2017 Index of Economic Freedom

Timor-Leste

overall score46.3
world rank173
Rule of Law

Property Rights6.8

Government Integrity29.2

Judicial Effectiveness10.3

Government Size

Government Spending65.6

Tax Burden64.7

Fiscal Health20.0

Regulatory Efficiency

Business Freedom72.2

Labor Freedom63.9

Monetary Freedom77.5

Open Markets

Trade Freedom80.0

Investment Freedom45.0

Financial Freedom20.0

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Quick Facts
  • Population:
    • 1.3 million
  • GDP (PPP):
    • $6.6 billion
    • 4.3% growth
    • 5.7% 5-year compound annual growth
    • $5,629 per capita
  • Unemployment:
  • Inflation (CPI):
    • 0.6%
  • FDI Inflow:
    • $43.0 million
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Timor-Leste has made some progress toward macroeconomic stability since achieving independence in 2002. Gains in poverty reduction and income growth have been driven largely by development of the oil and gas sector.

However, structural and institutional deficiencies continue to constrain economic freedom. The economic base is narrow, and political instability continues to hold back lasting economic development. The state plays an outsized role in the economy with its increasing dependence on drawdowns from the Petroleum Fund. Private-sector development is further limited by a burdensome regulatory environment and an underdeveloped financial sector. Widespread corruption unchecked by a weak judicial system remains a considerable drag on economic activity.

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Background

The Democratic Republic of Timor-Leste became independent in 2002, and successive governments have struggled to pacify the country. Revolutionary leader Xanana Gusmao, its first president, who had been prime minister since 2007, stepped down in February 2015 and appointed opposition leader Rui Araujo as his successor. Timor-Leste remains one of East Asia’s poorest countries. Economic liberalization has mostly stalled, and the economy depends heavily on foreign aid. Oil and gas profits account for more than 95 percent of government revenue. The government deposits all oil income in the Petroleum Fund, which is not counted as part of GDP but is reflected in government revenue figures.

Rule of LawView Methodology

Property Rights 6.8 Create a Graph using this measurement

Government Integrity 29.2 Create a Graph using this measurement

Judicial Effectiveness 10.3 Create a Graph using this measurement

Land reform remains an unresolved and contentious issue with rival property claims from the Portuguese, Indonesian, and post-independence eras. The overly complex legal regime reflects that same confusing pedigree. The weak judicial system suffers from a severe shortage of qualified personnel and has failed to demonstrate independence in some politically sensitive cases. Corruption and nepotism continue to be serious problems.

Government SizeView Methodology

The top personal income and corporate tax rates are 10 percent. Most government revenue comes from offshore petroleum projects in the Timor Sea. Overall government revenue, including large petroleum receipts, equals 61.5 percent of total domestic income. Government spending has risen to more than 50 percent of total output (GDP) over the past three years, and budget deficits have averaged 46.6 percent of GDP. Timor-Leste has no public debt.

Regulatory EfficiencyView Methodology

The lack of consistency in enforcing regulations continues to discourage private-sector development. The minimum capital necessary to start a business is quite high. The public sector accounts for approximately half of nonagricultural employment, and the formal labor market remains underdeveloped. With state revenues reduced as a result of low world oil prices, the IMF has urged the government to curtail its large subsidy programs.

Open MarketsView Methodology

Trade is extremely important to Timor-Leste’s economy; the value of exports and imports taken together equals 111 percent of GDP. The average applied tariff rate is 2.5 percent. Foreign ownership of land is not allowed, and investment in other sectors of the economy is screened. Modest progress has been made in establishing an effective banking system, but the financial sector is still at a nascent stage of development.

Country's Score Over Time

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Regional Ranking

rank country overall change
1Hong Kong89.81.2
2Singapore88.60.8
3New Zealand83.72.1
4Australia810.7
5Taiwan76.51.8
6South Korea74.32.6
7Malaysia 73.82.3
8Macau70.70.6
9Brunei Darussalam69.82.5
10Japan69.6-3.5
11Kazakhstan695.4
12Vanuatu67.46.6
13Thailand 66.22.3
14Philippines65.62.5
15Azerbaijan63.63.4
16Fiji63.44.6
17Tonga633.4
18Indonesia61.92.5
19Kyrgyz Republic 61.11.5
20Cambodia59.51.6
21Bhutan58.4-1.1
22Samoa58.4-5.1
23Tajikistan58.26.9
24China57.45.4
25Sri Lanka57.4-2.5
26Nepal55.14.2
27Solomon Islands558.0
28Bangladesh 551.7
29Mongolia54.8-4.6
30Micronesia54.12.3
31Laos544.2
32Pakistan 52.8-3.1
33India52.6-3.6
34Burma52.53.8
35Vietnam52.4-1.6
36Uzbekistan52.36.3
37Papua New Guinea50.9-2.3
38Kiribati50.94.7
39Maldives50.3-3.6
40Afghanistan48.9N/A
41Turkmenistan47.45.5
42Timor-Leste46.30.5
43North Korea4.92.6
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