Lithuania and the EU: How long will it take to catch up?

  • 2004-05-27
  • By Alge Budryte
On May 1, 2004, the Euro-pean Union took in 10 new members, one of which was Lithuania. Although the increase in the number of EU members was impressive, enlargement itself doesn't seem very significant - this was the fifth time already that the EU expanded.

The biggest expansion, in both population and economic terms, took place about 30 years ago, when Great Britain, Denmark and Ireland entered what was then known as the European Economic Community. Then, in 1981, Greece decided to join the European club. Portugal and Spain followed five years later and in 1995, Sweden, Finland and Austria were accepted to what is now called the EU.
Although the recent EU expansion was welcomed with champagne and fireworks, the older members were not very enthusiastic. They are bothered by the fact that being poor, the new entrants will cost a lot of money. The mood in "old Europe" noticeably worsens when one points out that, due to the recent expansion, the number of farmers in the EU has increased dramatically. It is worth mentioning that Poland alone has almost as many farmers as the older EU members combined, or four times the population of Lithuania.
Thus, it is no wonder that net contributors to the EU, such as Germany and the Netherlands, are afraid of paying more while net receivers of EU funds, such as Portugal and Spain, are afraid that good times are coming to an end, as their money will start flowing eastward.
Other issues that older member countries are concerned with are immigration, poor border control and corruption in the new entrants. At present, "old Europe" accepts about 1.5 million immigrants from new members per year. In 2003, for example, the number of Lithuanians - 11,000 - who left the country (and a majority of them went to Europe) increased by 56 percent compared with 2002.
Some foreign analysts compare the recent EU expansion's economic challenges with those that developed when the United States signed the North American Free Trade Agreement with Mexico. Indeed, this drastic parallel is not without reason. Five of the new EU entrants possess a GDP per capita (in purchasing power parity) that is lower than half of the EU average. Lithuania, unfortunately, belongs to this group. On the other hand, Lithuania's standard of living, as measured by GDP per head, noticeably improved last year and is now higher than that of Latvia, Poland and even Estonia.
It would be wrong to conclude that joining the EU is beneficial only for the 10 new members. Older EU members can make use of not only the cheap and highly educated Eastern labor force but also the newcomers' economic vitality. Moreover, the economies of the 10 new member countries have been growing at a rate that "old Europe" has not seen for more than a decade. In terms of economic growth Lithuania is an obvious leader. Between the years of 1995 and 2003, the average growth rate of Lithuania's GDP was 1.6 percentage points higher than the average of the 10 new members and 3.1 percentage points higher than the average of the EU15.
Although EU membership does not automatically mean economic convergence, the first, at least theoretically, leads to the second. Recently, there has been much speculation as to how much time new entrants will need to catch up with existing members. Some experts claim that Lithuania's economy can make it in a little over 50 years, but this seems pessimistic. Assuming that Lithuania's economy expands at the same rate as it did last year (9 percent per year), while older EU members make no headway, less than 20 years would be enough. Since the older member countries will most likely escape economic stagnation and start experiencing moderate economic growth, a period of about 30 years looks reasonable for Lithuania.

Alge Budryte is a senior economist
at Vilniaus Bankas.