2009 Index of Economic Freedom

Quick Facts

Population:

• 2.0 million

GDP (PPP):

• $16.0 billion
• 3.7% growth
• 3.1% 5-year compound annual growth
• $7850 per capita

Unemployment:

• 35.0%

Inflation (CPI):

• 2.2%

FDI Inflow:

• $350.5 million

Macedonia's economic freedom score is 61.2, making its economy the 78th freest in the 2009 Index. Its score remains almost unchanged from last year, reflecting a decline in business freedom that offset an improvement in freedom from corruption. Macedonia is ranked 33rd out of 43 countries in the Europe region.

Macedonia's economic transformation into a market economy continues. Despite interruptions in its liberalization efforts, Macedonia still benefits from earlier reforms. In recent years, the country has achieved steady annual economic growth of around 3 percent. Macedonia enjoys high degrees of trade freedom, fiscal freedom, and monetary freedom. Personal and corporate income tax rates are very competitive, and monetary stability is relatively well maintained. With its moderate tariff and non-tariff barriers, Macedonia is generally open to global trade.

However, creating an environment that is truly conducive to vibrant economic development remains challenging. Macedonia lacks institutional capacity in protecting property rights and fighting corruption. Property rights are not secure, especially in contrast with other states in Europe, largely because the court system is prone to corruption, political interference, and inefficiency.

Background Back to the top

Since gaining its independence from the former Yugoslavia in 1991, the Republic of Macedonia has been undergoing a troubled political and economic transition. Following civil strife in 2001, the Ohrid Agreement prevented an all-out civil war by giving greater recognition to the Albanian minority within a unitary state. Macedonia still has high unemployment, one of Europe's lowest GDPs per capita, and a high level of informal economic activity. Nikola Gruevski became prime minister in August 2006 and was returned to power in June 2008 in elections that were criticized by international monitors. The government is trying to gain membership in the European Union and NATO, but Greece blocked an invitation to join NATO during the 2008 NATO summit because of an ongoing dispute.

Business Freedom 58.2 Back to the top

The overall freedom to start, operate, and close a business is limited by Macedonia's regulatory environment. Starting a business takes an average of nine days, compared to the world average of 38 days. However, obtaining a business license is costly, taking more than the world average of 18 procedures. Bankruptcy proceedings can be lengthy and burdensome.

Trade Freedom 81.6 Back to the top

Macedonia's weighted average tariff rate was 4.2 percent in 2006. Import taxes, import and export quotas, some import restrictions, some import licensing, non-transparent regulations and standards, and customs corruption add to the cost of trade. Ten points were deducted from Macedonia's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 89.4 Back to the top

Macedonia has low taxes. Effective January 2008, the individual income and corporate tax rates were reduced from 12 percent to a flat 10 percent. Other taxes include a value-added tax (VAT) and a property transfer tax. In the most recent year, overall tax revenue as a percentage of GDP was 29.3 percent. Tax administration reforms are underway.

Government Size 65.1 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 34.1 percent of GDP. In January 2008, the government eliminated electricity subsidies and began to promote private-sector involvement in energy by privatizing small and medium-size hydroelectric plants. The electricity sector remains an important target for further reforms.

Monetary Freedom85.4 Back to the top

Inflation is low, averaging 2.3 percent between 2005 and 2007. Most prices are determined in the market, but the government subsidizes agriculture and influences certain prices through state-owned enterprises and utilities, such as electricity. Five points were deducted from Macedonia's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom50.0 Back to the top

Foreign and domestic investors receive equal treatment, and non-residents may invest in domestic firms, except in arms manufacturing and narcotics production. Despite steps to guarantee foreign investments, bureaucracy can be slow, inefficient, lacking in adequate resources, and subject to political pressures and corruption. Residents and non-residents may hold foreign exchange accounts subject to some approvals and restrictions. Payments and transfers face few controls and restrictions. Most capital and money market activities require government consent or registration. The currency is not convertible on international markets. Foreign investors are permitted land-use rights but not land ownership.

Financial Freedom60.0 Back to the top

Macedonia's financial sector is not fully developed, but it is growing as the country encourages private-sector development and foreign investment. The foreign presence in the financial system is substantial, accounting for about 60 percent of total bank assets. Despite gradual efforts to strengthen the financial sector, it remains relatively weak. The banking sector is highly concentrated, and the three largest banks account for about 70 percent of all deposits and loans. Banking intermediation is relatively low, but credit is allocated on market terms. Regional adoption of the euro in 2002 led many Macedonians to change non-banking savings into the new currency, raising deposit rates. Capital markets are underdeveloped and unable to provide a full range of credit alternatives for businesses. Activity on the Macedonian Stock Exchange has been growing, and the number of companies listed on the exchange has increased.

Property Rights30.0 Back to the top

Protection of property is weak. The judiciary is subject to executive influence. The lack of effective rule of law and the uncertainty of property rights, especially in registering real property and obtaining land titles, undermine investment and development. The government has taken some action to combat piracy of items like CDs, DVDs, and software, but many pirated items remain for sale.

Freedom From Corruption33.0 Back to the top

Corruption is perceived as significant. Macedonia ranks 84th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007, a significant improvement from 2006. Corruption is found in all branches of government, especially the police and judicial system. Enforcement of laws against offenses like drug abuse, money laundering, and corrupt practices has been lackluster.

Labor Freedom59.8 Back to the top

Macedonia's burdensome labor regulations hinder employment growth, contributing to one of the highest unemployment rates in the region. The non-salary cost of employing a worker is very high, and the difficulty of laying off a worker creates a disincentive for new hiring. Regulations related to the number of work hours are rigid.