VU Researcher Identifies Three Economic Challenges for Lithuania in 2050

When observing Lithuania's trends, we should pay attention to three potential challenges: demographic changes, social inequality and green transformation, emphasised Dr Linas Tarasonis, Vice Dean of the Faculty of Economics at Vilnius University (VU), at an expert discussion on which economic models are most suitable for Lithuania by 2050.

At the exploratory workshop on the State Progress Strategy Lithuania 2050 in March, it was agreed that technological development is at the heart of all these challenges. "Partly it is technology that creates the challenges, but on the other hand, the same technology will help to solve them," the Vice Dean said.

Alarming trends in social inequality

The demographic developments show the first trend – a very sharp decline in population, noted Dr Tarasonis. According to him, Lithuania is projected to have just over 2 million inhabitants in 2050, which is 40% less than today. The VU researcher explained that the percentage of people aged 65 and over will increase in Lithuania, and in 2050 it may even be slightly higher than that of people of working age.

According to Dr Tarasonis, these trends also pose economic challenges. First, he argues, an important question is what kind of birth rate policy and what economic policies could mitigate the demographic challenges. Next, the labour market. What skills will older people need to remain in the labour market for as long as possible, and how can companies adapt in the face of major structural change? Another very important question, according to the VU researcher is what will happen with the country's pension system?

"There are three key elements here: either benefits have to fall, or contributions have to grow radically, even though they are already quite high, or the retirement age has to rise. These are open questions we need to answer," he said.

Dr Tarasonis pointed out that income inequality in Lithuania is one of the highest in Europe, exceeded only by Bulgaria. On the other hand, according to the latest data from the European Central Banks, wealth inequality in Lithuania is among the lowest in Europe.

"There are two trends, but we know that in the long run, income inequality has a significant impact on wealth inequality. So, if the situation regarding income inequality remains unchanged, we will also see a gradual increase in wealth inequality. It is an alarming trend," he explained.

One of the main factors influencing income inequality is the labour market, said Dr Tarasonis. He argues that there are several reasons for this, one of which is the polarisation of the labour market. This means that we have a labour market structure that is clustered, with some people generating high incomes and others earning low incomes.

"Economists are trying to find out where the wage gap comes from. We can see that the same people earn very different incomes depending on the company they work for, the productivity of that company and the way it uses innovation. This leads to big differences," said the VU researcher.

Will Lithuania be climate neutral by 2050?

The Vice Dean of VU also highlighted the third challenge: green transformation. According to the Seimas resolution of June 2021, Lithuania must become climate neutral by 2050. The agenda includes a shift towards innovative environmentally friendly technologies, renewable energy, carbon capture and use technologies.

Eurostat and the Bank of Lithuania estimate that greenhouse gas emissions were halved between 1990 and 2014. Recently, however, according to the Vice Dean of VU, there has been a stagnation.

In some sectors, such as waste and energy, the situation is improving, while in others, such as transport, it is getting worse. In the face of these economic challenges, Dr Tarasonis said, questions arise. One of them is: do we have an alternative to a carbon tax? And how to boost job opportunities in climate-friendly businesses?

"The other issue is the dynamics over time. Do we need to act aggressively – today and right now? Can we wait a little longer? Another very important issue is compensation mechanisms. The example of the French "yellow vests" (Gilets Jaune) shows that costs can be distributed disproportionately to society in the fight against climate change. Therefore, compensatory mechanisms need to be put in place," he suggested.

Summing up his presentation, Dr Tarasonis said that the vision of Lithuania 2050 is Lithuania as a creator of technologies that solve the challenges. He pointed out that several things should be highlighted in developing this vision. It is an ecosystem of tech development – universities, research centres, innovation companies, investment.

"My main point is that the role of the state should be very strong. Because technology per se is not necessarily good. The influence of policy makers on the direction of technological development is very important", concluded the Vice Dean.

The thematic discussions of the State Progress Strategy Lithuania 2050, which develops possible scenarios for Lithuania's future through specific themes relevant to the country's development, continue. These scenarios were outlined by experts from various fields, as well as representatives of science, business, culture and society, at a workshop on future scenarios organised by the VU and the Government Strategic Analysis Center (STRATA) in March.

Each of these scenarios also reflects six thematic dimensions that are important for the future development of the country over the next few decades, which are further analysed by experts of the particular area.

The State Progress Strategy Lithuania 2050 is being prepared using an innovative Foresight method. The planned duration for the implementation of the strategy is more than twenty years (from 2024 until 2050). The legal draft is to be submitted to the Seimas by 10 March 2023. The Lithuania 2050 Strategy is being developed by the Office of the Government in collaboration with the Seimas’ Committee for the Future, STRATA and Vilnius University.