2009 Index of Economic Freedom

Quick Facts

Population:

• 3.0 million

GDP (PPP):

• $14.7 billion
• 13.3% growth
• 13.0% 5-year compound annual growth
• $4879 per capita

Unemployment:

• 7.1%

Inflation (CPI):

• 4.4%

FDI Inflow:

• $343.5 million

Armenia's economic freedom score is 69.9, making its economy the 31st freest in the 2009 Index. Its overall score remains unchanged from last year. Armenia is ranked 18th freest among the 43 countries in the Europe region, and its score puts it above the world average.

Armenia rates significantly higher than the average country in eight of the 10 freedoms. Commercial regulations are flexible and relatively simple. Low tax rates and moderate government spending contribute to an impressive degree of fiscal freedom. There are few restrictions on foreign investment, and banking is wholly private and well regulated.

Widespread corruption and weak protection of property rights reduce Armenia's overall level of economic freedom. Burdensome bureaucratic procedures and discretionary decisions by individual officials encourage petty corruption. The constitution adopted in 2005 increased the power of the legislative branch and allows for more independence in the judiciary, but both branches remain subject to political pressure from the executive branch, which retains considerably more relative power than its counterparts in most other European countries.

Background Back to the top

Since gaining its independence from the former Soviet Union in 1991, Armenia has been challenged by external conflict, internal instability, and political strife. Prime Minister Serge Sargsyan’s party won a decisive victory in the May 2007 parliamentary elections, and Sargsyan was declared the winner in the first round of presidential elections in February 2008, but hundreds of thousands protested the alleged unfairness of the vote. Ten protesters were killed and scores wounded. The 20-year dispute with Azerbaijan over the territory of Nagorno–Karabakh has led to an estimated 750,000 Armenian and Azeri refugees in the two countries. A cease-fire has been in effect since 1994, but borders with Azerbaijan and Turkey remain closed. The economy relies in nearly equal measure on manufacturing, services, remittances, and agriculture, including its famous cognac production.

Business Freedom 83.7 Back to the top

The freedom to start, operate, and close a business is well protected under Armenia's regulatory environment. Starting a business takes an average of 18 days, much less than the world average of 38 days. Obtaining a business license requires about the world average of 18 procedures and about half of the world average of 225 days.

Trade Freedom 86.4 Back to the top

Armenia's weighted average tariff rate was 1.6 percent in 2006. Inadequate infrastructure and the customs system's unpredictable valuation, inefficient administration, and level of corruption add to the cost of trade. Ten points were deducted from Armenia's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 90.0 Back to the top

Armenia has low tax rates. The top income and corporate tax rates are 20 percent. Other taxes include a value-added tax (VAT) and a vehicle tax. In the most recent year, overall tax revenue as a percentage of GDP was 14.1 percent.

Government Size 89.7 Back to the top

Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 18.5 percent of GDP. Authorities vow to limit the fiscal deficit despite a 60 percent increase in pension payments featured in the 2008 budget.

Monetary Freedom77.8 Back to the top

Inflation has been increasing, averaging 3.7 percent between 2005 and 2007. Government subsidies and regulations distort prices in some sectors, such as public transportation, electricity, and gas. Ten points were deducted from Armenia's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom70.0 Back to the top

Officially, foreign and domestic investors are treated equally and have the same right to establish businesses in nearly all sectors. Privatization, though generally successful and legally open to all bidders, has not been transparent. There are no restrictions or controls on the holding of foreign exchange accounts, invisible transactions, or current transfers, and there are no repatriation requirements. Investment regulations lack transparency, and their administration is inefficient and prone to corruption. Non-residents may lease but not own land. By law, foreign investments cannot be expropriated except in extreme cases of a natural or state emergency, upon a decision by the courts, and with compensation.

Financial Freedom70.0 Back to the top

Armenia has accelerated the pace of legal and regulatory reform in order to restructure its financial sector. Banking accounts for over 90 percent of total financial sector assets. Other financial intermediations such as capital markets and insurance are not fully developed. Following a banking crisis in the 1990s, the government embarked on privatization and regulatory reform that included adopting international accounting standards, and many banks have closed or merged. As of 2007, there were 22 commercial banks with 326 branches. Bank credits to the private sector remain low, amounting to only 6 percent of GDP in 2007. Commercial lending has increased, but collateral located in Armenia is required, and this often hinders borrowers from entering the market. The state no longer has a stake in any bank, and all 22 are privately owned. There are no limitations on the conversion and transfer of money or the repatriation of capital and earnings. The efficiency of capital markets and portfolio investment needs to be strengthened. The securities market has a legal framework in place but remains small and underdeveloped.

Property Rights35.0 Back to the top

Armenian law provides substantial protection for intellectual property rights and is in compliance with the World Trade Organization’s Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement. The government has increased the enforcement of IPR laws. The judicial system is still recovering from underdevelopment and corruption—legacies of the Soviet era that substantially impede the enforcement of contracts.

Freedom From Corruption30.0 Back to the top

Corruption is perceived as widespread. Although a number of reforms, including the simplification of licensing procedures, civil service reform, the introduction of a new criminal code, energy privatization, and greater dissemination of laws and regulations, have been introduced during the past four years, corruption remains a problem in such critical areas as the judiciary, tax and customs operations, health, education, and law enforcement. Petty corruption pervades society. Armenia ranks 99th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007.

Labor Freedom66.3 Back to the top

Armenia's somewhat rigid labor regulations can impede employment and productivity growth. The non-salary cost of employing a worker is moderate, and dismissing a redundant employee is relatively inexpensive.