Sunday, January 21, 2007

Macedonia ranks 71st according to Heritage Foundation Index of Economic Freedom

Macedonian economy ranks 71st according to percentage of economic freedoms worldwide, the annual Heritage Foundation report reveals. According to the report, Macedonia has economic freedom index of 60,8%, which has increased for 0,2% since 2006. Hence, Macedonia now is placed in the group with moderate business-freedom.

Macedonia is ranked 32nd among 41 European countries, with an overall score lower that the European average, reads the annual "Index of Economic Freedom".

Report's assets present high level of fiscal and monetary freedom in Macedonia with low annual inflation. Personal and corporate taxes are very low, noting that total tax incomes have significant role into the Gross Domestic Product.

The renowned foundation estimates that the Macedonian Government aims at lessening its impact on the price of market goods, although the market economy has been distorted in certain fields due to state-owned businesses.

Macedonia faces many challenges, including weak freedom from government, investment freedom, property rights, and freedom from corruption. Government expenditures are high, although state-owned businesses do not account for a significant portion of total revenue. The court system is prone to corruption, political interference, and inefficiency, partially as a result of the country's political turmoil.

The index of economic freedom derives from the following ten categories: banking, influx of capital and foreign investments, monetary politics, state and fiscal burdens, revenu and prices, country's intervention in economic policy, property rights, legal regulations and existance of black market.

Business Freedom - 60.9%

Starting a business takes an average of 18 days, compared to the world average of 48 days, encouraging entrepreneurship. Obtaining a business license is relatively simple, but closing a business can be very difficult. Although the government has made some effort to establish a regulatory system to promote competitiveness, poor and inconsistent enforcement of commercial legislation remains a problem. The overall freedom to start, operate, and close a business is restricted by the national regulatory environment.

Trade Freedom- 73,4%

Macedonia's weighted average tariff rate was 3.3 percent in 2005. Import taxes, import and export quotas, import restrictions, non-transparent regulations and standards, and corruption in the customs process all add to the cost of trade. Consequently, an additional 20 percent is deducted from Macedonia's trade freedom score to account for these non-tariff barriers.

Fiscal Freedom - 90.0%

Macedonia enjoys low tax rates. The top income tax rate is 18 percent, and the top corporate tax rate is 15 percent. Other taxes include a value-added tax (VAT) and a property transfer tax. In the most recent year, overall tax revenue as a percentage of GDP was 30.8 percent.

Freedom from Government - 67.8%

Total government expenditures in Macedonia, including consumption and transfer payments, are high. In the most recent year, government spending equaled 36.1 percent of GDP, and the government received 5.5 percent of its total revenues from state-owned enterprises and government ownership of property. The government has almost completed the privatization of small and medium-sized enterprises, but this has not resulted in considerable progress toward sound corporate governance.

Monetary Freedom - 91.1%

Inflation in Macedonia is extraordinarily low, averaging 0.4 percent between 2003 and 2005. Such stable prices explain most of the monetary freedom score. Most prices are determined in the market, and the government is continuing to privatize state-owned firms, but the government still retains an influence on certain prices through state-owned enterprises and utilities, such as electricity. Consequently, an additional 5 percent is deducted from Macedonia's monetary freedom score to account for these policies.

Investment Freedom - 50.0%

Macedonia grants foreign and domestic investors equal treatment and permits non-residents to invest in domestic firms, except in arms manufacturing. Foreign investors may also acquire state-owned firms that are slated for privatization. Political instability, however, weakens the business environment. Residents may hold foreign exchange accounts with approval from the central bank, and non-residents may hold foreign exchange accounts subject to some restrictions. Payments and transfers face few controls and restrictions. Most capital and money market activities require the approval of or must be registered with the government. Residents are generally not permitted to buy real estate abroad.

Financial Freedom - 60.0%

Although Macedonia has adopted reforms aimed at strengthening the financial sector, it remains relatively weak. Supervision and regulation are insufficient. The financial system is dominated by the banking sector. Macedonia has 20 banks, 15 savings houses, and one state-owned bank. Savings banks are restricted and may not offer banking operations to companies. The private sector controls about 90 percent of banking assets. Foreign-owned banks may establish branches or representative offices and control over half of banking assets. The banking sector is highly concentrated, with three banks accounting for about 70 percent of assets. The insurance industry is small and included seven companies in 2004, the largest being the former state-owned insurer. The stock exchange is small.

Property Rights - 30.0%

Protection of property in Macedonia is weak. The executive improperly influences the judiciary. The country is slowly trying to harmonize its judicial standards with those of the EU. The lack of an effective rule of law is a crucial impediment to economic development.

Freedom from Corruption - 27.0%

Corruption is perceived as widespread. Macedonia ranks 103rd out of 158 countries in Transparency International's Corruption Perceptions Index for 2005.

Labor Freedom - 58.1%

The labor market operates under restrictive employment regulations that hinder employment and productivity growth. The non-salary cost of employing a worker is very high, but dismissing a redundant employee can be easy. Regulations related to increasing or contracting the number of work hours are rigid. In an effort to increase labor market flexibility, Macedonia's parliament passed new legislation on labor relations in 2005.

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