TURKMENISTAN
Rank: 152 Regional Rank: 28 of 30
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urkmenistan’s economy is 42.5 percent free, according to our 2007 assessment, which makes it the world’s 152nd freest economy. Its overall score is 1.3 percentage points lower than last year, partially reflecting new methodological detail. Turkmenistan is ranked 28th out of 30 countries in the Asia–Pacific region, and its overall score is much lower than the regional average. Turkmenistan scores well in fiscal freedom, freedom from government, and trade freedom. The top income tax is only 10 percent, and the corporate tax is 20 percent. Government spending equals slightly more than one-fifth of national GDP. While there are non-tariff barriers, including cumbersome regulations, the average tariff rate is low. Turkmenistan’s business freedom, investment freedom, financial freedom, labor freedom, property rights, and freedom from corruption are all weak. Although total government spending is fairly low relative to GDP, a non-transparent regulatory system discourages both local businesses and foreign investment. The national financial market is unsophisticated, and most operations are dominated by the state; accordingly, many people keep their money in cash. The judicial system is wholly controlled by the state, and corruption pervades the judiciary and civil service. Inflation is fairly high, and the government subsidizes a wide array of goods. The labor market is highly inflexible, with the government providing most of the country’s jobs. BACKGROUND: Since gaining its independence in 1991, Turkmenistan has remained impoverished and largely closed to the outside world. Its government, led by President Saparmurat Niyazov, is composed mainly of former Communists who resist reform. Turkmenistan’s large external debt is due to low export prices and a heavy reliance on imports. Its main exports are gas, oil, and oil products, which are sold primarily to Russia. A recent agreement with Russia will double the export price of Turkmen gas. The other main industry, agriculture, is concentrated in cotton, the price of which is kept artificially low. How Do We Measure Economic Freedom? See Chapter 3 (page 37) for an explanation of the methodology or visit the Index Web site at heritage.org/index.
The economy is 42.5% free
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Asia Average = 59.1 World Average = 60.6
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1995
2007
QUICK FACTS
Population: 4.8 million GDP (PPP): $39.5 billion 17.2% growth in 2004 17.8% 5-yr. comp. ann. growth $8,000 per capita Unemployment: 60% (2004 estimate) Inflation (CPI): 5.9% FDI (net inflow): $150 million (gross) Official Development Assistance: Multilateral: $7 million Bilateral: $32 million (22% from the U.S.) External Debt: $2.4 (2001 estimate) Exports: $3.9 billion Primarily gas, crude oil, petrochemicals, cotton fiber, textiles Imports: $3.2 billion Primarily machinery and equipment, chemicals, food
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TURKMENISTAN’S TEN ECONOMIC FREEDOMS
Business Freedom Trade Freedom Fiscal Freedom Fdm fm Government Monetary Freedom Investment Freedom Financial Freedom Property Rights Fdm fm Corruption Labor Freedom 30 74.2 94.4 82.9 65.9 10 10 10 18 30
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state-owned utilities and enterprises. Consequently, an additional 15 percent is deducted from Turkmenistan’s monetary freedom score to account for these policies.
L L L L L L L L L L
50 100
INVESTMENT FREEDOM — 10%
The government controls most of Turkmenistan’s economy and restricts foreign participation. Investors face currency and trade restrictions, and the state continues to interfere in companies that have been privatized. The government chooses its investment partners selectively. Deficient rule of law, excessive and inconsistent regulation, and corruption are strong disincentives to foreign investment. Foreign exchange accounts require government approval. All payments and transfers require government approval. Capital transactions face restrictions and central bank approval in some cases.
100 = most free,
= world average
BUSINESS FREEDOM — 30%
The non-transparency of the entire regulatory system is a great challenge to entrepreneurial activities in Turkmenistan. Businesses have difficulty getting copies of laws and regulations as government officials routinely refuse even to provide them. Personal relations with government officials often help to determine how and when government regulations are applied. Considering the private sector a competitor, government entities use regulations as an excuse for restricting private business. The overall freedom to start, operate, and close a business is seriously restricted by the national regulatory environment.
FINANCIAL FREEDOM — 10%
Turkmenistan’s financial system is subject to very heavy government influence. A financial crisis led the number of banks in operation to fall from 67 to 12 in mid-2004. Many banks are insolvent by international standards, and the financial sector is dominated by state-owned or state-influenced institutions. An estimated 95 percent of all loans go to state-owned enterprises. The government directs credit allocation, often at subsidized rates. Most individuals hold their wealth in cash, preferably foreign currency. The central bank is not independent. Private enterprises have little access to credit. There are no significant non-bank financial institutions, and the state-owned insurance company is the sole insurer. There is no private capital market.
TRADE FREEDOM — 74.2%
Turkmenistan’s weighted average tariff rate was 2.9 percent in 2002. Prohibitive tariffs for agricultural and food products, import taxes and fees, export bans, and customs procedures that are bureaucratic, slow, and subject to corruption add to the cost of trade. Consequently, an additional 20 percent is deducted from Turkmenistan’s trade freedom score to account for these non-tariff barriers.
PROPERTY RIGHTS — 10%
The legal system does not strongly enforce contracts and rights. Laws are poorly developed, and judicial employees and judges are poorly trained and open to bribery.
FISCAL FREEDOM — 94.4%
Turkmenistan enjoys low tax rates. The top income tax rate is 10 percent, and the top corporate tax rate is 20 percent. Other taxes include a value-added tax (VAT) and an excise tax. Important gaps in the available data include figures for government finance. In the most recent year, overall tax revenue as a percentage of GDP was 18.3 percent.
FREEDOM FROM CORRUPTION — 18%
Corruption is perceived as widespread. Turkmenistan ranks 155th out of 158 countries in Transparency International’s Corruption Perceptions Index for 2005.
LABOR FREEDOM —30% FREEDOM FROM GOVERNMENT — 82.9%
Total government expenditures in Turkmenistan, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 22.1 percent of GDP. Turkmenistan has made very limited progress in economic reforms. Government intervention has been pervasive in the economy, and privatization has stalled. There are still mandatory state plans. The labor market operates under highly inflexible employment regulations that hinder overall productivity growth. The government provides the majority of jobs. Minimum wages are mandated by the state.
MONETARY FREEDOM — 65.9%
Inflation in Turkmenistan is high, averaging 9.1 percent between 2003 and 2005. Relatively high and unstable prices explain most of the monetary freedom score. A system of subsidies, price controls, and free provision of utilities underpins the government’s economic policies, and the government also influences prices through numerous
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2007 Index of Economic Freedom