Economic Freedom : Balkan Winners and Losers

The Index, published by The Wall Street Journal and The Heritage Foundation, evaluates 183 countries based on ten indicators that evaluate openness, the rule of law, and competitiveness.

The Index ranks economies according to their economic freedom, which include individual empowerment, non-discrimination, and the promotion of competition, evaluating economic policy developments since the second half of 2009.

Hong Kong tops the list with a score of 89.7, while North Korea rounds out the list at 179 with a score of 1.

Europe and North America lag behind the developing world in progress since last year, though some « reform-minded economies", including Bulgaria and Serbia, have seen overall score improvements due to tax cuts, simplified regulatory frameworks, and other structural reforms, according to the Index.

All Balkan countries ranked slightly below the regional European average, but only Serbia and Bosnia and Herzegovina received scores below the world average. Macedonia was the highest ranking economy in the Balkans, coming in 55th place out of the 183 countries in the Index.


Macedonia - Leads Reforms:

Macedonia’s overall economic freedom score of 66 increased slightly from last year, the result of improvements in freedom from corruption and monetary freedom, two of the Index indicators.

The report says Skopje has carried out important reforms in recent years, which have spurred economic growth and the development of a "thriving entrepreneurial sector.

"Competitive flat tax rates and a growing financial sector that allocates credit on market terms contribute to private-sector dynamism, as does Macedonia’s openness to foreign trade and investment," it says.

As in all Balkan countries, substantial levels of corruption still damage the business environment and slow down innovation, although the Index notes improvements to lowering corruption levels this year, increasing its score slightly.


Bulgaria - Significant Gains :

Bulgaria is one of only two European countries to make it onto the list of biggest gainers in the report - countries that gained at least two points in their score from last year - the result of improvements in seven of the 10 economic freedom categories.

With an economic freedom score of 64.9, Bulgaria's economy is the 60th freest in the 2011 Index, and the report notes that Sofia has carried out significant reforms over the past decade and has made progress in income growth and poverty reduction.

Unlike Romania, Bulgaria "has weathered the impact of the global economic downturn relatively well, with the economy supported by generally prudent fiscal policy and sound public debt management".

Continued reform, however, is crucial to sustaining economic growth, and "corruption and the weak rule of law increase the cost of conducting business and constrain more dynamic economic development."


Romania - Continued Recovery :

Romania made improvements in five of the ten economic freedom indicators and scored slightly higher than last year, with the economy ranking 63rd freest in the 2011 Index with an overall score of 64.7.

Romania was hit hard by the global financial crisis, and has implemented a variety of significant austerity measures as it attempts to recover with the help of an IMF-led aid package.

The report notes that the financial crisis slowed Romania's "economic dynamism", which has been seen as a result of the "openness and flexibility [of the economy] over the past decade".

The budget deficit has risen, putting greater pressure on the government for fiscal restraint.

However, deeper reforms in areas such as public finance management and the labour market are now required. Institutional challenges that persist include widespread corruption and a rigid labour market, and the judiciary remains vulnerable to political interference, the report finds.

Romania scored significantly higher in investment freedom (+5.5), while other indicators had only a slight or no change to their score.


Albania - Dropping Down:

Albania, which has boosted its economy through the services and construction sectors over the past several years, comes in 70th place in terms of the freest economy.

Its level of economic freedom declined by two points to 64 during the past year, mainly as a result of decreases in trade freedom, investment freedom, freedom from corruption, labour freedom, and its government spending scores, the report notes.

The Index credits the government with taking action to improve the business environment and fostering growth in the private sector through the adoption of structural reforms.

A familiar issue continues to drag down Albania's economic development- pervasive corruption. It also suffers from weak property rights and political interference in the judiciary, the report found, and its FDI levels remain among the lowest in the region.


Montenegro – Becoming "Modern and Vibrant"

Montenegro's score decreased by 1.1 points since last year, falling to 62.5, which the Index attributes to the "explosive growth of government spending".

Despite the slight decrease, Podgorica is the 76th freest economy in the 2011 Index, and the report notes that the country has made "tremendous gains in its move toward becoming a modern and vibrant economy" thanks largely to an increasingly open trade regime and more efficient legal frameworks for investment and production.

Areas that negatively affect Montenegro's economic freedom score are similar to those found in other countries in the region - inadequate protection of property rights and an ineffective fight against corruption, as well as the lack of a truly independent judiciary.

Montenegro's government spending score dropped dramatically (-25.8) from last year. The report noted that "total government expenditures, including consumption and transfer payments, climbed to 48.8 percent of GDP...  The structural deficit now measures 6 per cent of GDP, and public debt has risen to 38.8 per cent of GDP."


Croatia - "Increasingly Vibrant Private Sector" :

Croatia’s economic freedom score is 61.1, making its economy the 82nd freest in the 2011 Index. Its overall score is 1.9 points higher than last year, with improvements in six of the 10 indicators. Croatia has moved up 10 spots in the world rankings, but its overall score is still below the regional average.

The Index notes that Croatia’s economic freedom has improved largely as a result of structural reforms and an increasingly vibrant private sector. The report also finds that Croatia withstood the global financial crisis "relatively well", and notes that the country's "openness to global trade and competitive tax reforms contributed to modernization of the economy and strong economic expansion before the global economic slowdown".

According to the report, Croatia's economic freedom is restricted by "considerable state intervention in key areas of the economy", and corruption and the lack of a truly independent judiciary continue to negatively affect the country.


Serbia - Political Will Lacking :

Serbia ranks just ahead of Bosnia in the 2011 index - at 101 with a score of 58- with similar areas in need of reform and action, including levels of corruption, bureaucracy, and a weak judiciary. A lack of political will to implement tough reforms is also cited in the report, along with high and poorly managed government spending, which drags down Serbia's economic potential.

Serbia, which is ranked 38th of 43 countries in the Europe region, has carried out significant structural reforms in some areas. Low, flat tax rates and flexible employment regulations boost entreprenurial activity in the country, according to the report.


Bosnia – Near the Bottom :

Bosnia and Herzegovina’s economy is the least free in the Balkans, ranking 104th in the 2011 Index, with an economic freedom score of 57.5.

Its score improved slightly over last year, thanks to "significant improvements in trade freedom, monetary freedom, and property rights".

But with an overall score well below the regional average, Bosnia continues to be plagued by "inefficient and high government spending, weak protection of property rights, and widespread corruption", all of which "discourage entrepreneurial activity".

The Index also targets the rule of law and the independence of the courts as areas that need improvement, as well as bureaucracy reminiscent of the Communist era.


The 2011 Index of Economic Freedom, published by The Wall Street Journal and The Heritage Foundation, was released by its strategic partner, the Adriatic Institute for Public Policy an independent think tank in Rijeka, Croatia.