2009 Index of Economic Freedom

Quick Facts

Population:

• 26.7 million

GDP (PPP):

• $17.2 billion
• 6.1% growth
• $644 per capita

Unemployment:

• 40.0%

Inflation (CPI):

• 13.0%

FDI Inflow:

• $2.1 million

This year, Afghanistan is covered in the Index of Economic Freedom for the first time. However, its level of economic freedom cannot be scored because sufficient reliable data are not available. The country will receive an economic freedom score and ranking in future editions as more information becomes available.

Afghanistan has undergone substantial political, economic, and social transformation since the fall of the Taliban regime in late 2001, and its economy is growing at a fast pace. The construction sector has been a principal factor in this rapid growth because of its close link to infrastructure and housing development under the country's economic reconstruction process. The opium trade remains a large part of economic activity, with Afghanistan accounting for about 90 percent of global opium production in 2007.

Background Back to the top

Afghanistan, a democracy, is one of the world's poorest countries. After an American led coalition ousted the Taliban government in 2001, a U.N.-sponsored conference established a framework that led to a new constitution and successful elections for a president and parliament in 2004 and 2005, respectively. GDP grew significantly in 2007, largely as a result of foreign aid, but Afghanistan's economy remains hobbled by poor infrastructure, a Taliban insurgency, and the government's inability to extend the rule of law to many rural areas. The economic dominance of illegal opium production is a major impediment to sustainable development.

Business Freedom Not Graded Back to the top

The overall freedom to start, operate, and close a business is constrained by Afghanistan's regulatory environment. Starting a business and obtaining a business license are relatively easy, but other structural barriers discourage entrepreneurial initiatives. Business reform programs are in progress, but regulatory systems are inconsistent, and the legal framework is too inadequate and weak to spark sustainable business activity.

Trade Freedom Not Graded Back to the top

Afghanistan's weighted average tariff rate in 2007 was 5.9 percent. Inefficient and cumbersome customs administration, inadequate trade and physical infrastructure, undeveloped regulatory administration, and corruption can delay trade and increase costs. If Afghanistan were being graded, 15 points would be deducted from its trade freedom score to account for non-tariff barriers.

Fiscal Freedom Not Graded Back to the top

Afghanistan has moderate tax rates. Both the top income tax rate and the top corporate tax rate are 20 percent. Other taxes include a sales tax that ranges from 2 percent to 5 percent. In the most recent year, overall tax revenue as a percentage of GDP was 6.4 percent. The tax system has become somewhat simpler and more transparent, and major tax reforms are scheduled for coming years.

Government Size Not Graded Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 11.6 percent of GDP. Restructuring of state-owned enterprises has been slow and uneven. State officials seem reluctant to disengage from economic activity. Legislation to cultivate an economic environment friendly to the private sector has been held up in Parliament, and commercial laws to lay the foundation for further privatization have yet to be implemented.

Monetary FreedomNot Graded Back to the top

Inflation is high, averaging 11.0 percent between 2005 and 2007. Price controls exist in major cities, and controls on prices of eggs, milk, cheese, bread, meat, fruits, and vegetables vary by municipality. If Afghanistan were being graded, 15 points would be deducted from its monetary freedom score to adjust for price-control measures.

Investment FreedomNot Graded Back to the top

Foreign and domestic firms are treated equally under the law, but foreign investment in utilities, airports, health and education services, and natural resources is subject to special scrutiny. Foreign investors may not own land but may lease parcels for up to 50 years. Foreigners may own 100 percent of a company, and there are no capital or currency controls. The state can expropriate an investment or asset for the purpose of public interest and on a non-discriminatory basis. No seizures of foreign-owned assets have been reported. Investment is discouraged by inadequate regulations, corruption, inefficient bureaucracy, and the slow pace of privatization of the many state-owned enterprises.

Financial FreedomNot Graded Back to the top

The expansion of private banking has allowed banking activity to grow considerably. As of December 2007, 16 licensed banks were operating, up from 10 in 2001, including three state-owned banks and five branches of foreign banks. Total banking assets have increased to $1.3 billion from about $400 million over the past several years. Progress has been made on restructuring state-owned banks, and two domestic private banks account for around half of total assets. Among serious deficiencies are a lack of adequate management and irregularities concerning insider lending. Most bank credit is short-term, and regulatory inefficiency has kept the sector from becoming fully developed. There are no controls or restrictions on capital conversion and transfer activities.

Property RightsNot Graded Back to the top

Afghanistan's judicial system lacks capacity and is rife with corruption. Protection of property rights is also weakened by a lack of property registries or a land titling database and by poorly trained personnel in commercial courts. The bankruptcy law dates from the 1960s and is ineffective. Afghanistan has no legislation that addresses intellectual property rights and does not belong to any international IPR-protection organizations.

Freedom From CorruptionNot Graded Back to the top

Corruption is perceived as rampant. Afghanistan ranks 172nd out of 179 countries in Transparency International's Corruption Perceptions Index for 2007, a serious deterioration from 2006. Corruption networks permeate all sectors and levels of government and pose a serious risk to the rebuilding of state institutions. The very large opium economy is the most important source of corruption.

Labor FreedomNot Graded Back to the top

Afghanistan's labor market remains disrupted by the political and security situation. Laws and regulations concerning wage rates and maximum work hours are not uniformly observed. The prevalence of opium-related activities and a large informal economy further dampen the capacity to develop and implement efficient labor market policies.