Belarus's economy is 47.4 percent free, according to our 2007 assessment, which makes it the world's 145th freest economy. Belarus is ranked 41st among the 41 countries in the European region, and its overall score is below the regional average. Belarus's persistently low score has been blamed on the failure of post-Soviet reforms, and this year it experienced a 1.2 percentage point decrease overall.Belarus's fiscal freedom scores highly. Others are simply in line with world averages, such as freedom from government, trade freedom, and monetary freedom. The top income and corporate tax rates are a moderate 30 percent, and although the government adds additional costs such as a value-added tax, revenue collected from taxes is relatively low. Belarus has a low average tariff rate, but non-tariff barriers lower its overall trade freedom score.
Belarus's economy has significant shortcomings. Financial freedom, investment freedom, property rights, and freedom from corruption are weak. The government dominates the banking sector, which is politically influenced. Foreign investment in all sectors faces hurdles, from outright restrictions to bureaucratic incompetence. Weak rule of law allows for significant corruption and insecure property rights.
Background:
Belarus won independence from the Soviet Union in 1991 but has retained close economic and political ties to Russia. President Alexander Lukashenko declared himself the winner of the March 2006 elections—a result that was challenged by internal democratic opposition and Western observers. The economy deteriorated after 1995, when Lukashenko vowed to guide his country toward a path of "market socialism." Belarus's continuing dependence on Russian gas to meet its energy needs could be a problem because Russian gas giant Gazprom has signaled its intention to increase gas prices in early 2007.
Business Freedom - 54.5%
Starting a business takes an average of 69 days, compared to the world average of 48 days. Entrepreneurship should be easier for maximum job creation. Obtaining a business license is difficult, and closing a business is very difficult. Burdensome regulations discourage private enterprises, leading small and medium-sized private companies to concentrate in retail and catering, where relatively low sunk costs prevent excessively high losses. The overall freedom to start, operate, and close a business is limited by the national regulatory environment.
Trade Freedom - 62.2%
The weighted average tariff rate in Belarus was 8.9 percent in 2002. The government maintains extensive import licensing and quotas. Consequently, an additional 20 percent is deducted from Belarus's trade freedom score to account for non-tariff barriers.
Fiscal Freedom - 87.9%
Belarus has moderate tax rates. The top income tax rate is 30 percent, and the top corporate income tax rate is 24 percent. Other taxes include a value-added tax (VAT), an ecological tax, and a turnover tax. In the most recent year, overall tax revenue as a percentage of GDP was 18.6 percent.
Freedom from Government - 66.9%
Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 36.5 percent of GDP, and the government received 5.9 percent of its total revenues from state-owned enterprises and government ownership of property. Privatization is stalled.
Monetary Freedom - 61.4%
Inflation is relatively high, averaging 13.9 percent between 2003 and 2005. Relatively high and unstable prices explain most of the monetary freedom score. The government subsidizes many basic goods and services, sets prices of products made by state-owned enterprises, and regulates prices in the retail sector. Consequently, an additional 15 percent is deducted from Belarus's monetary freedom score to adjust for price control measures that distort domestic prices.
Investment Freedom - 20.0%
There are significant restrictions on capital transactions. Foreign investment must be registered with the Minsk City Executive Committee. There are restrictions in the share of foreign investment in insurance organizations and banks. An inefficient bureaucracy, corruption, and concerted resistance to the private sector all serve to hinder foreign investment. In March 2004, the government extended the "golden share" rule to include companies in which the government has no claim at all. Foreigners may not own land. Capital transactions, resident and non-resident accounts, invisibles, and current transfers are subject to strict controls.
Financial Freedom - 10.0%
Belarus's financial system is very heavily influenced by the government. All but one of the 31 banks are owned or controlled by the state. A handful of commercial banks dominate the financial sector and account for about 85 percent of banking assets. Five of these banks are state-controlled. The central bank is fully controlled by the government. Banks are frequently pressured into making politically motivated loans, which comprised over half of all outstanding loans in 2004. Foreign banks face high barriers, and barriers to credit are high. The non-bank financial sector is small and inhibited by state intervention and irregular regulatory enforcement. Policies enacted in 2004 and 2005 curtailed competition in the insurance sector and led many companies to leave the market. The stock market is small and largely dormant.
Property Rights - 20.0%
The legal system does not fully protect private property, and the inefficient court system does not enforce contracts consistently. The judiciary has proved neither independent nor objective by international standards. Independent lawyers were barred from practicing in 1997.
Freedom from Corruption - 26.0%
Corruption is perceived as widespread. Belarus ranks 107th out of 158 countries in Transparency International's Corruption Perceptions Index for 2005.
Labor Freedom - 64.7%
The labor market operates under relatively flexible employment regulations that hinder employment and productivity growth. The non-salary cost of employing a worker is very high, but dismissing a redundant employee is relatively costless. The unemployment insurance system, funded almost entirely by employers with some government assistance, offers benefits approximately equivalent to 30 percent of an average worker's annual salary.
