Download 2003 Index of Economic Freedom

2003 Index of
Economic Freedom
GERALD P. O’DRISCOLL, JR., is Senior Fellow in Economic Policy and Director of the Center for
International Trade and Economics (CITE) at The Heritage Foundation.
EDWIN J. FEULNER is President of The Heritage Foundation.
MARY ANASTASIA O’GRADY is Editor of the “Americas” column and Senior Editorial Page Writer at
The Wall Street Journal.
Robert L. Bartley is Editor of The Wall Street Journal.
William W. Beach is John M. Olin Fellow in Economics and Director of the Center for Data Analysis at
The Heritage Foundation.
Ana I. Eiras is Latin America Policy Analyst in the Center for International Trade and Economics at The
Heritage Foundation. She is also Editor of the Spanish-language edition of the Index of Economic Freedom.
Sara J. Fitzgerald is Trade Policy Analyst in the Center for International Trade and Economics at The
Heritage Foundation.
Mart Laar is the former Prime Minister of Estonia.
Robert L. Pollock is Editorial Page Writer at The Wall Street Journal.
Brett D. Schaefer is Jay Kingham Fellow in International Regulatory Affairs in the Center for International Trade and Economics at The Heritage Foundation.
2003 Index of
Economic Freedom
Gerald P. O’Driscoll, Jr.,
Edwin J. Feulner,
and Mary Anastasia O’Grady
with Ana I. Eiras and
Brett D. Schaefer
Copyright © 2003 by The Heritage Foundation and Dow Jones & Company, Inc.
The Heritage Foundation
214 Massachusetts Avenue, NE
Washington, DC 20002
(202) 546-4400
www.heritage.org
The Wall Street Journal
Dow Jones & Company, Inc.
200 Liberty Street
New York, NY 10281
(212) 416-2000
www.wsj.com
Cover image copyright ©2002 by Getty Images
Cover design by Brian S. Cobb
ISBN 0-89195-262-4
ISSN 1095-7308
iv
2003 Index of Economic Freedom
Table of Contents
v
vi
2003 Index of Economic Freedom
Table of Contents
Foreword ............................................................................................................ xi
by Robert L. Bartley
Preface .............................................................................................................. xiii
by Edwin J. Feulner
Acknowledgments .............................................................................................. xv
by Gerald P. O’Driscoll, Jr., Edwin J. Feulner,
and Mary Anastasia O’Grady
Executive Summary .............................................................................................. 1
by Gerald P. O’Driscoll, Jr., Edwin J. Feulner,
and Mary Anastasia O’Grady
Chapter 1: The Role of Property Rights in Economic Growth ............................... 27
An Introduction to the 2003 Index
by William W. Beach and Gerald P. O’Driscoll, Jr.
Chapter 2: In the Middle East, Arbitrary Government Feeds Rage ......................... 29
by Robert L. Pollock
Chapter 3: How Estonia Did It ............................................................................. 35
by Mart Laar
Chapter 4: Scandinavia’s Changing Political and Economic Landscape .................. 39
by Sara J. Fitzgerald
Chapter 5: Explaining the Factors of the Index of Economic Freedom ........................ 49
by William W. Beach and Gerald P. O’Driscoll, Jr.
Chapter 6: The 2003 Index of Economic Freedom: The Countries ............................... 71
by Ana I. Eiras and Brett D. Schaefer
Table of Contents
vii
Albania .............................................................. 75
Algeria .............................................................. 77
Angola............................................................... 79
Argentina .......................................................... 81
Armenia ............................................................ 85
Australia ........................................................... 87
Austria .............................................................. 89
Azerbaijan .........................................................91
The Bahamas .................................................... 93
Bahrain ............................................................. 95
Bangladesh ........................................................97
Barbados ........................................................... 99
Belarus ............................................................ 101
Belgium .......................................................... 103
Belize .............................................................. 105
Benin ............................................................... 107
Bolivia ............................................................. 109
Bosnia and Herzegovina ................................ 111
Botswana ........................................................ 113
Brazil ............................................................... 115
Bulgaria .......................................................... 119
Burkina Faso ................................................... 121
Burma (Myanmar) ......................................... 123
Burundi ........................................................... 125
Cambodia ....................................................... 127
Cameroon ....................................................... 129
Canada ............................................................ 131
Cape Verde...................................................... 133
Central African Republic ................................ 135
Chad ................................................................ 137
Chile ................................................................ 139
China, People’s Republic of ........................... 143
China, Republic of (Taiwan) .......................... 147
Colombia ........................................................ 151
Congo, Democratic Republic of
(formerly Zaire) ........................................... 155
Congo, Republic of ......................................... 157
Costa Rica ....................................................... 159
Croatia ............................................................ 161
Cuba ................................................................ 163
Cyprus ............................................................ 167
Czech Republic ............................................... 169
Denmark ........................................................ 171
Djibouti .......................................................... 173
Dominican Republic ....................................... 175
Ecuador ........................................................... 177
Egypt .............................................................. 179
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El Salvador...................................................... 181
Equatorial Guinea .......................................... 183
Estonia ............................................................ 185
Ethiopia .......................................................... 189
Fiji ................................................................... 191
Finland ............................................................ 193
France.............................................................. 195
Gabon ............................................................. 197
The Gambia .................................................... 199
Georgia ........................................................... 201
Germany ......................................................... 203
Ghana.............................................................. 205
Greece ............................................................. 207
Guatemala ...................................................... 209
Guinea............................................................. 211
Guinea–Bissau ................................................ 213
Guyana ........................................................... 215
Haiti ................................................................ 217
Honduras ........................................................ 219
Hong Kong ..................................................... 221
Hungary ......................................................... 225
Iceland............................................................. 227
India ................................................................ 229
Indonesia ........................................................ 231
Iran ................................................................. 233
Iraq ................................................................. 235
Ireland............................................................. 237
Israel ............................................................... 241
Italy................................................................. 243
Ivory Coast ..................................................... 245
Jamaica ............................................................ 247
Japan ............................................................... 249
Jordan.............................................................. 253
Kazakhstan ..................................................... 255
Kenya .............................................................. 257
Korea, Democratic People’s Republic of
(North Korea)............................................... 259
Korea, Republic of
(South Korea) ............................................... 261
Kuwait ............................................................ 265
Kyrgyz Republic ............................................ 267
Laos ................................................................ 269
Latvia .............................................................. 271
Lebanon .......................................................... 273
Lesotho ........................................................... 275
Libya ............................................................... 277
Lithuania ......................................................... 279
2003 Index of Economic Freedom
Luxembourg ................................................... 281
Macedonia....................................................... 283
Madagascar ..................................................... 285
Malawi ............................................................ 287
Malaysia .......................................................... 289
Mali ................................................................. 291
Malta ............................................................... 293
Mauritania ...................................................... 295
Mauritius ........................................................ 297
Mexico............................................................. 299
Moldova .......................................................... 301
Mongolia ......................................................... 303
Morocco .......................................................... 305
Mozambique ................................................... 307
Namibia .......................................................... 309
Nepal .............................................................. 311
The Netherlands ............................................ 313
New Zealand .................................................. 315
Nicaragua ....................................................... 317
Niger ............................................................... 319
Nigeria ............................................................ 321
Norway .......................................................... 323
Oman .............................................................. 325
Pakistan .......................................................... 327
Panama ........................................................... 329
Paraguay ......................................................... 331
Peru ................................................................. 333
The Philippines............................................... 335
Poland ............................................................. 337
Portugal .......................................................... 339
Qatar ............................................................... 341
Romania ......................................................... 343
Russia .............................................................. 345
Rwanda ........................................................... 349
Saudi Arabia ................................................... 351
Senegal ............................................................ 353
Sierra Leone ................................................... 355
Singapore ........................................................ 357
Slovak Republic .............................................. 361
Slovenia ........................................................... 363
South Africa .................................................... 365
Spain ............................................................... 367
Sri Lanka ......................................................... 369
Sudan .............................................................. 371
Suriname ......................................................... 373
Swaziland ........................................................ 375
Sweden ........................................................... 377
Table of Contents
Switzerland ..................................................... 379
Syria ................................................................ 381
Tajikistan ........................................................ 383
Tanzania ......................................................... 385
Thailand .......................................................... 387
Togo ................................................................ 389
Trinidad and Tobago ...................................... 391
Tunisia ............................................................ 393
Turkey ............................................................ 395
Turkmenistan ................................................. 397
Uganda ........................................................... 399
Ukraine ........................................................... 401
United Arab Emirates .................................... 403
United Kingdom ............................................. 405
United States .................................................. 407
Uruguay .......................................................... 411
Uzbekistan...................................................... 413
Venezuela ........................................................ 415
Vietnam .......................................................... 419
Yemen ............................................................. 423
Yugoslavia, Federal Republic of
(Serbia–Montenegro) ................................... 425
Zambia ........................................................... 427
Zimbabwe ...................................................... 429
Per Capita Income Throughout the World .. 432
Major Works Cited .................................... 437
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2003 Index of Economic Freedom
Foreword
T
he fall of the Berlin Wall in 1989 dramatically
changed our world, in terms of personal freedom, in terms of military power, in terms of
diplomatic influence. In terms of the economy, it
meant that the chimera of centrally planned economies had vanished. The Index of Economic Freedom
started a few years later and has recorded the worldwide advance of the principles of free markets.
It is especially significant that the trend continues with the 2003 Index, for this was not a year of
spreading prosperity. In earlier years, of course,
economic liberalism continued to spread despite the
implosion of the Japanese economy, the taming of
the Asian tigers, and the stunning default by Russia. In these cases, the U.S. locomotive continued
to pull the world toward economic growth.
In the third quarter of 2000, though, the locomotive ran off the rails. After four impressive quarters from mid-1999 to mid-2000, soaring technology stocks collapsed, earnings warnings echoed
along Wall Street, and the U.S. economy slipped
into recession for the first time in a decade. In 2001,
this was followed by the stunning terrorist attack
at the World Trade Center and the Pentagon, war
in Afghanistan, the prospect of further war in Iraq,
oil prices rising to $30, and economic stagnation in
the U.S., Europe, and Asia. Economists call it a synchronized world downturn.
In this foreword a year ago, I wrote that economic freedom continued to spread despite the start
of a downturn. The economic freedom of 73 countries improved, while 53 declined. But I worried,
“Are this year’s encouraging results merely moTable of Contents
mentum, or will they be carried forward in the
more difficult time we’re just now navigating?”
Another year’s results are now in. In the period
from July 2001 to June 2002, the ratings of 74 countries improved while 49 declined.
The trend toward liberalization, that is, continued undisturbed. This suggests it is anything but a
passing fad, the artifact of some economic “bubble.”
Rather, it represents a deep worldwide consensus
that the path to prosperity lies in the verities of
open trade, sound money, international flows of
goods and capital (and labor), market-determined
prices, sensible regulation, and the protection of
property rights.
One of the most remarkable developments of
the past few years is that Mexico is no longer a
Latin American economy. The rest of the Southern
Cone has slipped back into trouble, with crisis
spreading from Argentina to Brazil to Venezuela.
But thanks to the North American Free Trade
Agreement, the Mexican economy is now linked to
the United States. Though Mexico is still ranked
only “mostly free,” its economic freedom has continued to improve, and, politically, it has had its
first peaceful inter-party transfer of government.
This should be a lesson about development, but,
sadly, the NAFTA momentum has been lost. President Bush did struggle to get new trade promotion
authority, but he also imposed new steel tariffs and
went along with congressional passage of higher
agricultural subsidies. The era of trade agreements
historically succeeded in lowering trade barriers
around the world, but the principle of “I’ll lower
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my barriers if you’ll lower yours” has an inherent
contradiction. The GATTs and WTOs provide an
incentive to keep barriers as negotiating chips and,
despite their storied past, seem to be sputtering to
an end as protectionist devices.
It’s time for both developed and developing
nations to look again at a policy of unilateral free
trade, letting your businesses and consumers buy
the cheapest products in the world and learn from
the rigors of international competition. This suggestion seems startling against the background of
the last half-century, but it was the policy of the
British Empire at its zenith. The repeal of the Corn
Laws in 1846 was the proudest moment in British
economic history.
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The world is still some way from such sweeping reform, intellectually and politically. The Bush
Administration is providing strong leadership in
the campaign against terrorism, but this seems to
be a distraction from the economic leadership that
would reestablish the U.S. as a world locomotive
and world champion of free markets, property
rights, and other tenets of economic liberalism.
Some time may pass before such leadership is once
again in place, so it’s comforting to see that the
trend is well-established and, even with Washington distracted, likely to continue on its own.
Robert L. Bartley
Editor, The Wall Street Journal
September 2002
2003 Index of Economic Freedom
Preface
E
conomic freedom is advancing. For the past
nine years, The Heritage Foundation’s annual
Index of Economic Freedom has provided a valuable tool with which to measure economic freedom
around the world. Journalists, teachers, students,
entrepreneurs, and government officials are among
the many who use this book. In this edition, once
again co-published with The Wall Street Journal, we
analyze the economic freedom of 161 countries according to 10 factors in an effort to trace the path to
economic prosperity.
As we have emphasized in the past, the road to
economic freedom is not easy, but it is rewarding.
Today, however, as economic freedom continues
to grow in countries in all regions of the world,
many other countries continue to pursue the failed
and counterproductive policies of the past.
To reap the fruits of economic freedom, a country must embrace a fundamental commitment to
that aim. As argued by Adam Smith in his Lectures
on Jurisprudence:
Little else is requisite to carry a state to the
highest degree of opulence from the lowest
barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest
being brought about by the natural course of
things. All governments which thwart this
natural course, which forces things into another channel or which endeavor to arrest
the progress of society at a particular point,
are unnatural, and to support themselves are
obliged to be oppressive and tyrannical.
Table of Contents
Countries that embrace economic freedom not
only see long-term benefits, such as expansion in
growth, but also are able to weather economic
storms. Ignoring this simple yet profound fact,
many countries grow impatient and resort to protectionism and government intervention instead of
allowing the free market to do its work. When economic turmoil strikes, the markets in these countries therefore lack the institutions that would insulate their economies from economic shocks. The
current conditions of some countries in Latin
America, such as Argentina, as well as several of
the countries still struggling to emerge from the
Asian financial crisis, are prime examples of this
consequence of the lack of economic freedom.
Despite the dire economic circumstances in
some countries, however, others continue to open
their markets and improve, as this year’s Index indicates. Improvement is seen from the very top 10
countries down even to those at the bottom of the
scale.
The list of greatly improved countries includes
Botswana. While Botswana has yet to attain the
ranking of “free,” it has long served, through its
prudent economic policies, as a model of successful
development for sub-Saharan Africa. Having capitalized on its record by improving its trade policy,
capital flows and foreign investment, banking and
finance, and regulation scores, Botswana is now subSaharan Africa’s freest country.
Scandinavia continues on the path of economic
freedom, with four of its five countries ranked as
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“free.” This year, for the first time, Sweden and
Iceland are ranked as “free” countries, and Norway,
though it remains “mostly free,” continues to improve. Denmark is the world’s sixth freest country, tied with the United States and Estonia. Still
known for their large welfare states, many of the
Scandinavian countries have decreased regulation
and government intervention, and have liberalized
their policies to attract foreign investors. Additionally, Scandinavia has a strong rule of law, a history
of openness to trade, and little, if any, corruption.
Clearly, these countries have advanced significantly along the path to economic freedom. As this
year’s Index reveals, however, this is not the case
for all countries. Despite its abundance of oil, the
Middle East continues to be plagued by the corruption and absence of the fundamental rule of law
that rob its people of economic freedom. In his chapter, “In the Middle East, Arbitrary Government
Feeds Rage,” Robert L. Pollock graphically describes the snares that deter entrepreneurs in the
Middle East.
In addition, as many countries have improved
or regressed, there are many others whose scores
or rankings have not changed. Although its overall
economic freedom has declined somewhat, Hong
Kong remains the world’s most economically free
country. Yet, as the scores reveal, Singapore is close
behind, with their overall scores separated by a
difference of only 0.05 point. Hong Kong’s score is
worse because of government intervention, but
Singapore’s has improved because of the lower cost
of government.
A few changes in Singapore’s policy could easily put it in first place next year, and several other
countries likewise could be contending for first place
with only a few changes. As a tax haven for foreign
investment that has attracted capital from around
the world, Luxembourg is a prime example. Last
year, Luxembourg was tied for fourth place; this
year, its government intervention score has improved, enabling it to claim the honor of the world’s
third freest economy. This is proof that incremental changes matter.
Mart Laar, former prime minister of Estonia,
has contributed a chapter to this year’s Index titled
simply “How Estonia Did It.” In just a few pages,
he describes how Estonia rose from a former Soviet satellite economy to become one of the freest
economies in the world. Despite such success stories, however, the leaders of many other nations
continue to resist the changes that must take place
if their economic freedom and resultant prosperity
are to advance.
Many of these leaders denounce or simply avoid
the policies necessary for growth on one hand, while
the other hand asks for more economic aid; but
economic freedom, not aid, is the solution to the
problems of developing countries.
The lesson, once again as in past years, is deceptively simple: Economic freedom leads to economic prosperity. While taking steps to advance
economic freedom may be uncomfortable and politically difficult in the short term, the growth rates
found in the “free” countries demonstrate beyond
question that the benefits enable a country not only
to stand on its own, but to flourish.
Edwin J. Feulner
President
The Heritage Foundation
September 2002
xiv
2003 Index of Economic Freedom
Acknowledgments
W
e wish to express our grateful appreciation to the many individuals, especially
those at The Heritage Foundation, who
have made such valuable contributions to the ninth
edition of the Index of Economic Freedom.
The primary responsibility for producing the
Index was borne by The Heritage Foundation’s
Center for International Trade and Economics
(CITE). Ana Eiras and Brett Schaefer did an excellent job in grading the countries this year. Ana also
coordinated the complex process of producing the
Index. In managing the data and the extensive research process, she was ably assisted by Sara
Fitzgerald, Anthony Kim, and Kimberly Thompson. In addition to these tasks, Anthony authored
the statistical summary that accompanies each country and Kimberly served as initial editor and fact
checker. Both were invaluable in guaranteeing a
professional and error-free product. Additionally,
Ana, Brett, and Kimberly authored many of the introductory paragraphs for the countries.
In the Kathryn and Shelby Cullom Davis Institute for International Studies, Ariel Cohen, John
Hulsman, Stephen Johnson, and James Phillips
wrote introductory paragraphs and provided their
expertise. Director Helle Dale also provided valuable input. Yvette Campos and Allison Goodman
provided valuable production support.
In the Asian Studies Center, Dana Dillon, Balbina
Hwang, John Tkacik, Jr., and Paolo Pasicolan wrote
introductions and provided assistance. Director
Larry Wortzel supplied guidance and advice. Kathy
Gudgel provided valuable production support.
Table of Contents
We are particularly grateful to William Beach,
Director of the Center for Data Analysis, for his
continued support in reviewing the methodology
employed by the Index and for his contributions to
Chapter 1.
We thank Todd Gaziano, Senior Fellow in Legal Studies, for his perceptive comments on the
property rights factor and for grading the property
rights factor in the United States.
In the Information Technology Department,
invaluable help was provided by Vice President of
Information Systems Michael Spiller, Ted Morgan,
Genevieve Grimes, and Joanna Yu. We are grateful for their professionalism.
We are also grateful to Jon Garthwaite, Director of Online Communications, and his staff for placing the entire Index on the Heritage Web site (http:/
/www.heritage.org/index/). They also did an excellent job of developing a searchable database that
helps researchers identify key trends over the eightyear history of the Index. Ryan Zempel, Melissa
Kaiser, Chris Avore, John Hanley, and Johnny
Boursiquot were indispensable to this project.
Once again, as in past years, we are grateful for
the work of veteran Senior Editor Richard
Odermatt, who was responsible for final review of
the entire text, and to Senior Copy Editor William
T. Poole, who continues to bear the primary responsibility for editing the entire text and whose
professionalism, commitment to the project, and
attention to detail do so much to make each year’s
edition a reality.
xv
In Publishing Services, Brian Cobb was responsible for all design and layout, and Valerie Rieder,
assisted by Thomas J. Timmons, developed the
regional and country maps and formatted the charts
and tables. Daryl Malloy managed the publishing
of the Index, and Therese Pennefather coordinated
the entire production process.
We are especially pleased to be able to include an
essay by Mart Laar, former Prime Minister of Estonia, this year. We would also like to thank Leonard
Liggio, Maralene Martin, Peter Noble, our former
colleague Aaron Schavey, and the editors of The Wall
Street Journal, who helped to guide us with their
thoughtful advice and insight on the countries.
Countless individuals serving with various accounting firms, businesses, research organizations, U.S.
government agencies, foreign embassies, and other
organizations cooperated in providing us with the data
used in the Index. Their assistance is much appreciated. So, too, is the work of Heritage interns Adam
Doverspike, Kevin Lee, Lisa Martilotta, Angela
Mattoon, and Kolbjorn Nelson, who were particularly helpful in producing this edition. Like their predecessors, they did the legwork, compiled the data,
and researched hard-to-find data in a timely fashion.
We wish them the best in their new ventures.
As always, we must acknowledge our enduring
debt both to Heritage Trustee Ambassador J. Will-
iam Middendorf II, for originally encouraging us to
undertake such a study of global economic freedom,
and to the many other people within Heritage who
continue to lend their expertise to our effort as they
have in past years.
Sadly, this year we must bid farewell to one of
those people. Kim Holmes served as an editor of the
Index of Economic Freedom from its inception, and his
wise counsel and insights have helped make it a better book. President George W. Bush has nominated
Kim to serve as Assistant Secretary of State for International Organizations. Among his duties in that new
position, he will oversee the Administration’s policy
toward the United Nations. We wish him all the best
as he pursues this new challenge.
Finally, we would like to express our appreciation
to the many people who, year after year, have either
praised or criticized the Index of Economic Freedom so
enthusiastically. The support and encouragement of
people in all parts of the world continue to serve as a
major source of inspiration for The Heritage Foundation and The Wall Street Journal in their ongoing collaboration on this important work. We hope this
year’s effort matches the expectations of all our supporters, as well as the thoughtful critics who so often
have provided the insights that enable us to continue
to improve the Index.
Gerald P. O’Driscoll, Jr.
Edwin J. Feulner
Mary Anastasia O’Grady
September 2002
xvi
2003 Index of Economic Freedom
Table of Contents
xvii
Executive Summary
by Gerald P. O’Driscoll, Jr., Edwin J. Feulner,
and Mary Anastasia O’Grady
The idea of producing a user-friendly “index of economic freedom” as a tool for policymakers and investors was first discussed at The Heritage Foundation in the late 1980s. The goal then, as it is today,
was to develop a systematic, empirical measurement
of economic freedom in countries throughout the
world. To this end, the decision was made to establish a set of objective economic criteria that, since
1994, have been used to study and grade various
countries for the annual publication of the Index of
Economic Freedom.
The Index, however, is more than just a dataset
based on empirical study; it is a careful theoretical
analysis of the factors that most influence the institutional setting of economic growth. Moreover, although many theories exist about the origins and
causes of economic development, the findings of this
study are straightforward: The countries with the
most economic freedom also have higher rates of
long-term economic growth and are more prosperous than are those with less economic freedom.
The Heritage Foundation/Wall Street Journal
2003 Index of Economic Freedom measures how well
161 countries score on a list of 50 independent variables divided into 10 broad factors of economic freedom. The higher the score on a factor, the greater
the level of government interference in the economy
and the less economic freedom a country enjoys.
These 50 variables are grouped into the following
categories:
Executive Summary
•
Trade policy,
•
Fiscal burden of government,
•
Government intervention in the economy,
•
Monetary policy,
•
Capital flows and foreign investment,
•
Banking and finance,
•
Wages and prices,
•
Property rights,
•
Regulation, and
•
Black market.
Chapter 5 explains these factors in detail. Taken
together, they offer an empirical depiction of a
country’s level of economic freedom. A systematic
analysis of these factors continues to demonstrate
that countries with the highest levels of economic
freedom also have the highest living standards.
WORLDWIDE PATTERNS
This year, economic freedom has advanced
throughout the world. Every region has improved.
Worldwide, 74 countries have better scores, 49 have
worse scores, and 32 have scores that are unchanged.
Of the 156 countries numerically graded in the 2003
Index, 15 are classified as “free,” 56 as “mostly free,”
1
25 countries but lower
in 34 countries. Monetary policy is better in
2000 Per Capita Income in Purchasing Power Parities
23 countries and worse
$30,000
$26,855
in 21 countries. Openness to foreign invest$25,000
ment is worse in 16
countries and better in
$20,000
only eight countries.
The banking and fi$15,000
$12,569
nance scores for 23
countries are improved
$10,000
this year, while only
five have worse scores
$5,000
$3,585
$3,229
because of restrictions
and requirements on
Free
Mostly Free
Mostly Unfree
Repressed
banks. The wages and
prices scores are better
Economic Freedom in 2003
for 20 countries and
Source: World Bank, World Development Indicators on CD–ROM 2002; Central Intelligence Agency, The World Factbook 2001 for the following countries:
Bahrain, Bosnia and Herzegovina, Burma, Congo, Dem. Rep., Cuba, Djibouti, Iraq, North Korea, Libya, Oman, Qatar, Taiwan, United Arab Emirates,
worse for eight counYugoslavia; The Heritage Foundation and The Wall Street Journal, the 2003 Index of Economic Freedom.
tries. The regulation
scores are better for
74 as “mostly unfree,” and 11 as “repressed.”
eight countries and worse for three countries. The
Sierra Leone was graded numerically this year black market scores are the same for 152 countries,
because the civil war has ended and peaceful elec- with only two improving and only one earning a
tions have occurred, returning stability to the na- worse score.
tion. Iraq, the Democratic Republic of Congo,
For the past two years, we have noted a worldAngola, Sudan, and Burundi were suspended from wide trend in the decline of the protection of propgrading. Iraq was suspended due to a lack of basic erty rights. Sadly, many countries continue to disreeconomic data. The four sub-Saharan African coun- gard the important relationship between maintaintries have been in a prolonged state of anarchy or ing strong property rights and attracting investment.
civil unrest and remain suspended from grading until This trend continues: Three countries have weaksuch time as political stability again makes a quanti- ened in their protection of property rights and only
tative assessment possible.
one has improved. While 151 countries remained
Of those countries ranked in the top 10—two tie the same, considering last year’s decline in the proat number 3, three tie at number 6, and two tie at tection of property of rights (22 countries), the lack
number 9—six are in North America or Europe and of improvement this year with a net loss of two counfour are in Asia. Most of the world’s economically tries indicates that the outlook continues to be disrepressed countries lie in Asia. With the exception appointing.
of Latin America, all of the regions boast a net gain
In order to grow, countries must implement poliof six countries with improved scores. Latin America cies that attract investors and encourage entreprehas a net gain of only one country.
neurs. As Lee Hoskins and Ana I. Eiras pointed out
Of the 10 factors measured in the Index, the fiscal in the 2002 edition of the Index, in spite of having
burden factor marked the greatest number of im- similar natural resources, human capital, and strucprovements, at 37 countries, while the scores of 22 ture in their economies, Australia is a thriving nacountries are worse because of their high cost of tion while the citizens of Argentina have become
government. The level of protection that countries increasingly poor.1 The difference between the two
maintain in their trade policy is worse in 31 coun- countries lies in policy.
tries, while 20 countries have improved their scores.
Governments around the world should take note
The level of government intervention is higher in of the message in this book. Economic freedom enEconomic Freedom and Per Capita Income
Economic Freedom and Per Capita Income
2
2003 Index of Economic Freedom
ables a country to utilize its resources efficiently.
Economically free countries tend to have higher per
capita income than less free countries. For instance,
while Hong Kong’s GDP per capita in 2000 was
$24,218, Iran’s was $1,649 and Zimbabwe’s was a
mere $621.2 As long as Iran and Zimbabwe continue
to maintain economies that are repressed, their citizens will continue to suffer. The level of economic
freedom in a country determines whether its fate
will be one of prosperity or one of poverty.
NORTH AMERICA AND EUROPE
The region encompassed by North America and
Europe remains the world’s most economically free,
containing six of the top 10 freest countries in this
year’s Index. Yet economic freedom in North
America and Europe appears to be a European phenomenon claiming half of the world’s freest economies. Additionally, the four freest economies in Asia
are former British colonies that have maintained the
basic legal and political institutions inherited from
Great Britain.
On net, the region shows a gain in economic freedom by six countries. The factor that shows the most
improvement in this region is the fiscal burden of
government, with 12 countries earning better scores
and only three countries earning worse scores over
the past year. The property rights score for the entire region remains the same.
The countries that illustrate the most dramatic
improvement in score are Iceland, Croatia, and
Slovenia. All of these countries improved by 0.25
point this year. Hungary illustrates the sharpest decline in economic freedom. Many of the former Soviet satellite economies continue to struggle to take
hold of economic freedom. Belarus, for instance, is
the least free country in the region. Across the board,
Belarus scores poorly in all of the factors.
As many of these economies continue to struggle,
however, Estonia proves that with the right policies
in place, growth is achievable. Estonia has maintained its score and is ranked as the world’s sixth
freest economy this year (tied with Denmark and
the United States). In his chapter, “How Estonia Did
It,” former Prime Minister Mart Laar details
Estonia’s journey to economic freedom, emphasizing the paramount importance of property rights and
the rule of law.
Executive Summary
Just across the Baltic Sea, Scandinavia continues
to advance with four out of the five Scandinavian
countries ranked as “free.” Denmark remains the
freest economy in Scandinavia. This year, for the
first time, Sweden and Iceland are ranked as “free”
countries. Even Norway, which remains “mostly
free,” has made progress. In her chapter on
“Scandinavia’s Changing Political and Economic
Landscape,” Sara J. Fitzgerald describes the changes
that have taken place.
As noted last year, while European leaders have
often promoted big government, many countries are
now beginning to lower taxes, cut regulations, and
privatize state-owned enterprises. Iceland’s Prime
Minister, David Oddsson, wants to cut the corporate tax rate to 15 percent and eliminate property
taxes by 2004. Finland has often been noted for its
strong business environment. Luxembourg, the
third freest economy in the world, attracts capital
from around the globe and is a tax haven for foreign
investors.
The Celtic tiger also continues to roar. Ireland
has had the fastest growing economy in the European Union for the past eight years. One of the secrets of Ireland’s success is its competitive tax rates.
For instance, Ireland’s corporate taxation rate—currently 16 percent—is scheduled to fall to 12.5 percent by 2003. Ireland clearly illustrates the importance of a lighter fiscal burden in advancing economic freedom and spurring growth.
LATIN AMERICA AND THE CARIBBEAN
Latin America and the Caribbean continue to
suffer from a lack of reform. In general, throughout
the 1990s, the region implemented only politically
facile reforms. Countries in the region failed to
implement a strong rule of law. In some, many economic deficiencies began to emerge and an economic crisis developed as they faced a global economic downturn. Instead of implementing full reforms, many of these countries have chosen to stifle
what little economic freedom they had.
Of the 26 countries that are graded this year, 11
have improved in their overall level of economic
freedom and 10 are worse. There was no net gain
last year; this year, however, there is a net gain of
one country. This region improved the least. Not
one country is rated “free” in the entire region, although 14 are rated “mostly free.”
3
Although Chile’s score is worse this year, the
country remains the freest nation in the region and
is tied for 16th freest economy in the world. Chilean
government consumption has increased along with
the regulatory burden on business. Chile’s regulation and government intervention scores are worse.
The country that has declined the most in economic freedom will come as no surprise. Argentina
has gone through several presidents and continues
to blame the free market for its ills. As noted in Chapter 6, “despite the need for tough reforms, the
government’s main focus is on trying to obtain more
funds from international financial institutions….
Argentina appears to be reverting to the closed society that characterized the end of the 1980s, with price
controls, financial restrictions, inflation, and rampant
violation of property rights.”
On a positive note, for the past several years, economic freedom has advanced in Barbados. As the
third freest economy in this region, Barbados has a
low level of government intervention, a very low
level of inflation, a low level of restrictions in banking and finance, a low level of intervention in wages
and prices, strong property rights, a low level of regulation, and little black market activity. Barbados is a
country that could easily become “free” by implementing a few changes.
NORTH AFRICA AND THE MIDDLE EAST
The scores of 11 countries in this region have
improved this year, while five are worse, giving
North Africa and the Middle East a net gain in economic freedom of six countries. This is an improvement from last year’s net gain of only one country.
The region has 10 countries that are ranked “mostly
free,” but none has been ranked as “free.” The region improved the most in the fiscal burden factor,
with eight countries earning better scores and only
one earning a worse score this year.
Maintaining the same score as last year, Bahrain
remains the most economically free country in this
region and is tied for 16th freest economy in the
world. The United Arab Emirates continues to have
the second freest economy in the region, followed
by Israel, Kuwait, and Qatar. The United Arab Emirates’ score is worse this year based on the availability of more information concerning regulation and
the fiscal burden of government.
Israel, Kuwait, and Qatar have improved since
last year. Israel’s government intervention and black
4
market scores have improved. Kuwait’s government
intervention and trade policy scores also have improved.
Qatar’s fiscal burden of government, government intervention, banking and finance, and wages
and prices scores have all improved. This is the
second consecutive year that Qatar has improved.
As noted in Chapter 6, “Qatar’s ruler, Sheikh
Hamad bin Khalifa al-Thani, has undertaken a bold
program of political and economic reform since
coming to power in 1995…. He has liberalized the
political system; given women the right to vote;
created a democratically elected Municipal Council; and nurtured an independent television station,
al-Jazira, that has acquired a wide audience throughout the Arab world.”
SUB-SAHARAN AFRICA
Overall, economic freedom in sub-Saharan Africa has improved in the past year. The scores of 19
countries are better, while the scores of 13 are worse.
The region has a net gain of six countries. The factor that is most improved in this region is banking
and finance, in which 12 countries have improved
their scores. The monetary policy factor proved to
be the biggest challenge for this region, with 10 countries earning worse scores. The property rights factor is for the most part unchanged, with 35 countries receiving the same score as last year. While
none of the countries are ranked “free,” five earn
the ranking of “mostly free.”
This year, Botswana is the region’s freest country. In addition, for the second year in a row, it has
improved its score. Botswana’s trade policy, capital
flows and foreign investment, banking and finance,
and regulation scores have improved. Madagascar
is the second freest country in the region and is tied
with Libya for having made the most improvements
in the past year.3
Among countries numerically graded, Zimbabwe
remains the region’s least economically free and
continues to deteriorate. Yet the country that suffered the greatest decline in economic freedom is
Rwanda. Its trade policy, capital flows and foreign
investment, and fiscal burden of government scores
all are worse.
The property rights score remains the same for
the majority of the countries, with only one improving and one worsening. As noted last year, however,
2003 Index of Economic Freedom
freedom are the Kyrgyz Republic and
Turkmenistan. The country that suffered the largest decline is Sri Lanka. South Korea suffered the
second largest decline in economic freedom.
For the second consecutive year, Indonesia has
improved. While Indonesia’s monetary policy score
is 1 point better, its government intervention score
is 0.5 point worse this year. Considering the probASIA–PACIFIC
lems that Indonesia continues to face, this is only a
With 15 countries improving and nine countries small step, but it is a step in the right direction.
that are worse, the Asia–Pacific region experienced
As noted in Chapter 6, the Indonesian governa net gain of six countries. This region is diverse, ment “is considered one of the most corrupt in Asia.”
boasting both the world’s top three freest economies Corruption remains a large problem in Asia generand the largest number (five) of repressed econo- ally. For the most part, the economies that have
mies of all the regions. The four freest economies in failed to emerge fully from the Asian financial crisis
the region—Hong Kong, Singapore, New Zealand, remain burdened with crony capitalism.
and Australia—have stayed true to their Anglo–
The economies that are thriving have little or no
Saxon roots by keeping legal systems modeled after
corruption and have cracked down on the black
Great Britain.
market. However, there are other countries that
The region improved the most in the monetary suffer from one or multiple problems such as a thrivpolicy and fiscal burden factors. In monetary policy, ing market for software piracy, a black market that
six countries have earned better scores and three holds a significant amount of the economy, or a pohave earned worse scores. In the fiscal burden fac- litical scene in which leaders are frequently bribed.
tor, six countries are better and five are worse. The The black market score for the region is unchanged
region experienced the largest net gain (four coun- this year.
tries) in the wages and prices factor, with five countries improving and only one country earning a COUNTRY TREND TABLES
worse score.
Table 1 lists the countries that have improved
Even though its score is worse for the second the most since the publication of the 2002 edition of
consecutive year, Hong Kong remains the world’s the Index. It is very difficult to obtain data for many
freest economy. Hong Kong’s government interven- of the “repressed” countries. With respect to Libya,
tion score worsened this year, but its many virtues Cuba, and Iran, new data became available that clariinclude a duty-free port, low cost of government, fied policies and led to improvements in their scores
very low level of inflation, very low barriers to for- in the past year—in some cases perhaps without
eign investment, very low level of restrictions in positive actions by the governments of these counbanking and finance, low level of intervention in tries.
wages and prices, strong property rights, very low
Improved availability of data is a positive result
level of regulation, and a low level of black market
of the greater transparency that globalization deactivity.
mands. For instance, some countries have released
Once again, Singapore boasts the world’s second data in order to comply with requirements of interfreest economy. Singapore’s overall score is better national institutions such as the World Bank and
this year because of improvement in its fiscal bur- International Monetary Fund. In other cases, such
den of government score. Clearly, if economic free- as Cuba, the government has slightly opened its
dom continues to advance, Singapore could easily economy to foreign investment, and data are accube a contender for the rank of freest economy in the mulated as foreign investors analyze the business
world next year. The difference between Hong climate within the country and as more tourists visit
Kong’s score and Singapore’s is only 0.05 point.
the country.
The countries that experienced the largest imMadagascar and Libya have experienced the
provement overall in the advancement of economic greatest change this year. Last year, Madagascar’s
many of these countries remain crippled by corruption and a lack of strong protection of property
rights. Without strong property rights, these countries will remain poverty-stricken. Investors will not
consider investing in countries that are rife with corruption and where property rights are poorly protected.
Executive Summary
5
score was 3.10; this year, its score
is 2.65. Madagascar remains ranked
as “mostly free.” If reforms continue at the same pace as in the past
year, Madagascar could achieve a
ranking of “free” within two years.
Last year, Libya’s score was 4.75;
this year, its score is 4.30. While
Libya remains ranked as a “repressed” country with many reforms needed, this is the second
consecutive year it has improved.
The primary reason for this improvement is the availability of
more extensive data on inflation
that were not available during
preparation of the 2002 Index.
Botswana and Iran are tied as
the second most improved countries in the past year. Additionally,
Botswana is one of the countries
that have greatly improved since
1995. (See Table 3.) Last year,
Botswana’s score was 2.90; this
year, its score is 2.50. Iran’s score
last year was 4.55; this year, it is
4.15. This is the second consecutive
year that Iran has improved.
Table 2 lists the countries that
experienced the greatest decline in
economic freedom during the past
year. After being on a political and
economic roller coaster, it is no
surprise that Argentina has experienced the greatest decline in economic freedom among all countries. Last year, Argentina’s score
was 2.50; this year, its score is 2.95.
Not only have South Korea and
Zambia experienced a great loss in
economic freedom in the past year,
as Table 4 indicates, but both countries have regressed since the first
edition of the Index in 1995. Last
year, South Korea’s score was 2.50;
this year, its score is 2.70. Last year,
Zambia’s score was 3.25; this year,
its score is 3.50.
6
Table 1. Countries Showing Greatest
Improvement Overall Since 2002
Index of Economic Freedom
Countries
Score Change
Region
Madagascar
0.45
Sub-Saharan Africa
Libya
0.45
North Africa and Middle East
Botswana
0.40
Sub-Saharan Africa
Iran
0.40
North Africa and Middle East
Equatorial Guinea
0.30
Sub-Saharan Africa
Cuba
0.30
Latin America and the Caribbean
Qatar
0.30
North Africa and Middle East
Iceland
0.25
North America and Europe
South Africa
0.25
Sub-Saharan Africa
Slovenia
0.25
North America and Europe
Croatia
0.25
North America and Europe
Kyrgyz Rep.
0.25
Asia and the Pacific
Turkmenistan
0.25
Asia and the Pacific
Table 2. Countries Showing Greatest Decline
in Economic Freedom Since 2002
Index of Economic Freedom
Countries
Score Change
Region
Argentina
0.45
Latin America and the Caribbean
Hungary
0.25
North America and Europe
Sri Lanka
0.25
Asia and the Pacific
Zambia
0.25
Sub Saharan Africa
Rwanda
0.25
Sub Saharan Africa
Nigeria
0.25
Sub Saharan Africa
El Salvador
0.20
Latin America and the Caribbean
Korea, South
0.20
Asia and the Pacific
Mozambique
0.20
Sub Saharan Africa
Benin
0.20
Sub Saharan Africa
Yugoslavia
0.20
North America and Europe
Poland
0.20
North America and Europe
Djibouti
0.20
Sub Saharan Africa
Gambia, The
0.20
Sub Saharan Africa
2003 Index of Economic Freedom
Table 3. Countries Showing Greatest
Improvement Overall Since 1995
Index of Economic Freedom
Countries
Score Change
Region
Azerbaijan (1996)
1.40
Asia Pacific
Armenia (1996)
1.10
North America & Europe
Lithuania (1996)
1.10
North America & Europe
Cambodia (1997)
1.00
Asia Pacific
Nicaragua (1995)
1.00
Latin America & The Caribbean
Mozambique (1995)
0.95
Sub-Saharan Africa
Bosnia (1998)
0.90
North America & Europe
Haiti (1995)
0.80
Latin America & The Caribbean
Madagascar (1995)
0.80
Sub-Saharan Africa
Botswana (1995)
0.80
Sub-Saharan Africa
Vietnam (1995)
0.80
Asia Pacific
* The number in parentheses indicates the first year the country was included in the Index
Table 4. Countries Showing Greatest Decline
in Economic Freedom Since 1995
Index of Economic Freedom
Countries
Score Change
Region
Turkey (1995)
0.70
North America & Europe
Japan (1995)
0.65
Asia Pacific
Belarus (1995)
0.60
North America & Europe
Malaysia (1995)
0.60
Asia Pacific
Nigeria (1995)
0.60
Sub-Saharan Africa
Zimbabwe (1995)
0.60
Sub-Saharan Africa
Korea, South (1995)
0.55
Asia Pacific
Paraguay (1995)
0.55
Latin America & The Caribbean
Venezuela (1995)
0.50
Latin America & The Caribbean
Zambia (1995)
0.40
Sub-Saharan Africa
Mauritius (1999)
0.35
Sub-Saharan Africa
* The number in parentheses indicates the first year the country was included in the Index
Table 3 shows the countries
that have made the largest overall improvement over the entire
history of the Index. Azerbaijan has
made the most improvement with
a score change of 1.40 since the
country was first graded in 1996.
Armenia and Lithuania are tied for
second most improved with a
change of 1.10 in their scores. As
mentioned last year, it is noteworthy that, although these three
economies were once part of the
Soviet Union, their levels of overall economic freedom have all advanced. Estonia, however, continues to be the only “free” country
from the former Soviet bloc.
Mozambique is listed as a
country that has made the greatest improvement since the inception of the Index. This year,
Mozambique is one of the countries exhibiting the greatest decline in economic freedom in the
past year. Mozambique’s trade
policy and monetary scores are
worse.
Table 4 shows the countries
that have exhibited the greatest
decline in economic freedom over
the entire history of the Index. Turkey has declined the most, with a
score change of 0.70, and continues its descent with a worse score
this year. Despite taking initial
steps to adopt reform, Turkey is
still reeling from its economic crisis. Japan, as a country with the
second greatest decline in economic freedom with a score
change of 0.65, has a worse score
this year as well.
GLOBAL FREE TRADE
ASSOCIATION
COUNTRIES
In the 2001 edition of the Index,
three Heritage analysts proposed
Executive Summary
7
a plan for a global free trade association (GFTA).4
This year, 13 countries qualify, while 15 are in the
“near-miss” category by falling short in one factor
by 1 point.5
The qualifying countries, based on 2003 Index of
Economic Freedom data, are Australia, Botswana, Denmark, Estonia, Finland, Hong Kong, Iceland, Ireland,
Luxembourg, New Zealand, Singapore, the United
Kingdom, and the United States. Botswana qualifies
for the first time this year because of improvements
in its trade, regulation, and foreign investment
scores.
Among the “near-miss” countries are examples
that range from Switzerland to Israel. Regulation
continues to be the most common reason for the
“near-miss” countries. Although Chile qualified last
year, it is in the “near-miss” category this year because of a worse regulation score. Of the 15 “nearmiss” countries, 11 fail to qualify because of their
regulation scores; two (Canada and Cyprus) do not
qualify because of their foreign investment scores;
one (El Salvador) does not qualify because of weak
property rights; and one (Bahrain) does not qualify
because of restrictions on trade.
While most liberalization in the past year has
been accomplished through bilateral free trade
agreements, such agreements include only two parties, thereby creating trade diversion for those who
are left out. A GFTA would not be a substitute for
the World Trade Organization (WTO), but would
seek to advance liberalization while the WTO round
is being negotiated.
A GFTA would limit trade diversion by welcoming all those who are truly free traders into the fold.
Additionally, a GFTA would motivate other countries to liberalize their markets in order to join.
Market liberalization should be voluntary. The
GFTA would operate under this very concept. Membership in the GFTA would include only countries
that have a record as free traders.
Criteria for Membership in a
Global Free Trade Association
Freedom to Trade. Countries must maintain an open trade policy, with minimal barriers to imports and minimal subsidies to domestic industries. This means an average tariff rate not greater than
9 percent as well as few or no non-tariff barriers, which include import quotas or licensing requirements that restrict trade. Countries that generally set low tariff barriers, do not impose excessive nontariff barriers, and do not put serious impediments in the way of foreign investment demonstrate
their fundamental commitment to free trade.
Freedom to Invest. Countries must maintain liberal policies regarding capital flows and investment. Specifically, this means a transparent and open foreign investment code, impartial treatment of
foreign investments, and an efficient approval process. Restrictions on foreign investment must be
few in number and not significant economically.
Freedom to Operate a Business (Low Regulatory Burden). Countries must maintain an open
environment for business. Overly burdensome regulations can deter trade and investment. Investors
may choose not to enter a country because of the difficulties involved in opening a business or because the cost of doing business in that country is excessive. Countries must maintain simple licensing procedures, apply regulations uniformly, and be nondiscriminatory in their treatment of foreignowned business.
Secure Property Rights. A country with a well-established rule of law protects private property
and provides an environment in which business transactions can take place with a degree of certainty. Investors are likely to engage in economic transactions when they know the judicial system
protects private property and is not subject to outside influence. Secure property rights help to ensure
that efforts to expand trade with a GFTA country can be successful.
8
2003 Index of Economic Freedom
Table 5. Membership in a Global Free Trade Association
Next in Line
Qualifying Countries
Country
Policy Blocking Membership
1
Australia
1
Austria
Regulation
2
Botswana
2
Bahrain
Trade
3
Denmark
3
Belgium
Regulation
4
Estonia
4
Canada
Foreign Investment
5
Finland
5
Chile
Regulation
6
Hong Kong
6
Cyprus
Foreign Investment
7
Iceland
7
El Salvador
Property Rights
8
Ireland
8
Germany
Regulation
9
Luxembourg
9
Israel
Regulation
10 New Zealand
10 Italy
Regulation
11 Singapore
11 Netherlands
Regulation
12 United Kingdom
12 Portugal
Regulation
13 United States
13 Spain
Regulation
14 Sweden
Regulation
15 Switzerland
Regulation
Notes:
1
Lee Hoskins and Ana I. Eiras, “Property Rights: The Key to Economic Growth,” in Gerald P. O’Driscoll,
Jr., Kim R. Holmes, and Mary Anastasia O’Grady, 2002 Index of Economic Freedom(Washington, D.C.: The
Heritage Foundation and Dow Jones &, Company, Inc., 2002), pp. 42–44.
2
Numbers are in real terms.
3
For a discussion of data issues with respect to Libya, see “Country Trend Tables,” p. 5.
4
John C. Hulsman, Gerald P. O’Driscoll, Jr., and Denise H. Froning, “The Free Trade Association: A
Trade Agenda for the New Global Economy,” in Gerald P. O’Driscoll, Jr., Kim R. Holmes, and Melanie
Kirkpatrick, 2001 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow
Jones & Company, Inc., 2001), pp. 33–41.
5
See Table 5, “Membership in a Global Free Trade Association,” p. 9.
Executive Summary
9
10
2003 Index of Economic Freedom
Mostly Free
Score: 2.00 to 2.95
Free
Score: 1.00 to 1.95
Score: 3.00 to 3.95
Mostly Unfree
Global Distribution of Economic Freedom
Score: 4.00 to 5.00
Repressed
Not
Ranked
Asia and the Pacific Index of Economic Freedom Scores
(30 Economies)
World
Rank
1
2
3
9
27
35
35
40
52
62
72
72
80
99
99
104
104
113
119
119
119
119
127
135
143
146
148
149
153
156
Hong Kong
Singapore
New Zealand
Australia
Taiwan
Cambodia
Japan
Thailand
Korea, South
Philippines, The
Malaysia
Mongolia
Sri Lanka
Indonesia
Pakistan
Kyrgyz Rep., The
Azerbaijan
Fiji
Bangladesh
Kazakhstan
India
Nepal
China
Vietnam
Tajikistan
Turkmenistan
Burma
Uzbekistan
Laos
Korea, North
Executive Summary
2003
1.45
1.50
1.70
1.85
2.30
2.50
2.50
2.55
2.70
2.85
3.00
3.00
3.05
3.30
3.30
3.35
3.35
3.40
3.50
3.50
3.50
3.50
3.55
3.70
3.95
4.15
4.20
4.25
4.40
5.00
2002
1.35
1.55
1.70
1.85
2.35
2.60
2.45
2.40
2.50
2.95
3.10
2.90
2.80
3.35
3.30
3.60
3.50
3.40
3.70
3.60
3.55
3.40
3.55
3.85
3.85
4.40
4.10
4.35
4.55
5.00
2001
1.30
1.55
1.70
1.90
2.10
2.85
2.05
2.20
2.25
3.05
3.00
3.00
2.70
3.55
3.45
3.65
3.95
3.40
3.80
3.75
3.85
3.50
3.55
4.10
3.95
4.40
4.20
4.45
4.65
5.00
2000
1.30
1.45
1.70
1.90
2.00
3.00
2.15
2.70
2.40
2.85
2.70
3.15
2.90
3.50
3.40
3.60
4.20
3.30
3.75
3.70
3.80
3.60
3.40
4.30
4.00
4.30
4.10
4.40
4.60
5.00
1999
1.30
1.40
1.70
1.90
1.90
3.00
2.05
2.35
2.20
2.85
2.60
3.25
2.75
3.10
3.45
3.60
4.20
3.30
3.75
3.95
3.80
3.30
3.60
4.30
4.00
4.30
4.10
4.40
4.60
5.00
1998
1.30
1.40
1.85
1.90
1.95
3.10
2.00
2.35
2.25
2.65
2.60
3.15
2.75
2.85
3.20
3.80
4.30
3.20
3.50
4.00
3.80
3.40
3.50
4.35
4.25
4.20
4.20
4.50
4.50
5.00
1997
1.40
1.50
1.80
2.15
1.95
3.50
2.05
2.30
2.25
2.85
2.80
3.35
2.50
2.90
3.20
1996
1.30
1.50
1.80
2.05
1.95
1995
1.30
1.50
2.05
2.35
2.30
2.95
2.70
3.50
2.80
2.85
3.15
1.85
2.35
2.15
3.20
2.40
3.33
3.00
3.40
3.15
4.65
3.20
3.50
4.75
3.15
3.50
3.40
3.60
3.80
3.65
3.60
4.45
3.85
3.55
3.60
4.45
4.30
4.30
4.45
5.00
4.35
5.00
2.05
2.00
3.80
3.60
4.50
5.00
11
12
Azer.
India
Thailand
Laos
Singapore
Note: Fiji and Samoa are not to scale.
Malaysia
Camb.
Score: 2.00 to 2.95
Burma
Mostly Free
Bangladesh
Bhutan
Score: 1.00 to 1.95
Sri Lanka
Nepal
People’s Republic of China
Mongolia
Free
1000 Miles
Pakistan
Afghanistan
Tajikistan
Kyrgyz Rep.
Kazakhstan
Russia
Taiwan
Philippines
Score: 3.00 to 3.95
Mostly Unfree
Indonesia
Brunei
Vietnam
Hong Kong
South
Korea
North
Korea
Economic Freedom in the Asia-Pacific Region
tan
kis
e
b
Uz
an
ist
en
m
rk
Tu
2003 Index of Economic Freedom
Japan
Australia
Score: 4.00 to 5.00
Repressed
Australia
Papua
New Guinea
Fiji
Australia
Not
Ranked
New
Zealand
Samoa
North America and Europe Economic Freedom Score
(45 Economies)
World
Rank
3
5
6
6
6
9
11
11
11
11
15
18
19
19
19
22
27
29
29
29
32
33
35
40
44
44
52
56
56
62
66
66
89
92
94
104
104
113
119
131
135
138
139
149
151
Luxembourg
Ireland
Denmark
Estonia
United States
United Kingdom
Iceland
Sweden
Finland
Netherlands
Switzerland
Canada
Austria
Belgium
Germany
Cyprus
Norway
Italy
Lithuania
Spain
Portugal
Latvia
Czech Rep., The
France
Armenia
Hungary
Malta
Mexico
Greece
Slovenia
Slovak Rep., The
Poland
Croatia
Moldova
Macedonia
Bulgaria
Albania
Georgia
Turkey
Ukraine
Russia
Romania
Bosnia
Yugoslavia
Belarus
Executive Summary
2003
1.70
1.75
1.80
1.80
1.80
1.85
1.90
1.90
1.90
1.90
1.95
2.05
2.10
2.10
2.10
2.15
2.30
2.35
2.35
2.35
2.40
2.45
2.50
2.55
2.65
2.65
2.70
2.80
2.80
2.85
2.90
2.90
3.15
3.20
3.25
3.35
3.35
3.40
3.50
3.65
3.70
3.75
3.80
4.25
4.30
2002
1.80
1.80
1.90
1.80
1.80
1.85
2.15
2.05
1.95
1.80
1.90
2.00
2.10
2.10
2.10
2.15
2.45
2.35
2.35
2.30
2.30
2.50
2.40
2.70
2.70
2.40
2.70
2.90
2.80
3.10
2.90
2.70
3.40
3.35
3.25
3.40
3.30
3.40
3.35
3.85
3.70
3.70
3.90
4.05
4.35
2001
1.75
1.65
2.05
2.05
1.75
1.80
2.15
2.25
2.15
1.85
1.90
2.05
2.05
2.10
2.10
2.15
2.45
2.30
2.55
2.40
2.30
2.65
2.20
2.50
2.95
2.55
2.80
2.95
2.70
2.90
2.85
2.75
3.45
3.60
2000
1.80
1.85
2.25
2.20
1.80
1.90
2.15
2.35
2.20
2.05
1.90
2.00
2.05
2.10
2.20
2.55
2.30
2.30
2.90
2.40
2.30
2.65
2.20
2.50
3.10
2.55
2.95
3.00
2.75
3.00
3.00
2.80
3.50
3.20
1999
1.95
1.90
2.25
2.35
1.80
1.80
2.15
2.35
2.20
2.05
1.90
2.00
2.10
2.10
2.20
2.65
2.35
2.30
3.00
2.40
2.30
2.75
2.20
2.40
3.45
2.95
3.05
3.20
2.85
2.90
3.10
2.80
3.60
3.30
1998
1.85
1.90
2.25
2.30
1.85
1.85
2.15
2.45
2.15
2.10
1.95
2.20
2.10
2.10
2.30
2.70
2.35
2.40
3.00
2.45
2.40
2.85
2.35
2.40
3.50
3.00
3.05
3.30
2.85
3.00
3.15
2.90
3.65
3.40
1997
2.00
2.10
2.05
2.50
1.80
1.90
2.25
2.45
2.20
1.95
1.95
2.20
2.10
2.10
2.20
2.60
2.45
2.50
3.10
2.55
2.40
2.95
2.20
2.40
3.50
3.00
3.15
3.25
2.80
3.30
3.05
3.10
3.60
3.40
1996
2.00
2.10
2.00
2.50
1.85
1.90
1995
2.65
2.35
1.90
1.95
2.10
2.10
2.10
2.20
2.60
2.45
2.60
3.45
2.70
2.65
3.05
2.20
2.30
3.75
3.00
3.25
3.10
2.90
3.50
3.00
3.10
3.60
3.40
2.65
3.30
3.50
3.55
2.90
3.85
3.70
3.65
4.00
3.40
3.70
3.65
2.75
3.60
3.70
3.30
4.40
3.50
3.60
3.65
2.80
3.60
3.50
3.30
4.70
3.65
3.70
3.65
2.60
3.80
3.35
3.30
4.70
3.60
3.60
3.85
2.70
3.75
3.55
3.40
3.50
3.70
3.95
2.90
3.80
3.50
3.65
3.50
3.60
4.25
4.10
4.10
4.00
3.80
3.40
3.70
2.10
2.40
1.90
1.90
2.05
2.10
2.10
2.50
2.50
2.70
2.20
2.30
3.00
3.35
2.85
3.00
2.80
3.30
3.90
2.80
3.70
3.40
3.60
13
14
2003 Index of Economic Freedom
Russia
Mostly Free
Score: 2.00 to 2.95
Free
Score: 1.00 to 1.95
1,000 Miles
Mexico
United States
Canada
Greenland
(Denmark)
Portugal
Italy
Germany
Switz.
Luxembourg
Belg.
Score: 3.00 to 3.95
Mostly Unfree
Denmark
Norway
Netherlands
France
U.K.
250 Miles
Spain
Ireland
Iceland
Greenland
(Denmark)
Economic Freedom in North America and Europe
Score: 4.00 to 5.00
Repressed
Greece
Bulgaria
M
old
ov
a
Russia
Not
Ranked
Turkey
Cyprus
Ukraine
Belarus
Romania
Maced.
Yugoslavia
Albania
Bosnia
Latvia
Estonia
Lithuania
Slovak Rep.
Hungary
Croatia
Malta
Slov.
Austria
Czech
Republic
Poland
(Russia)
Sweden
Finland
Armen.
Georgia
North Africa and Middle East Index of Economic Freedom Scores
(18 Economies)
World
Rank
16
24
33
40
44
56
62
68
68
68
94
94
104
131
143
146
151
Bahrain
United Arab Emirates
Israel
Kuwait
Qatar
Oman
Jordan
Morocco
Saudi Arabia
Tunisia
Lebanon
Algeria
Egypt
Yemen
Syria
Iran
Libya
Iraq
2003
2.00
2.20
2.45
2.55
2.65
2.80
2.85
2.95
2.95
2.95
3.25
3.25
3.35
3.65
3.95
4.15
4.30
n/a
2002
2.00
2.15
2.65
2.75
2.95
2.90
2.70
3.05
3.00
2.85
3.15
3.10
3.55
3.75
4.10
4.55
4.75
5.00
2001
1.90
2.05
2.75
2.55
3.15
2.70
2.90
2.70
3.00
2.90
2.85
3.20
3.60
3.85
4.00
4.70
4.90
4.90
2000
1.80
2.15
2.75
2.50
3.05
2.80
2.90
2.75
2.95
3.00
3.20
3.45
3.50
3.85
4.00
4.55
4.85
4.90
1999
1.80
2.15
2.75
2.50
3.15
2.85
2.90
2.85
2.85
3.00
3.25
3.50
3.40
4.05
4.10
4.55
4.85
4.90
1998
1.90
2.25
2.75
2.60
1997
1.70
2.20
2.75
2.50
1996
1.80
2.20
3.00
2.50
1995
1.70
2.70
2.90
3.05
2.70
2.80
3.25
3.45
3.35
4.10
3.95
4.70
4.90
4.90
2.80
2.80
2.90
2.80
2.80
2.95
3.50
3.55
4.00
3.95
4.70
4.90
4.90
2.90
2.95
2.85
2.80
2.70
3.05
3.50
3.45
3.85
4.00
4.65
4.85
4.90
2.70
3.05
2.95
2.90
2.90
3.50
3.70
3.80
Sub-Saharan Africa Index of Economic Freedom Scores (42 Economies)
World
Rank
35
44
44
52
62
72
72
72
80
80
80
85
85
85
89
89
94
94
99
99
104
104
104
104
113
113
113
119
119
128
128
131
131
135
140
140
142
153
Botswana
Madagascar
South Africa
Namibia
Uganda
Swaziland
Mauritius
Mali
Senegal
Central African Rep.
Ivory Coast
Guinea
Mauritania
Kenya
Gabon
Cape Verde
Burkina Faso
Mozambique
Djibouti
Gambia, The
Lesotho
Tanzania
Cameroon
Benin
Chad
Niger
Ghana
Ethiopia
Zambia
Equatorial Guinea
Togo
Malawi
Rwanda
Congo, Republic of
Sierra Leone
Nigeria
Guinea Bissau
Zimbabwe
Angola
Burundi
Congo, Dem. Rep. of
Sudan
Executive Summary
2003
2.50
2.65
2.65
2.70
2.85
3.00
3.00
3.00
3.05
3.05
3.05
3.10
3.10
3.10
3.15
3.15
3.25
3.25
3.30
3.30
3.35
3.35
3.35
3.35
3.40
3.40
3.40
3.50
3.50
3.60
3.60
3.65
3.65
3.70
3.85
3.85
3.90
4.40
n/a
n/a
n/a
n/a
2002
2.90
3.10
2.90
2.90
3.00
3.10
3.00
2.90
3.20
3.05
2.90
3.30
3.30
3.20
3.25
3.15
3.20
3.05
3.10
3.10
3.40
3.40
3.25
3.15
3.60
3.50
3.40
3.55
3.25
3.90
3.60
3.50
3.40
3.75
n/a
3.60
3.95
4.30
n/a
n/a
n/a
n/a
2001
2.95
3.10
3.05
2.95
3.00
3.00
2.95
2.95
3.05
2000
2.95
3.20
2.90
2.90
3.00
3.00
2.85
2.90
3.05
1999
2.95
3.25
2.90
2.85
2.50
2.90
2.65
3.00
3.15
1998
2.95
3.35
2.80
2.90
2.50
2.90
1997
3.05
3.25
2.90
2.90
2.60
3.10
1996
3.00
3.35
3.00
1995
3.30
3.45
3.00
2.61
3.20
2.78
3.00
3.10
3.30
3.20
3.45
3.25
3.70
3.30
3.00
3.10
3.70
3.15
3.25
3.35
3.30
3.35
3.35
3.35
3.40
3.50
3.20
2.90
3.60
3.50
3.10
3.65
3.15
3.90
3.75
3.55
3.60
3.70
n/a
3.35
4.00
4.25
n/a
n/a
n/a
n/a
3.45
3.10
3.80
3.05
3.10
3.70
3.40
3.80
3.40
3.40
3.55
3.40
3.40
2.90
3.80
3.80
3.10
3.50
2.90
4.05
3.80
3.65
4.00
3.90
3.80
3.30
4.30
3.90
4.50
4.00
4.70
3.85
3.55
3.10
3.70
3.05
3.00
3.80
3.50
3.90
3.30
3.30
3.45
3.20
3.40
3.00
3.90
3.60
3.10
3.50
2.90
3.95
3.90
3.65
4.00
3.95
3.70
3.20
4.20
3.90
4.50
4.20
4.70
4.05
3.45
2.90
3.75
3.10
3.00
3.60
3.60
4.10
3.45
3.50
3.50
3.20
3.80
3.10
4.00
3.80
3.20
3.50
2.90
3.60
3.20
3.90
3.25
3.20
3.60
3.60
4.00
3.25
3.40
3.65
3.25
3.70
3.10
4.00
3.90
3.40
3.60
2.75
3.50
3.00
3.75
3.35
3.40
3.50
3.80
4.10
3.20
3.15
4.00
3.40
3.55
3.00
3.30
3.75
3.10
3.70
4.20
4.55
3.60
3.20
3.65
4.30
4.00
3.55
3.30
3.60
3.50
4.10
3.50
3.40
3.60
3.25
4.00
4.40
4.20
3.95
4.20
3.75
4.40
4.10
4.15
4.20
3.75
4.40
3.80
4.30
4.20
4.10
3.90
4.10
3.65
3.50
3.80
3.20
3.30
3.00
4.20
3.60
3.30
15
Economic Freedom in Africa and the Middle East
Morocco
Tunisia
Syria
Leb.
Iran
Iraq
Israel
Jordan
Algeria
Western
Sahara
Kuwait
Libya
Bahrain
Egypt
Qatar
Saudi Arabia
UAE
Oman
Mauritania
Mali
Senegal
Niger
The Gambia
Guinea–
Cape Bissau
Verde
Guinea
Liberia
Eritrea
Sudan
Yemen
Djibouti
Nigeria
Ivory
Coast
Sierra
Leone
Chad
Burkina
Faso
Ethiopia
Central African
Republic
Benin
Cameroon
Togo
Ghana
Equatorial
Guinea
Somalia
Uganda
Gabon
Congo
Congo,
Dem. Rep.
Kenya
Rwanda
Burundi
(Angola)
Tanzania
Madagascar
Angola
Malawi
Zambia
Zimbabwe
Mozambique
Namibia
Mauritius
Réunion
(France)
Botswana
Swaziland
South
Africa
Lesotho
1,000 Miles
16
Free
Mostly Free
Mostly Unfree
Repressed
Score: 1.00 to 1.95
Score: 2.00 to 2.95
Score: 3.00 to 3.95
Score: 4.00 to 5.00
Not
Ranked
2003 Index of Economic Freedom
Latin America and the Caribbean Index of Economic Freedom Scores
(26 Economies)
World
Rank
16
22
24
26
35
43
44
44
44
55
56
56
56
68
72
72
72
80
85
92
99
118
119
128
143
155
Chile
Bahamas
Barbados
El Salvador
Uruguay
Trinidad and Tobago
Bolivia
Panama
Costa Rica
Belize
Jamaica
Guatemala
Peru
Argentina
Nicaragua
Brazil
Colombia
Honduras
Dominican Rep., The
Guyana
Paraguay
Ecuador
Venezuela
Haiti
Suriname
Cuba
Executive Summary
2003
2.00
2.15
2.20
2.25
2.50
2.60
2.65
2.65
2.65
2.75
2.80
2.80
2.80
2.95
3.00
3.00
3.00
3.05
3.10
3.20
3.30
3.45
3.50
3.60
3.95
4.45
2002
1.85
2.05
2.30
2.05
2.55
2.45
2.70
2.70
2.65
2.70
2.90
2.80
2.75
2.50
3.15
3.10
2.85
3.15
3.00
3.20
3.10
3.45
3.65
3.80
3.95
4.75
2001
2.00
2.15
2.40
1.95
2.35
2.50
2.40
2.55
2.65
2.70
2.80
2.70
2.50
2.25
3.45
3.25
2.95
3.35
2.85
3.35
3.20
3.45
3.55
3.90
3.85
4.75
2000
2.00
2.20
2.50
2.00
2.55
2.35
2.65
2.40
2.85
2.80
2.50
2.70
2.45
2.10
3.60
3.50
2.90
3.35
2.90
3.20
2.80
3.10
3.30
4.00
3.90
4.75
1999
2.10
2.20
2.60
2.15
2.65
2.50
2.75
2.40
2.95
2.85
2.70
2.65
2.55
2.10
3.60
3.30
2.90
3.45
3.10
3.20
2.80
3.00
3.30
4.00
3.90
4.85
1998
2.15
2.05
2.50
2.40
2.65
2.60
2.60
2.40
2.95
2.95
2.70
2.70
2.85
2.30
3.50
3.45
3.00
3.25
3.20
3.40
2.80
2.90
3.40
4.10
3.90
4.85
1997
2.20
2.05
2.70
2.40
2.65
2.60
2.70
2.50
2.95
2.75
2.70
2.70
2.90
2.60
3.70
3.45
3.05
3.35
3.10
3.30
2.65
3.00
3.40
4.10
3.90
4.85
1996
2.55
2.10
2.90
2.45
2.85
2.60
2.70
2.50
2.95
2.75
2.80
2.85
2.90
2.55
3.60
3.55
3.05
3.30
3.20
3.30
2.65
3.10
3.50
4.40
4.00
4.85
1995
2.60
2.25
2.65
2.90
3.10
2.40
2.90
2.70
2.90
3.05
3.30
2.75
4.00
3.30
2.90
3.25
3.40
3.60
2.65
3.20
3.00
4.40
4.85
17
Economic Freedom in South America
Guyana
Venezuela
Suriname
French Guiana
(France)
Colombia
Ecuador
Brazil
Peru
Bolivia
Paraguay
Chile
Argentina
Uruguay
1,000 Miles
Falkland Islands
(United Kingdom)
South Georgia Island
(United Kingdom)
Free
Mostly Free
Mostly Unfree
Repressed
Score: 1.00 to 1.95
Score: 2.00 to 2.95
Score: 3.00 to 3.95
Score: 4.00 to 5.00
18
Not
Ranked
2003 Index of Economic Freedom
Executive Summary
19
Mostly Free
Score: 2.00 to 2.95
Free
Score: 1.00 to 1.95
500 Miles
Costa
Rica
Nicaragua
Honduras
El Salvador
Guatemala
Belize
Cuba
Panama
Jamaica
Score: 3.00 to 3.95
Mostly Unfree
Cayman Islands
(U.K.)
Dominican
Republic
Puerto Rico
(U.S.)
Aruba, Curaçao and Bonaire
(Netherlands)
Score: 4.00 to 5.00
Repressed
Haiti
The Bahamas
Economic Freedom in the Central America and Caribbean
Not
Ranked
Trinidad
and Tobago
Barbados
20
2003 Index of Economic Freedom
4.00
3.00
Mostly Free
2003 Index of Economic Freedom Score
Mostly Unfree
2.00
Free
Note: Per capita GDP figures were not available for the following countries: Armenia, The Bahamas, Bahrain, Bosnia, Democratic Republic of Congo, Cuba, Djibouti,
Iraq, North Korea, Kuwait, Lebanon, Libya, Malta, Oman, Qatar, Suriname, Taiwan, Tajikistan, United Arab Emirates, Yugoslavia. Per capita GDP figures are in
current international dollars and are from1999.
Source: The World Bank, 2001 World Development Indicators on CD-ROM.
Repressed
Asia-Pacific
Europe and North America
Africa and the Middle East
Latin America
Fitted Line
2000 Per Capita GDP in Purchasing Power Parities
5.00
5,000
10,000
15,000
20,000
25,000
30,000
$35,000
Economic Freedom and Income
1.00
Executive Summary
21
2003 2002 2001 2000 1999 1998 1997 1996 1995 Trade Fiscal Burden Government Monetary Foreign Banking and Wage/ Property Regulation Black
Scores Scores Scores Scores Scores Scores Scores Scores Scores
of Government Intervention Policy Investment Finance
Prices Rights
Market
1.45 1.35 1.30 1.30 1.30 1.30 1.40 1.30 1.30
1
2
3
1
1
1
2
1
1
1.5
Hong Kong
2
3
1
1
2
2
1
1
1
1.50 1.55 1.55 1.45 1.40 1.40 1.50 1.50 1.50 1
Singapore
1.70 1.80 1.75 1.80 1.95 1.85 2.00 2.00
2
4
2
1
1
1
2
1
2
1
Luxembourg
1.70 1.70 1.70 1.70 1.70 1.85 1.80 1.80
2
4
2
1
1
1
2
1
2
1
New Zealand
1.75 1.80 1.65 1.85 1.90 1.90 2.10 2.10 2.10
2
3
2
2
1
1
2
1
2
1.5
Ireland
1.80 1.90 2.05 2.25 2.25 2.25 2.05 2.00
2
4.5
3.5
1
2
1
1
1
1
1
Denmark
1.80 1.80 2.05 2.20 2.35 2.30 2.50 2.50 2.40
1
3.5
2
2
1
1
1
2
2
2.5
Estonia
1.80 1.80 1.75 1.80 1.80 1.85 1.80 1.85 1.90
2
3.5
2
1
2
1
2
1
2
1.5
United States
1.85 1.85 1.90 1.90 1.90 1.90 2.15 2.05 2.05
2
3.5
2
2
2
1
2
1
2
1
Australia
1.85 1.85 1.80 1.90 1.80 1.85 1.90 1.90 1.90
2
4
2
1
2
1
2
1
2
1.5
United Kingdom
1.90 1.95 2.15 2.20 2.20 2.15 2.20 2.35
2
4
2
1
2
2
2
1
2
1
Finland
1.90 2.15 2.15 2.15 2.15 2.15 2.25
2
3
2
2
2
3
1
1
2
1
Iceland
1.90 1.80 1.85 2.05 2.05 2.10 1.95 1.90
2
4
2
2
1
1
2
1
3
1
Netherlands
1.90 2.05 2.25 2.35 2.35 2.45 2.45 2.65 2.65
2
4.5
2.5
1
1
1
2
1
3
1
Sweden
1.95 1.90 1.90 1.90 1.90 1.95 1.95 1.95
2
3.5
3
1
2
1
2
1
3
1
Switzerland
2.00 2.00 1.90 1.80 1.80 1.90 1.70 1.80 1.70
3
2
3
1
2
1
3
1
2
2
Bahrain
2.00 1.85 2.00 2.00 2.10 2.15 2.20 2.55 2.60
2
2.5
2
2
2
2
2
1
3
1.5
Chile
2.05 2.00 2.05 2.00 2.00 2.20 2.20 2.10 2.05
2
4
2.5
1
3
2
2
1
2
1
Canada
2.10 2.10 2.05 2.05 2.10 2.10 2.10 2.10 2.10
2
4.5
2
1
2
2
2
1
3
1.5
Austria
2.10 2.10 2.10 2.10 2.10 2.10 2.10 2.10
2
5
2
1
1
2
2
1
3
2
Belgium
2.10 2.10 2.10 2.20 2.20 2.30 2.20 2.20 2.10
2
4.5
2
1
1
3
2
1
3
1.5
Germany
2.15 2.05 2.15 2.20 2.20 2.05 2.05 2.10 2.25
5
1.5
2
1
3
2
3
1
1
2
Bahamas
2.15 2.15 2.15 2.55 2.65 2.70 2.60 2.60
2
3.5
3
1
3
2
2
1
2
2
Cyprus
2.20 2.30 2.40 2.50 2.60 2.50 2.70 2.90
3
4
2
1
3
2
2
1
2
2
Barbados
2.05 2.15 2.15 2.25 2.20 2.20
2
2
3
1
3
3
2
2
3
1
United Arab Emirates 2.20 2.15
2.25 2.05 1.95 2.00 2.15 2.40 2.40 2.45 2.65
2
2
2
2
2
2
2
3
2
3.5
El Salvador
2.30 2.45 2.45 2.30 2.35 2.35 2.45 2.45
2
4
3
1
3
3
2
1
3
1
Norway
2.30 2.35 2.10 2.00 1.90 1.95 1.95 1.95 2.00
2
3
2.5
1
3
2
2
2
3
2.5
Taiwan
2.35 2.35 2.30 2.30 2.30 2.40 2.50 2.60 2.50
2
5
2
1
2
2
2
2
3
2.5
Italy
2.35 2.35 2.55 2.90 3.00 3.00 3.10 3.45
2
3.5
2
1
2
2
2
3
3
3
Lithuania
2.35 2.30 2.40 2.40 2.40 2.45 2.55 2.70 2.50
2
4
2.5
2
2
2
2
2
3
2
Spain
2.40 2.30 2.30 2.30 2.30 2.40 2.40 2.65 2.70
2
4
2
2
2
3
2
2
3
2
Portugal
2.45 2.65 2.75 2.75 2.75 2.75 2.75 3.00 2.90
2
5
3
1
2
3
2
2
3
1.5
Israel
2.45 2.50 2.65 2.65 2.75 2.85 2.95 3.05
2
4
2
1
2
2
2
3
3
3.5
Latvia
Note: Countries whose scores have changed since last year are in Bold.
1
2
3
3
5
6
6
6
9
9
11
11
11
11
15
16
16
18
19
19
19
22
22
24
24
26
27
27
29
29
29
32
33
33
Rank
Index of Economic Freedom Rankings
22
2003 Index of Economic Freedom
Argentina
Slovak Rep., The
Jamaica
Mexico
Oman
Peru
Jordan
Philippines, The
Slovenia
Uganda
Poland
Greece
Guatemala
Namibia
Belize
Malta
Hungary
Madagascar
Panama
Qatar
South Africa
Korea, South
Costa Rica
Botswana
Cambodia
Czech Rep., The
Japan
Uruguay
France
Kuwait
Thailand
Trinidad and Tobago
Armenia
Bolivia
2003
Scores
2.50
2.50
2.50
2.50
2.50
2.55
2.55
2.55
2.60
2.65
2.65
2.65
2.65
2.65
2.65
2.65
2.65
2.70
2.70
2.70
2.75
2.80
2.80
2.80
2.80
2.80
2.80
2.85
2.85
2.85
2.85
2.90
2.90
2.95
2002
Scores
2.90
2.60
2.40
2.45
2.55
2.70
2.75
2.40
2.45
2.70
2.70
2.65
2.40
3.10
2.70
2.95
2.90
2.50
2.70
2.90
2.70
2.80
2.80
2.90
2.90
2.90
2.75
2.70
2.95
3.10
3.00
2.70
2.90
2.50
2001
Scores
2.95
2.85
2.20
2.05
2.35
2.50
2.55
2.20
2.50
2.95
2.40
2.65
2.55
3.10
2.55
3.15
3.05
2.25
2.80
2.95
2.70
2.70
2.70
2.80
2.95
2.70
2.50
2.90
3.05
2.90
3.00
2.75
2.85
2.25
2000
Scores
2.95
3.00
2.20
2.15
2.55
2.50
2.50
2.70
2.35
3.10
2.65
2.85
2.55
3.20
2.40
3.05
2.90
2.40
2.95
2.90
2.80
2.75
2.70
2.50
3.00
2.80
2.45
2.90
2.85
3.00
3.00
2.80
3.00
2.10
1999
Scores
2.95
3.00
2.20
2.05
2.65
2.40
2.50
2.35
2.50
3.45
2.75
2.95
2.95
3.25
2.40
3.15
2.90
2.20
3.05
2.85
2.85
2.85
2.65
2.70
3.20
2.85
2.55
2.90
2.85
2.90
2.50
2.80
3.10
2.10
1997
Scores
3.05
3.50
2.20
2.05
2.65
2.40
2.50
2.30
2.60
3.50
2.70
2.95
3.00
3.25
2.50
2.90
2.25
3.15
2.90
2.75
2.80
2.70
2.70
3.25
2.80
2.90
2.80
2.85
3.30
2.60
3.10
3.05
2.60
1998
Scores
2.95
3.10
2.35
2.00
2.65
2.40
2.60
2.35
2.60
3.50
2.60
2.95
3.00
3.35
2.40
2.80
2.25
3.05
2.90
2.95
2.85
2.70
2.70
3.30
2.70
2.85
2.90
2.65
3.00
2.50
2.90
3.15
2.30
Note: Countries whose scores have changed since last year are in Bold.
35
35
35
35
35
40
40
40
43
44
44
44
44
44
44
44
44
52
52
52
55
56
56
56
56
56
56
62
62
62
62
66
66
68
Rank
1996 1995 Trade Fiscal Burden Government Monetary Foreign Banking and Wage/ Property Regulation Black
of Government Intervention Policy Investment Finance
Prices Rights
Market
Scores Scores
2
3.5
4
3
2
2
2
2
2
2.5
3.00 3.30
2
2
1
1
3
2
3
4
4
3
3
4.5
2
2
2
1
2
2
3
3.5
2.20 2.20
2
4
3
1
3
3
2
2
3
2
2.05 1.85
3
3.5
2.5
2
2
2
2
2
3
3
2.85 2.90
2
4.5
3
1
3
3
2
2
3
2
2.30 2.30
2
2.5
3
1
4
3
3
2
3
2
2.50
4
2.5
1.5
1
3
3
2
2
3
3.5
2.35 2.35
4
3.5
3
2
2
2
2
2
3
2.5
2.60
1
2.5
3
2
2
2
3
3
4
4
3.75
3
3
2
1
1
2
2
4
4
4.5
2.70 3.10
2
3
2.5
3
2
3
2
3
3
3
2.95 2.90
3
4
2
3
2
2
3
2
3
2.5
3.00 3.00
2
2.5
1
3
3
3
2
3
3
4
3.35 3.45
3
4
3
1
2
1
2
4
3
3.5
2.50 2.40
3
2.5
3
1
3
3
2
3
4
2
3
4.5
2
2
2
2
2
3
3
3
3.00 3.00
3
3
4
2
2
3
2
2
3
3
2.30 2.15
3
4
3
1
3
3
3
1
2
4
3.25 3.35
3
4
3.5
3
2
2
2
2
3
2.5
4
3.5
2
1
3
3
2
3
3
3
2.75 2.70
2
4
2
2
3
3
3
3
3
3
2.90 3.00
3
2
1
3
3
2
2
4
4
4
2.85 3.05
4
4
3
3
1
2
2
3
3
3
2.80 2.90
2
3.5
3
3
3
2
2
3
3
3.5
3.10 2.85
3
3
4
1
3
3
3
3
3
2
2.90 2.70
4
2.5
3
1
2
2
2
4
4
3.5
2.90 3.30
5
3.5
4
1
2
2
2
3
3
3
2.95 3.05
2
2.5
2
2
3
3
3
3
4
4
2.95 3.20
4
4
2
3
3
3
2
3
2
2.5
3.50
3
3
2
1
3
3
2
3
4
4.5
2.61 2.78
3
4.5
2
3
3
2
3
2
3
3.5
3.10 3.30
3
4.5
2
3
2
2
3
3
3
3.5
3.00 2.80
4
3
2
1
3
4
2
4
3
3.5
2.55 2.75
Index of Economic Freedom Rankings
Executive Summary
23
Pakistan
Mozambique
Djibouti
Gambia, The
Indonesia
Macedonia
Moldova
Algeria
Burkina Faso
Lebanon
Guyana
Croatia
Gabon
Cape Verde
Honduras
Ivory Coast
Senegal
Sri Lanka
Dominican Rep., The
Guinea
Kenya
Mauritania
Central African Rep.
Mongolia
Nicaragua
Swaziland
Mauritius
Morocco
Saudi Arabia
Tunisia
Brazil
Colombia
Malaysia
Mali
2003
Scores
2.95
2.95
2.95
3.00
3.00
3.00
3.00
3.00
3.00
3.00
3.00
3.05
3.05
3.05
3.05
3.05
3.10
3.10
3.10
3.10
3.15
3.15
3.15
3.20
3.20
3.25
3.25
3.25
3.25
3.25
3.30
3.30
3.30
3.30
2002
Scores
3.05
3.00
2.85
3.10
2.85
3.10
2.90
3.00
2.90
3.15
3.10
3.05
3.15
2.90
3.20
2.80
3.00
3.30
3.20
3.30
3.15
3.40
3.25
3.20
3.35
3.10
3.20
3.15
3.25
3.05
3.10
3.10
3.35
3.30
3.35
3.35
3.35
3.55
3.45
3.35
3.00
3.05
2.70
2.85
3.10
3.15
3.70
3.35
3.45
3.25
3.35
3.60
3.20
3.30
2.85
2001
Scores
2.70
3.00
2.90
3.25
2.95
3.00
2.95
2.95
3.00
3.45
3.00
3.80
3.40
3.40
3.50
3.40
3.35
3.45
3.05
2.90
2.90
3.10
3.05
3.80
3.70
3.50
3.10
3.20
3.20
3.45
3.40
3.20
2000
Scores
2.75
2.95
3.00
3.50
2.90
2.70
2.90
2.85
3.15
3.60
3.00
3.90
3.30
3.30
3.10
3.45
3.45
3.55
3.15
2.75
3.10
3.10
3.05
3.70
3.80
3.60
3.00
3.20
3.30
3.50
3.50
3.25
1999
Scores
2.85
2.85
3.00
3.30
2.90
2.60
3.00
2.65
3.25
3.60
2.90
4.10
3.45
3.50
2.85
3.20
3.25
3.45
3.30
2.75
3.20
2.90
3.10
3.75
3.60
3.65
3.00
3.40
3.40
3.45
3.60
3.25
3.15
3.50
2.90
1998
Scores
3.05
2.70
2.80
3.45
3.00
2.60
3.10
Note: Countries whose scores have changed since last year are in Bold.
68
68
68
72
72
72
72
72
72
72
72
80
80
80
80
80
85
85
85
85
89
89
89
92
92
94
94
94
94
94
99
99
99
99
Rank
4.00
3.25
3.40
2.90
3.20
3.35
3.60
3.45
2.50
3.10
3.20
3.25
3.90
3.60
3.60
3.20
3.30
3.40
3.50
3.60
2.95
3.35
3.70
3.10
1997
Scores
2.90
2.80
2.80
3.45
3.05
2.80
3.20
2.85
3.15
4.10
3.30
3.50
3.70
2.80
3.20
3.00
3.35
3.75
3.40
3.60
3.40
3.30
3.40
3.50
3.80
3.05
3.50
3.60
3.20
1996
Scores
2.85
2.80
2.70
3.55
3.05
2.70
3.25
1995 Trade Fiscal Burden Government Monetary Foreign Banking and Wage/ Property Regulation Black
of Government Intervention Policy Investment Finance
Prices Rights
Market
Scores
5
4
2.5
3
2.95
2
2
4
1
3
3
4
2.5
4
4
3
2
3
1
3
3
5
4
3
3
2.90
3
2
3
1
3
2.5
4
2.5
3
3
3.30
3
2
3
3
3
3.5
4
3.5
3
2
2.90
2
2
4
3
3
3.5
3
3
3
4
2.40
4
3
3
1
3
3
3
3
3
3
3.30
3
2
3
2
3
5
5
3
3
2
3
4
2
2
3
3
2
4.5
2.5
3
3.33
3
2
3
3
4
3
2
3
3
2
4.00
2
3
4
3
4
4
2
4
2
3
3.00
3
3
3
3
4
3
5
2.5
3
3
2
3
3
1
4
4
3
2.5
3
3
3.25
3
2
3
3
4
4
4
3.5
1
2
3.20
3
3
4
2
4
4
4
2.5
3
3
3
3
3
1
4
4
3
3.5
3
3
3.00
3
3
3
3
3
3
5
1.5
1
3
3.40
3
3
4
3
3.5
4
5
3
1
2
3.15
3
2
4
3
4
4
4
3.5
3
3
3.30
3
2
3
1
4.5
4
4
4
2
2
2
3
4
2
4
4
4
4.5
4
3
3
3
3
1
4
2
3
4
2
3
3
3
4
2
3.5
4
5
4.5
2
3
3.00
3
3
3
1
3
4
4
4
3
3
3.60
3
2
3
2
4
4
2
3.5
3
3
3.90
3
3
3
4
3.5
4
5
3.5
3
4
3.50
2
3
4
2
3
3
4
3.5
3
3
2
3
4
2
4
4
5
3.5
3
2
3
2
4
1
5
4
5
2.5
3
2
3
2
4
2
5
4
4
3.5
3
2
4.20
2
3
4
3
4
4
4
4
4
3
3
2
4
1
4
4
4
3
3
3
3
3
3
2
5
4
3
2.5
3
4
3.40
3
2
4
3
4.5
4
5
3
3
3
3.15
3
3
4
2
4
3
Index of Economic Freedom Rankings
24
2003 Index of Economic Freedom
Russia
Malawi
Rwanda
Ukraine
Yemen
Congo, Republic of
Togo
Equatorial Guinea
Haiti
China
Bangladesh
Ethiopia
India
Kazakhstan
Nepal
Turkey
Venezuela
Zambia
Ecuador
Niger
Fiji
Georgia
Ghana
Paraguay
Albania
Azerbaijan
Benin
Bulgaria
Cameroon
Egypt
Kyrgyz Rep., The
Lesotho
Tanzania
Chad
2003
Scores
3.30
3.35
3.35
3.35
3.35
3.35
3.35
3.35
3.35
3.35
3.40
3.40
3.40
3.40
3.40
3.45
3.50
3.50
3.50
3.50
3.50
3.50
3.50
3.50
3.55
3.60
3.60
3.60
3.65
3.65
3.65
3.65
3.70
3.70
2002
Scores
3.10
3.30
3.50
3.15
3.40
3.25
3.55
3.60
3.40
3.40
3.60
3.40
3.40
3.40
3.50
3.45
3.70
3.55
3.55
3.60
3.40
3.35
3.65
3.25
3.55
3.90
3.80
3.60
3.50
3.40
3.85
3.75
3.75
3.70
2001
Scores
3.20
3.50
3.95
2.90
3.30
3.20
3.60
3.65
3.40
3.50
3.60
3.40
3.55
3.10
3.50
3.45
3.80
3.65
3.85
3.75
3.50
2.90
3.55
3.15
3.55
3.90
3.90
3.75
3.55
3.60
3.85
3.85
3.70
3.70
2000
Scores
2.80
3.70
4.20
2.90
3.40
3.40
3.50
3.60
3.55
3.40
3.80
3.30
3.65
3.10
3.80
3.10
3.75
3.50
3.80
3.70
3.60
2.75
3.30
2.90
3.40
4.05
4.00
3.80
3.65
4.00
3.60
3.85
3.90
3.70
1999
Scores
2.80
3.60
4.20
3.00
3.50
3.40
3.40
3.60
3.45
3.20
3.90
3.30
3.65
3.10
3.60
3.00
3.75
3.50
3.80
3.95
3.30
2.80
3.30
2.90
3.60
3.95
4.00
3.90
3.65
4.00
3.60
4.05
3.95
3.50
3.70
4.20
3.80
4.10
4.55
3.35
4.10
1998
Scores
2.80
3.70
4.30
3.10
3.65
3.80
3.35
3.80
3.50
3.20
4.00
3.20
3.65
3.20
3.80
2.90
3.50
3.50
3.80
4.00
3.40
2.60
3.40
2.90
3.50
Note: Countries whose scores have changed since last year are in Bold.
99
104
104
104
104
104
104
104
104
104
113
113
113
113
113
118
119
119
119
119
119
119
119
119
127
128
128
128
131
131
131
131
135
135
Rank
3.15
3.95
3.40
4.00
3.10
3.50
3.55
3.85
3.55
2.90
3.50
3.00
3.60
3.65
2.70
3.40
2.75
3.60
3.65
4.30
3.75
4.00
4.00
3.55
3.80
3.85
4.10
3.50
3.60
4.40
3.65
3.50
3.65
3.25
4.00
3.20
3.85
3.40
3.90
3.00
3.50
3.60
3.80
4.10
1996
Scores
2.65
3.70
4.75
3.20
3.50
3.80
3.45
1997
Scores
2.65
3.60
4.65
3.10
3.60
3.70
3.55
1995 Trade Fiscal Burden Government Monetary Foreign Banking and Wage/ Property Regulation Black
of Government Intervention Policy Investment Finance
Prices Rights
Market
Scores
3
2
3
3
3
3
3
4
4
5
2.65
5
3.5
3
2
2
3
2
4
4
5
3.60
3
3
3
1
4
4
3
4
4
4.5
4
3.5
3
2
3
3
3
4
4
4
4
4
2
5
3
3
2
4
3
3.5
3.50
5
3
3
1
3
3
3
4
4
4.5
3.30
4
5
3
1
3
4
3
4
3
3.5
3.70
4
2.5
2
4
3
3
3
4
4
4
3
4.5
3
3
3
3
3
4
3
4
5
2.5
2
3
3
3
3
4
4
4
3.60
5
4
2
3
3
2
2
4
4
5
5
4
3
2
4
2
3
3
4
4
3.40
4
2
2
4
3
3
3
4
4
5
4
3.5
3
5
3
3
3
3
3
3.5
3.30
4
3
3
2
3
3
3
4
4
5
4
2.5
2
5
3
3
3
4
4
4
3.20
5
2
3
1
3
4
3
5
4
5
3.60
5
3.5
3
1
4
4
3
4
4
3.5
3.75
5
4
3
2
3
4
3
4
3
4
3.80
4
3
2
3
4
4
3
4
4
4
5
2
2
2
4
4
3
4
4
5
3
4.5
3
5
3
3
3
4
3
3.5
2.80
4
3
2
4
3
3
4
4
4
4
3.00
4
4
2
5
3
3
3
4
3
4
3.10
5
3
4
1
4
4
3
4
4
3.5
3.60
5
2
2
3
3
4
4
4
4
5
3
2
2
4
4
3
3
5
5
5
4.40
3
3
3
2
4
4
3
5
4
5
4
4
3
5
3
4
3
4
3
3.5
3.50
5
2.5
3
2
4
3
3
5
4
5
3
4.5
3
4
4
3
3
4
4
4
3.70
3
4.5
3
3
3
4
3
4
4
5
3.80
5
4
3
1
4
4
3
4
4
5
3.90
4
3.5
2.5
5
3
4
3
4
4
4
3.40
Index of Economic Freedom Rankings
Executive Summary
25
Korea, North
Syria
Tajikistan
Iran
Turkmenistan
Burma
Uzbekistan
Yugoslavia
Belarus
Libya
Laos
Zimbabwe
Cuba
Suriname
Vietnam
Romania
Bosnia
Nigeria
Sierra Leone
Guinea Bissau
2003
Scores
3.70
3.75
3.80
3.85
3.85
3.90
3.95
3.95
3.95
4.15
4.15
4.20
4.25
4.25
4.30
4.30
4.40
4.40
4.45
5.00
2002
Scores
3.85
3.70
3.90
3.60
n/a
3.95
3.95
4.10
3.85
4.55
4.40
4.10
4.35
4.05
4.35
4.75
4.55
4.30
4.75
5.00
2000
Scores
4.30
3.30
4.40
3.30
3.80
4.30
3.90
4.00
4.00
4.55
4.30
4.10
4.40
4.10
4.85
4.60
3.90
4.75
5.00
2001
Scores
4.10
3.65
4.00
3.35
n/a
4.00
3.85
4.00
3.95
4.70
4.40
4.20
4.45
4.25
4.90
4.65
4.25
4.75
5.00
4.10
4.85
4.60
3.90
4.85
5.00
1999
Scores
4.30
3.30
4.70
3.20
3.70
4.20
3.90
4.10
4.00
4.55
4.30
4.10
4.40
4.00
4.90
4.50
4.00
4.85
5.00
3.90
3.95
4.25
4.70
4.20
4.20
4.50
1998
Scores
4.35
3.30
4.70
3.20
3.60
4.30
4.30
3.40
4.85
4.35
3.75
4.85
5.00
4.65
4.70
3.80
4.90
4.45
3.75
4.85
5.00
4.00
4.00
3.40
3.50
3.30
3.55
3.90
3.95
1996
Scores
4.45
3.65
1997
Scores
4.45
3.40
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
5.00
n/a
n/a
n/a
n/a
4.90
n/a
4.50
4.00
4.70
4.90
3.85
4.50
4.20
4.70
4.90
4.05
Note: Countries whose scores have changed since last year are in Bold.
Angola
Burundi
Congo, Dem. Rep. of
Iraq
Sudan
4.40
4.20
3.95
4.90
4.20
4.40
4.10
4.15
4.90
4.20
n/a
4.20
4.90
4.10
4.10
4.30
1995 Trade Fiscal Burden Government Monetary Foreign Banking and Wage/ Property Regulation Black
of Government Intervention Policy Investment Finance Prices Rights
Market
Scores
3
3
1
4
4
3
5
5
4
4.50 5
4.5
3
5
3
3
3
4
4
4
3.60 4
2
4
5
2
4
3
3
5
5
5
3.5
3
4
3
4
3
4
4
5
3.25 5
3.5
2
3
4
4
2
5
5
5
3.60 5
4
4
2
3
3
5
3
5
5
5
4
4.5
4
5
3
4
3
3
4
5
4
4.5
4
1
4
5
4
4
4
5
3
2.5
3
5
4
5
4
4
4
5
3
2.5
4
4
4
5
4
5
5
5
5
2.5
4
4
4
5
4
4
4
5
5
2
3
4
5
4
4
5
5
5
5
3.5
3
5
4
5
4
4
5
4
4
3.5
4
5
5
4
3
4
5
5
4
3
5
4
4
5
4
5
3.70 4
5
5
3
4
1
5
5
5
5
5
5
5
3
3
5
4
5
4
5
5
5
4
3
5
5
5
4
5
4
3.80 5
4
4.5
4
5
4
5
5
5
4
4.85 3
5
5
5
5
5
5
5
5
5
5.00 5
5
4.40
Due to economic and/or political instability, scoring was suspended this year for the following countries:
135
138
139
140
140
142
143
143
143
146
146
148
149
149
151
151
153
153
155
156
Rank
Index of Economic Freedom Rankings
1
The Role of Property Rights in
Economic Growth
An Introduction to the 2003 Index
by William W. Beach and Gerald P. O’Driscoll, Jr.
W
hy do some countries prosper while
others do not? That question has animated the research and inquiry of economists at least since Adam Smith.1 Smith’s analysis,
though most associated with its emphasis on the critical role played by the division of labor in economic
growth, also began a long tradition in Anglo–American economics that emphasized the importance of
the political and legal institutions protecting economic
activity in explaining the wealth of nations. The 1999
Index of Economic Freedom discussed this tradition more
fully and contrasted it with others.2
A society’s institutions provide the framework
within which economic activity takes place. They
provide the rules governing the production and exchange of goods. Commercial courts adjudicate disputes among complainants. In doing so, they provide parties with a fair hearing of their respective
positions and an impartial verdict. A litigant is guaranteed what Edmund Burke pithily characterized
as the “cold neutrality of an impartial judge.”3
A constitution ensures that the laws protecting
individuals from the government and each other
are not easily changed by a shifting electoral majority. Constitutions provide an additional layer of
certainty for individual action.
In the 2002 Index of Economic Freedom, the editors
focused on the role of constitutions and a system of
property rights. Properly constructed constitutions
incorporate the concept of negative liberty, constraining governments to the protection of person
and property. A system of private property fosters
economic growth and wealth creation.
Last year’s theme is further elaborated in three
chapters included in this year’s Index. First, Mart
Laar provides a riveting account of how little Estonia successfully made the transition from former
Soviet satellite economy to free economy. Estonia
is the first economy to achieve that recognition.
Laar especially emphasizes the paramount importance of the rule of law:
In some transition countries, the importance
of the rule of law has not been understood,
and this has been a huge mistake. No kind of
general understanding, best effort, or wishful thinking can replace a sound and constantly improving legal environment. There
can be no market economy and democracy
without laws, clear property rights, and a
functioning justice system.4
Estonia’s economic success contrasts sharply
with the dismal performance of many countries in
the Middle East. Robert Pollock chronicles how
arbitrary government brings not only economic
Chapter 1: The Role of Property Rights in Economic Growth
27
misery, but also rage to that region. He views the
rule of law “as a central element of economic freedom.”5 His focus is the area governed by the Palestinian Authority, but he also recognizes that problems caused by insufficient rule of law are prevalent in Arab states generally.
Pollock quotes President Bush’s vision of a Palestinian state based on democracy and capitalism.
Bringing democratic capitalism to the Arab world
is not a dream but an imperative. F. A. Hayek wrote
eloquently of how private property protects the
poorest of the poor:
The system of private property is the most
important guaranty of freedom, not only for
those who own property, but scarcely less
for those who do not. It is only because the
control of the means of production is divided
among many people acting independently
that nobody has complete power over us, that
we as individuals can decide what to do with
ourselves. If all the means of production were
vested in a single hand, whether it be nominally that of “society” as a whole or that of a
dictator, whoever exercises this control has
complete power over us.6
Finally, in her chapter on economic freedom in
Scandinavia, Sara J. Fitzgerald notes that
all these countries have well-defined property
rights and a legal framework for their enforcement. They exhibit fair and independent judiciaries, sound protections for private property, and respect for contractual agreements.
In fact, all of them have had a “very high”
level of property rights protection (a score
of 1 out of a possible 5) for at least the past
two years.7
Strong protection of private property rights, in
other words, has been instrumental in establishing
the conditions that have enabled business to flourish in Scandinavia.
These three chapters present a persuasive case
for the central role that property rights play in fostering consistent economic growth. In so doing,
they echo the broad theme of this book over nine
years: that economic freedom is the wellspring of
economic growth.
With this enduring and overarching theme in
mind, The Heritage Foundation and The Wall Street
Journal are pleased to present the readers with the
2003 Index of Economic Freedom.
Notes:
1
Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (New York: The Modern
Library, 1937); first published in 1776.
2
William W. Beach and Gareth G. Davis, “The Institutional Setting of Economic Growth,” in Bryan T.
Johnson, Kim R. Holmes, and Melanie Kirkpatrick, 1999 Index of Economic Freedom (Washington, D.C:
The Heritage Foundation and Dow Jones & Company, Inc., 1999), pp. 1–20.
3
Edmund Burke, Preface to Brissot’s Address, Vol. v. p. 67, as cited in John Bartlett, comp., Familiar Quotations, 10th ed., revised and enlarged by Nathan Haskell Dole (Boston: Little, Brown, 1919; New York:
Bartleby.com, 2000), at www.bartleby.com/100/.
4
See Mart Laar, “How Estonia Did It,” infra.
5
See Robert Pollock, “In the Middle East, Arbitrary Government Feeds Rage,” infra.
6
F. A. Hayek, The Road to Serfdom, introduction by Milton Friedman, 50th anniversary ed. (Chicago:
University of Chicago Press, 1994), p. 115.
7
See Sara J. Fitzgerald, “Scandinavia’s Changing Political and Economic Landscape,” infra.
28
2003 Index of Economic Freedom
2
In the Middle East, Arbitrary
Government Feeds Rage
by Robert L. Pollock
I
n 1996, Mahmoud el Farra returned to the Gaza
Strip. He had lived 30 years in Los Angeles, where
he raised a family and built a construction business. He was precisely the sort of entrepreneur the
emerging Palestinian Authority (PA) sorely needed,
and in those heady days he built its first technologically modern flour mill. But the business
struggled against competition from Israeli imports,
and PA officials began pressuring Mr. Farra to sell
them shares. Led by Mohammed Rashid, Yasser
Arafat’s moneyman, they soon gained control of
the company. Two days later, they closed the market to Israeli flour.
Meanwhile, in Ramallah, Mohamed Masrouji of
Jerusalem Pharmaceuticals struggled with the large
cuts Israeli importers took on the drugs he bought
for his distribution company. Then one of Arafat’s
ministers formed a pharmaceutical distribution company of his own. In one day, the official registered
dozens of drugs with the Palestinian Ministry of
Health, a process that often took Masrouji a year,
and began importing drugs from Egypt.
But those two maneuvers were finesse jobs compared to what happened to Mahmoud Hamdouni.
Also hoping to cash in on the peace divided, he
bought 30 acres near Jericho, built a gas a station,
and planned a housing development. He was then
charged with the capital crime of treason and freed
only after signing over his land to the PA. The Oasis
Casino now sits on the property. “We got rid of
the Israeli occupation,” Mr. Hamdouni told
Newsweek in June 2000. “Now we are under Palestinian economic occupation.”
At a time like this, with violence a daily reality
and the peace process all but forgotten, it might
seem that a lack of economic freedom is the least of
the Palestinians’ problems. But with bread riots becoming almost as common in the Palestinian territories as anti-Israel demonstrations, many Palestinians see the lawlessness and economic misery
inflicted by Arafat & Company as a major factor in
a generalized rage.
Moreover, many see their plight as emblematic
of a larger regional problem that, especially in the
wake of the September 11 terrorist attacks on the
United States, threatens to exacerbate tensions between East and West. “If this continues,” Palestinian legislator Hanan Ashrawi has said bluntly of
the corruption, “we will be repeating the mistakes
of the Arab world.” “We want to be a democracy,”
echoes Khalil Shikaki, a Palestinian scholar and
pollster. “We don’t want to be a corrupt, mismanaged entity—just another Arab country.”
Chapter 2: In the Middle East, Arbitrary Government Feeds Rage
29
“We want to be a democracy,” [says] Khalil
Shikaki, a Palestinian scholar and pollster.
“We don’t want to be a corrupt, mismanaged entity—just another Arab country.”
In its crudest form, of course, the poverty-causesterrorism argument has little going for it. If it did,
sub-Saharan Africa would be its greatest exporter.
Fifteen of the 19 September 11 hijackers, moreover,
came from oil-rich and relatively prosperous Saudi
Arabia, while two more were middle class boys
from Lebanon and Egypt.
ECONOMIC HARDSHIP AND
LAWLESSNESS
That said, it is likely that, mixed with an aggressive quasi-religious ideology and/or an abiding sense
of historical grievance and humiliation, economic hardship plays a role in spurring people to commit or support heinous acts. The shocking scenes of jubilation in
the West Bank as the World Trade Center collapsed
likely had something to do with this desperate combination. People were cheering the destruction of symbols of a world they could not share.
Cliched as talk of “root causes” and “hopelessness”
and “despair” has come to sound, there is something
to it. If the war on terrorism is not to become a longrunning clash of civilizations, America must combine
military victory over terrorism’s sponsors with an
effort to bring progress to the Islamic world.
If the war on terrorism is not to become a
long-running clash of civilizations, America
must combine military victory over
terrorism’s sponsors with an effort to bring
progress to the Islamic world.
Sadly, economic freedom has become something
of a joke among Palestinians and other Arabs. “It’s a
free trade zone,” Hussam Khader, a reform-minded
member of Arafat’s Fatah movement, tells a journalist, pointing to a neighborhood in the Balata refugee
camp where stolen Israeli cars are stripped for parts
and both Israeli and Palestinian security forces fear to
tread.
30
This has not gone unnoticed by would-be investors and entrepreneurs. Like Mahmoud el Farra, many
Palestinian–Americans who returned to contribute to
their fledgling state have complained to the U.S. consulate in Jerusalem about PA officials demanding stakes
in their companies. Abdel Muhsen Qattan, a Londonbased Palestinian millionaire, has refused to invest in
anything but charitable projects. And when Yasser
Arafat, citing the famous financier of early Zionism,
said to billionaire Palestinian expatriate Hasib Sabaagh
that “Palestine needs a Rothschild,” he got a rather
terse reply. “You will have a Rothschild,” Sabbagh
said, “when Palestine gets a Ben-Gurion.”
The comparison is an interesting one, since neither David Ben-Gurion nor any of the other Zionist
pioneers could be considered advocates of markets or
capitalism. Israel was founded as a quasi-socialist state,
with powerful labor unions and government monopolies controlling much of the economy. To this day, as
this 2003 Index of Economic Freedom notes, it retains one
of the world’s most crushing tax burdens.
One thing it had and has, however, is a rule of
law. Any property that could be amassed despite the
burden of government could be considered relatively
safe from arbitrary expropriation, while business disputes could be settled swiftly in uncorrupt courts. It is
surely the rule of law that explains Israel’s astonishing relative prosperity in a benighted region. According to the World Bank’s World Development Indicators
2001, Israel’s per capita (nominal) GDP in 1999 was
$16, 518. By contrast, the U.N. Development
Program’s Arab Human Development Report for 2002
calculates an average per capita (nominal) GDP of
$1,897 for the Arab League countries in 1999.
For a time, this benefited Israelis and Palestinians
alike. Israel’s seizure of Gaza and the West Bank from
Egypt and Jordan in 1967 did not bring dignity or political freedom, but it at least brought some respite
from arbitrary government, and with it rising Palestinian standards of living. But since Arafat & Company returned in 1994 to monopolize the economy,
fortunes have reversed dramatically. Based on World
Bank and International Monetary Fund data, Professor Ephraim Kleiman of the Hebrew University of
Jerusalem estimates that Palestinian GNP was about
one-third lower in 2001 than in 1993. Groups like
Hamas, which provide social welfare services along
with their radical teachings, have been quick to take
advantage.
2003 Index of Economic Freedom
THE RULE OF LAW: “MORE BASIC
THAN PRIVATIZATION”
Appreciation of the rule of law as a central element of economic freedom has increased greatly over
the past 10 years as economists have watched the countries of the former Soviet Union struggle to emerge
from communism. A decade ago, Milton Friedman
had three words for countries struggling to make the
transition: privatize, privatize, privatize. “But I was
wrong,” he said last year. “It turns out that the rule of
law is probably more basic than privatization.
Privatization is meaningless if you don’t have the rule
of law.”
Economist Robert Lawson agrees, saying that 10
years ago he would have cited taxes as the central
element of economic freedom. Today, he says, “Giving people property rights and the ability to settle
disputes peacefully and fairly—that’s the number one
thing that matters.”
That makes a lot of intuitive sense. After all, a good
chance that you will be “taxed” at 100 percent is probably more of a disincentive to productive activity than
the certainty that you will be taxed at 50 percent. It
certainly would explain how heavily taxed and regulated Western Europe remains prosperous while lawless countries that collect little or no taxes continue to
suffer. It is also the central problem identified by Palestinian economist Hisham Awartani of An Najah
University in Nablus: “Multinationals and big firms,
even local firms, are appalled at the level of lawlessness in Palestine. If you’ve got a problem with a client, a customer, you fool yourself to think it can be
settled in the courts.”
Palestinian dissident Omar Karsou agrees and has
included “the rule of law” along with democratic reform as priorities in the platform of his nascent opposition movement. (The fate of Karsou’s own banking
business in the Palestinian territories has been uncertain since he launched his challenge; but he is already
well familiar with the economic arbitrariness of neighboring Jordan, which froze his assets there in the late
1980s.) Even Palestinian Information Minister Yasser
Abed Rabbo has given the PA a grade of “F” for the
judicial system.
Perhaps the most unlikely reform advocate has
been Jihad Wazir, son of legendary Palestinian commando and Arafat-number-two Abu Jihad, who was
assassinated by Israel in 1988. Two years ago, as managing director of the Palestine World Trade Center in
Gaza, he was quick to blame the tight grip Israel holds
over the territories for Palestinian economic problems.
But the fundamental problem, he conceded, was
that “the normal business practices of any other country are not practiced here.” Sitting in his unfilled office
complex just prior to the outbreak of the second
intifada in September 2000, he told the Los Angeles
Times: “The fear is that we will end up with a Syrian
constitution: beautiful, but it can be changed in 15
minutes…. We’d rather have Israeli occupation than
a banana republic. And we are at the crossroads.”
Indeed they were. Two years of guerrilla war have
led Israel to reoccupy much of the West Bank and
close out the hundreds of thousands of Palestinian laborers who once commuted to jobs in Israel, in addition to all but killing hopes for the establishment of a
Palestinian state anytime soon. Yasser Arafat has
grudgingly agreed to hold elections and finally adopt
a Palestinian constitution, but odds are that he will do
his best to see that neither ever happens.
BEYOND PALESTINE IN THE ARAB
WORLD
Palestinian problems with the rule of law may be
extreme, but in virtually every Arab state, the whim
of an unelected ruler reigns supreme and the constitution—if one exists—remains mere words. Arabs have
too often been content to blame their consequent economic decline on others, be it a Zionist conspiracy or
mere lack of First World aid. And where concerted
efforts at economic progress have been made, they
have too often been influenced by misguided Western notions of protectionism, self-sufficiency, and socialism. The fact that many fell within the Soviet ambit
during the Cold War did not help either.
Arabs have too often been content to blame
their economic decline on others…. And
where concerted efforts at economic progress
have been made, they have too often been
influenced by misguided Western notions of
protectionism, self-sufficiency, and socialism.
Egypt’s Gamal Abdel Nasser, for example, sought
economic salvation in big government projects like
the Aswan Dam. Meanwhile, the effects of regulation
and bureaucracy on the general business climate were
Chapter 2: In the Middle East, Arbitrary Government Feeds Rage
31
neglected. In recent years, efforts have been made to
train workers displaced from state industries that were
privatized to start small businesses, but they have met
with little success. “Ninety percent of your time is
wasted obtaining a license, in paying social insurance,
going to the tax authority, faxing your orders and so
on,” says one Egyptian. “We don’t even have the startup atmosphere that would help [small] projects survive and become medium-sized in the future.” The
result is that Egypt’s standard of living, which was
roughly the same as South Korea’s in 1950, is now
little over 20 percent of South Korea’s.
Fortunately, Arabs themselves are starting to recognize the “root causes” of their problems. This year,
the United Nations Development Program (UNDP)
released its first-ever Arab Human Development Report, and it could not be more damning. Specifically:
• With a GDP of $531 billion in 1999, the
report’s Arab authors note, the 280 million
citizens and 22 nations of the Arab League
produced less than Spain.
• Adjusted for purchasing power parity, the
income of the average Arab citizen was just 14
percent of the average citizen of an
Organisation for Economic Co-operation and
Development (OECD) country.
• If the Arab world’s per capita growth rate of
0.5 percent annually over the past two decades
continues, it will take the average Arab citizen
140 years to double his income, while citizens
of other regions are on track to achieve that in
less than 10 years.
Meanwhile, Arabs lack access to the knowledge
that might enable them to compete in the modern
economy. They lag behind sub-Saharan Africa even
in the number of Internet connections per capita, while
fewer books have been translated into Arabic over
the past millennium than Spain translates in an average year.
Even more shocking are the report’s policy conclusions. Rather than blame a lack of aid from the
First World, as both the Arabs and the UNDP have
been wont to do in the past, the report identifies
32
the lack of democratic and efficient governance as a major obstacle to economic
growth. The Arab Region needs to abandon
the vestiges of the old dirigiste approach and
foster private enterprise with “beneficial
regulation” to curb both public and private
monopolies. To do so, the Arab states need
a transparent rule of law, a fair and fast legal
system with a professional judiciary.
LESSONS LEARNED
President Bush, too, is charting a new course for
American policy in the region based on democracy
and the rule of law. For too long, the U.S. tolerated—
even supported—corrupt and unrepresentative governments as agents of “stability.” But the lessons of
the Iranian revolution—a friendly dictator can quickly
become a major liability if his people come to view
you as agents of their oppression—may have finally
sunk in.
The President seems to understand that even if
Yasser Arafat had any intention of making peace with
Israel, the economic misery there would make it a
fragile one at best. In a historic speech in July, he promised American support for the creation of a Palestinian state, but only if it could show itself to be a democratic—and, yes, economically free—state capable of
living in peace with Israel:
The Palestinian people are gifted and capable,
and I am confident they can achieve a new birth
for their nation. A Palestinian state will never
be created by terror—it will be built through
reform. And reform must be more than cosmetic change, or veiled attempt to preserve the
status quo. True reform will require entirely
new political and economic institutions, based
on democracy, market economics and action
against terrorism….
Today, the Palestinian people live in economic stagnation made worse by official
corruption. A Palestinian state will require a
vibrant economy in which honest enterprise
is encouraged by honest government.
Today, the Palestinian people live in economic stagnation made worse by official corruption. A Palestinian
2003 Index of Economic Freedom
state will require a vibrant economy in which honest
enterprise is encouraged by honest government.
In Iraq, too, the President and his advisers seem
determined to avoid past mistakes. The talk is of replacing the regime of Saddam Hussein with an economically free constitutional democracy, not just a
friendlier thug. American success in Palestine and Iraq
could be precisely the sort of exogenous shock the
Arab world needs, spurring calls for reform throughout the region.
After all, the Arabs do not lack the desire for freedom—according to the UNDP, about 50 percent of
adolescents polled say they would like to emigrate.
They do not lack for talent, as the countless success
stories of those who have already done so attest. And
they do not lack an understanding of markets, as anyone who has ever visited an Arab souk would know.
The problem is that bureaucracy, corruption, and
uncertainty make it difficult to build a business bigger
than a market stall. If accountable government and
the rule of law could be brought to the region, fortunes could change very rapidly.
Chapter 2: In the Middle East, Arbitrary Government Feeds Rage
33
3
How Estonia Did It
by Mart Laar1
I
n a world where most decision-makers were fash
ioning their policies on the assumption that the
socialist way of thinking and the Soviet Union are
permament fixtures on the planet, a few private-sector men of vision like Robert Krieble and a few great
political leaders like Ronald Reagan and Margaret
Thatcher thought otherwise. They refused to be
blinded by the Red Smog. They broke the back of
the Soviet Empire in the Cold War, pressed the Soviet Union into the corner, and gave captive nations
the possibility to destroy the Soviet Empire from
inside.
The progress made by former socialist countries
serves as testimony to the wisdom of those who
fought the long Cold War against the “Evil Empire”
that was the Soviet Union. The cause of freedom,
however, has been sweeping not only Central and
Eastern Europe, but around the world. Political authorities have found themselves increasingly accountable to those they govern, and economies have
became increasingly subject to competition in a global marketplace.
This would not have been possible if the founders
of the conservative revolution had not dreamed of
individual freedom. They have shown us that seemingly impossible dreams can be achieved if only we
pursue them with an attitude that accepts no defeat.
There are countries where impossible dreams
have been achieved. In the 2002 Index of Economic
Chapter 3: How Estonia Did It
Freedom, for the first time, a former communist country had a free economy. Even more remarkable, it
was not only a “free economy,” but one of the freest
in the world.
The founders of the conservative revolution
have shown us that seemingly impossible
dreams can be achieved if only we pursue
them with an attitude that accepts no defeat.
This country is called Estonia, and I had the honor
to serve two terms as its Prime Minister. Estonia’s
ranking in sixth place in the 2003 Index of Economic
Freedom makes it one of Europe’s most free-market–
oriented economies. Ten years ago, however, we
were probably among the most “unfree” of the
world’s economies.
Estonian history has not been easy. In 1940, independent Estonia was occupied by the Soviet
Union, but we never gave up. We fought a partisan
war for nearly 10 years and continued to resist in
other ways. Along with mass deportations, Estonia
lost one-third of its population as a result. We fought
the Cold War together as brothers in arms with you,
and we won it together. In 1991, the Empire of Evil
ceased to exist.
But after 50 years of Soviet occupation, Estonia
was in ruins. Our economy was a shambles, the spirit
35
of our people spoiled by the socialist heritage. Shops
were empty of goods, and money no longer had any
value. Fuel prices rose by more than 10,000 percent
over one year, while inflation was running more than
1,000 percent per annum. People stood for hours
and hours in lines to buy food.
Within 10 years, Estonia has changed beyond
recognition. Sometimes it is hard even for us to remember how this country looked under the socialist system. Estonia is now a modern and vibrant
young country, integrating with Western structures
like the European Union and NATO with astonishing speed.
THREE KEY LESSONS
A large number of experts and politicians have
asked how we did it. In planning our “jump to nowhere,” we tried to learn from the experiences of
other countries that had undertaken a transition
from left-wing socialist utopia to free-market
economy.
Some key lessons emerged. One is to take care of
politics first and then to proceed with economic reform. Don’t underestimate the importance of a new,
modern constitution and democratic legislature with
free elections.
In some transition countries, the importance of
the rule of law has not been understood, and this
has been a huge mistake. No kind of general understanding, best effort, or wishful thinking can replace
a sound and constantly improving legal environment. There can be no market economy and democracy without laws, clear property rights, and a functioning justice system.
There can be no market economy and democracy without laws, clear property rights, and a
functioning justice system.
The second lesson is summed up by a well-known
advertising slogan: “Just do it.” In other words, be
decisive about adopting reforms and stick with them
despite the short-term pain they bring. To put it
briefly: no pain, no gain. Of course, that is easy to
say and hard to do.
The most basic and vital change of all, however,
must take place in the minds of people. In the era of
36
socialism, people were not used to thinking for themselves, taking the initiative, or assuming risks. Many
people had to be shaken free of the illusion—common in post-communist countries—that, somehow,
somebody else was going to come along and solve
their problems for them. It was necessary to energize people, to get them moving, to force them to
make decisions and take responsibility for these decisions.
To achieve this change, we had to wake up the
people. First, competition had to be supported. In
1992, Estonia abolished all import tariffs and became
one big free trade zone. Foreign competition pressed
local enterprises to change and restructure their production. At the same time, Estonia stopped all subsidies, support, and cheap loans to enterprises, leaving them with two options—to die or to begin working efficiently. Surprisingly, a lot of them chose the
second option.
At the same time, we had to make clear that if
somebody works more and earns more, he will not
be punished for this. Radical tax reform was introduced, decreasing sharply the taxation level and introducing a flat-rate, proportional income tax. The
flat-rate tax has been an important part of the Estonian success story. It is easy to collect and easy to
control. The only losers of this kind of tax reform
were the tax lawyers.
The flat-rate tax has been an important part
of the Estonian success story. It is easy to
collect and easy to control. The only
losers…were the tax lawyers.
We have abolished tax on corporate income that
is reinvested in the domestic economy. This decision is quite unprecedented in the world. Reinvested
earnings are not subject to taxation because, in our
opinion, this is the money that goes to the creation
of added value in our economy—something that
Estonia really needs.
At the same time, countries in transition not only
must deal with their current problems, but must
have the courage to look into the future as well. If
you are severely underdeveloped, you can make a
tremendous leap to the future by moving immediately to the most modern technologies.
2003 Index of Economic Freedom
TRADE, NOT AID
To do this, one should not rely too much on foreign aid. Moreover, we realized quickly the danger
of extensive reliance on aid. Shipments of outdated
computers to any transition country can secure them
a permanent seat in the Third World. “Trade, not
aid,” was proclaimed by Estonia in 1993 and characterizes its forward thinking.
We realized quickly the danger of extensive
reliance on aid. Shipments of outdated computers to any transition country can secure them a
permanent seat in the Third World.
As a result, Estonia has made a real jump to modern technology, and this gave us our advantage. The
government uses no paper; all members of the government use computers during meetings and sessions. One-third of Estonians use mobile telephones,
many of them made in Estonia, while 44 percent of
our exports are electronics.
Estonia is ahead of many European Union countries in terms of Internet use. Estonians make a big
part of their bank transfers through the Internet. You
can send your tax declaration to the tax department
electronically. I did this last week, and it took about
five minutes to complete it. E-government can be a
very effective tool in the creation of lean and open
government.
Of course, to implement such changes is not easy.
I can say to you: You will not be very popular with
such politics. A government that implements such
policy can become unpopular and be ousted from
power. But this is not important. More important is
that your country is changed beyond recognition.
Looking back, you can say: This was a dirty job, but
someone had to do it. The train that you pushed to
start it moving will not be stopped, and this is actually the only thing that matters.
Followers of Ronald Reagan and Margaret
Thatcher are not in power in too many places in the
world. We still see failures and collapses; we are
fighting together against terrorism; too many people
in the world are hungry and unhappy. Sometimes it
seems for us that nothing has actually changed.
But this is not so. Think about the world now
compared to 20 years ago. Conservative governments have been defeated politically again and again;
but their ideas, values, and dreams have won. It is
important to have the dreams and do the right thing.
And we see the world changing before our eyes.
There are a lot of people in the world who doubt
that an individual can change the world. The only
acceptable response to such thoughts is the one Robert Krieble said to the naysayers who doubted him—
to every obstacle that stood between him and his
vision of great things that could be and should be:
Yes, we can!
NOTES:
1 Mart Laar served as Prime Minister of Estonia from 1992 through 1994 and then again from 1999 until January
2002. He also has served as a member of the Supreme Council, Estonia’s highest legislative body in the years
before the first independent parliamentary elections in 1992, and as a member of Estonia’s Parliament. This
chapter is adapted from the text of the Fourth Annual Robert H. Krieble Lecture delivered by Mr. Laar during
the 25th Annual Meeting of The Heritage Foundation’s Resource Bank in Philadelphia, Pennsylvania, on April
11–12, 2002.
Chapter 3: How Estonia Did It
37
4
Scandinavia’s Changing Political
and Economic Landscape
by Sara J. Fitzgerald
A
s the 2003 Index scores for Denmark, Finland,
Iceland, Norway, and Sweden indicate, the
level of economic freedom across
Scandinavia has been improving noticeably for several years. All of these countries have improved
their overall scores since last year, with four out of
the five now ranked “free” on the Index of Economic
Freedom. Notably, Sweden and Iceland have
achieved the rank of “free” for the first time. Only
Norway, which has adopted some market-oriented
reforms, remains “mostly free.”
These countries have achieved such levels of
economic freedom by implementing policies that
increase opportunity and attract investment,
whether by lowering taxes, cutting regulation,
privatizing state-owned businesses, reducing government expenditures, or reducing government
intervention in the economy. Scandinavia’s history
of political stability, strong rule of law, and protection of property rights provides fertile ground for
such policies to take root.
Even the socialist rhetoric espoused by many of
these governments in the past appears to have been
tamed to ritual denunciations of “Thatcherism” as
the new policies produce results. In some countries,
such as Denmark, free-market thinkers are now
part of the governing coalition. The new govern-
ment of Norway is demonstrating an openness to
privatization and competition.1 Such changes bode
well for further economic growth.
In some countries, such as Denmark, freemarket thinkers are now part of the governing coalition. The new government of Norway is demonstrating an openness to
privatization and competition. Such changes
bode well for further economic growth.
There is more to do, however. One of the largest problems these countries face is an excessively
high rate of taxation. The tax burdens in Denmark
(with a top income tax of 59 percent) and Sweden
(60 percent) are among the heaviest in the world.
Such taxes are necessary to fund these countries’
historically large welfare systems.
Although the Scandinavian economies are not
fully unfettered, the policy changes these countries
have made in recent years are notable and provide
continuing evidence that the factors measured by
the Index are key to economic freedom and growth.
Chapter 4: Scandinavia’s Changing Political and Economic Landscape
39
tries, particularly highly specialized enterprises, depends on their continued ability to trade in the global marketplace.10
Many of the positive changes the Scandinavian
Former President Martti Ahtisaari of Finland
countries have instituted can be attributed to new
believes the liberalization of trade enables the Finnthinking and, in some cases, new leadership. In
ish people not only to export more, but also to “inDenmark, the coalition government that was
crease our prosperity.”11 In 2001, Finland exported
elected in November 2001 is led not by the Social
$78.8 billion in goods and services—over 47 perDemocrat Party, but by the Liberal Party under
cent of GDP. That same year, Iceland exported over
Fogh Rasmussen, who had published a forward$3 billion (over 33 percent of GDP); Norway exthinking book titled From Welfare Society to Minimalist
ported over $72 billion (over 41 percent of GDP);
Society, which The Economist has praised as a “freeand Sweden exported over $143 billion (over 51
market manifesto.”2 The Social Democrat Party had
percent of GDP).
implemented the reforms that have carried DenThe products these countries export are varied.
mark to where it is today; far from suffering from
Denmark,
the world’s main supplier of bacon,12
“reform fatigue,” however, the electorate voted for
primarily exports machinery, fish, dairy, meat, and
more reform.
instruments. The majority of its exports go to counIceland’s Prime Minister, David Oddsson, has
tries in the European Union, with the greatest porindicated that he intends to make that country a
tion (19.6 percent) going to Germany. While fortax haven for foreign direct investment. In 2001,
ests remain Finland’s most crucial raw material
Finland was ranked as the world’s most competisource, that nation has become a technology leader.
tive economy and best business environment by
Its most important export today is the mobile
the World Economic Forum.3 The Finnish governphone,13 followed by machinery and chemicals. The
ment is planning to reduce marginal tax rates.4
largest percentage of its exports (12.4 percent) goes
In Norway, a new “co-operation” government to Germany.
elected in October 2001 under Prime Minister Kjell
Iceland established free trade in 1854. It joined
Magne Bondevik, a Christian Democrat, is expected
the General Agreement on Tariffs and Trade
to “rethink” the role of the state in the economy
(GATT) in 1968 and the European Free Trade Asand, according to the Economist Intelligence Unit,
sociation (EFTA) in 1970,14 and it began engaging
has already demonstrated “an even more openin free trade with the European Economic Comminded attitude towards privatization and compemunity (EEC, now the European Union) in 1972.15
tition” than its predecessor.5
Marine products constitute more than 70 percent
Only Sweden continues to lag behind this trend of exports; other major exports include animal prodtoward new thinking. Its Social Democratic Party, ucts and aluminum. The largest percentage of its
which has held power since the 1930s except from exports (19.4 percent) goes to the United Kingdom.
1976–1982 and 1991–1994,6 has enacted some reNorway is the world’s second largest exporter
forms; yet it clearly plans to maintain the sizeable
of oil. Other major exports include fish, machinwelfare state that strains the economy and keeps
ery, and chemicals. The largest portion of its extaxes high.
ports (19.8 percent) also goes to the United Kingdom. Norway is a member of the EFTA.
A HISTORY OF TRADE
Sweden went from poverty to prosperity within
The Scandinavian countries have a strong hisa
few
decades of opening its borders to trade in the
tory of trade7 and remain highly dependent on it.8
19th century.16 Its main exports today include pulp,
Openness to trade enables Scandinavian markets
paper, and pasteboard.17 The largest percentage of
to use their resources more efficiently.9
its exports (21.5 percent) goes to Germany.
In 2001, Denmark exported $88.4 billion in goods
Overall, the Scandinavian countries maintain a
and services—almost 43 percent of gross domestic
low level of protectionism in trade policy, although
product (GDP). The Confederation of Danish Inall of them still heavily subsidize agriculture.
dustry believes that the welfare of Danish indus-
CHANGING GOVERNMENTS, NEW
WAYS OF THINKING
40
2003 Index of Economic Freedom
partially privatized, and a subsidiary, Orbiant, was
sold to the Singapore-based U.S. group Flextronics
Scandinavia generally welcomes foreign investInternational.27
ment. Sweden has the lowest barriers to foreign
investment, while Norway has the highest (their
Foreign investment not only pours money
barriers are rated, respectively, as “very low” and
“moderate”); the rest have barriers rated as “low.”
into the local economy, but also brings emEssentially, Denmark treats foreign investors ployment opportunities, skilled workers, and
like domestic companies. From 1993 to 2001, for- new technology. Moreover, it fosters competieign direct investment in Denmark increased 860
tion, which encourages companies to offer
percent.18 The United Nations’ 2001 Investment Rebetter products and services at lower prices.
port ranks Denmark as the world’s 8th best place to
19
invest. In 2001, most investments were made in
the financial and business service sectors.
In Sweden, as in other countries in the region,
Finland changed its laws during the past decade foreign investment increased following the
to attract more investment. In 1993, according to privatization of state-owned enterprises. Foreign
the U.S. Department of State, “laws restricting for- investment not only pours money into the local
eign ownership were abolished to support the al- economy, but also brings employment opportuniready commonly accepted liberal treatment of for- ties, skilled workers, and new technology. Moreeign investments.”20 A report by Invest in Finland over, it fosters competition, which encourages comhighlights the result: There are now “more than panies to offer better products and services at lower
2,000 foreign-owned companies in Finland, with prices. The Confederation of Danish Industries
113,000 employees.”21
notes that “foreign direct investments stimulate
Iceland’s corporate tax incentives are designed economic growth, technology transfer and increase
to attract foreign investment. For instance, new competition among companies.”28
international trading companies pay only a 5 percent tax, whereas other companies pay 30 percent.22 STRONG PROPERTY RIGHTS
All sectors are open to foreign investment except
According to 2002 Index contributors Lee
marine resources, and foreign investors are not al- Hoskins and Ana I. Eiras,
lowed to invest directly in fishing stocks.23
The two essential elements of property
Norway, as part of the European Economic Area
rights are (1) the exclusive right of individu(EEA), is required “to apply principles of national
als to use their resources as they see fit as
treatment in certain areas where foreign investlong as they do not violate someone else’s
ment was prohibited or restricted in the past.”24
rights and (2) the ability of individuals to
Foreign investors do not need government authotransfer or exchange these rights on a volunrization before purchasing limited shares of large
tary basis. This is what we mean by ecoNorwegian companies, but all investors must nonomic freedom.29
tify the government when their ownership share
When private property is protected, citizens are
exceeds certain thresholds.25 Additionally, all investors are barred from investing in industries that free to save and invest without fear and, as a result, the economy will prosper. Government interare government monopolies.
vention in property rights leads to capital flight,
In 1995, Sweden established the Invest in Swe- which results in a stagnant economy.
den Agency (ISA) to promote foreign investment.
As the 2002 Index of Economic Freedom attests,
According to the U.S. Department of State, Swehaving
strong property rights is crucial to attractden is an attractive destination for foreign investment and attracted the most foreign interest in ing long-term investment. Without such rights, comScandinavia last year.26 Sweden has, it privatized a panies are unlikely to venture into a market where
number of companies, with the sale of shares open their property (physical assets, technology, etc.)
to foreign investors. One such industry, Telia, was could be snatched away from them with possibly
little or no compensation and without just cause.
OPENNESS TO FOREIGN INVESTMENT
Chapter 4: Scandinavia’s Changing Political and Economic Landscape
41
Countries that do not have defined and enforced
property rights reduce the likelihood of an investment gain and in fact increase the chances of a significant loss. As Philip C. English II and William T.
Moore explain in the 2002 Index,
When a firm invests in a foreign country, it
does so in the expectation that the investment
will be profitable to the company in the future, but the same factors that eventually
determine the success of the investment also
make it an attractive target for expropriation
by the host government.30
In other words, without strong property rights,
risk trickles from the company in the foreign country down to the stockholders at home. Shareholders of companies that invest in the Nordic region
will not have to worry about falling stock prices
caused by the weak enforcement of property rights.
Without strong property rights, risk trickles
from the company in the foreign country
down to the stockholders at home. Shareholders of companies that invest in the
Nordic region will not have to worry about
falling stock prices caused by the weak
enforcement of property rights.
To their credit, all these countries have welldefined property rights and a legal framework for
their enforcement. They exhibit fair and independent judiciaries, sound protections for private property, and respect for contractual agreements. In fact,
all of them have had a “very high” level of property rights protection (a score of 1 out of a possible
5) for at least the past two years. For this score to
be achieved, corruption must be nearly nonexistent and expropriation unlikely.
THE FISCAL BURDEN OF
GOVERNMENT
One of the most serious problems these countries face is reducing the excessive tax rates that
fund their governments. Iceland’s “moderate” level
of expenditures this year is the lowest in the region. The other countries have either “high” or
“very high” levels of government expenditure. In
2001, government spending in Sweden was over
42
half of GDP (52.5 percent), followed by Denmark
(50.8 percent), Finland (44.6 percent), Norway (41.8
percent), and Iceland (39.7 percent).
High marginal tax rates on income discourage
productivity. Workers should be rewarded for their
efforts, not burdened with high tax rates to fund
the welfare programs these countries maintain.
Though many of these countries have begun to rein
in welfare expenditures, much more could be done.
It is still far too easy to collect unemployment and
to do so for long periods of time, for example. In
Denmark, immigrants can still receive benefits almost immediately after entering the country. And
in Finland, people who lose their jobs can still receive the equivalent of up to full salary for over a
year. Such generous benefits both strain the
economy and leave individuals with little incentive
to work.
Whereas strong property rights attract longterm investment, high taxes have the opposite effect, deterring prospective investors and forcing
highly skilled workers and college graduates to
seek better opportunities abroad. This problem is
particularly evident in Sweden. Lowering taxes
would stem this “brain drain” and attract skilled
workers.31
Whereas strong property rights attract longterm investment, high taxes have the opposite
effect, deterring prospective investors and forcing
highly skilled workers and college graduates to
seek better opportunities abroad. This problem is
particularly evident in Sweden.
While tax rates in these countries are extremely
high, this too may be changing. Denmark has frozen tax rates, and Finland is planning to lower all
marginal tax rates to keep skilled workers and attract others from overseas.32 This will heighten
Finland’s attractiveness to business. Iceland has introduced measures in its 2002 budget to cut income
and corporate taxes; the Economist Intelligence Unit
reports that Prime Minister Oddsson wants to cut
the corporate tax rate from 18 percent to 15 percent and eliminate property taxes by 2004 to help
attract more foreign direct investment.33
Norway’s new government also plans to cut
taxes and give more tax incentives to businesses,
2003 Index of Economic Freedom
including eliminating the 7 percent investment tax.
The Economist Intelligence Unit expects that tax
cuts, rather than increased spending, will dominate
fiscal policy in Norway under the country’s new
leadership.34
Sweden’s long-standing policy of funding its
huge welfare system with high taxes continues to
discourage entrepreneurship. “Among the biggest
corporate gripes,” according to the Financial Times,
“are a system of double taxation of dividends, the
wealth tax and a top income tax rate of 55 percent.”
One business analyst in Sweden warns that “Swedish companies will continue to move out of the country as long as taxes for Swedes owning shares are
higher than for foreigners.”35
Sweden currently is running a budget surplus,
which the government is expected to use to lower
taxes. The Economist Intelligence Unit reports that
“the finance minister, Bosse Ringholm, will adhere
to the expenditure limits and use the (modest) surplus primarily to cut taxes on low and mid-level
incomes and to reduce the public debt.”36
GOOD MONETARY POLICY
With the exception of Iceland, the Nordic countries have generally maintained a “very low” level
of inflation for several years; Iceland’s level of inflation has been low. Maintaining low levels of inflation indicates that monetary policy is facilitating
market pricing, which contributes to a stable investment climate and helps to spur economic
growth.
Maintaining low levels of inflation indicates
that monetary policy is facilitating market
pricing, which contributes to a stable investment
climate and helps to spur economic growth.
Conversely, as 2002 Index contributors William
W. Beach and Gerald P. O’Driscoll, Jr., explain, “Inflation not only confiscates wealth, but also distorts
pricing, misallocates resources, and undermines a
free society.”37
LIBERALIZED BANKING AND FINANCE
SYSTEMS
A banking system that imposes high levels of
restrictions and is controlled by the government
rather than market forces hinders economic growth.
Overall, the Nordic countries have low levels of
restrictions on banking and finance: According to
the Index, Denmark and Sweden have “very low”
levels; Finland has a “low” level; and Norway and
Iceland have “moderate” levels of restrictions.
A banking system that imposes high levels of
restrictions and is controlled by the government
rather than market forces hinders economic
growth. Overall, the Nordic countries have low
levels of restrictions on banking and finance.
The Danish banking system is largely independent of the government and open to foreign competition. The Economist Intelligence Unit notes that
“there are no distinctions between the borrowing
patterns of domestic and foreign companies” in
Denmark. 38 Moreover, only one regulator—
Finanstilsynet—supervises its financial services industry.
The Finnish banking system is open to foreign
competition; there are six foreign banks and six foreign credit institutions. Legislation passed in July
2000 allows credit institutions to use their own
methods to calculate market risk, and this eases
the regulatory burden on companies. A foreign bid
for more than a one-third share of a credit institution or commercial bank must win approval from
the Ministry of Finance.
Iceland has only four commercial banks. The
Index has given it a rating of “moderate” in its level
of restrictions for the past several years, but this
could improve if privatization plans proceed. While
the privatization of the Icelandic Investment Bank
is complete, only about 30 percent of shares in the
two remaining state-owned commercial banks has
been sold. The goal is to fully privatize them by
the end of 2003.
The government of Norway is liberalizing the
banking system. According to the U.S. Department
of State, “the Finance Ministry has abolished remaining restrictions on the establishment of
branches by foreign financial institutions including
banks, mutual funds, and other financial institutions.”39 In spite of these changes, the government
at times will favor Norwegian investors over for-
Chapter 4: Scandinavia’s Changing Political and Economic Landscape
43
eign investors. An example is its resistance to Finnish Sampo’s purchase of Storebrand, the country’s
largest insurer, as a result of which Sampo withdrew from the bid.
In Sweden, most commercial banks are privately
owned and operated. Since 1995, Sweden has improved
its relatively moderate restrictions in the banking and
finance sector. The Economist Intelligence Unit reports that the government has been reprivatizing
banks it had acquired after the banking crisis in the
early 1990s.40
LOW LEVELS OF REGULATION
Overall, the burden of regulation is low in the region. According to the Index, Sweden and Norway
have “moderate” levels of regulation; Finland and Iceland have “low” levels; and Denmark has a “very low”
level. This is attractive to entrepreneurs, since complying with regulations can consume time and money.
Excessive regulations are an undue burden on businesses that makes them less profitable.
The Economist Intelligence Unit previously has
highlighted Finland’s low level of regulation by contrasting it with Austria’s.41 Essentially, in Finland, it
cost an average of $277 to set up a company in 2001
and acquire the four necessary permits—a process that
takes about 32 days. In Austria, however, the same
effort costs $11,612 in fees, requires 12 permits, and
takes an average of 154 days.
FEW WAGE AND PRICE CONTROLS
Most Scandinavian economies continue to demonstrate a low level of government wage and price controls, which not only distort markets but also lead to
inefficient resource utilization. Denmark and Iceland
are notable in that, according to the Index, they have
“very low” levels of wage and price controls. However, the Economist Intelligence Unit notes that the
Danish government “retains the power to intervene
with price controls in an emergency—such as during
a period of accelerating inflation.”42
RELATIVELY LITTLE BLACK MARKET
ACTIVITY
Corruption corrodes the underpinnings of a
market economy. The countries of Scandinavia,
however, have relatively small, contained black
markets. Specifically, all of them are characterized
by “very low” levels of black market activity, and
44
this is one of the strongest factors attracting investors to these countries.
Companies have difficulty operating in an environment in which their products compete against
imitations in the black market. While there is some
black market in labor, meaning that individuals get
paid under the table, the level in Scandinavia is small
compared with other regions.
Companies have difficulty operating in an
environment in which their products compete
against imitations in the black market.
While there is some black market in
labor…the level in Scandinavia is small
compared with other regions.
According to a study by the Business Software
Alliance, Denmark has a low piracy rate of 26 percent, while Finland’s is 27 percent, Sweden’s is 31
percent, and Norway’s is 34 percent. No data are
reported for Iceland. All these rates are low compared with Spain’s piracy rate of 46 percent and
Greece’s rate of 64 percent.43
Transparency International’s 2001 Corruption
Perceptions Index ranks the Nordic states among
the world’s 10 least corrupt countries. On a scale of
0 to 10, with 10 representing the least corruption,
Finland received a score of 9.9. Denmark received
a score of 9.5, followed by Iceland (9.2), Sweden
(9.0), and Norway (8.6).44 The relative absence of
corruption in Scandinavia makes these countries an
attractive place in which to conduct business and
invest.
MIXED RECORD ON GOVERNMENT
INTERVENTION
A ranking of “high” for government intervention in the economy indicates that the country owns
an excessive number of companies and/or property. State-owned enterprises are usually inefficient,
removing vital activity from the private sector and
thereby reducing prosperity. While high levels of
government intervention once characterized the
Scandinavian countries, they have slowly improved
in this regard.
Iceland and Sweden have improved their scores
since last year. Both Iceland and Finland are rated
2003 Index of Economic Freedom
in the 2003 Index as having “low” levels of intervention. Sweden and Norway have “moderate”
levels of intervention.
Denmark maintains a “high level” of government intervention in the economy due to the
amount of revenues that are generated by stateowned enterprises and the amount of property the
government owns. For instance, in 2000, Denmark
received 7.29 percent of its revenues from stateowned enterprises and government ownership of
property.
If Denmark sells the state-owned oil and gas
group and the national post office as planned, the
level of Danish government intervention will be
reduced.45 To improve its score, Denmark should
follow Iceland’s example and sell state-owned enterprises and property. Since the early 1990s, Iceland has privatized industries ranging from financial institutions to pharmaceutical companies, enabling it to achieve a government intervention rating of “low” this year.
As investors continue to abandon markets that
are riddled with corruption, whether in Southeast
Asia or Latin America, they will be more likely to
look to the Nordic countries, where their investments would be buttressed by the rule of law. It is
up to the governments in Scandinavia to continue
instituting sound market-oriented policies to lift
their economies to even greater heights of growth
and prosperity.
CONCLUSION
While Scandinavian countries have yet to achieve
the level of economic freedom that exists in Hong
Kong and Singapore, to cite two outstanding examples, they clearly are moving in the right direction. Most important for their future economic vitality, many of these countries are starting to recognize the limits that their large welfare systems
impose on the economy.
While Scandinavian countries have yet to
achieve the level of economic freedom that exists
in Hong Kong and Singapore…they clearly are
moving in the right direction. Most important
for their future economic vitality, many…are
starting to recognize the limits that their large
welfare systems impose on the economy.
The Nordic region, blessed with an abundance
of natural resources, has the potential to become
an economic powerhouse in Europe. While tax cuts,
deregulation, and privatization efforts continue in
many of these countries, most are already strong
in trade policy and open to foreign direct investment. As privatization moves forward, foreign investment can only increase.
Chapter 4: Scandinavia’s Changing Political and Economic Landscape
45
Notes:
1
Economist Intelligence Unit, Country Monitor Norway, April 8, 2002.
2
"A Center–Right Prime Minister for Homogeneous, Welfare-Statist Denmark,” The Economist, November 24, 2001.
3
Frances Williams, “Finland Goes Top in Competitiveness League,” Financial Times, September 7, 2000.
4
Economist Intelligence Unit, Country Report Finland, March 2002.
5
Economist Intelligence Unit, Country Report Norway, December 2001.
6
Economist Intelligence Unit, Country Profile Sweden, 2002.
7
Ribe, one of Denmark’s oldest towns, for example, is known historically for trade. According to the
Danish embassy, “As early as the 700s Ribe was a well-organised trade centre where markets were held
regularly. From Ribe connections were good with England, Friesland and the Frankish empire and…the
gate of Scandinavia to northwestern Europe.” See http://www.denmarkemb.org/danish_vikings.html.
“The Danish economy is small and open, very dependent on trade with other countries.” See http://
www.um.dk/english/danmark/danmarksbog/kap2/2-1.asp.
9
Mary Anastasia O’Grady, “First, Open Markets,” in Gerald P. O’Driscoll, Jr., Kim R. Holmes, and Melanie
Kirkpatrick, 2001 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow
Jones & Company, Inc., 2001), p. 26.
10 See http://www.di.dk/english/show.asp?page=DOC&objno=18284.
11 Martti Ahtisaari, “A New Role,” Harvard International Review, July 1, 1998.
12 See http://www.denmarkemb.org/press/297.html.
13 See http://www.finland.org/facts1/page11.html.
14 The EFTA, which currently includes Norway, Iceland, Liechtenstein, and Switzerland, was established
in 1960 “to provide a framework for the liberalization of trade in goods amongst its Member States.” See
http://secretariat.efta.int/stockholmconv/fact/. In the 1990s, the European Economic Area (EEA) was
established to form a single market between the EFTA (excluding Switzerland) and the EU.
15 See http://www.icetrade.is/english/navigation/factsabout/default.htm.
16 Theodor Paues, “Globalisation Manifesto: An Open World,” Confederation of Swedish Enterprise,
March 22, 2002.
17 See http://www.swedish-embassy.org/facts_gen.html.
18 See http://www.investindk.com.
19 See http://www.investindk.dk/idk_frame.asp?artikelID=8112.
20 U.S. Department of State, “Finland,” Country Commercial Guide FY 2002.
21 See http://www.investinfinland.fi/ind_nne.htm.
22 Marshall Langer, “What It Takes to Become a Financial Centre,” in Hannes H. Gissurarson and Tryggvi
Thor Herbertsson, eds., Tax Competition: An Opportunity for Iceland? (Reykjavík: University of Iceland
Press, 2001), p. 111.
23 Nicholas George, “World Stock Markets: Iceland Springs Back Into Life,” Financial Times, May 30, 2002.
24 See http://www.tradeport.org/ts/countries/norway/climate.html.
25 U.S. Trade Representative, Foreign Trade Barriers Report, 2002.
26 U.S. Department of State, “Sweden,” Country Commercial Guide FY 2002, January 2002.
27 "Divestments Boost Telia Profits in Third Quarter,” Agence France-Presse, November 7, 2001.
28 Confederation of Danish Industries, “Key Figures 2002,” May 2002, at http://www.di.dk.
46
2003 Index of Economic Freedom
29 Lee Hoskins and Ana I. Eiras, “Property Rights: The Key to Economic Growth,” in Gerald P. O’Driscoll,
Kim R. Holmes, and Mary Anastasia O’Grady, 2002 Index of Economic Freedom (Washington, D.C.: The
Heritage Foundation and Dow Jones & Company, Inc., 2002), p. 38.
30 Philip C. English II and William T. Moore, “Property Rights Ambiguity and the Effect of Foreign
Investment Decisions on Firm Value,” in ibid., p. 50.
31 Daniel J. Mitchell, The Flat Tax: Freedom, Fairness, Jobs and Growth (Washington, D.C.: Regnery Publishing, 1996).
32 Alan Cowell, “Not in Finland Anymore? More Like Nokialand,” The New York Times, February 6, 2002.
33 Economist Intelligence Unit, Country Report Iceland, December 2001.
34 Economist Intelligence Unit, Country Monitor Norway, April 8, 2002.
35 Sten Westerberg, senior adviser to Nordea Securities, quoted by Christopher Brown-Humes, “Survey—Sweden: Downbeat Mood as Telecoms Sector Falters,” Financial Times, December 12, 2001.
36 Economist Intelligence Unit, Country Report Sweden, July 3, 2002.
37 William W. Beach and Gerald P. O’Driscoll, Jr., “Explaining the Factors of the Index of Economic
Freedom,“ in O’Driscoll et al., 2002 Index of Economic Freedom, p. 69.
38 Economist Intelligence Unit, Country Commerce Denmark, February 2002, p. 37.
39 U.S. Department of State, “Norway,” Country Commercial Guide FY 2002.
40 Economist Intelligence Unit, Country Profile Sweden, 2002, p. 33.
41 See “Finland,” in O’Driscoll et al., 2002 Index of Economic Freedom.
42 Economist Intelligence Unit, Country Commerce Denmark, February 2002.
43 See http://www.bsa.org/resources/2001-06-10.129.pdf.
44 Transparency International, at http://www.transparency.org/cpi/2001/cpi2001.html.
45 Economist Intelligence Unit, Country Report Denmark, March 2002.
Chapter 4: Scandinavia’s Changing Political and Economic Landscape
47
5
Explaining the Factors of the
Index of Economic Freedom
by William W. Beach and Gerald P. O’Driscoll, Jr.
S
ince 1995, the Index of Economic Freedom has
offered the international community an
annual in-depth examination of the factors
that contribute most directly to economic
freedom and prosperity. As the first
comprehensive study of economic freedom ever
published, the 1995 Index defined the method by
which economic freedom can be measured in such
vastly different places as Hong Kong and North
Korea. Since then, other studies have joined the
effort, analyzing such issues as trade, corruption,
or government intervention in the economy.1
There is overlapping coverage among these indices,
but the Index of Economic Freedom includes the broadest
array of institutional factors determining economic
freedom:
• Corruption in the judiciary, customs
service, and government bureaucracy;
• Non-tariff barriers to trade, such as
import bans and quotas as well as strict
labeling and licensing requirements;
• The fiscal burden of government, which
encompasses income tax rates, corporate
tax rates, and government expenditures
as a percent of output;
• The rule of law, reliability, impartiality, and
efficiency of the judiciary, and the ability to
enforce contracts;
• Regulatory burdens on business, including health, safety, and environmental
regulation;
• Restrictions on banks regarding financial
services, such as selling securities and
insurance;
• Labor market regulations, such as established work weeks and mandatory
separation pay; and
• Black market activities, including smuggling, piracy of intellectual property
rights, and the underground provision of
labor and other services.
Analyzing economic freedom on an annual basis
permits the authors of the Index to include the most
recent data on these variables as they become available
on a country-by-country basis. Not surprisingly,
changes in government policy are occurring at a rapid
rate in many less-developed countries. The Index of
Economic Freedom, because it is published each year,
enables readers around the world to see how recent
changes in government policy affect economic freedom
in any one of 161 specific countries. (This year,
numerical grading was suspended for five countries—
Angola, Burundi, Democratic Republic of Congo, Iraq,
and Sudan—that are currently in a state of civil unrest
or anarchy or for which data necessary to grade the
country are unavailable. Information is provided,
however, even for these countries.)
Chapter 5: Explaining the Factors of the Index of Economic Freedom
49
MEASURING ECONOMIC FREEDOM
Economic freedom is defined as the absence of
government coercion or constraint on the production,
distribution, or consumption of goods and services beyond the
extent necessary for citizens to protect and maintain liberty
itself.
All government action involves coercion. Some
minimal coercion is necessary in order for the citizens
of a community or nation to defend themselves,
promote the evolution of civil society, and enjoy the
fruits of their labor. This Lockean idea was embodied
in the U.S. Constitution. For example, citizens are
taxed to provide revenue for the protection of person
and property as well as for a common defense. Most
political theorists also accept that there are certain
goods—what economists call “public goods”—that
often can be supplied most conveniently by
government.
When government employs coercion beyond that
minimalist standard, however, it risks trampling on
freedom. When it interferes in the market to effect
ends other than the protection of person and property,
it undermines economic freedom. Exactly where that
line is crossed is open to reasoned debate. Only a
standard achievable by imperfect human beings—
neither anarchy nor utopia—is envisioned in the
scoring of economic freedom.
Throughout history, governments have exercised
their power to place a wide array of constraints on
economic activity. Many such constraints can be
measured by assessing their impact on economic
choices. Constraining economic choice interferes with
the production, distribution, or consumption of goods
and services (including, of course, labor services).2
One overriding reality characterizes the world: To
varying degrees, governments realign through
coercion the choices that ordinary people make with
respect to their persons and property. Economic
freedom is diminished when governments do this.
Additionally, economic growth suffers to the extent
that governments practice coercion in the marketplace.
To measure economic freedom and rate each
country, the authors of the Index study 50 independent
economic variables. These variables fall into 10 broad
categories, or factors, of economic freedom:
• Trade policy,
• Fiscal burden of government,
• Government intervention in the economy,
50
•
•
•
•
•
•
•
Monetary policy,
Capital flows and foreign investment,
Banking and finance,
Wages and prices,
Property rights,
Regulation, and
Black market activity.
A detailed discussion of each of these factors and
their variables follows this overview.
Weighting. The Index of Economic Freedom treats
the 10 factors as equally important in evaluating the
level of economic freedom in any country. Thus, to
determine a country’s overall score, the factors are
weighted equally.
This approach is the fairest and most consistent
with the purpose of the Index: to produce a score that
reflects the institutional environment for economic
activity in every country. The Index is not designed to
measure the proportionate contribution made by a
set of statistically independent variables to economic
growth. That is ably done in the many empirical
studies of economic growth. Rather, the authors of
the Index identify a set of institutional factors that,
taken together, determine the degree of economic
freedom in a society. It is this institutional
environment that is viewed as necessary for economic
growth in the first place.
Although it is not possible at this stage of academic
research to know with a high degree of certainty which
factors are more important than others for economic
freedom, it is clear that, for a country to achieve longterm growth and economic well-being, it must
perform well in all 10 factors. When a sufficient history
has been developed, Heritage analysts intend to reexamine the issue of differential weighting of factors.
The authors welcome the opportunity to work with
outside scholars and researchers to enhance the Index
in any and all ways.
The Grading Scale. Each country receives its overall
economic freedom score based on the average of the
10 individual factor scores. Each factor is scored
according to a grading scale that is unique for that
factor. The scales run from 1 to 5: A score of 1 signifies
an institutional or consistent set of policies that are
most conducive to economic freedom, while a score
of 5 signifies a set of policies that are least conducive.
In addition, each factor score is followed by a
description— “better,” “worse,” or “stable”—to
2003 Index of Economic Freedom
indicate, respectively, whether that factor of economic
freedom is improving, is getting worse, or has stayed
the same compared with the country’s score last year.
Finally, the factors are added and averaged, and
an overall score is assigned to the country.
The four broad categories of economic freedom in
the Index are:
• Free—countries with an average overall score
of 1.95 or less;
• Mostly Free—countries with an average
overall score of 2.00 to 2.95;
• Mostly Unfree—countries with an average
overall score of 3.00 to 3.95; and
• Repressed—countries with an average
overall score of 4.00 or higher.
Previous Scores. The Index of Economic Freedom
includes a comprehensive listing of 161 countries with
their scores for each of the 10 factors. This year, each
country’s listing includes its overall score for each of
the years the country was graded between 1995 and
2002. With this history, readers can easily discern
whether a country is improving or restricting
economic freedom over time, or whether its level of
economic freedom has not changed.
Transparency. The discussions that follow in this
chapter explain why each factor is an important
element of economic freedom, how the levels of
economic freedom are broken down and scored for
that factor, and what sources of data and information
were used for this analysis. The authors endeavor to
make their scoring as transparent as possible to the
reader.
Thus, factor scoring is straightforward. If a
country’s banking system received a score of 3, for
example, this means that its banking and financial
system displays most of the characteristics for level 3,
which are spelled out on page 60: The government
exercises substantial influence on banks; the
government owns or operates some banks; the
government significantly influences credit allocation;
and there are significant barriers to the formation of
domestic banks. Similarly, a country receiving a score
of 5 in trade policy has the characteristics explained
on page 52: an average tariff rate of at least 19 percent
or a lower tariff but very high non-tariff barriers that,
for all practical purposes, close its markets to imports.
A country must meet most, but not necessarily
all, of the conditions specified for each grade level of a
factor. In the banking and finance factor, a country
would rate a grade of 2 (which is better than a grade
of 3) if its banking system has only some government
limits on financial services and minor barriers to new
bank formation. It would receive a 4 (which is worse
than a 3) if its banking system is in transition from a
state-dominated, primitive, or crisis-ridden state; the
government keeps its banks under tight control; some
corruption is present; or domestic bank formation is
virtually nonexistent.
Period of Study. For the 2003 Index of Economic
Freedom, the authors generally examined data for the
period covering the second half of 2001 through the
first half of 2002. To the extent possible, the information
considered for each factor was current as of June 30,
2002.
It is important to understand, however, that certain
factors are based on historical information. For
example, the monetary policy factor considers a 10year weighted average inflation rate, from January 1,
1992, to December 31, 2001. Other factors are current
for the year in which the Index is published. For
example, the taxation variable for this Index considers
tax rates that apply to the taxable year 2002 (the year
in which the 2003 Index is published).
Sometimes, because the Index is published several
months after the cutoff date for evaluation, major
economic events occur after that date that cannot be
factored into the scores. In the past, such occurrences
have been uncommon and isolated to one region of
the world. The Asian financial crisis, for example,
erupted as the 1998 Index of Economic Freedom was ready
to go to print. As a result, the effects of policy changes
in response to that crisis were not considered in that
year’s scoring; instead, they have been considered in
later editions. The authors and editors also note in
the country write-ups any major event that might have
a substantial impact on a country’s score in the future.
Sources. In determining how a country meets the
criteria for each factor, the authors have used a range
of authoritative sources. For example, a statement
about the level of corruption in a country’s customs
service may be followed by a supporting quote from
a source of demonstrated reliability. There also are
innumerable lesser sources of information, including
conversations with government officials and visits to
Internet sites. These sources are indicated in the
narrative where appropriate. It would be unnecessarily
cumbersome to cite all the sources used in scoring
every single variable of each factor; therefore, unless
Chapter 5: Explaining the Factors of the Index of Economic Freedom
51
otherwise noted, the major sources used in preparing
the country summaries may be found below, in the
introduction to Chapter 6, and in the list of Major
Works Cited on pages 437 and 438.
Gathering these trade data to make a consistent crosscountry comparison can be a challenging task. Unlike
inflation data, for instance, countries do not report
their weighted average tariff rate or simple average
tariff rate every year; in some cases, the last time a
A SUMMARY OF FACTOR VARIABLES
country reported its tariff data could have been as far
To grade each country for the Index, the authors back as 1993. To preserve a consistent way of grading
examined some 50 independent variables to determine the trade factor, the authors have decided to use the
an overall level of economic freedom. They collected most recent weighted average tariff rate reported for
information pertaining to all 50 independent variables a country as our primary source. If a reliable source
and analyzed it to determine which of the five grade reports more updated information on the country’s
levels established for each factor most closely applies tariff rate, the authors note this fact and may review
to a country. Even though all of the variables were the grading of this factor if there is strong evidence
studied, however, not all are given an individual score that the last reported weighted average tariff rate is
or specific mention in the text. For example, it is not outdated.
The World Bank produces the world’s most
necessary to mention cases in which corruption in the
judiciary is virtually nonexistent; in general, this comprehensive and consistent information on
variable is discussed only when corruption in the weighted average tariffs rates. When the weighted
average tariff rate is not available, the authors utilize
judiciary is a documented problem.
Thus, instead of grading each of the 50 variables the country’s average tariff rate; and when the country’s
individually for each of the 156 countries that are average tariff rate is not available, the authors base
scored in this year’s edition, the variables are divided their grading on the revenue raised from tariffs and
into the 10 broad factors of economic freedom, which duties as a percentage of total imports of goods. The
are then graded. Such a system keeps the Index to a data for customs revenues and total imports may be
manageable length. The independent variables for each found in different sources and not consolidated in just
factor are summarized in the callout box within the one source. In addition, in the very few cases in which
data on duties and customs revenues are not available,
factor’s description.
the authors use data on international trade taxes
instead. In any instance, the authors clarify the type of
FACTORS OF ECONOMIC FREEDOM
data used and the different sources for those data in
the corresponding write-up for the trade policy factor.
Factor #1: Trade Policy
Sometimes, none of this information is available. In
Trade policy is a key factor in measuring economic such cases, the authors analyze information on the
freedom. The degree to which government hinders overall tariff structure and estimate an average tariff
the free flow of foreign commerce can have a direct rate.
bearing on an individual’s ability to pursue his
Tariffs, however, are not the only barriers to trade.
economic goals.
Many countries impose import quotas, licensing
For example, when a government taxes directly requirements, and other mandates—or non-tariff
through tariffs, or impedes through non-tariff barriers, barriers (NTBs)—to restrict imports. The trade
the importation of a certain product, some group of analysis also considers corruption within the customs
people in that country will produce that product service. This is an important consideration because,
instead of another product they may be better suited even though countries may have lower published tariff
to producing. The import limitation reduces economic rates and no official NTBs, their customs officials may
freedom by discouraging individuals from applying be corrupt and may require bribes to allow products
their talents and skills in a manner that they know or to enter their ports. Or customs officials may steal
believe will be better for them. In addition, it limits goods for themselves, which also constitutes a barrier
consumers’ choices, thereby limiting their well-being. to trade.
Methodology. The trade policy score is given based
These circumstances are analyzed and documented
on a country’s weighted average tariff rate—weighted whenever possible. If NTBs exist in sufficient quantity,
by imports from the country’s trading partners. The or if there is ample evidence of corruption, a country’s
higher the rate, the worse (or higher) the score.
52
2003 Index of Economic Freedom
Trade Policy Grading Scale
Score
Levels of Protectionism
Criteria
1
Very low
Weighted average tariff rate less than or equal to 4 percent.
2
Low
Weighted average tariff rate greater than 4 percent but less than or equal to 9 percent.
3
Moderate
Weighted average tariff rate greater than 9 percent but less than or equal to 14 percent.
4
High
Weighted average tariff rate greater than 14 percent but less than or equal to 19 percent.
5
Very high
Weighted average tariff rate greater than 19 percent.
score based solely on tariff rates receives an additional
point on the scale (representing decreased economic
freedom).
Sources. Unless otherwise noted, the authors used
the following sources to determine scores for trade
policy: Economist Intelligence Unit, Country Report and
Country Commerce, 2002; International Monetary Fund,
Government Finance Statistics Yearbook and International
Financial Statistics on CD–ROM, 2002; Office of the U.S.
Trade Representative, 2002 National Trade Estimate
Report on Foreign Trade Barriers; U.S. Department of
State, Country Commercial Guide3 and Country Reports on
Economic Policy and Trade Practices for 2001 and 2002;
World Bank, World Development Indicators 2002; World
Trade Organization, Trade Policy Reviews, 1995 to June
2001; and official government publications of each
country. For all the European Union countries, the
authors have based the score on data reported by the
World Bank.
choices and private goals. This is true whether the
expenditure is to acquire resources for its own
purposes (government consumption) or for transfer
payments among citizens.
The government’s method of financing its
expenditures, in addition to their absolute amount,
has an impact. Whether a given level of government
expenditure is financed by taxation, debt issuance, or
money creation (or varying amounts of each) has its
own impact on the economy and society. The financing
method imposes its own burden, but the expenditures
are a fiscal burden unto themselves.
Milton Friedman believes that government
expenditures are the most complete measure of a
state’s burden on the economy. Government
expenditures capture the possibility of spending in
excess of tax revenues, financed either by increased
borrowing or by the printing of money, which imposes
further costs on an economy.4
The size of a government’s appetite for private
Factor #2: Fiscal Burden of Government
resources affects both economic freedom and
To measure the fiscal burden a government economic growth. For example, if the government of
imposes on its citizens, the authors examined both an economically small and emerging country
tax rates and the level of government expenditures. appropriates one-third of the nation’s total output
The tax rate confronting an individual is effectively a
“price” paid for supplying economic effort or engaging
Variables of Factor #1:
in an entrepreneurial venture. The higher the price of
effort or entrepreneurship, the less of it will be
Trade Policy
undertaken. Higher tax rates discourage individuals
from pursuing their goals in the marketplace.
• Weighted average tariff rate
Government expenditures, measured as a percent
• Non-tariff barriers
of GDP, capture the true cost of government in a
• Corruption in the customs service
society. When a government expends money, it
acquires resources, diverting them away from private
Chapter 5: Explaining the Factors of the Index of Economic Freedom
53
Individual Income Tax Grading Scale
Score
Tax Rates
Criteria
1
Very low
Top income tax rate 0 percent. Marginal rate for the average taxpayer 0 percent.
2
Low
Top income tax rate greater than 0 percent and less than or equal to 25 percent.
Marginal rate for the average taxpayer greater than 0 percent and less than or equal to
10 percent.
3
Moderate
Top income tax rate greater than 25 percent and less than or equal to 35 percent.
Marginal rate for the average taxpayer greater than 10 percent and less than or equal
to 15 percent.
4
High
Top income tax rate greater than 35 percent and less than or equal to 50 percent.
Marginal rate for the average taxpayer greater than 15 percent and less than or equal
to 20 percent.
5
Very high
Top income tax rate greater than 50 percent. Marginal rate for the average taxpayer
greater than 20 percent.
through expenditures, it drains away resources that
could have been used for private investment projects
and consumption. The same appetite by the
government of a large advanced economy may do
comparatively less to affect the growth rate, since
advanced societies typically enjoy substantial savings
and a large base of productive capital, but high levels
of government expenditures in developed countries
can still significantly hamper their economic growth.
Methodology. The score for the fiscal burden of
government has two components: tax rates and
government expenditures as a percentage of GDP.
The tax component reflects the country’s income and
corporate tax rates. The authors followed several steps
in scoring the tax portion for this factor. First, a
country’s individual income tax score was determined
by averaging the score for the top income tax rate
and the score for the marginal rate for the average
taxpayer. For instance, Chile has a top income tax rate
of 43 percent, and the marginal rate for the average
taxpayer is 0 percent. Chile would receive a 4 for the
top income tax of 43 percent and a 1 for the 0 percent
marginal rate for the average taxpayer. The individual
income tax score would be 2.5.5
Some countries had 1 point subtracted from their
individual income tax score because they had a flat
54
tax.6 While the level of taxation is the most important
issue, a flat tax conveys benefits that a traditional
progressive tax bracket system does not.7 For instance,
a simple flat tax (1) reduces the hours invested in
calculating tax payments, increases the accuracy of
returns, and reduces expenditures on tax preparation
by experts; (2) does not discourage increased income
because more income is retained as it increases, as
opposed to traditional progressive tax systems; (3) is
fairer because all people are treated equally for tax
purposes; (4) eliminates opportunities for political
influence over the tax system because deductions,
preferences, exclusions, loopholes, credits, and
exemptions are eliminated; and (5) helps avoid
corruption and tax collection as avenues for tax
avoidance and evasion are eliminated. In sum, the
ease of administration and compliance avoids the
distortions caused by progressivity, and thereby merits
special notice in scoring.
The individual income tax score is averaged with
the corporate tax score to calculate the overall income
and corporate taxation score. For instance, Chile’s
corporate tax of 16 percent earns it a “very low” score
of 1. To calculate the income and corporate taxation
score, Chile’s individual income tax score of 2.5 would
be added to its corporate tax score of 1 and divided in
2003 Index of Economic Freedom
Corporate Tax Grading Scale
Score
Tax Rates
Criteria
1
Very low
Corporate tax rate less than or equal to 20 percent.
2
Low
Corporate tax rate greater than 20 percent and less than or equal to 25 percent.
3
Moderate
Corporate tax rate greater than 25 percent and less than or equal to 35 percent.
4
High
Corporate tax rate greater than 35 percent and less than or equal to 45 percent.
5
Very high
Corporate tax rate greater than 45 percent.
half to yield an overall score of 1.75. This would be
rounded up to a 2, giving Chile an overall income tax
rating of “low.”
The second half of the fiscal burden of government
score is government expenditures as a percent of gross
domestic product (GDP). Government expenditure as a
percent of GDP was assigned a score from 1 to 5.8
As a developing country, Chile’s government
expenditure of 24.6 percent of GDP earns Chile a
“moderate” government expenditure score of 3. The
authors then averaged the scores for income and
corporate taxation and for government expenditures
to arrive at a final score for the fiscal burden that the
government imposes on a country. For Chile, this
process resulted in a “moderate” overall fiscal burden
of government score of 2.5.
To keep the fiscal burden of government score
consistent with the other nine factors—so that each
score ends in either 0.00 or 0.50—all numbers that
end with a 0.25 were rounded up to 0.50, while
numbers that end with a 0.75 were rounded up to the
nearest whole number.
Sources. Unless otherwise noted, the authors used
the following sources for information on taxation, in
order of priority: Ernst & Young, 2002 The Global
Executive and 2002 Worldwide Corporate Tax Guide;
International Monetary Fund Staff Country Report,
Selected Issues and Statistical Appendix, 2000 to 2002;
Economist Intelligence Unit, Country Commerce,
Country Profile, and Country Report for 2001 and 2002;
U.S. Department of State, Country Commercial Guide9;
and official government publications of each country.
Sources other than Ernst & Young are noted in the
text.
For information on government expenditures, the
authors’ primary sources were Organisation for
Economic Co-operation and Development data (for
member countries); International Monetary Fund,
Government Finance Statistics Yearbook for 2001, and
International Monetary Fund Staff Country Report,
Selected Issues and Statistical Appendix, 2000 to 2002;
Standard & Poor’s, Sovereigns Ratings Analysis; Asian
Development Bank, Key Indicators of Developing Asian
and Pacific Countries 2001; African Development Bank,
ADB Statistics Pocketbook 2002; European Bank for
Variables of Factor #2:
Fiscal Burden of Government
• Top income tax rate
• Marginal rate for the average
taxpayer
• Corporate tax rate
• Government expenditures as a
percent of GDP
Chapter 5: Explaining the Factors of the Index of Economic Freedom
55
Government Expenditures Scale for Developed Countries
Score
Government Expenditures
as Percent of GDP
1
Very low
Less than or equal to 15 percent.
2
Low
Greater than 15 percent but less than or equal to 25 percent.
3
Moderate
Greater than 25 percent but less than or equal to 35 percent.
4
High
Greater than 35 percent but less than or equal to 45 percent.
5
Very high
Greater than 45 percent.
Reconstruction and Development, Country Strategies;
Inter-American Development Bank; U.S. Department
of State, Country Commercial Guide10; and official
government publications of each country. Sources
other than the OECD and the IMF are noted in the
text.
Factor #3: Government Intervention in the
Economy
This factor measures government’s direct use of
scarce resources for its own purposes and
government’s control over resources through
ownership. The measure comprises both government
consumption and government production. Transfer
payments, which consist of compulsory exchange of
titles over resources among individuals, are excluded
from this measure.
Government consumption consists of net purchases
of goods, services, and structures (for example, bridges
and buildings); wages paid to government employees;
net purchases of fixed assets; and inventory changes
in government enterprises.11 Government production
is measured as described below. The measure of
government intervention is distinct from
government’s regulatory role and complements the
measure of fiscal burden.12
Methodology. By taking government consumption
as a percentage of GDP, one can begin to determine
the level of government intervention in the economy.
The higher the rate of government consumption as a
56
Criteria
percentage of GDP, the higher the Index score and,
hence, the lower the level of economic freedom.
Governments intervene in the economy not only
by consuming scarce resources, but also by engaging
in business activities that generally could be carried
out in the private sector. Governments that operate
state-owned enterprises crowd out private initiative
and investment. In addition, state-run enterprises are
generally inefficient and deter economic growth. The
authors measure the size of the state-owned sector by
using the share of revenues a country receives from
Variables of Factor #3:
Government Intervention in the
Economy
• Government consumption as a
percentage of the economy
• Government ownership of businesses
and industries
• Share of government revenues from
state-owned enterprises and
government ownership of property
• Economic output produced by the
government
2003 Index of Economic Freedom
Government Expenditures Scale for Developing Countries
Score
Government Expenditures
as Percent of GDP
Criteria
1
Very low
Less than or equal to 15 percent.
2
Low
Greater than 15 percent but less than or equal to 20 percent.
3
Moderate
Greater than 20 percent but less than or equal to 25 percent.
4
High
Greater than 25 percent but less than or equal to 30 percent.
5
Very high
Greater than 30 percent.
Government Intervention Grading Scale
Score
Level of Government Intervention
in the Economy
Criteria
1
Very low
Less than or equal to 10 percent of GDP.
2
Low
Greater than 10 percent but less than or equal to 25 percent of GDP.
3
Moderate
Greater than 25 percent but less than or equal to 35 percent of GDP.
4
High
Greater than 35 percent but less than or equal to 45 percent of GDP.
5
Very high
45 percent or more of GDP.
Chapter 5: Explaining the Factors of the Index of Economic Freedom
57
Monetary Policy Grading Scale
Score
Weighted Average
Inflation Rate
1
Very low
Weighted average inflation less than or equal to 3 percent.
2
Low
Weighted average inflation greater than 3 percent but less than or equal to 6 percent.
3
Moderate
Weighted average inflation greater than 6 percent but less than or equal to 12 percent.
4
High
Weighted average inflation greater than 12 percent but less than or equal to 20 percent.
5
Very high
Weighted average inflation greater than 20 percent.
state-owned enterprises and government ownership
of property.
To scale this statistic, the authors computed the
standard deviation around the median value and then
added and subtracted one standard deviation to the
median using the data from the International
Monetary Fund’s 2001 Government Finance Statistics
Yearbook. To ensure that changes in scores reflect only
changes in the statistic and not a change in the scale,
the authors do not rescale this statistic each year. The
median value is 6.12 percent, and the standard
deviation is 1.7; thus, the demarcations in the scale
are 4.4 percent and 7.8 percent. The authors then added
0 points to the government consumption score if its
share of the revenue for state-owned enterprises and
government-owned property was less than 4.4
percent, 0.5 point if its share was greater than or equal
to 4.4 percent but less than 7.8 percent, and 1 point if
the statistic was greater than or equal to 7.8 percent.
The main source used for revenues from stateowned enterprises is the International Monetary
Fund’s Government Finance Statistics Yearbook. When
these data are not available in this source, the authors
look for them in the country’s Ministry of Economy
or Finance’s Web site or through the country’s
embassy in the United States. When the authors obtain
the data on revenues from state-owned enterprises
from more than one place, they note this fact in the
country’s write-up.
For countries in which the share of total revenues
from state-owned enterprises and government
ownership of property was not available, the following
methodology was employed: For countries with
evidence of many state-owned enterprises, 1 point was
58
Criteria
added to the government intervention score (with a
variety of sources used in making this judgment).
This factor also examines the state of privatization
programs. If a country has a state-owned sector that
is being aggressively privatized, the authors note this
fact; it puts into context any statements about the size
of the state-owned sector. If the privatization program
has stalled or if one is not in place, however, the authors
note that as well.
Additionally, in a few cases, there is strong reason
to doubt either the measure of government
consumption or the share of enterprise income. In
these cases, where there is compelling evidence of
heavy government involvement in the economy, the
authors added 1 or more points to the score (making
it worse).13
The final variable is whether or not the government
intervenes in the stock market. When a government
intervenes in the stock market, it contravenes the
choices of millions of individuals. It does so by
interfering with the pricing of capital—the most critical
function of a market economy. Equity markets
measure, on a continual basis, the expected profits
and losses in publicly held companies. This
measurement is essential in allocating capital resources
to their highest valued uses and thereby satisfying
consumers’ most urgent wants. When the authors
Variables of Factor #4:
Monetary Policy
• Weighted average inflation rate from
1992 to 2001
2003 Index of Economic Freedom
find evidence of government intervention in the stock
market, they add 1 point more to the score.
Sources. Unless otherwise noted, the authors used
the following sources for information on government
intervention in the economy: International Monetary
Fund, Government Finance Statistics Yearbook 2001; U.S.
Department of State, Country Commercial Guide14 and
Country Reports on Economic Policy and Trade Practices
for 2001 and 2002; Economist Intelligence Unit, Country
Report, 2002; World Bank, World Development Indicators
2002; and official government publications of each
country.
Sometimes, the data for the share of total revenues
from state-owned enterprises and government
ownership of property are not readily reported. In
these cases, the authors look both for the data on total
revenues from state-owned enterprises and
government ownership of property and for the data
on total government revenues and then calculate the
percentage of total revenues represented by revenues
from state-owned enterprises and government
ownership of property.
Keynes observed that “by a continuing process of
inflation, governments can confiscate, secretly and
unobserved, an important part of the wealth of their
citizens.”15
Inflation not only confiscates wealth, but also
distorts pricing, misallocates resources, and
undermines a free society.
There is no singularly accepted theory of the right
monetary institutions for a free society. At one time,
the gold standard enjoyed widespread support, but
this is no longer the case (though some continue to
support that system). What characterizes almost all
monetary theorists today, however, is support for low
or zero inflation. A good way to gauge the influence
of monetary policy on economic freedom is to analyze
the inflation rate over a period of time.
Methodology. The main criterion for this factor is
a country’s weighted average annual rate of inflation
from 1992 to 2001. The authors created the monetary
policy score by first weighting inflation rates for each
of the past 10 years so that the year farthest from the
present has the least weight and the current year has
the greatest weight. Then the authors calculated an
Factor #4: Monetary Policy
average of these weighted rates.16 In some cases, data
The value of a country’s currency is shaped largely were not available for all 10 years; for these countries,
by its monetary policy. When a government’s the authors used as many years as the availability of
monetary policy facilitates market pricing, individuals data would allow.17 The reader should be aware that
enjoy greater economic freedom. John Maynard when governments have comprehensive price and
Capital Flows and Foreign Investment Grading Scale
Score
Barriers to Foreign Investment
Criteria
1
Very low
Open and impartial treatment of foreign investment; accessible foreign
investment code; almost no restrictions on foreign investments except for
fields related to national security.
2
Low
Restrictions on investments in few sectors, such as utilities, companies vital to
national security, and natural resources; limited, efficient approval process.
3
Moderate
Restrictions on many investments, but official policy conforms to established
foreign investment code; bureaucratic approval process.
4
High
Investment permitted on a case-by-case basis; possible presence of
bureaucratic approval process and corruption.
5
Very high
Government seeks actively to prevent foreign investment; rampant
corruption.
Chapter 5: Explaining the Factors of the Index of Economic Freedom
59
Banking and Finance Grading Scale
Score
Restrictions on Banks
Criteria
1
Very low
Government involvement in the financial sector negligible; very few
restrictions on foreign financial institutions; banks may engage in all types
of financial services.
2
Low
Government involvement in the financial sector minimal; few limits on
foreign banks; country may maintain some limits on financial services;
domestic bank formation may face some barriers.
3
Moderate
Substantial government influence on banks; government owns or controls
some banks; government controls credit; domestic bank formation may
face significant barriers.
4
High
Heavy government involvement in the financial sector; banking system in
transition; banks tightly controlled by government; possible corruption;
domestic bank formation virtually nonexistent.
5
Very high
Financial institutions in chaos; banks operate on primitive basis; most credit
controlled by government and goes only to state-owned enterprises;
corruption rampant.
wage controls, measured inflation may be distorted.
Sources. Unless otherwise noted, the sources for
data on monetary policy are, in order of priority:
International Monetary Fund, International Financial
Statistics on CD–ROM; International Monetary Fund,
2002 World Economic Outlook, available at http://
www.imf.org/external/pubs/ft/weo/2002/01/data/
pcpi_a.csv; and Economist Intelligence Unit, Country
Report, 1996 to 2002. Sources other than the IMF
International Financial Statistics are noted in the text.
Factor #5: Capital Flows and Foreign
Investment
Restrictions on foreign investment limit the inflow
of capital and thus hamper economic freedom. By
contrast, little or no restriction of foreign investment
enhances economic freedom; foreign investment
provides funds for economic expansion. For this
category, the more restrictions a country imposes on
foreign investment, the lower the level of economic
freedom and the higher the score.
Methodology. This factor scrutinizes each country’s
policies toward foreign investment in order to
determine its overall investment climate. It examines
such variables as the presence of a foreign investment
60
Variables of Factor #5: Capital Flows
and Foreign Investment
• Foreign investment code
• Restrictions on foreign ownership of
business
• Restrictions on the industries and
companies open to foreign investors
• Restrictions and performance
requirements on foreign companies
• Foreign ownership of land
• Equal treatment under the law for
both foreign and domestic companies
• Restrictions on repatriation of
earnings
• Availability of local financing for
foreign companies
2003 Index of Economic Freedom
code that defines the country’s investment laws and
procedures; whether the government encourages
foreign investment through fair and equitable
treatment of investors; whether there are restrictions
on access to foreign exchange; whether foreign firms
are treated the same as domestic firms under the law;
the presence of restrictions on payments, transfers,
and capital transactions; and whether specific industries
are closed to foreign investment. This analysis helps
to develop an overall description of the country’s
investment climate. The authors then grade each
country based on those variables.
Sources. Unless otherwise noted, the authors used
the following sources for data on capital flows and
foreign investment: Economist Intelligence Unit,
Country Commerce, Country Profile, and Country Report
for 2001 and 2002; International Monetary Fund,
Annual Report on Exchange Arrangements and Exchange
Restrictions 2001; Office of the U.S. Trade
Representative, 2001 National Trade Estimate Report on
Foreign Trade Barriers; U.S. Department of State, Country
Commercial Guide18; U.S. Department of State, Country
Reports on Economic Policy and Trade Practices for 2001;
and official government publications of each country.
Factor #6: Banking and Finance
In most countries, banks provide the essential
financial services that facilitate economic growth; they
lend money to start businesses, purchase homes, and
secure credit to purchase consumer durable goods, in
addition to furnishing a safe place in which individuals
can store their earnings. The more banks are controlled
by the government, the less free they are to engage in
these activities. One consequence of heavy bank
regulation is restricted economic freedom; therefore,
the more a government restricts its banking sector,
the higher its score and the lower its level of economic
freedom.
In developed economies, commercial banks are
relatively less important; a higher proportion of credit
is supplied in organized securities markets. Over the
years, the authors have devoted more attention to
the non-banking part of the financial services industry
(insurance and securities).
It should be noted that virtually all countries
provide some type of prudential supervision of banks
and other financial services. This supervision serves
two major purposes: ensuring the safety and soundness
of the financial system and ensuring that financial
services firms meet basic fiduciary responsibilities.
Variables of Factor #6:
Banking and Finance
• Government ownership of banks
• Restrictions on the ability of foreign
banks to open branches and
subsidiaries
• Government influence over the
allocation of credit
• Government regulations
• Freedom to offer all types of financial
services, securities, and insurance
policies
Ultimately, this task falls under a government’s duty
to enforce contracts and protect its citizens against
fraud.
Some protection of this sort is provided in the
marketplace by such institutions as independent
auditors and firms providing information services, and
the market arguably could take over even more of
this oversight responsibility. The key point, however,
is that markets demand independent oversight of
financial services firms because of the high standards
of fiduciary duty required in that industry. Such
oversight is distinguished from burdensome
government regulation, which interferes with market
provision of financial services to consumers. It is the
latter, not the former, that interferes with economic
freedom and causes the grade on this factor to be better
or worse.
Methodology. The banking and finance factor
measures the relative openness of a country’s banking
and financial system, and the authors score this factor
by determining the openness of a country’s banking
and financial system: specifically, whether foreign
banks and financial services firms are able to operate
freely, how difficult it is to open domestic banks and
other financial services firms, how heavily regulated
the financial system is, the presence of state-owned
banks, whether the government influences allocation
of credit, and whether banks are free to provide
customers with insurance and invest in securities (and
vice-versa). The authors use this analysis to develop a
description of the country’s financial climate.
Sources. Unless otherwise noted, the authors used
Chapter 5: Explaining the Factors of the Index of Economic Freedom
61
Wages and Prices Grading Scale
Score
Wage and Price Controls
Criteria
1
Very low
The market sets prices of goods and services, and the country either does not
have a minimum wage or the evidence indicates that the minimum wage
applies to a small portion of the work force and is therefore not relevant in
wage setting. The government may participate in collective bargaining as long
as it does not impose those wage agreements on other sectors or on workers
that are not immediate parties to the agreement.
2
Low
The government controls prices on some goods and services, but controls do
not apply to a significant portion of national output. The government either
has a minimum wage that applies to a significant portion of the work force or
extends collective bargaining agreements across industries or sectors and on
workers that are not immediately party to the agreement.
3
Moderate
The government controls prices of goods and services that constitute a significant
portion of national output , government-set wages apply to a large portion of the
work force, or both.
4
High
The government determines most prices of goods and services and most
wages.
5
Very high
Wages and prices of goods and services are almost completely controlled by
the government.
the following sources for data on banking and finance:
Economist Intelligence Unit, Country Commerce,
Country Profile, and Country Report for 2001 and 2002;
U.S. Department of State, Country Commercial Guide19;
U.S. Department of State, Country Reports on Economic
Policy and Trade Practices for 2001; and official
government publications of each country.
Factor #7: Wages and Prices
In a market economy, prices allocate resources to
their highest use. A firm that needs more employees
may signal this need to the market by offering a higher
wage; an individual who greatly values a home on
the market offers a higher price to purchase it. Prices
also act as signals to producers and consumers by
conveying information that otherwise would be
prohibitively costly to obtain. For example, if the
demand for a good increases, this will be reflected in
the price of the product and will be a signal to producers
to increase production.
When prices are determined freely, resources go to
their most productive use for satisfying consumers. As
Nobel Laureate Friedrich A. Hayek put it, “We must
62
look at the price system as…a mechanism for
communicating information if we want to understand
its real function—a function which, of course, it fulfills
less perfectly as prices grow more rigid.”20
Some governments mandate wage and price
controls. By so doing, they restrict economic activity
and curtail economic freedom. Government control
Variables of Factor #7:
Wages and Prices
• Minimum wage laws
• Freedom to set prices privately
without government influence
• Government price controls and the
extent to which government price
controls are used
• Government subsidies to businesses
that affect prices
• Government role in setting wages
2003 Index of Economic Freedom
can emanate not only from explicit price controls, but its score and the lower its level of economic freedom.
also from heavy involvement in the economy that
Methodology. The authors score this factor by the
distorts pricing. Therefore, the more a government extent to which a government allows the market to
intervenes and controls prices and wages, the higher set wages and prices. Specifically, this factor looks at
which products have prices set by the government
and whether the government has a minimum wage
Variables of Factor #8:
policy or otherwise influences wages. The factor’s scale
Property Rights
measures the relative degree of government control
over wages and prices. A “very low” score of 1
• Freedom from government influence
represents wages and prices that are set almost
over the judicial system
completely by the market, whereas a “very high” score
• Commercial code defining contracts
of 5 means that wages and prices are set almost
completely by the government.
• Sanctioning of foreign arbitration of
contract disputes
Sources. Unless otherwise noted, the authors used
the
following sources for data on wages and prices:
• Government expropriation of
Economist Intelligence Unit, Country Commerce,
property
Country Profile, and Country Report for 2001 and 2002;
• Corruption within the judiciary
U.S. Department of State, Country Commercial Guide21;
U.S. Department of State, Country Reports on Human
• Delays in receiving judicial decisions
Rights Practices for 2001; and U.S. Department of State,
Country Reports on Economic Policy and Trade Practices
• Legally granted and protected private
for 2001 and 2002.
property
Property Rights Grading Scale
Score
Protection of Private Property
Criteria
1
Very high
Private property guaranteed by the government; court system efficiently
enforces contracts; justice system punishes those who unlawfully
confiscate private property; corruption nearly nonexistent and
expropriation unlikely.
2
High
Private property guaranteed by the government; court system suffers delays
and is not always strict in enforcing contracts; corruption possible but rare;
expropriation unlikely.
3
Moderate
Court system inefficient and subject to delays; corruption may be present;
judiciary may be influenced by other branches of government; expropriation
possible but rare.
4
Low
Property ownership weakly protected; court system inefficient; corruption
present; judiciary influenced by other branches of government; expropriation
possible.
5
Very low
Private property outlawed or not protected; almost all property belongs to
the state; country in such chaos (for example, because of ongoing war) that
property protection is nonexistent; judiciary so corrupt that property is not
effectively protected; expropriation frequent.
Chapter 5: Explaining the Factors of the Index of Economic Freedom
63
Regulation Grading Scale
Score
Levels of Regulation
Criteria
1
Very low
Existing regulations straightforward and applied uniformly to all businesses;
regulations not much of a burden for business; corruption nearly
nonexistent.
2
Low
Simple licensing procedures; existing regulations relatively straightforward
and applied uniformly most of the time, but burdensome in some instances;
corruption possible but rare.
3
Moderate
Complicated licensing procedure; regulations impose substantial burden on
business; existing regulations may be applied haphazardly and in some
instances are not even published by the government; corruption may be
present and poses minor burden on businesses.
4
High
Government-set production quotas and some state planning; major barriers
to opening a business; complicated licensing process; very high fees; bribes
sometimes necessary; corruption present and burdensome; regulations
impose a great burden on business.
5
Very high
Government impedes the creation of new businesses; corruption rampant;
regulations applied randomly.
Factor #8: Property Rights
The ability to accumulate private property is the
main motivating force in a market economy, and the
rule of law is vital to a fully functioning free-market
economy. Secure property rights give citizens the
confidence to undertake commercial activities, save
their income, and make long-term plans because they
know that their income is safe from expropriation.
This factor examines the extent to which the
government protects private property by enforcing
the laws and how safe private property is from
expropriation. The less protection private property
receives, the lower the level of economic freedom and
the higher the score.
Methodology. This factor scores the degree to
which private property rights are protected and the
degree to which the government enforces laws that
protect private property. It also accounts for the
possibility that private property will be expropriated.
In addition, it analyzes the independence of the
judiciary, the existence of corruption within the
judiciary, and the ability of individuals and businesses
to enforce contracts. The less the legal protection of
property, the higher the score; similarly, the greater
the chances of government expropriation of property,
the higher the score.
64
Sources. Unless otherwise noted, the authors used
the following sources for information on property
rights: Economist Intelligence Unit, Country Commerce,
2001 and 2002; U.S. Department of State, Country
Commercial Guide22 and Country Reports on Human Rights
Practices for 2001 and 2002.
Variables of Factor #9: Regulation
• Licensing requirements to operate a
business
• Ease of obtaining a business license
• Corruption within the bureaucracy
• Labor regulations, such as
established work weeks, paid
vacations, and parental leave, as well
as selected labor regulations
• Environmental, consumer safety,
and worker health regulations
• Regulations that impose a burden
on business
2003 Index of Economic Freedom
Black Market Grading Scale
Score
Black Market Activity
Criteria
1
Very low
Very low level of black market activity; economies are free markets with
black markets in such things as drugs and weapons.
2
Low
Low level of black market activity; economies may have some black market
involvement in labor or pirating of intellectual property.
3
Moderate
Moderate level of black market activity; countries may have some black
market activities in labor, agriculture, and transportation, and moderate
levels of intellectual property piracy.
4
High
High level of black market activity; countries may have substantial
levels of black market activity in such areas as labor, pirated intellectual
property, and smuggled consumer goods, and in such services as
transportation, electricity, and telecommunications.
5
Very high
Very high level of black market activity; countries have black markets that
are larger than their formal economies.
Factor #9: Regulation
Regulations and restrictions make it difficult for
entrepreneurs to create new businesses. In some
countries, government officials frown on any privatesector initiatives; in a few, they even make them illegal.
Although many regulations hinder business, the most
important are associated with licensing new companies
and businesses. In some countries, as well as many
states in the United States, the procedure for obtaining
a business license can be as simple as mailing in a
registration form with a minimal fee. In Hong Kong,
for example, obtaining a business license requires filling
out a single form, which can be completed in a few
hours.23 In other countries, such as India and in parts
of South America, obtaining a business license requires
endless trips to government offices, and the process
can take a year or more.
Once a business is open, government regulation
does not always subside; in some cases, it increases.
In some cases, two countries with the same set of
regulations can impose different regulatory burdens.
If one of them, for example, applies its regulations
evenly and transparently, it lowers the regulatory
burden since businesses can make long-term plans.
On the other hand, if a country applies regulations
inconsistently, it raises the regulatory burden on
businesses by creating an unpredictable business
environment. For example, in some countries, an
environmental regulation may be used to shut down
one business but not another. Business owners are
uncertain about which regulations they must obey.
In addition, the existence of excessive regulation can
support corruption as confused and harassed business
owners attempt to navigate the red tape.
Methodology. This factor measures how easy or
difficult it is to open and operate a business. The more
regulations imposed on business, the harder it is to
establish one. The factor also examines the degree of
corruption in government and whether regulations
are applied uniformly to all businesses. Another
consideration is whether the country has state planning
agencies that set production limits and quotas. The
scale establishes a set of conditions for each of the five
possible grades. These conditions also include such
items as the extent of government corruption, how
uniformly regulations are applied, and the extent to
which regulations impose a burden on business. A
“very low” score of 1 indicates that corruption is
virtually nonexistent and regulations are minimal and
applied uniformly; a “very high” score of 5 indicates
that corruption is rampant, regulations are applied
randomly, and the general level of regulation is very
high. A country need only meet a majority of the
Chapter 5: Explaining the Factors of the Index of Economic Freedom
65
conditions for a particular score to receive that score.
Sources. Unless otherwise noted, the authors
used the following sources for data on regulation:
Economist Intelligence Unit, Country Commerce
and Country Report, 2001 and 2002; U.S.
Department of State, Country Commercial Guide24
and Country Reports on Economic Policy and Trade
Practices for 2000; Office of the U.S. Trade
Representative, 2002 National Trade Estimate
Report on Foreign Trade Barriers; and official
government publications of each country.
Factor #10: Black Market
In some cases, the existence of a black market may
appear positive; at least there is some ability to engage
in entrepreneurship or to obtain scarce goods and
services. Harvard economist Robert Barro notes, “In
some circumstances, corruption may be preferable to
honest enforcement of bad rules. For example,
outcomes may be worse if a regulation that prohibits
some useful economic activity is thoroughly enforced
rather than circumvented through bribes.”25 Alejandro
Chafuen and Eugenio Guzmán, however, point out
that “corruption is the cost of obtaining privileges that
only the State can ‘legally’ grant, such as favoritism in
taxation, tariffs, subsidies, loans, government
contracting, and regulation.”26
Black markets are the direct result of some kind of
government intervention in the marketplace. A black
market activity is one that the government has taxed
heavily, regulated in a burdensome manner, or simply
outlawed in the past. This factor captures the effects
of government interventions not always fully
measured elsewhere.
Although many societies outlaw such activities as
trafficking in illicit drugs, others frequently limit
individual liberty by outlawing such activities as
private transportation and construction services. A
government regulation or restriction in one area may
create a black market in another. For example, a
country with high barriers to trade may have laws
that protect its domestic market and prevent the
import of foreign goods, but these barriers create
incentives for smuggling and a black market for the
barred products. In addition, governments that do
not have strong property rights protection for items
like intellectual property, or that do not enforce
existing laws, encourage piracy and theft of these
products.
66
Variables of Factor #10:
Black Market
• Smuggling
• Piracy of intellectual property in the
black market
• Agricultural production supplied on
the black market
• Manufacturing supplied on the black
market
• Services supplied on the black
market
• Transportation supplied on the black
market
• Labor supplied on the black market
For the purposes of this Index, the larger the black
market in a particular country, the lower the level of
economic freedom; and the more prevalent black
market activities are, the worse the score. Conversely,
the smaller the black market, the higher the level of
economic freedom; and the less prevalent these
activities are, the better the score.
Methodology. This factor relies on Transparency
International’s Corruption Perceptions Index (CPI),
which measures the level of corruption in 91 countries,
to determine the black market score.27 As the level of
corruption increases, the level of black market activity
rises as well. Citizens often engage in corrupt activity,
such as bribing an official, so that they can enter the
black market.
Because the CPI is based on a 10-point scale in
which 10 equals very little corruption and 1 equals a
very corrupt government, it was necessary to
transform the CPI to a five-point scale consistent with
the other nine factors graded in the Index. To do this,
the authors regressed the CPI on the black market
Index of Economic Freedom score. After estimating the
relationship between the two variables, the authors
substituted the CPI into the equation to arrive at a
number between 1 and 5. The authors then rounded
the numbers to the nearest half point (0.5 point).28 If
2001 Transparency International data were not
2003 Index of Economic Freedom
available and 2000 TI data were available, the authors
used the 2000 TI data.
For countries that are not covered in the CPI, the
black market score is determined by using the same
procedure as in previous years. (See text box.) This
factor considers the extent to which black market
activities occur. Although information on the size of
black markets in less-developed countries is difficult
to obtain, information on the extent of smuggling,
piracy of intellectual property, and black market labor
can be found. When such information is available, the
authors use it to determine the extent of black market
activities. The higher the level of black market activity,
the higher the score and the lower the level of economic
freedom. As newer data become available, it may
become possible to document the percentage of black
market activity in a country’s overall economy.
Although this factor measures black market activity
in the production, distribution, or consumption of
goods and services, it does not measure such things
as black market exchange rates or illegal provision of
“vices,” such as gambling, narcotics, prostitution, and
related activities. Such activities are very difficult to
quantify with objectivity.
Sources. Unless otherwise noted, the authors used
the following sources for information on black market
activities: Transparency International, Corruption
Perceptions Index for 2000 and 2001; U.S. Department
of State, Country Commercial Guide29 and Country Reports
on Economic Policy and Trade Practices for 2001 and 2002;
Economist Intelligence Unit, Country Commerce,
Country Profile, and Country Report, 2002; Office of the
U.S. Trade Representative, 2002 National Trade Estimate
Report on Foreign Trade Barriers; official U.S. government
cables supplied by the U.S. Department of Commerce
and U.S. Department of State, available through the
National Trade Data Bank of the United States; and
official government publications of each country.
Chapter 5: Explaining the Factors of the Index of Economic Freedom
67
NOTES:
1
See also James D. Gwartney and Robert A. Lawson with Chris Edwards, Walter Park, Veronique de Rugy, and
Smita Wagh, Economic Freedom of the World, 2002 Annual Report (Vancouver, Canada: Fraser Institute, 2002), and
Richard E. Messick, World Survey of Economic Freedom: 1995–1996 (New Brunswick, N.J.: Transaction Publishers,
1996).
2
“The property which every man has in his own labour, as it is the original foundation of all other property, so it is
the most sacred and inviolable.” Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (New
York: The Modern Library, 1937), pp. 121–122; first published in 1776.
3
The Country Commercial Guides are published by the U.S. Commercial Service but are based on data from U.S.
embassies, the U.S. Department of State, and the U.S. Department of Commerce. Quotes from this publication
are cited as originating with the U.S. Department of State in the country write-ups.
4
Walter Block, ed., Economic Freedom: Toward a Theory of Measurement (Vancouver, Canada: Fraser Institute, 1991),
available at http://www.fraserinstitute.ca/publications/books/measurement/index.html.
5
A Note on Income Taxes:
The marginal income tax rate for the average taxpayer is calculated by establishing the per capita GDP for the
nation and determining what income tax rate would be assessed on that level of income. Per capita GDP is from
the World Development Indicators 2002 on CD–ROM, and the tax rates are from the sources noted for tax information.
If data are not available for both the top individual income tax rate and the marginal rate for the average taxpayer,
the data that are available will be used to determine the individual income tax score.
6
These countries are Bolivia, Estonia, Hong Kong, Iceland, Latvia, Lithuania, and Russia.
7
Daniel Mitchell, The Flat Tax (Washington, D.C.: Regnery Publishing, Inc., 1996).
8
A Note on Government Expenditures:
The authors divided the countries into two groups: countries recognized as economically developed and countries
that are emerging or developing. This division reflects the differing effects of government expenditures in countries
of significantly different sizes. “Developed countries” enjoy this designation in part because they have accumulated
substantial capital structures and high levels of productivity per capita. Substantial savings in developed countries
permit resource owners and entrepreneurs to prosper even when government absorbs a significant portion of the
economy’s annual output—say, 25 percent. This ability to weather government’s presence in the economy,
however, is not found as readily in an emerging economy. The government of an emerging country that spends
25 percent of annual economic output will have a much greater influence on entrepreneurship than the
government of its developed counterpart will have. Thus, the authors used two scales in calculating the government
expenditures component of the fiscal burden score: the first for government expenditures (federal, state, and local
levels) as a percentage of a developed country’s GDP and the second for the same statistic in developing and
emerging countries. The authors ranked the countries using per capita GNP and designated the top 40 countries
as developed countries. This list will be revised in the tenth edition
9
See note 3.
10 See note 3.
11 U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, March 1998,
p. 31.
12 In a few cases, data on government consumption were not available for a country, but data on government
expenditures were available, or vice versa. When information on government consumption was not available for
the government intervention factor and government expenditure data were available, the authors used
government expenditures as a proxy for government consumption. Similarly, when government expenditure
data were not available for the fiscal burden of government factor and government consumption data were
available, the authors used government consumption as a proxy for government expenditures.
13 The countries for which a point was added include Bangladesh, Burma, Belarus, Cuba, Chad, China, Egypt, Haiti,
Indonesia, Iran, Libya, Macedonia, Syria, Tajikistan, Venezuela, and Vietnam.
68
2003 Index of Economic Freedom
14 See note 3.
15 John Maynard Keynes, The Economic Consequences of the Peace (London: Macmillan and Co., Ltd., 1919), pp. 102–103.
16 The weights were generated using an exponential weighting procedure. The weights are as follows: The most
recent year received a weight of 1.0, followed by 0.36788, 0.13534, 0.04979, 0.01832, 0.00674, 0.00248, 0.00091,
0.00034, and 0.00012.
17 In his cross-country study on growth, Robert J. Barro found that relatively recent inflation had the main explanatory
power for growth. Robert J. Barro, Determinants of Economic Growth: A Cross-Country Empirical Study (Cambridge,
Mass.: MIT Press, 1997).
18 See note 3.
19 See note 3.
20 Friedrich A. Hayek, “The Use of Knowledge in Society,” in Individualism and Economic Order (Chicago: University
of Chicago Press, 1948), p. 86.
21 See note 3.
22 See note 3.
23 John Stossel, “Is America Number One?” ABC News, aired September 19, 1999.
24 See note 3.
25 Robert J. Barro, “Rule of Law, Democracy, and Economic Performance,” in Gerald P. O’ Driscoll, Jr., Kim R.
Holmes, and Melanie Kirkpatrick, 2000 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation
and Dow Jones & Company, Inc., 2000), p. 36.
26 Alejandro A. Chafuen and Eugenio Guzmán, “Economic Freedom and Corruption,” in
O’ Driscoll, Holmes, and Kirkpatrick, 2000 Index of Economic Freedom, p. 53.
27 Last year, the authors graded the black market factor using Transparency International ’s 2000 and 2001 Corruption
Perceptions Index (CPI) reports. At the time of writing the 2003 Index of Economic Freedom, the 2002 CPI report had
not been published. Therefore, the black market factor could be updated this year only for those countries that
were not covered in the 2000 and 2001 CPI reports and for which additional information was available.
28 The equation the authors estimated is as follows: black market = 5.227 -.4771*CPI. The authors then substituted
the CPI score back into the equation to arrive at a number between 1 and 5. For example, substituting Denmark’s
CPI score of 9.5 back into the equation yields a black market score of 0.695 (which rounds up to a score of 1).
29 See note 3.
Chapter 5: Explaining the Factors of the Index of Economic Freedom
69
6
The 2003 Index of Economic
Freedom: The Countries
by Ana I. Eiras and Brett D. Schaefer1
T
his chapter is a compilation of 161 countries,
each of which is graded in all 10 factors of the
Index of Economic Freedom. (This year, numerical grading was suspended for five countries—
Angola, Burundi, the Democratic Republic of
Congo, Iraq, and Sudan—that are currently in a
state of civil unrest or anarchy. Information is provided, however, even for these countries.)
Each country is given a score ranging from 1
through 5 for all 10 factors; then these scores are
averaged to get its final Index of Economic Freedom
score. Countries with a score between 1 and 2 have
the freest economies; those with a score around 3
are less free; those with a score near 4 are excessively regulated and will need significant economic
reform to achieve sustained increases in economic
growth; and those with a score of 5 are the most
economically repressed.2
In addition to these factor scores and an overall
score, each country summary includes a brief introduction describing the country’s political and
economic background, as well as the principal challenges that it currently faces, and a statistical profile with the main economic indicators. These statistics and their sources are outlined in detail below.
In each of the 10 factors on which the countries
are graded, every effort has been made to use the
same source for each country to ensure reliability
Chapter 6: The Countries
of data; when data are unavailable from the primary source, secondary sources are used and are
indicated in Chapter 5 as necessary. The information included reflects the most recent data available at the time of publication.
GUIDE TO STATISTICS
The data in each country’s statistical profile, in
most cases and unless otherwise indicated, are as
of 2000 and in constant 1995 U.S. dollars. At the
time of producing the 2003 Index, data for 2001 were
available for only 42 countries: Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China,
Croatia, the Czech Republic, Denmark, Estonia,
Finland, France, Germany, Greece, Hong Kong,
Hungary, Iceland, Ireland, Israel, Italy, Japan,
Lithuania, Luxembourg, Mexico, the Netherlands,
New Zealand, Norway, Poland, Portugal,
Singapore, the Slovak Republic, Slovenia, the Republic of Korea, Spain, Sweden, Switzerland, Taiwan, Turkey, the United Kingdom, and the United
States. The few cases in which no data were available for
the country’s statistics are indicated by “n/a.”
The sources for each country’s statistical profile
include the following:
Population: 2000 estimate from World Bank,
World Development Indicators 2002 on-line. For some
countries, the source is the country’s statistical
agency and/or central bank.
71
Total area: Both land and sea area, expressed in
square kilometers. From U.S. Central Intelligence
Agency, The World Factbook 2001.
GDP: Gross domestic product—total production
of goods and services—expressed in constant 1995
U.S. dollars. The primary source for GDP data is
World Bank, World Development Indicators 2002 online. Other sources include Economist Intelligence
Unit Limited, Country Reports, 2002, and Country Profiles, 2001–2002; the country’s statistical agency; and
the country’s central bank. 2001 GDP estimates
were calculated by applying the 2001 GDP growth
rate to real 2000 GDP data in constant 1995 U.S.
dollars. The data used in this calculation are from
Organisation for Economic Co-operation and Development (OECD), Main Economic Indicators, June
2002; Economist Intelligence Unit Limited, Country
Reports, 2002; International Monetary Fund, World
Economic Outlook; the country’s statistical agency;
and the country’s central bank.
GDP growth rate: Annual percentage growth
rate of GDP at market prices based on constant
local currency. The primary sources for 2000 data
are World Bank, World Development Indicators 2002
on-line, and Economist Intelligence Unit Limited,
Country Reports, 2002. 2001 growth rate data are
from Organisation for Economic Co-operation and
Development (OECD), Main Economic Indicators; the
country’s statistical agency; the country’s central
bank; and International Monetary Fund, World Economic Outlook.
GDP per capita: Gross domestic product expressed in constant 1995 U.S. dollars divided by total
population. The sources for these data are World
Bank, World Development Indicators 2002 on-line;
Economist Intelligence Unit Limited, Country Reports, 2002; Organisation for Economic Co-operation and Development (OECD), Main Economic Indicators, June 2002; and the country’s statistical
agency.
Major Exports: The country’s six to eight principal export products. Data for major exports are
from U.S. Central Intelligence Agency, The World
Factbook 2001, and Economist Intelligence Unit Limited, Country Reports, 2002, and Country Profiles, 2001–
2002.
Exports of goods and services: The value of all
goods and other market services. Included is the
value of merchandise, freight, insurance, travel, and
72
other non-factor services. Factor and property income, such as investment income, interest, and labor income, is excluded. Data are in constant 1995
U.S. dollars. 2000 data are from World Bank, World
Development Indicators 2002 on-line, and Economist
Intelligence Unit Limited, Country Reports, 2002, and
Country Profiles, 2001–2002. Other sources include
the country’s statistical agency and ministry of
economy and trade. 2001 exports data were calculated by applying the real growth rate (year-onyear percentage change based on constant price) to
2000 exports data in constant 1995 U.S. dollars. Data
necessary for this calculation are from Economist
Intelligence Unit Limited, Country Reports, 2002;
World Bank, World Development Indicators 2002 online; and the country’s statistical agency.
Major export trading partners: Main destination
of exports from each country and percentage of
overall exports. From Economist Intelligence Unit,
Country Reports, 2002, and Country Profiles, 2001–2002.
Major imports: The country’s six to eight principal import products. From U.S. Central Intelligence Agency, The World Factbook 2001, and Economist Intelligence Unit Limited, Country Reports,
2002, and Country Profiles, 2001–2002.
Imports of goods and services: The value of all
goods and other market services. Included is the
value of merchandise, freight, insurance, travel, and
other non-factor services. Factor and property income, such as investment income, interest, and labor income, is excluded. Data are in constant 1995
U.S. dollars. The primary source is World Bank,
World Development Indicators 2002 on-line. Other
sources include Economist Intelligence Unit Limited, Country Reports, 2002, and Country Profiles, 2001–
2002; the country’s statistical agency; and the
country’s ministry of economy and trade. 2001 imports data were calculated by applying the real
growth rate (year-on-year percentage change based
on constant price) to 2000 imports data in constant
1995 U.S. dollars. Data necessary to carry out this
calculation are from Economist Intelligence Unit
Limited, Country Reports, 2002; World Bank, World
Development Indicators 2002 on-line; and the country’s
statistical agency.
Major import trading partners: Principal countries from which imports originate and percentage
of overall imports. From Economist Intelligence
Unit, Country Reports, 2002, and Country Profiles,
2001–2002.
2003 Index of Economic Freedom
Foreign direct investment (net): Net inflows of
investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that
of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and
short-term capital as shown in the balance of payments. This series indicates total net; that is, net
FDI in the reporting economy less net FDI by the
reporting economy. Data are in constant 1995 U.S.
dollars. The 1995 GDP deflator was used to convert net FDI from current U.S. dollars to constant
1995 dollars. Data for 2000 are from World Bank,
World Development Indicators 2002 on-line; United Nations Conference on Trade and Development
(UNCTAD), World Investment Report 2001; United
Nations Economic Commission for Latin America
and the Caribbean (ECLAC), Statistical Yearbook for
Latin America and the Caribbean 2001; the country’s
statistical agency; and the country’s central bank.
Data for 2001 are from the country’s central bank;
the country’s statistical agency; and Organisation
for Economic Co-operation and Development
(OECD), Trends and Recent Developments in Foreign
Direct Investment.
TERMS USED IN IMPORT–EXPORT
STATISTICS
CARICOM: Caribbean Community and Common Market, consisting of the Bahamas, Barbados,
Belize, Guyana, Haiti, Jamaica, Suriname, Trinidad
and Tobago, and the Windward and Leeward Islands in the Eastern Caribbean.
CIS: Commonwealth of Independent States.
EU: European Union, consisting of Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom.
SACU: Southern African Customs Union, consisting of Botswana, Lesotho, Namibia, South Africa, and Swaziland.
Notes:
1
With the gratefully acknowledged assistance of Kimberly Thompson and Anthony Kim.
2
For a detailed explanation of the scoring procedure used in this year’s Index, see Chapter 5, supra.
Chapter 6: The Countries
73
74
2003 Index of Economic Freedom
ALBANIA
Tirana
Trade Policy
Fiscal Burden
5
3.5
Government Intervention 3
Monetary Policy
2
Rank:
104
Score:
3.35
Category: Mostly Unfree
Foreign Investment 2
Banking and Finance 3
The rule of law in Albania has been held back by political instability, the pyramid
collapse of 1997, the Kosovo crisis of 1999, and endemic corruption of government institutions and the electoral process. Levels of training and pay for members of the judiciary are low, and judicial corruption remains a significant problem. Investment is also deterred by a crumbling infrastructure. For example, the
1999–2001 drought exacerbated a crisis in the state-owned electricity company,
which depends on hydroelectricity for its power. In 1999, only 58 percent of customers were paying for electricity; by late 2001, Tirana was lit for only around four
hours a day, with the government subsidizing even this. Privatization of the electricity sector has been deferred. These shortcomings explain why nearly half of
Albanians live on less than $2 per capita per day. Not surprisingly, up to 25 percent
of Albanians of working age have left the country since the demise of communism. Despite real efforts to combat crime, the traffic in drugs, weapons, and people
will continue to flourish so long as the government is unable to control Albania’s
borders, especially in the north of the country. Albania’s fiscal burden of government score is 0.5 point better this year; however, its trade policy score is 1 point
worse. As a result, Albania’s overall score is 0.05 point worse this year.
TRADE POLICY
Score: 5–Worse (very high level of protectionism)
According to the World Bank, Albania’s weighted average tariff rate in 1997 (the
most recent year for which World Bank data are available) was 14.4 percent, up
from the 10.77 percent reported in the 2002 Index. As a result, Albania’s trade policy
score is 1 point worse this year. Non-tariff barriers take the form of corruption in
the customs clearance process. According to the Center for the Study of Democracy, “In Albania…customs departments were seen as the most corrupt institutions.”
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 2–Better
(low tax rates)
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 3.5–Better (high cost of government)
The International Monetary Fund reports that Albania’s top income tax rate is 25
percent, down from the 30 percent reported in the 2002 Index; the marginal rate
for the average taxpayer is 5 percent. Both the IMF and Ernst & Young report that
the top corporate tax rate is 25 percent, down from the 30 percent reported in the
2002 Index. In 2000, government expenditures equaled 31.4 percent of GDP. Based
on its lower top income tax rate and lower corporate tax rate, Albania’s fiscal burden of government score is 0.5 point better this year.
Chapter 6: The Countries
Wages and Prices 2
Property Rights
4
Regulation
Black Market
4
5
Scores for Prior Years:
2002: 3.30
1999: 3.60
1996: 3.70
2001: 3.50
1998: 3.70
1995: 3.60
2000: 3.70
1997: 3.60
2000 Data
(in constant 1995 US dollars)
Population: 3,411,000
Total area: 28,748 sq. km
GDP: $3.1 billion
GDP growth rate: 7.8%
GDP per capita: $899
Major exports: textiles and
footwear, asphalt, metals and
metallic ores, crude oil, vegetables,
fruits, tobacco
Exports of goods and services:
$395 million
Major export trading partners:
Italy 71.2%, Greece 12.1%, Germany
6.8%, Yugoslavia 2.8%, Denmark 1.1%
Major imports: machinery and
equipment, foodstuffs, chemicals
Imports of goods and services:
$1.2 billion
Major import trading partners:
Italy 36.2%, Greece 27.6%, Germany
5.5%, Turkey 5.4%, Bulgaria 2.4%
Foreign direct investment (net):
$79 million
75
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Stable (moderate level)
The World Bank reports that the government consumed 10.9
percent of GDP in 2000. In the same year, according to the
International Monetary Fund, Albania received 13.7 percent
of its revenues from state-owned enterprises and government
ownership of property.
MONETARY POLICY
Score: 2–Stable (low level of inflation)
From 1992 to 2001, Albania’s weighted average annual rate of
inflation was 3.15 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Stable (low barriers)
Foreign and domestic firms are treated equally under the law
in Albania and are guaranteed safety from expropriation or
nationalization. There is no approval process, and no sectors
are closed to foreign investment. Albania controls foreign purchase of land. Political instability continues to discourage foreign investment and undermine the implementation of reform. Problems such as crime, corruption, and a thriving informal market continue to present impediments to foreign
investment. The International Monetary Fund reports that
both residents and non-residents are permitted to hold foreign exchange accounts. Payments and transfers exceeding a
specified amount require supporting documentation but otherwise face no restrictions. The Bank of Albania must approve
the purchase of capital and money market instruments, outward direct investment, most credit operations, and the purchase of real estate abroad by residents. The Albanian Securities Commission regulates transactions in these instruments.
cation, railway transport, and electricity through subsidies. Albania has a minimum wage for all workers over 16 years old.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
Albania’s legal system does not protect private property sufficiently. According to the U.S. Department of State, “The Constitution provides for an independent judiciary; however, the
judiciary remained hampered by a lack of resources and inexperienced and untrained personnel and was subject to political pressure, intimidation and widespread corruption that
weakened its ability to function independently and efficiently.”
REGULATION
Score: 4–Stable (high level)
Albania has made some progress toward streamlining its bureaucracy, but the bureaucracy remains both large and inefficient. According to the U.S. Department of State, “The regulatory system is far from transparent. Businesses have difficulty obtaining copies of laws and regulations. Laws and regulations are sometimes inconsistent, leading to unreliability of
interpretation. Corruption also means that laws and regulations are applied inconsistently.”
BLACK MARKET
Score: 5–Stable (very high level of activity)
According to the U.S. Department of State, “A significant portion of economic activity remains outside formal legal structures.” Smuggling of consumer products, including cars and
pharmaceuticals, is common, as are drug trafficking, arms
dealing, and illegal immigration.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
Albania’s banking sector is rudimentary, and most transactions
are still carried out in cash. According to the U.S. Department
of State, “Banks do not yet play a central role in the Albanian
economy, as most businesses do not rely on banks for financing. Business start-ups are funded by cash (often foreign remittances) supplied by family, friends and partners.” There are 13
commercial banks in Albania, of which 10 were foreign-owned
at the end of 2001. The share of banking assets held by foreign
entities increased sharply from 60 percent in 1999 to 84 percent
in 2001, according to the Economist Intelligence Unit. The government privatized the second-largest bank, the National Commercial Bank, in June 2000. Plans to privatize the Savings Bank
of Albania (the country’s largest bank in terms of deposits and
its last remaining state-owned bank) have been delayed by a
political crisis.
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
Most prices have been liberalized. The Economist Intelligence
Unit reports that the government affects prices for water, edu-
76
2003 Index of Economic Freedom
ALGERIA
Algiers
Rank:
94
Score:
3.25
Category: Mostly Unfree
Trade Policy
Fiscal Burden
5
3.5
Government Intervention 3
Monetary Policy
2
Foreign Investment 2
Banking and Finance 4
Wages and Prices 3
Property Rights
4
Regulation
Black Market
Algeria has been a one-party socialist state almost exclusively since gaining its independence from France in 1962, and its economy has paid a heavy price for decades of state
domination. Years of economic mismanagement by the ruling National Liberation Front
(FLN) and low oil prices in the late 1980s led to anti-government riots in 1988. In 1989, the
FLN tried to open the political system by amending the constitution and calling for multiparty elections, but the elections were cancelled in January 1992 when it became clear
that the radical Islamic Salvation Front (FIS) would take control. The FIS went underground and launched a brutal civil war that has claimed the lives of more than 100,000
Algerians since 1992. Although Islamic terrorism continues, the intensity of the civil war
has declined since its peak in the mid-1990s. President Abdelaziz Bouteflika, who came to
power in April 1999 in elections boycotted by a number of opposition parties, negotiated
a peace accord with the FIS. His government is pressing for liberalization and privatization
in the oil and gas sectors but faces strong opposition from high-level army leaders who
have acquired a vested interest in the current system. Algeria’s fiscal burden of government score is 0.5 point better this year, and its government intervention score is 1 point
better; however, its trade policy, monetary policy, and banking and finance scores are all 1
point worse. As a result, Algeria’s overall score is 0.15 point worse this year.
Scores for Prior Years:
TRADE POLICY
Major export trading partners:
Italy 21.6%, France 11.7%, US 11.7%,
Spain 9.9%
Score: 5–Worse (very high level of protectionism)
According to the World Bank, Algeria’s weighted average tariff rate in 1998 (the
most recent year for which World Bank data are available) was 17.3 percent, up
from the 12.46 percent reported in the 2002 Index. As a result, Algeria’s trade policy
score is 1 point worse this year. Non-tariff barriers take the form of bureaucratic
customs clearance procedures. According to the U.S. Department of State, “The
importation of some items, essentially luxury goods, continues to be restricted to
certain importers owing to the state-owned banks’ unwillingness to provide to all
importers the documents that are necessary to clear such items through customs.”
FISCAL BURDEN OF GOVERNMENT
2002: 3.10
1999: 3.50
1996: 3.50
2001: 3.20
1998: 3.45
1995: 3.50
2000: 3.45
1997: 3.50
2000 Data
(in constant 1995 US dollars)
Population: 30,399,250
Total area: 2,381,740 sq. km
GDP: $48.8 billion
GDP growth rate: 2.4%
GDP per capita: $1,606
Major exports: petroleum, natural
gas, and petroleum products
Exports of goods and services:
$14.9 billion
Major imports: capital goods, food
and beverages, consumer goods
Imports of goods and services:
$13.3 billion
Major import trading partners:
France 32.0%, Italy 9.0%, Germany
6.4%, Spain 5.7%
Foreign direct investment (net):
$384 million
Score—Income and Corporate Taxation: 3–Stable
(moderate tax rates)
Score—Government Expenditures: 4–Better
(high level of government expenditure)
Final Score: 3.5–Better (high cost of government)
According to the International Monetary Fund, Algeria’s top income tax rate is 50
percent; the marginal rate for the average taxpayer is 10 percent. The top corporate tax rate is 30 percent. In 2000, government expenditures equaled 29.4 percent
of GDP, down from the 34.7 percent reported in the 2002 Index. As a result, Algeria’s
fiscal burden of government score is 0.5 point better this year.
Chapter 6: The Countries
3
3
77
GOVERNMENT INTERVENTION IN THE ECONOMY
WAGES AND PRICES
Score: 3–Better (moderate level)
The World Bank reports that the government consumed 14.1
percent of GDP in 2000. In the same year, according to the
Economist Intelligence Unit, Algeria received 76.8 percent of
its total revenues solely from state-owned enterprises in the
hydrocarbon sector. The Economist Intelligence Unit reports
that the “hydrocarbons sector dominates the Algerian
economy, accounting for 40 percent of GDP, 96 percent of
total merchandise exports and 77 percent of total fiscal revenue.” Data from the Economist Intelligence Unit provide a
more accurate estimate of the extent and impact of stateowned enterprises in Algeria. As a result, Algeria’s government
intervention score is 1 point better this year.
Score: 3–Stable (moderate level of intervention)
Algeria has removed some price controls and subsidies. However, the U.S. Department of State reports that the government still subsidizes some basic commodities, public utilities,
and public transportation. The price of petroleum is controlled
in the domestic market. Algeria maintains a minimum wage.
MONETARY POLICY
Score: 2–Worse (low level of inflation)
From 1992 to 2001, Algeria’s weighted average annual rate of
inflation was 3.37 percent, up from the 2.12 percent from 1991
to 2000 reported in the 2002 Index. As a result, Algeria’s monetary policy score is 1 point worse this year.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Stable (low barriers)
Algeria’s 1993 investment code does not distinguish between
foreign and domestic investment. Liberalization of oil and
natural gas exploration has led to greater foreign investment;
some 25 foreign companies had investments worth $2.5 billion in Algeria in 2000. The state monopoly of existing oil and
gas pipelines constrains competition. The International Monetary Fund reports that both residents and non-residents may
hold foreign exchange accounts. Payments and transfers are
subject to various limits, approvals, surrender requirements,
and restrictions. According to the IMF, “Capital transfers to
any destination abroad are subject to individual approval by
the Bank of Algeria.” Purchase, sale, or issue of capital market securities is permitted through an authorized intermediary.
BANKING AND FINANCE
Score: 4–Worse (high level of restrictions)
Société Générale and Natexis of France, the Arab Banking
Corporation, EFG–Hermes of Egypt, and Citibank of the
United States have subsidiaries or branches in Algeria. A new
private bank, Compagnie Algérienne de Banque, opened its
first branch in 2001. According to the Economist Intelligence
Unit, however, “the banking sector retains a number of deeprooted structural problems. The IMF described the financial
condition of the six state-owned banks—whose assets exceed
90% of total—as a ‘source of concern’, with low profitability,
uncertain solvency, and inadequate efficiency.” Based on this
evidence of state dominance of the banking sector, Algeria’s
banking score is 1 point worse this year.
78
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
Government expropriation is unlikely in Algeria. The constitution provides for an independent judiciary; according to the
U.S. Department of State, however, “The Government does
not always respect the independence of the judiciary….
[E]xecutive branch decrees restrict some of the judiciary’s
authority. The authorities do not always respect defendants’
rights to due process.” Algeria also suffers from civil unrest,
and the police are not able to provide adequate protection.
REGULATION
Score: 3–Stable (moderate level)
Algerian workers cannot be dismissed easily; the norm is employment for life, and this imposes a considerable burden on
foreign companies and the private sector. Setting up a business is fairly straightforward, but business activities are subject to red tape. “Despite the free-market reforms,” says the
U.S. Department of State, “some Algerian commercial laws
and regulations can be complex.” In addition, the government
closely regulates all investment in the hydrocarbons sector.
The Economist Intelligence Unit reports that “up to now
Sonatrach [the main state-owned hydrocarbons company] has
been operating both as a regulator, overseeing the operations
of the sector, including those of foreign firms, and as a firm
actively pursuing its own development and extraction opportunities. The conflicting incentives created by this structure
have been a major factor behind delays in [for example] bidding processes.”
BLACK MARKET
Score: 3–Stable (moderate level of activity)
According to a November 1998 Economist Intelligence Unit
report, “It is estimated that the ‘black’ economy accounts for
some 37.7% of non-agricultural employment and 20% of
household income. The figure of 17.4% of non-agricultural,
non-hydrocarbon GDP probably underestimates the influence
of the informal economy, which acts as an important safety
net for many Algerians.” This problem continues today.
2003 Index of Economic Freedom
ANGOLA
Luanda
Rank:
Score:
Category:
Trade Policy
Fiscal Burden
n/a
n/a
Government Intervention n/a
Monetary Policy
n/a
Foreign Investment n/a
Banking and Finance n/a
The death of Jonas Savimbi, leader of the insurgent National Union for the Total
Independence of Angola (UNITA), in February 2002 presented an opportunity for
UNITA and the ruling Popular Movement for the Liberation of Angola (MPLA) to
negotiate the fourth peace agreement since the beginning of the civil war in 1975.
While the prospects for peace look more promising than at any time in recent
decades, however, many serious problems, including the difficult task of demobilizing large numbers of armed men on both sides of the conflict, still need to be
resolved. Post-conflict priorities include combating extensive corruption and mismanagement, creating an effective legal system and enforcing the law, and establishing a representative government that incorporates UNITA supporters. Angola
faces enormous economic problems. From 1991 to 2000, compound growth in
GDP averaged only 0.7 percent and per capita GDP fell from $627 to $506 (in constant 1995 U.S. dollars), despite extensive oil and diamond resources. The level of
opposition from powerful vested interests, particularly government officials who
profit from the currently opaque system, is such that the government’s poor record
of fiscal and monetary prudence and transparency is unlikely to change in the
short term. The International Monetary Fund estimates that over 50 percent of
government spending occurs through parallel undisclosed accounts from oil revenue. Because the civil war continued through most of the grading period considered by the 2003 Index, economic data are unreliable and Angola remains suspended.
If the peace process proves successful, Angola should be eligible for grading in the
2004 Index.
TRADE POLICY
Score: Not graded
Angola is liberalizing its trade regime. According to the Economist Intelligence
Unit, “Duties on basic foodstuffs have been reduced to 2–5% and those on consumer goods to 10–30% (compared with previous rates as high as 80%), and the
number of customs duty bands has been cut from 40 to six….” According to Xinhua
News Agency, “The British company Crowns Agents, one of the Angolan partners
in the customs service, has been operating in Angola for over a year in charge of
customs administrative works, and is currently involved in professional training of
Angolan customs officers.” This new customs management should help to increase
the efficiency in Angola’s customs.
Chapter 6: The Countries
Suspended
n/a
n/a
Wages and Prices n/a
Property Rights
n/a
Regulation
n/a
Black Market n/a
Scores for Prior Years:
2002: n/a
1999: 4.50
1996: 4.40
2001: n/a
1998: 4.40
1995: 4.30
2000: 4.50
1997: 4.40
2000 Data
(in constant 1995 US dollars)
Population: 13,134,000
Total area: 1,246,700 sq. km
GDP: $6.6 billion
GDP growth rate: 2.1%
GDP per capita: $506
Major exports: crude oil, diamonds,
refined petroleum products, gas,
coffee, fish and fish products, timber,
cotton
Exports of goods and services:
$4.8 billion
Major export trading partners:
US 49.4%, China 13.9%,
Belgium–Luxembourg 7.8%,
France 5.1%, Spain 2.6%
Major imports: machinery and
electrical equipment, vehicles and
spare parts, medicines, food, textiles
Imports of goods and services:
$7.1 billion
Major import trading partners:
Portugal 15.9%, US 10.3%, South
Africa 10.2%, France 5.6%
Foreign direct investment (net):
$1.6 million
79
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: Not
graded
Score—Government Expenditures: Not graded
Final Score: Not graded
Angola’s official top income tax rate is 15 percent; the marginal rate for the average taxpayer is 6 percent. The top corporate tax rate is 35 percent. In 2000, according to the African
Development Bank, government expenditures equaled 48.2
percent of GDP. However, these figures are very unreliable.
Decades of war have undermined the government’s ability to
enforce its edicts in the countryside, leaving the tax burden
uncertain for much of the population, and government accounts are extremely opaque and unreliable.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: Not graded
According to the World Bank, the government consumed 39.2
percent of GDP in 2000. Agence France-Presse reports that
“Angola’s government has opened the process to partially
privatize six large public companies and one hotel, in a bid to
boost domestic production, hard-hit by 26 years of civil
war….”
MONETARY POLICY
Score: Not graded
Between 1992 and 2001, Angola’s weighted average annual
rate of inflation was 224.53 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: Not graded
During the civil war, only the lucrative oil and diamond industries attracted foreign investors. Coca-Cola’s $36 million
investment in 2000 was the first significant investment in years
outside of the oil and diamond sectors. According to a 2001
report by CountryWatch.com, foreign investment is officially
welcomed in Angola and is accorded national treatment for
investment regulations, guaranteed right of repatriation, guarantees of compensation in cases of expropriation, and national
tax treatment; but opaque regulation, unreliable application
of regulations, mismanagement, corruption, and a judicial
system subject to government influence and corruption effectively dissuade most investors. The government forbids investment in the areas of defense, public order and security,
and central banking activities. There are controls on capital
and money market transactions, real estate transactions, and
personal capital movements. If the nascent peace process
holds, Angola’s foreign investment climate is likely to improve.
BANKING AND FINANCE
Score: Not graded
The decades-long conflict and pervasive mismanagement have
crippled the banking sector. Banking reforms in 1999 ended
the central bank’s monopoly on financial services, and two
80
state-owned banks were established: the Banco Commécio e
Indústria (BCI) and the Caixa de Crédito Agroecúaria e Pescas
(CAP). The nationalized savings institution, Banco Popular
de Angola, changed its name to Banco de Poupanca e Crédito
(BCP). The exchange rate and interest rates were liberalized
in 1999, according to the Angolan government in an advertising supplement in the May 22, 2002, edition of The Washington Post; the same source also announced that the government
has privatized Angola’s largest bank, the Bank of Commerce
and Industry, and the Savings and Credit Bank and intends to
liquidate the Farmers’ Bank, which has been wracked by corruption and scandal. The state affects the allocation of credit
by providing credit to small enterprises. According to the
Economist Intelligence Unit, “Foreign banks reappeared in
1992, and three Portuguese banks now have commercial banking operations in Luanda and are expanding their branches
elsewhere in the country. Three other foreign banks also have
representative offices providing specialized financing and other
services. There are two Angolan private banks as well as various foreign-exchange bureaux. Financial services remain
highly restricted.”
WAGES AND PRICES
Score: Not graded
Although Angola has made some progress in converting its
centrally planned economy to a more open market economy,
the government still sets, controls, or manipulates wage rates
and prices.
PROPERTY RIGHTS
Score: Not graded
The government has few means to protect private property,
and expropriation is likely. Corruption and bureaucratic inefficiency are pervasive.
REGULATION
Score: Not graded
Government regulations are a severe hindrance to business.
Labor regulations are particularly onerous. Corruption and
bureaucratic red tape have created an environment in which
legal businesses find it nearly impossible to operate. According to the Economist Intelligence Unit, “Official commitment
to the economic reforms agreed with the IMF is clearly slackening. The government now appears to wish to put the reform programme on hold, as it is not prepared to offer full
transparency in how it manages public finances.”
BLACK MARKET
Score: Not graded
Transparency International’s 2000 score for Angola was 1.7.
Therefore, Angola would have a black market score of 4.5 this
year if grading were not suspended.
2003 Index of Economic Freedom
ARGENTINA
Buenos
Aires
Rank:
Score:
Category:
Trade Policy
Fiscal Burden
4
3
Government Intervention 2
Monetary Policy
1
Foreign Investment 3
Banking and Finance 4
Argentina’s political and economic situation has deteriorated noticeably during
the past year. In 1989, in a period of severe hyperinflation, newly elected President
Carlos Menem implemented aggressive market reforms. He stabilized the currency,
privatized industries, and liberalized prices, sparking robust growth for most of
the 1990s; however, because he failed to deregulate the labor market and downsize
the bureaucracy, and because he allowed newly privatized utilities monopoly status, the economy remained uncompetitive. Menem also failed to address a weakness in the rule of law and increased Argentina’s trade dependence on neighboring
Brazil through the protectionist MERCOSUR customs union. When Brazil devalued its currency in January 1999, Argentina’s economy was heavily affected; when
Menem’s successor, President Fernando de la Rua, took office in December 1999, a
recession was already underway for 25 months. De la Rua failed to reverse the
recession or deal effectively with the debt, bureaucracy, and rule of law problems.
One of his first moves was a tax hike. Later, Economy Minister Domingo Cavallo
turned economic malaise into full-blown depression by increasing barriers to trade,
raising the level of international borrowing, and forcing local banks and pension
management firms to purchase poor-quality government bonds. He even reportedly violated the convertibility law by using dollar reserves to pay part of the debt.
In December 2001, having been granted extraordinary powers to implement policy,
Cavallo froze bank deposits. De la Rua resigned later that month. Under current
President Eduardo Duhalde, Argentina has defaulted on part of its debt and dissolved the convertibility law, which held the peso at par with the dollar. Prices have
gone up more than 30 percent, the payment system has collapsed, and the economy
has virtually come to a halt. According to Standard & Poor’s, hundreds of local and
foreign firms have gone bankrupt. Output and tax revenue have contracted, and
unemployment has reached more than 20 percent. Yet, despite the need for tough
reforms, the government’s main focus is on trying to obtain more funds from international financial institutions. Perhaps the clearest symbol of what ails Argentina is the government’s decision to freeze bank deposits in late 2001 and later
mandate that those frozen assets be converted into devalued pesos. That decision,
like the country’s dysfunctional judicial system and pervasive culture of corruption, is exacerbated by the oversized bureaucracy. According to the Argentine daily
La Nación, 82 percent of people living in Argentina do not trust the legal system
and therefore do not use it. Argentina appears to be reverting to the closed society
that characterized the end of the 1980s, with price controls, financial restrictions,
inflation, and rampant violation of property rights. Argentina’s government intervention score is 0.5 point better this year; however, its banking and finance score is
2 points worse, and its capital flows and foreign investment score, wages and prices
score, and property rights score are all 1 point worse. As a result, Argentina’s overall score is 0.45 point worse this year.
Chapter 6: The Countries
68
2.95
Mostly Free
Wages and Prices 2
Property Rights
4
Regulation
3.0
Black Market 3.5
Scores for Prior Years:
2002: 2.50
1999: 2.10
1996: 2.55
2001: 2.25
1998: 2.30
1995: 2.75
2000: 2.10
1997: 2.60
2001 Data (unless otherwise indicated)
(in constant 1995 US dollars)
Population: 36,027,000
Total area: 2,766,890 sq. km
GDP: $281 billion
GDP growth rate: –4.5%
GDP per capita: $7,800
Major exports: edible oils, fuels and
energy, cereals, feed, motor vehicles
Exports of goods and services:
$34.3 billion
Major export trading partners:
Brazil 26.5%, US 11.8%, Chile 10.6%,
Spain 3.5% (2000)
Major imports: machinery and
equipment, motor vehicles,
chemicals, metal manufactures,
plastics
Imports of goods and services:
$31.6 billion
Major import trading partners:
Brazil 25.1%, US 18.7%, Germany
5.0%, China 4.6% (2000)
Foreign direct investment (net):
$2.7 billion
81
TRADE POLICY
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 4–Stable (high level of protectionism)
As a member of the Southern Cone Common Market
(MERCOSUR), Argentina maintains relatively low trade barriers with Brazil, Paraguay, and Uruguay but applies a high
tariff on all goods and services coming into Argentina from
countries outside MERCOSUR. According to the Embassy of
Uruguay, MERCOSUR’s common average external tariff
(CET) rate was 13 percent in 2001. Because Argentina is a
member of MERCOSUR, its average tariff rate is the same as
MERCOSUR’s CET, but Argentina has deviated from
MERCOSUR’s CET temporarily and will not adopt it again
until December 2002. There is no available information on
Argentina’s current average tariff rate after deviating from
MERCOSUR’s CET; therefore, the CET has been used to score
Argentina’s trade policy. Argentina maintains some non-tariff
barriers, such as quotas on automobiles. According to the U.S.
Department of State, “Customs procedures are opaque and
time-consuming, thus raising the cost for importers.”
Score: 3–Worse (moderate barriers)
Argentina’s regulations and laws on foreign investment and
capital flows have been in flux as the government attempts to
restrict capital outflows and resolve its debt default in the wake
of the country’s financial crisis. Laws are irregularly enforced
and frequently changed, and actual rules are unclear. Argentina has erected significant barriers to capital flows, access to
foreign exchange, and investment. Foreign investors and their
domestic counterparts receive equal treatment, and most local companies may be wholly owned by foreign investors.
Foreign investment is prohibited only in a few sectors, including shipbuilding, fishing, border-area real estate, and nuclear
power generation. The government has replaced its currency
board system, which guaranteed free conversion between the
Argentine peso and the dollar, with a dual exchange rate system that discriminates against imports. It also has restricted
access to bank accounts through quantitative limits and frozen some accounts outright. Only the Central Bank of Argentina can authorize money transfers abroad. Based on the
level of government restrictions on capital flows and access
to foreign exchange, Argentina’s capital flows and foreign investment score is 1 point worse this year.
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3–Worse
(moderate tax rates)
Score—Government Expenditures: 3–Stable
(moderate level of government expenditure)
Final Score: 3–Stable
(moderate cost of government)
Argentina’s top income tax rate is 35 percent; the marginal
rate for the average taxpayer is 9 percent. The top corporate
tax rate is 35 percent. According to Standard and Poor’s, government expenditures equaled 27.8 percent of GDP in 2001.
Based on a clarification in methodology, Argentina’s income
and corporate taxation score is 0.5 point worse this year; however, this is not sufficient to affect its overall fiscal burden of
government score, which remains unchanged this year.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Better (low level)
Based on data from the International Monetary Fund, the government consumed 14.1 percent of GDP in 2001. In the same year, according to the IMF, Argentina received 3.62 percent of its total revenues from state-owned enterprises and government ownership of
property, down from the 4.63 percent reported in the 2002 Index. As a
result, Argentina’s government intervention score is 0.5 point better
this year.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, Argentina’s weighted average annual rate
of inflation was –0.95 percent. The inflationary impact of
Argentina’s abandonment of its currency board can be expected to affect its monetary policy score in next year’s Index.
82
BANKING AND FINANCE
Score: 4–Worse (high level of restrictions)
Argentina’s banking system has been devastated by the 2001
economic crisis, government policies freezing bank deposits,
frequent rulings by judges limiting access to assets, increasing
default on loans, and forced conversion of foreign exchange
at confiscatory rates. The country has defaulted on most of
its debt obligations. The Congress rejected a proposal that bank
deposits be forcibly converted into low-interest government
bonds, but access to bank deposits remains frozen. The
Duhalde government has attempted by executive decree to
prevent depositors from accessing their accounts, but some
courts have declared this action unconstitutional, leaving the
rules for withdrawing bank deposits unclear. The government
has been printing pesos for subsidized government loans to
support insolvent local and provincial banks, and this has led
to rapidly accelerating inflation. The national and provincial
governments are paying some of their bills with quasi-money:
bonds that look like currency and can be used for everyday
transactions. Foreign banks account for seven of the 10 largest banks in Argentina, but many may have to close as their
parent banks refuse to transfer additional money to them because of the uncertainty surrounding the government’s policy
toward banking assets and deposits. Canada’s Scotiabank and
France’s Crédit Agricole have already refused to re-capitalize
their Argentine branches and effectively have closed their
doors. Overall, the banking system is essentially dysfunctional,
and recent rules severely constrict banking operations. As a
result, Argentina’s banking and finance score is 2 points worse
this year.
2003 Index of Economic Freedom
WAGES AND PRICES
Score: 2–Worse (low level of intervention)
Despite the current crisis and the recent spike in inflation, reports the Economist Intelligence Unit, “The government is
now saying that it will respect pricing freedom and that there
will be no official interference in the markets…. [O]ne of the
first decisions of the economy minister, Roberto Lavagna, after taking over two weeks ago was to fire the chief of the
consumer defence office at his ministry, Pablo Challú, who
wanted to introduce formal price controls to stem inflation.”
However, the government has frozen natural gas and electricity rates, and reports in the Financial Times indicate that it will
not consider price increases until 2003. These price controls
apply to private companies operating privatized public services. The government mandates a minimum wage. Based on
the evidence of new price controls on electricity and natural
gas, Argentina’s wages and prices score is 1 point worse this
year.
PROPERTY RIGHTS
Score: 4–Worse (low level of protection)
Private property is not secure in Argentina, and application
of the law is uneven. In December 2001, when Argentina went
into a crisis, the government violated property rights by denying depositors access to their own money. Although Argentines have challenged the government’s decision in the courts,
some have successfully accessed their money with a court order while others have not. After the crisis, the government
also challenged the validity of the terms of the contracts signed
with most utility providers by prohibiting them to adjust utility prices as established in those contracts. Corruption in the
judiciary is extensive. According the The Wall Street Journal,
politicians are “blind” to the legal system, and “Every day [business] deals collapse [because] the legal risk is high.” In December 2001, the daily La Nación quoted a Peronist Congressman as calming a nervous colleague with the words, “Don’t
worry. With the exception of the law of gravity, we can modify
anything.” According to the U.S. Department of State, “Inefficiencies in the Argentine judicial system slow efforts to stem
corruption…. Since Argentine laws do not provide for pleabargaining, many corruption charges are difficult to prosecute.
As a result, convictions are rare.” One example is the April
2000 Senate bribery scandal in which 11 Senators were accused
of accepting bribes to pass the labor reform law—a situation
that has yet to be resolved. Based on the increasing evidence
of insufficient protection of property rights, Argentina’s property rights score is 1 point worse this year.
sage of a labor flexibility law in April 2000. Such rigidity is
reflected, in part, in rising unemployment. According to a
Deloitte & Touche report, “labor costs in Argentina continue
being relatively high…affecting efficiency, competitiveness and
the unemployment level.” The report includes the following
examples of burdensome labor regulations: mandatory overtime payment; mandatory severance; mandatory holidays
granted between October 1 and April 30; mandatory written
notification of dismissal or cash compensation; mandatory annual bonus (aguinaldo); mandatory social security contributions; and limited night work and overtime. In addition, reports the U.S. Department of State, “Government corruption
[is a] common complaint…. [B]usinesses have identified corruption in Argentina as a significant problem for trade and
investment. Procurement, regulatory systems, tax collection
and health care administration are problem areas…. [T]he government has regulations against bribery of government officials, but enforcement is uneven.”
BLACK MARKET
Score: 3.5–Stable (high level of activity)
Transparency International’s 2001 score for Argentina is 3.5.
Therefore, Argentina’s black market score is 3.5 this year. Since
the collapse of Argentina’s payment system, barter activity
has become widespread. According to Time, “Some municipal governments, including the town of Gonzales Chaves in
Buenos Aires province, are accepting eggs and chickens as tax
payments, using them to feed poor families.”
REGULATION
Score: 3–Stable (moderate level)
Existing regulations are relatively straightforward and in general are applied uniformly, but they also can be burdensome.
According to the U.S. Department of State, “Businesses in
Argentina—foreign and domestic alike—still face problems
involving inconsistent application of regulations, fraud and
corruption.” The labor market remains rigid despite the pas-
Chapter 6: The Countries
83
84
2003 Index of Economic Freedom
ARMENIA
Yerevan
Trade Policy
Fiscal Burden
1
2.5
Government Intervention 3
Monetary Policy
2
Foreign Investment 2
Banking and Finance 2
Armenia’s economic growth has been strong since independence despite a lack of
political stability, ongoing tensions with Azerbaijan and Turkey, and failure to reduce
corruption and restructure the energy sector. Since the October 1999 assassinations
of Prime Minister Vazgen Sarkisian and Parliament Speaker Karen Demirchian, there
have been three prime ministers and five government reshufflings. The agricultural
sector accounts for one-third of GDP, and a strong harvest in 2001 is seen as the
impetus for recent growth. Nevertheless, agriculture continues to depend largely on
assistance from the Food and Agriculture Organization and the World Bank. Armenia’s
trade policies are among the most free trade–oriented in the Commonwealth of Independent States. In December 2001, Russia—Armenia’s largest bilateral creditor,
accounting for 11 percent of the country’s total debt—signed an agreement restructuring this debt in a debt-to-equity swap. Armenia’s accession to the Council of Europe in 2001 and the World Trade Organization in 2002 represent significant steps
toward its integration into the global and European economic systems. Armenia’s
wages and prices score is 1 point worse this year; however, its fiscal burden of government score is 0.5 point better, and its monetary policy score is 1 point better. As a
result, Armenia’s overall score is 0.05 point better this year.
TRADE POLICY
Score: 1–Stable (very low level of protectionism)
In 2001, based on data from Armenia’s central bank, Armenia’s average tariff rate
was 1.9 percent (based on import duties as a percentage of total imports). The U.S.
Department of State reports that most imports are free of prohibitions, quotas, or
licensing, but the government requires authorization for the importation of some
products, including weapons, explosives, and medicines.
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 1.5–Better
(low tax rates)
Score—Government Expenditures: 3–Better
(moderate level of government expenditure)
Final Score: 2.5–Better (moderate cost of government)
The International Monetary Fund reports that Armenia’s top income tax rate is 20
percent; the marginal rate for the average taxpayer is 10 percent. The top corporate tax rate is 20 percent. In 2001, based on data from the Economist Intelligence
Unit, government expenditures equaled 23 percent of GDP, down from the 25.9
percent reported in the 2002 Index. Based on a decrease in the level of government
expenditure and a clarification in methodology that resulted in a lower income
and corporate taxation score, Armenia’s overall fiscal burden of government score
is 0.5 point better this year.
Chapter 6: The Countries
Rank:
Score:
Category:
44
2.65
Mostly Free
Wages and Prices 3
Property Rights
3
Regulation
Black Market
4
4
Scores for Prior Years:
2002: 2.70
1999: 3.45
1996: 3.75
2001: 2.95
1998: 3.50
1995: n/a
2000: 3.10
1997: 3.50
2000 Data (unless otherwise indicated)
(in constant 1995 US dollars)
Population: 3,804,200
Total area: 29,800 sq. km
GDP: $4.1 billion (2001)
GDP growth rate: 9.6% (2001)
GDP per capita: $976
Major exports: diamonds, scrap
metal, machinery and equipment,
brandy, copper ore
Exports of goods and services:
$899 million
Major export trading partners:
Belgium 25.2%, Russia 15.0%,
US 12.7%, Iran 9.3%
Major imports: natural gas,
petroleum, tobacco products,
foodstuffs, diamonds
Imports of goods and services:
$2 billion
Major import trading partners:
Russia 14.9%, US 11.6%, Belgium
9.5%, Iran 9.4%
Foreign direct investment (net):
$114.5 million
85
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Stable (moderate level)
The World Bank reports that the government consumed 12 percent of GDP in 2000. In 2001, based on data from the Ministry of
Finance, Armenia received 0.31 percent of its total revenues from
state-owned enterprises and government ownership of property.
However, data for revenues from state-owned enterprises may
underestimate the level of state involvement in the economy. The
government controls some key industries. “In 1999–2000,” reports the Economist Intelligence Unit, “the privatisation process
slowed…. The privatisation of the large industrial plants has been
difficult, partly because of populist objections to the sale of what
are regarded as national institutions.” Based on the evidence of
large state-owned enterprises, 1 point has been added to Armenia’s
government intervention score.
MONETARY POLICY
Score: 2–Better (low level of inflation)
Armenia reduced inflation from 4,964 percent in 1994 to 3.1 percent in 2001. Between 1992 and 2001, the weighted average annual rate of inflation was 5.94 percent, down from the 10.82 percent between 1992 and 2000 reported in the 2002 Index. As a result, Armenia’s monetary policy score is 1 point better this year.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Stable (low barriers)
Armenia offers equal official treatment to foreign investors, who
have the same right to establish businesses as native Armenians
in most sectors of the economy. Unless specifically authorized,
foreign investment is not allowed in consumer co-operatives, collective farms, government enterprises, and enterprises of strategic significance. The government continues to restrict ownership of land by foreigners, although they may lease it. Privatization
is proceeding and is open to foreigners. The privatization process, once clouded by lack of transparency, has become somewhat less opaque. Other factors such as political and regional instability and corruption, despite some improvement, are what
really deter foreign investors. According to the International
Monetary Fund, Armenia has no restrictions or controls on the
holding of foreign exchange accounts, invisible transactions, current transfers, repatriation of profits, or outward and inward direct investments by either residents or non-residents.
BANKING AND FINANCE
Score: 2–Stable (low level of restrictions)
The central bank adopted a reform and consolidation program in
1994 after several banks had collapsed. Armenia’s banking system
is improving as supervision increases, regulation becomes more
efficient, and minimum capital requirements are enforced. The
Economist Intelligence Unit reports that all banks now adhere to
international accounting standards; under the revised standards,
several banks were closed, and the number of banks fell from 58 in
1994 to 31 at the end of 2000. Consolidation has left five banks in
control of over 70 percent of total banking capital. Foreign banks
account for 40 percent of banking capital. The Ministry of Finance
and Economy, which regulates the insurance industry, allows the
86
presence of foreign insurance companies. The government’s only
direct involvement in the banking sector, according to the July 2001
“Armenia: 2002 Investment Climate Statement” of the U.S. Embassy in Armenia, is its 100 percent ownership of the Armenian
Savings Bank and 28 percent ownership of Ardshinbank.
WAGES AND PRICES
Score: 3–Worse (moderate level of intervention)
According to the U.S. Department of State, “The state continues
to control prices for utilities and public transportation…. From
time to time, the government conducts rationed sales of basic
foods and other consumables (sugar, powdered milk, matches,
soap) to the most needy groups at prices much lower than market prices.” In addition, “The Armenian Customs Department is
authorized to control export agreements for certain products to
ensure that they are not exported from Armenia at prices lower
than minimum export prices set by the Ministry of Finance.” In
January 2002, the Armenian State Repository set new prices
(which are used to calculate the tax on exploitation of natural
resources) for nonferrous, rare, and precious metals. The government sets a minimum wage by decree. Based on new evidence of price controls, Armenia’s wages and prices score is 1
point worse this year.
PROPERTY RIGHTS
Score: 3–Stable (moderate level of protection)
Private property is guaranteed by law, but neither legal enforcement nor the judicial system provides adequate protection. According to the U.S. Department of State, “The Constitution provides for an independent judiciary; however, in practice, the courts
are subject to pressure from the executive branch and corruption.” The same source also notes that, “Although Armenian
courts are still subject to political pressure from both the executive and legislative branches, they are becoming increasingly independent. The Ministry of Justice is gradually limiting its involvement in civil cases.”
REGULATION
Score: 4–Stable (high level)
A corrupt bureaucracy often applies regulations haphazardly, and
political strife hampers the progress of any reforms. The U.S. Department of State reports that “bribery is widespread and is the
most common form of corruption, especially in the areas of government procurement, all types of transfers and approvals, and
such business-related services as company registration, licensing,
and land or space allocation.” In addition, “bureaucratic procedures
can be burdensome and time consuming when an investor negotiates a contract with the Armenian government, as the contract
may require approval by several ministries.” In 1998 and 1999, the
government adopted new legislation to penalize corruption, but
no significant progress has been made.
BLACK MARKET
Score: 4–Stable (high level of activity)
Transparency International’s 2000 score for Armenia was 2.5.
Therefore, Armenia’s black market score is 4 this year.
2003 Index of Economic Freedom
AUSTRALIA
Rank:
Score:
Category:
Canberra
Trade Policy
Fiscal Burden
2
3.5
Government Intervention 2
Monetary Policy
2
Foreign Investment 2
Banking and Finance 1
Australia continues on the course of reform. In 1983, the government began to
shed its traditional protectionist practices by deregulating financial markets, removing substantial trade barriers, and privatizing many state-owned enterprises;
today, it continues to open its borders to trade and to seek bilateral free trade agreements. Industries still protected by high tariffs include automobiles, textiles, and
footwear. Among the other challenges in trading with Australia are new labeling
requirements for foods that are produced using biotechnology. By the end of 2002,
a bilateral free trade agreement will likely be completed with Singapore and another may be completed with Thailand; the government is also seeking a similar
agreement with the United States. Australia remains open to foreign investment,
with the United Kingdom and the United States accounting for 69 percent of all
foreign ownership, according to a report by the Australian Bureau of Statistics.
The U.S. Department of State notes that “special regulations apply to investments
in the media sector, urban real estate or land, and civil aviation.” The Liberal–
National federal government won the November 2001 election, increasing its share
of the vote and its majority in the House of Representatives, and Prime Minister
John Howard has promised to overhaul the media ownership laws and privatize
the remaining shares of Telstra. The Economist Intelligence Unit reports that “there
is limited scope for desirable reforms such as lowering taxes on superannuation
(that is, pensions saving)—a last-minute election promise—and the top marginal
tax rate for individuals because of the impact on government revenue.” The superannuation system is an occupation-based mandatory pension system that is privately managed.
TRADE POLICY
Score: 2–Stable (low level of protectionism)
According to the World Bank, Australia’s weighted average tariff rate in 2000 (the
most recent year for which World Bank data are available) was 4 percent. The U.S.
Department of State reports that non-tariff barriers include “stringent sanitary and
phytosanitary restrictions affecting imports of fresh fruit and vegetables and imports of meat and poultry products…. [I]mported agricultural commodities must
have an import risk analysis (IRA) [that] can take an average of two years to carry
out. Australia’s acceptable level of protection is considered extremely constrictive,
making access to the Australian market often difficult, expensive, time-consuming, and in some cases, impossible.”
Chapter 6: The Countries
9
1.85
Free
Wages and Prices 2
Property Rights
1
Regulation
Black Market
2
1
Scores for Prior Years:
2002: 1.85
1999: 1.90
1996: 2.05
2001: 1.90
1998: 1.90
1995: 2.05
2000: 1.90
1997: 2.15
2001 Data
(in constant 1995 US dollars)
Population: 19,603,502
Total area: 7,686,850 sq. km
GDP: $462 billion
GDP growth rate: 2.4%
GDP per capita: $23,588
Major exports: coal, crude
petroleum, gold, meat, wool,
aluminum, iron ore, wheat,
machinery and transport equipment
Exports of goods and services:
$104.7 billion
Major export trading partners:
Japan 19.4%, US 9.7%, South Korea
7.8%, China 6.2%, New Zealand 5.9%
Major imports: passenger motor
vehicles, crude petroleum,
telecommunications equipment,
computers, medicaments
Imports of goods and services:
$114 billion
Major import trading partners:
US 18.2%, Japan 13.0%, China 8.8%,
Germany 5.7%, UK 5.3%
Foreign direct investment (net):
–$5.7 billion
87
FISCAL BURDEN OF GOVERNMENT
WAGES AND PRICES
Score—Income and Corporate Taxation: 4–Stable
(high tax rates)
Score—Government Expenditures: 3–Stable
(moderate level of government expenditure)
Final Score: 3.5–Stable (high cost of government)
Australia’s top income tax rate is 47 percent; the marginal rate
for the average taxpayer is 30 percent. The top corporate tax
rate is 30 percent. In 2001, government expenditures equaled
33.1 percent of GDP.
Score: 2–Stable (low level)
According to the Economist Intelligence Unit, the government
consumed 18.7 percent of GDP in 2001. In the same year, based
on data from the Department of Finance and Administration,
Australia received 4 percent of its total revenues from stateowned enterprises and government ownership of property.
Score: 2–Stable (low level of intervention)
The market determines most wages and almost all prices.
Australia’s federal minimum wage is roughly 50 percent of
the average full-time wage. In addition to the official minimum wage, Australia’s “Award” system provides various minimum wages for specific economic sectors. The Award system
and the minimum wage apply only to a minority of workers.
There are no national price controls on goods, but Australian
states retain the power to impose their own price controls.
Price controls over the country’s major airports were scheduled to be eliminated as of July 1, 2002, and replaced by a feeincrease monitoring system. The Economist Intelligence Unit
reports that “there are several price regulating laws in place….
The Price Surveillance Act gives the Australian Competition
and Consumer Commission power to examine the prices of
selected goods and services to promote competitive pricing
wherever possible and restrain price rises in markets where
competition is less than effective.”
MONETARY POLICY
PROPERTY RIGHTS
Score: 2–Stable (low level of inflation)
From 1992 to 2001, Australia’s weighted average annual rate
of inflation was 3.99 percent.
Score: 1–Stable (very high level of protection)
Property is very secure in Australia. According to the Economist Intelligence Unit, “Contractual agreements in Australia
are protected by the rule of law and the independence of the
judiciary…although backlogs in the court lists can delay cases
coming for trial for several years.” Government expropriation
is highly unlikely.
GOVERNMENT INTERVENTION IN THE ECONOMY
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Stable (low barriers)
Australia’s economy is open to foreign investment, and foreign investors receive national treatment. The Foreign Investment Review Board requires notification of some proposed
investment. The government accepts most of these proposals
routinely, although they may be rejected if the investment is
determined not to be in the country’s “national interest.” In
April 2001, the government cited this proviso in rejecting a
takeover bid for Australia’s Woodside Petroleum from Royal
Dutch/Shell. While no sector is completely closed, foreign
investment in television and newspaper media, banking, airlines, airports, shipping, urban real estate, and telecommunications is subject to limitations. Since 1999, foreign airlines
have been able to purchase 100 percent equity in a domestic
airline and 49 percent in an international Australian airline;
the old restrictions remain in effect for the national airline,
Qantas.
BANKING AND FINANCE
Score: 1–Stable (very low level of restrictions)
Australia has a modern, competitive financial system. Banks
are relatively free of government control, and foreign banks
may be licensed as branches or subsidiaries. Branches of foreign banks face restrictions on retail banking, but foreign subsidiaries are free to offer the full range of banking services.
The government has focused on significantly streamlining and
reforming financial-sector regulation and does not affect the
allocation of credit.
88
REGULATION
Score: 2–Stable (low level)
Australia’s regulatory environment is transparent and for the most
part not burdensome. “In areas of the economy dominated by
small businesses,” reports the Economist Intelligence Unit, “the
government favors self-regulation with ‘light-handed’ intervention by government…. If [the government] is convinced that selfregulation is not working, it has the power under the Trade Practices Act to declare the code of conduct mandatory.” An Office
of Regulation Review monitors new and existing regulations to
determine the costs they would impose on business. Most environmental laws come from the states, but there is little uniformity among the various state acts. According to the Economist
Intelligence Unit, “Polluting industries must purchase a pollution license [that is] generally not tradable.” The Economist Intelligence Unit reports that “there is no entrenched institutional
corruption in the bureaucracy and abuse of political influence is
extremely rare.” According to the U.S. Department of State, “the
government procurement system is generally transparent and
well regulated, thereby minimizing opportunities for corrupt dealings.”
BLACK MARKET
Score: 1–Stable (very low level of activity)
Transparency International’s 2001 score for Australia is 8.5.
Therefore, Australia’s black market score is 1 this year.
2003 Index of Economic Freedom
AUSTRIA
Vienna
Rank:
Score:
Category:
Trade Policy
Fiscal Burden
2
4.5
Government Intervention 2
Monetary Policy
1
Foreign Investment 2
Banking and Finance 2
The state’s role in Austria’s economy has decreased in recent years. The government
has relinquished control of the formerly nationalized oil and gas, steel, and engineering companies, and telecommunications and electricity have been deregulated. Yet
Austria remains overregulated. Despite recent efforts to decrease the amount of paperwork required, establishing a business still involves negotiating a bureaucratic maze.
Foreign investors face rigidities, barriers to market entry, and an elaborate regulatory
environment in certain sectors; new laws seeking to prevent the construction of
megastores and forbidding the opening of shops on Sundays (Austria mandates a maximum 40-hour workweek) have been enacted; and environmental standards are restrictive. As a result, prices in Austria are among the highest in the European Union. Under
the Proporz system established after World War II, the Social Democrats and the People’s
Party divided power. To this day, many larger firms, particularly banks, remain associated with one of the major political parties, causing the economic interactions within
and between government entities and these companies to be highly political. It is disaffection with this static duopoly that best explains the rise to power of Jörg Haider’s
populist, right-wing Freedom Party in February 2000 in coalition with Wolfgang
Schussel’s People’s Party. Chancellor Schussel, the first center–right premier in 30 years,
has accelerated the pace of market reform and enacted laws designed to do away with
the Proporz system. In October 2000, the new coalition approved a tough two-year
budget with the goal of having the budget in balance by 2002. The government has
committed itself to painful spending cuts, tax increases, and public-sector job losses.
Support for Haider’s Freedom Party has fallen as the austerity-minded government has
proved both politically fragile and generally unpopular.
TRADE POLICY
Score: 2–Stable (low level of protectionism)
Because Austria is a member of the European Union, its trade policy is the same as the
policies of other EU members. Imports are subject to the common EU weighted average external tariff of 1.8 percent. Austria’s participation in the Common Agricultural
Policy (CAP), a program that heavily subsidizes agricultural goods, acts as a non-tariff
barrier.
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 4–Stable
(high tax rates)
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 4.5–Stable (very high cost of government)
Austria’s top income tax rate is 50 percent; the marginal rate for the average taxpayer is 41
percent. The top corporate tax rate is 34 percent. In 2001, government expenditures equaled
49.6 percent of GDP.
Chapter 6: The Countries
19
2.10
Mostly Free
Wages and Prices 2
Property Rights
1
Regulation
3.0
Black Market 1.5
Scores for Prior Years:
2002: 2.10
1999: 2.10
1996: 2.10
2001: 2.05
1998: 2.10
1995: 2.10
2000: 2.05
1997: 2.10
2001 Data (unless otherwise indicated)
(in constant 1995 US dollars)
Population: 8,121,300
Total area: 83,858 sq. km
GDP: $265 billion
GDP growth rate: 1.0%
GDP per capita: $32,630
Major exports: machinery and
equipment, paper and paperboard,
metal goods, chemicals, iron and
steel, textiles, foodstuffs
Exports of goods and services:
$142 billion
Major export trading partners:
Germany 33.3%, Italy 8.9%,
Switzerland 6.7%, Hungary 5.0%
(2000)
Major imports: machinery and
equipment, chemicals, metal goods,
oil and oil products, foodstuffs
Imports of goods and services:
$137.9 billion
Major import trading partners:
Germany 43.6%, Italy 6.8%,
Switzerland 4.8%, Hungary 4.0%
(2000)
Foreign direct investment (net):
$125 million
89
GOVERNMENT INTERVENTION IN THE ECONOMY
WAGES AND PRICES
Score: 2–Stable (low level)
Data from the International Monetary Fund indicate that Austria’s
government consumed 19.9 percent of GDP in 2001. In 2000, based
on data from the Ministry of Finance, Austria received 0.9 percent
of its total revenues from state-owned enterprises and government
ownership of property.
Score: 2–Stable (low level of intervention)
Prices are determined primarily by the market. According to the
Economist Intelligence Unit, “there are now very few remaining
price-controlled goods—primarily rail travel and pharmaceuticals…. Although the law still permits certain price controls, in practice it is rarely implemented. In the past two years, however, the
government has repeatedly tried to control prices in the retail petrol
business…. The government has applied price caps three times since
March 1999 to force oil companies to keep prices down.” Austria
does not maintain a minimum wage; minimum wages are determined by annual collective bargaining agreements between employers and employee organizations.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, Austria’s weighted average annual rate of inflation was 2.33 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Stable (low barriers)
Austria welcomes most foreign direct investment, and there is no
discrimination against foreign investors. According to the Economist Intelligence Unit, “There have been no restrictions on incoming investment since 1991, when the National Bank completed its
liberalisation of capital movements.” Foreign investment is forbidden in arms and explosives, as well as industries in which the state
has a monopoly (casinos, printing of banknotes, and minting coins).
The International Monetary Fund reports that restrictions also exist for non-residents in the auditing and legal professions, the transportation sector, and energy generation. “Austrian laws governing
the establishment of a business give wide latitude for administrative decisions,” reports the Economist Intelligence Unit; “nevertheless, procedures tend to be slow and cumbersome, and the process requires considerable patience.” There are no controls or requirements on current transfers, access to foreign exchange, repatriation of profits, or capital transactions, but those transactions
must be reported to the Austrian National Bank. Although the national government no longer imposes restrictions on foreign purchase of land, the International Monetary Fund reports that real
estate transactions are subject to approval by local authorities.
BANKING AND FINANCE
Score: 2–Stable (low level of restrictions)
Austrian banks offer services ranging from credit to finance, and
the government permits savings banks to perform commercial
banking functions, including the brokering of securities and mutual funds. Although the banking system is competitive, the government is involved in the banking sector. The Economist Intelligence Unit reports that “Austrian Investkredit offers long-term financing of up to 20 years. Investkredit, a state controlled bank that
specialises in long-term credit and corporate financing for companies based in Austrian [sic], provides a range of services, including
bank loans, for mainly small and medium-sized companies.
Investkredit has also taken stakes in a number of smaller firms preparing for initial public offerings on the Vienna Stock Exchange.”
The government maintains reserve and liquid asset requirements
for euro deposits and places limits on open foreign exchange positions. In 2002, the European Union fined seven Austrian banks $117
million for price-fixing its banking fees and interest rates.
90
PROPERTY RIGHTS
Score: 1–Stable (very high level of protection)
Property is very secure in Austria. The U.S. Department of State
reports that “the Constitution provides for an independent judiciary, and the government respects this provision in practice. The
judiciary provides citizens with a fair and efficient judicial process.”
REGULATION
Score: 3–Stable (moderate level)
Austria’s regulatory system is characterized in some sectors by complexity and slow, bureaucratic procedures. According to the U.S.
Department of State, “Although Austria’s economy has become
considerably more liberal and open, foreign investors as well as
local businesses still must cope with rigidities, barriers to market
entry, and an elaborate regulatory environment in certain sectors.
Progress was made in streamlining the permit process, in deregulation and liberalization, particularly in the telecommunications,
electricity and gas sectors. However, there is room for improvement.” It now takes about three months to open a business, except
for large projects requiring an environmental impact assessment.
Despite bureaucratic problems, the tax and labor laws, as well as
health and safety standards, are applied uniformly. In October 2001,
according to the Financial Times, the government deregulated the
electricity market. Since Austria became a member of the European Union, its investment environment has become more conducive to business activity. The U.S. Department of State reports
that “the government plans to introduce flex-time and gender-neutral regulations for night work by 2001 in compliance with EU regulations, and more liberal regulations for shop opening hours.” The
Economist Intelligence Unit reports that “Austria’s legislation on
industry and its effect on the environment is complex and extensive.”
BLACK MARKET
Score: 1.5–Stable (low level of activity)
Transparency International’s 2001 score for Austria is 7.8. Therefore, Austria’s black market score is 1.5 this year. According to
the Deutsche Presse-Agentur, the smuggling of animals, plants,
cigarettes, and narcotic drugs is flourishing.
2003 Index of Economic Freedom
Baku
AZERBAIJAN
Rank:
104
Score:
3.35
Category: Mostly Unfree
Trade Policy
Fiscal Burden
3
3
Government Intervention 3
Monetary Policy
1
Foreign Investment 4
Banking and Finance 4
President Heydar Aliev maintains his control of the political process, often using
non-democratic methods to suppress the opposition. Oil price volatility has a major impact on overall economic performance. However, foreign direct investment
in the oil and gas industry has risen substantially. The oil sector has benefited from
plans to develop new main export pipeline projects such as the Baku–Tbilisi–Ceyhan
pipeline. Despite provisions for the protection of property and contractual rights,
the legal system remains deeply politicized and dysfunctional. The second Chechen
war, continuing since September 1999, has hurt the economy badly, disrupting trade
routes with and through Russia and slowing pipeline construction projects; and
friction with neighboring Iran over maritime border demarcation has complicated
development of the Araz–Azov–Sharg oil fields. Azerbaijan’s fiscal burden of government score is 0.5 worse this year; however, its monetary policy and wages and
prices scores are both 1 point better. As a result, Azerbaijan’s overall score is 0.15
point better this year.
TRADE POLICY
Score: 3–Stable (moderate level of protectionism)
Based on data from the Economist Intelligence Unit and the International Monetary Fund, Azerbaijan’s average tariff rate was 6.7 percent in 1999 (based on import duties as a percent of total imports). The U.S. Department of State reports
that “Non-tariff barriers include [an]…unpredictable…customs
administration…and corruption…. Alcoholic beverages and tobacco products are
subject to both quantitative restrictions and import licenses.”
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3–Stable
(moderate tax rates)
Score—Government Expenditures: 3–Worse
(moderate level of government expenditure)
Final Score: 3–Worse (moderate cost of government)
Azerbaijan’s top income tax rate is 35 percent; the marginal rate for the average
taxpayer is 12 percent. The top corporate tax rate is 27 percent. In 2000, government expenditures equaled 20.5 percent of GDP, up from the 19.75 percent reported in the 2002 Index. As a result, Azerbaijan’s fiscal burden of government
score is 0.5 point worse this year.
Wages and Prices 3
Property Rights
4
Regulation
4.0
Black Market 4.5
Scores for Prior Years:
2002: 3.50
1999: 4.20
1996: 4.75
2001: 3.95
1998: 4.30
1995: n/a
2000: 4.20
1997: 4.65
2000 Data
(in constant 1995 US dollars)
Population: 8,049,000
Total area: 86,600 sq. km
GDP: $4.1 billion
GDP growth rate: 11.1%
GDP per capita: $506
Major exports: oil and gas,
machinery, cotton, foodstuffs
Exports of goods and services:
$1.9 billion
Major export trading partners:
Italy 43.7%, France 11.8%,
Turkey 6.0%, Russia 5.6%,
Georgia 4.3%
Major imports: machinery and
equipment, foodstuffs, metals,
chemicals
Imports of goods and services:
$2.2 billion
Major import trading partners:
Russia 21.3%, Turkey 11.0%, US 8.9%,
UK 5.0%, Kazakhstan 4.9%,
Japan 1.4%
Foreign direct investment (net):
$107 million
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Stable (moderate level)
According to the World Bank, Azerbaijan’s government consumed 12.5 percent of
GDP in 2000. State involvement in the economy remains extensive. The Economist Intelligence Unit reports that “privatization and structural reform have lagged
Chapter 6: The Countries
91
well behind changes in monetary and fiscal policy. The private sector has just 1.4m employees, another 599,800 are self
employed and the state directly and indirectly employs the
rest of the 3.7m in employment….”
MONETARY POLICY
Score: 1–Better (very low level of inflation)
From 1992 to 2001, Azerbaijan’s weighted average annual rate
of inflation was 2.65 percent, down from the 4.63 percent from
1991 to 2000 reported in the 2002 Index. As a result,
Azerbaijan’s monetary policy score is 1 point better this year.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 4–Stable (high barriers)
A number of barriers impede investment. The Economist Intelligence Unit reports that “privatization is slow and
untransparent, laws are poorly enforced, and infrastructure
needs upgrading. Business is dominated by patronage and
personal contacts…. When combined with political risk, serious problems in the investment climate will deter most nonoil investors.” According to the U.S. Department of State,
“Government bureaucracy, weak legal institutions and predatory behavior by politically-connected monopoly interests
have severely hindered investment outside of the energy sector…. Practically speaking, private investment can only be
made through joint ventures with a state partner.” Sixty percent of foreign direct investment is from oil firms. The government prohibits investments in national security and defense
sectors and restricts investment in government-controlled sectors like energy, mobile telephony, and oil and gas. The International Monetary Fund reports that foreign exchange accounts are subject to some restrictions. Payments and transfers are subject to documentation requirements and quantitative limits. The central bank must authorize most capital transactions.
BANKING AND FINANCE
Score: 4–Stable (high level of restrictions)
Azerbaijan’s banking system is weak and plays a minor role in
the economy, where most transactions are conducted in cash.
The central bank raised minimum capital requirements in
January 2002 leading to the closure of five banks. According
to the Economist Intelligence Unit, “Azerbaijan still has too
many small banks for an economy of its size, and few of them
are financially healthy.” The same source reports that as of
June 2002, there were 46 banks in operation, most of them
state-owned. Because of state ownership and a central bank
restriction capping participation of banks with foreign ownership at 30 percent of commercial banking assets, the level
of foreign ownership in Azerbaijan’s banks is not significant.
According to the U.S. Department of State, “Local private
banks exist, but they account for about 15 percent of deposits
in the commercial banking sector, which is dominated by the
state-owned [International Bank of Azerbaijan].”
92
WAGES AND PRICES
Score: 3–Better (moderate level of intervention)
In 1993, the government implemented a reform program under which prices were gradually liberalized. The Economist
Intelligence Unit reports that the government “eliminated
preferential consumer tariffs for electricity, gas and heating,
and transportation from January 2002 (although tariffs are still
subsidized). The spread between domestic and export prices
for oil is to be phased out gradually.” The U.S. Department of
State also reports that the government sets the nationwide
administrative minimum wage by decree. Although subsidies
on utilities and price controls on domestic oil prices are significant, price controls do not apply to oil exports and therefore do not affect most oil production. Based on the minor
improvement of switching from price controls to subsidies
on utilities, as well as evidence that most oil production is
unaffected by price controls, Azerbaijan’s wages and prices
score is 1 point better this year.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
The legal system does not provide sufficient protection for
private property. According to the U.S. Department of State,
“Dispute settlement mechanisms are improving in Azerbaijan,
but effective means of protecting and enforcing property and
contractual rights are not yet assured. While the [government]
does not officially interfere in the court system, in practice
courts are weak, judges often inexperienced, and progressive
new tax and other economic legislation poorly understood.
The Economic Court, which has jurisdiction over commercial disputes, is weak, widely regarded as corruptible, and its
decisions are often inconsistent.”
REGULATION
Score: 4–Stable (high level)
The procedure for establishing a business can be tedious and
time-consuming. According to the U.S. Department of State,
Azerbaijan’s regulatory system “remains characterized by
weak administration, a lack of transparency and widespread
allegations of corruption. The lack of transparent policies and
effective laws to establish clear rules and foster competition
are particularly serious impediments to investment…. Ready
access to government rules and regulations is an impediment
to doing business…. Many persons doing business in
Azerbaijan complain that bureaucratic procedures contribute
to long delays in gaining necessary permits and licenses….
Corruption is a significant deterrent to investment in
Azerbaijan.”
BLACK MARKET
Score: 4.5–Stable (very high level of activity)
Transparency International’s 2001 score for Azerbaijan is 2.0.
Therefore, Azerbaijan’s black market score is 4.5 this year.
2003 Index of Economic Freedom
Nassau
THE BAHAMAS
Rank:
Score:
Category:
Trade Policy
Fiscal Burden
5
1.5
Government Intervention 2
Monetary Policy
1
Foreign Investment 3
Banking and Finance 2
22
2.15
Mostly Free
Wages and Prices 3
Property Rights
1
Regulation
Black Market
The Bahamas is a parliamentary democracy and member of the British Commonwealth,
with political and legal traditions that follow those of the United Kingdom. According to the
U.S. Department of State, tourism accounts for approximately 60 percent of GDP and employs about 50 percent of the population. A lucrative financial services sector contributes 15
percent of GDP. The mid-2001 U.S. economic slowdown, coupled with the September 11
attacks, led to a dramatic decline in investment and tourism. As a result, reports the Economist Intelligence Unit, real GDP growth has deteriorated significantly, falling from 5.0 percent in 2000 to roughly 1.5 percent in 2001 as estimated in December by Finance Minister
William Allen; in addition, “local economists are forecasting a 1.5–2 percent contraction in
GDP in 2002.” The economy is likely to stagnate at this rate until 2003, when the Bahamas
will be primed to reap the benefits of a predicted U.S. recovery in the second half of 2002.
After implementing tough laws to combat money laundering, the Bahamas was removed
in June 2001 from the Organisation for Economic Co-operation and Development’s list of
“un-cooperative countries,” signaling an end to a time when banking laws allowed drug
traffickers to launder money easily through the islands. An election in May 2002 brought the
leftist Progressive Liberal Party to power, ousting the Free National Movement party. The
former government had been pursuing privatization of the telecommunications industry
(the market is dominated by the state-owned Bahamas Telecommunications Corporation)
and had planned to privatize the utilities sector. Despite uncertainties surrounding the PLP’s
economic policies, the Financial Times reports that banking leaders are optimistic that the
new government will not make significant changes in the way the country conducts international business. The Bahamas’ wages and prices score is 1 point worse this year. As a
result, its overall score is 0.10 point worse this year.
Scores for Prior Years:
TRADE POLICY
Imports of goods and services:
$2.6 billion
Score: 5–Stable (very high level of protectionism)
According to the Bahamas Customs Department, the Bahamas had an average tariff rate of
35 percent in 2001. The U.S. Department of State reports that the government also charges
a 7 percent stamp tax on imported goods and restricts the import of some agricultural
goods through import permits. In addition, “Permit applications have occasionally been
denied when the Government determined that a surplus existed in locally-grown products
in the same category.”
2002: 2.05
1999: 2.20
1996: 2.10
2001: 2.15
1998: 2.05
1995: 2.25
2000: 2.20
1997: 2.05
2000 Data
(in constant 1995 US dollars)
Population: 303,000
Total area: 13,940 sq. km
GDP: $4.2 billion
GDP growth rate: 5.0%
GDP per capita: $13,928
Major exports: pharmaceuticals,
rum, cement
Exports of goods and services:
$2.3 billion
Major export trading partners:
US 28.2%, France 16.5%, Germany
14.1%, UK 12.9%
Major imports: foodstuffs,
manufactured goods, crude oil,
vehicles, electronics
Major import trading partners:
US 31.6%, South Korea 18.2%,
Italy 17.4%, Japan 5.8%
Foreign direct investment (net):
$228.8 million
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 1–Stable
(very low tax rates)
Score—Government Expenditures: 2–Stable
(low level of government expenditure)
Final Score: 1.5–Stable (low cost of government)
The Bahamas has no income tax, no corporate income tax, no capital gains tax, no inheritance tax, and no value-added tax. In 2000, government expenditures equaled 19.3 percent of
GDP.
Chapter 6: The Countries
1
2
93
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Stable (low level)
The International Monetary Fund reports that in 2000, government expenditures equaled 19.3 percent of GDP. (The Ministry
of Finance reports that the government has not reported or published data on the level of government consumption since 1992;
therefore, data on government expenditures as a percent of GDP
have been used as a proxy.) In 2000, according to the IMF, the
Bahamas received 3.16 percent of its revenues from state-owned
enterprises and government ownership of property.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, the Bahamas’ weighted average annual rate
of inflation was 1.84 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
The Bahamas restricts foreign investment in a number of sectors: wholesale and retail operations; commission agencies engaged in import–export trade; real estate and domestic property
management agencies; media and advertising; nightclubs and
some restaurants; security services; building supplies and most
construction companies; some fishing operations; auto and appliance service operations; and public transportation. All outward
capital transfers and inward transfers by non-residents require
exchange control approval, and outward transfers by residents
are restricted. Sales of bonds and debt securities, shares and other
securities, commercial credits, and financial credits are subject to
varying approval of the central bank or regulations when involving foreign exchange or non-residents. According to the U.S. Department of State, “Large foreign investors may be held to higher
labor, health and safety standards than are local entrepreneurs.
Obtaining required permits, especially immigration permits,
sometimes can take an inordinate length of time.” The International Monetary Fund reports that some payments require central bank approval. The U.S. Department of State reports that
“approval is automatically granted for non-Bahamians to purchase
residential property of less than five acres on any single island in
the Bahamas, except where the property constitutes over fifty
percent of the land area of a cay (small island) or involves ownership of an airport or marina. The government has now decided
to discontinue sales of islands to foreigners.” Repatriation of profits is unrestricted.
BANKING AND FINANCE
Score: 2–Stable (low level of restrictions)
The Bahamas is one of the financial centers of the Caribbean.
The U.S. Department of State reports that 410 banks and trust
companies were licensed in the Bahamas in 2000. Offshore banking and finance produces some 15 percent of GDP and employs
about 3 percent of the labor force. The financial sector is extremely
open to foreigners. In an effort to secure its removal from the
Organisation for Economic Co-operation and Development’s list
of jurisdictions with a non-cooperative record on money laun-
94
dering, the Bahamas passed a package of legislation to tighten
controls on such activity. The new legislation imposes extra regulatory costs on the financial sector but does not significantly reduce the level of economic freedom. Stricter regulation and supervision led the government to suspend licenses for a large number of licensed banks (managed by standing institutions called
“managed banks”) that could not show proof of an actual physical presence.
WAGES AND PRICES
Score: 3–Worse (moderate level of intervention)
The U.S. Department of State reports that “price controls exist
on 13 breadbasket items, as well as on gasoline, utility rates, public transportation, automobiles, and automobile parts.” The government established a minimum wage for all non-salaried public-sector workers in 1996 and passed legislation establishing a
minimum wage for the private sector in 2001. Based on the expansion of the minimum wage to include the private sector, as
well as the evidence of extensive price controls, the Bahamas’
wages and prices score is 1 point worse this year.
PROPERTY RIGHTS
Score: 1–Stable (very high level of protection)
It is relatively easy to acquire and protect private property in the
Bahamas, which has an advanced and efficient legal system based
on English common law. According to the U.S. Department of
State, however, “while generally fair, the Bahamian judicial process tends to be much slower than the norm in the United States.”
In addition, “the judicial system is plagued by a large backlog of
cases, and delays reportedly can last as long as two years.”
REGULATION
Score: 1–Stable (very low level)
The government of the Bahamas follows a hands-off approach
to business. According to the U.S. Department of State, “The
Bahamas offers potential investors a stable democratic environment, relief from personal and corporate income taxes, timely
repatriation of corporate profits, proximity to the United States
with extensive air and communication links, and a good pool of
skilled professionals.” There are no specific requirements for establishing a business, and English common law is used to enforce
contracts. The system is generally transparent and equitable, although the U.S. Department of State notes that “the discretionary issuance of business licenses can result in a lack of transparency.”
BLACK MARKET
Score: 2–Stable (low level of activity)
The U.S. Department of State reports that software, music, and
video piracy is a problem in the Bahamas. The Economist Intelligence Unit reports that illegal drug trafficking is also significant.
2003 Index of Economic Freedom
Manama
BAHRAIN
Rank:
Score:
Category:
Trade Policy
Fiscal Burden
3
2
Government Intervention 3
Monetary Policy
1
Foreign Investment 2
Banking and Finance 1
Since gaining its independence from Great Britain in 1971, Bahrain has maintained
a vibrant economy. The oil industry replaced pearl fishing as the leading source of
income in the 1930s and has been eclipsed in turn by the financial sector in recent
years. Because of its relatively cosmopolitan outlook, advanced economy, favorable regulatory structure, and excellent communications and transportation infrastructure, Bahrain is home to many multinational firms doing business in the Persian Gulf. The emir, Sheikh Hamad bin Isa al-Khalifa, has adopted a conciliatory
policy toward the political opposition and the traditionally disaffected Shi’a community, which makes up roughly two-thirds of the population. Sheikh Hamad,
having won a resounding victory in a February 2001 national referendum that approved his political reform program, has moved up elections for a new National
Assembly to October 2002; municipal elections were held in May 2002 as a precursor to the October parliamentary elections. As part of the reforms, Bahrain became a constitutional monarchy in 2002, with Sheikh Hamad as King. The government plans to privatize portions of the health and educational systems, and to
allow foreigners to own 100 percent of any company by the end of 2005. In June
2002, the Bush Administration signed a Trade and Investment Framework Agreement with Bahrain, in the words of the U.S. Trade Representative, “to deepen our
economic relationship” with that country.
TRADE POLICY
Score: 3–Stable (moderate level of protectionism)
According to the World Trade Organization, Bahrain’s average tariff rate was 7.7
percent in 2000. The government maintains strict labeling requirements on imported products and prohibits imports of irradiated food products, weapons, pornography and materials considered scandalous, wild animals, radio-controlled
model airplanes, children’s toys containing methyl chloride, and other articles declared injurious by the Ministry of Health, as well as foodstuffs and sweets containing cyclamates. According to the U.S. Department of State, “Import licenses for
items to be sold in Bahrain are issued only to locally established companies that are
at least 51 percent Bahraini-owned.”
16
2.00
Mostly Free
Wages and Prices 3
Property Rights
1
Regulation
Black Market
Scores for Prior Years:
2002: 2.00
1999: 1.80
1996: 1.80
2001: 1.90
1998: 1.90
1995: 1.70
2000: 1.80
1997: 1.70
2000 Data
(in constant 1995 US dollars)
Population: 691,000
Total area: 620 sq. km
GDP: $6.5 billion
GDP growth rate: 5.3%
GDP per capita: $9,406
Major exports: petroleum products,
base metals, textiles, aluminum
Exports of goods and services:
$5.8 billion
Major export trading partners:
India 8.4%, US 3.9%, Saudi Arabia
3.4%, Japan 2.8%, South Korea 2.1%
Major imports: textiles, base metals,
crude oil
Imports of goods and services:
$4.4 billion
Major import trading partners:
Saudi Arabia 28.7%, US 12.5%,
UK 6.6%, France 6.0%, Japan 4.0%
Foreign direct investment (net):
$328 million
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 1–Stable
(very low tax rates)
Score—Government Expenditures: 3–Stable
(moderate level of government expenditure)
Final Score: 2–Stable (low cost of government)
Bahrain imposes no taxes on income or corporate profits. Based on data from the
International Monetary Fund, government expenditures equaled 25.9 percent of
GDP in 2000.
Chapter 6: The Countries
2
2
95
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Stable (moderate level)
The World Bank reports that the government consumed 17.6
percent of GDP in 2000. In the same year, according to the International Monetary Fund, Bahrain received 74.85 percent of its
total revenues (the largest portion being oil and gas revenues)
from state-owned enterprises and government ownership of property.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, Bahrain’s weighted average annual rate of
inflation was 0.69 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Stable (low barriers)
Bahrain maintains some barriers to foreign investment. According to the U. S. Department of State, “All commercial investments
remain subject to government approval, and most must be made
in partnership with at least 51 percent Bahraini equity…. Foreign
firms in Bahrain are required to have a local agent or a partner
before bidding on a government contract.” In general, however,
Bahrain encourages foreign investment. Foreigners may own 100
percent of new industrial businesses, and foreign companies may
set up local branch offices without a local sponsor. Except for
Gulf Cooperation Council nationals, non-residents are generally
prohibited from purchasing land; foreign corporations established
in Bahrain and long-term residents, however, may be allowed to
purchase property on a case-by case basis. Capital transactions
and transfers may not be made to or received from Israel, but
Bahrain has no other restrictions on capital repatriation or transfers. Instances of bias toward local business in violation of transparency or the rule of law have been known to occur but remain
rare. In 2002, the United States and Bahrain signed a Trade and
Investment Framework Agreement to expand trade and investment between the two nations.
BANKING AND FINANCE
Score: 1–Stable (very low level of restrictions)
Over the past 20 years, Bahrain has established itself as a leading
financial center for the Persian Gulf region and the Arab world.
The country’s legal, regulatory, and accounting systems are transparent and meet international standards. It is relatively easy to
establish a bank; there are few, if any, restrictions or requirements
on new banks; and foreign banks are welcome. “Foreigners and
Bahrainis alike have ready access to credit on market terms,” reports the U.S. Department of State. “The banking system is sound,
and undergoes examination and supervision by the Bahrain Monetary Agency (BMA), which has an international reputation for
excellence.” Efforts are being made to bring regulations for Islamic banks up to international standards. The government is
heavily involved in the housing loan industry. According to the
Economist Intelligence Unit, “King Hamad ordered that families
who are paying off debts to government for state-provided housing should only pay 50% of the amount originally due. In addi-
96
tion, families that have taken out loans from the government to
build or buy will be forgiven 50% of the debt. Some 30,174
Bahraini families will benefit immediately from this debt relief….”
WAGES AND PRICES
Score: 3–Stable (moderate level of intervention)
The market sets most wages and prices. According to the Economist Intelligence Unit, “The government substantially subsidizes
the cost of utilities” and “has continued to subsidize many basic
goods and services to support price stability.” The U.S. Department of State reports that, “With the exception of a few basic
foodstuffs and petroleum product prices, the government does
not control prices on the local market.” There is a minimum wage
for the government sector, but private-sector wages are determined by contract. The Ministry of Labor and Social Affairs has
announced a plan to introduce a national minimum wage.
PROPERTY RIGHTS
Score: 1–Stable (very high level of protection)
Property is secure, and expropriation is unlikely. The Economist
Intelligence Unit reports that “the Bahraini legal system has a
good reputation, and foreign firms have been able to resolve disputes satisfactorily through the local courts. There are no prohibitions on the use of international arbitration to safeguard contracts.” According to the U.S. Department of State, “the courts
are subject to government pressure…although the judiciary provides some checks on government authority.”
REGULATION
Score: 2–Stable (low level)
Bahrain’s regulatory structure is generally evenhanded, and the
process for establishing a business is relatively straightforward.
According to the U.S. Department of State, Bahrain generally
follows a laissez-faire approach, although “its laws and procedures
are not always transparent. Bureaucratic procedures can create
significant stumbling blocks.” In addition, “bureaucracy and poor
coordination between ministries on occasion can impede new
industrial ventures.” In the manufacturing sector, this situation
appears to be largely a function of the number of ministries involved in the licensing process and has not proved to be overly
burdensome. Despite the existence of anticorruption laws, there
is occasional high-level corruption in contract bidding and the
management of successful investments; overall, reports the U.S.
Department of State, “petty corruption is rare in Bahrain. The
bureaucracy is sometimes inefficient but it is honest.”
BLACK MARKET
Score: 2–Stable (low level of activity)
With few barriers to imports, smuggling is not a problem. The
U.S. Department of State reports that “piracy in audio and videotape sales has been virtually eliminated.” However, the Business
Software Alliance reports that the rate of software piracy in
Bahrain was 80 percent in 2000.
2003 Index of Economic Freedom
BANGLADESH
Dhaka
Trade Policy
Fiscal Burden
5
2
Government Intervention 3
Monetary Policy
1
Rank:
119
Score:
3.50
Category: Mostly Unfree
Foreign Investment 3
Banking and Finance 4
Bangladesh’s economy continues to rely heavily on agriculture and fishing, which
together account for 25 percent of real GDP and employ over two-thirds of the labor
force. The government has attempted to stimulate other sectors to diversify the
economy, but political instability, investment restrictions, and high tariffs continue to
undermine these efforts. Bangladesh’s parliament has been bitterly divided since the
October 2001 elections. The opposition Awami League accuses the ruling Bangladesh
Nationalist Party of rigging the vote and has boycotted parliamentary sessions. This
has hampered government efforts to maintain law and order, thereby discouraging
foreign investors. The government continues to play a major role in the economy;
the public sector employs one-third of the formal labor force and controls over 40
percent of manufacturing and utility assets. Gross losses of non-financial state firms
remain at 2 percent of GDP. The country’s limited infrastructure also continues to
constrain economic development and exacerbate income disparities between regions.
Bangladesh’s monetary policy and wages and prices scores are both 1 point better
this year. As a result, its overall score is 0.20 point better this year.
TRADE POLICY
Wages and Prices 3
Property Rights
4
Regulation
Black Market
Scores for Prior Years:
2002: 3.70
1999: 3.75
1996: 3.50
2001: 3.80
1998: 3.50
1995: 3.60
2000: 3.75
1997: 3.50
2000 Data
(in constant 1995 US dollars)
Population: 131,050,000
Total area: 144,000 sq. km
GDP: $48 billion
GDP growth rate: 6.0%
GDP per capita: $373
Major exports: clothing, jute goods,
leather, fertilizer
Exports of goods and services:
$6.5 billion
Score: 5–Stable (very high level of protectionism)
According to the World Bank, Bangladesh’s weighted average tariff rate in 2000 (the
most recent year for which World Bank data are available) was 21 percent, up from
the 14.7 percent reported in the 2002 Index. The U.S. Department of State reports
that “business people consider Customs to be among the worst [government agencies], a thoroughly corrupt organization in which officials routinely exert their power
to influence the tariff value of imports and to expedite or delay import and export
processing at the ports.”
Major export trading partners:
US 33.4%, Germany 10.9%, UK 7.1%,
France 5.2%, Italy 4.0%
FISCAL BURDEN OF GOVERNMENT
Major import trading partners:
India 9.7%, Japan 9.3%, Singapore
8.3%, China 6.9%, Hong Kong 5.4%
Score—Income and Corporate Taxation: 3–Stable
(moderate tax rates)
Score—Government Expenditures: 1–Stable
(very low level of government expenditure)
Final Score: 2–Stable (low cost of government)
Bangladesh’s top income tax rate is 25 percent; the marginal rate for the average
taxpayer is 0 percent. The top corporate tax rate is 40 percent, but publicly traded
companies with a registered office in Bangladesh are charged a lower corporate tax
of 35 percent. In 2000, government expenditures equaled 14.1 percent of GDP.
Chapter 6: The Countries
5
5
Major imports: machinery and
equipment, chemicals, iron and steel,
textiles, raw cotton, food, crude oil
and petroleum products, cement
Imports of goods and services:
$8.2 billion
Foreign direct investment (net):
$177.8 million
97
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Stable (moderate level)
According to the World Bank, the government of Bangladesh consumed 4.6 percent of GDP in 2000, down from the 14.4 percent
reported in the 2002 Index. However, there is significant evidence
suggesting that reported government consumption data are unreliable. According to the Economist Intelligence Unit, “The government employs around one-third of those in formal sector employment, either directly in the civil service or through state owned
enterprises (SOEs).” The U.S. Department of State reports that the
state owns 40 percent of industrial capacity. According to the World
Bank, “in 2000, [state-owned enterprises] accounted for over 25.0%
of total fixed capital formation….” The Economist Intelligence
Unit reports that “most of the 33 [state-owned enterprises] divested
in 1996–2001 were smaller units, and the privatizations have not
materially diminished the government’s role in the economy….”
Based on the level of state-owned enterprise, 1 point has been added
to Bangladesh’s government intervention score; another point has
been added based on the evidence that the level of government
participation in the economy is greater than the World Bank’s government consumption figure indicates. As a result, Bangladesh’s
government intervention score is unchanged this year.
banks. The state-owned banks are plagued by a high proportion
of non-performing loans as the government continues to encourage them to lend to unprofitable state-owned enterprises. Two
nationalized companies dominate the insurance sector, although
private competition is permitted.
WAGES AND PRICES
Score: 3–Better (moderate level of intervention)
According to the U.S. Department of State, “Other than a few
essential pharmaceutical products and petroleum products, the
government does not have price controls for the private sector.”
However, “The state controls a large portion of the industrial
infrastructure through huge, money-losing state-owned enterprises (SOE) that the Government is unable or unwilling to privatize.” Bangladesh does not have a minimum wage, and privatesector employers ignore wages set by the Wage Commission.
Based on the evidence that the government is removing price
controls and does not have an effective minimum wage system,
Bangladesh’s wages and prices score is 1 point better this year.
PROPERTY RIGHTS
Score: 1–Better (very low level of inflation)
From 1992 to 2001, Bangladesh’s weighted average annual rate of
inflation was 2.89 percent, down from the 4.24 percent from 1991
to 2000 reported in the 2002 Index. As a result, Bangladesh’s monetary policy score is 1 point better this year.
Score: 4–Stable (low level of protection)
According to the U.S. Department of State, “The Constitution
provides for an independent judiciary; however, under a
longstanding ‘temporary’ provision of the Constitution, the lower
courts remain part of the executive and are subject to its influence…. There is also corruption within the legal process, especially at the lower levels.” The same source reports that more
than a million cases are backlogged.
CAPITAL FLOWS AND FOREIGN INVESTMENT
REGULATION
Score: 3–Stable (moderate barriers)
Bangladesh seeks foreign investment and has removed many barriers to such activity. Foreign investors receive national treatment
and are allowed full ownership in most sectors. The International
Monetary Fund reports that most foreign investments require approval. Most of the barriers that remain are informal or involve
inadequate implementation of existing laws. According to the U.S.
Department of State, “Although the government has enacted some
liberal investment policies to foster private sector involvement
(mainly in energy and telecommunications), poor infrastructure,
bureaucratic inertia, corruption, labor militancy, and a generally
weak financial system discourage investment. Political unrest and
a deteriorating law and order situation also discourage domestic
and foreign investors.” The International Monetary Fund reports
that foreign exchange accounts are generally permitted but are
subject to central bank approval and other restrictions in some cases.
Payments and transactions for authorized activities are generally
not restricted, but approval is required, and some activities are subject to quantitative limits.
Score: 5–Stable (very high level)
Bangladesh’s largest regulatory problems are corruption, bureaucracy characterized by vested interests, lack of transparency, and
outdated business laws that do not protect private contracts, although red tape is also a major impediment. According to the
U.S. Department of State, “Policy and regulations in Bangladesh
are often not clear, consistent, or publicized. Generally, the civil
service, businesses, professionals, trade unions and political parties have vested interests in a system in which confidentiality is
used as an excuse for lack of transparency…. [A]ccounts from
foreign investors of solicitation of bribes by public officials and
politicians are common.”
MONETARY POLICY
BLACK MARKET
Score: 5–Stable (very high level of activity)
Transparency International’s 2001 score for Bangladesh is 0.4—
the highest level of perceived corruption reported among 91 countries. Therefore, Bangladesh’s black market score is 5 this year.
BANKING AND FINANCE
Score: 4–Stable (high level of restrictions)
Although Bangladesh has recently made some reforms in the financial sector, the banking system remains underdeveloped, inefficient, and dominated by the four state-owned commercial
98
2003 Index of Economic Freedom
BARBADOS
Rank:
Score:
Category:
Bridgetown
Trade Policy
Fiscal Burden
3
4
Government Intervention 2
Monetary Policy
1
Foreign Investment 3
Banking and Finance 2
Barbados, a former British colony, has been governed by the Barbados Labour Party
since 1994. The economy is based on tourism. Although the heavily subsidized
sugar industry is diminishing in importance, it remains an important employer
and exporter. Due to the global economic downturn that began in mid-2001 and
was exacerbated by the September 11 terrorist attacks on the United States, tourism slowed and sugar prices declined. The result was Barbados’s first negative annual GDP growth rate in eight years: –2.8 percent for 2001, as estimated by the
Economist Intelligence Unit. The financial services sector remains significant but
has been hindered by a World Trade Organization dispute between the U.S. and
the European Union, which claimed that tax benefits for U.S. firms constituted an
illegal export subsidy. The dispute prevented any new U.S. foreign sales corporations from registering in Barbados in 2001. In January 2002, the WTO ruled in
favor of the EU, and uncertainties surrounding implementation of this decision
will continue to dampen the country’s attractiveness as a financial center. The
Organisation for Economic Co-operation and Development (OECD) has removed
Barbados from its list of tax havens, allowing the country to renegotiate important
tax treaties, particularly with Canada. The pace of privatization is slow, but the
government plans to liberalize the telecommunications industry by mid-2003, phasing out the monopoly held by Cable and Wireless. Telecommunications competitors are permitted to offer only Internet services. Barbados’s capital flows and foreign investment score is 1 point worse this year; however, its trade policy and government intervention scores are both 1 point better. As a result, Barbados’s overall
score is 0.10 point better this year.
TRADE POLICY
Score: 3–Better (moderate level of protectionism)
As a member of the Caribbean Community and Common Market (CARICOM)
trade bloc, Barbados has a common external tariff rate ranging from 5 percent to
20 percent. The World Trade Organization reports that Barbados’s weighted average tariff rate in 1998 (the most recent year for which reliable data are available)
was 9.1 percent. In April 2001, Barbados eliminated restrictive import licensing
procedures that used to act as non-tariff barriers. As a result, Barbados’s trade policy
score is 1 point better this year.
24
2.20
Mostly Free
Wages and Prices 2
Property Rights
1
Regulation
Black Market
Scores for Prior Years:
2002: 2.30
1999: 2.60
1996: 2.90
2001: 2.40
1998: 2.50
1995: n/a
2000: 2.50
1997: 2.70
2000 Data
(in constant 1995 US dollars)
Population: 267,000
Total area: 430 sq. km
GDP: $2.2 billion
GDP growth rate: 4.1%
GDP per capita: $8,282
Major exports: sugar, chemicals,
electrical components, rum
Exports of goods and services:
$1.12 billion
Major export trading partners:
US 15.3%, UK 13.2%, Trinidad and
Tobago 11.9%, Jamaica 7.1%
Major imports: consumer goods,
machinery, foodstuffs, construction
materials, chemicals, fuel, electrical
components
Imports of goods and services:
$1.24 billion
Major import trading partners:
US 40.8%, Venezuela 15.3%, UK 8.1%,
Japan 5.2%, Canada 4.2%
Foreign direct investment (net):
$16.8 million
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 4.5–Stable
(very high tax rates)
Score—Government Expenditures: 3–Stable
(moderate level of government expenditure)
Final Score: 4–Stable (high cost of government)
Barbados has a top income tax rate of 40 percent; the marginal rate for the average
Chapter 6: The Countries
2
2
99
taxpayer is 25 percent. The top corporate tax rate is 37.5 percent. In 2000, according to the Inter-American Development
Bank, government expenditures equaled 34.3 percent of GDP.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Better (low level)
According to the World Bank, the government consumed 23.3
percent of GDP in 2000. In 1999, based on data from the International Monetary Fund, the government received 0.31
percent of its total revenues from state-owned enterprises and
government ownership of property. Based on new data on
revenues from state-owned enterprises, Barbados’s government intervention score is 1 point better this year.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, Barbados’s weighted average annual rate
of inflation was 2.4 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Worse (moderate barriers)
While investment restrictions are relatively minor, capital flows
face significant barriers in terms of exchange controls, quantitative limits, and approval requirements from the central
bank. Barbados permits 100 percent foreign ownership of
enterprises and treats domestic and foreign firms equally.
However, reports the U.S. Department of State, “Foreign investors are required to finance their investments from external sources or from income generated by the investment.”
Prior government approval is required for investment, including the establishment of all franchises, which must also register with the Ministry of Finance. The International Monetary
Fund reports that central bank approval is required for both
residents and non-residents to hold foreign exchange accounts.
Transactions in foreign currency are restricted: Approval is
required for current transfers, transfer of assets, and gifts and
inheritance over a certain amount; there are limits on the interest payments that can be paid on investments to a single
individual and company; personal payments abroad are subject to limits that vary according to purpose for the payment;
issuance and transfer of securities and money market instruments to non-residents require exchange control approval, as
do direct investment and real estate purchases; and the central bank must approve all credit operations. Based on the evidence of restrictions on access to domestic credit for foreign
investors, as well as exchange restrictions, Barbados’s capital
flows and foreign investment score is 1 point worse this year.
BANKING AND FINANCE
Score: 2–Stable (low level of restrictions)
The banking system is open to competition. The Economist
Intelligence Unit reports that there are seven commercial
banks, of which three are wholly foreign-owned and one is
partially state-owned. In 1998, the government passed legislation that tightened the controls against money laundering and
100
prevented Barbados from being identified in 2000 by the Financial Action Task Force as a “non-co-operative jurisdiction.”
In addition, uncertainty about the financial system was removed in January 2002 when Barbados was removed from the
OECD’s list of countries with harmful tax policies and thereby
avoided sanctions. The central bank imposes minimum interest rates on deposits at commercial banks.
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
The market sets most wages and prices. According to the
Embassy of Barbados, “the government maintains a general
policy of no price controls. There [is a] very limited number
of items—gasoline and a few food items—which…remain
subject to government supervision with respect to pricing.”
The Economist Intelligence Unit reports that the government
has established a price cap on telecommunications rates that
will enter into effect in August 2003 and will set rates through
a temporary mechanism until then. The Financial Times reports that the government subsidizes the sugar industry. The
government establishes legally enforced minimum wages for
specified categories of workers, but only two categories of
workers (household domestics and shop assistants) are subject to a formal minimum wage.
PROPERTY RIGHTS
Score: 1–Stable (very high level of protection)
Private property is well-protected in Barbados. The country’s
legal tradition is based on British common law, and the courts
operate independently and afford citizens a fair public hearing. The constitution provides for fair trials within a reasonable period of time by an independent and impartial court,
and the U.S. Department of State reports that “the Government respects this right in practice.”
REGULATION
Score: 2–Stable (low level)
The process for establishing a business in Barbados is simple.
According to the U.S. Department of State, “Barbados uses
transparent policies and effective laws to foster competition
and establish clear rules for foreign and domestic investors in
the areas of tax, labor, environment, health and safety…. The
Ministry of Industry and International Business administers
the Companies Act and other statutes dealing with company
affairs. The Companies Act is modeled on the Canada Business Corporations Act, and creates flexibility and simplicity
for the incorporation and operation of companies in Barbados.” Corruption is not regarded as a major problem.
BLACK MARKET
Score: 2–Stable (low level of activity)
Overall, black market activity is low by global standards, although the U.S. Department of State reports that “black market copies of computer software, designer items, and video
tapes are easily accessible.”
2003 Index of Economic Freedom
BELARUS
Rank:
Score:
Category:
Trade Policy
Fiscal Burden
4
4
Government Intervention 3
Monetary Policy
5
Foreign Investment 4
Banking and Finance 4
Belarus is one of the most backward and repressive countries of the former Soviet
Union. Political arrests, disappearances of opposition leaders, and the absence of freedom of expression have isolated Belarus internationally and inhibited foreign investment. Economic mismanagement has caused a dramatic increase in stocks of unsold
goods, which by the end of 2001 stood at 60 percent of average monthly output. The
industrial base has become obsolete, and more then 40 percent of industrial enterprises
work at a loss. Existing legislation prevents individual investors from holding more
than a 50 percent share of industrial companies. Private land ownership is still absent in
the agriculture sector, which remains dominated by Soviet-era collective farms. Belarus
relies heavily on Russian economic assistance. The economic and political support provided by Russia is a legacy of the “big brother” policy of Boris Yeltsin, and the proWestern turn in Vladimir Putin’s foreign relations fosters criticism in Moscow among
those who oppose maintaining close ties with Belarus’s Soviet-style regime. Belarus’s
trade policy score is 1 point worse this year; however, its fiscal burden of government
and government intervention scores are, respectively, 0.5 point and 1 point better. As a
result, Belarus’s overall score is 0.05 point better this year.
TRADE POLICY
151
4.30
Repressed
Wages and Prices 5
Property Rights
4
Regulation
Black Market
Scores for Prior Years:
2002: 4.35
1999: 4.10
1996: 3.40
2001: 4.25
1998: 4.00
1995: 3.70
2000: 4.10
1997: 3.80
2000 Data
(in constant 1995 US dollars)
Population: 10,005,000
Total area: 207,600 sq. km
GDP: $27 billion
GDP growth rate: 5.9%
GDP per capita: $2,760
Major exports: machinery and
equipment, mineral products,
chemicals, textiles
Exports of goods and services:
$15 billion
Score: 4–Worse (high level of protectionism)
According to the World Bank, Belarus’s weighted average tariff rate in 1997 (the most
recent year for which World Bank data are available) was 9.50 percent, up from the 4.79
percent reported in the 2002 Index. As a result, Belarus’s trade policy score is 1 point
worse this year. According to the European Commission’s Market Access Database,
non-tariff barriers include “foreign trade and exchange restrictions, particularly the
multiple exchange rate system…[and] administrative restrictions.”
Major export trading partners:
Russia 51.0%, Ukraine 7.6%,
Poland 3.8%, Germany 3.1%
FISCAL BURDEN OF GOVERNMENT
Major import trading partners:
Russia 65.3%, Germany 6.9%, Ukraine
4.0%, Poland 2.5%
Score—Income and Corporate Taxation: 3.5–Stable
(high tax rates)
Score—Government Expenditures: 4–Better
(high level of government expenditure)
Final Score: 4–Better (high cost of government)
The International Monetary Fund reports that Belarus’s top income tax rate is 30 percent; the marginal rate for the average taxpayer is 30 percent. The top corporate income tax rate is 30 percent. In 2000, based on data from the IMF, government expenditures equaled 29 percent of GDP, down from the 32.3 percent reported in the 2002
Index. Based on the lower level of government expenditure, Belarus’s fiscal burden of
government score is 0.5 point better this year.
Chapter 6: The Countries
5
5
Major imports: mineral products,
machinery and equipment, metals,
chemicals, foodstuffs
Imports of goods and services:
$14.8 billion
Foreign direct investment (net):
$82.4 million
101
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Better (moderate level)
According to the World Bank, the government consumed 19.5 percent of GDP in 2000. In the same year, according to the International Monetary Fund, Belarus received 2.66 percent of its total revenues from state-owned enterprises and government ownership of
property. However, the figure for revenues from state-owned enterprises appears to understate the true extent of government involvement in the economy. According to the Economist Intelligence Unit,
“The current state-dominated economic system will remain largely
in place…. [E]conomic policy will focus on…keeping inefficient Soviet-era enterprises alive and preventing overly independent private
interests from emerging.” Based on the apparent unreliability of reported total revenue figures, 1 point has been added to Belarus’s government intervention score. Overall, however, Belarus’s government
intervention score is 1 point better this year.
MONETARY POLICY
Score: 5–Stable (very high level of inflation)
From 1992 to 2001, Belarus’s weighted average annual rate of inflation was 112.08 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 4–Stable (high barriers)
Political instability, anti-Western sentiment, an inefficient bureaucracy,
corruption, and the lack of privatization all serve to hinder foreign
investment. The government does not permit foreigners to own land.
A new investment code that went into effect in 2001 guarantees property rights, the right to remit income, and protection against nationalization without complete and timely compensation. However, the
investment environment remains extremely poor because of a concerted resistance to the private sector, a lack of transparency and an
independent rule of law, unreliable enforcement of regulations, and
the failure to adopt economic reform. Natural resources, waters, forests, and land are owned exclusively by the state, but 99-year-use agreements are permitted. According to the Economist Intelligence Unit,
“Despite occasional rhetoric to the contrary, the administration will
continue to focus on the politically motivated task of both preserving Soviet-era enterprises and preventing private business from becoming excessively independent from the state…. Over the first half
of 2001 FDI in Belarus accounted for about 1% of total investment,
the lowest share of FDI among all CIS countries.” The International
Monetary Fund reports that both residents and non-residents may
hold foreign exchange accounts with authorized banks, but approval
of the central bank is required in certain circumstances. There are no
restrictions on payments and transfers conducted for legitimate business purposes and repatriated within the specified period. Registration and permits are mandatory for many capital transactions.
BANKING AND FINANCE
Score: 4–Stable (high level of restrictions)
The government continues to exert enormous control over the banking sector, which had 27 commercial banks in 2001. According to the
Economist Intelligence Unit, “A recent programme of banking reform presented by Piotr Prakapovich, the chairman of the National
Bank of Belarus (NBB, the central bank) similarly suggests a greater
102
willingness to begin slowly to scale back the state’s role in the banking sector. In line with these measures, by 2010 the state would retain full ownership of only three major banks, including Belarusbank
(savings and loans institution), Belahraprambank (agricultural bank)
and Belainvestabk (investment bank). Given the long time-scale involved, the banking system appears set to remain under government
control for the foreseeable future.” The Economist Intelligence Unit
reports that “commercial banks, although nominally independent,
have also frequently been pressured by the government into providing loss-making loans to selected industries and purchasing government-issued securities.”
WAGES AND PRICES
Score: 5–Stable (very high level of intervention)
The Economist Intelligence Unit reports that the government subsidizes many basic goods and services, including housing and utilities;
intervenes directly in agricultural markets; controls the majority of
the economy through state-owned enterprises; and otherwise influences prices through its credit policies and purchasing practices. The
International Monetary Fund estimated subsidies at 10 percent of
GDP in 2000. Belarus has a monthly minimum wage and influences
wages through its massive state-owned sector.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
The legal system does not fully protect private property, and the inefficient court system does not consistently enforce contracts. In January 2000, reports The Russia Journal, Belarus passed a law enabling
the government to nationalize the property of any individual or business deemed to be damaging the state. According to the Economist
Intelligence Unit, “since November 1996 the judiciary on the whole
has proved neither independent nor objective by international standards. Independent lawyers were barred from practising in 1997.”
REGULATION
Score: 5–Stable (very high level)
The regulatory system in Belarus is anti-business. The Economist
Intelligence Unit reports that Belarus “has failed to create a business environment conducive to investment…. [The Lukashenka
administration’s] antipathy towards the private sector and excessive involvement in the economy remain major deterrents. The
administration’s lack of progress on political and judicial reforms
has further dampened investors’ interest, while its ideological opposition to the privatisation of large-scale state-held assets has precluded any sizeable privatisation-related inflows.”
BLACK MARKET
Score: 5–Stable (very high level of activity)
The Economist Intelligence Unit reports that “small-scale privately
owned enterprises are either forced to the margins or else pushed
into the shadow economy.” Black market activity includes the smuggling of consumer goods and drugs, the provision of transportation and other services, and violations of intellectual property rights,
such as the pirating of audio and video productions and software.
2003 Index of Economic Freedom
BELGIUM
Brussels
Rank:
Score:
Category:
Trade Policy
Fiscal Burden
2
5
Government Intervention 2
Monetary Policy
1
Foreign Investment 1
Banking and Finance 2
Belgium has one of Western Europe’s most punishing tax systems and one of the
world’s highest total tax burdens; government revenue as a share of GDP was 47 percent in 2000. Economic pressures led to the election in June 1999 of a Liberal-led coalition espousing a “third way.” Prime Minister Guy Verhofstadt has made tax reform a
priority, spearheading legislation to lower income tax rates over the next few years. The
government plans to continue lowering taxes gradually until 2006. The principal objective of the government’s fiscal policy agenda is budgetary consolidation, but public
debt remains staggeringly high (110 percent of GDP in 2000) despite having declined
steadily for years. With 63 percent of Belgium’s workers unionized, labor laws remain
overly complex—particularly in terms of employment, health, and safety regulations—
and lawmakers frequently add to the already onerous European Union labor regulations; labor rigidities, for example, remain a major bar to hiring and firing. Belgium is
still run on a largely corporatist basis; every other year, the business federation and the
unions negotiate a national collective bargaining agreement. Belgium has passed a series of ecotaxes to redirect consumer purchasing patterns away from materials regarded
as environmentally damaging, and both foreign and domestic investors in some sectors
face stringent regulations designed to protect small and medium-sized companies. Ruling
in coalition with the Socialists and the Greens, Verhofstadt has concentrated on civil
service reform, as well as police and judicial reform, after a series of scandals. A new
civil service recruitment procedure that avoids political appointments in public administration is being adopted. State-owned enterprises constitute a progressively smaller
percentage of economic activity.
TRADE POLICY
Score: 2–Stable (low level of protectionism)
Because Belgium is a member of the European Union, its trade policy is the same as
the policies of other EU members. Imports are subject to the common EU weighted
average external tariff of 1.8 percent. Belgium’s participation in the Common Agricultural Policy (CAP), a program that heavily subsidizes agricultural goods, acts as a nontariff barrier. The government also maintains non-tariff barriers on pharmaceutical
products by delaying market authorization for, and approval for the pricing of, new
pharmaceutical products.
19
2.10
Mostly Free
Wages and Prices 2
Property Rights
1
Regulation
Black Market
Scores for Prior Years:
2002: 2.10
1999: 2.10
1996: 2.10
2001: 2.10
1998: 2.10
1995: n/a
2000: 2.10
1997: 2.10
2001 Data
(in constant 1995 US dollars)
Population: 10,271,000
Total area: 30,510 sq. km
GDP: $321.1 billion
GDP growth rate: 1.1%
GDP per capita: $31,263
Major exports: food and beverages,
machinery and transport equipment,
chemicals, crude materials
Exports of goods and services:
$253 billion
Major export trading partners:
Germany 18.1%, France 17.3%,
Netherlands 12.1%, UK 9.6%, US 5.6%
Major imports: machinery and
equipment, chemicals, metals and
metal products
Imports of goods and services:
$237 billion
Major import trading partners:
Netherlands 17.5%, Germany 16.8%,
France 13.8%, UK 8.0%, US 7.2%
Foreign direct investment (net):
–$14.2 billion
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 4.5–Stable
(very high tax rates)
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 5–Stable (very high cost of government)
Belgium’s top income tax rate is 55 percent; the marginal rate for the average taxpayer
is 45 percent. A tax reform passed in July 2001 will eliminate the two top income tax
Chapter 6: The Countries
3
2
103
brackets (55 percent and 52 percent) between 2002 and 2006,
bringing the top rate down to 50 percent. The top corporate tax
rate is 39 percent. In 2001, government expenditures equaled 46.4
percent of GDP.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Stable (low level)
The Economist Intelligence Unit reports that the government
consumed 21.3 percent of GDP in 2001. In 2000, based on data
from the National Bank of Belgium, Belgium received 1.25 percent of its total revenues from state-owned enterprises and government ownership of property.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, Belgium’s weighted average annual rate of
inflation was 2.31 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 1–Stable (very low barriers)
Belgium has an attractive foreign investment climate. Foreign
and domestic firms are treated equally, and no approval is required for a new investment, although a takeover law requires
each owner of 5 percent or more of a corporation’s voting stock
to notify the Ministry of Economic Affairs and the Banking and
Finance Commission. There are few restrictions on foreign investment that do not also apply to domestic investment. Belgium requires majority domestic or European Union ownership in the aviation sector and inland shipping, as well as for
Belgian flag vessels operated by shipping companies that do not
have their main office in Belgium. There are some restrictions
on non-EU investment in public works as required under EU
regulations. There are no restrictions on the purchasing of real
estate, repatriation of profit, or transfer of capital.
BANKING AND FINANCE
Score: 2–Stable (low level of restrictions)
Belgium’s domestic banking system has undergone privatization
in the past few years and is now almost entirely privately owned.
There are 75 banks in Belgium, including 12 branches of foreign banks. There is government oversight, but foreign banks
are allowed to operate and are subject to relatively few restrictions. “For financial institutions and insurance companies,” reports the Economist Intelligence Unit, “the procedures differentiate between EU and non-EU firms; in some circumstances,
however, firms from countries that either are in [the] European
Economic Area or are signatories to WTO agreements are
treated akin to EU firms. But generally speaking, no distinction
is made between foreign and domestic investment.” Commercial banks have ventured into new areas of the financial sector,
including project financing and securitization of assets, and
privatization and mergers have largely eliminated the differentiation between short-term and long-term financial institutions.
However, the government affects the allocation of credit; according to the Economist Intelligence Unit, “An interest-rate
104
subsidy may be available from regional authorities on mediumand long-term borrowing.”
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
The market determines most wages and prices in Belgium. According to the Economist Intelligence Unit, “Government pricecontrol powers ended in 1993…. However, companies with an
annual turnover of Bfr 300m, must notify the Ministry of Economic Affairs of any price increase or decrease; moreover, the
principle that prices must be ‘normal’ is still enshrined in legislation. This can be enforced in courts.” In addition, “Permission is sometimes necessary to increase the price…. The sectors affected [by this requirement] are those where there is a
deemed monopoly or an explicit social character (water, electricity and gas distribution, waste handling, homes for the elderly, medicines and implantable medical devices, certain cars,
compulsory insurance, fire insurance, petroleum products, taxi
transport, cable TV, and certain types of bread).” According to
the U.S. Department of State, “The only areas where price controls are effectively in place are energy, household leases, and
pharmaceuticals.” Belgium maintains a minimum wage.
PROPERTY RIGHTS
Score: 1–Stable (very high level of protection)
Property is well-protected. The Economist Intelligence Unit reports that “contractual agreements are quite secure in Belgium.
The country’s laws are codified, and the quality of the Belgian
judiciary and civil service is high, though the process is often
slow.”
REGULATION
Score: 3–Stable (moderate level)
There is considerable regulation geared to the protection of
small and mid-sized businesses, and a complex assortment of
regulations restricts the ability to open a business in many sectors, including banking, insurance, food, and pharmacies,
among others. These regulations include high labor costs and
social contributions, inflexible labor regulations, high taxation
levels, costly work hiring practices, and a perceived lack of
consistency in the government’s tax policies. According to the
U.S. Department of State, “the Federal Government…in 1998
set up a special task force to simplify official procedures. The
Belgian Employers’ Federation estimates the extra costs related to [lack of transparency] at $110 million per year.” In
addition, “The American Chamber of Commerce has called
attention to the adverse impact of cumbersome procedures
and unnecessary red tape on foreign investors, although Foreign companies do not necessarily suffer more from this than
Belgian firms.”
BLACK MARKET
Score: 2–Stable (low level of activity)
Transparency International’s 2001 score for Belgium is 6.6.
Therefore, Belgium’s black market score is 2 this year.
2003 Index of Economic Freedom
BELIZE
Belmopan
Trade Policy
Fiscal Burden
4
3.5
Government Intervention 2
Monetary Policy
1
Rank:
Score:
Category:
Foreign Investment 3
Banking and Finance 3
55
2.75
Mostly Free
Wages and Prices 2
Property Rights
3
Regulation
Black Market
Belize is a constitutional monarchy and member of the British Commonwealth.
Prime Minister Said Musa’s People’s United Party enjoys a parliamentary majority
that facilitates the passing of legislation, but it also is plagued by internal divisions.
Border disputes with Guatemala dominate Belize’s foreign policy agenda, and the
date for a solution to the dispute has been postponed once again until early 2003.
Despite strong growth in 2000, growth in GDP was lower than expected in 2001
and, according to the Economist Intelligence Unit, will continue to decline as a
result of the devastating effects of Hurricane Iris on the banana and citrus industry,
as well as on tourism infrastructure. The Economist Intelligence Unit also reports
that proposed government expenditures for 2002 include an increase in capital
spending for post-hurricane reconstruction, widening the deficit by 21 percent. To
finance that deficit, the government will tighten tax collection, cut expenditures,
and privatize some remaining public enterprises. Tourism remains one of the most
important economic sectors; despite the damages to this sector, tourist arrivals in
November 2001 were 8 percent above 2000 levels. Belize’s fiscal burden of government score is 0.5 point worse this year. As a result, its overall score is 0.05 point
worse this year.
Scores for Prior Years:
TRADE POLICY
Major export trading partners:
US 52.4%, UK 28.2%, CARICOM 6.0%,
Canada 1.7%
Score: 4–Stable (high level of protectionism)
As a member of the Caribbean Community and Common Market (CARICOM)
trade bloc, Belize has a common external tariff rate ranging from 5 percent to 20
percent. The World Trade Organization reports that Belize’s average tariff rate
was 9.1 percent in 1998 (the most recent year for which reliable data are available).
According to the U.S. Department of State, “A list of 27 categories of products
require import licenses prior to importation into Belize…. Belizean importers continue to complain that the process for obtaining import licenses is prone to corruption and needless red tape.”
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 2–Stable
(low tax rates)
Score—Government Expenditures: 5–Worse
(very high level of government expenditure)
Final Score: 3.5–Worse (high cost of government)
According to the International Monetary Fund, Belize’s top income tax rate is 25
percent; the marginal rate for the average taxpayer is 0 percent. The top corporate
income tax rate is 25 percent. Standard & Poor’s reports that government expenditures equaled 33.5 percent of GDP in 1999, up from the 28.5 percent reported in
the 2002 Index. Based on the increase in the level of government expenditures,
Belize’s overall fiscal burden of government score is 0.5 point worse this year.
Chapter 6: The Countries
2002: 2.70
1999: 2.85
1996: 2.75
2001: 2.70
1998: 2.95
1995: 2.70
3
3
2000: 2.80
1997: 2.75
2000 Data
(in constant 1995 US dollars)
Population: 240,000
Total area: 22,966 sq. km
GDP: $749 million
GDP growth rate: 10.2%
GDP per capita: $3,141
Major exports: sugar, garments,
molasses
Exports of goods and services:
$353.4 million
Major imports: machinery and
transportation equipment,
manufactured goods, food,
beverages, tobacco, fuels, chemicals,
pharmaceuticals
Imports of goods and services:
$480.7 million
Major import trading partners:
US 49.0%, Mexico 10.6%, Central
America 5.0%, UK 2.6%, Canada 2.1%
Foreign direct investment (net):
$16.5 million
105
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Stable (low level)
In 2000, according to the World Bank, the government of
Belize consumed 15.3 percent of GDP. In 2001, based on data
from the Central Bank of Belize, the government received 0.1
percent of its total revenues from state-owned enterprises and
government ownership of property. The government has
privatized a number of industries in the utilities sector, including water and electricity, and plans to privatize ports and concessions for the airport.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, Belize’s weighted average annual rate of
inflation was 0.79 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
Belize generally is open to foreign investment and allows 100
percent foreign ownership, but a number of sectors—commercial fishing within the barrier reef, merchandising, sugarcane farming, real estate and insurance, internal transportation, some tourism activities, accounting and legal services,
entertainment, beauty salons, and restaurants and bars—require special licenses that non-citizens may not acquire. The
government encourages foreign investment in tourism, light
manufacturing, agriculture, and forestry. Foreigners must register all investments with the central bank. To address extensive red tape and confusing lines of authority, Belize established the Belize Trade and Investment Development Service
as a one-stop shop for investors. According to the International
Monetary Fund, both residents and non-residents are permitted to hold foreign exchange accounts subject to government
approval. The central bank rations its foreign exchange for
invisible payments on an ad hoc basis, controls some payments,
and requires that repatriation be made through an authorized
dealer. All capital transactions must be approved by the central bank.
on tax matters with Organisation for Economic Co-operation
and Development countries to avoid countermeasures and
sanctions. In 1999, the government passed the International
Financial Services Act to promote its offshore financial services and offers extensive banking secrecy.
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
The market sets most wages and prices, but there are controls
on the prices of some basic commodities such as rice, flour,
beans, sugar, bread, butane gas, and fuel. Belize maintains a
two-tiered minimum wage, with workers in agriculture and
the export sector having a slightly lower minimum wage than
other sectors.
PROPERTY RIGHTS
Score: 3–Stable (moderate level of protection)
The constitution provides for an independent judiciary, which
in practice is subject to political influence. According to the
U.S. Department of State, “the judicial system is constrained
by a severe lack of trained personnel, and police officers often
act as prosecutors in the magistrate’s courts.” The result is
lengthy trial backlogs.
REGULATION
Score: 3–Stable (moderate level)
Belize’s regulatory regime is not always transparent. According to the U.S. Department of State, “Belize’s laws and regulations on tax, labor, customs, and health and safety do not significantly distort or impede the efficient mobilization and allocation of investment capital. However, some investors have
found a lack of transparency in the administration of some
Belizean laws and procedures, such as compulsory acquisition
of land, investment incentive programs and import licenses.”
Regulations often are applied haphazardly, and obtaining a
business license can be complicated. The U.S. Department of
State reports that “bribery is officially considered a criminal
act in Belize, but laws against bribery are rarely enforced.”
BANKING AND FINANCE
BLACK MARKET
Score: 3–Stable (moderate level of restrictions)
Belize has four commercial banks (one domestically owned
and three foreign); two state-controlled lending institutions
(the Development Finance Corporation and the Small Farmers and Business Bank); and some small credit unions. The
U.S. Department of State reports that banking services are
open to foreign investors. In 1998, the government lowered
the liquidity requirements of commercial banks from 26 percent to 24 percent and lowered cash reserve requirements from
7 percent to 5 percent to expand bank lending resources. According to Standard & Poor’s, “Banking supervision remains
a problem, with high turnover of supervisory personnel.
Credit Unions and other non-bank financial intermediaries
receive no supervision from the central bank.” Belize has
agreed to increase its transparency and exchange information
Score: 3–Stable (moderate level of activity)
Belize’s intellectual property laws are inadequate and insufficiently enforced. Piracy continues to be a problem.
106
2003 Index of Economic Freedom
BENIN
Rank:
104
Score:
3.35
Category: Mostly Unfree
Porto-Novo
Trade Policy
Fiscal Burden
4
3.5
Government Intervention 3
Monetary Policy
2
Foreign Investment 3
Banking and Finance 3
Wages and Prices 3
Property Rights
4
Regulation
Black Market
In 1960, Marxist insurgents in the former French colony of Dahomey seized power, established a one-party state, renamed the country, and nationalized most large businesses and
industries. In 1990, after a period of corruption, economic decline, and resultant civil unrest,
the country returned to democratically elected government. Privatization has proceeded,
but slowed by periods of delay and often in a non-transparent manner. From 1980 to 1999,
the number of state-owned enterprises fell from 130 to 27. Slated privatization of the important state-owned cotton monopoly and the port of Cotonou has been delayed, as has reform of the civil service. The economy is underdeveloped and focused primarily on cotton
production, regional trade, and subsistence agriculture. The U.S. Department of State identifies “the pervasive level of inefficient and corrupt government bureaucracies” as the key
obstacle for investors and businesses. Extensive union-led protests have forced the government to delay plans to reform civil service pay and restructure government expenditures
and enterprises. Between 1991 and 2000, according to World Bank data, compound annual
growth in GDP was a strong 4.8 percent and per capita GDP increased from $351 to $414 (in
constant 1995 U.S. dollars). Benin’s fiscal burden of government and government intervention scores are both 1 point worse this year. As a result, its overall score is 0.20 point worse
this year.
Scores for Prior Years:
TRADE POLICY
Major export trading partners:
Italy 17%, India 16%, Indonesia 11%,
Thailand 4%
Score: 4–Stable (high level of protectionism)
Benin is a member of the West African Economic and Monetary Union (WAEMU),
which imposes a common external tariff with four rates: 0 percent, 5 percent, 10 percent, and 20 percent. According to the International Monetary Fund, the WAEMU’s
average tariff rate was 12 percent in 2000. (The other seven members of the WAEMU
are Burkina Faso, Guinea–Bissau, Ivory Coast, Mali, Niger, Senegal, and Togo.)
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3.5–Worse
(high tax rates)
Score—Government Expenditures: 3–Worse
(moderate level)
Final Score: 3.5–Worse (high cost of government)
Ernst & Young reports that Benin’s top income tax rate is 60 percent, substantially higher
than the 35 percent reported in the 2002 Index; the marginal rate for the average taxpayer
is 6 percent. The corporate tax rate is 35 percent, according to Ernst & Young, down from
the 38 percent reported in the 2002 Index. In 2000, according to the African Development
Bank, government expenditures equaled 20.1 percent of GDP, up from the 17.1 percent
reported in the 2002 Index. Because data on government expenditures are available this
year (consumption data were substituted last year), Benin’s government expenditures
score is 1 point worse this year. Based on the availability of expenditure data and a higher
top income tax rate, Benin’s overall fiscal burden of government score is 1 point worse
this year.
Chapter 6: The Countries
2002: 3.15
1999: 3.00
1996: 3.20
2001: 2.90
1998: 3.10
1995: n/a
4
4
2000: 2.90
1997: 3.10
2000 Data
(in constant 1995 US dollars)
Population: 6,272,000
Total area: 112,620 sq. km
GDP: $2.6 billion
GDP growth rate: 5.8%
GDP per capita: $414
Major exports: cotton and textiles,
petroleum
Exports of goods and services:
$521 million
Major imports: foodstuffs, tobacco,
petroleum products, capital goods
Imports of goods and services:
$803 million
Major import trading partners:
France 20%, China 11%, Ivory Coast
9%, Germany 5%
Foreign direct investment (net):
$26.6 million
107
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Worse (moderate level)
The World Bank reports that in 2000, the government consumed
12 percent of GDP, up from the 10 percent reported in the 2002
Index. As a result, Benin’s government intervention score is 1
point worse this year. According to the Economist Intelligence
Unit, “Apart from the sale of Société nationale pour la promotion agricole (Sonapra)…and the privatization in 1999 of the
oilseed company, Société nationale pour l’industrie des corps
gras (Sonicog)—which runs six small palm-oil mills—the
privatization program has been held up because of delays in
submitting to parliament the draft laws outlining the regulatory framework for these industries.”
MONETARY POLICY
Score: 2–Stable (low level of inflation)
From 1992 to 2001, Benin’s weighted average annual rate of
inflation was 3.70 percent. Benin has benefited from a stable
currency—a rarity in sub-Saharan Africa—as a member of the
CFA franc zone. Fourteen countries use the CFA franc, a common currency with a fixed parity with the euro. (The other
countries are Burkina Faso, Cameroon, Central African Republic, Chad, Congo [Brazzaville], Equatorial Guinea, Gabon,
Guinea–Bissau, Ivory Coast, Mali, Niger, Senegal, and Togo.)
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
While the investment climate has improved, the U.S. Department of State reports that foreign investors still must contend
with inefficient bureaucracies that are subject to corruption.
Foreign direct investment requires prior declaration to the government. There are no controls on the purchase of land. The
privatization process has been open to foreigners but has been
marked by a lack of transparency. Privatization efforts have
stalled, leaving the government in control of the electricity,
water, and cotton sectors. The government requires partBeninese ownership of any privatized company. According to
the International Monetary Fund, payments and transfers to
member countries of the Central Bank of West African States
(BCEAO) are without restriction, but payments and transfers
to other countries require approval. (Members of the BCEAO
are Benin, Burkina Faso, Guinea–Bissau, Ivory Coast, Mali,
Niger, Senegal, and Togo.) The IMF reports that foreign exchange accounts require government and BCEAO authorization. Many capital transactions are subject to reporting requirements and approval by the government and the BCEAO.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
The BCEAO, a central bank common to the eight members of
the WAEMU, governs Benin’s banking system. The eight
BCEAO member countries use the CFA franc, pegged to the
French franc and guaranteed by the French Treasury. The
Economist Intelligence Unit reports that several bankrupt statecontrolled banks have been liquidated. Following restructuring,
108
four banks, all of them privately owned, now operate in Benin.
According to the U.S. Department of State, “Credit is allocated
on market terms and foreign investors can get credit on the
local market. Legal, regulatory and accounting systems are often unwieldy. In the view of some observers, the banking industry is not subject to effective mandatory regulation and most
banks are not managed in a transparent fashion.” In 2002, all
banks are required to meet a minimum capital adequacy ratio
of 8 percent to meet international accounting standards, and
supervision of the banking system has been strengthened.
WAGES AND PRICES
Score: 3–Stable (moderate level of intervention)
The International Monetary Fund reports that “the government
controls only utility rates and the prices of bread, pharmaceutical products, cement, and school and office supplies.” The government also partially controls the price of petroleum products and influences prices through state-owned enterprises, particularly the cotton parastatal. The government sets wages for
a number of occupations administratively.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
Benin’s justice system is weak and subject to corruption. According to the U.S. Department of State, there is no separate
commercial court system, and “the settlement of disputes pertaining to breach of contract, contract enforcement, claims, land
title, and related issues must be adjudicated in the civil courts….
The backlog of civil cases often results in a wait of two or more
years before matters proceed to trial…. Judicial corruption remains an impediment to administration of justice.”
REGULATION
Score: 4–Stable (high level)
The U.S. Department of State reports that the large bureaucracy and corruption “make it extremely difficult for…business
to conduct operations….” In addition, although the government
has established a “‘processing office’ (one-stop-shop) at the trade
ministry to help dispense with unnecessary and time consuming formalities,” investors continue to complain about bureaucratic obstacles to implement the investment code.
BLACK MARKET
Score: 4–Stable (high level of activity)
There is considerable smuggling of such products as secondhand cars between Benin and Nigeria. Benin is also a transit
route for illegal narcotics trafficking from Nigeria. The U.S.
Department of State reports that “many ‘employed’ persons
work in the informal sector or in exchange for room, board
and a pittance.”
2003 Index of Economic Freedom
BOLIVIA
Rank:
Score:
Category:
Trade Policy
Fiscal Burden
3
3
Government Intervention 2
Monetary Policy
1
Foreign Investment 1
Banking and Finance 2
Bolivia has made significant progress in opening its economy in the past decade
but still remains one of South America’s poorest and least developed countries.
The combination of a large bureaucracy and the lack of a strong rule of law has
fostered corruption, undermining both foreign and domestic investment as well as
economic growth generally. Agriculture traditionally has been the most important
economic sector. The government’s foreign policy is focused on expanding trade
with the United States and reducing coca production and drug trafficking. Former
President Jorge Quiroga had successfully addressed many issues, including social
unrest, poverty, and corruption, and committed to coca eradication; successful eradication of coca will depend, however, on how attractive it becomes to grow alternative crops. To make alternative crops more attractive, Bolivia will need to increase
trade while strengthening the rule of law and reducing bureaucracy to facilitate
investment. The government’s coca policy has found strong opposition from coca
growers’ unions, which claim there is no good alternative to growing coca for poor
farmers. On August 6, 2002, the Bolivian Congress decided that Gonzalo Sanchez
de Lozada, a market-friendly former president, would be Bolivia’s new president.
Lozada faces the challenge of improving Bolivian institutions and fostering sustained economic growth. Bolivia’s trade policy score is 1 point worse this year;
however, its fiscal burden of government and monetary policy scores are, respectively, 0.5 point and 1 point better. As a result, Bolivia’s overall score is 0.05 point
better this year.
TRADE POLICY
Score: 3–Worse (moderate level of protectionism)
According to the World Bank, Bolivia’s weighted average tariff rate in 1999 (the
most recent year for which World Bank data are available) was 9.1 percent, up
from the 5.37 percent (based on import duties as a percentage of total imports)
reported in the 2002 Index. As a result, Bolivia’s trade policy score is 1 point worse
this year. There are few if any non-tariff barriers.
44
2.65
Mostly Free
Wages and Prices 2
Property Rights
4
Regulation
4.0
Black Market 4.5
Scores for Prior Years:
2002: 2.70
1999: 2.75
1996: 2.70
2001: 2.40
1998: 2.60
1995: 3.10
2000: 2.65
1997: 2.70
2000 Data
(in constant 1995 US dollars)
Population: 8,328,700
Total area: 1,098,580 sq. km
GDP: $7.9 billion
GDP growth rate: 2.4%
GDP per capita: $952
Major exports: processed soya, zinc,
natural gas, gold
Exports of goods and services:
$1.5 billion
Major export trading partners:
US 31.8%, Colombia 17.5%, UK 15.3%,
Brazil 14.9%, Peru 5.5%
Major imports: capital goods, raw
materials and semi-manufactures,
chemicals, petroleum, food
Imports of goods and services:
$2.2 billion
Major import trading partners:
US 23.5%, Argentina 16.5%,
Brazil 15.2%, Chile 8.9%, Peru 5.4%
Foreign direct investment (net):
$669.7 million
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 2–Stable
(low tax rates)
Score—Government Expenditures: 4–Better
(high level of government expenditure)
Final Score: 3–Better (moderate cost of government)
Bolivia has a flat income tax of 13 percent, which also applies to the average taxpayer. The corporate tax rate is 25 percent. In 2000, based on data from the International Monetary Fund, government expenditures equaled 30 percent of GDP,
down from the 32.48 percent reported in the 2002 Index. Based on the lower level
of government expenditure, Bolivia’s overall fiscal burden of government score is
Chapter 6: The Countries
109
0.5 point better this year.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Stable (low level)
The World Bank reports that the government consumed 15.7
percent of GDP in 2000. In the same year, according to the
International Monetary Fund, Bolivia received 3.1 percent of
its total revenues from state-owned enterprises and government ownership of property.
MONETARY POLICY
Score: 1–Better (very low level of inflation)
From 1992 to 2001, Bolivia’s weighted average annual rate of
inflation was 2.64 percent, down from the 4.42 percent from
1991 to 2000 reported in the 2002 Index. As a result, Bolivia’s
monetary policy score is 1 point better this year.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 1–Stable (very low barriers)
Bolivia encourages foreign investment. Foreign investors receive national treatment, and there is no screening process.
Few restrictions remain in effect, and those that apply to the
petroleum and mining industries are minimal. The mining law
permits foreign firms to operate within 50 kilometers of international borders through joint ventures and service contracts with domestic firms, amending the previous ban on foreign investment in that region. The International Monetary
Fund reports that both residents and non-residents may hold
foreign exchange accounts; there are no restrictions or controls on payments, transactions, transfers, purchase of real
estate, access to foreign exchange, or repatriation of profits.
According to the same source, “All foreign credits…and credits to the private sector with official guarantees are subject to
prior authorization by the MOF [Ministry of Finance] and to
control by the CBB [Central Bank of Bolivia].”
BANKING AND FINANCE
Score: 2–Stable (low level of restrictions)
New laws reformed Bolivia’s banking system in 1993 and 1995,
clarifying the legality of factoring, leasing, foreign currency
hedging, permitting banks to hold foreign currency accounts,
increasing reserve requirements, and prohibiting insider lending. Government-owned banks no longer exist, and the Economist Intelligence Unit reports that reform of the banking sector has led to consolidation, with the number of local retail
banks shrinking to nine from 14 in 1995. Over 95 percent of
total deposits are U.S. dollar denominated. Bolivia’s banking
sector is open to foreign investment. According to the Economist Intelligence Unit, “The majority of local banks now have
some level of foreign participation…. Wholly foreign banking operations in La Paz and Santa Cruz are mainly engaged
in corporate lending….”
There are few price controls. According to the U.S. Department of State, “There remain two significant exceptions to
this general reliance on market forces: petroleum prices
(whose price is set by the Superintendent of Hydrocarbons)
and the most commonly sold bread rolls, whose prices are set
by the respective municipal governments.” There is a minimum wage that is subject to annual renegotiation.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
Legal protection of private property in Bolivia is weak. While
the judiciary is independent, according to the U.S. Department
of State, “investors should be aware…that there is a severe
lack of transparency in the country’s judicial system. The current Administration recognizes this deficiency and is working with the political opposition to legislate changes to the
system. In the meantime it can be difficult to enforce contracts through a court system in which corruption and inefficiency are significant problems. Incidents of corruption are
also not uncommon among low-level officials of the executive branch.” With respect to the constitutional rights of defendants—such as the right to be presumed innocent, to have
an attorney, to remain silent, to essential due process, and to
an appeal—the same source reports that “in practice almost
none…systematically exist” and “defense attorneys at public
expense if needed…are not always available.”
REGULATION
Score: 4–Stable (high level)
According to the U.S. Department of State, “Although some
bureaucratic procedures have been reduced, plenty of red tape
and archaic policies remain at all levels of Bolivian Government…. The scale of corruption in Bolivia was reduced significantly by the capitalization program, which passed control of the largest state entities to private hands. Until further
dramatic changes are undertaken, bribes will continue to be
paid by hapless and/or conniving businesses to move their
paperwork faster through the bureaucratic maze or to gain
contracts.” The government has identified streamlining bureaucracy and addressing corruption as two key economic
goals, but progress is slow, partly because of political conditions. Corruption remains a problem at many levels of government, and the Economist Intelligence Unit reports that
“Repeated cases of corruption and influence peddling by top
officials continue to emerge.”
BLACK MARKET
Score: 4.5–Stable (very high level of activity)
Transparency International’s 2001 score for Bolivia is 2.0.
Therefore, Bolivia’s black market score is 4.5 this year.
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
110
2003 Index of Economic Freedom
BOSNIA AND HERZEGOVINA
Rank:
139
Score:
3.80
Category: Mostly Unfree
Sarajevo
Trade Policy
Fiscal Burden
2
4
Government Intervention 5
Monetary Policy
2
Foreign Investment 4
Banking and Finance 3
Despite billions in assistance since 1995, Bosnia has yet to enjoy significant economic
recovery. The rule of law remains virtually nonexistent, and local courts are subject to
substantial political interference and lack the skills needed to prosecute any but the simplest crimes fairly and effectively. The weak central government spends freely but ineffectively; the people have received very little in return; and most of the older political parties
in all three ethnic communities (Serbian, Croatian, and Muslim) are linked to organized
crime. A lack of privatization caused the United States to suspend aid in December 1999.
Since then, there has been some improvement, with Slovene companies in particular
beginning to invest in local banking, brewing, and retailing concerns. However, such problems as intrusive bureaucracy, long and costly registration procedures, and restrictive labor laws, along with the obvious political fragility, remain unaddressed. Much of the
economy is centered on the black market. Bosnia remains desperately poor; only 13.2
percent of the population earns in excess of $4 a day. Overall, the economy remains
controlled by a political elite at odds with reforms that would lead to greater openness.
On the other hand, the economy has shown signs of marginal revival with the increase in
trade across the inter-entity boundary that demarcates Bosnia’s constituent parts. Bosnia
and Herzegovina’s monetary policy score is 1 point worse this year; however, its trade
policy and banking and finance scores are both 1 point better. As a result, Bosnia and
Herzegovina’s overall score is 0.10 point better this year.
TRADE POLICY
Score: 2–Better (low level of protectionism)
In 2000, based on data from the International Monetary Fund and the Economist Intelligence Unit, Bosnia and Herzegovina’s average tariff rate was 3.4 percent (based on taxes
on international trade as a percent of total imports), down from the 6.2 percent reported
in the 2002 Index. As a result, Bosnia and Herzegovina’s trade policy score is 1 point better
this year. According to the Economist Intelligence Unit and other sources, non-tariff barriers take the form of corruption and inefficiencies in the customs clearance process.
FISCAL BURDEN OF GOVERNMENT
Wages and Prices 3
Property Rights
5
Regulation
Black Market
Scores for Prior Years:
2002: 3.90
1999: 4.70
1996: n/a
2001: 4.00
1998: 4.70
1995: n/a
2000: 4.40
1997: n/a
2000 Data
(in constant 1995 US dollars)
Population: 3,977,000
Total area: 51,129 sq. km
GDP: $6.5 billion
GDP growth rate: 5.9%
GDP per capita: $1,526
Major exports: base metals,
clothing, wood products
Exports of goods and services:
$1.7 billion
Major export trading partners:
Italy 17.2%, Switzerland 16.8%,
Germany 16.0%, Croatia 11.0%
Major imports: food and beverages,
chemicals, machinery and
equipment, fuel
Imports of goods and services:
$3.5 billion
Major import trading partners:
Croatia 29.3%, Slovenia 14.5%,
Germany 12.8%, Italy 9.4%
Foreign direct investment (net):
$107 million
Score—Income and Corporate Taxation: 2.5–Stable
(moderate tax rates)
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 4–Stable (high cost of government)
Based on information from the Foreign Investment Promotion Agency, Bosnia’s top income tax rate is 25 percent; the marginal rate for the average taxpayer is 0 percent. The
top corporate tax rate is 30 percent. Government expenditures equaled 65.9 percent of
GDP in 2000 and have been rising rapidly. According to the International Monetary Fund,
the high level of government expenditure results from entitlements to a highly dependent post-war demographic of elderly, invalid, and disabled; benefits to war veterans; and
large numbers of working-age people who left the country during the war.
Chapter 6: The Countries
5
5
111
GOVERNMENT INTERVENTION IN THE ECONOMY
WAGES AND PRICES
Score: 5–Stable (very high level)
The International Monetary Fund reports that government expenditures equaled 65.9 percent of GDP in 2000. (Data on government consumption are not available; therefore, data on government expenditures have been used as a proxy.) Data from the IMF
indicate that from January to November 2001, the government received 3 percent of its total revenues from state-owned enterprises
and government ownership of property.
Score: 3–Stable (moderate level of intervention)
According to the U.S. Department of State, “Although the markets
generally determine prices, certain goods and services are still subject to government control (electricity, gas, telecom services). The
government has the ability to influence pricing policy at companies under its direct or indirect control.” Bosnia maintains a minimum wage.
MONETARY POLICY
Score: 2–Worse (low level of inflation)
Data from the Economist Intelligence Unit indicate that between
1994 and 2001, Bosnia’s weighted average annual rate of inflation
was 3.19 percent, up from the 2.99 percent between 1994 and 2000
reported in the 2002 Index. As a result, Bosnia and Herzegovina’s
monetary policy score is 1 point worse this year.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 4–Stable (high barriers)
The U.S. Department of State reports that Bosnia “accords foreign
investors the same rights as domestic investors. Further, with the
exception of armaments and public information, which limit the
percentage of foreign control to 49 percent, there are no restrictions on the types of business activities. Investors are also protected
from changes in laws regarding foreign investment. Should the
government make changes, the investor may choose the most favorable set of rules to abide by. Finally, the law prohibits expropriation and nationalization of assets, except under special circumstances and not without due compensation.” However, business
regulations remain “complex, cumbersome, and intrusive, providing for the maximum of bureaucratic control and offering official
inspectors of every ilk abundant opportunities for extorting bribes.”
BANKING AND FINANCE
Score: 3–Better (moderate level of restrictions)
Bosnia’s banking sector has been improving since the central bank
adopted increased capital requirements and independent bank supervision. According to the Economist Intelligence Unit, “Most
banks are privately owned and undercapitalised, many of them
having only the statutory minimum level of capital…. The stateowned banks have also been in no position to lend, because a large
proportion of their loan portfolios are non-performing and they
have acute liquidity problems.” The same source also notes that
private banks controlled approximately 80 percent of banking assets in early 2002, compared to just 10 percent in 1995. The four
foreign banks now operating in the Federation of Bosnia–
Herzegovina hold 50 percent of deposits and account for 70 percent of banking assets. Four of the 11 majority state-owned banks
in the Republika Srpska region have been privatized. Based on evidence of progress in privatizing the banking sector, Bosnia and
Herzegovina’s banking and finance score is 1 point better this year.
112
PROPERTY RIGHTS
Score: 5–Stable (very low level of protection)
The U.S. Department of State reports that “Bosnia’s judicial system, which is still evolving, does not yet adequately cover commercial activities. There are no commercial/economic courts in
Bosnia and Herzegovina and no efficient way to resolve commercial disputes. Contract law, in practice, is almost unenforceable.
Businesses may lodge complaints; however, due to backlogs in the
courts, the average suit to collect unpaid accounts takes an average
of a year and a half to come to trial. Further, business people report that judges typically seek bribes or are subject to influence by
public officials. Even when there is a positive decision from the
court, there may be no way to enforce a judgment.”
REGULATION
Score: 5–Stable (very high level)
Bosnia’s business environment is characterized by lack of transparency, and its investment process is both plodding and burdensome. According to the U.S. Department of State, “Establishing a business in Bosnia can be an extremely burdensome
and time-consuming process for investors. In the Federation,
there are 14 different administrative approvals needed for registration. The average time to complete the process in the Federation is 95 days…. [H]owever, the entire process can often
take a year or more…. The myriad of state, entity and municipal administrations creates a heavily bureaucratic system lacking transparency. This is particularly problematic for investors.
All three levels of government (municipal, cantonal, and entity-levels) establish laws and regulations affecting businesses,
creating redundant and inconsistent procedures that encourage corruption.”
BLACK MARKET
Score: 5–Stable (very high level of activity)
Bosnia’s black market is extensive. According to the Economist
Intelligence Unit, “Although much progress has been made in
improving the tracking of export and import flows, it is believed
that a significant part of trade still goes unrecorded.” The same
source reports that “The official unemployment rate, which was
around 40% at end-2000…[is] misleading, as the informal
economy is large.”
2003 Index of Economic Freedom
BOTSWANA
Rank:
Score:
Category:
Gaborone
Trade Policy
Fiscal Burden
2
3.5
Government Intervention 4
Monetary Policy
3
Foreign Investment 2
Banking and Finance 2
Political stability under continuous civilian rule, sound economic policy, and ample
natural resources have contributed to Botswana’s status as the country with the
fastest growth in per capita income over the past 35 years, according to The Economist. Between 1991 and 2000, compound growth in GDP averaged 4.4 percent and
per capita GDP—among the highest in sub-Saharan Africa—increased from $3,259
to $3,951. As one of sub-Saharan Africa’s brightest economic prospects, Botswana
has the region’s highest sovereign credit rating. The economy remains heavily dependent on diamond mining; diamonds provide two-thirds of export income and
account for over 50 percent of government revenue. According to the U.S. Department of State, nearly 50 percent of the population is engaged in the agricultural
sector, especially subsistence farming and cattle ranching. Botswana’s privatization
agency has not revealed details of the country’s privatization agenda aside from
confirming that Air Botswana will be included once the market for international
aviation improves. An estimated 19 percent of Botswana’s population of 1.6 million are infected with HIV (including 38 percent of the adult population), reducing
life expectancy from 68 years to 44 years and undermining productivity throughout the economy. Botswana’s trade policy, capital flows and foreign investment,
banking and finance, and regulation scores are all 1 point better this year. As a
result, its overall score is 0.40 point better this year.
TRADE POLICY
Score: 2–Better (low level of protectionism)
Botswana is part of the Southern African Customs Union (SACU) with South Africa, Lesotho, Swaziland, and Namibia. According to the World Bank, in 1999 (the
most recent year for which World Bank data are available),the SACU had an average common external tariff rate of 8.5 percent, down from the 12 percent reported
in the 2002 Index. As a result, the score in this factor is 1 point better this year.
There are few if any non-tariff barriers.
FISCAL BURDEN OF GOVERNMENT
35
2.50
Mostly Free
Wages and Prices 2
Property Rights
2
Regulation 2
Black Market 2.5
Scores for Prior Years:
2002: 2.90
1999: 2.95
1996: 3.00
2001: 2.95
1998: 2.95
1995: 3.30
2000: 2.95
1997: 3.05
2000 Data
(in constant 1995 US dollars)
Population: 1,602,000
Total area: 600,370 sq. km
GDP: $6.3 billion
GDP growth rate: 7.7%
GDP per capita: $3,951
Major exports: diamonds, copper
and nickel, textiles, meat products
Exports of goods and services:
$2.4 billion
Major export trading partners:
UK 69.7%, SACU 6.7%, Zimbabwe
3.9%, US 0.6%
Major imports: foodstuffs,
machinery and transport equipment,
textiles, petroleum products
Imports of goods and services:
$2.2 billion
Major import trading partners:
SACU 73.9%, UK 4.2%, Zimbabwe
3.5%, US 1.6%
Foreign direct investment (net):
$23 million
Score—Income and Corporate Taxation: 2–Stable
(low tax rates)
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 3.5–Stable (high cost of government)
Botswana has one of Southern Africa’s lower tax burdens. The top income tax rate
is 25 percent; the marginal rate for the average taxpayer is 5 percent. The top corporate tax rate is 25 percent. Based on data from the International Monetary Fund,
government expenditures equaled 44.8 percent of GDP in 2000.
Chapter 6: The Countries
113
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 4–Stable (high level)
Based on data from Botswana’s Central Statistics Office, the
government consumed 29.8 percent of GDP in 2000. In the
same year, based on data from the Bank of Botswana, the government received 67.59 percent of its total revenues from stateowned enterprises and government ownership of property.
MONETARY POLICY
Score: 3–Stable (moderate level of inflation)
From 1992 to 2001, Botswana’s weighted average annual rate
of inflation was 7.14 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Better (low barriers)
Botswana restricts foreign investment in a number of activities, including manufacture of school furniture, welding and
bricklaying, hawkers and vendors, butchery and produce,
petrol filling stations, bars and liquor stores, supermarkets,
and retail, but these restrictions are easily circumvented in
most cases. Most utilities, telecommunications, postal services,
water, railways, and agriculture are closed to private investment. According to the U.S. Department of State, however,
“these restrictions are not a meaningful impediment to serious foreign investment.” Botswana permits 100 percent foreign ownership of other businesses, although there is a screening process. Exchange controls were eliminated in 1999. The
International Monetary Fund reports that both residents and
non-residents are permitted to hold foreign exchange accounts
and that controls on payments, transfers, and transactions are
negligible. Non-residents are not permitted to purchase monetary instruments issued by the Bank of Botswana. The evidence indicates that, while barriers to foreign investment exist, they do not represent a serious impediment to foreign investment. As a result, Botswana’s capital flows and foreign
investment score is 1 point better this year.
BANKING AND FINANCE
Score: 2–Better (low level of restrictions)
Botswana’s banking system is competitive and advanced, compared to those of most African states. The four main banks
are British and South African. An Indian bank, the Bank of
Baroda, began commercial banking activities in the spring of
2000. Government involvement in the financial sector includes
the National Development Bank, which oversees many government financial operations including the disbursal of funds
under the Financial Assistance Policy; the Botswana Building
Society, which provides most mortgages; and the Botswana
Development Corporation, which provides loans and equity
to foreign companies and local entrepreneurs. Credit is available on market terms and is freely available to foreign investors. The insurance sector and the stock market have been
growing strongly in recent years. Although the government
owns several development banks, there are no barriers to foreign banks and no restrictions on credit or interest rates, and
114
there is no evidence of government influence on private banks.
As a result, Botswana’s banking and finance score is 1 point
better this year.
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
Price controls have been eliminated. Local farmers receive
extensive government relief in drought years—in some cases
to such an extent that profits increase during drought, according to the Economist Intelligence Unit, which also reports that
“Cattle farmers receive significant financial support and generous tax treatment.” The government sets a minimum daily
wage, which is determined by the Cabinet with advice from
government, labor, and private-sector representatives. The
minimum wage was extended to domestic workers in 2002.
PROPERTY RIGHTS
Score: 2–Stable (high level of protection)
The constitution provides for an independent judiciary, and
the government respects this provision in practice. According
to the U.S. Department of State, “The Botswana constitution
provides for a judiciary, which is independent of both the executive and legislative authorities…. The legal system is sufficient to conduct secure commercial dealings.” However, “the
civil courts remained unable to provide for timely, fair trials in
many cases due to severe staffing shortages and a backlog of
pending cases.”
REGULATION
Score: 2–Better (low level)
Regulation is transparent and evenly applied in Botswana. The
U.S. Department of State reports that “the Botswana government adheres to transparent policies and maintains effective
laws to foster competition and establishes clear rules for operation. Bureaucratic procedures are streamlined and open,
although somewhat slow, and not excessively overbearing compared to other African countries.” The government has made
some efforts to make it easier for small businesses to open
and operate. To that end, it has created a one-stop shop for
investors to avoid unnecessary bureaucratic steps to start a
new business. According to the U.S. Department of State, “Investors with experience in other developing nations describe
the lack of obstruction or interference by government as
among the country’s most important assets.” Transparency
International has rated Botswana as the least corrupt country
in sub-Saharan Africa. Based on new evidence with respect to
the transparency of the regulatory environment, Botswana’s
regulation score is 1 point better this year.
BLACK MARKET
Score: 2.5–Stable (moderate level of activity)
Transparency International’s 2001 score for Botswana is 6.0.
Therefore, Botswana’s black market score is 2.5 this year.
2003 Index of Economic Freedom
BRAZIL
Brasilia
Trade Policy
Fiscal Burden
4
2.5
Government Intervention 3
Monetary Policy
3
Rank:
72
Score:
3.00
Category: Mostly Unfree
Foreign Investment 3
Banking and Finance 3
Brazil’s economy is the largest in Latin America, and the administration of current
President Fernando Henrique Cardoso has introduced several laws to advance economic reform, but more needs to be done. Brazil’s economy is still burdened with
structural problems that undermine the prospects for long-term growth, including a convoluted tax system, barriers to foreign investment in some sectors, government management of most of the oil and electricity sector as well as a significant part of the banking system, a weak judiciary, and an overabundance of red
tape. The winner of the 2002 presidential election, scheduled for October 6, will
therefore need to advance structural reforms to open the Brazilian economy further. Jose Serra, the Partido da Social Democracia Brasileira (PSDB) candidate, has
promised to ensure the continuity of market liberalization, but his chances of winning are uncertain. As of this writing, leftist Partido dos Trabalhadores candidate
Luiz Inacio “Lula” da Silva is ahead in the polls and, if he wins, could reverse reform. Last year, the government approved a tax reform combining two indirect
business taxes into a single consumption levy, but a threatening budget deficit may
lead to corporate tax increases. The government also began to liberalize the stateowned oil giant Petrobras, inviting foreign competition. Trade Minister Sergio
Amaral fears a significant dip in export revenues because of U.S. steel tariffs. As an
alternative, Brazil could expand its export markets by pursuing free trade agreements with other countries and improve the quality of its products by lowering its
high tariff rates. Brazil’s exports account for about 50 percent of the volume of
Mexico’s, whose economy is half the size of Brazil’s. Brazil’s fiscal burden of government score is 1 point better this year. As a result, its overall score is 0.1 point
better this year.
TRADE POLICY
Score: 4–Stable (high level of protectionism)
As a member of the Southern Cone Common Market (MERCOSUR), Brazil maintains relatively low trade barriers with Argentina, Paraguay, and Uruguay but applies a high tariff on all goods and services coming into Brazil from countries outside MERCOSUR. According to the Embassy of Uruguay, the average rate for
MERCOSUR’s common external tariff was 13 percent in 2001. According to the
U.S. Department of State, “importers must comply with onerous registration guidelines, including a minimum capital requirement, to register with SECEX. Complete information on requirements for importing into Brazil is available only through
SISCOMEX, and such information is only available to registered importers…. Despite progress, SPS [sanitary and phytosanitary] measures remain significant barriers in many cases, in part driven by Brazil’s implementation of the harmonized
phytosanitary standards of the Southern Cone Phytosanitary Committee
(COSAVE).”
Chapter 6: The Countries
Wages and Prices 2
Property Rights
3
Regulation
3.0
Black Market 3.5
Scores for Prior Years:
2002: 3.10
1999: 3.30
1996: 3.55
2001: 3.25
1998: 3.45
1995: 3.30
2000: 3.50
1997: 3.45
2001 Data
(in constant 1995 US dollars)
Population: 172,390,000
Total area: 8,511,965 sq. km
GDP: $799.8 billion
GDP growth rate: 1.5%
GDP per capita: $4,698
Major exports: transport equipment
and parts, chemical products, iron
ore, soybeans
Exports of goods and services:
$63.5 billion
Major export trading partners:
US 23.8%, Argentina 11.1%,
Netherlands 5.0%, Germany 4.5%
Major imports: machinery and
equipment, chemical products, oil,
electricity
Imports of goods and services:
$85.6 billion
Major import trading partners:
US 23.1%, Argentina 12.2%, Germany
7.9%, Japan 5.3%
Foreign direct investment (net):
$22.2 billion
115
FISCAL BURDEN OF GOVERNMENT
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score—Income and Corporate Taxation: 1.5–
Better (low tax rates)
Score—Government Expenditures: 3–Better
(moderate level of government expenditure)
Final Score: 2.5–Better (moderate cost of
government)
Brazil’s top income tax rate is 27.5 percent; the marginal rate
for the average taxpayer is 0 percent. The top corporate tax
rate is 15 percent. Based on data from the Central Bank of
Brazil, government expenditures equaled 24 percent of GDP
in 2001, down from the 30.6 percent reported in the 2002 Index. Based on a clarification in the methodology for scoring
income and corporate taxation, as well as a reduction in the
level of government expenditures, Brazil’s overall fiscal burden of government score is 1 point better this year.
Score: 3–Stable (moderate barriers)
Constitutional amendments in 1995 dissolved legal distinctions
between foreign and domestically owned companies; foreign
capital may enter Brazil freely and receives national treatment,
according to the Economist Intelligence Unit. Constitutional
reform adopted in 2002 allows foreign investment of up to 30
percent in Brazilian media, in addition to permitting corporate ownership, but Brazilian nationals must oversee management and editorial control. Restrictions remain in effect on
foreign investment in certain sectors, including internal transportation, public utilities, and other “strategic” industries.
Foreigners are allowed to take part in the ongoing privatization
process. The International Monetary Fund reports that only
authorized foreign exchange dealers, Brazilians living abroad,
credit card companies, embassies, international organizations,
foreign citizens in transit, and energy companies may hold
foreign exchange accounts. Most payments and transfers require government authorization, as do many capital transactions. Foreign nationals may not own land in rural areas or
along national borders without permission from the National
Security Council.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Stable (moderate level)
Based on data from the International Monetary Fund, the
government consumed 20 percent of GDP in 2001. The U.S.
Department of State reports that “the government established
a tradition of being the dominant force in shaping economic
growth by means of planning and management. Its influence
was felt not only directly through the day-to-day activities of
government entities, but also through governmental wage,
price, and credit policies, and subsidy and fiscal incentive programs. While the central government retains an important
economic role, the policies of the Cardoso administration have
aimed at reducing the government presence in economic activities and concentrating on its role in areas such as public
health, safety, and education.” In addition, “Most electricity
distribution has been privatized, but a large share of generating capacity is held by the government. In the petroleum and
gas sector, the government has open[ed] exploration to private companies, including foreigners, although PETROBRAS,
a state-owned enterprise, still dominates the sector. In the telecommunications sector, the government…established a National Telecommunications Agency (Anatel) to regulate this
once dormant sector, which has experienced explosive growth
since privatization…. The government is also considering a
privatization of Infraero, which runs the country’s sixty-seven
airports.” In 2001, according to the Economist Intelligence
Unit, the government privatized two cellular bands, offered
Petrobras shares, and sold a few state-owned banks. Despite
these privatization efforts, however, the government’s presence in Brazil’s economy remains significant.
MONETARY POLICY
Score: 3–Stable (moderate level of inflation)
From 1992 to 2001, Brazil’s weighted average annual rate of
inflation was 8.42 percent.
116
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
Brazil’s highly developed and efficient banking system is the
largest in South America and offers a wide range of financial
services. The U.S. Department of State reports that “Many of
Brazil’s states have state-owned or controlled banks offering
public and private banking services. However, the number of
such state-level banking institutions has fallen in recent years
due to the central government’s financial and banking reform
efforts.” The government affects the allocation of credit. According to the Economist Intelligence Unit, “Through BNDES
[the National Bank for Economic and Social Development],
the federal government created the ‘Brazil Entrepreneur’
programme to finance micro-, small, and medium-sized businesses. This programme disburses loans for real estate construction; acquisition of capital goods, machinery, and equipment; workforce training; research, development and franchise-related costs.” The government has relaxed some restrictions on foreign participation in the Brazilian stock market;
since November 2000, for example, foreigners are no longer
required to pay a tax of 0.38 percent on all financial transactions. The central bank must approve all incoming foreign
loans. The U.S. Trade Representative reports that Brazil has
yet to ratify the 1997 World Trade Organization financial services agreement, reserving for itself “the right to approve, on
a case-by-case basis and subject to non-transparent criteria, all
new foreign entry or expansion in the non-insurance financial services sector.” Brazil does not often block such investments, however, and foreign-owned or foreign-controlled
banks accounted for over 28 percent of total bank assets at
the end of 2000.
2003 Index of Economic Freedom
WAGES AND PRICES
BLACK MARKET
Score: 2–Stable (low level of intervention)
The Economist Intelligence Unit reports that “some public
goods and services supplied by state-owned enterprises or by
local governments remain under government control. Although many public services and infrastructure investments
such as railways, telecommunications and electricity were either privatized or transferred to private management through
public concessions, the federal government still oversees tariffs and prices, especially in telecoms and energy, through regulatory agencies for these sectors.” The government removed
all controls on gasoline and diesel fuel in January 2002. Brazil
has a minimum wage that is adjusted by the government each
year.
Score: 3.5–Stable (high level of activity)
Transparency International’s 2001 score for Brazil is 4.0. Therefore, Brazil’s black market score is 3.5 this year.
PROPERTY RIGHTS
Score: 3–Stable (moderate level of protection)
Expropriation of property in Brazil is unlikely, and contracts
are generally considered secure. According to the Economist
Intelligence Unit, “The judiciary and civil service are considered fair, but their decision-making is hampered by time consuming procedures.” The U.S. Department of State reports
that “The judiciary…is inefficient, subject to political and economic influence, and plagued by problems relating to lack of
resources and training of officials.” In addition, “An overburdened court system is available for enforcing property rights
but decisions can take years. Decisions of the Supreme Federal Tribunal are not automatically binding on lower courts,
leading to more appeals than would otherwise occur.”
REGULATION
Score: 3–Stable (moderate level)
Brazil’s regulatory structure is not entirely transparent. Many
regulations continue to restrain business activity and frequently are not applied evenly or consistently. “Although some
improvements have been made,” reports the U.S. Department
of State, “the Brazilian legal and procedural system is complex and often far from transparent…. The central government has historically exercised considerable control over private business through extensive and frequently changing regulations. The bureaucracy has broad discretionary authority.
To implement economic changes more rapidly, the government has resorted to presidential decrees rather than securing congressional approval of laws. Such decrees are frequently
challenged in the courts and a number have been declared
unconstitutional, making planning difficult.” Although the
government has attempted to reform the labor laws, such efforts have not proved successful, and a key civil service reform bill has been stalled in the legislature. Recent corruption scandals have underscored what the U.S. Department of
State calls “a persistent problem in Brazil.” Lax enforcement
of existing laws against corruption is part of the problem.
Chapter 6: The Countries
117
118
2003 Index of Economic Freedom
BULGARIA
Rank:
104
Score:
3.35
Category: Mostly Unfree
Sofia
Trade Policy
Fiscal Burden
4.0
4
Government Intervention 2
Monetary Policy
5
Foreign Investment 3
Banking and Finance 3
Bulgaria’s government is finding it difficult to build political support for a far-reaching
economic stabilization policy. A majority coalition is led by Simeon Saxe-Coburg, the
former king, who was elected prime minister in July 2001; former socialist leader Georgi
Purvanov won the presidential elections in November 2001, and center–right parties are
in opposition. From 1994–1997, Bulgaria’s economy suffered under an anti-reformist government headed by socialists. In 1997–2001, the center–right government implemented
vital economic reforms and an effective privatization program in all major sectors. It is
expected that privatization of the electricity network and largest telecommunications
operator will be completed in 2002. The Currency Board Arrangement introduced in
July 1997 has promoted recovery of foreign exchange reserves while pegging the national
currency to the euro. Important steps have been taken in energy pricing; property rights
(although the constitution bars foreigners from owning land); the reduction of price controls; banking sector reform; agricultural liberalization; and legal reform. The program
agreed upon with the International Monetary Fund largely determines Bulgaria’s economic policies in 2002; a tight consolidated budget puts the deficit targets at 0.8 percent
of GDP. By the beginning of 2002, Bulgaria had implemented only 14 of 29 negotiable
chapters for accession to the European Union; it is therefore unlikely to join the EU in the
first wave of expansion. Bulgaria’s active lobbying for NATO and EU enlargement is
driven by the risk of “double exclusion” from the process of integration into the two
premier European organizations. Bulgaria has signed free trade agreements with the
European Free Trade Area and is a party to the Central European Free Trade Agreement.
Bulgaria’s capital flows and foreign investment score is 1 point worse this year; however,
its fiscal burden of government and government intervention scores are, respectively, 0.5
point and 1 point better. As a result, Bulgaria’s overall score is 0.05 point better this year.
TRADE POLICY
Score: 4–Stable (high level of protectionism)
According to the U.S. Trade Representative, Bulgaria’s average tariff rate in 2001
was 11.29 percent. The Washington Times cites customs corruption as a non-tariff
barrier.
FISCAL BURDEN OF GOVERNMENT
Wages and Prices 2
Property Rights
3
Regulation
4.5
Black Market 3.5
Scores for Prior Years:
2002: 3.40
1999: 3.50
1996: 3.50
2001: 3.30
1998: 3.65
1995: 3.50
2000: 3.40
1997: 3.60
2000 Data
(in constant 1995 US dollars)
Population: 8,166,960
Total area: 110,910 sq. km
GDP: $12.3 billion
GDP growth rate: 5.8%
GDP per capita: $1,503
Major exports: textiles, clothing,
footwear, base metals, machinery
and transport equipment, chemicals
Exports of goods and services:
$7.02 billion
Major export trading partners:
Italy 15.0%, Germany 9.6%, Greece
8.8%, Turkey 8.1%, France 5.6%
Major imports: fuels, minerals, raw
materials, machinery and equipment,
metals and ores, chemicals and
plastics, food, textiles
Imports of goods and services:
$7.7 billion
Major import trading partners:
Russia 19.9%, Germany 15.3%, Italy
9.6%, France 6.1%, Greece 5.7%
Foreign direct investment (net):
$919 million
Score—Income and Corporate Taxation: 3–Better
(moderate tax rates)
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 4–Better (high cost of government)
The government cut taxes in 2001. Bulgaria’s top income tax rate is 38 percent, down
from the 40 percent reported in the 2002 Index; the marginal rate for the average taxpayer
is still 26 percent. The top corporate tax rate is 20 percent, down from the 25 percent
reported in the 2002 Index. Data from the International Monetary Fund indicate that
Chapter 6: The Countries
119
government expenditures equaled 38 percent of GDP in 2000. Based
on a clarification in methodology, Bulgaria’s income and corporate taxation score is 0.5 point better this year. As a result, its overall
fiscal burden of government score is 0.5 point better this year.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Better (low level)
The World Bank reports that the government consumed 17.7
percent of GDP in 2000. In the same year, according to the
International Monetary Fund, Bulgaria received 4.4 percent
of its total revenues from state-owned enterprises and government ownership of property, down from the 8.8 percent
reported in the 2002 Index. As a result, Bulgaria’s government
intervention score is 1 point better this year.
MONETARY POLICY
Score: 5–Stable (very high level of inflation)
From 1992 to 2001, Bulgaria’s weighted average annual rate
of inflation was 20.83 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Worse (moderate barriers)
Bulgaria welcomes foreign investment. The law mandates
equal treatment for foreign investors, and investors may repatriate 100 percent of profits. Non-residents may not purchase
or own land, and non-residents inheriting land must dispose
of it within three years, but ownership of buildings and lease
of land are permitted. According to the U.S. Department of
State, “Local companies where foreign partners have controlling interests must obtain prior approval (licenses) to engage
in certain activities: production and export of arms/ammunition; banking and insurance; exploration, development and
exploitation of natural resources; and acquisition of property
in certain geographic areas.” A well-entrenched bureaucracy
remains an obstacle to foreign investment, which until recently
also was discouraged by a large state-owned sector and weak
infrastructure. The International Monetary Fund reports that
residents may hold foreign exchange accounts subject to some
restrictions; non-residents may hold foreign exchange accounts
without restriction. Payments and transfers over a set amount
are subject to documentation. Prior registration with the central bank is required for most capital transactions. Based on
the availability of more detailed information on the
government’s foreign investment policies, Bulgaria’s capital
flows and foreign investment score is 1 point worse this year.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
Bulgaria’s banking system has undergone major reform since
1997. With the possibility of bailouts eliminated under the
currency board, banks have had to focus instead on sound
banking practices. There are no restrictions on foreign banks.
“As of September 2001,” reports the U.S. Department of State,
“all banks except the State Savings Bank have either been sold
or are in the privatization process.” The Economist Intelligence
120
Unit reports that the Bulgarian government has set mid-2003
as the privatization date for Banka DSK [formerly the State
Savings Bank]; is in the process of selling Biochim Bank; and
has initiated privatization of the State Insurance Institute
(DZI). The insurance sector has been open to foreign firms
since 1997. However, majority foreign ownership joint ventures in Bulgarian banks and insurance companies are subject
to government approval.
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
According to the U.S. Department of State, “Price supports
and state subsidies are being stripped away. The 1997 amendment to the Regulation for Implementing the Law on Prices
substantially decreased the number of items subject to limited price control. The products affected are primarily basic
necessities. All other prices are directly negotiated between
the manufacturer and the distributor. Price competition is
becoming more intensive.” Rules regulating household energy
pricing, ratified by the State Energy Regulation Commission,
took effect in April 2002. Bulgaria maintains a minimum wage.
PROPERTY RIGHTS
Score: 3–Stable (moderate level of protection)
Bulgaria’s constitution provides for an independent judiciary.
“In practice,” reports the U.S. Department of State, “execution of judgments is subject to delays, sometimes resulting
from corruption and inefficiency in the judicial system.” The
threat of expropriation is low.
REGULATION
Score: 4–Stable (high level)
The U.S. Department of State reports that “implementation
of regulations by the bureaucracy produces frequent impediments to sound commercial practices. Regulations may not
make commercial sense, and slow and poor service on applications leads to delays in investments. The government recently completed a major review of existing permit and licensing regimes with the objective of removing obstacles to
business formation and development.” According to the
Economist Intelligence Unit, “Employers have also complained about the tighter restrictions placed on the use of fixedterm contracts, which has been the only way to circumvent
inflexible hiring and firing rules.”
BLACK MARKET
Score: 3.5–Stable (high level of activity)
Transparency International’s 2001 score for Bulgaria is 3.9.
Therefore, Bulgaria’s black market score is 3.5 this year.
2003 Index of Economic Freedom
BURKINA FASO
Rank:
94
Score:
3.25
Category: Mostly Unfree
Ouagadougou
Trade Policy
Fiscal Burden
4
3.5
Government Intervention 3
Monetary Policy
2
Foreign Investment 2
Banking and Finance 3
Wages and Prices 3
Property Rights
4
Regulation
Black Market
Landlocked Burkina Faso has not fared well since gaining its independence from
France in 1960. It remains plagued by political instability, poor governance, inadequate infrastructure, and widespread illiteracy. According to the U.S. Department
of State, over 80 percent of the population is engaged in subsistence agriculture.
Burkina Faso has made progress in liberalizing its economy, including selling a
majority share of the national cotton ginning and marketing company and liquidating or selling 41 other state enterprises. From 1991 to 2000, according to World
Bank data, compound growth in GDP averaged 4.5 percent annually and per capita
GDP increased from $210 to $252 (in constant 1995 U.S. dollars). On April 12, 2002,
Burkina Faso became the fifth country to reach the completion point under the
International Monetary Fund–World Bank Heavily Indebted Poor Country (HIPC)
Initiative; when HIPC debt relief proved insufficient, the IMF and World Bank then
provided “exceptional” debt relief to further reduce Burkina Faso’s debt service.
This additional relief should alleviate the government’s financial constraints.
Burkina Faso’s fiscal burden of government score is 0.5 point better this year, but
its monetary policy score is 1 point worse. As a result, Burkina Faso’s overall score
is 0.05 point worse this year.
Scores for Prior Years:
TRADE POLICY
Major export trading partners:
Venezuela 14.7%,
Belgium–Luxembourg 12.2%,
Italy 9.6%
Score: 4–Stable (high level of protectionism)
Burkina Faso is a member of the West African Economic and Monetary Union
(WAEMU), which imposes a common external tariff with four rates: 0 percent, 5
percent, 10 percent, and 20 percent. According to the International Monetary Fund,
the WAEMU’s average tariff rate in 2000 was 12 percent. (The other seven members of the WAEMU are Benin, Guinea–Bissau, Ivory Coast, Mali, Niger, Senegal,
and Togo.) The U.S. Department of State reports that non-tariff barriers exist in
the form of licenses and extraneous fees.
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3–Better
(moderate tax rates)
Score—Government Expenditures: 4–Stable
(high level of government expenditure)
Final Score: 3.5–Better (high cost of government)
Ernst & Young reports that Burkina Faso’s top income tax rate is 30 percent, down
from the 40 percent reported in the 2002 Index; the marginal rate for the average
taxpayer is 2 percent. The top corporate tax rate is 35 percent, down from the 40
percent reported in the 2002 Index. In 2000, based on data from the International
Monetary Fund, government expenditures equaled 27 percent of GDP. Based on
the lower tax rates reported by Ernst & Young, Burkina Faso’s overall fiscal burden
of government score is 0.5 point better this year.
Chapter 6: The Countries
2002: 3.20
1999: 3.50
1996: 3.80
2001: 3.30
1998: 3.60
1995: n/a
4
4
2000: 3.40
1997: 3.60
2000 Data
(in constant 1995 US dollars)
Population: 11,274,000
Total area: 274,200 sq. km
GDP: $3 billion
GDP growth rate: 2.2%
GDP per capita: $252
Major exports: cotton, livestock,
gold
Exports of goods and services:
$347.3 million
Major imports: machinery, food
products, petroleum
Imports of goods and services:
$732.3 million
Major import trading partners:
Ivory Coast 25.1%, Venezuela 23.4%,
France 17.4%
Foreign direct investment (net):
$7.3 million
121
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Stable (moderate level)
According to the World Bank, the government consumed 15.1
percent of GDP in 2000 and remains active in the economy,
although it also has a privatization program. “As of May 2000,”
reports the Economist Intelligence Unit, “22 state enterprises
have been successfully privatized…. The main enterprises
awaiting privatization include: Off ice national de
télecommunications (Onatel), Poura gold mine, Office national de l’eau (ONEA), Société nationale de cinéma du
Burkina (Sonacib), Centre national d’équipement agricole
(CNEA), Ouagadougou and Bobo-Dioulasso airports.”
MONETARY POLICY
Score: 2–Worse (low level of inflation)
From 1992 to 2001, Burkina Faso’s weighted average annual
rate of inflation was 3.16 percent, up from the 0.21 percent
from 1991 to 2000 reported in the 2002 Index. Burkina Faso
has benefited from a stable currency—a rarity in sub-Saharan
Africa—as a member of the CFA franc zone. Fourteen countries use the CFA franc, a common currency with a fixed parity with the euro. (The other 13 countries are Benin,
Cameroon, Central African Republic, Chad, Congo
[Brazzaville], Equatorial Guinea, Gabon, Guinea–Bissau, Ivory
Coast, Mali, Niger, Senegal, and Togo.) Based on the higher
weighted average rate of inflation, Burkina Faso’s monetary
policy score is 1 point worse this year.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Stable (low barriers)
There are few restrictions on investment. In 1992, the government adopted a new investment code that treats foreign and
domestic firms equally. According to the U.S. Department of
State, “Foreign investment is welcome in Burkina Faso. Investment and mining codes permit full repatriation of profits, 100 percent ownership of companies, and many tax exemptions.” Foreign direct investment must be reported but is
not restricted. The International Monetary Fund reports that
residents may hold foreign exchange accounts with permission of the government and the Central Bank of West African
States, or BCEAO. (BCEAO member states include Benin,
Burkina Faso, Guinea–Bissau, Ivory Coast, Mali, Niger,
Senegal, and Togo.) Payments and transfers over a specified
amount require supporting documents, and proceeds from
countries that are not members of the WEAMU must be surrendered to an authorized dealer. All capital investments
abroad by residents require government approval, as do most
commercial and financial credits. Money market and capital
instruments require BCEAO authorization.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
The BCEAO, a central bank common to the eight members
of the WEAMU, governs Burkina Faso’s banking system. The
eight member countries use the CFA franc that is issued by
122
the BCEAO, pegged to the French franc, and guaranteed by
the French Treasury. In the past, the government of Burkina
Faso has been known for heavily regulating and controlling
the banking system through its direct ownership of many of
the country’s banks. According to the Economist Intelligence
Unit, however, “Since the early 1990s, Burkina Faso’s banking
system has undergone restructuring, and the government has
adopted the principle of limiting state participation to a maximum 25% in the banking sector.” Of the country’s three commercial banks, Banque internationale du Burkina Faso has
been reformed, the Banque nationale de development du
Burkina is being liquidated, and the government sold 34 percent of Banque pour le financement du commerce et de
l’industrie du Burkina to domestic private investors in 1997
and 51 percent to foreign investors in 1998. Overall, government involvement in the sector remains substantial.
WAGES AND PRICES
Score: 3–Stable (moderate level of intervention)
By 1998, as part of a World Bank program, the government
had eliminated many price controls. According to the U.S.
Department of State, “Prices have been freed up, and the public
sector has been restructured.” The large public sector, however, continues to influence some prices. Burkina Faso’s labor
code establishes a monthly minimum wage, which the same
source reports was last set in 1996.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
Burkina Faso’s judicial system is weak. According to the U.S.
Department of State, “The Constitution provides for an independent judiciary; however…the President has extensive appointment and other judicial powers. The Constitution stipulates that the Head of State is also the President of the Superior Council of the Magistrature, which can nominate and
remove some high-ranked magistrates and can examine the
performance of individual magistrates.” Expropriation is possible but rare.
REGULATION
Score: 4–Stable (high level)
Establishing a business in Burkina Faso can be difficult. The
rule of law is lacking, and regulations can be applied unevenly
and inconsistently. The government is making efforts to reform the regulatory structure; the Economist Intelligence Unit
reports that Burkina Faso’s main donor countries have become
“increasingly vocal in expressing concern about…signs of
growing corruption within the public administration.”
BLACK MARKET
Score: 4–Stable (high level of activity)
Transparency International’s 2000 score for Burkina Faso was
3.0. Therefore, Burkina Faso’s black market score is 4 this year.
2003 Index of Economic Freedom
BURMA(MYANMAR)
Rank:
Score:
Category:
Trade Policy
Fiscal Burden
5
2
Government Intervention 3
Monetary Policy
4
Foreign Investment 5
Banking and Finance 4
Burma’s real GDP growth fell an estimated 5.4 percent in 2001–2002, and the ruling military
junta (the so-called State Peace and Development Council) continues its heavily repressive
economic policies. Imports of nonessential goods are banned outright, and the government
suspended the export licenses of all foreign firms in April 2002 as part of a formal strategy to
promote self-sufficiency by discouraging imports. The SPDC has maintained a huge deficit
despite cutting spending on health and education, employing forced labor for infrastructure
projects, and using barter to purchase fighter planes from Russia. Since Burma’s black market
remains untaxed, the government prints money to pay for the deficit, pushing inflation up to
21.1 percent in 2001. In May 2002, fearing that the United States and the European Union
might restrict imports from Burma (U.S. investments are already banned), the SPDC released
democracy leader Aung San Suu Kyi from house arrest. Suu Kyi has been released before,
and there is no guarantee that economic reforms will follow, but her release could be a positive sign. Burma’s monetary policy score is 1 point worse this year. As a result, its overall score
is 0.10 point worse this year.
TRADE POLICY
Score: 5–Stable (very high level of protectionism)
Based on data from the International Monetary Fund and the Asian Development Bank,
Burma’s average tariff rate was 33 percent in 1999 (based on import duties as a percent
of total imports). The U.S. Department of State reports that Burma’s “tariffs range
from a low of zero to a maximum of 40 percent…. Tariffs on most industrial inputs,
machinery and spare parts average about 15 percent.” The same source reports that
“permits [are] required for imports, exports and most other business activities…. Importers and exporters say it is extremely difficult to obtain the necessary business permits without paying for them ‘unofficially.’”
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3–Worse
(moderate tax rates)
Score—Government Expenditures: 1–Stable
(very low level of government expenditure)
Final Score: 2–Stable (low cost of government)
Burma’s top income tax rate is 30 percent, down from the 40 percent reported in the
2002 Index; the marginal rate for the average taxpayer has risen to 10 percent from 7
percent due to an increase in reported per capita GDP. The top corporate tax rate is 30
percent. In 2000, government expenditures equaled 6.6 percent of GDP; however, the
evidence indicates that the state’s role in the economy is greater than this figure suggests. Based on a clarification in methodology, Burma’s income and corporate taxation
score is 0.5 point worse this year; however, this is not sufficient to affect its overall fiscal
burden of government score, which remains unchanged.
Chapter 6: The Countries
148
4.20
Repressed
Wages and Prices 4
Property Rights
5
Regulation
Black Market
5
5
Scores for Prior Years:
2002: 4.10
1999: 4.10
1996: 4.30
2001: 4.20
1998: 4.20
1995: n/a
2000: 4.10
1997: 4.30
2000 Data
(in constant 1995 US dollars)
Population: 47,749,000
Total area: 678,500 sq. km
GDP: $6.7 billion
GDP growth rate: 5.5%
GDP per capita: $140
Major exports: apparel, wood
products
Exports of goods and services: n/a
Major export trading partners:
Thailand 15.1%, US 14.6%, India 9.8%,
China 6.8%, Singapore 6.2%
Major imports: machinery, transport
equipment, construction materials,
food products
Imports of goods and services: n/a
Major import trading partners:
Singapore 24.5%, Thailand 12.7%,
China 11.8%, Japan 8.8%
Foreign direct investment (net):
$197 million
123
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Stable (moderate level)
Based on data from the Economist Intelligence Unit, the government consumed 2 percent of GDP in 2000. However, the
evidence suggests that reported government consumption data
are unreliable. The Economist Intelligence Unit reports that
the official figures “use methods of compilation and estimation that are not transparent and are not supported by available anecdotal evidence.” In addition, “the state dominates
some sectors including mining and power, and has an important role in transport, domestic trade and manufacturing….
The military and the Union Solidarity Development Association (USDA) are also involved in businesses including gems
and logging.” Based on the apparent unreliability of reported
government consumption figures, 1 point has been added to
Burma’s government intervention score. In 1999, according
to the International Monetary Fund, Burma received 38.46
percent of its total revenues from state-owned enterprises and
government ownership of property.
MONETARY POLICY
Score: 4–Worse (high level of inflation)
Data from the International Monetary Fund’s 2002 World Economic Outlook indicate that from 1992 to 2001, Burma’s
weighted average annual rate of inflation was 14.94 percent,
up from the 9.91 percent from 1991 to 2000 reported in the
2002 Index. As a result, Burma’s monetary policy score is 1
point worse this year.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 5–Stable (very high barriers)
According to the U.S. Department of State, “the highly unfavorable political climate, unfavorable economic policies including a highly unrealistic exchange rate, and increasing corruption, have contributed to a significant loss of foreign investor confidence….” The International Monetary Fund reports that both residents and non-residents may hold foreign
exchange accounts with government approval (except for diplomatic missions and international organizations and their
employees, who are permitted to hold such accounts at the
Myanmar Foreign Trade Bank). All payments and transfers
require government approval and are considered on a caseby-case basis. A 10 percent tax is applied to all repatriation
transfers. All capital transactions are controlled.
BANKING AND FINANCE
Score: 4–Stable (high level of restrictions)
Burma’s financial sector consists of the central bank, state
banks, private banks, and foreign representative bank offices.
According to the U.S. Department of State, “Private banks
have assumed a large share of banking activity in the last several years, and…are generally more efficient and provide better service than state banks. By March 1999, private banks held
over 70 percent of demand deposits and over 50 percent of
time and savings deposits. Private banks are not permitted to
124
deal in foreign exchange.” Foreign banks are not permitted to
conduct business domestically and generally serve foreign clients. State banks lend at negative real interest rates under government direction. “Particularly outside urban centres,” reports the Economist Intelligence Unit, “the main source of
capital is private money-lenders, who typically charge interest rates of 12–20% a month (depending on location and availability of collateral), many times the official rate.”
WAGES AND PRICES
Score: 4–Stable (high level of intervention)
The government lifted some price controls in the early 1990s;
according to the U.S. Department of State, however, “State
economic enterprises and the military holding
companies…benefit from official favoritism….” The government subsidizes and enforces price controls over agricultural
goods and subsidizes the price of gasoline and diesel. The U.S.
Department of State reports that “government employees and
the employees of a few traditional industries are covered by
minimum wage provisions.”
PROPERTY RIGHTS
Score: 5–Stable (very low level of protection)
Private property is not protected in Burma. According to the
U.S. Department of State, “Lawyers cannot defend their clients independently, especially in cases where the State has a
special interest…. [J]udges do not allow a free defense in ‘policy
cases’ and decisions are predetermined by the SPDC.” In addition, “Pervasive corruption further serves to undermine the
impartiality of the justice system.”
REGULATION
Score: 5–Stable (very high level)
Regulations lack transparency and are applied unevenly. According to the U.S. Department of State, “Certain companies
close to the junta…have been given special import permits
and preferential lending. State economic enterprises and the
military holding companies also benefit from official favoritism [that includes] preferential tariff rates and customs duties; preferred access to natural resources; monopoly privileges
in certain lucrative areas of commerce and industry; special
considerations in the issuance of licenses and permits; subsidized prices for land, buildings, petrol and diesel, gas, electricity and water; preferential exchange rates; and preferential
treatment on government contracts.”
BLACK MARKET
Score: 5–Stable (very high level of activity)
Burma’s thriving black market involves smuggling of consumer goods and pirated intellectual property from Western
countries, illegal logging, and drug trafficking and arms smuggling over the Thai border. Burma is the world’s biggest producer and supplier of opiates.
2003 Index of Economic Freedom
BURUNDI
Bujumbura
Rank:
Score:
Category:
Trade Policy
Fiscal Burden
n/a
n/a
Government Intervention n/a
Monetary Policy
n/a
Foreign Investment n/a
Banking and Finance n/a
Burundi continues to deal with the aftermath of the 1993 civil war, which led to
thousands of deaths, displacement of a significant portion of the population, severe economic disruption, and political instability. A peace agreement mediated by
South Africa’s Nelson Mandela in August 2000 to reform the security forces, judiciary, and political structure was approved by the National Assembly but has been
only partially implemented. Threats to political stability—including armed rebel
groups (who rejected the peace agreement) and periodic coup attempts by elements of the armed forces—continue despite the installation of a transitional coalition government in November 2001. In addition, Burundi’s retaliation for attacks
by rebel groups based in the Democratic Republic of Congo and Tanzania has
increased tensions with neighboring governments. Ongoing conflict and market
distortions have crippled domestic economic activity, inhibited investment, and
led to extensive corruption. Poor rains in recent years have harmed agricultural
production among subsistence farmers—a major concern because over 90 percent
of the population depends on subsistence agriculture. Declining international prices
for tea and coffee, which constitute over 90 percent of Burundi’s export earnings,
have offset recent production increases. Economic growth has been poor in recent
years; from 1991 to 2000, according to World Bank data, compound growth in
GDP averaged –2.3 percent annually and per capita GDP fell from $210 to $141 (in
constant 1995 U.S. dollars). The data below are based on best estimates but should
be considered reliable or representative only for the portion of the country that is
under government control.
TRADE POLICY
Score: Not graded
Based on data from the World Bank, Burundi’s average tariff rate in 2000 was 13.5
percent (based on import duties as a percent of total imports). Non-tariff barriers
include difficult border crossings, an inefficient customs service, and border thieves
and bandits.
Suspended
n/a
n/a
Wages and Prices n/a
Property Rights
n/a
Regulation
n/a
Black Market n/a
Scores for Prior Years:
2002: n/a
1999: 4.20
1996: n/a
2001: n/a
1998: 4.20
1995: n/a
2000: 4.00
1997: 4.10
2000 Data
(in constant 1995 US dollars)
Population: 6,807,000
Total area: 27,830 sq. km
GDP: $946 million
GDP growth rate: –0.9%
GDP per capita: $141
Major exports: coffee and tea, hides
Exports of goods and services:
$273 million
Major export trading partners:
UK 38.3%, Germany 16.0%, US 13.2%,
Netherlands 12.8%
Major imports: capital goods,
petroleum products, foodstuffs
Imports of goods and services:
$436 million
Major import trading partners:
France 24.9%, Zambia 15.6%,
Kenya 14.4%, South Africa 11.5%
Foreign direct investment (net):
n/a
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: Not graded
Score—Government Expenditures: Not graded
Final Score: Not graded
According to the International Monetary Fund, Burundi’s top income tax rate is 60
percent; the marginal rate for the average taxpayer is 20 percent. The top corporate tax rate is 40 percent. In 2000, based on data from the IMF, government expenditures equaled 27.3 percent of GDP, up from the 23.29 percent reported in the
2002 Index.
Chapter 6: The Countries
125
GOVERNMENT INTERVENTION IN THE ECONOMY
WAGES AND PRICES
Score: Not graded
The World Bank reports that the government consumed 13 percent of GDP in 2000. In 1999, according to the International
Monetary Fund, Burundi received 4.26 percent of its total revenues from state-owned enterprises and government ownership
of property.
Score: Not graded
Wages and prices in Burundi are affected by a large public sector,
import substitution policies, and government subsidies, particularly for agriculture. The government also directly controls prices
of some basic goods and services. The Economist Intelligence
Unit reports that the government controls output and prices in
the coffee sector and cotton, Burundi’s main agricultural products, through its state-owned companies. The government has a
number of minimum wages, based on location and skill.
MONETARY POLICY
Score: Not graded
From 1992 to 2001, Burundi’s weighted average annual rate of
inflation was 12.69 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: Not graded
The government treats domestic and foreign firms equally and
actively seeks investment, but continued fighting has made
Burundi a dangerous place in which to invest. According to the
Economist Intelligence Unit, “Government capacity to evaluate
state assets and oversee a transparent sale process is weak, and
the chances of attracting investors under current conditions are
poor.” The International Monetary Fund reports that residents
may hold foreign exchange accounts, but documentation must
be submitted to the central bank, withdrawals over set limits require supporting documentation, and central bank approval is
required to hold them abroad. Non-residents may hold foreign
exchange accounts and withdraw funds up to a set limit upon
presentation of documentation. According to the IMF, all payments for invisibles require approval and are often subject to limitations and bona fide tests. Capital transfers out of Burundi by
residents are approved on an individual basis. Of the few capital
transactions for which the IMF has information, most—including credit operations, direct investment, and personal capital
movements—are subject to restrictions or authorization requirements.
BANKING AND FINANCE
Score: Not graded
The banking system is severely underdeveloped and subject to
government influence. According to the Economist Intelligence
Unit, “The effect of the war and international isolation was that
Burundi’s central bank, Banque de la République du Burundi
(BRB), was forced to abandon its previous monetary prudence
and lend heavily to the government. The BRB also relaxed its
regulation of the commercial banking sector, taking a permissive approach to the minimum reserve requirement for commercial banks…. There are seven commercial banks in Burundi, all
of which have been heavily involved in lending to the government…. The relative importance of lending to the private sector
rose in 2000, although in general the banks are hindered by weak
balance sheets due to a large number of bad loans.” The private
Banque de Commerce et de Développement reported profits in
March 2002, but most banks have been extending only short-term
loans at high interest rates and concentrating on raising revenue
through fees. Essentially, the financial system has ceased to function.
126
PROPERTY RIGHTS
Score: Not graded
Private property is subject to government expropriation and
armed banditry. According to the U.S. Department of State, “in
practice, the judiciary is not independent of the executive and is
dominated by ethnic Tutsis…. [M]ost citizens assume that the
courts promote the interests of the dominant Tutsi minority.
Members of the Hutu majority believe that the judicial system is
biased against them.”
REGULATION
Score: Not graded
Establishing a business can be difficult because of Burundi’s massive and corrupt bureaucracy, as well as its continued instability.
According to the Economist Intelligence Unit, “Civil conflict and
the international sanctions from 1996 to 1999, including a cut-off
in non-humanitarian assistance, resulted in a siege approach to
economic management. This included rationing foreign exchange, imposing an overvalued exchange rate for official imports and financing the fiscal deficit through monetary growth
and borrowings from the Banque de la Republique du Burundi
(the central bank). Economic distortions have provided fertile
ground for corruption.” The large number of state-owned enterprises presents another impediment to the establishment of
business.
BLACK MARKET
Score: Not graded
Burundi’s black market is larger than its formal market and still
growing. According to the Economist Intelligence Unit, “Energy
imports began to recover in 1999–2000, after being depressed by
regional sanctions. Following a series of tax increases since the
early 1990s, the importing of fuel by informal economic routes
has become profitable and increasingly common.” In addition,
“Civil service wages have been greatly eroded, while economic
distortions have provided incentives for smuggling.”
2003 Index of Economic Freedom
CAMBODIA
Rank:
Score:
Category:
Phnom Penh
Trade Policy
Fiscal Burden
2
2
Government Intervention 1
Monetary Policy
1
Foreign Investment 3
Banking and Finance 2
Communal elections in February 2002, although marred by violence and intimidation, demonstrated the growing grassroots strength of the dominant Cambodian
People’s Party, which won 61 percent of the vote. It might be hoped that the CPP
will use this demonstration of strength to further economic reform, but the obstacles that the regime must overcome are formidable. The first impediment will
be the party’s own inclination to spend, possibly loosening tight fiscal restraints, in
anticipation of July 2003 elections. Ongoing difficulties include widespread corruption; the weakness of Cambodia’s judiciary; the high costs of infrastructure,
such as telecommunications; and the state of the country’s roads. Foreign direct
investment declined in 2001 because of these problems, which are compounded
by competition from China and Vietnam, where FDI is increasing. Nevertheless,
Cambodia will probably continue to enjoy economic growth buoyed by the global
economic resurgence. Cambodia’s banking and finance score is 1 point better this
year. As a result, its overall score is 0.1 point better this year.
TRADE POLICY
Score: 2–Stable (low level of protectionism)
Data from the Economist Intelligence Unit and the World Bank indicate that
Cambodia’s average tariff was 8.5 percent in 1999 (based on import duties as a
percent of total imports). Import licenses have been abolished for most items but
remain in effect for pharmaceuticals.
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 1.5–Better
(low tax rates)
Score—Government Expenditures: 2–Stable
(low level of government expenditure)
Final Score: 2–Stable (low cost of government)
According to the International Monetary Fund, Cambodia’s top income tax rate is
20 percent; the marginal rate for the average taxpayer is 5 percent. The top corporate income tax rate also is 20 percent. More accurate information from the Asian
Development Bank indicates that government expenditures equaled 20 percent of
GDP in 2000, rather than the 17.91 percent reported for the same year in the 2002
Index. Based on a clarification in methodology, Cambodia’s income and corporate
taxation score is 0.5 point better this year; however, this is not sufficient to affect its
overall fiscal burden of government score.
Chapter 6: The Countries
35
2.50
Mostly Free
Wages and Prices 3
Property Rights
4
Regulation
Black Market
4
3
Scores for Prior Years:
2002: 2.60
1999: 3.00
1996: n/a
2001: 2.85
1998: 3.10
1995: n/a
2000: 3.00
1997: 3.50
2000 Data
(in constant 1995 US dollars)
Population: 12,021,230
Total area: 181,040 sq. km
GDP: $3.5 billion
GDP growth rate: 4.0%
GDP per capita: $297
Major exports: garments, rubber,
fishery products
Exports of goods and services:
$1.5 billion
Major export trading partners:
US 46.4%, Vietnam 26.1%, Singapore
5.0%, UK 3.9%
Major imports: cigarettes, gold,
construction materials, petroleum
products, machinery, motor vehicles
Imports of goods and services:
$1.8 billion
Major import trading partners:
Singapore 22.5%, Thailand 19.8%,
Hong Kong 15.6%, Vietnam 4.9%
Foreign direct investment (net):
$140 million
127
GOVERNMENT INTERVENTION IN THE ECONOMY
WAGES AND PRICES
Score: 1–Stable (very low level)
The Economist Intelligence Unit reports that the government
consumed 6.7 percent of GDP in 1999. According to the U.S.
Department of State, “Cambodia has a free market
economy…. Even in the communist era, the state-owned industrial base was never extensive, and the government began
to sell and lease government assets as early as 1989…. The
role of state-owned enterprises in the economy is not significant today.”
Score: 3–Stable (moderate level of intervention)
The market determines some prices. In 1989, according to the
Asia Society, Cambodia began to implement reforms, including the removal of price controls “with the exception of some
key commodities, such as petroleum, electricity, cement, and
fertilizer.” The government also influences prices through
state-owned utilities. The Labor Law establishes a minimum
wage based on recommendations from the Labor Advisory
Committee. The minimum wage in Cambodia can vary regionally but applies only to the garment and footwear industries.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
Between 1992 and 2001, according to the International Monetary Fund’s 2002 World Economic Outlook, Cambodia’s
weighted average annual rate of inflation was 0.40 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
The 1994 Law on Investment encourages investment in export-oriented industries, tourism, energy, mining, and industrial agriculture; guarantees remittance of foreign exchange;
and offers investment incentives. Sectors in which restrictions
on foreign investment still apply include the law and accounting professions, some transportation, construction, publishing, printing, radio and television broadcasting, gemstone exploitation, brick making, rice mills, wood and stone carving,
and silk weaving. The government still must approve most
foreign investments, and foreigners are not permitted to own
investment companies. Overall, other factors such as lack of
infrastructure and an overall “climate of lawlessness” (in the
words of the Economist Intelligence Unit) are greater impediments to foreign investment than is the foreign investment
regime itself. According to the International Monetary Fund,
Cambodia has no restrictions or controls on the holding of
foreign exchange accounts by either residents or non-residents,
but balances over a set amount must be declared to the central bank. Non-residents may not own land in Cambodia.
BANKING AND FINANCE
Score: 2–Better (low level of restrictions)
Cambodia’s banking system remains underdeveloped. The
Economist Intelligence Unit reports that 28 banks were active
in Cambodia in 2001: 19 private banks, seven foreign bank
branches, and two state-owned banks. After the 1999 Financial Institutions Law took effect, 29 banks were examined
through a re-licensing process; 11 were closed after they were
declared non-viable, 14 were considered potentially viable if
restructured, and four were considered viable as is. The government has liberalized interest rates, established reserve requirements, capped total exposure allowed to any one individual or client, and capped bank positions in foreign currency
as a percent of the bank’s net worth. Based on recent efforts
to restructure and liberalize the banking system, Cambodia’s
banking and finance score is 1 point better this year.
128
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
Cambodia’s legal system does not protect private property
effectively. According to the U.S. Department of State,
“Cambodia’s court system is weak. Judges, who have been
trained either for a short period in Cambodia or under other
systems of law, have little access to published Cambodian law.
Judges are inexperienced and courts are understaffed. The local and foreign business communities have reported frequent
problems with inconsistent judicial rulings as well as outright
corruption…. Corruption is a far greater problem in Cambodian courts than government interference in judicial decisions.”
REGULATION
Score: 4–Stable (high level)
Cambodia’s bureaucracy is politicized, cumbersome, and inefficient, and this creates problems for both potential and existing businesses. Non-transparent regulation and the lack of
infrastructure continue to burden business. The U.S. Department of State reports that “numerous issues of transparency
in the regulatory regime arise…from the lack of legislation
and the weakness of key institutions. Investors often complain
that decisions of Cambodian regulatory agencies are inconsistent, irrational, or corrupt…. The Cambodian government
is still in the process of drafting laws and regulations that establish a framework for the market economy.” According to
the Economist Intelligence Unit, “Investors have also been put
off by red tape, high utility costs and corruption, all of which
detract from the advantages of low labor costs.”
BLACK MARKET
Score: 3–Stable (moderate level of activity)
Much of Cambodia’s black market activity occurs in labor and
pirated intellectual property, but illegal logging is also widespread despite some attempt to crack down on the problem;
according to the Economist Intelligence Unit, “officially, the
contribution of forestry to GDP was 2.7% in 1998, but this is
almost certainly an underestimate because of widespread illegal logging.” Smuggling continues to be extensive, particularly over the Thai border.
2003 Index of Economic Freedom
CAMEROON
Rank:
104
Score:
3.35
Category: Mostly Unfree
Yaoundé
Trade Policy
Fiscal Burden
5
3
Government Intervention 3
Monetary Policy
1
Foreign Investment 3
Banking and Finance 3
Cameroon fell victim to dictatorship after independence in 1960, but opposition parties
were legalized in 1990. However, the Economist Intelligence Unit reports that the political system, the military, the media, and the judiciary all remain firmly controlled by President Paul Biya. Cameroon enjoys ample natural resources, including natural gas, oil, and
mineral reserves, but agriculture remains the backbone of the economy, employing the
majority of Cameroon’s population and accounting for over 25 percent of GDP. Inefficient state-controlled industries and businesses, bloated government bureaucracy, stalled
deregulation, and widespread corruption retard economic growth and investment. Although the government has posted a budget surplus in recent years, Cameroon has a
legacy of huge debt from years of poor fiscal discipline. The government is trying to
meet the conditions necessary to reduce its debt service under the International Monetary Fund–World Bank Heavily Indebted Poor Country Initiative. Privatization is a primary focus of the IMF, and the government has privatized 11 state-owned enterprises
since 1997; privatization of the water and telecommunications utilities is slated for the
near future, as is the long-delayed sale of two agro-industrial companies. From 1991 to
2000, according to World Bank data, compound growth in GDP averaged only 2 percent
annually. Per capita GDP, however, has shown some improvement recently; after falling
from $705 in 1991 to $595 in 1994 (in constant 1995 U.S. dollars), it increased to $675 in
2000. Cameroon’s government intervention score is 1 point worse this year. As a result, its
overall score is 0.10 point worse this year.
TRADE POLICY
Score: 5–Stable (very high level of protectionism)
Cameroon is a member of the Central African Economic and Monetary Community
(CEMAC), which also includes Central African Republic, Chad, Republic of Congo, Equatorial Guinea, and Gabon. The U.S. Trade Representative reports that in 2000 CEMAC
applied a common average external tariff of 18.4 percent. In addition, reports the U.S.
Trade Representative, “there are other surtaxes assessed on imports that vary according
to the nature of the item, the quantity of the item in the shipment, and even the mode of
transport.” According to the U.S. Department of State, “Customs fraud is endemic in
Cameroon.”
Wages and Prices 3
Property Rights
4
Regulation
4.0
Black Market 4.5
Scores for Prior Years:
2002: 3.25
1999: 3.40
1996: 3.80
2001: 3.20
1998: 3.80
1995: 3.30
2000: 3.40
1997: 3.70
2000 Data
(in constant 1995 US dollars)
Population: 14,876,000
Total area: 475,440 sq. km
GDP: $10 billion
GDP growth rate: 4.2%
GDP per capita : $675
Major exports: oil, timber and cork,
coffee, cocoa
Exports of goods and services:
$3.08 billion
Major export trading partners:
Italy 28.7%, France 12.6%,
Spain 10.6%
Major imports: machines and
electrical equipment, transport
equipment, fuel, food
Imports of goods and services:
$2.9 billion
Major import trading partners:
France 35.6%, Nigeria 14.4%,
Italy 4.6%
Foreign direct investment (net):
$41 million
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3.5–Stable
(high tax rates)
Score—Government Expenditures: 2–Stable
(low level of government expenditure)
Final Score: 3–Stable (moderate cost of government)
Cameroon’s top income tax rate is 60 percent; the marginal rate for the average taxpayer
is 0 percent. The top corporate tax rate is 38.5 percent. In 2000, based on data from the
Economist Intelligence Unit, government expenditures equaled 16.2 percent of GDP.
Chapter 6: The Countries
129
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Worse (moderate level)
The World Bank reports that the government consumed 10.2
percent of GDP in 2000, up from the 10 percent reported in the
2002 Index. As a result, Cameroon’s government intervention
score is 1 point worse this year. In 2001, based on data from the
Economist Intelligence Unit, Cameroon received 33.24 percent
of its revenue just from its state-owned oil companies.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
Data from the International Monetary Fund’s 2002 World Economic Outlook indicate that from 1992 to 2001, Cameroon’s
weighted average annual rate of inflation was 2.34 percent.
Cameroon has benefited from a stable currency—a rarity in subSaharan Africa—as a member of the CFA franc zone. Fourteen
countries use the CFA franc, a common currency with a fixed
parity with the euro. (The other 13 countries include Benin,
Burkina Faso, Central African Republic, Chad, Congo
[Brazzaville], Equatorial Guinea, Gabon, Guinea–Bissau, Ivory
Coast, Mali, Niger, Senegal, and Togo.)
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
Cameroon law provides an open environment for foreign investment in most industries, but the arbitrary application of the laws
presents some barriers. The investment approval process, while
appearing open on paper, is convoluted and confusing in practice, lacking transparency. According to the U.S. Department of
State, “The law governing investments in Cameroon is the 1990
investment code which is attractive on paper…. However, the
code’s application has been perverted by arbitrary application in
the administration and courts as well as 1994 tax changes which
have annulled all the tax benefits arising from some special investment schedules.” The International Monetary Fund reports
that the government must approve transfers to countries other
than France, Monaco, members of the West African Economic
and Monetary Union, members of the CEMAC, and Comoros.
Other transfers are subject to numerous requirements, controls,
and authorization depending on the transaction. Both residents
and non-residents may hold accounts in freely convertible foreign exchange. Most capital transactions require approval of or
declaration to the government.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
The banking sector has been in crisis for much of the past decade, but the government has made some effort to restructure
and reform the system. In January 2000, the state sold the last
majority government-owned bank to Banques Populaires Group
of France. Three new private banks have been established since
2000, and the sector now comprises 11 banks. However, the system continues to have high costs because of limited competition
and judicial weakness. Foreign insurance firms may operate only
in conjunction with a local partner. According to the U.S. De-
130
partment of State, “After more than a decade of bank restructuring, Cameroon’s banking system is more solid. The banking system is still plagued, however, by the unwillingness of many bankers to take risks and assess good venture, by the lack of modern
banking products and the generally poor quality of service.”
WAGES AND PRICES
Score: 3–Stable (moderate level of intervention)
According to the U.S. Department of State, “Price controls were
lifted in 1994, with the exception of those on water, electricity,
collective passenger surface transport, pharmaceuticals, petroleum products, and schoolbooks.” The government also controls
prices for cotton—a major agricultural product and export—
through its monopoly on marketing, collection, and supply of
inputs and fertilizer for the cotton sector. By law, the Ministry of
Labor sets a single minimum wage that applies to all sectors of
the economy.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
A reportedly corrupt government and an uncertain legal environment can result in the confiscation of private property. According to the U.S. Department of State, “While Cameroonian
business laws on paper are clear, few foreign investors have come
forward because implementation of those laws is problematic.
Under the current judicial system, local and foreign
investors…have found it complicated and costly to enforce contract rights, protect property rights, obtain a fair and expeditious
hearing before the courts or defend themselves against frivolous
lawsuits. However, the recently implemented ‘Organisation pour
l’Harmonisation du Droit des Affaires en Afrique’ (OHADA)
treaty may foster improvements in the judiciary.”
REGULATION
Score: 4–Stable (high level)
Existing regulations are applied unevenly and impose a substantial burden on businesses. According to the U.S. Department of
State, “Potential investors should be aware that…obtaining
government approvals after incorporation in Cameroon can be a
lengthy processing involving a series of government ministries.”
Both the U.S. Department of State and the Economist Intelligence Unit cite widespread corruption as a barrier to business.
BLACK MARKET
Score: 4.5–Stable (very high level of activity)
Transparency International’s 2001 score for Cameroon is 2.0.
Therefore, Cameroon’s black market score is 4.5 this year.
2003 Index of Economic Freedom
CANADA
Rank:
Score:
Category:
Ottawa
Trade Policy
Fiscal Burden
2
4
Government Intervention 2.5
Monetary Policy
1
Foreign Investment 3
Banking and Finance 2
Canada is the world’s seventh largest market economy and has experienced solid
economic growth under the Liberal government of Jean Chrétien, who won his third
national parliamentary majority in November 2000. The government continues to
liberalize the economy with spending cuts at both the federal and provincial levels.
The federal government’s corporate tax rate, under proposed scheduled decreases,
should fall to 21 percent by 2004. The U.S. economic boom significantly encouraged
Canada’s rapid growth during the 1990s; the United States is Canada’s largest trading
partner, accounting for 85 percent of all Canadian exports and 73 percent of all Canadian imports. In recent years, since the establishment of the North American Free
Trade Area (NAFTA), there have been record numbers of cross-border mergers and
acquisitions. With two-way trade accounting for an astounding $1.5 billion per day,
the U.S.–Canadian economic relationship is the largest that has ever existed between
two countries. It is thus not surprising that, as the American economy slowed, Canada’s
growth rate began to sputter as well. In 2001, unemployment rose to 7.1 percent
while growth increased at a rate of only 1.5 percent, down from 4.7 percent in 2000.
More recently, growth has been more resilient. Over the long run, further liberalization is critical. For example, while NAFTA has been an impetus behind Canadian
trade liberalization, federal regulatory regimes still affect foreign investment in telecommunications, publishing, broadcasting, aviation, mining, and fishing. Canada’s
government intervention score is 0.5 point worse this year. As a result, its overall
score is 0.05 point worse this year.
TRADE POLICY
Score: 2–Stable (low level of protectionism)
As a party to the North American Free Trade Agreement with the United States and
Mexico, Canada generally supports free trade. According to the World Bank, Canada’s
weighted average tariff rate in 2000 (the most recent year for which World Bank data
are available) was 0.8 percent. The International Monetary Fund reports that Canada
requires import permits for certain agricultural products, textiles, endangered species of flora and fauna, natural gas, material and equipment for the production or use
of atomic energy, certain military armaments, certain internationally controlled drugs,
and used cars (except for those of U.S. origin).
18
2.05
Mostly Free
Wages and Prices 2
Property Rights
1
Regulation
Black Market
Scores for Prior Years:
2002: 2.00
1999: 2.00
1996: 2.10
2001: 2.05
1998: 2.20
1995: 2.05
2000: 2.00
1997: 2.20
2001 Data
(in constant 1995 US dollars)
Population: 31,081,900
Total area: 9,976,140 sq. km
GDP: $715.4 billion
GDP growth rate: 1.5%
GDP per capita: $23,016
Major exports: machinery and
equipment, motor vehicles and parts,
wood pulp, timber, crude petroleum,
machinery, natural gas, aluminum,
telecommunications equipment
Exports of goods and services:
$313.8 billion
Major export trading partners:
US 84.6%, Japan 2.3%, UK 1.6%
Major imports: machinery and
equipment, crude oil, chemicals,
motor vehicles and parts, durable
consumer goods
Imports of goods and services:
$289.5 billion
Major import trading partners:
US 72.8%, UK 3.4%, Japan 3.0%
Foreign direct investment (net):
–$8.4 billion
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3.5–Stable
(high tax rates)
Score—Government Expenditures: 4–Stable
(high level of government expenditure)
Final Score: 4–Stable (high cost of government)
Canada’s base federal income tax rate is 29 percent; the marginal rate for the average
taxpayer is 22 percent. The base federal corporate tax rate is 25 percent. There is also
Chapter 6: The Countries
2
1
131
a 4 percent surtax on corporate profits, which yielded a 26.12
percent overall top federal corporate tax rate as of January 1,
2002, according to information from the Canadian embassy. The
base federal corporate tax rate is scheduled to fall to 21 percent
by 2004. In 2001, government expenditures equaled 38.2 percent of GDP.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2.5–Worse (moderate level)
The Canadian Department of Finance reports that the government consumed 21.6 percent of GDP in 2001. In 2000, according to the International Monetary Fund, Canada received
6.49 percent of its total revenues from state-owned enterprises
and government ownership of property, up from the “less than
1” percent reported in the 2002 Index. As a result Canada’s
government intervention score is 0.5 point worse this year.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, Canada’s weighted average annual rate of
inflation was 2.45 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
Canada welcomes foreign investment but maintains specific
restrictions on direct investment in several sectors, including
fisheries, energy, publishing, telecommunications, transportation, airlines, book retailing, media, sound recording, film
production, and broadcasting. Prior review of potential foreign investments usually is not required, but the Investment
Canada Act (ICA) requires the federal regulatory agency, Invest Canada, to review foreign investment in or acquisition of
any Canadian business by World Trade Organization investors with assets over Can$209 million, investments of lesser
amounts by non-WTO investors, and acquisitions considered
“culturally sensitive.” The ICA requires that the investor must
be notified of the progress of the review within 75 days. Indirect acquisitions are not subject to review. There are no restrictions on current transfers, repatriation of profits, purchase
of real estate, or access to foreign exchange.
BANKING AND FINANCE
Score: 2–Stable (low level of restrictions)
Canada has a private financial system with some restrictions. The
Economist Intelligence Unit reports that the banking system “is
well developed and dominated by six, large domestic banks.
Ownership of the banks is restricted, and their activities are highly
regulated…. Canadian banks continue to be restricted in some
activities—measures that protect the business of other enterprises.
Banks may not provide leases for vehicles, for example, which
has been legislated to protect car retailers. Nor may they sell insurance products through their branch networks.” According to
the International Monetary Fund, there is a general prohibition
on any individual’s directly owning over 20 percent of any class
of bank. Amendments to the Bank Act in recent years have in-
132
creased liberalization. Foreign banks are now allowed to forgo
Canada Deposit Insurance and open two types of branch offices—
full-service and lending—although full-service foreign bank subsidiaries are not allowed to own lending branches.
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
The market sets most prices in Canada. The Economist Intelligence Unit reports that “there are no broad controls on prices for
goods and services in Canada, although private companies that
operate monopoly services, such as telephones and cable television, are subject to price regulation…. State-owned monopolies,
such as the provincial power utilities, submit rates for government approval.” In addition, “under new regulation governing
Air Canada…the Transportation Ministry will be able to regulate airfares.” Additional price controls cover poultry, eggs, dairy,
wheat, rail revenues for grain traffic, seaway pricing, and telecommunications. Provinces have jurisdiction over price controls
on energy. The government also provides substantial subsidies
for agriculture. Provinces or territories set minimum wages.
PROPERTY RIGHTS
Score: 1–Stable (very high level of protection)
Private property is well-protected in Canada. The judiciary is independent, and the Economist Intelligence Unit reports that
“judges and civil servants are generally honest, and bribery and
other forms of corruption are rare.”
REGULATION
Score: 2–Stable (low level)
It is relatively easy to establish a business in Canada. According to
the U.S. Department of State, “incorporation is a straightforward
and inexpensive procedure, accomplished federally under the
Canada Business Corporations Act, or provincially under provincial corporate statutes. An average of three–four weeks is required
to process an application.” To reduce the level of bureaucracy, both
information on the administrative procedure to open a business
and the necessary forms are available on-line. The regulatory system is thorough but essentially transparent. Regulations differ from
province to province, as well as from one municipality to the next,
as in other countries that have a federal system. The government
has deregulated the telecommunications services sector to a considerable degree, allowing growth in the domestic market, although
the state maintains a presence in the economy through such remaining Crown corporations as Hydro Quebec and Ontario Power
Generation. The Canadian government has allowed e-commerce
to operate with a minimal regulatory burden.
BLACK MARKET
Score: 1–Stable (very low level of activity)
Transparency International’s 2001 score for Canada is 8.9. Therefore, Canada’s black market score is 1 this year. The Economist
Intelligence Unit reports that piracy of computer software is significant.
2003 Index of Economic Freedom
CAPE VERDE
Rank:
89
Score:
3.15
Category: Mostly Unfree
Praia
Trade Policy
Fiscal Burden
4
4.5
Government Intervention 4
Monetary Policy
1
Foreign Investment 3
Banking and Finance 3
Wages and Prices 3
Property Rights
3
Regulation
Black Market
The island nation of Cape Verde was governed as a one-party Marxist state from the
time it became independent from Portugal in 1975 until 1991, when constitutional
changes allowed multi-party elections. It has close economic and political ties to Portugal and the European Union, and its currency is pegged to the euro. Cape Verde has
few natural resources, frequent droughts, and serious water shortages. It is generally
able to provide for only 15 percent of its food needs, and food imports consume a large
portion of foreign exchange earnings. The economy is dominated by services, with
commerce, transport, foreign remittances, and public services accounting for over 70
percent of GDP. Agriculture and fishing employ the bulk of the population but contribute only about 11 percent of GDP. Over 30 state-owned enterprises have been sold
over the past decade. Despite its small size, remote location, and poor resource base,
Cape Verde has experienced steady economic growth. From 1991 to 2000, according to
World Bank data, compound growth in GDP averaged 6.3 percent annually and per
capita GDP increased from $1,113 to $1,519 (in constant 1995 U.S. dollars). Cape Verde’s
trade policy and regulation scores are both 1 point better this year, but its government
intervention and capital flows and foreign investment scores are both 1 point worse. As
a result, Cape Verde’s overall score is unchanged this year.
Scores for Prior Years:
TRADE POLICY
Major export trading partners:
Portugal 81.2%, US 9.1%
Score: 4–Better (high level of protectionism)
Cape Verde’s tariff rates range from 5 percent to 50 percent. Based on data from the
International Monetary Fund and the Economist Intelligence Unit, the average tariff
rate in 2000 was 13.3 percent (based on import duties as a percent of total imports),
down from the 19.06 percent reported in the 2002 Index. The U.S. Department of State
reports that “imports…are subject to a general customs service tax of 7 percent and a
consumption tax on non-priority goods, ranging from 5 percent to up to 60 percent for
hard liquor.” In addition, “Pharmaceuticals may only be imported by public institutions.” By itself, the lower average tariff rate would cause Cape Verde’s trade policy
score to be 2 points better this year, but this is partially offset by evidence of non-tariff
barriers. As a result, Cape Verde’s trade policy score is only 1 point better this year.
2002: 3.15
1999: 3.80
1996: 3.40
2001: 3.35
1998: 3.60
1995: n/a
2000: 3.70
1997: 3.60
2000 Data
(in constant 1995 US dollars)
Population: 441,000
Total area: 4,033 sq. km
GDP: $667 million
GDP growth rate: 6.8%
GDP per capita: $1,519
Major exports: clothing, footwear,
fish
Exports of goods and services:
$156 million
Major imports: foodstuffs, industrial
products, transport equipment, fuels
Imports of goods and services:
$413 million
Major import trading partners:
Portugal 48.1%, Netherlands 5.9%,
Japan 5.5%, US 4.6%
Foreign direct investment (net):
n/a
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3.5–Stable
(high tax rates)
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 4.5–Stable (very high cost of government)
The International Monetary Fund reports that Cape Verde’s top income tax rate is 45
percent; the marginal rate for the average taxpayer is 15 percent. The top corporate tax
rate is 35 percent. In 2000, according to the African Development Bank, government
expenditures equaled 41.9 percent of GDP.
Chapter 6: The Countries
2
4
133
GOVERNMENT INTERVENTION IN THE ECONOMY
WAGES AND PRICES
Score: 4–Worse (high level)
The World Bank reports that the government consumed 25.3
percent of GDP in 2000, up from the 23.3 percent reported in
the 2002 Index. As a result, Cape Verde’s government intervention score is 1 point worse this year. The Economist Intelligence Unit reports that the government still owns the airline, the ports company, and the food supply authority, although it plans to privatize them in the near future.
Score: 3–Stable (moderate level of intervention)
According to the Economist Intelligence Unit, “The
Movimento para a Democracia government abolished most
price controls, although food imports and distribution are
handled by a parastatal agency.” There is no private-sector
minimum wage, but most private wages are linked to those
of equivalent civil servants.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, Cape Verde’s weighted average annual rate
of inflation was 2.4 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Worse (moderate barriers)
The government recognizes that, because of its limited resources, Cape Verde must be integrated into the global
economy. The government encourages foreign investment—
particularly in tourism, fishing, light manufacturing, communications, and transportation—and all sectors of the economy
are now open to investment, although the approval process
for some investments can be slow. The International Monetary
Fund reports that both residents and non-residents may hold
foreign exchange accounts, subject to government approval
and regulations. Most payments and transfers are subject to
controls. Real estate transactions require central bank approval. While most capital transactions are permitted, the
central bank must approve most in advance. Based on evidence
of restrictions on capital flows and investment, Cape Verde’s
capital flows and foreign investment score is 1 point worse
this year.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
Cape Verde’s banking system is underdeveloped and is overseen by the central bank, which gained greater autonomy following July 1999 constitutional reforms. In addition to the
central bank, Cape Verde had four commercial banks in 2001.
Legislation implemented in 1993 removed restrictions on establishing private banks and barriers to foreign banks, but new
banks must be authorized by the central bank, and 50 percent
of bank employees must be Cape Verdean. According to the
Economist Intelligence Unit, “Commercial institutions include
the Banco Comercial do Atlantico and the Caixa Economica
de Cabo Verde, both of which were privatised in 1999–2000….
Branches of two Portuguese banks…have been established and
are expected to contribute to competition and the deepening
of the financial sector. Reforms in the financial sector have
allowed the government to offer new financial instruments
such as tax-free government bonds and high-yield savings accounts. A stock exchange opened in Praia in April 1999.”
134
PROPERTY RIGHTS
Score: 3–Stable (moderate level of protection)
Private property is only moderately protected in Cape Verde.
According to the U.S. Department of State, “The Constitution provides for a judiciary independent of the executive
branch…. [H]owever, there continued to be accusations of
politicized and biased judicial decisions.” In addition, “The
judiciary generally provides due process rights. However the
right to an expeditious trial is constrained by a seriously overburdened and understaffed judicial system. A backlog of cases
routinely leads to trial delays of 6 months.”
REGULATION
Score: 2–Better (low level)
Government efforts to streamline the cumbersome bureaucracy and increase transparency have made it easier to establish a business in Cape Verde. According to the U.S. Department of State, “Bureaucratic procedures have been simplified
in a number of cases…. The Center for Tourism, Investment
and Export Promotion, PROMEX, has become a one-stop
shop for external investors. In general, external investment
operations are subject to prior authorization from the minister in charge of economic affairs. An application is submitted
to PROMEX, and within thirty days the investor should get a
reply. If government action is not forthcoming, within 30 days,
approval is automatic.” Mass privatizations also have eased
the burden of competing with state-owned enterprises, although the process has been criticized for a lack of transparency. Regulations are applied evenly in most cases. Based on
increasing evidence of a simplified bureaucracy, Cape Verde’s
regulation score is 1 point better this year.
BLACK MARKET
Score: 4–Stable (high level of activity)
Cape Verde has a widespread black market, mainly in consumer goods, luxury items, and Western books, video and
audiocassettes, and movies. However, it recently has entered
into several treaties on intellectual property protection.
2003 Index of Economic Freedom
CENTRAL AFRICAN REPUBLIC
Rank:
80
Score:
3.05
Category: Mostly Unfree
Trade Policy
Fiscal Burden
5
2.5
Government Intervention 3
Monetary Policy
1
Foreign Investment 2
Banking and Finance 3
Economic growth in the Central African Republic is hindered by a combination of
political instability, deficient infrastructure, a poorly educated population, and a
long history of poor economic policies. The country endured successive military
governments from 1960, when it gained its independence from France, until the
establishment of civilian government in 1993. Three military mutinies in 1996 and
1997 were suppressed with the aid of a French-funded African peacekeeping force.
This force was succeeded by a United Nations peacekeeping mission (Mission des
Nations Unies en République Centrafricaine), which left in 2000 after overseeing
the 1998 legislative elections and 1999 presidential elections. An attempted coup in
May–June 2001 was quelled only with the support of Libyan armed forces, which
remain in the country. More than 50 percent of the population is rural and engaged in small-scale farming, forestry, fishing, and livestock, which contribute approximately 55 percent of GDP. Between 1991 and 2000, according to World Bank
data, compound annual GDP growth was 1.9 percent but per capita GDP fell from
$354 to $339 (in constant 1995 U.S. dollars) as population growth exceeded economic growth. The government has failed to pay civil servants and security forces
regularly since 2000, and this has led to an increase in corruption and has undermined the government’s ability to enforce its policies or the rule of law.
TRADE POLICY
Score: 5–Stable (very high level of protectionism)
The Central African Republic is a member of the Central African Economic and
Monetary Community (CEMAC), which also includes Cameroon, Chad, the Republic of Congo, Equatorial Guinea, and Gabon. In 2000, according to the U.S.
Trade Representative, CEMAC applied an average common external tariff of 18.4
percent; however, “there are other surtaxes assessed on imports which can vary
according to the nature of the item, the quantity of the particular item in the shipment, and even the mode of transport.”
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3–Stable
(moderate tax rates)
Score—Government Expenditures: 2–Stable
(low level of government expenditure)
Final Score: 2.5–Stable (moderate cost of government)
The International Monetary Fund reports that the Central African Republic’s top
income tax rate is 50 percent; the marginal rate for the average taxpayer is 0 percent. The top corporate tax rate is 30 percent. According to the African Development Bank, government expenditures equaled 17.5 percent of GDP in 2000.
Chapter 6: The Countries
Wages and Prices 3
Property Rights
3
Regulation
Black Market
4
4
Scores for Prior Years:
2002: 3.05
1999: n/a
1996: n/a
2001: n/a
1998: n/a
1995: n/a
2000: n/a
1997: n/a
2000 Data
(in constant 1995 US dollars)
Population: 3,717,000
Total area: 622,984 sq. km
GDP: $1.3 billion
GDP growth rate: 2.6%
GDP per capita: $339
Major exports: timber, diamonds,
cotton, coffee
Exports of goods and services:
$175 million
Major export trading partners:
Belgium–Luxembourg 62.8%,
Spain 6.1%, Pakistan 5.1%
Major imports: food, textiles,
petroleum products, machinery,
electrical equipment, motor vehicles,
chemicals, pharmaceuticals,
consumer goods, industrial products
Imports of goods and services:
$209 million
Major import trading partners:
France 29.2%, Cameroon 12.9%,
Belgium 7.8%
Foreign direct investment (net):
$7.3 million
135
GOVERNMENT INTERVENTION IN THE ECONOMY
WAGES AND PRICES
Score: 3–Stable (moderate level)
The World Bank reports that the government consumed 11.2 percent of GDP in 2000. According to the U.S. Department of State,
“The role of the Central African government in the economy is
diminishing in the commercial and industrial sectors, as it is currently privatizing certain companies. After privatizing its water company, parastatal banks and oil company, the C.A.R. government
plans to privatize 60% of its share in Socatel, the telecommunication company, with 40% being controlled by France Cable, a French
company.”
Score: 3–Stable (moderate level of intervention)
The government still influences prices through its state-owned companies and subsidies, although the Economist Intelligence Unit reports that the International Monetary Fund is urging the country
to liberalize “the petroleum, sugar and cotton sectors [one of the
country’s main economic outputs]; and [privatize] telecommunications, electricity and water services.” The Minister of Labor has
the authority to set the minimum wage by decree. The minimum
wage varies by sector and type of work.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, the Central African Republic’s weighted average annual rate of inflation was 2.95 percent. The Central African
Republic has benefited from a stable currency—a rarity in sub-Saharan Africa—as a member of the CFA franc zone. Fourteen countries use the CFA franc, a common currency with a fixed parity
with the euro. (The other 13 countries include Benin, Burkina Faso,
Cameroon, Chad, Congo [Brazzaville], Equatorial Guinea, Gabon,
Guinea–Bissau, Ivory Coast, Mali, Niger, Senegal, and Togo.)
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Stable (low barriers)
The Central African Republic welcomes foreign investment. The
International Monetary Fund reports that investments must be
declared unless they are reinvestment of undistributed profits. According to the U.S. Department of State, the Central African Republic “is in the process of adopting a more attractive investment
code. This new code…is designed to open up the country to foreign investors while complying with the treaty creating the Central African states economic and monetary community…. There
is no single sector/matter in which foreign investors are denied
national treatment in the C.A.R.” Although state-owned enterprises
hinder foreign investment, foreigners have won a significant presence in some formerly state-dominated sectors, such as telecommunications, and full ownership of businesses by foreigners is permitted. The IMF reports that both residents and non-residents may
hold foreign exchange accounts. Transfers and payments to countries other than France, Monaco, members of the West African
Economic and Monetary Union, members of the CEMAC, and
Comoros must be approved by the government and are subject to
some reporting requirements. Sale or issue of capital market securities and commercial credits requires government approval.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
The banking and finance sector is underdeveloped. There are only
four commercial banks operating in the Central African Republic.
The government has privatized the two largest banks, Banque
internationale pour le Centrafrique and Commercial Bank
Centrafrique. Credit is allocated on market terms, and foreigners
have access to credit on the local market, although it is limited by
the small size of the banking sector.
136
PROPERTY RIGHTS
Score: 3–Stable (moderate level of protection)
Property rights are not strongly protected in the Central African
Republic. According to the U.S. Department of State, “the Constitution provides for an independent judiciary to enforce property
and contractual rights…. [E]xecutive interference has been reported
[and] courts are not functioning due to inefficient administration,
shortage of trained personnel, growing salary arrears, and a lack
of material resources.” Settling disputes can be difficult because of
corruption. The U.S. Department of State reports that “corruption to some degree is more pervasive in government procurement,
dispute settlement and taxation.”
REGULATION
Score: 4–Stable (high level)
The state maintains a considerable presence, in part through
parastatals, in important sectors such as telecommunications
and cotton, the country’s main cash crop. Domestic resistance
to privatization and reforms makes implementation of the
privatization program difficult. Corruption is a problem, as
the Economist Intelligence Unit reports, partly because payment of civil servants’ salaries is at best sporadic. According
to the U.S. Department of State, “Setting up a business in the
C.A.R. requires voluminous paperwork and approvals from
the ministries of commerce, finance and justice. The government is trying to simplify this process.” The government also
is trying to reform the labor code and improve transparency
in the regulatory system, but much remains to be done.
BLACK MARKET
Score: 4–Stable (high level of activity)
Informal market activity, particularly smuggling in the mining sector, is extensive. The Economist Intelligence Unit reports that “an
estimated two-thirds of diamond production [one of the country’s
main export products] is traditionally smuggled out of the country
in spite of the halving of diamond export tax rates in 1999.” Smuggling of arms also takes place.
2003 Index of Economic Freedom
CHAD
Rank:
113
Score:
3.40
Category: Mostly Unfree
N’Djamena
Trade Policy
Fiscal Burden
5
4
Government Intervention 20
Monetary Policy
3
Foreign Investment 3
Banking and Finance 2
Chad gained its independence from France in 1960 and, except for a brief period
after the 1996 presidential election, has experienced almost constant internal and
external conflict. An armed revolt has gone on for three years in the remote northwest, but the Economist Intelligence Unit reports that the government has generally managed to enforce its policies in the rest of the country. The U.S. Department
of State reports that over 80 percent of the population is engaged in subsistence
farming, fishing, and herding. The economy continues to be burdened by widespread corruption, poor infrastructure, poor governance, and lack of transparency.
Construction of a much-anticipated oil pipeline from Chad through Cameroon
began in 2000, spurring investment, increasing government revenue, and creating
hopes for oil-based economic growth in one of the world’s poorest countries. From
1991 to 2000, according to World Bank data, compound growth in GDP averaged
1.8 percent annually but per capita GDP declined from $242 to $218 (in constant
1995 U.S. dollars) as population growth exceeded economic growth. Chad’s monetary policy score is 2 points worse this year; however, its government intervention, capital flows and foreign investment, banking and finance, and wages and
prices scores are all 1 point better. As a result, Chad’s overall score is 0.20 point
better this year.
TRADE POLICY
Score: 5–Stable (very high level of protectionism)
Chad is a member of the Central African Customs and Economic Union (CEMAC),
which also includes Cameroon, Central African Republic, Republic of Congo, Equatorial Guinea, and Gabon. In 2000, according to the U.S. Trade Representative,
CEMAC applied an average common external tariff of 18.4 percent. Customs corruption acts as a non-tariff barrier. The U.S. Department of State reports that “corruption exists in all levels of government and in many different ministries. It may
be most pervasive in the customs and tax enforcement services as well as the judiciary and the government procurement office.”
FISCAL BURDEN OF GOVERNMENT
Wages and Prices 2
Property Rights
4
Regulation
Black Market
Scores for Prior Years:
2002: 3.60
1999: 3.90
1996: n/a
2001: 3.60
1998: 4.00
1995: n/a
2000: 3.80
1997: 4.00
2000 Data
(in constant 1995 US dollars)
Population: 7,694,000
Total area: 1,284,200 sq. km
GDP: $1.64 billion
GDP growth rate: 0.6%
GDP per capita: $218
Major exports: livestock, meat,
cotton
Exports of goods and services:
$288 million
Major export trading partners:
Portugal 31%, Germany 17%,
France 6%, US 6%
Major imports: machinery and
transportation equipment, industrial
goods, petroleum products,
foodstuffs, textiles
Imports of goods and services:
$446.3 million
Major import trading partners:
France 35%, Nigeria 10%, US 6%,
Saudi Arabia 5%
Foreign direct investment (net):
$40.3 million
Score—Income and Corporate Taxation: 4.5–Stable
(very high tax rates)
Score—Government Expenditures: 3–Stable
(moderate level of government expenditure)
Final Score: 4–Stable (high cost of government)
The International Monetary Fund reports that Chad’s top income tax rate is 65
percent; the marginal rate for the average taxpayer is 20 percent. The top corporate tax is 45 percent. In 2000, government expenditures equaled 20.3 percent of
GDP.
Chapter 6: The Countries
4
5
137
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Better (low level)
The World Bank reports that the government consumed 7.8 percent of GDP in 2000. According to the Economist Intelligence Unit,
the government still owns 75 percent of CotonTchad, a cotton
monopoly employing 14 percent of the population and producing
Chad’s top export; however, “The majority of state-owned enterprises have now been either sold or liquidated [including stateowned banks and the national sugar company, Sonasut]….
[M]anagement of the national electricity company (Société
Tchadienne d’eau et d’électricité, STEE) was taken over by the
French group Vivendi in September 2000, ahead of privatisation at
end-2005.” Based on the evidence of increasing privatization, Chad’s
government intervention score is 1 point better this year.
MONETARY POLICY
Score: 3–Worse (moderate level of inflation)
From 1992 to 2001, Chad’s weighted average annual rate of inflation was 8.68 percent, up from the 2.28 percent from 1991 to 2000
reported in the 2002 Index. Chad has benefited from a stable currency—a rarity in sub-Saharan Africa—as a member of the CFA
franc zone. Fourteen countries use the CFA franc, a common currency with a fixed parity with the euro. (The other 13 countries are
Benin, Burkina Faso, Cameroon, Central African Republic, Congo
[Brazzaville], Equatorial Guinea, Gabon, Guinea–Bissau, Ivory
Coast, Mali, Niger, Senegal, and Togo.) Based on the higher
weighted inflation rate, Chad’s monetary policy score is 2 points
worse this year.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Better (moderate barriers)
Chad welcomes foreign investment, places no limits on foreign
ownership, and provides equal treatment to foreign investors. The
U.S. Department of State reports that “constraints [on investment]
include: limited infrastructure, chronic energy shortages, high energy costs, a scarcity of skilled labor, a high tax burden and corruption.” All investments must be reviewed and approved by the government. The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts with
government approval. Capital transactions, payments, and transfers to France, Monaco, members of the CEMAC, members of
the West African Economic and Monetary Union, and Comoros
are permitted freely. Capital transactions, payments, and transfers
to other countries are subject to exchange control approval, quantitative limits, and approval in most cases. Overall, the government’s
investment policy is bureaucratic but does not discriminate against
foreign investment. As a result, Chad’s capital flows and foreign
investment score is 1 point better this year.
BANKING AND FINANCE
Score: 2–Better (low level of restrictions)
Chad’s banking system is small, offers few services, and is regulated by the regional Commission de Banque de l’Afrique Centrale.
According to the U.S. Department of State, “The banking sector
has improved in recent years as the two largest banks, [Banque
138
Internationale de l’Afrique au Tchad] and [Societe Generale de
Banque Tchadienne] were privatized and all major banks have undergone internal reforms to reduce the volume of bad debt and
improve lending practices. Credit is available from commercial
banks on market terms….” The Economist Intelligence Unit reports that bank privatization was complete in 1999. Based on the
evidence of privatization and minimal state intervention in the
banking sector, Chad’s banking and finance score is 1 point better
this year.
WAGES AND PRICES
Score: 2–Better (low level of intervention)
According to the U.S. Department of State, “Over the past decade,
the government of Chad has made progress in privatizing state
enterprises, eliminating price controls and liberalizing the
economy.” The sugar company has been sold, and privatization of
state-owned cotton enterprises is proceeding. Chad’s labor code
requires the government to set minimum wages. Based on evidence of diminishing state influence and elimination of price controls, Chad’s wages and prices score is 1 point better this year.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
Protection of private property is weak. According to the U.S. Department of State, “There is a widespread perception that the courts
should be avoided at all costs, so most disputes are settled out of
court. There have been so few commercial disputes taken to court
that it is difficult to judge the effectiveness of the courts in this area.
Some businessmen have claimed that recent efforts to improve the
judiciary have resulted in fairer hearings for business disputes….
Chad’s judiciary is easily influenced by the Executive branch. Magistrates are appointed by presidential decree with no legislative oversight, hence the careers of magistrates, judges, clerks, and other
judicial agents depend on the Presidency and the Justice Ministry.”
REGULATION
Score: 4–Stable (high level)
Establishing a business is difficult because of Chad’s massive and
corrupt government bureaucracy. “While government policies
themselves do not hinder approval,” reports the U.S. Department
of State, “bureaucratic procedures are often cumbersome or slow.
Clear rules exist on paper but they are not always followed….
Restrictive labor laws also discourage investment.” In addition,
“Corruption exists in all levels of government and in many different ministries.”
BLACK MARKET
Score: 5–Stable (very high level of activity)
According to the U.S. Department of State, “Given the pervasive
problems of smuggling and corruption in the customs department, official figures systematically underestimate actual imports,
especially those from neighboring countries such as Cameroon
and Nigeria…. Chad has a small formal sector and a large, thriving informal sector.”
2003 Index of Economic Freedom
CHILE
Santiago
Rank:
Score:
Category:
Trade Policy
Fiscal Burden
20
2.5
Government Intervention 2
Monetary Policy
2
Foreign Investment 2
Banking and Finance 2
Chile has been a model of economic reform for Latin America since the beginning of
the 1980s—a record of success that is due in large measure to a trade policy of unilateral liberalization coupled with an almost uniform tariff rate. Yet President Ricardo
Lagos, who took office in March 2000, has promoted a reversal of labor deregulation
and spending restraint. Since March 11, 2002, when a new Congress was inaugurated,
President Lagos’s party, La Concertación, has lost some seats in Congress, although it
still has a majority and, because of the level of political cooperation that exists between
the government and its opposition, is still able to pass key legislation. Long-promised
labor legislation was finally approved in September 2001, adding significantly to the
burden of doing business in Chile. Also, the tax on reinvested corporate profits rose
from 15 percent to 16 percent, and will increase to 17 percent in 2004. The tax increase
will finance a cut in personal taxes to stimulate consumption. These two measures
raise the cost of investment in Chile and will undermine prospects for lower unemployment, currently at 9 percent; they also cast doubt on whether Chile will remain a
model of reform for the rest of Latin America. The Lagos administration has committed to imposing a structural budget surplus rule of 1 percent of GDP but is struggling
to keep its commitment. Chile recently signed a free trade agreement with the European Union, which now awaits ratification in Congress, and is engaged in trade negotiations with the United States. On May 21, 2002, President Lagos announced his intention to expand government expenditures in the health area and raise a few taxes to
finance this expansion. In addition, the low economic growth of the past five years,
averaging 2.5 percent per year, prompted a meeting between representatives of the
public and private sectors to elaborate a pro-growth agenda, which has yet to be introduced in Congress. Chile’s fiscal burden of government score is 0.5 point better this
year; however, both its government intervention and regulation scores are 1 point worse.
As a result, Chile’s overall score is 0.15 point worse this year, causing Chile to be classified as a mostly free economy.
TRADE POLICY
Score: 2–Stable (low level of protectionism)
On January 1, 2002, according to the U.S. Trade Representative, the government reduced the flat tariff rate of 8 percent on most products to 7 percent. Chile has by far the
best tariff regime in its region; however, its tariffs are still high by global standards. On
some agricultural goods, such as wheat, vegetable oils, and sugar, Chile applies duties
on top of the existing tariff rate, and this can increase the effective tariff rate dramatically. The U.S. Trade Representative reports that “due to low international wheat prices
in 1999 and 2000, this system led to applied import duties as high as 90 percent, well
above Chile’s WTO bound rate.” In May 2001, the price band was temporarily lowered
until March 2003. Since agriculture is one of the most important export sectors, barriers on agricultural products distort trade significantly. If the price band increases after
March 2003, Chile’s trade policy score could worsen in future editions of the Index.
Chapter 6: The Countries
16
2.00
Mostly Free
Wages and Prices 2
Property Rights
1
Regulation
35
Black Market 1.5
Scores for Prior Years:
2002: 1.85
1999: 2.10
1996: 2.55
2001: 2.00
1998: 2.15
1995: 2.60
2000: 2.00
1997: 2.20
2001 Data
(in constant 1995 US dollars)
Population: 15,402,000
Total area: 756,950 sq. km
GDP: $83.7 billion
GDP growth rate: 2.8%
GDP per capita: $5,436
Major exports: copper, fish, fruits,
chemicals
Exports of goods and services:
$30.8 billion
Major export trading partners:
US 17.4%, Japan 13.8%, UK 5.8%,
China 5.3%
Major imports: consumer goods,
chemicals, motor vehicles, fuels,
electrical machinery, heavy industrial
machinery, food
Imports of goods and services:
$22.1 billion
Major import trading partners:
US 18.5%, Argentina 15.9%, Brazil
7.4%, China 5.5%, Japan 3.9%
Foreign direct investment (net):
$2.7 billion
139
FISCAL BURDEN OF GOVERNMENT
BANKING AND FINANCE
Score—Income and Corporate Taxation: 2–Better
(low tax rates)
Score—Government Expenditures: 3–Stable
(moderate level of government expenditure)
Final Score: 2.5–Better (moderate cost of
government)
The top income tax rate has been lowered from 45 percent to 43
percent and will be lowered to 40 percent in 2003; the marginal rate
for the average taxpayer is 0 percent. The top corporate income tax
rate has been increased to 16 percent from 15 percent and is slated to
increase further to 16.5 percent in 2003 and 17 percent in 2004. The
Economist Intelligence Unit reports that government expenditures
equaled 24.6 percent of GDP in 2001. Based on a clarification in methodology, Chile’s income and corporate taxation score is 0.5 point better this year. As a result, Chile’s overall fiscal burden of government
score is 0.5 point better this year.
Score: 2–Stable (low level of restrictions)
Chile’s banking system meets Basle standards and is very competitive; a majority of the country’s 27 banks (and one specialist
consumer lending company) are foreign-affiliated and compete
on the same terms as their domestic rivals. The Economist Intelligence Unit reports that foreign banks accounted for 45 percent
of total bank assets at the end of 2000. There is one state-owned
bank, the Banco del Estado, which is also one of the nation’s largest. The 1997 banking law continued the gradual liberalization
of the mid-1990s by allowing banks to open branches abroad and
to enter the insurance and foreign investment funds businesses
domestically. The Economist Intelligence Unit reports that “the
Central Bank of Chile modified its Compendium of Financial
Norms in October 2000, substantially widening the range of foreign-currency operations that banks are allowed to perform by
including domestic savings accounts and overdrafts, domestic
credits and trading in foreign-currency instruments issued by local residents.”
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Worse (low level)
Based on data from the International Monetary Fund, the government consumed 12.7 percent of GDP in 2001, up from the 8
percent reported in the 2002 Index. As a result, Chile’s government intervention score is 1 point worse this year. In 2000, according to the International Monetary Fund, Chile received 3.11
percent of its total revenues from state-owned enterprises and
government ownership of property.
WAGES AND PRICES
MONETARY POLICY
PROPERTY RIGHTS
Score: 2–Stable (low level of inflation)
From 1992 to 2001, Chile’s weighted average annual rate of inflation was 3.72 percent.
Score: 1–Stable (very high level of protection)
Private property is well-protected in Chile. The Economist Intelligence Unit reports that “contractual agreements in Chile are
probably the most secure in Latin America, and the local public
administration is generally honest.”
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Stable (low barriers)
Chile’s investment regime is transparent and easy to navigate,
and most sectors are unrestricted to foreigners. The law specifically guarantees non-discriminatory treatment to foreign investors, access to foreign exchange for repatriation of capital and
profits, the ability to hold assets indefinitely, and the option to
receive national tax treatment. Purchase of certain land by foreign investors is prohibited for national security reasons; fishing
within Chile’s Exclusive Economic Zone is reserved for Chilean
vessels; sea transport between Chilean destinations is restricted;
oil and gas reserves are reserved for the state; and senior management of Chilean radio and television stations must be Chilean.
According to the Chilean Foreign Investment Committee, “In
companies with more than 25 employees, foreigners cannot represent more than 15% of the labor force…. However, this limit
does not apply to highly specialized technical staff that cannot be
replaced by Chilean workers.” The Foreign Investment Committee authorizes all foreign direct investment and expansions, but
rejections are rare. The central bank eliminated all exchange restrictions on trade and capital flows in 2001.
140
Score: 2–Stable (low level of intervention)
The market determines pricing policy to a significant extent; exceptions include prices for public utilities, urban public transport,
the postal service, and port charges. According to the Economist
Intelligence Unit, “major agricultural products, such as cooking
oils, sugar and wheat are covered by a system of price bands to
encourage local production.” Chile maintains a minimum wage.
REGULATION
Score: 3–Worse (moderate level)
Opening a business is relatively easy. The U.S. Department of State
reports that “approval procedures [to start a business] are expeditious,
and applications are typically approved within a matter of days and
almost always within one month.” Government regulation, however,
can be burdensome. According to the Office of the U.S. Trade Representative, “the most heavily regulated areas of the Chilean economy
are utilities, the banking sector, securities markets and pension funds.
Other regulations tend to be focused on labor, environment and health
standards.” In December 2001, a new labor law (Law 19,759) went
into effect, increasing the cost of doing business in Chile. The Economist Intelligence Unit reports that this law includes, among other
things, new firing restrictions; a sharp increase in fines (10 to 15 times
higher); statutory compensation for unjustified layoffs; and strong penalties for vaguely defined anti-union practices. The greatest burden
falls on small enterprises; according to a study carried out by the industrialists association, “the new labor law will increase payroll costs
by up to 13 percent in a firm employing 35 people…and 18 percent
2003 Index of Economic Freedom
for a firm employing 20 people at an average wage.” Because the
small and medium enterprises (SMEs) employ approximately 75 percent of the labor force, and because abiding by the new legislation is
more costly for SMEs than for large enterprises—which tend to be
capital-intensive rather than labor-intensive—the new legislation imposes a significant burden on doing business in Chile. As a result, Chile’s
regulation score is 1 point worse this year. Corruption in the bureaucracy exists, but only on a small scale.
BLACK MARKET
Score: 1.5–Stable (low level of activity)
Transparency International’s 2001 score for Chile is 7.5. Therefore, Chile’s black market score is 1.5 this year.
Chapter 6: The Countries
141
142
2003 Index of Economic Freedom
CHINA,
Beijing
PEOPLE’S REPUBLIC OF
Rank:
Score:
Category:
Trade Policy
Fiscal Burden
5
3
Government Intervention 4
Monetary Policy
1
Foreign Investment 4
Banking and Finance 4
China, the world’s sixth-largest trading nation, finally entered the World Trade Organization in early 2002 after the lengthy implementation of trade barrier reductions that already
have begun to undermine the state-owned sector’s role in the economy. Predictions of a
coming collapse—economic or otherwise—are certainly exaggerated; but there also is a
growing body of evidence that China’s economic growth figures have been overstated, and
Beijing’s leaders still face the threat of social instability brought on by rising unemployment
and a foundering banking system. This threat will eclipse all other considerations as Beijing
prepares for the October 2002 16th Party Congress, which will lay the groundwork for the
political succession to a younger “Fourth Generation” of leaders. Maintaining political and
social stability will continue to be the leadership’s major, if not sole, concern well into 2003,
and economic reforms will again be sidelined in favor of big-spending policies aimed at
dampening dislocations in employment, investment, and the financial and industrial sectors
of the economy. Beijing reported GDP growth of 7.3 percent in 2001 and predicts the same
for 2002. This continues the putative trend of rapid growth claimed in 2000, despite recession throughout much of the world, but the numbers are suspect. Rapid growth should be
reflected in increased employment and higher energy usage; in China, these indicators have
been negative. Moreover, in many large urban areas, total disposable income is about onethird of total reported economic output figures—a figure that is closer to 80 percent in other
East Asian countries. Another dubious indicator of economic growth is the dramatic rise in
imports since 1997; it now appears that import growth has followed declining tariffs since
1997 and the consequent drop-off in the profitability of smuggling. China’s export growth
was only 6.8 percent in 2001, the lowest level since 1996, with statistics showing a sudden
slump after the September 11 terrorist attacks on the United States. Among the major challenges that still threaten China’s economy is that—despite ongoing attempts to restructure
the myriad labor-intensive state-owned enterprises (SOEs) that still employ over two-thirds
of China’s 170 million urban workers but account for less than one-third of total output—
total losses in the state-owned sector reached US$30.2 billion in 2000 and continue to rise.
China’s own figures point to non-performing loans (NPLs) to SOEs from the big four stateowned banks at just over 26 percent of total lending, and some fear that the NPL figure is
closer to 50 percent. With banks and non-bank financial institutions directly subservient to
government policy and unable to function as financial intermediaries, the microeconomic
foundation of the entire banking sector is problematic. Nevertheless, there apparently is at
least some lending that the government does not want. In late 2000, the central bank discovered yet another US$100 billion in off–balance-sheet, hidden non-performing assets that one
Chinese economist speculates went into the stock market. Under the terms of China’s accession to the WTO, foreign banks will begin conducting local currency businesses with
Chinese companies and individuals over the coming five years and China’s banks will be
forced to compete on rational economic terms; but Beijing’s communist ideology still prevents it from permitting the establishment of domestic privately owned banks even as it
countenances foreign-owned banks. Privatization of state assets remains taboo in Communist Party circles and will remain so at least until the 16th Party Congress has concluded and
a new government has been named in March 2003. Despite these challenges, the “China
Chapter 6: The Countries
127
3.55
Mostly Unfree
Wages and Prices 3
Property Rights
4
Regulation
4.5
Black Market 3.5
Scores for Prior Years:
2002: 3.55
1999: 3.60
1996: 3.60
2001: 3.55
1998: 3.50
1995: 3.60
2000: 3.40
1997: 3.60
2001 Data
(in constant 1995 US dollars)
Population: 1,271,200,000
Total area: 9,596,960 sq. km
GDP: $1.1 trillion
GDP growth rate: 7.3%
GDP per capita: $876
Major exports: machinery and
equipment, textiles and clothing,
footwear, toys and sporting goods,
mineral fuels
Exports of goods and services:
$288 billion
Major export trading partners:
US 20.4%, Hong Kong 17.4%,
Japan 16.9%, South Korea 4.7%,
Germany 3.7%
Major imports: machinery and
equipment, mineral fuels, plastics,
iron and steel, chemicals
Imports of goods and services:
$249 billion
Major import trading partners:
Japan 17.6%, Taiwan 11.2%,
US 10.8%, South Korea 9.6%,
Germany 5.6%
Foreign direct investment (net):
$40.4 billion
Note: The sources for China’s data are the World Bank’s
World Development Indicators for 2002 and the Economist
Intelligence Unit’s Country Report. The dollar amounts
listed here for GDP, GDP per capita, exports of goods and
services, imports of goods and services, and foreign
direct investment are estimates based on data published
in these two sources. However, there have been concerns
about the accuracy of China’s official statistics, as pointed
out in a study by Professor Thomas Rawski of the
University of Pittsburgh;
see http://www.pitt.edu/~tgrawski/papers2001/gdp912f.pdf.
143
Market” lured another US$40.4 billion in contracted net foreign direct investment in 2001, and foreign contracted investments are expected to total US$61 billion in 2002. These growth figures obscure
systemic weaknesses that arise from the high government spending
that still masks the heavy burden of inadequate banking and SOE
reform; but with China now in the WTO, there are hopes that enhanced transparency of China’s legal and regulatory structure will
stabilize the business environment.
TRADE POLICY
Score: 5–Stable (very high level of protectionism)
According to the World Bank, China’s weighted average tariff rate in
2000 (the most recent year for which World Bank data are available)
was 14.7 percent. The Economist Intelligence Unit reports that “import barriers have been reduced incrementally over the past few years.
A total of 36 categories of goods are now subject to import licensing,
most of which are also subject to quota management…. Besides
quotas, China retains stringent regulatory controls over imports via
licensing, registrations requirements, commodity inspection and
quarantine rules.” On December 11, 2001, China gained access to
the World Trade Organization. As a WTO member, it has committed to eliminating a number of trade barriers, which could improve
China’s trade score in future editions of the Index.
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3.5–Stable
(high tax rates)
Score—Government Expenditures: 2–Stable
(low level of government expenditure)
Final Score: 3–Stable
(moderate cost of government)
China’s top income tax rate is 45 percent; the marginal rate for the
average taxpayer is 20 percent. The top corporate tax rate is 33 percent, up from the 30 percent reported in the 2002 Index. In 2000,
according to the Asian Development bank, government expenditures equaled 17.8 percent of GDP.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 4–Stable (high level)
The World Bank reports that the government consumed 13.1 percent of GDP in 2000. In 1999, according to the International Monetary Fund, China reported receiving 4.52 percent of its total revenues from state-owned enterprises and government ownership of
property, up from the 1.37 percent reported in the 2002 Index. However, the figure for revenues from state-owned enterprises vastly
understates the true extent of government involvement in the
economy. According to the U.S. Department of State, “As the ultimate owner of SOEs [state-owned enterprises], the government—
or more precisely, the Chinese Communist Party—continues to control roughly two thirds of GDP and urban employment.” The government has pledged to reform the SOEs to improve their efficiency,
but the speed of reform is very slow. The Economist Intelligence
Unit reports that “mandatory state control remains over all ‘vital’
economic sectors, a principle that has been emphasized in the Tenth
Five-Year Plan (2001–05). China’s SOEs include large concerns oper-
144
ating in finance, transport, telecommunications, energy, heavy industry, and other essential areas of the economy.” The Chinese government also intervenes in the stock market. In March 2002, according to the Financial Times, the government criticized securities regulators for failing to supervise the stock market, which fell from 2,250
points last year to 1,300 at the beginning of this year. The market
“has since recovered to about 1600 points, mainly because the government and the regulator, the China Securities Regulatory Commission (CSRC), have backed away from an unpopular policy to sell
extra state shares.” Based on the apparent unreliability of reported
total revenue figures, 1 point has been added to China’s government
intervention score instead of the 0.5 point that would have been added
had the data been fully reliable; another full point has been added
based on the evidence of government intervention in the stock market.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, China’s weighted average annual rate of inflation was 0.47 percent. This number should be viewed with caution,
however. China influences prices through direct price controls and
through subsidies administered by state-owned enterprises; therefore, it is likely that official inflation figures underestimate the true
rate.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 4–Stable (high barriers)
According to the U.S. Department of State, China has been second
only to the United States as a destination for foreign direct investment over the past eight years. However, China’s foreign investment
policy is designed to prevent foreign companies from competing with
some state-owned industries while directing them toward desired
sectors, such as new or high-technology sectors and investment to
develop Central and Western China. As noted by the Economist
Intelligence Unit, “Although China welcomes foreign investment, it
does not wish to see control over important sectors of its economy
slip into foreign hands.” Restricted categories of foreign investment
include sectors in which China has imported technology and domestic production meets demand, sectors with a state monopoly in
which the state is experimenting with limited foreign investment,
exploration and exploitation of rare or precious minerals, and projects
requiring capital planning by the government. Foreign investment is
prohibited if it involves a sector in which foreign investment is deemed
to threaten national security or harm the public interest or if the
project might harm the environment or human health, entail the
use of large amounts of farmland or inhibit the use of military resources, utilize manufacturing techniques or technology unique to
China, or involve any other area in which investment is prohibited
by law or regulations. The U.S. Department of State reports that
ongoing barriers to investment include “opaque and inconsistently
enforced laws and regulations and a lack of rules-based legal infrastructure.” China pledged to relax a number of these restrictions
upon accession to the World Trade Organization, but the extent to
which Beijing will comply with its WTO obligations has yet to be
demonstrated. The International Monetary Fund reports that a narrow range of resident enterprises may hold foreign exchange ac-
2003 Index of Economic Freedom
counts with approval of the government. Non-residents may hold
foreign exchange savings accounts for short periods while staying in
China. The government regulates the flow of foreign exchange in
and out of the country. According to the U.S. Department of State,
“To better control this flow, almost all Chinese enterprises and agencies are required to turn over their foreign currency earnings to the
banks in exchange for renminbi…. Foreign-invested enterprises (FIEs)
are permitted to keep foreign exchange in foreign exchange accounts
at commercial banks.” The IMF reports that most payments and
transfers over set amounts must be approved by the government or
require supporting documentation. The government imposes restrictions, prohibitions, and requirements for government approval on
nearly all transactions involving capital and money market instruments, derivatives, credit operations, real estate, and direct investment. China’s foreign investment policy—some open, much closed—
creates a lack of transparency that, despite growing foreign direct
investment, characterizes a still highly restricted foreign investment
climate.
BANKING AND FINANCE
Score: 4–Stable (high level of restrictions)
The U.S. Department of State reports that “China’s banking system
has undergone significant changes in the last two decades: banks are
now functioning more like banks than before. Nevertheless, China’s
banking industry has remained in the government’s hands even
though banks have gained more autonomy. Foreign participation in
China’s banking industry is severely restricted.” Foreign banks,
whether branches or joint ventures, are permitted to buy or sell foreign exchange only from or to foreign-funded ventures but are forbidden to accept renminbi deposits or make renminbi loans unless
they have been specially licensed to do so in specific regions. The
government remains firmly in control of the banking sector and
directs lending to state-favored projects, businesses, and individuals.
According to the U.S. Department of State, “Years of governmentdirected lending has presented these banks with large amounts of
non-performing loans. According to the Chinese government, nonperforming loans account for 25% to 30% of total lending of China’s
four big banks.” The Economist Intelligence Unit states that in 2001,
the banking system included the four large state-owned commercial
banks (Bank of China, the Agricultural Bank of China, the Industrial
and Commercial Bank of China, and the China Construction Bank),
which dominate the market, and three policy banks, 10 national jointstock commercial banks, 90 municipal banks, and approximately
45,000 urban and rural credit co-operatives. Approximately 160 foreign banks had representative offices or branches in China in 2001,
but the Economist Intelligence Unit reports that “their activities are
highly restricted and their share of the market is tiny.” The central
bank affects the allocation of credit by setting interest rates on deposits and loans. Membership in the World Trade Organization is expected to open China’s financial sector, and investment up to 50 percent in life insurance firms was permitted upon accession; but the
level of China’s adherence to WTO rules and the impact of membership on the financial sector have yet to be determined.
WAGES AND PRICES
maceutical Law, which took effect on December 1st 2001, lets authorities introduce price controls on pharmaceutical products…. Price
controls usually apply to less than 30% of goods, and controlled circulation applies to only 19 categories of commodities (versus a high
of 256 in the past). In general, prices remain controlled only for goods
and services deemed essential, such as foodstuffs and tobacco.” The
government also influences prices through subsidies to its extensive
state-owned enterprises. A Price Law passed in 1998 makes both price
collusion and price slashing by individual companies to eliminate
competition illegal. China does not have a mandatory minimum
wage, but the government mandates compliance with wage agreements.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
China’s judicial system is weak. The Economist Intelligence Unit
reports that “the security of contracts remains problematic….
[F]oreign investors often complain of the maze of regulatory difficulties they encounter in pressing their local partners to adhere to
previously agreed understandings.” According to the Financial Times,
for example, “Contracts [with foreign power companies signed about
10 years ago] were broken, ‘guarantees’ evaporated and profits mostly
proved illusory. Now…two large foreign-invested plants in the southern province of Fujian struggle to renegotiate terms with local authorities….” According to the U.S. Department of State, “The Constitution states that the courts shall, in accordance with the law, exercise judicial power independently; however, in practice, the judiciary
receives policy guidance from both the Government and the Communist Party, whose leaders use a variety of means to direct courts
on verdicts and sentences in sensitive cases…. Corruption and conflicts of interest also affect judicial decision making…. Police and
prosecutorial officials often ignore the due process provisions of the
law and of the Constitution.”
REGULATION
Score: 4–Stable (high level)
China’s regulatory regime is not transparent, and enforcement of
existing laws is not consistent, but some improvements can be seen
now that China has become a member of the World Trade Organization. The U.S. Department of State reports that “China’s legal and
regulatory system lacks transparency and consistent enforcement
despite the promulgation of thousands of regulations, opinions, and
notices affecting…investment. Although the Chinese government
has simplified the legal and regulatory environment for…investors
in recent years, China’s laws and regulations are still often ambiguous. Foreign investors continue to rank the inconsistent and arbitrary enforcement of regulations and the lack of transparency as
two major problems in China’s investment climate…. Corruption
remains widespread….”
BLACK MARKET
Score: 3.5–Stable (high level of activity)
Transparency International’s 2001 score for China is 3.5. Therefore, China’s black market score is 3.5 this year.
Score: 3–Stable (moderate level of intervention)
According to the Economist Intelligence Unit, “An amended Phar-
Chapter 6: The Countries
145
146
2003 Index of Economic Freedom
CHINA,
Taipei
REPUBLIC OF (TAIWAN)
Rank:
Score:
Category:
Trade Policy
Fiscal Burden
2
3
Government Intervention 2.5
Monetary Policy
1
Foreign Investment 3
Banking and Finance 2
Since the late 1960s, the Republic of China on Taiwan has been one of the world’s
fastest-growing economies. Though weaknesses in its financial sector were exposed
with the 2000–2001 global economic downturn, the island’s political leaders—realizing
that they would be blamed for the country’s economic woes if the gridlock that marked
earlier policy fights persisted—in mid-2001 implemented potentially far-reaching legislation and regulatory reforms that created an environment for bank mergers and more
efficient functioning of financial institutions. With public attention focused on a serious non-performing loan problem, President Chen Shui-bian has been dealing with
the crisis in the financial industry. Foreign businesses in Taiwan praise the government’s
anti-corruption campaign for “delivering on” President Chen’s commitments and making a “significant impact” on business confidence. In the December 2001 legislative
elections, a significant number of sitting legislators were ousted and replaced by a
younger, well-educated cadre of freshmen. President Chen’s Democratic Progressive
Party and its allied Taiwan Solidarity Union increased the number of their seats by 50
percent, while the Kuomintang (KMT) lost nearly 50 percent of its seats. By the first
quarter of 2002, GDP was growing by 0.9 percent—the first year-on-year GDP growth
in 17 months—and quarter-on-quarter growth was up 7.4 percent. By April, export
orders were up over 11 percent from the previous year, with quarterly export performance growing by about 20 percent. Robust export growth, however, seems to mask
contractions in the rest of the economy, indicating that Taiwan will undergo major
economic readjustments over the coming years. The increasing relocation of Taiwan’s
manufacturing capacity in China also means continuing unemployment pressures in
Taiwan. The most significant economic development of 2002 was Taiwan’s entry into
the World Trade Organization, which has required the government to dismantle most
of its monopolies in telecommunications, tobacco and alcohol, petroleum, and power
generation and continue to pursue the privatization of state enterprises and financial
institutions. The government also continues to lower barriers to trade and foreign investment in Taiwan and to ease restrictions on Taiwan businesses that trade and invest
in Mainland China. Taiwan’s government intervention score is 0.5 point better this
year. As a result, its overall score is 0.05 point better this year.
TRADE POLICY
27
2.30
Mostly Free
Wages and Prices 2
Property Rights
2
Regulation
3.0
Black Market 2.5
Scores for Prior Years:
2002: 2.35
1999: 1.90
1996: 1.95
2001: 2.10
1998: 1.95
1995: 2.00
2000: 2.00
1997: 1.95
2001 Data
(in constant 1995 US dollars)
Population: 22,406,000
Total area: 35,980 sq. km
GDP: $282 billion
GDP growth rate: –1.9%
GDP per capita: $12,597
Major exports: machinery and
electrical equipment, metals, textiles,
plastics, chemicals
Exports of goods and services:
$141.6 billion
Major export trading partners:
US 22.5%, Hong Kong 22.0%, Japan
10.4%, Germany 3.6%
Major imports: machinery and
electrical equipment, minerals,
precision instruments
Imports of goods and services:
$122.3 billion
Major import trading partners:
Japan 24.1%, US 17.0%,
South Korea 6.2%, Malaysia 3.9%
Foreign direct investment (net):
–$1.2 billion
Score: 2–Stable (low level of protectionism)
According to the World Bank, Taiwan’s weighted average tariff rate in 2000 (the most
recent year for which World Bank data are available) was 3.9 percent. Taiwan maintains
several non-tariff barriers. According to the Economist Intelligence Unit, “There are
now 190 items subject to import bans and 164 subject to restrictions…. [G]overnment
purchase orders may not be placed with non-U.S. foreign firms. Moreover, the system
of taxing imports on a [cost, insurance, and freight] rather than a [free on board] basis
results in a built-in bias against more distant countries and in favor of Japan, because of
freight rates.”
Chapter 6: The Countries
147
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3–Stable
(moderate tax rates)
Score—Government Expenditures: 3–Stable
(moderate level of government expenditure)
Final Score: 3–Stable (moderate cost of
government)
Taiwan’s top income tax rate is 40 percent; the marginal rate
for the average taxpayer is 13 percent. The top corporate tax
rate is 25 percent. In 2001, according to Standard & Poor’s,
government expenditures equaled 26.1 percent of GDP.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2.5–Better (moderate level)
Based on data from the Economist Intelligence Unit, the government consumed 12.9 percent of GDP in 2001. Data from
Taiwan’s Ministry of Finance indicate that in the same year,
Taiwan received 4.91 percent of its total revenues from stateowned enterprises and government ownership of property.
Based on new data on revenues from state-owned enterprises,
Taiwan’s government intervention score is 0.5 point better this
year.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, Taiwan’s weighted average annual rate of
inflation was 0.4 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
Taiwan continues to relax investment restrictions but maintains barriers against foreign investment in agriculture, broadcasting, power, alcohol, and cigarettes, as well as “foreign investments that are against public safety, security or morals or
that are in highly polluting industries,” according to the Economist Intelligence Unit. Foreigners are limited to 60 percent
ownership of telecommunications, including a 49 percent limit
on foreign direct investment, and foreign ownership of airlines is limited to 33 percent. In January 2001, Taiwan lifted
restrictions on foreign employees in securities firms and removed the 50 percent limit on foreign ownership of listed
Taiwanese companies. Passage of the Petroleum Enterprise
Management Law in September 2001 opened gasoline and liquid natural gas importation to the private sector. Taiwan still
maintains a Negative List for Investment by Overseas Chinese
and Foreign Nationals, which forbids foreign investment in 28
categories of domestic business and restricts foreign investment in 46 other categories. The government offers tax incentives to multinational corporations setting up world or
regional headquarters in Taiwan and to newly listed companies. The Securities and Exchange Commission raised the
portfolio investment limit to $3 billion for qualified foreign
institutional investors (QFII) and relaxed qualifications for
QFIIs in May 2001 to allow all portfolio investors to be eli-
148
gible to trade securities in Taiwan. In January 2002, the Department of Insurance allowed insurance companies to set
their own premiums. Since January 2002, the government also
has allowed foreign lawyers to practice in Taiwan, provided
they pass the bar examination and are fluent in written and
spoken Chinese. In November 2001, the government lifted its
50-year ban on direct trade and investment in China, but it
also established limitations on such investment in certain cases.
Some controls remain in effect on access to foreign exchange
and repatriation of investment capital (but not profits).
BANKING AND FINANCE
Score: 2–Stable (low level of restrictions)
Taiwan has focused on reforming its financial sector, particularly liberalizing regulations, reducing non-performing loans,
and strengthening financial ties with China. The U.S. Department of State reports that there were 53 domestic commercial banks and 39 foreign banks in 2001. The government is
privatizing its state-owned banks but continues to maintain a
substantial presence in the sector. According to the Economist Intelligence Unit, “A further problem with the liberalization programme is that it has not been accompanied by a resolute withdrawal of the state from the sector. Bank privatisation
began in earnest only in August 1997, when the central government reduced its stake in a commercial bank, Chiao Tung
Bank, from 89% to 60%. The government sold stakes in the
provincial government-owned ‘Big Three’ commercial
banks—Chang Hwa, Hua Nan and First Commercial—in early
1988. In June 2001, the government passed the financial holding company law, which allows banks, security houses, insurance companies, investment funds, and futures brokerages to
be grouped under one entity. The government took over 36
failing or insolvent credit co-operatives in August 2001 to repackage and sell their non-performing loans, which quickly
ceded control to a group of major commercial banks. But in
2002 the government still held stakes in 17 banks, and fully
private banks controlled just 42.2% of the market. Officials
still interfere from time to time with the lending policies of
state-owned and state-linked banks….” The sector continues
to be hindered by non-performing loans, estimated at 15 percent of bank loans in 2001.
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
Most wages and prices are set by the market. According to
the Economist Intelligence Unit, “Domestic price controls are
primarily applied to public utilities or to implement specific
government policies.” The few price controls in effect apply
to electricity, salt, telecommunications, postage, and oil. Taiwan maintains a minimum wage.
PROPERTY RIGHTS
Score: 2–Stable (high level of protection)
The judiciary may be subject to corruption and political influence, although these problems do not represent a serious impediment to business activity. According to the Economist
2003 Index of Economic Freedom
Intelligence Unit, “The judiciary’s biggest problems are corruption associated with ‘black gold’ (that is, organized crime),
slow decision making and lack of training to handle complex
commercial or technological cases.”
REGULATION
Score: 3–Stable (moderate level)
While the regulatory structure in Taiwan largely promotes
competition, some procedures can be burdensome. Taiwan’s
legislation includes comprehensive laws and regulations to
govern taxes, labor, health, and safety. Many investors complain of unrealistic wording in regulations and inconsistent
enforcement. In November 2001, reports the Economist Intelligence Unit, “the government officially relaxed the 10-yearold ‘no haste, be patient’ policy restricting investments in the
mainland.” The government adopted the new “aggressive
opening, effective management” policy, offering investors targeting China easier access to operational funding. In addition,
the government increased the number of categories available
for investment in China to 7,000 and allows Taiwan-based
firms to make direct investments in the mainland. According
to the U.S. Department of State, “Although corruption has
been a source of complaints by…businesspeople with operations in Taiwan, its impact on foreign direct investment decisions has been relatively less serious than in areas such as public procurement [although there were] cases where money was
paid by local firms to ensure favorable regulatory consideration of proposed investments.” In addition, “corruption has
been reported as most pervasive in the area of government
procurement, particularly in local-level construction tenders.
The authorities generally investigate allegations of corruption
and take action to penalize corrupt officials. Since its inauguration in May of 2000, the Chen Administration has stepped
up the anti-corruption efforts.”
BLACK MARKET
Score: 2.5–Stable (moderate level of activity)
Transparency International’s 2001 score for Taiwan is 5.9.
Therefore, Taiwan’s black market score is 2.5 this year.
Chapter 6: The Countries
149
150
2003 Index of Economic Freedom
COLOMBIA
Bogota
Trade Policy
Fiscal Burden
4
3.5
Government Intervention 3
Monetary Policy
3
Rank:
72
Score:
3.00
Category: Mostly Unfree
Foreign Investment 2
Banking and Finance 2
Colombia’s multi-front internal conflict has deepened over the past year and could
well get worse before the situation improves. The outlook, however, is not totally
bleak. In March 2002, voters went to the polls in large numbers and elected a new
national congress and a president—Alvaro Uribe Vélez. Both the majority of incoming legislators and the new president favor forcing Colombia’s three narco-terrorist
groups to bargain for peace using military might, as opposed to appeasing them as
outgoing President Andrés Pastrana tried to do. In 1998, Pastrana awarded the largest
rebel group, the Revolutionary Armed Forces of Colombia (FARC), a Switzerlandsized sanctuary in the heart of Colombia’s countryside as an incentive to negotiate
without placing any conditions on its use or on the group’s behavior. Pastrana’s dialogue broke down in February 2002 having failed to achieve any concessions from the
FARC. Military experts agree that Colombia must double the number of police and
combat troops in its security forces to bring the FARC, the smaller National Liberation Army, and the paramilitary United Self-Defense Forces to justice. The government must also regain momentum in eradicating the drug trafficking that now finances these terrorist groups, in addition to establishing public order in the countryside and reviving a faltering economy, to help undergird these efforts. Coffee prices
are at a record low because of a global market flooded with cheap Vietnamese beans,
in addition to which credit is tight and rebel attacks on Colombian oil pipelines continue to disrupt petroleum exports and require expensive environmental cleanups.
Unemployment remains close to 20 percent, which mirrors the growing number of
persons displaced by guerrilla and paramilitary violence. Colombia’s trade policy score
is 1 point worse this year, and its fiscal burden of government score is 0.5 point worse.
As a result, Colombia’s overall score is 0.15 point worse this year, causing Colombia to
be classified as a mostly unfree economy.
TRADE POLICY
Score: 4–Worse (high level of protectionism)
According to the World Bank, Colombia’s weighted average tariff rate in 2000 (the
most recent year for which World Bank data are available) was 11 percent, up from
the 7.62 percent reported in the 2002 Index. As a result, Colombia’s trade policy score
is 1 point worse this year. According to the U.S. Department of State, “The absence of
clear procedures to solve the problem of incorrect import documentation continues
to be a [trade] barrier.… Shipments have been detained indefinitely by Colombian
Customs because of improper tariff schedule classification, use of an improper address, or typing errors.” The U.S. Trade Representative reports that since April 1995,
“Colombia has applied a variable import duty system [price band] on agricultural
products [that] lacks transparency and can be manipulated to provide arbitrary levels
of import protection, often resulting in artificially high, prohibitive tariff rates.”
Chapter 6: The Countries
Wages and Prices 2
Property Rights
4
Regulation
3.0
Black Market 3.5
Scores for Prior Years:
2002: 2.85
1999: 2.90
1996: 3.05
2001: 2.95
1998: 3.00
1995: 2.90
2000: 2.90
1997: 3.05
2000 Data
(in constant 1995 US dollars)
Population: 43,070,700
Total area: 1,138,910 sq. km
GDP: $96.5 billion
GDP growth rate: 2.8%
GDP per capita: $2,290
Major exports: oil, coffee, coal,
nickel
Exports of goods and services:
$18.4 billion
Major export trading partners:
US 50.6%, Venezuela 9.9%,
Ecuador 3.3%, Germany 3.3%
Major imports: industrial
equipment, transportation
equipment, consumer goods,
chemicals, paper products, fuels,
electricity
Imports of goods and services:
$16.8 billion
Major import trading partners:
US 34.0%, Venezuela 8.1%,
Mexico 4.7%, Japan 4.5%
Foreign direct investment (net):
$1.8 billion
151
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3.5–
Better
(high tax rates)
Score—Government Expenditures: 3–Worse
(moderate level of government expenditure)
Final Score: 3.5–Worse (high cost of government)
Colombia’s top income tax rate is 35 percent; the marginal rate
for the average taxpayer ranges from 0.35 percent to 23.11 percent. (There are 93 different brackets within this range. For purposes of computing the marginal tax rate for the average taxpayer, 23.11 percent was used.) The top corporate tax rate is 35
percent. Data from the International Monetary Fund indicate
that in 2000, government expenditures equaled 20.3 percent of
GDP, up from the 19.3 percent reported in the 2002 Index. Based
on a clarification in methodology, Colombia’s income and corporate taxation score is 0.5 point better this year; however, its
government expenditures score is 1 point worse. As a result,
Colombia’s overall fiscal burden of government score is 0.5 point
worse this year.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Stable (moderate level)
The Economist Intelligence Unit estimates that the government consumed 22.2 percent of GDP in 2001. In the same
year, based on data from the International Monetary Fund,
Colombia received 12 percent of its total revenues from stateowned enterprises and government ownership of property.
MONETARY POLICY
Score: 3–Stable (moderate level of inflation)
From 1992 to 2001, Colombia’s weighted average annual rate
of inflation was 9.66 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Stable (low barriers)
Colombia permits 100 percent foreign ownership in almost
all sectors of its economy. Investments are subject to a simple
registration and licensing process, and the law mandates equal
treatment for foreign and domestic investors. According to
the International Monetary Fund, residents may hold foreign
exchange accounts, but they are restricted to travel agencies,
international transport companies, companies and stores in
free trade areas, and employees of multilateral entities. Nonresidents may hold foreign exchange accounts subject to reporting requirements. Other than registration requirements
and temporary restrictions, there are no controls on payments
and transfers. Non-residents may purchase real estate but must
register these purchases. Some capital transactions are subject to registration and reporting requirements. There are restrictions on foreign presence in waste disposal and national
security. Although foreign ownership up to 100 percent is permitted, the Banking Superintendent must approve foreign investment above 5 percent in any Colombian financial entity.
152
There are requirements on Colombian employees in foreignowned companies, and foreign employees in financial institutions are restricted to management, technical positions, or legal advisers. The U.S. Department of State reports that the
government “retains the right to identify other sectors in which
to limit or forbid foreign investment.” Foreign exploration and
development of petroleum resources must be carried out under an association contract with Ecopetrol, the state oil company, although liberalization in 1999 reduced Ecopetrol’s participation requirement from 50 percent to 30 percent. Restrictions on foreign investment in publicly traded companies were
eliminated in 2000. According to the Economist Intelligence
Unit, “Government policies towards foreign investors continue
to be highly favourable. However, guerrilla attacks on foreign
investments and kidnappings of foreign company personnel
remain major stumbling blocks to potential investors.”
BANKING AND FINANCE
Score: 2–Stable (low level of restrictions)
Foreign banks have complete access to credit and the entire
Colombian financial system, and the private sector directs almost all credit. The Banking Superintendent, however, must
approve foreign investment above 5 percent in any Colombian financial entity. Domestic banks may sell securities, insurance policies, and investment services, and domestic and
foreign banks are treated as equals. The Economist Intelligence
Unit reports that there were 26 commercial banks, 6 financial
corporations, and 30 commercial financing companies in 2001.
The government took over a number of banks during the 1998
and 1999 recession and advised others to close. It has since
liquidated or privatized most of these banks and has announced its intention to sell or merge all remaining stateowned banks, with the exception of the state agricultural bank
(Banco Agrario). Colombia allows foreign firms to own 100
percent of insurance firm subsidiaries but does not allow foreign insurance companies to establish local branch offices.
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
The market determines most prices. The Economist Intelligence Unit reports that “price controls only affect a few pharmaceutical products, petroleum derivatives, natural gas, some
petrochemicals, school books and tuition, residential rents,
public utility services and ground-and-air transportation….
[T]he agricultural ministry may also intervene temporarily to
freeze prices of basic foodstuffs through agreements with regional wholesalers.” The government sets a uniform minimum wage every January that serves as a benchmark for collective bargaining in tripartite (government, employers, and
organized labor) negotiations.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
Protection of property is weak in Colombia. According to the
Economist Intelligence Unit, “Although the Supreme Court
is held in high regard, the lower levels of the Judiciary and
2003 Index of Economic Freedom
civil service are susceptible to corruption and intimidation.”
The U.S. Department of State reports that “Colombia’s civil
codes define commercial entities’ legal rights and outline enforcement procedures regarding commercial activities. Enforcement mechanisms exist, but historically the judicial system has not taken an active role in adjudicating commercial
cases.” In addition, “the high number of civilian kidnappings,
terrorism and corruption [generates] a negative general security situation [that] distorts everyday life and…seriously undermines business and investor confidence.”
REGULATION
Score: 3–Stable (moderate level)
The Pastrana administration tried to reduce red tape, primarily through a series of June 1999 decrees that, among other
provisions, cut by half the time required to obtain an environmental license; however, the U.S. Department of State reports
that “the Colombian government bureaucracy still constitutes
a barrier…for both local and foreign companies.” Corruption
also remains a problem, according to the U.S. Department of
State, even though the law prohibits such practices and the
Pastrana administration made some effort to make the anticorruption agencies more effective.
BLACK MARKET
Score: 3.5–Stable (high level of activity)
Transparency International’s 2001 score for Colombia is 3.8.
Therefore, Colombia’s black market score is 3.5 this year.
Chapter 6: The Countries
153
154
2003 Index of Economic Freedom
CONGO, DEMOCRATIC REPUBLIC
OF (FORMERLY ZAIRE)
Rank:
Score:
Category:
Kinshasa
Trade Policy
Fiscal Burden
n/a
n/a
Government Intervention n/a
Monetary Policy
n/a
Foreign Investment n/a
Banking and Finance n/a
Joseph Kabila assumed the presidency of the Democratic Republic of Congo following the assassination of his father, Laurent Kabila. Kabila’s government forces
and allies control the western and southwestern Congo, while rebels backed by
Rwanda and Uganda control the rest of the country. Talks to end the devastating
four-year war have yielded little progress. The war has crippled economic output,
reduced government revenue, increased government debt, undermined the rule
of law, facilitated corruption, stifled efforts at economic reform, and relegated much
of the population to subsistence agriculture and barter as many industries and businesses have ceased to operate. While foreign businesses have avoided Congo because of uncertainty, some African nations have exploited the conflict to gain lucrative access to the country’s rich natural resources in return for support. In May
2001, the government floated the Congolese franc, which promptly fell by 84 percent against the dollar but has since stabilized. Recent liberalization efforts and a
tighter monetary policy, though positive, are not enough to overcome the damage
caused by the conflict. From 1991 to 2000, based on data from the World Bank and
the International Monetary Fund, compound growth in GDP averaged –5.5 percent annually and per capita GDP fell from $197 to $88 (in constant 1995 U.S. dollars). The data below are based on best estimates but should be considered reliable
or representative only for the portion of the country that is under government
control.
TRADE POLICY
Score: Not graded
According to the U.S. Department of State, “Congo adopted the harmonized system of tariff classification in 1988. The majority of the tariffs are ad valorem and
are calculated on a CIF [cost, insurance, and freight] basis. Congo’s tariff rates (droit
d’entrée) as set by decrees in January 1997 are: 5% heavy equipment, industrial raw
materials, agricultural and veterinary inputs and kits for assembly (ckd)[;] 15% light
equipment, spare parts, items of social use, mkd assembly kits[;] 20% products
competing with local goods in short supply[;] 30% products competing with local
goods in adequate supply, luxury goods.” In addition, “most of the country’s trade
barriers result from complex regulations, a multiplicity of administrative agencies,
and a frequent lack of professionalism and control by officials responsible for their
enforcement.”
Suspended
n/a
n/a
Wages and Prices n/a
Property Rights
n/a
Regulation
n/a
Black Market n/a
Scores for Prior Years:
2002: n/a
1999: 4.70
1996: 4.20
2001: n/a
1998: 3.95
1995: 3.90
2000: 4.70
1997: 4.15
2000 Data
(in constant 1995 US dollars)
Population: 50,948,000
Total area: 2,345,410 sq. km
GDP: $4.5 billion
GDP growth rate: –7.0%
GDP per capita: $88
Major exports: diamonds, crude oil,
cobalt, copper
Exports of goods and services: n/a
Major export trading partners:
Belgium 61.1%, US 17.4%,
Finland 6.1%, Netherlands 2.6%
Major imports: foodstuffs, mining
and other machinery, transport
equipment, fuels
Imports of goods and services: n/a
Major import trading partners:
South Africa 21.2%, Belgium 15.7%,
Nigeria 10.4%, Zambia 5.2%
Foreign direct investment (net):
n/a
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: Not graded
Score—Government Expenditures: Not graded
Final Score: Not graded
According to the International Monetary Fund, the Democratic Republic of Congo’s
official top income tax rate is 60 percent; the marginal rate for the average taxpayer
Chapter 6: The Countries
155
is 15 percent. The top corporate tax rate is 40 percent. In 2000,
according to the African Development Bank, government expenditures equaled 10.5 percent of GDP. However, these figures are very unreliable. “As of July 2000,” reports the U.S.
Department of State, “the government’s finances are out of
balance and opaque.” Moreover, the government’s inability
to exert its authority in vast portions of the country undermines its ability to collect taxes or prevent others from extorting their own “taxes” from Congolese nationals.
under the control of the Ministry of Economy and an
interministerial consultative price commission. But enforcement is inconsistent.” Although most citizens are engaged in
subsistence agriculture or otherwise outside of the formal
economy, the government has a minimum wage policy.
PROPERTY RIGHTS
Score: Not graded
The Economist Intelligence Unit reports that in 1995 (the most
recent year for which data are available), the government consumed 4.9 percent of GDP. The government dominates the
economy. According to the U.S. Department of State, “Much
of the government’s revenue is kept ‘off-book,’ and not included in published statistics on revenue and expenditure.
Further, published budget figures do not include credit purchases by the government, which were extensive and out of
control.”
Score: Not graded
Private property is not secure, both because of corruption and
because of government expropriation. According to the U.S.
Department of State, “The law provides for an independent
judiciary; however, in practice the judiciary was not independent of the executive branch….” In addition, “courts are
marked by a high degree of corruption, public administration is not yet reliable, and both expatriates and nationals are
subject to selective application of a complex legal code. Official channels still often provide no clear-cut recourse in the
event of property seizures, whose legal or moral standing can
rarely be determined. Seizures have been made via the security services, often supported by questionable decisions by the
courts.”
MONETARY POLICY
REGULATION
Score: Not graded
Data from the International Monetary Fund’s 2002 World Economic Outlook indicate that from 1992 to 2001, the Democratic
Republic of Congo’s weighted average annual rate of inflation was 364.43 percent.
Score: Not graded
The regulatory environment significantly undermines economic activity. The U.S. Department of State reports that
“Congo has never been able to provide a well-defined, stable,
and transparent legal or regulatory framework for the orderly
conduct of business and protection of investment. The
country’s laws and regulations have never been codified….
Combined with the micro-interventionism of the overmanned
and underpaid Congolese administration, this has long been
a major impediment to both foreign and domestic investment…. Existing tax, labor, and safety regulations are not onerous in themselves, but impose major burdens because they
can be capriciously applied and there are no rapid and impartial adjudication mechanisms for relief.”
GOVERNMENT INTERVENTION IN THE ECONOMY
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: Not graded
According to the U.S. Department of State, “The current investment climate in the Democratic Republic of Congo is dismal. The economy has been in decline since a policy of rampant nationalization was instituted in the mid-1970’s, and the
two wars fought in the country during the last four years have
caused a sharp drop in economic activity…. Pervasive corruption, the lack of a functioning legal mechanism for conversion and repatriation of funds, macroeconomic
mismanagement…are among the burdens companies operate under in the DRC.”
BANKING AND FINANCE
Score: Not graded
The banking system has collapsed in most of the country, and
the banks that remain are hampered by an unpredictable monetary policy and unrecoverable loans.
WAGES AND PRICES
BLACK MARKET
Score: Not graded
According to the U.S. Department of State, “The institutionalized corruption of the Mobutu regime evolved a dual
economy. Individuals and businesses in the ‘formal’ sector—
both private and state-owned—operated with high costs under extensive and unpredictably enforced laws, kept double
books, and frequently colluded with corrupt officials to secure commercial advantage or simply to remain in business.
In the ‘second’ (‘informal’ or ‘parallel’) economy, operators
sought to evade taxes and regulation altogether.”
Score: Not graded
The government imposes price controls, but enforcement is
inconsistent because of the ongoing conflict. “After a surge in
inflation during 1999,” reports the U.S. Department of State,
“the government began enforcing price control laws, creating
a Commission on Economic Crimes…. Prices are nominally
156
2003 Index of Economic Freedom
CONGO, REPUBLIC OF
Rank:
135
Score:
3.70
Category: Mostly Unfree
Brazzaville
Trade Policy
Fiscal Burden
5
4
Government Intervention 3
Monetary Policy
1
Foreign Investment 4
Banking and Finance 4
Since gaining its independence from France in 1960, the Republic of Congo has
endured one-party dictatorships and frequent military coups and wars, including
the four months of fierce fighting in 1997 that returned former President SassouNguesso to power. A truce was reached in 1999, but fighting erupted again in March
2002, this time between government troops and elements of the Ninja militia group.
Expanded fighting beyond the Pool region threatens to undo the progress made to
overcome the damage wrought by the civil war. Congo’s oil industry has declined
but still drives the economy, accounting for over 90 percent of export earnings and
47 percent of GDP in 1999. Most of the people, however, are engaged in farming.
The government remains too large, efforts to promote civil service reform and
privatization have stalled, and opaque accounting encourages corruption. The
government’s fiscal position has deteriorated significantly, and the government is
in arrears on debt payments to multilateral and bilateral creditors. Between 1991
and 2000, according to World Bank data, compound growth in GDP averaged 1.1
percent annually and per capita GDP fell from $1,094 to $841 (in constant 1995 U.S.
dollars) as population growth exceeded economic growth. The Republic of Congo’s
fiscal burden of government score is 0.5 point better this year. As a result, its overall score is 0.05 point better this year.
TRADE POLICY
Score: 5–Stable (very high level of protectionism)
Congo is a member of the Central African Economic and Monetary Community
(CEMAC), which also includes Cameroon, the Central African Republic, Chad,
Equatorial Guinea, and Gabon. In 2000, according to the U.S. Trade Representative, CEMAC applied a common external tariff of 18.4 percent. The most significant non-tariff barriers include import licenses, red tape, an inefficient customs
service, and theft of imported goods by government officials.
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 4–Stable
(high tax rates)
Score—Government Expenditures: 4–Better
(high level of government expenditure)
Final Score: 4–Better (high cost of government)
Congo’s top income tax rate is 50 percent; the marginal rate for the average taxpayer is 15 percent. According to Ernst & Young, the top corporate tax is 40 percent, down from the 45 percent reported in the 2002 Index. In 2000, according to
the African Development Bank, government expenditures equaled 25.5 percent of
GDP, down from the 39 percent reported in the 2002 Index. Based on the lower
level of government expenditure, Congo’s fiscal burden of government score is 0.5
point better this year.
Chapter 6: The Countries
Wages and Prices 3
Property Rights
4
Regulation
Black Market
4
5
Scores for Prior Years:
2002: 3.75
1999: 3.95
1996: 4.10
2001: 3.70
1998: 4.55
1995: n/a
2000: 3.90
1997: 4.00
2000 Data
(in constant 1995 US dollars)
Population: 3,018,000
Total area: 342,000 sq. km
GDP: $2.6 billion
GDP growth rate: 7.9%
GDP per capita: $841
Major exports: petroleum, sugar,
timber
Exports of goods and services:
$2 billion
Major export trading partners:
US 20.9%, South Korea 15.5%,
China 6.7%, Germany 3.2%
Major imports: petroleum products,
capital equipment, construction
materials, foodstuffs
Imports of goods and services:
$1.6 billion
Major import trading partners:
France 20.5%, US 9.8%, Italy 7.5%,
Belgium 3.8%
Foreign direct investment (net):
$5.4 million
157
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Stable (moderate level)
The World Bank reports that the government consumed 11.1
percent of GDP in 2000. In the same year, according to the
International Monetary Fund, Congo received 77.12 percent
of its total revenues from state-owned enterprises and government ownership of property.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, Congo’s weighted average annual rate of
inflation was 0.33 percent. Congo has benefited from a stable
currency—a rarity in sub-Saharan Africa—as a member of the
CFA franc zone. Fourteen countries use the CFA franc, a common currency with a fixed parity with the euro. (Other members are Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Equatorial Guinea, Gabon, Guinea–Bissau, Ivory
Coast, Mali, Niger, Senegal, and Togo.)
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 4–Stable (high barriers)
Ongoing conflict between the government and militia groups
has undermined the foreign investment environment. Foreign
investment is virtually nonexistent beyond the oil sector and
forestry, although privatization has attracted some interest.
Despite the adoption of a new investment code in 1997, according to the U.S. Department of State, “Congo’s investment
climate was not considered favorable, offering few meaningful incentives. High costs for labor, energy, raw materials, and
transportation; a restrictive labor code; low productivity and
high production costs; militant labor unions; and a deteriorating transportation infrastructure were among the factors
discouraging investment.” The International Monetary Fund
reports that residents are permitted to hold foreign exchange
accounts. Most non-residents are not permitted to hold foreign exchange accounts. Payments and transfers to countries
other than France, Monaco, members of the CEMAC, members of the West African Economic and Monetary Union, and
Comoros are subject to documentation requirements. Payments for travel outside of the franc zone face quantitative
limits. Most inward direct investment requires government
approval. Residents must receive government approval to borrow from abroad or to lend abroad.
BANKING AND FINANCE
Score: 4–Stable (high level of restrictions)
Congo’s central bank, as it is for five other countries of the
Central African region of the franc zone, is the Banque des
Etats de l’Afrique Centrale. Banks remain under the control
or influence of corrupt government officials. According to the
Economist Intelligence Unit, “The local banking sector has
been crippled by poor management, political interference and
the accumulation of non-performing loans, many of which
have involved prominent individuals as well as public enterprises. Congo’s two main public banks, the Union des banques
158
congolaises (UCB) and the Banque internationale de
développement du Congo (BIDC), were already insolvent
prior to the outbreak of the war in 1997…. Because of the
civil war, and the fact that loan recovery cannot be guaranteed through the justice system, many banks have ceased providing loan credit, except on a very short term basis, and now
generate their revenue mostly through transaction fees.” The
performing assets of the largest bank (UCB) have been incorporated into the Campagnie de financement and participation, which also has European capital. The BIDC had not been
sold as of May 2001, but the third largest bank (Crédit pour
l’agriculture et le commerce) had been sold to Banques
populaires de France.
WAGES AND PRICES
Score: 3–Stable (moderate level of intervention)
The Economist Intelligence Unit reports that “fuel prices are
regulated in Congo.” The government also continues to influences prices through state-owned companies in transport,
the electricity and water utilities, and the financial sector. The
labor code stipulates a monthly minimum wage.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
According to the U.S. Department of State, “The Fundamental Act provides for an independent judiciary; however, in practice the judiciary continued to be corrupt, overburdened, under financed, and subject to political influence. Lack of resources continued to be a severe problem; almost nothing remains of judicial records, case decisions, and law books following the looting during the civil wars.”
REGULATION
Score: 4–Stable (high level)
The Economist Intelligence Unit reports that corruption remains a considerable problem. Regulations, in addition to
being burdensome, are enforced haphazardly, and labor laws
favor militant unions at the expense of employers. According
to the same source, “The…main security risks to business in
Congo are the lack of clarity in regulation and slow and poorly
functioning government institutions on which investors may
depend for routine matters. Security of contracts and enforcement of justice cannot be guaranteed through the slow-moving justice system.”
BLACK MARKET
Score: 5–Stable (very high level of activity)
Congo’s black market is huge. According to the Economist
Intelligence Unit, “about 60% of the population earns a livelihood from, or has links to, the informal agricultural sector.”
2003 Index of Economic Freedom
San Jose
COSTA RICA
Rank:
Score:
Category:
Trade Policy
Fiscal Burden
2
3
Government Intervention 2.5
Monetary Policy
3
Foreign Investment 2
Banking and Finance 3
Psychologist and media personality Abel Pacheco won the April 2002 presidential
election on a commitment to fiscal austerity and a pledge to revitalize the economy.
Effective reform is unlikely, however, as the new president faces resistance in the
Congress where Pacheco’s Partido Unidad Social Cristiana does not hold a majority. Moreover, Costa Ricans associate privatization with corruption and job losses,
preferring to absorb the high cost of inefficient services rather than the loss of
inefficient jobs. Despite rising internal debt, both the public and Pacheco remain
committed to the welfare state. Privatization of the energy and telecommunications sectors remains doubtful; former President Miguel Rodriquez failed to privatize state monopolies, in large part because of public opposition. Yet most Costa
Ricans pay little or nothing in taxes, leading central bank president Eduardo Lizano
to observe that “We spend like we’re rich but pay taxes like paupers.” The Economist Intelligence Unit notes that the main “issue facing the country now is how to
sustain a European-style welfare state on a Latin American tax base.” Despite its
fiscal problems and the level of government involvement in the economy, Costa
Rica is investor-friendly and the political climate is stable. Weak enforcement of
property rights can deter foreign investment.
TRADE POLICY
Score: 2–Stable (low level of protectionism)
According to the World Bank, Costa Rica’s weighted average tariff rate in 2000
(the most recent year for which World Bank data are available) was 3.7 percent,
down from the 7 percent reported in the 2002 Index. The government has streamlined customs procedures so that most of the processing is done electronically, and
this has significantly reduced the amount of time needed for an importer to clear
customs. However, there are non-tariff barriers, such as lengthy and cumbersome
processes to obtain standard sanitary and phytosanitary documentation. By itself,
tariff reduction would cause Costa Rica’s trade policy score to be 1 point better
this year, but this is offset by the evidence of non-tariff barriers. As a result, Costa
Rica’s trade policy score is unchanged this year.
44
2.65
Mostly Free
Wages and Prices 2
Property Rights
3
Regulation 3
Black Market 3
Scores for Prior Years:
2002: 2.65
1999: 2.95
1996: 2.95
2001: 2.65
1998: 2.95
1995: 2.90
2000: 2.85
1997: 2.95
2000 Data
(in constant 1995 US dollars)
Population: 3,811,000
Total area: 51,100 sq. km
GDP: $14.6 billion
GDP growth rate: 1.7%
GDP per capita: $3,912
Major exports: coffee, bananas,
sugar, pineapples, textiles, electronic
components, medical equipment
Exports of goods and services:
$7.7 billion
Major export trading partners:
US 52.8%, EU 19.8%, Puerto Rico
3.8%, Mexico 1.8%
Major imports: raw materials,
consumer goods, capital equipment,
petroleum
Imports of goods and services:
$6.7 billion
Major import trading partners:
US 52.2%, Mexico 5.2%,
Venezuela 4.3%
Foreign direct investment (net):
$370 million
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 2.5–Stable
(moderate tax rates)
Score—Government Expenditures: 3–Stable
(moderate level of government expenditure)
Final Score: 3–Stable (moderate cost of government)
Costa Rica’s top income tax rate is 25 percent; the marginal rate for the average taxpayer is 0 percent. The top corporate income tax rate is 30 percent. In 2000, according
to Standard & Poor’s, government expenditures equaled 23.4 percent of GDP.
Chapter 6: The Countries
159
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2.5–Stable (moderate level)
The World Bank reports that in 2000, the government consumed 13.4 percent of GDP. In the same year, according to
the International Monetary Fund, Costa Rica received 5.56
percent of its total revenues from state-owned enterprises and
government ownership of property.
MONETARY POLICY
Score: 3–Stable (moderate level of inflation)
From 1992 to 2001, Costa Rica’s weighted average annual rate
of inflation was 11.01 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Stable (low barriers)
Costa Rica offers one of Central America’s best investment
climates, and foreign investors are treated the same as domestic investors. State monopolies constrain some investment
opportunities. Foreign investment is restricted in hydrocarbon
and radioactive materials extraction; petroleum importing,
refining, and wholesale distribution; alcohol distillation; port
and airport operations; police enforcement; and public health.
There are no controls on capital flows, but reporting requirements are mandatory for some transactions. According to the
International Monetary Fund, Costa Rica has no restrictions
or controls on the holding of foreign exchange accounts, invisible transactions, or current transfers by either residents or
non-residents; in addition, repatriation of profits is unrestricted
unless they are profits, dividends, or remittances of interest
that are subject to a 15 percent withholding tax. Government
demand for domestic credit to fund its budget deficit increasingly crowds out private investment; internal debt was 30 percent of GDP in 2000, up from 17 percent in the early 1990s.
Beachfront real estate is generally the property of the state,
and government approval is required for foreign purchase.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
Competition has generally been free and open since the state
banking monopoly was eliminated. Insurance services are
provided by a state-owned monopoly. The banking sector is
dominated mainly by three state-owned banks that were nationalized in 1949, control two-thirds of the onshore banking
system, and account for over 40 percent of private-sector loans.
“Despite the relatively recent strengthening of banking regulations and supervision,” notes Standard & Poor’s, “an important risk remains the lack of information regarding the large
parallel banking system. Because consolidated financials are
not available for the entire banking system, it is impossible to
measure the level of problem assets…. [D]omestic banks may
transfer problem loans to parallel banks in order to improve
their reported asset quality; or, conversely, they may transfer
non-performing loans to the domestic banks in order to reduce their reported asset quality or tax liability. Regulatory
changes in late 1997 required financial groups to submit con-
160
solidated financial statements…but regulators do not have the
ability to confirm the information presented…and reporting
remains incomplete.” Allocation of credit is influenced
through state banks.
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
According to the U.S. Department of State, “Prices are set by
the market, except in sectors controlled by the state (e.g. gasoline, electricity, telecommunications, and insurance).” The
Economist Intelligence Unit reports that the government “also
applies price controls to all goods included in the basic consumption list. An adjustment in fuel prices generally affects
all prices in the economy.” Costa Rica’s constitution provides
for a minimum wage, which is set by a tripartite council representing government, business, and labor.
PROPERTY RIGHTS
Score: 3–Stable (moderate level of protection)
Private property is not entirely safe in Costa Rica. According
to the U.S. Department of State, “The law grants considerable rights to squatters who invade uncultivated land, regardless of who may hold title to the property. Landowners
throughout the country have suffered frequent squatter invasions for years.” The Economist Intelligence Unit describes
the judiciary as “quite backlogged and inefficient.”
REGULATION
Score: 3–Stable (moderate level)
According to the U.S. Department of State, “Costa Rican laws,
regulations and practices are generally transparent and foster
competition, except in monopoly sectors where competition
is explicitly excluded. Tax, labor, health and safety laws are
generally well conceived and enforced and do not interfere
with investment decisions or flows.” Bureaucratic procedures
“are frequently long, involved and discouraging to newcomers.” The government created an on-line investor manual and
one-stop windows; but since some practices are engraved in
law, they cannot be changed administratively. Some regulations (for example, those requiring environmental impact studies) are moderately burdensome, and the government requires
private companies to grant vacations, a substantial holiday
bonus, overtime, and social insurance. The U.S. Department
of State also reports that “Developers of tourism facilities
periodically cite municipal level corruption as a problem….
In recent years, corruption has been exposed in the Civil Aviation Directorate, the Ministry of Public Works and Transportation, the State-owned banks, the public housing authority
(in charge of financing low-income housing) and the ports.…”
BLACK MARKET
Score: 3–Stable (moderate level of activity)
Transparency International’s 2001 score for Costa Rica is 4.5.
Therefore, Costa Rica’s black market score is 3 this year.
2003 Index of Economic Freedom
CROATIA
Zagreb
Rank:
89
Score:
3.15
Category: Mostly Unfree
Trade Policy
Fiscal Burden
3
4
Government Intervention 2
Monetary Policy
2
Foreign Investment 3
Banking and Finance 3
Since the death of its first president, Franjo Tudjman, Croatia has begun to change
course. Elections on January 3, 2000, brought to power a fractious coalition led by
the Social Democrats and Social Liberals, leaving Tudjman’s Croatian Democratic
Union in the unaccustomed role of opposition. Former Communist Ivica Racan
became premier of the moderate reformist government but inherited an economy
in shambles. Tudjman and his allies had plundered the national treasury, partly by
manipulating privatization of state-owned companies. Croatia’s unemployment
rate has worsened from 20.8 percent in 1999 to 22.3 percent at the end of 2001.
The new government inherited a foreign debt burden of $9 billion—equal to approximately 45 percent of GDP. The government recognizes that it needs to pursue privatization, and the parliament has approved the sale of the electricity company and several state-owned banks and oil companies. As a result, foreign direct
investment rose to $1 billion in 2001. The Racan government has decreased subsidies to public enterprises. Another serious drain on the treasury, Croatia’s pension
system, is being reformed; since January 2001, Croatia has been moving toward a
more market-based pension system. Overall, while much more can and should be
done to liberalize the economy, the current government appears to be heading in
the right direction. Croatia’s fiscal burden of government score is 0.5 point better
this year, and its government intervention and monetary policy scores are both 1
point better. As a result, Croatia’s overall score is 0.25 point better this year.
TRADE POLICY
Score: 3–Stable (moderate level of protectionism)
Based on data from the International Monetary Fund and the Economist Intelligence Unit, Croatia’s average tariff rate in 2000 was 6.11 percent (based on import
duties as a percentage of total imports), down from the 8.11 percent reported in
the 2002 Index. Non-tariff barriers include strict testing and certification requirements for some foods, pharmaceuticals, and electronics.
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 2.5–Better
(moderate tax rates)
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 4–Better (high cost of government)
Croatia’s top income tax rate is 35 percent; the marginal rate for the average taxpayer is 20 percent. Ernst & Young reports that the top corporate tax rate is 20
percent, down from the 35 percent reported in the 2002 Index. Data from the International Monetary Fund indicate that in 2001, government expenditures equaled
33.3 percent of GDP. Based on the lower corporate tax rate, Croatia’s overall fiscal
burden of government score is 0.5 point better this year.
Chapter 6: The Countries
Wages and Prices 3
Property Rights
4
Regulation
4.5
Black Market 3.5
Scores for Prior Years:
2002: 3.40
1999: 3.60
1996: 3.60
2001: 3.45
1998: 3.65
1995: n/a
2000: 3.50
1997: 3.60
2001 Data (unless otherwise indicated)
(in constant 1995 US dollars)
Population: 4,381,000
Total area: 56,542 sq. km
GDP: $23.5 billion
GDP growth rate: 4.1%
GDP per capita: $5,364
Major exports: textiles and clothes,
chemicals, petroleum products, food
products
Exports of goods and services:
$10.6 billion
Major export trading partners:
Italy 22.0%, Germany 14.2%, Bosnia
and Herzegovina 11.1%,
Slovenia 10.7%, Austria 6.2% (2000)
Major imports: machinery, transport
and electrical equipment, chemicals,
fuels and lubricants, foodstuffs
Imports of goods and services:
$13 billion
Major import trading partners:
Italy 17.1%, Germany 16.4%,
Russia 8.5%, Slovenia 7.9%,
Austria 6.7% (2000)
Foreign direct investment (net):
$1.2 billion
161
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Better (low level)
Based on data from the International Monetary Fund, the
government consumed 24 percent of GDP in 2001, down from
the 27 percent reported in the 2002 Index. In 2000, reports the
IMF, the government received 1.25 percent of its total revenues from state-owned enterprises and government ownership of property. Based on the lower level of government consumption, Croatia’s government intervention score is 1 point
better this year.
MONETARY POLICY
Score: 2–Better (low level of inflation)
From 1992 to 2001, Croatia’s weighted average annual rate of
inflation was 5.21 percent, down from the 6.21 percent from
1991 to 2000 reported in the 2002 Index. As a result, Croatia’s
monetary policy score is 1 point better this year.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
According to the U.S. Department of State, the relatively low
level of foreign direct investment in Croatia “is due to the
political instability of the last decade as well as the policies of
the previous regime. The former regime under Franjo
Tudjman went out of its way to obstruct foreign investors and
award the spoils of industry to political cronies. In contrast,
since coming to power in January 2000, the current government has taken active measures to welcome foreign investors,
expedite privatization of the state monopolies, and improve
the Croatian business environment.” The World Bank reports
that a judicial backlog, aggravated by poor funding and bureaucratic red tape, inhibits investment. Foreign investors have
the same rights and status as domestic investors, subject to
reciprocity with their home nation, and may invest in nearly
every sector of the economy. All foreign direct investments
must be registered with the commercial courts, and foreigners may purchase real estate only with permission from the
government, according to the International Monetary Fund.
The IMF also reports that both residents and non-residents
are technically allowed to hold foreign exchange accounts, but
numerous limitations are enforced, and government approval
is required in certain instances. Payments and transfers face
few restrictions. Most capital transactions either must be registered with or approved by the central bank.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
The Croatian embassy reports that there were 43 banks operating in Croatia at the end of 2001 and that 25 of these were
majority foreign-owned. Croatia has no formal barriers to foreign banks. A new law governing banks passed by the parliament in 2001 brought regulations more closely into harmonization with European Union standards—for example, by raising capital adequacy requirements. There were three stateowned banks, representing 5 percent of banking assets, at the
162
end of 2001; two of these banks are slated for sale in 2002.
According to the U.S. Department of State, “Significant restructuring and consolidation of the banking sector has been
achieved only during the past two years. Opening of the banking sector to foreign investment is directly responsible for the
progress achieved.”
WAGES AND PRICES
Score: 3–Stable (moderate level of intervention)
The government has the authority to determine prices on a
wide range of goods and services. According to the Embassy
of Croatia, price controls affect natural gas, liquid gas, oil, electric energy, wood in the rough, radio and television services,
passenger transport on railways and coastal ferries, and standardized letters and post cards. In 1999, the government signed
a collective bargaining agreement establishing a monthly minimum wage.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
The court system is cumbersome and inefficient. According
to the U.S. Department of State, “The Constitution provides
for an autonomous and independent judiciary; however, the
judiciary continued to suffer from some political influence, a
backlog of over 1.1 million cases, and funding and training
shortfalls.” In addition, “A public opinion poll by the Center
for Market Research in August 2001 found that fully 83 percent of Croatians believed that their country is corrupt….
Respondents cited the…judiciary (13 percent) as [one of the]
areas where bribery and corruption were most prevalent.”
REGULATION
Score: 4–Stable (high level)
Croatia’s bureaucracy, like the bureaucracies of other postcommunist regimes, remains entrenched, and red tape
abounds. The Economist Intelligence Unit cites high wage
costs and “restrictive labour laws” as considerable impediments
to business. The same source also reports that “corruption
(inspired by impenetrable thickets of bureaucracy) seems to
be a [great] source of worry for foreign businesses. Often, gratuities are requested to speed up the process….” The government has pledged to trim the overgrown civil service.
BLACK MARKET
Score: 3.5–Stable (high level of activity)
Transparency International’s 2001 score for Croatia is 3.9.
Therefore, Croatia’s black market score is 3.5 this year.
2003 Index of Economic Freedom
CUBA
Havana
Rank:
Score:
Category:
Trade Policy
Fiscal Burden
3
4.5
Government Intervention 4
Monetary Policy
5
Foreign Investment 4
Banking and Finance 5
In the past 10 years, the Cuban government has opened some sectors of the
economy to foreign investment and has permitted some privileged Cubans to engage in economic activity on their own with other countries. However, the reforms have been insufficient to transform the Cuban economy and allow Cubans
to raise their standard of living. Fidel Castro’s 43-year-old dictatorship is having
trouble finding lenders. Last year, Cuba defaulted on some $500 million in loans to
private banks and devalued its currency, the peso, by 18 percent. Foreign debt stands
at nearly $11 billion. In June 2001, Dutch authorities impounded one of Cuba’s
merchant ships in waters off The Hague to secure payment to numerous creditors. Both France and the Netherlands have stopped extending credit because of
non-payment in arrears. Even relations with formerly friendly neighbors are turning sour. In April 2002, Uruguay became the first Latin American country to sponsor a resolution in the United Nations Human Rights Commission to condemn
the Castro regime’s treatment of dissidents and political prisoners. This leaves
Cuba’s aging leader with few friends—outside of Iraq and Venezuela—from whom
to seek a handout. Even guaranteed supplies of Venezuelan oil at concessionary
rates are no longer certain. In an effort to convince the United States of its value as
a customer, the Castro regime paid cash for some $30 million in U.S. grain last year
after a U. S. law was passed permitting agricultural sales to Cuba on a cash-only
basis. Yet Castro is broke, and such cash payments are not the rule for Cuba. Lifting the embargo and initiating a regular trade relationship would require financing
by U.S. banks and multilaterals. Since Castro refuses to admit the failure of his
economic model, this would be unacceptably risky, as evidenced by Cuba’s current
creditworthiness. Even with an injection of new credit, Cuba’s outdated economic
model would not be able to compete in the global market. Productive economic
talk now centers largely on a post-Castro transition. To make Cuba prosperous,
the island’s new leaders will have to establish civil liberties and property rights as
well as convert the military structure that now runs the government and most
state businesses into administrative and financial institutions of a market-based
economy. Cuba’s fiscal burden of government score is 1 point worse this year;
however, its trade policy score is 2 points better, and its government intervention
and regulation scores are both 1 point better. As a result, Cuba’s overall score is
0.30 point better this year.
155
4.45
Repressed
Wages and Prices 5
Property Rights
5
Regulation
Black Market
Scores for Prior Years:
2002: 4.75
1999: 4.85
1996: 4.85
2001: 4.75
1998: 4.85
1995: 4.85
2000: 4.75
1997: 4.85
2000 Data
(in constant 1995 US dollars)
Population: 11,188,000
Total area: 110,860 sq. km
GDP: n/a
GDP growth rate: 5.6%
GDP per capita: n/a
Major exports: nickel, tobacco,
sugar, seafood
Exports of goods and services: n/a
Major export trading partners:
Russia 23.3%, Netherlands 14.5%,
Canada 12.9%, Spain 8.0%,
Egypt 3.7%
Major imports: petroleum, food,
machinery, chemicals, semi-finished
goods, transport equipment,
consumer goods
Imports of goods and services: n/a
Major import trading partners:
Spain 19.5%, France 14.0%,
Canada 8.2%, China 8.1%, Italy 7.7%
Foreign direct investment (net):
$11.9 million
TRADE POLICY
Score: 3–Better (moderate level of protectionism)
According to the World Bank, Cuba’s weighted average tariff rate in 1997 (the
most recent year for which World Bank data are available) was 8.1 percent. The
Lexington Institute reports that “foreign trade was decentralized as 350 enterprises
were permitted to import and export on their own authority.” Cuba maintains
significant non-tariff barriers, however. The government inspects and approves most
imports. In many cases, customs officials also confiscate imports (especially scarce
Chapter 6: The Countries
4
5
163
goods like electronics) for their own use, and such corruption
enjoys official sanction. Based on previously unavailable data
on the average tariff rate, Cuba’s trade policy score is 2 points
better this year.
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3.5–
Stable
(high tax rates)
Score—Government Expenditures: 5
(very high level of government expenditure)
Final Score: 4.5–Worse
(very high cost of government)
According to information from the Pi Management Association, Cuba’s top income tax rate is 50 percent. (Data on the
marginal rate for the average taxpayer are unavailable; therefore the income tax portion of Cuba’s income and corporate
taxation score is based solely on the top income tax rate.) The
same source also reports that Cuba’s corporate tax rate is 30
percent. Wholly owned foreign businesses are assessed a 35
percent rate, but the standard 30 percent rate is used to score
this factor, with the 35 percent tax viewed as a foreign investment barrier. Data from the Economist Intelligence Unit indicate that in 2000, government expenditures equaled 52.2
percent of GDP. Based on previously unavailable data on the
level of government expenditures, Cuba’s overall fiscal burden of government score is 1 point worse this year.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 4–Better (high level)
The World Bank reports that the government consumed 7.8
percent of GDP in 2000. Data from the Economist Intelligence
Unit indicate that in the same year, Cuba received 10.42 percent of its total revenues from state owned enterprises and
government ownership of property. However, these figures
are implausibly small, given the fact that the state produces
most economic output and employs most of the labor force.
According to the Lexington Institute, “As a matter of policy,
Cuba has neither abandoned socialism nor proclaimed a systemic reform according to a Chinese, Vietnamese or other
model of revised socialism. The state retains a predominant
guiding role in economic production.” The Economist Intelligence Unit reports that the state employs more than 75 percent of the labor force. Based on the level of state involvement in the economy, 2 points have been added to this factor.
Overall, based on the fact that a small private sector is emerging, Cuba’s government intervention score is 1 point better
this year.
MONETARY POLICY
Score: 5–Stable (very high level of inflation)
Data from the Economist Intelligence Unit indicate that from
1996 to 2001, Cuba’s weighted average rate of inflation was
0.03 percent. However, the validity of this number is questionable. Cuba’s currency is basically worthless and is not con-
164
vertible on the international market. As noted by the Economist Intelligence Unit, “Given the prevalence of fixed prices
and the existence of parallel markets in domestic currency
and US dollars, the government can largely control inflation
by using price controls and the regulation of the limited free
markets.”
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 4–Stable (high barriers)
Foreign investment is permitted on a case-by-case basis. All
investments must go through the state, and licensing is required for all businesses in Cuba. Cuba’s constitution still outlaws all foreign ownership of property and real estate. Officially, all sectors of the economy except defense, education,
and health care are open to foreign investment. The tourism,
sugar, mining, and light industry sectors have attracted the
most foreign investment. According to the Economist Intelligence Unit, “The authorities remain firmly committed to
maintaining a planned economy…. The opening of the
economy to foreign investment will remain tightly controlled,
but foreign investors will continue to trickle in.” Bureaucratic
red tape makes the process for establishing a company a very
time-consuming one. The foreign investment law provides
additional protection against expropriation, but all arbitration
must take place in government ministries that afford the investor little protection.
BANKING AND FINANCE
Score: 5–Stable (very high level of restrictions)
Reform of the banking system, initiated in 1994, has involved
restructuring existing banks, modernizing banking regulations,
and expanding the system. Most notably, central bank functions were stripped from the Banco Nacional de Cuba, and a
new central bank, the Banco Central de Cuba, was created in
1997. Although the government has established a new set of
state-owned banks over the past several years and has opened
a series of state-run bureaux de change, it still controls all activity in the banking sector. It has permitted over a dozen foreign banks to open representative offices but does not allow
them to operate freely. Some changes also have been introduced in the insurance sector. According to the Economist
Intelligence Unit, “Products not known for 35 years, such as
travel and medical insurance, and personal pensions, are being promoted. The first insurance joint ventures with foreign
capital were announced in early 1997.” The government, however, still fully controls this sector as well.
WAGES AND PRICES
Score: 5–Stable (very high level of intervention)
The government sets virtually all wages and prices. It also sets
numerous minimum wages that vary according to occupation. According to the U.S. Department of State, “The Government supplements the minimum wage with free education, subsidized medical care (daily pay is reduced by 40 percent after the third day of being admitted to a hospital), housing, and some food (this subsidized food is enough for about 1
2003 Index of Economic Freedom
week per month)…. The Government rations most basic necessities such as food, medicine, clothing, and cooking gas….”
A news brief in the June 3, 2002, edition of The Wall Street
Journal notes that “Cuba announced price increases at the
nation’s stores but promised that the cost of foods and other
essentials will remain untouched or slightly lowered.”
PROPERTY RIGHTS
Score: 5–Stable (very low level of protection)
Private ownership of land and productive capital by Cuban
citizens is limited to farming and self-employment. According to the U.S. Department of State, “The
Constitution…explicitly subordinates the courts to the ANPP
[National Assembly of People’s Power] and the Council of
State, which is headed by Fidel Castro. The ANPP and its lower
level counterparts choose all judges…. The law and trial practices do not meet international standards for fair public trials.”
REGULATION
Score: 4–Better (high level)
Cuba’s government regulates the entire economy by owning
and controlling the means of production. According to the
Lexington Institute, the decline in state bureaucracy since the
fall of the Soviet regime has reduced the number of ministries from 50 to 31. It also has allowed some private enterprises to operate. However, private entrepreneurship is heavily
regulated to the point of driving many workers to the informal economy. For example, reports the Lexington Institute,
“except for food service operations…assistants and employees are not permitted…. [P]rivate taxis are barred from picking up passengers at tourist hotels or airports…. [T]eachers
may not work as private tutors.” In addition, “regulatory enforcement [is] at times arbitrary…. Still, it is easy to find entrepreneurs who work within the law and make a good living…. In some cases, the legal framework eventually changes
to accommodate the gray-market private sector. For example,
paladares, Cuba’s famous private family restaurants, existed
for years in an undefined legal area before the government
made them legal in 1993.” The Economist Intelligence Unit
reports that economic reform is likely to remain gradual and
slow. Based on evidence of a reduction in the level of bureaucracy, Cuba’s regulation score is 1 point better this year.
BLACK MARKET
Score: 5–Stable (very high level of activity)
Cuba’s black market is very large. Even basic economic activities—including the sale of milk and bread, transportation services, and housing—are performed in the black market. According to the Lexington Institute, “there is a thriving black
market where goods of all kinds are sold. Cheese and vegetables are sold along highways, and fruits and beef are sold
door-to-door in Havana residential neighborhoods…. [O]ther
goods such as construction materials and fuel are purloined
from the state and sold privately. Services are also supplied
illegally.” The black market in currency is likewise substantial.
Chapter 6: The Countries
165
166
2003 Index of Economic Freedom
CYPRUS
Rank:
Score:
Category:
Nicosia
Trade Policy
Fiscal Burden
2
3.5
Government Intervention 3
Monetary Policy
1
Foreign Investment 3
Banking and Finance 2
Cyprus (specifically, the Greek portion of the island) is negotiating to join the European Union. Negotiations are likely to be completed in 2002, with membership
occurring in 2004 or 2005. The accession process has served as an impetus for economic liberalization. The level of government involvement in the economy is declining; but the government retains significant control over telecommunications,
electricity, and the national airline. In the past two years, the number of staple
goods subject to price controls has been slashed, and most goods traded between
Cyprus and the EU are not subject to any tariff. All foreign investment restrictions
on investors from EU member states were abolished in January 2000, and the Cypriot pound has been pegged to the euro since January 1999. Cyprus closed its EU
accession chapter regarding the free movement of capital, allowing for stricter controls against money laundering in March 2001, but allegations that Slobodan
Milosevic may have laundered money through Cypriot banks have reawakened
Brussels to this sensitive topic. Exchange control restrictions concerning the holding of currency accounts are slowly being abolished, and there is evidence that
property rights are becoming more secure. Cyprus’s trade policy score is 1 point
worse this year, but its monetary policy is 1 point better. As a result, Cyprus’s overall score is unchanged this year.
TRADE POLICY
Score: 2–Worse (low level of protectionism)
Based on data from the International Monetary Fund, Cyprus’s average tariff rate
was 2.8 percent in 1999 (based on import duties as a percentage of total imports).
The government maintains some non-tariff barriers. According to the U.S. Department of State, “In 1995, Cyprus adopted a stricter law on the labeling of food
products, requiring that the product name, ingredients, net contents, and country
of origin be in the Greek language. A sticker with a Greek translation on the product is acceptable, provided it does not conceal the original label and it has the approval of the Ministry of Commerce, Industry, and Tourism. Compliance with
this law has been mandatory for all food products since February 1, 1997.” In addition, “the 20 percent price preference granted to locally produced goods and services for public tenders is clearly discriminatory against foreign bidders. It is also
contrary to EU practice and the WTO’s Government Procurement Agreement.”
Based on the level of non-tariff barriers, Cyprus’s trade policy score is 1 point worse
this year.
Chapter 6: The Countries
22
2.15
Mostly Free
Wages and Prices 2
Property Rights
1
Regulation
Black Market
2
2
Scores for Prior Years:
2002: 2.15
1999: 2.65
1996: 2.60
2001: 2.15
1998: 2.70
1995: n/a
2000: 2.55
1997: 2.60
2000 Data
(in constant 1995 US dollars)
Population: 757,000
Total area: 9,250 sq. km
GDP: $10.6 billion
GDP growth rate: 4.8%
GDP per capita: $14,063
Major exports: pharmaceuticals,
clothing, citrus, potatoes
Exports of goods and services:
$4.4 billion
Major export trading partners:
UK 16.6%, Greece 9.2%, Russia 9.0%,
Syria 7.5%, Lebanon 5.8%
Major imports: consumer goods,
petroleum and lubricants, food and
feed grains, machinery, minerals,
chemicals
Imports of goods and services:
$4.9 billion
Major import trading partners:
UK 10.7%, US 10.5%, Italy 8.9%,
Greece 8.7%, Germany 7.1%
Foreign direct investment (net):
–$16.7 million
167
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3–Stable
(moderate tax rates)
Score—Government Expenditures: 4–Stable
(high level of government expenditure)
Final Score: 3.5–Stable (high cost of government)
Cyprus’s top income tax rate is 40 percent; the marginal rate for
the average taxpayer is 20 percent. The top corporate tax rate is 25
percent. In 2000, according to Standard and Poor’s, government
expenditures equaled 36.6 percent of GDP.
investment permits non-residents to own up to 50 percent of a
Cypriot bank, up from 15 percent, but acquisition of more than 10
percent requires central bank approval. Interest rates were liberalized as of January 1, 2001, and are now set by the market. According to the Economist Intelligence Unit, “the 9% ceiling on lending
abolished at the beginning of 2001 tended to reduce profitability,
although banks found means of evading the restrictions, in effect
raising interest rates by several points.” Effective January 2001, the
government lifted restrictions on foreign-currency–denominated
lending for more than two years to residents. There have been allegations of money laundering through Cypriot banks.
GOVERNMENT INTERVENTION IN THE ECONOMY
WAGES AND PRICES
Score: 3–Stable (moderate level)
In 2000, according to the Economist Intelligence Unit, the government consumed 19.2 percent of GDP. In the same year, based on
data from the Ministry of Finance, Cyprus received 8.2 percent of
its total revenues from state-owned enterprises and government
ownership of property.
Score: 2–Stable (low level of intervention)
The market sets most prices. The U.S. Department of State reports that “price controls still in place are restricted to pasteurized
milk, common bread, and cement. Additionally, the price of gasoline is legislatively mandated.” Cyprus maintains a minimum wage.
MONETARY POLICY
Score: 1–Stable (very high level of protection)
Private property on Cyprus is protected from government expropriation. According to the U.S. Department of State, “Effective
means are available for enforcing property and contractual rights.”
In addition, “The Constitution…provides for an independent judiciary, provisions which generally are respected in practice…. Cyprus
inherited many elements of its legal system from the United Kingdom, including the presumption of innocence, the right to due
process, and the right of appeal. Throughout Cyprus, a fair public
trial is provided for in law and accorded in practice.”
Score: 1–Better (very low level of inflation)
From 1992 to 2001, Cyprus’s weighted average annual rate of inflation was 2.48 percent, down from the 3.33 percent from 1991 to
2000 reported in the 2002 Index. As a result, Cyprus’s monetary
policy score is 1 point better this year.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
In January 2000, Cyprus liberalized all foreign direct investment
controls on local businesses for residents of the European Union,
who may now own 100 percent of local companies and any company listed on the Cyprus Stock Exchange. All applications for direct investment by a foreigner must go through official review, but
the government generally grants investment permits in a timely
and non discriminatory fashion. However, foreign ownership in
agriculture, manufacturing, services, tourism, banking, insurance,
public companies, newspaper and magazine publishing houses, and
new airlines is subject to various minimum investment amounts,
maximum ownership restrictions, or approval processes. The International Monetary Fund reports that the central bank must approve payments over a set amount for business, personal, and other
services and that similar requirements apply for other transactions,
transfers, and payments. Real estate purchases of land abroad by
residents and in Cyprus by non-residents are subject to restrictions
and approval. Transfers of assets, gifts, and loans between residents
and non-residents require central bank approval or are subject to
restrictions.
BANKING AND FINANCE
Score: 2–Stable (low level of restrictions)
Cyprus’s six domestic banks provide a full range of services and
have solid international ratings. According to the Embassy of
Cyprus, there are only two state-owned banks controlling 4.1 percent of total bank assets. The January 2000 liberalization of foreign
168
PROPERTY RIGHTS
REGULATION
Score: 2–Stable (low level)
Establishing a business is relatively easy in Cyprus. According to
the U.S. Department of State, “Existing procedures and regulations
affecting business…are sufficiently transparent and applied in practice without bias…. Some of the challenges still around the corner
for Cyprus include liberalization of utilities (including telecommunications, and power generation), restructuring state subsidies, abolishing restrictions on land ownership by non-residents, and addressing the issue of favorable tax treatment granted to international
business companies.” In addition, the U.S. embassy “is not aware
of any U.S. firms identifying corruption as an obstacle to foreign
direct investment in Cyprus.”
BLACK MARKET
Score: 2–Stable (low level of activity)
The protection of intellectual property rights has improved since
passage of modern copyright and patent laws in 1994 and 1998,
respectively. According to the U.S. Department of State, “The
business community…remains concerned about the level of IPR
[intellectual property rights] piracy, which it attributes to ineffective implementation of these laws.” Nevertheless, piracy of intellectual property such as copyrighted and trademarked goods
has decreased substantially in recent years, from an estimated 80
percent a decade ago to around 20 percent today.
2003 Index of Economic Freedom
CZECH REPUBLIC
Rank:
Score:
Category:
Prague
Trade Policy
Fiscal Burden
3.0
4.5
Government Intervention 2
Monetary Policy
2
Foreign Investment 2
Banking and Finance 1
35
2.50
Mostly Free
Wages and Prices 2
Property Rights
2
Regulation
3.0
Black Market 3.5
A member of the NATO alliance since 1999, the Czech Republic is considered a
likely candidate for the first wave of EU enlargement; by February 2002, it had closed
24 out of 29 negotiable chapters of the body of EU law, although the competition
chapter continues to be impeded by persistent state support of the steel industry.
Weak minority governments since 1996 have led to the lack of political consensus
and decisive structural reform, but the country’s new prime minister, Vladimir
Spidla, of the center-left Czech Social Democratic Party, is committed to a stabilization strategy within a policy guided by EU standards. The global slowdown had a
moderate effect on the Czech economy; the fall in exports to the EU (which constitute two-thirds of overall Czech exports) has been offset by increased domestic demand. In 2002, restructuring of the banking sector has exceeded initially targeted
costs, adding a heavy burden to public expenditures. In addition, the state-funded
welfare programs are excessively expensive and inefficient. The private sector accounts for nearly 80 percent of GDP, but the government continues to retain ownership in many key industries. The most rapid growth has been experienced by industrial enterprises with large shares of foreign ownership. Foreign and domestic corporations receive equal treatment under the law, and foreign investment is expected to
rise as a result of gradual economic recovery in Western Europe in 2002–2003. The
Czech Republic’s trade policy score is 1 point worse this year. As a result, its overall
score is 0.10 point worse this year.
Scores for Prior Years:
TRADE POLICY
Major imports: machinery and
transport equipment, other
manufactured goods, chemicals, raw
materials and fuels
Score: 3–Worse (moderate level of protectionism)
According to the World Bank, the Czech Republic’s weighted average tariff rate in
1999 (the most recent year for which World Bank data are available) was 5.7 percent,
up from the 1.24 percent (based on import duties as a percentage of total imports)
reported in the 2002 Index. Based on previously unavailable data on the weighted
average tariff rate, the Czech Republic’s trade policy score is 1 point worse this year.
The U.S. Department of State reports that “technical barriers continue to hamper
imports of certain agricultural and food products…. A lack of consistency in the
application of customs norms can also act as a non-tariff barrier.”
2002: 2.40
1999: 2.20
1996: 2.20
2001: 2.20
1998: 2.35
1995: 2.20
2000: 2.20
1997: 2.20
2001 Data
(in constant 1995 US dollars)
Population: 10,292,933
Total area: 78,866 sq. km
GDP: $56.5 billion
GDP growth rate: 3.6%
GDP per capita: $5,489
Major exports: machinery and
transport equipment, chemicals
Exports of goods and services:
$50.9 billion
Major export trading partners:
Germany 40.4%, Slovakia 7.7%,
Austria 6.0%, Poland 5.4%, UK 4.3%
Imports of goods and services:
$56 billion
Major import trading partners:
Germany 26.7%, Russia 6.4%,
Slovakia 6.0%, Italy 5.2%, Austria
4.9%
Foreign direct investment (net):
$1.7 billion
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3.5–Stable
(high tax rates)
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 4.5–Stable (very high cost of government)
The Czech Republic’s top income tax rate is 32 percent; the marginal rate for the
average taxpayer is 20 percent. The top corporate income tax rate is 31 percent. In
2001, government expenditures equaled 45 percent of GDP.
Chapter 6: The Countries
169
GOVERNMENT INTERVENTION IN THE ECONOMY
WAGES AND PRICES
Score: 2–Stable (low level)
Based on data from the Statistical Office of the Czech Republic,
the government consumed 19.1 percent of GDP in 2001. In 2000,
according to the International Monetary Fund, the Czech Republic received 1.12 percent of its total revenues from state-owned
enterprises and government ownership of property. According
to The Washington Times, “the process of selling virtually an entire economy…is almost over…holding off only with the sale of
Czech Telecom.”
Score: 2–Stable (low level of intervention)
The market sets most wages and prices. According to the
Economist Intelligence Unit, “The government has broad
powers to regulate prices, according to the Price Law. The
Ministry of Finance can fix prices directly, set minimum or
maximum prices for any commercial transaction and establish periods when prices may not change.… Nevertheless, the
government favors a laissez-faire pricing policy on most products. Goods and services subject to controls include energy,
some raw materials, domestic rents, and rail and bus transport. Maximum prices apply on mail and telecommunications
tariffs.” The Czech Republic maintains a minimum wage.
MONETARY POLICY
Score: 2–Stable (low level of inflation)
Data from the International Monetary Fund’s 2002 World Economic
Outlook indicate that between 1992 and 2001, the Czech Republic’s
weighted average annual rate of inflation was 4.56 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Stable (low barriers)
The Czech Republic is open to foreign investment. Foreign investors receive national treatment and may invest in nearly all
sectors except those related to national security. As of January 1,
2002, non-Czech entities can acquire non-agricultural, non-forest land. In late 2000, the government revised the Commercial
Code, bringing it into conformity with European Union regulations. The code is expected to improve creditor protection. However, regulatory gaps contribute to a system that lacks transparency in some areas, such as land ownership. There are no restrictions on payments or proceeds transactions or on current transfers, and both residents and non-residents may hold foreign exchange accounts. Prior authorization is required for issuance of
debt securities and money market securities. There are limits on
open foreign exchange positions. The U.S. Department of State
reports that a lack of transparency and a 10 percent preference
for Czech bidders impedes foreign tenders for government contracts.
BANKING AND FINANCE
Score: 1–Stable (very low level of restrictions)
Banking is open to foreign participation pending approval by the
Czech central bank; a foreign bank may establish a wholly owned
bank, buy into an existing bank, or open a branch. According to
the U.S. Department of State, “Foreign banks and branch offices
of foreign banks have increased their activity over the past several
years and continue to increase their share of the total Czech-banking sector.” The Economist Intelligence Unit reports that there are
16 foreign banks offering full commercial services in the Czech
Republic. Czech banks are allowed to sell securities and make some
investments. Prudential regulation and supervision are improving,
and the government is in the process of privatizing the few remaining state-owned banks; at the same time, the sector remains burdened by a backlog of bankruptcy claims, although reform of the
bankruptcy code should help resolve this situation. The Financial
Times reports that roughly 50 percent of the 2001 and 2002 budget
deficits is due to costs of bailing out insolvent banks prior to
privatization.
170
PROPERTY RIGHTS
Score: 2–Stable (high level of protection)
Private property is well-protected in the Czech Republic. The
Economist Intelligence Unit reports that “contractual agreements are generally secure in the Czech Republic.” According to the U.S. Department of State, however,
“Investors…complain about the difficulty of protecting their
rights through legal means such as a secured interest. In particular, investors have been frustrated by the lack of effective
recourse to the court system. The slow pace of the courts is
often compounded by judges’ unfamiliarity with commercial
cases.”
REGULATION
Score: 3–Stable (moderate level)
The Czech Republic imposes few regulations on businesses.
However, administrative delays and corruption caused by inefficiency and outmoded laws make the process of setting up
a business a burdensome one. The Economist Intelligence Unit
reports that “firms must meet myriad local standards on
health, hygiene, ventilation, and utilities use, among others.”
Obtaining the local government approval necessary for investments can be subject to long delays. The same source reports
that “to establish a company or change a registration, bundles
of documents stamped by notaries have to be submitted to a
special judge at a regional court.” This problem is further complicated by the absence of office equipment, staff, and skills
to handle the workload. As a result, companies are almost
forced to hire lawyers and bribe officials to complete the process. According to the Economist Intelligence Unit, “Newspapers have reported that Kc30000 ($954) is the typical bribe
required to register a limited liability company and Kc50000
for a joint-stock company.”
BLACK MARKET
Score: 3.5–Stable (high level of activity)
Transparency International’s 2001 score for the Czech Republic is 3.9. Therefore, the Czech Republic’s black market score
is 3.5 this year.
2003 Index of Economic Freedom
DENMARK
Rank:
Score:
Category:
Copenhagen
Trade Policy
Fiscal Burden
2
4.5
Government Intervention 3.5
Monetary Policy
1
Foreign Investment 2
Banking and Finance 1
With a population of more than 5 million, the Kingdom of Denmark also includes the
world’s largest island (Greenland) and the Faroe Islands. Denmark is a member of the
European Community; Greenland and the Faroes are not. The majority of Danish
trade is with the European Union, and the United States is Denmark’s largest nonEuropean trading partner; according to the Danish Trade Council, Danish exports to
the U.S. increased by 25 percent in 2001. Although the 2002 budget implements a tax
freeze, rates remain far too high, and taxes continue to fund an excessively large welfare state. “The Danish tax burden is among the highest in the world—close to 50
percent of the GDP,” according to the U.S. Department of State, and “the business
sector opines that the high income taxes and the series of environmental taxes imposed
on business, pending introduction of similar environmental taxes in Denmark’s competing countries, jeopardize Danish competitiveness.” One of the most controversial
issues in Denmark is immigration; in the past, immigrants have been able to start living
off the welfare state immediately upon arrival. The government has outlined plans to
reduce unemployment among foreigners, among whom, according to the Financial
Times, unemployment is three times higher than it is for native Danes. Several fundamental reforms are desperately needed; the government, for example, needs to reduce
taxes, reform the welfare state, and cut spending. Public expenditure has tended to
outgrow forecasts in recent years, according to Danske Bank, and local governments
lack incentives to stick to their budgets. Denmark’s regulation score is 1 point better
this year. As a result, its overall score is 0.1 point better this year.
TRADE POLICY
Score: 2–Stable (low level of protectionism)
Because Denmark is a member of the European Union, its trade policy is the same as
the policies of other EU members. Imports are subject to a weighted average tariff rate
of 1.8 percent. Denmark’s participation in the Common Agricultural Policy (CAP), a
program that heavily subsidizes agricultural goods, acts as a non-tariff barrier. According to the Economist Intelligence Unit, “Labeling, health and safety regulations are not
particularly onerous,” and the government, with very few exceptions, requires no import licenses.
FISCAL BURDEN OF GOVERNMENT
6
1.80
Free
Wages and Prices 1
Property Rights
1
Regulation
Black Market
Scores for Prior Years:
2002: 1.90
1999: 2.25
1996: 2.00
2001: 2.05
1998: 2.25
1995: n/a
2000: 2.25
1997: 2.05
2001 Data
(in constant 1995 US dollars)
Population: 5,368,400
Total area: 43,094 sq. km
GDP: $207.4 billion
GDP growth rate: 0.9%
GDP per capita: $38,633
Major exports: machinery and
instruments, meat and meat
products, dairy products, fish,
chemicals, furniture, ships, windmills
Exports of goods and services:
$88.4 billion
Major export trading partners:
Germany 19.6%, Sweden 11.8%, UK
9.5%, US 6.9%, Norway 5.5%
Major imports: machinery and
equipment, raw materials, chemicals,
grain and foodstuffs, consumer
goods
Imports of goods and services:
$79.7 billion
Major import trading partners:
Germany 21.9%,Sweden 12.1%, UK 7.5%,
Netherlands 7.1%, France 5.7%
Foreign direct investment (net):
–$2.07 billion
Score—Income and Corporate Taxation: 4–Stable
(high tax rates)
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 4.5–Stable (very high cost of government)
Denmark’s top income tax rate is 59 percent; the marginal rate for the average taxpayer is 45 percent. The top corporate tax rate is 30 percent. In 2001, government
expenditures equaled 50.8 percent of GDP.
Chapter 6: The Countries
1
1
171
GOVERNMENT INTERVENTION IN THE ECONOMY
PROPERTY RIGHTS
Score: 3.5–Stable (high level)
According to the Economist Intelligence Unit, the government
consumed 25.1 percent of GDP in 2001. The International
Monetary Fund reports that in 2000, Denmark received 7.29
percent of its revenues from state-owned enterprises and government ownership of property.
Score: 1–Stable (very high level of protection)
The judiciary is independent and, in general, both fair and
efficient. The Economist Intelligence Unit reports that “the
country provides a high level of professionalism in the judiciary and civil service. Given the slow pace of Denmark’s legal system, however, out-of-court settlements are common.”
MONETARY POLICY
REGULATION
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, Denmark’s weighted average annual rate
of inflation was 2.47 percent.
Score: 1–Better (very low level)
Establishing a business in Denmark is a simple process.
Regulations are applied evenly and efficiently in most cases,
and the government takes a laissez-faire approach to the free
market. The Economist Intelligence Unit reports that
“Denmark has been introducing a string of regulatory changes
to increase the flexibility of the local workforce…. [L]abor
laws…are flexible and efficient in practice.” According to a
report on the labor market issued by the Confederation of
Danish Industries, “while labor markets in most other
countries are regulated by legislation, the Danish labor market
is mainly regulated through agreements between social
partners…. In Denmark, terms of notice are shorter than in
other countries. This is one element in a fairly flexible labor
market. Denmark is characterized by a high proportion of
smaller and medium sized firms—firms that are quickly able
to adapt to changing demands and conditions.” The U.S.
Department of State reports that “Denmark applies high
standards with regard to environment, health and safety, and
labor. Bureaucratic procedures appear streamlined and
transparent, and corruption is generally unknown.” Based on
new evidence with respect to the regulatory environment,
Denmark’s regulation score is 1 point better this year.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Stable (low barriers)
Foreign investors, including those from outside the European
Union, receive national treatment in Denmark. The only exception is real estate; non-residents may not own Danish summer cottages. In general, there are few restrictions on investment in Denmark and no screening process. Notable exceptions are limitations on foreign ownership in hydrocarbon
exploration, arms production, aircraft, and ships registered in
the Danish International Ships Register. The country’s liberal
investment regime has attracted increasingly high levels of
foreign investment in the past several years. Companies not
registered in an EU country or in a country with a statutory
authority under an existing international agreement (such as
the United States) need permission from the Ministry of Trade
and Industry for an investment permit and approval for the
purchase of a building site.
BANKING AND FINANCE
Score: 1–Stable (very low level of restrictions)
Denmark’s banking system is open to foreign competition and
largely independent of government. The same rules apply to
commercial and savings banks, and banks may provide services in a wide variety of areas including mortgage financing,
stock trading, leasing, factoring, investment, real estate, and
insurance. As of 1999, there were 650 financial institutions,
including 186 banks, in Denmark, with the five largest accounting for 82 percent of market turnover. The Economist Intelligence Unit reports that in 2000, there were at least 30 Danish
venture capital companies.
BLACK MARKET
Score: 1–Stable (very low level of activity)
Transparency International’s 2001 score for Denmark is 9.5.
Therefore, Denmark’s black market score is 1 this year. Software piracy is a problem but is expected to decline. According to the U.S. Department of State, “There is no evidence
that pirated products are imported to or exported from Denmark to any significant extent.”
WAGES AND PRICES
Score: 1–Stable (very low level of intervention)
The market sets wages and prices. According to the Economist Intelligence Unit, “the government retains the power to
intervene with price controls in an emergency—such as during a period of accelerating inflation…. Otherwise, none apply.” There is no mandated minimum wage, but various negotiated labor agreements effectively set a minimum wage for
their respective economic sectors.
172
2003 Index of Economic Freedom
DJIBOUTI
Rank:
99
Score:
3.30
Category: Mostly Unfree
Djibouti
Trade Policy
Fiscal Burden
4
4
Government Intervention 4
Monetary Policy
1
Foreign Investment 3
Banking and Finance 3
Djibouti gained its independence from France in 1977, but France maintains its
largest overseas naval base there, and Germany established its largest overseas naval base since 1945 in Djibouti as part of the war on terrorism in January 2002.
Djibouti’s economy is hindered by a bloated civil service, poor fiscal management
and transparency, off-budget expenditures, high unemployment, and a lack of resources. The highlight of the economy is a large, relatively modern port that serves
as a regional transit and international transshipment and refueling center and is
the primary outlet for Ethiopian trade. Management of the port has been contracted to a Dubai-based company that has improved service. Traditionally, the
state has been a key source of patronage, paying well above the average income to
employees. Thus, it is not likely that the size of the civil service and armed forces
will be reduced prior to elections. The U.S. Central Intelligence Agency reports
that two-thirds of the population is located in the capital city; those not living in
the capital are overwhelmingly nomadic herders. From 1991 to 2000, according to
World Bank data, compound growth in GDP averaged –1.1 percent annually and
per capita GDP decreased from $1,083 to $783 (in constant 1995 U.S. dollars).
Djibouti’s fiscal burden of government and property rights scores are both 1 point
worse this year. As a result, its overall score is 0.20 point worse this year.
TRADE POLICY
Score: 4–Stable (high level of protectionism)
The U.S. Agency for International Development reports that Djibouti’s tariffs range
from 5 percent to 33 percent. There are no reports on the average tariff rate. Trade
is further constrained, according to the Economist Intelligence Unit, by “the strict
and cumbersome ‘rules of origin’ criteria.”
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 2.5–Worse
(moderate tax rates)
Score—Government Expenditures: 5–Worse
(very high level of government expenditure)
Final Score: 4–Worse (high cost of government)
The International Monetary Fund reports that Djibouti’s top income tax rate is 30
percent; the marginal rate for the average taxpayer is 2 percent. The top corporate
tax rate is 25 percent. In 2000, according to the African Development Bank, government expenditures equaled 32.8 percent of GDP, up from the 29.6 percent reported in the 2002 Index. Based the higher level of government expenditure and a
clarification in the methodology used to calculate the income and corporate taxation score, Djibouti’s overall fiscal burden of government score is 1 point worse
this year.
Chapter 6: The Countries
Wages and Prices 2
Property Rights
4
Regulation
Black Market
4
4
Scores for Prior Years:
2002: 3.10
1999: 3.30
1996: n/a
2001: 3.35
1998: 3.45
1995: n/a
2000: 3.40
1997: 3.25
2000 Data
(in constant 1995 US dollars)
Population: 632,000
Total area: 22,000 sq. km
GDP: $518 million
GDP growth rate: 0.7%
GDP per capita: $783
Major exports: re-exports, hides and
skins, coffee
Exports of goods and services: n/a
Major export trading partners:
Somalia 56%,Yemen 24%, France 6%,
United Arab Emirates 5%, Ethiopia 4%
Major imports: foods, beverages,
transport equipment, chemicals,
petroleum products
Imports of goods and services:
n/a
Major import trading partners:
Saudi Arabia 18%, China 10%,
Ethiopia 10%, France 10%, Italy 6%
Foreign direct investment (net):
$4.6 million
173
GOVERNMENT INTERVENTION IN THE ECONOMY
WAGES AND PRICES
Score: 4–Stable (high level)
According to the World Bank, the government consumed 25.2
percent of GDP in 2000. Much of Djibouti’s GDP is produced
by the state. The Economist Intelligence Unit reports that the
government owns “all the principal public utilities: water; electricity; postal services and telecommunications; and the railway (owned jointly with Ethiopia) and port.” The government
also owns two pharmaceutical factories and dairy products
plants. The government agreed with the International Monetary Fund on the need to privatize many state-owned enterprises, but little has been done.
Score: 2–Stable (low level of intervention)
The market sets wages and prices for most products. The Addis
Tribune reports that Djibouti maintains fixed prices for chat,
fruit, and vegetables imported from Ethiopia. According to
the U.S. Department of State, “only the basic commodities
such as rice, sugar, and oil have controlled prices.” Djibouti
maintains a minimum wage.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
Data from the International Monetary Fund’s 2002 World Economic Outlook indicate that from 1992 to 2001, Djibouti’s
weighted average annual rate of inflation was 1.99 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
According to the U.S. Department of State, “The government
of Djibouti welcomes all foreign direct investment…. In principle there is no screening of investment or other discriminatory mechanisms. That said, certain sectors, most notably
public utilities, are state owned and some parts are not currently open to investors.” Investment is inhibited also by numerous administrative difficulties, including what the U.S.
Department of State calls “a ‘circular dependency’ [by which]
the Finance Ministry will issue a license only if an investor
possesses an approved investor visa, while the Interior Ministry will only issue an investor visa to a licensed business.”
Djibouti has no restrictions on foreign exchange or on the inflow and outflow of cash. According to the International
Monetary Fund, both residents and non-residents may hold
foreign exchange accounts, and there are no restrictions on
payments or transfers. Credit transactions, direct investment,
and international lending are subject to controls.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
“Because Djibouti is essentially a one-city state,” reports the
Economist Intelligence Unit, “there is little banking activity
outside the capital. Several banks have been established in
Djibouti, including the Banque pour le commerce et l’industrie
(Mer Rouge), in which Banque nationale de Paris has a 51%
stake, and the Banque Indo-Suez, owned by Groupe Indosuez
of France and the Commercial Bank of Ethiopia.” The only
commercial banks are the three discussed by the Economist
Intelligence Unit, and the government has a stake in the
Banque pour le commerce et l’industrie. Commercial banks
provide only short-term financing and lending, which is allocated at market rates.
174
PROPERTY RIGHTS
Score: 4–Worse (low level of protection)
Private property rights are weakly protected in Djibouti; the
courts are frequently overburdened, and the enforcement of
contracts can be time-consuming and cumbersome. According to the U.S. Department of State, “For settlement of disputes, Djibouti’s legal system is based on French law. It is complex and far from transparent. Government interference in the
court system is common. Djibouti does have written commercial and bankruptcy laws, but they are not applied consistently.” In addition, “While there are laws against corruption,
they are rarely enforced, in part because most people prefer
to deal with corruption issues on their own rather than involve complicated legal mechanisms.” Based on increasing
evidence of the weak protection of property, Djibouti’s property rights score is 1 point worse this year.
REGULATION
Score: 4–Stable (high level)
Djibouti’s regulations are cumbersome and a significant barrier to business. The U.S. Agency for International Development reports that “the most recurrent problem mentioned
by investors in almost every stage of the investment start-up
process is the lack of procedural transparency. There are few
formal, written guidelines. The success of many applications
and requests hinges on the approval of the Minister responsible for the particular portfolio…. [T]he company registration process is dispersed across several agencies with little or
no coordination among them; moreover, there are numerous
duplicative requirements among these agencies.” The government has drafted a revised labor code aimed at updating 40year-old legislation that has been identified as an impediment
to business, but much remains to be done.
BLACK MARKET
Score: 4–Stable (high level of activity)
Much of Djibouti’s economic activity, especially trade in pirated trademarks and computer software, occurs in the black
market. Laws protecting intellectual property are not adequately enforced. Conventional black market activity—the
smuggling of such products as liquor, drugs, gemstones, and
cigarettes—is also extensive.
2003 Index of Economic Freedom
DOMINICAN REPUBLIC
Rank:
85
Score:
3.10
Category: Mostly Unfree
Santo
Domingo
Trade Policy
Fiscal Burden
5
1.5
Government Intervention 1
Monetary Policy
3
Foreign Investment 3
Banking and Finance 3
After enjoying steady growth over the past few years, the economy of the Dominican Republic contracted significantly in 2001, with the annual rate of growth in
GDP falling from 7.6 percent in 2000 to 2.7 percent last year. The U.S. economic
slowdown, coupled with the September 11 attacks, generated a dramatic decline
in the external sector; tourism, agriculture, and manufacturing free zones experienced dismal growth while construction, domestic manufacturing, and telecommunications performed well. Until a U.S. recovery boosts export demand, the
economy will continue to grow at a slow and uneven rate; the Economist Intelligence Unit predicts a modest 3.7 percent for 2002. Tourism promises to stagnate,
although the future appears bright for construction and telecommunications. In
September 2001, the government issued a U.S. $500 million foreign bond and likely
will use the proceeds to spur investment in social and public infrastructure. If administered properly, this bond should ease the worries of President Hipolito Mejia,
who has struggled to improve living standards since his election in August 2000.
Impediments to development include an inefficient and bloated bureaucracy and
poor transparency in the central bank. Despite these obstacles, the government
has proven its commitment to fiscal austerity and foreign investment; the Economist Intelligence Unit, for example, reports that the tax code was reformed in 2001
to “help raise compliance and simplify import duties.” New opportunities for investment may be found in the growing sectors of transportation and financial services. The Dominican Republic’s trade policy score is 1 point worse this year. As a
result, its overall score is 0.10 point worse this year.
TRADE POLICY
Score: 5–Worse (very high level of protectionism)
According to the World Bank, the Dominican Republic’s weighted average tariff
rate in 1997 (the most recent year for which World Bank data are available) was
15.8 percent, up from the 12.08 percent reported in the 2002 Index. As a result, the
Dominican Republic’s trade policy score is 1 point worse this year. Non-tariff barriers take the form of inefficient customs procedures. According to the U.S. Department of State, “A complex system of licensing and consular approvals of invoices impedes imports. Reports of corruption and poor organization at the ports
point to additional non-tariff impediments to trade.”
Chapter 6: The Countries
Wages and Prices 3
Property Rights
4
Regulation
4.5
Black Market 3.5
Scores for Prior Years:
2002: 3.00
1999: 3.10
1996: 3.20
2001: 2.85
1998: 3.20
1995: 3.40
2000: 2.90
1997: 3.10
2000 Data
(in constant 1995 US dollars)
Population: 8,520,000
Total area: 48,730 sq. km
GDP: $17.4 billion
GDP growth rate: 7.8%
GDP per capita: $2,062
Major exports: ferronickel, sugar,
tobacco, coffee
Exports of goods and services:
$5.1 billion
Major export trading partners:
US 87.3%, Netherlands 1.1%,
Canada 0.7%, France 0.7%
Major imports: foodstuffs,
petroleum, cotton and fabrics,
chemicals and pharmaceuticals
Imports of goods and services:
$6.8 billion
Major import trading partners:
US 60.5%, Japan 10.4%, Mexico 4.7%,
Venezuela 3.0%
Foreign direct investment (net):
$873 million
175
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 2–Stable
(low tax rates)
Score—Government Expenditures: 1–Stable
(very low level of government expenditure)
Final Score: 1.5–Stable (low cost of government)
The Dominican Republic’s top income tax rate is 25 percent;
the marginal rate for the average taxpayer is 0 percent. The top
corporate tax rate is 25 percent. In 2000, based on data from the
Economist Intelligence Unit, government expenditures equaled
14.7 percent of GDP.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 1–Stable (very low level)
The World Bank reports that the government consumed about
8.2 percent of GDP in 2000. In 1999, according to the International Monetary Fund, the Dominican Republic received 3
percent of its total revenues from state-owned enterprises and
government ownership of property.
MONETARY POLICY
Score: 3–Stable (moderate level of inflation)
From 1992 to 2001, the Dominican Republic’s weighted average annual rate of inflation was 8.26 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
The Dominican Republic has liberalized a portion of its foreign investment policy. There are no limits on foreign control
of businesses or screening of foreign investment. According
to the U.S. Department of State, foreign investment is permitted in all sectors except the disposal and storage of toxic,
hazardous, or radioactive waste; activities affecting public
health; activities affecting the country’s environmental equilibrium; and activities related to defense and security. The International Monetary Fund reports that both residents and
non-residents may hold foreign exchange accounts. Payments
and transfers are subject to documentation requirements.
Some capital transactions are subject to approval, documentation, or reporting requirements.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
The U.S. Department of State reports that the Dominican
Republic has two banking systems: specialized banks (commercial banks, mortgage banks, development banks, and savings and loan associations) and multi-service banks that offer
the full range of banking services. Most banks are making the
transition to multi-service banks. The same source also reports that the government owns the country’s largest bank—
the Banco de Reservas—but that the remaining 14 commercial banks, including two foreign-owned banks, are privately
owned. According to the Economist Intelligence Unit, “The
foreign investment law that came into effect in September 1997
176
opens up the banking sector to further foreign participation,
although it stipulates that insurance agencies remain under
majority Dominican ownership.”
WAGES AND PRICES
Score: 3–Stable (moderate level of intervention)
The market sets most wages and prices, but price controls on
sugar, petroleum derivatives, cement for construction, staples,
and agricultural products remain in effect. Since agriculture
and sugar refining are among the most dynamic sectors of
the economy, price controls in these areas significantly affect
the economy. The government also affects prices through
some state-owned utilities, although it has ended electricity
subsidies. The Dominican Republic maintains a minimum
wage.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
Although the constitution provides for an independent judiciary, other branches of the government have undermined this
independence. The court system is inefficient, corruption and
bureaucratic red tape run high, and the government can expropriate property. Despite recent judicial reforms, according
to the U.S. Department of State, “Dominican and foreign business leaders have complained of judicial and administrative
corruption, and have charged that corruption affects the settlement of business disputes…. Several foreign firms and individuals have outstanding disputes with the Dominican Government concerning expropriated property or non fulfillment
of contractual obligations.”
REGULATION
Score: 4–Stable (high level)
Business regulations are still burdensome, and red tape and
inconsistent application remain problems. The U.S. Department of State reports that “red tape and differences between
law and actual practice remain significant problems…. A highly
centralized regulatory and administrative system adversely
affects the business climate. The interpretation of laws and
regulations is often arbitrary. This has contributed to an unstable and capricious regulatory environment. Businesses,
domestic as well as foreign, complain that the rules of the
game are constantly changing.” The source reports that corruption, which the government has made some efforts to fight,
remains a serious problem.
BLACK MARKET
Score: 3.5–Stable (high level of activity)
Transparency International’s 2001 score for the Dominican
Republic is 3.1. Therefore, the Dominican Republic’s black
market score is 3.5 this year.
2003 Index of Economic Freedom
ECUADOR
Quito
Rank:
118
Score:
3.45
Category: Mostly Unfree
Trade Policy
Fiscal Burden
4
2.5
Government Intervention 2
Monetary Policy
5
Foreign Investment 3
Banking and Finance 3
After dollarization in 2000, Ecuador began to emerge from a period of economic
and political instability. For this new monetary regime to be effective, however,
Ecuador will need greater fiscal discipline, regulatory and tax simplification, and a
stronger rule of law to protect private property and preserve reforms. This will not
be easy because the country’s fractured political interests make it difficult to advance modernization. In October 2002, Ecuador will hold congressional and presidential elections. If the next president, like the current one, does not represent one
of the major parties, attempts to promote reform will face serious obstacles. The
Colombian war may have serious implications for the security of Ecuador’s northern border as well as for the economy. Incursions by rebels seeking refuge could
force Ecuador to commit more resources to security along the border. At the same
time, guerrilla activity spilling over from Colombia poses a serious risk to the development of the oil industry that is so crucial to Ecuador’s economy: Oil represents almost 20 percent of GDP, accounts for 40 percent of the central government’s
revenue, and attracts the majority of foreign investment. Dollar remittances from
abroad are now the second largest generator of foreign exchange, after oil. Ecuador’s
capital flows and foreign investment score is 1 point worse this year, but its banking and finance score is 1 point better. As a result, Ecuador’s overall score is unchanged this year.
TRADE POLICY
Score: 4–Stable (high level of protectionism)
According to the World Bank, Ecuador’s weighted average tariff rate in 1999 (the
most recent year for which World Bank data are available) was 11.1 percent. The
Economist Intelligence Unit reports that “prior authorization [from the corresponding Ministry] is still needed to import processed foods, cosmetics, liquor, syringes,
certain agricultural commodities, armored vehicles, helicopters and airplanes, ships,
gambling equipment, animal feed, mineral fertilizers, [and] vegetable seeds….
Agricultural commodities are occasionally prevented from entering Ecuador
through the arbitrary use of sanitary rules as a way to restrict import quantities.”
Wages and Prices 3
Property Rights
4
Regulation
Black Market
Scores for Prior Years:
2002: 3.45
1999: 3.00
1996: 3.10
2001: 3.45
1998: 2.90
1995: 3.20
2000: 3.10
1997: 3.00
2000 Data
(in constant 1995 US dollars)
Population: 12,646,000
Total area: 283,560 sq. km
GDP: $18 billion
GDP growth rate: 2.3%
GDP per capita: $1,425
Major exports: oil, bananas, shrimp,
canned fish
Exports of goods and services:
$5.5 billion
Major export trading partners:
US 36.6%, Peru 7.2%, Colombia 6.9%,
Germany 3.7%, Italy 3.7%
Major imports: machinery and
equipment, raw materials, fuels,
consumer goods
Imports of goods and services:
$4 billion
Major import trading partners:
US 25.0%, Colombia 14.5%,
Japan 6.6%, Venezuela 5.5%
Foreign direct investment (net):
$648 million
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 2–Stable
(low tax rates)
Score—Government Expenditures: 3–Stable
(moderate level of government expenditure)
Final Score: 2.5–Stable (moderate cost of government)
Ecuador’s top income tax rate is 25 percent; the marginal rate for the average taxpayer is 0 percent. The top corporate tax rate is 25 percent. Data from the International Monetary Fund indicate that in 2000, government expenditures equaled 21.8
percent of GDP.
Chapter 6: The Countries
4
4
177
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Stable (low level)
The World Bank reports that the government consumed 9.5
percent of GDP in 2000. According to the Economist Intelligence Unit, “the state participates in about 190 companies in
agriculture, communications, energy, finance, industry, mining, storage, transport and tourism.”
MONETARY POLICY
Score: 5–Stable (very high level of inflation)
From 1992 to 2001, Ecuador’s weighted average annual rate
of inflation was 52.3 percent. This figure reflects the legacy
of high inflation throughout the 1990s. According to the U.S.
Department of State, “Initially, inflation rates were high as
the residual affects of dollarization [March 1999] worked their
way through the system and Ecuador ended 2000 with an annual inflation of 96.1 percent. However, the rate of inflation
has slowed sharply throughout 2001.”
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Worse (moderate barriers)
According to the Economist Intelligence Unit, “The Law on
Promotion and Guarantee of Investments, passed in 1997,
expressly permits direct, sub-regional or neutral foreign investment in all economic sectors without prior
authorization…under the same conditions that prevail for any
Ecuadorian natural or corporate person.” Prior authorization
is required for investment in fishing and industries considered
vital to national security, and investment in radio and television broadcasting is restricted. The U.S. Department of State
reports that investments in the oil sector must be conducted
with the state-owned oil company. The International Monetary Fund reports that both residents and non-residents may
hold foreign exchange accounts. Payments and transfers are
largely unrestricted. Capital and money market transactions
are subject to controls, and all foreign loans to or guaranteed
by the government must be approved by the central bank.
Despite the liberalization of the investment regime, Ecuador
remains one of the region’s more state-dominated economies,
which creates an informal barrier to investment in state-controlled industries. Based on evidence that investment is hindered by state-owned enterprises and other significant barriers, Ecuador’s capital flows and foreign investment score is 1
point worse this year.
BANKING AND FINANCE
Score: 3–Better (moderate level of restrictions)
Financial crisis in late 1998 and 1999 led to the collapse of
multiple banks. According to the U.S. Department of State,
“The government intervened by taking control of the defaulting banks…. In March of 1999, the Government of Ecuador
froze monetary deposits in the system, and as of today USD
815 million dollars have still not been recovered by bank customers.” Only one bank taken over by the government
(Pacifico) still operates; the others have been closed, and the
government is in the process of paying off account holders.
178
The government maintains its interest caps on loans at 1.5
times the reference-lending rate set by the central bank. All
new banks are required to meet higher capital standards. The
state retains significant influence over the financial sector, but
it appears that the financial crisis has been largely resolved. As
a result, Ecuador’s banking and finance score is 1 point better
this year.
WAGES AND PRICES
Score: 3–Stable (moderate level of intervention)
The government sets some prices. According to the Economist Intelligence Unit, this includes a freeze on electricity and
telephone rates in 2002 and subsidies for public transportation. “In general,” reports the same source, “the government
does not have a policy of fixing prices. However, bananas,
coffee, cocoa, pharmaceuticals and fuels are exceptions to the
rule.” Since coffee, bananas, and cocoa comprise a large portion of the country’s output, controls on these products have
a significant effect on the economy. The government periodically sets the minimum wage after consulting with the Commission on Salaries, but the Congress also has the authority
to amend the minimum wage.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
The rule of law in Ecuador is weak and does not adequately
protect private property rights. The Economist Intelligence
Unit reports that “the judiciary has long been accused of failing on standards of efficiency and impartiality…. [T]he system has long suffered from a lack of financial resources, administrative inefficiencies and growing case backlog.” According to the U.S. Department of State, “it is sometimes difficult
to gain effective protection via the legal system due to problems in transparency and endemic corruption.”
REGULATION
Score: 4–Stable (high level)
According to the Economist Intelligence Unit, “The civil service is renowned for slowing investment decisions with needless bureaucracy. Though efforts have been made to reduce
size, cost and corruption at higher levels, the bureaucracy is
still complex, much larger than necessary and often inefficient.” The U.S. Department of State reports that “Ecuador’s
regulatory system is not transparent…. Cabinet ministries,
parastatals, and regional and municipal governments all impose their own requirements and regulations on commercial
activity…. Ecuador has laws and regulations to combat official corruption, but they are rarely enforced. Illicit payments
for official favors and theft of public funds take place frequently.”
BLACK MARKET
Score: 4–Stable (high level of activity)
Transparency International’s 2001 score for Ecuador is 2.3.
Therefore, Ecuador’s black market score is 4 this year.
2003 Index of Economic Freedom
EGYPT
Cairo
Rank:
104
Score:
3.35
Category: Mostly Unfree
Trade Policy
Fiscal Burden
4
5
Government Intervention 3
Monetary Policy
1
Foreign Investment 3
Banking and Finance 4
Egypt has the largest population and second largest economy (after Saudi Arabia)
in the Arab world. Under the cautious leadership of President Hosni Mubarak, the
government continues to grapple with the question of how best to chip away at
the inefficient socialist economic system built up by the regime of Gamal Abdel
Nasser in the 1950s and 1960s without at the same time jeopardizing future political stability. Despite marginal measures to reduce state domination of the economy,
little progress has been made in privatizing or streamlining the swollen public sector. Overall, economic reform has taken a back seat to social concerns. Political
stability has been enhanced by the government’s success in containing the radical
Islamic movements that threatened the country with persistent terrorism in the
early 1990s; but Egypt’s economy has been hurt by the post–September 11 downturn in foreign tourism, rising unemployment, and the declining value of the Egyptian pound, which has increased the costs of imports and contributed to inflation.
Egypt’s monetary policy and trade policy scores are both 1 point better this year.
As a result, its overall score is 0.20 point better this year.
TRADE POLICY
Score: 4–Better (high level of protectionism)
According to the World Bank, Egypt’s weighted average tariff rate in 1998 (the
most recent year for which World Bank data are available) was 13.7 percent, down
from the 15 percent reported in the 2002 Index. As a result, Egypt’s trade policy
score is 1 point better this year. According to the U.S. Department of State, “in
addition to tariffs, Egypt assesses a service and inspection fee of one percent on
imports. Egypt also applies an additional surcharge of 2 percent on goods subject
to import duties of 5 percent to 29 percent, and a surcharge of three percent on
goods subject to duties of 30 percent or more.” Moreover, “Customs procedures
are subjective when it comes to identifying whether a commodity fits in one tariff
category or another.”
FISCAL BURDEN OF GOVERNMENT
Wages and Prices 3
Property Rights
3
Regulation
4.5
Black Market 3.5
Scores for Prior Years:
2002: 3.55
1999: 3.40
1996: 3.45
2001: 3.60
1998: 3.35
1995: 3.70
2000: 3.50
1997: 3.55
2000 Data
(in constant 1995 US dollars)
Population: 63,976,000
Total area: 1,001,450 sq. km
GDP: $78 billion
GDP growth rate: 5.1%
GDP per capita: $1,226
Major exports: petroleum, cotton
yarn, textiles, raw cotton
Exports of goods and services:
$15.9 billion
Major export trading partners:
Italy 17.4%, US 13.8%, Germany 4.2%,
UK 3.2%
Major imports: machinery and
equipment, foodstuffs, chemicals,
wood products, fuels
Imports of goods and services:
$19.3 billion
Major import trading partners:
US 14.9%, Germany 7.6%, Italy 7.5%,
France 6.4%
Foreign direct investment (net):
$1.5 billion
Score—Income and Corporate Taxation: 4.5–Stable
(very high tax rates)
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 5–Stable (very high cost of government)
Egypt’s top income tax rate is 40 percent; the marginal rate for the average taxpayer is 27 percent. The corporate tax rate is 40 percent. The African Development
Bank reports that in 2000, government expenditures equaled 31.4 percent of GDP.
Chapter 6: The Countries
179
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Stable (moderate level)
The World Bank reports that the government consumed 9.7 percent
of GDP in 2000, down from the 10 percent reported in the 2002
Index. However, this figure appears to understate the true extent of
state involvement in the economy. The government, for example,
employs most of the labor force. The Economist Intelligence Unit
reports that Egypt Air, the Egyptian General Petroleum Corporation, and the Suez Canal are “off limits” to privatization and that for
some companies considered to be in “strategic sectors,” only 40 percent of the company can be privatized. These “strategic sectors”
include pharmaceuticals, flour mills, and telecommunications. According to the International Labor Office, the most recent estimate
of public-sector employment was 69 percent of the labor force in
1995. Based on the apparent unreliability of reported government
consumption figures, in addition to evidence on the level of stateowned enterprise, 2 points have been added to Egypt’s government
intervention score.
MONETARY POLICY
Score: 1–Better (very low level of inflation)
From 1992 to 2001, Egypt’s weighted average annual rate of inflation was 2.55 percent, down from the 3.09 percent from 1991 to 2000
reported in the 2002 Index. As a result, Egypt’s monetary policy score
is 1 point better this year.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
A revised investment law has eliminated pre-incorporation approval
and replaced it with a notification requirement for statistical purposes.
The U.S. Department of State reports that the investment law “is
designed to allocate investment to targeted economic sectors and to
promote decentralization of industry from the crowded geographical area of the Nile Valley. The law…allows 100% foreign ownership
and guarantees the right to remit income earned in Egypt and to
repatriate capital. Other key provisions include: the guarantee against
confiscation, sequestration and nationalization; the right to own land;
the right to maintain foreign currency bank accounts; freedom from
administrative attachment; the right to repatriate capital and profits;
and equal treatment regardless of nationality.” Under this law, approval is nearly automatic for specified sectors. According to the
Economist Intelligence Unit, businesses not included under the new
investment law still face “tremendous bureaucratic obstacles.” The
approval process moves more smoothly for joint ventures. Foreigners may not own agricultural land, and prior approval from the cabinet is required for investment in military production and in the Sinai
region. The International Monetary Fund reports that both residents
and non-residents may hold foreign exchange accounts. There are
no restrictions on payments and transfers. The Capital Market Authority must approve bond issues.
BANKING AND FINANCE
Score: 4–Stable (high level of restrictions)
The Egyptian government maintains a dominant presence in the
banking sector, and new bank formation is restricted. The Economist Intelligence Unit reports that “50% of the market [is] controlled
180
by the state-owned Bank of Alexandria, Banque du Caire, Banque
Misr, and the National Bank of Egypt. They suffer from a high percentage of poorly performing loans, however, which are extended
mainly to public enterprises.” Four majority foreign-owned insurance companies now operate in Egypt, according to the U.S. Department of State. The Egyptian Parliament has approved a new law
permitting 100 percent ownership for foreign insurance companies
and authorizing privatization of state-owned insurance companies.
WAGES AND PRICES
Score: 3–Stable (moderate level of intervention)
Price controls on most goods have been removed. According to the
Economist Intelligence Unit, “Price controls on industrial goods have
been removed, except for pharmaceuticals, cigarettes, rationed edible oil and rationed sugar. State subsidies play a large part in energy
and basic foods. Energy prices are about 20% below international
levels, and the government has committed itself to eliminating the
implicit energy subsidy on petroleum products and raising natural
gas and electricity tariffs to their long-run marginal cost.” Egypt has
a national minimum wage that is set by the government.
PROPERTY RIGHTS
Score: 3–Stable (moderate level of protection)
Although private property is protected by the constitution, the legal
code is complex and can create delays. The Economist Intelligence
Unit reports that “a commercial case takes, on average, six years to
be decided, and appeal procedures can extend the court cases beyond 15 years.” According to the U.S. Department of State, “The
Egyptian legal system provides protection for real and personal property, but laws on real estate ownership are complex and titles to real
property may be difficult to establish and trace. The government is
moving slowly to modernize the laws on real estate ownership and
tenancy.”
REGULATION
Score: 4–Stable (high level)
Egypt’s economy is dominated by the state. “With such a large public sector,” reports the Economist Intelligence Unit, “the government
is necessarily deeply involved in the labor market…. A long-standing
government guarantee to provide work for all university graduates
has produced an 11-year waiting list for state jobs and a large surplus
of underemployed, badly paid civil servants. Heavy reliance on income from the informal sector has created circumstances conducive
to the spread of corruption at all levels.” According to the U.S. Department of State, “Red tape remains a business impediment in Egypt,
including a multiplicity of regulations and regulatory agencies, delays in clearing goods through customs, arbitrary decision-making,
high market entry transaction costs, and a generally unresponsive
commercial court system.”
BLACK MARKET
Score: 3.5–Stable (high level of activity)
Transparency International’s 2001 score for Egypt is 3.6. Therefore, Egypt’s black market score is 3.5 this year.
2003 Index of Economic Freedom
EL SALVADOR
Rank:
Score:
Category:
San Salvador
Trade Policy
Fiscal Burden
2
2
Government Intervention 2
Monetary Policy
2
Foreign Investment 2
Banking and Finance 2
El Salvador is still digging out from major earthquakes that occurred in 2001, and its
maquiladoras (assembly plants) have lost some business because of the post–September
11 U.S. economic slowdown. Nevertheless, the government continues to pursue
privatization and economic liberalization. Since 1999, it has privatized the state telephone company, the electrical distribution system, thermal power plants, and pension
funds. With the country enjoying a relatively free economy, the government and civic
groups began collaborating in 2002 on a project to update the 30-year-old commercial
code to promote foreign and local investment, increase the availability of credit for
starting new businesses, and reduce state intervention in commercial activities. Economic growth is crucial, since the country cannot always count on $2 billion in remittances from Salvadorans living in the United States. In addition, the country is still
plagued by violence; carjackings, kidnappings, and murders make El Salvador one of
the world’s crime capitals. Intellectual property rights are poorly enforced, and software piracy is rampant. Despite recent reforms, the judiciary still cannot keep up with
its burgeoning caseload. Corruption reportedly continues to bring justice to those who
can pay for it but not to others; some 70 percent of prison detainees have yet to receive
a sentence. El Salvador’s government intervention and monetary policy scores are both
1 point worse this year. As a result, its overall score is 0.20 point worse this year.
TRADE POLICY
Score: 2–Stable (low level of protectionism)
According to the World Bank, El Salvador’s weighted average tariff rate in 2000 (the
most recent year for which World Bank data are available) was 6.5 percent. The government encourages imports of capital goods and intermediate products by charging a
lower tariff on these products than on final goods. The U.S. Department of State reports that “when the imported goods are vegetables or animals, a license from the
Ministry of Agriculture is needed to certify that the goods meet local health and sanitary regulations. Firearms require a license from the Ministry of Defense.”
FISCAL BURDEN OF GOVERNMENT
26
2.25
Mostly Free
Wages and Prices 2
Property Rights
3
Regulation
2.0
Black Market 3.5
Scores for Prior Years:
2002: 2.05
1999: 2.15
1996: 2.45
2001: 1.95
1998: 2.40
1995: 2.65
2000: 2.00
1997: 2.40
2000 Data
(in constant 1995 US dollars)
Population: 6,276,000
Total area: 21,040 sq. km
GDP: $10.9 billion
GDP growth rate: 2.0%
GDP per capita: $1,752
Major exports: coffee, sugar, shrimp,
maquila
Exports of goods and services:
$3.9 billion
Major export trading partners:
US 65.3%, Guatemala 10.9%,
Honduras 7.6%, Costa Rica 3.9%
Major imports: raw materials,
consumer goods, capital goods, fuels,
foodstuffs, petroleum, electricity
Imports of goods and services:
$5 billion
Major import trading partners:
US 49.5%, Guatemala 9.9%, Mexico
5.2%, Costa Rica 2.4%
Foreign direct investment (net):
$175 million
Score—Income and Corporate Taxation: 2–Stable
(low tax rates)
Score—Government Expenditures: 2–Stable
(low level of government expenditure)
Final Score: 2–Stable (low cost of government)
According to the Embassy of El Salvador, the top income tax rate is 30 percent; the
marginal rate for the average taxpayer is 0 percent. The top corporate income tax rate
is 25 percent. The embassy also reports that in 2001, government expenditures equaled
15.2 percent of GDP.
Chapter 6: The Countries
181
GOVERNMENT INTERVENTION IN THE ECONOMY
PROPERTY RIGHTS
Score: 2–Worse (low level)
In 2000, according to the World Bank, the government consumed
10.2 percent of GDP, up from the 10 percent reported in the 2002
Index. In the same year, the International Monetary Fund reports
that El Salvador received 1.11 percent of its total revenues from
state-owned enterprises and government ownership of property.
Based on the higher level of government consumption, El Salvador’s
government intervention score is 1 point worse this year.
Score: 3–Stable (moderate level of protection)
Property rights are not well-protected in El Salvador. According to
the U.S. Department of State, “the Constitution provides for an
independent judiciary and the Government respects this provision
in practice. However, the judiciary suffers from inefficiency and
corruption.” In addition, “A purge of the judicial system is getting
underway and some corrupt judges and administrators have been
removed from their posts. However, investors must be aware that
the legal and regulatory system can act arbitrarily, and should take
all due precautions to protect their property and investments.” The
Economist Intelligence Unit reports that “violent crime continues
to be a serious problem. El Salvador has the highest per-capita
murder rate in the Americas and one of the highest in the world.”
Last year, the Financial Times reported that “almost 80 percent of
executives said that crime had affected their business in a survey
quoted by the Inter American Development Bank, and that kidnapping is a constant threat in El Salvador.”
MONETARY POLICY
Score: 2–Worse (low level of inflation)
From 1992 to 2001, El Salvador’s weighted average annual rate of
inflation was 3.14 percent, up from the 2.10 percent from 1991 to
2000 reported in the 2002 Index. As a result, El Salvador’s monetary
policy score is 1 point worse this year.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Stable (low barriers)
El Salvador maintains a very open foreign investment climate.
Under the 1999 Investment Law, foreign investors receive equal
treatment and may establish a business in any area except small
business and fishing in territorial ocean waters. Foreign investors
may own no more than 49 percent equity stakes in television and
radio broadcasting. Net profits may be fully remitted except in a
few service sectors, such as hotels and restaurants, in which net
profit remittance is limited to 50 percent. According to the Economist Intelligence Unit, the National Investment Office, which was
created by the October 1999 foreign investment law to coordinate
all paperwork and procedures for foreign investors, “does not appear to function as stated. Enquiries there meet with little response,
and employees insist their role is merely to register investments
after all bureaucratic paperwork has already been independently
completed.” There are no controls or requirements on current
transfers, purchase of real estate, or access to foreign exchange.
BANKING AND FINANCE
Score: 2–Stable (low level of restrictions)
Foreign banks can operate on the same basis as domestic banks under a
modern banking law passed in 1999. Most local and foreign banks are
allowed to offer a wide range of financial services. Regulations on opening branches of foreign banks are open and transparent. There are 16
banks and one non-bank financial institution, 11 of which are foreignowned. Two banks are government-owned and account for 4.2 percent of total banking assets. Market forces determine interest rates. The
Monetary Integration Law converted all financial system assets, liabilities, and operations to U.S. dollars on January 1, 2001.
REGULATION
Score: 2–Stable (low level)
El Salvador has made significant progress in reducing onerous regulations. The U.S. Department of State reports that “the laws and
policies of El Salvador are relatively transparent and generally foster competition.” The labor law, “although generally in accord with
internationally recognized standards, is sometimes not strictly enforced by government authorities.” The law requires that 90 percent of the labor force at plants and in clerical jobs be comprised of
Salvadorans, but foreigners may hold professional and technical
positions. New business projects need to submit environmental
impact studies to obtain a license. As noted above, the Economist
Intelligence Unit reports that the National Investment Office “does
not appear to function as stated. Enquiries there meet with little
response, and employees insist their role is merely to register investments after all bureaucratic paperwork has already been independently completed.”
BLACK MARKET
Score: 3.5–Stable (high level of activity)
Transparency International’s 2001 score for El Salvador is 3.6. Therefore, El Salvador’s black market score is 3.5 this year. According to
the Economist Intelligence Unit, “the so-called underemployment
rate is about 40 per cent. That covers the huge informal sector,
where people for the most part are self-employed or are agricultural day laborers.” In addition, “the country is cited as the region’s
leader in software piracy.”
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
Most prices are determined by the market. The government maintains price controls on bus fares, utilities (water and electricity), port
and airport services, and propane gas. The Embassy of El Salvador
reports that prices for oil and oil products were liberalized early in
2002. El Salvador has a minimum wage.
182
2003 Index of Economic Freedom
Malabo
EQUATORIAL GUINEA
Rank:
128
Score:
3.60
Category: Mostly Unfree
Trade Policy
Fiscal Burden
5
2
Government Intervention 2
Monetary Policy
3
Foreign Investment 3
Banking and Finance 4
Equatorial Guinea traditionally has relied on cocoa and coffee as its primary economic
activity and main source of exports, and most people remain engaged in agriculture,
forestry, or fishing. The importance of agriculture has declined since the discovery of
offshore oil in the 1990s. Equatorial Guinea, with a population under 500,000, has received more than $3 billion in foreign direct investment from American businesses since
1995—an amount greater than that received by any other country in sub-Saharan Africa
except Nigeria and Angola. The oil industry now dominates the economy, accounting for
more than 60 percent of GNP. Corruption and a lack of transparency permeate government expenditure. Oil wealth has masked the fundamental weaknesses of the economy.
From 1991 to 2000, according to World Bank data, compound growth in GDP averaged
22.7 percent (although this number is skewed by dramatic growth resulting from the
exploitation of extensive offshore oil beginning in 1997) and per capita GDP grew from
$322 to $1,599 (in constant 1995 U.S. dollars). Equatorial Guinea’s monetary policy score
is 1 point worse this year; however, its government intervention, capital flows and foreign
investment, banking and finance, and property rights scores are all 1 point better. As a
result, Equatorial Guinea’s overall score is 0.30 point better this year.
TRADE POLICY
Score: 5–Stable (very high level of protectionism)
Equatorial Guinea is a member of the Central African Economic and Monetary Community (CEMAC), which also includes Cameroon, the Central African Republic, Chad,
the Republic of Congo, and Gabon. In 2000, reports the U.S. Trade Representative, CEMAC
applied a common average external tariff of 18.4 percent. According to the U.S. Department of State, “Customs fraud is endemic in Equatorial Guinea and protracted negotiations with customs officers over the value of imported goods are common.”
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 2.5–Worse
(low tax rates)
Score—Government Expenditures: 1–Better
(very low level of government expenditure)
Final Score: 2–Stable (low cost of government)
Ernst & Young reports that Equatorial Guinea’s top income tax rate is 20 percent; the
marginal rate for the average taxpayer is 14 percent, up from the 9 percent reported in the
2002 Index (due to higher per capita GDP). The top corporate tax rate is 25 percent. In
2000, according to the African Development Bank, government expenditures equaled 8.6
percent of GDP, down from the 15.9 percent reported in the 2002 Index. Based on the
higher marginal tax rate for the average taxpayer, Equatorial Guinea’s income and corporate taxation score is 0.5 point worse this year; however, this is offset by the lower level of
government expenditure. As a result, Equatorial Guinea’s overall fiscal burden of government score is unchanged this year.
Chapter 6: The Countries
Wages and Prices 4
Property Rights
4
Regulation
Black Market
4
5
Scores for Prior Years:
2002: 3.90
1999: 3.95
1996: n/a
2001: 3.90
1998: n/a
1995: n/a
2000: 4.05
1997: n/a
2000 Data
(in constant 1995 US dollars)
Population: 457,000
Total area: 28,051 sq. km
GDP: $594 million
GDP growth rate: 16.9%
GDP per capita: $1,599
Major exports: petroleum, timber,
cocoa
Exports of goods and services:
$641 million
Major export trading partners:
China 24.2%, Japan 7.9%, US 7.2%,
Korea 4.5%
Major imports: manufactured
goods and equipment
Imports of goods and services:
$520 million
Major import trading partners:
US 60.2%, France 12.5%, Spain 8.7%,
Italy 6.0%
Foreign direct investment (net):
$91.6 million
183
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Better (low level)
The World Bank reports that the government consumed 6.7 percent of GDP in 2000, down from the 20.9 percent reported in the
2002 Index. As a result, Equatorial Guinea’s government intervention score is 1 point better this year. According to the U.S.
Department of State, the government plays an active role in the
oil sector, awards licenses for exploration and extraction of oil to
the private sector, and created a state-owned oil company in 2001
to take advantage of the country’s large oil resources.
MONETARY POLICY
Score: 3–Worse (moderate level of inflation)
Data from the International Monetary Fund’s 2002 World Economic Outlook indicate that from 1992 to 2001, Equatorial Guinea’s
weighted average annual rate of inflation was 9.73 percent, up
from 3.68 percent from 1994 to 2000 reported in the 2002 Index.
As a result, Equatorial Guinea’s monetary policy score is 1 point
worse this year. Equatorial Guinea has benefited from a stable
currency—a rarity in sub-Saharan Africa—as a member of the
CFA franc zone. Fourteen countries use the CFA franc, a common currency with a fixed parity with the French franc. (The
other 13 countries are Benin, Burkina Faso, Cameroon, Central
African Republic, Chad, Congo [Brazzaville], Gabon, Guinea–
Bissau, Ivory Coast, Mali, Niger, Senegal, and Togo.)
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Better (moderate barriers)
According to the U.S. Department of State, the law governing
investments imposes “minimal eligibility and performance requirements and no time limitations…. Foreign investment is not
screened, and foreign equity ownership is not subject to limitation, although additional advantages can be gained by having a
national majority partner.” Lack of transparency, bureaucratic
red tape, and corruption impede investment. Foreign investment
is not permitted in the manufacture of arms, explosives, or other
weapons; collection, treatment, and storing of toxic or dangerous materials and waste; or production of alcoholic beverages
aside from beer. The International Monetary Fund reports that
both residents and non-residents may hold foreign exchange accounts, but approval is required. Capital transactions, payments,
and transfers to countries other than France, Monaco, members
of the CEMAC, members of the West African Economic and
Monetary Union, and Comoros are subject to exchange control
approval, government approval, and quantitative limits in some
cases. Equatorial Guinea’s barriers to investment do not specifically target or discourage foreign investment. As a result, Equatorial Guinea’s capital flows and foreign investment score is 1 point
better this year.
BANKING AND FINANCE
Score: 4–Better (high level of restrictions)
The Banque Centrale des Etats de l’Afrique Centrale has acted as
Equatorial Guinea’s central bank since the country joined the
franc zone in 1985. The Economist Intelligence Unit reports that
184
two efforts “to establish commercial banks in the 1970s collapsed
in bankruptcy amid reports of extravagant fraud and government
interference.” According to the U.S. Department of State, “Of
the thirty banks operating in Central Africa, two work in Equatorial Guinea. Both operate only two branches in the country.”
These two banks (Societe Generale de Banque en Guinee
Equatoriale and Caisse Commune d’Epargne et d’Investissement)
are the only commercial banks, and the government has a minority ownership stake in the first. Based on revived private-sector banking activity, Equatorial Guinea’s banking and finance
score is 1 point better this year.
WAGES AND PRICES
Score: 4–Stable (high level of intervention)
The Economist Intelligence Unit reports that in January 2002,
the commerce minister announced “a new regime of fixed prices.
Items covered include tinned sardines, meat, powdered milk,
sugar, cooking oil, rice, matches, medicines, construction materials, agricultural products and school books.” The government
mandates various minimum wages.
PROPERTY RIGHTS
Score: 4–Better (low level of protection)
Government corruption, an inefficient judiciary, and poor law
enforcement all prevent legal protection of private property. According to the U.S. Department of State, “Judges serve at the pleasure of the President, and they are appointed, transferred, and
dismissed for political reasons. Corruption is widespread.” Equatorial Guinea recently became a member of OHADA
(Organisation pour l’Harmonisation du Droit des Affaires en
Afrique), a regional organization that focuses primarily on training judges and lawyers in commercial law to help reform the protection of property and enforcement of contracts in member
countries. Based on evidence of efforts to improve the judiciary,
Equatorial Guinea’s property rights score is 1 point better this
year.
REGULATION
Score: 4–Stable (high level)
The regulatory structure in Equatorial Guinea imposes a great
burden on business. “While business laws promote a liberalized
economy,” reports the U.S. Department of State, “the business
climate remains very difficult. Application of the laws remains
selective. Corruption among officials is widespread, and many
business deals are concluded under non-transparent circumstances.”
BLACK MARKET
Score: 5–Stable (very high level of activity)
Recent reports indicate that Equatorial Guinea has a huge black
market, especially in labor. According to Inter Press Services,
Equatorial Guinea is a transit point for smuggling children into
Ivory Coast, Gabon, and Nigeria, where they are employed in
farming and street vending. The government offers no protection for intellectual property rights.
2003 Index of Economic Freedom
ESTONIA
Rank:
Score:
Category:
Trade Policy
Fiscal Burden
1
3.5
Government Intervention 2
Monetary Policy
2
Foreign Investment 1
Banking and Finance 1
The rapid and decisive economic reform begun after the dissolution of the Soviet
Union and the regaining of independence in 1991 allowed Estonia to achieve one
of Eastern Europe’s most free-market–oriented economies. Tight budgetary policies, foreign trade liberalization, and extensive privatization are the core of structural reform. The government also introduced a flat tax on corporate profits and
personal income, as well as a new Law on Income Tax exempting the undistributed profits of companies from income tax as of the end of 1999. Since 1992, Estonia has followed a Currency Board Arrangement (CBA), with the kroon now pegged
to the euro. The monetary base is fully backed by foreign exchange reserves. Estonia eliminated most of its tariff and non-tariff barriers to trade as part of its 1999
accession to the World Trade Organization. The privatization of large and medium-sized enterprises is largely complete, and the private sector now contributes
over 75 percent of GDP. Estonia’s three largest banks, which account for 90 percent of total assets, are fully owned by foreigners. The revocation of the Foreign
Investments Act in July 2000 removed all restrictions on property rights and repatriation of profits. Currently, most of Estonia’s economic policies are driven by the
government’s main foreign policy priority: accession to the European Union and
NATO. Future economic development is closely tied to the EU market, especially
Sweden and Finland, which together account for more than 50 percent of Estonia’s
exports. Estonia has closed negotiations on 24 of 29 chapters of EU law and was
expected to close four more chapters by March 2002. Ironically, the Estonian
economy appears to be excessively free by EU standards: The tax chapter is complicated by Estonia’s tax exemption on reinvested profits, and the EU is pressuring
Estonia to abolish duty-free shopping, which is an important source of income for
the domestic tourism and transport sectors.
TRADE POLICY
Score: 1–Stable (very low level of protectionism)
Estonia is essentially duty-free. According to the World Bank, Estonia’s weighted
average tariff rate in 1995 (the most recent year for which World Bank data are
available) was 0.4 percent; Estonia’s Trade Council reports that the average tariff
rate is currently 0.05 percent. According to the U.S. Department of State, “Estonia’s
liberal foreign trade regime, which contains few tariff or non-tariff barriers, is virtually unique in Europe.” However, “since January 2000 Estonia has imposed import tariffs on certain agricultural products from third countries, including the U.S.,
in response to EU harmonization requirements.” In addition, “Licenses are required
for importing and exporting: metals; fuel; spirits; tobacco and tobacco goods; pharmaceuticals; weapons, ammunition, explosives; lottery tickets; and private passenger vehicles.” By global standards, Estonia still maintains very low trade barriers.
Chapter 6: The Countries
6
1.80
Free
Wages and Prices 1
Property Rights
2
Regulation
2.5
Black Market 2.5
Scores for Prior Years:
2002: 1.80
1999: 2.35
1996: 2.50
2001: 2.05
1998: 2.30
1995: 2.40
2000: 2.20
1997: 2.50
2001 Data
(in constant 1995 US dollars)
Population: 1,361,242
Total area: 45,227 sq. km
GDP: $6.4 billion
GDP growth rate: 5.4%
GDP per capita: $4,697
Major exports: machinery and
equipment, wood products, textiles,
food products, metals, chemical
products
Exports of goods and services:
$5.1 billion
Major export trading partners:
Finland 31.3%, Sweden 19.8%,
Germany 8.2%, Latvia 6.8%, Russia
2.0%
Major imports: machinery and
equipment, chemical products,
foodstuffs, metal products, textiles
Imports of goods and services:
$5.9 billion
Major import trading partners:
Finland 37.6%, Sweden 10.5%,
Germany 9.5%, Russia 8.0%, Latvia
4.1%
Foreign direct investment (net):
$482 million
185
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 2–Stable
(low tax rates)
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 3.5–Stable (high cost of government)
Estonia has a flat income tax rate of 26 percent, which also
applies to the average taxpayer. If enacted, the Estonian Reform Party’s proposal to reduce the personal income tax to 20
percent could result in an improved fiscal burden of government score in the next edition of the Index. The corporate tax
on reinvested profits is 0 percent. Based on data from the Ministry of Finance and Estonia’s Statistical Office, government
expenditures increased slightly to 36.3 percent of GDP in 2001,
up from the 35.8 percent reported in the 2002 Index; this increase, however, is not enough to affect Estonia’s overall fiscal burden score.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Stable (low level)
Based on data from Estonia’s Statistical Office, the government consumed 20.7 percent of GDP in 2001. The International Monetary Fund reports that in 2000, Estonia received
2.53 percent of its total revenues from state-owned enterprises
and government ownership of property.
MONETARY POLICY
Score: 2–Stable (low level of inflation)
From 1992 to 2001, Estonia’s weighted average annual rate of
inflation was 5.54 percent. Estonia’s success in bringing inflation down from the high rates experienced in the early 1990s
is a direct result of the country’s currency board, which restricts the government’s ability to print money.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 1–Stable (very low barriers)
Estonia is open to foreign investment, and foreign investors
receive national treatment. The government allows foreigners to invest in all sectors, with requirements restricted to nondiscriminatory regulation and documentation to establish clear
ownership. There are no exchange controls and no repatriation limitations that force investors to keep their capital in the
country. Foreigners may own real estate. The government
requires licenses for investment in banking, mining, gas and
water supply or related structures, railroads and transport,
energy, and communications networks, but this requirement
does not restrict investment and is applied in a routine, evenhanded manner.
BANKING AND FINANCE
Score: 1–Stable (very low level of restrictions)
Estonia has a sound, prudently regulated banking sector that
is considered the strongest and most developed in the Baltic
States. The country’s universal banking system allows banks
186
to engage in a wide range of financial activities, including insurance, leasing, and brokerage services. The government
welcomes foreign participation in the banking sector; major
foreign banks controlled over 95 percent of all commercial
bank assets in 2001. The U.S. Department of State reports that
“Estonia’s financial sector is modern and efficient. Government and Central Bank policies facilitate the free flow of financial resources, thereby supporting the flow of resources
in the product and factor markets. Credit is allocated on market terms and foreign investors are able to obtain credit on
the local market….”
WAGES AND PRICES
Score: 1–Stable (very low level of intervention)
The market determines wages and prices; according to the
U.S. Department of State, “There are no price controls in Estonia.” In preparation for membership in the European Union,
Estonia signed an agreement in 2001 to boost the minimum
wage from the current 30 percent of average gross wages to
41 percent of gross wages by 2008. Only a small portion of
the work force is affected by the minimum wage.
PROPERTY RIGHTS
Score: 2–Stable (high level of protection)
Estonia has made significant progress toward establishing an
independent judiciary and protecting private property rights.
The U.S. Department of State reports that “Estonia’s efforts
to create a modern, western legal system from the remnants
of the Soviet system is a work in progress. The implementation of legislation and the training of court officials and law
enforcement personnel continues. The Estonian government
and foreign donors commit substantial resources to this effort and progress is being made…. Despite these problems,
Estonia’s judiciary is independent and insulated from government influence. Property rights and contracts are enforced by
the courts. In increasingly infrequent instances, judicial decisions in these and other matters can be arbitrary and indifferent to the law…. Estonia’s commercial law has proven extremely effective and is often cited as one of the key factors
that has contributed to Estonia’s successful economic reforms.”
REGULATION
Score: 2–Stable (low level)
Regulations in Estonia are transparent and evenly applied. Businesses are subject to some red tape, but reforms have permeated the bureaucracy, and many procedures are far more
streamlined and transparent than in other countries in the region. According to The Moscow Times, “within a matter of days
one can register a new company and the whole process should
not cost more than 600 dollars. The ease of registration is such
that more than 58,000 enterprises have now been registered,
making Estonia one of the most enterprising countries in the
world (in terms of number of enterprises per capita.)” Tax,
labor, health, and safety laws and policies have been crafted to
encourage investment. The Estonian Embassy reports that
2003 Index of Economic Freedom
“licenses are required by businesses wishing to engage in specific activities (for example mining, public utilities, production of alcohol and tobacco, gambling and banking).” There
is some corruption, but it does not impose a burden on businesses. According to the U.S. Department of State, “although
Estonia has laws, regulations and penalties to combat corruption, it generally has not been a problem faced by foreign investors. Bribery is a criminal offense and uncommon, although
more frequent are ‘payments’ that exceed the services rendered.” Overall, surveys of American and other non-Estonian
businesses have shown that issues of corruption and/or protection rackets are not a concern for companies.
BLACK MARKET
Score: 2.5–Stable (moderate level of activity)
Transparency International’s 2001 score for Estonia is 5.6.
Therefore, Estonia’s black market score is 2.5 this year. According to the Baltic News Service, “the share of illegal [alcohol] on the Estonian vodka market stood between 30 and 35
per cent in 2001.” The Financial Times reports that “the level
of software piracy in Estonia amounts to 69 per cent.”
Chapter 6: The Countries
187
188
2003 Index of Economic Freedom
ETHIOPIA
Rank:
119
Score:
3.50
Category: Mostly Unfree
Addis Ababa
Trade Policy
Fiscal Burden
5
3.5
Government Intervention 3
Monetary Policy
1
Foreign Investment 4
Banking and Finance 4
Years of conflict and Marxist economic policies devastated Ethiopia, the third most
populous country in Africa and one of the poorest. The war with neighboring Eritrea
ended with a peace agreement in 2000, but relations remain strained. Ethiopia’s economy
is based primarily on small-scale agriculture, which supports over 85 percent of the
population, accounts for approximately 45 percent of GDP, and comprises 70 percent
of exports, of which coffee is the most important. Urban economic activity is primarily
informal. Economic liberalization has proceeded slowly, and over 200 state-owned enterprises remain to be privatized or liquidated. Most manufacturing, utilities, and transportation remain under state control. In January 2002, following revelations of extensive corruption in the financial sector, the government arrested over 40 senior employees of the Commercial Bank of Ethiopia, which dominates the country’s retail banking
sector. Prospects for growth are hindered by deterioration of the infrastructure (including roads and water supply), poor weather, inefficient farming techniques, and low
international prices for Ethiopian exports. From 1991 to 2000, according to World Bank
data, compound growth in GDP averaged 4.8 percent annually but per capita GDP
increased only slightly from $92 to $116 (in constant 1995 U.S. dollars). Ethiopia’s black
market score is 0.5 point better this year. As a result, Ethopia’s overall score is 0.05 point
better this year.
TRADE POLICY
Wages and Prices 3
Property Rights
4
Regulation
4.0
Black Market 3.5
Scores for Prior Years:
2002: 3.55
1999: 3.50
1996: 3.55
2001: 3.65
1998: 3.50
1995: 3.75
2000: 3.50
1997: 3.60
2000 Data
(in constant 1995 US dollars)
Population: 64,298,000
Total area: 1,127,127 sq. km
GDP: $7.4 billion
GDP growth rate: 5.3%
GDP per capita: $116
Major exports: coffee, gold, leather
products
Exports of goods and services:
$1.3 billion
Major export trading partners:
Germany 17.8%, Japan 10.8%,
Djibouti 10.5%, Saudi Arabia 7.7%
Score: 5–Stable (very high level of protectionism)
According to the World Bank, Ethiopia’s weighted average tariff rate in 1995 (the most
recent year for which World Bank data are available) was 18.1 percent. According to
the U.S. Department of State, “The Ministry of Trade and Industry has the power to
restrict and/or limit imports and exports. There are restrictions on the importation of
products that compete with locally produced goods, particularly in agricultural sectors. Automobile or motor vehicle imports require approval from the Ministry of Transport and Communications.”
Major imports: food and live
animals, petroleum and petroleum
products, chemicals, machinery,
motor vehicles
FISCAL BURDEN OF GOVERNMENT
Foreign direct investment (net):
$46.7 million
Score—Income and Corporate Taxation: 3–Worse
(moderate tax rates)
Score—Government Expenditures: 4–Stable
(high level of government expenditure)
Final Score: 3.5–Stable (high cost of government)
Ethiopia’s top income tax rate is 40 percent; the marginal rate for the average taxpayer
is 0 percent. The top corporate tax rate is 35 percent. Data from the Economist Intelligence Unit indicate that in 2000, government expenditures equaled 28.9 percent of
GDP. Based on a clarification in methodology, Ethiopia’s income and corporate taxation score is 0.5 point worse this year; however, this is not sufficient to affect its overall
fiscal burden of government score, which is unchanged.
Chapter 6: The Countries
Imports of goods and services:
$2.2 billion
Major import trading partners:
Saudi Arabia 25.0%, US 8.8%,
Italy 6.7%, Russia 3.5%
189
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Stable (moderate level)
The World Bank reports that the government consumed 23.3
percent of GDP in 2000. According to the U.S. Department
of State, the government “is still heavily involved in Ethiopia’s
commercial and economic sectors.” The Economist Intelligence Unit reports that Ethiopia’s “privatization program began in 1995 with the sale of small retail outlets and mediumsized hotels and restaurants. The disposal of state farms and
agro-industrial plants proved more problematic, in part because of continued wrangles over the allocation of land titles
by regional authorities…. [P]roblems with brewery sales in
2000, coupled with personnel changes linked to the schism
within the Tigray People’s Liberation Front (TPLF) in early
2001, are likely to further delay privatization plans.”
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, Ethiopia’s weighted average annual rate
of inflation was –3.89 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 4–Stable (high barriers)
Although Ethiopia has lowered barriers to foreign investment
by implementing a progressive investment code and assisting
foreign investors in obtaining licenses and navigating bureaucratic hurdles, the U.S. Department of State reports that “foreign investors find Ethiopia a difficult environment in which
to operate. Many sectors, particularly in services and trade,
are off-limits to foreigners. The government retains rigid control over the utilities and the transport sector and prohibits
foreign participation in banking and insurance.” The International Monetary Fund reports that foreign investors may not
invest in banking, insurance, or transport. Investment in telecommunications and defense industries is allowed only in partnership with the government. Rail transport, postal services,
and the generation, transmission, and supply of electricity are
reserved for the government. The Ethiopian Investment Authority must approve all investments and repatriation of capital. Only Ethiopian passport holders may purchase real estate.
BANKING AND FINANCE
Score: 4–Stable (high level of restrictions)
It is only since 1994 that the government of Ethiopia has permitted private banks and insurance companies. These services
are limited to domestic concerns; foreign firms are prohibited from investing in the banking and insurance sectors. The
presence of private banks and insurance firms in the financial
sector has grown. According to the Economist Intelligence
Unit, “By 2002 six private banks and eight private insurance
companies were operating alongside the CBE [Commercial
Bank of Ethiopia] and two far smaller state-owned banks.”
The state-owned Commercial Bank of Ethiopia dominates the
retail-banking sector. The U.S. Department of State reports
that the recent conflict with Eritrea and that nation’s seizure
190
of assets in the port of Assab “severely increased the liabilities
of private banks and reduced their liquidity. As a result, Ethiopia more than tripled the minimum capital requirement for
commercial banks and required 100% advance payment for
importers opening letters of credit.”
WAGES AND PRICES
Score: 3–Stable (moderate level of intervention)
Many price controls have been removed. According to the U.S.
Department of State, “All retail prices except petroleum, fertilizers and pharmaceuticals have been decontrolled.” However, the government influences prices through state-owned
utilities and the large number of state-owned enterprises. The
government mandates a minimum wage for both private and
public employees, and individual industries and services have
established their own minimum wages.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
Ethiopia’s judicial system does not offer a high level of protection of personal property. According to the U.S. Department of State, “the Constitution provides for an independent
judiciary; however, the judiciary remains weak and overburdened….” In addition, “The commercial code is antiquated
and the overworked judicial system unpracticed in adjudicating business disputes.”
REGULATION
Score: 4–Stable (high level)
The U.S. Department of State reports that Ethiopia’s regulatory regime “is considered fair and honest, but not necessarily open to outside examination. There are instances in which
burdensome regulatory or licensing requirements have prevented the local sale of [other countries’] exports, particularly
personal hygiene and health care products.” Much of the
economy remains under state control, and the evidence suggests that businesses also must contend with political favoritism. In effect, notes the U.S. Department of State, “state-owned
enterprises have considerable de facto advantages over private
firms, particularly in the realm of Ethiopia’s regulatory and
bureaucratic environment, and including ease of access to
credit and speedier customs clearance.”
BLACK MARKET
Score: 3.5–Better (high level of activity)
Transparency International’s 2000 score for Ethiopia was 3.2.
Therefore, Ethiopia’s black market score is 3.5 this year. Due
to a calculation error in the 2002 Index, this is 0.5 point better
than the black market score reported for Ethiopia last year.
2003 Index of Economic Freedom
FIJI
Rank:
113
Score:
3.40
Category: Mostly Unfree
Suva
Trade Policy
Fiscal Burden
5
4
Government Intervention 3
Monetary Policy
2
Foreign Investment 4
Banking and Finance 2
The future looks bleak for the island nation of Fiji as political instability continues
to reign. After the 2001 general election, the Fiji Labor Party was not given the
number of seats it should have received under the 1997 constitution. According to
the Economist Intelligence Unit, “the Court of Appeal ruled on February 15th
[2002] that the prime minister, Laisenia Qarase, acted unconstitutionally in 2001
when he refused to appoint members of the Fiji Labor Party (FLP) as government
ministers.” Mr. Qarase is appealing to the Supreme Court, but the Supreme Court
has not operated for several years. Beyond political instability, the future of Fiji’s
economy is clouded by the large numbers of skilled workers emigrating abroad.
Fiji’s natural resources are one of the few things that the island has in its favor. The
Reserve Bank of Fiji reports that tourism, gold production, fresh fish production,
and timber production rose in 2001. Fiji’s monetary policy score is 1 point worse
this year, but its banking and finance score is 1 point better. As a result, Fiji’s overall
score is unchanged this year.
TRADE POLICY
Score: 5–Stable (very high level of protectionism)
Based on data from the Fiji Islands Statistics Bureau, Fiji’s average tariff rate was
25.6 percent in 2001 (based on import duties as a percentage of total imports). The
U.S. Department of State reports that “some goods are absolutely restricted and
some subject to quotas. Most imports are subject to duty.” In addition, “Products
subject to specific import licensing are powdered milk, bulk butter, seed potatoes,
rice, coffee, canned fish, lubricants, transformer and circuit breaker oils, cleansing
oils and hydraulic brake oils.”
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 2.5–Stable
(moderate tax rates)
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 4–Stable (high cost of government)
In 2001, the government implemented a policy of lowering taxes. The top individual and corporate tax rates were reduced from 35 percent to 32 percent for 2002
and are scheduled to be reduced to 30 percent for 2003; the marginal rate for the
average taxpayer is 0 percent. In 2000, based on data from the Bank of Fiji, government expenditures equaled 36.7 percent of GDP.
Wages and Prices 3
Property Rights
4
Regulation
Black Market
Scores for Prior Years:
2002: 3.40
1999: 3.30
1996: 3.15
2001: 3.40
1998: 3.20
1995: 3.40
2000: 3.30
1997: 3.20
2000 Data
(in constant 1995 US dollars)
Population: 811,900
Total area: 18,270 sq. km
GDP: $2 billion
GDP growth rate: –2.8%
GDP per capita: $2,395
Major exports: garments, sugar, fish,
gold
Exports of goods and services:
$1.21 billion
Major export trading partners:
Australia 34.2%, US 19.6%, UK 14.3%,
New Zealand 4.3%, Japan 3.8%
Major imports: manufactured
goods, machinery and transport
equipment, petroleum products,
food, chemicals
Imports of goods and services:
$1.2 billion
Major import trading partners:
Australia 38.9%, New Zealand 16.4%,
Singapore 5.7%, Japan 4.5%, US 4.5%
Foreign direct investment (net):
–$17 million
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Stable (moderate level)
The World Bank reports that the government consumed 15.5 percent of GDP in 2000.
According to the U.S. Department of State, “Though private enterprises are allowed to
Chapter 6: The Countries
3
4
191
operate freely, and in some cases, thrive, government maintains
control over major sectors of the economy. This includes sugar
production, power generation and supply, timber harvesting,
telecom services, Air Pacific, the national airline, the government
tannery and the water and sewerage services.”
MONETARY POLICY
Score: 2–Worse (low level of inflation)
From 1992 to 2001, Fiji’s weighted average annual rate of inflation
was 3.38 percent, up from the 1.79 percent from 1991 to 2000 reported in the 2002 Index. As a result, Fiji’s monetary policy score is
1 point worse this year.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 4–Stable (high barriers)
Fiji places a number of restrictions on foreign investment but also
offers a number of tax incentives to would-be investors in preferred
activities. The government must approve all potential foreign investments and requires potential investors to undergo a series of
bureaucratic registration and regulatory processes. Fiji discourages
foreign acquisition of a controlling interest in established Fijian
businesses unless such acquisition is in the “national interest.” State
control of several major sectors, such as telecommunications, also
restricts foreign investment. The government has announced its
intention to review the list of “reserved” and “restricted” business
activities. According to the International Monetary Fund, residents
are permitted to hold foreign exchange accounts only with prior
approval of the government. Non-residents may hold foreign exchange accounts subject to certain regulations. Most payments and
transfers are subject to government approval and limitations on
amounts. The International Monetary Fund reports that all capital
transfers require approval by the Reserve Bank of Fiji.
BANKING AND FINANCE
Score: 2–Better (low level of restrictions)
Fiji’s banking system included two merchant banks and six foreign-owned commercial banks in 2001. The commercial banks are
permitted a wide range of services, although the sector has been
shaken by a recent banking crisis. According to the Economist Intelligence Unit, “The government’s role in the commercial banking sector has…changed significantly following the near-collapse
and subsequent bailout of the National Bank of Fiji in 1998. An
Australian financial services group, Colonial, acquired 51 percent
of the bank in 1999…. The expensive bailout, although inevitable
in political terms, was a severe strain on the economy. The government is also reviewing the future of its Fiji Development Bank.”
Since the sale of the National Bank of Fiji, foreign banks have dominated the banking sector, and the government’s influence is limited. As a result, Fiji’s banking and finance score is 1 point better
this year.
cant price changes to protect the interests of consumers or suppliers. According to the U.S. Department of State, “There are a number of basic food items under price control. The Minister responsible is empowered under the Counter-Inflation Act to alter, remove or add any item from price control.” There is no national
minimum wage, but the Ministry for Labor sets and enforces minimum wages for certain sectors of the economy.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
Protection of property is highly uncertain in Fiji. According to the
U.S. Department of State, “Prior to the May [2000] takeover of
Parliament, the judiciary was independent; however, with the purported abrogation of the Constitution and other events, including
abolition of the Supreme Court, the status of the Judiciary is uncertain.”
REGULATION
Score: 3–Stable (moderate level)
The U.S. Department of State reports that “enactment of the Foreign Investment Act of 1999 establishes transparent and simple
procedures for the registration of foreign investors and is expected
to streamline and reduce the time required for foreign investment
approvals…. [T]he transparency of implementation is yet to be
seen.” In addition, although the old government had pledged to
fight corruption and had made some efforts to streamline bureaucratic regulatory processes, “there is room for greater transparency, both in the government procurement and in the investigative
processes.” Continuing political instability makes regulatory reform
difficult.
BLACK MARKET
Score: 4–Stable (high level of activity)
Piracy of such intellectual property as video and sound recordings
and motion pictures is rampant. Fiji’s relatively closed import market creates a substantial black market in smuggled items. In addition, reports the Financial Times, the smuggling of people is a severe problem.
WAGES AND PRICES
Score: 3–Stable (moderate level of intervention)
In 1973, Fiji established a Prices and Incomes Board (PIB) with the
authority to impose wage freezes and price controls on a number
of commodities. The PIB imposes controls when there are signifi-
192
2003 Index of Economic Freedom
FINLAND
Rank:
Score:
Category:
Helsinki
Trade Policy
Fiscal Burden
2
4
Government Intervention 2
Monetary Policy
1
Foreign Investment 2
Banking and Finance 2
Although forest products remain its most crucial raw material source, Finland is a
leader in technology; its most important export, for example, is the mobile telephone. Finland has benefited greatly from trade, and its top four trading partners
are Germany, Sweden, the United Kingdom, and the United States. The country
has a generally attractive business environment with few regulations; however,
high taxes regulate the economy, and the tax burden tends to discourage new investors and workers. To promote growth, according to the U.S. Department of
State, the government plans to reduce the income tax burden in 2002. Finland also
needs to reform its welfare state. The New York Times reports, for example, that
“people who lose their jobs receive benefits equivalent to full salary for 15 months.”
Finland’s pension system poses another set of problems. The country’s aging population is both large and growing; and the very structure of the system, which includes a cap on pension benefits, encourages workers to retire early. According to
the Organisation for Economic Co-operation and Development, “in fiscal terms,
public pension spending is likely to increase by about 5 percentage points of GDP
over the next 50 years.” Finland’s fiscal burden of government score is 0.5 point
better this year. As a result, its overall score is 0.05 point better this year.
TRADE POLICY
Score: 2–Stable (low level of protectionism)
As a member of the European Union, Finland imposes a common weighted average external tariff of 1.8 percent. Finland’s participation in the Common Agricultural Policy (CAP), a program that heavily subsidizes agricultural goods, acts as a
non-tariff barrier. In addition, according to the Economist Intelligence Unit, “regulations on food and consumer goods and health regulations for imports are strict
and comprehensive in Finland.”
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 4–Stable
(high tax rates)
Score—Government Expenditures: 4–Better
(high level of government expenditure)
Final Score: 4–Better (high cost of government)
Finland’s top income tax rate is 37 percent; the marginal rate for the average taxpayer is 24 percent. The top corporate tax rate is 29 percent. In 2001, government
expenditures equaled 44.6 percent of GDP, down from the 47 percent reported in
the 2002 Index. Based on the lower level of government expenditures in 2001,
Finland’s fiscal burden of government score is 0.5 point better this year.
Chapter 6: The Countries
11
1.90
Free
Wages and Prices 2
Property Rights
1
Regulation
Black Market
2
1
Scores for Prior Years:
2002: 1.95
1999: 2.20
1996: 2.35
2001: 2.15
1998: 2.15
1995: n/a
2000: 2.20
1997: 2.20
2001 Data
(in constant 1995 US dollars)
Population: 5,196,000
Total area: 337,030 sq. km
GDP: $166.6 billion
GDP growth rate: 0.7%
GDP per capita: $32,063
Major exports: machinery and
equipment, chemicals, metals,
timber, paper, pulp
Exports of goods and services:
$78.8 billion
Major export trading partners:
Germany 12.4%, US 9.7%, UK 9.6%,
Sweden 8.4%, Russia 5.9%
Major imports: foodstuffs,
petroleum and petroleum products,
chemicals, transport equipment, iron
and steel, machinery, textile yarn
and fabrics, grains
Imports of goods and services:
$56.4 billion
Major import trading partners:
Germany 14.5%, Sweden 10.2%,
Russia 9.6%, US 6.9%, UK 6.4%
Foreign direct investment (net):
–$26.3 billion
193
GOVERNMENT INTERVENTION IN THE ECONOMY
WAGES AND PRICES
Score: 2–Stable (low level)
The Economist Intelligence Unit reports that the government
consumed 19.9 percent of GDP in 2001. In 2000, according to
the International Monetary Fund, Finland received 3.76 percent of its total revenues from state-owned enterprises and
government ownership of property.
Score: 2–Stable (low level of intervention)
Finland’s market sets wages and prices, but the government
can influence prices through subsidies to the agriculture sector in accordance with European Union practices. In addition,
according to the Economist Intelligence Unit, “price margins
of pharmacies in Finland are regulated by a drug tariff.” The
U.S. Department of State reports that “general horizontal subsidies form the bulk of aid in Finland, including assistance for
research and development, environmental protection, energy
and investment…. Foreign-owned companies are eligible for
government incentives on an equal footing with Finnishowned companies.” Finland does not have a legislated minimum wage, but it does require all employers to meet minimum wages established through collective bargaining agreements in each industrial sector.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, Finland’s weighted average annual rate of
inflation was 2.58 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Stable (low barriers)
Finland welcomes foreign investment, and few restrictions
remain in effect. Foreign investments do not require prior approval, although the International Monetary Fund reports that
“Acquisition of shares giving at least one-third of the voting
rights in a Finnish defense enterprise to a single foreign owner
requires prior confirmation by the Ministry of Defense.”
Moreover, reports the Economist Intelligence Unit, “the Ministry of Trade and Industry has the right to reject corporate
transactions in which more than one-third of voting rights of
a major company would pass into foreign ownership outside
countries of the European Economic Area (EEA) or OECD
[Organisation for Economic Co-operation and Development].”
Non-EEA investors must apply for a license to invest in a number of monitored industries, including national security–related sectors, mining, travel agencies, and restaurants. Restrictions on the purchase of land apply only to non-residents purchasing land in the Aaland Islands for recreational purposes
or secondary residences. There are no exchange controls and
no restrictions on current transfers or repatriation of profits.
BANKING AND FINANCE
Score: 2–Stable (low level of restrictions)
Finland’s banking system generally is in line with the rest of
the European Union. The state-owned Leonia Bank has
merged with Sampo, Finland’s largest insurance company,
with government ownership of 40.25 percent. Even though
the government has ownership stake in a bank that competes
with private banks, the industry is open to foreign competition; six foreign banks have branches in Finland, and six foreign credit institutions have offices there. A foreign bid for
more than a one-third share of a credit institution or commercial bank must be approved by the Ministry of Finance.
Banks may engage in some related financial services, such as
the buying and selling of securities. Recently passed legislation defines the rules by which credit institutions may issue
mortgage bonds. According to the Economist Intelligence
Unit, “Only mortgage banks may conduct such activities; previously, mortgage banking was not allowed in Finland.” Legislation passed in July 2000 allows credit institutions to use
their own methods to calculate market risk.
194
PROPERTY RIGHTS
Score: 1–Stable (very high level of protection)
Private property is safe in Finland. The Economist Intelligence
Unit reports that “contractual obligations, for both government and business, are strictly honored in Finland. The quality of the judiciary and the civil service is generally high.”
There is no history of government expropriation.
REGULATION
Score: 2–Stable (low level)
Finland maintains an open and transparent regulatory structure. There are some legal requirements to conduct business,
especially for non–European Economic Area residents or companies. According to the U.S. Department of State, the most
regulated sectors are “banking and insurance, nuclear energyrelated activities, mining, manufacturing and sale of medicinal substances, dangerous chemicals and explosives, private
security services, travel agencies, restaurant and catering services.” The government has streamlined investment approval
procedures and has lifted restrictions on buying real estate.
Many activities that have a detrimental effect on the environment are prohibited. The Economist Intelligence Unit reports
that “the ‘polluter pays’ principle is a general rule of Finnish
environmental policy.” In addition, “high costs and restrictive
laws characterize the Finnish labor market.” The labor market is highly unionized.
BLACK MARKET
Score: 1–Stable (very low level of activity)
Transparency International’s 2001 score for Finland is 9.9.
Therefore, Finland’s black market score is 1 this year. According to Nordic Business Report, “one in ten…workers have been
offered jobs without registering for a tax in the past year.”
2003 Index of Economic Freedom
FRANCE
Paris
Trade Policy
Fiscal Burden
2
4.5
Government Intervention 3
Monetary Policy
1
Foreign Investment 3
Banking and Finance 3
Rank:
Score:
Category:
40
2.55
Mostly Free
Wages and Prices 2
Property Rights
2
Regulation
Black Market
According to the Organisation for Economic Co-operation and Development, public
expenditure in France amounted to 48.6 percent of GDP in 2001—one of the highest in Europe. The state employs 25 percent of the workforce—double the percentage in both Germany and the United Kingdom. France remains awash in regulation. Most notoriously, since February 2000, the legal workweek has been a
miniscule 35 hours for firms of 20 or more workers. It takes about 15 weeks to
register a company, which then faces 10 to 21 more administrative obstacles, compared with a maximum of eight in Germany, four in Britain, and two in the United
States. France has striven mightily to preserve its overregulated politico-economic
culture by adopting protectionist stances in global trading fora; it is no secret, for
example, that the EU’s Common Agricultural Policy is sustained largely to protect
French farmers. The need for microeconomic reforms in the labor market, product markets, the tax system, pensions, and public administration is becoming urgent given France’s demographic profile and the continued weakness of its public
finances. The new center–right government must implement economic reforms if
France is to remain competitive with other EU countries, to say nothing of the rest
of the world. France’s fiscal burden of government score is 0.5 point better this
year, and its wages and prices score is 1 point better. As a result, its overall score is
0.15 point better this year.
Scores for Prior Years:
TRADE POLICY
Major export trading partners:
Germany 14.0%, UK 10.0%, Spain
9.3%, Italy 9.0%, US 8.7%
Score: 2–Stable (low level of protectionism)
As a member of the European Union, France has a weighted average tariff rate of
1.8 percent. Complex technical standards and lengthy testing procedures act as
non-tariff barriers for electronics, telecommunications equipment, and agricultural
products. France’s participation in the Common Agricultural Policy (CAP), a program that heavily subsidizes agricultural goods, also acts as a non-tariff barrier.
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 4–Better
(high tax rates)
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 4.5–Better (very high cost of government)
France’s top income tax rate is 52.75 percent; the marginal rate for the average
taxpayer is 41.8 percent. The top corporate tax is 33.3 percent, down from the
36.44 percent reported in the 2002 Index. In 2001, government expenditures equaled
48.6 percent of GDP. Based on the government’s lower top corporate tax rate,
France’s overall fiscal burden of government score is 0.5 point better this year.
Chapter 6: The Countries
2002: 2.70
1999: 2.40
1996: 2.30
2001: 2.50
1998: 2.40
1995: 2.30
3
2
2000: 2.50
1997: 2.40
2001 Data
(in constant 1995 US dollars)
Population: 59,700,000
Total area: 547,030 sq. km
GDP: $1.79 trillion
GDP growth rate: 2.0%
GDP per capita: $29,983
Major exports: machinery and
transportation equipment, aircraft,
plastics, chemicals, pharmaceutical
products, iron and steel, beverages
Exports of goods and services:
$516.3 billion
Major imports: machinery and
equipment, vehicles, crude oil,
aircraft, plastics, chemicals
Imports of goods and services:
$476.3 billion
Major import trading partners:
Germany 17.0%, Belgium 9.9%,
Italy 8.9%, Netherlands 7.6%
Foreign direct investment (net):
–$26 billion
195
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Stable (moderate level)
Based on data from France’s National Institute of Statistic and
Economic Studies, the government consumed 23.3 percent
of GDP in 2001. According to the Economist Intelligence Unit,
“At the beginning of 2002 there were fewer than a dozen public enterprises still wholly owned by the state.” France maintains a “golden share” law that gives the government the right
to require investors to obtain prior authorization from the
Ministry of Economy and Finance before making an investment over a certain percentage of a firm’s capital and to prevent any sale of any asset to protect the national interest. A
ruling by the European Court of Justice may make golden
shares illegal, but the issue is unresolved. Some of the enterprises in which the state has a golden share include Air France,
France Télécom, Renault, and Thales (a defense electronics
company previously known as Thomson CSF).
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, France’s weighted average annual rate of
inflation was 1.52 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
France has no investment screening process for most sectors,
and rules for investors are straightforward. According to the
U.S. Department of State, “Notification requirements apply
to foreign investment, EU and non-EU, that affects national
defense, public safety, or public health.” The Economist Intelligence Unit reports strict foreign ownership limits in “media,
public utilities, road transport, travel agencies, and the banking and other financial services,” though exceptions are often
granted. The government maintains strict quotas for European and French programming on television and radio, and
for legal and accounting services, that limit foreign investment
in these areas. Other factors, such as an inflexible labor market and an onerous tax regime, also discourage foreign investment. According to the International Monetary Fund, both
residents and non-residents may hold foreign exchange accounts. There are no restrictions or controls on payments,
transactions, transfers, or repatriation of profits, and non-residents may purchase real estate.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
The government has enacted reforms to return all large banks to
private ownership, increase competition in the banking industry,
and open some financial services to foreign banks. The government retains a 10 percent stake in Crédit Lyonnais, which was
kept afloat in the 1990s only through massive amounts of state
assistance that represented the largest banking bailout ever undertaken in any country. The Economist Intelligence Unit reports
that foreign banks may now belong to the French stock exchange
and purchase shares in French brokerage firms. The French Bank-
196
ing Association reports that there are over 203 foreign banks operating in France. The U.S. Department of State reports that the
French government “retains ownership of the Caisse des Depots
et Consignations and minority stakes in several major financial
institutions, including Credit Lyonnais. The French postal service, La Poste, an independent public entity, offers a range of
financial service products and holds 10% of the French market.”
Overall, the government remains a significant force in France’s
banking sector.
WAGES AND PRICES
Score: 2–Better (low level of intervention)
The market freely determines prices of most goods and services.
The Economist Intelligence Unit reports that price controls remain in effect on “pharmaceuticals…certain other healthcare
products, books, tobacco, agricultural products (subject to EU
price controls), and coal and steel products (subject to European
Coal and Steel community treaty).” The government also controls prices in state monopolies, such as gas and electricity, rail
transportation, and telephone services. France has a minimum
wage that is revised annually on July 1 and also whenever the
cost of living index increases by 2 percent. Based on evidence
that price controls do not apply to a large portion of national
output, France’s wages and prices score is 1 point better this year.
PROPERTY RIGHTS
Score: 2–Stable (high level of protection)
Contractual agreements are secure in France, and both the judiciary and the civil service are highly professional. There are some
impediments to acquiring property. The constitution states that
any company defined as a national public service or natural monopoly must pass into state ownership. Both in practice and by
global standards, however, the level of property protection is high.
REGULATION
Score: 3–Stable (moderate level)
Unlike the other members of the European Union, France has
resisted pressure to deregulate its economy. Labor reforms have
been put off indefinitely because of their political unpopularity,
as have public-sector administration and pension reforms. Companies are concerned with local standards, including rigorous testing and approval procedures that must be undertaken before
goods—particularly those that entail risk—can be sold in France.
Last year, the European Commission took France to the European Court of Justice for failure to implement Directive 98/30
on gas-market liberalization by the August 10, 2000, deadline.
The French government drafted legislation but has yet to press
for its passage. The U.S. Department of State reports that “deregulation is far from complete and the state remains very involved in economic life.”
BLACK MARKET
Score: 2–Stable (low level of activity)
Transparency International’s 2001 score for France is 6.7.
Therefore, France’s black market score is 2 this year.
2003 Index of Economic Freedom
GABON
Libreville
Rank:
89
Score:
3.15
Category: Mostly Unfree
Trade Policy
Fiscal Burden
5
4.5
Government Intervention 2
Monetary Policy
1
Foreign Investment 3
Banking and Finance 3
Gabon has experienced few bouts of instability since gaining its independence from
France in 1960, despite the fact that multi-party democracy was not adopted until 1991.
The oil industry accounts for more than 40 percent of GDP as well as the majority of
government revenue and exports. The combination of ample oil reserves and a small
population has bolstered Gabon’s per capita income, which is among the highest in
sub-Saharan Africa. From 1991 to 2000, according to World Bank data, compound
growth in GDP averaged 2 percent annually but per capita GDP decreased from $4,695
to $4,378 (in constant 1995 U.S. dollars) as population growth exceeded economic growth.
Reductions in oil production are likely unless new reserves are discovered. With oil
revenues now lower, Gabon has become heavily indebted. The government has appealed for debt relief but is unlikely to qualify because per capita income exceeds the
eligibility levels established for the International Monetary Fund–World Bank Heavily
Indebted Poor Country Initiative. Timber and manganese were economic staples before the discovery of oil and may become more important as oil production declines.
The pace of privatization has been slow, with less than 10 state-owned enterprises
completely privatized since 1997, due to labor strikes and vested interests. Gabon’s
government intervention score is 1 point better this year. As a result, its overall score is
0.10 point better this year.
TRADE POLICY
Score: 5–Stable (very high level of protectionism)
Gabon is a member of the Central African Economic and Monetary Community
(CEMAC), which also includes Cameroon, Central African Republic, Chad, Republic
of Congo, and Equatorial Guinea. The U.S. Trade Representative reports that in 2000,
CEMAC applied an average common external tariff of 18.4 percent. According to the
U.S. Department of State, “There are few barriers in the crude oil sector [Gabon’s
largest economic sector]…. There have been problems relating to customs duties imposed on the import of exploration equipment, in contravention of exploration agreements, which usually provide for duties exemptions for equipment which will be reexported for use elsewhere.” The government prohibits the importation of sugar in
order to protect the Gabonese sugar monopoly.
Wages and Prices 3
Property Rights
3
Regulation
Black Market
Scores for Prior Years:
2002: 3.25
1999: 3.00
1996: 3.40
2001: 3.25
1998: 3.00
1995: 3.00
2000: 3.10
1997: 3.20
2000 Data
(in constant 1995 US dollars)
Population: 1,230,000
Total area: 267,667 sq. km
GDP: $5.4 billion
GDP growth rate: 2.0%
GDP per capita: $4,378
Major exports: petroleum,
manganese, timber
Exports of goods and services:
$2.6 billion
Major export trading partners:
US 50.2%, France 17.1%, China 7.7%,
Japan 1.3%
Major imports: machinery and
equipment, foodstuffs, chemicals,
petroleum products, construction
materials
Imports of goods and services:
$1.96 billion
Major import trading partners:
France 64.8%, US 5.1%, Belgium 4.2%
Foreign direct investment (net):
$91 million
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 4–Stable
(high tax rates)
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 4.5–Stable (very high cost of government)
Ernst & Young reports that Gabon’s top income tax rate is 55.5 percent, down from the
60.5 percent reported in the 2002 Index, and that the marginal rate for the average
taxpayer is 20 percent, up from the 15 percent reported in the 2002 Index. The corpo-
Chapter 6: The Countries
4
3
197
rate tax rate is 35 percent. In 2000, government expenditures
equaled 42.7 percent of GDP.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Better (low level)
The World Bank reports that the government consumed 10
percent of GDP in 2000, down from the 17 percent reported
in the 2002 Index. As a result, Gabon’s government intervention score is 1 point better this year. In the same year, according to the International Monetary Fund, Gabon received 21.6
percent of its total revenues from state-owned enterprises and
government ownership of property.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, Gabon’s weighted average annual rate of
inflation was 1.29 percent. Gabon’s economy has benefited
from a stable currency—a rarity in sub-Saharan Africa—as a
member of the CFA franc zone. Fourteen countries use the
CFA franc, a common currency with a fixed parity with the
euro. (The other 13 countries are Benin, Burkina Faso,
Cameroon, Central African Republic, Chad, Equatorial
Guinea, Guinea–Bissau, Ivory Coast, Mali, Niger, Republic of
Congo, Senegal, and Togo.)
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
Foreign investors face minimal restrictions in most areas, and
foreign businesses may compete with local businesses. A new
investment charter should streamline and liberalize the foreign investment climate; for example, it would grant foreign
companies with head offices in Gabon the same rights as
Gabonese companies. However, this code has not been fully
enacted, and foreign companies still do not enjoy national treatment. The government still dominates the most lucrative economic sectors, most notably oil. The International Monetary
Fund reports that residents may hold foreign exchange accounts and that non-residents may hold them if they receive
prior approval from the government. Transfers and payments,
including repatriation of profits, to countries other than
France, Monaco, members of the West African Economic and
Monetary Union, members of the CEMAC, and Comoros
must be approved by the government. Capital transactions
are subject to various requirements, controls, and official authorization.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
Gabon’s banking system is open to both foreign and domestic
competition, but the state maintains a significant role through
majority ownership in two banks and stakes in three others.
Banks with some government involvement account for more
that 85 percent of banking assets. According to the International Monetary Fund, there are six commercial banks, six
finance companies, six insurance companies, two savings
198
banks, and two securities firms. The three largest banks—
Banque Internationale pour le Commerce et l’Industrie du
Gabon, BGFIBANK, and Union Gabonaise de Banque—hold
more than 80 percent of deposits and loans. The IMF reports
that banking supervision lacks rigor and transparency, but the
banking system appears to be healthy.
WAGES AND PRICES
Score: 3–Stable (moderate level of intervention)
Some prices are set by the market and some by the government. According to the International Monetary Fund, “Price
setting is in principle free. Restrictions do exist, however, for
the following items: petroleum, school books, water and electricity, certain kinds of bread, cement, certain kinds of cooking oil, drinking water, medical glasses, surgical equipment,
local beer, sugar and public transportation.” Gabon adopted
“wage austerity recommended by the international financial
institutions” in 1994. Representatives from labor, employers,
and the government negotiated a minimum wage, which the
government then set through decree and has not changed since
1994.
PROPERTY RIGHTS
Score: 3–Stable (moderate level of protection)
Private property is moderately well-protected in Gabon. According to the U.S. Department of State, “The judiciary is
generally independent in principle” but “remains vulnerable
to government manipulation.”
REGULATION
Score: 4–Stable (high level)
Both the U.S. Department of State and the Economist Intelligence Unit report that corruption is pervasive and that complex regulations impede business. According to the U.S. Department of State, “Corruption is prevalent and is an obstacle
for…business in Gabon.” Although the government has made
efforts to reduce bureaucracy and regulation—parastatals
employ 20 percent of formal-sector workers—success has been
limited, in large part because of entrenched political interests. The Economist Intelligence Unit reports that “the commitment of the government—especially the president—to fundamental reforms remains unclear, as shown by the slow
progress it has made in the privatization program and in tackling corruption.”
BLACK MARKET
Score: 3–Stable (moderate level of activity)
According to the Economist Intelligence Unit, the “expanding informal sector, which produces cheap, albeit low-quality,
goods and distributes smuggled goods in major urban areas,”
provides a great deal of competition for the formal economy.
2003 Index of Economic Freedom
Banjul
THE GAMBIA
Rank:
99
Score:
3.30
Category: Mostly Unfree
Trade Policy
Fiscal Burden
4
3
Government Intervention 3
Monetary Policy
2
Foreign Investment 3
Banking and Finance 3
Five years after gaining its independence from the United Kingdom in 1965, The
Gambia established a multi-party republic that lasted until 1994, when a military
coup placed then-Lieutenant Yahyah Jammeh in power. In 2001, President Jammeh
was returned to office in an election characterized by intimidation of the opposition parties. In 1999, the Gambian attorney general released a report alleging some
600 cases of financial mismanagement. Corruption remains an ongoing problem,
leading donors to demand greater accountability and transparency in government
budgeting and expenditures. Over 75 percent of the population is engaged in farming for subsistence or export. The primary crops are maize, millet, sorghum, and
groundnuts (peanuts), the country’s main export crop. The leading industries are
tourism, trade, and fishing. The pace of privatization has been noticeably slow;
the last successful privatization, according to the Economist Intelligence Unit, was
the sale of the Atlantic hotel to the Libyan company Lafico in November 1999.
Economic growth has been disappointing, largely because of the private sector’s
inability to operate freely. From 1991 to 2000, according to World Bank data, compound growth in GDP averaged 3.5 percent annually and per capita GDP increased
slightly from $367 to $370 (in constant 1995 U.S. dollars). The Gambia hopes that
debt relief under the International Monetary Fund–World Bank Heavily Indebted
Poor Country Initiative will alleviate a large debt burden that is a constant drain on
government resources. The Gambia’s trade policy and monetary policy scores are
both 1 point worse this year. As a result, its overall score is 0.20 point worse this
year.
TRADE POLICY
Score: 4–Worse (high level of protectionism)
Based on data from the International Monetary Fund, The Gambia’s average tariff
rate was 14.8 percent in 2000 (based on import duties as a percentage of total
imports), up from the 9.7 percent reported in the 2002 Index. As a result, The
Gambia’s trade policy score is 1 point worse this year. There are no reports of nontariff barriers.
Wages and Prices 3
Property Rights
3
Regulation
Black Market
Scores for Prior Years:
2002: 3.10
1999: 3.30
1996: n/a
2001: 3.35
1998: 3.50
1995: n/a
2000: 3.40
1997: 3.40
2000 Data
(in constant 1995 US dollars)
Population: 1,303,000
Total area: 11,300 sq. km
GDP: $482 million
GDP growth rate: 5.6%
GDP per capita: $370
Major exports: peanuts, fish, palm
kernels
Exports of goods and services:
$231 million
Major export trading partners:
Belgium–Luxembourg 25.6%,
Japan 14.9%, UK 14.1%, Brazil 7.1%
Major imports: foodstuffs,
manufactures, fuel, machinery and
transport equipment
Imports of goods and services:
$294 million
Major import trading partners:
China 17.9%, UK 10.4%,
Netherlands 8.5%, France 6.4%,
Brazil 6.1%
Foreign direct investment (net):
$13 million
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 2.5–Stable
(moderate tax rates)
Score—Government Expenditures: 3–Stable
(moderate level of government expenditures)
Final Score: 3—Stable (moderate cost of government)
According to the Embassy of The Gambia, the top income tax rate is 35 percent;
the marginal tax rate for the average taxpayer is 0 percent. The top corporate tax
rate is 35 percent. The African Development Bank reports that in 2000, government expenditures equaled 22.1 percent of GDP.
Chapter 6: The Countries
4
5
199
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Stable (moderate level)
In 2000, according to the World Bank, the government consumed
13 percent of GDP. The public sector is large. The Economist
Intelligence Unit reports that some of the major parastatals include “the Gambia Ports Authority, Nawec, the Gambia Civil
Aviation Authority, the Social Security and Housing Finance Corporation, the Gambia Public Transport Corporation…Gambia
Telecommunications (Gamtel)…National Printing and Stationery
Corporation (NPSC)…and the Maintenance Services Agency
(MSA).”
MONETARY POLICY
Score: 2–Worse (low level of inflation)
From 1992 to 2001, The Gambia’s weighted average annual rate
of inflation was 3.34 percent, up from the 1.69 percent from 1991
to 2000 reported in the 2002 Index. As a result, The Gambia’s
monetary policy score is 1 point worse this year.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
The Gambia grants equal treatment to domestic and foreign firms
and actively seeks foreign investment. The government must
approve all investments, which it does on a case-by-case basis.
There is repatriation of profits, foreign investors are allowed to
invest without a local partner, and the tax system does not discriminate between foreign and domestic companies. Other factors, such as political instability, serve as practical impediments
to foreign investment. The International Monetary Fund reports
that neither residents nor non-residents may hold foreign exchange
accounts. There are no restrictions on payments and transfers.
Some capital transactions are controlled.
BANKING AND FINANCE
still influences prices through its state-owned companies, particularly in the full production of groundnuts. Since groundnut production is The Gambia’s major agricultural activity, price setting
in this sector significantly affects the economy. Minimum wages
are set through six tripartite councils (government, labor, and
employers) that govern commerce, artisans, transport, port operations, agriculture, and fisheries.
PROPERTY RIGHTS
Score: 3–Stable (moderate level of protection)
According to the U.S. Department of State, “The Constitution
provides for an independent judiciary; however, the judiciary reportedly is subject at times to executive branch pressure, especially at lower levels, although the courts have demonstrated their
independence on occasion.”
REGULATION
Score: 4–Stable (high level)
Establishing a business in The Gambia can be difficult because of
bureaucratic inefficiency, lack of transparency, and what the
Economist Intelligence Unit characterizes as “institutional corruption.” As reported in The Gambia Daily, the bureaucratic chaos
“discouraged most investors in The Gambia because of too much
bureaucracy by senior public officers through backdoor arrangements.” Political uncertainty has added to the problem.
BLACK MARKET
Score: 5–Stable (very high level of activity)
The Gambia’s black market is large. Most of this activity occurs
in smuggled consumer goods, labor, and pirated intellectual property. Smuggling of gasoline is reportedly pervasive. According to
the Economist Intelligence Unit, “Most regional trading activity
takes place in the informal economy, which raises doubt as to the
validity of any official figures on The Gambia’s trade patterns.”
Score: 3–Stable (moderate level of restrictions)
The banking system, while underdeveloped, is growing. The
government sold a majority of its share in the Trust Bank to private investors: 30 percent to the Gambian-based investment firm
Data Bank, 25 percent to the Social Security and Housing Finance Corporation of The Gambia, 10 percent to the Gambian
Company Boule & Company, 8 percent to bank employees, and
2 percent to Great Alliance Insurance, with 10 percent reserved
for “strategic investors.” According to the Economist Intelligence
Unit, “The Gambia Commercial and Development Bank was
wholly owned by the government but has now been sold to private interests, and the other commercial bank, the International
Bank for Commerce and Industry, is also privately owned. A new
development bank, the Arab Gambian Islamic Bank, opened in
Banjul in January 1998.”
WAGES AND PRICES
Score: 3–Stable (moderate level of intervention)
The market sets some prices. The World Bank reports that “there
are no price controls in rice [the major import]. The Gambia has
removed almost all price controls.” However, the government
200
2003 Index of Economic Freedom
GEORGIA
Tbilisi
Trade Policy
Fiscal Burden
4
2
Government Intervention 2
Monetary Policy
4
Rank:
113
Score:
3.40
Category: Mostly Unfree
Foreign Investment 3
Banking and Finance 3
Georgia’s overall economic performance has improved. Construction of the Baku–Tbilisi–
Ceyhan pipeline, which will connect Azerbaijan, Georgia, and Turkey, is expected to
begin in 2002 and could improve regional cooperation as well as development in certain
sectors. Approximately 80 percent of Georgia’s large and medium-sized enterprises have
been privatized, although the state-run energy sector remains unreformed. Georgia has
adopted a modern commercial code and several other market-oriented laws. According
to the U.S. Department of State, “Georgia professes to have some of the most progressive
business legislation in the former Soviet Union, although there is often a disparity between the passage of legislation and implementation of the laws.” Georgia joined the
World Trade Organization in June 2000, and the United States extended permanent normal trade relations (PNTR) in December 2000. However, economic development is hampered by corruption and a large shadow economy. According to a European Bank for
Reconstruction and Development survey, Georgian businesses pay the highest proportion of bribes in the region. In addition, tax collection is extremely inefficient. Georgia’s
trade policy score is 2 points worse this year, and its monetary policy score is 1 point
worse; however, its government intervention, banking and finance, and wages and prices
scores are all 1 point better. As a result, Georgia’s overall score is unchanged this year.
TRADE POLICY
Score: 4–Worse (high level of protectionism)
According to the World Bank, Georgia’s weighted average tariff rate in 1999 (the most
recent year for which World Bank data are available) was 10.1 percent, up from the 2.85
percent (based on import duties as a percentage of total imports) reported in the 2002
Index. In 2000, the Financial Times cited customs corruption as an obstacle to imports.
According to the U.S. Department of State, “Imported goods are also subject to…an
excise tax from 5–100 percent for certain goods including alcoholic drinks, ethyl alcohol,
jewelry, ethyl petrol for cars, cigarettes, tires for cars, and caviar…. The Customs Service
is authorized to impose special and seasonal taxes on certain imports for a period not to
exceed six months.” Based on the availability of more precise tariff data, Georgia’s trade
policy score is 2 points worse this year.
FISCAL BURDEN OF GOVERNMENT
Wages and Prices 3
Property Rights
4
Regulation
Black Market
Scores for Prior Years:
2002: 3.40
1999: 3.65
1996: 3.95
2001: 3.55
1998: 3.65
1995: n/a
2000: 3.65
1997: 3.85
2000 Data
(in constant 1995 US dollars)
Population: 5,270,000
Total area: 69,700 sq. km
GDP: $2.5 billion
GDP growth rate: 1.9%
GDP per capita: $499
Major exports: metals, aluminum,
ferro alloys, textiles, citrus fruits, tea,
wine, chemicals, fuel re-exports
Exports of goods and services:
$1 billion
Major export trading partners:
Turkey 22.7%, Russia 21.1%,
Germany 10.4%, Azerbaijan 6.4%
Major imports: fuel, grain and other
foods, machinery and parts,
transport equipment
Imports of goods and services:
$1.4 billion
Major import trading partners:
Turkey 16.0%, Russia 14.1%,
Azerbaijan 8.5%, Germany 7.7%,
US 5.5%
Foreign direct investment (net):
$139 million
Score—Income and Corporate Taxation: 2–Stable
(low tax rates)
Score—Government Expenditures: 2–Stable
(low level of government expenditure)
Final Score: 2–Stable (low cost of government)
Georgia’s top income tax rate is 20 percent; the marginal rate for the average taxpayer is
20 percent. The top corporate tax rate is 20 percent. In 2000, government expenditures
equaled 19.4 percent of GDP. Georgia is overhauling and simplifying its tax code, but
details were not available by the June 30, 2002, closing date for inclusion in the 2003 Index.
Chapter 6: The Countries
4
5
201
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Better (low level)
The World Bank reports that the government consumed 12.5
percent of GDP in 2000. In the same year, according to the International Monetary Fund, Georgia received 0.38 percent of its
total revenues from state-owned enterprises and government
ownership of property, down from the 11.33 percent reported in
the 2002 Index. As a result, Georgia’s government intervention
score is 1 point better this year.
MONETARY POLICY
Score: 4–Worse (high level of inflation)
Data from the International Monetary Fund’s 2002 World Economic Outlook indicate that from 1992 to 2001, Georgia’s weighted
average annual rate of inflation was 15.88 percent, up from the
10.51 percent from 1993 to 2000 reported in the 2002 Index. As a
result, Georgia’s monetary policy score is 1 point worse this year.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
Georgia places few official restrictions on investment, and foreigners receive equal treatment under the law. According to the
U.S. Department of State, “The formal legislative
framework…conforms to internationally accepted norms and
principles…and aims to establish favorable conditions—but not
preferential treatment—for foreign investors.” Most sectors of
the economy are open to foreign investment, although exceptions exist for some infrastructure projects and agricultural land.
The Economist Intelligence Unit reports that, “regional pipelines
aside, Georgia offers foreign firms a mix of increasing political
fragility, macroeconomic worries, rampant corruption and kidnapping…. Foreign investors must also deal with a lack of adequate legal protection, arbitrary enforcement of laws and regulations, and pervasive corruption.” The International Monetary
Fund reports that residents may hold foreign exchange accounts,
but non-residents may not. There are limits and bona fide tests
for all payments and current transfers. Capital transactions are
not restricted but must be registered with the government.
BANKING AND FINANCE
Score: 3–Better (moderate level of restrictions)
The state has largely divested itself of banks, and two formerly
state-owned banks are among the largest banks in the country,
according to the International Monetary Fund. “Reform of the
banking sector began in earnest in mid-1995,” reports the Economist Intelligence Unit, “with the National Bank of Georgia (NBG,
the central bank) assuming a supervisory role. The NBG instituted bank consolidation and reform, imposing increasingly stringent reporting requirements.” Despite these reforms, the banking sector remains weak and focused on short-term lending rather
than long-term finance. Interaction between foreign and domestic banks is common, and 22 banks have been created with foreign capital, according to the U.S. Department of State. The IMF
reports that foreign investors have majority ownership of seven
banks comprising over 10 percent of total banking assets. Based
202
on the divestiture of state-owned banks and the increasing foreign presence in the banking sector, Georgia’s banking and finance score is 1 point better this year.
WAGES AND PRICES
Score: 3–Better (moderate level of intervention)
According to the U.S. Department of State, “State price controls
are being phased out. Georgia has already liberated most prices
and is gradually raising regulated prices, such as utility tariffs, to
market levels.” Georgia has a minimum wage for state workers
but not for the private sector. Based on progress in phasing out
price controls, Georgia’s wages and prices score is 1 point better
this year.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
“The Constitution provides for an independent judiciary,” reports
the U.S. Department of State, “but in practice the judiciary often
does not exercise full independence.” Although the government
has made substantial improvement in the efficiency and fairness
of the courts, corruption is still a problem. According to the same
source, “In adjudicating [business] disputes, the performance of
the Georgian court system has been mixed. While the judicial
objectivity of the Supreme and Constitutional Court is dependable, the ability of the lower courts to adjudicate without interference has not been well established. Both foreign and Georgian
investors have expressed a lack of confidence in the competence,
independence, and impartiality of lower court decisions, in addition to the ever present concerns about their ability to be corrupted.”
REGULATION
Score: 4–Stable (high level)
Establishing a business can be difficult despite government efforts to foster a market economy. According to the U.S. Department of State, “Much of the legal framework governing commercial activities in Georgia has been enacted only very recently.
Many of the laws were drafted with the assistance of technical
advisors from the United States and Western Europe and are supportive of a liberal investment regime…. However, the true test
of Georgia’s commitment to openness, transparency and the
equitable treatment of foreign investors will be the implementation and enforcement of these laws.”
BLACK MARKET
Score: 5–Stable (very high level of activity)
Black market activity includes trade in consumer goods such as
flour, sugar, and cigarettes, as well as the sale of pirated computer software, compact discs, and videos, against which there is
no effective enforcement. Agence France-Presse reports that “the
shadow economy represents 53.2 percent of the country’s GDP.”
2003 Index of Economic Freedom
GERMANY
Berlin
Trade Policy
Fiscal Burden
2
4.5
Government Intervention 2
Monetary Policy
1
Foreign Investment 1
Banking and Finance 3
While Germany accounts for over one-third of total output within the euro zone, it is beset
by economic malaise. In the 10 years ending in 2001, annual GDP growth averaged just 1.5
percent; in 2001, unemployment, with approximately 4 million Germans out of work, stood
at 9.6 percent. Germany’s economic problems cannot be explained primarily by the global
economic slowdown, as Germany has been affected far more than its Western European
peers; rather, the answer lies in the country’s structural problems. Industrial labor costs are
still among the world’s highest at an average of $28 an hour per worker—one-third higher
than the comparable American figure. Given the tangle of regulations, complex taxes, and
high social security costs, companies are reluctant to hire workers during an upswing, as
they find it very hard to lay off workers during a downswing. In addition, under Chancellor
Gerhard Schroeder’s government, labor market rigidities have been made worse. Small
firms face tighter restrictions on dismissing workers, rules regarding part-time work have
been made stricter, and the role of workers’ councils in the management of companies has
increased. German companies are among the world’s most advanced but increasingly look
abroad to retain their competitive advantage, leaving unemployment persistently high. Some
things, however, have improved. The government recently completed a significant overhaul
of the tax system that opens the way for German corporations, particularly banks and
insurance companies, to sell the extensive tax-free cross-holdings that have hindered open
competition and the development of a shareholder culture. Taxes on corporate profits, as
of January 2002, were 26.37 percent, while the top personal income tax rate fell from 53
percent to 48.5 percent and is scheduled to fall to 42 percent by 2005. However, the heavy
burden of reunification remains an enduring drag on the country as a whole. Since 1997,
despite subsidies from Western Germany to the East amounting to 4.5 percent of Western
GDP per annum, Eastern Germany has been slipping ever further behind the West.
TRADE POLICY
Score: 2–Stable (low level of protectionism)
As a member of the European Union, Germany has a weighted average tariff of 1.8 percent. Germany’s participation in the Common Agricultural Policy (CAP), a program that
heavily subsidizes agricultural goods, acts as a non-tariff barrier.
FISCAL BURDEN OF GOVERNMENT
Rank:
Score:
Category:
19
2.10
Mostly Free
Wages and Prices 2
Property Rights
1
Regulation
3.5
Black Market 1.5
Scores for Prior Years:
2002: 2.10
1999: 2.20
1996: 2.20
2001: 2.10
1998: 2.30
1995: 2.10
2000: 2.20
1997: 2.20
2001 Data
(in constant 1995 US dollars)
Population: 82,403,000
Total area: 357,021 sq. km
GDP: $2.7 trillion
GDP growth rate: 0.6%
GDP per capita: $32,765
Major exports: machinery, vehicles,
chemicals, metals and manufactures,
scientific instruments, foodstuffs,
textiles
Exports of goods and services:
$937.8 billion
Major export trading partners:
France 11.1%, US 10.6%, UK 8.4%,
Italy 7.5%, Netherlands 6.2%
Major imports: machinery, vehicles
and parts, chemicals, food and
beverages, metals
Imports of goods and services:
$848 billion
Major import trading partners:
France 9.5%, US 8.4%, UK 7.0%,
Netherlands 6.2%, Italy 6.0%
Foreign direct investment (net):
–$19 billion
Score—Income and Corporate Taxation: 4–Stable
(high tax rates)
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 4.5–Stable (very high cost of government)
Germany is cutting taxes. The top income tax rate is 48.5 percent and is scheduled to be
reduced to 42 percent by 2005; the marginal rate for the average taxpayer is 35 percent. The
top corporate tax rate is 25 percent, but an additional 5.5 percent solidarity tax raises this rate
to 26.37 percent. In 2001, government expenditures equaled 45.9 percent of GDP.
Chapter 6: The Countries
203
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Stable (low level)
Data from the Economist Intelligence Unit indicate that the government consumed 19.4 percent of GDP in 2001. In 2000, based on data
from Eurostat, Germany received 1.84 percent of its total revenues
from state-owned enterprises and government ownership of property.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, Germany’s weighted average annual rate of inflation was 2.13 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 1–Stable (very low barriers)
Germany welcomes foreign investment and imposes no permanent
currency or administrative controls on foreign investments. Some
businesses require licenses, including certain financial institutions and
passenger transport businesses, and there are prudential and currency-matching regulatory provisions for life insurance and pension
funds. Otherwise, foreign and domestic investors receive equal treatment and must face the same regulatory hurdles in establishing a
business. There are no restrictions or barriers with respect to capital
transactions or current transfers, repatriation of profits, or access to
foreign exchange.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
Germany’s banking system is sound and well-regulated, but it also is
dominated by public-sector financial institutions. According to the
U.S. Department of State, “Private banks control roughly 30 percent
of the market, while publicly-owned savings banks controlled by
state and local governments account for 50 percent of banking turnover, and cooperative banks make up the balance.” Germany’s
Landesbanken, which are owned primarily by state governments
and local savings banks associations, play a significant role in the
banking industry and local investment projects. The combination of
increased competition resulting from the opening of European Union
markets and unwise speculative financing has put some German
banks at risk. For example, the Economist Intelligence Unit reports
that “disclosure in May 2001 that Bankgesellschaft Berlin, the country’s
11th largest bank, had incurred massive losses and was only surviving through aid from the Berlin state, which owns 57 percent of the
bank.” Banks may engage in a wide array of services, including securities trading.
for public utilities and insurance premiums).” Germany does not
maintain an official minimum wage; the U.S. Department of State
reports that “wages and salaries are set either by collective bargaining agreements between unions and employer federations or by individual contracts. Covering approximately 90 percent of all wage
and salary earners, the collective bargaining agreements set minimum pay rates and are enforceable by law.”
PROPERTY RIGHTS
Score: 1–Stable (very high level of protection)
Property is well-protected in Germany. The judiciary is both independent and efficient. The Economist Intelligence Unit reports that
“contractual agreements are secure in Germany, and both the judiciary and the civil service are highly professional. The courts are
decentralized, reflecting the country’s federal system, with separate
supreme courts to deal with cases on commercial, tax, labour and
constitutional issues.”
REGULATION
Score: 3–Stable (moderate level)
Businesses in Germany must contend with a vast and confusing web
of regulations that hinder free enterprise. According to the U.S. Department of State, “Many new investors consider bureaucracy excessive…. The German government recognizes that certain aspects
of German tax, labor, health, environmental and safety regulations
are overly burdensome and impede new investment.” German wages
and fringe benefits are among the highest in the world. The U.S.
Department of State reports that “Legislation designed to protect
workers limits the ability of employers to adapt to dynamic market
conditions.” In an effort to simplify the bureaucracy, on May 2, 2002,
the government created a new super-regulator—the Federal Agency
for Financial Services Supervision—that will replace three separate
agencies. According to The Wall Street Journal, “the change is meant
to cut costs and increase efficiency….” Banks, which used to submit
the same paperwork to three different agencies, will now be able to
submit it to just one. Corruption is minimal, although Transparency
International reports that “the construction sector, the privatization
of former East German enterprises, and the awarding of public contracts represent areas of some continued concern.”
BLACK MARKET
Score: 1.5–Stable (low level of activity)
Transparency International’s 2001 score for Germany is 7.4.
Therefore, Germany’s black market score is 1.5 this year.
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
The market sets most prices. According to the Economist Intelligence Unit, “No general price controls exist in Germany, though the
Bundeskartellamt (Federal Cartel Office) watches for price increases
that apparently stem from an abuse of dominant market positions….
[D]irect price controls include maximum prices (for example, on rent),
minimum prices (mainly for agricultural products, in accordance
with EU regulations) and price-calculation ordinances (for example
204
2003 Index of Economic Freedom
GHANA
Rank:
113
Score:
3.40
Category: Mostly Unfree
Accra
Trade Policy
Fiscal Burden
4
3.5
Government Intervention 3
Monetary Policy
5
Foreign Investment 3
Banking and Finance 3
Ghana possessed the region’s highest per capita income when it became independent in 1957; but military dictatorship and repressive economic policies squandered this relative wealth, and Ghana’s per capita income remains below its 1960
level of $459 (in constant 1995 U.S. dollars). President John Agyekum Kufuor has
pursued economic liberalization far more diligently than former President Jerry
Rawlings. From 1991 to 2000, according to World Bank data, annual compound
growth in GDP averaged 4.2 percent and per capita GDP increased from $352 to
$413 (in constant 1995 U.S. dollars). Agriculture accounts for 36 percent of Ghana’s
GDP. The government remains the country’s largest formal source of jobs, many
of which are often superfluous according to The Economist. Economic progress
includes the privatization of more than 230 state-owned enterprises over the past
decade and significant growth in non-traditional exports like tuna and flowers.
Several tough reforms are still needed; the government must reduce its bloated
bureaucracy, increase transparency, and demand accountability. President Kufuor,
however, has made progress; the Economist Intelligence Unit reports that government expenditures declined along with inflation and interest rates in 2001, and the
sentencing of former Deputy Minister of Finance Victor Selormey for corruption
is a positive sign. Bilateral and multilateral debt relief should aid efforts to cut
government expenditures. Ghana’s wages and prices score is 1 point worse this
year, but its regulation score is 1 point better. As a result, Ghana’s overall score is
unchanged this year.
TRADE POLICY
Score: 4–Stable (high level of protectionism)
According to the World Bank, Ghana’s weighted average tariff rate in 1993 (the
most recent year for which World Bank data are available) was 11.2 percent. The
U.S. Trade Representative reports that “additional excise tax levels ranging between
5 and 140 percent are applied for tobacco products, beer, water and malt milk.” In
2000, the government introduced a special tax of 20 percent to address a severe
trade imbalance; in March 2001, it reduced the temporary tax on special imports
from 20 percent to 10 percent.
Wages and Prices 3
Property Rights
3
Regulation
3.0
Black Market 3.5
Scores for Prior Years:
2002: 3.40
1999: 3.10
1996: 3.40
2001: 3.10
1998: 3.20
1995: 3.30
2000: 3.10
1997: 3.40
2000 Data
(in constant 1995 US dollars)
Population: 19,306,000
Total area: 238,540 sq. km
GDP: $7.9 billion
GDP growth rate: 3.7%
GDP per capita: $413
Major exports: gold, cocoa, timber,
tuna, bauxite, aluminum, manganese
ore, diamonds
Exports of goods and services:
$2.8 billion
Major export trading partners:
Togo 14.9%, Netherlands 13.2%,
US 10.8%, UK 7.3%, Germany 5.9%
Major imports: capital equipment,
petroleum, foodstuffs
Imports of goods and services:
$3.8 billion
Major import trading partners:
Nigeria 20.2%, Italy 12.2%, UK 9.4%,
US 6.9%
Foreign direct investment (net):
$53 million
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3–Worse
(moderate tax rates)
Score—Government Expenditures: 4–Stable
(high level of government expenditure)
Final Score: 3.5–Stable (high cost of government)
Ghana’s top income tax rate is 35 percent; the marginal rate for the average taxpayer is 5 percent. Following a 2000 tax reform, Ghana’s top corporate tax rate is
32.5 percent, down from the 35 percent reported in the 2002 Index. In 2000, accord-
Chapter 6: The Countries
205
ing to the African Development Bank, government expenditures equaled 27.7 percent of GDP. Based on a clarification in
methodology, Ghana’s income and corporate taxation score
is 0.5 point worse this year; however, this is not sufficient to
affect its overall fiscal burden of government score, which is
unchanged.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Stable (moderate level)
The World Bank reports that the government consumed 15.3
percent of GDP in 2000. According to the U.S. Department of
State, “Ghana has divested all or part of its holdings in nearly
two-thirds of all state-owned enterprises (SOEs). The government has retained a minority stake in many divested enterprises [and has] reconstituted the Divestiture Implementation
Committee (which will continue to coordinate future divestitures), and is taking tentative steps toward privatizing most
of the remaining SOEs, including the oil refinery, power and
water utilities, ports and railways, and civil aviation establishments.”
MONETARY POLICY
Score: 5–Stable (very high level of inflation)
From 1992 to 2001, Ghana’s weighted average annual rate of
inflation was 28.82 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
Ghana encourages foreign investment. The foreign investment
code eliminates screening of foreign investment, guarantees
capital repatriation, and provides equal treatment with respect
to taxes, imports, and access to foreign exchange. The only
remaining precondition for foreign investment is a minimum
capital requirement. The areas restricted to native Ghanaians
are petty trading, taxi services, gambling and lotteries, beauty
salons, and barbershops. While largely open to foreigners,
privatization has been slow, and the process has been cited for
lack of transparency. The International Monetary Fund reports that residents may hold foreign exchange accounts but
must receive permission to hold them abroad. Non-residents
may hold foreign exchange accounts but must get permission
from the government. Payments and transfers face few restrictions. Most capital transactions must be approved by the
Bank of Ghana.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
The financial sector, though small, has become increasingly
competitive since liberalization was initiated in 1992. According to the U.S. Department of State, “Ghana’s formal banking
sector comprises the central bank—the Bank of Ghana—nine
(9) commercial banks, three (3) development banks, five (5)
merchant banks and over one hundred rural unit banks. Until
recently the sector was dominated by state-owned institutions
and showed few signs of competition. Within the last three
206
years, however, two state-owned banks have been privatized
under the government’s Divestiture Implementation Program,
and others were recently advertised for divestiture.” Two stateowned companies dominate the insurance sector, but the number of companies in competition has risen to 19, and the stateowned State Insurance Company is slated for privatization.
Private insurance companies must be at least 40 percent Ghanaian-owned.
WAGES AND PRICES
Score: 3–Worse (moderate level of intervention)
The market sets most wages and prices, but the government
influences the prices of fuel and utilities, maintains some food
subsidies, manipulates prices through remaining government
enterprises, and influences prices in the cocoa sector (cocoa is
Ghana’s major export). Ghana maintains a minimum wage
that is set by a tripartite commission composed of representatives of government, labor, and employers. Based on the
combination of price controls on energy and continuing government influence over prices of the country’s major agricultural crop and export, Ghana’s wages and prices score is 1
point worse this year.
PROPERTY RIGHTS
Score: 3–Stable (moderate level of protection)
Ghana’s judicial system suffers from political influence and
inadequate resources. According to the U.S. Department of
State, “the government respects constitutional provisions for
an independent judiciary; however, in practice the judiciary is
subject to influence and corruption…. The integrity of the
legal system is compromised by a severe lack of financial,
human and material resources.” Intervention is less prominent in commercial matters.
REGULATION
Score: 3–Better (moderate level)
Regulations in Ghana are moderately burdensome. According to the U.S. Department of State, “The Ghana Investment
Promotion Center has established a one-stop shop to eliminate the bureaucratic bottlenecks for investors.” However,
reports the U.S. Trade Representative, “the residual effects of
a highly regulated economy and periodic lack of transparency
in government operations create an element of risk for potential investors. Bureaucratic inertia is sometimes a
problem…and administrative approvals often take longer than
they should.” The U.S. Department of State notes that “while
corruption exists in Ghana, it is somewhat less prevalent than
in many other countries in the region.” Based on increasing
evidence of an improved regulatory environment, Ghana’s
regulation score is 1 point better this year.
BLACK MARKET
Score: 3.5–Stable (high level of activity)
Transparency International’s 2001 score for Ghana is 3.4.
Therefore, Ghana’s black market score is 3.5 this year.
2003 Index of Economic Freedom
GREECE
Athens
Trade Policy
Fiscal Burden
2
4
Government Intervention 2
Monetary Policy
2
Foreign Investment 3
Banking and Finance 3
Since joining the European Union in 1981, Greece has worked to bring its economy
into line with the economies of other members, and the momentum for free-market reform increased with Costas Simitis’s rise to the premiership as the new leader
of Andreas Papandreou’s Panhellenic Socialist Movement (PASOK). Simitis comes
from PASOK’s economic reform wing and was able to steer Greece into the EU’s
single currency as of January 1, 2001. In doing so, the Simitis government successfully reorganized the tax collection system, which led to a surge in government
revenue. This enabled Greece to adopt the euro—a major goal of the present government. During 2001, growth in GDP registered 4.1 percent, but unemployment
remained high at just below 11 percent. Regrettably, the Simitis government’s reformist fervor seems to have run its course. The government has been unable to
find a buyer for Olympic Airways; and even though the Greek pay-as-you-go pension system is set to collapse in around five years if nothing is done, a badly needed
reform program that would have raised the standard retirement age from 55 to 65
was halted in April and May 2001 when two massive general strikes and a backbench
PASOK revolt signaled the public’s opposition to the reforms, which are now being
watered down.
TRADE POLICY
Score: 2–Stable (low level of protectionism)
Because Greece is a member of the European Union, its trade policy is the same as
the policies of other EU members. Imports are subject to the common EU weighted
average external tariff of 1.8 percent. Greece’s participation in the Common Agricultural Policy (CAP), a program that heavily subsidizes agricultural goods, acts as
a non-tariff barrier.
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3.5–Better
(high tax rates)
Score—Government Expenditures: 4–Stable
(high level of government expenditure)
Final Score: 4–Stable (high cost of government)
The government of Greece reduced taxes through a law introduced in December
2000. Greece’s top income tax rate is 40 percent, down from the 45 percent reported in the 2002 Index; the marginal rate for the average taxpayer is 15 percent.
The top corporate tax rate is 35 percent, down from the 40 percent reported in the
2002 Index. In 2001, government expenditures equaled 41.5 percent of GDP. Based
on the lower corporate tax rate, Greece’s income and corporate taxation score is
0.5 point better this year; however, this is not sufficient to affect Greece’s overall
fiscal burden of government score, which is unchanged.
Chapter 6: The Countries
Rank:
Score:
Category:
56
2.80
Mostly Free
Wages and Prices 3
Property Rights
3
Regulation
Black Market
3
3
Scores for Prior Years:
2002: 2.80
1999: 2.85
1996: 2.90
2001: 2.70
1998: 2.85
1995: 3.00
2000: 2.75
1997: 2.80
2001 Data
(in constant 1995 US dollars)
Population: 10,939,771
Total area: 131,940 sq. km
GDP: $144 billion
GDP growth rate: 4.1%
GDP per capita: $13,163
Major exports: manufactured
goods, food and beverages,
petroleum products
Exports of goods and services:
$28.5 billion
Major export trading partners:
Germany 12.3%, Italy 9.2%, UK 6.4%,
US 5.5%
Major imports: manufactured
goods, foodstuffs, fuels, chemicals
Imports of goods and services:
$39.4 billion
Major import trading partners:
Italy 13.5%, Germany 13.4%, France
7.1%, Netherlands 6.2%
Foreign direct investment (net):
$897 million
207
GOVERNMENT INTERVENTION IN THE ECONOMY
WAGES AND PRICES
Score: 2–Stable (low level)
The Economist Intelligence Unit reports that the government
consumed 14.9 percent of GDP in 2000. In 1999, based on
data from the International Monetary Fund, Greece received
3.78 percent of its total revenues from state-owned enterprises
and government ownership of property.
Score: 3–Stable (moderate level of intervention)
According to the U.S. Department of State, “The only remaining price controls are on pharmaceuticals. The government
can also set maximum prices for fuel and private school tuition fees, and has done so several times in the last several
years. About one quarter of the goods and services included
in the Consumer Price Index (CPI) are produced by state-controlled companies. As a result, the government retains considerable indirect control over pricing.” The Economist Intelligence Unit reports that the government sets fares for air
travel, urban transport, inter-urban railways, and ferry transport. Collective bargaining between the General Confederation of Greek Workers and the Employers Association sets a
nationwide minimum wage that is ratified by the Ministry of
Labor and enforced under the law.
MONETARY POLICY
Score: 2–Stable (low level of inflation)
From 1992 to 2001, Greece’s weighted average annual rate of
inflation was 3.36 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
Officially, Greece welcomes foreign investment and reviews
proposals only to decide whether they qualify for government
incentives. The government restricts both foreign and domestic
investment in utilities but has recently begun to liberalize telecommunications and energy. For national security reasons,
foreigners are subject to limitations on the buying of real estate along the country’s borders and on some islands. Foreign
ownership in maritime businesses, broadcasting, mining, and
air transport is also restricted. Investment in most other areas
is unrestricted, and foreign investors receive national treatment. However, the Economist Intelligence Unit reports that
“prospective foreign investors find the Greek bureaucracy
obstructive. Language barriers and poor organisation are
major impediments at the initial investment stages. Moreover,
many decisions are delayed because individuals in the bureaucracy are wary of accountability and unnecessarily refer decisions to higher authorities. The government recognizes this
and has created the Hellenic Centre for Investments (ELKE).”
According to the International Monetary Fund, both residents
and non-residents may hold foreign exchange accounts. There
are no restrictions or controls on payments, transactions, transfers, or repatriation of profits, except for an import license
requirement on goods from certain low-cost countries.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
As a condition of membership in the European Union, the
government has liberalized the banking system considerably,
initiating changes that facilitate foreign competition and have
led to the sale of five public-sector banks. Two of Greece’s
five significant banks—the National Bank of Greece and Commercial Bank of Greece—remain indirectly controlled by the
state. The government has considered plans to privatize these
two commercial banking groups, at least in part, but progress
has been halting. The Economist Intelligence Unit reports that
the number of commercial banks has been reduced significantly through a number of mergers and acquisitions. According to the U.S. Department of State, there were 33 commercial banks in 2001, of which 19 were foreign banks.
208
PROPERTY RIGHTS
Score: 3–Stable (moderate level of protection)
Expropriation of property is unlikely in Greece. The court
system is a highly time-consuming means for enforcing property and contractual rights. According to the U.S. Department
of State, “the courts have a heavy backlog of cases and rigid
procedures lead to long delays; cases are frequently abandoned
because of the statute of limitations.” In addition, “Foreign
companies report their experience that Greek courts do not
always provide unbiased and effective recourse.”
REGULATION
Score: 3–Stable (moderate level)
The Greek government is very bureaucratic, and regulations,
because of their complexity and uneven application by civil
servants, are not transparent. The Economist Intelligence Unit
reports that “investors find the Greek bureaucracy obstructive…. [P]oor organisation [is one of the] major impediments
at the initial investment stages…. [M]any decisions are delayed
because individuals in the bureaucracy are wary of accountability and unnecessarily refer decisions to higher authorities.”
The government has created the Hellenic Centre for Investments to answer investors’ concerns, but investors still find
the bureaucracy burdensome. According to the U.S. Department of State, “Foreign companies consider the complexity
of government regulations to be the greatest impediment to
operating in Greece.” The Economist Intelligence Unit reports
that the “labor market reforms approved…at the beginning
of 2001…have failed to tackle the rigidities of Greece’s labor
market.”
BLACK MARKET
Score: 3–Stable (moderate level of activity)
Transparency International’s 2001 score for Greece is 4.2.
Therefore, Greece’s black market score is 3 this year.
2003 Index of Economic Freedom
GUATEMALA
Guatemala City
Trade Policy
Fiscal Burden
3
2
Government Intervention 1
Monetary Policy
3
Foreign Investment 3
Banking and Finance 2
Guatemala’s economy is the largest in Central America, but a year-long drought
has ravaged the agricultural sector, hurting subsistence farmers, who raise just
enough to feed their families, and coffee growers, whose harvests now fetch lower
prices on the glutted global market. Agriculture accounts for two-thirds of exports, but Guatemala also manufactures prepared foods, clothing, textiles, and pharmaceuticals that could help balance the uncertainty of weather-dependent farming. Bureaucratic complexity blocks more aggressive foreign investment, and slow
progress in education, transportation, and infrastructure development constrains
more rapid expansion of the economy. Further undercutting faith in Guatemala’s
economy is the continued high incidence of crime, from rising software piracy to
kidnappings and murders. Political infighting has gone beyond the reported ill will
between President Alfonso Portillo and National Congress President Efraín Rios
Montt to include a loss of confidence by the business community in the
government’s ability to develop a consistent economic policy. Adding to the uncertainty, a congressional commission reportedly presented evidence in May 2002 that
President Portillo and other officials had opened bank accounts in Panama intending to embezzle state funds—a charge that the president denied. Guatemala’s monetary policy score is 1 point worse this year; however, its wages and prices score is
1 point better. As a result, Guatemala’s overall score is unchanged this year.
TRADE POLICY
Score: 3–Stable (moderate level of protectionism)
According to the World Bank, Guatemala’s weighted average tariff rate in 2000
(the most recent year for which World Bank data are available) was 5.8 percent.
Non-tariff barriers include the arbitrary application of customs procedures and
red tape in the customs agency. The U.S. Department of State reports that Guatemala “now imposes tariff rates quotas (TRQ) for corn, rice, wheat and wheat flour,
apples, poultry meat and poultry by-products (fresh, frozen, or refrigerated, with
some exceptions), and fresh and frozen red meat.”
FISCAL BURDEN OF GOVERNMENT
Rank:
Score:
Category:
56
2.80
Mostly Free
Wages and Prices 2
Property Rights
4
Regulation
Black Market
Scores for Prior Years:
2002: 2.80
1999: 2.65
1996: 2.85
2001: 2.70
1998: 2.70
1995: 3.05
2000: 2.70
1997: 2.70
2000 Data
(in constant 1995 US dollars)
Population: 11,385,000
Total area: 108,890 sq. km
GDP: $17.7 billion
GDP growth rate: 3.3%
GDP per capita: $1,558
Major exports: coffee, sugar,
bananas, fruits and vegetables,
cardamom, meat, apparel, petroleum
Exports of goods and services:
$3.7 billion
Major export trading partners:
US 56.9%, El Salvador 8.7%,
Costa Rica 3.7%, Germany 2.6%
Major imports: fuels, machinery and
transport equipment, construction
materials, grain, fertilizers, electricity
Imports of goods and services:
$5.3 billion
Major import trading partners:
US 35.2%, Mexico 12.6%,
South Korea 7.9%, El Salvador 6.4%
Foreign direct investment (net):
$224 million
Score—Income and Corporate Taxation: 3–Stable
(moderate tax rates)
Score—Government Expenditures: 1–Stable
(very low level of government expenditure)
Final Score: 2–Stable (low cost of government)
Guatemala’s top income tax rate is 31 percent; the marginal rate for the average
taxpayer is 15 percent. The top corporate income tax is 31 percent. In 2000, based
on data from the International Monetary Fund, government expenditures equaled
12.3 percent of GDP.
Chapter 6: The Countries
4
4
209
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 1–Stable (very low level)
The World Bank reports that the government consumed 6.6 percent of GDP in 2000. In the same year, according to the International Monetary Fund, Guatemala received 2.07 percent of its
total revenues from state-owned enterprises and government
ownership of property.
MONETARY POLICY
Score: 3–Worse (moderate level of inflation)
From 1992 to 2001, Guatemala’s weighted average annual rate
of inflation was 7.03 percent, up from the 5.99 percent from 1991
to 2000 reported in the 2002 Index. As a result, Guatemala’s monetary policy score is 1 point worse this year.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
Guatemala passed legislation to liberalize its rules on foreign investment in 1998, but substantial barriers remain. Foreign investment is welcomed but must be approved by the government to
guarantee against expropriation or loss from foreign exchange
limitations. The government restricts investment in surface transportation, insurance, airlines, and professional services (including legal and accounting services). Minerals, petroleum, and natural resources are considered the property of the state. Investment
in the oil sector is regulated by separate legislation. According to
the U.S. Department of State, “Some restrictions remain on foreign investment, but foreign investors generally receive national
treatment.” The International Monetary Fund reports that residents may hold foreign exchange accounts, but banks do not offer them because rules governing them have not yet been clarified. The only non-residents who may hold foreign exchange accounts are diplomats and employees of international institutions.
There are few restrictions or controls on payments, transactions,
and transfers. Repatriation of profit, if registered, is permitted,
and non-residents may purchase real estate. Guatemala is listed
as a non-compliant state in the fight against money laundering
by the Organisation for Economic Co-operation and Development, which has advised banks headquartered in its member
nations to be cautious about doing business in Guatemala. The
U.S. Department of State reports that political instability, excessive bureaucracy, corruption, and a lack of transparency inhibit
foreign investment.
BANKING AND FINANCE
Score: 2–Stable (low level of restrictions)
The government has liberalized the banking sector to allow for
more foreign participation and domestic competition. The U.S.
Department of State reports that state intervention in the financial sector is largely restricted to a regulatory role and the implementation of monetary policy. Under the 1995 rules, foreign banks
must register with the country’s Superintendent of Financial
Entities. The Economist Intelligence Unit reports that the Guatemalan government intervened in five financial institutions in
2001 because of insolvency and that “the sector remains weak,
210
fragmented and poorly regulated.” The Law of Banks, which
was passed in January 2002, consolidated supervision of banks,
strengthened capital requirements, and set out a clear procedure
for intervention if a bank fails. Three other reform bills that would
increase the independence of the central bank, strengthen supervision of the financial system, and streamline regulations over
foreign currency transactions are meeting stiff resistance from
the opposition in the legislature. The state has announced plans
to privatize Banco del Ejército, which is controlled by the army’s
pension fund and wracked by bad loans, and restructure Crédito
Hipotecario Nacional, the state mortgage bank.
WAGES AND PRICES
Score: 2–Better (low level of intervention)
According to the Economist Intelligence Unit, “Guatemala has
no price controls and is gradually eliminating subsidies on various economic activities and products…. [T]he government maintains some 24,000 direct subsidies, among them a Q12,000-perhouse subsidy on construction costs.” Guatemala has a minimum
wage law, but the U.S. Department of State reports that noncompliance is common in the agriculture sector and the extensive informal sector. Based on the lack of evidence of price controls, Guatemala’s wages and prices score is 1 point better this
year.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
Private property is not well-protected. According to the Economist Intelligence Unit, the “judicial system continues to show
signs of weakness and lack of independence.” The U.S. Department of State reports that “the process [to enforce agreements]
is less transparent [than elsewhere], more cumbersome and poorly
implemented. The time required to complete these [enforcement]
procedures can be significant, and Guatemala does not allow the
parties to proceed to arbitration or obtain a default award until
procedures are completed. The process of enforcing foreign
awards is even more cumbersome.”
REGULATION
Score: 4–Stable (high level)
Regulations are both patchy and vague, causing significant bureaucratic obstacles to establishing a business. According to the
U.S. Department of State, “Bureaucratic hurdles are common
for both domestic and foreign companies. Regulations often contain few explicit criteria for government administrators, resulting in ambiguous requirements that are applied inconsistently or
retroactively by different government agencies.” The Economist
Intelligence Unit and other sources report that the Portillo government has been plagued by allegations of corruption.
BLACK MARKET
Score: 4–Stable (high level of activity)
Transparency International’s 2001 score for Guatemala is 2.9.
Therefore, Guatemala’s black market score is 4 this year.
2003 Index of Economic Freedom
GUINEA
Rank:
85
Score:
3.10
Category: Mostly Unfree
Conakry
Trade Policy
Fiscal Burden
5
3
Government Intervention 1
Monetary Policy
3
Foreign Investment 3
Banking and Finance 2
The government of Guinea remains involved in many sectors of the economy,
thereby contributing to the perpetuation of poor economic growth. Poor infrastructure, a weak judicial system, political corruption, and a lack of transparency
have hindered progress toward liberalization. The Economist Intelligence Unit reports that recent actions to address corruption are “a belated effort to show the
[International Monetary Fund] and other donors that [the government] is serious
about trying to reduce corruption…. However, donors will require more consistent evidence that reforms are being implemented.” From 1991 to 2000, according
to World Bank data, compound growth in GDP averaged 4.2 percent annually and
per capita GDP increased from $524 to $603 (in constant 1995 U.S. dollars). Mining
of bauxite, gold, and diamonds is the major source of GDP and accounts for roughly
80 percent of exports. Over 80 percent of the population, however, is engaged in
subsistence agriculture, and informal employment is widespread. The area of
Guinea bordering Liberia continues to be troubled by fighting between government forces and rebel groups; President Charles Taylor of Liberia has accused the
Guinean government of supporting Liberian dissidents—an ironic accusation given
Taylor’s history of fomenting regional instability. Guinea’s banking and finance
and wages and prices scores are both 1 point better this year. As a result, its overall
score is 0.20 point better this year.
TRADE POLICY
Score: 5–Stable (very high level of protectionism)
The U.S. Department of State reports that Guinea imposes a flat import tax of 33
percent on most imports and that a “surtax is imposed on luxury items, such as
vehicles, alcohol, tobacco, and other consumer items. The surtax varies from 20 to
70%. The surtax is 20 to 30% for vehicles.” In addition, “Corruption remains a
significant factor in clearing products through customs.”
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 4–Stable
(high tax rates)
Score—Government Expenditures: 2–Stable
(low level of government expenditure)
Final Score: 3–Stable (moderate cost of government)
Guinea’s top income tax rate is 40 percent; the marginal rate for the average taxpayer is 25 percent. The top corporate tax rate is 35 percent. In 2000, according to
the African Development Bank, government expenditures equaled 16.7 percent of
GDP.
Chapter 6: The Countries
Wages and Prices 2
Property Rights
4
Regulation
Black Market
4
4
Scores for Prior Years:
2002: 3.30
1999: 3.10
1996: 3.00
2001: 3.10
1998: 2.90
1995: 3.15
2000: 3.10
1997: 3.20
2000 Data
(in constant 1995 US dollars)
Population: 7,415,000
Total area: 245,857 sq. km
GDP: $4.47 billion
GDP growth rate: 1.8%
GDP per capita: $603
Major exports: bauxite, aluminum,
gold, diamonds, coffee, fish,
agricultural products
Exports of goods and services:
$981 million
Major export trading partners:
US 16.9%, Belgium 12.9%, Russia
9.2%, Ireland 8.8%
Major imports: petroleum products,
metals, machinery, transport
equipment, textiles, grain and other
foodstuffs
Imports of goods and services:
$1.04 billion
Major import trading partners:
France 18.9%, US 11.0%,
Ivory Coast 8.5%, Belgium 7.1%
Foreign direct investment (net):
n/a
211
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 1–Stable (very low level)
The World Bank reports that the government consumed 6 percent
of GDP in 2000. In 1999, according to the International Monetary
Fund, Guinea received 2.29 percent of its total revenues from stateowned enterprises and government ownership of property.
MONETARY POLICY
Score: 3–Stable (moderate level of inflation)
Data from the International Monetary Fund’s 2002 World Economic
Outlook indicate that from 1992 to 2001, Guinea’s weighted average annual rate of inflation was 6.48 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
Guinea has adopted an open policy toward foreign investment over
the past decade and guarantees foreign investors national treatment. The government screens new investment through the National Investment Commission. The investment code permits 100
percent foreign investment, joint foreign and domestic investments,
and joint investments with the public sector. Guinea provides guarantees against expropriation and nationalization, except for reasons of public interest. Corruption and bureaucratic inefficiency
are unofficial barriers. According to the U.S. Department of State,
“Until June of 2001 private operators managed the production,
distribution and fee-collection operations of water and electricity
under performance based contracts with the [government]. However, both sectors have continued to battle inefficiency, corruption
and nepotism over the past year, and foreign private investors in
these operations have recently departed the country in frustration.”
Foreign investors are restricted from majority ownership in radio,
television, and newspapers, and the central bank must authorize
all real estate transactions. The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts, but residents may hold foreign exchange accounts
abroad only with approval of the Central Bank of the Republic of
Guinea. Payments and transfers are subject to government approval
in some cases, and repatriation is controlled. The IMF reports that
all capital transfers through the official exchange market and most
capital transactions must be authorized by the central bank.
BANKING AND FINANCE
Score: 2–Better (low level of restrictions)
There are few restrictions on banks, and foreign banks are welcome. Most banks are in private hands pursuant to a massive
privatization of the banking industry in the late 1980s and early
1990s. In 2001, there were six commercial banks, most of which
were foreign-owned. The banking sector has been unstable since
the 1997 crisis that forced one bank to close and the government to
restructure three others. Reform of the banking system, including
reduced government borrowing and improved authority by the
central bank to supervise banks and impose Basle committee principles, was scheduled to be completed in 2000 but has stalled.
Guinea’s banking system remains fragile and is unable to meet the
development needs of the private sector. According to the U.S.
212
Department of State, “Since banks are conservative and risk averse,
there is not a significant amount of capital available to finance large
investments. Banks prefer to finance trade. Commercial banks favor short term lending at high interest rates (25–30%), as there is
an astronomically high potential for default.” Overall, instability
and lack of prudent oversight do not overwhelm the generally low
level of restrictions in the banking and finance sector. As a result,
Guinea’s banking and finance score is 1 point better this year.
WAGES AND PRICES
Score: 2–Better (low level of intervention)
Price controls have been removed, but the Ministry of Trade reserves the right to introduce emergency price control measures.
The government has made some significant progress in
privatization but still sets prices for state-run utility companies. The
Labor Code allows the government to set a minimum wage by
decree, but the government has not established a minimum wage.
Based on evidence of price liberalization and the absence of a government-set minimum wage, Guinea’s wages and prices score is 1
point better this year.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
Property is not completely secure in Guinea. According to the U.S.
Department of State, “The Constitution provides for the judiciary’s
independence; however, judicial authorities routinely defer to executive authorities and the executive branch in politically sensitive
cases…. Because of corruption and nepotism in the judiciary, relatives of influential members of the Government often are, in effect, above the law…. Many citizens are wary of judicial corruption and instead prefer to rely on traditional systems of justice at
the village or urban neighborhood level.”
REGULATION
Score: 4–Stable (high level)
Although the government has taken steps to end its interference in
private business, the bureaucracy remains huge. According to the
U.S. Department of State, “Corruption is the single biggest obstacle discouraging U.S. investment in Guinea. The business and
political cultures encourage corruption. Business is routinely conducted through the payment of bribes rather than by the rule of
law. Though it is illegal to pay bribes in Guinea, there is no enforcement, and it is, in practice, difficult and time consuming to conduct business without paying bribes.”
BLACK MARKET
Score: 4–Stable (high level of activity)
The U.S. Department of State reports that Guinea’s “informal sector continues to be a major contributor to the economy.” The government is revising its laws on intellectual property rights to meet
international standards but has no administrative or regulatory
structure with which to enforce any such legislation. Much of the
labor market, including such areas as subsistence farming and smallscale mining operations, is in the informal sector.
2003 Index of Economic Freedom
Bissau
GUINEA–BISSAU
Rank:
142
Score:
3.90
Category: Mostly Unfree
Trade Policy
Fiscal Burden
4
4
Government Intervention 2
Monetary Policy
3
Foreign Investment 3
Banking and Finance 5
Guinea–Bissau is one of the world’s poorest nations. From 1991 to 2000, according to
World Bank data, compound annual growth in GDP averaged 1.1 percent and per
capita GDP declined from $234 to $210. (It should be noted that these statistics are
skewed by the sharp economic downturn in 1998 during the civil war; the economy
averaged steady, if unspectacular, growth in 1999 and 2000.) The economy is based on
agriculture, which accounts for over 50 percent of GDP, employs over 80 percent of the
labor force, and is the source of 90 percent of exports. Political instability struck the
country less than two years after the 2000 presidential election when the National Assembly and the Supreme Court objected to President Koumba Yala’s decision to expel
an Islamic religious group. The dispute led the President to dismiss several Supreme
Court justices on charges of corruption and threaten to suspend the National Assembly when they criticized that action. The recent instability reflects a long-term problem: Guinea–Bissau has endured several coups and an 11-month civil war that ended in
May 1999. Guinea–Bissau’s fiscal burden of government score is 0.5 point worse this
year, but its capital flows and foreign investment score is 1 point better. As a result,
Guinea–Bissau’s overall score is 0.05 point better this year.
TRADE POLICY
Score: 4–Stable (high level of protectionism)
Guinea–Bissau is a member of the West African Economic and Monetary Union
(WAEMU), which imposes a common external tariff with four rates: 0 percent, 5 percent, 10 percent, and 20 percent. According to the International Monetary Fund, the
WAEMU’s average tariff rate was 12 percent in 2000. (The other seven members of the
WAEMU are Benin, Burkina Faso, Ivory Coast, Mali, Niger, Senegal, and Togo.) The
Economist Intelligence Unit cites corruption in government procurement practices as
a non-tariff barrier.
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 2.5–Better
(moderate tax rates)
Score—Government Expenditures: 5–Worse
(very high level of government expenditure)
Final Score: 4–Worse (high cost of government)
Data from the International Monetary Fund indicate that Guinea–Bissau’s top income
tax rate is 20 percent, down from the 30 percent reported in the 2002 Index; the marginal rate for the average taxpayer is 0 percent, down from the 10 percent reported in
the 2002 Index. The top corporate tax rate is 35 percent, but a 50 percent rate applies to
profits earned from oil products. (The standard 35 percent rate was used to score this
factor.) In 2000, according to the African Development Bank, government expenditures equaled 35.3 percent of GDP, up from the 21.5 percent reported in the 2002 Index.
Based on lower income taxes and an adjusted corporate tax rate, Guinea–Bissau’s in-
Chapter 6: The Countries
Wages and Prices 3
Property Rights
5
Regulation
Black Market
5
5
Scores for Prior Years:
2002: 3.95
1999: 4.20
1996: n/a
2001: 4.00
1998: n/a
1995: n/a
2000: 4.30
1997: n/a
2000 Data
(in constant 1995 US dollars)
Population: 1,199,000
Total area: 36,120 sq. km
GDP: $233 million
GDP growth rate: 7.5%
GDP per capita: $210
Major exports: cashew nuts, fish
and shrimp
Exports of goods and services:
$62 million
Major export trading partners:
India 51.4%, Italy 2.7%,
South Korea 2.0%, Belgium 2.0%
Major imports: foodstuffs,
machinery and transport equipment,
petroleum products
Imports of goods and services:
$104 million
Major import trading partners:
Portugal 30.0%, Senegal 14.6%,
Thailand 8.5%, China 5.7%
Foreign direct investment (net):
$4.6 million
213
come and corporate taxation score is 1 point better this year;
however, this is offset by a higher level of government expenditure. As a result, Guinea–Bissau’s overall fiscal burden of government score is 0.5 point worse this year.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Stable (low level)
The World Bank reports that the government consumed 13.9
percent of GDP in 2000. In 1999, according to the International
Monetary Fund, Guinea–Bissau received 1.41 percent of its total
revenues from state-owned enterprises and government ownership of property.
MONETARY POLICY
Score: 3–Stable (moderate level of inflation)
Data from the International Monetary Fund’s 2002 World Economic Outlook indicate that from 1992 to 2001, Guinea–Bissau’s
weighted average annual rate of inflation was 6.11 percent.
Guinea–Bissau has benefited from a stable currency—a rarity in
sub-Saharan Africa—as a member of the CFA franc zone. Fourteen countries use the CFA franc, a common currency with a
fixed parity with the euro. (The other 13 countries are Benin,
Burkina Faso, Cameroon, Central African Republic, Chad, Congo
[Brazzaville], Equatorial Guinea, Gabon, Ivory Coast, Mali, Niger,
Senegal, and Togo.)
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Better (moderate barriers)
Political and economic instability have discouraged foreign investment in Guinea–Bissau in the past few years, although there
is some foreign investment in the fishing industry and oil exploration. The investment code provides for incentives for investment and guarantees against nationalization and expropriation.
The International Monetary Fund reports that both residents and
non-residents may hold foreign exchange accounts with permission of the Central Bank of West African States. (BCEAO member states include Benin, Burkina Faso, Guinea–Bissau, Ivory
Coast, Mali, Niger, Senegal, and Togo.) Payments and transfers
are generally free of restrictions. The government must authorize outward capital transactions. Capital transfers to members
of the WAEMU are unrestricted, aside from direct investments.
The government must approve most personal capital movements
between residents and non-residents, such as personal loans, gifts
or inheritances, or transfer of assets. Overall, barriers are moderate by global standards. As a result, Guinea–Bissau’s capital flows
and foreign investment score is 1 point better this year.
during the civil war and only reopened in July 1999. They have
been severely weakened, as local businesses were decapitalised
by the war and many loans are now unrecoverable.” Of the other
two banks that were active briefly after the conflict, the Banco
Totta e Acores withdrew from the country in March 2002 and
the Banco Internationales da Guiné–Bissau is being liquidated.
The eight member countries of the BCEAO use the CFA franc
that is issued by the BCEAO, pegged to the French franc, and
guaranteed by the French Treasury.
WAGES AND PRICES
Score: 3–Stable (moderate level of intervention)
According to the Economist Intelligence Unit, “Since 1987 government policy, with the support of the IMF and World Bank,
has aimed at macroeconomic stabilization by reducing the fiscal
deficit, removing price controls, reforming the public sector and
strengthening the role of private enterprise.” The government
reports that “only five basic products are subject by law to price
controls: fuels, electricity, water, telecommunications and rice.”
Since rice is the most important crop in this mostly agricultural
economy, price controls on rice are significant. The Council of
Ministers sets a minimum wage annually for various categories
of work.
PROPERTY RIGHTS
Score: 5–Stable (very low level of protection)
There is no rule of law in Guinea–Bissau and little protection of
private property. According to the U.S. Department of State, “The
Constitution provides for an independent judiciary; however
judges are trained and paid poorly [and] are sometimes subject
to political pressures and corruption. The Supreme Court is especially vulnerable to political pressure because its members are
appointed by the President and serve at his pleasure.”
REGULATION
Score: 5–Stable (very high level)
Guinea–Bissau remains plagued by political instability, corruption, and a continuing lack of the rule of law. Poor infrastructure
also impedes business activity. For investors, reports the Economist Intelligence Unit, “The greatest risk arises from the country’s
political instability, depressed business environment, periodic inability of the government to honour its financial and commercial obligations, and slow, weakly functioning local institutions
on which investors or other foreign parties may depend. Enforcement of contracts cannot be assured through the local justice
system.”
BANKING AND FINANCE
BLACK MARKET
Score: 5–Stable (very high level of restrictions)
The BCEAO, a central bank common to the eight members of
the WAEMU, governs Guinea–Bissau’s banking system, which is
beginning to recover after having been shut down during the war.
According to the Economist Intelligence Unit, “There is only one
commercial bank, Banco Africano Ocidentale (BAO), established
in 2001 with local and Portuguese capital…. All banks closed down
Score: 5–Stable (very high level of activity)
Guinea–Bissau’s black market is so large that it eclipses the legal
market. According to the Economist Intelligence Unit, “there is
an active trade in smuggled diamonds from Guinea–Conakry and
Liberia.”
214
2003 Index of Economic Freedom
GUYANA
Georgetown
Rank:
92
Score:
3.20
Category: Mostly Unfree
Trade Policy
Fiscal Burden
4
4
Government Intervention 3
Monetary Policy
2
Foreign Investment 3
Banking and Finance 3
Guyana gained its independence from the United Kingdom in 1966 and throughout the
1970s and 1980s pursued an inward-looking development strategy that transformed it
into one of the poorest countries in the Americas. This strategy changed in the 1990s,
when President Desmond Hoyte advanced an economic recovery plan to open the
economy. Relations between the two main political parties have become more constructive as the hostility experienced when Bharrat Jagdeo won re-election in March 2001 has
lessened. According to the Economist Intelligence Unit, Guyana’s economy is under pressure. On the one hand, climatic problems in the past couple of years have affected the
production of sugar and rice, and export prices for these crops have fallen. On the other
hand, the government has increased public-sector spending to maintain political stability.
A recent $781 million International Monetary Fund–World Bank assistance package should
ease some of the pressure on the economy, at least temporarily; but unless the government of Guyana opens the country’s markets and controls expenditures, it will do nothing to relieve the country’s poverty.
TRADE POLICY
Score: 4–Stable (high level of protectionism)
According to the World Trade Organization, Guyana’s average tariff rate in 1998 (the
most recent year for which WTO data are available) was 9.1 percent. Other sources yield
an estimated non-weighted average tariff rate of approximately 16.6 percent and indicate
that, as a member of the Caribbean Community and Common Market (CARICOM),
Guyana has a common external tariff rate ranging from 5 percent to 20 percent; because
of the variability of these estimates, the Index relies on the 9.1 percent reported by the
WTO. Customs procedures function as a non-tariff barrier. According to the U.S. Department of State, “Since the Customs Department (like many government agencies) is extremely understaffed, the mandatory inspection often results in extended waits on the
wharf. There are special provisions for perishable goods…. [C]ustoms procedures present
problems relating to inconsistent valuations of imports by customs officials and delays in
customs clearance. Some businesses have alleged that customs officers may delay processing in hopes of attaining inducements to expedite clearances.”
Wages and Prices 2
Property Rights
3
Regulation
Black Market
Scores for Prior Years:
2002: 3.20
1999: 3.20
1996: 3.30
2001: 3.35
1998: 3.40
1995: 3.60
2000: 3.20
1997: 3.30
2000 Data
(in constant 1995 US dollars)
Population: 761,000
Total area: 214,970 sq. km
GDP: $716 million
GDP growth rate: –0.7%
GDP per capita: $941
Major exports: sugar, gold, bauxite
and aluminum
Exports of goods and services:
$691 million
Major export trading partners:
US 22.5%, Canada 20.8%, UK 13.7%,
Netherlands Antilles 11.4%
Major imports: manufactures,
machinery, petroleum, food
Imports of goods and services:
$796 million
Major import trading partners:
US 32.7%, Netherlands Antilles 18.9%,
Trinidad and Tobago 14.2%, UK 6.2%
Foreign direct investment (net):
$61 million
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3–Stable
(moderate tax rates)
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 4–Stable (high cost of government)
Guyana’s top income tax rate is 33.3 percent; the marginal rate for the average taxpayer is
0 percent. The top corporate tax rate is 45 percent. Data from the Economist Intelligence
Unit indicate that in 2000, government expenditures equaled 39.6 percent of GDP.
Chapter 6: The Countries
4
4
215
GOVERNMENT INTERVENTION IN THE ECONOMY
PROPERTY RIGHTS
Score: 3–Stable (moderate level)
The World Bank reports that the government consumed 17.4
percent of GDP in 2000. In 1999, according to the International
Monetary Fund, Guyana received 9.42 percent of its total revenues from state-owned enterprises and government ownership
of property.
Score: 3–Stable (moderate level of protection)
Guyana’s judicial system is often slow and inefficient. According
to the U.S. Department of State, “The Constitution provides for
an independent judiciary; however, law enforcement officials and
prominent lawyers questioned the independence of the judiciary
and accused the Government of intervening in certain criminal
and civil cases.” In addition, “Delays in judicial proceedings are
caused by shortages of trained court personnel and magistrates,
inadequate resources…occasional alleged acts of bribery, poor
tracking of cases, and slowness of police preparing cases for trial.”
MONETARY POLICY
Score: 2–Stable (low level of inflation)
From 1992 to 2001, Guyana’s weighted average annual rate of
inflation was 3.42 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
There are few restrictions on foreign investment, although licenses
are required for some activities, and the process for securing them
can be time-consuming. The investment regime is still undeveloped, and the government tends toward caution in approving
new investments. According to the U.S. Department of State,
“After years of a state-dominated economy…the mechanisms for
private investment, both domestic and foreign, are still evolving.
Much crucial legislation is outdated and is currently being revised, including laws pertaining to resource use, mining, and the
formation of private companies and capital markets…. While
there is no ‘screening’ of investment, the centralized process of
decision-making and lack of transparency can result in delays
and frustration for foreign investors.” The International Monetary Fund reports that both residents and non-residents may
hold foreign exchange accounts. Payments and transfers are not
restricted, but the IMF reports that all credit operations are controlled. Guyana’s constitution guarantees the right of foreigners
to own property or land.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
Guyana’s banking system is becoming more competitive but remains underdeveloped. The lack of an efficient inter-bank trading system can make it difficult to obtain foreign exchange; however, both banks and private operations are permitted to offer
foreign exchange services. There are seven commercial banks,
the two largest of which (the Bank of Nova Scotia and Republic
Bank of Trinidad) are foreign-owned. In addition to three private
Guyanese banks, the Indian Bank of Baroda operates in Guyana,
and there is one remaining state-owned bank, the Guyana National Co-Operative Bank (GNCB). The International Monetary
Fund reports that banks must obtain approval from the Ministry
of Finance before lending to non-resident enterprises.
REGULATION
Score: 4–Stable (high level)
Some sectors of the economy, such as utilities and other stateowned industries, are highly regulated, and the bureaucracy is
extensive. According to the U.S. Department of State, “Bureaucratic procedures are cumbersome. Investors often receive conflicting messages from various officials and have difficulty determining where the authority for decision-making lies. In the current absence of adequate legislation, much decision-making is
centralized and an extraordinary number of issues are resolved
in Cabinet, a process that is not open to public scrutiny and which
often results in long delays. Attempts at reform of bureaucratic
procedures have not succeeded in limiting red tape.” Lack of transparency is also an impediment, as is corruption. Businessmen,
reports the U.S. Department of State, complain that “government officials have solicited bribes as a prerequisite for the granting of licenses and permits needed to operate their businesses.”
BLACK MARKET
Score: 4–Stable (high level of activity)
Guyana has a rather large black market, mainly because of trademark and copyright infringement and the massive pirating of
video and audio recordings and computer software. According
to the U.S. Department of State, “there is no enforcement mechanism to protect intellectual property rights. Patent and trademark
infringement are also common. Pirating of TV satellite signals is
widespread and takes place with impunity.” A new copyright law
is under consideration.
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
The U.S. Department of State reports that the government sets
electricity prices. While the Labor Act and the Wages Council
Act give the Labor Minister the authority to set minimum wages,
Guyana does not have a legislated private-sector minimum wage.
216
2003 Index of Economic Freedom
HAITI
Rank:
128
Score:
3.60
Category: Mostly Unfree
Port-au-Prince
Trade Policy
Fiscal Burden
3
2
Government Intervention 2
Monetary Policy
4
Foreign Investment 4
Banking and Finance 3
Stable democracy, respect for private property, and the rule of law still elude Haiti. President Jean-Bertrand Aristide seems to prefer mob rule to the creation of enduring governing institutions, while the Convergence Democratique—a coalition of opposition parties—refuses to recognize his government. At the center of their complaints are the May
2000 parliamentary elections that reportedly were manipulated to favor candidates from
Aristide’s leftist Lavalas Family party. In December, unidentified gunmen attacked the
presidential palace, after which Lavalas partisans destroyed the opposition’s headquarters. Opponents said the government staged the incident. Days earlier, journalist and
Aristide critic Brignol Lindor was murdered and his body hacked to pieces in public by
Aristide supporters after his name appeared on a Lavalas-inspired enemies list. No arrests
were made. Police officers trained by Canada and the United States are being replaced by
Aristide loyalists. Adding fuel to this political chaos is the country’s economic chaos: The
infrastructure continues to deteriorate, and the economy has declined 11 percent since
1991. For more than two years, international donors have suspended direct support to the
government pending an unlikely settlement between Aristide and the opposition. Haiti’s
government intervention and banking and finance scores are both 1 point better this year.
As a result, its overall score is 0.20 point better this year.
TRADE POLICY
Score: 3–Stable (moderate level of protectionism)
As a member of the Caribbean Community and Common Market (CARICOM), Haiti
has a common external tariff rate ranging from 5 percent to 20 percent. Based on data
from the International Monetary Fund and the Economist Intelligence Unit, Haiti’s average tariff rate in 2000 was 5.9 percent (based on import duties as a percentage of total
imports), down from the 8.14 percent reported in the 2002 Index. The U.S. Department of
State reports that the government has removed most non-tariff barriers, but the inefficiency of the state-owned international seaport remains a significant barrier.
FISCAL BURDEN OF GOVERNMENT
Wages and Prices 3
Property Rights
5
Regulation
Black Market
Scores for Prior Years:
2002: 3.80
1999: 4.00
1996: 4.40
2001: 3.90
1998: 4.10
1995: 4.40
2000: 4.00
1997: 4.10
2000 Data
(in constant 1995 US dollars)
Population: 7,959,000
Total area: 27,750 sq. km
GDP: $2.92 billion
GDP growth rate: 1.1%
GDP per capita: $367
Major exports: coffee, oils, mangoes
Exports of goods and services:
$455 million
Major export trading partners:
US 91.0%, EU 5.9%
Major imports: food, machinery and
transport equipment, fuels, raw
materials
Imports of goods and services:
$1.1 billion
Major import trading partners:
US 60.6%, EU 11.5%,
Dominican Republic 3.4%,
Japan 2.8%
Foreign direct investment (net):
$11.9 million
Score—Income and Corporate Taxation: 2.5–Stable
(moderate tax rates)
Score—Government Expenditures: 1–Stable
(very low level of government expenditure)
Final Score: 2–Stable (low cost of government)
International Monetary Fund data indicate that Haiti’s top income tax rate is 30 percent;
the marginal rate for the average taxpayer is 0 percent. The top corporate income tax rate
is 35 percent. An additional levy of 30 percent on deemed distributions to foreign shareholders in addition to the normal tax—domestic firms pay only a 15 percent additional
withholding tax—serves as a barrier to foreign investment. (The standard corporate tax
rate was used to grade this factor.) In 2000, based on data from the International Monetary Fund, government expenditures equaled 10.5 percent of GDP.
Chapter 6: The Countries
5
5
217
GOVERNMENT INTERVENTION IN THE ECONOMY
WAGES AND PRICES
Score: 2–Better (low level)
Based on data from the International Monetary Fund, the government consumed 6.9 percent of GDP in 2000. The privatization
process has stalled; the U.S. Department of State reports that the
government still owns the telephone company (TELECO), electric company (EDH), port authority, airport authority, edible-oil
plant, and two commercial banks. Based on a reassessment of the
data on government consumption, Haiti’s government intervention score is 1 point better this year.
Score: 4–Stable (high level of inflation)
From 1992 to 2001, Haiti’s weighted average annual rate of inflation was 13.63 percent.
Score: 3–Stable (moderate level of intervention)
Haiti’s government has attempted to eliminate its direct control of
prices. “In an economy dominated by small-scale traders and merchants,” reports the U.S. Department of State, “it is almost impossible for the government to control retail prices of food products
and consumer goods. Utility prices and pump prices for fuel are
probably the only exceptions to the rule.” According to the same
source, “There are few government subsidies or price controls,
and goods are traded at market prices…. The government does,
however, regulate prices of petroleum products such as gasoline.”
The government also influences the price of utilities through its
state-owned monopolies. A tripartite commission composed of
six members appointed by the president sets Haiti’s minimum daily
wage.
CAPITAL FLOWS AND FOREIGN INVESTMENT
PROPERTY RIGHTS
MONETARY POLICY
Score: 4–Stable (high barriers)
Haiti has made efforts to attract foreign investment, but the U.S.
Department of State reports that judicial inadequacies, lack of transparency, corruption, inefficient government, poor financial services,
and a paucity of clear and enforceable laws and regulations discourage investment. Although the government has committed itself to removing the relevant provision from the tax code, it still
discriminates against foreign investors. The International Monetary
Fund reports that residents may hold foreign exchange accounts
for specific purposes—for example, for export proceeds or receipts
from non-governmental organizations—and non-residents may
hold foreign exchange accounts without restriction. There are no
restrictions on payments and transfers. All inward direct investments require government approval.
Score: 5–Stable (very low level of protection)
Property is not secure in Haiti. According to the U.S. Department
of State, “The Constitution provides for an independent judiciary;
however, it is not independent in practice. Years of rampant corruption and governmental neglect have left the judicial system
poorly organized and nearly moribund…. A shortage of adequately
trained and qualified…judges and prosecutors, as well as
underfunding, among other systemic problems, created a huge
backlog of cases.” The Economist Intelligence Unit reports that
“Political structures are prey to personal ambition and factionalism among politicians, while the judicial system suffers from inadequate resources, inefficiency and corruption. Persistent fear makes
juries and witnesses unreliable, leading to both impunity and wrongful convictions.”
BANKING AND FINANCE
REGULATION
Score: 3–Better (moderate level of restrictions)
Although Haiti now welcomes foreign banks and recent changes
allow foreign banks to engage in a variety of financial services, the
banking system remains underdeveloped. The Economist Intelligence Unit reports that “Haiti has a rudimentary banking sector,
reflecting the country’s low levels of income and savings and the
small number of people involved in the formal economy.” According to the U.S. Department of State, “There are seven locally incorporated banks (Promobank, Unibank, Banque de l’Union
Haitienne, Sogebank, Socabank, Capital Bank and the very small
Banque Industrielle et Commerciale d’Haiti) and two foreign banks
(Bank of Nova Scotia, Citibank). There are also two state banks
(Banque Populaire Haitienne and Banque Nationale de Credit), a
private development finance institution (SOFHIDES), and two
mortgage banks (BCI and Sogebel).” The government reportedly
plans to privatize two state-owned banks (Banque Nationale de
Credit and Banque Populaire Haitienne) but has not done so. Overall, the evidence indicates that the government does not dominate
the sector and that foreign banks do have access. As a result, Haiti’s
banking and finance score is 1 point better this year.
218
Score: 5–Stable (very high level)
It is virtually impossible to open a business legally under Haitian
law. The U.S. Department of State reports that “Haitian law is deficient in a number of areas, including operation of the judicial
system; organization and operation of the executive branch; publication of laws, regulations and official notices; establishment of
companies; land tenure and real property law and procedures; bank
and credit operations; insurance and pension regulation; accounting standards; civil status documentation; customs law and administration; international trade and investment promotion; foreign
investment regime; and regulation of market concentration and
competition.” The same source reports that businesses cite corruption as an impediment to investing in Haiti.
BLACK MARKET
Score: 5–Stable (very high level of activity)
According to the U.S. Department of State, “Much of Haiti’s
economy is informal…. [B]oth women and men engage in informal economic activities [that include] street vending, handicraft
manufacturing, and the provision of personal services.” Haiti has
laws that provide protection for intellectual property, but enforcement is insufficient, and the judiciary is too weak to provide real
protection. The market for such products is, however, small.
2003 Index of Economic Freedom
HONDURAS
Tegucigalpa
Trade Policy
Fiscal Burden
3
2.5
Government Intervention 3
Monetary Policy
3
Rank:
80
Score:
3.05
Category: Mostly Unfree
Foreign Investment 3
Banking and Finance 3
Honduras continues on a slow but steady path of political and economic reform. A stable
democracy for the past two decades, it subordinated its armed forces to direct civilian
leadership in 1999, divorced the police from the military, and has taken initial steps toward
judicial reform. In February 2002, Honduras replaced its Napoleonic criminal code and
inquisitorial trial system with a new code based on the presumption of innocence, oral
trials open to the public, and appointed legal counsel for indigent defendants; despite such
progress, however, judges are few and poorly paid, the system is inadequately staffed, and
powerful interests reportedly are still able to affect outcomes with bribes. During the past
10 years, successive governments have lowered trade barriers, dismantled price controls,
and encouraged foreign investment. The pace of privatization, however, has been slow at
best; management of the airports has been privatized, but commitments to do the same
for the state telephone company and electrical power distribution have been held back by
opposition in the National Congress. Property rights remain weak, and bureaucratic requirements make dealing with the government difficult. Honduras has taken steps to
expand tourism, and manufacturing for export (most of which involves producing clothing) grew to about $550 million in foreign exchange by the end of 2000, largely because of
the availability of inexpensive labor. Honduras’s wage and prices score is 1 point better
this year. As a result, its overall score is 0.10 point better this year.
TRADE POLICY
Score: 3–Stable (moderate level of protectionism)
According to the World Bank, Honduras’s weighted average tariff rate in 2000 (the most
recent year for which World Bank data are available) was 8.3 percent. The U.S. Trade
Representative reports that “Honduras implements a price band mechanism for imports
of yellow corn, sorghum, and corn meal…. [I]mports entering with prices within the
price band are assessed a 20 percent tariff…. [F]rom February to August, duties are allowed to fluctuate according to the predetermined duty tables for each commodity. This
seasonal restriction has been added to provide protection to local grain farmers during
the main harvest season.” Honduras prohibits imports of cement, sugar, rice from Southeast Asia, and beef from South America to protect the domestic industry.
Wages and Prices 2
Property Rights
3
Regulation
Black Market
Scores for Prior Years:
2002: 3.15
1999: 3.45
1996: 3.30
2001: 3.35
1998: 3.25
1995: 3.25
2000: 3.35
1997: 3.35
2000 Data
(in constant 1995 US dollars)
Population: 6,417,000
Total area: 112,090 sq. km
GDP: $4.5 billion
GDP growth rate: 5.0%
GDP per capita: $711
Major exports: coffee, bananas,
shrimp, lobster, meat, zinc, lumber
Exports of goods and services:
$1.9 billion
Major export trading partners:
US 39.9%, El Salvador 9.2%,
Germany 7.9%, Guatemala 5.4%
Major imports: machinery and
transport equipment, industrial raw
materials, chemical products, fuels,
foodstuffs
Imports of goods and services:
$2.4 billion
Major import trading partners:
US 46.1%, Guatemala 8.2%,
El Salvador 6.6%, Mexico 4.7%
Foreign direct investment (net):
$258 million
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 2–Stable
(low tax rates)
Score—Government Expenditures: 3–Stable
(moderate level of government expenditure)
Final Score: 2.5–Stable (moderate cost of government)
Honduras International Magazine and PriceWaterhouseCoopers report that Honduras’s
top income tax rate is 25 percent; the marginal rate for the average taxpayer is 0 percent.
The top corporate tax rate is 25 percent. In 2000, based on data from the International
Monetary Fund, government expenditures equaled 23.4 percent of GDP.
Chapter 6: The Countries
4
4
219
GOVERNMENT INTERVENTION IN THE ECONOMY
WAGES AND PRICES
Score: 3–Stable (moderate level)
The World Bank reports that the government consumed 12.7 percent of GDP in 2000. According to the U.S. Department of State,
“The Honduran government has been characterized for many years
by its unwieldy size, high degree of centralization and control of a
large number of public enterprises…. [O]pposition to privatization
remains an obstacle to the state’s modernization, whether based
on reasons of ideology or personal interest.”
Score: 2–Better (low level of intervention)
The government maintains price controls on pharmaceuticals and
pressures producers of cement, milk, and sugar to keep their prices
low. “After Hurricane Mitch struck in October 1998,” reports the
Economist Intelligence Unit, “severe price controls were placed on
basic products. These were lifted at end-1999, but the government
reserves the rights to impose price controls as needed.” The government reviews (but does not set) prices for gasoline, diesel, liquid propane gas, public transportation, and utilities. Honduras has
a minimum wage system, established in 2000, that applies to all
sectors of the economy but varies according to work and geographic area. Based on evidence that the government has lifted
price controls on basic products, Honduras’s wage and prices score
is 1 point better this year.
MONETARY POLICY
Score: 3–Stable (moderate level of inflation)
From 1992 to 2001, Honduras’s weighted average annual rate of
inflation was 10.51 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
According to the Economist Intelligence Unit, “The Honduran
constitution states that foreign investment will receive the same
treatment as domestic investment, except that the government must
register and regulate foreign investment…. [T]here is minimal discrimination against foreign investment….” However, government
authorization is required for foreign investment in private health
care services, telecommunications, electricity, air transport, tourism, fishing and hunting, exploration and exploitation of minerals,
agriculture, insurance and financial services, and private education. Among the other factors that impede foreign investment is a
lack of transparency in the judicial system in cases involving foreigners. Foreign ownership of land near the coast or along borders
is generally prohibited, but such land may be purchased with permission from the government for tourism purposes. The International Monetary Fund reports that both residents and non-residents
may hold foreign exchange accounts. Payments and transfers are
not restricted, and few capital transactions require official approval.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
The government must approve any foreign investment in financial
services and insurance. Honduras’s financial system included 21
commercial banks (two of them foreign), 12 insurance companies, four savings and loan associations, and three state banks at
the end of 2000. The U.S. Department of State reports that the
Financial Sector Reform Law ratified on October 17, 1995, “replaced archaic financial legislation dating back to the early 1950’s.
The banking law is a modern piece of legislation modeled on the
Chilean banking law…. The reforms strengthen monetary policy
management by giving the Central Bank authority to impose reserve requirements on savings and loan associations and finance
companies, in addition to commercial banks. Overall, the new legislation is a major step toward modernizing financial intermediation in Honduras. However, bank supervision has been poor to
date.”
220
PROPERTY RIGHTS
Score: 3–Stable (moderate level of protection)
Expropriation of property remains a possibility. According to the
U.S. Department of State, “Both the Judiciary and the Public Ministry suffer from inadequate funding; low wages and lack of internal controls make law enforcement officials susceptible to
bribery…and powerful special interests still exercise influence and
often prevail in the courts.” The Economist Intelligence Unit reports that “it can take years to prosecute and pass judgment on a
case, and the number of cases pending resolution has increased
considerably over the past few years.”
REGULATION
Score: 4–Stable (high level)
Businesses in Honduras are subject to significant red tape, lack of
transparency, and the absence of an established rule of law. According to the U.S. Department of State, “Most Honduran laws
dealing with business, trade, and labor are outdated. The country
lacks a basic/indexed legal code…. The Government of Honduras often lacks the resources to implement or enforce laws already
on the books…. Property registration often is not up to date, nor
can the results of title searches be relied upon…. Procedural red
tape to obtain government approval for investment activities is still
very common.” The government has made some progress in fighting corruption; in February 2000, it passed a new Criminal Procedures Code, designed to increase transparency in the legal process.
According to the U.S. Trade Representative, however, corruption
remains endemic.
BLACK MARKET
Score: 4–Stable (high level of activity)
Transparency International’s 2001 score for Honduras is 2.7. Therefore, Honduras’s black market score is 4 this year.
2003 Index of Economic Freedom
HONG KONG
Rank:
Score:
Category:
Trade Policy
Fiscal Burden
1
2
Government Intervention 3
Monetary Policy
1
Foreign Investment 1
Banking and Finance 1
Hong Kong became a Special Administrative Region (SAR) of the People’s Republic of
China (PRC) on July 1, 1997. Five years later, it remains the world’s freest economy, tenthlargest trading entity, and ninth-largest banking center. As measured by per capita GDP
(2001 data in constant 1995 dollars), Hong Kong’s standard of living exceeds that of Great
Britain ($24,506 vs. $22,241). Hong Kong’s banking system is sound, and the government
treasury maintains massive operating reserves from previous surplus years. However, the
2001 economic downturn has resulted in a budget deficit that is not yet under control and
threatens Hong Kong’s low tax regime. In July 2002, a government spokesman was quoted
as saying that tax hikes are “almost certain” in 2003, and the government seems ready to
impose an unprecedented sales tax on Hong Kong consumers. The economy has been
built on Hong Kong’s status as a major trading port and financial center for East Asia. In
particular, Hong Kong is renowned for its rule of law, lack of trade barriers, and low
taxes. Despite a robust 10.5 percent GDP growth rate in 2000, Hong Kong was affected
seriously by a drop in U.S. economic growth and a concomitant fall-off in U.S. imports,
with GDP growth collapsing to 0.1 percent in 2001. The economy is growing slowly in
2002 as global demand for Hong Kong’s exports recovers. In 2002, the government has
continued to ease barriers to economic flows, particularly of “people, cargo, capital, information and services,” with mainland China. There are fears, however, that the government may abandon its traditional laissez-faire stance. Chief Executive C. H. Tung’s top
financial and industrial policy aides both appear to believe that large changes in Hong
Kong’s economic structure are needed. Since the 1997 handover, worries have persisted
about Chinese political influence in what had been one of the world’s freest political
environments. These worries center on signs of Beijing’s interference in Hong Kong’s
independent judiciary, increasing press self-censorship, and the exclusion of politically
objectionable visitors. In a 1999 immigration case, for example, the government lost in
the Court of Final Appeal and caused an uproar by seeking a “reinterpretation of the
Basic Law” from China’s National People’s Congress (NPC); the government then declared that its recourse to the NPC would be “rare and exceptional.” Otherwise, Hong
Kong’s courts remain independent, and the rule of law is respected. Though press freedoms are respected, several journalists critical of China have lost their jobs in Hong Kong–
owned newspapers over the past two years, raising the specter of self-censorship in Hong
Kong’s media. The May 2002 firing of the South China Morning Post’s Beijing correspondent is the most recent case. The government has been accused of interfering with academic public opinion research that was unflattering to the government. Finally, Hong
Kong’s immigration authorities, under pressure from Beijing, routinely expel or refuse
entry to foreign nationals who are deemed politically controversial. Chinese–American
labor activist Harry Wu was refused entry twice in 2002, and a respected Princeton University professor was detained by immigration officials and questioned at length about
his activities in China before being allowed to enter. Because the rule of law, a free press,
and an independent academic community are the oxygen of a free society, any erosion of
these freedoms bodes ill for the maintenance and expansion of economic freedom. Hong
Kong’s government intervention score is 1 point worse this year. As a result, its overall
score is 0.10 point worse this year.
Chapter 6: The Countries
1
1.45
Free
Wages and Prices 2
Property Rights
1
Regulation
1.0
Black Market 1.5
Scores for Prior Years:
2002: 1.35
1999: 1.30
1996: 1.30
2001: 1.30
1998: 1.30
1995: 1.30
2000: 1.30
1997: 1.40
2001 Data
(in constant 1995 US dollars)
Population: 6,724,900
Total area: 1,092 sq. km
GDP: $164.8 billion
GDP growth rate: 0.1%
GDP per capita: $24,506
Major exports: electrical machinery,
apparatus and appliances, electrical
parts, clothing, textile, jewelry
Exports of goods and services:
$263.44 billion
Major export trading partners:
China 36.9%, US 22.3%, Japan 5.8%,
Germany 5.0%, UK 4.1%
Major imports: foodstuffs, transport
equipment, raw materials, semimanufactures, petroleum (a large
share of which is re-exported)
Imports of goods and services:
$255 billion
Major import trading partners:
China 43.5%, Japan 11.3%, Taiwan
6.9%, US 6.7%
Foreign direct investment (net):
$12 billion
221
TRADE POLICY
Score: 1–Stable (very low level of protectionism)
Hong Kong levies virtually no import tariffs or duties and is
considered a duty-free port. It also does not maintain antidumping or countervailing duties legislation or import quotas. According to the Economist Intelligence Unit, “some excise duties are charged on four groups of commodities [including] hydrocarbon oil, liquors, methyl alcohol and tobacco.”
However, “in the few cases where an import license is required,
it can usually be obtained quickly.” Overall, there are very
few barriers to imports in Hong Kong, which has one of the
world’s most accessible markets. It is an important market
for U.S. exports and consumes U.S. manufactured and agricultural goods at a higher rate per capita than most of the
world’s other economies.
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 1.5–Stable
(low tax rates)
Score—Government Expenditures: 2–Stable
(low level of government expenditure)
Final Score: 2–Stable (low cost of government)
Hong Kong’s top income tax rate is 17 percent; the marginal
rate for the average taxpayer is 17 percent. (The income tax
on individuals is a progressive rate from 2 percent to 17 percent after deductions and allowances, or a flat rate of 15 percent on gross salary—whichever produces the lower tax liability; for purposes of grading Hong Kong’s income tax rate,
the flat 15 percent rate was used.) The corporate tax is 16
percent. In 2001, according to the Hong Kong Economic and
Trade Office, government expenditures equaled 21.6 percent
of GDP. (Hong Kong reports two government expenditure
figures: one that includes only expenditures by the government and another that includes government expenditures by
the housing authority, the five trading funds, and the lottery.
Because of the availability of this new information, the Index
uses the latter measure of government expenditures to compute Hong Kong’s overall fiscal burden of government score.)
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Worse (moderate level)
Based on data from Hong Kong’s Census and Statistics Department, the government consumed 10.3 percent of GDP in
2001, up from the 10 percent reported in the 2002 Index, and
Hong Kong has virtually no state-owned enterprises. Hong
Kong intervened in its stock market in August 1998, purchasing some $15.2 billion in private stocks. The Economist Intelligence Unit reports that “the Exchange Fund Investment (EFI)
aimed for an orderly disposal of the shares to prevent disrupting the stock market, beginning with an initial public offering
of HK$84.6 bn worth of the Hang-Seng Index-linked Tracker
Fund units in late 1999. Another HK$12 bn worth of Tracker
Fund units was sold in the third quarter of 2001. The government has recovered more than HK$138 bn from the Tracker
Fund, and was holding about HK$83 bn in shares in Septem-
222
ber 2001. It plans to hold HK$50 bn for long-term investment
and sell the rest—HK$33bn—through a quarterly offering of
HK$12 bn in shares. But amid weak market sentiment in September, the government announced it would scale down the
size of the Tracker Fund offering in the fourth quarter of 2001
to HK$1 bn.” The Hong Kong Economic and Trade Office
reports that the government’s offering was HK$3 billion in
the first quarter of 2002 and HK$5.8 billion in the second quarter of 2002. There are some indications that the Hong Kong
government might become more interventionist. In March
2002, according to The Wall Street Journal, Finance Minister
Antony Leung indicated during the budget speech that the
government could be a “proactive market enabler.” In May
2001, he had stated that “for certain areas we believe that it
would be good to have a push so that critical mass can be
developed so that the market can take over, the government
may, from time to time, have to step in and give it a push.”
This statement suggests potential government intervention
that bears close watching. Based on the increase in government consumption as a percentage of GDP, Hong Kong’s
government intervention score is 1 point worse this year.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, Hong Kong’s weighted average annual
rate of inflation was –2 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 1–Stable (very low barriers)
Hong Kong’s government is one of the most receptive to investment in the world and does not discriminate between foreign and domestic investors. There are virtually no restrictions on foreign capital, ownership of property or companies,
or investment except in the media sector. According to the
Economist Intelligence Unit, foreign entities may own no more
than 49 percent of local broadcast stations or cable operations. There are no controls or requirements on current transfers, purchase of real estate, access to foreign exchange, or
repatriation of profits. The Securities and Futures Bill, passed
on March 13, 2002, consolidates 10 existing ordinances and
introduces some new elements to simplify the regulatory environment, increase transparency, and strengthen the securities regulator.
BANKING AND FINANCE
Score: 1–Stable (very low level of restrictions)
Hong Kong is a global banking center and was ninth in the
world in terms of volume of external transactions in 2001.
Banks are classified as licensed banks, restricted licensed banks
(RLBs), and deposit taking companies (DTCs). There were
151 licensed banks, 48 restricted license banks, and 61 deposit
taking companies in Hong Kong at the end of 2000. Banks are
independent of the government, and foreign banks are free to
operate with only limited restrictions. The Hong Kong Monetary Authority (HKMA) removed all remaining restrictions
on the number of branches foreign banks are allowed to main-
2003 Index of Economic Freedom
tain in Hong Kong in November 2001 and reduced requirements on assets for new foreign bank branches to bring them
in line with locally incorporated banks in December 2001.
Regulations governing financial activities in Hong Kong are
light compared to world standards, although the International
Monetary Fund lists caps on the aggregate holding of share
capital and land as a percent of an institution’s capital base.
The Economist Intelligence Unit reports that in January 2002,
Hong Kong’s Securities and Futures Commission enacted new
disclosure and selection criteria for index funds to improve
transparency and investor protection.
BLACK MARKET
Score: 1.5–Stable (low level of activity)
Transparency International’s 2001 score for Hong Kong is 7.9.
Therefore, Hong Kong’s black market score is 1.5 this year.
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
Hong Kong’s market largely sets wages and prices, although
price controls are imposed on rent for some residential properties, public transport, and electricity. The Economist Intelligence Unit reports “The government has the authority to
enforce minimum wages in industries in which remuneration
is ‘unreasonably low’, but has never exercised this power.” According to the U. S. Department of State, Hong Kong’s labor
laws incorporate the principle of “fair wages” and require
compliance with wage agreements; at the same time, Hong
Kong has no mandatory minimum wage and no specific statutory protection for collective bargaining, although the government does not impede or discourage such arrangements.
PROPERTY RIGHTS
Score: 1–Stable (very high level of protection)
The government of Hong Kong fully protects private property rights. The legal system to protect these rights is both
efficient and effective. According to the U.S. Department of
State, “The local court system provides effective enforcement
of contracts, dispute settlements and protection of rights, including intellectual property. Secured interests in property are
recognized and enforced.”
REGULATION
Score: 1–Stable (very low level)
Hong Kong has a simple system for the licensing of businesses.
The regulations imposed on business are few, not burdensome,
and applied uniformly. According to the Economist Intelligence Unit, “the government runs a Business License Information Service with a one-stop service to provide information on the licensing requirements for all business operations…. It normally takes the registrar six working days to
process documents and issue a certificate of incorporation.”
Hong Kong’s labor code is considered fairly relaxed. The
Economist Intelligence Unit reports that “[labor] regulations
on the whole are strictly enforced, but [this] does not present
any unusual difficulties for firms.” In addition, “companies
considering a major new industrial project in Hong Kong
should provide an outline to the Environmental Protection
Department (EPD) early in the planning stage for advice on
any requirements for environmental assessment.”
Chapter 6: The Countries
223
224
2003 Index of Economic Freedom
HUNGARY
Budapest
Trade Policy
Fiscal Burden
3
4
Government Intervention 2
Monetary Policy
3
Foreign Investment 2
Banking and Finance 2
In the April 2002 elections, the Socialists, led by Peter Medgyessy, and their liberal partners, the Free Democrats, defeated the ruling center–right FIDESZ party and won a
parliamentary majority. The center–right coalition, when it came to power in 1998, had
implemented economic liberalization and privatization that led to majority foreign ownership in major industries. Private industry now supplies approximately 80 percent of
GDP, and 90 percent of the banking sector is privately held. Thanks to consistent liberalization and a predictable exchange rate policy, Hungary now attracts one-third of Central
and Eastern Europe’s total foreign direct investment. Among the major unsolved economic problems are the unreformed public sector, which is draining finances, and large
industrial subsidies. Hungary’s economic achievements, combined with the advanced
harmonization of its legal system with European Union requirements, have made it a
likely candidate for the first wave of EU enlargement. Joining the EU remains Hungary’s
main economic and political priority; the government has closed 24 of 29 negotiable
chapters of EU law. Hungary has been a member of NATO since 1999 and is a founding
member of the World Trade Organization and the Central European Free Trade Agreement. Hungary’s fiscal burden of government score is 0.5 point better this year; however,
its trade policy, government intervention, and wages and prices scores are all 1 point
worse. As a result, Hungary’s overall score is 0.25 point worse this year.
TRADE POLICY
Score: 3–Worse (moderate level of protectionism)
According to the World Bank, Hungary’s weighted average tariff rate in 1997 (the most
recent year for which World Bank data are available) was 4.5 percent, up from the 2.48
percent (based on import duties as a percentage of total imports) reported in the 2002
Index. As a result, Hungary’s trade policy score is 1 point worse this year. The Economist
Intelligence Unit reports that “import licenses are required for…food, medicines, textiles,
energy carriers, floor covering, clothing, footwear, cars, precious stones and metals, hazardous chemicals and explosives, tires, paper and wood…. [There is a] global quota applying to textiles, jewelry and precious metals, motor vehicles, domestic cleaning products,
shoes and clothes, among other products.”
FISCAL BURDEN OF GOVERNMENT
Rank:
Score:
Category:
44
2.65
Mostly Free
Wages and Prices 3
Property Rights
2
Regulation
3.0
Black Market 2.5
Scores for Prior Years:
2002: 2.40
1999: 2.95
1996: 3.00
2001: 2.55
1998: 3.00
1995: 3.00
2000: 2.55
1997: 3.00
2001 Data
(in constant 1995 US dollars)
Population: 10,169,000
Total area: 93,030 sq. km
GDP: $56.5 billion
GDP growth rate: 3.8%
GDP per capita: $5,556
Major exports: machinery and
equipment, raw materials, food
products
Exports of goods and services:
$39.9 billion
Major export trading partners:
Germany 35.6%, Austria 7.9%,
Italy 6.3%, France 6.0%
Major imports: machinery and
equipment, other manufactures,
fuels and electricity, food products,
raw materials
Imports of goods and services:
$40.4 billion
Major import trading partners:
Germany 24.9%, Italy 7.9%, Austria
7.4%, Russia 7.0%
Foreign direct investment (net):
$582.7 million
Score—Income and Corporate Taxation: 3–Better
(moderate tax rates)
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 4–Better (high cost of government)
Hungary’s top income tax rate is 40 percent; the marginal rate for the average taxpayer is
40 percent. The top corporate income tax rate is 18 percent. In 2001, government expenditures equaled 49.3 percent of GDP. Based on a clarification in methodology, Hungary’s
income and corporate taxation score is 0.5 point better this year. As a result, its overall
Chapter 6: The Countries
225
fiscal burden of government score is also 0.5 point better this year.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Worse (low level)
Based on data from the International Monetary Fund, the government consumed 11 percent of GDP in 2001, up from the 10
percent reported in the 2002 Index. As a result, Hungary’s government intervention score is 1 point worse this year. In 2000,
according to the IMF, Hungary received 3.43 percent of its total
revenues from state-owned enterprises and government ownership of property.
MONETARY POLICY
Score: 3–Stable (moderate level of inflation)
From 1992 to 2001, Hungary’s weighted average annual rate of
inflation was 9.73 percent, down from the 10.7 percent from 1991
to 2000 reported in the 2002 Index.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Stable (low barriers)
Hungary is very open to foreign investment and is a leader in
foreign investment reform. With few exceptions, the government
allows 100 percent foreign ownership in almost all firms. Foreign
investors receive national treatment, and government approval
is not required in most cases. Foreigners may not purchase agricultural land, but they may purchase real estate once the central
government and the county government grant permission or if
they have a residence permit or have worked in Hungary for five
years. Licenses for air transport and shipping and asset management services are subject to approval. The government restricts
ownership of broadcasting and newspapers and continues to hold
a “golden share” with power to veto sales in many privatized
“strategic” enterprises. (A ruling by the European Court of Justice could make golden shares illegal for members of the European Union, which Hungary is seeking to join.) The National
Bank of Hungary permits foreign exchange accounts held by residents, subject to approval, and non-residents are free to hold foreign exchange accounts. Hungary places no restrictions or controls on payments for or proceeds from invisible transactions,
current transfers, real estate transactions, or repatriation of profits. Some issues or sales of capital market securities, bonds, debt
securities, derivatives, credits, and some outward direct investments require authorization.
BANKING AND FINANCE
Score: 2–Stable (low level of restrictions)
The banking industry is increasingly competitive. Banks are relatively free from burdensome government oversight, and the state
has largely left the banking sector. Foreign banks face no barriers
to entry into the Hungarian market. According to the Economist Intelligence Unit, “The trend of declining state shareholdings
has been accompanied by a corresponding increase in foreign
ownership, from 14.9% in 1994 to 67.6% by 2000.” The U.S. Department of State reports that “34 banks are in majority foreign
ownership. Wholly owned subsidiaries or branches of foreign
226
banks are acquiring an increasingly larger share of the market.”
The government still holds equity in four banks whose total assets are 5 percent of the banking system. Privatization of the
banking industry is progressing; the government plans to sell its
shares of Budapest Bank and OTP Bank, and the future of
Postabank is still under consideration.
WAGES AND PRICES
Score: 3–Worse (moderate level of intervention)
Hungary has eliminated most price controls on products and
services offered by private concerns. However, the central government maintains price controls on pharmaceuticals, long distance public transport, basic telephone service, basic postal service, electricity, natural gas, and water supply and sewage. Local
governments control prices on steam and hot water supply, local
public transport, local water supply and sewage disposal, rent,
and certain public services. The central government also offers a
wholesale price floor for many agricultural products and price
ceilings for housing. According to the Hungarian embassy, central government price controls cover 10 percent of total consumption, and local government price controls cover 6 percent of total
consumption. Hungary has a minimum wage, but the U.S. Department of State reports that “many citizens, while officially
earning the minimum wage, actually were paid higher wages
informally so that their employers could avoid high payroll taxes.”
Based on new evidence that price controls influence up to 16
percent of consumption, Hungary’s wages and prices score is 1
point worse this year.
PROPERTY RIGHTS
Score: 2–Stable (high level of protection)
The constitution provides for an independent judiciary, and the
government respects this provision in practice. The threat of expropriation is low. However, the Economist Intelligence Unit reports that the court system is slow and severely overburdened.
REGULATION
Score: 3–Stable (moderate level)
Much of Hungary’s regulatory regime corresponds with European Union standards. A business license is required only for a
few activities, and the government has streamlined the process
for obtaining a license. However, regulations are not always transparent or evenly applied. According to the U.S. Department of
State, “a lack of regulatory and legal transparency is a common
complaint of companies doing business in Hungary…. [S]ome
foreign companies have complained about incidents of corruption or illicit influence in government administration.” In December 2001, the government liberalized the telecommunications
market.
BLACK MARKET
Score: 2.5–Stable (moderate level of activity)
Transparency International’s 2001 score for Hungary is 5.3. Therefore, Hungary’s black market score is 2.5 this year.
2003 Index of Economic Freedom
ICELAND
Rank:
Score:
Category:
Reykjavik
Trade Policy
Fiscal Burden
2
3
Government Intervention 2
Monetary Policy
2
Foreign Investment 2
Banking and Finance 3
Iceland, the second largest island in the North Atlantic, is a sparsely populated
country. Fishing grounds are its primary natural resource. According to the Embassy of Iceland, marine products constitute more than 70 percent of the value of
Iceland’s exports; however, this export trade is in danger because of Iceland’s quota
system, which was introduced in the early 1990s to protect a depleted cod stock.
The Economist Intelligence Unit reports that “television footage in November [2001]
showing fishermen throwing discarded catches back into the water has led to much
criticism of the quota system, which is deemed responsible for this wastage and is
restraining Icelandic exports of marine products in 2001–2002.” In addition to benefiting from trade, the economy has prospered as a result of the government’s
privatization program. Industries privatized during the past 10 years range from
financial institutions to pharmaceutical companies, although the government has
failed to find a buyer for Iceland Telecom and needs to expand its privatization
plan to include the National Power Company. Privatization paves the way for expanded foreign investment, and Iceland plans to change other policies, such as tax
rates, to attract more foreign investment as well. Although taxes are high, the Economist Intelligence Unit reports that the 2002 budget includes measures to cut income and corporate taxes. Prime Minister David Oddsson wants to cut the corporate tax rate to 15 percent and eliminate property taxes by 2004. Iceland’s fiscal
burden of government score and wages and prices score are both 1 point better
this year, and its government intervention score is 0.5 point better. As a result,
Iceland’s overall score is 0.25 point better this year, making it a free economy.
TRADE POLICY
Score: 2–Stable (low level of protectionism)
According to the World Bank, Iceland’s weighted average tariff rate in 1996 (the
most recent year for which World Bank data are available) was 3.6 percent. Although the average tariff rate is low, the government maintains high tariffs and
heavy subsidies in the agricultural sector.
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 2–Better
(low tax rates)
Score—Government Expenditures: 4–Stable
(high level of government expenditure)
Final Score: 3–Better (moderate cost of government)
Iceland has a flat income tax rate of 35 percent; therefore, both the top rate and the
marginal rate for the average taxpayer are 35 percent. The top corporate tax rate
was lowered from 30 percent to 18 percent in a December 2001 tax reform. In
2001, government expenditures equaled 39.7 percent of GDP. The Economist Intelligence Unit reports that the prime minister wants to cut the corporate income
tax to 15 percent and abolish property taxes by 2004 and reduce the top income tax
Chapter 6: The Countries
11
1.90
Free
Wages and Prices 1
Property Rights
1
Regulation
Black Market
2
1
Scores for Prior Years:
2002: 2.15
1999: 2.15
1996: n/a
2001: 2.15
1998: 2.15
1995: n/a
2000: 2.15
1997: 2.25
2001 Data
(in constant 1995 US dollars
unless otherwise indicated)
Population: 286,275
Total area: 103,000 sq. km
GDP: $9.1 billion
GDP growth rate: 2.1%
GDP per capita: $31,787
Major exports: fish and fish
products, aluminum, diatomite,
ferrosilicon
Exports of goods and services:
$3.02 billion
Major export trading partners:
UK 19.4%, Germany 16.4%, US 12.2%,
Netherlands 7.2%, France 4.6%,
Japan 4.3%
Major imports: machinery and
equipment, petroleum products,
foodstuffs, textiles
Imports of goods and services:
$3.6 billion
Major import trading partners:
Germany 11.8%, US 11.0%, UK 9.0%,
Norway 8.1%, Denmark 7.9%
Foreign direct investment (net):
–$204.7 million (2000)
227
rate by the end of 2003. Based on the reduced corporate tax
rate, as well as a clarification in the methodology for calculating the income tax score, Iceland’s fiscal burden of government score is 1 point better this year.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Better (low level)
Data from the International Monetary Fund indicate that the
government consumed 23.3 percent of GDP in 2001. In 2000,
based on data from the Ministry of Finance, Iceland received
1.1 percent of its total revenues from state-owned enterprises
and government ownership of property, down from the 5.7
percent reported in the 2002 Index. As a result, Iceland’s government intervention score is 0.5 point better this year.
MONETARY POLICY
Score: 2–Stable (low level of inflation)
From 1992 to 2001, Iceland’s weighted average annual rate of
inflation was 5.6 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Stable (low barriers)
Iceland generally welcomes foreign investment, and foreign
investors receive domestic treatment, although the government still maintains some restrictions in such key areas as fishing and primary fish processing, aviation, and energy. In the
fishing industry, for example, foreign direct investment is restricted. There are no controls or requirements on current
transfers, purchase of real estate, access to foreign exchange,
or repatriation of profits. Although permission is rarely withheld, individuals or companies whose principal residence or
office is not located in the European Union or the European
Economic Area must apply to the Ministry of Agriculture,
Food, and Rural Development to purchase land. Iceland does
not have many barriers, but those that exist—particularly in
the fishing industry—affect a major portion of the economy.
As a result, Iceland’s capital flows and foreign investment score
is unchanged this year.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
Since joining the European Economic Area (EEA), Iceland has
complied with European Union directives by liberalizing and
deregulating financial markets and allowing Icelandic financial institutions to operate on a cross-border basis in the EEA
and EEA financial institutions to operate similarly in Iceland.
The Icelandic Investment Bank has been completely privatized,
and approximately 30 percent of the two remaining stateowned commercial banks (the National Bank of Iceland and
Agricultural Bank of Iceland) has been sold with a view to
full privatization by the end of 2003. There are only four commercial banks in Iceland, giving the state considerable influence over this sector. If privatization proceeds as planned,
Iceland’s banking and finance score could improve in future
editions of the Index.
228
WAGES AND PRICES
Score: 1–Better (very low level of intervention)
The market sets most prices in Iceland, although agriculture
remains subsidized. According to the Economist Intelligence
Unit, “Price support and export subsidies have been replaced
with subsidies in the form of direct income payments to farmers. The agricultural sector is nevertheless one of the most
heavily subsidized and protected in the world.” However, the
very low portion of economic output resulting from the agricultural sector minimizes the impact of agricultural subsidies.
Collective bargaining agreements set workers’ pay, hours, and
working conditions; government plays a minor role, primarily as a mediator, in this process. Iceland does not have a minimum wage. Based on evidence of the low level of government intervention in setting wages, as well as the small portion of economic output generated by the agricultural sector,
Iceland’s wages and prices score is 1 point better this year.
PROPERTY RIGHTS
Score: 1–Stable (very high level of protection)
Private property is well-protected in Iceland. The U.S. Department of State reports that “the Constitution and law provide
for an independent judiciary, and the Government respects
this provision in practice…. With limited exceptions, trials are
public and conducted fairly, with no official intimidation.”
REGULATION
Score: 2–Stable (low level)
Over the past several years, significant deregulation and some
privatization have opened Iceland’s economy to greater competition and efficiency. In the early 1990s, according to the
Economist Intelligence Unit, “the government initiated extensive structural reforms and a reassessment of economic policies pursued in earlier years. This process accelerated when
Iceland joined the European Economic Area (EEA) and started
implementing EU law and directives. At the core of these reforms was a greater emphasis on an extensive liberalization
program and the privatization of state-owned enterprises.”
Some of the economy—especially fishing and agriculture—
remains heavily regulated. For example, reports the Economist Intelligence Unit, “Iceland has stood aloof from membership of the EU, largely in order to maintain exclusive control of its vital fisheries resources. Opponents of EU membership claim that as a member of the EU, Iceland would be
bound by the common fisheries policy (CFP), which would
be unacceptable for an economy which relies so heavily on
fishing.” There has been talk of reforming the fisheries quota
system, which the International Monetary Fund says would
“add further to the transparency of public policies.”
BLACK MARKET
Score: 1–Stable (very low level of activity)
Transparency International’s 2001 score for Iceland is 9.2.
Therefore, Iceland’s black market score is 1 this year.
2003 Index of Economic Freedom
INDIA
New Delhi
Rank:
119
Score:
3.50
Category: Mostly Unfree
Trade Policy
Fiscal Burden
5
4
Government Intervention 3
Monetary Policy
2
Foreign Investment 3
Banking and Finance 4
Despite substantial progress with economic reform since 1991, every advance uncovers another layer of obstacles to a truly free market in India. For example, tariffs
were reduced on most products, but a “special additional duty” was added, and
numerous non-tariff barriers remain in effect. A survey by the Political and Economic Risk Consultancy rated India at the bottom of countries in Asia because of
the extreme resistance to change in India’s bureaucracy. There is substantial consensus across the political spectrum in favor of economic reform, but political parties frequently express nominal support for policies or legislation and then oppose
them to score political points with constituents. Although many of India’s national
security goals are being furthered by the American war on terrorism, the persistence and viciousness of terrorist attacks launched from Pakistani soil have pushed
India and Pakistan to the brink of nuclear war. Despite the foregoing problems,
however, the Indian government and Indian entrepreneurs are gaining needed experience and are learning to adjust economic policy to their country’s particular
circumstances. There is therefore reason to be cautiously optimistic about the longterm prospects for successful economic reform. India’s fiscal burden of government score is 0.5 point worse this year, but its wages and prices score is 1 point
better. As a result, India’s overall score is 0.05 point better this year.
TRADE POLICY
Score: 5–Stable (very high level of protectionism)
According to the World Bank, India’s weighted average tariff rate in 1999 (the most
recent year for which World Bank data are available) was 28.5 percent. The government, reports the Economist Intelligence Unit, “has directed that 131 imported
products must comply with the mandatory standards applicable to domestic products and register themselves with the Bureau of Indian standards for this purpose.
The list includes food preservatives and additives, milk powder, infant milk food,
household and similar electrical appliances.”
FISCAL BURDEN OF GOVERNMENT
Wages and Prices 3
Property Rights
3
Regulation
Black Market
Scores for Prior Years:
2002: 3.55
1999: 3.80
1996: 3.85
2001: 3.85
1998: 3.80
1995: 3.80
2000: 3.80
1997: 3.80
2000 Data
(in constant 1995 US dollars)
Population: 1,015,923,000
Total area: 3,287,590 sq. km
GDP: $466.7 billion
GDP growth rate: 6.0%
GDP per capita: $459
Major exports: textile goods, gems
and jewelry, engineering goods,
chemicals, leather manufactures
Exports of goods and services:
$56.5 billion
Major export trading partners:
US 20.9%, UK 5.2%, Germany 4.3%,
Japan 4.0%
Major imports: crude oil, machinery,
gems, fertilizer, chemicals
Imports of goods and services:
$68.4 billion
Major import trading partners:
UK 6.3%, US 6.0%, Belgium 5.7%,
Japan 3.6%, Germany 3.5%
Foreign direct investment (net):
$2.2 billion
Score—Income and Corporate Taxation: 2.5–Stable
(moderate tax rates)
Score—Government Expenditures: 5–Worse
(very high level of government expenditure)
Final Score: 4–Worse (high cost of government)
India’s top income tax rate is 30 percent; the marginal rate for the average taxpayer
is 0 percent. The top corporate tax rate is 35 percent. In 2000, government expenditures equaled 30.6 percent of GDP, up from the 26.8 percent reported in the 2002
Index. Based on the higher level of government expenditure, India’s overall fiscal
burden of government score is 0.5 point worse this year.
Chapter 6: The Countries
4
4
229
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Stable (moderate level)
The World Bank reports that the government consumed 13.2 percent of GDP in 2000. In the same year, according to the International Monetary Fund, India received 21.91 percent of its total revenues from state-owned enterprises and government ownership
of property.
MONETARY POLICY
Score: 2–Stable (low level of inflation)
Data from the International Monetary Fund’s 2002 World Economic
Outlook indicate that from 1992 to 2001, India’s weighted average
annual rate of inflation was 4.30 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
According to the International Monetary Fund, foreign investors
may acquire 100 percent of Indian businesses in all sectors “except
for 13 items that require the approval of the Foreign Investment
Promotion Board (FIPB) and for another seven items where less
than 100% is allowed. There are other exclusions, such as industrial licensing and locational policies.” These restricted sectors include (among others) postal services, agriculture, atomic energy
and related projects, petroleum, civil aviation, banking, advertising, exploration of minerals and mining, drugs and pharmaceuticals, insurance, housing and real estate development, and telecommunications. The IMF reports that central bank approval is required
for residents to open foreign currency accounts, either domestically or abroad, and that such accounts are subject to significant
restrictions. Non-residents may hold foreign exchange and domestic currency accounts, subject to approval and conditions. Some
payments and transfers face quantitative limits and bona fides tests.
The IMF also reports numerous restrictions and requirements on
capital transactions. Resident companies may not issue rupee-denominated derivatives or similar instruments in India and must get
the central bank’s approval to sell them abroad; non-residents may
neither sell nor issue them. Some credit operations face restrictions. Outward direct investment over a set amount requires central bank approval.
BANKING AND FINANCE
Score: 4–Stable (high level of restrictions)
In December 2001, Standard & Poor’s reported that the government has majority ownership of 27 commercial banks, which account for approximately 80 percent of banking assets, and that
non-performing loans are estimated to be over 20 percent of total
loans. The same source reports that the government “politicizes
the financial sector and reinforces its quasi-fiscal role through mandatory lending to favored borrowers. The political preference is to
‘revive’ weak banks with more cash rather than to restructure with
closures and cost cutting.” The government has shown more tolerance for foreign banks in recent years. The Confederation of
Indian Industries reported in April 2002 that “RBI [the central bank]
has allowed FDI in private banks up to 49 percent through automatic route. For other public sector banks, including State Bank of
230
India, the limit is 20 percent.” As of July 2000, there were 45 foreign
banks with 180 branches operating in India, accounting for some
10 percent of deposits. Under the law, foreign investors may acquire no more than 26 percent ownership in insurance.
WAGES AND PRICES
Score: 3–Better (moderate level of intervention)
Central and state governments still regulate the pricing of
some products, which includes subsidizing the price of electricity. The Financial Times reports that India has abolished
price controls in its oil and refinery sectors and that state subsidies for all oil and gas products have been eliminated, except
for kerosene and cooking gas. According to The Economist, “A
dozen items, cement and yarn among them, are to be removed
from the list of 29 governed by the [1955 Essential Commodities Act]. More important is the removal of restrictions on
storage and movement of grain and sugar, which should improve farmers’ access to markets and encourage private investment in distribution.” India has numerous minimum
wages that vary according to state and industry. Based on the
liberalization of price controls, India’s wages and prices score
is 1 point better this year.
PROPERTY RIGHTS
Score: 3–Stable (moderate level of protection)
Protection of property rights is applied unevenly in India. The
Economist Intelligence Unit reports that “large backlogs create
delays—sometimes years long—in reaching decisions. Consequently, foreign corporations often include clauses for international
arbitration in their contracts.” Protection of property for local investors, particularly the smallest ones, is weak.
REGULATION
Score: 4–Stable (high level)
Businesses must contend not only with considerable federal regulation, but also with additional regulation at the state level, where
governments exercise a great deal of power. According to the
U.S. Department of State, the government has established independent regulators in such key areas as telecommunications, electricity, and insurance to improve the regulatory environment, but
these regulators are “still developing their working methods.” In
addition, “Indian industry remains highly regulated by a powerful bureaucracy armed with excessive rules and broad discretion…. The speed and quality of regulatory decisions governing
important issues such as zoning, land-use and environment varies dramatically from one state to another.” The Economist Intelligence Unit reports that “India’s labour laws are overlapping,
potentially inconsistent and cumbersome—with more than 45
pieces of relevant legislation. There are specific difficulties in terminating employment and closing an industrial establishment.”
BLACK MARKET
Score: 4–Stable (high level of activity)
Transparency International’s 2001 score for India is 2.7. Therefore,
India’s black market score is 4 this year.
2003 Index of Economic Freedom
INDONESIA
Rank:
99
Score:
3.30
Category: Mostly Unfree
Jakarta
Trade Policy
Fiscal Burden
3
2.5
Government Intervention 3
Monetary Policy
3
Foreign Investment 3
Banking and Finance 4
Indonesia is mired in political and economic stasis. President Megawatti has a reputation for indecisiveness and ignorance of economic policy. Vice President Hamzah Haz,
who purchased his doctoral degree from a store-front university, hosted a dinner at his
home for Indonesia’s most notorious alleged terrorists while the world was roundly
criticizing Jakarta for its inaction against religious and political extremists. This leadership vacuum has created a governmental environment in which non-performance either is tolerated or simply goes unnoticed. The Indonesian Bank Restructuring Agency
(IBRA), which is responsible for selling off non-performing loans (NPLs) assumed by
the government after the 1997 financial disaster, has sold very few of its holdings, and
the value of the NPLs continues to decline as the IBRA searches for a market. Even
though the Indonesian government—under four different presidents in as many years—
continues to declare war on corruption, it is considered one of the most corrupt in
Asia. There are some signs of progress; the International Monetary Fund has released
a $347 million tranche to the government, tariffs and licensing requirements for foreign goods have been reduced and economic growth should benefit in 2002 from the
global recovery. Without firm leadership, however, Indonesia’s economy is not likely
to improve significantly, at least in the near term. Indonesia’s government intervention
score is 0.5 point worse this year; however, its monetary policy score is 1 point better.
As a result, Indonesia’s overall score is 0.05 point better this year.
TRADE POLICY
Score: 3–Stable (moderate level of protectionism)
According to the World Bank, Indonesia’s weighted average tariff rate in 2000 (the
most recent year for which World Bank data are available) was 5.2 percent. The Economist Intelligence Unit reports that the government restricts imports of “alcoholic
beverages…lubricants, plastics, pesticides, maize, mung beans, peanuts and salt.”
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3–Worse
(moderate tax rates)
Score—Government Expenditures: 2–Stable
(low level of government expenditure)
Final Score: 2.5–Stable (moderate cost of government)
Indonesia’s top income tax rate increased from 30 percent to 35 percent when a new
tax law was implemented on January 1, 2001. The marginal rate for the average taxpayer is still 5 percent, and the top corporate income tax rate remains 30 percent. In
2000, according to the Asian Development Bank, government expenditures equaled 17
percent of GDP. Based on a clarification in methodology, Indonesia’s income and corporate taxation score 0.5 point worse this year; however, this is not sufficient to affect
its overall fiscal burden of government score, which is unchanged.
Chapter 6: The Countries
Wages and Prices 2
Property Rights
4
Regulation
4.0
Black Market 4.5
Scores for Prior Years:
2002: 3.35
1999: 3.10
1996: 2.85
2001: 3.55
1998: 2.85
1995: 3.40
2000: 3.50
1997: 2.90
2000 Data
(in constant 1995 US dollars)
Population: 210,421,000
Total area: 1,919,440 sq. km
GDP: $209 billion
GDP growth rate: 4.8%
GDP per capita: $994
Major exports: oil and natural gas,
electrical appliances, plywood,
textiles, rubber
Exports of goods and services:
$54.4 billion
Major export trading partners:
Japan 23.4%, US 13.8%, Singapore 10.7%,
South Korea 7.0%, China 4.5%
Major imports: machinery and
equipment, chemicals, fuels,
foodstuffs
Imports of goods and services:
$45.5 billion
Major import trading partners:
Japan 16.3%, Singapore 11.4%,
US 10.2%, South Korea 6.3%,
China 6.1%, Australia 5.1%
Foreign direct investment (net):
–$4.3 billion
231
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Worse (moderate level)
The World Bank reports that the government consumed 7
percent of GDP in 2000. In 1999, according to the International Monetary Fund, Indonesia received 5.18 percent of its
total revenues from state-owned enterprises and government
ownership of property. However, these figures appear to understate the true level of government involvement in the
economy. According to Indonesia’s Statistics Office, the government employs over 20 percent of the labor force, and the
World Bank reports that the government maintains a considerable amount of “off-balance sheet obligations of public sector corporations.” Based on the apparent unreliability of reported total revenue figures, 1 point has been added to
Indonesia’s government intervention score instead of the 0.5
point that would have been added had the data been fully reliable; in addition, 1 point has been added to the government
consumption figure based on the evidence of greater government participation in the economy than the reported data indicate. As a result, Indonesia’s government intervention score
is 0.5 point worse this year.
MONETARY POLICY
Score: 3–Better (moderate level of inflation)
From 1992 to 2001, Indonesia’s weighted average annual rate
of inflation was 11.84 percent, down from the 12.41 percent
from 1991 to 2000 reported in the 2002 Index. As a result,
Indonesia’s monetary policy score is 1 point better this year.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
Indonesia permits 100 percent foreign ownership in many sectors and has opened several sectors to foreign investors, but
many barriers remain. According to the government’s 2000
“negative list,” 11 business sectors are closed to both foreign
and domestic investment. Eight are open to domestic investment but closed to foreign investment. The International
Monetary Fund reports that both residents and non-residents
may hold foreign exchange checking and time deposit accounts. There are no restrictions on payments and transfers.
Beginning in January 2001, Indonesia prohibited lending and
overdraft to non-residents, placing funds with non-residents,
purchase of rupiah-denominated securities issued by non-residents, interoffice transactions in rupiah, and equity participation in rupiah with non-residents. According to the U.S. Department of State, “Investor confidence remains depressed,
with existing and potential investors citing a number of concerns: political uncertainty, the unknown impact of political
and fiscal decentralization, uneven implementation of economic reform commitments, the unreliable judicial system,
security issues, and treatment of existing investors.”
in 1999 that has stabilized the banking sector but is not yet
completed. While the banking sector is no longer in a state of
collapse, it has not yet recovered to pre-crisis levels, and several large state-owned banks continue to lose money.” The
Economist Intelligence Unit reports that the state banks are
the primary source of medium-term to long-term credit for
most domestic companies. The government’s agencies
charged with restructuring corporate debt and recapitalizing
the banking sector have made progress, but the banking system remains fragile, and much more needs to be done. Four
years after the fact, in June 2002, the Indonesia Bank Restructuring Agency offered for sale $30 billion (book value) in bad
loans dating back to the Asian financial crisis. It also sold 51
percent of Bank Central Asia, Indonesia’s largest commercial
bank, to a foreign investor in early 2002.
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
According to the Economist Intelligence Unit, “A handful of
commodities and services remained classified as under ‘administered prices.’ These include petrol, electricity, liquefied
petroleum gas, rice, cement, hospital services, potable/piped
water, city transport, air transport, telephone charges, trains,
salt, toll-road tariffs and postage.” Regional wage councils establish minimum wages for their areas under the supervision
of the National Wage Council.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
Court rulings can be arbitrary and inconsistent, and the judicial system suffers from corruption. “Indonesia’s judiciary has
an erratic record of arbitration with foreign businesses,” reports the Economist Intelligence Unit, and “Indonesia’s protection of property rights is even worse…. The court system
does not provide adequate legal recourse for settling property disputes.” The Laksamana.Net news network reports that
a PriceWaterhouseCoopers audit of the attorney general’s
office “revealed endemic corruption within the institution that
allows Indonesia’s wealthy elite to buy justice.”
REGULATION
Score: 4–Stable (high level)
Indonesia’s regulatory environment is plagued by corruption
and red tape. According to the Economist Intelligence Unit,
“Facilitation fees, personal relationships and a subjective legal
system limit the abilities of foreign firms to obtain permits,
licenses, and government contracts and concessions.” The U.S.
Department of State reports that “Indonesia has a tangled
regulatory and legal environment…. Laws and regulations are
often vague and require substantial interpretation by implementing offices, leading to business uncertainty.”
BANKING AND FINANCE
BLACK MARKET
Score: 4–Stable (high level of restrictions)
According to the U.S. Department of State, Indonesia’s government “launched a massive bank recapitalization program
Score: 4.5–Stable (very high level of activity)
Transparency International’s 2001 score for Indonesia is 1.9.
Therefore, Indonesia’s black market score is 4.5 this year.
232
2003 Index of Economic Freedom
IRAN
Tehran
Rank:
Score:
Category:
Trade Policy
Fiscal Burden
3
2.5
Government Intervention 4
Monetary Policy
4
Foreign Investment 4
Banking and Finance 5
Iran had one of the Middle East’s most advanced economies before it was crippled
by the 1979 Islamic revolution, the devastating 1980–1988 Iran–Iraq war, and widespread economic mismanagement. Hopes for systematic political and economic
reform were raised under President Mohammed Khatami, who was re-elected in
June 2001, but Khatami has been hamstrung by opposition from entrenched bureaucrats who permeate the state agencies and by Islamic hard-liners in the judiciary and elsewhere who value ideological purity over economic progress. In late
2001, for example, the Council of Guardians rejected foreign investment legislation passed by the Majlis (parliament). In March 2002, however, Khatami’s government was able to establish a new unified currency regime, and the central bank
has given permission for the establishment of Iran’s first private banks since the
1979 revolution. Iran’s trade policy and fiscal burden of government scores are
both 2 points better this year. As a result, its overall score is 0.40 point better this
year.
TRADE POLICY
Score: 3–Better (moderate level of protectionism)
According to a World Bank study, Iran’s average tariff rate in 2000 was 6.1 percent,
down from the 18.93 percent (based on import duties as a percentage of total imports) reported in the 2002 Index. As a result, Iran’s trade policy score is 2 points
better this year. This trade statistic reflects the average collected tariff plus the
average commercial benefit tax on imports. The World Bank reports that “the
main instruments of commercial policy have been non-tariff barriers and the system of multiple exchange rates rather than explicit import tariffs.”
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3–Better
(moderate tax rates)
Score—Government Expenditures: 2–Better
(low level of government expenditure)
Final Score: 2.5–Better (moderate cost of government)
Iran’s top income tax rate is 54 percent; according to Arthur Andersen, the marginal rate for the average taxpayer is 12 percent, down from the 25 percent reported in the 2002 Index. Middle East Business Weekly reports that the top corporate
tax rate was recently reduced to 25 percent, down from the 54 percent reported in
the 2002 Index. In 2000, based on data from the International Monetary Fund, government expenditures equaled 18.6 percent of GDP, down from the 25.7 percent
reported in the 2002 Index. Based on new evidence of lower tax rates and a lower
level of government expenditure, Iran’s overall fiscal burden of government score
is 2 points better this year.
Chapter 6: The Countries
146
4.15
Repressed
Wages and Prices 4
Property Rights
5
Regulation
Black Market
5
5
Scores for Prior Years:
2002: 4.55
1999: 4.55
1996: 4.65
2001: 4.70
1998: 4.70
1995: n/a
2000: 4.55
1997: 4.70
2000 Data
(in constant 1995 US dollars)
Population: 63,664,000
Total area: 1,648,000 sq. km
GDP: $105 billion
GDP growth rate: 5.8%
GDP per capita: $1,649
Major exports: petroleum, carpets,
fruits and nuts, iron and steel,
chemicals
Exports of goods and services:
$20.6 billion
Major export trading partners:
Japan 17.7%, Italy 7.9%, France 7.5%,
United Arab Emirates 7.5%
Major imports: industrial raw
materials and intermediate goods,
capital goods, foodstuffs and other
consumer goods, technical services,
military supplies
Imports of goods and services:
$12.5 billion
Major import trading partners:
Germany 9.8%, Japan 9.4%, Italy
6.2%, United Arab Emirates 6.2%,
China 4.9%
Foreign direct investment (net):
$35.7 million
233
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 4–Stable (high level)
The World Bank reports that the government consumed 14
percent of GDP in 2000. However, this figure may underestimate the level of state involvement in the economy since the
private sector is extremely small. The Economist Intelligence
Unit reports that “inefficient state owned enterprises (SOEs),
and politically powerful individuals and institutions such as
the bonyad (Islamic ‘charities’ that control large business conglomerates) have established a tight grip on much of the nonoil economy, utilising their preferential access to domestic
credit, foreign-exchange, licences, and public contracts to protect their positions. These advantages have made it difficult
for the private sector to compete, and as a result it remains
small….” Based on the apparent unreliability of reported government consumption figures, as well as the level of stateowned enterprise, 2 points have been added to Iran’s government intervention score.
MONETARY POLICY
Score: 4–Stable (high level of inflation)
From 1992 to 2001, Iran’s weighted average annual rate of
inflation was 13.2 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 4–Stable (high barriers)
In June 2000, Iran passed its first foreign investment law since
the 1950s after a year of debate between the reformist parliament and the reactionary Council of Guardians that had
blocked the legislation. According to the Financial Times, a
compromise was struck by including ceilings of 25 percent of
market share for foreigners by economic sector and a cap of
35 percent of individual industries. Under the new law, nationalization or expropriation of investments will be reimbursed at fair market value, foreign investors will be permitted to invest in any sector open to domestic investors, and
repatriation of profits will be permitted in hard currencies.
The government screens all investments. The International
Monetary Fund reports that most payments and transfers face
limitations, quantitative limits, or approval requirements. All
credit operations face government controls, as do most personal capital movements.
private banks were nationalized. The central bank approved
the first three private banks in mid-2001, but they have not
yet begun to operate because they have not met minimum
capital requirements. According to the Economist Intelligence
Unit, “Those Iranians able to do so operate bank accounts
outside the country, rather than use the domestic system.” If
recent liberalization is adhered to and private banks are permitted to operate, Iran’s banking and finance score could improve in future editions of the Index.
WAGES AND PRICES
Score: 4–Stable (high level of intervention)
The government influences prices through the large public
sector and extensive subsidies. According to the U.S. Department of State, “The Labor Code empowers the Supreme Labor Council to establish annual minimum wage levels for each
industrial sector and region. It is not known if the minimum
wages are adjusted annually or enforced.” The size of Iran’s
public sector clearly indicates that the government sets wages
for a large portion of the labor force.
PROPERTY RIGHTS
Score: 5–Stable (very low level of protection)
Property rights are not protected in Iran. The U.S. Department of State reports that “the court system is not independent and is subject to government and religious influence. It
serves as the principal vehicle of the State to restrict freedom
and reform in the Society.” According to the Financial Times,
the judiciary has initiated a new wave of repression by the
“crackdown…against pro-reform media and activists.” The
Economist Intelligence Unit reports that the government permits private investment in state land, but not land ownership.
REGULATION
Score: 5–Stable (very high level)
The government effectively discourages the establishment of
new businesses. President Khatami’s attempts to instill reform
have been largely unsuccessful, and the rule of law remains
weak. The Economist Intelligence Unit reports that regulations are applied unevenly in most cases, the legislative structure is inadequately developed, and corruption is a continuing problem.
BANKING AND FINANCE
BLACK MARKET
Score: 5–Stable (very high level of restrictions)
The ability of banks to charge interest is restricted under Iran’s
interpretation of Islamic law. Much of Iran’s commercial bank
loan portfolio is tied up in low-return loans to state-owned
enterprises and politically connected individuals or businesses.
Privatization of state banks is fiercely opposed by conservative elements, and proposals for full or partial privatization of
state banks have stalled. In 1998, foreign banks were allowed
to establish limited ventures in the free-trade zones. In April
2000, the government announced that it would permit private banks for the first time since the 1979 revolution, when
Score: 5–Stable (very high level of activity)
Smuggling is rampant. According to the Economist Intelligence Unit, “The highly fluid nature of Iran’s labour market
and the large size of the informal services sector make accurate estimates of employment levels difficult.” There is an
active black market in currency.
234
2003 Index of Economic Freedom
IRAQ
Baghdad
Rank:
Score:
Category:
Trade Policy
Fiscal Burden
n/a
n/a
Government Intervention n/a
Monetary Policy
n/a
Foreign Investment n/a
Banking and Finance n/a
Iraqi dictator Saddam Hussein has devastated his country’s economy by launching the
1980–1988 Iran–Iraq war, invading Kuwait to precipitate the 1991 Gulf War, and stubbornly refusing to meet the terms for lifting United Nations economic sanctions against
his regime. The Ba’athist socialist government maintains extensive central planning of
the industrial economy and foreign trade while leaving most agriculture, some smallscale industry, and some services to private entrepreneurs. The economy is dominated by
the oil sector, which provides more than 90 percent of hard currency earnings. United
Nations economic sanctions have depressed exports and imports, but the regime reportedly has been bolstered by oil smuggling and illegal surcharges on legal oil buyers. Iraq
refuses to provide basic economic data to the United Nations—a requirement of membership—or any other international organization. This lack of data is so complete that
international financial institutions, foreign government agencies, and private businesses
that provide economic analysis and data refuse to publish any official data or estimates on
Iraq’s economy. This situation makes it impossible to score several factors and raises
questions about the reliability of data in the other factors. As a result, Iraq has been
suspended from grading in the 2003 Index.
TRADE POLICY
Score: Not graded
The government inspects and controls all imports; according to the Economist Intelligence Unit, however, there is considerable smuggling across most of Iraq’s borders. The
International Monetary Fund reports that “imports are restricted by [United Nations]
sanctions. Licenses are issued in accordance with an annual import program. Imports of
all goods from Israel are prohibited. All private imports are subject to licenses, except
imports of materials constituting basic elements for development projects…. [A] tax of
0.5% is levied on all imports of capital goods, and a tax of 0.75% is levied on imports of
consumer goods. All imports subject to import duty are also subject to a customs surcharge…. Imports of commodities are normally handled by the public sector.”
Suspended
n/a
n/a
Wages and Prices n/a
Property Rights
n/a
Regulation
n/a
Black Market n/a
Scores for Prior Years:
2002: 5.00
1999: 4.90
1996: 4.90
2001: 4.90
1998: 4.90
1995: n/a
2000: 4.90
1997: 4.90
2000 Data
(in constant 1995 US dollars)
Population: 23,263,840
Total area: 437,072 sq. km
GDP: n/a
GDP growth rate: 4.0%
GDP per capita: n/a
Major exports: crude oil
Exports of goods and services: n/a
Major export trading partners:
US 46.2%, Italy 12.2%, France 9.6%,
Spain 8.6%
Major imports: food, medicine,
manufactures
Imports of goods and services: n/a
Major import trading partners:
France 22.5%, Australia 22.0%,
China 5.8%, Russia 5.8%
Foreign direct investment (net):
n/a
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: Not graded
Score—Government Expenditures: Not graded
Final Score: Not graded
According to the Economist Intelligence Unit, “Direct taxation has never been a preferred
means of raising revenue in Iraq…. The only effective means of taxation is the customs
duty that is levied at the point of entry into the country; the only entities still paying
corporation tax are large public sector companies. The state does still try to tax the repatriation of foreign-currency remittances by Iraqi professionals abroad…. Even in a postsanctions context, it is unlikely that any Iraqi government would be able to impose an
effective system of personal or corporation taxation in the short run.” Data on taxation
and government expenditure are not available.
Chapter 6: The Countries
235
GOVERNMENT INTERVENTION IN THE ECONOMY
WAGES AND PRICES
Score: Not graded
No recent data on government consumption are available. The
Economist Intelligence Unit reports that in 1993 (the most
recent year for which EIU data are available), the government
consumed 13.9 percent of GDP. The level of state involvement in the economy is significant. According to the Economist Intelligence Unit, “Oil revenue has been the mainstay of
government income since the 1950s. In 1968 the oil-based nature of the economy was reinforced by the introduction of a
centralised socialist system, with the government regulating
all aspects of economic life other than peripheral agriculture,
personal services and trade…. Meanwhile, the state’s centrality to the economy has increased because the vast majority of
imports and foreign exchange have been controlled by the government.”
Score: Not graded
The government controls almost all prices, and for items like
food, rationing is the norm. “Within the oil-for-food
programme,” reports the Economist Intelligence Unit, “the
regime has little choice but to continue to distribute imported
goods in what is essentially a highly centralized command
economy structure, although it does retain the ability to skew
the distribution of food and other items as a way of favouring
key regime supporters.” The government also controls the
oil industry and all utilities, but oil export prices are set by the
United Nations sanctions regime. There is no reliable information on minimum wages.
MONETARY POLICY
Score: Not graded
Data from the Economist Intelligence Unit indicate that from
1994 to 2001, Iraq’s weighted average annual rate of inflation
was 80.41 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: Not graded
Even though Iraq has permitted some foreign investment,
mainly to help it rebuild from the damage of the Persian Gulf
War, it discourages most investment. Contracts are not guaranteed, and there is little recourse in the event their enforcement is needed. The International Monetary Fund reports that
resident and non-resident Iraqis and nationals of other Arab
countries may hold foreign exchange accounts, but approval
is required for some transactions. All payments and transfers
are restricted and face quantitative limits. Most capital transactions must be approved. Non-Arab investment is not permitted in private companies, but Arab investors may participate with Iraqis in industrial, agricultural, and tourism
projects.
PROPERTY RIGHTS
Score: Not graded
Property is not protected in Iraq. “In effect,” reports the Economist Intelligence Unit, “the Revolutionary Command Council (RCC) is the executive, legislative and judicial authority….
The chairman of the RCC is Saddam Hussein, who also appoints a council of ministers, theoretically vested with executive authority, but in fact able only to rubber-stamp decisions
of the RCC and the president.” According to the U.S. Department of State, “the judiciary is not independent, and there is
no check on the President’s power to override any court decision…. [T]he Government shields certain groups from prosecution.”
REGULATION
Score: Not graded
In Iraq, the state owns all significant industries. The private
business sector is small and forced to conduct much of its
activity on the black market. According to the Economist Intelligence Unit, “Government economic policy has been essentially reactive since 1990, driven by the goal of feeding its
patronage network and hence staying in power. Hastily
adopted and frequently inconsistent initiatives are often reversed when their negative results become clear.”
BANKING AND FINANCE
BLACK MARKET
Score: Not graded
According to the Economist Intelligence Unit, “The government controls all financial transactions. Unofficial currency
dealings, although illegal, are widespread, despite periodic
crackdowns. The Central Bank of Iraq acts for the government in issuing and managing currency, establishing banking
controls and disposing of foreign exchange. The major commercial bank is Rafidain Bank, which acts for the state in functions not undertaken by the Central Bank.” The Rasheed Bank
was established in 1989 to compete with the Rafidain Bank
but does not generally compete in international transactions.
Six other banks were established in 1991, but the state remains
firmly in control of banking activity.
Score: Not graded
Smuggling of all kinds of products is rampant. Because of
the sanctions, smuggling oil out of the country is a major
business. The black market in currency is also active. According to the Economist Intelligence Unit, “The small private
sector is engaged in illegal trade, smuggling goods and dealing in foreign exchange on the black market.”
236
2003 Index of Economic Freedom
IRELAND
Dublin
Rank:
Score:
Category:
Trade Policy
Fiscal Burden
2
3
Government Intervention 2
Monetary Policy
2
Foreign Investment 1
Banking and Finance 1
Once a poor, largely agricultural society heavily dependent on the export of commodities to Britain, Ireland has become a modern, highly industrialized economy
that has grown by 80 percent in real terms over the past decade; for eight consecutive years, it has had the European Union’s fastest growing economy. Ireland possesses one of the world’s most pro-business environments, in particular for foreign
businesses and foreign investment. According to Foreign Policy magazine, Ireland
was the world’s most globalized economy in 2002. Not surprisingly, Ireland has
become a major center for U.S. investment in Europe, especially for the computer,
software, and engineering industries. Although accounting for 1 percent of the
euro-zone market, it receives nearly one-third of U.S. investment in the EU. American firms value Ireland’s education system, high-skills economy, and corporate tax
environment and see Ireland as an English-speaking point of entry into Europe.
GDP growth totaled 11.5 percent in 2000 and 5.9 percent in 2001. However, inflation has begun to rise; by the end of 2001, the rate had reached 4.1 percent—well
above the EU average. Ireland’s very competitive corporate taxation rate—currently 16 percent and set to fall to 12.5 percent by 2003—is a major reason for its
astounding recent success. Yet while Ireland has some of Europe’s lowest corporate tax rates, taxes on labor remain high. Given Ireland’s extensive social welfare
system, U.S. employers find that the marginal cost of employing workers is high,
though less expensive than in the major Western European states. For example, a
significant severance package for fired workers is a distinctive feature of the Irish
economy. There also have been pressures to harmonize the Irish economy with
the more statist economic ethos found in Continental Europe. After Ireland was
lectured by Brussels about its “unfair tax competition” (low corporate tax rates)
and censured by the European Commission for its loose fiscal policy, however, the
Irish people voted in June 2001 against ratification of the Nice Treaty, and the
combination of economics and envy from Continental Europe makes it doubtful
that the Irish people will be inclined to reverse themselves as the EU and the Irish
government attempt to win yet another referendum on the treaty scheduled for
the fall of 2002. Ireland’s fiscal burden of government score is 0.5 point better this
year. As a result, its overall score is 0.05 better this year.
TRADE POLICY
Score: 2–Stable (low level of protectionism)
As part of the European Union, Ireland has weighted average tariff rate of 1.8
percent. Ireland’s participation in the Common Agricultural Policy (CAP), a program that heavily subsidizes agricultural goods, acts as a non-tariff barrier. The
Economist Intelligence Unit reports that “approval is required for non-European
Union imports of clothing, textiles and footwear. There are a few specific quotas,
mainly on imports (such as textiles and yarn) that compete with locally produced
goods, but these do not apply to products originating in EU member states.”
Chapter 6: The Countries
5
1.75
Free
Wages and Prices 2
Property Rights
1
Regulation
2.0
Black Market 1.5
Scores for Prior Years:
2002: 1.80
1999: 1.90
1996: 2.10
2001: 1.65
1998: 1.90
1995: 2.10
2000: 1.85
1997: 2.10
2001 Data
(in constant 1995 US dollars)
Population: 3,830,000
Total area: 70,280 sq. km
GDP: $113.7 billion
GDP growth rate: 5.9%
GDP per capita: $29,687
Major exports: machinery and
equipment, computers, chemicals,
pharmaceuticals, live animals, animal
products
Exports of goods and services:
$116.7 billion
Major export trading partners:
UK 20.0%, US 18.2%, Germany 12.9%,
France 6.5%, Netherlands 6.0%
Major imports: data processing
equipment, other machinery and
equipment, chemicals, petroleum
and petroleum products, textiles,
clothing
Imports of goods and services:
$97.3 billion
Major import trading partners: UK
30.3%, US 15.7%, Germany 6.5%,
France 4.9%, Japan 4.5%
Foreign direct investment (net):
$3.9 billion
237
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3–Better
(moderate tax rates)
Score—Government Expenditures: 3–Stable
(moderate level of government expenditure)
Final Score: 3–Better (moderate cost of
government)
Ireland’s top income tax rate is 42 percent; the marginal rate
for the average taxpayer is 42 percent. Ireland is reducing its
top corporate tax rate; the top rate is 16 percent, down from
the 20 percent reported in the 2002 Index, and is scheduled to
be reduced to 12.5 percent in 2003. In 2001, government expenditures equaled 30.6 percent of GDP. Based on the lower
corporate tax rates, Ireland’s overall fiscal burden of government score is 0.5 point better this year.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Stable (low level)
Data from Ireland’s Central Statistics Office indicate that the
government consumed 12.4 percent of GDP in 2001. In the
same year, based on data from Eurostat, Ireland received 4.33
percent of its revenues from state-owned enterprises and government ownership of property.
MONETARY POLICY
Score: 2–Stable (low level of inflation)
From 1992 to 2001, Ireland’s weighted average annual rate of
inflation was 4.14 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 1–Stable (very low barriers)
Ireland welcomes foreign investment, and barriers to such activity are minimal. There is no approval process for foreign
investment or capital inflows unless the company is applying
for incentives. Exploration companies must apply for a mining license because most mineral sources are governmentowned, and restrictions apply to Irish airlines and agricultural
land. There are no restrictions or barriers with respect to current transfers, repatriation of profits, or access to foreign exchange. Although permission is rarely withheld, individuals
and businesses whose primary residence or office is not located in the European Union or European Economic Area
must obtain permission from the Ministry of Agriculture,
Food, and Rural Development to purchase land.
BANKING AND FINANCE
Score: 1–Stable (very low level of restrictions)
Ireland’s banking and financial system is both advanced and
generally competitive. According to the U.S. Department of
State, “Credit is allocated on market terms, and there is no
discrimination between Irish and foreign firms…. The Irish
banking system is sound.” The government announced the
sale of two small state-owned banks in 2000 and intends to
sell a third when a buyer is found. Dublin has attracted a num-
238
ber of foreign banks through its International Financial Services Center (IFSC). The Economist Intelligence Unit reports
that “institutions qualifying for IFSC status…were offered a
preferential 10% corporate tax rate, though the government,
under pressure from the European Commission (which saw
the special rate as an aid to the industry), has agreed to phase
out the IFSC corporate tax incentives. Since the end of 1999
new institutions at the IFSC have not been eligible for the 10%
rate…. However, institutions who were already paying the
special 10% rate will continue to do so until 2005. At the end
of 1999 there were 388 active projects based in the IFSC.” The
government has established the Irish Financial Services Regulatory Authority specifically to supervise financial services;
the Financial Times reports that this agency will improve the
efficiency of the sector because “up until now, the regulation
of financial services was done by a plethora of different bodies. If something went wrong, it tended to fall between two
stools. It was very unclear as to who was responsible.”
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
Ireland has no system of price controls, but the government
intervenes in wage-setting through the National Wage Partnership Program. According to the Economist Intelligence
Unit, “The fifth and latest three year wage agreement, the socalled Programme for Prosperity and Fairness (PPF), came
into effect in March 2000. While an eclectic array of economic
and social issues are covered by the PPF, ranging from education and public transport to the treatment of refugees, social
housing and sex discrimination, the most important elements
deal with pay increase, tax reform and public sector reform.”
These agreements influence both public-sector and privatesector wages. Ireland implemented a new national minimum
wage in 2001.
PROPERTY RIGHTS
Score: 1–Stable (very high level of protection)
Expropriation of property is highly unlikely. Property receives
good protection from the court system. The Economist Intelligence Unit reports that “contractual agreements are secure
in Ireland, and both the judiciary and the civil service are of
high quality.”
REGULATION
Score: 2–Stable (low level)
Overall, Ireland’s policy framework promotes an open and
competitive business environment. Regulations are applied
uniformly and are not particularly onerous. The U.S. Department of State reports that “most tax, labor, environment,
health and safety, and other laws are compatible with European Union regulations, and they do not adversely affect investment. Bureaucratic procedures generally are transparent
and reasonably efficient.” Environmental protection has become increasingly important as a result of Ireland’s membership in the European Union. According to the U.S. Department of State, “Potential investors are required to examine
2003 Index of Economic Freedom
the environmental impact of the proposed project and to meet
with Irish Environmental Protection Agency (EPA) officials.”
In addition, reports the Economist Intelligence Unit, “the government has put increasing emphasis on ‘precautionary’ and
‘polluter pays’ principles.” Mining investments need authorization from the Department of Public Enterprise. For the
most part, the employee–employer relationship is based on
contract; the Economist Intelligence Unit reports that “[labor] legislation has been enacted over the years [and] should
not present special difficulties to employers, but it is strictly
enforced.” Corruption is not a serious problem for investors
in Ireland.
BLACK MARKET
Score: 1.5–Stable (low level of activity)
Transparency International’s 2001 score for Ireland is 7.5.
Therefore, Ireland’s black market score is 1.5 this year.
Chapter 6: The Countries
239
240
2003 Index of Economic Freedom
ISRAEL
Tel Aviv
Jerusalem
Rank:
Score:
Category:
Trade Policy
Fiscal Burden
2
5
Government Intervention 3
Monetary Policy
1
Foreign Investment 2
Banking and Finance 3
The collapse of the Oslo peace process, the onset of the Palestinian intifada in
September 2000, and the persistence of anti-Israeli terrorism and civil violence
have depressed Israel’s tourism industry and discouraged foreign investment. Prime
Minister Ariel Sharon, who won a landslide victory over the Labor Party’s Ehud
Barak in the February 2001 elections, formed a government of national unity consisting of his own Likud Party, the Labor Party, and six smaller parties. Although
these parties share a consensus in favor of a tougher approach to the stalled negotiations with the Palestinian Authority and the need for greater security efforts to
fight Palestinian terrorism, there is no clear consensus on economic reforms for
Israel’s huge and wasteful public sector. The central bank liberalized the foreign
exchange and capital markets in late 2001 as part of a package that included lower
interest rates in return for a government commitment to restore fiscal discipline,
but it has rescinded some of these cuts in the face of growing inflationary pressures and the depreciation of the shekel. The Sharon government’s preoccupation
with security issues continues to undermine the prospects for systematic economic
reform. With the economy mired in recession, the government is under pressure
to reduce public spending and raise taxes even though the tax burden remains high.
Israel’s capital flows and foreign investment score is 1 point worse this year; however, its government intervention score is 0.5 point better, and its black market
score is 2.5 points better. As a result, Israel’s overall score is 0.20 point better this
year.
TRADE POLICY
Score: 2–Stable (low level of protectionism)
According to the World Bank, Israel’s weighted average tariff rate in 1993 (the
most recent year for which World Bank data are available) was 4 percent. The
Economist Intelligence Unit reports that Israel’s average tariff rate in 2000 was less
than 1 percent and that “certain classes of goods may be prohibited from entry on
grounds of health, environmental or obscenity regulations. Local Hebrew labeling
is required for some products.”
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 4.5–Stable
(very high tax rates)
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 5–Stable (very high cost of government)
Israel’s top income tax rate is 50 percent; the marginal rate for the average taxpayer is 30 percent. The top corporate tax rate is 36 percent. In 2001, based on data
from the Central Bureau of Statistics, government expenditures equaled 54.5 percent of GDP.
Chapter 6: The Countries
33
2.45
Mostly Free
Wages and Prices 2
Property Rights
2
Regulation
3.0
Black Market 1.5
Scores for Prior Years:
2002: 2.65
1999: 2.75
1996: 3.00
2001: 2.75
1998: 2.75
1995: 2.90
2000: 2.75
1997: 2.75
2001 Data
(in constant 1995 US dollars)
Population: 6,541,600
Total area: 20,770 sq. km
GDP: $105.7 billion
GDP growth rate: –0.6%
GDP per capita: $16,158
Major exports: machinery and
equipment, software, cut diamonds,
agricultural products, chemicals,
textiles and apparel
Exports of goods and services:
$40 billion
Major export trading partners:
US 38.2%, Belgium–Luxembourg 6.0%,
Germany 4.4%, Hong Kong 4.3%,
UK 4.2%
Major imports: raw materials,
military equipment, investment
goods, rough diamonds, fuels,
consumer goods
Imports of goods and services:
$56.1 billion
Major import trading partners:
US 18.1%, Belgium–Luxembourg
8.0%, Germany 7.8%, UK 6.7%,
Switzerland 5.3%
Foreign direct investment (net):
$1.7 billion
241
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Better (moderate level)
The Economist Intelligence Unit reports that the government
consumed 29.7 percent of GDP in 2001. In 2000, according to
the International Monetary Fund, Israel received 4.4 percent
of its total revenues from state-owned enterprises and government ownership of property, down from the 6.40 percent
reported in the 2002 Index. As a result, Israel’s government
intervention score is 0.5 point better this year.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, Israel’s weighted average annual rate of
inflation was 1.75 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Worse (low barriers)
There are no significant barriers to foreign investment except
for those that apply to regulated sectors like banking, insurance, defense industries, and such state-owned interests as the
national airline and the power monopoly. Israel otherwise
permits 100 percent foreign ownership of businesses, although
a foreign-owned entity must register with the government.
Government procurement gives a 15 percent price preference
to Israeli suppliers; in addition, when it signed the World Trade
Organization’s Government Procurement Agreement, Israel
retained the right to set aside at least 20 percent of subcontracts for Israeli firms through 2004. According to the International Monetary Fund, both residents and non-residents may
hold foreign exchange accounts, and there are no controls or
restrictions on current transfers, repatriation of profits, and
invisible transactions. Direct investment, money market instruments, securities, debt securities, and other capital transactions by residents are limited to a portion of their assets.
Political instability is a far greater disincentive to foreign investment than government restrictions. Based on the level of
government regulation in certain sectors of the economy and
domestic preferences in contracts, Israel’s capital flows and
foreign investment score is 1 point worse this year.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
The commercial banking system is highly concentrated, with
the five largest banks accounting for over 90 percent of banking assets. Israel’s four largest banks came under government
control after the 1983 banking crisis, and the government still
owns a significant portion of the banking sector. The government fully privatized Mizrahi in 1998 and privatized Bank
Hapoalim, Israel’s largest bank, in two stages in 1997 and 2000.
However, it has yet to sell its shares in the second and third
largest banking groups—Bank Leumi (in which it holds a 40
percent share) and Israel Discount Bank (56 percent)—and
owns a controlling stake in the Industrial Development Bank.
The government must approve any foreign investment in the
highly regulated banking and insurance sectors. Citibank was
242
the first large international bank to establish a full branch in
Israel in 2000, and other foreign banks have expanded their
presence since then. Banks are prohibited from selling insurance and are allowed to manage pension funds only on a very
limited basis.
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
Although most price controls have been lifted, they remain in
effect in a few areas. According to the Economist Intelligence
Unit, “The Law for Supervision of Prices of Goods and Services authorizes the Treasury and the Ministry of Industry
and Trade to impose price controls on goods and services supplied by a monopoly, or in the framework of restricted trade.
Controls may also be imposed if there is a large concentration in the supply of a good, or if the goods and services are
subsidized, or if their producers receive support from the state
budget. The government is entitled to impose price controls
on goods and services deemed vital.” The government also
influences prices through its many state-owned companies.
Israel has a minimum wage.
PROPERTY RIGHTS
Score: 2–Stable (high level of protection)
According to the Economist Intelligence Unit, “In spite of the
fractious political environment, contractual arrangements in
Israel are generally secure. The country’s legal system…is
highly regarded as independent, fair and honest.” The U.S.
Department of State reports, however, that “settlers convicted
in Israeli courts of crimes against Palestinians regularly receive lighter punishment than Palestinians convicted in Israeli
courts…for similar cases.” Expropriation is possible, particularly for Palestinians, although it reportedly occurs only if the
property is linked to a terrorist threat and expropriation is
deemed to be in the interest of national security. Because expropriation is not the norm and occurs only in the context of
national security, it is not considered a generalized threat to
the protection of property.
REGULATION
Score: 3–Stable (moderate level)
Israel has identified deregulation and encouragement of competition as official policies. However, the U.S. Department of
State reports that “tax, labor, health, and safety laws can be
impediments to…investors. Although the current trend is towards deregulation, Israel’s bureaucracy can still be difficult
to navigate.” Bribery and corruption are not regarded as serious impediments.
BLACK MARKET
Score: 1.5–Better (low level of activity)
Transparency International’s 2001 score for Israel is 7.6. Therefore, Israel’s black market score is 1.5 this year. The score in
the 2002 Index did not use the TI score.
2003 Index of Economic Freedom
ITALY
Rome
Trade Policy
Fiscal Burden
2
5
Government Intervention 2
Monetary Policy
1
Foreign Investment 2
Banking and Finance 2
Southern Italy remains poor and heavily subsidized, while the northern part of the
country remains one of Europe’s most affluent regions. After more than 50 governments since World War II, the May 2001 election of Prime Minister Silvio Berlusconi
has given Italy a chance to make the structural reforms that could reverse its lowgrowth, high-unemployment cycle. Berlusconi came to office committed to slashing
taxes, cutting red tape, facing down unions over collective bargaining, and spending
more on infrastructure. However, little has happened. Serious structural problems
relating to the state’s huge pension liabilities, labor market rigidities, and bureaucratic burdens remain unaddressed. Annual pension payouts, for example, total 14
percent of overall GDP, compared with an EU average of 10.4 percent. Italy’s labor
market is among the most rigid in Western Europe, and this makes it virtually impossible for employers to dismiss staff when they need to restructure. It is therefore
not surprising that the Italian economy has underperformed the rest of the euro
zone throughout the past half-decade. The Berlusconi government has attempted to
reform the labor laws, only to be confronted by an April 2002 general strike by the
country’s three biggest unions—the first such massive work stoppage in 20 years.
The unions want to retain their workers’ right to jobs for life, together with the
corporatist tradition whereby they determine the country’s economic policy along
with employers and the government. At stake in this political contest is nothing less
than the future of the Italian economy.
TRADE POLICY
Rank:
Score:
Category:
29
2.35
Mostly Free
Wages and Prices 2
Property Rights
2
Regulation
3.0
Black Market 2.5
Scores for Prior Years:
2002: 2.35
1999: 2.30
1996: 2.60
2001: 2.30
1998: 2.40
1995: 2.50
2000: 2.30
1997: 2.50
2001 Data
(in constant 1995 US dollars)
Population: 57,844,000
Total area: 301,230 sq. km
GDP: $1.2 trillion
GDP growth rate: 1.8%
GDP per capita: $21,185
Major exports: engineering
products, textiles and clothing,
production machinery, motor
vehicles, transport equipment,
chemicals, food, beverages and
tobacco, minerals and nonferrous
metals
Exports of goods and services:
$365.5 billion
Score: 2–Stable (low level of protectionism)
As a member of the European Union, Italy has a weighted average tariff rate of 1.8
percent. The U.S. Department of State reports that “where EU standards do not exist,
Italy can set its own national requirements and some of these have been known to hamper imports of game meat, processed meat products, frozen foods, alcoholic beverages,
and snack foods/confectionary products.” In addition, “fragmented, nontransparent government procurement practices and previous problems with corruption have created
obstacles to…participation in Italian government procurement.” Italy’s participation in
the Common Agricultural Policy (CAP), a program that heavily subsidizes agricultural
goods, also acts as a non-tariff barrier.
Major export trading partners:
Germany 15.1%, France 12.6%,
US 10.4%, UK 6.9%, Spain 6.2%
FISCAL BURDEN OF GOVERNMENT
Major import trading partners:
Germany 17.5%, France 11.4%,
Netherlands 5.9%, UK 5.4%, US 5.3%
Score—Income and Corporate Taxation: 4.5–Stable
(very high tax rates)
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 5–Stable (very high cost of government)
Italy’s top income tax rate is 45.1 percent; the marginal rate for the average taxpayer is
33.1 percent. The top corporate income tax rate is 36 percent. In 2001, government ex-
Chapter 6: The Countries
Major imports: engineering
products, chemicals, transport
equipment, energy products,
minerals and nonferrous metals,
textiles and clothing, food,
beverages and tobacco
Imports of goods and services:
$343.5 billion
Foreign direct investment (net):
–$5.9 billion
243
penditures equaled 45.7 percent of GDP.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Stable (low level)
The Economist Intelligence Unit reports that the government consumed 17.5 percent of GDP in 2001. In 2000, according to the International Monetary Fund, Italy received 1.36 percent of its total
revenues from state-owned enterprises and government ownership of property.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, Italy’s weighted average annual rate of inflation was 2.61 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Stable (low barriers)
Italy generally welcomes foreign investment, although the government has the authority to veto mergers and acquisitions involving
foreign investors for “reasons essential to the national economy.”
Foreigners may invest in any of the state-owned firms undergoing
privatization except those relating to defense. According to the U.S.
Department of State, “Industrial projects require a multitude of
approvals and permits, and foreign investments often receive close
scrutiny. These lengthy procedures can present extensive difficulties for the uninitiated foreign investor.” Foreign citizens may not
buy land along the Italian border, which falls under the jurisdiction
of the Ministry of Defense. There are no barriers to repatriation of
profits, capital transfers, payments, or current transfers.
BANKING AND FINANCE
Score: 2–Stable (low level of restrictions)
Italy’s banking sector was dominated by the state until a recent
spate of privatizations. With the sale of its remaining stake in Banco
di Napoli in 2000, the government no longer has a large presence
in the banking sector. The share of bank funds managed by government-controlled banks fell to 12 percent in May 2001. The result has been greater banking concentration as private banks have
merged with or bought stakes in former state banks; in 2000, the
five largest bank groups had a market share of 54 percent, compared to 36 percent in 1995. Banks face some government restrictions and regulations; for example, in order to sell life and property
insurance, firms must receive permission from the government.
The Banking Law requires approval from the Bank of Italy if a
foreign entity wants to raise its level of ownership in a bank above
5 percent.
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
The market determines most wages and prices. The Italian government, however, has the power to introduce price controls
through the Interministerial Committee on Economic Programming (CIPE) and does impose price controls on a few goods. According to the Italian embassy, “There are very limited price controls in place, mainly in rail transportation and electric power. In
244
the health care sector, publicly provided health services keep prices
low in the private health sector…. Some price controls are in place
through taxes and levies on: car fuel, electricity, and tobacco.” There
are substantial subsidies in agriculture; however, since agriculture
comprises a small portion of the economy, they have minimal
impact. Minimum wages are set through collective bargaining
agreements on a sector-by-sector basis that traditionally applies to
all workers regardless of union affiliation. If labor and employers
cannot reach an agreement, the courts can step in to set a “fair”
wage, though this rarely happens.
PROPERTY RIGHTS
Score: 2–Stable (high level of protection)
Italy’s constitution provides for an independent judiciary. In general, contractual agreements are properly secured, although many
people use arbitration as an alternative to a slow court proceeding.
There are some indications that the judiciary may not be entirely
transparent and independent. The Economist Intelligence Unit
reports that “corruption and improper business practices are more
common [in Italy] than in Northern Europe. Extortion rackets by
organized crime are a problem particularly in construction and
retailing.”
REGULATION
Score: 3–Stable (moderate level)
Red tape, slow deregulation, and regulations that vary from region to region and are inefficiently implemented all contribute to a
non-transparent system. In 2001, the government passed the legge
obiettivo (objective law) to facilitate the completion of large infrastructure and industrial projects. According to a European Commission report, it is now easier to establish a company in Italy, but
many procedures are still complicated. The Economist Intelligence
Unit reports, for example, that “there are now more than 40,000
laws that make up Italian environmental legislation; they are highly
fragmented, and regional authorities interpret them inconsistently.”
In 2001, the government passed labor legislation to encourage the
legalization of informal labor, which, according to the Italian embassy, represents 14.7 percent of the work force. Corruption in the
bureaucracy remains a problem. Although a 2001 Transparency
International study reports that the situation has improved, the
level of corruption in Italy is the highest among the G–7 countries,
and the U.S. Department of State reports that “surveys of the business community in Italy routinely identify such domestic corruption as a disincentive to investing or doing business in the south
and some other less-developed areas of Italy.”
BLACK MARKET
Score: 2.5–Stable (moderate level of activity)
Transparency International’s 2001 score for Italy is 5.5. Therefore, Italy’s black market score is 2.5 this year. According to the
Economist Intelligence Unit, “estimates put the underground
economy in Italy as much as 25 percent of GDP.”
2003 Index of Economic Freedom
IVORY COAST
Rank:
80
Score:
3.05
Category: Mostly Unfree
Abidjan
Trade Policy
Fiscal Burden
4
3.5
Government Intervention 1
Monetary Policy
2
Foreign Investment 3
Banking and Finance 2
An October 2000 election, following a military coup in December 1999, restored
civilian rule to the Ivory Coast. The economy is based on commercial agriculture;
much of the population depends on production of coffee and cocoa for export,
and agriculture and timber accounted for 28.5 percent of GDP in 2000. Exports are
primarily agricultural; the country produces 40 percent of the world’s cocoa crop
and is a leading producer of robusta coffee. It also possesses substantial oil, gas,
gold, iron, and nickel resources. The Ivory Coast has one of Western Africa’s highest HIV/AIDS rates, and this has a negative impact on the economy and the country generally. From 1991 to 2000, according to World Bank data, compound growth
in GDP averaged 2.9 percent annually but per capita GDP decreased from $754 to
$743 (in constant 1995 U.S. dollars) due to instability and population growth that
exceeded economic growth. The Ivory Coast’s government intervention score is 1
point better this year; however, its fiscal burden of government, monetary policy,
and wages and prices scores are, respectively, 0.5 point, 1 point, and 1 point worse.
As a result, the Ivory Coast’s overall score is 0.15 point worse this year, causing the
Ivory Coast to be classified as a mostly unfree economy.
TRADE POLICY
Score: 4–Stable (high level of protectionism)
The Ivory Coast is a member of the West African Economic and Monetary Union
(WAEMU), which imposes a common external tariff with four rates: 0 percent, 5
percent, 10 percent, and 20 percent. According to the International Monetary Fund,
the WAEMU’s average tariff rate in 2000 was 12 percent. (The other seven members of the WAEMU are Benin, Burkina Faso, Guinea–Bissau, Mali, Niger, Senegal,
and Togo.) The U.S. Department of State reports that “Corruption has the greatest
impact with regard to the judiciary, contract awards, customs, and tax enforcement.”
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3.5–Worse
(high tax rates)
Score—Government Expenditures: 3–Stable
(moderate level of government expenditure)
Final Score: 3.5–Worse (high cost of government)
The Ivory Coast’s top income tax rate is 60 percent; the marginal rate for the average taxpayer is 10 percent. The top corporate income tax rate is 35 percent. Data
from the Central Bank of the Ivory Coast and the Economist Intelligence Unit
indicate that in 2000, government expenditures equaled 20.7 percent of GDP. Based
on a clarification in the methodology used to calculate the income and corporate
taxation score, the Ivory Coast’s overall fiscal burden of government score is 0.5
point worse this year.
Chapter 6: The Countries
Wages and Prices 3
Property Rights
4
Regulation
Black Market
4
4
Scores for Prior Years:
2002: 2.90
1999: 3.55
1996: 3.50
2001: 3.00
1998: 3.45
1995: 3.20
2000: 3.45
1997: 3.60
2000 Data
(in constant 1995 US dollars)
Population: 16,013,000
Total area: 322,460 sq. km
GDP: $11.9 billion
GDP growth rate: –2.3%
GDP per capita: $743
Major exports: cocoa, coffee,
tropical woods, petroleum, cotton,
bananas, pineapples, palm oil,
cotton, fish
Exports of goods and services:
$5.2 billion
Major export trading partners:
France 11.4%, Netherlands 7.5%,
US 6.4%, Italy 3.4%
Major imports: food, consumer
goods, capital goods, fuel, transport
equipment
Imports of goods and services:
$4.3 billion
Major import trading partners:
Nigeria 19.8%, France 15.1%,
Belgium–Luxembourg 3.0%,
Germany 2.7%, Italy 2.7%
Foreign direct investment (net):
$236 million
245
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 1–Better (very low level)
The World Bank reports that the government consumed 9.9 percent of GDP in 2000, down from the 11 percent reported in the
2002 Index. As a result, the Ivory Coast’s government intervention score is 1 point better this year. In 1999, according to the
International Monetary Fund, the Ivory Coast received 1.08 percent of its total revenues from state-owned enterprises and government ownership of property.
MONETARY POLICY
Score: 2–Worse (low level of inflation)
From 1992 to 2001, the Ivory Coast’s weighted average annual
rate of inflation was 3.59 percent, up from the 2.39 percent from
1991 to 2000 reported in the 2002 Index. The Ivory Coast has
benefited from a stable currency—a rarity in sub-Saharan Africa—as a member of the CFA franc zone. Fourteen countries
use the CFA franc, a common currency with a fixed parity with
the euro. (The other 13 countries are Benin, Burkina Faso,
Cameroon, Central African Republic, Chad, Congo [Brazzaville],
Equatorial Guinea, Gabon, Guinea–Bissau, Mali, Niger, Senegal,
and Togo.) Based on the higher weighted inflation rate, the Ivory
Coast’s monetary policy score is 1 point worse this year.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
“For all practical purposes,” reports the U.S. Department of State,
“there are no significant limits on foreign investment—or difference in the treatment of foreign and national investors—either
in terms of levels of foreign ownership or sector of investment.”
Investments from outside the franc zone require government
approval. Purchases of real estate are permitted, but they must
be reported to the government if they involve investment in an
enterprise, branch, or corporation. The International Monetary
Fund reports that foreign exchange accounts by both residents
and non-residents must be approved by the government. Transfers to countries other than France, Monaco, members of the
WAEMU, members of the Central African Economic and Monetary Community (CEMAC), and Comoros must also be approved by the government. Other transfers are subject to numerous requirements, controls, and authorization depending on the
transaction. Foreign investors remain wary because of political
instability, corruption, an inefficient bureaucracy, and unstable
legal protections.
BANKING AND FINANCE
Score: 2–Stable (low level of restrictions)
The Central Bank of West African States (BCEAO), a central bank
common to the eight members of the WAEMU, governs the banking system. The eight BCEAO member countries (Benin, Burkina
Faso, Guinea–Bissau, Ivory Coast, Mali, Niger, Senegal, and Togo)
use the CFA franc that is issued by the BCEAO, pegged to the
French franc, and guaranteed by the French Treasury. The government has privatized but retains shares in formerly state-owned
banks. The four largest banks are majority-owned by the private
246
sector—three by foreign banks. According to the U.S. Department of State, “With the Government only retaining a small
minority share in the large banks, and no share in some of the
smaller banks, credit decisions are made on classic banking criteria.”
WAGES AND PRICES
Score: 3–Worse (moderate level of intervention)
Following wide price swings in 2000 and 2001, the government
has backtracked on its 1999 decision to liberalize prices for cocoa
and has approved a new Bourse du café et cacao, which is 66
percent owned by the growers and 33 percent owned by the exporters, to monitor and set minimum prices every three months;
the Autorité to manage a system of purchasing quotas; and the
Fond de régulation et de contrôle to finance price stabilization
through taxation on cocoa exports and forward selling. The government last set monthly minimum wage rates, which vary by
occupation, in 1996. Most people work informally in the agriculture sector, where the minimum wage is ineffective. Based on
the government’s intervention to control cocoa prices, the Ivory
Coast’s wages and prices score is 1 point worse this year.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
According to the U.S. Department of State, “Enforcement of
contract rights can be a time consuming and expensive process.
Court cases move slowly and some do not appear to be judged
on their legal or contractual merits. This has led to a widely-held
view in the business community that there are corrupt magistrates.” In practice, the court system “is subject to executive
branch, military, and other outside influences” and “follows the
lead of the executive in national security and politically sensitive
issues.”
REGULATION
Score: 4–Stable (high level)
The Ivory Coast’s bureaucracy obstructs business activity. The
Economist Intelligence Unit reports that “heavy red tape pervades public administration, making it sometimes slow and inefficient.” The government has made some efforts to increase both
regulatory transparency and overall competitiveness. Some of
the steps taken, according to the U.S. Department of State, include “the creation of a centralized Office of Public Bids in the
Ministry of Finance in an effort to ensure compliance with international bidding practices…the establishment of an Inspector
General’s office for the Government; the dissolution of the nontransparent cocoa and coffee marketing board; and the creation
of regulatory bodies for the increasingly-liberalized telecommunications and electricity sectors.” The same source reports that
companies see corruption as an impediment to doing business.
BLACK MARKET
Score: 4–Stable (high level of activity)
Transparency International’s 2001 score for the Ivory Coast is
2.4. Therefore, the Ivory Coast’s black market score is 4 this year.
2003 Index of Economic Freedom
JAMAICA
Kingston
Trade Policy
Fiscal Burden
4
4
Government Intervention 3
Monetary Policy
3
Foreign Investment 1
Banking and Finance 2
Jamaica’s small, open economy is driven by tourism and highly sensitive to external shocks. The mid-year global economic slowdown, coupled with the September
11 attacks and a destructive November hurricane, resulted in a dramatic decline in
tourism and agricultural output. Standard & Poor’s predicts modest growth of
under 3 percent over the next few years, “in large part due to weak merchandise
export prospects, an inflexible labor market, high security costs, and high, though
declining, interest rates.” The government is still struggling with the residual effects of a mid-1990s financial crisis brought on by fiscal irresponsibility. The ensuing government bailout through the Financial Sector Adjustment Company
(FINSAC) left Jamaica with a high debt burden—approximately 130 percent of
GDP in 2001—that continues to hinder economic growth. The government has
made significant progress in divesting its interests in the banking and insurance
sectors, signaling that its debt burden will decrease over time. Elections are scheduled to be held by December 2002, but both parties, according to Standard & Poor’s,
remain committed to an “open economy, privatization, and fiscal austerity.”
Jamaica’s tough economic reforms, increased transparency, and promising debt
reduction plan have laid the groundwork for a productive financial services sector.
Soaring crime rates, however, deter potential investors by eroding international
confidence. Continued fiscal discipline and tougher law enforcement measures
are necessary for the economy to experience significant growth in the coming
years. Jamaica’s government intervention score is 1 point worse this year, but its
banking and finance score is 2 points better. As a result, Jamaica’s overall score is
0.10 point better this year.
TRADE POLICY
Score: 4–Stable (high level of protectionism)
As a member of the Caribbean Community and Common Market (CARICOM),
Jamaica has a common external tariff rate ranging from 5 percent to 20 percent.
According to the World Bank, Jamaica’s weighted average tariff rate in 2000 (the
most recent year for which World Bank data are available) was 9.6 percent. Jamaica restricts some imports to protect local industry. The U.S. Department of
State reports that the government requires an import permit and imposes strict
sanitary and phytosanitary restrictions on the importation of animals and animal
products. Jamaica can depart from its common external tariff through the Minimum Rate Approach, a mechanism that is used to exceed the agreed minimum
rates on several key goods.
Chapter 6: The Countries
Rank:
Score:
Category:
56
2.80
Mostly Free
Wages and Prices 2
Property Rights
3
Regulation
Black Market
3
3
Scores for Prior Years:
2002: 2.90
1999: 2.70
1996: 2.80
2001: 2.80
1998: 2.70
1995: 2.90
2000: 2.50
1997: 2.70
2000 Data
(in constant 1995 US dollars)
Population: 2,633,000
Total area: 10,990 sq. km
GDP: $4.7 billion
GDP growth rate: 1.5%
GDP per capita: $1,785
Major exports: aluminum, bauxite,
sugar, bananas, rum
Exports of goods and services:
$2.6 billion
Major export trading partners:
US 39.1%, UK 11.5%, EU (excluding
UK) 11.0%, Canada 10.2%, CARICOM
2.5%
Major imports: machinery and
transport equipment, construction
materials, fuel, food, chemicals
Imports of goods and services:
$2.56 billion
Major import trading partners:
US 44.8%, CARICOM 11.1%, EU
(excluding UK) 3.8%, UK 3.1%
Foreign direct investment (net):
$349.8 million
247
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 2.5–Stable
(moderate tax rates)
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 4–Stable (high cost of government)
Jamaica’s top income tax rate is 25 percent; the marginal rate for the
average taxpayer is 0 percent. The top corporate tax rate is 33.3 percent. More precise data from Standard & Poor’s indicate that in 2000,
Jamaica’s government expenditures equaled 32.4 percent of GDP
rather than the 31.8 percent reported in the 2002 Index.
troubled banks and sold them to the Royal Bank of Trinidad and
Tobago; combined the portfolios of several life insurance companies and sold them to a Jamaican insurance company and a
Trinidadian insurance company; sold all but a small stake in Island
Life Insurance Company; and sold its 49 percent stake in Dehring,
Bunting, & Golding Merchant Bank. The rescue of the financial sector is complete with the March 2002 sale of the National Commercial Bank but has entailed a cost estimated at 30 percent of GDP.
Foreign banks hold over 80 percent of deposits in the banking sector.
The rapid divestiture of banks taken over after the 1996 crisis has left
the government with a minimal presence. As a result, Jamaica’s banking and finance score is 2 points better this year.
GOVERNMENT INTERVENTION IN THE ECONOMY
WAGES AND PRICES
Score: 3–Worse (moderate level)
The World Bank reports that the government consumed 16.2 percent of GDP in 2000. In the same year, according to the International
Monetary Fund, Jamaica received 17.11 percent of its total revenues
from state-owned enterprises and government ownership of property. Based on new data on revenues from state-owned enterprises,
Jamaica’s government intervention score is 1 point worse this year.
Score: 2–Stable (low level of intervention)
The U.S. Department of State reports that “certain public utility
charges such as bus fares, water, electricity and telecommunications
remain subject to price controls and can be changed only with government approval.” Jamaica has a minimum wage law, but most
workers are paid more than the minimum.
MONETARY POLICY
Score: 3–Stable (moderate level of protection)
The likelihood of expropriation is remote, and private property is
protected. However, the judiciary lacks adequate resources, and this
creates delays. The U.S. Department of State reports that in some
cases, “trials…are delayed for years, and other cases are dismissed
because files cannot be located.” An inadequate police force further
weakens the security of property rights; the same source reports
that “crime poses a greater threat to foreign investment than do politically motivated activities.”
Score: 3–Stable (moderate level of inflation)
From 1992 to 2001, Jamaica’s weighted average annual rate of inflation was 7.37 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 1–Stable (very low barriers)
Jamaica encourages foreign investment in nearly all sectors but limits broadcasting licenses to television and radio businesses that are
incorporated in Jamaica and have a majority ownership or controlling interest by CARICOM nationals. Foreign investors and domestic interests receive equal treatment. The U.S. Department of State
describes the screening process as “standard and nondiscriminatory.”
According to the Economist Intelligence Unit, the gradual liberalization of the telecommunications sector that is now underway will
open the sector to competition in 2003. The International Monetary
Fund reports that there are no restrictions on foreign exchange accounts, which may be held by both residents and non-residents. There
are no restrictions on transactions, transfers, or repatriation of funds,
and non-residents may purchase real estate. Sale or issue of money
market instruments by non-residents, sale or issue of those instruments abroad by residents, or purchase abroad of similar instruments by residents requires government approval.
BANKING AND FINANCE
Score: 2–Better (low level of restrictions)
A 1996 financial crisis prompted a government bailout of the banking and insurance sectors and strengthened supervision and regulation. The Financial Sector Adjustment Company (FINSAC) was created to provide funding and reorganize illiquid and close insolvent
financial institutions, and then to divest their assets. Since assuming
control of over 12 financial institutions and intervening in 10 others
during the financial crisis of the 1990s, FINSAC has merged several
248
PROPERTY RIGHTS
REGULATION
Score: 3–Stable (moderate level)
Most regulations are moderately burdensome, and red tape can be a
problem. According to the U.S. Department of State, “A cumbersome bureaucracy has been identified as a major disincentive to investment in Jamaica.” In addition, “Although there has been improvement in the approval process for most investment projects, the time
can take anywhere from three months for Free Zone projects to
over an year for large mining and greenfield projects.” New developments require environmental impact assessments prior to approval.
The U.S. Department of State and other sources identify corruption
as a problem, although the government has proposed anti-corruption legislation that would penalize bribery.
BLACK MARKET
Score: 3–Stable (moderate level of activity)
Pirated broadcasts, videotapes, computer software, and recorded
music are found frequently on the black market. The government
has made some progress in promoting the protection of intellectual property rights. Drug trafficking is reportedly a serious problem in Jamaica.
2003 Index of Economic Freedom
JAPAN
Tokyo
Trade Policy
Fiscal Burden
2
4
Government Intervention 3
Monetary Policy
1
Foreign Investment 3
Banking and Finance 3
Despite a decade of weak economic performance, Japan remains the world’s second largest economy, exceeded only by the United States. Since 1990, Japan has
experienced four recessions, and annual growth has averaged a dismal 0.37 percent. The economy posted 1.4 percent growth (5.7 percent annualized rate) in the
first quarter of 2002, but the prospects for a strong economic turnaround are still
uncertain because of the Japanese government’s inability to effect painful but necessary structural reforms. Prime Minister Junichiro Koizumi took office in April
2001 on an unprecedented wave of popularity; since then, both public and party
support have waned sharply because of the lack of widespread confidence that
there will be significant economic recovery. Recent modest growth is largely a
cyclical recovery driven by stronger export growth as the U.S. economy recovers.
Depressed consumer demand, high unemployment hovering at 5 percent, and continuing deflationary pressures in Japan will continue to have a negative effect on
economic confidence. Business investment growth is likely to be undermined by
the relocation of production facilities abroad, particularly to China since its admission to the World Trade Organization at the end of 2001. Non-performing loans
by banks and the private sector reached an all-time high of approximately $294
billion in 2001 and may represent the greatest threat to revival of the Japanese
economy. Japan also needs to become more open to foreign imports; despite pressure from the U.S. and other important trading partners, official and unofficial
restrictions on merchandise imports remain in place to protect the less efficient
sectors of Japan’s industry. Japan’s protectionism has often been cited as one of the
reasons for the persistence of structural problems in its economy in general and
the poor productivity of companies in the non-tradable sectors in particular. Japan’s
government intervention score is 0.5 point worse this year. As a result, its overall
score is 0.05 point worse this year.
TRADE POLICY
Score: 2–Stable (low level of protectionism)
According to the World Bank, Japan’s weighted average tariff rate in 2000 (the
most recent year for which World Bank data are available) was 2 percent. Nontariff barriers take the form of non-transparent regulations, discriminatory standards, and exclusionary business practices. The Economist Intelligence Unit reports that Japan maintains import restrictions for wheat and rice flours; certain
agricultural and meat products; endangered species and products such as ivory,
animal parts, and certain furs; swords and firearms; and more-than-two-month
supplies of medicines and cosmetics for personal use.
Chapter 6: The Countries
Rank:
Score:
Category:
35
2.50
Mostly Free
Wages and Prices 2
Property Rights
2
Regulation
Black Market
3
2
Scores for Prior Years:
2002: 2.45
1999: 2.05
1996: 2.05
2001: 2.05
1998: 2.00
1995: 1.85
2000: 2.15
1997: 2.05
2001 Data
(in constant 1995 US dollars)
Population: 127,270,000
Total area: 377,835 sq. km
GDP: $5.48 trillion
GDP growth rate: –0.4%
GDP per capita: $43,042
Major exports: motor vehicles,
semiconductors, office machinery,
chemicals
Exports of goods and services:
$550.7 billion
Major export trading partners:
US 30.1%, China 7.7%, South Korea
6.3%, Taiwan 6.0%, Hong Kong 5.8%
Major imports: fuels, foodstuffs,
chemicals, textiles, office machinery
Imports of goods and services:
$505.5 billion
Major import trading partners:
US 18.1%, China 16.6%, South Korea
4.9%, Indonesia 4.3%, Taiwan 4.1%
Foreign direct investment (net):
–$23.1 billion
249
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation:3.5 Stable
(high tax rates)
Score—Government Expenditures: 4–Stable
(high level of government expenditure)
Final Score: 4–Stable (high cost of government)
Japan’s top income tax rate is 37 percent; the marginal rate
for the average taxpayer is 20 percent. The top corporate tax
rate is 30 percent. In 2001, government expenditures equaled
36.9 percent of GDP.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Worse (moderate level)
According to the Economist Intelligence Unit, the government
consumed 17.5 percent of GDP in 2001, up from the 9.9 percent reported in the 2002 Index. In 2001, based on data from
the Ministry of Finance, Japan received 1.6 percent of its total
revenues from state-owned enterprises and government ownership of property, down from the 4.5 percent reported in the
2002 Index. The Financial Times reports that “the Japanese
government was suspected…of intervening in the market to
prop prices because of fears that falling shares could lead to
bank insolvency…. The Nikkei 225 posted its biggest percentage gain in 11 months…with some traders attributing the rise
to buying by trust banks that manage public pension funds
and post office savings.” By itself, the increased level of government consumption would cause Japan’s government intervention score to be 1 point worse this year; however, the
drop in revenue from state-owned enterprises causes it to improve by 0.5 point, and 1 point continues to be added for stockmarket interventions. Overall, Japan’s government intervention score is 0.5 point worse this year.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, Japan’s weighted average annual rate of
inflation was –0.6 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
In the early 1990s, the Japanese government substantially liberalized foreign investment procedures, and foreigners gained
a larger foothold in Japanese business. Recent highly visible
purchases of shares in major Japanese corporations, including Nissan, are signs that Japan is becoming more open to
significant foreign investment. However, while most direct
legal restrictions on foreign investment have been removed,
many bureaucratic and informal barriers remain in effect, as
evidenced by Japan’s last-place standing among Organisation
for Economic Co-operation and Development nations in foreign direct investment as a percentage of output. According
to the U.S. Department of State, ongoing challenges to foreign investment include “laws and regulations that hamper
establishing new businesses and acquiring existing businesses,
close ties between government and industry, informal exclu-
250
sive buyer-supplier networks and alliances, and extensive crossshareholding by Japanese firms.” The revision of Japan’s Commercial Code will help foreign investment, but further reform
is required to overcome existing barriers. Foreign investors
now need to notify and obtain approval from the government
only for investments in the following restricted areas: defense,
agriculture, mining, aerospace and aviation, fisheries, forestry,
leather manufacturing, oil and gas production, maritime transport, telecommunications, and utilities. Japan has no restrictions or controls on residents or non-residents holding foreign exchange accounts, invisible transactions, current transfers, repatriation of profits, or real estate transactions. According to the International Monetary Fund, outward (by residents)
and inward (by foreign investors) direct investments in a few
industries, such as arms manufacturing, require notification
of the government prior to the investment and there are limits on investment portfolios held abroad by institutional investors.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
Japan’s banking system (comprised of “city” banks serving
large corporations, “regional” banks serving small and medium-size businesses in certain regions, and “trust” banks providing long-term credit) is very competitive, but it also is subject to significant levels of government regulation. A number
of banks have accumulated huge portfolios of non-performing loans; even at official estimates of 8 percent of GDP (almost certainly underestimates), Japan’s non-performing loan
crisis is twice the size of the U.S. savings and loan crisis of the
1980s. These loans were made during the late 1980s asset
bubble and collateralized with real estate. The resulting collapse in real estate prices, combined with Japan’s prolonged
economic stagnation, has left many loans with collateral worth
a fraction of the loan amount. The government has encouraged many banks’ reluctance to write off these loans through
successive bailouts that have averted a crisis but also have failed
to resolve the non-performing loan problem. Indeed, new nonperforming loans are created through deflation as old ones
are slowly written off. The relationship between banks and
large corporations is part of the problem in resolving the banking crisis because a lack of transparency and impartiality impedes the banks’ ability to deal with failing companies. The
government has tightened regulations, has taken over a number of ailing banks, and continues to exercise substantial influence over many more. The government also affects the supply of credit through its state-run postal savings system, which
is the world’s largest single pool of savings (valued at $2 trillion or 50 percent of GDP). According to the Economist Intelligence Unit, “Private-sector banks have long complained
that the existence of such a large state-run savings system distorts the country’s credit market by encouraging the
disintermediation of funds from the private sector, and they
have lobbied vociferously for the system to be privatised.” In
addition, privatization of the postal savings system—despite
being a top priority of Prime Minister Junichiro Koizumi’s
administration—”is unlikely in the short term, largely because
2003 Index of Economic Freedom
the funds from the postal savings system are used to fund the
government’s off-budget spending through its Fiscal Investment and Loan Programme….”
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
The market sets most wages and prices. According to the
Economist Intelligence Unit, “There are no formal price controls except on rice. But indirect regulation continues to influence prices on a wide range of products. For decades,
Japan’s major producers…have been able to dictate retail as
well as wholesale prices…. Although prices for many imported consumer goods have fallen sharply in recent years,
they are still substantially higher than international prices.”
The U.S. Department of State reports that minimum wages
are set on a regional or industry basis with input advisory
councils composed of three groups: business, workers, and
“public interest” organizations.
the “close relationships between Japanese companies, politicians, government organizations, and universities has been
said to foster an inwardly-cooperative business climate that
is conducive to the awarding of contracts, positions, etc.
within a tight circle of local players.”
BLACK MARKET
Score: 2–Stable (low level of activity)
Transparency International’s 2001 score for Japan is 7.1.
Therefore, Japan’s black market score is 2 this year.
PROPERTY RIGHTS
Score: 2–Stable (high level of protection)
In general, property rights are secure in Japan, although the
judicial system at times becomes an obstacle to business.
According to the Economist Intelligence Unit, “Japan has civil
courts for enforcing property and contractual rights. The
courts do not discriminate against foreign investors, but these
courts are ill suited for litigation of investment and business
disputes. Moreover, Japanese courts are slow; there are virtually no discovery procedures to compel disclosure of evidence from the opposing party, the courts lack contempt
powers to compel a witness to testify or a party to comply
with an injunction and preliminary injunctions are almost
impossible to obtain.” In addition, reports the U.S. Department of State, “disputes in Japan are rarely settled in court,
and it is difficult to appeal an unfavorable ruling by a regulator to a higher authority.”
REGULATION
Score: 3–Stable (moderate level)
Japan has taken steps toward deregulation in recent years,
but remaining regulations impose a substantial burden on
businesses. The U.S. Department of State reports that “the
Government of Japan has taken significant measures to improve its regulatory system. An Administrative Procedures
Law was enacted in July 1994, Public Comment Procedures
were introduced in March 1999, a Policy Evaluation System
was established in 2000 and early in 2001 a No Action Letter
System was introduced and an Information Disclosure Law
took effect.” At the same time, however, “Japan’s reputation
for protectionism and red tape…is well deserved…. [T]he
Japanese economy remains over-regulated and those regulations can be used to hinder foreign firms’ attempts to gain
access to the market.” Bureaucrats and regulators are much
more powerful in Japan than in other countries, having wide
discretion to act as they see fit. Foreigners doing business in
Japan believe, according to the U.S. Department of State, that
Chapter 6: The Countries
251
252
2003 Index of Economic Freedom
JORDAN
Amman
Trade Policy
Fiscal Burden
5
3.5
Government Intervention 4
Monetary Policy
1
Foreign Investment 2
Banking and Finance 2
Jordan is a small, poor country with few economic resources and an economy that
historically has been propped up by foreign loans, foreign aid, and remittances
from a large expatriate population. In recent years, Jordan has taken steps to encourage the private sector and reduce government involvement in the economy.
King Abdullah II, who succeeded his father, the late King Hussein, in February
1999, has committed Jordan to economic reform. In 2000, Jordan became a member of the World Trade Organization and signed a trade agreement with the United
States that was ratified by the U.S. Congress in 2001. The government also has
undertaken a major privatization initiative and actively promotes foreign investment, although the country also continues to face a heavy debt burden and high
unemployment. In 2001, the budget deficit equaled 7 percent of GDP. Jordan’s
fiscal burden of government score is 0.5 point better this year; however, both its
trade policy and government intervention scores are 1 point worse. As a result,
Jordan’s overall score is 0.15 point worse this year.
TRADE POLICY
Score: 5–Worse (very high level of protectionism)
According to the World Bank, Jordan’s weighted average tariff rate in 2000 (the
most recent year for which World Bank data are available) was 18.9 percent, up
from the 11.8 percent reported in the 2002 Index. As a result, Jordan’s trade policy
score is 1 point worse this year. The government maintains non-tariff barriers
through an inefficient customs clearance process. According to the U.S. Department of State, “cumbersome customs procedures continue to undermine Jordan’s
business and investment climate…. Actual appraisal and tariff assessment practices are frequently arbitrary and may even differ from written regulations…. Delays in clearing customs are common.” In addition, “Imports of raw leather are
restricted to the Jordan Tanning Company; crude oil and its derivatives (except
metallic oils) and household gas cylinders are restricted to the Jordan Petroleum
Refinery Company; cement is restricted to the Jordan Cement Factories Company;
explosives and gun powder are restricted to the Jordan Phosphate Mines Company; and used tires are restricted to tire…factories.”
Rank:
Score:
Category:
62
2.85
Mostly Free
Wages and Prices 2
Property Rights
3
Regulation
Black Market
Scores for Prior Years:
2002: 2.70
1999: 2.90
1996: 2.95
2001: 2.90
1998: 2.90
1995: 3.05
2000: 2.90
1997: 2.80
2000 Data
(in constant 1995 US dollars)
Population: 4,886,810
Total area: 92,300 sq. km
GDP: $7.9 billion
GDP growth rate: 3.9%
GDP per capita: $1,616
Major exports: phosphates,
fertilizers, potash, agricultural
products, manufactures
Exports of goods and services:
$3.6 billion
Major export trading partners:
US 10.1%, Iraq 9.9%, India 9.0%,
Saudi Arabia 5.8%
Major imports: crude oil, machinery,
transport equipment, food, live
animals, manufactured goods
Imports of goods and services:
$5.6 billion
Major import trading partners:
Iraq 14.2%, Germany 9.2%, US 8.2%,
China 4.9%
Foreign direct investment (net):
$688 million
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 2.5–Stable
(moderate tax rates)
Score—Government Expenditures: 4–Better
(high level of government expenditure)
Final Score: 3.5–Better (high cost of government)
Jordan’s top income tax rate is 25 percent, down from the 30 percent reported in
the 2002 Index; the marginal rate for the average taxpayer is 5 percent. The top
corporate tax rate is 35 percent. In 2000, based on data from the Central Bank of
Chapter 6: The Countries
3
3
253
Jordan, government expenditures equaled 28.7 percent of GDP,
down from the 31.52 percent reported in the 2002 Index. Based
on a lower level of government expenditure, Jordan’s fiscal
burden of government score is 0.5 point better this year.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 4–Worse (high level)
According to the World Bank, the government consumed 25.3
percent of GDP in 2000, up from the 25 percent reported in
the 2002 Index. As a result, Jordan’s government intervention
score is 1 point worse this year. The International Monetary
Fund reports that in 2000, Jordan received 12.38 percent of its
total revenues from state-owned enterprises and government
ownership of property.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, Jordan’s weighted annual rate of inflation
averaged 1.56 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Stable (low barriers)
The government—most notably, King Abdullah—actively promotes foreign investment. The Investment Promotion Law
requires equal treatment for foreign and domestic investors,
and there is no screening process for foreign investments. The
International Monetary Fund reports that residents and nonresidents are permitted to hold foreign exchange accounts.
There are no restrictions or controls on payments; transactions; transfers; purchase of real estate (provided Jordan and
the country of residence for the individual or business have a
reciprocal relationship); access to foreign exchange; or repatriation of profits. “Effective November 16, 2000,” according
to the IMF, “nonresident investments are restricted to a maximum of 49% or 50% ownership or subscription of shares in
the following major sectors: trading and trade services, construction, contracting, and transportation…. Investments in
the following sectors are not permitted for nonresidents: investigation and security, quarrying and mining, removal of
waste, sport clubs, and transportation of goods and passengers.”
BANKING AND FINANCE
Score: 2–Stable (low level of restrictions)
Jordan’s banking system is open to foreign investment, and
supervision has been strengthened and regulations clarified
and updated through banking reform. A new banking law was
passed in 2000. The government imposes strict reserve requirements. Jordan has 14 commercial banks (of which five are
foreign), two Islamic banks, and five investment banks; but
the Economist Intelligence Unit reports that the Arab Bank
dominates the sector, accounting for 60 percent of assets. The
government affects the allocation of credit in Jordan. According to the U.S. Department of State, “One flaw in the credit
market is the lack of long-term credit…. Long-term financing is also curtailed by the Ottoman-era law that stipulates
254
that total interest payments over the life of a bond may not be
greater than the principal amount. This effectively impedes
the development of longer-maturity fixed-income instruments, even though it is not effectively enforced.” A new Public Debt law has overturned this restriction, opening up opportunities for longer-term loans. The banking system remains
burdened by non-performing loans, which the U.S. Department of State estimates at 30 percent of all loans.
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
The government has removed most price controls. The government also has agreed to reduce subsidies (raise prices) on
bread and fuel as a condition attached to a six-week extension
of Jordan’s International Monetary Fund loan, although it
continues to regulate prices for these items. There is a minimum wage for all workers except domestic servants, those
working in small family businesses, and agricultural workers.
PROPERTY RIGHTS
Score: 3–Stable (moderate level of protection)
The judiciary is independent but subject to political influence.
According to the U.S. Department of State, “the judiciary is
subject to influence from the executive branch…. The Ministry of Justice has great influence over a judge’s career and
subverts the judicial system in favor of the executive branch.
There have been numerous allegations that judges have been
‘reassigned’ temporarily to another court…in order to remove
them from a particular proceeding.” In June 2001, Parliament
passed a law intended to increase the judiciary’s independence.
The U.S. Department of State reports that “the purpose of
the new law is to limit the Ministry of Justice’s influence over
a judge’s career and prevent it from subverting the judicial
system in favor of the executive branch…. [However], judges
complain of telephone surveillance by the government.” Expropriation is unlikely in Jordan.
REGULATION
Score: 3–Stable (moderate level)
Jordan’s regulatory environment is moderately bureaucratic
and burdensome, although the government is attempting to
reform the system and reduce red tape. According to the
Economist Intelligence Unit, “successive governments
have…attempted to alter the legislative regime to promote
private sector investment. Changes have been made to customs taxation, companies law and the financial market but
bureaucratic resistance has often weakened their impact.”
Despite the government’s efforts to streamline regulations,
foreign and domestic investors still face red tape and opaque
procedures. Regulations are sometimes applied in an arbitrary
fashion.
BLACK MARKET
Score: 3–Stable (moderate level of activity)
Transparency International’s 2001 score for Jordan is 4.9.
Therefore, Jordan’s black market score is 3 this year.
2003 Index of Economic Freedom
KAZAKHSTAN
Rank:
119
Score:
3.50
Category: Mostly Unfree
Trade Policy
Fiscal Burden
4
3
Government Intervention 2
Monetary Policy
3
Foreign Investment 4
Banking and Finance 4
Kazakhstan relies excessively on its oil and gas sectors for investment and economic growth, especially since the discovery of the Kashagan oil field in its territorial waters in the northern Caspian Sea. President Nursultan Nazarbayev has shown
a growing inclination to violate civil rights and tighten his control of the media.
The political and economic systems are based on clan networks and centralized
control, and the tax code is plagued by a lack of transparency and consistency.
Investigations by U.S. and Swiss authorities into the government’s allegedly corrupt practices have highlighted the failures of its transition to a market economy.
After a government reshuffle in 2001, the new prime minister stated that the interests of foreign and domestic investors needed to be “reconciled.” Though the country has reoriented trade toward markets outside the former USSR since becoming
independent in 1991, the new government has increased its hostility to Western
investors and has favored domestic and Russian owners as part of its import substitution strategy. Kazakhstan has abstained from supplying early oil to the Baku–
Tbilisi–Ceyhan pipeline favored by the United States, and the government is attempting to revise contracts with foreign investors. Overall, the government is
reluctant to implement economic reforms and vital structural changes. Kazakhstan’s
monetary policy score is 1 point better this year. As a result, its overall score is 0.10
point better this year.
TRADE POLICY
Score: 4–Stable (high level of protectionism)
According to the U.S. Trade Representative, Kazakhstan’s weighted average tariff
rate in 2001 was approximately 10 percent. Non-tariff barriers take the form of
burdensome customs requirements.
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3–Worse
(moderate tax rates)
Score—Government Expenditures: 3–Stable
(moderate level of government expenditure)
Final Score: 3–Stable (moderate cost of government)
Kazakhstan’s top income tax rate is 30 percent; due to increased estimates of per
capita income by the World Bank, the marginal rate for the average taxpayer is 10
percent, up from the 5 percent reported in the 2002 Index. The top corporate tax
rate is 30 percent. In 2000, according to the Asian Development Bank, government
expenditures equaled 24.6 percent of GDP. Based on a clarification in methodology, Kazakhstan’s income and corporate taxation score is 0.5 point worse this year;
however, this is not sufficient to affect its overall fiscal burden of government score,
which is unchanged.
Chapter 6: The Countries
Wages and Prices 3
Property Rights
4
Regulation
Black Market
4
4
Scores for Prior Years:
2002: 3.60
1999: 3.95
1996: n/a
2001: 3.75
1998: 4.00
1995: n/a
2000: 3.70
1997: n/a
2000 Data (unless otherwise indicated)
(in constant 1995 US dollars)
Population: 14,869,000
Total area: 2,717,300 sq. km
GDP: $24.9 billion (2001)
GDP growth rate: 13.2% (2001)
GDP per capita: $1,512
Major exports: oil, ferrous and
nonferrous metals, machinery,
chemicals, grain, wool, meat, coal
Exports of goods and services:
$9.9 billion
Major export trading partners:
CIS 30.4% (Russia 20.2%), Italy 11.1%
Major imports: machinery and
parts, industrial materials, oil and
gas, vehicles
Imports of goods and services:
$6.5 billion
Major import trading partners:
CIS 52.0% (Russia 45.4%), Germany
7.4%, US 5.4%
Foreign direct investment (net):
$1.1 billion
255
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 2–Stable (low level)
The World Bank reports that the government consumed 11.2 percent of GDP in 2000. In the same year, according to the International Monetary Fund, Kazakhstan received 2.81 percent of its total revenues from state-owned enterprises and government ownership of property.
MONETARY POLICY
Score: 3–Better (moderate level of inflation)
Data from the International Monetary Fund’s 2002 World Economic
Outlook indicate that from 1992 to 2001, Kazakhstan’s weighted
average annual rate of inflation was 11.49 percent, down from the
15.54 percent from 1994 to 2000 reported in the 2002 Index. As a
result, Kazakhstan’s monetary policy score is 1 point better this
year.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 4–Stable (high barriers)
According to the U.S. Department of State, “The Government of
Kazakhstan has made significant progress in creating a favorable
investment climate…. These reforms include de-monopolization,
privatization, debt restructuring, lifting profitability controls, price
liberalization, customs reform, and tax reform. Kazakhstan also
established a securities and exchange commission, liberalized trade,
enacted laws on investment, set up an adequate government procurement process, and reformed the banking system…. Key concerns remain, however, including the vagueness of laws, contradictory legal provisions, and poor implementation, especially at
the local level of government.” Foreigners may not own land, and
there has been a growing trend in favor of domestic investors over
foreign investors for state contracts. It can be difficult to obtain
work permits for employees of foreign investors because of continuing quotas on the number allowed. No sectors of Kazakhstan’s
economy are closed to investors, but there is a cap on foreign capital in the banking system, and the media and telecommunications
are subject to some restrictions. The government screens foreign
investment proposals in a process that is often non-transparent and
slow.
BANKING AND FINANCE
Score: 4–Stable (high level of restrictions)
According to the U.S. Department of State, “The banking system
of Kazakhstan is the most developed in Central Asia and rapidly
moving towards adoption of international banking standards as
the National Bank of Kazakhstan continues to strengthen its supervision of the financial sector.” The number of banks has fallen
from 55 in 2000 to 47 in May 2001 because of mergers, increased
capital requirements by the central bank, and the re-licensing of
smaller banks as credit unions or partnerships. Three banks dominate the sector: Kazkommertsbanks; Turan-Alem Bank (a merger
of failed state-owned banks); and Halyk Bank (a state-owned savings bank). There are 16 banks with at least one-third foreign ownership, including 12 affiliates of foreign banks. The government is
a dominant force in the banking industry. Foreign insurance com-
256
panies may not operate in Kazakhstan except through joint ventures with domestic firms. The government has a policy of capping foreign ownership in the banking sector.
WAGES AND PRICES
Score: 3–Stable (moderate level of intervention)
Most price controls were liberalized in 1991, when Kazakhstan
began a series of broad-based reforms in an effort to move from a
planned economy to a market economy. The government still controls prices when considered necessary. It also sets a monthly minimum wage.
PROPERTY RIGHTS
Score: 4–Stable (low level of protection)
Kazakhstan’s legal system does not provide sufficient protection for private property. According to the U.S. Department of
State, “Kazakhstan is still in the process of building the institutional capabilities of its court system. Until this is complete,
the performance of courts in the country will be less than optimal. Further problems exist in enforcing judgments. The Ministry of Justice is only beginning to establish a judicial executory system. Given this lack of development, there is ample
opportunity for interference in judicial cases.” In addition, “corruption is evident at every stage and level of the judicial process.” According to the Economist Intelligence Unit, “Current
legislation severely curtails private land ownership.”
REGULATION
Score: 4–Stable (high level)
According to the U.S. Department of State, “Transparency in the
application of laws remains…an obstacle to expanded trade and
investment…. [I]nvestors complain of moving goalposts and corruption. While foreign participation is generally welcomed, some
foreign investors point out that the Government is not always evenhanded and sometimes reneges on its commitments. Although
the State Agency for Investments was established to facilitate foreign investment, it had limited success in addressing the concerns
of foreign investors…. Often, contradictory norms hinder the functioning of the legal system. While Kazakhstan has recently defined
more clearly which laws take precedence in the event of a contradiction, it has become clear that stability clauses granted investors
under the Foreign Investment Law or other legislation will not
necessarily be honored despite future changes in the legal and tax
regulatory regime. Moreover, in the draft Investment Law…the
Government plans to eliminate stability clauses for foreign investors who come to Kazakhstan after the enactment of the new law.”
The same source reports that “firms have cited corruption as an
obstacle to investment. Law enforcement agencies have on occasion brought pressure on foreign investors perceived to be uncooperative with the Government.”
BLACK MARKET
Score: 4–Stable (high level of activity)
Transparency International’s 2001 score for Kazakhstan is 2.7.
Therefore, Kazakhstan’s black market score is 4 this year.
2003 Index of Economic Freedom
KENYA
Rank:
85
Score:
3.10
Category: Mostly Unfree
Nairobi
Trade Policy
Fiscal Burden
4
3.5
Government Intervention 3
Monetary Policy
1
Foreign Investment 3
Banking and Finance 3
With its well-educated population, extensive infrastructure, and entrepreneurial
tradition, Kenya served in the past as a model for African development. Over the
past decade, however, rampant corruption, a bloated public sector, and deterioration of the infrastructure have undermined Kenya’s economic performance and
potential for growth. From 1991 to 2000, according to World Bank data, compound growth in GDP averaged 1.7 percent annually and per capita GDP decreased
from $353 to $328 (in constant 1995 U.S. dollars) as population growth exceeded
economic growth. This decline is also a reflection of poor performance in two of
Kenya’s key economic sectors: agriculture (due to bad weather and lower international prices) and tourism (due to concerns over terrorist attacks and crime). A
recent survey by Transparency International placed Kenya’s law enforcement network—judges, police, prisons, and the attorney general’s office—among the top
one-third of the country’s most corrupt institutions. After a brief resumption of
aid in 2000, relations with multilateral and bilateral donors faltered, leading the
International Monetary Fund and the World Bank to suspend disbursement of aid
until the government adopted several reforms to improve governance, implement
an anti-corruption law, and reduce government expenditure. Progress on liberalization is unlikely, however, before the elections scheduled for December 2002.
Kenya’s monetary policy score is 1 point better this year. As a result, its overall
score is 0.10 point better this year.
TRADE POLICY
Score: 4–Stable (high level of protectionism)
According to the World Bank, Kenya’s weighted average tariff rate in 2000 (the
most recent year for which World Bank data are available) was 12.4 percent. The
Institute of Economic Affairs reports that “trade licensing in Kenya became so
onerous that it was described in 1997 as the ‘single greatest deterrent to entry into
and growth of business in the private sector in Kenya’.”
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 3–Worse
(moderate tax rates)
Score—Government Expenditures: 4–Stable
(high level of government expenditure)
Final Score: 3.5–Stable (high cost of government)
Kenya’s top income tax rate is 30 percent; the marginal rate for the average taxpayer is 10 percent. The top corporate income tax is 30 percent. In 2000, according
to the African Development Bank, government expenditures equaled 25.9 percent
of GDP. Based on a clarification in methodology, Kenya’s income and corporate
taxation score is 0.5 point worse this year; however, this is not sufficient to affect
Kenya’s overall fiscal burden of government score, which is unchanged.
Chapter 6: The Countries
Wages and Prices 2
Property Rights
3
Regulation
4.0
Black Market 4.5
Scores for Prior Years:
2002: 3.20
1999: 3.05
1996: 3.35
2001: 3.15
1998: 3.10
1995: 3.30
2000: 3.05
1997: 3.25
2000 Data
(in constant 1995 US dollars)
Population: 30,092,000
Total area: 582,650 sq. km
GDP: $9.8 billion
GDP growth rate: –0.2%
GDP per capita: $328
Major exports: tea, coffee,
horticultural products, petroleum
products, fish, cement
Exports of goods and services:
$3.1 billion
Major export trading partners:
UK 11.5%, Tanzania 10.5%,
Uganda 9.7%, Germany 3.1%
Major imports: machinery and
transportation equipment,
petroleum products, iron and steel
Imports of goods and services:
$3.8 billion
Major import trading partners:
UK 10.22%, United Arab Emirates
9.8%, Japan 5.5%, India 4.2%
Foreign direct investment (net):
$18 million
257
GOVERNMENT INTERVENTION IN THE ECONOMY
WAGES AND PRICES
Score: 3–Stable (moderate level)
The World Bank reports that the government consumed 18
percent of GDP in 2000. According to the U.S. Department of
State, “Since the privatization started in 1993, most of the
smaller parastatals have been sold. However, the government
has been slow in privatizing ‘strategic’ parastatals.”
Score: 2–Stable (low level of intervention)
The government intervenes in agriculture markets to various
degrees to support farmers. The government also protects the
sugar industry for political reasons, as it accounts for a large
portion of formal employment. Kenya has a minimum wage
for blue-collar workers.
MONETARY POLICY
PROPERTY RIGHTS
Score: 1–Better (very low level of inflation)
From 1992 to 2001, Kenya’s weighted average annual rate of
inflation was 2.49 percent, down from the 5.38 percent from
1991 to 2000 reported in the 2002 Index. As a result, Kenya’s
monetary policy score is 1 point better this year.
Score: 3–Stable (moderate level of protection)
Expropriation of property is unlikely in Kenya. However, according to the Economist Intelligence Unit,
“Although…arrangements [are] more secure than in many
other African countries, abuses and disputes are common. The
country’s judicial system is widely regarded as overloaded,
inefficient and often corrupt. There is little confidence in the
lower courts.”
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 3–Stable (moderate barriers)
Kenya’s government has relaxed its screening standards and
is developing a one-stop shop for investment approval. According to the U.S. Department of State, “The only significant sectors in which investment (both foreign and domestic)
is constrained are those where state corporations still enjoy a
statutory monopoly. These are restricted almost entirely to
infrastructure (e.g., power, posts, telecommunications and
ports) and the media, although there has been partial liberalization of these sectors.” The government often discriminates
in favor of domestic bids. Foreign branches are assessed higher
tax rates than domestic companies or locally incorporated
foreign subsidiaries. The International Monetary Fund reports
that both residents and non-residents may hold foreign exchange accounts. There are no controls or requirements for
payments and transfers. Most capital transactions are permitted, but approval of the government is required for sale or
issue of capital and money market instruments, derivatives,
and purchase of real estate by non-residents. Corruption and
bureaucratic inefficiency impede foreign investment.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
The Kenyan banking system is troubled. An estimated 41 percent of loans are non-performing, with most of these loans
held by state-controlled banks. Two state-controlled banks
(Kenya Commercial Bank and National Bank of Kenya) dominate the banking sector along with two international banks
(Barclays and Standard Chartered). According to the U.S. Department of State, “A significant number of Kenyan banks
are struggling, including the National Bank of Kenya, which
had to be bailed out by the government in 1999. The banking
problems in Kenya are the result of poor bank management,
inadequate government supervision, political pressure to make
loans that are rarely paid, and current economic conditions.”
Interest rates are very high on average due to high risk in repayment and collecting collateral. Efforts to resurrect legislation to cap interest rates on loans and put a minimum interest
rate on savings failed in April 2002.
258
REGULATION
Score: 4–Stable (high level)
Kenya’s bureaucracy remains significantly burdensome. The
Economist Intelligence Unit reports that “investors should be
aware that the official register is in a deplorable state; it has
never been computerized or properly updated.” Obtaining licenses can also be a challenge. In 1999, the government updated the Local Government Act in an effort to streamline
the bureaucracy, creating what the same source calls a “single
business permit in place of a multitude of different licenses.”
The government gives local authorities “discretion to choose
the appropriate schedule of fees to charge, depending on the
size and level of development of the local authority concerned”; but businesses complain that, because of this discretion, they sometimes have to “pay more for a single business
permit than they have paid before for many trading licenses.”
The convoluted bureaucratic structure has bred pervasive corruption. Transparency International reports that “bribing police officers is the most rampant practice…. [T]he Nairobi City
Council ranks second [on the bribery scale]…. Telkom Kenya
ranks third…the Provincial Administration fourth, and Kenya
Power & Lighting Company fifth.”
BLACK MARKET
Score: 4.5–Stable (very high level of activity)
Transparency International’s 2001 score for Kenya is 2.0.
Therefore, Kenya’s black market score is 4.5 this year.
2003 Index of Economic Freedom
KOREA, DEMOCRATIC PEOPLE’S
REPUBLIC OF (NORTH KOREA)
Rank:
Score:
Category:
Pyongyang
Trade Policy
Fiscal Burden
5
5
Government Intervention 5
Monetary Policy
5
Foreign Investment 5
Banking and Finance 5
The Democratic People’s Republic of Korea (DPRK) is still an unreformed communist
state, and Kim Jong-Il is still its absolute ruler. The economy, which never recovered from
the sharp decline in trade and aid after the collapse of the Soviet Union and East European Communist governments in the early 1990s, may also be the world’s most closed.
After registering negative growth for nine consecutive years through 1998, it has shown
modest positive growth since 1999, registering 3.7 percent in 2001, largely because of
government construction projects. Since 1995, North Korea has depended on outside aid
to feed its 22 million people. Pyongyang estimates that more than 200,000 people died of
starvation and hunger-related diseases in the late 1990s, but more realistic estimates place
the number at close to 3 million. After the historic summit between Kim Jong-Il and
South Korean President Kim Dae Jung in 2000, the United States lifted sanctions on trade
with North Korea except for those on strategic and military-related goods. In May 2001,
the European Union and its 15 member states agreed to establish diplomatic ties with the
DPRK. However, North Korea remains largely closed to international trade with the
exception of inter-Korean trade, China and, until mid 2001, Japan. Infrastructure is decaying, and the lack of electricity has reached crisis levels. North Korea may be attempting to open its economy by encouraging foreign direct investment, but its overwhelming
military establishment and ongoing proliferation of weapons of mass destruction inevitably cast doubt on the seriousness of this effort.
TRADE POLICY
Score: 5–Stable (very high level of protectionism)
The government controls all imports and exports. According to the Economist Intelligence Unit, “Trade with the outside world is mainly handled by the Foreign Trade Bank.”
Essentially, North Korea is closed to trade except for some imports manufactured in
South Korea, China, and Japan. “As [the] deficit recorded in 2000 suggests,” reports the
same source, “much trade is de facto aid, above all with its main partner[s]. After a brief
attempt to enforce proper settlement at world prices, China now sustains North Korea to
stave off its complete collapse. In 2000 bilateral trade totalled U.S.$488m—up by 32%
from 1999.” The same situation applies to South Korea.
156
5.00
Repressed
Wages and Prices 5
Property Rights
5
Regulation
Black Market
Scores for Prior Years:
2002: 5.00
1999: 5.00
1996: 5.00
2001: 5.00
1998: 5.00
1995: 5.00
2000: 5.00
1997: 5.00
2000 Data
(in constant 1995 US dollars)
Population: 22,268,000
Total area: 120,540 sq. km
GDP: n/a
GDP growth rate: 1.3%
GDP per capita: n/a
Major exports: minerals,
metallurgical products,
manufactures (including armaments),
agricultural and fishery products
Exports of goods and services: n/a
Major export trading partners:
Japan 36.3%, South Korea 21.5%,
China 5.2%
Major imports: petroleum, coking
coal, machinery and equipment,
consumer goods, grain
Imports of goods and services: n/a
Major import trading partners:
China 26.7%, South Korea 16.2%,
Japan 12.3%
Foreign direct investment (net):
n/a
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: n/a
Score—Government Expenditures: 5–Stable
(very high level of government expenditure)
Final Score: 5–Stable (very high cost of government)
Data from the Economist Intelligence Unit indicate that in 2000, government expenditures equaled 50.2 percent of GDP. (Tax data are not available; therefore, North Korea’s
fiscal burden of government score is based solely on government expenditures for 2000.)
Chapter 6: The Countries
5
5
259
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 5–Stable (very high level)
The government owns all property and sets production levels for
most products, and state-owned industries account for nearly all
GDP. According to the U.S. Department of State, “The State directs all significant economic activity, and only government-controlled labor unions are permitted.” However, reports the Economist Intelligence Unit, “de facto private enterprise [is emerging] to
complement or supplant the failing formal economy. Constitutional
revisions in 1998 gave more scope both to co-operatives and private property. Peasants’ markets, never abolished, have expanded,
as has private cross border trade with China. The authorities are
trying to check, control or at least tax all this, with mixed success.”
MONETARY POLICY
Score: 5–Stable (very high level of inflation)
The Korea Economic Institute and the Korea Institute of International Economic Policy report that the DPRK’s small private sector “rocks the foundation of the centrally planned system…by causing the general public to avoid bank savings deposits in favor of
holdings of domestic and foreign currency…. [A]s the rationing
system broke down…North Koreans turned to farmers’ markets
to purchase necessities, spending their currency. Since the currency
remained and circulated within the farmers’ markets, the central
bank could not withdraw it, thus disrupting normal currency flow
[and] inducing a sharp increase in the amount of currency in circulation.” North Korea’s currency is worth little and is not convertible on the international market.
2000 inter-Korean summit South Korean banks have been considering possible investment in the North, but so far there is no system for the direct settlement of payments despite an agreement to
create one.” The central bank also serves as a commercial bank
with a network of 227 local branches. The state-owned
Changgwang Credit Bank, founded in 1983, has 172 branches. The
state holds a monopoly on insurance through the State Insurance
Bureau and the Korea Foreign Insurance Company. Foreigners may
not use banking services, and Western tourists are charged in U.S.
dollars rather than won.
WAGE AND PRICES
Score: 5–Stable (very high level of intervention)
According to the Korea Economic Institute and the Korea Institute
of International Economic Policy, “Under the difficult economic
conditions that have prevailed since 1995…greater laxity has crept
into the planned economy, giving some scope for the rise of a private sector…. The centrally planned sector includes all the state’s
key industries, including coal, electricity, steel, machinery, transport, and construction. The private sector consists chiefly of a system of farmers’ markets…. The centrally planned sector represents 96.4 percent of the total economy.” Prices are fixed in the
centrally planned sector.
PROPERTY RIGHTS
Score: 5–Stable (very low level of protection)
Almost all property belongs to the state. According to the U.S.
Department of State, “the judiciary is not independent.”
CAPITAL FLOWS AND FOREIGN INVESTMENT
REGULATION
Score: 5–Stable (very high barriers)
According to the Economist Intelligence Unit, “The dire debt record
has not stopped North Korea from seeking new foreign investment…. Taken at face value, many of the new provisions are liberal and attractive, with low tax rates aimed at undercutting China.
The main concern, apart from trust, is high wage rates (of which
the state takes a substantial cut). So far there are only a few takers,
with ABB, a Swiss–Swedish power engineering group, the only
major multinational yet committed.” South Korea—the only significant source of investment—has promoted a number of joint
ventures and direct investments in business and infrastructure, including a car assembly factory, but North Korea remains generally
resistant to foreign investment or economic activity with the world
at large. The government must remain a majority owner in a business, investments are effectively banned in most industries, and
foreign investors still do not receive equal treatment.
Score: 5–Stable (very high level)
The government regulates the economy heavily. According to the
Financial Times, Kim Jong-Il refuses to follow China’s example of
opening to foreign investment and relaxing borders; this refusal
has serious implications because “the country’s economy, stripped
of its industries and starved of energy, is unsustainable.” The Economist Intelligence Unit reports indications that local government
officials have stepped up extortion-like tactics to help raise revenue.
BLACK MARKET
Score: 5–Stable (very high level of activity)
North Korea’s black market is immense even though the government imprisons many who engage in such activity. Black market
activity in agricultural goods flourishes as a result of famines and
oppressive government policies. There is also an active black market in currency and in trade with China.
BANKING AND FINANCE
Score: 5–Stable (very high level of restrictions)
“As a communist command economy,” reports the Economist Intelligence Unit, “North Korea largely lacks a financial sector in the
capitalist sense. Most funding for industry comes from the state,
which also earns revenue by taking a percentage on transactions
among enterprises…. Most foreign banks will not touch North
Korea because of debts dating back to the 1970s…. Since the June
260
2003 Index of Economic Freedom
KOREA, REPUBLIC OF
(SOUTH KOREA)
Seoul
Kwangju
Trade Policy
Fiscal Burden
3
3
Government Intervention 4
Monetary Policy
2
Foreign Investment 2
Banking and Finance 3
South Korea’s economy, despite the global economic downturn, grew by 3.0 percent in
2001 and at an annualized rate of 5.7 percent during the first quarter of 2002. Unlike
the economies of China and Japan, in which expansion is supported by infrastructure
spending and exports, Korea’s economy depends increasingly on consumer spending,
which grew at an annualized rate of 9.4 percent in the last quarter of 2001, allowing the
economy to escape recession in 2001 despite a slowdown of demand in the U.S. economy.
Credit-card use has exploded from $50 billion in 1998 to $235 billion in 2001. Retail
lending is rapidly replacing loans to the chaebol (South Korea’s conglomerates, which
are the traditional mainstay employers) as a safer source of bank revenue, and new
consumer borrowing has pumped tens of billions of dollars into the economy. Hightech industries contribute 15 percent of GDP, up from less than 8 percent in 1997. More
than 1 million service-sector jobs have been added to South Korea’s increasingly service-driven economy since 2000. Bad bank debt was reduced by more than 55 percent
last year through aggressive disposal of distressed assets (compared to Japanese banks,
which are on the verge of collapse), and bad loans have been reduced to an internationally acceptable level of 3.4 percent from approximately 10 percent three years ago.
Daily average trading volume on the Korean stock exchange (KOSPI) increased from
27 million shares in 1996 to 473 million in 2001 despite the withdrawal of 259 companies from the index. Foreigners now account for 38 percent of share ownership and
two-thirds of daily trades. Since 1998, Korea has attracted $52 billion in new overseas
investment—more than double what it attracted during the previous four decades.
Overall, South Korea has done a better job of restructuring and attracting foreign investment than any other country in the region. However, corporate debt is still too
high; better bankruptcy laws, which are now only in the planning stages, are needed to
speed the disposal of unprofitable companies, of which there are still too many; transparency and disclosure still fall short of world standards; and the lack of labor flexibility
remains a serious problem. In addition, while increased consumer spending may help
the economy in the short term, there is a danger that without proper measures to
address non-performing consumer debt, it could lead eventually to creation of a dangerous consumer credit bubble. South Korea’s fiscal burden of government score is 0.5
point better this year; however, both its monetary policy and property rights scores are
1 point worse, and its government intervention score is 0.5 point worse. As a result,
South Korea’s overall score is 0.2 point worse this year.
Rank:
Score:
Category:
52
2.70
Mostly Free
Wages and Prices 2
Property Rights
2
Regulation
Black Market
Scores for Prior Years:
2002: 2.50
1999: 2.20
1996: 2.30
2001: 2.25
1998: 2.25
1995: 2.15
2000: 2.40
1997: 2.25
2001 Data
(in constant 1995 US dollars)
Population: 47,676,000
Total area: 98,480 sq. km
GDP: $635.9 billion
GDP growth rate: 3.0%
GDP per capita: $13,338
Major exports: electronic products,
machinery and equipment, motor
vehicles, steel, ships, textiles,
clothing, footwear, fish
Exports of goods and services:
$323.9 billion
Major export trading partners:
US 20.7%, China 12.1%, Japan 11.0%,
Hong Kong 6.3%, Taiwan 3.9%
Major imports: machinery,
electronics and electronic
equipment, oil, steel, transport
equipment, textiles, organic
chemicals, grains
Imports of goods and services:
$213.8 billion
Major import trading partners:
Japan 18.9%, US 15.9%, China 9.4%,
Saudi Arabia 5.7%, Australia 3.9%
Foreign direct investment (net):
$528.5 million
TRADE POLICY
Score: 3–Stable (moderate level of protectionism)
According to the World Bank, South Korea’s weighted average tariff rate in 1999 (the
most recent year for which World Bank data are available) was 5.9 percent. Non-tariff
barriers remain stringent. According to the U.S. Department of State, “Nontariff barriers, which often result from non-transparent regulatory practices, continue to inhibit
imports to Korea across a range of sectors. A lack of regulatory transparency and
consistency can affect licensing, inspections, type approval, marking/labeling requirements and other standards.”
Chapter 6: The Countries
3
3
261
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation:3.5–Stable
(high tax rates)
Score—Government Expenditures: 2–Better
(low level of government expenditure)
Final Score: 3–Better
(moderate cost of government)
South Korea’s top income tax rate is 36 percent; the marginal
rate for the average taxpayer is 20 percent. The top corporate tax
rate is 27 percent. In 2001, government expenditures equaled 23.6
percent of GDP, down from the 25.2 percent reported in the 2002
Index. Based on the lower level of government expenditure, South
Korea’s fiscal burden of government score is 0.5 point better this
year.
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 4–Worse (high level)
Data from the International Monetary Fund indicate that the
government consumed 10.5 percent of GDP in 2001, up from
the 10 percent reported in the 2002 Index. South Korea is making progress in privatizing some of its state-owned enterprises.
According to the Economist Intelligence Unit, however, the
government still owns (or is a shareholder in) companies in
the banking, telecommunications, electric power, oil, tobacco,
and heavy industries sectors. The government also has intervened in the economy in other areas. According to The Wall
Street Journal, for example, it intervened in the stock market
in October 2000 by purchasing $3.8 billion worth of shares. It
has not disposed of these shares. The government also bails
out big enterprises in crisis. The Financial Times reports that
when Hyundai’s tourism project in North Korea faltered, “the
government was forced to rescue the project.” In addition,
some state-run banks “saved debt-laden Hynix, one of Korea’s
leading chipmakers from collapse.” Based on the higher level
of government consumption, the government’s intervention
in the stock market, and the level of state involvement in the
economy, South Korea’s government intervention score is 0.5
point worse this year.
MONETARY POLICY
Score: 2–Worse (low level of inflation)
From 1992 to 2001, South Korea’s weighted average annual
rate of inflation was 3.51 percent, up from the 2.49 percent
from 1991 to 2000 reported in the 2002 Index. As a result, South
Korea’s monetary policy score is 1 point worse this year.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 2–Stable (low barriers)
The Foreign Investment Promotion Act of November 1998 and
other reforms substantially opened the South Korean economy
to foreign investment. “In addition,” according to the Embassy
of Korea (and other sources), “no specific restrictions apply to
foreign investment in Korea as long as such investment does not
violate national security, public health and conservation of the
environment…. Out of a total of 1,121 sectors, only 2 remain
262
completely closed to FDI [as of March 2001], so that in terms of
the number of sectors, 99.8% of Korea’s economy is open to
FDI. 27 sectors are currently only partially open to FDI, but the
Korean government will consider further liberalization in the near
future. The two closed sectors are television and radio broadcasting, and the 27 partially open sectors are mostly in media and
communications sectors, electric power related sectors, and certain agricultural sectors.” According to the International Monetary Fund, residents and non-residents are permitted to hold
foreign exchange accounts, but institutional investors are subject
to maximum amounts of deposits held abroad and for a maximum amount of time. Payments, transactions, transfers, or repatriation of profits are subject to reporting requirements or restrictions on amounts permitted for specified periods. Non-residents may purchase real estate but must notify the government.
The IMF also reports that capital transactions, including sale or
issue of securities, derivatives, credits, money market instruments,
bonds, loans, and debt securities, are subject to reporting requirements and, in rare circumstances, approval by the ministry of
Finance and Economy or the Bank of Korea.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
The government has reformed South Korea’s troubled financial sector. In a landmark example, it sold 51 percent of Korea
First Bank, which had been nationalized during the Asian financial crisis, to U.S. investment firm Newbridge Capital in
September 1999. This is the first (and so far the only) time a
foreign interest has been permitted to acquire controlling interest in a domestic South Korean bank. Korea has also opened
itself to foreign banking. An amendment to the Banking Act
raised the ceiling on foreign ownership of a nationwide domestic bank from 4 percent to 10 percent, although the Korean Embassy reports that this limit can be exceeded with
permission from the Financial Supervisory Commission. The
U.S. Department of State reports that “The Korean banking
and financial sectors are undergoing thorough structural reform” and that “reforms aim at increasing transparency and
investor confidence, and generally purging the sector of moral
hazard, that is, the assumption that government would make
good all losses and not permit large companies to fail.” The
Asian financial crisis placed many Korean banks in jeopardy
and led the government to become a substantial stockholder
in most large commercial banks; at the end of 2000, government-owned shares in commercial banks totaled 16.6 trillion
won. The government maintains majority ownership of several large commercial banks and has a significant stake in several others. The problem of non-performing loans in Korean
banks led to the creation of the Korean Asset Management
Corporation to purchase non-performing loans at a discount
to restore health to the system. As it nears the end of the
process of restoring health to the banking system, the Korean government has spent over $120 billion on bad loans and
bank bailouts, has taken over eight failing banks (some of
which were closed and others of which were scheduled for
privatization), and has forced many bank mergers.
2003 Index of Economic Freedom
WAGES AND PRICES
Score: 2–Stable (low level of intervention)
The market sets most prices, although the government has
the power to control prices on a range of products. According to the Korean Embassy, the government controls the price
of electricity, water, telephone services, postal services, public transportation services, cigarettes, oil products, and coal
briquettes. The government also maintains stockpiles of foodstuffs that it releases into the market to offset seasonal price
fluctuation. In November 2000, South Korea strengthened
its minimum wage law and extended it to all industries.
PROPERTY RIGHTS
Score: 2–Worse (high level of protection)
Private property is secure, and expropriation is highly unlikely. However, the justice system can be inefficient and slow.
The Economist Intelligence Unit reports that “a contract is
often considered a broadly defined consensus statement that
allows for flexibility and adjustment…. [L]egal procedures in
South Korea can be cumbersome and expensive.” In addition, reports the U.S. Department of State, “Although commercial disputes can be adjudicated in a civil court, foreign
businesses often feel that this is not a practical means to resolve disputes. For example, proceedings are conducted in
the Korean language, often without adequate translation.
Foreign lawyers (i.e., who have not passed the Korean Bar)
are almost always prohibited by Korean law from representing clients in Korean courts…. Legal proceedings are expensive and time-consuming. Lawsuits often are contemplated
only as a last resort, signaling the end of a business relationship.” Based on evidence of delays and loose enforcement of
contracts, South Korea’s property rights score is 1 point worse
this year.
published prior to promulgation, or are published with insufficient time to permit public comment and industry adjustment. For example, regulatory changes originating from
legislation proposed by members of Korea’s National Assembly are not subject to public comment periods. After promulgation, rules can be applied retroactively and arbitrarily.”
The government’s efforts to fight corruption led it on June
28, 2001, to pass a controversial Anti-Corruption Law that
went into effect in January 2002.
BLACK MARKET
Score: 3–Stable (moderate level of activity)
Transparency International’s 2001 score for South Korea is
4.2. Therefore, South Korea’s black market score is 3 this year.
REGULATION
Score: 3–Stable (moderate level)
In the years since the Asian financial crisis, Korea has made
progress in opening the economy and making regulations
more transparent. The administration of Kim Dae Jung has
implemented structural reforms to increase transparency and
deregulation in the Korean economy. The U.S. Department
of State reports that “much of [Kim Dae Jung’s] agenda has
been implemented, including legislative changes to promote
labor flexibility, corporate transparency, and capital market
liberalization.” The Embassy of South Korea reports that
“since 1998, the Korean government has abolished 5,464 regulatory provisions (50.1%) and loosened 2,630 regulatory provisions (24.5%)….” The government’s efforts to deregulate
have been strong, but much remains to be done since the
regulatory environment remains difficult for both domestic
and foreign firms. According to the U.S. Department of State,
“Laws and regulations are framed in general terms and are
subject to differing interpretations by government officials,
who rotate frequently…. Mid-level bureaucrats rely on unpublished ministerial guidelines and unwritten administrative advice for direction. Proposed rules are still not always
Chapter 6: The Countries
263
264
2003 Index of Economic Freedom
KUWAIT
Kuwait City
Trade Policy
Fiscal Burden
2
2.5
Government Intervention 3
Monetary Policy
1
Foreign Investment 4
Banking and Finance 3
The Kuwaiti economy is dominated by oil. Kuwait possesses 94 billion barrels of
oil reserves—about 10 percent of the world’s oil supply—and the governmentowned oil sector accounts for nearly 50 percent of GDP and 90 percent of export
revenues. The economy has recovered from the August 1990 Iraqi invasion, the
1991 Gulf War, and Iraqi sabotage of Kuwait’s oil fields. The government has committed to a reform program designed to reduce the state’s role in the economy
through privatization, enhance the role of the private sector, reduce subsidies, roll
back high levels of protection against foreign competition, and trim the country’s
extensive welfare system. However, this program faces an uphill struggle in the
largely uncooperative parliament, and the strength of the government’s commitment to economic reform appears to fluctuate in inverse relation to world oil prices.
Kuwait’s trade policy and government intervention scores are both 1 point better
this year. As a result, its overall score is 0.20 point better this year.
TRADE POLICY
Score: 2–Better (low level of protectionism)
Based on data from the International Monetary Fund and the Economist Intelligence Unit, Kuwait’s average tariff rate was 2.35 percent in 1999 (based on import
duties as a percentage of total imports), down from the 4.1 percent reported in the
2002 Index. As a result, Kuwait’s trade policy score is 1 point better this year. According to the U.S. Department of State, “where imports compete with ‘infant
industries,’ the Ministry of Commerce and Industry may impose protective tariffs
of up to 25 percent.” The same source reports that government procurement policies cater generally to Kuwaiti firms and that non-tariff barriers include restrictive
standards on imports of food and both medical and telecommunications equipment.
FISCAL BURDEN OF GOVERNMENT
Score—Income and Corporate Taxation: 1–Stable
(very low tax rates)
Score—Government Expenditures: 4–Stable
(high level of government expenditure)
Final Score: 2.5–Stable (moderate cost of government)
The U.S. Department of State reports that Kuwait has no income tax. No corporate taxes are assessed on companies wholly owned by Kuwaitis or citizens of Gulf
Cooperation Council (GCC) countries. Foreign corporations are subject to a 55
percent corporate income tax rate, but this is considered a foreign investment barrier; therefore, the domestic taxation rate has been used to score this factor. In
2000, based on data from the Economist Intelligence Unit, government expenditures equaled 41.3 percent of GDP.
Chapter 6: The Countries
Rank:
Score:
Category:
40
2.55
Mostly Free
Wages and Prices 3
Property Rights
2
Regulation
Black Market
3
2
Scores for Prior Years:
2002: 2.75
1999: 2.50
1996: 2.50
2001: 2.55
1998: 2.60
1995: n/a
2000: 2.50
1997: 2.50
2000 Data
(in constant 1995 US dollars)
Population: 1,984,400
Total area: 17,820 sq. km
GDP: $28.6 billion
GDP growth rate: 1.7%
GDP per capita: $14,392
Major exports: oil and refined
products, fertilizers
Exports of goods and services:
$19.5 billion
Major export trading partners:
Japan 23.1%, US 13.8%,
Singapore 7.0%, Netherlands 5.9%
Major imports: food, construction
materials, vehicles and parts,
clothing
Imports of goods and services:
$10.6 billion
Major import trading partners:
US 11.7%, Japan 8.4%, UK 7.5%,
Germany 7.4%, France 4.0%
Foreign direct investment (net):
–$218 million
265
GOVERNMENT INTERVENTION IN THE ECONOMY
Score: 3–Better (moderate level)
The World Bank reports that the government consumed 22.1
percent of GDP in 2000, down from the 27 percent reported
in the 2002 Index. As a result, Kuwait’s government intervention score is 1 point better this year. Most GDP comes from
oil production, nearly all of which is owned by the government. In 2001, based on data from the Economist Intelligence
Unit, Kuwait received 85.15 percent of its total revenues from
state-owned enterprises and government ownership of property.
MONETARY POLICY
Score: 1–Stable (very low level of inflation)
From 1992 to 2001, Kuwait’s weighted average annual rate of
inflation was 2.04 percent.
CAPITAL FLOWS AND FOREIGN INVESTMENT
Score: 4–Stable (high barriers)
Kuwait is open to some types of foreign investment, but significant restrictions exist. The International Monetary Fund
reports that foreign participation in new Kuwaiti companies
is capped at 49 percent ownership, except for GCC nationals
who may own up to 75 percent of the company. In March
2001, Kuwait rescinded the law requiring foreign investors to
have a local sponsor or partner; however, the government
continues to charge foreign corporations a 55 percent corporate income tax rate, while companies wholly owned by Kuwaitis or GCC citizens are not charged a corporate tax. Except for GCC citizens, foreigners may not own real estate. In
May 2000, Kuwait’s Parliament passed the Indirect Foreign
Investment Law, which permits foreign investors to buy 100
percent of any company listed on the Kuwait Stock Exchange,
except for banks; previously, only GCC nationals were allowed
to invest in the stock market. Foreign stocks and bonds may
not be listed on the stock exchange without permission from
the Exchange Committee. Kuwait still resists foreign investment in its predominant sector—oil—and laws to allow foreign interests in oil have been undermined by political opposition. According to the International Monetary Fund, both
residents and non-residents may hold foreign exchange accounts, and there are no restrictions or controls on payments,
transactions, transfers, or repatriation of profits.
BANKING AND FINANCE
Score: 3–Stable (moderate level of restrictions)
Banking in Kuwait is competitive and meets international standards. The banking sector has been opened to foreign competition, and the government sold a stake in the Bank of Kuwait
and the Middle East to a Bahrain-based (but partly Kuwaitiowned) bank in March 2001. There are seven commercial
banks, including one Islamic bank, which have 140 branches
and offer the usual bank services. Foreigners are restricted to
a maximum of 49 percent ownership in a Kuwaiti bank and
may not issue insurance. There are three government-owned
266
banks, which grant medium-term and long-term financing.
Banks are relatively free of government control, but there are
ties between the state and the banking sector.
WAGES AND PRICES
Score: 3–Stable (moderate level of intervention)
The market sets many prices. According to the Economist
Intelligence Unit, however, “most of the items in the basket
of commodities tracked by the Consumer Price Index (CPI)
had administratively controlled prices.” In addition, Kuwait
“subsidizes health and education, housing loans, petrol, power
and water, bread and other essential goods.” Kuwait does not
mandate a minimum wage in the private sector, but it does
set wages in the public sector, in which over 93 percent of
Kuwaitis are employed.
PROPERTY RIGHTS
Score: 2–Stable (high level of protection)
Private property is protected in Kuwait, but the U.S. Department of State reports that claimants in both commercial and
investment disputes are frustrated by the slow pace of the
legal system. The constitution and law provide for an independent judiciary; in practice, however, the Amir appoints all
judges. In addition, the majority of the judges are non-citizens, and renewal of their appointments is subject to government approval. According to the U.S. Department of State,
“non-citizen judges work under 1 to 3 year renewable contracts, which undermine their independence. Also, the Amir
has the constitutional power to pardon or commute all sentences.”
REGULATION
Score: 3–Stable (moderate level)
State involvement in the economy is considerable, and competition with state-owned or private Kuwaiti concerns is difficult. While regulations are applied evenly in most cases, bureaucratic procedures and red tape can cause considerable
delay. According to the U.S. Department of State, “the government of Kuwait has not developed effective antitrust laws
to foster competition, and its bureaucracy often resembles that
of a developing country.” In addition, “the often lengthy procurement process in Kuwait occasionally results in accusations
of attempted bribery or the offering of other inducements by
foreign bidders.”
BLACK MARKET
Score: 2–Stable (low level of activity)
Kuwait’s black market is confined mainly to pirated computer
software, video and cassette recordings, and other similar products. A new copyright protection law that went into effect in
February 2000 meets most TRIPS (Trade-Related Aspects of
Intellectual Property Rights) requirements, although enforcement can be arbitrary.
2003 Index of Economic Freedom
Bishkek
KYRGYZ REPUBLIC
Rank:
104
Score:
3.35
Category: Mostly Unfree
Trade Policy
Fiscal Burden
4
2.5
Government Intervention 2
Monetary Policy
4
Foreign Investment 3
Banking and Finance 3
Political liberalization in the Kyrgyz Republic has been partially reversed. Opponents
of Pr