2013 Index of Economic Freedom

Tonga

overall score56.0
world rank112
Rule of Law

Property Rights20.0

Freedom From Corruption31.0

Limited Government

Government Spending64.7

Fiscal Freedom87.1

Regulatory Efficiency

Business Freedom76.6

Labor Freedom84.4

Monetary Freedom71.1

Open Markets

Trade Freedom75.6

Investment Freedom30.0

Financial Freedom20.0

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Quick Facts
  • Population:
    • 0.1 million
  • GDP (PPP):
    • $0.8 billion
    • 1.5% growth
    • 0.4% 5-year compound annual growth
    • $7,344 per capita
  • Unemployment:
  • Inflation (CPI):
    • 5.3%
  • FDI Inflow:
    • $10.4 million
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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.

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Background

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.

Rule of LawView Methodology

Property Rights 20.0 Create a Graph using this measurement

Freedom From Corruption 31.0 Create a Graph using this measurement

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.

Limited GovernmentView Methodology

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 EfficiencyView Methodology

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.

Open MarketsView Methodology

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.

Country's Score Over Time

Bar Graph of Tonga Economic Freedom Scores Over a Time Period

Country Comparisons

Bar Graphs comparing Tonga to other economic country groups

Regional Ranking

rank country overall change
1Hong Kong89.3-0.6
2Singapore880.5
3Australia82.6-0.5
4New Zealand81.4-0.7
5Taiwan72.70.8
6Japan71.80.2
7Macau71.7-0.1
8South Korea70.30.4
9Malaysia 66.1-0.3
10Thailand 64.1-0.8
11Kazakhstan63-0.6
12Mongolia61.70.2
13Sri Lanka60.72.4
14Azerbaijan59.70.8
15Kyrgyz Republic 59.6-0.6
16Cambodia58.50.9
17The Philippines58.21.1
18Fiji57.2-0.1
19Samoa57.1-3.4
20Indonesia56.90.5
21Vanuatu56.60.0
22Tonga56-1.0
23India55.20.6
24Pakistan 55.10.4
25Bhutan55-1.6
26Papua New Guinea53.6-0.2
27Tajikistan53.40.0
28Bangladesh 52.6-0.6
29China51.90.7
30Vietnam51-0.3
31Nepal50.40.2
32Micronesia50.1-0.6
33Laos50.10.1
34Maldives49-0.2
35Uzbekistan460.2
36Kiribati45.9-1.0
37Solomon Islands45-1.2
38Timor-Leste43.70.4
39Turkmenistan42.6-1.2
40Burma39.20.5
41North Korea1.50.5
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