2009 Index of Economic Freedom

Quick Facts

Population:

• 1.3 million

GDP (PPP):

• $25.5 billion
• 11.2% growth
• 9.0% 5-year compound annual growth
• $18969 per capita

Unemployment:

• 4.7%

Inflation (CPI):

• 6.6%

FDI Inflow:

• $1.7 billion

Estonia's economic freedom score is 76.4, making its economy the 13th freest in the 2009 Index. Its overall score decreased 1.5 points, as an improved government size score was offset by weakened business freedom. Estonia is ranked 6th out of 43 countries in the Europe region, and its overall score is well above the regional and world averages.

Estonia enjoys high levels of investment freedom, financial freedom, property rights, and freedom from corruption. Top income and corporate tax rates are low, and business freedom is relatively strong. Competitive, efficient, and open to international firms, Estonia's financial sector is one of the most developed among the Baltic States. The investment code is simple and transparent but subject to licensing in some sectors of the economy like banking and mining. The rule of law is strong and consistently enforced. The judiciary is independent of political influence and protects property rights effectively.

Estonia could improve still more in government size and in labor freedom. Total government spending is high, although in line with other European Union economies, and labor market reforms could enhance employment and productivity growth.

Background Back to the top

Since the fall of the Soviet Union, Estonia, the smallest Baltic state, has been one of the most determined economic reformers among the former Soviet nations and has transformed itself into one of the world's most dynamic and modern economies. High GDP growth upwards of 9 percent annually over the past two decades has helped to revitalize society. Estonia has strong trade ties to Finland, Sweden, and Germany, and its services and manufacturing sectors are thriving. The country became a member of NATO and the European Union in 2004 and aims to join the euro zone in 2010. A model of stable multi-party democracy, Estonia has enjoyed seven peaceful changes in leadership since regaining its independence in 1991.

Business Freedom 75.9 Back to the top

The overall freedom to conduct a business is relatively well protected under Estonia's transparent regulatory environment. Starting a business takes an average of seven 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. Regulations are evenly applied.

Trade Freedom 85.8 Back to the top

Estonia'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 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 Estonia's trade freedom score to reflect these factors.

Fiscal Freedom 81.5 Back to the top

Estonia has moderate tax rates. The personal income tax rate is a flat 21 percent, to be reduced to 20 percent in 2009. Distributed profits are subject to the 21 percent corporate tax rate; undistributed profits, whether invested or retained, are not subject to taxation. Other taxes include a value-added tax (VAT) and an excise tax. Additional reforms regarding the timing of tax payments will be implemented in 2009. In the most recent year, overall tax revenue as a percentage of GDP was 31.1 percent.

Government Size 67.3 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 33 percent of GDP. Privatization is nearly complete, and the private sector generates more than 80 percent of GDP. Public finance management is generally sound, and there is a budget surplus.

Monetary Freedom79.7 Back to the top

Inflation is moderately high, averaging 5.8 percent between 2005 and 2007. As a participant in the EU's Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. It also subsidizes fuel and rent. Five points were deducted from Estonia's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom90.0 Back to the top

Foreign and domestic investment are treated equally under the law. Foreigners may invest in all sectors and own real estate, but there are some restrictions on land purchases exceeding 10 hectares. Licenses required for investment in banking, mining, gas and water supply or related structures, railroads and transport, energy, and communications net-works are reviewed in a non-discriminatory manner. The foreign investment code is transparent. The commercial community's small size can encourage favoritism despite regulations and procedures designed to provide equitable treatment. Residents and non-residents may hold foreign exchange accounts, and payments, transfers, and most capital transactions are not subject to controls. FDI rules on sectors like aviation and real estate are harmonized with EU standards.

Financial Freedom80.0 Back to the top

Before its accession to the EU, Estonia reformed its financial system through a series of consolidations and mergers. Regulatory and supervisory frameworks are efficient and transparent. As of mid-2008, there were more than 50 financial institutions, including six commercial banks and 10 foreign bank branches. The banking sector is highly profitable and provides a wide range of financial services. Applications abound for new banks, particularly from EU firms, but four banks still control 95 percent of assets. The government has no financial stake in any local credit institution. Foreign financial institutions are welcome, and foreign firms dominate the insurance sector. Credit is allocated on market terms, and foreign investors may obtain credit freely. The small but active stock exchange is part of a network of Scandinavian and Baltic exchanges.

Property Rights90.0 Back to the top

Estonia's judiciary is independent and insulated from government influence. Property rights and contracts are enforced, and the commercial code is applied consistently. Estonian law is in compliance with EU directives protecting intellectual property rights.

Freedom From Corruption65.0 Back to the top

Corruption is perceived as present. Estonia ranks 28th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Estonia has laws, regulations, and penalties to combat corruption, and the corruption that does exist is generally not targeted at foreign investors.

Labor Freedom48.5 Back to the top

Estonia's rigid employment regulations remain barriers to job creation and productivity growth. The non-salary cost of employing a worker can be high, and dismissing a redundant employee is relatively difficult and costly. Restrictions on the number of work hours remain rigid.