2009 Index of Economic Freedom

Quick Facts

Population:

• 5.3 million

GDP (PPP):

• $173.9 billion
• 4.9% growth
• 3.0% 5-year compound annual growth
• $33022 per capita

Unemployment:

• 6.8%

Inflation (CPI):

• 1.6%

FDI Inflow:

• $3.7 billion

Finland's economic freedom score is 74.5, making its economy the 17th freest in the 2009 Index. Its score remains almost unchanged, decreasing by only 0.1 point. Finland is ranked 9th out of 43 countries in the Europe region, and its overall score is well above the world average.

Despite small reductions in six of the 10 economic freedoms, Finland is still a world leader in business freedom, trade freedom, monetary freedom, property rights, and freedom from corruption. Private enterprise continues to blossom in a minimally regulated, business-friendly environment. Finland is one of the least corrupt countries in the world, and the result is a business environment that is free from political influence. Property is protected by transparent laws and even-handed enforcement, and foreign investors enjoy excellent market access. As a member of the euro zone, Finland has a standardized monetary policy that yields low inflation despite some government distortion in the agricultural sector.

Finland's labor freedom is weak, and government size is problematic. As in many other European social democracies, high government spending supports an extensive welfare state that is continually expanding even though government spending already equals half of Finland's GDP. Restrictive labor regulations hurt employment and productivity growth by mandating maximum work hours and unusually high unemployment benefits.

Background Back to the top

Finland joined the European Union in 1995 and adopted the euro in 1999. Finland is sparsely populated, with about one-fourth of its land mass above the Arctic Circle, but boasts a modern, competitive, and transparent economy with vibrant information and communications technology sectors. Finland is a member of NATO's Partnership for Peace program but has not pursued full NATO membership because of its neutral military status.

Business Freedom 95.1 Back to the top

The overall freedom to start, operate, and close a business is strongly protected under Finland's regulatory environment. Starting a business takes an average of 14 days, compared to the world average of 38 days. Obtaining a business license requires less than the world average of 18 procedures and 225 days. Bankruptcy proceedings are straightforward and not costly.

Trade Freedom 85.8 Back to the top

Finland'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 and bans for some goods and services, market access restrictions in some service sectors, non-transparent and restrictive regulations and standards, and inconsistent customs administration across EU members. Ten points were deducted from Finland's trade freedom score to account for these factors.

Fiscal Freedom 64.3 Back to the top

Finland has a high income tax and a moderate corporate tax. The top income tax rate is 31.5 percent, reduced from 32 percent. The top corporate tax rate is 26 percent. Other taxes include a value-added tax (VAT), a real estate tax, and a flat 28 percent capital gains tax. In the most recent year, overall tax revenue as a percentage of GDP was 43.6 percent.

Government Size 28.6 Back to the top

Total government expenditures, including consumption and transfer payments, are very high. In the most recent year, government spending equaled 48.8 percent of GDP. State ownership of productive assets is considerable. The government has plans for income tax cuts and increased spending on welfare programs, and revenue from alcohol and tobacco taxes can offset only a fraction of the cost.

Monetary Freedom87.4 Back to the top

Finland uses the euro as its currency. Between 2005 and 2007, Finland's weighted average annual rate of inflation was 1.4 percent. As a participant in the EU's Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. It also imposes artificially low prices on pharmaceutical products. Five points were deducted from Finland's monetary freedom score to account for measures that distort domestic prices.

Investment Freedom70.0 Back to the top

Finland is open to foreign direct investment. Certain acquisitions of large Finnish companies may require follow-up clearance from the Ministry of Trade and Industry. Non–European Economic Area investors must apply for a license to invest in many sectors, including security, electrical contracting, alcohol, telecommunications, aviation, and restaurants. Some residency restrictions apply to foreign investment to ensure the jurisdiction of the court system. There are no exchange controls and no restrictions on current transfers or repatriation of profits, and residents and non-residents may hold foreign exchange accounts. Restrictions on the purchase of land apply only to non-residents purchasing land in the Aaland Islands.

Financial Freedom80.0 Back to the top

Finland's sophisticated financial system provides a wide range of services. Deregulation in the 1980s and a banking and financial crisis in the 1990s led to consolidation, international mergers, and links to insurance companies. There were more than 300 domestic banks in 2008, but three bank groups (Nordea, OP Bank Group, and the Sampo Group) dominate the system. The government owns about 14 percent of the Sampo Group. Banking is open to foreign competition. Capital markets determine interest rates, and credit is available to nationals and foreigners equally. The stock exchange is part of an integrated network of Baltic and Nordic exchanges and has strong high-tech equity representation. Under legislation submitted to Parliament in mid-2008, the Financial Supervision Authority and Insurance Supervisory Authority would be merged to create a single national supervisory agency.

Property Rights95.0 Back to the top

Property rights are well protected, and contractual agreements are strictly honored. The quality of the judiciary and civil service is generally high. Expropriation is unlikely. Finland adheres to numerous international agreements concerning intellectual property.

Freedom From Corruption94.0 Back to the top

Corruption is perceived as almost nonexistent. Finland is tied for 1st place out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Finland is a signatory to the OECD Anti-Bribery Convention, and it is a criminal act to give or accept a bribe.

Labor Freedom44.8 Back to the top

Burdensome labor market regulations hamper employment opportunities and productivity growth. The non-salary cost of employing a worker is high, and dismissing a redundant employee is relatively costly. Restrictions on the number of work hours remain rigid.