North Korea, one of the world's most centrally directed
and least open economies, faces chronic economic problems.
Industrial capital stock is nearly beyond repair as a result of
years of underinvestment and shortages of spare parts. Large-scale
military spending draws off resources needed for investment and
civilian consumption. Industrial and power output have declined in
parallel from pre-1990 levels. Severe flooding in the summer of 2007
aggravated chronic food shortages caused by on-going systemic
problems including a lack of arable land, collective farming
practices, and persistent shortages of tractors and fuel.
Large-scale international food aid deliveries have allowed the
people of North Korea to escape widespread starvation since famine
threatened in 1995, but the population continues to suffer from
prolonged malnutrition and poor living conditions. Since 2002, the
government has allowed private "farmers' markets" to begin selling a
wider range of goods. It also permitted some private farming - on an
experimental basis - in an effort to boost agricultural output. In
October 2005, the government tried to reverse some of these policies
by forbidding private sales of grains and reinstituting a
centralized food rationing system. By December 2005, the government
terminated most international humanitarian assistance operations in
North Korea (calling instead for developmental assistance only) and
restricted the activities of remaining international and
non-governmental aid organizations such as the World Food Program.
External food aid now comes primarily from China and South Korea in
the form of grants and long-term concessional loans. In May 2008,
the US agreed to give 500,000 metric tons of food to North Korea via
the World Food Program and US nongovernmental organizations;
Pyongyang began receiving these shipments in mid-2008. During the
October 2007 summit, South Korea also agreed to develop some of
North Korea's infrastructure, natural resources, and light industry,
but inter-Korean economic cooperation slowed in 2008 as Pyongyang
restricted tourism and manufacturing joint ventures in the North,
and food aid from South Korea was suspended. Firm political control
remains the Communist government's overriding concern, which will
likely inhibit the loosening of economic regulations.
Korea, South
Since the 1960s, South Korea has achieved an incredible
record of growth and integration into the high-tech modern world
economy. Four decades ago, GDP per capita was comparable with levels
in the poorer countries of Africa and Asia. In 2004, South Korea
joined the trillion dollar club of world economies. In 2008, its GDP
per capita was roughly the same as that of the Czech Republic and
New Zealand. Initially, this success was achieved by a system of
close government/business ties including directed credit, import
restrictions, sponsorship of specific industries, and a strong labor
effort. The government promoted the import of raw materials and
technology at the expense of consumer goods and encouraged savings
and investment over consumption. The Asian financial crisis of
1997-98 exposed longstanding weaknesses in South Korea's development
model including high debt/equity ratios, massive foreign borrowing,
and an undisciplined financial sector. GDP plunged by 6.9% in 1998,
then recovered by 9% in 1999-2000. Korea adopted numerous economic
reforms following the crisis, including greater openness to foreign
investment and imports. Growth fell back to 3.3% in 2001 because of
the slowing global economy, falling exports, and the perception that
much-needed corporate and financial reforms had stalled. Led by
consumer spending and exports, growth in 2002 was an impressive 7%
despite anemic global growth. Between 2003 and 2007, growth
moderated to about 4-5% annually. A downturn in consumer spending
was offset by rapid export growth. In 2008, inflation increased in
the face of rising oil and food prices before easing in the fourth
quarter. Korea was hit hard by the global financial turmoil that
began in September 2008. Stock prices fell by more than 40% for the
year and the value of the won fell by approximately 26%. Korean GDP
shrank in the fourth quarter and GDP growth for the year was just
2.2%. The Korean government adopted several measures to combat the
credit crunch and stimulate the economy.
Kosovo
Over the past few years Kosovo's economy has shown
significant progress in transitioning to a market-based system and
maintaining macroeconomic stability, 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 - are estimated to account
for about 15% of GDP, and donor-financed activities and aid for
another 15%. Kosovo's citizens are the poorest in Europe with an
average annual per capita income of only $2,300. Unemployment,
around 40% of the population, is a significant problem that
encourages outward migration and black market activity. 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. 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 of ageing equipment and insufficient
investment. A limited and unreliable electricity supply due to
technical and financial problems is a major impediment to economic
development. Kosovo's Ministry of Energy and Mining has solicited
expressions of interest from private investors to develop a new
power plant in order to address Kosovo and the region's unmet and
growing demands for power. The official currency of Kosovo is the
euro, but the Serbian dinar is also used in Serb enclaves. Kosovo's
tie to the euro has helped keep core inflation low. Kosovo has one
of the most open economies in the region, and continues to work with
the international community on measures to improve the business
environment and attract foreign investment.
Kuwait
Kuwait is a small, rich, relatively open economy with
self-reported crude oil reserves of about 104 billion barrels - 8%
of world reserves. Petroleum accounts for nearly half of GDP, 95% of
export revenues, and 80% of government income. Kuwait experienced
rapid economic growth over the last several years on the back of
high oil prices and in 2008 posted its tenth consecutive budget
surplus. As a result of this positive fiscal situation, the need for
economic reforms was less urgent and the government did not push
through new initiatives. The drop in oil prices in late 2008 will
reduce Kuwait's fiscal surplus in 2009. The global financial crisis
may slow the pace of investment and development projects, but Kuwait
has vowed to use its considerable financial resources to stabilize
the economy if necessary.
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.
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
2007-08. 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. GDP grew
more than 6% annually in 2007-08, partly due to higher gold prices
internationally, but growth is likely to decline from that level in
2009, due to declining demand and lower commodity prices in the wake
of the international financial crisis.
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 from 1988-2008
except during the short-lived drop caused by the Asian financial
crisis that began in 1997. Despite this high growth rate, Laos
remains a country with an 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 many rural districts. Subsistence agriculture,
dominated by rice, accounts for about 40% of GDP and provides 80% of
total employment. The government depends upon aid from international
donors for over 80% of its capital investment. The economy has until
recently benefited from high foreign investment in hydropower,
mining, and construction. The fiscal crisis of late 2008, and the
rapid drop in commodity prices - especially copper - has slowed
these investments. Several policy changes since 2004 may help spur
growth. Laos, which gained Normal Trade Relations status with the US
in 2004, is taking steps to join the World Trade Organization.
Related trade policy reforms will improve the business environment.
On the fiscal side, a value-added tax (VAT) regime, which began with
a few large businesses in early 2009, should slowly help streamline
the government's inefficient tax system. Economic prospects will
improve gradually as the administration continues to simplify
investment procedures and as a more competitive banking sector
extends credit to small farmers and small entrepreneurs. The
government appears committed to raising the country's profile among
investors. Foreign donors have praised the Lao government for its
efforts to improve the investment regime. The World Bank has
declared that Laos' goal of graduating from the UN Development
Program's list of least-developed countries by 2020 could be
achievable.
Latvia
Latvia's economy experienced GDP growth of more than 10% per
year during 2006-07; but entered a severe recession in 2008 as a
result of an unsustainable current account deficit and large debt
exposure amid the softening world economy. The IMF, EU, and other
donors provided assistance to Latvia as part of an agreement to
defend the currency's peg to the euro and reduce the fiscal deficit
to about 5% of GDP. 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
and inflation remain major concerns.
Lebanon
Lebanon has a free-market economy and a strong laissez-faire
commercial tradition. The government does not restrict foreign
investment; however, the investment climate suffers from red tape,
corruption, arbitrary licensing decisions, high taxes, tariffs, and
fees, archaic legislation, and weak intellectual property rights.
The Lebanese economy is service-oriented; main growth sectors
include banking and tourism. 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 2000 began an
austerity program, reining in government expenditures, increasing
revenue collection, and passing legislation to privatize 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 the new government was formed in
July 2008. Political stability since the Doha Accord of May 2008 has
helped to boost investment and tourism, but economic growth is
likely to slow in 2009 as a result of the global economic recession.
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. The expected
weakness in world hydrocarbon prices throughout 2009 will reduce
Libyan government tax income and constrain Libyan economic growth in
2009. 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. UN Sanctions against Libya were lifted
in September 2003. The process of lifting US unilateral sanctions
began in the spring of 2004; all sanctions were removed by June
2006, helping Libya attract greater foreign direct investment,
especially 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 2012. 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 the highest per capita income in the world. 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 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. In 2008
Liechtenstein came under renewed international pressure -
particularly from Germany - to improve transparency in its banking
and tax systems.
Lithuania
Lithuania's economy grew on average 8% per year for the
four years prior to 2008, driven by exports and domestic consumer
demand. Unemployment stood at 4.8% in 2008, while wages grew at
double digit rates. The current account deficit rose to roughly 15%
of GDP in 2007-08. Lithuania has gained membership in the World
Trade Organization and joined the EU in May 2004. Despite
Lithuania's EU accession, Lithuania's trade with its Central and
Eastern European neighbors, and Russia in particular, accounts for a
growing percentage of total trade. 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 - has historically
featured 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 third in the world, after
Liechtenstein and Qatar. After two years of strong economic growth
in 2006-07, turmoil in the world financial markets trimmed
Luxembourg's economy in 2008.
Macau
Macau's economy has enjoyed strong growth in recent years on
the back of its expanding tourism and gaming sectors. After opening
up its locally-controlled casino industry to foreign competition in
2001, the territory attracted tens of billions of dollars in foreign
investment, transforming Macao into the world's largest gaming
center. By 2006, Macau's gaming revenue surpassed that of the Las
Vegas strip, and gaming-related taxes accounted for 75% of total
government revenue. In 2008, government revenue from gaming was set
to double 2006 collections. The expanding casino sector, and China's
decision beginning in 2002 to relax travel restrictions, reenergized
Macau's tourism industry. This city of just over 500,000 hosted more
than 30 million visitors in 2008. Almost 60% came from mainland
China despite increasing restrictions on travel to the SAR. Macau's
traditional manufacturing industry has been in a slow decline since
the termination of the Multi-Fiber Agreement in 2005. In 2008,
exports of textiles and garments generated only $1.1 billion,
compared to $13.7 billion in gross gaming receipts. 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
Having a small, open economy makes Macedonia vulnerable to
economic developments in Europe and dependent on regional
integration and progress toward EU membership for continued economic
growth. 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
averaged 4% per year during 2003-06 and more than 5% per year during
2007-08. 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% of GDP, that is
not captured by official statistics. In the wake of the global
economic downturn, Macedonia has experienced decreased foreign
direct investment, lowered credit, and a slowdown of export growth.
The Government of Macedonia now predicts growth in 2009 to be no
more than 3%.
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.