2009 Index of Economic Freedom

Quick Facts

Population:

• 9.7 million

GDP (PPP):

• $94.7 billion
• 10.0% growth
• 7.5% 5-year compound annual growth
• $9732 per capita

Unemployment:

• 1.6%

Inflation (CPI):

• 8.4%

FDI Inflow:

• $354.0 million

Belarus's economic freedom score is 45, making its economy the 167th freest in the 2009 Index. The persistence of Soviet-era policies and practices continues to deny Belarus the benefits of economic freedom now enjoyed in most other former Soviet republics. Its already low score underwent another deterioration of 0.4 point due to reckless and inefficient government spending that overshadowed gains in trade and business freedom. Belarus is ranked last among the 43 countries in the Europe region.

The majority of Belarus's 10 economic freedom scores are significantly worse than the world average, though moderate tax rates and low tax revenues put its fiscal freedom score in the top half. Weak economic institutions create major barriers to development. Financial freedom, investment freedom, property rights, and freedom from corruption are 20–40 points below the world average. The government controls many financial institutions, either directly or partially. Foreign investment in all sectors faces hurdles ranging from outright restrictions to bureaucratic incompetence. Weak rule of law allows for significant corruption and insecure property rights. Large state-owned enterprises still generate considerable output, and privatization lags well behind other countries in the region.

Background Back to the top

Belarus remains close to Russia culturally, economically, and politically. President Alexander Lukashenko, in power since 1994, changed the constitution, effectively appointing himself president for life, and was strengthened by local elections in January 2007 that did not meet international democratic standards. Persecution of the opposition continued in 2007–2008. The antiquated import-substitution economy has deteriorated since 1995 when Lukashenko vowed to guide Belarus toward “market socialism.” Industry and the state-controlled agricultural sector continued to perform badly in 2007, and GDP growth slowed. Rising energy costs are expected to hurt the economy further and increase inflation throughout 2008. Obsolescent Soviet-era industrial assets are not being replaced. Growing ties with Iran, Venezuela, and the Persian Gulf countries have not offset the economic and social impact of isolation from the West.

Business Freedom 63.7 Back to the top

The overall freedom to start, operate, and close a business is constrained by Belarus's regulatory environment. Obtaining a business license takes slightly less than the global average of 225 days. Burdensome and non-transparent regulations lead small and medium-size private companies to concentrate in the retail sector, where relatively low costs prevent excessively high losses. Closing a business is difficult.

Trade Freedom 67.2 Back to the top

Belarus's weighted average tariff rate was 8.9 percent in 2002. Extensive import restrictions and quotas, burdensome licensing requirements, non-transparent and arbitrary regulations, and government subsidies add to the cost of trade. Fifteen points were deducted from Belarus's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 79.4 Back to the top

Belarus has moderate tax rates. The top income tax rate is 30 percent, and the top corporate tax rate is 24 percent. Other taxes include a value-added tax (VAT), a turnover tax, and an environmental tax for legal entities. The sales tax has been reduced, and the Chernobyl tax has been abolished. Amendments to tax legislation having to do with exemptions for companies and entrepreneurs working in rural areas were introduced in January 2008 but are not yet implemented. In the most recent year, overall tax revenue as a percentage of GDP was 24.2 percent.

Government Size 30.9 Back to the top

Belarus's economy is highly centralized. Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 48.0 percent of GDP. A reformed social security system was implemented in January 2008, but overall progress in structural reform lags. Energy and telecommunications remain two of many targets for privatization.

Monetary Freedom66.8 Back to the top

Inflation is high, averaging 8.2 percent between 2005 and 2007. The government subsidizes many basic goods and services, sets prices of products made by state-owned enterprises, and regulates prices in the retail sector. Fifteen points were deducted from Belarus's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom20.0 Back to the top

Despite no particular discrimination against foreign investors in general, the government does discriminate against domestic and foreign private parties in favor of state-owned businesses. Numerous industries remain the exclusive domain of the state, and profitable and strategic sectors are often under de facto government control. Inefficient bureaucracy, corruption, contradictory and often retroactively enforced legislation, and official resistance to the private sector hinder foreign investment. Foreigners and businesses may not own land. Capital transactions, resident and non-resident accounts, and current transfers are subject to strict controls. When expropriating property, the government generally alleges breaches of business law and offers no compensation.

Financial Freedom10.0 Back to the top

Belarus's financial system is heavily government-influenced. The 30 commercial banks' lending practices are often directed by state pressure. Laws are applied inconsistently and often disregarded. The state controls the central bank as a conduit for its economic policies. Foreign banks face major impediments, and barriers to credit are high. Businesses have access to various credit mechanisms, but long bureaucratic delays discourage smaller companies. The small non-bank financial sector is inhibited by state intervention and irregular regulatory enforcement. The stock market is small and largely dormant, and the insurance market has stagnated.

Property Rights20.0 Back to the top

The structure of property rights is unchanged since the Soviet period, with state ownership of land and government-controlled collective and state farms. The legal system does not fully protect private property, and inefficient courts do not enforce contracts consistently. The judiciary is neither independent nor objective by international standards. The government has wide scope to interfere in commercial transactions. Independent lawyers cannot practice without a special license from the Ministry of Justice. Protection of intellectual property rights is weak.

Freedom From Corruption21.0 Back to the top

Corruption is perceived as pervasive. Belarus ranks 150th out of 179 countries in Transparency International's Corruption Perceptions Index for 2006. Owners of import'export businesses in particular complain that corruption exists at every point in a transaction. Its prevalence in the executive branch of government is symbolized by the blurry line between the president's personal and official funds.

Labor Freedom70.8 Back to the top

Relatively inflexible employment regulations hinder job creation and productivity growth. The non-salary cost of employing a worker is very high, but dismissing a redundant employee is relatively easy. Unemployment insurance, funded almost entirely by employers, offers benefits approximately equivalent to 30 percent of an average worker's annual salary.