Embed This Data
- GDP (PPP):
- $0.8 billion
- 1.5% growth
- 0.4% 5-year compound annual growth
- $7,344 per capita
- Inflation (CPI):
- FDI Inflow:
Tonga’s economic freedom score is 56, making its economy the 112th freest in the 2013 Index. Its score has decreased by 1.0 point from last year, reflecting substantial declines in labor freedom and property rights that outweigh modest gains in the control of government spending, fiscal freedom, and freedom from corruption. Tonga is ranked 22nd out of 41 countries in the Asia–Pacific region.
All four pillars of economic freedom in Tonga lack the institutional foundations needed for sustained economic growth. Potential entrepreneurial investment is stifled by a largely opaque regulatory environment, and most economic activity is informal. Property rights are weakly enforced. High levels of corruption unduly burden positive economic activity and hinder private-sector growth. The judicial system deserves much of the blame for these shortfalls because it is often influenced by politics, increasing investment risk and slowing economic growth.
The Tongan economy continues to depend heavily on foreign aid and overseas remittances. The dominance of the public sector has contributed to a low level of economic dynamism despite a workforce that is considered the best educated among the Pacific Island nations. Although trade-weighted average tariffs have dropped, the lack of commitment to dismantling non-tariff barriers and enhancing the investment regime thwarts the emergence of a more dynamic private sector.
The Kingdom of Tonga is the South Pacific’s last Polynesian monarchy. Some 100,000 people are spread across about 50 of its 171 islands. Tonga has been independent since 1970, and its political life is dominated by the royal family, hereditary nobles, and a few other landholders. Tonga held its first elections in November 2010 in its drive to become a constitutional monarchy. The Friendly Islands Democratic Party was not able to win a majority in parliament, but it did win a plurality, and Lord Siale’ataonga Tu’ivakano became Tonga’s first elected prime minister. Tonga boasts a 99 percent literacy rate, although more than half of the population lives abroad, mostly in New Zealand. Agriculture is the principal productive sector of the economy.
Tonga has a fairly efficient legal system based on British common law. The judiciary conducts generally fair public trials, although all judges are appointed by the monarch (newly acceded to the throne in March 2012) and can be subject to political pressure. Property rights are uncertain. Pervasive corruption continues to undermine government integrity. There are concerns about the new king’s commitment to his late brother’s reforms.
The top income tax rate is 20 percent, and the top corporate tax rate is 25 percent. Other taxes include a value-added tax (VAT) and an interest tax. The overall tax burden equals 16.3 percent of total domestic income. Government spending is equivalent to 34.3 percent of GDP, keeping the budget balance in deficit. Public debt amounts to around 43 percent of total domestic output. An expansionary fiscal policy has contributed to widening deficits.
Regulatory codes are relatively sound, but implementation of regulations remains ineffective. There is no minimum capital requirement for establishing a business, although the process can be time-consuming, requiring 16 days on average. An efficient labor market has not been developed, and informal labor activity continues to be substantial. Monetary stability is weak as inflationary pressure lingers.
The trade-weighted average tariff rate is 7.2 percent, and non-tariff barriers further raise the cost of trade. Many investment activities are stringently regulated. The poorly developed legal system and infrastructure continue to impede the development of a modern financial sector. There are no capital markets. Much of the population operates financially outside of the formal banking sector.