LITHUANIAN QUARTERLY JOURNAL OF ARTS AND SCIENCES
Volume 38, No.1 - Spring 1992
Editor of this issue: Robert A. Vitas, Lithuanian Research & Studies Center
Copyright © 1992 LITUANUS Foundation, Inc.
THE POLITICAL ECONOMY OF LITHUANIA
Albert Cizauskas is a retired U.S. foreign service officer and World Bank economist. He now researches and writes in the Washington, D.C. area. This article reflects his assessment as of June 1991 and was edited by Lituanus in November 1991.
Economic freedom impossible without political freedom
In the Old Testament, Israel was known as a land flowing with milk and honey. In the collapsing economy of the Soviet Union, Lithuania has been one of the few islands of relative plenty, a land flowing with milk and vodka, and much else besides, commodities much in demand in the Soviet Union, which, when smuggled, commanded a price several times their value in Lithuania itself.
How to make sense of this situation, and what does it portend for Lithuania? Can the economy support an independent nation separate from the iron grip of Gorbachev's Soviet Union? As a Soviet colony, did it give more than it received, or as Soviet economists alleged, did it get more than it gave?
To pursue these issues, let's go back to 1989, the year of the great anti-Communist revolutions. For many years, the peoples of the Soviet Bloc Poland, Czechoslovakia, Hungary, East Germany, Rumania, and Bulgaria had envied Western democracies for their market-oriented economies which operated for the welfare of the people rather than the state, and they wanted the same. But market economies cannot for long operate in politically-centralized states, and so, in one of the most astounding reversals in history, the restive peoples of these countries threw off the shackles of Communist rule in spontaneous and simultaneous uprisings.
Since the Eastern Bloc countries, nominally independent, were a heavy drain on Soviet resources, Gorbachev, a pragmatic Communist, tolerated and even facilitatedthe severance of the political-economic ties that bound them to the USSR. But he was adamantly unwilling to allow the illegally - occupied non-Russian "republics" like Lithuania to break away. The Soviet leader publicly acknowledged that he was also a doctrinaire Communist, guided by two inflexible principles: opposition to the private ownership of property and an unwavering belief in the geographic integrity of the Soviet Union. In other words, Gorbachev was determined to pre-serve the Soviet Union as a Communist state no matter what the cost. Glasnost and perestroika were intended only as pragmatic means to the doctrinaire end of achieving a more efficient Communist staten not as ends in themselves. Nowhere was this made more evident than in Lithuania.
The dark night of Communism
Lithuania too desires economic growth in a free society which the static, inward-looking, non-Western culture of Marxist-Leninism denied them so long. The New Republic has denounced the Communist system as "the most corrupting and distorting ideology of modern times." Precisely because Lithuania has been in the vanguard of a large movement throughout the Soviet Union to repudiate this corrupting ideology, Gorbachev developed an intense animosity toward its people.
Like King Canute of old, Gorbachev tried to hold back the tide of Lithuanian national unrest with bribes of economic "autonomy." But if autonomy meant "independence," then economic autonomy within the U.S.S.R. was a non-viable proposition. Oil and water do not mix and neither can political dependence and economic independence.
This was clearly demonstrated at the start of 1990 when the Soviet Parliament turned over claims to Lithuania's own land, resources, fiscal and trade policies to Vilnius.1 Only a politically independent country, however, can exercise such basic economic rights. As the Washington Post editorialized at the time, "Economic freedom is not separable from political freedom. The Soviets are now searching for a way to preserve perestroika without permitting Lithuania to secede... But there is no way."
According to one East European expert, how much regional autonomy Moscow permits at any one time is not so much a function of law as it is a variable that shifts with the political-economic needs of the center. In 1990, Lithuania was said to control its own republican budget but was required to contribute a specified sum to the overall Soviet budget. Inevitably, friction was bound to arise between a Soviet-administered fiscal and monetary policy based on the ruble and Lithuania's own tax and budget policy. Perhaps the truth was best summed up when a Lithuanian economist commented wryly: "Any time we try to take a small part of our economy into our own hands, they [the Soviet bureaucrats] say it contradicts some Soviet law."2 In other words, Moscow will give only that which strengthens the center.
Gorbachev's refusal to recognize Lithuania's political-economic sovereignty led to costly economic blockade and the explosion of violence on Bloody Sunday in January 1991. Both actions suggested the possibility of further non-peaceful measures by this year's Nobel peace laureate to resolve the Lithuanian-Soviet impasse while the West remained preoccupied with other problems. In fact, what happened in Lithuania was piecemeal violence, even as the Communist leader showed his other accommodating face to Western leaders prior to the coup attempt of August 1991.
Can the Lithuanian economy support an independent state?
Some economists, mainly Soviet, reply in the negative, citing the country's lack of natural resources. These nay-sayers for-get, however, that throughout history, freedom has acted as a catalyst releasing unsuspected reserves of national energy and initiative. Forbes, a U.S. business journal, was so impressed by the economic parallels in Lithuania between the interwar period and the situation today that it firmly answered the above question in the affirmative. Lithuania, it wrote, emerged from World War I free but economically ravaged. Still, it quickly revived by drawing on its farming and trading heritage to create a thriving export economy mostly based on agriculture (dairy and meat products). Lithuania, Forbes continued, became the most fertile and productive agricultural state in Eastern Europe with a standard of living only slightly less prosperous than Finland's. An independent Lithuania would suffer from immediate short-term dislocations as it did after World War I but, according to the journal, it would recoup rapidly.
Lending support to this view was the report by the head of a World Bank team that had recently surveyed the Soviet economy. The survey, carried out together with the International Monetary Fund and the Organization for Economic Cooperation and Development, was the first to be undertaken by Western agencies with Soviet consent. Partly of Lithuanian and Ukrainian descent, the World Bank representative admitted in a private conversation to a certain amount of favoritism but was nonetheless convinced that the relatively advanced state of the Lithuanian economy (as well as those of the other Baltic nations) vis-a-vis the Soviet Union would materially facilitate its transition to a free-market on a self-sustainable basis. He added that, for the Soviet Union as a whole, however, the economy was fast approaching ground zero. Government policies had caused enormous distortions with widespread shortages and hoarding.
It's possible that another reason Gorbachev was so adamantly opposed to Lithuanian independence was that the country had been a reliable supplier of much-needed commodities, ranging from personal computers and kitchen matches to meat, milk and even vodka. No wonder Gorbachev became hostile at the mere mention of the separation of the highly-prized Lithuanian economy from the Soviet Union.
Lithuania's Postwar Economy
Following World War II the U.S.S.R. built up a significant industrial base in Lithuania but one geared toward serving the needs of the Soviet Union. A large metals sector was established for the fabrication of products such as machine tools, precision instruments, refrigerators and washing machines. Lithuania also became a major supplier of radios, television (both black and white and color), tape-recording equipment and personal computers. Another rapidly growing sector was the chemical industry. A large refinery to process Soviet crude oil was located at Mažeikai and a nuclear power plant at Ignalina. Increased emphasis on deep-sea fishing in the Atlantic made Klaipėda a major fishing port. Lithuania's wood-working industry specialized in furniture. Woolen and silk fabrics, knitted goods, and shoes were also typical Lithuanian products.
The principal industrial centers, importing raw material from other parts of the Soviet Union, and whose output amounted to three-quarters by value of the country's industrial goods, were located at Vilnius, Klaipėda, Šiauliai and Panevėžys.
Lithuania's agriculture continued as a major economic activity. Collective state farms emphasized dairy farming and meat production, the cultivation of potatoes and other vegetables, flax, sugar beets, and fruit. Rye, barley, wheat and legumes accounted for more than 40 percent of the crop area. Vodka and beer were produced in large quantities.
Lithuania is said to possess a large network of railroads which handle 90 percent of its freight, and a highway system for short hauls. Water traffic on the lower Nemunas is of secondary import. Beach resorts, chiefly at Palanga on the Baltic, attracted many holiday seekers, including Russians.
The above sounds like a varied and successful economy. Much of it did succeed by Soviet standards, and Lithuania's goods were valued throughout the Soviet Union for their superior quality. But superior is a relative term. Substandard goods were often produced in large quantities simply to fulfill unrealistic Plan norms; Soviet bureaucrats paid little attention to consumer needs; management techniques were inefficient and wasteful; prices, controlled by the state, were a function of ideology rather than real costs; and the nation's economy was isolated from the competitive thrust of Western technology.
A realistic assessment of the economic Sovietization of Lithuania must also take into account the deterioration of the country's ecology and the neglect of its infrastructure, including the transportation system. These serious deficiencies will have to be addressed by the independent national economy, imposing further heavy sacrifices upon an already suffering population. But without radical economic reform, painful as its costs might be, economic chaos will be the only alternative with far greater, incalculable costs.
Life and statistics in a Communist country
Detailed information on the state of the Lithuanian economy was hard to come by. Even a request to Lithuanian authorities went unanswered. However, Tiesa (Truth), the organ of the Lithuanian Communist Party, published a lengthy summary of the country's economic and social conditions during 1989. Taking into account the ideological bias of its source, the report still provides a revealing glimpse into the Lithuanian economy before Parliament reaffirmed Lithuanian independence on 11 March 1990.
The basic indicator of a nation's economy is the Gross National Product or GNP (the money value of the annual flow of goods and services) because it summarizes in one statistic the economic performance of the entire economy. There are several problems with the Communist application of this Western GNP concept, however. One is that transactions at every phase of the productive process are counted, instead of at the end of the process as in the West. Not only does this Marxist practice over-record the real value of output, but official Soviet statistics also under-report inflation and hence, once again, over-report the value of output. Because of these and other difficulties, Soviet statistics should be accepted with caution, the user keeping in mind their noncomparability with Western macroeconomic reporting. One Lithuanian economist even went so far as to say that that Tiesa report is in large part an exercise in concealment. Nevertheless, perhaps unwittingly, the report reveals even as it conceals. Or perhaps, as someone said of another country's statistics, Communist date are like a bikini. What they reveal is interesting, but what they conceal is vital.
The Tiesa report is lengthy and only a brief sampling is presented below. A note of caution is due the reader, however. The report employs technical and socialist vocabulary so that the writer cannot guarantee his translations and interpretations as necessarily correct.
Tiesa credits the Lithuanian economyin 1989 with a GNP slightly more than 3 percent higher than that of the previous year, a modestly good achievement. We are not, however, given the money value of this product nor are we informed at the outset whether allowance has been made for price changes from one year to the next to arrive at some semblance of the "real value" of the reported 3 percent differential. If, for instance, the GNP experienced a negative growth in 1988, then the 3 percent increase in 1989 might only measure a lower rate of decline.
Curiously buried under a mass of numbing statistics are two statements dealing with this very problem. One is that the GNP growth of 3 percent in 1989 was given in "real terms" ("faktinėmis kainomis"), and the other that the ruble lost 10 percent of its value in 1989, (that is the ruble underwent an inflation of 10 percent). Why these two statements, crucial to an understanding of the Tiesa report, were not given more prominence is puzzling. But if they mean what they purport to say, then the compilers of the report are telling us that the Lithuanian economy in 1989 grew at the high rate of 13 percent in current money terms (10 percent inflation plus 3 percent real growth).
Prices in a controlled economy, however, are set by the state for reasons other than real costs, generally for political and ideological considerations. Even the former Soviet Prime Minister, Nicolai Ryzkov, ridiculed the Soviet pricing system as a "kingdom of distorting mirrors." In addition, the many subsidies implicit in a socialized economy make it virtually impossible to arrive at an acceptable notion of "real costs" and "real prices." On top of this, consumer prices are only one of several indices used to measure real changes in an economy.
Since to try to resolve the issue of real growth under these circumstances would be analogous to the medieval debate about how many angels can stand on the head of a needle, it's best, for our purpose, simply to note that the Lithuanian economy is said to have grown 3 percent in 1989 in an atmosphere of sharp inflationary pressures. These pressures undoubtedly increased in 1990 with the economic blockade and the worsening political situation. How much may be gauged from the attempt by the former Lithuanian Prime Minister, Kazimiera Prunskienė, to raise consumer prices 300 percent in 1990, a startling recommendation which led to her resignation.
In early January 1991, the Financial Times of London reported that Lithuanian economists feared the onset of run-away inflation. According to the same journal, the Baltic republics and Moscow were waging a price war, escalating the goods shipped to each other. Actions such as these contributed to heating up an inflation that is now said to be almost out of control throughout the Soviet Union.
To discourage hoarding and black marketeering, Gorbachev raised prices at the beginning of April 1991 on half of the food and consumer goods sold in state-run stores by as much as 250 to 1,000 percent, according to an Associated Press report. Illegal trading is said to account for half of the Soviet economy and, some economists maintain, its more efficient half. So long as prices are controlled, however, no matter how high the levels, experience shows that the black market quickly adjusts upwards so that the Soviet economy will re-main stalled between the rock of inflation and the hard place of dwindling supplies. In the meantime, the deluge of Soviet inflation, unfortunately, flooded Lithuania as well.
The Lithuanian economy employed 1.9 million persons in 1989, slightly over half the country's 3.7 million inhabitants, a figure virtually unchanged from that of the previous year. Lithuania's socialized sector accounted for the lion's share of the labor force with 1.6 million, a figure marginally below that of 1988. Tiesa attributes the slight loss to the small but fast-growing private sector where employment quadrupled during 1989. Evidently, the camel of private enterprise was vigorously poking its nose into Lithuania's socialized tent.
The average earnings of a Lithuanian worker amounted to 241 rubles monthly, 18 rubles higher than the previous year but not enough to compensate for the 10 percent price inflation. Average earnings in the tiny private sector, which were not given in absolute terms, reportedly jumped by about four times their previous year's levels. These figures are difficult to translate into U.S. dollar terms due to the eroding value of the ruble, which some allege was, as of mid-1991, selling for over 30 to the dollar on the black market. To complicate matters even further, one must throw into the equation the indeterminate value of the many subsidized commodities and services provided under cost by the socialized state.
Milk, meat and vodka
Lithuania's food industry is both varied and substantial, its output in 1989 marginally higher than the year before. The data, at times in absolute terms, and at times in percentage figures, appear to suggest that the food supply was ample both for domestic consumption as well as export. A growing proportion, however, was diverted into the black market for smuggling to Soviet cities where widespread shortages commanded premium prices for Lithuanian produce. This, of course, had a negative effect upon availability in the Lithuanian market.
Milk and meat products (mostly butter and cheese) were by far the leading agricultural commodities, amounting to almost one-third by value of all processed food products. Other important staples were meat, vegetables and fruit, and bread. While meat output declined slightly, availability was still quite high, at a reported six pounds per person per week of which about 10 percent consisted of Lithuanian sausage, dešra. Also produced at a weekly per capita rate were four pounds of vegetables, three pounds of fruit, a half-dozen eggs, and over seven pounds of Lithuanian bread. In addition, fresh fish catches came to some 280,000 metric tons, eight percent below the government's Plan target, but more than enough to add variety to the diet.
In the unprocessed agricultural sector, grain output in 1989 came to 3.3 million tons (tonnage is metric in this report), up by 10 percent from the harvests of the previous year. Potato output was slightly higher (1.9 million tons), sugar beets much higher by 25 percent (1.1 million tons) and flax fiber up by 14 percent (15,000 tons).
The livestock situation was also satisfactory: 2.4 million head of cattle of which 850,000 were cows; 2.7 million pigs; and 80 million poultry.
Overall, Tiesa observed that farm productivity on state and communal farms was declining, but was more than made up on private plots.
One further sector deserves mention. Listed under processed foods, cigarette manufacture fell six percent, but a big surprise was that liquor ("dektinė ir likoris") jumped by a whopping 24 percent, with beer flowing at a distant but still decent eight percent more than in the previous year. Perhaps the heavy rise in alcoholic beverage output may have been due to demand inflated by the tensions gripping Lithuanian society during the revolutionary year of 1989. Some of the vastly increased output may also have been shipped to relieve the average Russian's proverbial thirst. Tiesa had no comment other than a terse observation that the surge in liquor was "unanticipated." No data were given in absolute terms.
Wide swings in output of a highly diversified industrial sector were evident in 1989. Thus, the manufacture of home refrigerators rose only slightly, whereas vacuum cleaners rose by 12 percent. Black and white TV sets fell six percent but colored TV vaulted upwards by 34 percent. Output of bicycles plunged 10 percent but furniture-making rose six percent.
Other sub-sectors were fine porcelain, down by 10 percent, glass and crystal unchanged, toilet and laundry soap up by five percent but the vitally important area of paper and paper products down by five percent, possibly affecting the printing of newspapers and journals.
Construction of "Sodo Nameliai," or garden cottages (which began as simple sheds on weekend farmers' plots), experienced one of the highest increases of all items in the report, 38 percent. On the other hand, construction of homes, apartments and commercial buildings fell seven percent below Plan targets. Tiesa did not elaborate.
For unexplained reasons, no figures were reported for certain items, except that production was said to be lower than central planners had anticipated. Among these were folding bicycles, personal computers and motorcycles.
This sector included clothing, shoes, hosiery and underwear as major items. On the whole, output rose by four percent/ but again with sharp variations. For instance, silken goods shot up by 22 percent whereas cotton goods fell 16 percent.
Who owes whom?
A major gap in Tiesa's report is the lack of information on Lithuania's foreign and intra-Soviet trade. The Wharton Econometrics Forecasting Association (WEFA) in Washington kindly made available Soviet data on such trade as amended by the Association. The data were mostly for 1988, were aggregative, lacked foreign country destinations, and were given largely in percentage terms, all of which limited their usefulness. Still they provided enough information to give the user a hint of Lithuania's export capability.
Even though Lithuania's 3.7 million population ranked tenth among the Soviet Union's 15 republics and comprised 1.2 percent of the Union's 289 million population as of mid -1989, the country occupied sixth place as importer, and seventh as exporter. Its negative trade balance for 1988 was shown as 1.6 million rubles, or three percent of the Soviet total.
Lithuania in 1988, according to WEFA, was the fifth largest supplier of meat and dairy products to the other Soviet republics. The value of Lithuanian food exports, however, would be higher were it not that data on such exports are skewed downwards in intra-Soviet trade because of the substantial U.S.S.R. subsidies to keep food prices artificially low for Soviet consumers.
What seems surprising at first is that Lithuanian industrial goods made up about three-quarters by value of exports to foreign and intra-Soviet destinations. This, however, was partly the result of the Soviet emphasis on industry, and, as mentioned above, of under-reporting the value of food shipments.
As for imports, Lithuania purchased large quantities of coal, metals, minerals, fertilizers and natural gas, mostly from other regions in the Soviet Union, raw materials needed in great part to operate Soviet-built industries for the benefit of the Soviets.
Lithuanian economists contend there was serious under-reporting of the value of industrial products as well. For example, a large oil refinery at Mažeikiai processes 12 million tons annually of Soviet crude, and exports 1.4 million tons of gasoline, 1.8 million tons of diesel fuel, and one million tons of jet fuel, for which Lithuania was said to be underpaid for the finished product and overcharged for the crude.
In addition to the vagaries of Soviet pricing, a thriving black marked absorbed a considerable quantity of Lithuanian trade which of course was not reflected in Soviet statistics. All these factors served to minimize Lithuania's officially reported trading position vis-a-vis the Soviet Union. There is little doubt that, with independence, more objective reporting shall reveal a trading relationship closer to parity between the two countries.
A highly significant point made by WEFA is that, on a per capita basis, the largest exporters and importers were the Baltic countries. This finding by an objective source suggests that the Baltic countries had developed a higher level of productivity and economic growth, even under Communist mismanagement, than elsewhere in the Soviet Union. Significantly, productivity is an essential measure of a country's ability to support itself.
Soviet economists are prone to raise the question, "Who Owes Whom?" to intimate that Lithuania's negative trade balance, as reported by the Soviet Union, and supposed lack of natural resources, argue for a structural inability to pay its own way. This point of view, however, ignores the Soviets' distorted trade reporting and other abnormalities of the Soviet system. It also ignores the character of the Lithuanian people, the most precious resource of all, who are industrious, intelligent, and able to adjust to changing circumstances.
The pejorative implication in the question "Who Owes Whom?" may be turned around by asking "Who Feeds Whom?" The five leading food exporters to the U.S.S.R. as a whole were the Ukraine, Georgia, Moldavia, Latvia and Lithuania, all of which have opted for independence and upon which the Soviets depended heavily for their food supply.3
The question is not whether Lithuania will maintain ties with the U.S.S.R. now that complete independence has been attained. There will always be economic ties due to geographic proximity and complementary needs, i.e. Lithuanian food in exchange for Soviet oil. The question, rather, is whether these ties will be exercised on a voluntary basis between two sovereign states.
With independence, the aging and inefficient Soviet-built industrial complex in Lithuania requires substantial modernization and perhaps even some dismantling. But Lithuania's strong agricultural position, plus interim financial aid from the West, should provide the support needed to make the transition from socialism to a free market economy. Also indispensable would be the willingness of the people to shoulder heavy initial burdens. A Common Market with the other Baltic states (elimination of tariffs among the three and an identical tariff with other nations) is an objective which the three are said to be striving for. The melding of the three economies would create a strong trading unit, the fourth largest (in terms of 1988 exports), behind only Russia, the Ukraine, and Byelorussia.
Without independence, Lithuania's mixed economy would have continued to deteriorate, remaining vulnerable to irrational acts by the Soviet Union such as the economic blockade in 1990. Yet, despite the official lifting of the blockade after two and a half months, stoppages continued on a sporadic basis. As a result, we can surmise that Lithuania's 1990 economy declined substantially. Worse still, the blockade-induced shortage of feed grain, which comes mostly from other points in the Soviet Union, led to cutbacks in livestock both for the domestic and Soviet markets as well. This very shortfall in Lithuanian food production, brought about by deliberate Soviet behavior, aggravated a crisis within the food-short Soviet Union which the United States and other Western nations are helping to alleviate with agricultural credits. In this sense, the West helped subsidize Gorbachev's repressive tactics in Lithuania.
Through the cracks of Tiesa's statistic-laden report, the reader could glimpse a people nervous and uncertain about the future, as they watched the anti-Communist wave washing over the former Eastern Bloc and speculated about Gorbachev's intentions toward their own country. One could almost sense a spirit of "Carpe Diem," seizing the moment, as Lithuanians consumed substantially more alcohol, and bought more silken goods, color TV sets and weekend retreats. Fortunately, their worst fears were not realized.
1 Business Week, 11 December 1989, p. 74.
2 Laima Andrikienė, as quoted in The New York Times, 11 February 1990.
3 The reader may have noticed a seeming contradiction in the suspected over-reporting of Lithuania's GNP and the under-reporting of its exports. Here we must recall that Soviet statistics are not meant to be factually objective but are primarily intended to serve a political purpose. Thus it is good for Moscow to show that the Lithuanian economy was progressing, but it is also good to show that Lithuania was heavily dependent on Soviet resources.
Announcement: Book Publication News
Second edition January 1992; Van Reenan, Antanas J.; Lithuanian Diaspora: Königsberg to Chicago; Lanham Maryland: University Press of America; paperback edition, $24.50; hard cover edition $51.50; includes bibliographical references and indexes. 1. Lithuanian AmericansIllinois-Chicago-cultural assimilation. 2. Lithuanian Americans-Illinois-Chicago-ethnic identity. 3. Chicago (III.)-Emigration and immigration history-20th century; I. Title. (First edition appeared November 1990.)