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Luxembourg
Luxembourg's
economic freedom score is 75.2, making its economy the 15th freest in the
2009 Index. Its overall score is 0.5 point higher than last year,
reflecting improvements in three of the 10 economic freedoms, particularly
government size. Luxembourg is ranked 8th out of 43 countries in the
Europe region.
Luxembourg, one of the
leading global financial centers and a sophisticated service-dominated
economy, benefits from high levels of investment freedom, trade freedom,
financial freedom, respect for property rights, and business freedom.
Offering a favorable climate for foreign investment, the government has
streamlined registration for new businesses. Virtually all commercial
operations are simple and transparent. The judiciary, independent of
politics and free of corruption, has demonstrated an exemplary ability to
protect property rights.
Luxembourg scores below
the world average in three areas: fiscal freedom, labor freedom, and
government size. Government spending, although lower than that of some
other EU member countries, accounts for almost 40 per cent of GDP. The
government has undertaken gradual reforms to improve the management of
public finance. A more flexible labor market would enhance employment
growth.
Background
The Grand Duchy of
Luxembourg is a small, stable, and wealthy country. A founding member of
the European Union in 1957, it continues to be a primary driver of further
European integration. It was one of the founding members of the single
European currency in 1999. Luxembourgers enjoy a high standard of living
with one of the world's highest income levels. During the 20th century,
Luxembourg evolved from an industrial economy into a mixed manufacturing
and services economy. With a financial services industry that accounts for
a major portion of GDP, it is Europe's principal center for mutual funds
and a major force in the banking and insurance industries. It has a
skilled workforce and well-developed infrastructure.
Business freedom 76.2%
The overall freedom to
conduct a business is relatively well protected under Luxembourg's
regulatory environment. Starting a business takes 26 days, compared to the
world average of 38 days. Obtaining a business license requires slightly
less than the world average of 18 procedures and 225 days.
Trade freedom 85.8%
Luxembourg's trade
policy is the same as that of other members of the European Union. The
common EU weighted average tariff rate was 2.1 per cent in 2005.
Non-tariff barriers reflected in EU policy include agricultural and
manufacturing subsidies, import restrictions for some goods and services,
market access restrictions in some services sectors, non-transparent and
restrictive regulations and standards, and inconsistent customs
administration across EU members. Some biotechnology bans and services
market access barriers exceed the EU norm. Ten points were deducted from
Luxembourg's trade freedom score to account for non-tariff barriers.
Fiscal freedom 66.3%
Luxembourg has a high
income tax rate but a low corporate tax rate. The top income tax rate is
39 per cent (38 per cent plus a 2.5 per cent surcharge). The top corporate
tax rate is 22.9 per cent (including a 4 per cent employment fund
contribution), but municipal business taxes can raise the effective rate
to as high as 29.6 per cent. Other taxes include a value-added tax (VAT)
and an inheritance tax. In the most recent year, overall tax revenue as a
percentage of GDP was 36.4 per cent.
Government size 54.4%
Total government
expenditures, including consumption and transfer payments, are high. In
the most recent year, government spending equaled 39 per cent of GDP.
Faced with rising wages and early retirements, the government must find a
way to deal with an unsustainable public pension scheme that is one of the
most generous in the region.
Monetary freedom 80.2%
Luxembourg is a member
of the euro zone. Inflation is low, averaging 2.4 per cent between 2005
and 2007. As a participant in the EU's Common Agricultural Policy, the
government subsidises agricultural production, distorting the prices of
agricultural products. The government also regulates electricity rates and
some fuel prices and influences prices through state-owned enterprises.
Ten points were deducted from Luxembourg's monetary freedom score to
account for policies that distort domestic prices.
Investment freedom 90.0%
Foreign and domestic
businesses receive equal treatment. Branches or subsidiaries of
non–European Economic Area banks must be licensed. Investments that
directly affect national security are restricted. Bureaucratic procedures,
including those for licenses and permits, are sufficiently streamlined and
transparent, and there is far less red tape than in larger European
countries. Both residents and non-residents may hold foreign exchange
accounts. There are no restrictions or barriers with respect to capital
transactions, current transfers, repatriation of profits, purchase of real
estate, or access to foreign exchange.
Financial freedom 80.0%
Luxembourg is a global
financial hub, and the sophisticated banking sector is well capitalised
and competitive. Financial and banking regulations are transparent and
effective. Government policies ensure the free flow of financial resources
for domestic as well as foreign investors. The financial sector accounts
for about 32 per cent of GDP and employs about 10 per cent of the labor
force. There are more than 150 banks from over 25 countries, offering a
full range of banking services on competitive terms. Many of the world's
leading banks have established subsidiaries in Luxembourg. The one
state-owned bank offers medium- and long-term financing of investments by
Luxembourg-based companies. The investment fund industry has been
expanding rapidly. Capital markets are well developed, and trading on the
Luxembourg Stock Exchange is very active with over 4,000 issuers from
about 105 countries represented.
Property rights 90.0%
Private property is well
protected, and contracts are secure. Luxembourg adheres to key
international agreements on intellectual property rights and protects
patents, copyrights, trademarks, and trade secrets.
Freedom from corruption
84.0%
Corruption is perceived
as minimal. Luxembourg ranks 12th out of 179 countries in Transparency
International's Corruption Perceptions Index for 2007. Giving or
Labour freedom 45.1%
Luxembourg's burdensome
labour regulations hinder employment and productivity growth. Unemployment
benefits are almost twice as high as those in neighboring countries.
Restrictions on the number of work hours remain rigid.
— Courtesy: The
Heritage Foundation
Quick Facts
Population
0.5 million
GDP (PPP)
$34.9 billion
6.1% growth
4.4% 5-year compound
annual growth
$75611 per capita
Unemployment
4.4%
Inflation (CPI)
2.3%
FDI Inflow
$29.3 billion
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