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European Economic Integration: Benefits and Challenges for Lithuania

“European Economic Integration: Benefits and Challenges for Lithuania”
by Petras Austrevicius, Director General of the European Committee
under the Government of the Republic of Lithuania

at the Seventh annual international scientific conference “Innovation Changes in Economics and Management under the Process of European Globalization”

September 25, 2003

Mr. Chairman,

Mr. Rector,

Distinguished Professors and Academic Staff,

Ladies and Gentlemen,

I am very pleased to welcome you at the annual international scientific conference of Vytautas Magnus University. The reason for my excitement is not only for it is already the seventh conference, but also because it has a strong European dimension. It deals with innovations in economy and management, i.e. a topic that is of major importance not only for Lithuania, but also for the enlarged European Union and for the entire world.

Europe and innovation. Today, the name of the old continent is not necessarily associated with the top leadership in research and development or new business practices on the global scale. In 1999 (the latest available figures), total US expenditure on research and development at 2,6% of GDP was over a third higher than that of the EU. Total expenditure on tertiary education in the EU-15 (by terms of share of the GDP) was only half of the US level. However, it will be no secret if I tell that Europe has an ambition for change. The direction for this change has been set by the Lisbon process: the EU has an ambition to become the most dynamic, competitive and sustainable knowledge-based economy by 2010.

Discussions on European economic integration date from more than 50 years ago, and still there is no unique concept or definition explaining this phenomenon. A number of authors define it as a progressive removal of economic frontiers between the member states. Others tend to explain it as a European response to the globalisation. Economic integration can also be perceived as a voluntary process of increasing interdependence of economies, starting with a free trade area and ending with the Economic and Monetary Union. At no doubt, the European Union is already beyond this definition: it has a customs union, common commercial policy, the single market; it has its own currency – the Euro - and it is at the last stage in the discussions on its Constitution. This is an obvious example how the demands for economic integration inevitably lead to growing political integration.

European Union is a unique project. If you follow the debates throughout Europe, you might have noticed that the discussions today are not only about delegating new powers to the supranational institutions, but also on possibility to review certain common policies. The EU is a two-way highway and it is a task for every member state to decide which way and how far to drive and agree the common rules with the other members. This is what is going to be discussed at the Intergovernmental Conference that is to start next week in Rome, where the acceding countries will participate as equal members in all the proceedings.

However, I would like to leave aside these charming arguments about Europe's future architecture and concentrate mainly on the innovation, competitiveness and construction of knowledge based economy as suggested by the topic of the conference. Lithuania’s goal in this process is twofold: first, integration and cohesion with the rest of the EU; second, competitiveness on the world scale, i.e. contribution to the implementation of Lisbon objectives.

Both tasks are equally challenging and important. Today, Lithuania’s GDP per capita (figures for 2002) constitutes 39% of the EU average, just like Poland. The space for the catch-up is immense. But the preconditions have already been set up. Modern Lithuania offers the same regulatory framework as any EU member state. The operational environment and business related infrastructure is rapidly approaching the EU standards. In certain sectors, the acceding countries have taken over certain Member States in their performance. The main key for success, however, is to be innovative. This means focussing not on traditional but on new and fast-growing sectors and finding suitable niche in the Single Market.

Integration to the EU has significantly contributed to achieving these objectives. The last decade witnessed the diversification of exports from both geographical and sectoral point of view. Some new specialisation has emerged. Along with textiles, refined oil products, foodstuffs, chemicals, such sectors like electronics are taking advantage of increasing economic integration. Increasing competitiveness is reflected by growing importance of international trade, which today comprises 96% of Lithuania’s GDP. The development of the service sector increased the role of financial intermediation, communications, wholesale and retail trade as well as transportation. Since 1999, the faster growth of labour productivity compared to that of wages has become one of the factors determining the growth of competitiveness.

An important contribution in taking over new management techniques and innovative business solutions has been brought by the foreign direct investment, around 60% of which originated in the EU member states. With the pegging of the Litas to the Euro, the conditions of economic relations and trade with the EU have become more stable and predictable. Current Lithuanian trade with the EU, the EFTA and the acceding countries amounts to around 70 percent of total Lithuanian exports. This means that more than 2/3 of Lithuanian exports is carried out under stable conditions with settlements in the Euro.

However, there are many tasks which still have to be achieved if Lithuania is to succeed in making significant contribution to the Lisbon process. Lisbon has outlined a clear framework of economic development and reforms, showing a way of combining national strategies with the European responsibilities. The most important elements of the Lisbon agenda being economic competitiveness, knowledge-based economy and safe society in terms of physical, legal and social aspects, there is much space in improving such factors of productivity like investment in R&D, innovations and human capital, development of knowledge society. The rate of participation in life-long learning in Lithuania (as a percentage of 25-64 years age class) is still below the average of the candidate and acceding countries (3,7% vs. 5,4% for the CC-13 and 8,5% for the EU-15). Both public and private spending (as a proportion to GDP) on research and development is lower than for the EU-15 and (with the exception of the public R&D investment) inferior to the CC-13 average. The national science system and business community are still not effectively integrated with each other. The bulk of investment (88%) in the sector is done by public funds and only the minority of the enterprises develop new technologies in co-operation with public research institutions.

The result is obvious: the number of EPO (European Patent Office) applications per million population in Lithuania is the smallest among the acceding countries and practically incomparable to the EU-15. Even the number of articles published in scientific periodicals per researcher is just a tenth of the average in highly developed countries. However, the EU accession has already significantly contributed to the revival of the research and development community. Both business and scientific community are availing themselves of the EU funding and partnership opportunities. Lithuania's success rate in the EU's 5th Framework programme (28% successful applications out of 470 projects submitted as of April 2002) is a high rate compared with the other accession countries. Since 2000, Lithuanian research and higher education institutions have participated (and still continue to do so) in over 50 projects under the COST (European Co-operation in the field of Scientific and Technical Research) programme and they are becoming increasingly active in EUREKA projects.

Additional impetus to intensify the application of new technological solutions and organisational initiatives in enterprises has been provided by the mid-term Innovation in Business Programme approved by the Government. A new framework for successful cluster development, technology transfer and commercialisation of research has emerged with the creation of science and technology parks: at the moment there are 6 science and technology parks operating in Vilnius, Kaunas, Klaipėda and Šiauliai. 2 innovation centres, 7 business incubators and 20 business information centres are spread throughout the country.

Lisbon objectives call for the policy review not only in the accession countries, but in the EU as a whole. This summer, the European Commission outlined a comprehensive package of financial and regulatory measures to boost investment in transeuropean networks and major research and development projects. This “Initiative for Growth” calls for the governments to redirect their expenditure towards growth-enhancing investment and to seek a higher leverage from private investment in the circumstances of current economic slowdown throughout the EU-15. It also calls for the Community funding to become more focused on high priority projects and the European Investment Bank to provide support with the necessary instruments to accompany this effort. Similar ideas and related suggestions have been expressed by the Italian Presidency (“European action for growth”) as well as France and Germany, which came up with a 10-point list of infrastructure development projects designed to boost European growth. In contrast to the usual emphasis on traditional infrastructure, the Franco-German plan would include developing digital television, radio and broadband networks, and further developing the Galileo satellite navigation system.

The people and businesses of Lithuania have shown a remarkable capacity to transform national economy and this is a good sign that they will contribute to the construction of a more innovative Europe. One can observe an increasing weight of high-skilled labour (if measured by labour skill type) in Lithuanian industries. It is obvious, that in a long term the future of the acceding countries should not lie in becoming the low-cost production sites for the EU economy. Of course, this will require significant adaptation costs, political and economic sacrifices, but at the end of the day, it will open window to greater opportunities for the economy. This has been recognised by signing the National Agreement on Economic and Social Progress last year. According to the Irish example, the political parties, business associations, professional and non-governmental associations agreed on joining their efforts to create a competitive knowledge-based economy, match education and science system with the needs of knowledge society and European Research Area, overcome poverty and social exclusion, restructure rural areas and the entire mode of public governance.

So how bright is the future? According to the global competitiveness index calculated by the World Economic Forum, Lithuania today ranks as the 49th country among the 75 nations in its ability to compete on a global scale. The prediction is that if the current policies are kept, Lithuania's likely future competitiveness (Growth Competitiveness Index) would increase by 6 positions to the 43rd place. It is estimated that the European integration contributes by 1,14% annually to Lithuania's GDP growth. The most significant share of the benefits due to European economic integration during the period 2002-2009 is expected in manufacturing industry (18,6 bill. Litas), wholesale and retail trade (9 bill. Litas), agriculture (7 bill. Litas), construction (3.8 bill. Litas), transport and communications (3.4 bill. Litas) and energy (3.1 bill. Litas). However, the real challenges are ahead to make the estimations true: to rethink the corporate strategy in the EU context, to take advantage of the opportunities of the Common Market, to absorb the supply of the Structural and Cohesion funds, and increase the competitiveness of the national economy.

Ladies and Gentlemen,

Globalisation today has become a reality. The increasingly international character of markets and production has intensified competition. Increased competition and technological development is a challenge both for the industry and scientific community. This challenge turns us into a dynamic society striving to create a dynamic knowledge economy as outlined in the Lisbon objectives. I am sure we all see it not only as a challenge, but also as a window of opportunity. A window to the future that we are able to open not only to ourselves, but to the EU as a whole.

Let me wish that today's and tomorrow's proceedings contribute to the achievement of this goal by turning it into a "win-win" game for all of us - business, scientific and research community, public institutions and all the consumers throughout the enlarged Union.

Thank you for your attention.

Author: Petras Austrevicius


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