2020 Index of Economic Freedom

Timor-Leste

OVERALL SCORE45.9
WORLD RANK171
Rule of Law

Property Rights45.2

Judicial Effectiveness12.6

Government Integrity32.5

Government Size

Tax Burden96.3

Government Spending5.3

Fiscal Health19.9

Regulatory Efficiency

Business Freedom64.0

Labor Freedom58.9

Monetary Freedom76.5

Open Markets

Trade Freedom75.0

Investment Freedom45.0

Financial Freedom20.0

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Quick Facts
  • Population:
    • 1.3 million
  • GDP (PPP):
    • $6.7 billion
    • 0.8% growth
    • 1.9% 5-year compound annual growth
    • $5,242 per capita
  • Unemployment:
    • 3.0%
  • Inflation (CPI):
    • 2.3%
  • FDI Inflow:
    • $47.9 million

Timor-Leste’s economic freedom score is 45.9, making its economy the 171st freest in the 2020 Index. Its overall score has increased by 1.7 points due to a higher score for property rights. Timor-Leste is ranked 40th among 42 countries in the Asia–Pacific region, and its overall score is well below the regional and world averages.

The economy of Timor-Leste has registered few signs of economic freedom since its inclusion in the Index in 2009. GDP growth has been weak.

The Timorese economy has become increasingly dependent on government expenditures funded by drawdowns from the Petroleum Fund. Other impediments to greater economic freedom are pervasive corruption, which weakens government integrity, and the ineffectiveness of the judicial system. Unfortunately, the independent Anti-Corruption Commission has no arrest or prosecution powers, and public procurement processes remain largely opaque.

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Background

The Democratic Republic of Timor-Leste gained independence from Indonesia in 2002 and has struggled to achieve political stability. U.N. peacekeepers were required until 2012. Current President Francisco Guterres and Prime Minister Taur Matan Ruak have clashed as they maneuver for power. Timor-Leste remains one of East Asia’s poorest countries and is heavily dependent on foreign aid. Economic liberalization has mostly stalled. Oil and gas account for more than 95 percent of government revenue, which is consigned to a Petroleum Fund that had assets of $16.93 billion at the end of June 2018. The technology-intensive oil industry has done little to create jobs.

Rule of LawView Methodology

Property Rights 45.2 Create a Graph using this measurement

Judicial Effectiveness 12.6 Create a Graph using this measurement

Government Integrity 32.5 Create a Graph using this measurement

The legal regime governing land and property ownership in Timor-Leste remains unclear, and uncertainty is aggravated by conflicting governing statutes from the Portuguese, Indonesian, and post-independence eras. The overly complex legal framework reflects that same confusing pedigree. The judiciary is not independent. Corruption and nepotism continue across the country. Anticorruption bodies lack enough funding to operate effectively.

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. The overall tax burden equals 13.1 percent of total domestic income. Government spending has amounted to 56.2 percent of the country’s output (GDP) over the past three years, and budget deficits have averaged 23.7 percent of GDP. Public debt is equivalent to 5.4 percent of GDP.

Regulatory EfficiencyView Methodology

Incomplete, unclear, and unevenly enforced legislation causes problems for businesses. The labor market remains underdeveloped, and the formal economy has yet to diversify beyond offshore oil and gas drilling. Preliminary plans exist to develop gas processing production facilities. Petroleum revenues have enabled the government to stimulate domestic consumption through direct or indirect subsidies, but better fiscal management is needed.

Open MarketsView Methodology

The total value of exports and imports of goods and services equals 121.0 percent of GDP. The average applied tariff rate is 2.5 percent, but layers of nontariff barriers are pervasive. Restrictions on foreign land ownership and a slow-moving bureaucracy deter foreign investment. The financial sector is still at a nascent stage of development. Access to credit remains limited, and the commercial banking sector remains very small.

Country's Score Over Time

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Regional Ranking

RANK COUNTRY OVERALL CHANGE
1Singapore89.40.0
2Hong Kong89.1-1.1
3New Zealand84.1-0.3
4Australia82.61.7
5Taiwan77.1-0.2
6Malaysia 74.70.7
7South Korea741.7
8Japan73.31.2
9Macau70.3-0.7
10Kazakhstan69.64.2
11Thailand 69.41.1
12Indonesia67.21.4
13Brunei Darussalam66.61.5
14Philippines64.50.7
15Fiji63.41.2
16Kyrgyz Republic 62.90.6
17Bhutan62.1-0.8
18Samoa62.1-0.1
19Vanuatu60.74.3
20China59.51.1
21Vietnam58.83.5
22Tonga58.81.1
23Papua New Guinea58.40.0
24Sri Lanka57.41.0
25Cambodia57.3-0.5
26Uzbekistan57.23.9
27Maldives56.53.3
28India56.51.3
29Bangladesh 56.40.8
30Mongolia55.90.5
31Laos55.5-1.9
32Pakistan 54.8-0.2
33Afghanistan54.73.2
34Nepal54.20.4
35Burma540.4
36Solomon Islands52.9-1.7
37Tajikistan52.2-3.4
38Micronesia520.1
39Turkmenistan46.5-1.9
40Timor-Leste45.91.7
41Kiribati45.2-2.1
42North Korea4.2-1.7
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