than $3.20 a day at 2011 international prices. Executive Summary Following several years of strong growth (above 3% following the 2008-2009 crisis), during the period under review Lithuania’s economy continued to grow, although at a slower pace due to the trade embargo from Russia and a temporary contraction in investment. Its macroeconomic fundamentals are in good shape with good medium-term prospects, although these will inevitably be affected by the rapidly declining and aging population in the long run. Importantly, its investment and productivity levels have not rebounded to pre-crisis levels, which are an indication of structural problems in public policies on education, innovation and labor market skills, still rather poor health outcomes and in public administration. Very little was done to address these issues during the reporting period, which coincided with the second half of the term in office of the prior center-left government. In fact, a number of indicators for human and social capital have worsened, namely, secondary education outcomes and social inequality. In summary, progress during 2015 to 2016 has been incremental, mostly due to a sluggish political drive to implement change. This is more obvious and tangible in policy areas governed or implemented by quasi-independent agencies (independent of political leadership), such as, for example, Lietuvos bankas (the central bank), the Public Procurement Office, the Special Investigation Service – SIS (the main anti-corruption institution), or by well-governed state enterprises, such as in the energy sector. During the period under review, Lithuania deepened its democratic credentials with important advancements in the openness of its courts, combating domestic violence and violence against children (though much more will be needed to make those efforts sustainable), combating corruption (prosecuting high-level corruption and lessening individual and corporate tolerance of bribery), improving attitudes toward the LGBT community and finally the first real, grassroots reconciliation efforts at addressing the legacy of the Holocaust in Lithuania. Importantly, Lithuania is maintaining its European Union anchor and commitments, both at the individual level BTI 2018 | Lithuania 4 (a continuous 60-70% of the population support EU membership since accession in 2004) and within the political system. The previous center-left government (2012-2016), led by Social Democrats, was only the second one (albeit the second in a row) to serve a full parliamentary term. There was political stability, but the diverse interests of the three governing parties meant protracted policy-making processes and few reforms. The introduction of the Euro, energy security through the liquid national gas (LNG) terminal in Klaipėda and two electricity power bridges with Sweden and Poland, respectively, were implemented in the first half of the term (i.e., during the previous reporting period). Importantly, the previous government failed to renew the much-needed social contract through modernization of the Labor Code (it caused controversy; though adopted, parts were vetoed by the president and the new government is reworking several contentious elements in early 2017). Most importantly, the previously seemingly unassailable position of the Social Democrats, who enjoyed high rates of popular support until early 2016 (presumably due to their conciliatory approach to governing the country) collapsed before the general election in October 2016. Affected by the failure of the social contract and several implied corruption scandals, the Social Democrats came in only third (with 17 seats of 141) and, for the first time, will be junior coalition partners to the governing Farmers and Greens Union of Lithuania (which won 56 seats in the Seimas). Though the new leading party has a long historical record, as well as some government experience as a junior coalition partner in 2004 to 2008, it will take effort to maintain party discipline in the parliament (due to the diverse backgrounds and policy beliefs of the members of parliament), and the policy agenda, as described in the section on strategic outlook, is very challenging. President Dalia Grybauskaitė was re-elected in 2014 for a second term until mid-2019. She is enjoying somewhat diminished, but still very high popular support. Most importantly, a significant increase in the Lithuanian population’s trust in state and political institutions as well as their satisfaction with their private lives and personal finances, observed during the previous reporting period, has been maintained and will undoubtedly contribute to the next generation of reforms, if the new government undertakes them as promised. History and Characteristics of Transformation Lacking not only the structures for transformation, but also statehood itself, Lithuania began completely anew in 1990. Occupied and annexed by the Soviet Union in the 1940s, Lithuania was a Soviet Republic for almost 50 years. Soviet rule had comprehensively reshaped the country, its resources, economy and above all, its people. Lithuanians often use the term “rebirth” to describe their return to statehood, which represented the starting point of transformation and set the goal of becoming a free and independent state within the community of European democracies. With accession to the European Union on May 1, 2004, and to NATO in March 2004, Lithuania has achieved the goals and aspirations it set in 1990. Because the creation of a democratic republic amounted to the end of foreign occupation, the change of the political system met with no BTI 2018 | Lithuania 5 opposition. The fight for independence and the founding of the new state provided a common popular basis of identity. The legitimacy of Lithuania’s democratic order is thus closely tied to the Baltic revolution and the victory of the independence movement that was supported by the vast majority of the population. Political transformation progressed smoothly with few problems. The population voted for the constitution in 1992, and in 1993, a multiparty system emerged, marking the successful end of the first phase of political transformation. The constitution provided for pluralism under the rule of law and established a Constitutional Court – a first in Lithuanian history. The political system has proven itself reliable. All actors have accepted transfers of power and the impeachment of President Paksas in 2004 demonstrated both the viability of democratic institutions and the degree to which established rules have been accepted. However, the will of the electorate itself remains subject to fluctuations. Since 1990, no government has succeeded in winning elections and staying in power (except for the Social Democratic Party, which succeeded in forming a ruling coalition for two consecutive periods, the first from 2001 to 2004 and the second from 2004 to 2008). During the Republic’s first decade, the moderately fragmented party system appeared to oppose any new challenges under the constant shifts of voter support. Since 2000, however, the situation has changed as populist parties have made striking gains, but in all instances (2000, 2004 and 2008), they were either co-opted into the governing coalitions led by the traditional parties, or (as in 2012) left at the margins of parliamentary politics. Until 2016, all the (XVI) governments were led by one of the two traditional leanings, rightwing Homeland Union/Christian Democrats of Lithuania or leftwing Social Democrats. Since late 2016, for the first time, the government is dominated by a traditional though previously small parliamentary party, the Farmers and Greens Union, which convincingly won the parliamentary elections in 2016. Though its somewhat unexpected landslide victory demonstrates voter volatility, the populist threat seems to have subsided and a broad-based reform agenda (advocated, but little implemented under the previous administrations) is likely to continue. The administrations seem to have become more stable too. Since