2012 Index of Economic Freedom: Bulgaria Still “Moderately Free”

Thanks to its traditional strong showings in areas such as property rights, freedom from corruption and business and trade freedom, Europe posted another year of strong scores in the 2012 Index of Economic Freedom, published annually by The Wall Street Journaland The Heritage Foundation.

But editors of the report caution Europe is slipping in many ways and that trouble lies ahead if European governments don’t address their spending crises. Already, Europe ranks last among the six regions in fiscal freedom and government spending.

The region has been undergoing tumultuous and uncertain times epitomized by the ongoing sovereign debt crisis,” the Index editors wrote. “Europe’s overall economic freedom rating is seriously undermined by weak scores in the management of government spending.”

Now in its 18th year, the Index rates countries on four broad areas of economic freedom – rule of law, regulatory efficiency, limited government and open markets. The world average dipped to 59.5, a drop of .2 points and the second-lowest score of the last 10 years. Scores improved for 75 of the 179 countries rated, declined for 90 and stayed the same for the rest.

For now, the continent seems on solid ground in many areas of economic freedom. Europe exceeds the world average in seven of 10 economic freedoms. It is 15 points ahead in property rights and freedom from corruption and 10 ahead in business and trade freedom.

Of its 43 countries, 80 percent rank as moderately free or mostly free and 9 rank among the world’s 20 freest economies. Switzerland, whose economy is rated as free, ranks 5th in the world and Ireland 9th. Great Britain climbed back into the Top 15 after implementing austerity measures and tax cuts, and Iceland returned to the mostly free category with a gain of 2.7 points – the third-largest increase in the world.

But Greece – where the sovereign debt crisis has taken hold – dropped 4.9 points, the largest decline in the world, and fell into the mostly unfree category. And Ireland, Denmark, Luxembourg, Estonia, Finland, Cyprus, Norway and Slovakia all fell by 1.5 points or more.

The Index results continued to prove countries that adopt the policies that lead to high scores also enjoy the most prosperity, security and success. In the United Nations’ assessment of “poverty intensity,” mostly and moderately free countries perform three times better than mostly unfree and unfree countries. And the freest countries in each region have per capita incomes far higher than the least free countries.

Bulgaria’s economic freedom score is 64.7, making its economy the 61st freest in the 2012 Index. Its overall score is down slightly, reflecting deterioration in freedom from corruption, government spending, and business freedom. Bulgaria is ranked 27th out of 43 countries in the Europe region, and its overall score is above the world average but below the regional average.

Bulgaria has weathered the impact of the global economic downturn relatively well, with the economy supported by generally prudent public finance management. Continued reform to strengthen the foundations of economic freedom, however, will be indispensable in ensuring vibrant economic development in coming years. Lingering corruption and the weak rule of law have added to the cost of conducting business.

Bulgaria’s transition to a more open and flexible economic system has been facilitated by substantial restructuring measures over the past decade. While maintaining macroeconomic stability, it has made considerable progress in income growth and poverty reduction. Competitive flat tax rates and a competitive trade regime, supported by a relatively efficient regulatory framework, have encouraged the development of a growing entrepreneurial sector.

 

 

Respect for constitutional provisions securing property rights and providing for an independent judiciary is somewhat lax. The judicial system is unable to enforce property rights effectively, and inconsistent application of the rule of law discourages private investments. Despite legal restrictions, government corruption and organized crime present a threat to Bulgaria’s border security.

 

The income and corporate tax rates are a flat 10 percent. Other taxes include a value-added tax (VAT) and an estate tax, with the total tax burden equivalent to 25.7 percent of total domestic income. Government spending has risen to 40.7 percent of total domestic output, leading to a higher budget deficit of around 4 percent of GDP. Public debt remains quite low at 17.4 percent of GDP.

 

Launching a business has become less time-consuming, and licensing requirements have been eased, though the pace of change has lagged behind some other countries in recent years. Labor regulations are relatively flexible, although the non-salary cost of employees can be burdensome. Labor productivity has been slightly higher than wage increases. Most prices are determined by market forces, and inflation has been modest.

 

The trade weighted tariff is 1.4 percent as in other members of the European Union, with myriad non-tariff barriers sometimes nullifying the low tariff. Foreign and domestic investors are treated equally, but arbitrary bureaucracy is an impediment to more dynamic investment. Privatization of state-owned banks is complete, and foreign banks account for more than 80 percent of total assets. Credit is generally allocated on market terms.

 

 

 

More information:

2012 Index of Economic Freedom – The full text, including charts and graphs, is available online here: http://www.heritage.org/Index/

Bulgarian chapter is available here: http://www.heritage.org/Index/country/Bulgaria


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