2009 Index of Economic Freedom

Quick Facts

Population:

• 44.1 million

GDP (PPP):

• $1.3 trillion
• 3.9% growth
• 3.3% 5-year compound annual growth
• $28649 per capita

Unemployment:

• 8.3%

Inflation (CPI):

• 2.8%

FDI Inflow:

• $20.0 billion

Spain's economic freedom score is 70.1, making its economy the 29th freest in the 2009 Index. Its score is 1 point higher than last year because of improvements in fiscal freedom and investment freedom. Spain is ranked 16th out of 43 countries in the Europe region, and its overall score is well above the world average.

Spain is notably strong in business freedom, trade freedom, investment freedom, financial freedom, property rights, and freedom from corruption. The average tariff rate is low, but non-tariff barriers still limit overall trade freedom. The government has streamlined red tape and improved licensing procedures. Foreign investment is subject to few government restrictions. Spain enjoys a modern and competitive financial system. Regulations are transparent, and domestic access to credit is more than adequate. The judiciary is independent of politics, although bureaucratic hurdles cause case resolution to remain slow.

Spain is relatively weak in fiscal freedom, government size, and labor freedom. Total government spending equals nearly 40 percent of GDP. Improving budget management is a key part of the fiscal reform agenda. The labor market remains restrictive, precluding more dynamic job growth.

Background Back to the top

Spain, which has enjoyed democratic rule only since 1977, joined the European Community in 1986. Public security has been marred by the nearly 50-year terrorist campaign of the Basque separatist movement ETA, which has claimed more than 800 lives, including a politically motivated killing during the 2008 elections. Current Prime Minister José Luis Rodríguez Zapatero won office in the wake of the al-Qaeda bombings in Madrid in 2004 and was re-elected in 2008. Many years of brisk growth characterized by strong job creation, structural reforms, and sound fiscal policy are a major part of the legacy of former Prime Minister José María Aznar’s government (1996 to 2004), and Zapatero has largely continued Aznar’s economic policies

Business Freedom 76.8 Back to the top

The overall freedom to start, operate, and close a business is relatively well protected under Spain's regulatory environment. Starting a business takes 47 days, compared to the world average of 38 days. Obtaining a business license takes less than the world average of 18 procedures. Bankruptcy proceedings are fairly easy and straightforward.

Trade Freedom 85.8 Back to the top

Spain's trade policy is the same as that of other members of the European Union. The common EU weighted average tariff rate was 2.1 percent in 2005. Non-tariff barriers reflected in EU policy include agricultural and manufacturing subsidies, import restrictions for some goods and services, market access restrictions in some services sectors, non-transparent and restrictive regulations and standards, and inconsistent customs administration across EU members. Pharmaceutical and biotechnology regulations and services market access barriers exceed EU policy, and protection of intellectual property rights can be problematic. Ten points were deducted from Spain's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 58.6 Back to the top

The top income tax rate is 43 percent, and the top corporate tax rate is 30 percent, down from 32.5 percent. Other taxes include a value-added tax (VAT), a property tax, and an inheritance tax. In the most recent year, overall tax revenue as a percentage of GDP was 37.3 percent.

Government Size 55.3 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 38.6 percent of GDP. Expenditures at the local and regional levels account for more than 75 percent of total government spending.

Monetary Freedom78.9 Back to the top

Spain is a member of the euro zone. Inflation is moderate, averaging 3.1 percent between 2005 and 2007. As a participant in the EU's Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. It also controls the prices of medicines and public transport and influences prices through regulation and state-owned enterprises and utilities. Ten points were deducted from Spain's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom80.0 Back to the top

In general, foreign and domestic investments are treated equally under the law. Foreign investment of up to 100 percent of equity is permitted in most sectors. Bureaucratic procedures have been streamlined, and much red tape has been eliminated, though permit and licensing processes can still involve delays. There are no restrictions or controls on resident or non-resident foreign exchange accounts, capital, repatriation of profits, or proceeds from invisible transactions. Current transfers must be declared to deposit institutions. The Bank of Spain requires reporting on most credit and lending activities.

Financial Freedom80.0 Back to the top

Spain's competitive and modern financial system is fully integrated into international markets. Foreign and domestic investors have adequate access to capital, and the private sector enjoys access to a wide variety of credit instruments. The financial regulatory system is transparent and consistent with international norms. All commercial banks are privately owned, and credit is allocated on market terms. The government provides subsidized financing for some activities. There are over 300 insurance companies, and over a quarter of the sector is foreign-controlled. Capital markets are well developed and open to foreign investors.

Property Rights70.0 Back to the top

The judiciary is independent in practice, but bureaucratic obstacles are significant. Contracts are secure, although enforcement is very slow. Patent, copyright, and trademark laws approximate or exceed EU levels of intellectual property protection. Enforcement actions (especially private-sector initiatives) using Spain's new IPR legal framework have greatly increased the criminal and civil actions against intellectual property pirates.

Freedom From Corruption67.0 Back to the top

Corruption is perceived as minimal. Spain ranks 25th out of 163 countries in Transparency International's Corruption Perceptions Index for 2007. Giving or accepting a bribe is a crime, and bribes are not tax-deductible for corporations or individuals. Corruption is not an obstacle to investment.

Labor Freedom48.3 Back to the top

Spain's inflexible labor regulations hinder overall employment and productivity growth. The non-salary cost of employing a worker is high, and the difficulty of firing a worker creates a disincentive for additional hiring. Regulations related to the number of work hours are rigid.