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FINLAND Economic Freedom Score 25 Least free World Rank: 17 inland’s economic freedom score is 73.8, making its economy the 17th freest in the 2010 Index. Its score declined by 0.7 point as a result of modest reductions in monetary freedom, property rights, and freedom from corruption. Finland is ranked 8th out of 43 countries in the Europe region, and its overall score is well above the world average. The modern and competitive Finnish economy has long benefited from high levels of economic freedom. The economy remains a world leader in business freedom, trade freedom, property rights, and freedom from corruption. Private enterprises continue to blossom and promote innovation in an efficient regulatory and legal environment. With prudent and sound banking practices, the financial sector has weathered the global financial turbulence relatively well. Finland’s overall high level of economic freedom is curbed by high government spending and the rigidity of the labor market. As in many other European social democracies, high government spending (close to half of Finland’s GDP) supports an extensive welfare state. Restrictive labor regulations undermine employment and productivity growth. Background: Finland joined the European Union in 1995 and adopted the euro as its currency in 1999. The country is sparsely populated, with about one-fourth of its land mass above the Arctic Circle, but boasts a modern, competitive, and transparent economy with vibrant information and communications technology sectors. Previously robust economic growth slowed in 2009 due to the global recession, and Finland, like many other European nations, faces demographic challenges in the form of an aging population and shrinking workforce that could threaten future growth and the government’s ability to maintain generous social spending programs. Finland became a member of NATO’s Partnership for Peace program in 1994 but has not pursued full NATO membership because of its neutral military status. 75 Most 100 free 0 73.8 Regional Rank: 8 F 50 100 100 Country’s Score Over Time Most free 8080 World average 6060 4040 Finland 2020 00 Least free 1995 1998 2001 2004 2007 2010 Quick Facts Population: 5.3 million GDP (PPP): $188.2 billion 0.9% growth in 2007 3.2% 5-year compound annual growth $35,427 per capita Unemployment: 6.4% Inflation (CPI): 3.9% FDI Inflow: –$4.2 billion 2008 data unless otherwise noted Data compiled as of September 2009 How Do We Measure Economic Freedom? See page 457 for an explanation of the methodology or visit the Index Web site at heritage.org/index. 195 finland’s Ten Economic Freedoms Business Freedom Trade Freedom Fiscal Freedom Government Spending Monetary Freedom Investment Freedom Financial Freedom Property Rights Fdm. from Corruption Labor Freedom It also imposes artificially low prices on pharmaceutical products. Ten points were deducted from Finland’s monetary freedom score to account for measures that distort domestic prices. 95.0 87.5 65.4 32.9 78.9 75.0 80.0 90.0 90.0 43.8 INVESTMENT FREEDOM — 75 0 0 least free20 40 50 60 = world average 100 100 most free 80 BUSINESS FREEDOM — 95 The overall freedom to start, operate, and close a business is strongly protected under Finland’s regulatory environment. Starting a business takes an average of 14 days, compared to the world average of 35 days. Obtaining a business license requires much less than the world average of 18 procedures and 218 days. Bankruptcy is straightforward and not costly. TRADE FREEDOM — 87.5 Finland’s trade policy is the same as that of other members of the European Union. The common EU weighted average tariff rate was 1.3 percent in 2008. However, the EU has high or escalating tariffs for agricultural and manufacturing products and its MFN tariff code is complex. Non-tariff barriers reflected in EU and Finnish policy include agricultural and manufacturing subsidies, quotas, import restrictions and bans for some goods and services, market access restrictions in some services sectors, non-transparent and restrictive regulations and standards, and inconsistent regulatory and customs administration among EU members. Ten points were deducted from Finland’s trade freedom score to account for non-tariff barriers. FISCAL FREEDOM — 65.4 Finland has moderate tax rates but a relatively high level of overall taxation. The top income tax rate is 30.5 percent, with municipal rates between 16.5 percent and 20 percent. The top corporate tax rate is 26 percent. Other taxes include a value-added tax (VAT), an inheritance tax, and a flat 28 percent tax on capital income. In the most recent year, overall tax revenue as a percentage of GDP was 43.1 percent. Finland is open to foreign direct investment. Certain acquisitions of large companies may require follow-up clearance from the Ministry of Trade and Industry. Non–European Economic Area investors must apply for a license to invest in security, electrical contracting, alcohol, telecommunications, aviation, and restaurants. Regulation is relatively transparent and efficient. There are no exchange controls and no restrictions on current transfers or repatriation of profits, and residents and non-residents may hold foreign exchange accounts. Restrictions on the purchase of land apply only to non-residents purchasing land in the Aaland Islands. FINANCIAL FREEDOM — 80 Finland’s sophisticated financial system provides a wide range of services, guided by sound regulations and prudent lending. There are more than 300 domestic banks, but three bank groups (Nordea, OP Bank Group, and the Sampo Group) dominate the system. The government owns about 14 percent of the Sampo Group. Banking is open to foreign competition, and about 60 percent of assets are foreign-owned. Capital markets determine interest rates, and credit is available to nationals and foreigners. The stock exchange is part of a Baltic–Nordic exchange network. Merger of the Financial Supervision Authority and Insurance Supervisory Authority came into force in January 2009. The impact of the global financial turmoil on the banking sector has been relatively muted. PROPERTY RIGHTS — 90 Property rights are well protected, and contractual agreements are strictly honored. The quality of the judiciary and civil service is generally high. Expropriation is unlikely. Finland adheres to numerous international agreements concerning the protection of intellectual property. FREEDOM FROM CORRUPTION — 90 Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 47.3 percent of GDP. State ownership of productive assets is considerable. Corruption is perceived as almost nonexistent. Finland is tied for 5th place out of 179 countries in Transparency International’s Corruption Perceptions Index for 2008. Finland is a signatory to the OECD Anti-Bribery Convention. The Council of Europe’s Group of States against Corruption has recommended that Finland sharpen its controls over political financing and increase the transparency of donations to political parties and election candidates. MONETARY FREEDOM — 78.9 LABOR FREEDOM — 43.8 Finland uses the euro as its currency. Between 2006 and 2008, Finland’s weighted average annual rate of inflation was 3.1 percent. As a participant in the EU’s Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. Burdensome labor market regulations hamper employment opportunities and productivity growth. The nonsalary cost of employing a worker is high, and dismissing an employee can be costly. Restrictions on work hours are rigid. GOVERNMENT SPENDING — 32.9 196 2010 Index of Economic Freedom