2009 Index of Economic Freedom

Quick Facts

Population:

• 0.5 million

GDP (PPP):

• $34.9 billion
• 6.1% growth
• 4.4% 5-year compound annual growth
• $75611 per capita

Unemployment:

• 4.4%

Inflation (CPI):

• 2.3%

FDI Inflow:

• $29.3 billion

Luxembourg's economic freedom score is 75.2, making its economy the 15th freest in the 2009 Index. Its overall score is 0.5 point higher than last year, reflecting improvements in three of the 10 economic freedoms, particularly government size. Luxembourg is ranked 8th out of 43 countries in the Europe region.

Luxembourg, one of the leading global financial centers and a sophisticated service-dominated economy, benefits from high levels of investment freedom, trade freedom, financial freedom, respect for property rights, and business freedom. Offering a favorable climate for foreign investment, the government has streamlined registration for new businesses. Virtually all commercial operations are simple and transparent. The judiciary, independent of politics and free of corruption, has demonstrated an exemplary ability to protect property rights.

Luxembourg scores below the world average in three areas: fiscal freedom, labor freedom, and government size. Government spending, although lower than that of some other EU member countries, accounts for almost 40 percent of GDP. The government has undertaken gradual reforms to improve the management of public finance. A more flexible labor market would enhance employment growth.

Background Back to the top

The Grand Duchy of Luxembourg is a small, stable, and wealthy country. A founding member of the European Union in 1957, it continues to be a primary driver of further European integration. It was one of the founding members of the single European currency in 1999. Luxembourgers enjoy a high standard of living with one of the world's highest income levels. During the 20th century, Luxembourg evolved from an industrial economy into a mixed manufacturing and services economy. With a financial services industry that accounts for a major portion of GDP, it is Europe's principal center for mutual funds and a major force in the banking and insurance industries. It has a skilled workforce and well-developed infrastructure.

Business Freedom 76.2 Back to the top

The overall freedom to conduct a business is relatively well protected under Luxembourg's regulatory environment. Starting a business takes 26 days, compared to the world average of 38 days. Obtaining a business license requires slightly less than the world average of 18 procedures and 225 days.

Trade Freedom 85.8 Back to the top

Luxembourg'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 services sectors, non-transparent and restrictive regulations and standards, and inconsistent customs administration across EU members. Some biotechnology bans and services market access barriers exceed the EU norm. Ten points were deducted from Luxembourg's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 66.3 Back to the top

Luxembourg has a high income tax rate but a low corporate tax rate. The top income tax rate is 39 percent (38 percent plus a 2.5 percent surcharge). The top corporate tax rate is 22.9 percent (including a 4 percent employment fund contribution), but municipal business taxes can raise the effective rate to as high as 29.6 percent. Other taxes include a value-added tax (VAT) and an inheritance tax. In the most recent year, overall tax revenue as a percentage of GDP was 36.4 percent.

Government Size 54.4 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 39 percent of GDP. Faced with rising wages and early retirements, the government must find a way to deal with an unsustainable public pension scheme that is one of the most generous in the region.

Monetary Freedom80.2 Back to the top

Luxembourg is a member of the euro zone. Inflation is low, averaging 2.4 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. The government also regulates electricity rates and some fuel prices and influences prices through state-owned enterprises. Ten points were deducted from Luxembourg's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom90.0 Back to the top

Foreign and domestic businesses receive equal treatment. Branches or subsidiaries of non–European Economic Area banks must be licensed. Investments that directly affect national security are restricted. Bureaucratic procedures, including those for licenses and permits, are sufficiently streamlined and transparent, and there is far less red tape than in larger European countries. Both residents and non-residents may hold foreign exchange accounts. There are no restrictions or barriers with respect to capital transactions, current transfers, repatriation of profits, purchase of real estate, or access to foreign exchange.

Financial Freedom80.0 Back to the top

Luxembourg is a global financial hub, and the sophisticated banking sector is well capitalized and competitive. Financial and banking regulations are transparent and effective. Government policies ensure the free flow of financial resources for domestic as well as foreign investors. The financial sector accounts for about 32 percent of GDP and employs about 10 percent of the labor force. There are more than 150 banks from over 25 countries, offering a full range of banking services on competitive terms. Many of the world's leading banks have established subsidiaries in Luxembourg. The one state-owned bank offers medium- and long-term financing of investments by Luxembourg-based companies. The investment fund industry has been expanding rapidly. Capital markets are well developed, and trading on the Luxembourg Stock Exchange is very active with over 4,000 issuers from about 105 countries represented.

Property Rights90.0 Back to the top

Private property is well protected, and contracts are secure. Luxembourg adheres to key international agreements on intellectual property rights and protects patents, copyrights, trademarks, and trade secrets.

Freedom From Corruption84.0 Back to the top

Corruption is perceived as minimal. Luxembourg ranks 12th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Giving or

Labor Freedom45.1 Back to the top

Luxembourg's burdensome labor regulations hinder employment and productivity growth. Unemployment benefits are almost twice as high as those in neighboring countries. Restrictions on the number of work hours remain rigid.