Executive Summary

Formal democracy well developed, but substantive weaknesses remain
Formal democracy is well developed in Lithuania. Participation rights, electoral competition and the rule of law are generally respected by the Lithuanian authorities. However, substantive democracy suffers from several weaknesses. Despite some recent improvements, party financing is not sufficiently monitored or audited, and campaign-financing legislation is not subject to adequate enforcement. In addition, discrimination continues to be evident, sometimes significantly so. Most importantly, corruption is not sufficiently contained in Lithuania. Anti-corruption legislation is well developed, but the public sector continues to offer opportunities for abuses of power and the enforcement of anti-corruption laws remains insufficient.
Social policies trail economic outcomes
Lithuanian policymakers have sought to establish and maintain social, economic and environmental conditions that promote citizens’ well-being. However, the country’s policy performance remains mixed, with social-policy results lagging behind those of economic and environmental policies. Some observers attribute this to EU transition and integration processes, which have primarily focused on political, economic and administrative issues. The country’s formal governance arrangements are well designed. However, these arrangements do not always function to their full potential. There are significant gaps in policy implementation and the use of impact-assessment processes for important policy decisions, while societal consultation remains underdeveloped. Across most sustainable governance criteria, little has changed during the review period.
New coalition becomes minority government
The establishment of a new coalition government was the most significant development during the review period. The Lithuanian Farmers and Greens Union won 56 out of 141 seats, and became the largest parliamentary party, although many of its faction members are not party members. The union is jointly led by Ramūnas Karbauskis, an industrial farmer and large landowner, and Saulius Skvernelis, a former police chief and interior minister in the 2012 to 2016 government. In December 2016, the Lithuanian Farmers and Greens Union, and the Social Democratic Party of Lithuania formed a coalition government with a parliamentary majority of 73 out of 141 parliamentary seats. However, in autumn 2017, the coalition became a minority government following the break-up of the Social Democratic Party of Lithuania.
Technocratic governing style. Numerous reforms still in development
During the election campaign the Lithuanian Farmers and Greens pledged to form a technocratic government. Consequently, only one out of 14 initial government ministers was a member of the union, while two ministers were members of the Social Democratic Party of Lithuania and 11 ministers were officially independent. Saulius Skvernelis led the Lithuanian Farmers and Greens Union during the election campaign, but without formally joining the party. Skvernelis subsequently became the new prime minister. Despite this arrangement, a few elected politicians from the Lithuanian Farmers and Greens Union have announced government policy pledges, which include introducing a state monopoly on alcohol sales, establishing a state-owned bank and transferring social-security contributions from second-pillar private pension funds to the state social security fund. However, the new government program, approved in December 2016, failed to substantiate several of these pledges. In its first year, the main policy decisions adopted by the new government included reform of the state-owned forestry companies, largely motivated and legitimized by the need to implement OECD recommendations required to join the organization, and the revised Labor Code. Considerable attention was also allocated to measures to reduce the availability of alcohol. However, many other reforms that were included in the government program (e.g., higher education, public administration, tax and pension reforms) are still in the preparatory stages of development, while reform of the forestry companies is likely to experience substantial resistance during the process of implementation. It should be noted that other state-owned enterprises like Lithuanian Railways, which have long been suspected of non-transparent practices, have also been reformed. The introduction of these reforms can be attributed to the skilled leadership of Rokas Masiulis, minister of transport and formerly minister of energy in the previous government, the prime minister and the president, and the ability of government to undertake reforms without the need for parliamentary approval.
Growth recovers after drop in exports
In terms of economic development, the economy continued to perform positively through 2015 and 2016. After the shock of the 2008 financial and economic crises, the economy returned to growth in 2010 following fiscal consolidation, a recovery in the global economy and increasing domestic demand. Lithuania has since numbered among the fastest-growing economies in the European Union with real GDP growth around 3%, despite the negative effects of sanctions imposed by Russia on exports from the European Union. Though the economic growth rate dropped to 1.7% in 2015 due to a drop in exports to Russia, economic activity picked up in 2016 reaching 2.3% growth and is projected to increase to 3.8% in 2017. However, inflation has become a major public concern.
Labor-market outcomes improving. New model liberalizes labor
In 2016, labor market outcomes improved due to economic growth and a declining working-age population. Unemployment decreased from 10.7% in 2014 to 8.1% in 2016 and is projected to decline further. The two main issues affecting the labor market are the mismatch between the supply of and demand for skilled labor, and the decreasing pool of labor due to emigration and declining numbers of graduates entering the labor market. However, despite these changes, unemployment rates remain high among low-skilled workers and the number of people at risk of social exclusion remains high. The share of the population at risk of poverty or social exclusion declined from 30.8% in 2013 to 27.3% in 2014, but increased to 29.3% in 2015. Moreover, the country continues to compare relatively poorly in terms of life expectancy at birth. A low birthrate, emigration to richer EU member states and relatively low immigration continue to present significant demographic challenges. These demographic challenges are likely to negatively affect economic growth and the pension system, and increase pressure to restructure the education, health care and public administration systems. In 2016, the parliament approved a new “social model,” which provides for the liberalization of labor market relations and the development of a more sustainable state social-insurance system. Implementation of the new social model began in mid-2017 after the new government revised the initial proposal to better balance labor market flexibility and employee protections.
OECD plans driving regulatory reform
Under the 2012 to 2016 and current governments, there was significant continuity in the country’s governance arrangements, although meetings of the State Progress Council and the Sunset Commission were discontinued in 2016. Overall, executive capacity and accountability have remained largely similar. Lithuania continued its preparations for joining the OECD, which has been the main motivating factor behind reforms to state-owned enterprises and regulatory policies. Another related positive development is the depoliticization of executive civil service appointments and the professionalization of management in state-owned enterprises. However, power and authority remain centralized. Citizens and other external stakeholders rarely engage in the processes of government. Despite numerous electoral pledges to undertake cost-benefit analyses, most major reforms are not accompanied by substantive impact assessments and stakeholder consultations. In particular, the initiatives of members of parliament continue to be poorly prepared and lack proper impact assessments.
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