Kosovo

Over the past few years Kosovo's economy has shown

significant progress in transitioning to a market-based system, but

it is still highly dependent on the international community and the

diaspora for financial and technical assistance. Remittances from

the diaspora - located mainly in Germany and Switzerland - account

for about 30% of GDP. Kosovo's citizens are the poorest in Europe

with an average annual per capita income of only $1800 - about

one-third the level of neighboring Albania. Unemployment - at more

than 40% of the population - is a severe problem that encourages

outward migration. Most of Kosovo's population lives in rural towns

outside of the capital, Pristina. Inefficient, near-subsistence

farming is common - the result of small plots, limited

mechanization, and lack of technical expertise. Economic growth is

largely driven by the private sector - mostly small-scale retail

businesses. With international assistance, Kosovo has been able to

privatize 50% of its state-owned enterprises (SOEs) by number, and

over 90% of SOEs by value. Minerals and metals - including lignite,

lead, zinc, nickel, chrome, aluminum, magnesium, and a wide variety

of construction materials - once formed the backbone of industry,

but output has declined because investment has been insufficient to

replace ageing Eastern Bloc equipment. Technical and financial

problems in the power sector also impedes industrial development.

The US has worked with the World Bank to prepare a commercial tender

for the development of new power generating and mining capacity. The

official currency of Kosovo is the euro, but the Serbian dinar is

also used in the Serb enclaves. Kosovo's tie to the euro has helped

keep inflation low. Kosovo has maintained a budget surplus as a

result of efficient tax collection and inefficient budget execution.

While maintaining ultimate oversight, UNMIK continues to work with

the EU and with Kosovo's government to accelerate economic growth,

lower unemployment, and attract foreign investment. In order to help

integrate Kosovo into regional economic structures, UNMIK signed (on

behalf of Kosovo) its accession to the Central Europe Free Trade

Area (CEFTA) in 2006. In February 2008, UNMIK also represented

Kosovo at the newly established Regional Cooperation Council (RCC).

Kuwait

Kuwait is a small, rich, relatively open economy with

self-reported crude oil reserves of about 104 billion barrels - 10%

of world reserves. Petroleum accounts for nearly half of GDP, 95% of

export revenues, and 80% of government income. High oil prices in

recent years have helped build Kuwait's budget and trade surpluses

and foreign reserves. As a result of this positive fiscal situation,

the need for economic reforms is less urgent and the government has

not earnestly pushed through new initiatives. Despite its vast oil

reserves, Kuwait experienced power outages during the summer months

in 2006 and 2007 because demand exceeded power generating capacity.

Power outages are likely to worsen, given its high population growth

rates, unless the government can increase generating capacity. In

May 2007 Kuwait changed its currency peg from the US dollar to a

basket of currencies in order to curb inflation and to reduce its

vulnerability to external shocks.

Kyrgyzstan

Kyrgyzstan is a poor, mountainous country with a

predominantly agricultural economy. Cotton, tobacco, wool, and meat

are the main agricultural products, although only tobacco and cotton

are exported in any quantity. Industrial exports include gold,

mercury, uranium, natural gas, and electricity. Following

independence, Kyrgyzstan was progressive in carrying out market

reforms such as an improved regulatory system and land reform.

Kyrgyzstan was the first Commonwealth of Independent States (CIS)

country to be accepted into the World Trade Organization. Much of

the government's stock in enterprises has been sold. Drops in

production had been severe after the breakup of the Soviet Union in

December 1991, but by mid-1995, production began to recover and

exports began to increase. The economy is heavily weighted toward

gold export and a drop in output at the main Kumtor gold mine

sparked a 0.5% decline in GDP in 2002 and a 0.6% decline in 2005.

GDP grew more than 6% in 2007, partly due to higher gold prices

internationally. The government made steady strides in controlling

its substantial fiscal deficit, nearly closing the gap between

revenues and expenditures in 2006, before boosting expenditures more

than 20% in 2007. The government and international financial

institutions have been engaged in a comprehensive medium-term

poverty reduction and economic growth strategy. In 2005, Bishkek

agreed to pursue much-needed tax reform and, in 2006, became

eligible for the heavily indebted poor countries (HIPC) initiative.

Progress fighting corruption, further restructuring of domestic

industry, and success in attracting foreign investment are keys to

future growth.

Laos

The government of Laos, one of the few remaining one-party

Communist states, began decentralizing control and encouraging

private enterprise in 1986. The results, starting from an extremely

low base, were striking - growth averaged 6% per year in 1988-2007

except during the short-lived drop caused by the Asian financial

crisis beginning in 1997. Despite this high growth rate, Laos

remains a country with a underdeveloped infrastructure, particularly

in rural areas. It has no railroads, a rudimentary road system, and

limited external and internal telecommunications, though the

government is sponsoring major improvements in the road system with

support from Japan and China. Electricity is available in urban

areas and in most rural districts. Subsistence agriculture,

dominated by rice, accounts for about 40% of GDP and provides 80% of

total employment. The economy will continue to benefit from aid from

international donors and from foreign investment in hydropower and

mining. Construction will be another strong economic driver,

especially as hydroelectric dam and road projects gain steam.

Several policy changes since 2004 may help spur growth. In late

2004, Laos gained Normal Trade Relations status with the US,

allowing Laos-based producers to benefit from lower tariffs on

exports. Laos is taking steps to join the World Trade Organization

in the next few years; the resulting trade policy reforms will

improve the business environment. On the fiscal side, a value-added

tax (VAT) regime, slated to begin in 2008, should help streamline

the government's inefficient tax system.

Latvia

Latvia's economy experienced GDP growth of more than 10% per

year during 2006-07. The majority of companies, banks, and real

estate have been privatized, although the state still holds sizable

stakes in a few large enterprises. Latvia officially joined the

World Trade Organization in February 1999. EU membership, a top

foreign policy goal, came in May 2004. The current account deficit -

more than 22% of GDP in 2007 - and inflation - at nearly 10% per

year - remain major concerns.

Lebanon

The 1975-90 civil war seriously damaged Lebanon's economic

infrastructure, cut national output by half, and all but ended

Lebanon's position as a Middle Eastern entrepot and banking hub. In

the years since, Lebanon has rebuilt much of its war-torn physical

and financial infrastructure by borrowing heavily - mostly from

domestic banks. In an attempt to reduce the ballooning national

debt, the Rafiq HARIRI government in the 1990s began an austerity

program, reining in government expenditures, increasing revenue

collection, and privatizing state enterprises, but economic and

financial reform initiatives stalled and public debt continued to

grow despite receipt of more than $2 billion in bilateral assistance

at the 2002 Paris II Donors Conference. The Israeli-Hizballah

conflict in July-August 2006 caused an estimated $3.6 billion in

infrastructure damage, and prompted international donors to pledge

nearly $1 billion in recovery and reconstruction assistance. Donors

met again in January 2007 at the Paris III Donor Conference and

pledged more than $7.5 billion to Lebanon for development projects

and budget support, conditioned on progress on Beirut's fiscal

reform and privatization program. An 18-month political stalemate

and sporadic sectarian and political violence hampered economic

activity, particularly tourism, retail sales, and investment, until

a new government was formed in July 2008.

Lesotho

Small, landlocked, and mountainous, Lesotho relies on

remittances from miners employed in South Africa and customs duties

from the Southern Africa Customs Union for the majority of

government revenue. However, the government has recently

strengthened its tax system to reduce dependency on customs duties.

Completion of a major hydropower facility in January 1998 permitted

the sale of water to South Africa and generated royalties for

Lesotho. Lesotho produces about 90% of its own electrical power

needs. As the number of mineworkers has declined steadily over the

past several years, a small manufacturing base has developed based

on farm products that support the milling, canning, leather, and

jute industries, as well as a rapidly expanding apparel-assembly

sector. The latter has grown significantly mainly due to Lesotho

qualifying for the trade benefits contained in the Africa Growth and

Opportunity Act. The economy is still primarily based on subsistence

agriculture, especially livestock, although drought has decreased

agricultural activity. The extreme inequality in the distribution of

income remains a major drawback. Lesotho has signed an Interim

Poverty Reduction and Growth Facility with the IMF. In July 2007,

Lesotho signed a Millennium Challenge Account Compact with the US

worth $362.5 million.

Liberia

Civil war and government mismanagement destroyed much of

Liberia's economy, especially the infrastructure in and around the

capital, Monrovia. Many businesses fled the country, taking capital

and expertise with them, but with the conclusion of fighting and the

installation of a democratically-elected government in 2006, some

have returned. Richly endowed with water, mineral resources,

forests, and a climate favorable to agriculture, Liberia had been a

producer and exporter of basic products - primarily raw timber and

rubber. Local manufacturing, mainly foreign owned, had been small in

scope. President JOHNSON SIRLEAF, a Harvard-trained banker and

administrator, has taken steps to reduce corruption, build support

from international donors, and encourage private investment.

Embargos on timber and diamond exports have been lifted, opening new

sources of revenue for the government. The reconstruction of

infrastructure and the raising of incomes in this ravaged economy

will largely depend on generous financial and technical assistance

from donor countries and foreign investment in key sectors, such as

infrastructure and power generation.

Libya

The Libyan economy depends primarily upon revenues from the

oil sector, which contribute about 95% of export earnings, about

one-quarter of GDP, and 60% of public sector wages. Substantial

revenues from the energy sector coupled with a small population give

Libya one of the highest per capita GDPs in Africa, but little of

this income flows down to the lower orders of society. Libyan

officials in the past five years have made progress on economic

reforms as part of a broader campaign to reintegrate the country

into the international fold. This effort picked up steam after UN

sanctions were lifted in September 2003 and as Libya announced in

December 2003 that it would abandon programs to build weapons of

mass destruction. Almost all US unilateral sanctions against Libya

were removed in April 2004, helping Libya attract more foreign

direct investment, mostly in the energy sector. Libyan oil and gas

licensing rounds continue to draw high international interest; the

National Oil Company set a goal of nearly doubling oil production to

3 million bbl/day by 2015. Libya faces a long road ahead in

liberalizing the socialist-oriented economy, but initial steps -

including applying for WTO membership, reducing some subsidies, and

announcing plans for privatization - are laying the groundwork for a

transition to a more market-based economy. The non-oil manufacturing

and construction sectors, which account for more than 20% of GDP,

have expanded from processing mostly agricultural products to

include the production of petrochemicals, iron, steel, and aluminum.

Climatic conditions and poor soils severely limit agricultural

output, and Libya imports about 75% of its food. Libya's primary

agricultural water source remains the Great Manmade River Project,

but significant resources are being invested in desalinization

research to meet growing water demands.

Liechtenstein

Despite its small size and limited natural resources,

Liechtenstein has developed into a prosperous, highly

industrialized, free-enterprise economy with a vital financial

service sector and living standards on a par with its large European

neighbors. The Liechtenstein economy is widely diversified with a

large number of small businesses. Low business taxes - the maximum

tax rate is 20% - and easy incorporation rules have induced many

holding or so-called letter box companies to establish nominal

offices in Liechtenstein, providing 30% of state revenues. The

country participates in a customs union with Switzerland and uses

the Swiss franc as its national currency. It imports more than 90%

of its energy requirements. Liechtenstein has been a member of the

European Economic Area (an organization serving as a bridge between

the European Free Trade Association (EFTA) and the EU) since May

1995. The government is working to harmonize its economic policies

with those of an integrated Europe.

Lithuania

Lithuania, the Baltic state that has conducted the most

trade with Russia, has grown rapidly since rebounding from the 1998

Russian financial crisis. Unemployment fell to 3.2% in 2007 while

wages continued to grow at double digit rates, contributing to

rising inflation. Exports and imports also grew strongly, and the

current account deficit rose to nearly 15% of GDP in 2007. Trade has

been increasingly oriented toward the West. Lithuania has gained

membership in the World Trade Organization and joined the EU in May

2004. Privatization of the large, state-owned utilities is nearly

complete. Foreign government and business support have helped in the

transition from the old command economy to a market economy.

Luxembourg

This stable, high-income economy - benefiting from its

proximity to France, Belgium, and Germany - features solid growth,

low inflation, and low unemployment. The industrial sector,

initially dominated by steel, has become increasingly diversified to

include chemicals, rubber, and other products. Growth in the

financial sector, which now accounts for about 28% of GDP, has more

than compensated for the decline in steel. Most banks are foreign

owned and have extensive foreign dealings. Agriculture is based on

small family-owned farms. The economy depends on foreign and

cross-border workers for about 60% of its labor force. Although

Luxembourg, like all EU members, suffered from the global economic

slump in the early part of this decade, the country continues to

enjoy an extraordinarily high standard of living - GDP per capita

ranks second in the world, after Qatar. After two years of strong

economic growth in 2006-07, turmoil in the world financial markets

will slow Luxembourg's economy in 2008, but growth will remain above

the European average.

Macau

Macau's economy has enjoyed strong growth in recent years on

the back of its expanding tourism and gaming sectors. Since opening

up its locally-controlled casino industry to foreign competition in

2001, the territory has attracted tens of billions of dollars in

foreign investment that have helped transform it into the world's

largest gaming center. In 2006, Macau's gaming revenue surpassed

that of the Las Vegas strip, and gaming-related taxes accounted for

75% of total government revenue. The expanding casino sector, and

China's decision beginning in 2002 to relax travel restrictions,

have reenergized Macau's tourism industry, which saw total visitors

grow to 27 million in 2007, up 62% in three years. Macau's strong

economic growth has put pressure its labor market prompting

businesses to look abroad to meet their staffing needs. The

resulting influx of non-resident workers, who totaled one-fifth of

the workforce in 2006, has fueled tensions among some segments of

the population. Macau's traditional manufacturing industry has been

in a slow decline. In 2006, exports of textiles and garments

generated only $1.8 billion compared to $6.9 billion in gross gaming

receipts. Macau's textile industry will continue to move to the

mainland because of the termination in 2005 of the Multi-Fiber

Agreement, which provided a near guarantee of export markets,

leaving the territory more dependent on gambling and trade-related

services to generate growth. However, the Closer Economic

Partnership Agreement (CEPA) between Macau and mainland China that

came into effect on 1 January 2004 offers many Macau-made products

tariff-free access to the mainland. Macau's currency, the Pataca, is

closely tied to the Hong Kong dollar, which is also freely accepted

in the territory.

Macedonia

At independence in September 1991, Macedonia was the least

developed of the Yugoslav republics, producing a mere 5% of the

total federal output of goods and services. The collapse of

Yugoslavia ended transfer payments from the central government and

eliminated advantages from inclusion in a de facto free trade area.

An absence of infrastructure, UN sanctions on the downsized

Yugoslavia, and a Greek economic embargo over a dispute about the

country's constitutional name and flag hindered economic growth

until 1996. GDP subsequently rose each year through 2000. In 2001,

during a civil conflict, the economy shrank 4.5% because of

decreased trade, intermittent border closures, increased deficit

spending on security needs, and investor uncertainty. Growth barely

recovered in 2002 to 0.9%, then averaged 4% per year during 2003-07,

expanding to 5.1% in 2007. Macedonia has maintained macroeconomic

stability with low inflation, but it has so far lagged the region in

attracting foreign investment and creating jobs, despite making

extensive fiscal and business sector reforms. Official unemployment

remains high at nearly 35%, but may be overstated based on the

existence of an extensive gray market, estimated to be more than 20

percent of GDP, that is not captured by official statistics.

Madagascar

Having discarded past socialist economic policies,

Madagascar has since the mid 1990s followed a World Bank- and

IMF-led policy of privatization and liberalization. This strategy

placed the country on a slow and steady growth path from an

extremely low level. Agriculture, including fishing and forestry, is

a mainstay of the economy, accounting for more than one-fourth of

GDP and employing 80% of the population. Exports of apparel have

boomed in recent years primarily due to duty-free access to the US.

Deforestation and erosion, aggravated by the use of firewood as the

primary source of fuel, are serious concerns. President RAVALOMANANA

has worked aggressively to revive the economy following the 2002

political crisis, which triggered a 12% drop in GDP that year.

Poverty reduction and combating corruption will be the centerpieces

of economic policy for the next few years.

Malawi

Landlocked Malawi ranks among the world's most densely

populated and least developed countries. The economy is

predominately agricultural with about 85% of the population living

in rural areas. Agriculture accounts for more than one-third of GDP

and 90% of export revenues. The performance of the tobacco sector is

key to short-term growth as tobacco accounts for more than half of

exports. The economy depends on substantial inflows of economic

assistance from the IMF, the World Bank, and individual donor

nations. In December 2007, the US granted Malawi eligibility status

to receive financial support within the Millennium Challenge

Corporation (MCC) initiative. Malawi will now begin a consultative

process to develop a five-year program before funding can begin. In

2006, Malawi was approved for relief under the Heavily Indebted Poor

Countries (HIPC) program. The government faces many challenges

including developing a market economy, improving educational

facilities, facing up to environmental problems, dealing with the

rapidly growing problem of HIV/AIDS, and satisfying foreign donors

that fiscal discipline is being tightened. In 2005, President

MUTHARIKA championed an anticorruption campaign. Since 2005

President MUTHARIKA'S government has exhibited improved financial

discipline under the guidance of Finance Minister Goodall GONDWE and

signed a three year Poverty Reduction and Growth Facility worth $56

million with the IMF. Improved relations with the IMF lead other

international donors to resume aid as well.

Malaysia

Malaysia, a middle-income country, has transformed itself

since the 1970s from a producer of raw materials into an emerging

multi-sector economy. Since coming to office in 2003, Prime Minister

ABDULLAH has tried to move the economy farther up the value-added

production chain by attracting investments in high technology

industries, medical technology, and pharmaceuticals. The Government

of Malaysia is continuing efforts to boost domestic demand to wean

the economy off of its dependence on exports. Nevertheless, exports

- particularly of electronics - remain a significant driver of the

economy. As an oil and gas exporter, Malaysia has profited from

higher world energy prices, although the rising cost of domestic

gasoline and diesel fuel forced Kuala Lumpur to reduce government

subsidies. Malaysia "unpegged" the ringgit from the US dollar in

2005 and the currency appreciated 6% per year against the dollar in

2006-07. Although this has helped to hold down the price of imports,

inflationary pressures began to build in 2007. Healthy foreign

exchange reserves and a small external debt greatly reduce the risk

that Malaysia will experience a financial crisis over the near term

similar to the one in 1997. The government presented its five-year

national development agenda in April 2006 through the Ninth Malaysia

Plan, a comprehensive blueprint for the allocation of the national

budget from 2006-10. With national elections expected within the

year, ABDULLAH has unveiled a series of ambitious development

schemes for several regions that have had trouble attracting

business investment. Real GDP growth has averaged about 6% per year

under ABDULLAH, but regions outside of Kuala Lumpur and the

manufacturing hub Penang have not fared as well.