2009 Index of Economic Freedom

Quick Facts

Population:

• 1.0 million

GDP (PPP):

• $2.2 billion
• -3.4% growth
• -2.8% 5-year compound annual growth
• $2141 per capita

Unemployment:

• 50.0%

Inflation (CPI):

• 7.8%

FDI Inflow:

• $2.6 million

The 2009 Index is the first to assess Timor-Leste's level of economic freedom. Timor-Leste's economic freedom score is 50.5, making its economy the world's 149th freest. Timor-Leste is ranked 34th out of 41 countries in the Asia–Pacific region, and its overall score is below the world and regional averages.

Violence and instability have a negative impact on every aspect of economic freedom in Timor-Leste, and its score suffers compared to the scores of many other countries in the Asia–Pacific region. It enjoys levels of economic freedom above the world average in only three areas: government size, monetary freedom, and labor freedom.

Constraints in the business operating environment and widespread corruption hurt Timor-Leste's scores in those areas. Its investment freedom score, also well below average, suffers as a result of poor institutional and regulatory capacity and overall volatility. The general lack of institutional capacity has a particularly damaging effect on the protection of property rights.

Background Back to the top

Timor-Leste is one of the poorest countries in Asia. It gained its independence in 2002 following 25 years of sometimes brutal Indonesian occupation and two and a half years of administration by the United Nations. Since then, the government has struggled to pacify the country. Economic liberalization has mostly stalled, and the country remains heavily dependent on foreign aid. Infrastructure is very poor, and corruption is rampant.

Business Freedom 47.0 Back to the top

The overall freedom to conduct a business is constrained by Timor-Leste's burdensome regulatory environment. Starting a business takes an average of 83 days, compared to the world average of 38 days. Obtaining a business license requires 22 procedures, compared to the world average of 18. Minimum capital to start a business is quite high.

Trade Freedom 73.0 Back to the top

According to the International Monetary Fund, Timor-Leste's simple tariff rate was 6 percent in 2007. Import taxes, non-transparent regulations, inadequate infrastructure and trade capacity, and underdeveloped markets limit trade and increase costs. Fifteen points were deducted from Timor-Leste's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 64.7 Back to the top

Timor-Leste has low taxes. The top income and corporate tax rates are 10 percent. In the most recent year, overall tax revenue as a percentage of non-oil GDP was 109.7 percent, reflecting large tax revenues from petroleum projects in the Timor Sea. Timor-Leste's Petroleum Fund'makes'the country's national accounting unique. The fund,'in which'the government reserves all'income from the oil sector, is'not counted as part of GDP'but is reflected in government revenue figures.

Government Size 84.0 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 23.1 percent of non-oil GDP.

Monetary Freedom74.1 Back to the top

Inflation is relatively high, averaging 6.3 percent between 2005 and 2007. The economy operates under a U.S. dollar'based currency regime that, when combined with the monetary authority's lack of legal power to lend, has constrained the scope of monetary and exchange rate policies. Ten points were deducted from Timor-Leste's monetary freedom score to adjust for price-control measures.

Investment Freedom30.0 Back to the top

Investment may be approved by the government for any sector of economic activity, but exploration, research, and exploitation of oil and gas, as well as the extraction of mineral resources, are governed by separate and additional regulations. In 2005, an investment and trade development organization was created to coordinate and monitor foreign investments and exports and to centralize the administrative procedures for authorizations. Nonetheless, the investment environment is significantly limited by inadequate institutional capacity, complex licensing requirements, weak contract enforcement, underdeveloped markets, and internal instability. The framework for land ownership is still evolving; foreign investors may lease but not own land.

Financial Freedom20.0 Back to the top

Timor-Leste's financial sector is at an early stage of development, with financial intermediation limited by the lack of viable domestic lending opportunities and underdeveloped regulatory and supervisory frameworks. Access to credit is very limited, though modest progress has been made in establishing an effective banking system. The banking sector consists of the monetary authority, three foreign-owned commercial banks, and a microfinance institution. Bank deposits have increased, as have loans to individuals and construction projects. Banking services are used by less than 2 percent of the population. Poor credit assessment policies and difficulties in contract enforcement and loan recovery have contributed to an increase in non-performing loans.

Property Rights20.0 Back to the top

A nascent legal system has been put in place, but the justice system remains among the weakest sectors of government, relying heavily on foreign assistance. Land titles from the Portuguese colonial period may conflict with competing claims from the Indonesian occupation and also with claims from squatters who may currently occupy the land. In some villages where traditional practices hold sway, women may not inherit or own property.

Freedom From Corruption26.0 Back to the top

Corruption is perceived as widespread. Timor-Leste ranks 123rd out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Official corruption, despite being subject to criminal penalties under the law, remains a serious problem. By law, the ombudsman's office is charged with leading national anti-corruption activities and has the authority to refer cases for prosecution. Cases investigated have included allegations of corruption involving both mid-level and senior government procurement officials. There are credible reports of petty corruption at the nation's port, and customs and border officials are suspected of facilitating the smuggling of gasoline, tobacco, and alcohol across the border from Indonesia.

Labor Freedom66.0 Back to the top

Timor-Leste's relatively rigid employment regulations hinder overall productivity growth. The non-salary cost of employing a worker is high, and dismissing a redundant employee is relatively costly. Overall, the formal labor market remains underdeveloped.