Estonia has one of world's freest economies

TALLINN - Estonia has one of the world's freest economies and Lithuania's economy has shown one of the greatest overall improvements in the last eight years, according to U.S. think tank The Heritage Foundation and The Wall Street Journal.

In the two organizations' annual index of economic freedom for 2002, Estonia together with the United States, Ireland, the Netherlands and Luxembourg tied for fourth place behind Hong Kong, Singapore and New Zealand among 156 world economies.

Lithuania in the 29th place was ranked a "mostly free" country and the second most successful of the former communist countries after Estonia. Latvia was 38th and Russia 131st.

The index of economic freedom is compiled from the most up-to-date information on foreign investment codes, taxes, tariffs, banking regulations, monetary policy and black markets. It aims to be a guide for potential investors and policy makers.

The authors of the publication say economic freedom is the key to economic growth, while excessive regulation and closed borders hinder investments and retard growth.

Estonia rose 14 places this year thanks to an improved monetary policy, loosening of restrictions on banks, and market oriented wages and prices. Its high ranking was also due to the well developed state of its banking sector, 90 percent of which is in the hands of foreign investors.

Estonia also has very low trade barriers, is very open to foreign investment and has no price controls, the 2002 Index of Economic Freedom reported.

The only category in which Estonia lost points compared to last year was for levels of black market activity, which increased.

Siim Kallas, minister of finance, said that preserving Estonia's current high position would be a great challenge. The government would have to reduce its intervention in the economy, cut spending as a proportion of gross domestic product and reduce taxes, he said. Estonian government spending amounted to 35.8 percent of GDP in 1999, compared to 30 percent in Lithuania in the same year and 40.3 percent in Latvia in 1998.

The survey's authors characterized Lithuania as a functioning market economy, with a low level of market protectionism and low inflation.

The average annual rate of inflation from 1992 to 2000 was 2.29 percent in Lithuania, 3.37 percent in Latvia and 4.86 percent in Estonia.

A minus point for Lithuania was the slow pace of privatization of its infrastructure, energy sector and banks.

The report shows that Latvia's economy has grown steadily since 1996, with both foreign and domestic investments expected to increase in the near future as confidence grows.

Latvia has decreased government intervention and black market activity over the last year but reform has been hindered by frequent changes in government, the report found.

Development has also been hindered by delays in privatizing three mayor industries, which represent a considerable share of GDP. Levels of corruption are of particular concern in the region. Lithuania comes 42nd and Latvia 46th in the index's corruption ranking.

The index says economic freedom has advanced throughout the world, with the economies of 73 countries showing improvement and the economies of 53 worsening. It characterizes 71 countries as either "free" or "mostly free" and 85 as "mostly unfree" or "repressed." The report's findings are presented at index.heritage.org.