Index of Economic Freedom 2003 by Cedice Libertad A.C.

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

The Wall Street Journal Dow Jones & Company, Inc. 200 Liberty Street New York, NY 10281 (212) 416-2000 www.wsj.com

2003 Index of Economic Freedom

Table of Contents

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

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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 viii

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 (Serbiaâ&#x20AC;&#x201C;Montenegro) ................................... 425 Zambia ........................................................... 427 Zimbabwe ...................................................... 429 Per Capita Income Throughout the World .. 432 Major Works Cited .................................... 437

2003 Index of Economic Freedom

Foreword

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 xi

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

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.

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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 xiii

“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

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2003 Index of Economic Freedom

Acknowledgments

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 Foundationâ&#x20AC;&#x2122;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 yearâ&#x20AC;&#x2122;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

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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

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Trade policy,

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Fiscal burden of government,

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Government intervention in the economy,

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Monetary policy,

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Capital flows and foreign investment,

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Banking and finance,

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Wages and prices,

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Property rights,

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Regulation, and

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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

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

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.

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

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.

2003 Index of Economic Freedom

Table 5. Membership in a Global Free Trade Association Next in Line Qualifying Countries

Country

Policy Blocking Membership

Australia

Austria

Regulation

Botswana

Bahrain

Trade

Denmark

Belgium

Regulation

Estonia

Canada

Foreign Investment

Finland

Chile

Regulation

Hong Kong

Cyprus

Foreign Investment

Iceland

El Salvador

Property Rights

Ireland

Germany

Regulation

Luxembourg

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.

Numbers are in real terms.

For a discussion of data issues with respect to Libya, see “Country Trend Tables,” p. 5.

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.

See Table 5, “Membership in a Global Free Trade Association,” p. 9.

Executive Summary

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

4.45 5.00

4.35 5.00

2.05 2.00

3.80 3.60 4.50

5.00

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

Peopleâ&#x20AC;&#x2122;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

4.00

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

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

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 Guineaâ&#x20AC;&#x201C; 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 RĂŠunion (France)

Botswana Swaziland

South Africa

Lesotho

1,000 Miles

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

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

Not Ranked

2003 Index of Economic Freedom

Executive Summary

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, Curaรงao 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

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

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

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

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

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

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

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.

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

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.

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.

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/.

See Mart Laar, “How Estonia Did It,” infra.

See Robert Pollock, “In the Middle East, Arbitrary Government Feeds Rage,” infra.

F. A. Hayek, The Road to Serfdom, introduction by Milton Friedman, 50th anniversary ed. (Chicago: University of Chicago Press, 1994), p. 115.

See Sara J. Fitzgerald, “Scandinavia’s Changing Political and Economic Landscape,” infra.

2003 Index of Economic Freedom

2 In the Middle East, Arbitrary Government Feeds Rage by Robert L. Pollock

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

“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

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

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 freedomâ&#x20AC;&#x201D;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

3 How Estonia Did It by Mart Laar1

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

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

4 Scandinavia’s Changing Political and Economic Landscape by Sara J. Fitzgerald

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

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

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

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

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

Notes: 1

Economist Intelligence Unit, Country Monitor Norway, April 8, 2002.

"A Center–Right Prime Minister for Homogeneous, Welfare-Statist Denmark,” The Economist, November 24, 2001.

Frances Williams, “Finland Goes Top in Competitiveness League,” Financial Times, September 7, 2000.

Economist Intelligence Unit, Country Report Finland, March 2002.

Economist Intelligence Unit, Country Report Norway, December 2001.

Economist Intelligence Unit, Country Profile Sweden, 2002.

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.

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.

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

5 Explaining the Factors of the Index of Economic Freedom by William W. Beach and Gerald P. O’Driscoll, Jr.

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

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

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

Very low

Weighted average tariff rate less than or equal to 4 percent.

Low

Weighted average tariff rate greater than 4 percent but less than or equal to 9 percent.

Moderate

Weighted average tariff rate greater than 9 percent but less than or equal to 14 percent.

High

Weighted average tariff rate greater than 14 percent but less than or equal to 19 percent.

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

Individual Income Tax Grading Scale

Score

Tax Rates

Criteria

Very low

Top income tax rate 0 percent. Marginal rate for the average taxpayer 0 percent.

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.

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.

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.

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

Very low

Corporate tax rate less than or equal to 20 percent.

Low

Corporate tax rate greater than 20 percent and less than or equal to 25 percent.

Moderate

Corporate tax rate greater than 25 percent and less than or equal to 35 percent.

High

Corporate tax rate greater than 35 percent and less than or equal to 45 percent.

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

Government Expenditures Scale for Developed Countries

Score

Government Expenditures as Percent of GDP

Very low

Less than or equal to 15 percent.

Low

Greater than 15 percent but less than or equal to 25 percent.

Moderate

Greater than 25 percent but less than or equal to 35 percent.

High

Greater than 35 percent but less than or equal to 45 percent.

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

Very low

Less than or equal to 15 percent.

Low

Greater than 15 percent but less than or equal to 20 percent.

Moderate

Greater than 20 percent but less than or equal to 25 percent.

High

Greater than 25 percent but less than or equal to 30 percent.

Very high

Greater than 30 percent.

Government Intervention Grading Scale

Score

Level of Government Intervention in the Economy

Criteria

Very low

Less than or equal to 10 percent of GDP.

Low

Greater than 10 percent but less than or equal to 25 percent of GDP.

Moderate

Greater than 25 percent but less than or equal to 35 percent of GDP.

High

Greater than 35 percent but less than or equal to 45 percent of GDP.

Very high

45 percent or more of GDP.

Chapter 5: Explaining the Factors of the Index of Economic Freedom

Monetary Policy Grading Scale Score

Weighted Average Inflation Rate

Very low

Weighted average inflation less than or equal to 3 percent.

Low

Weighted average inflation greater than 3 percent but less than or equal to 6 percent.

Moderate

Weighted average inflation greater than 6 percent but less than or equal to 12 percent.

High

Weighted average inflation greater than 12 percent but less than or equal to 20 percent.

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

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.

Low

Restrictions on investments in few sectors, such as utilities, companies vital to national security, and natural resources; limited, efficient approval process.

Moderate

Restrictions on many investments, but official policy conforms to established foreign investment code; bureaucratic approval process.

High

Investment permitted on a case-by-case basis; possible presence of bureaucratic approval process and corruption.

Very high

Government seeks actively to prevent foreign investment; rampant corruption.

Chapter 5: Explaining the Factors of the Index of Economic Freedom

Banking and Finance Grading Scale Score

Restrictions on Banks

Criteria

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.

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.

Moderate

Substantial government influence on banks; government owns or controls some banks; government controls credit; domestic bank formation may face significant barriers.

High

Heavy government involvement in the financial sector; banking system in transition; banks tightly controlled by government; possible corruption; domestic bank formation virtually nonexistent.

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

Wages and Prices Grading Scale Score

Wage and Price Controls

Criteria

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.

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.

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.

High

The government determines most prices of goods and services and most wages.

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

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.

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.

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.

Low

Property ownership weakly protected; court system inefficient; corruption present; judiciary influenced by other branches of government; expropriation possible.

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

Regulation Grading Scale Score

Levels of Regulation

Criteria

Very low

Existing regulations straightforward and applied uniformly to all businesses; regulations not much of a burden for business; corruption nearly nonexistent.

Low

Simple licensing procedures; existing regulations relatively straightforward and applied uniformly most of the time, but burdensome in some instances; corruption possible but rare.

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.

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.

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

Very low

Very low level of black market activity; economies are free markets with black markets in such things as drugs and weapons.

Low

Low level of black market activity; economies may have some black market involvement in labor or pirating of intellectual property.

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.

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.

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

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

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).

“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.

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.

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.

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.

These countries are Bolivia, Estonia, Hong Kong, Iceland, Latvia, Lithuania, and Russia.

Daniel Mitchell, The Flat Tax (Washington, D.C.: Regnery Publishing, Inc., 1996).

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

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

6 The 2003 Index of Economic Freedom: The Countries by Ana I. Eiras and Brett D. Schaefer1

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.

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.

For a detailed explanation of the scoring procedure used in this year’s Index, see Chapter 5, supra.

Chapter 6: The Countries

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

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-

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

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.

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

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

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

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.

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

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

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

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

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.

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

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.

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

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].”

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

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-

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

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-

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

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

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

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

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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

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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

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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

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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

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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

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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.

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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

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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,

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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

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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)

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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.

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5 5

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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.

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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.

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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

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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.

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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.

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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

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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

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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

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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

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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

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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

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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.

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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.

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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

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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.

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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.

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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-

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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

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2 1

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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-

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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.

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2 4

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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.”

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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

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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.

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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.

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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

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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.

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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

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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.

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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-

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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-

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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.”

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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-

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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.

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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.”

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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

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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.

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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.

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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

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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

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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

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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

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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.

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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-

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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

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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

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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

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4 5

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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-

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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.

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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

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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

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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.

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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.

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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.

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1 1

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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.

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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

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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.

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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

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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

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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

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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.

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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

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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

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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.

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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.

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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

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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

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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

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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

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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.”

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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%

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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

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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

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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-

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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

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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.

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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

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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-

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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-

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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

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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.

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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

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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.

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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

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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.

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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

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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

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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

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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

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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.

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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

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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,

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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

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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.

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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

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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.”

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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.

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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.

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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.

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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.

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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.

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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.”

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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

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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-

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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

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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

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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

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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)

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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.

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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

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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

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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

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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.

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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

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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.

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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.

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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.”

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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

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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-

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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-

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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

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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

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3 3

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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

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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

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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-

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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

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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.

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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

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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

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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

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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

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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

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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

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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 President Askar Akayev, including former Vice President and Interior Minister Felix Kulov, have been jailed. Growth in GDP (5.3 percent in 2001) is attributed mainly to the strong performance of the gold mining industry; other sectors of the economy are in recession due to the slow pace of structural reforms. With external debt roughly equal to GDP, heavy indebtedness remains one of the economy’s major problems. Institutional changes include a new tax regime and the decision to direct 75 percent of all privatization revenues toward debt repayment. Legislation allowing sales of agricultural land was adopted in 2001 and already has had a positive effect on growth in the agricultural sector. In 1998, the Kyrgyz Republic became the first member of the Commonwealth of Independent States to join the World Trade Organization. The Kyrgyz Republic’s government intervention score is 0.5 point better this year, and its fiscal burden of government and monetary policy scores are both 1 point better. As a result, the Kyrgyz Republic’s overall score is 0.25 point better this year.

TRADE POLICY

Wages and Prices 3 Property Rights 4

Regulation Black Market

Scores for Prior Years: 2002: 3.60 1999: 3.60 1996: n/a

2001: 3.65 1998: 3.80 1995: n/a

2000: 3.60 1997: n/a

2000 Data (unless otherwise indicated) (in constant 1995 US dollars) Population: 4,915,000 Total area: 198,500 sq. km GDP: $4.5 billion (2001) GDP growth rate: 5.3% (2001) GDP per capita: $885 Major exports: cotton, wool, meat, tobacco, gold, mercury, uranium, hydropower, machinery, shoes

Score: 4–Stable (high level of protectionism) The Ministry of External Trade and Industry reports that the Kyrgyz Republic has a “scheme of tariffs ranges…(0, 5%, 6.5%, 10%, 17.5%, and 20%).” No current information on the average tariff rate is available. More recent information from the U.S. Department of State shows that the government “has a uniform import tariff of ten percent on most goods.” According to the International Monetary Fund, “Non-tariff barriers for imports consist of fees for services rendered, quantitative restrictions, and import licenses.”

Exports of goods and services: $1.03 billion

FISCAL BURDEN OF GOVERNMENT

Imports of goods and services: $1 billion

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) The U.S. Department of State reports that the Kyrgyz Republic’s top income tax rate is 35 percent, down from the 40 percent reported in the 2002 Index. According to the World Bank, the top corporate tax rate is 30 percent. (The marginal rate for the average taxpayer is not available; therefore, the country’s income and corporate taxation score is based solely on the top income and corporate tax rates.) In 2000, according to the Asian Development Bank, government expenditures equaled 18.9 percent of GDP, down from the 22.65 percent reported in the 2002 Index. Based on the lower top income tax rate and lower level of government expenditure, the Kyrgyz Republic’s overall fiscal burden of government score is 1 point better this year.

Chapter 6: The Countries

4 4

Major export trading partners: Germany 28.7%, Uzbekistan 17.7%, Russia 12.9%, China 8.7%, Kazakhstan 6.6% Major imports: oil and gas, machinery and equipment, foodstuffs

Major import trading partners: Russia 23.9%, Uzbekistan 13.5%, Kazakhstan 10.3%, US 9.7% Foreign direct investment (net): –$6.2 million

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GOVERNMENT INTERVENTION IN THE ECONOMY Score: 2–Better (low level) The World Bank reports that the government consumed 18.7 percent of GDP in 2000. In the same year, according to the International Monetary Fund, the Kyrgyz Republic received 3.44 percent of its total revenues from state-owned enterprises and government ownership of property, down from the 6.6 percent reported in the 2002 Index. As a result, the Kyrgyz Republic’s government intervention score is 0.5 point better this year.

MONETARY POLICY Score: 4–Better (high level of inflation) From 1992 to 2001, the Kyrgyz Republic’s weighted average annual rate of inflation was 13.49 percent, down from the 24.76 percent from 1991 to 2000 reported in the 2002 Index. As a result, the Kyrgyz Republic’s monetary policy score is 1 point better this year.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) The Kyrgyz Republic has opened most of its economy to foreign investment, adopted guarantees against expropriation or nationalization, allowed investors to bid on privatized firms, and established a State Committee on Foreign Investments to serve as a one-stop shop for investors. Foreign investors receive national treatment. The U.S. Department of State reports that “sanctity of contracts and other such concepts are developing and not uniformly implemented. Individual investors can become involved in disputes over licensing, registration, enforcement of contracts, and the like, particularly at the middle and lower levels of officialdom. Corruption is a serious problem.” Other barriers— such as bureaucratic delays, lack of transparency, imprecise laws governing investment, and unfair implementation of the laws— also impede investment. The government imposes no foreign exchange controls on trade or investment. The International Monetary Fund reports that foreign exchange accounts are permitted and that there are no restrictions on payments and transfers. Most capital transactions must be registered or reported to the relevant government authority regulating that activity.

BANKING AND FINANCE Score: 3–Stable (moderate level of restrictions) The European Bank for Reconstruction and Development reports that “confidence in the banking system is low, and there is an apparent preference for keeping money ‘under the mattress’ rather than in bank deposits. According to official statistics, 58 percent of all the money in circulation is currently outside the banking system.” In 2001, there were 22 commercial banks, all but two of which were private. According to the U.S. Department of State, “The banking system consists of both state-owned and private banks supervised by the national bank. Last year the national bank forced four private banks to enter bankruptcy procedures because they either had issued significant loans that were not secured by their capital or had violated operational rules for banks.” The central bank established a minimum capital require-

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ment in July 2000. Several foreign banks operate in the Kyrgyz Republic, including banks from Turkey, Switzerland, and Russia. There are 29 small insurance companies, and the small stock exchange lists 70 to 80 companies.

WAGES AND PRICES Score: 3–Stable (moderate level of intervention) The Kyrgyz Republic lifted most price controls and removed most subsidies in 1994, but the Economist Intelligence Unit reports that the government influences prices by “heavy involvement and subsidization in the agricultural sector, with the state playing a major role in input support and serving as the primary purchaser of agricultural products.” According to the U.S. Department of State, “The Government mandates the national minimum wage…. The Federation of Trade Unions is responsible for enforcing all labor laws, including the law on minimum wages, and minimum wage regulations largely were observed.”

PROPERTY RIGHTS Score: 4–Stable (low level of protection) The legal system does not protect private property sufficiently. The U.S. Department of State reports that “the government of Kyrgyzstan has a mixed record on the handling of investment disputes” and “appears reluctant to discipline even its own parastatal monopolies involved in breach of contract…. [The weakness of the judicial system] is probably due to weak institutions and poor understanding of contract law…. The courts are widely believed to be subject to heavy influence from the executive branch….”

REGULATION Score: 4–Stable (high level) The regulatory system in the Kyrgyz Republic is not entirely transparent, and rules are applied inconsistently. According to the U.S. Department of State, “the legal and regulatory system…is still developing. Although the body of new commercial law promises to be an effective basis for commerce, implementing regulations and court procedures, in many cases, remain to be worked out and the law is not always implemented fully. In an effort to assist foreign investors on a variety of issues, the state committee for foreign investments and economic development established an agency based on the ‘one-stop-shop’ model. However, businesses report that registration with this new agency does not prevent bureaucratic holdups in other parts of the Kyrgyz government.” The European Bank for Reconstruction and Development reports that “corruption is widespread.”

BLACK MARKET Score: 4–Stable (high level of activity) Piracy of such products as computer software and CDs remains a significant problem. The Business Software Alliance estimates that the rate of software piracy in 2000 was 90 percent. Overall, much of the country’s economic activity takes place in the informal sector.

2003 Index of Economic Freedom

LAOS Rank: Score: Category:

Vientiane

Trade Policy Fiscal Burden

5 3

Government Intervention 3 Monetary Policy 5

Foreign Investment 4 Banking and Finance 5

153 4.40 Repressed

Wages and Prices 4 Property Rights 5

Regulation Black Market

Laos has been a one-party state since 1975 and most likely will remain so at least for the immediate future. It also is Southeast Asia’s poorest country and one of the world’s most repressed economies. The Lao People’s Revolutionary Party has touted its market-oriented reform program since 1986; however, erratic policy implementation reflects its ideological reluctance to embrace market competition. The government plans to establish a special economic zone that may give on-site investors tax breaks and tariff waivers. The government is liberalizing the telecommunications sector now that a five-year monopoly contract has expired, and a copyright law is in the works as Laos begins to build an intellectual property rights regime. Overall, however, the pace of liberalization is glacial. Last year, Laotian judges visited Thailand to observe its legal system; but within the Laotian system, much still remains to be done. Agriculture remains the backbone of the Laotian economy, accounting for more than 50 percent of real GDP, but the industrial and services sectors have been growing rapidly in the past few years. Laos remains economically dependent on Thailand, the primary destination of its exports. Laos’s fiscal burden of government score is 0.5 point better this year, and its capital flows and foreign investment score is 1 point better. As a result, Laos’s overall score is 0.15 point better this year.

Scores for Prior Years:

TRADE POLICY

Major export trading partners: Thailand 20.0%, France 7.5%, Germany 5.9%, UK 4.1%

Score: 5–Stable (very high level of protectionism) According to the World Bank, Laos’s weighted average tariff rate in 2000 (the most recent year for which World Bank data are available) was 14.7 percent. The U.S. Department of State reports that “non-tariff barriers, such as a quota on the import of automobiles, still exist…. Importing from and exporting to Laos still requires authorization from several national and local authorities, which can be a time-consuming and less-than-transparent process.”

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) The International Monetary Fund reports that Laos’s top income tax rate is 40 percent. The marginal rate for the average taxpayer is 10 percent, down from the 15 percent reported in the 2002 Index. (The personal income tax rates reported in the 2002 Index were based on personal income for self-employed individuals; this year, the score is based on tax rates on personal income from employment.) The top corporate tax rate is 35 percent. Data from the Asian Development Bank indicate that in 2000, government expenditures equaled 21.9 percent of GDP. Based on new income taxation data, Laos’s overall fiscal burden of government score is 0.5 point better this year.

Chapter 6: The Countries

2002: 4.55 1999: 4.60 1996: 4.35

2001: 4.65 1998: 4.50 1995: n/a

5 5

2000: 4.60 1997: 4.45

2000 Data (in constant 1995 US dollars) Population: 5,279,000 Total area: 236,800 sq. km GDP: $2.3 billion GDP growth rate: 5.8% GDP per capita: $450 Major exports: wood products, garments, electricity, coffee, tin Exports of goods and services: $449 million

Major imports: machinery and equipment, vehicles, fuel Imports of goods and services: $549 million Major import trading partners: Thailand 52.0%, Singapore 3.9%, Japan 1.6%, Hong Kong 1.5%, China 0.8% Foreign direct investment (net): $64 million

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GOVERNMENT INTERVENTION IN THE ECONOMY

WAGES AND PRICES

Score: 3–Stable (moderate level) Based on data from the Asian Development Bank, government expenditures equaled 21.9 percent of GDP in 2000. (Data on government consumption are not available; therefore, data on government expenditures as a percent of GDP have been used as a proxy.) Laos has a privatization program, but it has stalled. The Economist Intelligence Unit reports that the government still owns many companies, and the U.S. Department of State reports that it “still sets production targets for the agricultural sector, as well as for some industries, and controls the price on a few essential goods, such as cement and gasoline.”

Score: 4–Stable (high level of intervention) In 2000, the U.S. Department of State reported that “The government still sets production targets for the agricultural sector, as well as for some industries, and controls the price on a few essential goods, such as cement and gasoline.” Since the agricultural sector is the economy’s main sector, these controls constitute a major constraint. Laos maintains a daily minimum wage.

MONETARY POLICY Score: 5–Stable (very high level of inflation) Between 1992 and 2001, Laos’s weighted average annual rate of inflation was 25.03 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 4–Better (high barriers) In 2000, the U.S. Department of State reported that Laos’s “foreign investment law guarantees foreign investors protection on their investments and property from government confiscation, seizure or nationalization without compensation; operations free from government interference; the right to lease [but not own] land, transfer leasehold interests, and make improvements on land or buildings; and repatriate earnings. Foreign investors may invest in either joint ventures with Lao partners or in wholly foreign-owned entities.” However, the same source reports that the country is not open to foreign investment in practice, and a lack of transparency and bureaucratic red tape represent significant barriers. The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts and that there are no restrictions on payments and transfers. All capital transactions require central bank approval. The evidence indicates that the government does not actively discourage foreign investment, but the process is bureaucratic, opaque, and subject to corruption. Overall, however, Laos’s capital flows and foreign investment score is 1 point better this year.

BANKING AND FINANCE Score: 5–Stable (very high level of restrictions) Banking reform began in 1988 when the state bank devolved its commercial lending activities and assumed a central bank supervisory role. Domestic banks collapsed during the Asian financial crisis. The state merged three government-owned banks in the North as Lanexang Bank and the three government-owned banks in the South as Lao May Bank. The Economist Intelligence Unit reports that “nearly 50% of total [banking] assets are owned by the state-owned Banque pour le Commerce Exterieur Lao (BCEL), which handles foreign trade and other overseas transactions. Foreign banks have been permitted to open full branches since 1992, but they are limited to the Vientiane municipality.” In 1999, the government founded the Lao–Viet Bank with the Vietnamese government to facilitate trade between the two nations.

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PROPERTY RIGHTS Score: 5–Stable (very low level of protection) The U.S. Department of State reports that “foreign investors are not permitted to own land. The government grants long-term leases, and allows the ownership of property on leased land and the right to transfer and improve leasehold interests.” In addition, “foreign investors are generally advised to seek arbitration outside of Laos, since Laos’ domestic arbitration authority lacks the ability to enforce its decisions.” The same source reports that “senior government and party officials influence the courts…. [I]mpunity is a problem as is corruption. Many observers believe that judges can be bribed.”

REGULATION Score: 5–Stable (very high level) According to the Economist Intelligence Unit, “The environment for both domestic firms and foreign investors is still far from easy, owing to persistent red tape and corruption.” According to the U.S. Department of State, “Foreign investors most frequently cite inconsistencies in the interpretation and application of existing laws as among the greatest impediments to investment. The lack of transparency in an increasingly centralized decision-making process, as well as the difficulty encountered in obtaining general information, augment the perception of the regulatory framework as arbitrary and inscrutable.”

BLACK MARKET Score: 5–Stable (very high level of activity) The black market in Laos is larger than the formal economy. There are no copyright or patent laws, piracy is rampant, and the black market in currency is thriving. The Economist Intelligence Unit reports that there is extensive black market activity in the logging industry. In addition, “Laos is still the largest producer of opium in the world and a major transit route and destination for amphetamines.”

2003 Index of Economic Freedom

LATVIA Riga

Trade Policy Fiscal Burden

2 4

Government Intervention 2 Monetary Policy 1

Foreign Investment 2 Banking and Finance 2

Latvia’s economic transition since regaining its independence in 1991 has been generally successful. The privatization program is 97 percent complete, the currency is strong, and both the financial system and the overall economy have been liberalized. Most prices have been freed, and the trade regime has been liberalized in all sectors in accordance with Latvia’s 1999 accession to the World Trade Organization. The government has adopted a number of laws over the past three years, including a new commercial code, that are designed to bring the economy closer to that of the European Union. Currently, most of Latvia’s economic policies are driven by the government’s principal foreign policy priority: accession to the EU and NATO. Future economic development is closely tied to the EU market, which accounts for 60 percent of Latvia’s exports. Latvia has closed negotiations on 23 of 29 chapters of EU law and is expected to close more chapters in the near future. The national currency has been pegged to the special drawing right (SDR, International Monetary Fund currency basket) since 1994, and this has prevented excessive government spending. Both foreign and domestic investment have been growing due to the increase of confidence in the economy. Growth amounted to 7.6 percent in 2001. Frequent changes in government, including two new governments since 1998 and a shakeup of the current coalition, have hindered the reform process since the New Party left the government in February 2001. Privatizing the remaining state shares in major industries such as telecommunications, power, and shipping, which together represent a considerable share of GDP, is one of the government’s major objectives. Latvia’s fiscal burden of government score is 0.5 point worse this year, but its monetary policy score is 1 point better. As a result, Latvia’s overall score is 0.05 point better this year.

TRADE POLICY Score: 2–Stable (low level of protectionism) According to the World Bank, Latvia’s weighted average tariff rate in 1997 (the most recent year for which World Bank data are available) was 3.2 percent. The U.S. Department of State reports that “Latvia requires licenses for the imports of grains, sugar, fuel, tobacco, alcohol and arms, and for the export of ferrous and non-ferrous metal scrap, ethyl alcohol, and spirits.”

Rank: Score: Category:

33 2.45 Mostly Free

Wages and Prices 2 Property Rights 3

Regulation 3.5 Black Market 3.5

Scores for Prior Years: 2002: 2.50 1999: 2.75 1996: 3.05

2001: 2.65 1998: 2.85 1995: n/a

2000: 2.65 1997: 2.95

2000 Data (unless otherwise indicated) (in constant 1995 US dollars) Population: 2,375,300 Total area: 64,589 sq. km GDP: $6.6 billion (2001) GDP growth rate: 7.6% (2001) GDP per capita: $2,597 Major exports: wood and wood products, machinery and equipment, metals, textiles, foodstuffs Exports of goods and services: $3.5 billion Major export trading partners: Germany 16.7%, UK 15.7%, Sweden 9.6%, Russia 5.9% Major imports: machinery and equipment, chemicals, fuels Imports of goods and services: $3.9 billion Major import trading partners: Germany 17.0%, Russia 9.2%, Finland 8.0%, Sweden 6.5% Foreign direct investment (net): $364.8 million

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 2.5–Worse (moderate tax rates) Score—Government Expenditures: 5–Stable (very high level of government expenditure) Final Score: 4–Worse (high cost of government) Latvia has a flat income tax rate of 25 percent, which applies to the average taxpayer. The corporate tax rate is 25 percent. In 1999, according to the European Bank for

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Reconstruction and Development, government expenditures equaled 44 percent of GDP. Based on a clarification in the methodology used to calculate the income and corporate taxation score, Latvia’s overall fiscal burden of government score is 0.5 point worse this year.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 2–Stable (low level) Based on data from the Economist Intelligence Unit, the government consumed 17.7 percent of GDP in 2001. In 2000, according to the International Monetary Fund, Latvia received 1.58 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, Latvia’s weighted average annual rate of inflation was 2.81 percent, down from the 3.37 percent from 1992 to 2000 reported in the 2002 Index. As a result, Latvia’s monetary policy score is 1 point better this year.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 2–Stable (low barriers) Latvia welcomes foreign investment, and foreigners receive national treatment. The government has no screening process, and foreigners may bid on companies undergoing privatization. Foreign investors are permitted to invest in most industries but are not allowed to hold controlling shares in companies involved in security services, air transport, or gaming interests. Foreign investors may own land if there is an existing investment protection agreement between Latvia and the country in which the investor is based. 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 buildings and land unless the land is near the border or in an environmentally sensitive area.

BANKING AND FINANCE Score: 2–Stable (low level of restrictions) Latvia’s banking sector underwent significant transformation following a banking crisis in 1995, when less competitive banks went out of business. A financial crisis in the banking industry in neighboring Russia during 1998 also caused some Latvian banks to collapse and others to consolidate or turn to Western partners. However, the banking system has largely recovered, and banking regulations now require minimum accounting and financial standards, minimum capital requirements, restrictions on exposure, and open foreign exchange positions. The International Monetary Fund reports that bank exposure to certain countries is capped at 25 percent of bank capital and that a bank’s open foreign currency position may not exceed 10 percent for any one currency or 20 percent for all foreign currencies combined. Latvia has implemented a universal banking system that is competitive and mostly free of onerous government regulation, although the

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central bank vigorously enforces all banking regulations. According to the U.S. Department of State, “Foreign banks have the right to open subsidiaries and branch offices in Latvia and the licenses are granted using the same procedure as with domestic banks. Currently there are four foreign banks operating in Latvia, two German banks, one Estonian bank and Finnish Bank Merita branch.” Private pension funds must invest at least 85 percent of their assets domestically.

WAGES AND PRICES Score: 2–Stable (low level of intervention) According to the Economist Intelligence Unit, “Most prices were liberalized by the end of 1992, with the exception of rent, public transport, heating and fuel…but full recovery is not envisaged until 2005.” Latvia maintains a minimum wage.

PROPERTY RIGHTS Score: 3–Stable (moderate level of protection) Latvia’s constitution provides for an independent judiciary, which in practice is inefficient and subject to corruption. The Economist Intelligence Unit reports that “judicial institutions enjoy independence from political influence, but are regarded as inefficient, with long delays in court hearings and enforcement of decisions.” According to the U.S. Department of State, “The courts must rely on the Ministry of Justice for support, and the judiciary is not well trained, efficient, or free from corruption.”

REGULATION Score: 3–Stable (moderate level) Establishing a business is relatively easy, but some regulations are confusing and contradictory, leading to a lack of transparency. According to the U.S. Department of State, “Government bureaucracy, corruption and organized crime, typical of the old Soviet Bloc countries, have been the main impediments to…trade and investment also in Latvia. While these obstacles have sometimes made it more complicated to do business in Latvia than in the west, very few…companies have abandoned the Latvian market because of them.”

BLACK MARKET Score: 3.5–Stable (high level of activity) Transparency International’s 2001 score for Latvia is 3.4. Therefore, Latvia’s black market score is 3.5 this year.

2003 Index of Economic Freedom

LEBANON

Beirut

Rank: 94 Score: 3.25 Category: Mostly Unfree Trade Policy Fiscal Burden

5 3.5

Government Intervention 3 Monetary Policy 1

Foreign Investment 3 Banking and Finance 2

Lebanon’s freewheeling economy was shattered by the 1975–1991 civil war. Crossborder terrorist attacks by Lebanon-based Palestinian groups precipitated two Israeli military interventions in 1978 and 1982. Israeli troops withdrew from their security zone along the southern border in May 2000, but the Lebanon-based Hezballah (Party of God) continues its cross-border attacks. Syria, which maintains 30,000 troops in the northern part of the country, has sought to defuse growing Lebanese resentment of its domination. Lebanese Prime Minister Rafiq Hariri, who returned to power in October 2000, has undertaken a program of economic reform to address the country’s severe fiscal problems. His government has imposed a new value-added tax and plans to move forward with privatization to help reduce Lebanon’s large fiscal deficit, which remains at a crisis level of roughly 17 percent of GDP. Lebanon’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, Lebanon’s weighted average tariff rate in 2000 (the most recent year for which World Bank data are available) was 19.1 percent, up from the 15.8 percent reported in the 2002 Index. As a result, Lebanon’s trade policy score is 1 point worse this year. The U.S. Department of State reports that nontariff barriers include “30 types of import controls…administered within Lebanon by various ministries, which may issue and administer a range of prohibitions, restrictions, licenses and certificates.”

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 1.5–Stable (low tax rates) Score—Government Expenditures: 5–Stable (very high level of government expenditure) Final Score: 3.5–Stable (high cost of government) Lebanon’s top income tax rate is 20 percent. The marginal rate for the average taxpayer is 4 percent. The top corporate tax rate is 15 percent. In 2000, based on data from the Ministry of Finance, government expenditures equaled 34.1 percent of GDP.

Wages and Prices 2 Property Rights 4

Regulation Black Market

Scores for Prior Years: 2002: 3.15 1999: 3.25 1996: 3.05

2001: 2.85 1998: 3.25 1995: n/a

2000: 3.20 1997: 2.95

2000 Data (in constant 1995 US dollars) Population: 4,328,000 Total area: 10,400 sq. km GDP: $12.5 billion Major exports: foodstuffs and tobacco, textiles, chemicals, precious stones, metal and metal products, electrical equipment and products, jewelry, paper and paper products GDP growth rate: –1.0% GDP per capita: $2,891 Exports of goods and services: $1.6 billion Major export trading partners: Saudi Arabia 10.9%, United Arab Emirates 10.5%, France 7.1%, US 6.8% Major imports: foodstuffs, machinery and transport equipment, consumer goods, chemicals, textiles, metals, fuels, agricultural foods Imports of goods and services: $4.7 billion Major import trading partners: Italy 10.9%, France 8.5%, US 8.3%, Germany 7.3% Foreign direct investment (net): $779.9 million

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Stable (moderate level) The World Bank reports that the government consumed 18.9 percent of GDP in 2000. In 1999, according to the International Monetary Fund, Lebanon received 14.19 percent of its total revenues from state-owned enterprises and government ownership of property.

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4 5

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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, Lebanon’s weighted average annual rate of inflation was 0.23 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) Lebanon does not discriminate between national and foreign investments in most sectors. An April 2001 amendment to the 1969 law governing real estate purchases eased legal limits on foreign investment in real estate, removed legal distinctions between Arab and other foreign investment, and reduced registration fees. The U.S. Department of State reports that the May 2000 privatization law paved the way for laws liberalizing other sectors. However, bureaucratic red tape and corruption remain major obstacles to investment and entrepreneurial activity. The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts, but central bank approval is required to purchase treasury securities, money market instruments, and derivatives, and some credit operations are prohibited. There are no restrictions on payments and transfers. According to the U.S. Department of State, “there is no restriction on the movement of foreign currency or capital. The foreign exchange market is not regulated or restricted. There are no restrictions imposed on currency conversions and transfers, and no foreign exchange controls affect trading.”

BANKING AND FINANCE Score: 2–Stable (low level of restrictions) Lebanon’s banking regime is the most liberal in the region, with few restrictions on domestic bank formation and few barriers to foreign banks. The U.S. Department of State reports that the Banking Control Commission (BCC), which regulates Lebanon’s banking system, “is compliant with most of the CORE principles of the Basel Committee on banking control and ensures that all banks comply with Basel regulations on capital adequacy ratio.” However, the Economist Intelligence Unit reports that many private-sector borrowers are crowded out of the market because more than 60 percent of bank credits goes to the government. Lebanon strictly enforces bank secrecy and was listed as “a non-cooperative country in the international fight against money laundering” by the Organisation for Economic Co-operation and Development’s Financial Action Task Force even after the government passed a money laundering law on April 20, 2001.

The government also subsidizes the production of certain arable crops, such as tobacco, and indirectly affects prices of some utilities through its state-owned enterprises. Lebanon mandates a monthly minimum wage, but the U.S. Department of State reports that it is not enforced effectively.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) The Economist Intelligence Unit reports that the government significantly influences the judiciary. According to the U.S. Department of State, a survey of foreign investors revealed “that contract enforcement and the unpredictable judiciary system were considered the most important risk factors. The government does not consider that contract annulment has a negative impact on foreign investments in Lebanon, arguing Lebanon always honored all its obligations.”

REGULATION Score: 4–Stable (high level) The regulatory system is onerous. According to the U.S. Department of State, “Transparency has never been strong in Lebanon. The government does not always establish ‘clear rules of the game’ and often there is political interference in contract awards.” According to a United Nations Economic and Social Council for West Asia (ESCWA) 2001 survey, investors in Lebanon say that bureaucratic and administrative red tape, lack of transparency, and corruption are among the main obstacles to investment. Start-ups face complex administrative procedures for obtaining approvals and permits, as well as difficulty accessing information.

BLACK MARKET Score: 5–Stable (very high level of activity) Lebanon’s black market includes extensive trade in pirated intellectual property such as trademarks, patents, and copyrights. According to the U.S. Department of State, “Unauthorized copying of imported books, videotapes, cassettes, and computer software is common in Lebanon.” Black market trade, especially with Syria, is extensive and includes such diverse goods as pharmaceuticals, illicit drugs, weapons, and cigarettes.

WAGES AND PRICES Score: 2–Stable (low level of intervention) According to the U.S. Department of State, “The Consumer Protection Department at the Ministry of Economy and Trade regularly controls prices and quality of bread and petroleum derivatives, and the expiration dates of consumables…. The Ministry of Health also controls prices of pharmaceuticals.”

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2003 Index of Economic Freedom

LESOTHO

Maseru

Rank: 104 Score: 3.35 Category: Mostly Unfree Trade Policy Fiscal Burden

3 4.5

Government Intervention 3 Monetary Policy 3

Foreign Investment 3 Banking and Finance 3

Lesotho is small, landlocked, and completely surrounded by South Africa, upon which it depends for almost all of its trade, finance, and employment. The country possesses few significant natural resources, and the domestic economy is based on limited agriculture and manufacturing (milling, canning, leather, and jute). Subsistence agriculture is the livelihood for the majority of the labor force but accounts for only 15 percent of GDP. The government owns most agricultural industries and businesses, but the private sector dominates the relatively small manufacturing and construction sectors. The government is the largest single employer, and the 8 percent increase in civil service salaries in the period before the May 2002 legislative elections was widely regarded as politically motivated. According to the U.S. Department of State, approximately 13 percent of the adult male workforce is employed in South African mines, and remittances from these workers account for over 17 percent of gross national product. This employment decreased during the 1990s, leading to a gradual decline in these remittances and contributing to a growing unemployment problem in Lesotho. From 1991 to 2000, according to World Bank data, compound growth in GDP averaged 3.9 percent annually and per capita GDP increased from $466 to $551 (in constant 1995 U.S. dollars). Most of the damage done to the infrastructure during the 1998 political protests and failed military revolt has been repaired, and the political situation has stabilized substantially. The textile industry has grown rapidly in the wake of greater access to the United States market through the African Growth and Opportunity Act. Lesotho’s government intervention score is 0.5 point worse this year; however, its trade policy score is 1 point better. As a result, Lesotho’s overall score is 0.05 point better this year.

TRADE POLICY Score: 3–Better (moderate level of protectionism) Lesotho belongs to the Southern African Customs Union (SACU), a regional trade arrangement with South Africa, Botswana, Namibia, and Swaziland. 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, Lesotho’s trade policy score is 1 point better this year. Non-tariff barriers take the form of import controls on a number of agricultural products.

Wages and Prices 3 Property Rights 3

Regulation Black Market

Scores for Prior Years: 2002: 3.40 1999: 3.45 1996: 3.65

2001: 3.40 1998: 3.50 1995: n/a

2000: 3.55 1997: 3.65

2000 Data (in constant 1995 US dollars) Population: 2,035,000 Total area: 30,355 sq. km GDP: $1.1 billion GDP growth rate: 3.3% GDP per capita: $551 Major exports: clothing, footwear, road vehicles, wool, food and live animals Exports of goods and services: $376 million Major export trading partners: SACU 53.9%, North America 45.6%, EU 0.2% Major imports: food, building materials, vehicles, machinery, medicines, petroleum products Imports of goods and services: $903 million Major import trading partners: SACU 89.5%, Asia 7.0%, North America 0.9% Foreign direct investment (net): $183 million

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Economist Intelligence Unit, government expenditures equaled 48.9 percent of GDP. Based on a clarification in methodology, Lesotho’s income and corporate taxation score is 0.5 point better this year; however, this is not sufficient to affect Lesotho’s overall fiscal burden of government score, which is unchanged.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Worse (moderate level) The World Bank reports that the government consumed 18.3 percent of GDP in 2000. In the same year, according to the International Monetary Fund, Lesotho received 14.76 percent of its total revenues from state-owned enterprises and government ownership of property, up from the 6.5 percent reported in the 2002 Index. As a result, Lesotho’s government intervention score is 0.5 point worse this year.

MONETARY POLICY Score: 3–Stable (moderate level of inflation) From 1992 to 2001, Lesotho’s weighted average annual rate of inflation was 6.93 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) Lesotho has no established investment code but does offer a series of investment incentives. Political instability and extensive corruption, however, discourage foreign investment, and the government prefers the hiring of local employees and may refuse to issue visas to foreigners. The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts with government approval. Some payments and transfers are subject to prior government approval and some limitations. Most capital restrictions apply to residents, and outward direct investment and real estate purchases abroad require government approval.

BANKING AND FINANCE Score: 3–Stable (moderate level of restrictions) The government privatized the state-owned Lesotho Bank in 1999 and completed the liquidation of the Lesotho Agricultural Development Bank in 2000. The Central Bank of Lesotho has sought to encourage greater competition, particularly by increasing the participation of foreign banks, but the Economist Intelligence Unit reports that new activity is still undermined by the legacy of the 1998 political instability. Despite an overhaul of the regulatory environment through the 1999 Financial Institutions Act and the 2000 Central Bank Act, Lesotho’s banking system remains small, underdeveloped, and hindered by non-performing loans. The state remains active in the financial system through two stateowned development banks (the Lesotho National Development Corporation and Basotho Enterprises Development Corporation) that provide industrial credits and other services. The government has been reducing its activities in the insurance sector.

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WAGES AND PRICES Score: 3–Stable (moderate level of intervention) Although many prices have been liberalized in Lesotho, the government still influences them through large state-owned utilities and direct intervention in the agricultural sector, which employs over 50 percent of the labor force. According to the Economist Intelligence Unit, “A history of direct government involvement in production, marketing, and processing of agricultural inputs and outputs has limited private-sector involvement…. [The government] hopes to enhance the fortunes of the sector by continuing with the liberalization of farm pricing arrangements…. However, progress has been slow. The programme for privatizing agricultural parastatals has not made much headway either….” The Wage Advisory Board (a tripartite group of unions, government, and employers) sets a national minimum wage annually.

PROPERTY RIGHTS Score: 3–Stable (moderate level of protection) Private property is guaranteed, and expropriation is unlikely. According to the U.S. Department of State, “The Constitution provides for an independent judiciary; however, in the past, magistrates appeared to be subject at times to government and chieftainship influence.” Lesotho’s legal system also is inefficient and subject to police abuse.

REGULATION Score: 4–Stable (high level) The government is Lesotho’s largest employer, and its unwieldy bureaucracy impedes efficient regulatory rule. The government has pledged to address labor market inflexibility and the inefficient public sector as part of its International Monetary Fund package, but specific results have yet to be seen as of this writing. According to the Economist Intelligence Unit, “While Lesotho is a poor country, known for its fragile political stability and social disorder, corruption is not a major problem…. This is not to say that corruption is not present, especially at the petty level where civil servants, who have been without significant pay increases for several years, supplement their incomes.”

BLACK MARKET Score: 4–Stable (high level of activity) Lesotho has a substantial black market, primarily in consumer goods. Smuggling of firearms, automobiles, and dagga (a narcotic) between South Africa and Lesotho is a concern. According to Newafrica.com, “More than 85 percent of the population of 2 million lives in rural areas, engaged mainly in agriculture and informal activities.”

2003 Index of Economic Freedom

LIBYA Rank: Score: Category: Trade Policy Fiscal Burden

5 3

Government Intervention 4 Monetary Policy 1

Foreign Investment 5 Banking and Finance 5

Libya’s state-dominated economy depends primarily on oil revenues, which provide almost all export earnings and approximately 25 percent of GDP. Despite growing international pressure on the United Nations to lift its sanctions permanently, the United States continues to maintain economic sanctions against Libya for its support of terrorism. Muammar Qadhafi’s regime remains committed to quasi-Marxist economic theories and hostile to capitalism, and this is the fundamental cause of the country’s poor economic performance. The government’s statist economic policies, import restrictions, and inefficient resource allocations have led to periodic shortages of basic goods and foodstuffs. Libya’s fiscal burden of government, government intervention, and monetary policy scores are, respectively, 0.5 point, 1 point, and 3 points better this year. As a result, Libya’s overall score is 0.45 point better this year.

151 4.30 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: 4.90 1998: 4.90 1995: n/a

2000: 4.85 1997: 4.90

2000 Data (in constant 1995 US dollars) Population: 5,290,000 Total area: 1,759,540 sq. km GDP: n/a GDP growth rate: 3.0%

TRADE POLICY

GDP per capita: n/a

Score: 5–Stable (very high level of protectionism) According to the World Bank, Libya’s weighted average tariff rate in 1996 (the most recent year for which World Bank data are available) was 21.3 percent. According to the Economist Intelligence Unit, “Import controls remain tight even by regional standards, although they have been eased since the suspension of UN sanctions…. Government imports are limited mainly to pre-approved essential items, primarily food and capital goods.”

Major exports: crude oil, refined petroleum products

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 3.5–Better (high tax rates) Score—Government Expenditures: 2–Better (low level of government expenditures) Final Score: 3–Better (moderate cost of government) Libya’s government remains dedicated to the redistribution of wealth. The United Nations Development Programme reports that the top income tax rate is 90 percent; the marginal rate for the average taxpayer is 15 percent. The top corporate tax rate is 35 percent. No data on government expenditures are available; therefore, data on government consumption were used as a proxy. Based on a clarification in the methodology used to calculate the income and corporate taxation score, as well as a correction to an inaccuracy in the scoring of government expenditures in the 2002 Index, Libya’s fiscal burden of government score is 0.5 point better this year.

Exports of goods and services: n/a Major export trading partners: Italy 42.0%, Germany 19.2%, Spain 12.9%, Turkey 5.6%, France 4.5% Major imports: machinery, transport equipment, food, manufactured goods Imports of goods and services: n/a Major import trading partners: Italy 25.4%, Germany 9.8%, UK 7.6%, Tunisia 7.1%, France 7.0% Foreign direct investment (net): –$274 million

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 4–Better (high level) Based on data from the International Monetary Fund, the government consumed 22.4 percent of GDP in 1999; however, this figure may be inaccurate. The Economist Intelligence Unit reports that “obtaining statistical information from the Libyan government is

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extremely difficult [and the] provision of data to international institutions…remains patchy.” The government employs more than 18 times the number of bureaucrats needed in the public sector, which dominates the economy. The state owns the country’s oil companies, although the Economist Intelligence Unit reports that in 1974, Libya “began offering attractive exploration and production-sharing agreements (EPSAs), under which foreign oil companies received a fixed percentage of the output from the fields involved, negotiated on a case-by-case basis.” Based on the level of state-owned enterprise, as well as evidence that the level of government consumption is greater than the reported figure indicates, 2 points have been added to Libya’s government intervention score. Overall, however, Libya’s government intervention score is 1 point better this year.

MONETARY POLICY Score: 1–Better (very low level of inflation) Data from the International Monetary Fund’s 2002 World Economic Outlook indicate that from 1992 to 2001, Libya’s weighted average annual rate of inflation was –5.63 percent. The 15.9 percent from 1995 to 2000 reported in the 2002 Index was based on data from the Economist Intelligence Unit that have since been revised. As a result, Libya’s monetary policy score is 3 points better this year. These data must still be viewed with caution, however, because of the government’s role in setting prices and wages.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 5–Stable (very high barriers) According to the International Monetary Fund, “Foreign participation in industrial ventures set up after March 20, 1970, is permitted on a minority basis…if it leads to increased production in excess of local requirements, introduction of the latest technology, and cooperation with foreign firms in exporting the surplus production.” In May 2002, Libya announced that it would allow foreigners to invest directly in the country as part of an effort to reduce the government’s dominant role in production and services. However, the government has yet to formulate a privatization plan; reform its investment regime, which is especially hostile to foreign investors outside of the oil sector; or address the ongoing problems of cumbersome bureaucracy, poor legal protection for investment, and an unpredictable policy environment. The IMF reports that only residents may hold foreign currency accounts. Payments for authorized imports are not restricted; all other payments require government approval. Repatriation and most capital transactions, including approval requirements for transactions involving capital and money market instruments, credit operations, direct investment, and real estate, are controlled. If concrete changes are implemented to liberalize the foreign investment regime, Libya’s capital flows and foreign investment score could improve in future editions of the Index.

BANKING AND FINANCE Score: 5–Stable (very high level of restrictions) Libya’s banking system has been under state control since the 1970s and remains highly centralized. In March, reports the Economist Intelligence Unit, “members of the government indicated to po-

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tential foreign investors that they would like to privatise five local banks, including the National Commercial, Sahara, and Wahda banks. However, the banking sector suffers from a high proportion of non-performing loans, making Libya’s banks difficult to privatise.” A 1993 law permitted foreign and private banking. The first private bank since 1969 opened in December 1996. According to the Economist Intelligence Unit, “This was to be the first in a series of private institutions to be set up to promote regional economic development. However, no other officially sanctioned private-sector institutions have been formed.” The only foreign presence, the Bahrain-based Arab Banking Corporation, is partly owned by the Libyan government.

WAGES AND PRICES Score: 5–Stable (very high level of intervention) Aside from limited small farming, small business, and the one private bank, the government controls the economy and sets most wages and prices. It influences wages in both the public and private sectors, and the labor law establishes levels of compensation, pensions, minimum rest, and working hours. The government froze wages for the public sector in 1981.

PROPERTY RIGHTS Score: 5–Stable (very low level of protection) The U.S. Department of State reports that Libya’s judiciary “is not independent” and that “the private practice of law is illegal…. A large number of offenses, including political offenses and ‘economic crimes,’ are punishable by death.” According to the Economist Intelligence Unit, “Some small-scale private agricultural production [is] permitted.” However, there is little land ownership, and the government may re-nationalize the little private property that is granted, especially to foreign companies.

REGULATION Score: 5–Stable (very high level) It is nearly impossible to establish a business in Libya. “In the 1990s,” reports the U.S. Department of State, “government efforts to allow the private sector to emerge again were undermined by periodic crackdowns by ‘purification committees’, which had been set up to combat corruption. Since 2000 some restrictions on privatesector activity have been removed allowing private business to grow, especially in commerce but also in areas such as oil services. However, many restrictions remain in place and entrepreneurs and businessmen still lack confidence in the government’s commitment to the development of the private sector.” The same source reports that corruption is a considerable problem.

BLACK MARKET Score: 5–Stable (very high level of activity) Most consumer items must be smuggled into the country, and there is an active black market in currency. Since the suspension of United Nations sanctions in 1999, according to International Monetary Fund estimates, the black market has grown to account for approximately 20 percent of Libya’s exports.

2003 Index of Economic Freedom

LITHUANIA Vilnius

Trade Policy Fiscal Burden

2 3.5

Government Intervention 2 Monetary Policy 1

Foreign Investment 2 Banking and Finance 2

Lithuania is one of the economic leaders among the post-Soviet countries. Under the privatization program, nearly all small businesses and some 60 percent of industrial enterprises have been privatized through a voucher system. The private sector produces approximately 80 percent of GDP. A currency board arrangement has been in place since 1994; in February 2002, the government substituted the euro for the U.S. dollar as the peg currency. At the end of 2001, the Seimas (Lithuania’s parliament) amended tax legislation simplifying the tax base while reducing fiscal exemptions on corporate profits; the Ministry of Finance expects to raise an additional US$64 million for the budget annually from this reform by stimulating investment and raising compliance. At the same time, the zero tax rate on reinvested profits was raised to 15 percent despite protests from local businesses. In 2001, Lithuania experienced real GDP growth of 5.9 percent, driven largely by exports, which remained robust despite the recession in European Union markets. Currently, most of Lithuania’s economic policies are driven by the government’s principal foreign policy priority: accession to the EU and NATO. Lithuania has closed negotiations on 24 of 29 chapters of EU law and is most likely to join the EU as part of the first wave of enlargement. Lithuania’s trade policy score is 1 point worse this year, but its banking and finance score is 1 point better. As a result, Lithuania’s overall score is unchanged this year.

TRADE POLICY Score: 2–Worse (low level of protectionism) According to the World Bank, Lithuania’s weighted average tariff rate in 1997 (the most recent year for which World Bank data are available) was 2.3 percent. Lithuania maintains some non-tariff barriers. The International Monetary Fund reports that Lithuania requires import licenses for health and national security reasons, and on certain food products, such as semi-processed meat products, poultry, and fish; “certain agricultural goods are subject to…certain quantitative restrictions…to control trade in strategic goods and technology to protect Lithuania’s cultural heritage. Alcoholic beverages and tobacco may be imported only by traders registered with the government.” In addition, tariff “rates in agricultural products range as high as 87 percent.” Based on the evidence with respect to non-tariff barriers, Lithuania’s trade policy score is 1 point worse this year.

FISCAL BURDEN OF GOVERNMENT

Rank: Score: Category:

29 2.35 Mostly Free

Wages and Prices 2 Property Rights 3

Regulation Black Market

Scores for Prior Years: 2002: 2.35 1999: 3.00 1996: 3.45

2001: 2.55 1998: 3.00 1995: n/a

2000: 2.90 1997: 3.10

2001 Data (unless otherwise indicated) (in constant 1995 US dollars) Population: 3,490,800 Total area: 65,200 sq. km GDP: $7.9 billion GDP growth rate: 5.9% GDP per capita: $2,275 Major exports: machinery and equipment, mineral products, chemicals, textiles and clothing, foodstuffs Exports of goods and services: $5.6 billion Major export trading partners: UK 13.8%, Germany 12.6%, Latvia 12.6%, Russia 11.0%, Poland 6.3% Major imports: machinery and equipment, mineral products, chemicals, textiles and clothing, transport equipment Imports of goods and services: $7.3 billion Major import trading partners: Russia 25.3%, Germany 17.2%, Poland 4.9%, Italy 4.2%, France 3.8% Foreign direct investment (net): $343.8 million (2000)

Score—Income and Corporate Taxation: 2–Better (low tax rates) Score—Government Expenditures: 5–Worse (very high level of government expenditure) Final Score: 3.5–Stable (high cost of government) Lithuania has a flat income tax rate of 33 percent, which also applies to the average taxpayer. (Income earned from a primary job is taxed at a flat rate of 33 percent; income earned from a secondary job is taxed progressively from 10 percent to 35 percent.) Ac-

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cording to the Economist Intelligence Unit, the rates on corporate tax, dividends, and reinvested earnings have been standardized at 15 percent from their respective rates of 24 percent, 29 percent, and 0 percent. Data from the central bank indicate that government expenditures equaled 31.7 percent of GDP in 2001. Based on a clarification in methodology and a lower corporate income tax, Lithuania’s income and corporate taxation score is 0.5 better this year; however, its government expenditures score is 1 point worse. As a result, Lithuania’s overall fiscal burden of government score is unchanged this year.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 2–Stable (low level) Based on data from the Lithuanian Central Bank, the government consumed 16.2 percent of GDP in 2001. In 2000, according to the International Monetary Fund, Lithuania received 3.53 percent of its total revenues from state-owned enterprises and government ownership of property.

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, Lithuania’s weighted average annual rate of inflation was 1.71 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 2–Stable (low barriers) Lithuania maintains few barriers to foreign investment. Foreign companies are accorded the same treatment as domestic firms. Foreigners may not purchase land, but leases for up to 99 years are permitted in most of the country. The International Monetary Fund reports that the Law on Foreign Capital Investments prohibits investment in “state defense, production and sale of narcotic substances, and lottery transactions…. While firms with 100% foreign capital ownership are allowed to operate in Lithuania, the government reserves the right to establish limits on foreign investment in Lithuanian enterprises. In joint ventures in the transportation and communication sectors, the domestic partner is required to hold the majority of shares. Wholly owned ventures in the alcoholic beverage or tobacco industries are prohibited. Enterprises with foreign investment must be insured by Lithuanian insurance companies, even if the company retains other insurance services outside Lithuania.” Both residents and non-residents may hold foreign exchange accounts. There are no controls or restrictions on repatriation of profits, current transfers, or payments for invisible transactions.

BANKING AND FINANCE Score: 2–Better (low level of restrictions) Lithuania’s banking system has recovered from its collapse in 1995 and emerged relatively unscathed from the Russian financial crisis in 1998. The crisis has led to consolidation in the banking sector; the number of banks fell from 28 in 1995 to nine at the end of 2001. Scandinavian banks dominate the banking sector, in which foreign banks own the lion’s share of banking capital. Lithuania completed

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the privatization of Zemes Ukio Bankas (LZUB), its last remaining state-owned bank, on March 19, 2002, increasing foreign ownership of Lithuanian banking capital to 89 percent and virtually removing the government from the banking sector. As a result, Lithuania’s banking and finance score is 1 point better this year.

WAGES AND PRICES Score: 2–Stable (low level of intervention) Most prices are liberalized. However, according to information provided by the Lithuanian embassy, price controls remain in effect on electricity, water, and natural gas. According to the U.S. Department of State, “Enforcement of the minimum wage is almost nonexistent, in part because the Government does not want to exacerbate unemployment.”

PROPERTY RIGHTS Score: 3–Stable (moderate level of protection) According to the U.S. Department of State, “The Constitution provides for an independent judiciary, and the judiciary is independent in practice.” The European Bank for Reconstruction and Development (EBRD) reports that “Lithuania has made significant reforms to its legal framework…. [C]ommercial laws in Lithuania have improved considerably in the last years [although] there has been a gap between laws on the statute books and their implementation.” In addition, “weakness of the judicial system is viewed as a deterrent for foreign investors to enforce their rights in local courts.”

REGULATION Score: 3–Stable (moderate level) Establishing a business is relatively easy; but regulations, though applied evenly in most cases, remain significantly burdensome. According to the Lithuanian Free Market Institute (LFMI), “although business development and reduction of bureaucracy are considered to be strategic objectives of the current administration, no significant policy changes have been made yet.” In addition, reports the U.S. Department of State, “the common problems found in the countries of the former Soviet Union remain. These include government bureaucracy, corruption, and organized crime.” The parliament has amended the labor laws in an effort to make the labor market more flexible, but the LFMI reports that the amendment to the labor law was “a cosmetic improvement of existing labor regulations [and that] the new Labor Code…does not promise any profound changes either.” According to the EBRD, “administrative corruption remains an area of concern.”

BLACK MARKET Score: 3–Stable (moderate level of activity) Transparency International’s 2001 score for Lithuania is 4.8. Therefore, Lithuania’s black market score is 3 this year. The International Intellectual Property Alliance reports that Lithuania is a major transshipment point for optical media products. According to the LFMI, the informal economy “at present is estimated to account for about a fifth of the country’s economy.”

2003 Index of Economic Freedom

LUXEMBOURG Rank: Score: Category:

Luxembourg

Trade Policy Fiscal Burden

2 4

Government Intervention 2 Monetary Policy 1

Foreign Investment 1 Banking and Finance 1

Luxembourg, the smallest member of the European Union, has the world’s highest GDP per capita. Once an agrarian society, it developed throughout most of the 20th century into a manufacturing and services economy and one of the world’s richest and most highly industrialized countries. The main reason for its economic success lies in the rise of the financial services industry, which accounts for about one-third of GDP. With a liberal regulatory framework for financial services and a highly skilled multilingual work force, Luxembourg is Europe’s principal center for mutual funds and a major player in the banking and insurance industries. The 200 international banks located in Luxembourg also cherish its favorable tax environment and banking secrecy legislation. The coalition government, composed of the Christian Socialist and Democratic Parties, has enacted tax reform as the centerpiece of its domestic policy. The corporate tax, already relatively low, is now 30 percent for all corporations, and the top income tax rate has declined from 42 percent to 38 percent in 2002. Overall, Luxembourg presents both foreign and domestic investors with a very favorable business climate. There are no restrictions that apply specifically to foreign investors, the regulatory structure is fair and transparent, the labor force is efficient and productive, and labor strife is minimal. In general, Luxembourg’s tax, labor, health, and safety laws avoid distortions and impediments to investment compared to other EU member countries. As a result, it is not surprising that U.S.-sourced foreign direct investment in Luxembourg is the highest, on a per capita basis, in the world outside of North America. It also is not surprising that this business-friendly environment and concomitant individual prosperity have led other EU states to complain. Luxembourg, for example, has attracted fierce criticism from the German and French governments for alleged “tax dumping,” and a major effort, spearheaded by other more statist EU countries, to do away with some of Luxembourg’s banking secrecy laws is now underway. The success of such initiatives could have a detrimental impact on the whole of the economy. Luxembourg’s government intervention score is 1 point better this year. As a result, its overall score is 0.1 point better this year.

TRADE POLICY

3 1.70 Free

Wages and Prices 2 Property Rights 1

Regulation Black Market

Scores for Prior Years: 2002: 1.80 1999: 1.95 1996: 2.00

2001: 1.75 1998: 1.85 1995: n/a

2000: 1.80 1997: 2.00

2001 Data (in constant 1995 US dollars) Population: 441,300 Total area: 2,586 sq. km GDP: $25.5 billion GDP growth rate: 3.5% GDP per capita: $55,744 Major exports: machinery and equipment, steel products, chemicals, rubber products, glass Exports of goods and services: $31 billion Major export trading partners: Germany 24.6%, France 19.6%, Belgium 12.3%, US 3.5% Major imports: minerals, metals, foodstuffs, quality consumer goods Imports of goods and services: $26.4 billion Major import trading partners: Belgium 34.3%, Germany 25.1%, France 12.8%, US 5.8% Foreign direct investment (net): n/a

Score: 2–Stable (low level of protectionism) As a member of the European Union, Luxembourg has a weighted average tariff rate of 1.8 percent. Luxembourg’s participation in the Common Agricultural Policy (CAP), a program that heavily subsidizes agricultural goods, acts as a non-tariff barrier.

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FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 4–Stable (high tax rates) Score—Government Expenditures: 4–Stable (high level of government expenditure) Final Score: 4–Stable (high cost of government) According to the Economist Intelligence Unit, Luxembourg’s top income tax rate is 38 percent; the marginal rate for the average taxpayer is 22 percent. The top corporate tax rate is 30.38 percent. In 2001, government expenditures equaled 38.9 percent of GDP.

and exports through credits and guarantees.” Banking is one of Luxembourg’s largest industries; the country’s 250 banks, insurance firms, mutual funds, and other financial institutions employed 18.7 percent of its working population in 2000 and accounted for approximately 36.2 percent of GDP, with the banking sector accounting for 22.9 percent. Luxembourg is creating a legal infrastructure to accommodate e-commerce in order to maintain its predominant position as an international finance center.

WAGES AND PRICES

Score: 2–Better (low level) The Economist Intelligence Unit reports that the government consumed 17.4 percent of GDP in 2001. In the same year, based on data from Eurostat, Luxembourg received 4.4 percent of its revenues from state-owned enterprises and government ownership of property. Based on new data with respect to the level of revenue from state-owned enterprises, Luxembourg’s government intervention score is 1 point better this year.

Score: 2–Stable (low level of intervention) According to the Economist Intelligence Unit, “Price controls are handled by the Price, Competition and Consumer Protection Office (PCCPO), which is part of the Ministry of Economics. The office actively investigates pricing policies throughout Luxembourg’s economy. Parliament [is] in the process of preparing a new law to allow the government to control prices and fix ceilings in emergency situations.” In addition, “energy prices are fixed by the Ministry of Energy.” In practice, however, prices for most products are not subject to control. There is a minimum wage.

MONETARY POLICY

PROPERTY RIGHTS

GOVERNMENT INTERVENTION IN THE ECONOMY

Score: 1–Stable (very low level of inflation) From 1992 to 2001, Luxembourg’s weighted average annual rate of inflation was 2.59 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT

Score: 1–Stable (very high level of protection) Private property is well-protected in Luxembourg. The Economist Intelligence Unit reports that “contractual agreements…are secure, and the country’s judiciary and civil service are highly regarded.”

Score: 1–Stable (very low barriers) Luxembourg has a very open foreign investment regime and actively promotes foreign investment. Foreign and domestic businesses receive equal treatment, and there are no local content requirements. Over 60 percent of foreign direct investment involves the banking industry, which has a non-discriminatory policy toward foreign investors. The government, however, restricts investments that directly affect national security, as well as those in some utilities. In 2000, the government deregulated the electricity sector in line with European Union directives. There are no restrictions or barriers with respect to capital transactions or current transfers, repatriation of profits, purchase of real estate, or access to foreign exchange.

REGULATION

BANKING AND FINANCE

BLACK MARKET

Score: 1–Stable (very low level of restrictions) The banking system is highly competitive and subject to little government regulation, although banks are restricted in their ability to engage in some financial services, such as real estate. With its bank secrecy laws and no withholding tax on interest, Luxembourg is an attractive environment in which to do business. According to the Economist Intelligence Unit, “The state-owned development bank Societe nationale de credit et d’investissement (SNCI) is a major medium- and longterm lender on the domestic market…. It aims to promote the Luxembourg economy and to facilitate both investments

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Score: 2–Stable (low level) Establishing a business in Luxembourg is simple. The government’s one-stop-shopping system for business registration applies to foreign and domestic enterprises alike, and regulations are fair, transparent, and applied evenly in most cases. However, the Economist Intelligence Unit reports that “strict environmental and planning laws…high wage costs and generous labor protection discourage investment.” Retail businesses (except for some supermarkets) may not operate on Sundays but do not face any unusual difficulties as a result of this policy.

Score: 1–Stable (very low level of activity) Transparency International’s 2001 score for Luxembourg is 8.7. Therefore, Luxembourg’s black market score is 1 this year. According to the Economist Intelligence Unit, software piracy has decreased in recent years.

2003 Index of Economic Freedom

MACEDONIA Rank: 94 Score: 3.25 Category: Mostly Unfree Trade Policy Fiscal Burden

5 2.5

Government Intervention 3 Monetary Policy 2

Foreign Investment 3 Banking and Finance 2

In the late spring of 2001, Macedonia dissolved in ethnic conflict. Under the old order, the big state enterprises were controlled by the Slavs, and many Albanians had to make their living abroad in small businesses, both legal and illegal; the country held together partly because the Slav and Albanian elites divided the spoils from cronyism, corruption, and state control of the economy. To a significant degree, the current ethnic conflict was sparked by the disruption of these normal patterns of corruption. Following an August 2001 truce that averted full-blown civil war, the prospects for peace and stabilization are highly uncertain as the fighting has greatly increased inter-ethnic polarization. A March 12, 2002, conference of international donors in Brussels exceeded expectations, with the major Western allies pledging more than $500 million to rebuild Macedonia. This should ease the country’s budget deficit and balance of payments worries, but there also are grave economic problems that the government of Prime Minister Ljubcho Georgievski needs to deal with immediately. Corruption is still pervasive throughout the economy, and the unemployment rate remains a chronically high 40 percent. Macedonia’s trade policy score is 2 points worse this year; however, its monetary policy and wages and prices scores are both 1 point better. As a result, Macedonia’s overall score is unchanged this year.

TRADE POLICY Score: 5–Worse (very high level of protectionism) The International Monetary Fund reports that Macedonia’s weighted average tariff rate in 2000 was 14.5 percent, up from the 11 percent reported in the 2002 Index. Corruption in customs acts as a non-tariff barrier. According to the Center for the Study of Democracy, the “customs department [is] seen as [one of the country’s] most corrupt institutions….” Based on the increase in the average tariff rate and new evidence of customs corruption, Macedonia’s trade policy score is 2 points worse this year.

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 1.5–Stable (low tax rates) Score—Government Expenditures: 3–Stable (moderate level of government expenditure) Final Score: 2.5–Stable (moderate cost of government) Macedonia’s top income tax rate is 35 percent; the marginal rate for the average taxpayer is 0 percent. The top corporate income tax rate is 15 percent. In 2000, based on data from the Economist Intelligence Unit, government expenditures equaled 21.8 percent of GDP.

Chapter 6: The Countries

Wages and Prices 2 Property Rights 4

Regulation Black Market

4 5

Scores for Prior Years: 2002: 3.25 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: 2,031,000 Total area: 25,333 sq. km GDP: $2.8 billion GDP growth rate: 4.3% GDP per capita: $1,378 Major exports: food, beverages, tobacco, miscellaneous manufactures, iron and steel Exports of goods and services: $1.3 billion Major export trading partners: Yugoslavia 23.1%, Germany 20.6%, US 8.6%, Italy 7.7% Major imports: machinery and equipment, chemicals, fuels, food products Imports of goods and services: $1.8 billion Major import trading partners: Germany 12.6%, Greece 10.9%, Yugoslavia 9.3%, Russia 8.3%, Slovenia 7.0% Foreign direct investment (net): $161 million

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GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Stable (moderate level) According to the World Bank, the government consumed 18 percent of GDP in 2000. In the same year, based on data from the Ministry of Finance, the government received 4 percent of its total revenues from state-owned enterprises and government ownership of property. However, this figure appears to understate the extent of government involvement in the economy. As of June 30, 2001, according to the Privatization Agency of the Republic of Macedonia, “1,646 enterprises have been completely privatized and 113 additional enterprises are in process and are expected to get privatized in the next few months…. At present, privatization is not performed in the following entities: Enterprises and organizations that conduct activities of special national interest; Public utilities and enterprises that conserve water, forests, land and other public goods; Enterprises designated as monopolies, that are to be privatized under separate laws.” Based on the apparent unreliability of reported figures on revenues from state-owned enterprises, 1 point has been added to Macedonia’s government intervention score.

MONETARY POLICY Score: 2–Better (low level of inflation) Data from the International Monetary Fund’s 2002 World Economic Outlook indicate that from 1992 to 2001, Macedonia’s weighted average annual rate of inflation was 4.98 percent, down from the 7.15 percent from 1993 to 2000 reported in the 2002 Index. As a result, Macedonia’s monetary policy score is 1 point better this year.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) The Law on Trading Companies sets foreign investment policy in Macedonia. It grants foreign and domestic investors equal treatment and permits non-residents to invest in domestic firms, establish new firms, or launch joint ventures without restrictions outside of a few sectors, such as arms manufacturing. The government controls all real estate transactions involving foreign investment. Political instability has had a debilitating effect on foreign investment. The International Monetary Fund reports that residents may hold foreign exchange accounts if they were established after 1991, but such accounts may be held abroad only with the government’s approval. Non-residents also may hold foreign exchange accounts. Payments and transfers face few controls and restrictions. Most capital and money market activities require the approval of the Ministry of Finance or must be registered with the government. Investors see corruption and bureaucracy as impediments.

BANKING AND FINANCE Score: 2–Stable (low level of restrictions) The Economist Intelligence Unit reports that the collapse of the former Yugoslavia threw Macedonia’s banking system into chaos. When the National Bank of Yugoslavia refused to re-

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turn the foreign exchange deposits of Macedonian banks, they could not cover foreign-exchange deposits; the Macedonian government assumed these debts, but “foreign-currency deposits held in Macedonian banks were frozen and are now being paid out in installments.” The restrictions on access to savings led to various pyramid schemes that collapsed in 1997. The government is restructuring Macedonia’s banking sector and has sold its bank holdings. There were 21 banks in the country at the end of May 2001. Overall, the banking system is weak and suffers from a legacy of bad loans. Legislation passed in July 2000 brings Macedonia’s supervisory standards closer to those of the European Union and allows foreign banks to establish branches in the country.

WAGES AND PRICES Score: 2–Better (low level of intervention) The Commission of the European Communities reported in 2000 that “Price liberalization has been essentially completed. Price controls exist for only very few products.” The government influences prices through its remaining state-owned sectors; however, many state-owned enterprises have been privatized, and this influence is declining. Macedonia has a minimum wage that is set by law at two-thirds of the average wage. Based on the evidence of price liberalization, Macedonia’s wages and prices score is 1 point better this year.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) Protection of property in Macedonia still needs to be strengthened. According to the U.S. Department of State, “the Constitution provides for an independent judiciary, and the Government respects this provision in practice, although the court system is still developing and is sometimes inefficient and slow.” The U.S. Agency for International Development reports that “an inefficient judiciary and a lack of rule of law are key impediments to the economic and democratic development of the country.”

REGULATION Score: 4–Stable (high level) The state maintains a sizable role in the economy, and the privatization of several large, loss-making state-owned companies has been slow. The government has made some effort to establish a regulatory system to promote competitiveness; according to a survey sponsored by Freedom House, “the main problems are state bureaucracy, corruption and unpredictability of laws and regulations.”

BLACK MARKET Score: 5–Stable (very high level of activity) The Economist Intelligence Unit describes Macedonia’s informal economy as “burgeoning” and reports that “People survive…by working in the gray economy.” Smuggling of weapons, drugs, cigarettes, and people is active, and piracy of intellectual property is widespread.

2003 Index of Economic Freedom

MADAGASCAR Antananarivo

Trade Policy Fiscal Burden

2 2.5

Government Intervention 1 Monetary Policy 3

Foreign Investment 3 Banking and Finance 3

Civil unrest following the disputed December 2001 presidential election virtually froze economic activity in Madagascar’s capital city of Antananarivo for the first half of 2002. Militia groups loyal to former President Didier Ratsiraka blockaded the city, whose leaders are loyal to Marc Ravalomanana, who was sworn in as president in May following a recount of the vote. In addition to preventing access to raw materials and the export of finished products, the unrest cost Madagascar up to an estimated $14 million per day in economic disruption, curtailed tourism, lower investment, closed businesses, and increased unemployment. The situation was resolved after Ratsiraka’s flight from the country, when forces loyal to President Ravalomanana moved into his stronghold in the port city of Toamasina. The crisis also undermined strong growth in manufacturing and the exporting of textiles to the United States, particularly under the African Growth and Opportunity Act. Madagascar has made some progress in manufacturing since passage of the act, but agriculture, fishing, and forestry still account for one-third of the economy and fourfifths of employment. The government remains involved in the economy despite recent privatization and liberalization. From 1991 to 2000, according to World Bank data, compound growth in GDP averaged 2.7 percent annually and per capita GDP decreased from $253 to $246 (in constant 1995 U.S. dollars) as population growth exceeded economic growth. Until the political crisis is resolved, it is expected that economic activity will be curtailed and government policies will remain both unclear and unenforced. Madagascar’s trade policy, fiscal burden of government, and government intervention scores are, respectively, 3 points, 0.5 point, and 1 point better this year. As a result, its overall score is 0.45 point better this year, causing Madagascar to be classified as a mostly free economy.

TRADE POLICY Score: 2–Better (low level of protectionism) According to the World Bank, Madagascar’s weighted average tariff rate in 1995 (the most recent year for which World Bank data are available) was 5.2 percent, down from the 31.3 percent (based on import duties as a percentage of total imports) reported in the 2002 Index. According to the U.S. Department of State, “Madagascar does not have significant non-tariff barriers to trade.” Based on previously unavailable data on the weighted average tariff rate, Madagascar’s trade policy score is 3 points better this year.

Rank: Score: Category:

44 2.65 Mostly Free

Wages and Prices 2 Property Rights 3

Regulation Black Market

Scores for Prior Years: 2002: 3.10 1999: 3.25 1996: 3.35

2001: 3.10 1998: 3.35 1995: 3.45

2000: 3.20 1997: 3.25

2000 Data (in constant 1995 US dollars) Population: 15,523,000 Total area: 587,040 sq. km GDP: $3.8 billion GDP growth rate: 4.8% GDP per capita: $246 Major exports: coffee, vanilla, shellfish, sugar, cotton cloth, petroleum products Exports of goods and services: $1.3 billion Major export trading partners: France 40.9%, US 21.1%, Germany 7.4%, Japan 3.6%, UK 1.3% Major imports: intermediate manufactures, capital goods, petroleum, consumer goods, food Imports of goods and services: $1.6 billion Major import trading partners: France 38.0%, Hong Kong 10.1%, China 5.4%, Singapore 5.1%, Japan 2.9% Foreign direct investment (net): $26.5 million

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 3–Worse (moderate tax rates) Score—Government Expenditures: 2–Better (low level of government expenditure) Final Score: 2.5–Better (moderate cost of government) According to the International Monetary Fund, Madagascar’s top income tax rate is 35 percent; the marginal rate for the average taxpayer is 1 percent, up from the 0 percent reported in the 2002 Index. The top corporate income tax rate is 35 percent. Data from

Chapter 6: The Countries

3 4

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the IMF indicate that in 2000, government expenditures equaled 16.6 percent of GDP, down from the 22 percent reported in the 2002 Index. Based on the increase in the marginal income tax rate, Madagascar’s income and corporate taxation score is 0.5 point worse this year; however, its government expenditures score is 1 point better. As a result, Madagascar’s overall fiscal burden of government score is 0.5 point better this year.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 1–Better (very low level) The World Bank reports that the government consumed 7.4 percent of GDP in 2000. In the same year, according to the International Monetary Fund, Madagascar received 0.99 percent of its total revenues from state-owned enterprises and government ownership of property. Based on newly available data on revenues from state-owned enterprises, Madagascar’s government intervention score is 1 point better this year.

MONETARY POLICY Score: 3–Stable (moderate level of inflation) From 1992 to 2001, Madagascar’s weighted average annual rate of inflation was 6.66 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) Most sectors of Madagascar’s economy are open to 100 percent foreign ownership, and the government has established Export Processing Zones where export firms enjoy tax advantages. According to the U.S. Department of State, however, “Potential foreign investors are compelled to deal with a thicket of bureaucratic obstacles as they seek the necessary permits and approvals.” The African Growth and Opportunity Act led to substantial investment in the textile sector, which was prospering before the advent of instability. Foreigners may own property, but it is rare in practice, and the government prefers to extend 99-year land leases to foreigners. The International Monetary Fund reports that both residents and non-residents may open foreign exchange accounts. There are no restrictions on payments or transfers, though profits must be repatriated within 30 days. All capital movements with other nations require government authorization.

BANKING AND FINANCE Score: 3–Stable (moderate level of restrictions) The political crisis threw the financial system into disarray for the first half of 2002. Each claimant to the presidency appointed a central bank governor, immobilizing the banking system and access to foreign exchange, making it impossible to estimate tax collection and balance of payments, and confusing international creditors. The six commercial banks, two of which are controlled by foreign banks, were unable to conduct business because they could not collect income, businesses and individuals could not pay debts, and the government did not make payments on treasury bonds. Things have largely returned to normal since resolution of the crisis. The government sold controlling stakes in its

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last two state-controlled banks; a French firm purchased 70 percent of Banky fampandrosoana ny varotra (BFV) in October 1998, and the foreign purchase of Bankin’ny tantsaha mpamokatra (BTM) followed in 1999. The state owns two insurance companies. “For private banks,” reports the U.S. Department of State, “financial statements are in compliance with international standards and audits are performed both by local and internationally recognized accounting firms.”

WAGES AND PRICES Score: 2–Stable (low level of intervention) The government has abolished price controls on virtually all products, although it influences or controls prices for some agricultural products. The Ministry of Civil Service, Labor, and Social Laws enforces wages set by the labor code and supporting legislation.

PROPERTY RIGHTS Score: 3–Stable (moderate level of protection) According to the U.S. Department of State, “The High Court is subject to the President’s influence.” In addition, “Investors in Madagascar face a legal environment in which security of private property and the enforcement of contracts are inadequately protected by the judicial system. Government interference in the court system is not uncommon.”

REGULATION Score: 3–Stable (moderate level) Despite efforts to streamline the regulatory process, lack of transparency and red tape remain problems. “The bureaucratic process for establishing a new enterprise is time consuming and requires considerable maneuvering,” reports the U.S. Department of State. “Ministerial overlap and bureaucratic struggles for dominance are serious problems. Often, investors have no idea which ministries to approach, or where to start. While there has been a recent move to simplify, the process is still lacking in transparency and corruption is a persistent problem.” According to the Economist Intelligence Unit, “Reform of the civil service, to be piloted in a small number of ministries, has been under discussion for some time but has yet to make substantial progress.”

BLACK MARKET Score: 4–Stable (high level of activity) Intellectual property rights are not well-protected despite the existence of two government bodies and new regulation to monitor and promote the effort. According to the U.S. Department of State, “Compliance with [IPR] regulations is highly uneven. Major brand names and franchise rights are respected, but pirated copies of videotaped movies and music sell openly in the capital.” Smuggling of endangered species from the island is a continuing problem, and the black market in labor is substantial.

2003 Index of Economic Freedom

MALAWI Rank: 131 Score: 3.65 Category: Mostly Unfree

Lilongwe

Trade Policy Fiscal Burden

4 4

Government Intervention 3 Monetary Policy 5

Foreign Investment 3 Banking and Finance 4

Malawi remains one of the world’s poorest countries. Primarily agricultural, it is one of several countries in southern Africa that suffer from drought and face the prospect of famine. Malawi sold its entire grain reserve in 2001, leaving it with little domestic capacity to address the famine; an investigation into possible misconduct in the sale is being conducted. The government has shown a tendency toward corruption, and some donors have demanded that it improve transparency and governance before they resume distribution of aid. Being landlocked, Malawi faces expensive challenges in getting its goods to world markets. Transport costs have declined since the 1999 privatization of Malawi Railways and improved access to the Mozambique port of Nacala. Reforms during the 1990s focused on trade liberalization, exchange rate flexibility, and—to a lesser extent—privatization. Corn, seed, and fertilizer prices have been liberalized, but pressure resulting from drought and hunger could lead the government to re-establish price controls. Among the substantial reforms that still need to be undertaken are improving the infrastructure, increasing fiscal discipline and accountability, and diversifying the economy. From 1991 to 2000, according to World Bank data, growth in GDP averaged 2.9 percent annually and per capita income rose slightly from $155 to $169 (in constant 1995 U.S. dollars). Malawi’s fiscal burden of government score is 0.5 point worse this year, and its banking and finance score is 1 point worse. As a result, Malawi’s overall score is 0.15 point worse this year.

TRADE POLICY Score: 4–Stable (high level of protectionism) According to the World Bank, Malawi’s weighted average tariff rate in 1998 (the most recent year for which World Bank data are available) was 11.5 percent. Nontariff barriers include strict import licenses. According to the U.S. Department of State, “Trade licensing covers thirteen import and four export commodities.”

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 2.5–Stable (moderate tax rates) Score—Government Expenditure: 5–Worse (very high level of government expenditure) Final Score: 4–Worse (high cost of government) According to the International Monetary Fund, Malawi’s top income tax rate is 35 percent; the marginal rate for the average taxpayer is 0 percent. The top corporate tax rate is 35 percent. More accurate data from the African Development Bank indicate that in 2000, government expenditures equaled 31.7 percent of GDP rather than the 28.9 percent reported for the same year in the 2002 Index. Based on the higher level of government expenditure, Malawi’s fiscal burden of government score is 0.5 point worse this year.

Chapter 6: The Countries

Wages and Prices 3 Property Rights 3

Regulation 4.0 Black Market 3.5

Scores for Prior Years: 2002: 3.50 1999: 3.65 1996: 3.60

2001: 3.55 1998: 3.70 1995: 3.50

2000: 3.65 1997: 3.65

2000 Data (in constant 1995 US dollars) Population: 10,311,000 Total area: 118,480 sq. km GDP: $1.7 billion GDP growth rate: 1.7% GDP per capita: $169 Major exports: tobacco, tea, sugar, cotton, coffee, peanuts, wood products Exports of goods and services: $499 million Major export trading partners: Zimbabwe 17.9%, South Africa 14.6%, Portugal 11.5%, Spain 10.7% Major imports: food, petroleum products, semi-manufactures, consumer goods, transportation equipment Imports of goods and services: $683 million Major import trading partners: South Africa 36.7%, Portugal 7.9%, Japan 4.4%, US 3.1% Foreign direct investment (net): $43.9 million

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GOVERNMENT INTERVENTION IN THE ECONOMY

WAGES AND PRICES

Score: 3–Stable (moderate level) The World Bank reports that the government consumed 16.8 percent of GDP in 2000. In the same year, based on data from the International Monetary Fund, Malawi received 8.8 percent of its total revenues from state-owned enterprises and government ownership of property.

Score: 3–Stable (moderate level of intervention) The government has lifted price controls on almost all products, although controls on the prices of some food items and energy remain in effect. According to the U.S. Department of State, “Prices for most goods are generally market-determined. Petroleum and sugar are still subject to some degree of price controls. The maize price floats within a Government-set price band. State-provided utilities and services (telephones, water, electricity, etc.) are also subject to varying degrees of government price administration.” As most Malawians are active in the agricultural sector, these price restrictions affect a substantial portion of the economy. Malawi’s Ministry of Labor and Vocational Training sets different urban and rural minimum wages based on recommendations of a tripartite wage board composed of government, labor, and employer representatives.

MONETARY POLICY Score: 5–Stable (very high level of inflation) From 1992 to 2001, Malawi’s weighted average annual rate of inflation was 29.28 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) The government encourages foreign investment in most sectors. It has established the Malawi Investment Promotion Agency, has adopted various tax and financial incentives for investors, and has no formal screening requirement. Malawians are given preference in privatization projects. The International Monetary Fund reports that residents who regularly receive foreign exchange transfers from abroad may hold foreign exchange accounts, but these accounts may not be held abroad. Non-residents may hold foreign exchange accounts with authorized dealers, and some transactions require government approval. Neither residents nor non-residents are permitted to hold offshore accounts of domestic currency. Some payments and transfers, such as those for travel and medical treatment, are subject to quantitative limits. Most capital transactions by non-residents are unrestricted, but most capital transactions by residents—including purchase of foreign capital or money market instruments by residents, credit operations from non-residents to residents, and outward direct investment—require exchange control approval.

BANKING AND FINANCE Score: 4–Worse (high level of restrictions) According to the U.S. Department of State, “The Malawi government and the conglomerate Press Corporation Limited (PCL), in which the government holds a 49% stake, dominate the ownership of the Malawi banking sector.” The government exercises a great deal of control over the financial system. According to the Economist Intelligence Unit, “Much bank lending is to the government and parastatals, usually on a short-term basis; there is little lending to private individuals.” A foreign presence is allowed; for example, a subsidiary of a Mauritian bank opened in Malawi in 1999, and Fincom is partly owned by the South African Nedbank. A U.S. investor, along with two Malawian companies, purchased over 60 percent of the national insurance company of Malawi (NICO) in 2000. Based on new evidence of the extremely high level of government involvement in the banking sector, Malawi’s banking and finance score is 1 point worse this year.

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PROPERTY RIGHTS Score: 3–Stable (moderate level of protection) Malawi’s court system is independent but inefficient. The U.S. Department of State reports that “Malawi has a fairly independent but overburdened judiciary, which derives its procedures from English Common Law. Although not part of the formal judicial system, traditional authorities often mediate in disputes/legal matters at the village level. Credible allegations of political interference in court cases occasionally arise.”

REGULATION Score: 4–Stable (high level) Malawi’s regulatory environment is significantly burdensome. “No tax, labor, environment, health and safety or other laws distort or impede investment,” reports the U.S. Department of State. “However, procedural delays, red tape, and corrupt practices continue to impede the business and investment approval process. These include decision making, which is often neither transparent nor based purely on merit, and required land-access approvals.” According to the Economist Intelligence Unit, “Relations with donors have recently been damaged by allegations of corruption surrounding the use of donor funds and significant funding has been withheld. Problems over governance and the rule of law are also viewed with concern and donor scrutiny will remain high.”

BLACK MARKET Score: 3.5–Stable (high level of activity) Transparency International’s 2001 score for Malawi is 3.2. Therefore, Malawi’s black market score is 3.5 this year.

2003 Index of Economic Freedom

MALAYSIA

Kuala Lumpur

Rank: 72 Score: 3.00 Category: Mostly Unfree Trade Policy Fiscal Burden

3 3

Government Intervention 3 Monetary Policy 1

Foreign Investment 4 Banking and Finance 4

Malaysia’s economy has benefited from the global recovery, and many economists are revising their projections for economic growth in 2002 accordingly. The government is eager to portray Malaysia as a moderate Islamic country, intolerant of Muslim extremists. This position avoids scaring off foreign direct investment and muzzles Malaysian Muslims who could be political opponents of the dominant United Malays National Organization (UMNO) party. Malaysia’s economy is still burdened by crony capitalism; the government policy of supporting businesses based on ethnicity, for example, has proved remarkably successful for Prime Minister Mahathir Mohamad’s friends. Another burden is official trade policies that protect domestic industries; Malaysia’s weighted average tariff rate is approximately 6 percent, while those for the United States and Europe average almost 2 percent. In addition, while Mahathir’s principled stance on terrorism has done a great deal to enhance his international reputation, Malaysia’s judiciary is still handicapped by perceived political bias. In May 2002, Mahathir announced his intention to retire as prime minister in late 2003, after 21 years in power. He announced that his chosen successor as head of UMNO would be current Deputy Prime Minister Abdullah Badawi, who is also likely to succeed Mahathir as prime minister in the general election, which must be held by 2004. Malaysia’s trade policy score is 1 point better this year. As a result, its overall score is 0.10 point better this year.

TRADE POLICY

Wages and Prices 3 Property Rights 3

Regulation Black Market

Scores for Prior Years: 2002: 3.10 1999: 2.60 1996: 2.70

2001: 3.00 1998: 2.60 1995: 2.40

2000: 2.70 1997: 2.80

2000 Data (in constant 1995 US dollars) Population: 23,270,000 Total area: 329,750 sq. km GDP: $111 billion GDP growth rate: 8.3% GDP per capita: $4,797 Major exports: electronic equipment, petroleum and liquefied natural gas, chemicals, palm oil, wood and wood products, rubber, textiles Exports of goods and services: $135.7 billion

Score: 3–Better (moderate level of protectionism) According to the World Bank, Malaysia’s weighted average tariff rate in 1997 (the most recent year for which World Bank data are available) was 6 percent, down from the 9.18 percent reported in the 2002 Index. As a result, Malaysia’s trade policy score is 1 point better this year. The U.S. Trade Representative reports that “17 percent of Malaysia’s tariff lines…are also subject to non-automatic import licensing designed to protect importsensitive or strategic industries.” In addition, Malaysia maintains import bans, licensing requirements, and strict labeling requirements.

Major export trading partners: US 20.2%, Singapore 16.9%, EU 13.6%, Japan 13.3%, Hong Kong 4.6%, Taiwan 3.6%, South Korea 3.3%

FISCAL BURDEN OF GOVERNMENT

Major import trading partners: Japan 19.2%, US 16.0%, EU 12.9%, Singapore 12.6%, Taiwan 5.7%, China 5.2%, South Korea 4.0%

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) Malaysia’s top income tax rate is 29 percent; the marginal rate for the average taxpayer is 5 percent. The top corporate tax rate is 28 percent. In 2000, according to the Asian Development Bank, government expenditures equaled 23.9 percent of GDP. Based on a clarification in the methodology, Malaysia’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

3 3

Major imports: machinery and transport equipment, chemicals, food, fuel and lubricants Imports of goods and services: $100 billion

Foreign direct investment (net): $2.4 billion

289

GOVERNMENT INTERVENTION IN THE ECONOMY

WAGES AND PRICES

Score: 3–Stable (moderate level) The World Bank reports that the government consumed 10.6 percent of GDP in 2000. According to the U.S. Department of State, “the government continues to hold equity stakes (generally minority shares) in a wide range of domestic companies.” In December 2000, reports the Economist Intelligence Unit, the government bought back a “29% stake in the debt-ridden national carrier, Malaysian Airline System (MAS)… [at] three and a half times the MAS share price on the open market…. The government’s decision, in August 2001, to take over the heavily indebted Renong UEM may be a prelude to a takeover of the whole Renong group, one of Malaysia’s largest companies, which has close relations with UMNO.”

Score: 3–Stable (moderate level of intervention) The market determines most wages and prices. According to the Economist Intelligence Unit, “Under the Price Control Act, the Ministry of Domestic Trade and Consumer Affairs controls prices of selected essential foods and commodities and also certain manufactured products (including cement).” Malaysia does not have a national minimum wage, but the U.S. Department of State reports that “the Wage Councils Act provides for a minimum wage in those sectors or regions of the country where market determined wages are insufficient.”

MONETARY POLICY Score: 1–Stable (very low level of inflation) From 1992 to 2001, Malaysia’s weighted average annual rate of inflation was 1.69 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 4–Stable (high barriers) Malaysia encourages foreign investment in some sectors, such as high-technology and export-oriented manufacturing; according to the U.S. Department of State, however, it “retains considerable discretionary authority in approving individual investment projects.” While foreign investors may now own 100 percent of manufacturing projects, pending approval from the Malaysian Industrial Development Authority, which screens all proposed investments in manufacturing, limitations on foreign ownership still apply to many other sectors. Most restrictions apply to investments in industries considered essential to national security, although the government also restricts foreign participation in such services as law, architecture, and banking, and in such other sectors as media, real estate, energy, and utilities. The decision-making process in granting foreign investment often lacks transparency. Foreign-controlled companies must get 50 percent of local credit from domestic banks. Malaysia has abolished many onerous restrictions on foreign capital flows. All capital transactions are subject to various limitations and approval requirements.

BANKING AND FINANCE Score: 4–Stable (high level of restrictions) The government is heavily involved in financial markets. Most recently, it forced the 58 domestic banks to merge into 10 larger financial institutions, after which it re-capitalized these institutions and restructured their extensive non-performing loans through the national asset management company, Pengurusan Danaharta Nasional Berhad. In 2001, the Bank Negara Malaysia (the central bank) announced a 10-year plan for strengthening the financial sector that blocks competition from new foreign banks until after 2007. Overall, foreign participation in commercial banking is limited to 30 percent of equity in any single institution. Foreign insurance companies are not allowed more than 49 percent ownership without approval from the Malaysian government.

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PROPERTY RIGHTS Score: 3–Stable (moderate level of protection) Private property is protected in Malaysia, but the judiciary is subject to political influence. The Economist Intelligence Unit reports that “the judiciary does not enjoy total independence, and the application of commercial laws is sometimes unpredictable; it depends on the leaning of the judges, who often seem divided between justice and keeping the security of their jobs.” According to the same source, however, “The appointment in January 2001 of a new chief justice, Dzaiddin Abdullah, has lifted expectations that the judiciary will reassert its independence.”

REGULATION Score: 3–Stable (moderate level) Malaysia’s regulatory regime is efficient and fairly transparent, but there are restrictions, and the government intervenes in the economy to promote official policies. Both foreign and domestic businesses must have ethnic Malay (Bumiputera) business partners with a share in the enterprise of at least 30 percent, and the U.S. Department of State reports that businesses must “have a workforce which reflects Malaysia’s ethnic composition.” According to the Economist Intelligence Unit, all firms seeking manufacturing licenses must comply with the National Development Policy, which maintains the spirit of the affirmative-action requirements in favor of the country’s Bumiputeras.

BLACK MARKET Score: 3–Stable (moderate level of activity) Transparency International’s 2001 score for Malaysia is 5.0. Therefore, Malaysia’s black market score is 3 this year.

2003 Index of Economic Freedom

MALI Rank: 72 Score: 3.00 Category: Mostly Unfree

Bamako

Trade Policy Fiscal Burden

3 3

Government Intervention 3 Monetary Policy 2

Foreign Investment 3 Banking and Finance 3

Mali adopted a socialist development model and nationalized most large businesses and industries after gaining its independence from France in 1960. In recent years, however, the government has embraced a liberalization agenda that includes partially or fully privatizing or liquidating some 50 public enterprises. The U.S. Department of State reports that poor infrastructure, government mismanagement, corruption, and insufficient access to reliable sources of energy have retarded economic growth. The agricultural sector, particularly small-scale farming and animal husbandry, dominates the economy, contributing over 45 percent of GDP and employing nearly 80 percent of the labor force. The Economist Intelligence Unit reports that gold accounted for over 50 percent of exports in 1999 and that Mali is now Africa’s third largest producer of gold. Mali remains one of the world’s poorest countries; it also has a very low literacy rate and some of the world’s worst health indicators. From 1991 to 2000, according to World Bank data, compound growth in GDP averaged 4.1 percent annually but per capita GDP increased only marginally from $250 to $288 (in constant 1995 U.S. dollars). Mali’s wages and prices score is 1 point better this year; however, its monetary policy and capital flows and foreign investment scores are both 1 point worse. As a result, Mali’s overall score is 0.10 point worse this year, causing Mali to be classified as a mostly unfree economy.

TRADE POLICY Score: 3–Stable (moderate level of protectionism) Mali 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, Ivory Coast, Niger, Senegal, and Togo.) Most import barriers have been lifted, although import licenses are still required.

Wages and Prices 2 Property Rights 3

Regulation Black Market

Scores for Prior Years: 2002: 2.90 1999: 3.00 1996: 3.25

2001: 2.95 1998: 3.10 1995: 3.30

2000: 2.90 1997: 3.20

2000 Data (in constant 1995 US dollars) Population: 10,840,000 Total area: 1,240,000 sq. km GDP: $3.1 billion GDP growth rate: 4.6% GDP per capita: $288 Major exports: cotton, gold, livestock Exports of goods and services: $834.7 million Major export trading partners: Brazil 10.6%, South Korea 9.9%, Italy 7.3%, Canada 7.0% Major imports: machinery and equipment, construction materials, petroleum, foodstuffs, textiles Imports of goods and services: $1.19 billion Major import trading partners: Ivory Coast 21.0%, France 12.4%, Germany 4.0%, Senegal 4.0% Foreign direct investment (net): $45.8 million

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) The International Monetary Fund reports that Mali’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. In 2000, based on data from the IMF, government expenditures equaled 24.6 percent of GDP. Based on a clarification in methodology, Mali’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.

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GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Stable (moderate level) The World Bank reports that the government consumed 13.3 percent of GDP in 2000 and, through parastatal companies, is actively involved in marketing, pricing, and coordinating the production of the country’s major products, such as cotton and rice. The government also has shares in companies in the mining sector. Under a program sponsored by the International Monetary Fund and World Bank, the government is selling some of its shares in the telecommunications and electricity sectors.

MONETARY POLICY Score: 2–Worse (low level of inflation) From 1992 to 2001, Mali’s weighted average annual rate of inflation was 3.21 percent, up from the –0.2 percent from 1991 to 2000 reported in the 2002 Index. Mali 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, Ivory Coast, Niger, Senegal, and Togo.) Based on the higher weighted average rate of inflation, Mali’s monetary policy score is 1 point worse this year.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Worse (moderate barriers) The government has an established investment code and permits 100 percent foreign ownership of any new business. Foreign investors may purchase privatized state-owned enterprises and invest in most areas of the economy; they must go through the same screening process as domestic investors. The U.S. Department of State reports that foreign investors may face discriminatory treatment by tax collectors. The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts with permission from the government and regional central bank. Transfers to countries other than France, Monaco, WAEMU members, Central African Economic and Monetary Community members, and Comoros require government approval. Credit and loan operations, and issues and purchases of securities, derivatives, and other instruments, are subject to various requirements, controls, and authorization depending on the transaction. Purchase of real estate requires prior authorization from the Ministry of Finance. Based on new evidence of controls on capital flows, Mali’s capital flows and foreign investment score is 1 point worse this year.

BANKING AND FINANCE Score: 3–Stable (moderate level of restrictions) The Central Bank of West African States (BCEAO), a central bank common to the eight members of the WAEMU, governs Mali’s banking system. Mali uses the CFA franc that is

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issued by the BCEAO, pegged to the French franc, and guaranteed by the French Treasury. Mali’s banking sector is small, underdeveloped, and concentrated in urban areas, leaving rural services to the rapidly increasing number of micro-finance lenders. The Economist Intelligence Unit reports that seven commercial banks were operating in Mali in 2002, along with an agricultural bank and a housing bank. The government owns a majority share in three banks and a minority share of at least 20 percent in three others, including the country’s largest bank (Banque de développement du Mali), in which the state owns a 20 percent share and the regional central bank owns another 20 percent share. Three banks are privately held. Commercial banks are now permitted to invest in foreign capital markets.

WAGES AND PRICES Score: 2–Better (low level of intervention) The government has adopted a plan to introduce market-determined pricing, including producer prices for cotton, by 2005. The government also influences prices through public utilities and sets a national minimum wage, which is not observed. Based on the evidence of limited government control of prices, Mali’s wages and prices score is 1 point better this year.

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 rule of law is generally respected, although corruption [is] a significant problem within the judiciary.”

REGULATION Score: 3–Stable (moderate level) Despite government efforts to improve the regulatory structure and reform the civil service, such ongoing problems as corruption, sporadic application of regulations, and inefficient bureaucracy continue to present impediments to business. The Economist Intelligence Unit reports that “corruption is most pervasive in government procurement, where lower and middle-ranking civil servants may request bribes to expedite paperwork, but is not a serious impediment to foreign investment.”

BLACK MARKET Score: 5–Stable (very high level of activity) Violations of intellectual property rights are common, and there is a black market in currency and the illegal tapping of water and electricity lines. Though customs has improved, Mali still has a large black market, particularly in smuggled consumer electronics equipment like videocassette recorders. According to Africa News Service, most of the labor force works in the black market.

2003 Index of Economic Freedom

MALTA Valletta

Trade Policy Fiscal Burden

3 4

Government Intervention 3 Monetary Policy 1

Foreign Investment 3 Banking and Finance 3

Malta gained its independence from Great Britain in 1964, and its economy since then has depended on tourism, foreign trade, and manufacturing. Foreign companies have been attracted by Malta’s benign tax regime, well-trained workers, relatively cheap labor costs, and proximity to the European Union market. Having begun negotiations to enter the EU, the government has moved to liberalize and deregulate the economy, removing some import tariffs at the start of 2000 and reducing aid for loss-making state-owned shipyards. Among the difficult issues still to be negotiated with the EU are the pace of state withdrawal from the economy and the liberalization of both foreign and external trade. Privatization—a key part of the government’s strategy—has stalled since 1999, with no further major selloffs of state assets. The public sector remains large, accounting for 37 percent of overall employment. The government aims to reduce the budget deficit to below 4 percent over the next three years by curtailing welfare payments, pensions, and state-sector salaries, which account for the bulk of this spending, and privatizing more state-owned assets. Given the prevailing political and economic culture, these cuts can be expected to prove politically difficult. Other reforms also have proceeded slowly; the government has pledged to dismantle all tariffs relating to the EU by 2003 but still imposes tariffs on agriculture and food imports. Protectionism has been an essential component of the government’s policy. To qualify for membership in the EU, however, Malta must end its excessive subsidies, tariffs, levies on imported goods, and state-owned monopolies, all of which are incompatible with EU rules. Malta’s banking and finance score is 1 point worse this year; however, its regulation score is 1 point better. As a result, Malta’s overall score is unchanged this year.

TRADE POLICY Score: 3–Stable (moderate level of protectionism) According to Malta’s Chamber of Commerce, the average tariff rate in 2001 was 10 percent. The U.S. Department of State reports that the government imposes taxes above normal tariff rates to protect local industries.

Rank: Score: Category:

52 2.70 Mostly Free

Wages and Prices 3 Property Rights 1

Regulation Black Market

Scores for Prior Years: 2002: 2.70 1999: 3.05 1996: 3.25

2001: 2.80 1998: 3.05 1995: 3.35

2000: 2.95 1997: 3.15

2000 Data (in constant 1995 US dollars) Population: 390,000 Total area: 316 sq. km GDP: $3.9 billion GDP growth rate: 5.0% GDP per capita: $10,223 Major exports: machinery and transport equipment, manufactures Exports of goods and services: $3.2 billion Major export trading partners: US 27.3%, Germany 9.6%, France 8.0%, UK 7.3%, Italy 3.4% Major imports: machinery and transport equipment, manufactured and semi-manufactured goods, food, drink, and tobacco Imports of goods and services: $3.5 billion Major import trading partners: France 19.2%, Italy 16.3%, US 10.7%, Germany 8.1%, UK 8.1% Foreign direct investment (net): $554.4 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) Malta’s top income tax rate is 35 percent; the marginal rate for the average taxpayer is 15 percent. The top corporate tax rate is 35 percent. In 2000, based on data from the central bank, government expenditures equaled 45.9 percent of GDP.

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GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Stable (moderate level) The World Bank reports that the government consumed 18.7 percent of GDP in 2000. Despite a privatization program, the government remains active in the economy. According to the Economist Intelligence Unit, “Talks about the privatisation of various public entities, including Malta International Airport (MIA), Malta Freeport—a transshipment centre—Maltapost and Bank of Valletta, are ongoing…. As regards the airport, the Alterra consortium (which runs Singapore Airport) was nominated as the preferred bidder in December 2001. However, by February a second bidder—a consortium which runs Vienna International Airport—was holding talks with the government. A decision is expected later in 2002. On postal services Transend, a New Zealand firm, has acquired a 35% stake in Maltapost. Transend is to make a capital injection and provide technical support. Little progress has been registered in the privatization of other entities listed for disposal by the government.”

MONETARY POLICY Score: 1–Stable (very low level of inflation) From 1992 to 2001, Malta’s weighted average annual rate of inflation was 2.72 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) Malta seeks to attract foreign investment, at least in selected sectors. The central bank must approve foreign investments and maintains some sectoral restrictions on foreign investment, but there are no formal limitations on foreign ownership of capital in a Maltese company. According to Deloitte & Touche’s Malta International Tax and Business Guide, “companies with foreign participations are not normally allowed to carry on: Any wholesale or retail trade; Real estate development and dealing; and Essential state-controlled services, such as telecommunications, energy, and broadcasting.” A Business Promotion Act enacted on January 30, 2001, provides a number of incentives to promote investment, both foreign and domestic. The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts, subject to maximum amounts for residents and restricted to income earned in Malta for non-residents. Payments, capital transactions and transfers, and repatriation of profits are subject to proper documentation and authorization, maximum amounts, and time limits depending on the financial activity and residency; non-residents may purchase real estate with permission from the Ministry of Finance. Standard & Poor’s reports that, in general, long-term capital flows have been liberalized but short-term capital flows are still controlled by the central bank.

BANKING AND FINANCE Score: 3–Worse (moderate level of restrictions) The financial sector is small but competitive. The government removed ceilings on interest rates and loan maturities in 1994 and then removed some restrictions on inward and outward direct investment flows and further liberalized exchange controls in 2000.

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Two banks dominate Malta’s financial sector: HSBC (Malta) Ltd., owned by Hong Kong Shanghai Bank Corporation (HSBC) Group, and the government-owned Bank of Valletta. Together, these two banks control over 80 percent of the consumer banking market, according to the U.S. Department of State. Commercial banks may offer all forms of commercial banking services. Based on the fact that one of the country’s two major banks is government-owned, Malta’s banking and finance score is 1 point worse this year.

WAGES AND PRICES Score: 3–Stable (moderate level of intervention) Deloitte & Touche reports that the Office for Fair Competition has authority for “controlling retail and wholesale prices of certain goods, principally food stuffs and other basic commodities.” Malta mandates a minimum wage.

PROPERTY RIGHTS Score: 1–Stable (very high level of protection) Malta’s judiciary is independent, both under the constitution and in practice. “The Maltese judiciary has a long tradition of independence,” reports the U.S. Department of State. “Once appointed to the bench, judges and magistrates have fixed salaries, which do not require annual approval and they cannot be dismissed.” The threat of expropriation is low.

REGULATION Score: 2–Better (low level) Malta’s regulatory structure is transparent and largely consistent with those of its European neighbors. Companies are requested to submit a business proposal to the Malta Development Corporation before establishing operations. The U.S. Department of State reports that the government “has adopted transparent and effective policies and regulations to foster competition. It is striving to eliminate unnecessary bureaucratic procedures and has taken steps to revise labor, safety, health and other laws in general to conform to EU standards.” According to PriceWaterhouseCoopers, “Formation procedure is straightforward, and expenses are nominal” in establishing a business. Companies must obtain a license from the police to begin operations. Corruption is rare. Based on evidence of improvement in the regulatory environment, Malta’s regulation score is 1 point better this year.

BLACK MARKET Score: 4–Stable (high level of activity) Malta is a major center for smuggling, and its location makes it a preferred base for black market activity, including drug smuggling. The government has managed to reduce smuggling and other black market activities to some extent. Protection of intellectual property rights is adequate, although software and video piracy has been cited as a significant problem that led to the closing of Virgin Megastore’s operations in Malta in 2001. The government has conducted some crackdowns on pirating activity. A copyright bill passed in September 2000 has brought Malta into conformity with its TRIPS obligations. Malta also has an Intellectual Property Rights Act and a Trademarks Act.

2003 Index of Economic Freedom

MAURITANIA Rank: 85 Score: 3.10 Category: Mostly Unfree

Nouakchott

Trade Policy Fiscal Burden

4 4

Government Intervention 2 Monetary Policy 2

Foreign Investment 2 Banking and Finance 2

Most of Mauritania’s population depends on agriculture and herding for subsistence, making drought a serious threat that has led many nomads and small farmers to migrate to the cities. Major exports are iron ore mined from the country’s extensive deposits and fish from its rich coastal waters. Mauritania also possesses significant copper, cobalt, diamond, gold, gypsum, and phosphate deposits that have yet to be fully surveyed and exploited. Despite a history of economic reforms, Mauritania remains one of the world’s poorest nations and continues to endure widespread unemployment, high government debt, and a lack of government transparency and accountability. Mauritania has qualified for debt relief through the International Monetary Fund–World Bank Heavily Indebted Poor Country (HIPC) Initiative, which should ease its annual debt service. From 1991 to 2000, according to World Bank data, compound growth in GDP averaged 4.2 percent annually and per capita GDP grew from $446 to $496 (in constant 1995 U.S. dollars). Mauritania’s trade policy score and banking and finance score 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: 3.30 1999: 3.70 1996: 3.75

2001: 3.70 1998: 3.75 1995: n/a

2000: 3.80 1997: 3.90

2000 Data (in constant 1995 US dollars) Population: 2,665,000 Total area: 1,030,700 sq. km GDP: $1.36 billion GDP growth rate: 5.0% GDP per capita: $496 Major exports: iron ore, fish and fish products, gold Exports of goods and services: $480.8 million

Score: 4–Better (high level of protectionism) In 2001, according to the National U.S.–Arab Chamber of Commerce and other sources, Mauritania’s average tariff rate was approximately 10 percent, down from the 28 percent reported in the 2002 Index. As a result, Mauritania’s trade policy score is 1 point better this year. Trade restrictions include strict labeling and inspection requirements as well as a sometimes corrupt and inefficient customs agency. According to the U.S. Department of State, “Foreign investors frequently complain of corruption and complexity in customs procedures.”

Major export trading partners: France 17.6%, Japan 16.1%, Italy 13.1%, Spain 10.5%

FISCAL BURDEN OF GOVERNMENT

Major import trading partners: France 24.5%, Algeria 10.8%, Belgium 8.4%, Germany 6.8%, Spain 5.7%

Score—Income and Corporate Taxation: 2.5–Better (moderate cost of government) Score—Government Expenditures: 5–Worse (very high level of government expenditure) Final Score: 4–Stable (high cost of government) The International Monetary Fund reports that Mauritania’s top income tax rate is 55 percent; the marginal rate for the average taxpayer is 0 percent. The World Bank reports that the top corporate tax rate has been reduced from 40 percent in 1999 to 25 percent in 2002. In 2000, according to the African Development Bank, government expenditures equaled 30.3 percent of GDP, up from the 26.3 percent reported in the 2002 Index. Based on the lower corporate tax rate, Mauritania’s income and corporate taxation score is 1 point better this year; however, its government expenditures score is 1 point worse. As a result, Mauritania’s overall fiscal burden of government score is unchanged this year.

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Major imports: machinery and equipment, petroleum products, capital goods, foodstuffs, consumer goods Imports of goods and services: $681.6 million

Foreign direct investment (net): $1.8 million

295

GOVERNMENT INTERVENTION IN THE ECONOMY

PROPERTY RIGHTS

Score: 2–Stable (low level) According to the World Bank, the government consumed 17.3 percent of GDP in 2000. The Economist Intelligence Unit reports that Mauritania has privatized many state-owned enterprises.

Score: 4–Stable (low level of protection) Mauritania’s judicial system is chaotic and sometimes corrupt. According to the U.S. Department of State, “Property rights are protected under the Mauritanian civil code, which is modeled on the French one. However, impartial application of the law by the Mauritanian judiciary has been a problem for some local companies. Mauritania’s banks, for example, have had difficulty getting local courts to enforce banks’ right under loan agreements to seize pledged assets from local merchants.” In addition, “the executive branch exercises significant pressure on the judiciary through its ability to appoint and influence judges [and] poorly educated and poorly trained judges who are susceptible to social, financial, tribal, and personal pressures limit the judicial system’s fairness.”

MONETARY POLICY Score: 2–Stable (low level of inflation) From 1992 to 2001, Mauritania’s weighted average annual rate of inflation was 4.27 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 2–Stable (low barriers) Mauritania encourages foreign investment in all sectors, and the government passed two laws in late 2001 to improve the investment code and encourage investment. Protections include national treatment for foreign investment. Mauritania screens foreign investment; however, according to the U.S. Department of State, “The screening mechanisms are routine and non-discriminatory. They do not serve as an impediment to investment and do not limit competition.” The privatization process, in which foreign participation is encouraged, also has met with success. The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts; capital movements are subject to exchange controls, and payments and transfers are subject to reporting requirements and some restrictions.

BANKING AND FINANCE Score: 2–Better (low level of restrictions) Mauritania’s banking sector has been liberalized and is becoming more competitive; however, it remains underdeveloped, with only seven commercial banks, three credit agencies, and four insurance companies. According to the U.S. Department of State, the government “has sold its equity stake in commercial banks and insurance companies. Consequently, banks have considerably increased their capital and instituted stricter management. As a result, banks began to receive more customer deposits and make more rational credit decisions…. The banks’ financial statements are in compliance with international standards and are annually audited by local accounting firms.” Based on evidence that the government’s role in the financial system is largely supervisory, Mauritania’s banking and finance score is 1 point better this year.

WAGES AND PRICES

REGULATION Score: 4–Stable (high level) In recent years, the government has taken several steps to address Mauritania’s burdensome regulatory structure. In 1997, reports the U.S. Department of State, the government created the “Mauritanian Investment Window, a one-stop shop intended to enable investors to comply with Government requirements at a central location. In 1998, this office was renamed the Investment Promotion Office, and its services were expanded.” By 2001, the office had expedited the approval of approximately 80 industrial projects. Lack of transparency and accountability in some parts of the bureaucracy continue to be problems; small investments and license requests often require the payment of bribes to government employees. According to the U.S. Department of State, “Corruption exists at all levels of government and society. While Mauritania has laws, regulations, and penalties against corruption, enforcement is very limited. As a result, some wealthy business groups and [government] officials receive favors from authorities. The meager salaries of [government] employees at all levels foster corruption.”

BLACK MARKET Score: 4–Stable (high level of activity) Mauritania’s large informal market is confined principally to consumer goods and entertainment products, especially computer software, despite the country’s membership in a number of intellectual property protection agreements. According to the Economist Intelligence Unit, “The low volume of recorded trade with Senegal and Mali belies substantial cross-border commerce, little of which appears in official statistics.”

Score: 3–Stable (moderate level of intervention) The Economist Intelligence Unit reports that the government has removed many price controls. The government maintains a monthly minimum wage and, according to the International Monetary Fund, controls the price of land transportation services. Wages and prices are also controlled through subsidies to businesses and state-owned utilities like electricity. The U.S. Department of State reports that “privatization…is reducing the economic dominance of state-owned companies.”

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2003 Index of Economic Freedom

MAURITIUS Rank: 72 Score: 3.00 Category: Mostly Unfree Trade Policy Fiscal Burden

5 3

Government Intervention 3 Monetary Policy 2

Foreign Investment 3 Banking and Finance 2

The island nation of Mauritius, located in the Indian Ocean, has grown from a sugardependent low-income economy into an increasingly diversified middle-income economy. From 1991 to 2000, according to World Bank data, compound growth in GDP averaged 5.5 percent annually and per capita GDP increased from $3,053 to $4,429 (in constant 1995 U.S. dollars). The government has worked to promote tourism and financial services, and those activities are now equal to or greater than the agricultural and manufacturing sectors in economic importance. Efforts to diversify the agricultural and industrial sectors have fallen short; sugarcane cultivation dominates the agricultural sector and occupies nearly 90 percent of cultivated land area, while textiles and clothing dominate the industrial sector. The World Trade Organization notes that the government’s policy of protecting domestic markets while providing incentives for export enterprises strains government finances. The WTO also reports that Mauritius has become a high-cost producer as wages have outstripped productivity. Efforts to promote higher-paying jobs in information technology have yet to bear fruit. A series of recent corruption scandals and suspected money laundering through Mauritius’s banks threaten to mar the country’s reputation as an anti-corruption haven. Mauritius’s trade policy score is 1 point worse this year; however, its monetary policy score is 1 point better. As a result, Mauritius’s overall score is unchanged this year.

TRADE POLICY Score: 5–Worse (very high level of protectionism) According to the World Bank, Mauritius’s weighted average tariff rate in 1998 (the most recent year for which World Bank data are available) was 23.8 percent, up from the 11.1 percent (based on import duties as a percentage of total imports) reported in the 2002 Index. As a result, Mauritius’s trade policy score is 1 point worse this year. Non-tariff barriers take the form of a large bureaucracy and import licenses on numerous products. According to the U.S. Department of State, “The State Trading Corporation controls imports of rice, flour, petroleum products, and cement, and the Agricultural Marketing Board controls imports of potatoes, onions, corn, and some spices that compete with locally-grown produce.”

Wages and Prices 4 Property Rights 2

Regulation Black Market

Scores for Prior Years: 2002: 3.00 1999: 2.65 1996: n/a

2001: 2.95 1998: n/a 1995: n/a

2000: 2.85 1997: n/a

2000 Data (in constant 1995 US dollars) Population: 1,186,140 Total area: 1,860 sq. km GDP: $5 billion GDP growth rate: 3.6% GDP per capita: $4,429 Major exports: clothing and textiles, sugar, cut flowers, molasses Exports of goods and services: $3.3 billion Major export trading partners: UK 25.8%, France 20.8%, US 16.0%, South Africa 10.9% Major imports: manufactured goods, capital equipment, foodstuffs, petroleum products, chemicals Imports of goods and services: $3.4 billion Major import trading partners: France 20.0%, South Africa 19.0%, India 9.0%, Hong Kong 5.2% Foreign direct investment (net): $231.5 million

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) Mauritius’s top income tax rate is 25 percent; the marginal rate for the average taxpayer is 25 percent. The top corporate income tax rate is 25 percent. In 2000, based on data from the International Monetary Fund, government expenditures equaled 22.8 percent of GDP.

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297

GOVERNMENT INTERVENTION IN THE ECONOMY

WAGES AND PRICES

Score: 3–Stable (moderate level) The World Bank reports that the government consumed 11.8 percent of GDP in 2000. In the same year, according to the International Monetary Fund, Mauritius received 8.97 percent of its total revenues from state-owned enterprises and government ownership of property.

Score: 4–Stable (high level of intervention) According to the U.S. Department of State, “Imports currently subject to price control include rice, flour, cement, cooking gas, onions, iron and steel bars, petroleum products, edible oil, and salted fish. Maximum markups [between 20 percent and 50 percent] apply to refrigerators and certain appliances, tires, pharmaceuticals, sporting goods, tiles, crash helmets, glass panes, plywood, sanitary wares, textbooks, timber, prawns and shrimps, infant milk powder and fresh fruits…. In July 1998, the government passed a new [law] which provides for an extension of price control on several basic commodities, including cornflakes, butter, cheese, cooking oil, canned meat, canned and frozen fish, frozen chicken, milk powder, edible oil, fruit juice and sugar. It also provides for the imposition of maximum markups for goods not currently subject to government control as well as the setting up of a Profiteering Court.” The government also controls key utility services and administratively sets a minimum wage that varies according to sector.

MONETARY POLICY Score: 2–Better (low level of inflation) From 1992 to 2001, Mauritius’s weighted average annual rate of inflation was 5.31 percent. Due to a scoring inaccuracy in the 2002 Index, Mauritius’s monetary policy score is 1 point better this year.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) Mauritius generally welcomes foreign investment and has a transparent and well-defined foreign investment code. Foreigners may not own land without prior permission from the Prime Minister and the Minister of Internal Affairs. According to the U.S. Department of State, “The government has no economic or industrial strategy that discriminates against foreign investors. A foreign investor in export-oriented manufacturing is permitted 100% equity, although the government encourages local participation. Foreign participation may be limited to 50% in investments serving the domestic market, and is generally not encouraged in areas where Mauritius has already mastered the technology.” The approval process for foreign investment can take a significant amount of time.

BANKING AND FINANCE Score: 2–Stable (low level of restrictions) Mauritius has an open, efficient, and competitive banking system. The Bank of Mauritius serves as the central bank in overseeing domestic and offshore banks and setting monetary policies. There are 10 commercial banks in Mauritius, of which three are locally owned and seven are foreign-owned. The Mauritius Commercial Bank Ltd. and the State Bank of Mauritius Ltd., both of which also have overseas branches, dominate the local market. The U.S. Department of State reports that banks may provide “short-term finance, term loans of five to seven years, discounting of export bills, letters of credit, guarantees, and post-shipment finance for exporters at preferential rates.” The state-controlled Development Bank of Mauritius Ltd. provides loans to large and medium-sized enterprises and concessionary lending for small-scale enterprises. Eleven offshore banks have taken advantage of Mauritius’s efforts to become a regional financial center offering merchant banking, insurance, fund management, and securities services. Mauritius has come under Organisation for Economic Co-operation and Development scrutiny because of suspected money laundering.

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PROPERTY RIGHTS Score: 2–Stable (high level of protection) Expropriation of property is unlikely. The judiciary is independent and provides citizens with a fair trial. The Economist Intelligence Unit reports that the “legal system is based on English common law and the Code Napoléon…[and] legal or constitutional matters on which judgment cannot be reached are still referred to the judicial committee of the Privy Council in the UK.” According to the U.S. Department of State, “The domestic legal system is generally non-discriminatory and transparent.” In addition, “corruption exists but is much less than what is encountered elsewhere in Africa.”

REGULATION Score: 3–Stable (moderate level) According to the U.S. Department of State, “To streamline the bureaucratic procedures, the government has recently set up a Board of Investment, which acts as a one-stop-shop for investors.” However, regulations are burdensome, and the weight of bureaucracy can cause significant delays. There is some corruption, but the U.S. Department of State reports that it falls below levels seen in the rest of Africa, and the government has made anti-corruption efforts a priority. The government has revised some regulations—for example, in financial services—in an effort to improve the business environment.

BLACK MARKET Score: 3–Stable (moderate level of activity) Transparency International’s 2001 score for Mauritius is 4.5. Therefore, Mauritius’s black market score is 3 this year.

2003 Index of Economic Freedom

MEXICO Mexico City

Trade Policy Fiscal Burden

2 3.5

Government Intervention 3 Monetary Policy 3

Foreign Investment 3 Banking and Finance 2

The election of Vicente Fox as president on July 1, 2000, ended seven decades of rule by the Institutional Revolutionary Party, but Fox’s National Action Party still lacks a majority in Congress. The marked difference between the fiscal reform proposed by the government and the version finally approved by Congress illustrates this tension. The conflict between Fox and Congress delays crucial reforms, frustrates the public, and undermines Fox’s ability to govern. The situation is not likely to change until after the 2003 federal mid-term elections. In 2001, GDP declined by 0.3 percent—the first contraction since the 1995 peso crisis—largely as a result of the U.S. economic slowdown. According to the Economist Intelligence Unit, if the U.S. recovery proves sustainable, the Mexican economy will pick up in 2002, since private consumption has remained strong; for economic progress to be sustained, however, the government must further liberalize the economy by privatizing the energy sector and shrinking the bureaucracy in order to reduce corruption and facilitate small and medium-size business activity. The government has recently announced a plan to allow small and medium-size businesses as well as individuals providing services to obtain a working license in one business day. If implemented successfully, this plan will reduce the bureaucratic burden on businesses, thereby allowing millions currently working in the informal economy to formalize their businesses and contribute significantly to Mexico’s sustained economic growth. Mexico’s government intervention score is 1 point worse this year; however, its monetary policy and regulation scores are both 1 point better. As a result, Mexico’s overall score is 0.10 point better this year.

TRADE POLICY Score: 2–Stable (low level of protectionism) Based on data from the International Monetary Fund and the Economist Intelligence Unit, Mexico’s average tariff rate in 2000 was 2 percent (based on import duties as a percent of total imports). According to the World Trade Organization, “Mexico applies quotas on several agricultural products, with most quotas reserved for specific countries.” The U.S. Trade Representative reports that “U.S. exporters continue to complain about Mexican customs administration procedures, including the lack of sufficient prior notification of procedural changes; inconsistent interpretation of regulatory requirements for imports at different border posts; requirements that particular goods enter only through certain ports; and discriminatory and uneven enforcement of Mexican standards and labeling rules.”

Rank: Score: Category:

56 2.80 Mostly Free

Wages and Prices 2 Property Rights 3

Regulation 3.5 Black Market 3.5

Scores for Prior Years: 2002: 2.90 1999: 3.20 1996: 3.10

2001: 2.95 1998: 3.30 1995: 2.85

2000: 3.00 1997: 3.25

2001 Data (in constant 1995 US dollars) Population: 97,483,000 Total area: 1,972,550 sq. km GDP: $373.4 billion GDP growth rate: –0.3% GDP per capita: $3,830 Major exports: manufactured goods, oil and oil products, silver, fruits, vegetables, coffee, cotton Exports of goods and services: $158 billion Major export trading partners: US 88.7%, Canada 2.0%, Japan 0.6% Major imports: metal-working machines, steel mill products, agricultural machinery, electrical equipment, car parts for assembly, repair parts for motor vehicles, aircraft and aircraft parts Imports of goods and services: $187.3 billion Major import trading partners: US 80.4%, Japan 4.1%, Germany 3.6%, Canada 2.5% Foreign direct investment (net): $22.2 billion

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 3.5–Better (high tax rates) Score—Government Expenditures: 3–Stable (moderate level of government expenditure) Final Score: 3.5–Stable (high cost of government) Mexico’s top income tax rate is 40 percent; the marginal rate for the average taxpayer is 17 percent, down from the 35 percent reported in the 2002 Index due to an adjustment in

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individual tax brackets. The top corporate tax rate is 35 percent. In 2001, based on data from the Economist Intelligence Unit, government expenditures equaled 22.6 percent of GDP. Based on the lower marginal tax rate, Mexico’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, which is unchanged.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Worse (moderate level) The World Bank reports that the government consumed 11 percent of GDP in 2000, up from the 10 percent reported in the 2002 Index. As a result, Mexico’s government intervention score is 1 point worse this year. In 1999, according to the International Monetary Fund, the government received 9.17 percent of its revenues from state-owned enterprises. This figure, however, does not appear to include government revenues from state-owned companies in the oil sector; in 2000, according to Business Mexico, Mexico received 37 percent of its revenues from the state-owned oil company PEMEX.

acquired Banamex, making it Mexico’s largest bank. The government also has increased its transparency and efficiency by adopting U.S. GAAP-based accounting standards and has updated its bankruptcy law to allow companies to use their own capital, such as real estate, machinery, or a brand name, as a credit guarantee.

WAGES AND PRICES Score: 2–Stable (low level of intervention) According to the Economist Intelligence Unit, “Mexico maintains suggested retail prices for medicines and limits increases to a percentage of the amount that producers invest in research and development.” The government also controls prices through some state-owned utilities and the energy sector. Mexico has a minimum wage, but the Economist intelligence Unit reports that “the established minimum wage is generally considered a wage ceiling instead of a wage floor.”

PROPERTY RIGHTS

Score: 3–Better (moderate level of inflation) From 1992 to 2001, Mexico’s weighted average annual rate of inflation was 8.6 percent, down from the 12.44 percent from 1991 to 2000 reported in the 2002 Index. As a result, Mexico’s monetary policy score is 1 point better this year.

Score: 3–Stable (moderate level of protection) The threat of expropriation is low. According to the U.S. Department of State, “The judiciary is generally independent; however, on occasion it has been influenced by the executive branch, particularly at the state level…. Corruption and impunity are serious problems and tend to benefit the wealthy and powerful.” President Fox has promised reforms in this area, but progress has been slow.

CAPITAL FLOWS AND FOREIGN INVESTMENT

REGULATION

Score: 3–Stable (moderate barriers) According to the U.S. Department of State, most investments do not require approval; but only NAFTA partners receive domestic treatment, and most foreign investors may own 100 percent of a Mexican business only if certain conditions are satisfied. Industries reserved for the Mexican government are petroleum and hydrocarbons, petrochemicals, electricity, nuclear energy, radioactive materials, telecommunications, postal service, and control and supervision of ports and airports. State control of the most significant sectors inhibits foreign investment. Foreign investment in retail trade in gasoline or liquefied gas, broadcasting, ground passenger transport, tourism, credit unions, development banks, and certain professional services is prohibited. There are restrictions against majority foreign ownership in over 30 additional businesses. Foreigners may invest in border and coastal property only through bank-run trusts. Most payments, transactions, and transfers are permissible. The Economist Intelligence Unit reports that “foreign investment has been simplified by cutting legal and administrative red tape.”

Score: 3–Better (moderate level) The government of Mexico has taken an important step to reduce the bureaucratic burden on opening a business. According to the Secretaría de Economía de Mexico (Mexico’s Ministry of Economy), as of April 1, 2002, people can open a business or request a license in one business day. Applicants can submit a form along with an ID, birth certificate, and utility bill to prove their address and on the next business day have a license to operate a business. The primary beneficiaries are businesses carrying out any of the 685 activities officially identified as involving “low public risk.” The government estimates that “low risk businesses” entail 80 percent of the most frequent small and medium-size enterprise activities. If implemented successfully, this new law could do much to reduce bureaucratic corruption and formalize Mexico’s large underground economy. The regulatory burden is still significant for larger investments, which have to comply with, for example, more complex environmental impact assessments. Labor legislation is still rigid. Based on the new law making it easier to open a business, Mexico’s regulation score is 1 point better this year.

MONETARY POLICY

BANKING AND FINANCE Score: 2–Stable (low level of restrictions) Mexico’s banking sector—44 banks, including 13 under government intervention—is becoming more competitive and open to foreign investment. According to the Economist Intelligence Unit, “In mid2001 foreign financial institutions controlled or participated in 30 of the 32 private banks operating in Mexico.” In May 2001, Citigroup

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BLACK MARKET Score: 3.5–Stable (high level of activity) Transparency International’s 2001 score for Mexico is 3.7. Therefore, Mexico’s black market score is 3.5 this year.

2003 Index of Economic Freedom

MOLDOVA Chisinau

Trade Policy Fiscal Burden

2 3.5

Government Intervention 3 Monetary Policy 4

Rank: 92 Score: 3.20 Category: Mostly Unfree Foreign Investment 3 Banking and Finance 3

Moldova is the poorest country in Europe. A reform-oriented economic policy implemented by the previous government, which included successful privatization of agricultural land, resulted in Moldova’s joining the World Trade Organization in 2001. The election of communist Vladimir Voronin as president in April 2001 has jeopardized the reform process, although the government has passed legislation allowing privatization of the wine and tobacco sectors and has managed to preserve the agricultural liberalization introduced by the previous cabinet. In 2002, the International Monetary Fund approved Moldova’s tightened budget. Moldova maintains a non-discriminatory investment regime, allows foreigners to purchase non-agricultural land, and has a customs administration based on European Union standards. However, the unresolved conflict around the separatist Trans–Dniester region, which in the early 1990s suffered from civil war, constrains the country’s stability and economic development. Russia used to play an active role in the conflict, initially backing the Trans–Dniester secession, but now is skeptical about mediating peace talks, although its military remains on Moldova’s territory. Moldova is excessively reliant on the former Soviet export market; the overall share of exports to former Soviet states in 2001 accounted for 61 percent, far exceeding exports to EU countries. Moldova’s government intervention score is 0.5 point worse this year; however, both its trade policy and monetary policy scores are 1 point better. As a result, Moldova’s overall score is 0.15 point better this year.

TRADE POLICY Score: 2–Better (low level of protectionism) According to the World Bank, Moldova’s weighted average tariff rate in 2000 (the most recent year for which World Bank data are available) was 2.3 percent, down from the 4.5 percent reported in the 2002 Index. As a result, Moldova’s trade policy score is 1 point better this year. According to the U.S. Department of State, there are significant non-tariff barriers.

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 2–Better (low tax rates) Score—Government Expenditures: 5–Worse (very high level of government expenditure) Final Score: 3.5–Stable (high cost of government) Both the U.S. Agency for International Development and the Economist Intelligence Unit report that Moldova cut taxes in 2001. Moldova’s top income tax rate is 25 percent, down from the 28 percent reported in the 2002 Index; the marginal rate for the average taxpayer is 10 percent. The top corporate tax rate is 25 percent, down from the 28 percent reported in the 2002 Index. More precise data from the European Bank for Reconstruction and Development indicate that in 2000, gov-

Chapter 6: The Countries

Wages and Prices 3 Property Rights 3

Regulation 4.0 Black Market 3.5

Scores for Prior Years: 2002: 3.35 1999: 3.30 1996: 3.40

2001: 3.60 1998: 3.40 1995: 3.90

2000: 3.20 1997: 3.40

2000 Data (in constant 1995 US dollars) Population: 4,282,000 Total area: 33,843 sq. km GDP: $2.7 billion GDP growth rate: 1.9% GDP per capita: $636 Major exports: foodstuffs, wine, tobacco, textiles and footwear, machinery Exports of goods and services: $1.6 billion Major export trading partners: Russia 44.6%, Romania 8.2%, Italy 7.7%, Germany 7.6%, Ukraine 7.6% Major imports: mineral products and fuel, machinery and equipment, chemicals, textiles Imports of goods and services: $2.4 billion Major import trading partners: Romania 16.3%, Ukraine 14.2%, Russia 13.2%, Germany 10.8%, Italy 5.7% Foreign direct investment (net): $116 million

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ernment expenditures equaled 30.6 percent of GDP rather than the 26.2 percent reported for the same year in the 2002 Index. Based on recent tax cuts, Moldova’s income and corporate taxation score is 0.5 point better this year; however, this is offset by the higher level of government expenditure. As a result, Moldova’s overall fiscal burden of government score is unchanged this year.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Worse (moderate 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, Moldova received 10.78 percent of its revenues from state-owned enterprises and government ownership of property, up from the 6.38 percent reported in the 2002 Index. As a result, Moldova’s overall fiscal burden of government score is 0.5 point worse this year.

Comerciala Romana (BCR), and Banca Turco-Romana (BTR)– Moldova. One bank—Banca de Economii a Moldovei—is statecontrolled. The central bank has been increasing the minimum capital requirements, which could force the consolidation or closure of some smaller banks. Moldova opened its insurance market to foreign competition in 1999, and there were approximately 40 companies operating in 2001. The former state-owned insurance company, Asito, continues to dominate the market with more than 50 percent of commercial business and 90 percent of individual business.

WAGES AND PRICES Score: 3–Stable (moderate level of intervention) The government influences prices through the country’s large state-owned sector. Moldova has two legal monthly minimum wages—one wage for state employees and another, higher wage for the private sector.

MONETARY POLICY

PROPERTY RIGHTS

Score: 4–Better (high level of inflation) Between 1992 and 2001, Moldova’s weighted average annual rate of inflation was 18.13 percent, down from the 32.5 percent from 1992 to 2000 reported in the 2002 Index. As a result, Moldova’s monetary policy score is 1 point better this year.

Score: 3–Stable (moderate level of protection) Moldova has passed laws guaranteeing private property and strengthening the judiciary. The U.S. Department of State reports that the “legal system has improved in recent years. Moldova has a documented and consistently applied commercial law.” Nevertheless, much more needs to be done. According to the U.S. Department of State, “The Constitution provides for an independent judiciary; however, the executive branch has exerted undue influence on the judiciary. Many observers believe that arrears in salary payments also make it difficult for judges to remain independent from outside influences and free from corruption.”

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) Moldovan law provides guarantees on the repatriation of profits and is based on the principle of nondiscrimination between foreign and local investors. There is no official screening of foreign investment, but companies with foreign equity exceeding a set limit must be approved by the government. Foreign investors may not own agricultural land. A substantial stateowned sector presents a practical barrier to foreign investment, especially in sectors in which foreign investors would be most likely to take an interest. The only limits on foreign investment are those related to national security, prevention of monopolies, environmental protection, public health, and threats to the social order or moral norms. Political resistance has undermined International Monetary Fund prescriptions on privatization. The IMF reports that both residents and nonresidents may hold foreign exchange accounts. Payments and transfers require supporting documentation and approval of the National Bank of Moldova if they exceed specified amounts. Most capital transactions require approval by or registration with the National Bank of Moldova.

REGULATION Score: 4–Stable (high level) According to the U.S. Department of State, “Bureaucratic procedures are not always transparent and red tape often makes processing unnecessarily long.” In addition, although Moldova maintains anti-corruption laws, they “are not effectively enforced and corruption exists at an advanced level.”

BLACK MARKET Score: 3.5–Stable (high level of activity) Transparency International’s 2001 score for Moldova is 3.1. Therefore, Moldova’s black market score is 3.5 this year.

BANKING AND FINANCE Score: 3–Stable (moderate level of restrictions) There are no official barriers to founding foreign banks or branches in Moldova. The banking sector includes 20 commercial banks, which are permitted to offer different services based on a multi-tiered licensing system. Foreign investors have a controlling stake in five banks: Eximbank, Businessbank, International Commercial Bank of Greece–Moldova, Banca

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2003 Index of Economic Freedom

MONGOLIA Ulan Bator

Trade Policy Fiscal Burden

2 4.5

Government Intervention 2.5 Monetary Policy 3

Rank: 72 Score: 3.00 Category: Mostly Unfree Foreign Investment 3 Banking and Finance 3

Mongolia relies heavily on its rural economy, which accounts for one-third of GDP. The loss of 20 percent of the country’s livestock herds in 2000–2001 because of drought and an epidemic of foot-and-mouth disease kept economic growth to 1.1 percent in 2001. The International Monetary Fund promised assistance in return for divestiture of Mongolia’s state-owned enterprises by 2004; but the government failed to privatize even one large state-owned enterprise in 2001, and the prospects for its 2002 privatization program to sell off 20 state firms are uncertain. The government also promised to use a private sector–led development model, but entrepreneurs continue to complain that corporate taxes are unreasonable, and the 37.4 annual interest rate is both too high and still rising. On the positive side, the government has revised the 1993 foreign investment law and the 1997 mineral law to attract more foreign investment. It also has eliminated a 10 percent value-added tax on gold exports and is restructuring its energy sector in preparation for future deregulation, including the expansion of the energy grid to incorporate provinces that currently are not electrified. Mongolia’s wages and prices score is 1 point better this year; however, its trade policy and fiscal burden of government scores are both 1 point worse. As a result, Mongolia’s overall score is 0.10 point worse this year, causing Mongolia to be classified as a mostly unfree economy.

TRADE POLICY Score: 2–Worse (low level of protectionism) According to the U.S. International Trade Administration, Mongolia has an “acrossthe board import tariff of 5 percent,” up from the average rate of 1.12 percent reported in the 2002 Index. Based on newly available tariff data, Mongolia’s trade policy score is 1 point worse this year. The U.S. Department of State reports that Mongolia has no quotas or onerous licensing requirements.

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 3.5–Better (high tax rates) Score—Government Expenditures: 5–Worse (very high level of government expenditure) Final Score: 4.5–Worse (very high cost of government) According to Arthur Andersen, Mongolia has a top income tax rate of 40 percent and a marginal rate of 10 percent for the average taxpayer. The top corporate tax rate is 40 percent. Data from the Economist Intelligence Unit and the Bank of Mongolia indicate that in 2000, government expenditures equaled 39.5 percent of GDP, substantially higher than the 23 percent reported in the 2002 Index. Based on new data on the marginal income tax rate, Mongolia’s income and corporate taxation score is 0.5 point better this year; however, the country’s government expenditures score is 2 points worse. As a result, Mongolia’s overall fiscal burden of government score is 1 point worse this year.

Chapter 6: The Countries

Wages and Prices 2 Property Rights 3

Regulation Black Market

4 3

Scores for Prior Years: 2002: 2.90 1999: 3.25 1996: 3.50

2001: 3.00 1998: 3.15 1995: 3.33

2000: 3.15 1997: 3.35

2000 Data (in constant 1995 US dollars) Population: 2,398,000 Total area: 1,565,000 sq. km GDP: $1.1 billion GDP growth rate: 1.1% GDP per capita: $459 Major exports: copper, livestock, animal products, cashmere, wool, hides, other nonferrous metals Exports of goods and services: n/a Major export trading partners: China 58.9%, US 19.9%, Russia 9.7%, Italy 3.1%, UK 2.4%, Japan 1.7% Major imports: machinery and equipment, fuels, food products, industrial consumer goods, chemicals, building materials, sugar, tea Imports of goods and services: n/a Major import trading partners: Russia 33.6%, China 20.5%, Japan 11.9%, South Korea 9.0%, US 4.6% Foreign direct investment (net): $22 million

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GOVERNMENT INTERVENTION IN THE ECONOMY

WAGES AND PRICES

Score: 2.5–Stable (moderate level) The World Bank reports that the government consumed 20 percent of GDP in 2000. In the same year, according to the International Monetary Fund, Mongolia received 5.55 percent of its total revenues from state-owned enterprises and government ownership of property.

Score: 2–Better (low level of intervention) The U.S. Department of State reports that the government of Mongolia intervenes in the market to adjust prices for grain and other commodities, but it also liberalized energy prices in 1996. A minimum wage is enforced by the Ministry of Social Welfare and Labor. Based on the evidence that the market largely determines prices, Mongolia’s wages and prices score is 1 point better this year.

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, Mongolia’s weighted average annual rate of inflation was 9.66 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) Mongolian law allows completely foreign-owned businesses and local subsidiaries, joint ventures with Mongolian businesses or investors, foreign purchase of shares in an existing Mongolian enterprise, and acquisition of rights to natural resources for foreign investors. Foreign investors are accorded non-discriminatory treatment and may participate in privatization of state-owned property and enterprises. There is no screening of foreign investment, and no sectors are closed to foreign investment. Mongolian law provides for the protection of private property and foreign investments from government expropriation. However, the investment climate is hindered by corruption and a lack of transparency. Foreigners may own land but must register it with the State Real Estate Registry. According to the International Monetary Fund, residents may hold foreign exchange accounts in authorized banks and may use them for any purpose. Non-residents may hold foreign exchange accounts as long as they register with the State Registry. There are few restrictions on payments, transfers, and transactions. The issuing of capital market securities, money market instruments, collective investment securities, and derivatives is prohibited. Most credit and loan operations must be registered with the central bank.

BANKING AND FINANCE Score: 3–Stable (moderate level of restrictions) Mongolia’s financial sector remains underdeveloped. The licenses of seven insolvent banks were revoked in 1999, and six of the remaining 12 banks are owned by the state. According to the U.S. Department of State, “Mortgages do not really exist in Mongolia because of the weak banking sector. With annual interest rates of around 35 percent, few want or can take out a mortgage. Many businesses try to use their fixed assets as security for various business transactions. One problem with accepting the deed to property as security is that there is no registry of such liabilities, thus no way to tell whether that property has been offered to someone else as security for some transaction.” Several private and savings credit unions are emerging to fill the need for small community banking.

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PROPERTY RIGHTS Score: 3–Stable (moderate level of protection) Expropriation of existing private property is unlikely. However, the enforcement of laws protecting private property is inefficient, and the judiciary may be influenced by other branches. According to the U.S. Department of State, “The President…has strong influence on the judiciary through the power to appoint members to both the Supreme Court and Constitutional Court.” In addition, “[one of] the political problems most affecting business development in Mongolia [is] the need to strengthen the rule of law…. Reform within the legal and judicial sectors that is sorely needed as a foundation for business has been delayed and deferred…. [C]orruption…is increasingly an obstacle to honest business and efficiency.” Judges do not fully understand modern business practices.

REGULATION Score: 4–Stable (high level) The vast number of regulations implemented over the past several years, combined with the continuing restructuring of the government, imposes a sizeable burden on business. The U.S. Department of State identifies “corruption in the bureaucracy” as one of the typical problems affecting business development.

BLACK MARKET Score: 3–Stable (moderate level of activity) Mongolia’s government buys many goods through its complex procurement program, and this distorts the prices of food commodities. The result is a black market for these and other government-regulated goods. Smuggling—for example, the transfer of Russian medicine over the border—also poses a problem. According to the U.S. Department of State, “the informal sector is emerging as a major engine of growth and employment and may account for 13 percent of the GDP.”

2003 Index of Economic Freedom

MOROCCO Trade Policy Fiscal Burden

5 4

Government Intervention 2.5 Monetary Policy 1

Foreign Investment 2 Banking and Finance 3

Morocco is a constitutional monarchy that gained its independence from France in 1956 and has been liberalizing its economy since the early 1980s. Gradual progress has been made in privatizing some state enterprises. King Mohammed VI, who succeeded his father in 1999, has proved to be popular and has surrounded himself with advisers favorable to economic reform, expanded civil rights, and a campaign against corruption. The new king has moved cautiously to promote political and economic reforms. Parliamentary elections slated for September 2002 could replace the center–left seven-party governing coalition with another center–left coalition that is less unwieldy. Privatization of state-owned enterprises is expected to continue at a gradual pace, but most of the funds from the sale of state firms will be used to cover government expenditure and debt repayments, leaving little for productive investment. Morocco’s fiscal burden of government and government intervention scores are both 0.5 point better this year. As a result, Morocco’s overall score is 0.10 point better this year, causing Morocco to be classified as a mostly free economy.

TRADE POLICY Score: 5–Stable (very high level of protectionism) According to the World Bank, Morocco’s weighted average tariff rate in 2000 (the most recent year for which World Bank data are available) was 25.8 percent. Nontariff barriers take the form of inconsistent customs procedures. The U.S. Department of State reports that “cumbersome customs administration and procedures…impose costs and delays on firms currently involved in international trade and defer others potentially interested in entering the trade area.”

FISCAL BURDEN OF GOVERNMENT 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 (very high cost of government) Morocco’s top income tax rate is 44 percent; the marginal rate for the average taxpayer is 0 percent. The top corporate tax rate is 35 percent. (For banks and insurance companies, the rate is 39.6 percent. The general rate of 35 percent applied to business was used to score this factor.) In 2000, based on data from the International Monetary Fund, government expenditures equaled 34.9 percent of GDP. Based on a clarification in the methodology used to calculate the income tax portion of this factor, Morocco’s overall fiscal burden of government score is 0.5 point better this year.

Chapter 6: The Countries

Rank: Score: Category:

68 2.95 Mostly Free

Wages and Prices 2 Property Rights 4

Regulation Black Market

3 3

Scores for Prior Years: 2002: 3.05 1999: 2.85 1996: 2.85

2001: 2.70 1998: 3.05 1995: 2.95

2000: 2.75 1997: 2.90

2000 Data (in constant 1995 US dollars) Population: 28,705,000 Total area: 446,550 sq. km GDP: $38.7 billion GDP growth rate: 0.8% GDP per capita: $1,370 Major exports: phosphates and fertilizers, food and beverages, minerals Exports of goods and services: $12 billion Major export trading partners: France 25.9%, Spain 9.6%, UK 7.9%, Italy 5.6% Major imports: semi-processed goods, machinery and equipment, food and beverages, consumer goods, fuel Imports of goods and services: $16 billion Major import trading partners: France 25.3%, Spain 10.8%, Italy 5.9%, Germany 5.8% Foreign direct investment (net): $137 million

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GOVERNMENT INTERVENTION IN THE ECONOMY Score: 2.5–Better (moderate level) The World Bank reports that government consumption was 19.1 percent of GDP in 2000. In 1999, according to the International Monetary Fund, the government received 7.31 percent of its total revenues from state-owned enterprises and government ownership of property. Based on new data on revenues from stateowned enterprises, Morocco’s government intervention score is 0.5 point better this year.

MONETARY POLICY Score: 1–Stable (very low level of inflation) Between 1992 and 2001, Morocco’s weighted average annual rate of inflation was 1 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 2–Stable (low barriers) Morocco treats foreign-owned and locally owned investments equally and permits 100 percent foreign ownership. There is no screening requirement for foreign investment. According to the U.S. Department of State, “Foreign investment is now permitted in most sectors. Phosphate mining and tobacco marketing are reserved for the state and are closed to foreign and domestic investment, although the government is considering plans to offer a concession on tobacco marketing. Foreign investment is permitted in the agriculture sector, although foreigners are prohibited from owning agricultural land. Majority ownership in the insurance sector is effectively prohibited.” The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts, subject to restrictions and requirements. Personal payments, transfer of interest, and travel payments are subject to limits, documentation requirements, and approval in some cases. Real estate transactions are subject to the investment regime. A recent edict by the king established 16 regional investment centers, headed by an appointed wali (governor), to circumvent bureaucratic opposition and stimulate new investment by consolidating the investment process, coordinating land purchases, offering incentives, and providing land with clear title.

BANKING AND FINANCE Score: 3–Stable (moderate level of restrictions) The bank reform law of 1993 clarified lines of responsibility for oversight and supervision of the banking and financial sector, laid out penalties for violating banking regulations, established a depositors guarantee fund, and liberalized credit allocation. According to the U.S. Department of State, “The banking system is still used by the government to channel domestic savings to finance government debt, and the banks are required to hold a part of their assets in bonds paying below market interest rates.” The Economist Intelligence Unit reports that in 2001, Morocco had 14 banks in addition to a number of credit agencies, leasing companies, and government-owned financial institutions. Foreigners may participate freely in the local stock exchange, but commercial banks must have majority Moroccan ownership. The

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government has approved the privatization of three state banks— Banque Centrale Populaire, Banque Nationale pour le Development Economique, and Credit Immobilier et Hotelier—but progress has been slow.

WAGES AND PRICES Score: 2–Stable (low level of intervention) According to the U.S. Department of State, “Commodity prices are freely determined by the market without government involvement, with the exception of staple commodities such as sugar and subsidized flour. In November 2000, Morocco liberalized completely the retail prices and phased out the subsidy on vegetable oil. Further liberalization of other sectors (flour and sugar) is likely to occur over the next few years as the [government] pursues its policy to cut down its budget deficit and improve rural development prospects.” The government also influences prices through the country’s many state-owned enterprises. Morocco has one minimum wage for the industrial sector and another for the agricultural sector, but they are not observed in the extensive informal sector.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) Morocco’s constitution provides for an independent judiciary, although ultimate authority rests with the king. According to the U.S. Department of State, “the judiciary historically has been subject to corruption and Interior Ministry influence. The government is in the process of implemented reforms, but so far there is no evidence of changes in the justice system.” A survey among businesses that was conducted by the American Chamber of Commerce in Morocco to assess the business environment revealed that corruption in the legal system is regarded as one of the main impediments to doing business in Morocco.

REGULATION Score: 3–Stable (moderate level) Regulations and bureaucracy remain significantly burdensome despite the government’s attempts at reform. According to the U.S. Department of State, “Deficiencies remain in other areas…such as the labor law, which limits firms’ ability to dismiss workers. Even in areas where the regulations are favorable on paper, there are often problems in practice. Government procedures are not always transparent, efficient or quick. Routine permits, especially those required by local governments, can be difficult to obtain.” The same source also reports that “corruption exists and…companies have at times identified it as an obstacle to doing business in Morocco.”

BLACK MARKET Score: 3–Stable (moderate level of activity) Morocco’s laws governing intellectual property are fairly comprehensive, although enforcement of these laws in general is deficient. Trademark violations, mainly in the clothing industry, are another problem. The American Chamber of Commerce in Morocco reports that smuggling is significant.

2003 Index of Economic Freedom

MOZAMBIQUE Rank: 94 Score: 3.25 Category: Mostly Unfree

Maputo Trade Policy Fiscal Burden

4 3.5

Government Intervention 3 Monetary Policy 3

Foreign Investment 2 Banking and Finance 2

Over the past 15 years, the government of Mozambique has repudiated its former Marxist policies, relinquishing its grip on many state-controlled enterprises and encouraging entrepreneurs to take advantage of opportunities in agriculture, hydroelectric power, and transportation presented by a freer economic system. Liberalization, privatization, and relative peace and stability have led to strong, stable economic growth over the past decade and have made Mozambique a model for economic development and post-war recovery. However, much of the population remains in poverty, unemployment and underemployment are high, and approximately 80 percent of the people are engaged in small-scale agriculture. Corruption is prevalent in the government, and much economic activity occurs outside of the formal sector. The country has largely recovered from catastrophic flooding that displaced thousands and crippled the infrastructure; economic indicators reflected strong growth during the second half of 2001. Mozambique has the potential to reap economic benefits by exploiting its energy resources (hydropower, coal, and gas) and serving as a regional transport hub for landlocked neighbors like Malawi and Zimbabwe. From 1991 to 2000, according to World Bank data, compound growth in GDP averaged 5.6 percent annually and per capita GDP increased from $143 to $191 (in constant 1995 U.S. dollars). Mozambique’s banking and finance score is 1 point better this year; however, its trade policy score is 1 point worse, and its monetary policy score is 2 points worse. As a result, Mozambique’s overall score is 0.20 point worse this year.

TRADE POLICY Score: 4–Worse (high level of protectionism) According to the World Bank, Mozambique’s weighted average tariff rate in 1997 (the most recent year for which World Bank data are available) was 17.4 percent, up from the 13.8 percent reported in the 2002 Index. As a result, Mozambique’s trade policy score is 1 point worse this year. Most non-tariff barriers have been eliminated, and most customs procedures have been privatized.

FISCAL BURDEN OF GOVERNMENT

Wages and Prices 3 Property Rights 4

Regulation Black Market

Scores for Prior Years: 2002: 3.05 1999: 3.90 1996: 4.10

2001: 3.35 1998: 4.10 1995: 4.20

2000: 3.80 1997: 4.00

2000 Data (in constant 1995 US dollars) Population: 17,691,000 Total area: 801,590 sq. km GDP: $3.5 billion GDP growth rate: 1.6% GDP per capita: $191 Major exports: prawns, cashews, cotton, sugar, citrus, timber, bulk electricity Exports of goods and services: $631.6 million Major export trading partners: Zimbabwe 17.9%, South Africa 14.6%, Portugal 11.5%, Spain 10.7% Major imports: machinery and equipment, mineral products, chemicals, metals, foodstuffs, textiles Imports of goods and services: $1.5 billion Major import trading partners: South Africa 51.5%, Portugal 5.8%, US 3.8%, Zimbabwe 2.9% Foreign direct investment (net): $127.6 million

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) Mozambique’s top income tax rate is 20 percent; the marginal rate for the average taxpayer is 15 percent. The top corporate income tax rate is 35 percent. In 2000, according to the African Development Bank, government expenditures equaled 28.4 percent of GDP.

Chapter 6: The Countries

4 4

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GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Stable (moderate level) The World Bank reports that the government consumed 11.5 percent of GDP in 2000. According to the U.S. Department of State, “Only 11 large state-owned or operated companies remain, including the national airline, telephone, electricity, insurance, oil and gas exploration, port and rail, airports, water supply, and fuel distribution companies. While these parastatals continue to dominate their respective sectors, preparations for privatization and/or sector liberalization have begun.”

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, Mozambique’s weighted average annual rate of inflation was 9.97 percent, up from the 2.57 percent from 1990 to 1998 reported in the 2002 Index. These data allow a more extensive measure of Mozambique’s inflation as they incorporate relatively high inflation rates of 12.7 percent in 2000 and 9 percent in 2001. As a result, Mozambique’s monetary policy score is 2 points worse this year.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 2–Stable (low barriers) Most sectors of Mozambique’s economy are open to 100 percent foreign investment, but lengthy registration procedures can be problematic for both domestic and foreign investors. Some restrictions remain in effect—outright private ownership of land is prohibited, for example, and mining and management contracts are subject to specific performance requirements—but the main impediments to foreign investment are such problems as skill shortage, poor infrastructure, bureaucracy, and corruption. According to the U.S. Department of State, “Comprehensive investment legislation and related sector laws have simplified the investment process and greatly facilitated the entry and exit of foreign capital.” Mozambique allows 100 percent repatriation of profits and retention of earned foreign exchange in domestic accounts. The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts. Payments and transfers are subject to maximum amounts above which they must be approved by the central bank. Capital and money market transactions must be approved by the central bank.

BANKING AND FINANCE Score: 2–Better (low level of restrictions) The government has been dealing with the banking crisis following the insolvency of the two privatized banks: Banco Comercial de Mocambique and Banco Austral. The bank failures were caused by extensive non-performing loans made to politically connected individuals and then inherited with privatization in the late 1990s. Government influence over the banking sector is diminishing, and competition is growing as more foreign banks enter the country. After 1992, according to the Economist Intelligence Unit, “Foreign banks were allowed to invest in Mozambique; interest rates were deregulated; and the regulatory and commercial ac-

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tivities of the central bank were separated…. The transformation of the banking sector has been rapid…. Several banks are diversifying their products and services as competition in the market increases.” Although the system remains weak and supervision needs strengthening, foreign banks may freely enter Mozambique, and many have purchased domestic banks. Overall, government involvement in the banking sector has been minimal since the sale of Banco Austral. As a result, Mozambique’s banking and finance score is 1 point better this year.

WAGES AND PRICES Score: 3–Stable (moderate level of intervention) Remaining price controls apply to some rents, fuels, and public utilities. According to the U.S. Department of State, “As part of Mozambique’s traditional culture…as well as its socialist legacy, land is owned by the state. It in turn leases parcels to individuals and companies for up to 50 years, with an option to renew.” Mozambique has a minimum wage for industry and for agriculture, set by ministerial decree based on the advice of annual tripartite (labor unions, government, and employers) meetings.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) Outright private ownership of land is prohibited in Mozambique. According to the Economist Intelligence Unit, “The judicial system…is close to paralysis. There is a severe shortage of qualified legal personnel and a substantial backlog of cases. Enforcement of contracts and legal redress cannot be assured through the court system….” The same source also reports that the justice system is corrupt, and the U.S. Department of State reports that most commercial disputes are settled privately because of the judicial system’s inefficiency.

REGULATION Score: 4–Stable (high level) Corruption reportedly continues to characterize Mozambique’s regulatory environment. The Economist Intelligence Unit reports that “a ‘red tape study’ carried out by the World Bank in 1996…uncovered the labyrinthine procedures required for relatively simple private-sector activities such as registering a company. The commercial code, previously based on 19th-century Portuguese law, has now been updated to meet the needs of a modern commercial economy, and harmonized with the codes of neighboring countries. However, implementation of the reform measures…is significantly behind schedule, with progress delayed by the complexity of the reforms and the multiplicity of government ministries and departments involved. The private sector still complains that it faces extensive and opaque regulation; a lack of predictability in determining how long procedures will take, rather than their cost, is the greatest single problem.”

BLACK MARKET Score: 4–Stable (high level of activity) Transparency International’s 2000 score for Mozambique was 2.2. Therefore, Mozambique’s black market score is 4 this year.

2003 Index of Economic Freedom

NAMIBIA

Windhoek

Rank: Score: Category: Trade Policy Fiscal Burden

3 4

Government Intervention 3.5 Monetary Policy 3

Foreign Investment 2 Banking and Finance 2

Namibia gained its independence from South Africa in 1990 but continues to maintain close economic ties with that country. The economy depends heavily on mining, including uranium, gem-quality diamonds, lead, silver, tin, tungsten, and zinc; but while mining, manufacturing, and services provide most GDP, a majority of Namibians are employed in subsistence agriculture in the northern part of the country. From 1991 to 2000, according to World Bank data, compound growth in GDP averaged 4 percent annually and per capita GDP increased from $2,083 to $2,408 (in constant 1995 U.S. dollars). In redistributing land from white commercial farmers to landless black Namibians, the government of Namibia still seems determined to continue its “willing buyer–willing seller” policy instead of following the politically motivated path of confiscation and intimidation that has caused such disastrous results in Zimbabwe. The government also has adopted a plan that involves reforming state-owned enterprises to improve performance and accountability, and exploring possibilities for private-sector participation and divestiture. Namibia’s trade policy score and banking and finance score are both 1 point better this year. As a result, its overall score is 0.20 point better this year.

TRADE POLICY Score: 3–Better (moderate level of protectionism) Namibia belongs to the Southern African Customs Union (SACU), a regional trade arrangement with Botswana, Lesotho, South Africa, and Swaziland. 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, Namibia’s trade policy score is 1 point better this year. Non-tariff barriers include import licenses for imports from outside the SACU.

FISCAL BURDEN OF GOVERNMENT

52 2.70 Mostly Free

Wages and Prices 2 Property Rights 2

Regulation 3.0 Black Market 2.5

Scores for Prior Years: 2002: 2.90 1999: 2.85 1996: n/a

2001: 2.95 1998: 2.90 1995: n/a

2000: 2.90 1997: 2.90

2000 Data (in constant 1995 US dollars) Population: 1,757,000 Total area: 825,418 sq. km GDP: $3.7 billion GDP growth rate: 3.9% GDP per capita: $2,408 Major exports: diamonds, copper, gold, zinc, lead, uranium, cattle, processed fish Exports of goods and services: $2.2 billion Major export trading partners: n/a Major imports: foodstuffs, petroleum products and fuel, machinery and equipment, chemicals Imports of goods and services: $2.6 billion Major import trading partners: n/a Foreign direct investment (net): $111.8 million

Score—Income and Corporate Taxation: 3–Worse (moderate tax rates) Score—Government Expenditures: 5–Stable (very high level of government expenditure) Final Score: 4–Stable (high cost of government) Namibia’s top income tax rate is 36 percent; the marginal rate for the average taxpayer is 0 percent. The top corporate tax rate is 35 percent. In 2000, according to the Bank of Namibia, government expenditures equaled 34.2 percent of GDP. Based on a clarification in methodology, Namibia’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.

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GOVERNMENT INTERVENTION IN THE ECONOMY

WAGES AND PRICES

Score: 3.5–Stable (high level) The Economist Intelligence Unit reports that the government consumed 27.5 percent of GDP in 2000. In the same year, according to the International Monetary Fund, Namibia received 5.22 percent of its total revenues from state-owned enterprises and government ownership of property.

Score: 2–Stable (low level of intervention) The government has abolished most price controls, and the market now sets most wages and prices. However, the government does control the prices of petroleum and such utilities as electricity, telecommunications, water, and transportation. There is no national minimum wage law.

MONETARY POLICY

PROPERTY RIGHTS

Score: 3–Stable (moderate level of inflation) From 1992 to 2001, Namibia’s weighted average annual rate of inflation was 9.11 percent.

Score: 2–Stable (high level of protection) The judiciary is independent, and the threat of expropriation is low. According to the U.S. Department of State, however, “The lack of qualified magistrates, other court officials, and private attorneys has resulted in a serious backlog of criminal cases, which often translates in delays of up to a year or more between arrest and trial.”

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 2–Stable (low barriers) Namibia promotes foreign investment and was rated fourth behind Tunisia, Mauritius, and Botswana in terms of competitiveness criteria in the 1999 Africa Competitiveness Report. The Foreign Investment Act of 1990 guarantees foreign investors national treatment, the right to international arbitration of disputes between investors and the government, and the right to remit profits and access foreign exchange. According to the Economist Intelligence Unit, “Local manufacturing capacity is mainly in the hands of Namibian-owned or based firms, and the government gives preference to investors establishing locally registered companies with Namibian partners.” Residents are permitted to hold foreign exchange accounts up to specified amounts above which forms must be completed. Non-residents are permitted to hold foreign currency accounts only if they operate in an export-processing zone. Transactions, transfers, and payments are subject to various restrictions, approvals, and quantitative limits.

BANKING AND FINANCE Score: 2–Better (low level of restrictions) The banking sector is small but sound and includes the central bank and four private commercial banks, three of which are linked with banking institutions in South Africa. The 1998 Banking Institutions Act brought Namibia’s regulatory and supervisory standards up to international standards. In 1995, the government instituted measures that required domestic insurance companies to invest a minimum of 35 percent of assets in specified areas of the local market, as opposed to South Africa where they traditionally were invested. According to the Economist Intelligence Unit, the government has dropped plans to require insurance companies to cede 20 percent of the value of reinsurance policies and premiums to the state-owned Namibia National Reinsurance Corporation (NamibRe). Overall, government restrictions on the banking and financial sector are minimal, the government does not control any commercial banks, and foreign banks enjoy free access. As a result, Namibia’s banking and finance score is 1 point better this year.

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REGULATION Score: 3–Stable (moderate level) According to the Economist Intelligence Unit, “the anti-corruption bill was passed by the National Assembly” in November 2001; however, the U.S. Department of State and other sources continue to cite concerns about corruption. Businesses face burdensome regulations, including health and safety standards and a requirement that businesses submit an environmental impact statement for proposed new investments and construction. The Economist Intelligence Unit reports that “Namibia is burdened by an oversized civil service, which accounts for an unsustainably high proportion of government spending.”

BLACK MARKET Score: 2.5–Stable (moderate level of activity) Transparency International’s 2001 score for Namibia is 5.4. Therefore, Namibia’s black market score is 2.5 this year.

2003 Index of Economic Freedom

NEPAL Rank: 119 Score: 3.50 Category: Mostly Unfree

Kathmandu

Trade Policy Fiscal Burden

5 2

Government Intervention 2 Monetary Policy 2

Foreign Investment 4 Banking and Finance 4

The resumption of a violent Maoist insurgency complicated by political infighting in parliament has hurt Nepal, already one of the world’s poorest countries with nearly 50 percent of its population living in poverty. The country has been in a state of political chaos since the bizarre massacre of its royal family a year ago. New King Gyanendra extended a state of emergency until August 2002 after Maoist rebels withdrew from peace talks and resumed violent action last November. A protracted war will worsen deficit spending and increase inflationary pressures. Meanwhile, Prime Minister Sher Bahadur Deuba has called for general elections two years early as a tactical maneuver to remain in power as his ruling Nepali Congress Party disintegrates into bickering factions. Tourism has been the first industry to suffer; the Economist Intelligence Unit reports that tourist arrivals dropped by 20 percent in 2001. Investor confidence is waning, and agricultural production is also down. To compensate for weak revenue collection, the government has raised custom duties and taxes, adding a “security surcharge” on all goods. Nepal’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, Nepal’s weighted average tariff rate in 2000 (the most recent year for which World Bank data are available) was 17.7 percent, up from the 10.36 percent reported in the 2002 Index. As a result, Nepal’s trade policy score is 1 point worse this year. According to the U.S. Department of State, “All imports may be brought in without a license except for banned or quantitatively restricted items such as…communications equipment including computers and home entertainment products such as television sets and VCRs; valuable metals and jewelry; and beef and beef products.”

FISCAL BURDEN OF GOVERNMENT 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) The International Monetary Fund reports that Nepal’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 0 percent. The top corporate tax rate is 20 percent for industrial enterprises, 25 percent for other enterprises, and 30 percent for financial institutions. The general enterprise tax of 25 percent has been used to grade this factor. More accurate information from the Asian Development Bank indicates that in 2000, government expenditures equaled 17.6 percent of GDP rather than the 16.49 percent reported for the same year in the 2002 Index.

Chapter 6: The Countries

Wages and Prices 3 Property Rights 4

Regulation Black Market

4 5

Scores for Prior Years: 2002: 3.40 1999: 3.30 1996: 3.55

2001: 3.50 1998: 3.40 1995: n/a

2000: 3.60 1997: 3.65

2000 Data (in constant 1995 US dollars) Population: 23,043,000 Total area: 140,800 sq. km GDP: $5.5 billion GDP growth rate: 6.5% GDP per capita: $241 Major exports: carpets, clothing, leather goods, jute goods, grain Exports of goods and services: $1.3 billion Major export trading partners: India 47.7%, US 26.2%, Germany 10.8%, Japan 2.3%, UK 1.7%, France 1.2% Major imports: gold, machinery and equipment, petroleum products, fertilizer Imports of goods and services: $1.8 billion Major import trading partners: India 41.2%, Singapore 10.7%, China 10.2%, UK 7.7%, Hong Kong 4.9%, Saudi Arabia 4.3% Foreign direct investment (net): $3.1 million

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GOVERNMENT INTERVENTION IN THE ECONOMY Score: 2–Stable (low level) The World Bank reports that the government consumed 9.1 percent of GDP in 2000. In the same year, according to the International Monetary Fund, Nepal received 11.01 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, Nepal’s weighted average annual rate of inflation was 3.27 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 4–Stable (high barriers) Nepal has made progress in streamlining licensing requirements, permitting 100 percent foreign ownership, removing minimum investment amount requirements, and opening the telecommunications and civil aviation sectors that previously were government monopolies. Many sectors of the economy remain closed, however. Investment in cottage industries, small-scale industries, defense-related industries, alcohol and cigarette production, and some services such as financial, legal, accounting, and management consulting is prohibited. Foreign securities firms are restricted to 40 percent in joint ventures with Nepalese firms. According to the U.S. Department of State, “Although the Government of Nepal is open to foreign direct investment, implementation of its policies is often distorted by bureaucratic delays and inefficiency.” The International Monetary Fund reports that residents may hold foreign exchange accounts only in specific instances. Most non-residents may hold foreign exchange accounts. Most payments and transfers are subject to quantitative limitation restrictions. There are numerous restrictions on capital transactions, and all inward direct investment must be approved by the Department of Industry.

BANKING AND FINANCE Score: 4–Stable (high level of restrictions) Nepal’s financial sector, which consists of 15 commercial banks, 49 finance companies, 34 financial co-operatives, 17 insurance companies, 14 development banks, and five regional development banks, is in disarray. Two state-owned banks (the fully state-owned Rastriya Banijya Bank and 41 percent government-owned Nepal Bank) are technically insolvent—a critical problem as they hold 43 percent of deposits and 46 percent of loans. The Nepal Rastra Bank (the central bank) is contracting two private companies to manage Rastriya Banijya Bank and Nepal Bank and restore them to financial health. Many private-sector banks are also in a questionable state, and the government has issued directives raising capital adequacy and accounting standards, clarifying credit classifications, and increasing reporting transparency.

number of public enterprises, eliminated public monopolies in air transport and hydropower generation, eliminated price controls on most products, [and] reduced consumer subsidies….” The same source notes, however, that “there are special subsidies and preferred credit arrangements for individual public and private companies in select sectors, such as rural electrification, fertilizer importation, and the provision of agricultural credit.” Nepal maintains a minimum wage.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) Nepal’s judicial system suffers from corruption and inefficiency. According to the U.S. Department of State, the Supreme Court has demonstrated independence, but “lower level courts remain vulnerable to political pressure and bribery of judges and court staff is endemic.” In addition, “property disputes account for half of the current backlog in Nepal’s overburdened court system and such cases can take years to be settled…. [L]aws and regulations are unclear, and interpretation can vary from case to case.”

REGULATION Score: 4–Stable (high level) Nepal’s regulatory regime is not transparent. Bureaucratic delays are common, even in the most basic procedures, and laws are not reliably enforced. “Although the Government of Nepal is open to…investment,” reports the U.S. Department of State, “bureaucratic delays, inefficiency, and pervasive corruption often distort policy implementation. The government is aware of deficiencies in Nepal’s investment climate and has slowly moved toward more investor-friendly arrangements…. There are still multiple restrictions on trade, payments and investment that require constant interaction with government officials at all levels of the bureaucracy. Facilities granted under certain Acts or policies are often either contradicted or negated by another set of rules or policies…. Some companies report that the process of terminating unsatisfactory employees is cumbersome….” In addition, “investors have identified pervasive corruption as an obstacle to maintaining and expanding their…investments in Nepal.”

BLACK MARKET Score: 5–Stable (very high level of activity) Both legislation and enforcement of intellectual property protection are inadequate. Nepal’s black market is substantial, especially in consumer goods, labor, construction, currency, and the smuggling of weapons. The Economist Intelligence Unit reports that “gold smuggling from Nepal to India is huge. Official data record large gold imports and low exports, but it is well known that most of the imports are destined for India and the domestic market is small.”

WAGES AND PRICES Score: 3–Stable (moderate level of intervention) The government has eliminated most price controls. According to the U.S. Department of State, “Since 1990, Nepal has privatized a

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2003 Index of Economic Freedom

THE NETHERLANDS Rank: Score: Category:

Amsterdam

Trade Policy Fiscal Burden

2 4

Government Intervention 2 Monetary Policy 2

Foreign Investment 1 Banking and Finance 1

The Netherlands became a driving force in global trade and banking during the 17th and 18th centuries and, despite developing a large, European-style safety net over the years, maintains its traditional openness to the rest of the world. Rotterdam remains the world’s largest port as measured by tonnage of goods. Over the past two decades, the Netherlands has been the most successful of the core European Union countries, growing at an average rate of 3 percent per annum since 1982. If there is anywhere the “third way” variety of capitalism can claim to be successful, it is in the Netherlands. Much of this success is attributable to a tradition of effective negotiation and consensus among the government, employer federations, and unions; agreements reached by these three groups have led to public spending restraint, labor market reform, and wage moderation. Prime Minister Wim Kok, who served from 1994–2002, led a coalition committed to an American-style mixture of growth, jobs, and low inflation fused with standard European sensibilities about social protections. There are no obvious major weaknesses in the economy; the country is stable politically, possesses an efficient financial sector, and has benefited from the previous government’s ability to make sound macroeconomic decisions. There are few restrictions on foreign direct investment, and the Netherlands is one of the most open to FDI of all the world’s countries. Share purchases are treated equally, for example, whether they are made by foreign or domestic individuals or by concerns. The only cloud on the horizon is hidden rates of unemployment, as official numbers do not include an implausibly large number of people categorized as disabled. The absurdly generous disability scheme, the WAO, has nearly 1 million people on its rolls out of a total working-age population of 7 million. The May 15, 2002, elections led to a surprising center–right shift in the wake of right-wing populist Pim Fortuyn’s assassination. The centrist Christian Democratic Appeal is likely to head the new coalition. What is unlikely to change is the broadly agreed-upon Dutch “third way” approach to managing the economy. The Netherlands’ monetary policy score is 1 point worse this year. As a result, its overall score is 0.10 point worse this year.

TRADE POLICY

11 1.90 Free

Wages and Prices 2 Property Rights 1

Regulation Black Market

Scores for Prior Years: 2002: 1.80 1999: 2.05 1996: 1.90

2001: 1.85 1998: 2.10 1995: n/a

2000: 2.05 1997: 1.95

2001 Data (in constant 1995 US dollars) Population: 16,103,000 Total area: 41,526 sq. km GDP: $502.5 billion GDP growth rate: 1.1% GDP per capita: $31,203 Major exports: machinery and equipment, chemicals, fuels, foodstuffs Exports of goods and services: $337 billion Major export trading partners: Germany 26.5%, Belgium 12.4%, France 10.8%, UK 10.7%, Italy 5.9% Major imports: machinery and transport equipment, chemicals, fuels, foodstuffs, clothing Imports of goods and services: $310.8 billion Major import trading partners: Germany 15.4%, US 9.5%, UK 8.4%, Belgium 8.1%, France 5.0% Foreign direct investment (net): $7.2 billion

Score: 2–Stable (low level of protectionism) As a member of the European Union, the Netherlands levies a weighted average tariff rate of 1.8 percent on imports from outside the EU. The Netherlands’ participation in the Common Agricultural Policy (CAP), a program that heavily subsidizes agricultural goods, acts as a non-tariff barrier.

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3 1

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FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 3.5–Worse (high tax rates) Score—Government Expenditures: 4–Better (high level of government expenditure) Final Score: 4–Stable (high cost of government) The top income tax rate is 52 percent; the marginal rate for the average taxpayer is 8.2 percent. The top corporate tax rate is 34.5 percent. In 2001, government expenditures equaled 41.7 percent of GDP, down from the 47.8 percent reported in the 2002 Index. Based on a clarification in methodology, the Netherlands’ income and corporate taxation score is 0.5 point worse this year, but this is offset by lower government expenditures. As a result, the Netherlands’ overall fiscal burden of government score is unchanged this year.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 2–Stable (low level) Data from Statistics Netherlands indicate that the government consumed 22.85 percent of GDP in 2001. In 2000, based on data from Eurostat, the Netherlands received 4.07 percent of its revenues from state-owned enterprises and government ownership of property.

MONETARY POLICY Score: 2–Worse (low level of inflation) From 1992 to 2001, the Netherlands’ weighted average annual rate of inflation was 3.74 percent, up from the 2.38 percent from 1991 to 2000 reported in the 2002 Index. As a result, the Netherlands’ monetary policy score is 1 point worse this year.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 1–Stable (very low barriers) The Netherlands actively promotes foreign investment. The government requires no approval for investments, and foreign investors receive national treatment. There are no restrictions or barriers on current transfers, repatriation of profits, purchase of real estate, or access to foreign exchange. Capital transactions are not restricted but are subject to reporting requirements under the External Financial Relations Act. The few restrictions that exist apply to investment in defense-related industries, such as the manufacturing of weapons, and a few public and private monopolies that ban investment for foreign and domestic investors alike, such as public broadcasting and the railways.

BANKING AND FINANCE Score: 1–Stable (very low level of restrictions) The Netherlands has been one of Europe’s financial and banking centers for centuries, and its banking system operates freely with little government regulation. Banks established in the Netherlands may engage in a variety of financial services, such as buying, selling, and holding securities, insurance policies, and real estate. Most financial institutions are not subject to

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supervision by the central bank, but banks are subject to limits on their foreign currency and precious metals position and must submit reports to the government on non-resident assets and liabilities. The government is minimally involved in the banking sector. According to the Economist Intelligence Unit, “The Ministry of Economic Affairs occasionally extends credit to promote technical development in medium-sized ventures.”

WAGES AND PRICES Score: 2–Stable (low level of intervention) Wages and prices in the Netherlands are set primarily by the market. According to the Economist Intelligence Unit, “The Price Control Act gives the government substantial powers to control prices, especially in times of high inflation. These powers have been exercised occasionally since 1973…. [L]egislation was passed in 1996 to introduce price controls for medicines.” The Netherlands maintains a minimum wage.

PROPERTY RIGHTS Score: 1–Stable (very high level of protection) Private property is secure in the Netherlands. The Economist Intelligence Unit reports that “contractual agreements remain very secure in the Netherlands. The judiciary and the civil service are of high quality.”

REGULATION Score: 3–Stable (moderate level) Laws and regulations affecting investment are non-discriminatory and applied evenly. Starting a business in the Netherlands is easy, except for the country’s strict environmental regulations, which can obstruct the opening of a business. The Economist Intelligence Unit reports that a variety of environmental taxes exist and that “the government has required regular environmental reports from 251 companies since 1999.” Additional tax reforms in coming years are expected to increase environmental levies even more. Most available building land is owned by local government, which limits the number of building permits issued. Combined with the scarcity of land and high property prices, this also makes establishing a business more challenging. The government has expanded laws allowing for increased part-time work. The Economist reports that employers avoid rigid labor regulations and high minimum wages for full-time workers by hiring part-time and temporary workers.

BLACK MARKET Score: 1–Stable (very low level of activity) Transparency International’s 2001 score for the Netherlands is 8.8. Therefore, the Netherlands’ black market score is 1 this year. The Business Software Alliance reports that 40 percent of the software used in the Netherlands is pirated. In addition, according to a report for the European Union Commission, there is undeclared work, primarily in “agriculture, community, social and personal services (e.g., cleaning, care) and construction.”

2003 Index of Economic Freedom

NEW ZEALAND Rank: Score: Category:

Wellington

Trade Policy Fiscal Burden

2 4

Government Intervention 2 Monetary Policy 1

Foreign Investment 1 Banking and Finance 1

New Zealand reinforced its status as a free-trading nation in July 2001 when it removed tariffs on goods from the world’s poorest countries. Because trade is very important to New Zealand generally, Prime Minister Helen Clark has been lobbying the United States for a bilateral free trade agreement. New Zealand has the world’s fourth largest flock of sheep, and over 90 percent of its lamb is exported. In addition to being generally open to trade, New Zealand is relatively open to foreign investment. There are indications that change could be in the works, however. The Overseas Investment Commission has to approve investments that involve foreign ownership of 25 percent, and the Economist Intelligence Unit reports that “a performance audit of the OIC completed in early April 2001 called for increased scrutiny of foreign investment.” Such scrutiny is most likely to mean more paperwork for foreign investors. Other forms of government intervention include legislation to establish a telecommunications regulator to regulate prices and service access (introduced in May 2001) and the government’s takeover of Air New Zealand. At the same time, however, the U.S. Department of State reports that “The Labor-Alliance government has placed a cap on new spending over the next three years, which is expected to allow the public spending/GDP ratio to decline.”

TRADE POLICY Score: 2–Stable (low level of protectionism) According to the World Bank, New Zealand’s weighted average tariff rate in 2000 (the most recent year for which World Bank data are available) was 2.3 percent. The International Monetary Fund reports that “import prohibitions and restrictions affect some 70 products, primarily plants, animals, and products considered dangerous to human health or not in [the] public interest.” According to the U.S. Trade Representative, “New Zealand maintains a strict regime of sanitary and phytosanitary (SPS) control for virtually all imports of agricultural products…. [I]n 2001, SPS regulations were tightened.”

FISCAL BURDEN OF GOVERNMENT

3 1.70 Free

Wages and Prices 2 Property Rights 1

Regulation Black Market

Scores for Prior Years: 2002: 1.70 1999: 1.70 1996: 1.80

2001: 1.70 1998: 1.85 1995: n/a

2000: 1.70 1997: 1.80

2001 Data (in constant 1995 US dollars) Population: 3,855,400 Total area: 268,680 sq. km GDP: $70 billion GDP growth rate: 1.8% GDP per capita: $18,156 Major exports: dairy products, meat, fish, wool, forestry products, manufactures Exports of goods and services: $23 billion Major export trading partners: Australia 18.8%, US 14.4%, Japan 12.4%, UK 4.8% Major imports: machinery and equipment, vehicles and aircraft, petroleum, consumer goods, plastics Imports of goods and services: $22.8 billion Major import trading partners: Australia 21.9%, US 15.9%, Japan 11.0%, UK 3.8% Foreign direct investment (net): $2.2 billion

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) New Zealand’s top income tax rate is 39 percent; the marginal rate for the average taxpayer is 19.5 percent. The top corporate tax is 33 percent. In 2001, government expenditures equaled 38.4 percent of GDP.

Chapter 6: The Countries

2 1

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GOVERNMENT INTERVENTION IN THE ECONOMY Score: 2–Stable (low level) According to the Economist Intelligence Unit, the government consumed 17.4 percent of GDP in 2001. In 2000, according to the International Monetary Fund, New Zealand received 4.1 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, New Zealand’s weighted average annual rate of inflation was 2.33 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 1–Stable (very low barriers) New Zealand generally encourages foreign investment, and practical barriers to investment are minimal. Officially, foreign ownership is restricted in only three areas—fishing, airlines, and real estate—although it is sometimes possible to get approval for the latter. According to the International Monetary Fund, foreign investment in certain types of land is “subject to both a bona fide investor test and a ‘national interest’ test. Land acquisitions that require authorization relate to any land exceeding 5 hectares in area or where the consideration exceeds $NZ 10 million, and islands or land containing or adjoining reserves, historic or heritage areas, and the foreshore or lakes in excess of 0.4 hectares.” The Overseas Investment Commission approves foreign investment unless legislative criteria demand otherwise. Non-land foreign purchases of over 25 percent of New Zealand companies are also subject to a “bona fide investor test,” and new investments by existing foreign-controlled enterprises unrelated to the original investment are subject to review. There are no restrictions or barriers on current transfers, repatriation of profits, or access to foreign exchange.

BANKING AND FINANCE Score: 1–Stable (very low level of restrictions) New Zealand’s banking system is deregulated, and foreign banks are welcome; foreigners own or control all but two of New Zealand’s registered banks, both of which are stateowned. The small government-owned Taranaki Savings Bank was joined in February 2002 by Kiwibank Limited, registered by the New Zealand Post, a state-owned enterprise. The Reserve Bank of New Zealand is limited to prudential supervision. The government does not provide deposit insurance for financial institutions; instead, banks provide full disclosure of their financial condition to the public. The Labour government has returned control of workplace accident insurance to the state monopoly.

nomic Development (MED) and Commerce Commission have the power…to control prices in markets where effective competition is absent….” The government imposed price hikes on airfares following its takeover of Air New Zealand. New Zealand has a minimum wage.

PROPERTY RIGHTS Score: 1–Stable (very high level of protection) Private property is a fundamental right in New Zealand. The Economist Intelligence Unit reports that “contracts and court decisions are generally very well respected.” According to the U.S. Department of State, “the law 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: 2–Stable (low level) It is easy to establish a business in New Zealand, and years of substantive reforms have created a relatively light, transparent regulatory regime. According to the Embassy of New Zealand, “a new company can be incorporated online…. [T]here are three steps involved in the registration of a new company: submit application online, fax in consents, and print incorporation certificates.” The Resource Management Act of 1991 created a three-layer regulatory system involving national, regional, and local authorities that requires businesses to acquire a resource consent, or permit, for most types of business activity. The result is an inconsistent system in which each of the country’s 83 different local authorities interprets the law in its own way and accusations of environmental violations can be filed on a broad-ranging basis. This process can take as much as two years, and the system is overloaded with cases. According to the Economist Intelligence Unit, a telecommunications reform bill that became law in December 2001 includes the introduction of regulated services (those to which the carrier may not be denied access); establishment of an Office of Telecommunications Services Obligations; and a regime for sharing the costs for Telecommunications Services Obligations. Despite these impediments, New Zealand’s business environment is generally open and competitive.

BLACK MARKET Score: 1–Stable (very low level of activity) Transparency International’s 2001 score for New Zealand is 9.4. Therefore, New Zealand’s black market score is 1 this year. The New Zealand Embassy reports that “counterfeiting and piracy are recognized as important issues.”

WAGES AND PRICES Score: 2–Stable (low level of intervention) The market determines most wages and prices, although the Economist Intelligence Unit reports that “the Ministry of Eco-

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2003 Index of Economic Freedom

NICARAGUA Rank: 72 Score: 3.00 Category: Mostly Unfree

Managua

Trade Policy Fiscal Burden

2 3

Government Intervention 3 Monetary Policy 3

Foreign Investment 2 Banking and Finance 2

Wages and Prices 3 Property Rights 4

Regulation Black Market

Enrique Bolaños, elected president of Nicaragua over former Sandinista comandante Daniel Ortega on November 4, 2001, has faced a series of daunting tests. His three priorities are to revive the economy; clean up the corruption that flourished under his predecessor, President Arnoldo Alemán; and improve the protection of property rights, still in limbo since the Sandinista regime’s massive expropriation campaign in the 1980s. Alternating drought and floods, combined with a glut of coffee on the international market, caused earnings from Nicaragua’s chief export to fall by 38 percent in 2001; although growth in other commodities compensated for part of this loss, total export revenues also declined more than 8 percent. Nicaragua needs to diversify its economy into other sectors such as tourism and light manufacturing, but attracting investors will not be easy. Alemán stacked the Supreme Court and controller general’s office with cronies and arranged a seat for himself as an unelected member of the national legislature with immunity from prosecution. Since leaving office, an Alemán administration official has been charged with using government tax credits to buy a fleet of luxury cars for family and friends, and Alemán himself is under investigation for allegedly misusing state funds in a dispute involving a government-owned television station. Prosecution of Alemán is moving forward, but progress on property rights remains deficient overall. Earlier efforts to compensate those whose property was expropriated by the Sandinistas became bogged down with fictitious claims, making reform unpalatable; to make Nicaragua attractive to new investment, the Bolaños administration must improve titling procedures and strengthen guarantees so that there is no recurrence of confiscations and resulting disputes. Nicaragua’s government intervention score is 1 point worse this year; however, its trade policy score is 2 points better, and its fiscal burden of government score is 0.5 point better. As a result, Nicaragua’s overall score is 0.15 point better this year.

Scores for Prior Years:

TRADE POLICY

Major import trading partners: US 23.9%, Costa Rica 11.4%, Guatemala 9.9%, El Salvador 7.9%, Mexico 5.9%

Score: 2–Better (low level of protectionism) According to the World Bank, Nicaragua’s weighted average tariff rate in 2000 (the most recent year for which World Bank data are available) was 2.9 percent, down from the 10.9 percent reported in the 2002 Index. As a result, Nicaragua’s trade policy score is 2 points better this year. According to the U.S. Department of State, “Foreign investors sometimes complain about arbitrary customs procedures and valuations. Tariffs and import taxes for most used goods are…assessed on a…‘reference price’ [basis] determined by Customs at the time of entry inspection. This reference price can be significantly higher than the actual amount paid by importers.”

Chapter 6: The Countries

2002: 3.15 1999: 3.60 1996: 3.60

2001: 3.45 1998: 3.50 1995: 4.00

4 4

2000: 3.60 1997: 3.70

2000 Data (in constant 1995 US dollars) Population: 5,071,000 Total area: 129,494 sq. km GDP: $2.4 billion GDP growth rate: 4.3% GDP per capita: $466 Major exports: coffee, shrimp and lobster, cotton, tobacco, beef, sugar, bananas, gold Exports of goods and services: $952 million Major export trading partners: US 57.7%, Germany 5.3%, El Salvador 4.2%, France 3.3%, Honduras 3.0% Major imports: machinery and equipment, raw materials, petroleum products, consumer goods Imports of goods and services: $2 billion

Foreign direct investment (net): $242 million

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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) Nicaragua’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. More accurate information from the Inter-American Development Bank indicates that in 2000, government expenditures equaled 27.9 percent of GDP rather than the 33.7 percent reported for the same year in the 2002 Index. Based on the lower level of government expenditure, Nicaragua’s overall fiscal burden of government score is 0.5 point better this year.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Worse (moderate level) The World Bank reports that the government consumed 18.9 percent of GDP in 2000. According to the U.S. Department of State, “The Government still retains a number of state enterprises in nonutility areas, such as construction, insurance, building materials, pharmaceuticals and agribusiness.” Based on new evidence on the level of state-owned enterprise, Nicaragua’s government intervention score is 1 point worse this year.

MONETARY POLICY Score: 3–Stable (moderate level of inflation) From 1992 to 2001, Nicaragua’s weighted average annual rate of inflation was 8.91 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 2–Stable (low barriers) The U.S. Department of State reports that the May 24, 2000, Foreign Investment Law “a) assures that foreign and domestic investment receive the same treatment; b) eliminates the need to sign an investment contract; c) abolishes the foreign investment committee; d) eliminates restrictions on the way in which foreign capital can enter the country; e) recognizes the investor’s right to own property and use it as he wishes, and in the case of a declaration of eminent domain, proper indemnification.” Nicaragua began opening up staterun sectors in 1998, and most industries are now open to investment; restrictions still apply to foreign investment in the fishing industry, and all investment in the water and sewage systems, power transmission, and airports is prohibited. There are no restrictions on access to foreign exchange or repatriation of profits. Foreign investment faces a bureaucratic approval process and corruption. The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts. There are no controls or restrictions on payments and transfers. There are very few restrictions on capital transactions.

BANKING AND FINANCE

on bank shares held by any one private shareholder, placed limits on loans to any one borrower, and curbed the ability of banks to lend to related companies. In the wake of financial liberalization in the 1990s, reports the U.S. Department of State, “The banking system has undergone a painful adjustment process in which the Superintendency of Banks has intervened in seven banks due to a series of deficiencies. In August 2000, Interbank closed due to lack of liquidity and alleged fraud, and Banco Del Café closed at the end of 2000 amid fraud allegations.” In 2001, there were seven commercial banks in Nicaragua, overseen by the Superintendency of Banks, along with insurance companies, leasing firms, and the stock exchange. All commercial banks are majority owned by the private sector.

WAGES AND PRICES Score: 3–Stable (moderate level of intervention) According to the Economist Intelligence Unit, “Nicaragua maintains price controls only on sugar, domestically produced soft drinks, certain petroleum products, and pharmaceuticals.” The government also influences prices through state-owned enterprises in utilities and non-utility areas, such as the cement company. The minimum wage system applies different rates to different economic sectors. The various rates are set through tripartite negotiations involving business, government, and labor and confirmed by the Legislative Assembly.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) The Economist Intelligence Unit reports that “the judiciary remains inefficient, politicized, corrupt and ineffective in resolving property and other disputes.” According to the U.S. Department of State, “Difficulty in resolving commercial disputes in Nicaragua, particularly the enforcement of contracts, is a serious obstacle to investment….” The Washington Times reports that President Bolaños “stamped his first four months of public office with…a determination to further institutionalize the rule of commercial law and strengthen the judicial sector [and] a well-publicized policy of ‘zero-tolerance’ regarding corruption….”

REGULATION Score: 4–Stable (high level) According to the U.S. Department of State, “Despite significant streamlining in recent years, Nicaragua’s legal and regulatory framework remains cumbersome. The rules are not fully transparent, and much business is still conducted on a ‘who you know’ basis…. Although the 1997 tax law eliminated many special tax exonerations, investors still express frustration at a high level of discretion and overcentralized decision making in taxation and customs procedures.” Both the Economist Intelligence Unit and the U.S. Department of State have characterized corruption as a continuing problem.

BLACK MARKET Score: 4–Stable (high level of activity) Transparency International’s 2001 score for Nicaragua is 2.4. Therefore, Nicaragua’s black market score is 4 this year.

Score: 2–Stable (low level of restrictions) The 1999 reform of the General Banking Law adopted the Basel standard for capital adequacy of 10 percent, created a maximum cap

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2003 Index of Economic Freedom

NIGER Rank: 113 Score: 3.40 Category: Mostly Unfree

Niamey

Trade Policy Fiscal Burden

4 3

Government Intervention 3 Monetary Policy 2

Foreign Investment 3 Banking and Finance 3

Niger has enjoyed relative peace and political stability since November 1999, when elections led to the restoration of civilian government following the second military coup in three years. Niger’s economy is composed primarily of subsistence agriculture and animal husbandry, with agriculture and livestock contributing over 40 percent of GDP and employing 90 percent of the workforce. The U.S. Department of State estimates that only 15 percent of the economy, consisting mainly of the government and light industry, is in the formal sector. Although over 90 percent of the population is Muslim, the government is secular and has dissolved extremist Islamic groups while also prohibiting discussion of politics or religion on radio broadcasts, which act as the most effective media outlet for the largely illiterate population. Niger is one of the world’s poorest nations. From 1991 to 2000, according to World Bank data, compound growth in GDP averaged 1.9 percent annually and per capita GDP declined from $234 to $203 (in constant 1995 U.S. dollars) as population growth exceeded economic growth. Declining international demand for uranium—Niger’s top source of foreign exchange—has exacerbated slow economic growth. The government has announced its intention to implement civil service reform, pursue privatization, and maintain the country’s openness to foreign investment. Niger’s monetary policy score is 1 point worse this year; however, its capital flows and foreign investment score and banking and finance score are both 1 point better. As a result, Niger’s overall score is 0.10 point better this year.

TRADE POLICY Score: 4–Stable (high level of protectionism) Niger 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, Ivory Coast, Mali, Senegal, and Togo.) According to the U.S. Department of State, non-tariff barriers consist primarily of licenses, which the government requires for the importation of key products “to protect the position of well-entrenched local importers and producers.”

FISCAL BURDEN OF GOVERNMENT

Wages and Prices 3 Property Rights 4

Regulation Black Market

Scores for Prior Years: 2002: 3.50 1999: 3.60 1996: 4.00

2001: 3.50 1998: 3.80 1995: n/a

2000: 3.80 1997: 3.90

2000 Data (in constant 1995 US dollars) Population: 10,832,000 Total area: 1,267,000 sq. km GDP: $2.2 billion GDP growth rate: 0.1% GDP per capita: $203 Major exports: uranium ore, livestock products, cow peas, onions Exports of goods and services: $359.6 million Major export trading partners: France 43.4%, Nigeria 35.0%, Spain 4.5%, US 3.9% Major imports: consumer goods, primary materials, machinery, vehicles and parts, petroleum, cereals Imports of goods and services: $425 million Major import trading partners: France 16.8%, Ivory Coast 13.4%, US 9.6%, Nigeria 7.6% Foreign direct investment (net): $4.9 million

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) The International Monetary Fund reports that Niger’s top income tax rate is 45 percent, down from the 60 percent reported in the 2002 Index; the marginal rate for the average taxpayer is 2 percent. The top corporate tax rate is 42.5 percent, down from the 45 percent reported in the 2002 Index. In 2000, government expenditures equaled 16.2 percent of GDP.

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GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Stable (moderate level) The World Bank reports that the government consumed 12.7 percent of GDP in 2000, with most GDP generated by the public sector. According to the U.S. Department of State, “Several industrial enterprises are para-statals wholly or partially owned by the government. The government has made headway in restructuring and some companies have already been privatized with twelve more to go, including public utilities….”

MONETARY POLICY Score: 2–Worse (low level of inflation) From 1992 to 2001, Niger’s weighted average annual rate of inflation was 3.25 percent, up from the 1.94 percent from 1991 to 2000 reported in the 2002 Index. Niger 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, Ivory Coast, Mali, Senegal, and Togo.) Based on the higher weighted rate of inflation, Niger’s monetary policy score is 1 point worse this year.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Better (moderate barriers) Niger welcomes foreign investment. According to the U.S. Department of State, “The investment code contains no provisions for screening and guarantees equal treatment to foreign investors regardless of nationality. Total foreign ownership is permitted in all sectors except those few restricted for national security purposes, such as arms and munitions and private security forces, which require special arrangements.” The bureaucracy is cumbersome, and corruption is present. The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts with the approval of the Central Bank of West African States. Payments and transfers to countries other than France, Monaco, members of the Central African Economic and Monetary Community, members of the WAEMU, and Comoros are subject to quantitative limits and approval in some cases. Some capital transactions to countries other than members of the WAEMU are subject to authorization. Real estate purchases by non-residents must be declared to the government prior to purchase. The evidence indicates that the government’s foreign investment policy, while bureaucratic, is generally receptive to foreign investment. As a result, Niger’s capital flows and foreign investment score is 1 point better this year.

BANKING AND FINANCE

Department of State, “The banking system is served by only one modest-sized local bank, BIA Niger, which has close connections with the French banking system. There are several small commercial banks: Sonibank (Societe Nigerienne de Banque), Bank of Africa, BCN (Banque Commerciale du Niger, a Libyan– Nigerien joint venture), Credit du Niger, Banque Islamique du Niger (with Saudi and Islamic Development Bank ownership) and Ecobank which opened in July 1999.” Although the government is involved in the financial system, private banks and foreign banks operate freely. As a result, Niger’s banking and finance score is 1 point better this year.

WAGES AND PRICES Score: 3–Stable (moderate level of intervention) According to the U.S. Department of State, “Prices are set by market forces, not by the government.” The government, however, sets state-owned utility rates. Minimum wages for salaried workers differ by sector, and Niger’s large public sector affects wages and prices.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) Private property is subject to expropriation, although there are few recent examples of nationalization. The judicial system is inefficient and subject to outside influence. According to the U.S. Department of State, “Judges sometimes feared reassignment or having their financial benefits reduced if they rendered a decision unfavorable to the government….”

REGULATION Score: 4–Stable (high level) The U.S. Department of State reports that “investors should be prepared for delays caused by the process of acquiring inter-ministerial approvals.” Corruption is an admitted problem. The Economist Intelligence Unit reports that corruption, among other things, “brought the economy to its knees.” The government has promised the International Monetary Fund that it will reduce the country’s unwieldy civil service as part of economic reforms, but the extent of its willingness to do so remains unclear.

BLACK MARKET Score: 5–Stable (very high level of activity) According to the Economist Intelligence Unit, “as much as twothirds of all economic activity takes place in the informal sector.” The black market includes the sale of commercial goods, including petroleum, as well as providing a transit point for drug trafficking. Arms trafficking between Niger and its neighbors is likewise active.

Score: 3–Better (moderate level of restrictions) The Central Bank of West African States (BCEAO), a central bank common to the eight members of the WAEMU, governs Niger’s banking system. Member countries use the CFA franc that is issued by the BCEAO, pegged to the French franc, and guaranteed by the French Treasury. The banking system remains underdeveloped, and credit is difficult to obtain. According to the U.S.

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2003 Index of Economic Freedom

NIGERIA Abuja

Trade Policy Fiscal Burden

5 3.5

Government Intervention 3 Monetary Policy 4

Rank: 140 Score: 3.85 Category: Mostly Unfree Foreign Investment 3 Banking and Finance 4

Nigeria has endured military dictatorship and general political instability almost constantly since gaining its independence from the United Kingdom in 1960. It has sub-Saharan Africa’s largest population and second largest economy, in addition to being the world’s sixth largest exporter of oil, yet per capita income remains low. From 1991 to 2000, according to World Bank data, compound growth in GDP averaged 2.4 percent annually and per capita GDP declined slightly from $263 to $254 (in constant 1995 U.S. dollars) as population growth exceeded economic growth. The informal sector, or black market, generates an estimated 40 percent of GDP and employs many Nigerians. Most Nigerians are engaged in small-scale farming even though that sector contributes only slightly more than 30 percent of GDP. Infrastructure is insufficient and in poor repair, the government controls most large enterprises, and a lack of transparency coupled with rampant corruption impedes the economy. The civilian government, elected in 1999, announced an ambitious reform agenda, but implementation has been difficult because of opposition from corrupt officials and vested interests. Privatization has proceeded slowly; only 14 of the 107 state-owned enterprises scheduled for privatization have been fully privatized. Ethnic and religious tensions remain high, and more than 6,000 people have been killed in religious and ethnic clashes over the past three years. Oil has enabled the economy to grow despite these problems and continues to be the primary economic activity. Nigeria is blessed with rich resources, an entrepreneurial population, and a productive agricultural sector that would yield significant rewards if economic reform, good governance, and the rule of law were instituted. Nigeria’s fiscal burden of government score is 0.5 point worse this year, and its monetary policy and wages and prices scores are both 1 point worse. As a result, Nigeria’s overall score is 0.25 point worse this year.

TRADE POLICY Score: 5–Stable (very high level of protectionism) According to the World Bank, Nigeria’s weighted average tariff rate in 1995 (the most recent year for which World Bank data are available) was 20 percent. The Economist Intelligence Unit reports that “import bans apply mainly to certain locally produced agricultural products, or to locally sourced raw materials and semi-processed raw materials, [and] certain finished goods….” According to the U.S. Trade Representative, “most [port users] remain convinced that not enough has yet been done to reduce demonstrably the notorious bureaucracy and corruption at Nigeria’s ports.”

Wages and Prices 3 Property Rights 4

Regulation Black Market

Scores for Prior Years: 2002: 3.60 1999: 3.20 1996: 3.40

2001: 3.35 1998: 3.20 1995: 3.25

2000: 3.30 1997: 3.30

2000 Data (in constant 1995 US dollars) Population: 126,910,000 Total area: 923,768 sq. km GDP: $32 billion GDP growth rate: 3.8% GDP per capita: $254 Major exports: petroleum and petroleum products, cocoa, rubber Exports of goods and services: $12.8 billion Major export trading partners: US 44.0%, India 10.2%, Spain 5.8%, France 4.9% Major imports: machinery, chemicals, transport equipment, manufactured goods, food and live animals Imports of goods and services: $18 billion Major import trading partners: US 10.0%, UK 8.9%, France 8.4%, Germany 7.2% Foreign direct investment (net): $837.6 million

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 2.5–Stable (moderate tax rates) Score—Government Expenditures: 4–Worse (high level of government expenditure) Final Score: 3.5–Worse (high cost of government) Nigeria’s top income tax rate is 25 percent; the marginal rate for the average taxpayer is 10 percent. The corporate tax rate is 30 percent. The African Development Bank reports that in

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2000, government expenditures equaled 28.4 percent of GDP, up from the 23.8 percent reported in the 2002 Index. As a result, Nigeria’s fiscal burden of government score is 0.5 point worse this year.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Stable (moderate level) The World Bank reports that the government consumed 20.5 percent of GDP in 2000, up from the 10.7 percent reported in the 2002 Index. According to the Economist Intelligence Unit, only the first phase of Nigeria’s privatization plan has been implemented; the state still owns “hotels, insurance companies, ship-repair companies and vehicle-assembly plants…electric power, telecoms, national airlines and the refineries.”

MONETARY POLICY Score: 4–Worse (high level of inflation) From 1992 to 2001, Nigeria’s weighted average annual rate of inflation was 14.83 percent, up from the 7.83 percent from 1991 to 2000 reported in the 2002 Index. As a result, Nigeria’s monetary policy score is 1 point worse this year.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) The U.S. Department of State reports that the 1995 Nigerian investment promotion commission decree “eliminated discriminatory screening processes for foreign investment and allowed 100 percent foreign ownership of any business enterprise except those in the oil sector and on a ‘negative list’—industry deemed sensitive to national security.” Other obstacles include confusing land ownership laws, active labor unions, bureaucratic delays, corruption, crime, and arbitrary enforcement of regulations. According to the U.S. Department of State, “The country suffers from ill-maintained infrastructure, possesses an inconsistent regulatory environment, and enjoys a welldeserved reputation for endemic crime and corruption…. Criminal fraud conducted against unwary investors and personal security are chronic problems in Nigeria.” Foreigners may not own land, but they may lease. The International Monetary Fund reports that capital transactions are subject to documentation requirements but are generally unrestricted. Most payments and transfers must be conducted through banks, and applications for foreign exchange must be approved by the central bank.

BANKING AND FINANCE Score: 4–Stable (high level of restrictions) Foreign banks must acquire licenses from the central bank in order to operate. The Economist Intelligence Unit reports that “in January 1998 the Central Bank liquidated 26 troubled banks, bringing the total down to 89 (51 commercial and 38 merchant banks).” The government granted new banking licenses and revoked others between 1999 and 2001 to bring the number of banks to 90 in 2001. The government remains heavily involved in the banking sector, owning or controlling approximately 20 banks. Nigeria’s Bureau of Public Enterprises reports that the government has slated 11 banks and two insurance companies for privatization. According to the Economist Intelligence Unit, “On March 22nd 16 Nigerian banks were suspended

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from the interbank foreign exchange market (IFEM) for violating foreign exchange trading rules…. The fact is that Nigeria simply has too many banks chasing too little lending. The banks thus tend to speculate and look to the forex market to make easy money.” Overall, the banking system is chaotic, prone to small crises, and generally weak, and the government has demonstrated a strong tendency to intervene.

WAGES AND PRICES Score: 3–Worse (moderate level of intervention) According to the Economist Intelligence Unit, “There are no price control laws for manufactured goods and products. However, the government still regulates utility and fuel pricing.” The U.S. Department of State reports that unpopular efforts to remove domestic fuel subsidies have failed. The government influences prices through the country’s many state-owned enterprises. Nigeria has a minimum wage. Based on the evidence of price controls, Nigeria’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, “Several factors undermine effective enforcement [of judgements]: the severe lack of available court facilities; hand-written judgements and the lack of computerized systems to facilitate document processing; the arbitrary adjournment of court sessions due to power outages; and easily corrupted court officials and judges. In some instances, decrees have been promulgated and backdated to circumvent court rulings.” Corruption continues to be a problem, although the Economist Intelligence Unit reports that the current administration has taken steps to curb it.

REGULATION Score: 4–Stable (high level) According to the U.S. Department of State, “Nigeria’s legal, accounting, and regulatory systems, fashioned after the British common law, remain consistent with international norms…. The primary problem regarding Nigeria’s regulatory system is lax and uneven enforcement.” In addition, “corruption is an endemic problem…and permeates all aspects of society, despite laws and penalties on the books. Foreign investors are convenient targets for extortion, bribery, and other corruptive acts since they are viewed as both relatively easy to coerce and profitable.”

BLACK MARKET Score: 5–Stable (very high level of activity) Transparency International’s 2001 score for Nigeria is 1.0. Therefore, Nigeria’s black market score is 5 this year.

2003 Index of Economic Freedom

NORWAY Rank: Score: Category:

Oslo

Trade Policy Fiscal Burden

2 4

Government Intervention 3 Monetary Policy 1

Foreign Investment 3 Banking and Finance 3

Norway boasts a welfare state and the high taxes needed to fund it. The official unemployment rate is below 4 percent, but government figures are misleading when compared to the number of hours actually worked, which is low because of sick leave and the number of people claiming disability. The European Union is Norway’s principal trading partner. In general, Norway is more open to trade than it is to foreign investment. Regulations, for example, prevented a Finnish banking and insurance group from taking over Norway’s largest insurer; according to the Financial Times, however, “A Norwegian government appointed committee recommended that the state relax its ownership rules on financial institutions to make them more compatible with European Economic Area guidelines.” A new government comprised of the Conservative Party, the Christian Democrats, and two Liberal MPs came to power in October 2001 as the new “co-operation government” under Christian Democrat Prime Minister Kjell Magne Bondevik. The Economist Intelligence Unit reports that “the new government will continue with its predecessor’s rethinking of the state’s role in the economy and has already indicated an even more open-minded attitude towards privatization and competition.” The new government plans to cut taxes and give more tax incentives to businesses, although this will be difficult since Bondevik is known to favor large welfare programs. Norway’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, Norway’s overall score is 0.15 point better this year.

TRADE POLICY Score: 2–Stable (low level of protectionism) According to the World Bank, Norway’s weighted average tariff in 2000 (the most recent year for which World Bank data are available) was 1.1 percent. Non-tariff barriers include quotas and other restrictions on agricultural imports. The government restricts agricultural imports by administratively adjusting tariff rates when internal market prices fall below certain price limits; these administrative adjustments, because they are unpredictable, serve to disrupt advance purchase orders and restrict agricultural imports.

FISCAL BURDEN OF GOVERNMENT

27 2.30 Mostly Free

Wages and Prices 2 Property Rights 1

Regulation Black Market

Scores for Prior Years: 2002: 2.45 1999: 2.35 1996: 2.45

2001: 2.45 1998: 2.35 1995: n/a

2000: 2.30 1997: 2.45

2001 Data (in constant 1995 US dollars) Population: 4,530,000 Total area: 324,220 sq. km GDP: $172.9 billion GDP growth rate: 1.4% GDP per capita: $38,167 Major exports: petroleum and petroleum products, machinery and equipment, metals, chemicals, ships, fish Exports of goods and services: $72.1 billion Major export trading partners: UK 19.8%, France 11.8%, Germany 11.6%, Netherlands 10.2%, Sweden 7.9%, US 7.9% Major imports: machinery and equipment, chemicals, metals, foodstuffs Imports of goods and services: $61.7 billion Major import trading partners: Sweden 15.5%, Germany 12.8%, UK 7.8%, Denmark 7.2%, US 7.05% Foreign direct investment (net): $2.8 billion

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) Norway’s top income tax rate is 47.5 percent; the marginal rate for the average taxpayer is 28 percent. The top corporate tax rate is 28 percent. In 2001, government expenditures equaled 41.8 percent of GDP, down from the 46.2 percent

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3 1

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reported in the 2002 Index. Based on the lower level of government expenditure, Norway’s overall fiscal burden of government score is 0.5 point better this year.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Stable (moderate level) Data from the International Monetary Fund indicate that the government consumed 20 percent of GDP in 2001. In the same year, based on data from Norway’s National Statistics, the government received 18.4 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, Norway’s weighted average annual rate of inflation was 2.95 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) In 1995, Norway adopted European Economic Area (EEA) rules guaranteeing national treatment for foreign investors and liberalizing regulations constraining foreign investment in industrial companies. The U.S. Department of State reports that the government still restricts investment in certain sectors, including financial services, mining, hydropower, and some real estate and land. Foreign investors must go through a screening process, and the government must be notified of investment above certain limits in large Norwegian corporations; limits vary according to sector. The government mandates specific conditions in granting petroleum exploration and production licenses; it also holds a direct interest in almost all offshore oil field projects and has shown some disinclination to allow foreign interests to control domestic oil businesses. Without exemption from the government, no single investor or group of investors may own more than 10 percent of a Norwegian insurance company, commercial bank, or savings bank. Half the members of the corporate assembly and the board of every financial institution must be permanent residents of Norway or citizens of the EEA, but a 1999 amendment expands this limit with official approval.

BANKING AND FINANCE Score: 3–Stable (moderate level of restrictions) Norway’s banking system is becoming more liberalized. “The Finance Ministry,” reports the U.S. Department of State, “has abolished remaining restrictions on the establishment of branches by foreign financial institutions including banks, mutual funds and other financial institutions. Under the liberalized regime, branches of U.S. and other foreign financial institutions are granted the same treatment as nationals in Norway.” However, “any investor—foreign or domestic—must obtain permission/concession from the Norwegian government to acquire more than 10 percent of the equity in any Norwegian financial institution.” The government favors

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Norwegian investors over foreign investors; the Economist Intelligence Unit cites the government’s attempt to prevent the sale of Christiana Bank to the Scandinavian Conglomerate MeritaNordbanken in favor of a “Norwegian solution” and its resistance to Finnish Sampo’s purchase of the country’s largest insurer, Storebrand. The government has reduced its holdings in Norway’s three largest banks and has sold its stake in the largest (Den Norske Bank).

WAGES AND PRICES Score: 2–Better (low level of intervention) The government exercises indirect control over many wages and prices. According to the Economist Intelligence Unit, “Indirect price controls and price fixing exist in several industries. Besides the oil-sector cases, the government has defended the right of utilities to practice price discrimination and to refuse to sell power outside of their distribution areas.” According to the U.S. Department of State, “There is no specified minimum wage, but wages usually fall within a national scale negotiated by labor, employers and the Government.” Based on the evidence that price controls do not apply to a significant portion of national output, Norway’s wages and prices score is 1 point better this year.

PROPERTY RIGHTS Score: 1–Stable (very high level of protection) Private property is safe from expropriation. The Economist Intelligence Unit reports that “contractual agreements are secure, with solid legal basis, and Norwegians generally place a high value on meeting these obligations. The civil service and the Judiciary are both of high quality….”

REGULATION Score: 3–Stable (moderate level) Some of Norway’s economy—especially agriculture and such service industries as telecommunications and transportation— remains heavily regulated. The U.S. Department of State reports that “Norway’s market, with the notable exception of agricultural products and ancillary processed foods, is transparent and quite open. Few technical standards exist except in telecommunications equipment, although there are stringent regulations for chemicals and foodstuffs.” Building permits are subject to considerable government oversight and can take some time to approve. When key sectors, like the oil and gas industry and transportation, are threatened by strikes, the government imposes mandatory wage mediation.

BLACK MARKET Score: 1–Stable (very low level of activity) Transparency International’s 2001 score for Norway is 8.6. Therefore, Norway’s black market score is 1 this year.

2003 Index of Economic Freedom

OMAN

Muscat

Rank: Score: Category: Trade Policy Fiscal Burden

3 3

Government Intervention 4 Monetary Policy 1

Foreign Investment 3 Banking and Finance 3

Oman, an absolute monarchy that has been ruled by Sultan Qaboos bin Said al-Said since 1970, has enjoyed considerable political stability, although there is long-term uncertainty about succession because the sultan has produced no heirs. The country’s small economy is dominated by the oil industry, which accounts for about 40 percent of GDP and about 75 percent of export earnings and government revenues. Oman’s 4 billion barrels of proven oil reserves are projected to last 20 years at current rates of production; the sultanate therefore seeks to lessen its dependence on oil exports by diversifying the economy, primarily to natural gas–based industry. The government has placed a high priority on “Omanization,” an ill-conceived program aimed at providing increased economic opportunities to Oman’s fast-growing population by replacing foreign workers with Omanis. Oman has opened the power, water, and other economic sectors to private participation, but much more needs to be done. Oman’s capital flows and foreign investment 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, Oman’s weighted average tariff rate in 1997 (the most recent year for which World Bank data are available) was 4.7 percent. Import licenses are required for all imports, and the U.S. Department of State reports that “customs procedures are complex. There are complaints of sudden changes in the enforcement of regulations.”

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 1–Stable (very low tax rates) Score—Government Expenditures: 5–Stable (very high level of government expenditure) Final Score: 3–Stable (moderate cost of government) No income taxes are imposed on individuals. A corporate tax of 30 percent is applied to companies with over 70 percent foreign ownership; the top corporate tax rate for domestic firms, and for companies with foreign ownership under 70 percent, is 12 percent. (The latter figure has been used to calculate Oman’s corporate taxation score.) In 2000, based on data from the Ministry of Finance, government expenditures equaled 34.9 percent of GDP.

56 2.80 Mostly Free

Wages and Prices 3 Property Rights 3

Regulation Black Market

Scores for Prior Years: 2002: 2.90 1999: 2.85 1996: 2.90

2001: 2.70 1998: 2.70 1995: 2.70

2000: 2.80 1997: 2.80

2000 Data (in constant 1995 US dollars) Population: 2,395,000 Total area: 212,460 sq. km GDP: $16.4 billion GDP growth rate: 4.9% GDP per capita: $6,848 Major exports: petroleum, fish, metals, textiles Exports of goods and services: $7.5 billion Major export trading partners: China 28.1%, Japan 17.5%, South Korea 15.0%, United Arab Emirates 8.8%, Thailand 8.6% Major imports: machinery and transport equipment, manufactured goods, food, livestock, lubricants Imports of goods and services: $6.2 billion Major import trading partners: United Arab Emirates 31.7%, Japan 15.2%, UK 8.5%, US 4.1%, Saudi Arabia 3.8% Foreign direct investment (net): $54 million

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 4–Stable (high level) The Economist Intelligence Unit reports that the government consumed 26.9 percent of GDP in 2000. In the same year, according to the International Monetary Fund, Oman received 61.92 percent of its total revenues from state-owned enterprises and government ownership of property.

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MONETARY POLICY

WAGES AND PRICES

Score: 1–Stable (very low level of inflation) From 1992 to 2001, Oman’s weighted average annual rate of inflation was –0.93 percent.

Score: 3–Stable (moderate level of intervention) The government controls the price of many goods and services through subsidies and free services. Government purchases also affect prices. According to the U.S. Department of State, “the government is, at present, the most important economic actor, both as an employer and as a purchaser of goods and services.” Oman has a minimum wage law that is strictly enforced.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Better (moderate barriers) When Oman became a member of the World Trade Organization, it adopted a policy of automatic approval of majority foreign ownership up to 70 percent; foreign ownership above 70 percent is allowed with Minister of Commerce and Industry approval. Tax reform adopted in 2001 provides more equal treatment of firms that are wholly or partially foreign-owned; national tax treatment is now applied to any firm with less than 70 percent foreign participation. Entry of new foreign firms in accounting, legal services, and insurance is not permitted, but the government has announced plans to open its service sector to foreign firms in the next few years. The government’s “Omanization” policy requiring quotas of native workers, replacing foreign workers, is an impediment to foreign investment. The U.S. Department of State notes that the government continues to promote “Buy Omani” policies and gives preference of 10 percent of the bid to Omani contractors. The same source reports that, despite the establishment of a “one-stop shop” in 1997 to aid foreign investors, “the approval process for establishing a business remains slow and subject to multiple government authorities, particularly with respect to land acquisition and labor requirements.” Both residents and non-residents may hold foreign exchange accounts. Restrictions on payments, transactions, and transfers generally apply only to Israel. Remittances of profits by commercial banks requires approval of the Central Bank of Oman. Based on recently relaxed policies on foreign investment, Oman’s capital flows and foreign investment score is 1 point better this year.

BANKING AND FINANCE Score: 3–Stable (moderate level of restrictions) Oman’s thriving banking sector includes 15 commercial banks, nine of which are foreign branches. The government operates four specialized banks that provide housing and industrial loans at favorable terms to Omani citizens. According to the Economist Intelligence Unit, the 2000 banking law gave “the Central Bank greater powers to regulate the local banking sector…. [T]he Central Bank is given the authority to vet and reject candidates for senior positions within commercial banks, and regulate credit exposure to major bank shareholders and their families. It also sets limits on investment in foreign securities and raised the paid-up capital requirements….” Investment in the local stock market is limited to Gulf Cooperation Council nationals, although foreigners may take part in mutual funds. In 1999, the government reformed the rules governing the stock market to increase transparency, improve regulations, bring the exchange more in line with accepted international practice, and establish the Capital Markets Authority to regulate the market.

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PROPERTY RIGHTS Score: 3–Stable (moderate level of protection) The threat of expropriation is low, although the judiciary is subject to political influence. The U.S. Department of State reports that “the various courts are subordinated to the Sultan and subject to his influence. The Sultan appoints all judges, acts as a court of final appeal, and intercedes in cases of particular interest, especially in national security cases.” According to the same source, “The ultimate adjudicator of business disputes within Oman is the Commercial Court, which was reorganized in mid-1997 from the former Authority for Settlement of Commercial Disputes (ASCD)…. Business representatives generally have found that the former ASCD’s use of general principles of equity in deciding cases not directly covered by Omani commercial law was fair. There have been complaints that powerful businessmen utilized their connections to secure an unfair advantage in ASCD rulings.”

REGULATION Score: 3–Stable (moderate level) The U.S. Department of State describes Oman’s regulatory system as “not always transparent and sometimes contradictory…. [T]here is no complete body of regulations codifying Omani labor and tax laws and many government decisions are made on an ad hoc basis.” The system can be characterized by red tape, confusion, and considerable delay, as the private sector must run a gantlet of government ministries to win approval for business plans. The labor laws, which enforce “Omanization” (the requirement that private-sector firms meet quotas for hiring native Omani workers), are similarly burdensome.

BLACK MARKET Score: 2–Stable (low level of activity) Oman’s black market is negligible, and the protection of intellectual property rights is effective. The government stringently enforces copyright laws. A new copyright law enacted in May 2000 brought Oman’s laws substantially in line with its World Trade Organization requirements. Overt piracy has decreased significantly, although some problems remain, including illegal software sales.

2003 Index of Economic Freedom

PAKISTAN

Islamabad

Rank: 99 Score: 3.30 Category: Mostly Unfree Trade Policy Fiscal Burden

5 3

Government Intervention 3 Monetary Policy 2

Foreign Investment 3 Banking and Finance 3

Pakistan’s political, economic, and security situation is so complicated, volatile, and potentially dangerous that it defies easy description. General Pervez Musharraf, in his second self-appointed year as president, assisted the United States in invading neighboring Afghanistan and overthrowing a government that Pakistan’s own intelligence services had put in place. In addition, Pakistan’s security forces cracked down on the activities of Kashmir “freedom fighters” in an attempt to demonstrate Islamabad’s decision to eschew terrorist activities mounted from its soil. Then, because of incomplete or half-hearted efforts, the same freedom fighters—now branded terrorists by the international community—launched two attacks against India that brought India and Pakistan to the brink of nuclear war. In 2000, Pakistan’s Supreme Court ruled that collecting interest from a loan is un-Islamic and thus would be illegal in Pakistan after June 2001. The military supports itself through a number of foundations that operate business ventures. Competing against these military-sponsored businesses is difficult because the military also controls substantial resources and political influence. Pakistan’s regulation score is 1 point better this year; however, its trade policy score is 1 point worse. As a result, Pakistan’s overall score is unchanged this year.

TRADE POLICY

Wages and Prices 3 Property Rights 4

Regulation Black Market

Scores for Prior Years: 2002: 3.30 1999: 3.45 1996: 3.15

2001: 3.45 1998: 3.20 1995: 3.15

2000: 3.40 1997: 3.20

2000 Data (in constant 1995 US dollars) Population: 134,790,000 Total area: 803,940 sq. km GDP: $71 billion GDP growth rate: 3.9% GDP per capita: $516 Major exports: textiles (garments, cotton cloth, and yarn), rice, other agricultural products Exports of goods and services: $9.9 billion

Score: 5–Worse (very high level of protectionism) According to the World Bank, Pakistan’s weighted average tariff rate in 1998 (the most recent year for which World Bank data are available) was 41.7 percent, up from the 13 percent (based on import duties as a percentage of total imports) reported in the 2002 Index. Based on newly available and more precise weighted average tariff data, Pakistan’s trade policy score is 1 point worse this year. The U.S. Department of State reports that non-tariff barriers take the form of extraneous fees, discriminatory treatment of imported goods, and arbitrary application of customs tariffs.

Major export trading partners: US 24.8%, UK 6.5%, United Arab Emirates 6.2%, Hong Kong 5.9%, Germany 5.6%

FISCAL BURDEN OF GOVERNMENT

Imports of goods and services: $12.3 billion

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) Pakistan’s top income tax rate is 35 percent; the marginal rate for the average taxpayer is 0 percent. Ernst & Young reports that Pakistan’s standard corporate tax rate is 45 percent, but banks are assessed a 50 percent tax rate and public companies are assessed only a 35 percent corporate tax. The standard 45 percent corporate tax has been used to score this factor rather than the 35 percent rate used in the 2002 Index. More accurate data from the Asian Development Bank indicate that in 2000, government expenditures equaled 23.2 percent of GDP rather than the 22.2 percent reported for the same year in the 2002 Index. Based on new corporate taxation data, Pakistan’s income and

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Major imports: machinery, petroleum, petroleum products, chemicals, transportation equipment, edible oils, grains, pulses, flour

Major import trading partners: Kuwait 11.7%, United Arab Emirates 10.7%, Saudi Arabia 10.5%, US 6.0%, Japan 5.6% Foreign direct investment (net): $427.9 million

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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 11 percent of GDP in 2000. In the same year, according to the International Monetary Fund, Pakistan received 17.25 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, Pakistan’s weighted average annual rate of inflation was 3.92 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) The only formal restrictions on foreign investment involve defense production, banking, and broadcasting. Officially, domestic and foreign firms are accorded equal treatment. Foreign investment in real estate for business purposes is not restricted. According to the Economist Intelligence Unit, “The minimum required investment in the service sector was reduced to $300,000 (from $500,000)…. Although foreign ownership may be legally unrestricted in manufacturing, the government gives strong preference to joint ventures by offering concessions on import duties.” Unofficial barriers include inconsistent application of the law, corruption, and poor infrastructure. According to the U.S. Department of State, “Potential investors in Pakistan face…inconsistent, sometimes contradictory policies and lack of transparency in decision making.” The International Monetary Fund reports that foreign exchange accounts are subject to restrictions. Payments and transfers are subject to approval and some restrictions. Many capital transactions either are not permitted or require approval.

BANKING AND FINANCE Score: 3–Stable (moderate level of restrictions) The government has privatized Allied Bank Limited and Muslim Commercial Bank but retains control of United Bank Ltd.; National Bank of Pakistan; and the country’s largest bank, Habib Bank Ltd. In 2001, there were 44 banks operating in Pakistan: 25 domestic and 19 foreign. According to the U.S. Department of State, “Foreign banks are subject to higher withholding taxes than Pakistani banks, but this gap is gradually being closed. Most foreign banks may not establish more than four branches, though at least one exception has been granted to this general rule. Otherwise foreign banks are accorded essentially the same treatment as Pakistani banks.” Domestic banks are plagued by poor lending decisions—particularly by state-owned banks—and inefficiency. Some consolidation may result from the increase in minimum capital requirements that went into effect in January 2002. Pakistan is technically an interest-free banking country under Is-

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lamic law. The Pakistani Supreme Court set June 30, 2001, as a deadline to prohibit all interest charges and payments in accordance with Islamic principles, but the central bank delayed the deadline by a year and seems reluctant to enforce the edict.

WAGES AND PRICES Score: 3–Stable (moderate level of intervention) The U.S. Department of State reports that subsidized food and household items are sold at government-owned stores. The government intervenes in the price of wheat. “Provincial and local authorities occasionally set the price of commodities perceived to be in short supply,” reports the Economist Intelligence Unit, “and the government effectively fixes prices on locally manufactured goods granted tariff protection. The government fixes prices…for certain products of state-owned firms, including cars, petroleum, and public utilities…. Formal price controls, however, are in place only for the pharmaceutical industry.” The government sets minimum wages for unskilled workers and a slightly higher minimum wage for skilled workers for businesses employing more than 50 workers.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) The Economist Intelligence Unit reports that “Pakistan’s Judiciary was completely separated from the executive in mid-2001, but the legal system still functions poorly, hampered by ineffective implementation of laws, poor security for judges and witnesses, delays in sentencing and a huge backlog of cases. Moreover, the interpretation of a contract may be influenced by the heavy bribe-taking that is still common.” According to the U.S. Department of State, the judiciary suffers from corruption.

REGULATION Score: 3–Better (moderate level) Pakistan has made efforts to improve its business environment in recent years. The U.S. Department of State reports that “the end of licensing regimes, the decline of bureaucratic controls, and the liberalizing trend of the last five years have reduced industrial concentration by bringing down barriers to entry.” The Economist Intelligence Unit reports that, “according to the new Investment Policy announced in mid-2001, official approval is not required for most new investments…. Pakistan banned the establishment of new plants for manufacturing alcohol, except for industrial uses.” According to the U.S. Department of State, “Policy inconsistency, weak implementation and corruption have dampened investor interest and economic growth in Pakistan.” Based on the evidence of liberalization and improvement of the regulatory environment, Pakistan’s regulation score is 1 point better this year.

BLACK MARKET Score: 4–Stable (high level of activity) Transparency International’s 2001 score for Pakistan is 2.3. Therefore, Pakistan’s black market score is 4 this year.

2003 Index of Economic Freedom

PANAMA

Panama City

Rank: Score: Category: Trade Policy Fiscal Burden

3 4

Government Intervention 3 Monetary Policy 1

Foreign Investment 2 Banking and Finance 1

44 2.65 Mostly Free

Wages and Prices 2 Property Rights 4

Regulation 3.5 Black Market 3.5

Panama’s democratic government maintains a mixed record on economic growth and liberalization. It has improved the highways and roads around Panama City, and the city of Colon has experienced a rebirth as a Caribbean port of call for cruise liners with a $45 million investment in the Colon 2000 renovation program. During a five-month period in 2001, 150,000 tourists visited the resort and free trade zone. However, little has been done with former U.S. military properties that have reverted to Panamanian control and now languish while the government searches for investors. President Mireya Moscoso and the Legislative Assembly, which is dominated by the political opposition, have not been able to agree on a clear economic strategy for the country, and various interest groups, such as farmers and unions, have taken advantage of the leadership vacuum to block liberalization. Since 2000, the government has imposed agriculture tariffs and import barriers, and labor organizations have succeeded in winning minimum wage hikes to be implemented in increments through 2004. Additionally, both the Revolutionary Armed Forces of Colombia (FARC) and Colombia’s United Self-Defense Forces (AUC) continue their crossborder skirmishes in Panama’s lightly populated Darién Province. Panama’s fiscal burden of government score is 0.5 point worse this year; however, its trade policy score is 1 point better. As a result, Panama’s overall score is 0.05 point better this year.

Scores for Prior Years:

TRADE POLICY

Major export trading partners: US 45.9%, Sweden 8.1%, Belgium-Luxembourg 5.3%, Costa Rica 5.1%

Score: 3–Better (moderate level of protectionism) According to the World Bank, Panama’s weighted average tariff rate in 2000 (the most recent year for which World Bank data are available) was 7.8 percent, down from the 12 percent reported in the 2002 Index. As a result, Panama’s trade policy score is 1 point better this year. According to the U.S. Department of State, “The Government has erected substantial non-tariff barriers for certain agricultural products including chicken, beef, and some produce and dairy products.” With respect to specific implementation of this policy, “the mechanism utilized has been alleged phytosanitary deficiencies or simply the refusal or delays in processing phytosanitary permit applications for agricultural products. Panamanian law provides that such permits be presumed issued if not processed within 30 days but the relevant ministry has refused to recognize this legislation and refused entry for such shipments.”

2002: 2.70 1999: 2.40 1996: 2.50

2001: 2.55 1998: 2.40 1995: 2.40

2000: 2.40 1997: 2.50

2000 Data (in constant 1995 US dollars) Population: 2,856,000 Total area: 78,200 sq. km GDP: $9.3 billion GDP growth rate: 2.3% GDP per capita: $3,279 Major exports: bananas, shrimp, sugar, coffee, clothing Exports of goods and services: $3.3 billion

Major imports: capital goods, crude oil, foodstuffs, consumer goods, chemicals Imports of goods and services: $4.21 billion Major import trading partners: US 33.1%, Ecuador 7.2%, Venezuela 6.6%, Japan 5.5% Foreign direct investment (net): $552 million

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 3–Worse (moderate tax rates) Score—Government Expenditures: 5–Worse (very high level of government expenditure) Final Score: 4–Worse (high cost of government) Panama’s top income tax rate is 30 percent; the marginal rate for the average taxpayer is 4 percent. The top corporate tax rate is 30 percent. Preliminary numbers from the Ministry of the Economy indicate that government expenditures equaled 35.38 percent of GDP in

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2000, up from the 26.9 percent reported in the 2002 Index. Based on clarification in the methodology for calculating the income tax score, as well as the higher level of government expenditure, Panama’s fiscal burden of government score is 0.5 point worse this year.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Stable (moderate level) According to the World Bank, the government consumed 14.8 percent of GDP in 2000. The International Monetary Fund reports that in 1999, Panama received 18.49 percent of its total revenues from state-owned enterprises and government ownership of property.

MONETARY POLICY Score: 1–Stable (very low level of inflation) Between 1992 and 2001, Panama’s weighted average annual rate of inflation was 0.69 percent, primarily because Panama has used the U.S. dollar as its currency since 1904.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 2–Stable (low barriers) Most sectors of Panama’s economy are open to foreign investment, although there are a few restrictions on “national interest” industries, retail trade, and some services, and some professions require Panamanian technical licenses. The International Monetary Fund reports that residents and non-residents are permitted to 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 except within 10 kilometers of a national border or an island. Foreign nationals may comprise no more than 10 percent of the blue-collar work force for any business, and specialized and technical workers may comprise no more than 15 percent of the total number of employees in any business.

BANKING AND FINANCE Score: 1–Stable (very low level of restrictions) Domestic competition in banking is relatively high, and major banks from all over the world operate in Panama, which had 69 licensed banking institutions in 2001. Offshore banking in the International Banking Center is significant and subject to little financial regulation. Foreign and domestic banks are treated equally. The government issues three types of licenses that determine the services each bank may offer. Domestic banks are permitted to engage in a broad range of services. There are few restrictions on opening banks, and the government exercises little control over the allocation of credit. A banking reform law enacted in 1998 further modernized the banking system by requiring banks to adopt international banking standards and open their books to international auditing firms. This was followed in July 1999 by passage of a law regulating the securities market. The government has delayed plans to close two of the smaller state-owned banks but will likely proceed in order to meet International Monetary Fund conditions and end their drain on public finances. In June 2001, just one year after being placed on

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the list, Panama was removed from the Organisation for Economic Co-operation and Development’s Financial Action Task Force blacklist of countries that were not cooperating in the fight against money laundering.

WAGES AND PRICES Score: 2–Stable (low level of intervention) The market sets most wages and prices, although the U.S. Department of State reports that the government regulates the activities and pricing of private energy and telecommunications providers. The government also imposes a minimum wage that is reviewed every two years.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) Panama’s constitution provides for an independent judiciary, but the judicial system is inefficient and subject to corruption. According to the Economist Intelligence Unit, “Panama continues to have problems with the judiciary and civil service, which still lack independence and have traditionally been plagued with corruption and scandals. No Panamanian government has yet addressed these issues.”

REGULATION Score: 3–Stable (moderate level) Regulations in Panama are generally transparent, but businesses can be hampered by red tape. The U.S. Department of State reports that investors in the mining sector, for example, complain that “mining sector growth has been limited…by excessive bureaucracy in authorizing exploration, opposition by indigenous groups, and slow implementation of a mining master plan.” In addition, rigid labor laws reduce labor mobility and inhibit hiring. Corruption is a continuing problem; according to the U.S. Department of State, “Panamanian laws regarding corruption are generally weak, and government enforcement bodies such as the Comptroller General and the Attorney General have historically been ineffective in pursuing and prosecuting those accused of corruption.” Companies complain that corruption in Panama is a “nuisance” obstacle to doing business.

BLACK MARKET Score: 3.5–Stable (high level of activity) Transparency International’s 2001 score for Panama is 3.7. Therefore, Panama’s black market score is 3.5 this year.

2003 Index of Economic Freedom

PARAGUAY Rank: 99 Score: 3.30 Category: Mostly Unfree

Asunción

Trade Policy Fiscal Burden

3 2

Government Intervention 3 Monetary Policy 3

Foreign Investment 3 Banking and Finance 3

Since taking office in 1999, President Luís González Macchi has failed to implement economic reform or revitalize Paraguay’s depressed economy. Political corruption scandals have weakened González’s authority and depressed public confidence. Privatization plans for state utilities have been overturned as a result of public protest. Public debt is increasing. An April 2002 International Monetary Fund visit to Paraguay did not produce a new reform program (the most recent such program having expired in 2001) because of concerns about fiscal instability, unreliable national economic data, and the government’s failure to privatize. In the absence of both fiscal reform and support from international financial institutions, Paraguay is in danger of defaulting on its debt. A depreciating currency could fuel default as well. The crisis in neighboring Argentina has affected the Paraguayan economy by disrupting trade relations, in addition to highlighting Paraguay’s own structural problems. Terrorist activity remains a problem; the region of Ciudad del Este is known for housing terrorists, drug traffickers, and money-launderers. The Economist Intelligence Unit reports that the United States, suspecting possible links between terrorists and Paraguayan officials, has withdrawn visas from several government employees. Presidential elections scheduled for May 2003 could bring an administration capable of implementing economic reform and rooting out terrorists; until then, no progress is anticipated. Paraguay’s government intervention score and capital flows and foreign investment score are both 1 point worse this year. As a result, its overall score is 0.20 point worse this year.

TRADE POLICY Score: 3–Stable (moderate level of protectionism) As a member of the Southern Cone Common Market (MERCOSUR), Paraguay has been increasing its tariff rate each year to comply with MERCOSUR’s common external tariff (CET) and is on schedule for parity with the CET by the end of 2006. According to the World Bank, Paraguay’s weighted average tariff rate in 2000 (the most recent year for which World Bank data are available) was 10.5 percent. The government maintains no major nontariff barriers to trade, although it has erected barriers to some agricultural imports such as poultry.

Wages and Prices 3 Property Rights 4

Regulation Black Market

Scores for Prior Years: 2002: 3.10 1999: 2.80 1996: 2.65

2001: 3.20 1998: 2.80 1995: 2.65

2000: 2.80 1997: 2.65

2000 Data (in constant 1995 US dollars) Population: 5,496,000 Total area: 406,750 sq. km GDP: $9.2 billion GDP growth rate: –0.4% GDP per capita: $1,700 Major exports: electricity, soybeans, feed, cotton, meat, edible oils Exports of goods and services: $2.3 billion Major export trading partners: Brazil 28.1%, Uruguay 18.2%, Argentina 6.1% Major imports: road vehicles, consumer goods, tobacco, petroleum products, electrical machinery Imports of goods and services: $2.5 billion Major import trading partners: Brazil 28.3%, Argentina 24.1%, Uruguay 3.5% Foreign direct investment (net): $87 million

FISCAL BURDEN OF GOVERNMENT 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) Paraguay imposes no taxes on income derived from personal work, services provided, or professional services rendered. (The government levies a 30 percent tax on individuals engaged in sole proprietorship, but the impact of this tax is negligible.) The top corporate tax rate is 30 percent. In 2000, according to the Inter-American Development Bank, government expenditures equaled 15.5 percent of GDP.

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GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Worse (moderate level) The World Bank reports that the government consumed 10.3 percent of GDP in 2000, up from the 9 percent reported in the 2002 Index. In the same year, according to the International Monetary Fund, Paraguay received 13.04 percent of its total revenues from state-owned enterprises and government ownership of property. Based on the higher level of government consumption, Paraguay’s government intervention score is 1 point worse this year.

MONETARY POLICY Score: 3–Stable (moderate level of inflation) From 1992 to 2001, Paraguay’s weighted average annual rate of inflation was 7.79 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Worse (moderate barriers) Paraguay is generally open to foreign investment. According to the U.S. Department of State, “There are no formal restrictions [on] foreign investment in Paraguay. National treatment of foreign investors is guaranteed, as is full repatriation of capital and profits.” Other factors, such as widespread corruption and lack of property rights protection, impede foreign investment, and the many government-controlled sectors act as a restriction. Foreign investors still face significant challenges through corruption, bureaucracy, and a lack of transparency. The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts. Most payments and transfers are permitted. Capital transactions face minimal restrictions. Based on the lack of transparency and the level of corruption, Paraguay’s capital flows and foreign investment score is 1 point worse this year.

BANKING AND FINANCE Score: 3–Stable (moderate level of restrictions) Paraguay’s banking system remains weak, and private banks tend to invest abroad rather than in Paraguay. With the credibility of the central bank undermined by scandals, a decision was made in 2000 to require the bank’s president to secure the endorsement of the board of directors before implementing policy measures. Banks may engage in most financial activities, including the sale of stocks, bonds, and other securities. According to Standard & Poor’s, “since the series of banking crises in the 1990s, which stemmed from poor supervision/regulation and fraud, the system has remained dominated by foreign banks that now hold over 80% of deposits.” Efforts to merge, reform, or close public-sector banks have met political resistance; this is also a financially difficult issue, as the expense of absorbing large amounts of non-performing loans will be steep. There were 19 banks operating in Paraguay in 2002.

transportation fares.” The state also intervenes in the cotton market for small farmers. The Ministry of Justice and Labor sets a private-sector minimum wage.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) Expropriation of property is still possible. According to the U.S. Department of State, “Increasing pressure by peasants for land has led to invasions of rural properties and expropriations by the government.” In addition, “judges are often pressured by politicians and other persons whose interests are at stake…. There is little confidence in the legal system because cases routinely take several years, even as long as a decade, to resolve and because accusations of undue influence on judges are widespread.”

REGULATION Score: 4–Stable (high level) According to the U.S. Department of State, “Institutionalized corruption is…a barrier to investment.” Any would-be business must register with three different agencies in a duplicative process that frequently takes months to conclude. The same source reports that “voting board members of any company incorporated in Paraguay must be legal residents. This has posed some obstacles to potential foreign investors. Another potential roadblock is Paraguay’s law protecting agents and distributors (law 194/93). The law features severe penalties for severing relations with a distributor/agent (a percentage of gross sales since the inception of the contract to be determined by a judge) that often lead to expensive out-of-court settlements. The constitutionality of this law is being challenged in a case before the Supreme Court.”

BLACK MARKET Score: 5–Stable (very high level of activity) The U.S. Department of State reports that the black market is immense, and the U.S. Trade Representative reports that “Paraguay continues to be a regional center for piracy and counterfeiting and a transshipment point for infringing products to the larger markets bordering Paraguay.” According to the Economist Intelligence Unit, “the authorities’ ability to track trade is woefully inadequate. The mixture of contraband trade and re-exports, particularly around Ciudad del Este on the border with Brazil, is a major factor sustaining the Paraguayan economy.”

WAGES AND PRICES Score: 3–Stable (moderate level of intervention) The market sets most prices. According to the U.S. Department of State, “Consumer prices are generally determined by supply and demand, except for public sector utility rates (water, electricity, telephone), petroleum products, pharmaceutical products, and public

332

2003 Index of Economic Freedom

PERU Rank: Score: Category:

Lima

Trade Policy Fiscal Burden

4 2.5

Government Intervention 3 Monetary Policy 1

Foreign Investment 2 Banking and Finance 2

Two years ago, Alberto Fujimori, then President of Peru, went into exile in Japan after a scandal involving Fujimori, his military chief, and many other political figures. That episode exposed rampant corruption , the weakness of the rule of law, and the lack of congressional and judicial independence. In June 2001, Alejandro Toledo was elected president on a platform of sound economic growth, investment promotion, job creation, and poverty reduction. He also effectively played the race card, emphasizing his indigenous roots. After several months, as the economy failed to show signs of tangible recovery, his popularity began to decline. In February 2002, the government signed an agreement with the International Monetary Fund committing the country to a program of structural reform, including a reduction in the payroll tax and import tariffs and the advancement of privatization. The reform was also designed to end various tax exemptions. Getting reforms passed, however, has been difficult. According to the Economist Intelligence Unit, “the bills on tax debt restructuring, privatization policy and employment proved specially difficult, with [the bills] constantly being sent between Congress and the executive for amendment.” This environment makes it hard to privatize the four remaining state-owned refineries, the water and sewage treatment plant, and some electricity distributors. The Peruvian Congress’s apparent unwillingness to approve the government’s privatization program could well prove to be the most serious test of the country’s resolve to modernize. Peru’s monetary policy score is 1 point better this year; however, its trade policy score and government intervention score are, respectively, 1 point and 0.5 point worse. As a result, Peru’s overall score is 0.05 point worse this year.

TRADE POLICY Score: 4–Worse (high level of protectionism) According to the World Bank, Peru’s weighted average tariff rate in 1999 (the most recent year for which World Bank data are available) was 12.6 percent. In 1991, Peru introduced “temporary” import surcharges on some agricultural products, claiming they were needed to offset subsidies by exporting countries. The U.S. Department of State reports that “the government began reducing the surcharges in increments in April 1994, and in July 2001, this system was replaced by a ‘price band system’ similar to one used by the Andean Community.” Based on the evidence with respect to the overall level of non-tariff barriers, Peru’s trade policy score is 1 point worse this year.

Chapter 6: The Countries

56 2.80 Mostly Free

Wages and Prices 2 Property Rights 4

Regulation 4.0 Black Market 3.5

Scores for Prior Years: 2002: 2.75 1999: 2.55 1996: 2.90

2001: 2.50 1998: 2.85 1995: 3.30

2000: 2.45 1997: 2.90

2000 Data (in constant 1995 US dollars) Population: 25,661,000 Total area: 1,285,220 sq. km GDP: $61 billion GDP growth rate: 3.1% GDP per capita: $2,368 Major exports: fish and fish products, copper, zinc, gold, crude petroleum and byproducts, lead, coffee, sugar, cotton Exports of goods and services: $10.1 billion Major export trading partners: US 27.5%, Switzerland 8.3%, UK 8.3%, China 6.4% Major imports: machinery, transport equipment, foodstuffs, petroleum, iron and steel, chemicals, pharmaceuticals Imports of goods and services: $9.8 billion Major import trading partners: US 27.0%, Spain 8.4%, Chile 6.4%, Venezuela 4.4% Foreign direct investment (net): $623 million

333

FISCAL BURDEN OF GOVERNMENT

BANKING AND FINANCE

Score—Income and Corporate Taxation: 2.5–Stable (moderate tax rates) Score—Government Expenditures: 2–Stable (low level of government expenditure) Final Score: 2.5–Stable (moderate cost of government) According to the Peruvian embassy, Peru’s top income tax rate is 27 percent; the marginal rate for the average taxpayer is 0 percent. The corporate tax rate is 27 percent plus a 4.1 percent additional tax on distributed earnings, resulting in a potential corporate tax of 31.1 percent. In 2000, based on data from the International Monetary Fund, government expenditures equaled 19.3 percent of GDP.

Score: 2–Stable (low level of restrictions) The 1991 Law of Banks, modified in 1996, established a non-discriminatory policy toward foreign banks, opened the country to foreign banks and insurance companies, established capital requirements, and strengthened prudential standards and disclosure requirements. The government has liberalized the banking sector and has privatized most state-owned banks. Peru’s banking system has 15 commercial banks, of which 10 are majority foreign-owned. The two government-owned banks (Banco de la Nacion, a deposit-taking bank, and COFIDE, a development bank) account for 15 percent of banking assets. In February 1999, the Peruvian Congress passed a law establishing a fund to guarantee deposits in private and corporate savings accounts.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Worse (moderate 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, Peru received 9.43 percent of its total revenues from state-owned enterprises and government ownership of property, up from the 7.54 percent reported in the 2002 Index. As a result, Peru’s government intervention score is 0.5 point worse this year.

MONETARY POLICY Score: 1–Better (very low level of inflation) From 1992 to 2001, Peru’s weighted average annual rate of inflation was 2.85 percent, down from the 4.37 percent from 1991 to 2000 reported in the 2002 Index. As a result, Peru’s monetary policy score is 1 point better this year.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 2–Stable (low barriers) Foreign investment in Peru is welcomed and encouraged. Equal treatment for foreign and domestic investors is mandated by law, as is automatic investment approval, except in the banking and defense sectors. The government has eliminated controls on capital flows, and there are no local content requirements. Foreign ownership of land or water within 50km of the country’s borders is prohibited unless the government grants an exception. Majority ownership in broadcast media is restricted to Peruvian citizens. According to the U.S. Department of State, “U.S. firms continue to complain that executive branch ministries, regulatory agencies and the judiciary lack the resources, expertise and independence necessary to carry out their respective duties.” 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, or repatriation of profits, and non-residents may purchase real estate. Foreign investors must register with the National Commission on Foreign Investment and Technology to guarantee the repatriation of profits, capital, and royalties. Peruvian law limits foreign employees to 20 percent of the work force and no more than 30 percent of the payroll, but there are numerous exemptions.

334

WAGES AND PRICES Score: 2–Stable (low level of intervention) According to the U.S. Department of State, “Price controls, direct subsidies, and restrictions on foreign investment have been eliminated.” The Peruvian embassy reports that the government regulates prices for telecommunications, electricity, water, and some transportation. Peru maintains a minimum wage.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) Peru does not adequately protect private property. The crisis that brought down former President Alberto Fujimori in 2000 also exposed the extent to which corruption and a lack of independence characterize Peru’s judicial system; according to the Economist Intelligence Unit, “the justice system is rebuilding after years of intervention during the Fujimori administration.” The government of Alejandro Toledo is still expected to restore confidence by attacking corruption and strengthening the judiciary.

REGULATION Score: 4–Stable (high level) Peru remains plagued by an inefficient bureaucracy. According to the U.S. Department of State, “Various procedures—such as obtaining building licenses or certificates of occupancy—require many steps to carry out, and information on necessary procedures is often difficult to obtain. Business people often complain of excessive government red tape…. Peruvian business organizations allege that high government-imposed costs impede investment.” In addition, “corruption is a major factor influencing the business climate.” A new labor law passed in February 2002 increased the labor market’s rigidity.

BLACK MARKET Score: 3.5–Stable (high level of activity) Transparency International’s 2001 score for Peru is 4.1. Therefore, Peru’s black market score is 3.5 this year.

2003 Index of Economic Freedom

Manila

THE PHILIPPINES Rank: Score: Category:

Trade Policy Fiscal Burden

2 2.5

Government Intervention 2 Monetary Policy 2

Foreign Investment 3 Banking and Finance 3

Philippine President Gloria Macapagal-Arroyo seems to have weathered the storm of political uncertainty that followed her rather dubious constitutional succession to the presidency when her predecessor, Joseph Estrada, was forced to resign in January 2001. Promising fiscal discipline, the Arroyo government exceeded its deficit target by only 1.4 percent. The Philippines has made substantial, albeit slow, progress in liberalizing its economy. From 1987–2001, the government privatized some 480 state-owned enterprises, and it hopes to continue this trend; under a law passed in 2002, for example, the energy sector will be open to greater competition. However, nationalist forces continue to defend constitutional restrictions on foreign ownership of corporations that also restrict greater liberalization, and expatriate businessmen continue to complain that administrative bureaucracy has actually worsened. Moreover, despite rosier than expected economic prospects for the near future, the Philippines continues to deal with security issues; some 660 U.S. special forces were recently deployed there to help upgrade the Philippine military to deal more effectively with a militant Muslim insurgency. The Philippines’ trade policy score is 1 point better this year. As a result, its overall score is 0.10 point better this year.

TRADE POLICY Score: 2–Better (low level of protectionism) According to the World Bank, the Philippines’ weighted average tariff rate in 2000 (the most recent year for which World Bank data are available) was 3.8 percent, down from the 6.7 percent reported in the 2002 Index. As a result, the Philippines’ trade policy score is 1 point better this year. According to the Economist Intelligence Unit, “the National Food Authority (NFA) remains the sole importer of ordinary rice and continues to be involved in imports of maize…. [I]mporters have complained that processing of import shipments [was] delayed on a number of occasions by disputes over the valuation of goods.”

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 Philippines’ top income tax rate is 32 percent; the marginal rate for the average taxpayer is 15 percent. The top corporate tax is 32 percent. In 2000, according to the Asian Development Bank, government expenditures equaled 19.4 percent of GDP.

Chapter 6: The Countries

62 2.85 Mostly Free

Wages and Prices 3 Property Rights 3

Regulation Black Market

4 4

Scores for Prior Years: 2002: 2.95 1999: 2.85 1996: 2.95

2001: 3.05 1998: 2.65 1995: 3.20

2000: 2.85 1997: 2.85

2000 Data (in constant 1995 US dollars) Population: 75,580,000 Total area: 300,000 sq. km GDP: $87 billion GDP growth rate: 4.0% GDP per capita: $1,167 Major exports: electronic equipment, machinery and transport equipment, garments, coconut products Exports of goods and services: $31.8 billion Major export trading partners: US 28.7%, EU 17.9%, Japan 14.1%, Singapore 7.9%, Taiwan 7.3% Major imports: raw materials and intermediate goods, capital goods, consumer goods, fuels Imports of goods and services: $36 billion Major import trading partners: Japan 19.2%, US 15.5%, EU 9.2%, South Korea 7.5%, Taiwan 7.2% Foreign direct investment (net): $1.9 billion

335

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 2–Stable (low level) The World Bank reports that the government consumed 12.8 percent of GDP in 2000. In the same year, according to the International Monetary Fund, the Philippines received 2.99 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, the Philippines’ weighted average annual rate of inflation was 5.88 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) The Philippines maintains barriers to many foreign investments, with 100 percent or majority Filipino ownership required in over 30 specific industries, including mass media, retail trade, most professional services, use of marine resources, weapons, advertising, public utilities, commercial fishing, most manufacturing, and development of natural resources. Foreign equity in real estate is limited to 40 percent and is subject to provisions in the constitution. The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts, although non-residents may do so only with foreign currency deposits or proceeds from conversions of property in the Philippines. Payments, transactions, and transfers are subject to numerous restrictions, controls, quantitative limits, and authorizations.

created regional tripartite (government, labor, and employer) wage and productivity boards to fix minimum wages for regions, provinces, or industries that are enforced by fines and jail sentences.

PROPERTY RIGHTS Score: 3–Stable (moderate level of protection) Expropriation of private property is unlikely. The Economist Intelligence Unit reports that “the country has a slow judicial system, hampered by lack of funding and an insufficient number of judges to handle court cases.” According to the U.S. Department of State, “The judiciary is independent, but suffers from inefficiency and corruption…. The Government has been ineffective in reforming the police, the military forces, or the court system, with its poorly paid, overburdened judges and prosecutors. The court system remains susceptible to the influence of the wealthy and powerful, while failing to provide equal justice for others.” In addition, “both foreign and domestic investors have expressed concern about the propensity of courts to issue temporary restraining orders and to stray beyond matters of legal interpretation into policymaking functions.”

REGULATION

Score: 3–Stable (moderate level of restrictions) The banking sector is weak and is still trying to recover from the 50 percent devaluation in the Philippine peso in 1997 and from non-performing loans that, according to Standard & Poor’s, “approached 19 percent of total loans in 2001.” The Economist Intelligence Unit reports that the ratio of total banking assets to GNP is the lowest in East Asia. The ban on foreign banks was lifted in 1994, and in May 2000, the government passed the General Banking Law of 2000, which allows an unlimited number of foreign banks to fully own domestic banks over the succeeding seven years. In March 2001, the banking sector included 45 commercial banks (19 of them foreign-controlled, including 13 foreign branch banks and six majority foreign-owned subsidiaries); 111 thrift banks; and 787 rural banks. The banking system still suffers from insufficient supervision and periodic government intervention.

Score: 4–Stable (high level) The Philippine government has eliminated some significantly burdensome regulations, but since its regulatory agencies are not independent of executive branch control, lack of transparency is a concern. Regulations are also enforced haphazardly. According to the U.S. Department of State, “many…investors find business registration, customs, immigration, and visa procedures in the Philippines burdensome and a source of frustration. Some agencies (such as the Securities and Exchange Commission, Board of Investment, Department of Foreign Affairs) have established express lanes or ‘one-stop shops’ to reduce bureaucratic delays, with varying degrees of success…. Enforcement of regulations, once issued, is often weak and sometimes inconsistent.” Corruption continues to be a problem up to the highest levels of government. The same source reports that “an October 2000 USAIDfunded survey of more than 600 randomly selected Philippine and foreign-invested enterprises in the National Capital Region suggests that graft remains a serious problem at many levels in all branches of the Philippine Government. Almost three-fourths (73 percent) of the enterprises surveyed had extensive or moderate personal knowledge of public sector corruption on matters directly related to their sector of business. Almost one-half (45 percent) believed companies need to give bribes to win public sector contracts.”

WAGES AND PRICES

BLACK MARKET

Score: 3–Stable (moderate level of intervention) The market sets most wages and prices, but the Economist Intelligence Unit reports that the government controls or influences the price of “electricity distribution, water, telephone charges, public transport fares, port charges and road tolls.” In addition, “The president can also impose price controls to check inflation or ease social tension.” The Philippine Wage Rationalization Act

Score: 4–Stable (high level of activity) Transparency International’s 2001 score for the Philippines is 2.9. Therefore, the Philippines’ black market score is 4 this year.

BANKING AND FINANCE

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2003 Index of Economic Freedom

POLAND

Warsaw

Trade Policy Fiscal Burden

3 4.5

Government Intervention 2 Monetary Policy 3

Foreign Investment 3 Banking and Finance 2

At the beginning of 1990, Poland became the first country in post-communist Europe to embrace economic liberalization. Years of economic transformation have resulted in deep structural change. Poland is implementing reforms to deregulate, increase transparency, and promote competition in anticipation of its accession to the European Union, but these reforms remain a work in process. The banking sector has been almost completely privatized, with 75 percent of the assets owned by foreign institutions. Despite growing pressure from the Union of Labor and the Peasants Party—the populist coalition partners in the ruling Democratic Left Alliance—to loosen monetary policies, the government has maintained its commitment to monetary discipline. Spending cuts and higher taxes have been imposed to cope with a short-term fiscal emergency. The government’s ambitious economic program, announced in October 2001, aims to return the country to a path of sustained economic growth and is focused on three major components: job creation for young professionals, support of medium and small enterprises, and infrastructure development. It also aims to build the public–private mix in Poland, which will be similar to that in the EU. Accession to the EU is complicated by restrictions on land ownership and by Germany’s apprehensions over the possibility of more subsidies. Poland’s exports depend largely on EU markets; Germany alone accounted for nearly 35 percent of exports in 2001. Therefore, joining the EU has become the overall political and economic priority for Poland, which is also a member of the World Trade Organization and NATO. Poland’s trade policy and capital flows and foreign investment scores are both 1 point worse this year. As a result, its overall score is 0.20 point worse this year.

TRADE POLICY Score: 3–Worse (moderate level of protectionism) According to the World Bank, Poland’s weighted average tariff rate in 2000 (the most recent year for which World Bank data are available) was 7.4 percent, up from the 3.11 percent reported in the 2002 Index. As a result, Poland’s trade policy score is 1 point worse this year. The government maintains non-tariff barriers through its issuance of import permits on a growing number of products. The U.S. Department of State reports that import permit requirements “hamper import prospects for certain bulk products that might otherwise be shipped in larger quantities on ocean-going vessels.”

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) Poland’s top income tax rate is 40 percent; the marginal rate for the average taxpayer is 19 percent. The top corporate tax rate is 28 percent. In 2001, government expenditures equaled 45.5 percent of GDP.

Chapter 6: The Countries

Rank: Score: Category:

66 2.90 Mostly Free

Wages and Prices 3 Property Rights 2

Regulation 3.5 Black Market 3.5

Scores for Prior Years: 2002: 2.70 1999: 2.80 1996: 3.10

2001: 2.75 1998: 2.90 1995: 3.30

2000: 2.80 1997: 3.10

2001 Data (in constant 1995 US dollars) Population: 38,632,000 Total area: 312,685 sq. km GDP: $165.1 billion GDP growth rate: 1.1% GDP per capita: $4,273 Major exports: machinery and transport equipment, intermediate manufactured goods, miscellaneous manufactured goods, food and live animals Exports of goods and services: $53 billion Major export trading partners: Germany 34.9%, Italy 6.3%, France 5.2%, Netherlands 5.1%, UK 4.5% Major imports: machinery and transport equipment, intermediate manufactured goods, chemicals, miscellaneous manufactured goods Imports of goods and services: $55.2 billion Major import trading partners: Germany 23.9%, Russia 9.4%, Italy 8.3%, France 6.4%, UK 4.5% Foreign direct investment (net): $6.3 billion

337

GOVERNMENT INTERVENTION IN THE ECONOMY

WAGES AND PRICES

Score: 2–Stable (low level) Based on data from the International Monetary Fund, the government consumed 15.5 percent of GDP in 2001. In 2000, according to the same source, Poland received 3.12 percent of its total revenues from state-owned enterprises and government ownership of property.

Score: 3–Stable (moderate level of intervention) Poland has removed a number of price controls, but the government continues to influence the prices of some products. According to the Economist Intelligence Unit, “Official prices apply under the following conditions: (1) to goods or services when there are substantial threats to the proper functioning of the economy as specified by the Council of Ministers; (2) to pharmaceutical and medical materials that are covered by health insurance; and (3) to prices for taxi services…. [U]tility prices [are subject to] supervision if the provider is market dominating.” Poland mandates a minimum wage that is adjusted every three months through negotiations involving the government, the unions, and employers.

MONETARY POLICY Score: 3–Stable (moderate level of inflation) From 1992 to 2001, Poland’s weighted average annual rate of inflation was 7.17 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Worse (moderate barriers) Polish law allows 100 percent foreign ownership of domestic businesses with notable exceptions, including defense-related industries, mining, steel, fuel and energy operations, fisheries, broadcasting, gambling, legal and financial services, and aviation services. The government lifted the cap on foreign ownership of telecommunications on January 1, 2001. Foreign purchase of land over a set area requires government approval. According to the U.S. Department of State, “The government acknowledges that its policies are not as transparent as they ought to be and that bureaucratic requirements continue to impose a burden on investors…. Nonetheless, frustration with lack of transparency in government regulation and the high level of ‘red tape’ are the top complaints of investors, domestic and foreign.” The same source reports that unclear rules and outright corruption are informal barriers to foreign investment. The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts, subject to certain restrictions. Payments, transactions, and transfers over a specified amount must be conducted through a domestic bank. Most capital transactions require foreign exchange permits or central bank approval. Based on evidence of restrictions on investment and capital transactions, Poland’s capital flows and foreign investment score is 1 point worse this year.

BANKING AND FINANCE

PROPERTY RIGHTS Score: 2–Stable (high level of protection) Private property is generally well-protected in Poland but suffers from delays and inefficiency. According to the U.S. Department of State, “Many investors—foreign and domestic—complain about the slowness of the judicial system…. [I]nvestors often voice concern about frequent or unexpected issuance of or changes in laws and regulations.” The threat of expropriation is very low.

REGULATION Score: 3–Stable (moderate level) The U.S. Department of State reports that “investors must comply with a variety of laws concerning…taxation, labor practices, health and safety, and the environment. Complaints about these laws, especially the tax system, center on the lack of clarity and often-draconian penalties for minor errors.” In addition, “frustration with lack of transparency in government regulation and the high level of ‘red tape’ are the top complaints of investors, domestic and foreign.”

BLACK MARKET Score: 3.5–Stable (high level of activity) Transparency International’s 2001 score for Poland is 4.1. Therefore, Poland’s black market score is 3.5 this year.

Score: 2–Stable (low level of restrictions) Until the late 1980s, Poland’s banking system was geared toward supporting the state-run economy. The National Bank of Poland was established as the central bank in 1989 and oversaw the creation of nine independent regional banks, which subsequently were privatized and joined by a number of new private banks in the 1990s. Poland’s banking sector is now open and competitive. There are 83 private banks, and foreign banks account for 70 percent of the banking assets. According to the U.S. Department of State, “The majority of Polish banks have been privatized…. The majority of the Polish banking sector’s assets, deposits, and equity are in the hands of the private sector. Foreign companies do not have special restrictions on access to local finance as long as funds are used for activities in Poland.” The insurance sector is still dominated by the communist-era monopoly provider, now partially privatized.

338

2003 Index of Economic Freedom

PORTUGAL Rank: Score: Category:

Lisbon

Trade Policy Fiscal Burden

2 4

Government Intervention 2 Monetary Policy 2

Foreign Investment 2 Banking and Finance 3

Lisbon economists have dubbed 1998 and 1999 the “nirvana years” because low interest rates, low inflation, and growth rates between 3 percent and 4 percent of GDP seemed to herald the definitive modernization of the Portuguese state. Largely as a result of these economic good times, the “third-way” socialist government of Prime Minister Antonio Guterres handily won a second term in October 1999. With full liberalization of the telecommunications market at the start of 2000, the government promised further structural reforms. Then things began to go wrong. The second Guterres government did not live up to the expectations aroused by the first. Slower GDP growth of only 1.1 percent in 2001 led to a decrease in government revenue and brought about unexpectedly sharp cuts in public spending. The socialists also failed to make good on their promised reforms of the justice, health, and education sectors. Following poor results in local elections in December 2001, Guterres shocked supporters by deciding to resign. In March 2002, his party lost a close parliamentary election to the more centrist Social Democrats. Upon taking power, the new government, under Prime Minister Durao Barroso, was surprised to find that the projected government deficit of 2 percent of GDP in 2002 was woefully understated; overestimation of tax revenues and underestimation of public spending meant that the real deficit was likely to be a staggering 4.5 percent of GDP unless something was done immediately. In this emergency situation, Durao Barroso enacted deep spending cuts to bring the deficit down to 2.8 percent of GDP this year, in line with the EU’s stability pact limit of 3 percent. Overall, it seems certain that further tough times lie ahead. Portugal’s monetary policy score is 1 point worse this year. As a result, its overall score is 0.1 point worse this year.

TRADE POLICY Score: 2–Stable (low level of protectionism) As a member of the European Union, Portugal has a weighted average tariff rate of 1.8 percent. Portugal’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

32 2.40 Mostly Free

Wages and Prices 2 Property Rights 2

Regulation Black Market

Scores for Prior Years: 2002: 2.30 1999: 2.30 1996: 2.65

2001: 2.30 1998: 2.40 1995: 2.70

2000: 2.30 1997: 2.40

2001 Data (in constant 1995 US dollars) Population: 10,318,080 Total area: 92,391 sq. km GDP: $131.8 billion GDP growth rate: 1.1% GDP per capita: $12,774 Major exports: clothing and footwear, machinery, chemicals, cork and paper products, hides Exports of goods and services: $45.4 billion Major export trading partners: Germany 19.2%, Spain 18.6%, France 12.6%, UK 10.3%, US 5.8% Major imports: machinery and transport equipment, chemicals, petroleum, textiles, agricultural products Imports of goods and services: $59.3 billion Major import trading partners: Spain 26.5%, Germany 13.9%, France 10.3%, Italy 6.7%, UK 5.0%, US 3.8% Foreign direct investment (net): –$2.1 billion

Score—Income and Corporate Taxation: 4–Stable (high tax rates) Score—Government Expenditures: 4–Stable (high level of government expenditure) Final Score: 4–Stable (high cost of government) Portugal’s top income tax rate is 40 percent; the marginal rate for the average taxpayer is 24 percent. The top corporate tax rate is 30 percent. In 2001, government expenditures equaled 41.1 percent of GDP.

Chapter 6: The Countries

3 2

339

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 2–Stable (low level) The Economist Intelligence Unit reports that the government consumed 18.5 percent of GDP in 2001. In the same year, based on data from the Ministry of Finance, Portugal received 2.5 percent of its total revenues from state-owned enterprises and government ownership of property, down from the 3.28 percent reported in the 2002 Index.

MONETARY POLICY Score: 2–Worse (low level of inflation) From 1992 to 2001, Portugal’s weighted average annual rate of inflation was 3.75, up from the 2.73 percent from 1991 to 2000 reported in the 2002 Index. As a result, Portugal’s monetary policy score is 1 point worse this year.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 2–Stable (low barriers) Portugal has opened most of its industries to foreign investment and has liberalized the bureaucratic process for foreign investors. In keeping with European Union directives, Portuguese foreign investment law, which came into effect in December 1996, mandates equal treatment for foreign and domestic companies. For the most part, foreign investors are required to register investments with the government only after the fact, although the International Monetary Fund reports that certain stock, securities, and money market transactions require preliminary announcement, reporting to the Stock Market Committee, or authorization by the government. Investments are permitted in all sectors except those closed to private enterprise (postal services, armaments, water and sewage services, port operations, and certain industrial activities); the U.S. Department of State reports that prior approval is required for “investments that affect public health, order or security, or which relate to the arms industry.” NonEU ownership of civil aviation, television, and telecommunications is limited. Portugal allows both residents and non-residents to hold foreign exchange accounts. There are no controls or restrictions on repatriation of profits, current transfers, payments for invisible transactions, or real estate transactions; but the Bank of Portugal requires reporting of transactions and retains the right to impose temporary restrictions, according to the U.S. Department of State. Foreign employees may comprise no more than 10 percent of the work force in businesses with more than five employees.

BANKING AND FINANCE Score: 3–Stable (moderate level of restrictions) Extensive privatization since the late 1980s has left Caixa Geral do Depositos (CGD) as Portugal’s only remaining state financial services firm, as well as its largest. The government also influences the allocation of credit through a program designed to assist small and medium enterprises (SMEs); according to the U.S. Department of State, “Portugal’s Institute for Supporting Small and Medium-sized Enterprises and Investment

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(IAPMEI) has promoted a program of mutual guarantees so that SME’s do not have to use their assets or those of shareholders to collateralize debt.” The Bank of Portugal (for the EU) or the Ministry of Finance (non-EU) must authorize the establishment or acquisition of new credit institutions or finance companies and the establishment of subsidiaries.

WAGES AND PRICES Score: 2–Stable (low level of intervention) The government has eliminated almost all price controls, and most domestic agricultural subsidies have been replaced by European Union subsidies. According to the Economist Intelligence Unit, however, price controls and subsidies remain in effect in special sectors—such as petrol and diesel, widespread rent controls, basic food, water, electricity, most public transport, and pharmaceutical products—in which the government believes that price regulation is necessary. Portugal has a minimum wage that applies to all full-time workers, rural workers, and domestic employees.

PROPERTY RIGHTS Score: 2–Stable (high level of protection) The judiciary is independent, and the threat of expropriation is low. The court system, however, can be inefficient. The Economist Intelligence Unit reports that “the judiciary is independent and provides a fair legal process but is somewhat backlogged and inefficient.”

REGULATION Score: 3–Stable (moderate level) Regulation in Portugal is burdensome, and red tape abounds. According to the U.S. Department of State, “Decision-making tends to be overly centralized and obtaining government approvals or permits can be time-consuming and costly, particularly for small- and medium-sized foreign investors and entrepreneurs. Some U.S. firms report substantial delays and red tape in accomplishing such basic tasks as registering companies, filing taxes, receiving value-added tax refunds, and importing vehicles.” The government has created a one-stop “Formality Center” to begin to address the bureaucratic problem. Portuguese labor law tends to be rigid, defining the conditions under which an employer can hire and fire workers, and a number of restrictions apply to part-time or temporary employment contracts. However, reports the Economist Intelligence Unit, “A new labor law, which took effect in January 2002, radically overhauls Portugal’s immigration laws, giving legal status to undocumented workers…who present a valid work contract…. [This law] is the EU’s most liberal in terms of labor immigration.”

BLACK MARKET Score: 2–Stable (low level of activity) Transparency International’s 2001 score for Portugal is 6.3. Therefore, Portugal’s black market score is 2 this year.

2003 Index of Economic Freedom

QATAR Doha

Trade Policy Fiscal Burden

30 2.5

Government Intervention 3 Monetary Policy 1

Foreign Investment 3 Banking and Finance 3

Qatar, an energy-rich, rapidly modernizing Persian Gulf emirate, has been ruled by the al-Thani family since gaining its independence from Great Britain in 1971. Its robust economy is dominated by the oil and gas industry, which accounts for more than 30 percent of GDP and roughly 80 percent of export revenues. Qatar has 3.7 billion barrels of proven oil reserves; it also has the world’s third largest natural gas reserves after Russia and Iran—more than 7 trillion cubic meters, or about 5 percent of the world’s total reserves. 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 by ousting his father. 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. Qatar has sought to diversify and modernize its economy, which continues to depend on world oil and gas prices. Qatar’s trade policy score is 1 point worse this year; however, its fiscal burden of government, government intervention, banking and finance, and wages and prices scores are all 1 point better. As a result, Qatar’s overall score is 0.30 point better this year.

TRADE POLICY Score: 3–Worse (moderate level of protectionism) According to Ernst & Young, the majority of goods are subject to a 4 percent ad valorem customs duty. However, “certain goods which compete with locally manufactured products are subject to a higher customs duty tariff as a protectionist measure.” There is no information regarding Qatar’s average tariff rate, although the new evidence indicates that it is clearly above 4 percent. As a result, Qatar’s trade policy score is 1 point worse this year. According to the U.S. Department of State, non-tariff barriers include strict licensing requirements, import bans, and quotas.

Rank: Score: Category:

44 2.65 Mostly Free

Wages and Prices 2 Property Rights 3

Regulation Black Market

Scores for Prior Years: 2002: 2.95 1999: 3.15 1996: n/a

2001: 3.15 1998: n/a 1995: n/a

2000: 3.05 1997: n/a

2000 Data (in constant 1995 US dollars) Population: 584,890 Total area: 11,437 sq. km GDP: $12.7 billion GDP growth rate: 11.0% GDP per capita: $21,730 Major exports: petroleum products, fertilizers, steel Exports of goods and services: n/a Major export trading partners: Japan 44.9%, Singapore 8.8%, South Korea 8.4%, US 4.6%, United Arab Emirates 1.5% Major imports: machinery and transport equipment, food, chemicals Imports of goods and services: n/a Major import trading partners: UK 10.4%, Japan 9.6%, Germany 7.3%, US 6.6%, Italy 6.2% Foreign direct investment (net): $256.6 million

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 2–Stable (low tax rates) Score—Government Expenditures: 3–Better (moderate level of government expenditure) Final Score: 2.5–Better (moderate cost of government) The government does not impose income taxes on individuals. Qatar has a progressive tax regime on corporate profits starting at 10 percent and capped at 35 percent. This tax does not apply to corporate entities wholly owned by Qatari nationals or to Qatari shares in the profits of corporate bodies; if a business is 40 percent foreign-owned, for example, taxes are applied to 40 percent of its profits. For purposes of scoring this factor, the top corporate tax rate is 35 percent. Data

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4 2

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from the Central Bank of Qatar indicate that in 2000, government expenditures equaled 31.5 percent of GDP, down significantly from the 48.9 percent reported in the 2002 Index. This dramatic decline is due to stable government expenditures combined with rapid economic growth. As a result, Qatar’s overall fiscal burden of government score is 1 point better this year.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Better (moderate level) The Economist Intelligence Unit reports that the government consumed 19.9 percent of GDP in 2000, down from the 26.6 percent reported in the 2002 Index. As a result, Qatar’s government intervention score is 1 point better this year. The government owns nearly all of the country’s oil production. According to the Economist Intelligence Unit, “The government says that it believes privatization is vital to reduce the fiscal burden, generate additional funds and improve efficiency…. [However] Mr Kamal [the Minister of Finance] admits that the privatization process has been delayed.”

MONETARY POLICY Score: 1–Stable (very low level of inflation) From 1992 to 2001, Qatar’s weighted average annual rate of inflation was 0.13 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) An October 2000 investment law permits majority and full ownership of businesses in certain sectors, such as education, health, and tourism, but caps most sectors at 49 percent foreign ownership. The law still requires foreign businesses to employ a local agent. Foreign nationals may not buy land, but 50-year leases are available. According to the U.S. Department of State, “The Government’s procurement regulations strongly favor Qatari and [Gulf Cooperation Council] nationals.” The government screens all major foreign investment projects in the oil and gas industry. The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts. There are no controls or restrictions on payments and transfers.

BANKING AND FINANCE Score: 3–Better (moderate level of restrictions) The government has influence in the banking sector and owns 50 percent of the country’s largest bank, but foreign banks are able to operate, and the regulatory system is transparent and up to international standards. The banking sector consists of 15 commercial banks: Seven are domestically owned, including two Islamic banks; two are Arab-owned; and six are foreign-owned. The Doha Securities Market is very small, with only 22 listings, and restricted to Qatari citizens. Qatar has 12 insurance companies, seven of which are foreign-owned, but the Qatar Insurance Company dominates the market and manages the government’s insurance business. Based on the

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evidence of foreign competition in the banking industry, Qatar’s banking and finance score is 1 point better this year.

WAGES AND PRICES Score: 2–Better (low level of intervention) There are few official price controls. The government has reduced subsidies on gasoline, wheat, sugar, milk, and cooking oil, and these subsidies now operate only in special stores for low-income individuals. Citizens receive free education, health care, and water and electricity. Qatar does not maintain a minimum wage, but it does influence wages through extensive government employment of Qatari citizens. Based on the recent reduction in government subsidies, Qatar’s wages and prices score is 1 point better this year.

PROPERTY RIGHTS Score: 3–Stable (moderate level of protection) Expropriation of property is not likely. The judiciary is subject to inefficiencies and influence from the executive. According to the U.S. Department of State, “The judiciary is nominally independent, but most judges are foreign nationals who hold residence permits granted by the civil authorities and thus hold their positions at the Government’s pleasure…. The legal system is biased in favor of citizens and the Government.”

REGULATION Score: 4–Stable (high level) The government enforces some regulations more rigorously on foreign companies and those engaged in joint ventures. “In the past,” reports Ernst & Young, “the government has pursued the principle of reserving most business activities for Qataris. The new investment law enacted in 2000, allows for majority owned foreign investments in specific projects in the health, tourism, education, agriculture, power and manufacturing sectors.” Government businesses are often exempt from some regulations while private companies bear a greater regulatory burden. The overall regulatory burden is therefore significant.

BLACK MARKET Score: 2–Stable (low level of activity) Overall, Qatar’s black market is small. According to the Business Software Alliance, however, the rate of piracy in 2001 was 84 percent for software and 30 percent for motion pictures.

2003 Index of Economic Freedom

ROMANIA Rank: 138 Score: 3.75 Category: Mostly Unfree

Bucharest

Trade Policy Fiscal Burden

4 4.5

Government Intervention 3 Monetary Policy 5

Foreign Investment 3 Banking and Finance 3

Romania’s economic development has been constrained by the centralized and obsolete economic structure inherited from the former communist regime. Free-market, reformist policies have clashed with populist pressure from the center–left. Former President Emil Constantinescu initiated privatization programs and structural change, and Socialist President Ion Iliescu, re-elected in 2000, has vowed to continue on the path of economic reform. The record of Iliescu’s first administration, however, makes Romania’s economic future questionable. The government has introduced legislation to foster the privatization process that, among other things, provides for the sale of unprofitable state enterprises. In March 2002, the parliament approved improvements in land restitution. In July 2001, a law on the promotion of investment was adopted, granting tax exemptions for greenfield projects that exceed US$1 million. It was followed by a new initiative in March 2002 to create the Romanian Agency for Foreign Investment. Bureaucratic red tape, however, remains a serious problem. Romania’s active lobbying to join NATO and the European Union is driven by the risk of “double exclusion” from the process of integration into both organizations. Romania’s banking and finance score is 1 point better this year; however, its trade policy score is 1 point worse, and its fiscal burden of government score is 0.5 point worse. As a result, Romania’s overall score is 0.05 point worse this year.

TRADE POLICY Score: 4–Worse (high level of protectionism) According to the World Bank, Romania’s weighted average tariff rate in 1999 (the most recent year for which World Bank data are available) was 12.4 percent, up from the 5.33 percent ( based on total taxes on international trade as a percentage of total imports) reported in the 2002 Index. . Based on the availability of new and more precise data, Romania’s trade policy score is 1 point worse this year. Both the U.S. Trade Representative and the U.S. Department of State cite customs corruption as an obstacle to trade.

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 3.5–Stable (high tax rates) Score—Government Expenditures: 5–Worse (very high level of government expenditure) Final Score: 4.5–Worse (very high cost of government) Ernst & Young reports that Romania has been reducing taxes. Romania’s top income tax rate is 40 percent, down from the 45 percent reported in the 2002 Index. Tax reform lowers the marginal rate for the average taxpayer to 23 percent from the 30 percent reported in the 2002 Index. The top corporate income tax rate is 25 percent. More accurate information from the European Bank for Reconstruction and Development indicates that in 2000, government expenditures equaled 35.1 percent of GDP rather than the 28.5 percent reported for the same year in the 2002 Index. Based on the higher

Chapter 6: The Countries

Wages and Prices 3 Property Rights 4

Regulation Black Market

4 4

Scores for Prior Years: 2002: 3.70 1999: 3.30 1996: 3.65

2001: 3.65 1998: 3.30 1995: 3.60

2000: 3.30 1997: 3.40

2000 Data (in constant 1995 US dollars) Population: 22,435,000 Total area: 237,500 sq. km GDP: $32.7 billion GDP growth rate: 1.6% GDP per capita: $1,460 Major exports: textiles and footwear, metals and metal products, machinery and equipment, minerals and fuels Exports of goods and services: $15 billion Major export trading partners: Italy 22.4%, Germany 15.7%, France 7.0%, Turkey 6.1% Major imports: machinery and equipment, fuels and minerals, chemicals, textile and products Imports of goods and services: $19.6 billion Major import trading partners: Italy 18.7%, Germany 14.7%, Russia 8.6%, France 6.1% Foreign direct investment (net): $949.5 million

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level of government expenditure, Romania’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 World Bank reports that the government consumed 12.5 percent of GDP in 2000. Despite recent privatization, the government remains active in the economy. According to the Economist Intelligence Unit, “Although a number of public utilities, principally in transportation, and energy extraction and supply, were turned into public corporations and split up in 1998–99, they remain owned by the state. Little progress was made towards privatisation in 2000.”

MONETARY POLICY Score: 5–Stable (very high level of inflation) From 1992 to 2001, Romania’s weighted average annual rate of inflation was 40.35 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) Economic reform legislation passed between 1999 and 2001 opened more sectors to foreign investment, guaranteed foreign investors national treatment, allowed them to participate in privatization bids, and removed caps on their involvement in commercial enterprises. According to the U.S. Department of State, however, “A significant impediment to foreign investment is Romania’s unpredictable legal and regulatory system. Tax laws change frequently and are unevenly enforced.” In July 2001, the government passed a law granting tax incentives for investment; in March 2002, it created the Romanian Agency for Foreign Investments to promote foreign investment. The International Monetary Fund reports that foreign exchange accounts are subject to government approval. All payments and transfers must be documented. Most capital transactions between residents and non-residents require central bank approval. The foreign exchange market was liberalized in 1997.

BANKING AND FINANCE Score: 3–Better (moderate level of restrictions) “While the private share of the banking sector is increasing,” reports the U.S. Department of State, “the system remains concentrated, with a relatively small number of wholly or predominantly state-owned banks accounting for a substantial majority of loans and deposits.” In 1999, according to the Economist Intelligence Unit, the government sold a majority of the Romanian Development Bank; privatized the state savings bank (Banc Post); placed the country’s second largest bank (Bancorex) under state administration and merged it with the Romanian Commercial Bank; placed another state-owned bank (Bankcoop) under administration; and declared the small, private Bank Albania bankrupt. Romania permits wholly owned foreign branches and subsidiaries and foreign equity in domestic banks. Based on progress in privatization and openness to foreign banks, Romania’s banking and finance score is 1 point better this year.

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WAGES AND PRICES Score: 3–Stable (moderate level of intervention) The Romanian embassy reports that prices of natural monopolies or activities that have “legally a special character”—including energy, heating, natural gas, transportation of individuals on railroads and water, telecommunications, postal services, water and sewage, and pharmaceuticals—are controlled. Wages are generally based on minimum wages that apply for specific sectors or categories of workers.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) According to the U.S. Department of State, “Property and contractual rights are recognized, but enforcement through Romanian courts is difficult. Foreign companies engaged in trade or investment in Romania often express concerns with respect to the international commercial experience of Romanian courts. Judges generally have little experience in the functioning of a market economy, international business methods, or the application of new Romanian commercial laws.” The Economist Intelligence Unit reports that “successive reports by the European Commission have raised serious questions about the political neutrality of the Judiciary [and] the low level of training and qualifications of personnel in the judicial system.”

REGULATION Score: 4–Stable (high level) Romania’s regulatory structure is unwieldy. The Financial Times reports, based on a U.S. Agency for International Development study, that “it takes anything from 49 to 102 days to register a new company: 83 pages of forms have to be completed, weighting half a kilo…. Small to medium-sized enterprises have between 11 and 23 inspections a year…. A business start-up needs between 23 and 29 authorisations and approvals.” According to the U.S. Department of State, “A complex, confusing, and constantly changing regulatory environment…pervasive bureaucracy, and widespread corruption have often discouraged and chased foreign investors away.” The government has made some efforts to streamline the process for registering a business. According to the Embassy of Romania, a one-stop shop will streamline this cumbersome process, but the Financial Times reports that this reform applies only “for investors with more than [US]$10 m[illion].”

BLACK MARKET Score: 4–Stable (high level of activity) Transparency International’s 2001 score for Romania is 2.8. Therefore, Romania’s black market score is 4 this year.

2003 Index of Economic Freedom

RUSSIA Rank: 135 Score: 3.70 Category: Mostly Unfree

Moscow

Trade Policy Fiscal Burden

4 3.5

Government Intervention 2.5 Monetary Policy 5

Foreign Investment 3 Banking and Finance 4

Since being elected president in April 2000, Vladimir Putin has concentrated on consolidating his political power and boasting of economic reforms. The trend toward increased political and administrative regulation is characterized by cutbacks in regional autonomy, interference in regional elections, crackdowns on the independent media, the granting of increased power to the country’s security agencies, and a reluctance to introduce military and judicial reforms. Putin’s marketoriented policy could be undermined in the long run by the lack of democratic control and transparency. Nevertheless, his achievements have been impressive. He has presented balanced budgets, enacted a flat 13 percent personal income tax, and reduced the corporate tax to 24 percent and the small-business tax to 20 percent. In addition, since September 11, he has demonstrated his readiness to integrate Russia into the Western community. Although Putin’s rating in opinion polls remains exceptionally high at 70 percent, it is possible that as the parliamentary and presidential elections of 2003–2004 approach, he will try to preserve his strong public support at the cost of slowing unpopular but vital structural reforms. Although the government has clearly indicated that accession to the World Trade Organization is a major priority, it is not likely to meet the accession standards before 2003–2004. Russia must comply with WTO requirements that include creating a non-discriminatory environment for foreign goods and services, protecting intellectual property rights, and reforming the financial and banking sectors. Although the main portion of capital spending is financed by profits from increased oil and gas exports, bank lending accounts for only 3 percent of investment. Without significant foreign competition, financial companies lack proper incentives to improve their operations.

TRADE POLICY Score: 4–Stable (high level of protectionism) According to the World Bank, Russia’s weighted average tariff rate in 1997 (the most recent year for which World Bank data are available) was 11.3 percent. According to the Economist Intelligence Unit, “In general, Russia imposes few nontariff import restrictions. The government has introduced product-labeling rules to better serve the interest of consumers and to improve protection of the Russian market from a flood of low-quality consumer goods. A number of new regulations have been introduced on the import and sale of alcoholic beverages. Non-tariff restrictions refer also to Russia’s attempt to raise effective barriers to the ‘false transit’ and non-payment of customs duties.” The same source reports that “foreign investors uniformly complain about haphazard tariff rates, unfair classification of goods to higher categories, and customs clearance rules so complicated they have to be circumvented.”

Chapter 6: The Countries

Wages and Prices 3 Property Rights 4

Regulation Black Market

4 4

Scores for Prior Years: 2002: 3.70 1999: 3.50 1996: 3.50

2001: 3.70 1998: 3.35 1995: 3.40

2000: 3.70 1997: 3.55

2000 Data (in constant 1995 US dollars) Population: 145,555,000 Total area: 17,075,200 sq. km GDP: $350 billion GDP growth rate: 8.3% GDP per capita: $2,455 Major exports: petroleum and petroleum products, natural gas, wood and wood products, metals, chemicals, wide variety of civilian and military manufactures Exports of goods and services: $107.6 billion Major export trading partners: Germany 9.0%, US 7.7%, Italy 7.0%, Belarus 5.4%, China 5.1%, Ukraine 4.9% Major imports: machinery and equipment, consumer goods, medicines, meat, grain, sugar, semifinished metal products Imports of goods and services: $73.5 billion Major import trading partners: Germany 11.5%, Belarus 11.1%, Ukraine 10.8%, US 8.0%, Kazakhstan 6.5% Foreign direct investment (net): –$318 million

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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) Russia has reformed its tax code and has adopted a flat income tax of 13 percent, which also applies to the average taxpayer. Tax reform, implemented in 2002, lowered the top corporate tax rate to 24 percent, down from the 35 percent reported in the 2002 Index. According to the Financial Times, the government is considering further tax reform that would eliminate the value-added tax, sales tax, property tax, and income taxes on businesses and instead offer businesses the choice of paying 20 percent of profits or 8 percent of revenue. In 2000, according to Standard & Poor’s, government expenditures equaled 34.9 percent of GDP.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 2.5–Stable (moderate level) According to the World Bank, the government consumed 16.1 percent of GDP in 2000. In the same year, based on data from the International Monetary Fund, Russia received 4.4 percent of its total revenues from state-owned enterprises and government ownership of property.

MONETARY POLICY Score: 5–Stable (very high level of inflation) Data from the International Monetary Fund’s 2002 World Economic Outlook indicate that from 1992 to 2001, Russia’s weighted average annual rate of inflation was 27.31 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) In July 1999, a new law “On Foreign Investment in the Russian Federation” went into effect, replacing the 1991 version in an effort to clarify foreign investment rules and present a more favorable investment climate. The law identifies criteria for the types of investment projects that may receive favorable treatment, after which these projects must receive the approval of the Ministry of Economic Development and Trade to receive such treatment. The law grants national treatment to foreign investors except in sectors involving national security or to protect the constitution, public morals and health, and the rights and lawful interests of other persons. According to the U.S. Department of State, “Despite the passage of a new law regulating foreign investment in June 1999, Russian foreign investment regulations and notification requirements can be confusing and contradictory.” Foreigners may establish wholly owned companies in most sectors—although the registration process can be cumbersome—and may take part in the privatization process. The most significant barriers to foreign investment continue to be the weak rule of law, oppressive bureaucracy, contradictory legislation that is arbitrarily applied, crime and corruption, poor infrastructure, and

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legal uncertainty. “Although the country has clearly taken a turn for the better,” reports the Economist Intelligence Unit, “foreign investors still operate in extremely difficult business conditions.” In June 2002, the State Duma passed a bill to allow the sale and lease of agricultural land to Russians. Foreigners remain banned from buying agricultural land but may buy non-agricultural land and property. The International Monetary Fund reports that residents are permitted to hold foreign exchange accounts, but the use of foreign exchange proceeds from capital transactions requires a central bank license in most cases. Non-residents may maintain five types of foreign exchange accounts, categorized by purpose. Purchases of foreign exchange exceeding an established limit must meet special procedures, and there are repatriation requirements in some cases. Transactions involving capital and money market instruments, derivatives, and credit operations are subject to central bank authorization in many cases. In June 2002, Russia announced that it would loosen restrictions on repatriation of foreign funds frozen during the 1998 financial crisis.

BANKING AND FINANCE Score: 4–Stable (high level of restrictions) Russia’s 1998 financial crisis sent the entire financial system into chaos. Many banks became insolvent and shut down; others were taken over by the government and heavily subsidized. Reform of the banking sector proceeds slowly, and the sector is dominated by the state-owned Sberbank, which extends some 80 percent of the loans, many of which go to stateowned enterprises. According to the Economist Intelligence Unit, “Most Russian banks will remain undercapitalized and will eventually have to be closed down or merged with larger competitors. At present [June 2002], less than one fifth of Russia’s 1,300-odd banks has authorized capital of more than U.S.$1m and only a fraction has more than U.S.$10m…. Banking sector competition is mainly impeded by the dominant role of state-controlled banks.” Most of the protectionist measures to block foreign banks from Russia were eliminated in 1996, but foreign bank capital in the banking sector remained under 12 percent in 2001—a restriction that is codified in law. The replacement of fired central bank governor Viktor Gerashchenko by reformer Sergei Ignatiev is regarded as a positive sign for reform, which had faltered under Gerashchenko. There is a 49 percent cap on foreign ownership of life insurance firms, and total foreign assets in the sector are capped at 15 percent.

WAGES AND PRICES Score: 3–Stable (moderate level of intervention) The government of Russia has liberalized most prices but still sets prices for monopolies. According to the Economist Intelligence Unit, “Companies listed in the state monopoly registry are generally subject to price controls.” The government sets prices for different utilities and has resisted efforts to raise prices too quickly. The Economist Intelligence Unit also reports that “Industries generally pay more than households for

2003 Index of Economic Freedom

the same products and services, a distortion inherited from Soviet times, when artificially low prices in the consumer market were kept totally separate from the wholesale (industrial) markets.” Russia has a minimum wage, which was adjusted most recently in 2002.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) Protection of private property in Russia is weak. The Economist Intelligence Unit reports that “contractual agreements are becoming more secured but have not yet reached a level associated with contracts in Western Europe or the United States.” According to the U.S. Department of State, “Independent dispute resolution in Russia can be difficult to obtain; the judicial system is still developing. Regional and local courts are often subject to political pressure…. As with international arbitral procedures, the weakness in the system is in Russian enforcement of decisions. In one case, for example, after five years of successful Russian litigation with repeated favorable decisions and court orders for financial restitution, a foreign investor continues to await compensation from its former joint venture partner.” Corruption in the judiciary is a serious problem. The U.S. Department of State reports that “U.S. firms have identified corruption as a pervasive problem, both in number of instances and in the size of bribes sought. Successive Russian governments have designated the fight against corruption as a priority task of government due to its economic costs (particularly the deterring of foreign and domestic investment and encouragement of capital flight). President Putin has repeatedly stressed that enforcement of laws is a high priority of his administration, and has periodically focused attention on corrupt practices.” Land ownership is now allowed. According to the Los Angeles Times, the “Russian parliament voted [in September 2001] to permit Russians to buy, own and sell land.” Investor’s Business Daily reports that the government has adopted a new labor code that makes it “easier to hire and fire workers.”

visions of the new, and where still valid, old codes…. Keeping up with legislative changes, presidential decrees and government resolutions is a challenging task. Uneven implementation of laws creates further complications; various officials, branches of government and jurisdictions interpret and apply regulations with little consistency and the decisions of one may be overruled or contested by another.” The government has several reforms on its agenda that are aimed at alleviating the burden on business; it also has made progress in reining in the power of the oligarchs. Whether these efforts will prove successful, however, is unclear.

BLACK MARKET Score: 4–Stable (high level of activity) Transparency International’s 2001 score for Russia is 2.3. Therefore, Russia’s black market score is 4 this year.

REGULATION Score: 4–Stable (high level) Overweening bureaucracy, lack of transparency, and red tape continue to present significant impediments to business in Russia. The Economist Intelligence Unit reports that “corruption is so widespread in Russia that bribes…amount[ed] to an estimated 4 percent of gross domestic product in 2001…. State bureaucracy, thought to be even larger than during the Soviet era, continues to grow, while providing little sign of greater efficiency.” According to the U.S. Department of State, “The legal system in Russia is in flux, with various parts of the government struggling to create new laws on a broad array of topics. In this environment, negotiations and contracts for commercial transactions are complex and protracted. Russia has implemented only part of its new commercial code (contained within the civil code) and investors must carefully research all aspects of Russian law to ensure that each contract conforms with Russian law and embodies the basic pro-

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2003 Index of Economic Freedom

RWANDA Rank: 131 Score: 3.65 Category: Mostly Unfree Trade Policy Fiscal Burden

5 2.5

Government Intervention 3 Monetary Policy 2

Foreign Investment 4 Banking and Finance 3

Rwanda is still recovering from the 1994 genocidal campaign that, according to the U.S. Department of State, “destroyed the country’s social fabric, human resource base, institutional capacity, and economic and social infrastructure.” GDP fell by over 50 percent from 1993 to 1994 but has grown strongly since the 1994 genocide. The dramatic economic decline that year, however, lowers Rwanda’s average compound growth in GDP to 0.4 percent annually from 1991 to 2000, according to World Bank data, which further reflect that per capita GDP declined from $277 to $242 (in constant 1995 U.S. dollars) over the same period. Over 90 percent of Rwandans are engaged in subsistence agriculture, and agricultural production accounts for over 40 percent of GDP. The Economist Intelligence Unit reports that coffee and tea accounted for over 80 percent of export earnings in 2000. As part of the government’s ongoing liberalization program, 14 companies have been privatized—eight of them in 2001—since adoption of the privatization agenda in 1997, although the process has stalled in key sectors like telecommunications and energy. Rwanda contends that its military presence in the eastern part of the Democratic Republic of Congo and near the border with Burundi will be necessary as long as rebel groups hostile to Rwanda remain active and armed in those areas. Rwanda’s banking and finance score is 1 point better this year; however, its trade policy, fiscal burden of government, and capital flows and foreign investment scores are, respectively, 2 points, 0.5 point, and 1 point worse. As a result, Rwanda’s overall score is 0.25 point worse this year.

TRADE POLICY Score: 5–Worse (very high level of protectionism) According to the World Bank, Rwanda’s weighted average tariff rate in 1993 (the most recent year for which World Bank data are available) was 25.5 percent, up from the 12.8 percent (based on import duties as a percentage of total imports) reported in the 2002 Index. The U.S. Department of State reports that “customs procedures…are complex, bureaucratic and fraught with corruption.” Based on previously unavailable data on the weighted average tariff rate, as well as the evidence of non-tariff barriers, Rwanda’s trade policy score is 2 points worse this year.

Wages and Prices 3 Property Rights 4

Regulation Black Market

Scores for Prior Years: 2002: 3.40 1999: 4.00 1996: n/a

2001: 3.60 1998: 4.20 1995: n/a

2000: 4.00 1997: 4.30

2000 Data (in constant 1995 US dollars) Population: 8,508,000 Total area: 26,338 sq. km GDP: $2.1 billion GDP growth rate: 5.6% GDP per capita: $242 Major exports: coffee, tea, hides, tin, ore Exports of goods and services: $166 million Major export trading partners: Germany 17.7%, Pakistan 7.4%, Belgium 5.6%, US 5.1% Major imports: foodstuffs, machinery and equipment, steel, petroleum products, cement and construction material Imports of goods and services: $461 million Major import trading partners: Kenya 22.1%, US 15.6%, Belgium 9.0%, Japan 3.5%, Germany 3.1% Foreign direct investment (net): $3.6 million

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 3.5–Worse (high tax rates) Score—Government Expenditures: 1–Stable (very low level of government expenditure) Final Score: 2.5–Worse (moderate cost of government) According to the International Monetary Fund, Rwanda’s top income tax rate is 40 percent; the marginal rate for the average taxpayer is 0 percent. The top corporate tax rate is 40 percent. In 1999, government expenditures equaled 13.5 percent of

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GDP. Based on a clarification in methodology, Rwanda’s income and corporate taxation score is 0.5 point worse this year. As a result, its overall fiscal burden of government score is 0.5 point worse this year.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Stable (moderate level) The World Bank reports that the government consumed 12.2 percent of GDP in 2000. According to the Economist Intelligence Unit, “there have been further delays in Rwanda’s privatization program. The state telecommunications company…was supposed to have divested its stake in the country’s mobile phone operator…. [The] preferred bidder for the management contract for the state electricity, water and gas company…was also due to have been announced in February but there are still few indications as to when this might take place….” The Minister of Finance acknowledges the weakness of the privatization program and has promised to move forward.

MONETARY POLICY Score: 2–Stable (low level of inflation) From 1992 to 2001, Rwanda’s weighted average annual rate of inflation was 3.33 percent. (This does not include data for 1994, which are unavailable due to a lack of information during the period of genocide.)

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 4–Worse (high barriers) Rwanda continues to have difficulty attracting foreign investment because of the looting and damage done to investments during the 1994 genocide, ongoing concern about latent political instability, and existing political instability in neighboring countries. The government relaxed some restrictions on foreign investment in June 2000 and adopted a floating exchange rate in July 2000. The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts, but only if they provide supporting documentation. Payments and transfers are subject to authorizations and maximum allowances and limits. Nearly all capital transactions, including the purchase of real estate, require the central bank’s approval. The South African energy company Engen, which had taken over BP Fina’s Rwandan fuel sector assets in 1998, sold them to a Rwandan business at a loss in 2001 after charging the government with bureaucratic harassment, corruption, and undisclosed past-due tax obligations. Based on substantial restrictions on capital transactions, payments, and transfers, as well as reported corruption, lack of transparency, and bureaucratic red tape, Rwanda’s capital flows and foreign investment score is 1 point worse this year.

BANKING AND FINANCE Score: 3–Better (moderate level of restrictions) Rwanda’s small banking sector has become more competitive since 1994. Three of the country’s seven commercial banks have been established since 1994. The Economist Intelligence Unit reports that the government plans to sell its stake in Banque Com-

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mercial du Rwanda, Banque Rwandaise de Developpement, and Sonara, the largest insurance company; in addition, the government has made an effort to improve banking supervision, and all commercial banks were audited in 1999. The country also has increased capital requirements. Although the government remains involved in some domestic banks, there is private banking, and a Belgian bank operates in Rwanda. As a result, Rwanda’s banking and finance score is 1 point better this year.

WAGES AND PRICES Score: 3–Stable (moderate level of intervention) The government affects the price of tea and many other goods and services, particularly utilities, through its state-owned enterprises. Though privatization is scheduled for many of these industries, it has met with many delays. The government sets minimum wages that vary by type of job; more important, it sets wages as the country’s largest employer.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) Property rights have improved in Rwanda since the genocide in 1994 and 1995, although there is still uncertainty regarding the protection of private property. “Land ownership is a sensitive issue,” reports the Economist Intelligence Unit, “and the government is preparing new legislation with extreme caution.” Overall, protection of property is weak. According to the U.S. Department of State, “the…law provides for an independent judiciary; however, the government did not respect this provision fully; the judiciary is subject to executive influence and also suffers from inefficiency, a lack of resources, and some corruption. There were occasional reports of bribery of officials, ranging from clerks to judges.”

REGULATION Score: 5–Stable (very high level) Rwanda’s government has made efforts to establish a consistent regulatory regime following the civil unrest of earlier years, but it still has a long way to go. The Economist Intelligence Unit reports that “a review of the legislative framework to reduce business risk, establishing a short and predictable administrative and regulatory procedure, is proposed. However, new legislation alone will do little good without both a political commitment to ensuring that investors…are treated fairly and progress in reducing the supply-side constraints, many of them structural, that contribute to the high cost of doing business in Rwanda.”

BLACK MARKET Score: 5–Stable (very high level of activity) Most economic activity occurs in the black market. According to AllAfrica.com, “adulteration and smuggling of fuel is still rampant in the Great Lakes region,” with Rwanda one of the three countries involved in this smuggling. Animal trafficking and medicine smuggling are also prominent.

2003 Index of Economic Freedom

SAUDI ARABIA Riyadh

Trade Policy Fiscal Burden

4 2.5

Government Intervention 4 Monetary Policy 1

Rank: Score: Category: Foreign Investment 3 Banking and Finance 4

Saudi Arabia is the largest of the Persian Gulf monarchies and has the world’s largest proven oil reserves—over 260 billion barrels of oil. As the world’s foremost oil exporter, it dominates the Organization of Petroleum Exporting Countries (OPEC). The petroleum sector accounts for about 90 percent of export earnings. Crown Prince Abdallah, who has become the de facto ruler because of King Fahd’s declining health, has pushed for the removal of barriers to foreign investment, and new regulations designed to encourage foreign investment were approved in April 2000. The government also has moved slowly toward privatization of several state enterprises. Saudi Arabia’s black market score is 1 point worse this year; however, its fiscal burden of government score is 0.5 point better, and its wages and prices score is 1 point better. As a result, its overall score is 0.05 point better this year, causing Saudi Arabia to be classified as a mostly free economy.

68 2.95 Mostly Free

Wages and Prices 2 Property Rights 3

Regulation Black Market

Scores for Prior Years: 2002: 3.00 1999: 2.85 1996: 2.80

2001: 3.00 1998: 2.70 1995: n/a

2000: 2.95 1997: 2.80

2000 Data (in constant 1995 US dollars) Population: 20,723,150 Total area: 1,960,582 sq. km GDP: $142 billion GDP growth rate: 4.5% GDP per capita: $6,729

TRADE POLICY Score: 4–Stable (high level of protectionism) According to the World Bank, Saudi Arabia’s weighted average tariff rate in 2000 (the most recent year for which World Bank data are available) was 10.3 percent. The U.S. Department of State reports that “a number of Saudi ‘infant industries’, including furniture, cooking salt, mineral water, and plastic pipes will continue to enjoy 20 percent tariff protection. Cigarettes, wheat, flour, dates, and long-life milk imports have a 100% tariff. Saudi non-tariff barriers include: preferences for national and GCC [Gulf Cooperation Council] products in government procurement; a 30 percent of contract value ‘set-aside’ for local contractors on major government projects; a requirement that foreign contractors obtain their imported goods and services exclusively through Saudi agents; reservation of some services for government-owned companies (e.g. insurance and air transport); and the economic offset requirement mandating reinvestment of a portion of contract value in indigenous industries for certain high value government contracts, particularly in defense.”

Major exports: petroleum and petroleum products Exports of goods and services: $77 billion Major export trading partners: US 17.4%, Japan 17.3%, South Korea 11.7%, Singapore 5.3% Major imports: machinery and equipment, foodstuffs, chemicals, motor vehicles, textiles Imports of goods and services: $40 billion Major import trading partners: US 21.1%, Japan 9.4%, Germany 7.4%, UK 7.3% Foreign direct investment (net): –$1.7 billion

FISCAL BURDEN OF GOVERNMENT 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) Saudi Arabia has no income tax rate for residents, but non-residents are subject to a 30 percent income tax rate. (The rate applied to nationals has been used to calculate this factor rather than the 30 percent rate used in the 2002 Index, which is considered a foreign investment barrier.) The marginal rate for the average resident taxpayer is 0 percent. The top corporate tax rate is 30 percent, down from the

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45 percent reported in the 2002 Index. The reduction in the corporate income tax was enacted in 2000. In the same year, based on International Monetary Fund data, government expenditures equaled 28.5 percent of GDP. Based on the reduced corporate tax rate and a reassessment of income tax data, Saudi Arabia’s income and corporate taxation score is 1 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: 4–Stable (high level) According to the World Bank, the government consumed 27 percent of GDP in 2000. In the same year, based on data from Saudi Arabia’s Monetary Agency, the government received 83.09 percent of its total revenues from state-owned oil companies.

MONETARY POLICY Score: 1–Stable (very low level of inflation) From 1992 to 2001, Saudi Arabia’s weighted average annual rate of inflation was –0.61 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) In April 2000, the government implemented a more liberal foreign investment law that permits foreigners to invest and own property without a Saudi partner, accords foreign firms national treatment, and guarantees repatriation of profits and capital. The law also established the General Investment Authority and granted it sole jurisdiction over approving new foreign investment projects to streamline the approval process. In February 2001, the government’s “negative list” of sectors off-limits to foreign investors included the oil sector, military equipment and uniforms, printing and publishing, telecommunications, transportation, electricity, wholesale and retail trade, and a few other sectors. Foreign workers are subject to a 30 percent income tax. The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts. There are no controls or restrictions on payments and transfers. Only Saudi Arabian nationals may engage in portfolio investment in listed Saudi Arabian companies, and non-residents must have permission to issue securities, bonds, or money market instruments in Saudi Arabia.

BANKING AND FINANCE Score: 4–Stable (high level of restrictions) The Saudi central bank maintains tight control of the banking system, which is composed of 10 Saudi banks and one GCC bank, the Bahrain-based Gulf International Bank. Most banks are joint ventures with foreign banks, and only three are wholly Saudi-owned. The banking sector remains closed to all new foreign investment. Foreigners may own no more than 49 percent of domestic banks. Saudi Arabia’s largest bank in terms of assets, the National Commercial Bank (NCB), sold 50 percent of its shares to the government in 1999, but the

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intention is to sell these shares back to the private sector.

WAGES AND PRICES Score: 2–Better (low level of intervention) According to the Economist Intelligence Unit, “Many basic food commodities continue to be subsidized at the wholesale level; a government purchasing agency controls the prices of wheat and barley. Medicines dispensed through the health service are also subsidized.” There is no legal minimum wage. The market determines most prices, and subsidies do not involve a majority of output. As a result, Saudi Arabia’s wages and prices score is 1 point better this year.

PROPERTY RIGHTS Score: 3–Stable (moderate level of protection) The U.S. Department of State reports that the judiciary is not independent and is influenced by other branches of government. “In several cases, disputes have caused serious problems for foreign investors. For instance, Saudi partners have blocked foreigners’ access to exit visas, forcing them to remain in Saudi Arabia against their will. In cases of alleged fraud, foreign partners may also be jailed to prevent their departure from the country while awaiting police investigation or adjudication of the case. Courts can impose precautionary restraint of personal property pending the adjudication of a commercial dispute….”

REGULATION Score: 3–Stable (moderate level) Regulations are not transparent in Saudi Arabia, and bureaucracy poses a substantial hurdle for would-be businesses. Implementation of laws can be inconsistent. The official policy promoting employment of Saudi nationals (“Saudiisation”) creates an additional burden. According to the U.S. Department of State, “Foreign firms have identified corruption as an obstacle to investment in Saudi Arabia…. Bribes, often disguised as ‘commissions,’ are reputed to be commonplace.” However, the state has taken action, albeit slowly; the Economist Intelligence Unit reports that “structural reform has gained the full backing of Crown Prince Abdullah—the kingdom’s most powerful political actor—and real progress has been made.”

BLACK MARKET Score: 3–Worse (moderate level of activity) Saudi Arabia’s black market is growing. According to the U.S. Department of State, “Manufacturers of consumer products and automobile spare parts are particularly concerned about the widespread availability of counterfeit products in Saudi Arabia. Anti-counterfeiting laws exist, and the U.S. Government has urged the Saudi authorities to step up enforcement actions against perpetrators. In some popular consumer goods, manufacturers estimate that as much as 75% of the entire Saudi market is counterfeit.” Based on new evidence of black market activity, Saudi Arabia’s black market score is 1 point worse this year.

2003 Index of Economic Freedom

SENEGAL Dakar

Trade Policy Fiscal Burden

4 2.5

Government Intervention 3 Monetary Policy 1

Rank: 80 Score: 3.05 Category: Mostly Unfree Foreign Investment 3 Banking and Finance 3

The progressive liberalization of Senegal’s economy since 1994 has included privatization of key state-owned water, telecommunications, mining, and aviation sectors. The process was stalled by the protracted 2000 presidential election and the 2001 legislative elections, but President Abdoulaye Wade hopes to revive the reform agenda and proceed with privatization of the electricity utility and stateowned groundnut processing enterprise. Senegal faces fundamental challenges: adult illiteracy over 60 percent, life expectancy of roughly 50 years, pervasive poverty, and insufficient access to health care. The power generation and transportation systems are insufficient and in poor repair. The U.S. Department of State reports that approximately 70 percent of the labor force is engaged in subsistence agriculture even though the agricultural sector contributes only 11 percent of GDP. From 1991 to 2000, according to World Bank data, compound growth in GDP averaged 3.9 percent annually and per capita GDP increased from $553 to $609 (in constant 1995 U.S. dollars). The Senegalese government has announced that it will negotiate with the Casamance rebels to end the 20-year conflict only when the rebels resolve their internal problems and agree on an official leader and negotiator—an unlikely prospect, at least in the short term, in view of recent struggles and splits. Senegal’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, Senegal’s overall score is 0.15 point better this year.

TRADE POLICY Score: 4–Stable (high level of protectionism) Senegal is a member of the West African Economic and Monetary Union, which imposes a common external tariff with four rates: 0 percent, 5 percent, 10 percent, and 20 percent. The International Monetary Fund reports that the WAEMU’s average tariff rate in 2000 was 12 percent. (The other seven members of the WAEMU are Benin, Burkina Faso, Guinea–Bissau, Ivory Coast, Mali, Niger, and Togo.) Customs corruption acts as a non-tariff barrier. According to the U.S. Department of State, “Corruption can range from large-scale customs fraud, including invoice under-valuation, to bribe taking by officials.”

Wages and Prices 3 Property Rights 3

Regulation Black Market

Scores for Prior Years: 2002: 3.20 1999: 3.15 1996: 3.70

2001: 3.05 1998: 3.30 1995: n/a

2000: 3.05 1997: 3.45

2000 Data (in constant 1995 US dollars) Population: 9,530,000 Total area: 196,190 sq. km GDP: $5.7 billion GDP growth rate: 5.6% GDP per capita: $609 Major exports: fish, groundnuts, petroleum products, phosphates, cotton Exports of goods and services: $1.9 billion Major export trading partners: India 18.0%, France 15.6%, Italy 9.0%, Mali 5.9% Major imports: foods and beverages, consumer goods, capital goods, petroleum products Imports of goods and services: $2.3 billion Major import trading partners: France 27.4%, Nigeria 18.9%, Germany 5.3%, Italy 3.6% Foreign direct investment (net): $81 million

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 3–Stable (moderate tax rates) Score—Government Expenditures: 2–Better (low level of government expenditure) Final Score: 2.5–Better (moderate cost of government) Senegal’s top income tax rate is 50 percent; the marginal rate for the average taxpayer is 0 percent. The top corporate tax rate is 35 percent. In 2000, according to the African Development Bank, government expenditures equaled 20 percent of

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GDP, down from the 20.6 percent reported in the 2002 Index. As a result, Senegal’s fiscal burden of government score is 0.5 point better this year.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Stable (moderate level) The World Bank reports that the government consumed 10.4 percent of GDP in 2000. According to the U.S. Department of State, “The government is still by far the country’s largest single employer and biggest consumer…. [T]he government’s privatization program gained momentum with the successful privatization of the water company SONEES, the telecommunications company SONATEL, the phosphate mining company SSPT, the textile company SOTEXKA, the building construction company HAMO, and the national airline, Air Senegal. However, since then progress has been slow.”

MONETARY POLICY Score: 1–Stable (very low level of inflation) From 1992 to 2001, Senegal’s weighted average annual rate of inflation was 2.28 percent. Senegal 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, Ivory Coast, Mali, Niger, and Togo.) Monetary policy is set by the Central Bank of West African States.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) There is no legal discrimination against foreign investors, and 100 percent ownership of businesses is permitted in most sectors. Notable exceptions are electricity, telecommunications, water, and the food and fishing industries (although the government permits foreigners, especially from countries that are members of the European Union, to purchase fishing licenses). According to the U.S. Department of State, “administrative regulations combined with high factor costs have been obstacles to potential investors.” The International Monetary Fund reports that the government must approve most capital transfers to countries other than members of the West African Economic and Monetary Union. Other transfers are subject to numerous requirements, controls, and authorization depending on the transaction. Residents and non-residents must receive approval from the Central Bank of West African States and the Senegalese government to hold foreign exchange accounts. Most capital transactions require approval of or declaration to the government.

nomic and Monetary Union, governs Senegal’s banking system. Member countries use the CFA franc that is issued by the BCEAO, pegged to the French franc, and guaranteed by the French Treasury. The government holds large stakes in some banks. Three privately owned banks hold approximately two-thirds of total deposits. According to the U.S. Department of State, “Eight commercial banks operate in Senegal. The system is characterized by the overliquidity of banks and their hesitancy to lend at medium and long term.”

WAGES AND PRICES Score: 3–Better (moderate level of intervention) Senegal’s large state-owned sector influences wages and prices, and the government sets prices on utilities and major agricultural products like cotton and groundnuts. Senegal has a monthly minimum wage. While the government controls prices for several major goods and services, the market sets most prices, and many workers earn more than the minimum wage. As a result, Senegal’s wages and prices score is 1 point better this year.

PROPERTY RIGHTS Score: 3–Stable (moderate level of protection) Expropriation of private property is unlikely. The U.S. Department of State reports that Senegal’s judiciary, while independent, is “subject to influence and pressure. Magistrates are vulnerable to outside pressures due to low pay, poor working conditions, and family and political ties.” In addition, “The investment code provides for settlement of disputes via due process of the law prescribed in the cumbersome Senegalese judicial system. In order to overcome the weaknesses of the judicial system in the dispute settlement area and to speed the settlement process, Senegal established, in 1998, an arbitration center administered by the Dakar Chamber of Commerce.” The government is training judges in commercial law.

REGULATION Score: 4–Stable (high level) Competition is constrained by the state’s dominant role in the economy. Regulatory and enforcement agencies are characterized by red tape. The regulatory environment, which the Economist Intelligence Unit calls “cumbersome,” places a significant burden on businesses. Corruption in the bureaucracy is a serious impediment to business. According to the U.S. Department of State, “The potential for corruption is a significant obstacle for economic development and competitiveness in Senegal, in spite of laws, regulations, penalties, and agencies to combat it. Credible allegations of corruption have been made concerning government procurement, dispute settlement, and regulatory and enforcement agencies.”

BANKING AND FINANCE

BLACK MARKET

Score: 3–Stable (moderate level of restrictions) The Central Bank of West African States (BCEAO), a central bank common to the eight members of the West African Eco-

Score: 4–Stable (high level of activity) Transparency International’s 2001 score for Senegal is 2.9. Therefore, Senegal’s black market score is 4 this year.

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2003 Index of Economic Freedom

SIERRA LEONE Rank: Score: Category:

Freetown

Trade Policy Fiscal Burden

5 3.5

Government Intervention 2 Monetary Policy 3

Foreign Investment 4 Banking and Finance 4

Since gaining its independence from Great Britain in 1961, Sierra Leone has had five elections and five military coups. The most recent evidence of this pattern of ongoing instability is the civil war that began in 1991 with the rebel Revolutionary United Front (RUF). The civil war ended when the RUF agreed to a cease-fire in the face of a strengthened United Nations peacekeeping force, a rejuvenated Sierra Leone military trained and armed by the British, and growing discontent among its own troops. It will take many years for the country to recover from the decade-long conflict, which left over 50,000 dead and tens of thousands maimed. Despite rich natural resources, Sierra Leone’s economy has been in decline for decades because of corruption, mismanagement, and political instability. Approximately 65 percent of the population depends on subsistence agriculture. Incomes, business activity, health, and education have stagnated and declined over the past decade. From 1991 to 2000, according to World Bank data, compound growth in GDP averaged –3.73 percent annually and per capita GDP fell from $255 to $147 (in constant 1995 U.S. dollars). Since the end of the civil war, however, economic growth has improved.

TRADE POLICY Score: 5 (very high level of protectionism) Based on data from the International Monetary Fund and the Economist Intelligence Unit, Sierra Leone’s average tariff rate in 1999 was 26.6 percent (based on import duties as a percentage of total imports). This figure should be viewed with caution, however. According to the Economist Intelligence Unit, “Official trade figures have been unreliable in recent years, as a result of the civil war.”

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 3 (moderate tax rates) Score—Government Expenditures: 4 (high level of government expenditure) Final Score: 3.5 (high cost of government) Based on data from the International Monetary Fund, Sierra Leone’s top income tax rate has been reduced from 50 percent to 40 percent. The marginal rate for the average taxpayer is 0 percent. The IMF reports that the corporate income tax rate is 35 percent, down from the 45 percent reported in the 2002 Index. Data from the IMF indicate that in 2000, government expenditures equaled 27.9 percent of GDP.

Chapter 6: The Countries

140 3.85 Mostly Unfree

Wages and Prices 2 Property Rights 5

Regulation Black Market

5 5

Scores for Prior Years: 2002: n/a 1999: 3.70 1996: 3.50

2001: n/a 1998: 3.60 1995: 3.60

2000: 3.80 1997: 3.55

2000 Data (in constant 1995 US dollars) Population: 5,031,000 Total area: 71,740 sq. km GDP: $708 million GDP growth rate: 3.8% GDP per capita: $147 Major exports: diamonds, cocoa, coffee, fish Exports of goods and services: $122.7 million Major export trading partners: Belgium 41.7%, US 11.7%, France 8.0%, Canada 6.4% Major imports: foodstuffs, machinery and equipment, fuels and lubricants, chemicals Imports of goods and services: $139.3 million Major import trading partners: UK 39.5%, US 6.2%, Netherlands 5.8%, Germany 4.4% Foreign direct investment (net): $2.7 million

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GOVERNMENT INTERVENTION IN THE ECONOMY

WAGES AND PRICES

Score: 2 (low level) The World Bank reports that the government consumed 16.7 percent of GDP in 2000. In the same year, based on data from the Bank of Sierra Leone, the government received 1.06 percent of its total revenues from state-owned enterprises and government ownership of property. It should be noted that civil unrest interrupted normal business in 2000 and that revenues should increase as economic activity resumes.

Score: 2 (low level of intervention) The government sets few prices and wages. A 1997 law established the minimum wage, which has not been adjusted since then.

MONETARY POLICY Score: 3 (moderate level of inflation) From 1992 to 2001, Sierra Leone’s weighted average annual rate of inflation was 9.68 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 4 (high barriers) The government has little choice but to welcome foreign investment, as it lacks the resources necessary to rebuild its industry and infrastructure, much less meet public demand, in the aftermath of the civil war. However, the risky political environment and uncertain laws and legal enforcement hinder investment. The International Monetary Fund reports that residents are permitted to hold foreign exchange accounts, and non-residents are permitted to hold them with permission from the government. Payments and transfers are generally permitted but face quantitative limits and approval requirements in some instances. Most capital transactions involving capital and money market instruments, credit operation, direct investment, and purchase of real estate require the approval of the Bank of Sierra Leone.

BANKING AND FINANCE Score: 4 (high level of restrictions) The civil war between the government and rebel forces led to the collapse of the financial system, but the recent peace and elections have led to its revival. The Banking Act of 2000, the Banking Regulations of 2001, and the Other Financial Services Act of 2001 established capital adequacy ratios and bank licensing regulations, in addition to clarifying the powers and responsibilities of the central bank. According to the Economist Intelligence Unit, “Sierra Leone’s banking industry has been performing reasonably well, although profits have mostly come from lending to the government…. The spread between lending rates (currently around 23%) and savings rates (currently around 8%) remains high, because of banks’ perceived risk of lending to businesses. The banks have been hiring staff and returning to the rural areas, which suggests that they are expecting to play an active lending role in Sierra Leone’s reconstruction period.” Standard Chartered Bank is the only international bank operating in the country. The governmentowned Sierra Leone Commercial Bank and government-controlled Rokel Commercial Bank currently dominate the banking system, which is in transition to a functioning post-conflict system.

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PROPERTY RIGHTS Score: 5 (very low level of protection) Property is not secure in Sierra Leone. According to the U.S. Department of State, “The Constitution provides for an independent Judiciary…. [H]owever, the judiciary functioned only in part of the country…. [T]here is evidence that corruption has influenced some cases. Traditional justice systems continued to supplement extensively the central government judiciary in cases involving family law, inheritance, and land tenure, especially in rural areas.”

REGULATION Score: 5 (very high level) Years of civil war have taken their toll on the economy. According to the Economist Intelligence Unit, “The government of Ahmad Tejan Kabbah hopes to encourage investment by developing a range of incentives (including tax exemptions) for export- and resource-based industries, as well as for new investors, but weak local demand and foreign-exchange shortages are continuing to inhibit industrial expansion, while foreign companies are reluctant to invest in a country with such high levels of political risk.” According to the same source, “Even before the insurgency the economy had suffered from decades of corruption and mismanagement.”

BLACK MARKET Score: 5 (very high level of activity) Civil unrest and war have devastated Sierra Leone’s formal economy. Most economic activity today occurs in the informal sector. The diamond business is a large component of Sierra Leone’s black market.

2003 Index of Economic Freedom

SINGAPORE Rank: Score: Category:

Singapore

Trade Policy Fiscal Burden

1 2

Government Intervention 3 Monetary Policy 1

Foreign Investment 1 Banking and Finance 2

The city-state of Singapore is beginning the process of changing its economic strategy to reflect the maturation of its economy. The government appears to be on the verge of altering its development plan from the traditional Asian economic model of encouraging savings and discouraging consumption to one that focuses on balancing investment and consumption and fostering the creation of domestic private enterprises. Singapore’s campaign to increase its already open trade environment includes reducing taxes, liberalizing markets in telecommunications and the power industry, and further reducing already low tariff barriers. Nevertheless, Singapore still carries two millstones: government-linked companies (GLCs) and the use of its judiciary as a political weapon. GLCs continue to play a prominent and burdensome role in Singapore’s economy; they are widely recognized as competently run, but the GLC leadership is seen as risk-averse, and the companies are considered an obstacle to the development of domestic privately owned enterprises. Moreover, even though Singapore’s judiciary is widely viewed as competent and independent, some government officials use defamation suits as a weapon against political opponents and critics. The government’s remarkable success in financially destroying domestic opponents and expelling foreign critics by using this tactic raises concerns about the legitimacy of the outcomes in politically sensitive cases. Singapore’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: 1–Stable (very low level of protectionism) According to the World Bank, Singapore’s weighted average tariff rate in 1995 (the most recent year for which World Bank data are available) was 0 percent. According to the Embassy of Singapore, 99 percent of imports are duty free and the average tariff rate is less than 0.1 percent. Only tobacco, liquor, beer and certain other alcoholic beverages, motor vehicles, and petrol are dutiable on import. According to the Economist Intelligence Unit, “Singapore imposes no quota restrictions, and most goods may be imported under open general license…. [However, the government does prohibit] the import of chewing gum, certain cigarette lighters, firecrackers and rhinoceros horns.” It takes just two days to obtain import licenses. Corruption in customs is virtually non-existent.

FISCAL BURDEN OF GOVERNMENT

2 1.50 Free

Wages and Prices 2 Property Rights 1

Regulation Black Market

Scores for Prior Years: 2002: 1.55 1999: 1.40 1996: 1.50

2001: 1.55 1998: 1.40 1995: 1.50

2000: 1.45 1997: 1.50

2001 Data (in constant 1995 US dollars) Population: 4,131,200 Total area: 647.5 sq. km GDP: $110.7 billion GDP growth rate: –2.0% GDP per capita: $26,806 Major exports: machinery and equipment (including electronics), oil, chemicals, mineral fuels Exports of goods and services: $121.8 billion Major export trading partners: Malaysia 17.4%, US 15.4%, Hong Kong 8.9%, Japan 7.7%, Thailand 4.5% Major imports: machinery and equipment, mineral fuels, chemicals, foodstuffs Imports of goods and services: $114.7 billion Major import trading partners: Malaysia 17.3%, US 16.4%, Japan 13.9%, China 6.2%, Thailand 4.5% Foreign direct investment (net): –$1.4 billion

Score—Income and Corporate Taxation: 2–Better (low tax rates) Score—Government Expenditures: 2–Stable (low level of government expenditure) Final Score: 2–Better (low cost of government) Singapore has cut its taxes and has announced its intention to reduce the corporate and top personal income tax rates to 20 percent by 2005. According to the Embassy of Singapore, Singapore’s top income tax rate is 22 percent, down from the 28 percent reported in the 2002 Index; the marginal rate for the average taxpayer is 8 percent, down from the 12 percent

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1 1

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reported in the 2002 Index. The corporate tax rate is 22 percent, down from the 25.5 percent reported in the 2002 Index. In 2001, based on data from Singapore’s Department of Statistics, government expenditures equaled 18.1 percent of GDP. (According to information supplied by the Ministry of Finance, there has been an annual income tax rebate since 1980. In recent years, the rebate has varied between 5 percent and 10 percent of taxes. The variation in the amount of the rebate makes it impractical to incorporate it into this score. Depending on the amount of the rebate, it also would not materially affect Singapore’s final score.) Based on recent income and corporate tax cuts, Singapore’s fiscal burden of government score is 0.5 point better this year.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Stable (moderate level) Based on data from Singapore’s Department of Statistics, the government consumed 11.9 percent of GDP in 2001. In 2000, according to the International Monetary Fund, Singapore received 23.05 percent of its revenues from state-owned enterprises and government ownership of property. The government intervenes in the economy through its macroeconomic and microeconomic policies and formulates policy to aid industries in distress. The latest example is the government’s response in May 2002 to the challenge of a shipping rival. According to the Financial Times, the government of Singapore created “a five-year S$80m ($44m) fund to cut costs for shipping companies in an effort to stem customer defections to a cheaper nearby Malaysian port…. Despite the lower levies charged at Tanjung Pelepas [a Malaysian port, the Singaporean state-owned operator] PSA port has refused to cut its rates, but the new government fund would appear to act like a subsidy for shippers by lowering their costs.”

MONETARY POLICY Score: 1–Stable (very low level of inflation) From 1992 to 2001, Singapore’s weighted average annual rate of inflation was 0.98 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 1–Stable (very low barriers) Singapore’s investment laws are clear and fair, and they pose few problems for business. The government makes it a priority to foster investment; foreign and domestic businesses are treated equally, and there are no production or local content requirements. The country has made several moves to open the economy further during the past year. The telecommunications sector was largely liberalized in April 2000, and the government has opened the legal services sector to some degree. However, foreign investment in broadcasting, news media, domestic retail banking, and some sectors dominated by government-linked companies remains restricted. There are no controls or requirements on current transfers, capital transactions, or repatriation of profits. Foreigners are free—even encouraged—to purchase residential properties, but investment in residential land zoned or approved for industrial or com-

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mercial use requires government approval. The International Monetary Fund reports that, under changes in policy enacted on December 6, 2000, banks may now (subject to certain safeguards) transact freely with non-residents in Singapore dollar asset swaps; lend Singapore dollars to non-residents for use offshore; and lend Singapore derivatives, futures, and fully collateralized dollar-denominated securities to non-residents.

BANKING AND FINANCE Score: 2–Stable (low level of restrictions) Singapore has nominally provided national treatment to foreign banks, but restrictions remain in effect in the domestic retail banking sector. The Monetary Authority of Singapore (MAS) has shown greater willingness to grant Qualifying Full Bank (QFB) licenses—six foreign banks since 1999—and restricted bank licenses over the past few years to foreign banks. According to the Embassy of Singapore, foreign banks continue to face quantitative restrictions on the number of branches and off-premise ATMs to “prevent destabilizing competition.” The government maintains significant holdings in two banks: Keppel–TatLee Bank and the Development Bank of Singapore, which is the largest bank in Southeast Asia. All banks are limited to 25 percent of capital base in lending to a single borrower or group of borrowers. Banks must secure MAS approval before acquiring over 20 percent of the shares of any company.

WAGES AND PRICES Score: 2–Stable (low level of intervention) The market sets almost all wages and prices. According to the Economist Intelligence Unit, “the Ministry of Trade and Industry can impose controls as it deems necessary. Rice and live pigs are now the only price-controlled items.” The Embassy of Singapore reports that price controls are in effect for “all three segments of the electricity industry, vis generation, transmission, and retail. This is due to the lack of effective competition in these three segments….” The National Wage Council (a tripartite body of government, business, and labor) annually reviews wage and economic trends and provides wage increase guidelines for implementation by companies and unions. Although there is no minimum wage, the government intervenes in wage-setting through large government-linked companies and by manipulating the size of the employer contributions for workers to the Central Provident Fund, the system of mandatory individual retirement accounts. During the Asian financial crisis, for example, the government reduced the employer contribution by 10 percent, which was economically equivalent to a unilateral wage cut.

PROPERTY RIGHTS Score: 1–Stable (very high level of protection) The court system is very efficient and strongly protects private property, and there is no threat of expropriation. The constitution authorizes an independent judiciary. According to the U.S. Department of State, however, “there has been a perception that it reflects the views of the executive in politically sensitive cases

2003 Index of Economic Freedom

as government leaders historically have utilized court proceedings successfully, in particular defamation suits, against political opponents and critics.” Despite the reports of political influence, the legal system is sound and enforces contracts effectively. The Economist Intelligence Unit reports that “contractual agreements in Singapore are secure, and the professionalism and efficiency of key agencies such as the Economic Development Board are widely acknowledged.”

REGULATION Score: 1–Stable (very low level) Obtaining a business license can be easy, and regulations are straightforward and simple. Procedures for obtaining licenses and permits are generally transparent and not burdensome. According to the U.S. Department of State, “The Singapore Government promotes its regulatory environment as businessfriendly, with transparent and clear regulations…. [Before] implementing any law or regulation, the government usually consults relevant bodies and agencies, companies and the public, although the consultative process may not necessarily be conducted in public. Tax, labor, banking and finance, industrial health and safety, arbitration, wage and training rules and regulations are formulated and reviewed with the interests of foreign investors and local enterprises in mind, and the Government is usually open to comments from interested businesses.” The Korea Herald reports that Singapore was at the top of a list of “Asia’s least bureaucratic economies [and] found favor with the business community for providing a tough regulatory environment where clear rules were enforced in a nononsense manner.” Singapore is regarded by most observers and businesspersons as having a clean, corruption-free government.

BLACK MARKET Score: 1–Stable (very low level of activity) Transparency International’s 2001 score for Singapore is 9.2. Therefore, Singapore’s black market score is 1 this year.

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2003 Index of Economic Freedom

SLOVAK REPUBLIC Rank: Score: Category:

Bratislava

Trade Policy Fiscal Burden

3 4.5

Government Intervention 2 Monetary Policy 3

Foreign Investment 2 Banking and Finance 2

The reformist government of Prime Minister Mikulas Dzurinda and President Rudolf Schuster that came to power in September 1998 has improved transparency and has pursued European integration. It also has liberalized prices, reduced taxes, accelerated privatization, and begun the restructuring of the banking sector. In 2001, the government removed its 3 percent surcharge on imports. In November 2001, the government reduced personal and corporate income tax rates. In December 2001, the cabinet eliminated 10 of the 12 off-budget government funds, placing expenditures under the control of the Finance Ministry and improving transparency. Slovakia was admitted to the Organisation for Economic Co-operation and Development in the second half of 2000, and accession to the European Union and NATO is an important cabinet priority. Slovakia has closed negotiations on 22 of 29 chapters of EU law and is planning to close all chapters by the end of 2002. However, a left-leaning coalition partner has challenged the unity of the ruling coalition, and the populist bloc of former Prime Minister Meciar could become the largest parliamentary faction after the elections scheduled for September 2002; Slovakia’s chances of joining NATO and the EU therefore remain uncertain. The Slovak Republic’s trade policy score is 1 point worse this year; however, its government intervention score is 1 point better. As a result, the Slovak Republic’s overall score is unchanged this year.

TRADE POLICY Score: 3–Worse (moderate level of protectionism) According to the World Trade Organization, the Slovak Republic’s average tariff rate in 2000 was 6.1 percent, up from the 2.64 percent reported in the 2002 Index. As a result, the Slovak Republic’s trade policy score is 1 point worse this year. According to the Economist Intelligence Unit, “The import surcharge was phased out at the end of 2000” as a requirement of the Slovak Republic’s entrance to the European Union. The U.S. Department of State reports that the “licensing system is Slovakia’s primary non-tariff measure.”

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 3.5–Better (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 Slovak Investment and Trade Development Agency reports that the Slovak Republic is reforming its tax system and that corporate taxes are expected to fall to 18 percent in 2006. The top income tax rate is 38 percent, down from the 42 percent reported in the 2002 Index; the marginal rate for the average taxpayer is 25 percent. The top corporate income tax rate is 25 percent, down from the 29 percent reported in the 2002 Index. In 2001, government expenditures equaled 52.9 percent of GDP. Based on the lower corpo-

Chapter 6: The Countries

66 2.90 Mostly Free

Wages and Prices 3 Property Rights 3

Regulation 3.0 Black Market 3.5

Scores for Prior Years: 2002: 2.90 1999: 3.10 1996: 3.00

2001: 2.85 1998: 3.15 1995: 2.80

2000: 3.00 1997: 3.05

2001 Data (unless otherwise indicated) (in constant 1995 US dollars) Population: 5,378,951 Total area: 48,845 sq. km GDP: $23.2 billion GDP growth rate: 3.3% GDP per capita: $4,315 Major exports: machinery equipment, manufactured goods, miscellaneous manufactured goods, chemicals Exports of goods and services: $18.6 billion Major export trading partners: Germany 27.6%, Czech Republic 16.6%, Italy 8.8%, Austria 8.1% Major imports: transport equipment, intermediate manufactured goods, fuels, chemicals, miscellaneous manufactured goods Imports of goods and services: $19.6 billion Major import trading partners: Germany 24.7%, Czech Republic 15.1%, Russia 14.8%, Italy 6.4% Foreign direct investment (net): $1.86 billion (2000)

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rate tax rate—the result of tax reform that was approved by the cabinet in 2001 and became effective in January 2002—the Slovak Republic’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, which is unchanged.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 2–Better (low level) Based on data from the International Monetary Fund, the government consumed 19.3 percent of GDP in 2001. In 2000, according to the IMF, the Slovak Republic received 2.52 percent of its total revenues from state-owned enterprises and government ownership of property, down from the 10.6 percent reported in the 2002 Index. As a result, the Slovak Republic’s government intervention score is 1 point better this year.

MONETARY POLICY Score: 3–Stable (moderate level of inflation) From 1992 to 2001, the Slovak Republic’s weighted average annual rate of inflation was 8.67 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 2–Stable (low barriers) The government has made attracting foreign investment a priority. The Dzurinda administration’s incentives include tax breaks and elimination of tariffs on imports of new manufacturing machinery. There is no screening process for foreign investment, and both 100 percent foreign ownership and repatriation of profits are permitted. New policies on allowing “strategic privatisation” in formerly restricted sectors have further liberalized the foreign investment regime. The law requires that the state retain 51 percent ownership in privatized utilities, but this has not prevented intense interest by foreign investors in 49 percent of the natural gas company, the energy sector, and oil pipeline. The International Monetary Fund reports that residents may establish foreign exchange accounts when staying abroad or with permission of the National Bank of Slovakia, but non-residents may freely hold foreign exchange accounts. Some payments, transactions, and transfers require a permit. Foreign purchase of real estate is restricted to inheritance, diplomatic presence, acquisition through marriage or family, exchange of properties of equivalent value, use in the core activities of a foreign-owned business, or a few other restricted circumstances.

BANKING AND FINANCE Score: 2–Stable (low level of restrictions) The Slovak Republic has implemented an aggressive privatization program for its state-owned banks. The Economist Intelligence Unit reports that there were 24 banks in mid-2001, 15 of which had foreign capital participation and two of which were foreign branches. Interest rates have been completely liberalized, and credit limits have been abolished. According to Standard & Poor’s, “The privatization of banks, the recent legislation of the new Banking Act, and better implementation of the bankruptcy, banking supervision, and corporate governance laws have improved Slovakia’s payment culture, and the viability of the banking and corporate

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sectors [is] expected to improve.” Foreign banks account for more than 80 percent of total banking assets now that the last three stateowned banks have been privatized. Privatization of the Slovenska Poistovna insurance monopoly has proceeded.

WAGES AND PRICES Score: 3–Stable (moderate level) The Slovak Republic has removed a number of price controls. The government still regulates the prices of electricity, gas, transport, and other utilities but has been raising prices to “cost-recovery” levels, according to the European Bank for Reconstruction and Development. The Economist Intelligence Unit reports that the liberalization of prices for transportation, utilities, and housing rents has been postponed. According to the Embassy of the Slovak Republic, the government controls the prices of medicine and health care, natural gas, heating, water, telecommunications, road passenger transport, and selected agricultural products. The Slovak Republic maintains a minimum wage.

PROPERTY RIGHTS Score: 3–Stable (moderate level of protection) Expropriation is unlikely in the Slovak Republic, but the country has a somewhat weak and inefficient judicial system. According to the U.S. Department of State, “Property and contractual rights are enforced within the legal structure, but decisions may take years, thus limiting the attractiveness of the system for dispute resolution…. A bankruptcy law exists but is not very effective.” The Economist Intelligence Unit reports that “a far-reaching constitutional amendment adopted in February 2001 promises to remove uncertainties about [the judiciary’s] political independence. The amendment, which came into force on July 1st, abolishes the probationary period for judges and creates a Council of Judges empowered to oversee nomination and removal procedures.”

REGULATION Score: 3–Stable (moderate level) The government has reduced the level of regulation, and most businesses do not need a license. Lack of transparency, the persistence of red tape, and excessive and inefficient bureaucracy continue to present problems. According to the U.S. Department of State, “transparency and predictability have been a problem on many issues involving investors…. Investors also complain that the purchase of land and granting of building permits is a long, unpredictable process that can delay projects.” In addition, “the public continues to perceive corruption as a significant problem and business leaders claim that corruption is endemic,” despite the government’s efforts to combat it. The European Bank for Reconstruction and Development reports that the labor market remains inflexible.

BLACK MARKET Score: 3.5–Stable (high level of activity) Transparency International’s 2001 score for the Slovak Republic is 3.7. Therefore, the Slovak Republic’s black market score is 3.5 this year.

2003 Index of Economic Freedom

SLOVENIA Ljubljana

Trade Policy Fiscal Burden

4.0 4

Government Intervention 2 Monetary Policy 3

Rank: Score: Category: Foreign Investment 3 Banking and Finance 3

Slovenia has pursued a gradualist approach to economic development. The establishment has never accepted the need for radical economic reform, maintaining that the country’s relatively high regional level of economic development renders shock therapy irrelevant. For a number of years, the sale of key assets to foreigners has encountered widespread hostility. The government has been slow to privatize the banking and insurance sectors, and foreign direct investment has been modest because of the high level of bureaucratic red tape and the small size of the Slovene market. In May 2002, however, the government completed the sale of a minority stake in Slovenia’s largest bank to a Belgian financial institution. Slovenia is engaged in intensive accession negotiations with the European Union and hopes to join both the EU and NATO in the near future; this has been the impetus for a recent increase in efforts at reform. Janez Drnovsek, the leader of a center–left parliamentary coalition, has moved forward with ambitious plans for privatization in 2001–2002 that include financial institutions, an aluminum firm, a port, and an airport. Slovenia’s fiscal burden of government score is 0.5 point better this year, and its government intervention and wages and prices scores are both 1 point better. As a result, Slovenia’s overall score is 0.25 point better this year, causing Slovenia to be classified as a mostly free economy.

TRADE POLICY Score: 4–Stable (high level of protectionism) According to the World Bank, Slovenia’s weighted average tariff rate in 1999 (the most recent year for which World Bank data are available) was 11.4 percent. Non-tariff barriers take the form of quotas and import licenses. The U.S. Department of State reports that “import quotas restrict a few categories of goods, and in some sectors permits or licenses restrict importation.”

FISCAL BURDEN OF GOVERNMENT 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) Slovenia’s top income tax rate is 50 percent; the marginal rate for the average taxpayer is 35 percent. The top corporate tax rate is 25 percent. In 2001, based on data from the Bank of Slovenia, government expenditures equaled 44.5 percent of GDP, down slightly from the 45.8 percent reported in the 2002 Index. As a result, Slovenia’s fiscal burden of government score is 0.5 point better this year.

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62 2.85 Mostly Free

Wages and Prices 2 Property Rights 3

Regulation 2.0 Black Market 2.5

Scores for Prior Years: 2002: 3.10 1999: 2.90 1996: 3.50

2001: 2.90 1998: 3.00 1995: n/a

2000: 3.00 1997: 3.30

2001 Data (in constant 1995 US dollars) Population: 1,994,026 Total area: 20,253 sq. km GDP: $23.9 billion GDP growth rate: 3.0% GDP per capita: $11,972 Major exports: manufactured goods, machinery and transport equipment, chemicals, food Exports of goods and services: $15.5 billion Major export trading partners: Germany 26.0%, Italy 12.4%, Croatia 8.6%, Austria 7.4%, France 6.7% Major imports: machinery and transport equipment, manufactured goods, chemicals, fuels and lubricants, food Imports of goods and services: $15.9 billion Major import trading partners: Germany 19.6%, Italy 18.0%, France 10.8%, Austria 8.5%, Croatia 4.0% Foreign direct investment (net): $303 million

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GOVERNMENT INTERVENTION IN THE ECONOMY

WAGES AND PRICES

Score: 2–Better (low level) Based on data from the International Monetary Fund, the government consumed 21.3 percent of GDP in 2001. Data from the Bank of Slovenia indicate that in the same year, Slovenia received 3.3 percent of its total revenues from state-owned enterprises and government ownership of property. Based on newly available data on revenues from state-owned enterprises, Slovenia’s government intervention score is 1 point better this year.

Score: 2–Better (low level of intervention) The market determines most wages and prices. However, according to the Embassy of Slovenia, the government maintains price controls on liquid fuels, electricity, municipal services, transport, television and radio subscription, postal and telephone services, and schoolbooks. Slovenia maintains a minimum wage. Price controls do not represent a large portion of national output. As a result, Slovenia’s wages and prices score is 1 point better this year.

MONETARY POLICY

PROPERTY RIGHTS

Score: 3–Stable (moderate level of inflation) From 1992 to 2001, Slovenia’s weighted average annual rate of inflation was 8.87 percent.

Score: 3–Stable (moderate level of protection) Private property is guaranteed by Slovenia’s constitution. The Embassy of Slovenia indicates that the government has tried to strengthen the courts and make judges aware of the seriousness of corruption offenses. According to the Economist Intelligence Unit, “Judges are appointed by the executive branch…but are generally politically neutral.” Understaffing, backlogs, and the absence of guarantees for a speedy trial in criminal cases slow down the trial process; the same source also reports that a European Union Commission “found a backlog of more than 500,000 cases in mid-2000, most of which pertain to property restitution.” The Slovenian embassy, however, reports that in 2001, the courts solved almost all cases. According to the U.S. Department of State, a number of laws have been passed to strengthen the legal framework that supports Slovenia’s private sector, but “progress has been somewhat halting.”

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) The government allows foreign investment in most industries. According to the International Monetary Fund, foreign direct investment is not permitted in the provision of mandatory pension and health insurance paid for by the government or in the production of and trade in military equipment. The government has streamlined the investment process, has made it easier for foreigners to purchase land, and now grants foreign investors the same opportunities to win financial incentives as domestic companies enjoy. Privatization of state-owned sectors has been hindered by political opposition, and the government has delayed privatization of the telecommunications monopoly yet again to 2003. The IMF reports that residents may hold foreign exchange accounts after proving their identity, but foreign exchange accounts held abroad by residents are restricted. Non-residents may hold foreign exchange accounts. There are no restrictions on payments and transfers. Issue of foreign debt securities and investment securities is subject to approval by the Ministry of Finance, and the Bank of Slovenia sets conditions for the purchase, sale, or issue of money market instruments.

BANKING AND FINANCE Score: 3–Stable (moderate level of restrictions) The International Monetary Fund reports that foreign banks, insurance companies, and stock brokering companies may open branches in Slovenia. As a result of this increased foreign competition, Slovenia’s financial sector is consolidating. The government maintains a significant presence. There were 21 banks and 53 savings and loan institutions in Slovenia in December of 2001. Three banks dominate the sector, accounting for more than 50 percent of loans and deposits; the two largest are partially or wholly owned by the state. The Financial Times reports that the government sold a minority stake in the largest bank, Nova Ljubljanska banka (NLB), but decided not to sell a majority stake in the second largest, Nova Kreditna banka Maribor (Nova–KBM), in the wake of a public outcry against selling banks to foreigners. An insurance law passed in January 2000 met European Union requirements by granting EU insurance companies national treatment by February 2002. The legislation also immediately permitted non-residential reinsurance and allowed foreign insurance firms to establish branches in the country.

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REGULATION Score: 2–Stable (low level) It is becoming easier to establish a business as the government has undertaken regulatory reform, although an entrenched and sometimes inefficient bureaucracy continues to hinder business development. Deregulation of the labor market has not progressed, but the government has made progress in reforming public administration and identifying and reducing red tape. According to the Organisation for Economic Co-operation and Development, “the legal framework governing industrial relations remains in some aspects overly bureaucratic, with significant restrictions for employers. For this reason, many…enterprises avoid hiring regular employers and prefer temporary contracts.” The U.S. Department of State reports that the government has the authority to establish market restrictions in cases of natural disasters, epidemics, goods shortages, and other states of emergency. The same source reports that corruption exists on a “minor scale.”

BLACK MARKET Score: 2.5–Stable (moderate level of activity) Transparency International’s 2001 score for Slovenia is 5.2. Therefore, Slovenia’s black market score is 2.5 this year.

2003 Index of Economic Freedom

Pretoria

SOUTH AFRICA Rank: Score: Category:

Trade Policy Fiscal Burden

3 4.5

Government Intervention 2 Monetary Policy 2

Foreign Investment 2 Banking and Finance 2

South Africa, one of sub-Saharan Africa’s few middle-income countries, is often viewed as a springboard for investment in southern Africa. Despite such economic advantages as rich natural resources and well-developed financial, legal, communication, and energy sectors, however, economic growth has been poor in recent years; from 1991 to 2000, according to World Bank data, compound growth in GDP averaged 1.96 percent annually and per capita GDP fell marginally from $3,988 to $3,985 (in constant 1995 U.S. dollars). President Thabo Mbeki’s government has stated its commitment to flexible labor markets and privatization, but powerful unions oppose these goals and have managed to slow their implementation. Restrictive labor regulations have aggravated an already high unemployment rate of 25 percent. The government has sold only 18 state-owned enterprises since 1997 and remains active in many areas of the economy. Low growth, unemployment, and racial tensions threaten to spur counterproductive economic policies. For instance, the government is considering legislation to restore all mineral rights to the state in a controversial “use it or lose it” policy; black opposition parties and landless blacks have threatened to invade land owned by white South Africans as has happened in Zimbabwe; and legislative efforts endanger foreign ownership of land and security businesses. Overall, an extremely high crime rate, a growing number of corruption scandals, and regional instability have undermined both investment and growth. South Africa’s trade policy and banking and finance scores are both 1 point better this year, and its government intervention score is 0.5 point better. As a result, South Africa’s overall score is 0.25 point better this year.

TRADE POLICY Score: 3–Better (moderate level of protectionism) South Africa belongs to the Southern African Customs Union (SACU), a regional trade arrangement with Botswana, Lesotho, Namibia, and Swaziland. 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, South Africa’s trade policy score is 1 point better this year. The U.S. Department of State reports that the “Minister of Trade and Industry is empowered to regulate, prohibit or ration imports to South Africa in the national interest.” According to the Economist Intelligence Unit, “the trend of phasing out import controls has continued since 1992. Remaining import permits are used mainly to collect information rather than to limit trade.”

44 2.65 Mostly Free

Wages and Prices 2 Property Rights 3

Regulation Black Market

Scores for Prior Years: 2002: 2.90 1999: 2.90 1996: 3.00

2001: 3.05 1998: 2.80 1995: 3.00

2000: 2.90 1997: 2.90

2000 Data (in constant 1995 US dollars) Population: 42,800,990 Total area: 1,219,912 sq. km GDP: $169 billion GDP growth rate: 3.1% GDP per capita: $3,985 Major exports: gold, diamonds, other metals and minerals, machinery and equipment Exports of goods and services: $44.8 billion Major export trading partners: US 10.6%, UK 7.6%, Japan 7.1%, Germany 7.0%, Italy 6.4% Major imports: machinery, foodstuffs and equipment, chemicals, petroleum products, scientific instruments Imports of goods and services: $38.5 billion Major import trading partners: Germany 13.3%, US 11.9%, UK 9.4%, Japan 7.3% Foreign direct investment (net): $351 million

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) South Africa has a progressive tax system. The top income tax was lowered from 45 percent to 42 percent in the 2000 budget; the marginal rate for the average taxpayer is 18 percent,

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down from the 19 percent reported in the 2002 Index. The corporate tax is 30 percent. Data from the International Monetary Fund indicate that in 2000, government expenditures equaled 44.9 percent of GDP.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 2–Better (low level) The World Bank reports that the government consumed 18.4 percent of GDP in 2000. In the same year, according to the International Monetary Fund, South Africa received 1.8 percent of its total revenues from state-owned enterprises and government ownership of property, down from the 4.57 percent reported in the 2002 Index. As a result, South Africa’s government intervention score is 0.5 point better this year.

MONETARY POLICY Score: 2–Stable (low level of inflation) From 1992 to 2001, South Africa’s weighted average annual rate of inflation was 5.71 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 2–Stable (low barriers) The government does not require approval for investment, and foreign investors in most cases are subject to the same laws as domestic investors. Only a few areas of the economy are reserved for South Africans, and foreign investors are free to acquire land. Foreign-controlled firms are subject to domestic borrowing restrictions. The state continues to control a significant portion of the economy despite some slow, partial privatization, and this necessarily limits foreign involvement. The International Monetary Fund reports that both residents and non-residents may establish foreign exchange accounts through authorized dealers and must register amounts over set limits. Payments, transactions, and transfers are subject to some restrictions, controls, quantitative limits, and prior approval although most exchange controls have been phased out. South Africa is being pressured to regulate foreign ownership of land, restrict foreign work permits, and prohibit foreign companies from operating in security businesses.

BANKING AND FINANCE Score: 2–Better (low level of restrictions) South Africa’s banking system, comprised of 32 domestic and foreign banks as of June 2002, is the most developed in sub-Saharan Africa, and foreign financial institutions are largely free of restrictions. Standard & Poor’s reports that recent problems with secondtier banks like Saambou and BOE Bank do not reflect a worsening of credit portfolios across the sector: “Overall, the regulatory framework is sound, and indicators of financial health—such as capital adequacy ratios, nonperforming loans, and loan-loss provisions— have continued to improve from already relatively high levels.” With the takeover of Saambou and BOE, the four largest banks control over 85 percent of banking assets, according to the Economist Intelligence Unit. Racial tensions are reflected in demands by black empowerment groups to set asset ratios that must be invested in black enterprises, but the government has resisted these policies. Based on

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liberalization of the sector in recent years, South Africa’s banking and finance score is 1 point better this year.

WAGES AND PRICES Score: 2–Stable (low level of intervention) Prices are set by the market with the exception of petroleum products, coal, paraffin, and utilities. South Africa does not have a legally mandated minimum wage, but unionized workers set wage levels on an industry or plant basis through annual negotiations. The Ministry of Labor is empowered to set wages in sectors that lack widespread union membership, such as farm labor and domestic work.

PROPERTY RIGHTS Score: 3–Stable (moderate level of protection) The threat of expropriation is low. The judiciary is independent, and contractual arrangements are generally secure. According to the U.S. Department of State, “Though high rates of violent crime make it difficult for South African criminal and judicial entities to dedicate adequate resources to anti-corruption efforts, the government is committed to a tough stance on corruption…. During the past few years, crime in South Africa has been a far more serious problem than either corruption or political violence, and is an impediment to and a cost of doing business in the country.”

REGULATION Score: 3–Stable (moderate level) Even though the government has moved to increase transparency in the regulatory framework through a series of legislative and other reforms, regulation of economic activity can be burdensome. Labor regulations are onerous. According to the Economist Intelligence Unit, “the main regulatory risk for companies is complying with black empowerment legislation and meeting other related goals, which can raise the cost of implementing a commercial strategy. These regulations may also be changed on short notice.” In addition, “Owing to South Africa’s dearth of skilled labor, concerns exist over the capacity of the bureaucracy at the various levels of government, and performance is mixed. A further problem has been co-ordination and co-operation between different government departments and different tiers of government; attempts have been made through the presidency to tackle this. In provincial and local governments (outside the three main metropolitan areas) these problems tend to be worse.”

BLACK MARKET Score: 3–Stable (moderate level of activity) Transparency International’s 2001 score for South Africa is 4.8. Therefore, South Africa’s black market score is 3 this year.

2003 Index of Economic Freedom

SPAIN Madrid

Trade Policy Fiscal Burden

2 4

Government Intervention 2.5 Monetary Policy 2

Rank: Score: Category: Foreign Investment 2 Banking and Finance 2

Upon joining the European Union in 1986, Spain undertook a program of privatization that significantly reduced the size of government and helped open the economy. This trend continued throughout the 1990s, especially under the government of Prime Minister Jose Maria Aznar, with liberalization of the banking, energy, and telecommunications sectors and a decline in public spending as a percentage of GDP. As a result, Spain has enjoyed both economic growth and job creation, with GDP increasing by 2.4 percent in 2001—the first time in five years it has been under 3 percent—and unemployment decreasing from 22.9 percent in 1995 to around 12.7 percent in 2001. The boom has been marked by bullish business confidence, fast job creation, and rising consumer demand; it also has strengthened the peseta, allowing Spain to become an inaugural member of the euro zone. Following the June 2000 elections, Aznar embarked on an ambitious plan to open the oil, gas, electricity, and telecommunications markets. The main area still awaiting reform is the labor market; Spain’s dismissal laws remain among the strictest within the EU—68.5 percent of Spanish workers have lifetime contracts or the promise of generous nationally mandated redundancy payments. Aznar has used his power of decree to start liberalizing the labor markets, with the unions predictably calling a general strike to protest. The continued liberalization of the Spanish economy will depend on the outcome of this political contest. Spain’s government intervention score is 0.5 point better this year; however, its monetary policy score is 1 point worse. As a result, Spain’s overall score is 0.05 point worse this year.

TRADE POLICY Score: 2–Stable (low level of protectionism) Spain has a weighted average tariff rate of 1.8 percent. As a member of the European Union, Spain’s participation in the Common Agricultural Policy (CAP), a program that heavily subsidizes the EU agricultural sector, acts as a non-tariff barrier.

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 4–Stable (high tax rates) Score—Government Expenditures: 4–Stable (high level of government expenditure) Final Score: 4–Stable (high cost of government) Spain’s top income tax rate is 48 percent; the marginal rate for the average taxpayer is 28.3 percent. The top corporate rate is 35 percent. In 2001, government expenditures equaled 38.5 percent of GDP.

Chapter 6: The Countries

29 2.35 Mostly Free

Wages and Prices 2 Property Rights 2

Regulation Black Market

3 2

Scores for Prior Years: 2002: 2.30 1999: 2.40 1996: 2.70

2001: 2.40 1998: 2.45 1995: 2.50

2000: 2.40 1997: 2.55

2001 Data (in constant 1995 US dollars) Population: 41,116,842 Total area: 504,782 sq. km GDP: $723.5 billion GDP growth rate: 2.8% GDP per capita: $17,596 Major exports: machinery, motor vehicles, foodstuffs, other consumer goods Exports of goods and services: $222.4 billion Major export trading partners: France 19.5%, Germany 11.8%, Portugal 10.0%, Italy 9.0%, UK 8.9%, US 4.4% Major imports: machinery and equipment, fuels, chemicals, semifinished goods, foodstuffs, consumer goods Imports of goods and services: $236.7 billion Major import trading partners: France 16.8%, Germany 15.5%, Italy 9.1%, UK 7.0%, US 4.6% Foreign direct investment (net): –$4.8 billion

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GOVERNMENT INTERVENTION IN THE ECONOMY Score: 2.5–Better (moderate level) The Economist Intelligence Unit reports that the government consumed 17.3 percent of GDP in 2001. In the same year, based on data from the Ministry of Economy, the government received 4.93 percent of its total revenues from state-owned enterprises and government ownership of property. Based on new data on revenues from state-owned enterprises, Spain’s government intervention score is 0.5 point better this year.

MONETARY POLICY Score: 2–Worse (low level of inflation) From 1992 to 2001, Spain’s weighted average annual rate of inflation was 3.37 percent, up from the 3 percent from 1991 to 2000 reported in the 2002 Index. As a result, Spain’s monetary policy score is 1 point worse this year.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 2–Stable (low barriers) Spain maintains few restrictions on foreign investment; it allows up to 100 percent foreign ownership in most sectors and is liberalizing regulations on capital movements. For the most part, prior investment approval is not required. European Union–resident companies receive national treatment except in national defense industries, radio and television broadcasting, air transportation, and gambling. However, the government does employ its power to restrict unwanted investment. The Economist Intelligence Unit reports that “Spanish governments have acted to protect key domestic companies from foreign domination. They have fostered the formation of a core of Spanish investors in strategic sectors, especially those where privatization might lead to foreign control. Guarantees in this area are generally unwritten, and action has most often taken the form of tacit intervention in deals or public expressions of disapproval. The government used its golden share in Telefonica in May 2000 to block a planned merger of the Spanish telecommunications company with the Dutch KPN.” There are no restrictions or controls on resident or non-resident foreign exchange accounts, repatriation of profits, real estate transactions, and invisible transactions. Current transfers are not restricted but must be declared to deposit institutions. The Bank of Spain requires reporting on most credit and lending activities.

BANKING AND FINANCE Score: 2–Stable (low level of restrictions) Spain’s banking and financial sectors are diverse, modern, and fully integrated into international financial markets. Integration into the European Union has forced Spain to open its banking system to banks from other EU members. Spain has also made progress in opening its banking system to foreign competition by removing restrictions on investments from non-EU investors, but foreign competitors face substantial challenges from competitive domestic rivals and low margins. Of Spain’s 146 registered private banks, 53 are foreign and 93

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are domestic. Spain’s retail banking sector is dominated by the Banco Bilbao Vizcaya Argentaria (BBVA) and Banco Santander Central Hispano groups, which account for 80 percent of banking assets. Foreign firms are governed by the same conditions that apply to domestic interests with regard to access to the financial system. Spain’s stock market has developed rapidly, and Madrid now has the fifth largest stock market in the European Union.

WAGES AND PRICES Score: 2–Stable (low level of intervention) The government has removed most price controls. According to the Economist Intelligence Unit, “price controls have disappeared except in those sectors still controlled by the national government: farm insurance, stamps, public transport, electricity, natural gas/butane/propane and medicines. Regional governments also control a few prices locally.” Spain maintains a minimum wage.

PROPERTY RIGHTS Score: 2–Stable (high level of protection) Property is relatively safe from government expropriation. The judiciary is independent in practice, but bureaucratic obstacles are considerable at both the national and state levels. The Economist Intelligence Unit reports that “contractual agreements are secured although the legal system can be painfully slow, and enforcement becomes a tortuous process when contacts are not honored.” Out-of-court settlements are therefore common.

REGULATION Score: 3–Stable (moderate level) The government has streamlined its regulatory regime; nevertheless, according to the Economist Intelligence Unit, “bureaucratic steps are considerable both at the national and state levels, and many civil servants are un-cooperative, though generational change is helping make dealings with the public sector somewhat more agile.” Spain has the full array of European Union environmental regulations but does not enforce them effectively. One key area needing reform is the labor market, which is known for its rigidity. The Economist Intelligence Unit reports that “31.5% of salaried workers are on precarious temporary contracts; the rest have contracts guaranteeing lifetime employment or generous, nationally mandated redundancy payments in the event of layoffs. This segmented labor market has severely curtailed job creation and hampered productivity growth in Spain.”

BLACK MARKET Score: 2–Stable (low level of activity) Transparency International’s 2001 score for Spain is 7. Therefore, Spain’s black market score is 2 this year. According to El Pais, “the Spanish department of employment and social security discovered 61,951 illegal jobs in 2001, an 11.48% rise compared with the previous year.”

2003 Index of Economic Freedom

SRI LANKA Rank: 80 Score: 3.05 Category: Mostly Unfree

Colombo

Trade Policy Fiscal Burden

3 3.5

Government Intervention 3 Monetary Policy 3

Foreign Investment 3 Banking and Finance 3

The 19-year civil war between the government of Sri Lanka and the Liberation Tigers of Tamil Eelam (LTTE, or Tamil Tigers) may be close to resolution. A cease-fire was signed in February 2002, and two months later, LTTE leader Prabhakaran Velupillai committed to peace at his first press conference in a decade. Norway has agreed to mediate negotiations in Thailand. The ethnic-based conflict has put enormous strain on government spending, and the LTTE’s terrorist tactics have scared off both tourists and investors. With the prospect of peace, domestic flights have resumed, and the main road between Tamil-controlled Jaffna and the capital of Colombo has re-opened. Sri Lanka hopes that resumption of economic activity in war-torn areas can boost a lethargic economy that contracted by an estimated 1.3 percent in 2001. The government has sought to encourage private enterprise by curbing public spending and simplifying a convoluted tax structure. The government privatized two state-managed plantations and divested (or put up for sale) its holdings in the sugar, insurance, energy, and telecommunications industries. Sri Lanka’s government intervention and wages and prices scores are both 1 point worse this year, and its fiscal burden of government score is 0.5 point worse. As a result, Sri Lanka’s overall score is 0.25 point worse this year, causing Sri Lanka to be classified as a mostly unfree economy.

TRADE POLICY Score: 3–Stable (moderate level of protectionism) According to the World Bank, Sri Lanka’s weighted average tariff rate in 2000 (the most recent year for which World Bank data are available) was 7.4 percent. The Financial Times reports that Sri Lanka maintains one of the world’s toughest bans on genetically modified food. The ban requires that 21 categories of food products be completely free from genetically modified products. The government agreed to suspend the ban in June 2001 in response to a request from the World Trade Organization but then re-imposed it in September.

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 3–Worse (moderate tax rates) Score—Government Expenditures: 4–Worse (high level of government expenditure) Final Score: 3.5–Worse (high cost of government) Sri Lanka’s top income tax rate is 35 percent; the marginal rate for the average taxpayer is 10 percent. The top corporate income tax rate is 35 percent. In 2000, according to the Asian Development Bank, government expenditures equaled 25.7 percent of GDP, up from the 25 percent reported in the 2002 Index. Tax reform will reduce the income and corporate tax rates in 2003 and 2004. Based on the higher level of government expenditure, as well as a clarification in the methodology used to calculate the income and corporate taxation score, Sri Lanka’s overall fiscal burden of government score is 0.5 point worse this year.

Chapter 6: The Countries

Wages and Prices 3 Property Rights 3

Regulation Black Market

3 3

Scores for Prior Years: 2002: 2.80 1999: 2.75 1996: 2.80

2001: 2.70 1998: 2.75 1995: 3.00

2000: 2.90 1997: 2.50

2000 Data (in constant 1995 US dollars) Population: 19,359,000 Total area: 65,610 sq. km GDP: $16.3 billion GDP growth rate: 6.0% GDP per capita: $860 Major exports: textiles and apparel, tea, diamonds, coconut products, petroleum products Exports of goods and services: $6 billion Major export trading partners: US 39.3%, UK 13.3%, Germany 4.2%, Japan 3.7% Major imports: machinery and equipment, textiles, petroleum, foodstuffs Imports of goods and services: $9.1 billion Major import trading partners: Japan 8.8%, India 8.2%, Hong Kong 7.1%, Singapore 6.8% Foreign direct investment (net): $197 million

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GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Worse (moderate level) The World Bank reports that the government consumed 10.4 percent of GDP in 2000, up from the 9.96 percent reported in the 2002 Index. In the same year, according to the International Monetary Fund, Sri Lanka received 8.92 percent of its total revenues from state-owned enterprises and government ownership of property. Based on the higher level of government consumption, Sri Lanka’s government intervention score is 1 point worse this year.

MONETARY POLICY Score: 3–Stable (moderate level of inflation) From 1992 to 2001, Sri Lanka’s weighted average annual rate of inflation was 11.31 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) Legislation liberalizing foreign investment rules took effect on April 19, 2002. Foreign investment up to 100 percent is allowed in most sectors. Foreign investment in some sectors— including real estate, freight, coastal shipping, retail trading, mining, processing of non-renewable natural resources, deep sea fishing, mass media, growing and processing of many agricultural products, air transportation, and education—is prohibited or requires screening and approval by the government. The International Monetary Fund reports that residents may hold foreign exchange accounts up to a maximum amount; non-residents may hold foreign exchange accounts provided they originate from specified activities. There are strict reporting requirements on payments, transactions, and transfers. There are many restrictions, controls, and reporting requirements on capital transactions. Repatriation of profits is permitted.

BANKING AND FINANCE Score: 3–Stable (moderate level of restrictions) Liberalization raised foreign equity limits to 60 percent and permitted foreign bank branches to operate without restrictions. The state owns the two largest banks—Bank of Ceylon and People’s Bank. According to the U.S. Department of State, “Despite a gradual loss in market share, the two state-owned commercial banks…still dominate banking, making up a little over half of all assets and liabilities…. The World Bank and the IMF have identified the dominance of these inefficient state banks as a main constraint for development of the financial sector.” The Economist Intelligence Unit reports that the state also owns two insurance companies and pension funds. There are 26 commercial banks—10 domestic and 16 foreign.

WAGES AND PRICES

utilities, petroleum and fertilizer are subsidized or have below market prices.” According to Chairman and Director General of the Board of Investment of Sri Lanka Arjunna Mahendran, “50 percent of people in the country gets [sic] free handouts in terms of food, clothing, school fees, etc.” Sri Lanka does not have a national minimum wage, but the law provides for and enforces the decisions of wage boards for specific sectors and industries. Based on the evidence of price and wage controls, Sri Lanka’s wages and prices score is 1 point worse this year.

PROPERTY RIGHTS Score: 3–Stable (moderate level of protection) The judiciary is constitutionally independent but weak and may be subject to political influence. According to the U.S. Department of State, “Settlement through the Sri Lankan court system is subject to extremely protracted and inexplicable delay. Aggrieved investors (especially those dealing with the Government of Sri Lanka on projects) have frequently pursued out-of-court settlements, which offer the possibility— not frequently realized—of speedier resolution of disputes.” Sri Lanka’s civil war may soon be ending now that a cease-fire was declared in February 2002. Although the war has ravaged the northern part of the country, there has been considerable investment in other areas, and property rights have enjoyed moderate protection.

REGULATION Score: 3–Stable (moderate level) Sri Lankan regulations can be difficult to decipher, in addition to which enforcement can be deficient and transparency is sometimes lacking. The U.S. Department of State reports that “some of the laws and regulations are not freely available and are difficult to access. Foreign and domestic investors often complain that the regulatory system allows far too much leeway for bureaucratic discretion…. Lethargy and indifference on the part of mid- and lower-level public servants compound transparency problems.” In addition, corruption can be an obstacle to doing business. There are anti-corruption laws in place, but they are not enforced evenly.

BLACK MARKET Score: 3–Stable (moderate level of activity) Sri Lanka has a black market in pirated computer software, prerecorded music and video tapes, and compact discs. According to the U.S. Department of State, “Corruption is a persistent problem in customs clearance and enables wide-scale smuggling of certain consumer items.” Smuggling of arms, people, and goods is common. The Press Trust of India reports that commercial seizures on the Indo–Sri Lanka border in 2000 were worth Rs 72.4 million.

Score: 3–Worse (moderate level of intervention) “The state continues to control the price of (basic) bread, flour, petroleum, bus and rail fares, telecom rates, water and electricity,” reports the U.S. Department of State. “In addition,

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2003 Index of Economic Freedom

SUDAN

Khartoum

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

Suspended n/a n/a

Wages and Prices n/a Property Rights n/a

Regulation n/a Black Market n/a

Sudan has been embroiled in a civil war between the ruling National Islamic Front and separatist Christian and animist tribes in the southern part of the country for 19 years. The government is unable to extend its authority to roughly 50 percent of the country. Though the government and the primary rebel group (the Sudan People’s Liberation Army) have negotiated successive cease-fire agreements, these agreements often have been broken by both sides, and short-term prospects for peace, while they are improving, remain uncertain. The U.S. Department of State reports that civil war, economic mismanagement, and huge numbers of refugees have “devastated the country’s mostly agricultural economy.” From 1991 to 2000, according to World Bank data, compound growth in GDP averaged 7.8 percent annually and per capita GDP increased from $199 to $319 (in constant 1995 U.S. dollars). According to the Economist Intelligence Unit, the agricultural sector employs two-thirds of the labor force and historically has accounted for 80 percent of exports and over 40 percent of GDP. Despite the conflict, the Economist Intelligence Unit reports that the government has moved forward on trade liberalization, banking reform, and opening the economy to foreign investment. Sudan’s increasingly important oil sector has attracted substantial private investment.

Scores for Prior Years:

TRADE POLICY

Major export trading partners: China 37.6%, Japan 15.8%, Saudi Arabia 8.7%

Score: Not graded According to the World Bank, Sudan’s weighted average tariff rate in 1996 (the most recent year for which World Bank data are available) was 3.8 percent. Data from the International Monetary Fund and the Economist Intelligence Unit, however, indicate that Sudan’s average tariff rate in 1999 was 19.31 percent (based on import duties as a percentage of total imports). The government has eliminated import and export licenses but continues to ban the importation of some 30 items. Corruption is pervasive within the customs service.

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: Not graded Score—Government Expenditures: Not graded Final Score: Not graded According to the United Nations Development Programme, Sudan’s top income tax rate is 30 percent, the marginal rate for the average taxpayer is 0 percent, and the top corporate tax rate is 40 percent. In 1999, based on data from Sudan’s central bank and the Economist Intelligence Unit, government expenditures equaled 11.9 percent of GDP.

Chapter 6: The Countries

2002: n/a 1999: 4.05 1996: 4.10

2001: n/a 1998: 4.20 1995: 4.10

2000: 3.85 1997: 4.20

2000 Data (in constant 1995 US dollars) Population: 31,095,000 Total area: 2,505,810 sq. km GDP: $9.3 billion GDP growth rate: 8.3% GDP per capita: $319 Major exports: oil and petroleum products, cotton, sesame, livestock, groundnuts, sugar Exports of goods and services: n/a

Major imports: foodstuffs, manufactured goods, machinery and transport equipment, medicines and chemicals, textiles Imports of goods and services: n/a Major import trading partners: China 10.0%, Saudi Arabia 7.4%, Germany 6.7%, UK 5.0% Foreign direct investment (net): $163 million

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GOVERNMENT INTERVENTION IN THE ECONOMY Score: Not graded The Economist Intelligence Unit reports that the government consumed an estimated 4.7 percent of GDP in 1999. In the same year, according to the International Monetary Fund, Sudan received 6.77 percent of its total revenues from stateowned enterprises and government ownership of property. The government plays an active role in the economy, particularly in the agricultural sector, which accounts for over 80 percent of employment and approximately 48 percent of GDP. In an interview with the Arab Communication Consult, Sudan’s former Minister of Finance Abdel-Rahim Hamdi remarked, “We have already begun selling state assets through the privatization program so that we can revamp the railway, electricity, river transport and shipping sectors. We are helping all these public companies by giving them seed money and extending guarantees for them to get access to international financing.”

MONETARY POLICY Score: Not graded Data from the International Monetary Fund’s 2002 World Economic Outlook indicate that from 1992 to 2001, Sudan’s weighted average annual rate of inflation was 8.24 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: Not graded Foreign investment in Sudan is restricted by cumbersome regulations and political instability. According to the World Bank, “Economic progress has been constrained by the civil war, military expenditures, social dislocation, deterioration of basic infrastructure and lack of access to aid and foreign investment.” Foreign investment has concentrated on exploiting Sudan’s natural resources, particularly the hydrocarbon sector. United States sanctions also curtail investment. The International Monetary Fund reports that all residents (except the government, public institutions, and public enterprises) are permitted to hold foreign exchange accounts. Non-residents may also hold foreign exchange accounts, but only with government approval. Payments and transfers face minor restrictions, such as a requirement to insure imports through local companies. Capital transactions, except for capital market securities, are not restricted.

BANKING AND FINANCE Score: Not graded Sudan’s banking sector includes 25 commercial banks, 16 of which are wholly or majority owned by the private sector. There is little transparency in the system, however, so data should be treated with caution. State-owned banks dominate the sector. Officially, the government no longer directs bank lending, and banks are required to adopt international Basel banking standards by 2003. Little progress has been made toward privatization of state-owned banks. According to the Sudanese Minister of Finance, “We have four banks: Bank of

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Khartoum, Nilein Industrial Development Bank, Agricultural Bank of Sudan and the Real Estate Bank. At this stage, the Agricultural Bank is restructuring and the Real Estate Bank is small and bombed out—anybody who wants to, can buy it and do with it what he wants. The other two big commercial banks need to get their act together before we can privatize them. We want them to be better organized.”

WAGES AND PRICES Score: Not graded Although Sudan has liberalized some prices, price controls on foodstuffs remain in effect, and many goods are subsidized. The Economist Intelligence Unit reports that fuel subsidies were cut at the end of 2001. The Ministry of Labor enforces Sudan’s minimum wage.

PROPERTY RIGHTS Score: Not graded There is little respect for private property in Sudan. According to the U.S. Department of State, “The judiciary is not independent and is largely subservient to the Government.” Moreover, “The authorities do not ensure due process, and the military forces summarily tried and punished citizens. The Government infringed on citizens’ privacy rights. The Government still does not fully apply the laws of war to the southern insurgency and has taken few prisoners of war (POW’s).”

REGULATION Score: Not graded As is true in many other developing countries, Sudan’s regulatory burden is heavy and inefficient. Businesses often find it difficult to obtain licenses to operate, and business owners may be harassed by corrupt bureaucrats. One example of the effect of Sudan’s burdensome regulations is the agricultural sector, which accounts for more than 80 percent of employment. According to the Economist Intelligence Unit, “More than 100,000 tenant farmers and their families operate the scheme in partnership with the government and the Sudan Gezira Board, which provides the administration, credit and marketing services. However, the relationship of the tenant farmers to the board has frequently been difficult, with farmers attempting to circumvent regulations in order to increase their individual returns.” The Economist Intelligence Unit cites corruption as an “endemic” problem.

BLACK MARKET Score: Not graded Rationing has led to a black market in many items, including petroleum and sugar, and the ban on some imports encourages smuggling. In the war zone, the illicit economy is dominant.

2003 Index of Economic Freedom

SURINAME

Paramaribo

Rank: 143 Score: 3.95 Category: Mostly Unfree Trade Policy Fiscal Burden

4 4.5

Government Intervention 4 Monetary Policy 5

Foreign Investment 3 Banking and Finance 4

Suriname, a former Dutch colony, became a fully independent republic in 1975. Relations with the Netherlands remained good until Desi Bourdese, who served as president during the period of military government, was charged by the Netherlands with illegal drug trafficking and the murder of 15 opposition leaders during his tenure. The Bourdese case has had strong implications for the economy, since the Netherlands, the country’s major aid donor, stopped lending to Suriname because the Surinamese government did not allow Bourdese’s extradition. Suriname is rich in natural resources, especially timber and minerals; there are reserves of bauxite, gold, nickel, silver, and other minerals, and the Economist Intelligence Unit reports that the country is the world’s ninth largest bauxite producer, accounting for approximately 2.7 percent of production worldwide. Despite its large natural resource endowment, however, Suriname is one of South America’s poorest countries, with about 85 percent of households living below the official poverty line. Fiscal deficits historically have been the country’s most pressing economic problem. For the past year, the government has been granting union demands for higher salaries, further fueling the fiscal imbalance. Unemployment is high, and the government remains the country’s largest employer.

TRADE POLICY Score: 4–Stable (high level of protectionism) As a member of the Caribbean Community and Common Market (CARICOM), Suriname has a common external tariff rate ranging from 5 percent to 20 percent. According to the World Trade Organization, Suriname’s average tariff rate in 1998 (the most recent year for which reliable data are available) was 9.1 percent. The U.S. Department of State reports that Suriname maintains non-tariff barriers through a “complicated import/export licensing system, and extensive paperwork requirements [that] create…delays and frustration to be considered by some a form of trade barrier.”

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 3.5–Better (high tax rates) Score—Government Expenditures: 5–Worse (very high level of government expenditure) Final Score: 4.5–Stable (very high cost of government) Ernst & Young reports that Suriname has reduced taxes by 2 percent across the board. As a result, Suriname’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 8 percent rather than the 30 percent erroneously reported in the 2002 Index. The top corporate tax rate is 36 percent, down from the 38 percent reported in the 2002 Index. More precise data from Standard & Poor’s and the Economist Intelligence

Chapter 6: The Countries

Wages and Prices 3 Property Rights 3

Regulation Black Market

4 5

Scores for Prior Years: 2002: 3.95 1999: 3.90 1996: 4.00

2001: 3.85 1998: 3.90 1995: n/a

2000: 3.90 1997: 3.90

2000 Data (in constant 1995 US dollars) Population: 417,000 Total area: 163,270 sq. km GDP: $297 million GDP growth rate: 2.9% GDP per capita: $712 Major exports: aluminum, crude oil, lumber, shrimp and fish, rice, bananas Exports of goods and services: $91.8 million Major export trading partners: US 31.1%, Norway 22.8%, Netherlands 14.0% Major imports: capital equipment, petroleum, foodstuffs, cotton, consumer goods Imports of goods and services: $93 million Major import trading partners: US 58.5%, Netherlands 32.1%, Trinidad and Tobago 23.6% Foreign direct investment (net): –$10.9 million

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Unit indicate that in 2000, government expenditures equaled 41.6 percent of GDP, substantially higher than the 27.2 percent reported in the 2002 Index. Based on the correction in the marginal rate for the average taxpayer, Suriname’s income and corporate taxation score is 1 point better this year; however, this is offset by the higher level of government expenditure. As a result, Suriname’s overall fiscal burden of government score is unchanged this year.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 4–Stable (high level) The World Bank reports that the government consumed 32.8 percent of GDP in 2000, up from the 15.8 percent reported in the 2002 Index. Suriname’s government is significantly involved in the economy. According to the Economist Intelligence Unit, “There is a large state sector, accounting for 17.4% of GDP, which employs about half the workforce.”

MONETARY POLICY Score: 5–Stable (very high level of inflation) From 1992 to 2001, Suriname’s weighted average annual rate of inflation was 28.56 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) Despite improvement, foreign investors in Suriname still face such deterrents as administrative barriers and red tape. Licensing requirements are particularly cumbersome. According to the U.S. Department of State, “Surinamese investment legislation, formulated in 1960, is now outdated. As a result, companies negotiate directly with the Surinamese government on concessions, licenses and hiring. Investors are dealt with by the appropriate ministries on an ‘ad hoc’ basis. The process can be very slow, quixotic, and is not immune from patronage and favoritism.” Progress in liberalizing the economy has attracted foreign investment in gold, oil, and forestry. The International Monetary Fund reports few restrictions on the ability of residents and non-residents to hold foreign exchange accounts. Payments and transfers face various quantitative limits and approval requirements. The IMF reports that capital transactions involving outward remittances of foreign exchange require the approval of the Foreign Exchange Commission.

BANKING AND FINANCE Score: 4–Stable (high level of restrictions) Suriname’s banking legislation is out of date, although a new law is under consideration, and the central bank does not provide adequate oversight of the banking system. A minimum capital reserve requirement was passed in May 2001. Standard & Poor’s characterizes Suriname’s banking sector as “small, weak, and uncompetitive. Out of seven banks operating in Suriname, one large bank is 50 percent state-owned and three smaller ones are 100% state-owned, with two in dire financial condition…. The public sector’s domination of credit re-

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sources has crowded out private sector borrowers, restricted the productivity and competitiveness of the banking sector, and fueled the emergence of informal credit channels.”

WAGES AND PRICES Score: 3–Stable (moderate level of intervention) According to the U.S. Department of State, “Price controls remain on a variety of consumption goods, but are poorly enforced. There is a law requiring retail prices to be quoted in Surinamese guilders, but this is widely ignored.” The government intervenes in prices through state-owned enterprises, agricultural producers, and utilities. There is no official minimum wage, but the government influences wages as a major employer; the U.S. Department of State reports that “the government and state-owned companies employ over half the working population.”

PROPERTY RIGHTS Score: 3–Stable (moderate level of protection) Private property is not well-protected. The judicial process is inefficient and subject to political influence. According to the U.S. Department of State, “Surinamese law provides for the right of an individual or company to hold land, buildings and equipment. Settlement of ownership disputes or damage to property, buildings or equipment can be an extremely long process in the undermanned, overworked, legal system.”

REGULATION Score: 4–Stable (high level) Suriname’s state-owned sector plays a considerable role in the economy and impedes private enterprise. Moreover, the regulatory regime is burdensome and lacks transparency. “Favoritism, especially for the political/ethnic/business elite, remains common in business and government,” reports the U.S. Department of State, and “bureaucratic delays and red tape are a constant irritation.” The government has drafted a new investment code, mining law, minerals code, petroleum law, and intellectual property rights (IPR) law, all of which still await approval.

BLACK MARKET Score: 5–Stable (very high level of activity) The government offers little protection for intellectual property, and piracy of television programs, music, and videos is common. Suriname has an extensive black market in consumer goods and currency trading, and drug trafficking has a major impact on the economy. According to The Economist, “What is lacking is good political management. So what thrives is the informal economy.”

2003 Index of Economic Freedom

SWAZILAND Mbabane

Trade Policy Fiscal Burden

2 4

Government Intervention 2 Monetary Policy 3

Rank: 72 Score: 3.00 Category: Mostly Unfree Foreign Investment 3 Banking and Finance 3

Small and landlocked, Swaziland is surrounded by South Africa, with which it has extensive economic links; in 1999, South Africa served as the source for 89 percent of Swaziland’s imports and the destination for 72 percent of its exports. Economic liberalization is difficult because of a political environment in which the royal household, the government, the civil service, and unelected advisory bodies all influence policy. The government has resisted large-scale intervention in the economy but remains a principal employer; a state-owned corporation responsible to the king maintains large investments in industry, agriculture, and services. The government has made little progress on privatization, and reform has been stalled for several years. Most of the population is engaged in subsistence agriculture and the informal market; official unemployment rose to over 22 percent in 2001. Southern African Customs Union external tariff receipts have accounted for more than 50 percent of government revenues in recent years, but those revenues will decline under reductions mandated by the World Trade Organization and when a free trade agreement with the European Union enters into force. From 1991 to 2000, according to World Bank data, compound growth in GDP averaged 3.2 percent annually and per capita GDP increased slightly from $1,468 to $1,476 (in constant 1995 U.S. dollars). HIV/AIDS can be expected to have an increasingly devastating impact on the economy as the health of large portions of the working-age population continues to decline. Swaziland’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, Swaziland’s overall score is 0.10 point better this year.

TRADE POLICY Score: 2–Better (low level of protectionism) Swaziland belongs to the Southern African Customs Union (SACU), a regional trade arrangement with Botswana, Lesotho, Namibia, and South Africa. 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, Swaziland’s trade policy score is 1 point better this year. There is no evidence of significant non-tariff barriers.

Wages and Prices 3 Property Rights 3

Regulation Black Market

Scores for Prior Years: 2002: 3.10 1999: 2.90 1996: 3.20

2001: 3.00 1998: 2.90 1995: 3.00

2000: 3.00 1997: 3.10

2000 Data (unless otherwise indicated) (in constant 1995 US dollars) Population: 1,045,000 Total area: 17,360 sq. km GDP: $1.45 billion GDP growth rate: 2.2% GDP per capita: $1,476 Major exports: soft drink concentrates, sugar, wood pulp, cotton yarn, citrus and canned fruit Exports of goods and services: $1 billion Major export trading partners: South Africa 72.0%, EU 14.2%, Mozambique 3.7%, US 3.5% (1999) Major imports: motor vehicles, machinery, transport equipment, foodstuffs, petroleum products, chemicals Imports of goods and services: $1.2 billion Major import trading partners: South Africa 88.8%, EU 5.6%, Japan 0.6%, Singapore 0.4% (1999) Foreign direct investment (net): –$57.6 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) Swaziland’s top income tax rate is 33 percent; the marginal rate for the average taxpayer is 11.61 percent. The top corporate tax rate is 30 percent. In 2000, according to the African Development Bank, government expenditures equaled 31.5 percent of GDP.

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3 4

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GOVERNMENT INTERVENTION IN THE ECONOMY Score: 2–Better (low level) The World Bank reports that the government consumed 20.4 percent of GDP in 2000. In the same year, according to the International Monetary Fund, the government received 3.33 percent of its total revenues from state-owned enterprises and government ownership of property. Based on newly available data on revenues from state-owned enterprises, Swaziland’s government intervention score is 1 point better this year.

MONETARY POLICY Score: 3–Stable (moderate level of inflation) From 1992 to 2001, Swaziland’s weighted average annual rate of inflation was 7.36 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Worse (moderate barriers) Swaziland prohibits the nationalization of foreign-owned property, and foreign firms receive national treatment. The economy depends largely on export production run by foreign majority–owned firms in such industries as wood pulp, sugar, and soft drink concentrate. According to the International Monetary Fund, both residents and non-residents may hold foreign exchange accounts, but residents face quantitative limits. Payments and transfers are subject to controls but are not usually restricted. The IMF also reports that, except for equity investments by non-residents, the Central Bank of Swaziland must approve all inward capital transfers. Most other capital transactions require documentation, are controlled, are prohibited, or face quantitative limits. Based on these capital controls, Swaziland’s capital flows and foreign investment score is 1 point worse this year.

BANKING AND FINANCE Score: 3–Stable (moderate level of restrictions) Banks in Swaziland are relatively free of government control. The commercial banking system consists of four banks, including the South African-owned Nedbank. The government still owns the Swaziland Development and Savings Bank and controls the Swaziland Building Society, which provides long-term mortgage loans; the Swaziland Industrial Development Company; and the royal investment trust, Tibiyo Taka Ngwane, which is capitalized by mining royalties and has equity holdings to support “the national interest.” The government influences allocation of credit through these institutions. According to the Economist Intelligence Unit, “The Swaziland Royal Insurance Corporation, a private enterprise (of which the government owns 41%) has an industry monopoly. The Insurance Bill of 1993 has still not been passed, owing to a lack of political will, but could eventually increase competition and efficiency. Several South African companies have indicated that they will enter the market if it is liberalised.”

ning Office of Swaziland’s Ministry of Economic Planning and Development, the government has price controls on “locally produced and imported goods, e.g. electricity (even though most electricity is imported from South Africa, decisions on price increases are taken in Swaziland and do not necessarily reflect price increases by Eskom), fuel (fuel prices are set by Government and are also influenced by the level of the fuel levy), mealie meal, milk and bread flour.” The government also influences prices through state-owned enterprises. Swaziland has a legally mandated minimum wage that varies according to type of work.

PROPERTY RIGHTS Score: 3–Stable (moderate level of protection) Property is legally protected against government expropriation. The judiciary is not fully independent since the king has some judicial powers. The U.S. Department of State reports that “Swaziland has a dual legal system comprised of Roman–Dutch law and customary law. This parallel system can be confusing and has, at times, presented problems for foreign-owned business….” In addition, “a lack of an independent court budget, lack of trained manpower, inadequate levels of salary remuneration and managing case work remain problems for the judiciary…. [D]elays in trials are common.”

REGULATION Score: 3–Stable (moderate level) “Despite inadequate legislation,” reports the U.S. Department of State, “starting a business in Swaziland can be relatively simple process.” According to the Economist Intelligence Unit, it is expected that the “Trade and Business Facilitation Bill, which aims to attract investment and enhance industrial competitiveness by making it possible to obtain a trading license over the counter,” will be passed this year. Some government regulations (especially those dealing with safety conditions) are applied erratically, and this can lead to uncertainty and confusion. The Economist Intelligence Unit reports that one of the supply-side constraints on businesses is a cumbersome bureaucracy.

BLACK MARKET Score: 4–Stable (high level of activity) Swaziland has an active black market, primarily in the supply of labor, transportation service, the construction industry, and computer software. The Economist Intelligence Unit reports “high levels of illegal crossborder trade.” The trade in illegal software is mainly the result of poor protection of intellectual property. According to the U.S. Department of State, “Protection for patents, trademarks and copyrights is currently inadequate under Swazi law.”

WAGES AND PRICES Score: 3–Stable (moderate level of intervention) The government still controls some prices. According to the Development Plan for 1999/00 prepared by the Economic Plan-

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2003 Index of Economic Freedom

SWEDEN Rank: Score: Category: Trade Policy Fiscal Burden

2 4.5

Government Intervention 2.5 Monetary Policy 1

Foreign Investment 1 Banking and Finance 1

Sweden’s population of 9 million includes about 1 million immigrants or children of immigrants. Forests cover 228,000 square kilometers of the country. As a result, timber products, pulp, paper, and pasteboard are among the principal exports; the others are cars, trucks, machinery, electrical and telecommunications equipment, chemical products, iron ore, and steel. The government has privatized a number of companies during the past year, and the sale of shares was open to foreign investors. “Sweden is an attractive destination for foreign investment, and for the year just past, attracted the most foreign interest in Scandinavia,” according to the U.S. Department of State. Foreign investment is safe thanks to strong property rights. The U.S. Department of State also reports that Sweden levies “low corporate taxes (at 28 percent, one of the lowest corporate tax rates in the [European Union]).” At the same time, however, the personal income tax rate is high. In fact, Sweden’s taxes are among the highest in the world, and this encourages entrepreneurs and university graduates to leave the country to pursue opportunities abroad. These taxes also fuel a system of economic redistribution. Sweden has a high level of unemployment; according to reliable sources in the business community, when the number of people taking sick leave or a leave of absence is taken into account, the actual unemployment rate is at least 15 percent, which is much higher than the government reports. Overall, if it is to expand economic growth successfully, Sweden must drastically reform its welfare state and cut taxes. Sweden’s government intervention score is 1.5 points better this year. As a result, its overall score is 0.15 point better this year, and Sweden is now classified as a free economy.

TRADE POLICY Score: 2–Stable (low level of protectionism) As a member of the European Union, Sweden has a weighted average tariff rate of 1.8 percent. According to the Economist Intelligence Unit, “import restrictions have been few and loosely applied, except on agricultural products.” Sweden’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–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) Sweden’s tax burden is one of the heaviest among the world’s industrialized economies: a 60 percent top income tax rate, a 20 percent marginal tax rate for the average taxpayer, and a 28 percent top corporate tax rate. In 2001, government expenditures equaled 52.5 percent of GDP.

Chapter 6: The Countries

11 1.90 Free

Wages and Prices 2 Property Rights 1

Regulation Black Market

3 1

Scores for Prior Years: 2002: 2.05 1999: 2.35 1996: 2.65

2001: 2.25 1998: 2.45 1995: 2.65

2000: 2.35 1997: 2.45

2001 Data (in constant 1995 US dollars) Population: 8,909,128 Total area: 449,964 sq. km GDP: $281.3 billion GDP growth rate: 1.4% GDP per capita: $31,574 Major exports: machinery, motor vehicles, paper products, pulp and wood, iron and steel products, chemicals Exports of goods and services: $143.4 billion Major export trading partners: Germany 21.5%, US 13.1%, France 8.8%, Italy 7.7%, UK 5.7% Major imports: machinery, petroleum and petroleum products, chemicals, motor vehicles, iron and steel, foodstuffs, clothing Imports of goods and services: $139.3 billion Major import trading partners: Germany 29.1%, France 10.2%, Italy 9.3%, US 7.8%, UK 5.8% Foreign direct investment (net): $5.1 billion

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GOVERNMENT INTERVENTION IN THE ECONOMY

PROPERTY RIGHTS

Score: 2.5–Better (moderate level) Based on data from the Economist Intelligence Unit, the government consumed 23.6 percent of GDP in 2001, down from the 27 percent reported in the 2002 Index. In the same year, according to the International Monetary Fund, Sweden received 6.7 percent of its total revenue from state-owned enterprises and government ownership of property, down from the 9.26 percent reported in the 2002 Index. As a result, Sweden’s government intervention score is 1.5 points better this year.

Score: 1–Stable (very high level of protection) Sweden has a well-developed and efficient legal system. The judiciary is independent and provides citizens with a fair judicial process. According to the Economist Intelligence Unit, “contractual agreements are generally highly respected in Sweden, not just from a legal stand point but morally as well.”

MONETARY POLICY Score: 1–Stable (very low level of inflation) From 1992 to 2001, Sweden’s weighted average annual rate of inflation was 1.83 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 1–Stable (very low barriers) Sweden presents few barriers to foreign investment, although there are some restrictions on foreign ownership in fishing, civil aviation, transport, communications, and national security–related sectors like arms manufacturing. The government does not require investors to obtain prior approval of acquisitions. High taxes and burdensome regulations remain the principal impediments to foreign investment. As a result of deregulation in the early 1990s, there are no controls or requirements on current transfers, access to foreign exchange, or repatriation of profits. The International Monetary Fund reports that a permit may be required to purchase real estate.

BANKING AND FINANCE Score: 1–Stable (very low level of restrictions) Most commercial banks in Sweden are privately owned and operated. The Economist Intelligence Unit reports that the Swedish government reacted to the banking crisis of the early 1990s by taking over a number of banks, which have been reprivatized. Banks are allowed to offer a full range of services. According to the U.S. Department of Commerce, “The regime for foreigners in financial services has been liberalized, too. Now foreign banks, insurance companies, brokerage firms, and cooperative mortgage institutions are permitted to establish branches in Sweden on equal terms with domestic firms.” Net foreign exchange positions of financial institutions as a percentage of their capital base are limited by government guidelines.

REGULATION Score: 3–Stable (moderate level) Opening a business in Sweden is relatively easy, and the regulatory regime, while complex, is also relatively transparent. The Economist Intelligence Unit reports that Swedish business rules and practices include “annual submission of company accounts [and] employee representation on boards of directors.” In 2001, the Invest in Sweden Agency carried out a survey of the investment climate in Sweden compared to the rest of Europe. According to the survey, reports the U.S. Department of State, the “positives mentioned are competent employees, low corporate tax rates, excellent infrastructure and good access to capital. On the minus side are high cost of labor, rigid labor legislation and the overall high costs in Sweden.” The open market reforms of the 1990s resulted in more efficient sectors and lower prices. However, the U.S. Department of State reports that “a number of practical impediments to investment remain in Sweden. These include a fairly extensive, though non-discriminatory, system of permits and authorizations needed to engage in many activities and the dominance of few, very large players in certain sectors, e.g. construction and food wholesaling.” Environmental law continues to become increasingly stringent, surpassing even European Union standards.

BLACK MARKET Score: 1–Stable (very low level of activity) Transparency International’s 2001 score for Sweden is 9.0. Therefore, Sweden’s black market score is 1 this year. According to the Financial Times, “smuggling of beer and spirits takes place quite openly….”

WAGES AND PRICES Score: 2–Stable (low level of intervention) The market sets most prices for goods and services, although subsidies from the European Union support farming in the northern part of the country and the government sets high prices on liquor through a state-owned monopoly on sales outlets. There is no national minimum wage law, but social welfare entitlement programs substantially augment wages. Wages are set through collective bargaining agreements that traditionally apply to all workers regardless of union affiliation.

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2003 Index of Economic Freedom

SWITZERLAND Bern

Rank: Score: Category: Trade Policy Fiscal Burden

2 3.5

Government Intervention 3 Monetary Policy 1

Foreign Investment 2 Banking and Finance 1

15 1.95 Free

Wages and Prices 2 Property Rights 1

Regulation Black Market

With its stable currency and politics, relatively low taxes, and secure banking system, as well as its federal and cantonal incentives for new investors, Switzerland is an attractive investment location, particularly for small manufacturing. In most areas of business, there are no overall restrictions on the percentage of equity that foreign forms may hold; some cantons waive taxes on new firms for up to 10 years. Larger businesses are highly competitive and international, although smaller businesses—particularly those related to agriculture—are highly protected. Switzerland also has two of Europe’s five largest banks. In 2001, the Swiss economy grew at a moderate rate of 1.3 percent. Switzerland still has one of the world’s highest incomes per capita and a political system that obliges the federal government to call for a popular referendum on major changes in policy. In 1992, for example, the Swiss voted against joining the European Economic Area, a free trade area consisting of members of the European Union and other European countries that have not joined the EU; in May 1999, however, 67 percent of the voters approved closer trading ties with the EU, embodied in seven bilateral agreements scheduled to come into force in the summer of 2002. As a result, the Swiss have improved their ties with the EU’s single market while shunning some of the excessive regulation that has impaired EU countries’ rates of growth. One initiative under this enhanced relationship involves permitting oversize EU trucks (which tend toward high rates of pollution) to traverse the country in exchange for the Swiss government’s being allowed to tax them; another involves permitting the eventual free movement of labor between Swiss and EU nationals, with the Swiss being able to roam freely in the EU beginning in 2003 and EU nationals being accorded the same privilege by 2013. Switzerland has a customs union with the Principality of Liechtenstein. Switzerland’s government intervention 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 import trading partners: Germany 32.2%, France 11.0%, Italy 10.2%, US 5.3%, UK 4.6%

Score: 2–Stable (low level of protectionism) According to the World Bank, Switzerland’s weighted average tariff rate in 2000 (the most recent year for which World Bank data are available) was less than 1 percent. The government maintains import quotas, high tariffs, and import licenses on agricultural products.

Chapter 6: The Countries

2002: 1.90 1999: 1.90 1996: 1.95

2001: 1.90 1998: 1.95 1995: n/a

3 1

2000: 1.90 1997: 1.95

2001 Data (in constant 1995 US dollars) Population: 7,204,100 Total area: 41,290 sq. km GDP: $340.3 billion GDP growth rate: 1.3% GDP per capita: $47,237 Major exports: machinery and electronic devices, chemicals, metals, watches, agricultural products Exports of goods and services: $129.2 billion Major export trading partners: Germany 22.2%, US 10.6%, France 9.0%, Italy 8.0%, UK 5.3%, Japan 3.9% Major imports: machinery, chemicals, vehicles, metals, agricultural products, textiles Imports of goods and services: $104.5 billion

Foreign direct investment (net): –$4.5 billion

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FISCAL BURDEN OF GOVERNMENT

BANKING AND FINANCE

Score—Income and Corporate Taxation: 2.5–Worse (moderate tax rates) Score—Government Expenditures: 4–Better (high level of government expenditure) Final Score: 3.5–Stable (high cost of government) Switzerland’s top federal income tax rate is 11.5 percent. (According to Ernst & Young, “No average tax can be calculated because of the multilayered tax system. Taxes are calculated based on specific figures for specific cantons and municipalities. The maximum overall rate of federal income tax is 11.5%.” As a result, the top rate was used to determine Switzerland’s income tax score.) The top corporate tax rate is 30 percent. In 2001, based on data from Switzerland’s Federal Finance Administration and confirmed by the International Monetary Fund and Standard & Poor’s, consolidated accounts for government expenditures equaled 38.2 percent of GDP, down from the 49 percent reported in the 2002 Index. (Data on government expenditures used in the 2002 Index were supplied by the Embassy of Switzerland. These data included transfer payments between layers of government and therefore involved double counting.) Based on a clarification in methodology, Switzerland’s income and corporate taxation score is 0.5 point worse this year; however, its government expenditures score is 1 point better. As a result, Switzerland’s overall fiscal burden score is unchanged this year.

Score: 1–Stable (very low level of restrictions) Switzerland’s banking system is one of the freest and most competitive in the world. Banks may offer a wide range of financial services with virtually no government interference. Establishing a foreign bank requires a permit from the Swiss Federal Banking Commission, which supervises 370 financial institutions. Foreign financial institutions are accorded national treatment, and foreign banks and bank-like institutions accounted for 40 percent of Swiss banking institutions in 2000. Credit is allocated on market terms.

GOVERNMENT INTERVENTION IN THE ECONOMY

Score: 1–Stable (very high level of protection) Switzerland may be one of the world’s best protectors of property rights. The judiciary is independent, and the government respects this independence in practice. The Economist Intelligence Unit reports that “contractual arrangements are completely secure in Switzerland, and the judiciary and civil service are of high quality.”

Score: 3–Worse (moderate level) The Economist Intelligence Unit reports that the government consumed 14.7 percent of GDP in 2001. In the same year, based on data from the Ministry of Finance, Switzerland received 8.42 percent of its total revenues from state-owned enterprises and government ownership of property, up from the 4.91 percent reported in the 2002 Index. As a result, Switzerland’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, Switzerland’s weighted average annual rate of inflation was 1.05 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 2–Stable (low barriers) Switzerland is generally open to foreign investment and grants foreign investors national treatment. Formal approval is not required for foreign direct investment and is not under the auspices of any one government office. The government restricts investment in vacation real estate, utilities, and other sectors considered essential to national security (such as hydroelectric and nuclear power plants, operation of oil pipelines, operation of airlines and marine navigation, and the transportation of explosive materials). Visas and work permits for foreign workers are strictly controlled. There are no restrictions on repatriation of profits.

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WAGES AND PRICES Score: 2–Stable (low level of intervention) The market sets wages and most non-agricultural prices. According to the Economist Intelligence Unit, “permanent price and margin controls apply to all agricultural goods and their by-products that are subsidized or protected by the government. An official surveyor examines price increases for changes that exploit consumers, especially in monopolistic…sectors such as oil and food…. Companies that refuse to adjust prices voluntarily can be ordered to do so.” The U.S. Department of State reports that approximately 80 percent of gross farm income is due to government intervention. Switzerland has no minimum wage.

PROPERTY RIGHTS

REGULATION Score: 3–Stable (moderate level) Regulations are extensive, particularly at the local level, but the government applies them evenly and transparently in most cases. Although establishing a business can be easy, established businesses face strict environmental and building codes. According to the Economist Intelligence Unit, “companies have relative freedom in hiring and firing. Nevertheless there are usually generous social plans for those who lose their jobs.” Moreover, “strict limits on the entry of foreign workers rule out the entry of firms in labor-intensive industries.” The U.S. Department of State reports that businesses—especially in retail—face extensive rules governing such details as hours of operation, advertising, and equipment standards, among others.

BLACK MARKET Score: 1–Stable (very low level of activity) Transparency International’s 2001 score for Switzerland is 8.4. Therefore, Switzerland’s black market score is 1 this year.

2003 Index of Economic Freedom

SYRIA Rank: 143 Score: 3.95 Category: Mostly Unfree

Damascus

Trade Policy Fiscal Burden

4 4.5

Government Intervention 4 Monetary Policy 1

Foreign Investment 4 Banking and Finance 5

When he came to power after the June 2000 death of his father, Hafez al-Assad, Syrian President Bashar al-Assad pledged to undertake cautious economic reforms. To consolidate his power, however, he has reached an accommodation with the old guard generals, intelligence chiefs, and politicians who were the mainstays of his father’s regime and remain opposed to radical economic reform. Bashar’s economic reform agenda also has been blocked by the deeply rooted corruption that flourishes in Syria’s statist economic system. These factors have constrained his government’s efforts to reform the economy, which desperately needs liberalization and restructuring. Foreign and private investment are urgently needed to modernize Syria’s outmoded technological base and inadequate infrastructure, but potential investors remain deterred by cumbersome legal, regulatory, and bureaucratic structures. Assad’s government seeks to attract investment from Syrian expatriates and has passed a law to allow private banks to operate in Syria, albeit under strict terms. Syria’s trade policy score is 1 point better this year, and its fiscal burden of government score is 0.5 point better. As a result, its overall score is 0.15 better this year, causing Syria to be classified as a mostly unfree economy.

TRADE POLICY

Wages and Prices 4 Property Rights 4

Regulation Black Market

Scores for Prior Years: 2002: 4.10 1999: 4.10 1996: 4.00

2001: 4.00 1998: 3.95 1995: n/a

2000: 4.00 1997: 3.95

2000 Data (in constant 1995 US dollars) Population: 16,189,000 Total area: 185,180 sq. km GDP: $19.9 billion GDP growth rate: 2.5% GDP per capita: $1,229 Major exports: petroleum, textiles, manufactured goods, fruits and vegetables, raw cotton, live sheep, phosphates

Score: 4–Better (high level of protectionism) Based on data from the World Bank, Syria’s average tariff rate in 1999 was 11.2 percent (based on international trade taxes as a percent of total imports), down significantly from the 45.44 percent reported in the 2002 Index. As a result, Syria’s trade policy score is 1 point better this year. The Economist Intelligence Unit and other sources report that Syria has been reducing tariffs in recent years and has signed free trade agreements with several countries in the Middle East. In addition, it is currently negotiating a free trade agreement with the European Union. The U.S. Department of State reports that tariffs range from 1 percent to 200 percent. In addition, “Customs procedures are cumbersome, tedious, and time-consuming because of complex regulations. Producers often complain that it may take up to six months to import spare parts for their plant.”

Exports of goods and services: $5.8 billion

FISCAL BURDEN OF GOVERNMENT

Major import trading partners: Italy 8.8%, Germany 7.2%, France 4.9%, US 4.3%

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) According to data from the International Monetary Fund, Syria’s top income tax rate is 15 percent, down from the 64 percent reported in the 2002 Index, but War Effort Surtaxes increase this to 17.25 percent. This 17.25 percent rate is also the marginal rate for the average taxpayer. The top corporate tax rate is 45 percent, but War Effort Surtaxes and Local Administrative Surtaxes raise this to 60.3 percent. The adjusted rates were used to score this factor. In 1999, based on data from the Economist Intelligence Unit,

Chapter 6: The Countries

4 5

Major export trading partners: Germany 26.9%, Italy 12.2%, France 10.3%, Turkey 10.0%, Saudi Arabia 7.3% Major imports: machinery and equipment, foodstuffs and animals, metal and metal products, textiles, chemicals Imports of goods and services: $4.6 billion

Foreign direct investment (net): $247.4 million

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government expenditures equaled 31.1 percent of GDP. Based on new and more precise tax information that was not available during preparation of the 2002 Index, Syria’s fiscal burden of government score is 0.5 point better this year.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 4–Stable (high level) The World Bank reports that the government consumed 13.3 percent of GDP in 2000. In 1998, according to the International Monetary Fund, Syria received 26.95 percent of its total revenues from state-owned enterprises and government ownership of property. The evidence, however, suggests that reported government consumption data do not accurately reflect the true level of government involvement in the economy. According to the Economist Intelligence Unit, “A large part of economic activity in Syria is controlled by the state, ranging from agriculture to telecommunications and banking…. The overstaffed and inefficient public sector continues to act as a drain on the economy, soaking up government expenditure, foreign exchange and capital investment.” Based on the apparent unreliability of reported government consumption figures, 1 point has been added to Syria’s government intervention score.

MONETARY POLICY Score: 1–Stable (very low level of inflation) From 1992 to 2001, Syria’s weighted average annual rate of inflation was 0.03 percent. It is likely that the official inflation figures underestimate the true rate, however, as Syria influences prices both through direct price controls and through subsidies administered by state-owned enterprises.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 4–Stable (high barriers) Syria has made some efforts to attract foreign investment. Foreigners now may own 100 percent of a company and the land on which a business is located. In May 2000, the investment law was amended to increase incentives. Foreign investment remains encumbered by a bureaucratic approval process, excessive regulation, and the lack of a strong legal structure. According to the U.S. Department of State, the Syrian government “has not fully adopted the strong legal and regulatory framework demanded by both foreign and Syrian investors…. [M]ost observers continue to find Syria’s business environment a difficult one, plagued by ambiguous regulations and uncertainty. Recent economic corrections have been largely symbolic, doing little to improve Syria’s overall investment climate.” Many capital transactions are subject to controls.

BANKING AND FINANCE Score: 5–Stable (very high level of restrictions) The government owns Syria’s major banks, and most banks lend only to the public sector. The U.S. Department of State reports that “Syria’s government-controlled banking system consists of the Central Bank of Syria and five specialized banks…. In 2000, the Ministry of Economy and Foreign Trade announced that foreign banks could be established in Syrian free zones. To date seven

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foreign banks, mostly Lebanese, have established offices, but only two have begun providing limited banking services.” A new law enacted in April 2001 permits private banking, which has been prohibited for 30 years; as of July 2001, however, regulations governing private banks were lacking, and no private bank had received permission to operate.

WAGES AND PRICES Score: 4–Stable (high level of intervention) According to the U.S. Department of State, “Both the Ministry of Industry and the Ministry of Supply control product pricing…. The Syrian government continues to set prices on some goods/ commodities affecting an investor’s ability to recoup investments, but enforcement of such controls has waned….” The government also continues to intervene in agriculture, which is the largest sector of the economy. The U.S. Department of State reports that “The Minister of Labor and Social Affairs is responsible for enforcing minimum wage levels in the public and private sectors.”

PROPERTY RIGHTS Score: 4–Stable (low level of protection) “Property and contractual rights are protected by the constitution and enforced by law,” reports the U.S. Department of State. “However, there is considerable government interference in the court system and judgments by foreign courts are generally accepted only if the verdict favors the Syrian government. Although a written bankruptcy law exists, it is not applied fairly and creditors may or may not salvage their investment.” In addition, although the constitution enshrines judicial independence, “political connections and bribery can influence verdicts.”

REGULATION Score: 4–Stable (high level) An unwieldy and inefficient bureaucracy overburdens Syria’s regulatory system. According to the U.S. Department of State, “Fiscal and welfare regulations, such as tax, labor, safety, and health laws, appear to be enforced without systemic discrimination— when they are actually enforced. Bureaucratic procedures for licensing and necessary documentation move slowly and require official approval from many levels within the government. Under-the-table payments are often required, as corruption is endemic at nearly all levels of government.”

BLACK MARKET Score: 5–Stable (very high level of activity) Syria’s black market is extensive, although the smuggling of many consumer goods has prompted the government to expand its list of permitted legal imports. Piracy of books, computer software, and videos is extensive; however, the overall size of the market indicates that the costs of such activity are not high.

2003 Index of Economic Freedom

TAJIKISTAN Dushanbe

Trade Policy Fiscal Burden

3 2.5

Government Intervention 3 Monetary Policy 5

Rank: 143 Score: 3.95 Category: Mostly Unfree Foreign Investment 4 Banking and Finance 5

Tajikistan is one of the poorest countries in Central Asia. The economy is still half the size it was in 1991, and inflation remains high. The Islamic Renaissance Party of Tajikistan is the only Islamic group in Central Asia that has parliamentary and cabinet-level representation, and the regime continues to suppress other opposition movements, thereby increasing the likelihood of popular support for violent organizations. Russian military forces continue to patrol Tajikistan’s long border with Afghanistan. Granting permission for U.S. aircraft to use Tajik air bases in anti-terrorist operations in Afghanistan and allowing Tajik territory to be used as a staging point for humanitarian aid missions could lead to increased cooperation with the West. Tajikistan’s banking and finance score is 1 point worse this year. As a result, its overall score is 0.10 point worse this year.

Wages and Prices 4 Property Rights 4

Regulation Black Market

Scores for Prior Years: 2002: 3.85 1999: 4.00 1996: n/a

2001: 3.95 1998: 4.25 1995: n/a

2000: 4.00 1997: n/a

2000 Data (unless otherwise indicated) (in constant 1995 US dollars) Population: 6,170,000 Total area: 143,100 sq. km GDP: $2.3 billion (2001)

TRADE POLICY Score: 3–Stable (moderate level of protectionism) According to the Asian Development Bank, Tajikistan’s average tariff rate in 1999 was 8 percent. Non-tariff barriers take the form of an inefficient customs clearance process.

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 3.5–Better (high tax rates) Score—Government Expenditures: 1–Stable (very low level of government expenditures) Final Score: 2.5–Stable (moderate cost of government) The Economist Intelligence Unit reports that Tajikistan’s top income tax rate is 40 percent, up from the 35 percent reported in the 2002 Index. According to the same source, “Further tax reforms, aimed at raising revenue by encouraging people to leave the shadow economy, are due to come into effect in 2002. Measures include a cut in the rate of income tax from 40% to between 10% and 20%, depending on income levels.” Enactment of this reform could cause Tajikistan’s fiscal burden of government score to improve in future editions of the Index. No reliable information on the marginal tax rate for the average taxpayer is available. The top corporate tax, according to the U.S. Department of State, is 30 percent, down from the 50 percent reported in the 2002 Index. Tajikistan’s income and corporate taxation score is based only on the top income rate and the top corporate tax rate. In 2000, according to the Asian Development Bank, government expenditures equaled 14.2 percent of GDP. Based on a clarification in methodology and a lower corporate tax rate, Tajikistan’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, which is unchanged.

GDP growth rate: 10.3% (2001) GDP per capita: $386 Major exports: aluminum, electricity, cotton, fruits, vegetable oil, textiles Exports of goods and services: n/a Major export trading partners: Non-CIS 55%, Russia 30%, Uzbekistan 13% Major imports: electricity, petroleum products, aluminum oxide, machinery and equipment, foodstuffs Imports of goods and services: n/a Major import trading partners: CIS 83% (Uzbekistan 27%, Russia 16%), Non-CIS 17% Foreign direct investment (net): $20.2 million

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Stable (moderate level) The World Bank reports that the government consumed 8.2 percent of GDP in 2000. In the same year, according to the International Monetary Fund, Tajikistan received 3.43

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percent of its total revenues from state-owned enterprises and government ownership of property. However, these figures appear to understate the true extent of government involvement in the economy. According to the U.S. Department of State, “The economy is a state-controlled system making a difficult transition to a market-based one. Most of the work force is engaged in agriculture, which remains collectivized. Government revenue depends highly on state-controlled cotton production…. Small-scale privatization is over 80 percent complete, but the level of medium to large-scale privatization is much lower (approximately 16 percent) with the heavy industry, wholesale trade, and transport sectors remaining largely under state control.” Based on the apparent unreliability of reported government consumption and total revenues figures, 2 points have been added to Tajikistan’s government intervention score.

MONETARY POLICY Score: 5–Stable (very high level of inflation) Data from the International Monetary Fund’s 2002 World Economic Outlook indicate that from 1992 to 2001, Tajikistan’s weighted average annual rate of inflation was 40.28 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 4–Stable (high barriers) The government has opened some of the economy to foreign investment and has made some efforts to promote increased investment—for example, by offering two-year tax holidays on profits— but the bureaucratic procedure is arbitrary and restrictive. Impediments to progress include lack of transparency, lack of an established rule of law, and persistent political and economic instability. Foreigners may fully own Tajik enterprises, but they seldom participate in government privatizations. The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts, although residents may hold them abroad only with the central bank’s approval. Restrictions on payments and transfers include quantitative limits on wages for foreign workers and requirements on repatriation. Many capital transactions require the central bank’s approval.

BANKING AND FINANCE Score: 5–Worse (very high level of restrictions) The Economist Intelligence Unit reports that the banking system is weak and consists of the central bank and 16 commercial banks. Commercial banks have focused generally on channeling credit from the central bank to state-owned enterprises. The state owns most major banks and controls most of the financial system’s assets. According to the Economist Intelligence Unit, “The combined capital of the banking sector was less than US$10m in March 2001, with most banks insolvent and hampered by non-performing loans. The three main private banks are Agroinvestbank, Orienbank, and Tojiksodirotbonk, with Sberbank being the only remaining stateowned bank. Although in theory most banks are privatised (having been transformed into joint-stock companies), they are still closely controlled by the state through the shareholdings of state-owned enterprises.” The banking system is largely ineffective, and an increasing number of people conduct business in the shadow economy,

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including financial activities. Based on evidence that the government’s control of the financial sector and credit allocation is nearly complete, Tajikistan’s banking and finance score is 1 point worse this year.

WAGES AND PRICES Score: 4–Stable (high level of intervention) Wages and prices are greatly influenced by the large government sector. The Economist Intelligence Unit reports that “the level of quasi-fiscal expenditure—mainly in the form of government subsidies to unrestructured state-owned enterprises, particularly in the energy sector—remains high…. [E]lectricity prices are much lower than cost-recovery levels, with households charged just 15% of the true cost.” The government influences prices through extensive socialist-era collectives and state farms and state-owned industries and utilities. Since agriculture and electricity are the major economic output, such government intervention is significant. According to the U.S. Department of State, “The President, on the advice of the Ministry of Labor and in consultation with trade unions, sets the minimum monthly wage.”

PROPERTY RIGHTS Score: 4–Stable (low level of protection) Protection of private property is weak in Tajikistan. According to the U.S. Department of State, “the Constitution provides for an independent judiciary; however, in practice judges do not function independently of the executive branch and the judicial system is subject to the influence of executive authorities. In many instances, armed paramilitary groups directly influence judicial officials…. Judges at all levels have extremely poor access to legal reference materials. Bribery of prosecutors and judges appears to be a common practice.”

REGULATION Score: 4–Stable (high level) The procedure for establishing a business in Tajikistan can be both tedious and time-consuming. The government has completed its small-scale business privatization process and has made progress in privatizing medium and large-scale businesses, but the Economist Intelligence Unit reports that it “will have to ensure that rent-seeking activities are minimised—there have been concerns in the past over insufficient transparency in a privatisation process that has not been adequately explained to the local population, and has resulted in local interest groups controlling most of the newly privatised enterprises.” According to Freedom House, “Corruption is reportedly pervasive throughout the government…. Barriers to private enterprise, including limited access to commercial real estate and the widespread practice of bribe payments, continue to restrict equality of opportunity.”

BLACK MARKET Score: 5–Stable (very high level of activity) Black market activity in Tajikistan is ubiquitous, and despite laws to protect intellectual property rights, significant piracy of such goods continues. Drug smuggling remains a particularly large enterprise.

2003 Index of Economic Freedom

TANZANIA Rank: 104 Score: 3.35 Category: Mostly Unfree

Dar es Salaam

Trade Policy Fiscal Burden

5 2.5

Government Intervention 2 Monetary Policy 3

Foreign Investment 3 Banking and Finance 3

Between 1967 and 1985, socialist policies, including forced resettlement into “ujamaa” farming villages, retarded economic growth and private-sector development in Tanzania; but an economic recovery program initiated in the mid-1980s, including liberalization of agricultural policy and privatization of many state-owned enterprises, overturned most socialist policies and led to improved economic growth. Agriculture, timber, and fishing contributed over 48 percent of GDP, employed over 80 percent of the labor force, and provided over one-third of exports in 2000. The pace of privatization has been slow, but the government has announced plans to privatize the water, electricity, railway, and airline companies in 2002. Recent progress in curbing budget deficits and inflation provides an opportunity to move forward on economic liberalization. From 1991 to 2000, according to World Bank data, compound growth in GDP averaged 3 percent annually and per capita GDP increased slightly from $187 to $190 (in constant 1995 U.S. dollars). Corruption, smuggling, and periodic outbreaks of religious-based violence continue to constrain economic growth and efforts to enforce the rule of law. Tanzania’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, Tanzania’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, Tanzania’s weighted average tariff rate in 2000 (the most recent year for which World Bank data are available) was 14.2 percent, down from the 19.5 percent reported in the 2002 Index. A major non-tariff barrier is the inefficient customs system. According to the U.S. Department of State, “the customs department and the port authorities are the greatest hindrance to importers throughout Tanzania. Clearance delays and extra-legal levies are commonplace when dealing with the Tanzanian Customs Department. Corruption is a serious problem and also can be a deterrent to investors. These hindrances can also cause unpredictable delays when importing goods into the country.”

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 2.5–Better (moderate tax rates) Score—Government Expenditures: 2–Stable (low level of government expenditure) Final Score: 2.5–Better (moderate cost of government) Tanzania’s top income tax rate is 30 percent; the marginal rate for the average taxpayer is 0 percent, rather than the 20 percent reported in the 2002 Index. The top corporate tax rate is 30 percent. In 2000, according to the African Development Bank, government expenditures equaled 17.8 percent of GDP. Based on the change in its income and corporate taxation score, Tanzania’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 Black Market

4 4

Scores for Prior Years: 2002: 3.40 1999: 3.20 1996: 3.50

2001: 3.50 1998: 3.20 1995: 3.60

2000: 3.40 1997: 3.25

2000 Data (in constant 1995 US dollars) Population: 33,696,000 Total area: 945,087 sq. km GDP: $6.5 billion GDP growth rate: 5.1% GDP per capita: $190 Major exports: coffee, manufactured goods, cotton, cashew nuts, minerals, tobacco, sisal Exports of goods and services: $1.3 billion Major export trading partners: UK 20.2%, India 13.4%, Germany 9.1%, Netherlands 6.3% Major imports: consumer goods, machinery and transportation equipment, industrial raw materials, crude oil Imports of goods and services: $1.48 billion Major import trading partners: South Africa 11.5%, Japan 9.3%, UK 7.0%, Australia 6.2% Foreign direct investment (net): $177 million

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GOVERNMENT INTERVENTION IN THE ECONOMY

BANKING AND FINANCE

Score: 2–Better (low level) The World Bank reports that the government consumed 6.6 percent of GDP in 2000, down from the 12 percent reported in the 2002 Index. As a result, Tanzania’s government intervention score is 1 point better this year. According to the U.S. Department of State, “The [Presidential Parastatal Sector Reform Commission] has made steady progress in its privatization program. By June 2000, 333 out of 395 public enterprises were divested either by outright sales to local and foreign investors or leases and liquidations…. The remaining parastatals are at different stages of divestiture.”

Score: 3–Stable (moderate level of restrictions) Until 1991, private banks had been illegal in Tanzania for nearly 25 years; since then, the government has made great strides toward privatizing the sector. The Economist Intelligence Unit reports that 23 banks were licensed to operate in Tanzania in 2000 and that most international banks with a presence in Africa were represented. The government sold a majority stake in the National Bank of Commerce to a South Africa banking group in March 2000 and has privatized the Cooperative and Rural Development Bank. According to the U.S. Department of State, “The National Bank of Commerce (NBC) which used to account for over 75 percent of the country’s banking services, was split in 1997 into NBC and the National Micro-finance Bank (NMB). While shares of the former have been auctioned in July 1999 to South African firms, the latter is still waiting for financial recovery.” The government is restructuring the Tanzania Investment Bank, which provides loans for development purposes; the Tanzania Postal Bank; and the People’s Bank of Zanzibar with hopes of privatizing them. There are 11 non-bank financial institutions. A stock exchange was launched in March 1998 but so far has only four companies listed.

MONETARY POLICY Score: 3–Stable (moderate level of inflation) From 1992 to 2001, Tanzania’s weighted average annual rate of inflation was 6.03 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Worse (moderate barriers) Tanzania officially welcomes foreign investment under the investment regime established by the 1997 Tanzania Investment Act, which established the Tanzania Investment Center, identified investment priorities, overhauled the company registration process, and established investor rights and incentives. Investors must be licensed and must meet minimum capital requirements. The United Nations Conference on Trade and Development reports that remaining restrictions on investment include manufacturing and marketing of hazardous chemicals, armaments, and explosives. Zanzibar has additional restrictions on retail and wholesale trading, product brokerage, taxis, barbershops and hairdressing, butcher shops, and ice-cream manufacture. There are some further restrictions on investment in the petroleum sector. Otherwise, foreign investment is granted national treatment. According to the U.S. Department of State, other obstacles “include bureaucratic intransigence, corruption and poor infrastructure.” The International Monetary Fund reports that residents may hold foreign exchange accounts only with central bank approval and that accounts held abroad are subject to restrictions. Non-residents may hold foreign exchange accounts only while temporarily residing in Tanzania, and an authorized bank must approve making payments or placing credit from these accounts to non-residents. Documentation is required to purchase foreign exchange, payments for travel face quantitative limits, and other payments require documentation. The IMF reports that all transfers of foreign currency from residents to non-residents must be approved by the central bank. Most capital transactions face restrictions and reporting requirements. All foreign direct investment must be approved by the Investment Promotion Center, and some sectors are reserved for the public sector. Foreign purchase of real estate must have the consent of the Commissioner for Lands. Based on new evidence of restrictions, Tanzania’s capital flows and foreign investment score is 1 point worse this year.

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WAGES AND PRICES Score: 3–Stable (moderate level of intervention) According to the U.S. Department of State, “The Tanzanian government has eliminated most price controls; however, the government still regulates the price of gasoline, diesel fuel and kerosene.” The government ended price controls on sugar in 2001 but reinstated the subsidy on electricity rates for domestic use. Tanzania has a legal monthly minimum wage.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) According to the U.S. Department of State, “The Constitution provides for an independent judiciary; however, the judiciary is corrupt, inefficient and subject to executive influence.” In addition, “Clerks took bribes to decide whether or not to open cases and to hide or misdirect the files of those accused of crimes.” The same source reports that “the Government…established a Commercial Court (CC) in September 1999. The Commercial Court…in principle, provides a place for speedy, efficient and commercially aware litigation of commercial disputes.”

REGULATION Score: 4–Stable (high level) Tanzania’s bureaucracy is still burdensome, and corruption reportedly is rampant. Despite specific investment incentives, reports the Financial Times, “businessmen continue to complain of endless daily bureaucratic obstacles, including petty corruption.”

BLACK MARKET Score: 4–Stable (high level of activity) Transparency International’s 2001 score for Tanzania is 2.2. Therefore, Tanzania’s black market score is 4 this year.

2003 Index of Economic Freedom

THAILAND Bangkok

Trade Policy Fiscal Burden

4 2.5

Government Intervention 1.5 Monetary Policy 1

Rank: Score: Category: Foreign Investment 3 Banking and Finance 3

The ruling coalition led by the Thai Rak Thai party holds almost three-quarters of the seats in Thailand’s House of Representatives now that the Chart Pattana party has defected from the opposition. This guarantees the continuity of government until 2005 and gives Prime Minister Thaksin Shinawatra more political clout, which has both positive and negative implications. Thaksin’s plans include restructuring of bad debts left over from the 1997 Asian financial crisis (over $11.3 billion) and kick-starting long-term reforms like privatization of state-owned enterprises. The Thaksin government has imposed a moratorium on rural debt; set up a million-baht ($23,000) fund for each of Thailand’s 77,000 villages; and established universal health care—expensive programs the effects of which on government expenditure have yet to be felt. The government has made stateowned banks and financial institutions lend to all sectors of the economy, sometimes at lower-than-market-interest rates or without collateral; these are the very same practices that resulted in a critical mass of non-performing loans that led to the financial crisis. There are reports that Thaksin’s telecommunications company, Shin Corporation, has been given waivers on access fees, and several cabinet members also have vested interests in companies that fall under their control. Thailand’s government intervention score is 1.5 points better this year; however, its trade policy score is 2 points worse, and its capital flows and foreign investment score is 1 point worse. As a result, Thailand’s overall score is 0.15 point worse this year.

TRADE POLICY Score: 4–Worse (high level of protectionism) According to the World Bank, Thailand’s weighted average tariff rate in 2000 (the most recent year for which World Bank data are available) was 10.1 percent, up from the 3.6 percent reported in the 2002 Index. As a result, Thailand’s trade policy score is 2 points worse this year. The government maintains non-tariff barriers in many areas. For example, reports the U.S. Department of State, “Despite recent improvements, both foreign and Thai companies continue to complain about irregularities in the Thai Customs Service.” The U.S. Trade Representative reports that “import licenses are required for at least 26 categories of items, including many raw materials, petroleum, industrial materials, textiles, pharmaceuticals and agricultural products.”

FISCAL BURDEN OF GOVERNMENT

40 2.55 Mostly Free

Wages and Prices 2 Property Rights 2

Regulation 3.0 Black Market 3.5

Scores for Prior Years: 2002: 2.40 1999: 2.35 1996: 2.35

2001: 2.20 1998: 2.35 1995: 2.35

2000: 2.70 1997: 2.30

2000 Data (in constant 1995 US dollars) Population: 60,728,000 Total area: 514,000 sq. km GDP: $170 billion GDP growth rate: 4.3% GDP per capita: $2,805 Major exports: machinery and mechanical appliances, computers and parts, textiles, integrated circuits, rice Exports of goods and services: $97 billion Major export trading partners: US 20.4%, Japan 15.4%, Singapore 8.2%, Hong Kong 5.1%, Malaysia 4.2% Major imports: capital goods, intermediate goods and raw materials, consumer goods, fuels Imports of goods and services: $74 billion Major import trading partners: Japan 22.3%, US 11.5%, China 6.0%, Malaysia 4.9%, Singapore 4.6% Foreign direct investment (net): $3.1 billion

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) Thailand’s top income tax rate is 37 percent; the marginal rate for the average taxpayer is 5 percent. The top corporate tax rate is 30 percent. In 2000, according to the Asian Development Bank, government expenditures equaled 17.4 percent of GDP. Based on a clarifi-

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cation in the methodology, Thailand’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: 1.5–Better (low level) The World Bank reports that the government consumed 9.4 percent of GDP in 2000, down from the 11 percent reported in the 2002 Index. In the same year, according to the International Monetary Fund, Thailand received 6.09 percent of its total revenues from state-owned enterprises and government ownership of property, down from the 8.15 percent reported in the 2002 Index. As a result, Thailand’s government intervention score is 1.5 points better this year.

bank. Plans for addressing ongoing banking problems have been delayed by wrangling between the Bank of Thailand and the Ministry of Finance. The Economist Intelligence Unit reports that the government has instructed state-owned banks and public financial institutions (the Government Pension Fund and Social Security Fund) “to lend to all sectors of the economy,” in some cases at below market interest rates. The Thaksin government has enacted a moratorium on rural debt in an attempt to boost its popularity.

WAGES AND PRICES

Score: 1–Stable (very low level of inflation) From 1992 to 2001, Thailand’s weighted average annual rate of inflation was 1.79 percent.

Score: 2–Stable (low level of intervention) The market determines most wages and prices. The U.S. Department of State reports that “the government retains authority to set price ceilings for the prices of sugar and cooking gas. The government is also authorized to monitor the prices of fourteen additional products…. [T]he government uses its control of major suppliers of products and services under state monopoly, such as the petroleum, aviation, and telecommunications sectors, to influence prices in the market.” There is a minimum wage.

CAPITAL FLOWS AND FOREIGN INVESTMENT

PROPERTY RIGHTS

MONETARY POLICY

Score: 3–Worse (moderate barriers) The government has opened nearly all service and manufacturing sectors to foreign investment and relaxed restrictions on land and the financial sector. Residents may hold foreign exchange accounts, subject to approval and maximum limits in some cases, and non-residents must receive approval to sell foreign currencies for baht. The International Monetary Fund reports that some foreign exchange transactions, repatriation, some outward direct investments, and transactions involving capital market securities, bonds, debt securities, money market instruments, real estate, and short-term money securities are regulated. The law permits 100 percent foreign ownership, except in 32 restricted service occupations. Non-Thai businesses and citizens must receive permission to own land except in government-approved industrial areas. Based on new information on barriers to foreign investment, Thailand’s capital flows and foreign investment score is 1 point worse this year.

BANKING AND FINANCE Score: 3–Stable (moderate level of restrictions) The U.S. Department of State reports that, in the wake of the 1997 Asian crisis, “70 percent of Thailand’s domestic financial institutions (mostly finance companies) were shut down, taken over by the government as insolvent, or merged with other institutions; and non-performing debt climbed to 48 percent of total financial system assets.” At the end of 2000, there were 13 domestic banks, 21 finance companies, and 21 foreign bank branches. Following the Asian financial crisis, Thailand undertook a major liberalization of its financial sector. However, the banking sector continues to be constrained by restrictions on competition and cumbersome regulations; foreign banks, for example, may operate only three branches and must maintain a minimum investment in the government, state-owned enterprises, or the central

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Score: 2–Stable (high level of protection) Thailand generally protects private property, but there are some indications of inefficiency and corruption. According to the U.S. Department of State, “Disputes such as the enforcement of property or contract rights have generally been resolved through the Thai courts. Thailand has an independent judiciary that generally is effective in enforcing property and contractual rights, but in practice the legal process is slow and litigants or third parties sometimes may affect judgments through extra-legal means.”

REGULATION Score: 3–Stable (moderate level) Thailand has extensive legislation, especially to protect the environment and labor. “Despite the good intentions of most regulatory regimes,” reports the U.S. Department of State, “consistent and predictable enforcement of government regulations remains an obstacle to investment in Thailand. Gratuity payment to civil servants responsible for regulatory oversight and enforcement unfortunately remains a common practice. Through such payments, regulations can often be by-passed or ignored and approval processes expedited.”

BLACK MARKET Score: 3.5–Stable (high level of activity) Transparency International’s 2001 score for Thailand is 3.2. Therefore, Thailand’s black market score is 3.5 this year.

2003 Index of Economic Freedom

TOGO Rank: 128 Score: 3.60 Category: Mostly Unfree

Lomé Trade Policy Fiscal Burden

3 3

Government Intervention 3 Monetary Policy 2

Foreign Investment 4 Banking and Finance 4

Togo, a small nation on the western coast of Africa, is predominantly agricultural. An estimated 80 percent of the population is engaged in small-scale and subsistence agriculture, generating about 40 percent of GDP. Togo’s economic prospects depend on the government’s willingness and ability to deal with the problems created by inefficient state-owned enterprises, corruption, and poor fiscal discipline. During the 1990s, the government haltingly pursued privatization of inefficient state industries, including the cement, milling, and electricity companies. More recently, it has shown greater willingness to pursue privatization, anticorruption efforts, and a more disciplined budget and monetary policy. The U.S. Department of State reports that the recently created National Anti-Corruption Commission has arrested numerous public officials and private individuals for corruption and has recovered a significant amount of swindled public funds. Several state-owned companies, including the national electricity company, have been privatized in the past few years. From 1991 to 2000, compound growth in GDP averaged only 1.5 percent annually, lagging behind population growth and leading to a decline in per capita GDP, which fell from $367 to $327 (in constant 1995 U.S. dollars). Togo’s banking and finance score is 1 point better this year; however, its monetary policy score is 1 point worse. As a result, Togo’s overall score is unchanged this year.

TRADE POLICY Score: 3–Stable (moderate level of protectionism) Togo 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, Ivory Coast, Mali, Niger, and Senegal.) The government does not require any import licenses and has eliminated its quotas.

Wages and Prices 3 Property Rights 4

Regulation Black Market

Scores for Prior Years: 2002: 3.60 1999: 3.90 1996: n/a

2001: 3.75 1998: n/a 1995: n/a

2000: 3.80 1997: n/a

2000 Data (in constant 1995 US dollars) Population: 4,527,000 Total area: 56,785 sq. km GDP: $1.48 billion GDP growth rate: –0.7% GDP per capita: $327 Major exports: cotton, phosphates, coffee, cocoa Exports of goods and services: $455.6 million Major export trading partners: Benin 12%, Nigeria 9%, Belgium 5%, Ghana 4% Major imports: machinery and equipment, foodstuffs, petroleum products Imports of goods and services: $668 million Major import trading partners: Ghana 26%, France 11%, China 7%, Ivory Coast 7% Foreign direct investment (net): $33.9 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) Ernst & Young reports that Togo’s top income tax rate is 55 percent; the marginal rate for the average taxpayer is 0 percent. The top corporate tax rate is 40 percent, though “industries” pay a lower 37 percent rate, according to Ernst & Young. In 2000, according to the African Development Bank, government expenditures equaled 19.2 percent of GDP.

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GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Stable (moderate level) The World Bank reports that the government consumed 10.8 percent of GDP in 2000. According to the Economist Intelligence Unit, “Progress [in the privatization program] has so far been limited, mainly because of the difficult political and economic situation. Only CEET (now Togo Electricité) was sold to the consortium Elyo/Hydro-Québec International in 2000.”

MONETARY POLICY Score: 2–Worse (low level of inflation) From 1992 to 2001, Togo’s weighted average annual rate of inflation was 4.07 percent, up from the 2.09 percent from 1991 to 2000 reported in the 2002 Index. As a result, Togo’s monetary policy score is 1 point worse this year. Togo 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, Ivory Coast, Mali, Niger, and Senegal.)

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 4–Stable (high barriers) According to the U.S. Department of State, “Investor interest fell sharply in the early 1990’s, a period of overt political unrest in Togo. As the country continues to struggle to emerge from the negative economic impact of that period, foreign investment is if anything even more welcome than it was previously.” The 1990 investment code includes local content restrictions and requirements on hiring Togo citizens, and there is an overall lack of administrative transparency. Investment is permitted only in certain sectors of the economy, including agriculture, animal husbandry, fishing, forestry, and related activities; exploration, extraction, and transformation of minerals; hotels and tourism; and manufacturing. Investments are subject to minimum capital requirements and are screened on a case-by-case basis, and Togolese citizens must receive at least 60 percent of the payroll. The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts after obtaining approval of the government and the Central Bank of West African States. Payments and transfers to countries other than France, Monaco, members of the Central African Economic and Monetary Community, members of the West African Economic and Monetary Union, and Comoros are subject to authorization and quantitative limits in some cases. Capital transfers abroad and most other capital transactions require government approval.

BANKING AND FINANCE Score: 4–Better (high level of restrictions) The Central Bank of West African States (BCEAO), a central bank common to the eight members of the West African Economic and Monetary Union, governs Togo’s banking system. Member countries use the CFA franc that is issued by the BCEAO, pegged to the French franc, and guaranteed by the French Treasury. Government involvement in banking and lending decisions has caused the bank-

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ing sector to deteriorate in recent years. The Economist Intelligence Unit reports that “the sector remains fragile because of its high level of outstanding debt. The problem is particularly acute in the four state-controlled banks, whose unrecovered debts total around CFAfr45bn ($US$60.1m)…. The problem will probably persist until the judicial system becomes more effective at exposing the culprits.” The government owns the second largest commercial bank and 52 percent of the largest bank; these banks account for 74 percent of all lending and 63 percent of all deposits. The government privatized the state-owned insurance company in December 2000. Although heavy government involvement has led the banking sector to the brink of collapse, the system (including participation by foreign banks) continues to function. As a result, Togo’s banking and finance score is 1 point better this year.

WAGES AND PRICES Score: 3–Stable (moderate level of intervention) Togo lifted most price controls in the late 1980s. According to the U.S. Department of State, “Price control and profit margin regulations have been largely eliminated with electricity, water, and telecommunications the only sectors still subject to administrative price controls.” The Economist Intelligence Unit reports that the government continues to intervene in agricultural markets, particularly cotton. The government sets minimum wages from unskilled workers through professional positions.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) The judicial system does not protect private property sufficiently. According to the Economist Intelligence Unit, “The president has some control over the judiciary as he appoints the president of the supreme court.” The U.S. Department of State reports that “the court system remained overburdened and understaffed.” In addition, “Lack of transparency and predictability of the judiciary is a serious obstacle in enforcing property and judgment rights, and similar difficulties apply to administrative procedures.”

REGULATION Score: 5–Stable (very high level) Togo’s regulatory system lacks transparency. The U.S. Department of State reports that “establishing an office in Togo is in theory relatively simple, but administrative obstacles and delays are common.” In addition, corruption “has spread as a business practice in recent years…. Bribes, whether to private or government officials, are considered crimes…but [corruption] cases are relatively rare, and appear mostly to [involve] those who have in some way lost official favor.”

BLACK MARKET Score: 5–Stable (very high level of activity) Togo has a large black market in such pirated intellectual property as computer software and video and cassette recordings. According to the U.S. Department of State, “The size of the [Togolese] market is difficult to estimate because so much of the trade is informal.”

2003 Index of Economic Freedom

TRINIDAD AND TOBAGO Port-of-Spain

Rank: Score: Category: Trade Policy Fiscal Burden

4 3.5

Government Intervention 3 Monetary Policy 2

Foreign Investment 2 Banking and Finance 2

Since gaining its independence from the United Kingdom in 1962, Trinidad and Tobago has experienced steady economic growth. Investment inflows in the energy sector and government spending on social infrastructure have fueled a boom in construction that has been the driving force in GDP growth for the past six years. The government led by Basdeo Panday collapsed in October 2001, and general elections were held in December. The election resulted in a tie, and President Arthur Robinson finally chose Patrick Manning to be prime minister. Since then, Manning’s government has faced strong opposition from Panday and his party in Parliament, making it very difficult to pass legislation and implement reform. The government intends to support the development of the energy sector, but the tension between the two major parties creates uncertainty, undermining investment prospects. Many observers believe that the Manning administration may not be able to survive in office for a full term. Trinidad and Tobago’s fiscal burden of government score is 0.5 point better this year; however, its government intervention score and trade policy score are both 1 point worse. As a result, Trinidad and Tobago’s overall score is 0.15 point worse this year.

TRADE POLICY Score: 4–Worse (high level of protectionism) According to the World Bank, Trinidad and Tobago’s weighted average tariff rate in 1999 (the most recent year for which World Bank data are available) was 17 percent, up from the 9.1 percent reported in the 2002 Index. As a result, Trinidad and Tobago’s trade policy score is 1 point worse this year. The U.S. Department of State reports that only a small number of items require an import license and that “standards, labeling, testing and certification rarely hinder U.S. exports.”

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 3.5–Better (high tax rates) Score—Government Expenditures: 3–Better (moderate level of government expenditure) Final Score: 3.5–Better (high cost of government) Trinidad and Tobago’s top income tax rate is 35 percent; the marginal rate for the average taxpayer is 28 percent. The top corporate tax rate is 35 percent. According to the Inter-American Development Bank, government expenditures equaled 24.3 percent of GDP in 2000, down from the 28.4 percent reported in the 2002 Index. Based on a clarification in the methodology for calculating the income tax score, as well as the lower level of government expenditure, Trinidad and Tobago’s overall fiscal burden of government score is 0.5 point better this year.

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43 2.60 Mostly Free

Wages and Prices 2 Property Rights 2

Regulation 3.5 Black Market 2.5

Scores for Prior Years: 2002: 2.45 1999: 2.50 1996: 2.60

2001: 2.50 1998: 2.60 1995: n/a

2000: 2.35 1997: 2.60

2000 Data (in constant 1995 US dollars) Population: 1,301,000 Total area: 5,128 sq. km GDP: $6.7 billion GDP growth rate: 4.8% GDP per capita: $5,123 Major exports: petroleum and petroleum products, chemicals, steel products, fertilizer, sugar, cocoa, coffee, citrus, flowers Exports of goods and services: $3.4 billion Major export trading partners: US 46.8%, Jamaica 8.6%, France 5.1%, Barbados 3.8% Major imports: machinery, transportation equipment, manufactured goods, food, live animals Imports of goods and services: $3.9 billion Major import trading partners: US 34.3%, Venezuela 19.4%, Colombia 8.0%, UK 3.8% Foreign direct investment (net): $492 million

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GOVERNMENT INTERVENTION IN THE ECONOMY

PROPERTY RIGHTS

Score: 3–Worse (moderate level) Data from Trinidad and Tobago’s central bank indicate that in 2001, the government consumed 13.3 percent of GDP and received 9.92 percent of its total revenues from state-owned enterprises and government ownership of property. Based on new evidence with respect to revenues from state-owned enterprises, Trinidad and Tobago’s government intervention score is 1 point worse this year.

Score: 2–Stable (high level of protection) The judiciary is independent and provides a fair judicial process. However, there is increasing evidence that the judicial system suffers from some inefficiencies. The U.S. Department of State reports that “the High Court of Justice has jurisdiction over all matters involving sums in excess of TT$15,000 and can grant equitable relief such as acclamation injunctions and public law remedies. At present there is a several year backlog of cases waiting to be heard.”

MONETARY POLICY Score: 2–Stable (low level of inflation) From 1992 to 2001, Trinidad and Tobago’s weighted average annual rate of inflation was 4.85 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 2–Stable (low barriers) Trinidad and Tobago is open to 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 as long as they comply with the Foreign Investment Act. Government screening takes place only to determine environmental impact and whether the investment qualifies for incentives, although bureaucracy can delay the process. Foreign investment in private business is not subject to limitations, but a foreigner must obtain a license to purchase more than 30 percent of a publicly held business. The U.S. Department of State reports that bureaucratic red tape and a lack of transparency serve as an informal barrier to foreign investment.

REGULATION Score: 3–Stable (moderate level) Regulations and bureaucratic red tape are burdensome. According to the U.S. Department of State, “investors have complained about a lack of transparency and delays in the investment approval process. Complaints focus on a perceived lack of delineation of authority for final investment approvals between the various ministries which may be involved in a project, and excessive delays in receiving approvals from the Ministry of Planning and Development’s Town and Country Planning Office, which oversees environmental impact assessment approvals. Some projects have been delayed for several years and some potential [foreign] investors have abandoned Trinidad and Tobago as a result.” There are reports of moderate corruption, but this has not seriously undermined business operations.

BLACK MARKET Score: 2.5–Stable (moderate level of activity) Transparency International’s 2001 score for Trinidad and Tobago is 5.3. Therefore, Trinidad and Tobago’s black market score is 2.5 this year.

BANKING AND FINANCE Score: 2–Stable (low level of restrictions) The banking system is open and well-developed. There are no restrictions on foreign banks, although government approval is required for the establishment of new foreign banks. Banks are free to engage in a wide range of services. The International Monetary Fund reports that the government mandates a high reserve requirement—21 percent of all domestic currency deposits and a liquid asset ratio of 25 percent on foreign currency deposits. Although reform of banking regulation has boosted confidence, the Economist Intelligence Unit reports concerns over the lack of competition.

WAGES AND PRICES Score: 2–Stable (low level of intervention) The market sets most wages and prices, but the government determines prices on sugar, schoolbooks, and pharmaceuticals, as well as on some utilities through the state-owned enterprises. The government also mandates a minimum wage.

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2003 Index of Economic Freedom

Tunis

TUNISIA Rank: Score: Category:

Trade Policy Fiscal Burden

5 4

Government Intervention 3 Monetary Policy 1

Foreign Investment 3 Banking and Finance 3

Tunisia is one of the Arab world’s most modern, stable, and cosmopolitan countries. Its diverse economy includes important agricultural, mining, energy, tourism, and manufacturing sectors; and its association agreement with the European Union, which entered into force in 1998, was the first such agreement between the EU and a Maghreb country. In recent years, expanding trade and tourism have helped to yield steady economic growth, although the tourism industry has been hurt by post–September 11 worries about Islamist terrorism in the region. Encouraged by a major influx of foreign investment, the economy grew by over 6 percent in 1999 and nearly 5 percent in 2000. In 2001 the pace of privatization slowed, but the government hopes to reinvigorate the privatization program in 2002 and has listed 26 state-owned firms for sale. Tunisia’s capital flows and foreign investment 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) According to the World Bank, Tunisia’s weighted average tariff rate in 1998 (the most recent year for which World Bank data are available) was 28.8 percent. Nontariff barriers take the form of import licenses and quotas, particularly on consumer goods and motor vehicles. According to the U.S. Department of State, “Government use of non-tariff barriers…has sometimes led to the delay or rejection of goods shipped to Tunisia.”

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) Tunisia’s top income tax rate is 35 percent; the marginal rate for the average taxpayer is 15 percent. The top corporate tax rate is 35 percent. In 2000, according to Standard & Poor’s, government expenditures equaled 32.6 percent of GDP.

68 2.95 Mostly Free

Wages and Prices 2 Property Rights 3

Regulation 3.0 Black Market 2.5

Scores for Prior Years: 2002: 2.85 1999: 3.00 1996: 2.70

2001: 2.90 1998: 2.80 1995: 2.90

2000: 3.00 1997: 2.80

2000 Data (in constant 1995 US dollars) Population: 9,563,000 Total area: 163,610 sq. km GDP: $23.6 billion GDP growth rate: 4.7% GDP per capita: $2,470 Major exports: textiles, mechanical goods, phosphates and chemicals, agricultural products, hydrocarbons Exports of goods and services: $10.2 billion Major export trading partners: France 26.3%, Italy 22.5%, Germany 12.3%, Belgium 5.0% Major imports: machinery and equipment, hydrocarbons, chemicals, food Imports of goods and services: $11 billion Major import trading partners: France 26.6%, Italy 19.1%, Germany 9.5%, US 4.6%, Spain 4.0% Foreign direct investment (net): $688 million

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Stable (moderate level) The World Bank reports that the government consumed 15.7 percent of GDP in 2000. In 1999, according to the International Monetary Fund, Tunisia received 8.31 percent of its total revenues from state-owned enterprises and government ownership of property.

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MONETARY POLICY

WAGES AND PRICES

Score: 1–Stable (very low level of inflation) From 1992 to 2001, Tunisia’s weighted average annual rate of inflation was 2.29 percent.

Score: 2–Stable (low level of intervention) Tunisia maintains some price controls. According to the U.S. Department of State, “About 90 percent of prices are now deregulated at the production level, and almost as many at the distribution level.” The government mandates a minimum wage.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Worse (moderate barriers) Tunisia is open to foreign investment generally but does restrict it in some sectors. According to the U.S. Department of State, “The Tunisian Government screens potential foreign investment to minimize the impact of the investment on domestic competitors and employment, and to minimize foreign currency outflows. Tunisian government officials, until recently, identified restaurants, real estate, retail distribution, and other service industries as among the areas in which foreign investment is discouraged. Nevertheless, there now appears to be a partial relaxation of this policy. For onshore companies outside of the tourism sector, government authorization is required if the foreign capital share exceeds 49 percent.” All real estate transactions require approval, and foreigners may not own agricultural land, although leasing is allowed. Foreign investment is also barred from “strategic” sectors like finance, petroleum refining and production, the national airline, electricity, water, and telecommunications. Local content requirements apply in some sectors, and permission for foreign employees is usually limited to senior management. The International Monetary Fund reports that certain residents may hold foreign exchange accounts up to a maximum amount for specific uses, or for income from specified activities, but may not hold domestic currency accounts abroad. Non-residents are permitted to hold and use foreign exchange accounts for most financial activities. There are some controls and restrictions on payments, transactions, and transfers. There are many restrictions and controls on capital transactions—including derivatives, capital and money market instruments, purchases abroad by residents, repatriation, and direct investment—and many require approval. Despite these hurdles, over 2,000 foreign firms are operating in Tunisia, which is becoming a light-manufacturing source for the European Union because of preferential access to the EU market. Based on new evidence of restrictions on capital flows, Tunisia’s capital flows and foreign investment score is 1 point worse this year.

BANKING AND FINANCE Score: 3–Stable (moderate level of restrictions) According to the Economist Intelligence Unit, “The banking system remains inefficient, state-dominated and burdened by nonperforming debt. However, the system is being transformed by a series of bank mergers aimed at replacing the large number of specialist banks with a smaller number of stronger, more efficient multi-purpose institutions capable of meeting future foreign competition.” According to Standard & Poor’s, “Efforts by the authorities have improved prudential practices and strengthened the banking sector. Nevertheless, the system’s financial performance is still insufficient, due to weak credit skills and past government interference.”

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PROPERTY RIGHTS Score: 3–Stable (moderate level of protection) Property is not fully secured in Tunisia, and the executive branch is the supreme arbiter of events in the cabinet, government, judiciary, and military. According to the Economist Intelligence Unit, “The constitution guarantees the independence of the judiciary.” However, the judiciary is part of the Ministry of Justice. The government appoints, assigns, grants tenure to and transfers judges, making them susceptible to government pressure. In July 2001 Mokhtar Yahyaoui became the first senior judge to speak out publicly against the judiciary’s lack of independence. He said judges were harassed and intimidated to make them pronounce judgements decided in advance by the authorities. Mr Yahyaoui was initially suspended from his post, but was later reinstated.”

REGULATION Score: 3–Stable (moderate level) In general, bureaucracy can be a considerable impediment to business. According to the Economist Intelligence Unit, “Tunisian bureaucracy can still be slow and lacking in transparency, and work permits can take weeks to obtain…. [D]espite some reform, labor law is still relatively rigid, with high add-on costs and cumbersome regulations governing the hiring and dismissal of employees.” The U.S. Department of State reports that, “depending upon the type of commercial activity under consideration, firms may need to complete a wide range of regulatory, licensing and logistical procedures before bringing their products or services to the market. This can be a long process.” In addition, “some potential investors have asserted that competition and corruption among prospective local partners have delayed or blocked specific investment proposals, or there has been an appearance that cronyism or influence-peddling has affected some investment decisions.”

BLACK MARKET Score: 2.5–Stable (moderate level of activity) Transparency International’s 2001 score for Tunisia is 5.3. Therefore, Tunisia’s black market score is 2.5 this year.

2003 Index of Economic Freedom

TURKEY Ankara

Trade Policy Fiscal Burden

3 4.5

Government Intervention 3 Monetary Policy 5

Rank: 119 Score: 3.50 Category: Mostly Unfree Foreign Investment 3 Banking and Finance 3

The Turkish economy experienced a severe financial crisis in the spring of 2001. Turkey’s Minister of State in Charge of the Treasury, Kemal Dervis, pledged that the government would pass 15 laws to recapitalize state-owned and troubled private banks, make the central bank more independent of political control, allow the lira to float freely, decrease government spending, and arrange for the further privatization of state-owned banks and some companies. The most important of these efforts was the banking reform law, which made it far harder for politicians to borrow from state banks as their age-old means of dispensing patronage. Even though reform conditions attached to 17 previous International Monetary Fund loans have not been met, the IMF approved the plan, pledging $10 billion in new aid—$8 billion from the IMF and $2 billion from the World Bank. Ankara was warned that it will not receive further assistance if this latest overhaul fails; no bilateral aid was offered to augment the multilateral institutions’ loans, and disbursement of the tranches was tied to successful implementation of the Dervis plan. With the health of Prime Minister Bulent Ecevit in question, however, and with Turkey needing to roll over $200 billion of public debt, political stability is imperative if the Dervis program is to be completed successfully. Turkey’s trade policy score is 1 point worse this year, and its government intervention score is 0.5 point worse. As a result, Turkey’s overall score is 0.15 point worse this year.

TRADE POLICY Score: 3–Worse (moderate level of protectionism) According to the World Bank, Turkey’s weighted average tariff rate in 1997 (the most recent year for which World Bank data are available) was 5.7 percent, up from the 2.7 percent reported in the 2002 Index. As a result, Turkey’s trade policy score is 1 point worse this year. As part of the process of integration with the European Union, Turkey has begun to adopt the EU’s common tariffs, but it still does not implement the common external tariffs fully. According to the Economist Intelligence Unit, “Agricultural products, iron and steel, and pharmaceuticals constituted the three major exemptions to the custom union. Quantitative restrictions have also been removed.” The U.S. Trade Representative reports that “Non-tariff barriers result in costly delays, demurrage charges and other uncertainties that stifle trade for many agricultural products….”

Wages and Prices 3 Property Rights 3

Regulation 4.0 Black Market 3.5

Scores for Prior Years: 2002: 3.35 1999: 2.80 1996: 2.90

2001: 2.90 1998: 2.60 1995: 2.80

2000: 2.75 1997: 2.70

2001 Data (in constant 1995 US dollars) Population: 69,749,000 Total area: 780,580 sq. km GDP: $189.9 billion GDP growth rate: –7.4% GDP per capita: $2,717 Major exports: apparel, foodstuffs, textiles, metal manufactures, transport equipment Exports of goods and services: $51.4 billion Major export trading partners: Germany 17.2%, US 10.0%, Italy 7.5%, UK 7.0%, France 6.1% Major imports: machinery, chemicals, semi-finished goods, fuels, transport equipment Imports of goods and services: $59.6 billion Major import trading partners: Germany 13.2%, Italy 8.6%, Russia 8.6%, US 8.0%, France 5.6% Foreign direct investment (net): $2.5 billion

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) According to the Turkish embassy, Turkey’s top income tax rate is 40 percent; the marginal rate for the average taxpayer is 40 percent. The top corporate tax rate is 30 percent, but a surtax of 10 percent is applied to this income tax rate, yielding a total corporate

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income tax of 33 percent. In 2001, based on data from the Turkey State Institute of Statistics and the Embassy of Turkey, government expenditures equaled 44.3 percent of GDP.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Worse (moderate level) According to the Turkish embassy, the government consumed 14.1 percent of GDP in 2001. In 2000, according to the International Monetary Fund, Turkey received 10.13 percent of its total revenues from state-owned enterprises and government ownership of property, up from the 6.42 percent reported in the 2002 Index. As a result, Turkey’s government intervention score is 0.5 point worse this year.

MONETARY POLICY Score: 5–Stable (very high level of inflation) From 1992 to 2001, Turkey’s weighted average annual rate of inflation was 65.85 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) Turkey welcomes foreign investment but also maintains a number of barriers, especially for real estate. The International Monetary Fund reports that foreign direct investment in Turkey requires the permission of the Undersecretary of the Treasury. There is a minimum capital requirement for non-resident investors. According to the Turkish embassy, “Almost all sectors of the economy open to private domestic investors are also open to foreign participation…. [L]egislative arrangements regulate specific sectors like broadcasting, aviation, maritime transportation, fish processing, petroleum, and mining with the aim of ensuring national security, public order, and health and professional standards.” The IMF reports that both residents and non-residents may hold foreign exchange accounts. There are virtually no restrictions on payments and transfers. Some restrictions and reporting requirements apply to capital transactions.

BANKING AND FINANCE Score: 3–Stable (moderate level of restrictions) Turkey has passed banking reform legislation to incorporate market risk into capital adequacy requirements, clarify definitions for reporting and accounting purposes, include repurchase agreements on the balance sheet, improve monitoring and supervision of the banking system, and adopt international accounting standards. These reforms have not been fully implemented. According to the Economist Intelligence Unit, “The state is the banking sector’s biggest client, leaving few resources for others.” Foreign banks face no barriers to entry; the government has actively sought foreign banks to take over troubled domestic banks, and there were 20 foreign banks operating in the country as of mid-2001.

still primarily sets prices of goods produced by state-owned firms…. In general, the government sets annual prices for a range of crops. The municipalities fix ceilings on retail price of bread. The Ministry of Health controls drug prices.” The Turkish embassy reports that the government sets ceilings on petroleum prices; state-owned enterprises set electricity prices; and natural gas prices are set by the only supplier, BOTAS, a state-owned enterprise. The Ministry of Labor is required by law to adjust the minimum wage at least every two years based on the advice of the Minimum Wage Determination Commission, a tripartite body composed of government, labor, and employer representatives.

PROPERTY RIGHTS Score: 3–Stable (moderate level of protection) According to the U.S. Department of State, “Turkey’s…court system is overburdened…sometimes resulting in slow decisions and judges lacking sufficient time to grasp complex issues. Judgments of foreign courts need to be reconsidered by local courts before they are accepted and enforced.” Last year, in light of Turkey’s financial crisis, the Financial Times reported corruption in the judiciary. According to the Economist Intelligence Unit, “the judicial process can be…subject to political interference in high-profile cases.”

REGULATION Score: 4–Stable (high level) Turkish regulations are moderately burdensome. The Financial Times reports that “the primitive legal system and backward laws are among the biggest obstacles in the way of Turkey’s halfhearted quest to become a member of the European Union.” Establishing a business is relatively simple, but obtaining permits can be difficult. According to the U.S. Department of State, after establishing a business, “bureaucratic ‘red tape’ remains a significant problem…. Obtaining the approval of both national and local officials for essential permits is a time consuming and often frustrating process.” Corruption is cited by the U.S. Department of State and other sources as a significant impediment to doing business.

BLACK MARKET Score: 3.5–Stable (high level of activity) Transparency International’s 2001 score for Turkey is 3.6. Therefore, Turkey’s black market score is 3.5 this year.

WAGES AND PRICES Score: 3–Stable (moderate level of intervention) According to the Economist Intelligence Unit, “The government, despite talk of allowing the enterprises to set their own prices,

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2003 Index of Economic Freedom

TURKMENISTAN Rank: Score: Category:

Ashgabat

Trade Policy Fiscal Burden

5 2.5

Government Intervention 4 Monetary Policy 4

Foreign Investment 4 Banking and Finance 5

146 4.15 Repressed

Wages and Prices 4 Property Rights 4

Regulation Black Market

Turkmenistan possesses the world’s 11th largest reserves of natural gas and is among the world’s top 10 producers of cotton. Its communist-era leader was voted president for life by the People’s Council in December 1999. Key industries are still owned by the state, and the government’s over-regulation of the economy limits the incentives for foreign investment. Investors have to rely on bribes to top officials to ensure support for their projects. Despite growth in GDP and exports in 2001 due to increased export of oil and gas, the budget and trade balance are in deficit. The announced budget surplus for 2001 ignores expenditures by massive state-run extra-budgetary funds. The currency is not fully convertible. President Saparmurat Niyazov uses allegations of corruption to remove political opponents from office. With only two faiths—Sunni Islam and Russian Orthodoxy—officially allowed, the lack of religious freedom continues to raise strong concerns in the human rights community. The resignation of the foreign minister and two influential ambassadors at the end of 2001 indicates growing opposition to Niyazov inside the political elite; if this opposition accumulates strength and gains outside support, the political situation is likely to become unstable. Turkmenistan’s fiscal burden of government and monetary policy scores are, respectively, 1.5 point and 1 point better this year. As a result, its overall score is 0.25 point better this year.

Scores for Prior Years:

TRADE POLICY

Major export trading partners: Ukraine 27%, Iran 14%, Turkey 11%, Italy 9%, Switzerland 5% (1999)

Score: 5–Stable (very high level of protectionism) According to the World Bank, Turkmenistan’s weighted average tariff rate in 1998 (the most recent year for which World Bank data are available) was 0 percent. However, this figure does not accurately reflect the true state of the country’s tariff regime. The European Bank for Reconstruction and Development reports that Turkmenistan imposes excise taxes, ranging from 10 percent to 100 percent, on a large number of imports. The U.S. Department of State reports that “Turkmenistan maintains a significant number of non-tariff barriers to trade…. In addition, the government sets prices requirements that lead to the import of products and services of low quality.”

FISCAL BURDEN OF GOVERNMENT

2002: 4.40 1999: 4.30 1996: n/a

2001: 4.40 1998: 4.20 1995: n/a

2000: 4.30 1997: n/a

2000 Data (unless otherwise indicated) (in constant 1995 US dollars) Population: 5,198,940 Total area: 488,100 sq. km GDP: $5.4 billion GDP growth rate: 17.6% GDP per capita: $1,377 Major exports: gas, oil, cotton fiber, textiles Exports of goods and services: $2.7 billion

Major imports: machinery and equipment, foodstuffs Imports of goods and services: $2.3 billion Major import trading partners: Turkey 17%, Ukraine 12%, Russia 11%, United Arab Emirates 8%, France 6% (1999) Foreign direct investment (net): $120 million

Score—Income and Corporate Taxation: 2.5–Better (moderate tax rates) Score—Government Expenditures: 2–Better (low level of government expenditure) Final Score: 2.5–Better (moderate cost of government) Information from the Central Asia & Caucasus Business Report, confirmed by the Main State Tax Service in Turkmenistan, indicates that Turkmenistan has lowered its income taxes. Turkmenistan’s top income tax rate is 11 percent, down from the 25 percent reported in the 2002 Index; the marginal rate for the average taxpayer is also 11 percent, down from the 25 percent reported in the 2002 Index. The top corporate tax rate remains 25 percent. In 1999, according to the Asian Development Bank, government expenditures equaled 19.4 percent

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4 5

397

of GDP, down from the 25.8 percent reported in the 2002 Index. Based on the lower income tax rate and lower level of government expenditure, Turkmenistan’s overall fiscal burden of government score is 1.5 point better this year.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 4–Stable (high level) The World Bank reports that the government consumed 16.3 percent of GDP in 2000, down from the 25.8 percent reported in the 2002 Index. (In the previous Index, data on government expenditures were substituted because data on government consumption were not available.) However, the evidence suggests that reported government consumption data are unreliable. According to the Economist Intelligence Unit, “Official fiscal data…are flawed, since they hide a large structural deficit in off-budget accounts, debts and arrears.” In addition, “Privatisation has largely been avoided…. By mid-2000 it was reported that only about 200 small-scale companies, from an original list of 4,300, had been sold, and just six medium-sized enterprises out of 280 had been privatised.” Based on the apparent unreliability of reported government consumption figures, 1 point has been added to Turkmenistan’s government intervention score. Another point has been added based on the level of state-owned enterprise.

MONETARY POLICY Score: 4–Better (high level of inflation) From 1992 to 2001, Turkmenistan’s weighted average annual rate of inflation was 17.95, down from the 35.92 percent from 1991 to 2000 reported in the 2002 Index. As a result, Turkmenistan’s monetary policy score is 1 point better this year. (The Economist Intelligence Unit questions the reliability of lower inflation data for 2001 that led to this improvement.)

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 4–Stable (high barriers) Turkmenistan’s government controls most of the economy and allows little foreign participation. The International Monetary Fund reports that investments by “juridical persons” are permitted for all sectors in theory, but authorization from the government (at the highest level for investments over $500,000) is mandatory. The state restricts investment in a number of “strategic” sectors, such as utilities and oil and gas. Foreign exchange restrictions and opaque regulations governing foreign investment also serve as barriers. Repatriation of profits is difficult. Foreigners may not own land but may lease it. As summarized by the Economist Intelligence Unit, “Turkmenistan offers investors an unappealing mix of authorization politics and central economic planning, mitigated only by large oil and (especially) gas reserves…. [The president for life] will not privatize the hydrocarbons, utility and telecoms sectors, and all foreign investment needs government approval—a time-consuming and bureaucratic process…. [W]ith little prospect of investor-friendly reforms, most foreign firms not involved in hydrocarbons will stay away.” The IMF reports that foreign exchange accounts require government approval. All payments and transfers require the approval of the exchange control authorities. Inward and outward capital transactions require central bank approval.

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BANKING AND FINANCE Score: 5–Stable (very high level of restrictions) Turkmenistan’s government owns most of the commercial banks and controls almost all of the financial system’s assets. The number of banks fell from 67 to 13 in 1999, and another bank was abolished in 2000. Of the 12 banks operating in 2001, five were state-owned commercial banks, three were joint-stock domestic banks, two were joint-stock banks with foreign participation, and two were foreign banks. According to the Economist Intelligence Unit, “The banking sector consists mainly of state-owned banks, and the government controls all foreign exchange transactions. Moreover, banks have been forced by the president to offer negative real interest rates, thereby further restricting their ability to extend credit to the private sector…. [M]ore than 80% of all bank credits are directed to state-owned enterprises.” The only non-bank financial institution is the state-owned insurance monopoly.

WAGES AND PRICES Score: 4–Stable (high level of intervention) In Turkmenistan’s command economy, the government controls prices and most wages through widespread price controls, subsidies, and the extensive state-owned sector. According to the U.S. Department of State, there is no minimum wage, but the government influences wages as a major employer.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) The U.S. Department of State reports that “there is no legal system in place for the effective enforcement of property and contractual rights. Therefore, disputes must be worked out directly between the Turkmen Government and the investor.” Moreover, “The President’s power to select and dismiss judges subordinates the judiciary to the Presidency.” According to the Economist Intelligence Unit, “The judiciary is badly trained and open to bribery…. The provision in the constitution for the private ownership of land, Article 9, has yet to be implemented in practice.”

REGULATION Score: 4–Stable (high level) Since the government controls much of the economy, Turkmenistan’s business climate is necessarily constrained. According to the U.S. Department of State, “The government’s desire to regulate economic and commercial transactions creates impediments to investment. Personal relations with Government officials often play a decisive role in acquiring a contract or running a successful business. Since investment contracts are concluded on a case by case basis, it is difficult for the investor to identify a clear set of rules that apply and that will apply over the term of the investment.”

BLACK MARKET Score: 5–Stable (very high level of activity) Smuggling is rampant. The Business Software Alliance estimates that in 2000, the rate of computer software piracy was 90 percent. The Economist Intelligence Unit reports that “currency restrictions keep the manat at four times its black market rate.”

2003 Index of Economic Freedom

UGANDA Rank: Score: Category:

Kampala

Trade Policy Fiscal Burden

3 3

Government Intervention 2 Monetary Policy 1

Foreign Investment 3 Banking and Finance 3

62 2.85 Mostly Free

Wages and Prices 2 Property Rights 3

Regulation 4.0 Black Market 4.5

The bloody purge initiated by General Idi Amin when he seized power nine years after Uganda had gained its independence in 1962 destroyed the economy and forced skilled foreign workers to flee or be killed until order was restored in 1979. Under President Yoweri Moseveni, Uganda has become a favorite of the donor community and is touted as an example of successful development for sub-Saharan Africa in the wake of its economic reform efforts, including trade liberalization, privatization, and fiscal discipline. The World Trade Organization reports that agriculture is the primary economic activity, engaging 80 percent of the work force and serving as the source of 42 percent of the economy. Coffee remains the largest single export, although economic liberalization, which has led to improved economic growth and foreign direct investment, has caused the importance of the industrial sector to increase in recent years. Despite progress in liberalization, bureaucratic delays are a common and excessive drain on resources and time, and many businesses pay bribes to circumvent red tape. From 1991 to 2000, according to World Bank data, annual compound growth in GDP averaged 6.7 percent and per capita GDP increased from $256 to $348 (in constant 1995 U.S. dollars). Uganda reportedly has withdrawn its troops from the Democratic Republic of Congo but continues to support allied rebel groups in the DRC to counter armed groups that are opposed to the Ugandan government. An agreement with Sudan has allowed Uganda to pursue the Lord’s Resistance Army in Sudan, making their efforts to destroy the movement far more effective. Uganda’s regulation score is 1 point worse this year; however, its fiscal burden of government score is 0.5 point better, and its monetary policy and banking and finance scores are both 1 point better. As a result, Uganda’s overall score is 0.15 point better this year, causing Uganda to be classified as a mostly free economy.

Scores for Prior Years:

TRADE POLICY

Imports of goods and services: $2.2 billion

Score: 3–Stable (moderate level of protectionism) According to the World Bank, Uganda’s weighted average tariff rate in 2000 (the most recent year for which World Bank data are available) was 6.1 percent. The World Trade Organization reports that “most remaining non-tariff restrictions are maintained for moral, health, security or environmental reasons…. [I]mports may be subject to an import license commission of 2%, a 4% withholding tax, as well as internal taxes, such as the excise duty of 10%, except on cigarettes (130%), alcoholic beverages (70%) and soft drinks (15%).”

2002: 3.00 1999: 2.50 1996: 2.61

2001: 3.00 1998: 2.50 1995: 2.78

2000: 3.00 1997: 2.60

2000 Data (in constant 1995 US dollars) Population: 22,210,000 Total area: 236,040 sq. km GDP: $7.7 billion GDP growth rate: 4.4% GDP per capita: $348 Major exports: coffee, fish and fish products, tea, electrical products, iron and steel Exports of goods and services: $1.2 billion Major export trading partners: Germany 12.0%, Netherlands 10.2%, US 8.7%, Spain 8.0%, Belgium 7.1% Major imports: vehicles, petroleum, medical supplies, cereals

Major import trading partners: Kenya 41.0%, UK 7.6%, India 6.8%, South Africa 6.5%, Japan 6.0% Foreign direct investment (net): $226.9 million

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 2.5–Better (moderate tax rates) Score—Government Expenditures: 3–Stable (moderate level of government expenditure) Final Score: 3–Better (moderate cost of government) Uganda’s top income tax rate is 30 percent; the marginal rate for the average taxpayer is 0 percent rather than the 20 percent reported in the 2002 Index. The corpo-

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rate tax rate is 30 percent. More accurate information from the African Development Bank indicates that in 2000, government expenditures equaled 23.9 percent of GDP rather than the 20.7 percent reported for the same year in the 2002 Index. Based on the change in its income and corporate taxation score, Uganda’s overall fiscal burden of government score is 0.5 point better this year.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 2–Stable (low level) The World Bank reports that the government consumed 10.6 percent of GDP in 2000. In the same year, according to the International Monetary Fund, Uganda received 2.92 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, Uganda’s weighted average annual rate of inflation was 2.6 percent, down from the 3.63 percent from 1991 to 2000 reported in the 2002 Index. As a result, Uganda’s monetary policy score is 1 point better this year.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) Uganda is fairly open to foreign investment. Foreign investors may fully own Ugandan companies, and foreign-owned investments are treated in a nondiscriminatory manner. The government allows foreign investment in privatized industries, including the partially privatized telecommunications sector. According to the U.S. Department of State, “Foreign investors may form 100% foreign-owned companies and majority or minority joint ventures with local investors with no restrictions. However, 100 percent foreign owned companies may not trade on Uganda’s stock exchange (which has been inactive)…. [W]ork permits can be difficult to obtain, and the Uganda Revenue Authority often over-zealously targets foreign firms for payment of taxes.” Most barriers to foreign investment are informal, such as corruption, an inefficient bureaucracy, and inconsistent application of regulations. The International Monetary Fund reports that both residents and nonresidents may hold foreign exchange accounts. There are no restrictions or controls on payments, transactions, or transfers. Resident foreign nationals may purchase land, but nonresident foreign nationals may only lease land up to 99 years.

BANKING AND FINANCE Score: 3–Better (moderate level of restrictions) Uganda’s formal financial system is small, weak, and historically unstable, and several banks have been closed since 1998. Aside from the central bank (the Bank of Uganda, or BOU), there were 18 commercial banks and two development banks in 2000. According to the U.S. Department of State, “On paper, the BOU has adequate auditing standards. However, it lacks auditors and regulators have reportedly overlooked BOU requirements for some troubled banks. To promote and main-

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tain a sound and reputable financial sector, the Bank of Uganda has placed a moratorium on the licensing of banks and credit institutions offering banking services in the urban areas. New investors allowed entry into the sector must offer completely new financial services or take over existing banks.” The government sold 80 percent of Uganda Commercial Bank, which dominates the banking sector, to Standard Investment Corporation Limited (Stanbic Bank) in May 2002. Based on the government’s reduced role in the banking sector, Uganda’s banking and finance score is 1 point better this year.

WAGES AND PRICES Score: 2–Stable (low level of intervention) The government dismantled price controls in January 1994, and the abolition of coffee, cotton, and other government monopolies has allowed the market to set wages and prices in these important sectors. Uganda’s legal minimum wage was set in the early 1960s, and most workers earn more than the minimum. Most wages are set through negotiation among individuals, unions, and employers; the government is involved only if it is the employer.

PROPERTY RIGHTS Score: 3–Stable (moderate level of protection) The judicial system is not fully independent and lacks resources. According to the U.S. Department of State, “the President has extensive legal powers that influence the exercise of [the judiciary’s] independence.” The government is compensating individuals for property that was confiscated in the past.

REGULATION Score: 4–Worse (high level) The lack of regulatory transparency poses a problem for businesses in Uganda, as does the absence of reliable enforcement of the rule of law. According to the National Center for Policy Analysis, “in Uganda, a 1998 private sector survey revealed that, on average, 15 percent of management time was consumed by regulatory compliance activity, with some firms reporting as much as 40 percent.” The same source reports that “bribery has an adverse effect on firms’ growth more than three times greater than that of taxation.” Based on additional evidence with respect to the regulatory burden, Uganda’s regulation score is 1 point worse this year.

BLACK MARKET Score: 4.5–Stable (very high level of activity) Transparency International’s 2001 score for Uganda is 1.9. Therefore, Uganda’s black market score is 4.5 this year.

2003 Index of Economic Freedom

UKRAINE Rank: 131 Score: 3.65 Category: Mostly Unfree Trade Policy Fiscal Burden

3 4.5

Government Intervention 3 Monetary Policy 4

Foreign Investment 4 Banking and Finance 3

The March 2002 parliamentary elections did not lead to the formation of a majority coalition by either the pro-presidential forces or the opposition, which is divided between the center–right and communist-leaning left; but they did demonstrate the level of popular support for the pro-reform bloc led by former Prime Minister Viktor Yushchenko. Former Prime Minister Pavlo Lazarenko has been indicted for money laundering and corruption in both the United States and Switzerland, and President Leonid Kuchma has been implicated in scandals involving the disappearance and death of an investigative journalist as well as the surreptitious taping of conversations in his office. Ukraine depends almost entirely on energy imports from Russia, and the Kremlin has been using this dependence to gain political influence. Legacies of the Soviet past—bureaucratic inefficiency, pervasive corruption, a large military–industrial sector, and excessive government regulation—have hindered reform. Foreign investment remains low, and the inefficient energy sector is in crisis. However, there has been moderate progress on economic reforms, including land reform, price liberalization, and reducing barriers to trade, and tax reform is expected in 2003. If reforms are not implemented adequately, however, most observers will be looking forward to formation of a pro-reform cabinet following presidential elections in 2004. Ukraine’s capital flows and foreign investment score is 1 point worse this year; however, its government intervention, monetary policy, and banking and finance scores are all 1 point better. As a result, Ukraine’s overall score is 0.20 point better this year.

TRADE POLICY Score: 3–Stable (moderate level of protectionism) According to the World Bank, Ukraine’s weighted average tariff rate in 1997 (the most recent year for which World Bank data are available) was 5.2 percent. Nontariff barriers include non-transparent standards and import licenses. According to the U.S. Trade Representative, “Ukraine applies a range of sanitary and phytosanitary measures that are not consistent with a science-based approach to regulation and the certification and approval process is often lengthy, duplicative, and expensive.”

FISCAL BURDEN OF GOVERNMENT

Wages and Prices 3 Property Rights 4

Regulation Black Market

Scores for Prior Years: 2002: 3.85 1999: 3.60 1996: 3.80

2001: 3.85 1998: 3.80 1995: 3.70

2000: 3.60 1997: 3.75

2000 Data (in constant 1995 US dollars) Population: 49,501,000 Total area: 603,700 sq. km GDP: $44 billion GDP growth rate: 5.9% GDP per capita: $896 Major exports: ferrous and nonferrous metals, fuel and petroleum products, machinery and transport equipment, food products Exports of goods and services: $19.8 billion Major export trading partners: Russia 24.1%, Turkey 6.0%, Germany 5.1%, US 5.0% Major imports: energy, machinery and parts, transportation equipment, chemicals Imports of goods and services: $19 billion Major import trading partners: Russia 41.7%, Germany 8.1%, Turkmenistan 6.8%, Belarus 4.3% Foreign direct investment (net): $544 million

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) Ukraine’s top income tax rate is 40 percent; the marginal rate for the average taxpayer is 20 percent. The top corporate tax rate is 30 percent. In 2000, based on data from the Economist Intelligence Unit, government expenditures equaled 35.3 percent of GDP.

Chapter 6: The Countries

4 4

401

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Better (moderate level) The World Bank reports that the government consumed 18.7 percent of GDP in 2000, down from the 27.4 percent reported in the 2002 Index. As a result, Ukraine’s government intervention score is 1 point better this year. In 2000, according to the International Monetary Fund, the government received 2.68 percent of its total revenues from state-owned enterprises and government ownership of property. However, this figure appears to understate the true extent of government involvement in the economy. According to the Economist Intelligence Unit, “Although over 80% of all enterprises (accounting for over 60% of output) had been privatised by early 1999, controlling shares in many so-called privatised enterprises remained in government hands.” Based on the apparent unreliability of reported data on total revenues, 1 point has been added to Ukraine’s government intervention score.

MONETARY POLICY Score: 4–Better (high level of inflation) Data from the International Monetary Fund’s 2002 World Economic Outlook indicate that from 1992 to 2001, Ukraine’s weighted average annual rate of inflation was 18.88 percent, down from the 31.17 percent between 1993 and 2000 reported in the 2002 Index. As a result, Ukraine’s monetary policy score is 1 point better this year.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 4–Worse (high barriers) Foreign and domestic businesses receive equal treatment under the foreign investment law, but the U.S. Department of State reports that foreign businesses “are often left with a very strong impression that the laws are not applied equally and that, in fact, there is discrimination against foreign companies.” The regulatory process is not transparent, and requirements continually change. There are no regulatory restrictions on repatriation of capital or profits and few formal restrictions on foreign ownership of businesses. According to the U.S. Department of State, “Private investment…is greatly hampered by rampant corruption, over-regulation, lack of transparency, high business taxes, an inability to enforce contracts, and inconsistent application of local law.” The International Monetary Fund reports that payments and transfers are subject to various licensing requirements and quantitative limits. Some capital transactions, including credit operations, are subject to controls and licenses. Based on the evidence of extensive informal barriers to investment, Ukraine’s capital flows and foreign investment score is 1 point worse this year.

BANKING AND FINANCE Score: 3–Better (moderate level of restrictions) Overall, the state’s presence in banking remains considerable. “As of January 1, 2001,” reports the U.S. Department of State, “195 banks were registered in Ukraine, including 31 with foreign capital backing, and 7 with 100% foreign capital. Of the total 195 banks registered, 153 banks are actually operating. With the ex-

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ception of two state-owned banks, Oshchadbank and Ukreximbank, the banks are all either joint-stock companies (JSC) (118 open JSC, 49 closed JSC) or limited liability companies (26).” The two state-owned banks are among the eight largest and exert considerable influence in the banking system. Banking problems are associated with poor government policy, including uncertain macroeconomic conditions and the threat of inflation, rather than weakness in the system. The state exerts some pressure over lending, and the Economist Intelligence Unit states that one of the largest banks (Ukraina Bank) “has suffered from bad loans carried out under government pressure” and must be restructured. Government influence over the banking system, including credit, is substantial. Based on the large number of private banks and seven wholly foreign-owned banks, however, Ukraine’s banking and finance score is 1 point better this year.

WAGES AND PRICES Score: 3–Stable (moderate level of intervention) The government controls some prices. According to the U.S. Department of State, “The Cabinet of Ministers of Ukraine has price-setting authority, and determines lists of products, goods, and services whose costs are subject to approval by specific divisions of the government. Government-fixed and regulated prices and tariffs may change as a result of changes in production and sale conditions, regardless of the manufacturer’s performance.” Ukraine has a minimum wage.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) Property is weakly protected in Ukraine. According to the U.S. Department of State, “the Constitution provides for an independent judiciary; however, in practice, the judiciary is subject to considerable political interference from the executive branch and also suffers from corruption and inefficiency.” In addition, “Organized crime is alleged to influence court decisions.”

REGULATION Score: 4–Stable (high level) Ukraine’s business climate remains generally poor. The U.S. Department of State reports that “private investment (including U.S. investment) is greatly hampered by rampant corruption, overregulation, lack of transparency, high business taxes, and inconsistent application of local law…. The bureaucratic procedures for obtaining various permits, licenses, etc., are complex and unpredictable, burdensome and duplicative; they create confusion, significantly raise the cost of doing business in Ukraine, provide opportunities for corruption, and drive much activity into the burgeoning ‘shadow’ economy.” In addition, “Corruption is ubiquitous and constitutes a major impediment to investment and business development.”

BLACK MARKET Score: 4–Stable (high level of activity) Transparency International’s 2001 score for Ukraine is 2.1. Therefore, Ukraine’s black market score is 4 this year.

2003 Index of Economic Freedom

Abu Dhabi

UNITED ARAB EMIRATES Rank: Score: Category:

Trade Policy Fiscal Burden

2 2

Government Intervention 3 Monetary Policy 1

Foreign Investment 3 Banking and Finance 3

The United Arab Emirates (UAE), an oil-rich federation of seven small Arab monarchies (Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al-Khaimah, Sharjah, and Umm al-Qaiwain), became independent in 1971 when Great Britain withdrew from the Persian Gulf region. Oil and gas production provides about one-third of GDP, and energy reserves could last for more than 100 years at current rates of production. The federal government has encouraged diversification and privatization of the economy. Dubai has taken the lead in encouraging foreign investment, while Abu Dhabi, which accounts for about 90 percent of oil production, is spearheading the privatization of utilities and seeking foreign investment in some sectors of the economy, particularly the power industry, to bring in modern technology and management techniques and reduce costs. Despite higher oil revenues in 1999–2000, the federal government has not retreated from the economic reforms implemented during the 1998 oil price depression. The United Arab Emirates’ wages and prices score is 1 point better this year; however, its fiscal burden of government and regulation scores are, respectively, 0.5 point and 1 point worse. As a result, the UAE’s overall score is 0.05 point worse this year.

TRADE POLICY Score: 2–Stable (low level of protectionism) In 2000, according to the U.S. Department of State, the UAE’s highest custom duty was 4 percent. The U.S. Department of State also reports that “imports of liquor will be subjected to a 50 percent customs duty [and the] import duty of tobacco products is 90 percent.” In addition, “the UAE maintains non-tariff barriers to trade and investment, in the form of restrictive agency/sponsorship/distributorship requirements, and restrictive shelf-life requirements for food stuffs.”

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 1–Stable (very low tax rates) Score—Government Expenditures: 3–Worse (moderate level of government expenditure) Final Score: 2–Worse (low cost of government) The UAE has no income tax, no corporate tax, and no other significant taxes. However, a corporate tax is levied on oil-producing companies and foreign banks. Based on data from the UAE Central Bank, government expenditures equaled 33.3 percent of GDP in 2000, up significantly from the 18.4 percent reported in the 2002 Index. As a result, the UAE’s overall fiscal burden of government score is 0.5 point worse this year.

Chapter 6: The Countries

24 2.20 Mostly Free

Wages and Prices 2 Property Rights 2

Regulation Black Market

3 1

Scores for Prior Years: 2002: 2.15 1999: 2.15 1996: 2.20

2001: 2.05 1998: 2.25 1995: n/a

2000: 2.15 1997: 2.20

2000 Data (in constant 1995 US dollars) Population: 2,905,080 Total area: 82,880 sq. km GDP: $50.1 billion GDP growth rate: 5.0% GDP per capita: $17,276 Major exports: crude oil, natural gas, dried fish Exports of goods and services: $39 billion Major export trading partners: Japan 33.7%, South Korea 7.5%, India 5.2%, Thailand 4.0% Major imports: manufactured goods, machinery, fuels, foodstuffs Imports of goods and services: $32.1 billion Major import trading partners: Japan 7.3%, UK 7.1%, US 6.4%, France 6.0% Foreign direct investment (net): $35.7 million

403

GOVERNMENT INTERVENTION IN THE ECONOMY

WAGES AND PRICES

Score: 3–Stable (moderate level) Based on data from the UAE’s Ministry of Planning, the government consumed 16 percent of GDP in 2000. In the same year, based on data from the UAE Central Bank, the government received 81.32 percent of its total revenues from state-owned enterprises and government ownership of property.

Score: 2–Better (low level of intervention) According to the U.S. Department of State, “Market forces largely determine prices for most items. Exceptions include utilities, educational services, medical care and agricultural products, which are subsidized for UAE nationals.” The government also influences the domestic price of oil. There is no minimum wage. Price setting for the domestic market does not extend to oil exports. As a result, the UAE’s wages and prices score is 1 point better this year.

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, the UAE’s weighted average annual rate of inflation was 2.02 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) Foreign investment in the UAE is restricted, and foreigners do not receive national treatment. Foreign businesses must have a local sponsor, and import companies must be fully owned by a UAE citizen. Foreign investment is restricted in oil and gas operations and petrochemicals. Non–Gulf Cooperation Council (GCC) citizens are not permitted to purchase shares on the stock exchange, although they may take a limited part in some mutual funds. According to the Economist Intelligence Unit, “at the federal level, foreigners are limited to 49% ownership and are not permitted to undertake longterm land leases. The free zones, of which there are ten, are an exception to this framework. They permit 100% foreign ownership and allow foreigners to contract long-term land leases. In addition, the individual emirates have taken steps to reduce the restrictions on investment from overseas.” GCC citizens are largely exempt from these restrictions. They also are permitted majority ownership between 75 percent and 100 percent in domestic companies and are permitted to purchase general trading licenses. There are no controls or requirements on current transfers, access to foreign exchange, or repatriation of profits. Foreign ownership of land and stock is restricted.

BANKING AND FINANCE Score: 3–Stable (moderate level of restrictions) The UAE’s banking system has 20 domestic banks, one restricted license bank, two investment banks, and 26 foreign banks. The government still owns some banks, but its relatively liberal policies have led to the proliferation of private banks. The UAE has no corporate income tax, but there is a 20 percent tax on foreign bank profits. As a condition of membership in the World Trade Organization, the UAE is required to end the current restriction on allowing new foreign banks into the country. According to the U.S. Department of State, “Beginning in January 1999, employment of UAE nationals in the banking sector must increase by 4 percent per year, with UAE nationals required to comprise 40 percent of the total banking sector work force in 2009.” Commercial banks operating in the UAE are not allowed to engage in non-banking activities. Banks may not lend more than 7 percent of their capital to any single foreign institution or invest more than 25 percent of bank funds in commercial bonds or shares. Non-residents are prohibited from owning over 20 percent of the shares in UAE national banks.

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PROPERTY RIGHTS Score: 2–Stable (high level of protection) Private property is generally well-protected in the UAE. According to the U.S. Department of State, the judiciary’s “decisions are subject to review by the political leadership.” In addition, “codified law based on modern norms is new and still evolving, as are practices based on the law, such as court and other legal procedures…. [W]here laws appear to govern certain practices according to commonly accepted principles, terms and definitions are often at variance with usual interpretations…. [D]ispute resolution can be difficult and uncertain…. Enforcing judgments has not always been easy, and judicial proceedings can often go on several years.”

REGULATION Score: 3–Worse (moderate level) Establishing a business in the UAE is easy if the business is not to compete directly with state-owned concerns. Regulations are applied evenly in most cases. The government requires a license only for opening a place of business in the UAE, not for companies exporting to the emirates. Licenses available include trade, industrial, service, professional, and construction licenses. Special bylaws apply to business practice in the free zones. The U.S. Department of State reports that “private sector institutions, including banks and foreign oil companies, are not allowed to disseminate statistics to the public. Information on oil and gas pricing, overseas investments and government budgets is generally only available from external sources.” In addition, “corruption is a concern for U.S. firms seeking to do business in the UAE.” Based on the availability of more extensive information on the regulatory environment, the UAE’s regulation score is 1 point worse this year.

BLACK MARKET Score: 1–Stable (very low level of activity) The UAE has three laws protecting intellectual property rights, and they are strongly enforced. According to the International Intellectual Property Alliance, “in 1999, the UAE had the lowest estimated rate of software in the middle east.” There is no evidence of significant black market activity.

2003 Index of Economic Freedom

UNITED KINGDOM Rank: Score: Category:

London Trade Policy Fiscal Burden

2 4

Government Intervention 2 Monetary Policy 1

Foreign Investment 2 Banking and Finance 1

The United Kingdom has a long tradition of a strong rule of law and political and economic freedom. The Labour government, first elected in 1997, has largely continued the previous Conservative government’s pattern of support for privatization, deregulation, and competition. The UK is enjoying its longest sustained period of growth in half a century, with unemployment from 2000–2001 standing at a 25year low of 5.3 percent. Chancellor of the Exchequer Gordon Brown has avoided aggravating the economic cycle. One of his initiatives involves further insulating monetary policy from political influence by affording the Bank of England more independence. Particularly noteworthy is Britain’s privatized pension system, which allows workers to invest their own Social Security taxes; by contrast, the retirement systems operated by many other European governments face financial shortfalls that will require crippling tax increases or massive cuts in benefits. Such structural reforms and New Labour’s insistence on not undoing the Thatcher revolution continue to pay dividends. At the same time, however, Chancellor Brown’s propensity to raise taxes, stealthily or otherwise, to pay for social services is more indicative of the “Old Labour,” whose tax-and-spend policies proved ruinous in the past. In his April 2002 budget, Brown pledged to raise taxes on National Insurance contributions by 1 percent to pay for a massive financial increase in the failing National Health Service; this represents a continuation of the policy of tax increases begun during Labour’s first government.

TRADE POLICY Score: 2–Stable (low level of protectionism) Because the United Kingdom 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. In addition, the UK’s import licenses and other non-tariff measures are subject to EU regulations, including restrictions on textiles and clothing, agricultural, horticultural, and livestock products. The United Kingdom’s participation in the Common Agricultural Policy (CAP), a program that heavily subsidizes agricultural goods, also acts as a nontariff barrier.

9 1.85 Free

Wages and Prices 2 Property Rights 1

Regulation 2.0 Black Market 1.5

Scores for Prior Years: 2002: 1.85 1999: 1.80 1996: 1.90

2001: 1.80 1998: 1.85 1995: 1.90

2000: 1.90 1997: 1.90

2001 Data (in constant 1995 US dollars) Population: 59,800,000 Total area: 244,820 sq. km GDP: $1.33 trillion GDP growth rate: 2.2% GDP per capita: $22,241 Major exports: manufactured goods, fuels, chemicals, food, beverages, tobacco Exports of goods and services: $352.5 billion Major export trading partners: US 15.1%, Germany 11.3%, France 8.9%, Netherlands 6.6%, Ireland 5.6% Major imports: manufactured goods, machinery, fuels, foodstuffs Imports of goods and services: $385.5 billion Major import trading partners: Germany 17.1%, US 16.6%, France 11.9%, Netherlands 9.3%, Belgium 6.8% Foreign direct investment (net): –$12.9 billion

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 4–Stable (high tax rates) Score—Government Expenditures: 4–Stable (high level of government expenditure) Final Score: 4–Stable (high cost of government) The United Kingdom’s top income tax rate is 40 percent; the marginal rate for the average taxpayer is 22 percent. The top corporate tax rate is 30 percent. In 2001, government expenditures equaled 38.3 percent of GDP.

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GOVERNMENT INTERVENTION IN THE ECONOMY

WAGES AND PRICES

Score: 2–Stable (low level) According to the Economist Intelligence Unit, the government consumed 18.7 percent of GDP in 2001. In 2000, based on data from the United Kingdom’s National Statistics, the UK received 2.7 percent of its total revenues from state-owned enterprises and government ownership of property.

Score: 1–Stable (very low level of inflation) From 1992 to 2001, the United Kingdom’s weighted average annual rate of inflation was 2.13 percent.

Score: 2–Stable (low level of intervention) The market sets most prices in the United Kingdom, although the regulatory agencies assigned to monitor prices of public utilities have varying forms of authority. The energy regulator, Ofgen, confirmed that price controls on household electricity and gas were lifted on April 1, 2002. The Economist Intelligence Unit reports that “the government, either directly or through regulatory agencies, has permanent price controls power over matches, milk, most public utilities and London taxi fares.” The United Kingdom’s first official minimum wage took effect on April 1, 1999.

CAPITAL FLOWS AND FOREIGN INVESTMENT

PROPERTY RIGHTS

MONETARY POLICY

Score: 2–Stable (low barriers) The United Kingdom welcomes foreign investment, and foreign investors receive the same treatment as domestic businesses. More non–European Union businesses establish themselves in the UK than in any other European country; the UK also is home to more of the top 500 global companies (130) than any other European country, according to the U. S. Department of State. The government restricts some non-EU and non–European Free Trade Area foreign investment, including investment in the aerospace industry (because of defense considerations), capping foreign ownership of UK airlines at 49 percent; other restrictions apply to the registration of shipping vessels and investment in some media services. According to the Economist Intelligence Unit, “The main regulatory hazards for direct investors, especially those planning acquisitions, stem from Brussels, not London.”

BANKING AND FINANCE Score: 1–Stable (very low level of restrictions) London, along with New York and Tokyo, is one of the world’s largest financial centers with dominant positions in international bank lending, bond trading, foreign exchange trading, derivatives, and foreign equities trading. The London Stock Exchange is one of the world’s largest. The UK has a welldeveloped, competitive system of universal banking in which banking institutions are permitted to sell securities and insurance products, as well as invest in industrial firms. The system is open to foreign participation, although the government has some power to block foreign acquisitions, force divestments, and limit foreign ownership of British banks. The Economist Intelligence Unit reports that increased competition is causing banks to cut costs and merge with other financial institutions. Regulatory oversight of the banking and finance sector has been transferred from the Bank of England to a Financial Services Authority, which will oversee all aspects of the sector, including banking, insurance, and securities and investments. According to the Economist Intelligence Unit, “The most important [advantage] is that a single authority will be better able to supervise markets and institutions…. Critics of the reform, however…fear that the new regime will be excessively unwieldy and rigid and will consequently stifle financial innovation.”

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Score: 1–Stable (very high level of protection) Property rights in the United Kingdom are well-secured. The Economist Intelligence Unit reports that “contractual agreements are generally secure in the UK. There is no discrimination against foreign companies in court. The judiciary is of high quality when dealing with commercial cases.”

REGULATION Score: 2–Stable (low level) Opening a business in the United Kingdom is easy. The regulatory system can be somewhat burdensome, but the regulatory environment overall is better than in most other industrialized countries. For example, companies may self-regulate their industries. Businesses subscribe voluntarily to a code of conduct that, if violated, causes them to be penalized by consumers making use of free market competition. Nonetheless, there is concern that regulation creep is leading to a more onerous business environment. A survey carried out by NatWest Bank shows that concern about “government regulations and paperwork” has jumped in the past two years. This issue has been ranked by small businesses as the second problem after low financial turnover.

BLACK MARKET Score: 1.5–Stable (low level of activity) Transparency International’s 2001 score for the United Kingdom is 8.3. Therefore, the United Kingdom’s black market score is 1.5 this year. According to the Business Software Alliance, 26 percent of the software used in the UK is pirated.

2003 Index of Economic Freedom

UNITED STATES Rank: Score: Category:

Washington, D.C.

Trade Policy Fiscal Burden

2 3.5

Government Intervention 2 Monetary Policy 1

Foreign Investment 2 Banking and Finance 1

The U.S. Constitution provides strong protections for private property, and these guarantees have ensured a high degree of economic freedom throughout most of the country’s history. The vibrancy and dynamism of the U.S. economy are testimony to these constitutionally protected economic liberties. In the post–World War II period, the United States generally took a strong leadership position in expanding global trade through lower tariff barriers. In the 1980s, economic growth reflected deregulation and tax cuts. In the 1990s, a stable monetary policy and a wave of technological innovation, buttressed by strong protection of intellectual property rights, continued the growth trend. In 2001, that trend was interrupted by a recession, the effects of which linger into 2002. Today, however, the constitutionally protected rights that are the foundation of economic freedom are under assault. Particularly in cases involving a government entity—be it federal, state, or local—courts are proving increasingly ineffective in protecting property from regulatory takings. Since the implementation of the North American Free Trade Agreement (NAFTA), the United States has all but abandoned its leadership role in international trade. The Administration of President George W. Bush is rhetorically committed to free trade but has also implemented a series of protectionist measures for steel, agriculture, and lumber interests. As this book was being prepared for publication, Congress passed trade promotion authority for the President, and President Bush signed the legislation into law on August 6, 2002. That authority will enable the Administration to begin implementing its pro-trade agenda. Despite the foregoing caveats, however, the United States remains one of the world’s freest economies.

TRADE POLICY Score: 2–Stable (low level of protectionism) According to the World Bank, the United States’ weighted average tariff rate in 2000 (the most recent year for which World Bank data are available) was 1.8 percent. The government maintains trade restrictions or prohibits the entrance of certain products. According to the Economist Intelligence Unit, these include “alcoholic beverages, animals and animal products, certain drugs, vegetables, fruits, nuts, meat and dairy products, plant products, poultry, petroleum products and trademarked articles. Imports limited by absolute annual quotas include some dairy products, animal feed, chocolate, some beers and wines, textiles and apparel, cotton and cotton waste, peanuts, sugar, syrups, molasses, cheese, and wheat.” In March 2002, the United States levied a 30 percent “safeguard” tariff on most steel imports; then, in May 2002, it enacted into law a total of $180 billion in farm subsidies over ten years. By global standards, however, the level of protectionism remains low.

Chapter 6: The Countries

6 1.80 Free

Wages and Prices 2 Property Rights 1

Regulation 2.5 Black Market 1.5

Scores for Prior Years: 2002: 1.80 1999: 1.80 1996: 1.85

2001: 1.75 1998: 1.85 1995: 1.90

2000: 1.80 1997: 1.80

2001 Data (in constant 1995 US dollars) Population: 284,796,887 Total area: 9,629,091 sq. km GDP: $9.1 trillion GDP growth rate: 1.2% GDP per capita: $31,932 Major exports: capital goods, automobiles, industrial supplies and raw materials, consumer goods, agricultural products Exports of goods and services: $1.1 trillion Major export trading partners: Canada 22.4%, Mexico 13.9%, Japan 7.9%, UK 5.6%, Germany 4.1% Major imports: crude oil and refined petroleum products, machinery, automobiles, consumer goods, industrial raw materials, food and beverages Imports of goods and services: $1.5 trillion Major import trading partners: Canada 19.0%, Mexico 11.5%, Japan 11.1%, China 9.0%, Germany 5.2% Foreign direct investment (net): $9.4 billion

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FISCAL BURDEN OF GOVERNMENT 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) The United States’ top federal income tax rate is 39.1 percent; the marginal rate for the average taxpayer is 27.5 percent. The top corporate tax rate is 35 percent. In 2001, total government expenditures equaled 30.4 percent of GDP.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 2–Stable (low level) Based on data from the U.S. Department of Commerce, the government consumed 18 percent of GDP in 2001. The International Monetary Fund reports that in 2000, the government received 3.29 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, the United States’ weighted average annual rate of inflation was 2.86 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 2–Stable (low barriers) The United States welcomes foreign investment. Foreign and domestic enterprises are treated equally under the law; foreign investors are not required to register with or seek approval from the federal government; and there are no local content requirements or ownership restrictions on most industries. The government continues to restrict foreign investment in nuclear energy, maritime and air shipping and transport, broadcast licenses, and communications. It also restricts foreign acquisitions that threaten to impair national security. Restrictions on financial transactions with Cuba and Cuban nationals, Iran, Iraq, Libya, Sudan, the Taliban, specified terrorist groups, and specified drug traffickers are strict and enforced. There are no controls or requirements on current transfers, access to foreign exchange, or repatriation of profits. Purchase of real estate is unrestricted on a national level, although purchase of agricultural land by foreign nationals or companies with at least 10 percent foreign ownership must be reported to the Department of Agriculture; some states impose restrictions on purchases of land by foreign nationals.

BANKING AND FINANCE Score: 1–Stable (very low level of restrictions) Federal and state governments share regulatory responsibility for banks. Regulation of banking in the United States, while not heavy by global standards, has been heavy in comparison to regulation of other industries. In recent years, however, there has been substantial deregulation of banking. The 1999 reform of the Glass–Steagall Act and the 1956 Bank Holding

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Company Act eliminated barriers to entry into U.S. financial markets and removed prohibitions against the purchase of banks by insurance and securities companies. This has facilitated both the creation of universal financial services companies and the competitiveness of U.S. banking, as well as further consolidation of the financial services industry, enabling U.S. firms to compete more effectively in global markets. The securities industry is highly competitive and dynamic, reflecting generally favorable supervisory oversight that makes for a transparent market by global standards. A troubling development during the 1990s was the growing nationalization of mortgage risk through the growth of government-sponsored enterprises focused on housing finance. However, the overall trend in financial services is toward more competition and continued product innovation. Foreign banking and securities firms generally compete on an equal footing with domestic firms.

WAGES AND PRICES Score: 2–Stable (low level of intervention) Overall, the market sets wages and prices. The Economist Intelligence Unit reports that “price controls do exist for some regulated monopolies—like utilities and the postal service— and certain states and localities control residential rents. The most recent imposition of price restrictions was approved on April 2001, as a result of a recurring energy crisis in California.” The federal government continues to influence prices on some goods and services by purchasing excess production, closing borders to imports, and manipulating prices through subsidies to companies like Amtrak. The government also influences prices of some dairy products by subsidizing dairy farmers. The recently enacted Farm Security and Rural Investment Act of 2002 will increase agricultural spending and subsidies by more than 80 percent (from $100 billion to $180 billion) over the next 10 years, including increasing subsidies for corn, soybeans, wheat, rice, and cotton by 70 percent. While these subsidy amounts are immense, so is the U.S. agricultural sector (and the economy in general, of which agriculture accounts for only 2 percent), and this reduces the overall impact of agricultural subsidies on prices. The federal government imposes a minimum wage.

PROPERTY RIGHTS Score: 1–Stable (very high level of protection) The United States does very well in most measures of property rights protection, including an independent judiciary with practically no corruption, a sound commercial code and other laws for the resolution of commercial and other private property disputes, and the recognition of foreign arbitration and court rulings. However, the same areas of concern outlined ind the 2002 Index also linger. Direct, uncompensated government expropriations of property remain highly unlikely, but a pattern of governmental interference with property grows stronger. One troubling development is local government’s abuse of its eminent domain power with the seizure of private land (with at least some compensation for the original

2003 Index of Economic Freedom

owner) and its transfer to another private party for a non-public or quasi-public use based on the claim that the resulting development provides net economic benefits to the community. An even more widespread problem is that governments at all levels increasingly seek to impose regulatory and landuse controls that diminish the value and enjoyment of private property. Examples include extensive “growth controls”; significant and unreasonable zoning hurdles; facility permitting regimes; and far-reaching environmental, wetlands, and habitat restrictions on the use and development of real estate. Thus, the extensive theoretical protections for private property in the United States are undermined by a vast, well-funded bureaucracy that has the power to interfere substantially with many property rights. The Supreme Court’s June 2001 decision in Palazzolo v. Rhode Island was expected to strengthen the hand of property owners when they sought compensation for some types of government interference with property use and development; but the Supreme Court’s April 2002 ruling in Tahoe–Sierra Preservation Council v. Tahoe Regional Planning Agency contracts property rights protections somewhat because it makes it harder for property owners to secure compensation for allegedly “temporary moratoria” on development. Ultimately, the level of protection for property in the United States may turn on whether future judicial rulings place better limits on bureaucratic power or provide cost-effective remedies for affected property owners.

BLACK MARKET Score: 1.5–Stable (low level of activity) Transparency International’s 2001 score for the United States is 7.6. Therefore, the United States’ black market score is 1.5 this year. According to The Economist, much of “America’s farming, gardening, child-care and house-cleaning is done by its 7m–8m undocumented workers.”

REGULATION Score: 2–Stable (low level) Establishing a business can be easy and affordable. Regulations are applied evenly and consistently in most cases, and the U.S. labor market is one of the world’s most flexible. According to the Economist Intelligence Unit, few federal laws inhibit investment by either foreign or domestic firms. The Department of Justice and the Federal Trade Commission “enforce antitrust laws that affect takeovers and acquisitions.” A firm may organize under the laws of any one of the 50 states, the District of Columbia, or the U.S. commonwealths. “Through a fairly simple procedure,” reports the Economist Intelligence Unit, “it can then set up offices, plants or other permanent establishments under the corporation laws of other states…. Firms may choose a location on the basis of which state’s laws offer greater flexibility.” Despite some progress in recent years toward deregulating the economy, however, a study by the Center for the Study of American Business estimates that government regulations cost U.S. consumers about $700 billion each year. Many regulations—for example, the Americans with Disabilities Act, various civil rights regulations, environmental laws, health and product safety standards, and food and drug labeling requirements—although well-intentioned, can be onerous. In the emerging sector of electronic commerce, the United States has maintained a policy of minimal regulation of business despite domestic political and international pressure, mainly from the European Union. By global standards, the level of regulation in the United States is low.

Chapter 6: The Countries

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410

2003 Index of Economic Freedom

URUGUAY Rank: Score: Category:

Montevideo Trade Policy Fiscal Burden

3 3.5

Government Intervention 2.5 Monetary Policy 2

Foreign Investment 2 Banking and Finance 2

Uruguay has the second largest GDP per capita in South America–$6,115 in 2000 (in constant 1995 U.S. dollars), but its large public sector and persistent faith in welfare state policies do not bode well for the near term. Despite the country’s generally responsible, reform-minded leadership over the past decade, governmentowned industries in such sectors as energy and telecommunications continue to contribute up to 18 percent of GDP and employ a similar percentage of the labor force, which has a vested interest in the status quo. For that reason, privatization is widely opposed. Furthermore, Uruguay’s economic fortunes depend mostly on the markets of its immediate neighbors and trade partners in MERCOSUR. The economy had been growing until 1999 when Brazil devalued the real and began to buy fewer foreign goods. When Argentina plunged into fiscal crisis two years later, Uruguay’s second largest trade partner suddenly could buy almost no foreign goods. Argentines, who for years had put savings into Uruguayan institutions, began to withdraw them, creating a strain on Uruguay’s banking system. As a result, the country’s economy is now in its fourth year of recession. Despite a decade of gradual economic liberalization, momentum for greater reform may slow or even be reversed if Uruguay’s performance continues to decline in the shadow of Argentina’s economic crisis. Waning public confidence in open markets could usher in the leftist Frente Amplio coalition in the 2004 elections, bringing with it an end to hopes for any privatization, an increase in public spending and employment programs, and the return of triple-digit inflation from nearly a decade ago. Uruguay’s government intervention score is 0.5 point worse this year; however, its monetary policy score is 1 point better. As a result, Uruguay’s overall score is 0.05 point better this year.

TRADE POLICY Score: 3–Stable (moderate level of protectionism) As a member of the Southern Cone Common Market (MERCOSUR), Uruguay maintains relatively low trade barriers with Brazil, Paraguay, and Argentina but applies a high tariff on all goods and services coming into Uruguay from countries outside MERCOSUR. According to the Embassy of Uruguay, the average common external tariff rate for MERCOSUR in 2001 was 13 percent. Few other restrictions on imports remain in effect. Import licenses are easy to obtain and do not serve to restrict imports. In addition, a “de-bureaucratization” commission has reduced bureaucratic delays in getting goods through customs.

Chapter 6: The Countries

35 2.50 Mostly Free

Wages and Prices 2 Property Rights 2

Regulation Black Market

3 3

Scores for Prior Years: 2002: 2.55 1999: 2.65 1996: 2.85

2001: 2.35 1998: 2.65 1995: 2.90

2000: 2.55 1997: 2.65

2000 Data (in constant 1995 US dollars) Population: 3,337,000 Total area: 176,220 sq. km GDP: $20 billion GDP growth rate: –1.3% GDP per capita: $6,115 Major exports: meat, rice, leather products, vehicles, dairy products, wool Exports of goods and services: $4.2 billion Major export trading partners: Brazil 24.1%, Argentina 18.9%, US 9.4%, Germany 4.0%, Paraguay 3.9% Major imports: road vehicles, electrical machinery, metal manufactures, heavy industrial machinery, crude petroleum Imports of goods and services: $4.4 billion Major import trading partners: Argentina 24.1%, Brazil 19.2%, US 9.8%, Italy 4.3%, UK 3.2% Foreign direct investment (net): $266 million

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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) There is no income tax in Uruguay. The top corporate tax rate is 30 percent. In 2000, based on data from the International Monetary Fund, government expenditures equaled 31.5 percent of GDP.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 2.5–Worse (moderate level) The World Bank reports that the government consumed 13 percent of GDP in 2000. In the same year, according to the International Monetary Fund, Uruguay received 5.54 percent of its total revenues from state-owned enterprises and government ownership of property, up from the 4.28 percent reported in the 2002 Index. As a result, Uruguay’s government intervention score is 0.5 point worse this year.

MONETARY POLICY Score: 2–Better (low level of inflation) From 1992 to 2001, Uruguay’s weighted average annual rate of inflation was 5.17 percent, down from the 6.51 percent from 1991 to 2000 reported in the 2002 Index. As a result, Uruguay’s monetary policy score is 1 point better this year.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 2–Stable (low barriers) Uruguay is open to foreign investment. The Law for the Promotion and Protection of Investment mandates equal treatment for foreign investment and the free transfer of capital. Investments may proceed without registration with or approval from the government. Uruguay permits full foreign ownership of domestic concerns except for the so-called national security industries that require authorization; these include electricity, hydrocarbons, railroads, some minerals, port administration, and telecommunications, although the government is deregulating the telecommunications sector. 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: 2–Stable (low level of restrictions) Uruguay’s liberal policy toward capital transactions, history of noninterference in bank deposits, and political stability have made it a regional banking hub. Problems in neighboring Argentina led to a run on Uruguay’s banks as Argentine depositors raided their Uruguayan deposits. The Argentine crisis led to withdrawal of 15 percent of deposits in Uruguayan banks,

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and the Uruguayan government was forced to close Banco Galicia Uruguay in February because of a run on deposits. The country’s main public-sector banks account for over 40 percent of banking-sector credit. Foreign banks receive equal treatment with domestic banks. The government has announced that it will require increased scrutiny of the banking system. Private pension funds are legally required to hold 55 percent of their assets as government securities. The government has minimum mandatory reserve requirements of 10 percent for local currency deposits (except for 30-day and 180day deposits) and foreign currency deposits. The state-owned insurance company BSE had a monopoly on all insurance until the automobile insurance market was opened to private competition in 1994; the government is considering liberalization of other portions of the insurance sector.

WAGES AND PRICES Score: 2–Stable (low level of intervention) Although the market determines most prices, the Uruguayan embassy reports that goods and services subject to government price controls include health services, public transportation, electricity, local fixed-line telecommunications, water, oil products, and milk. Uruguay maintains a minimum wage.

PROPERTY RIGHTS Score: 2–Stable (high level of protection) Private property is generally secure in Uruguay, and expropriation is unlikely. Judicial proceedings tend to be slow but also, as reported by the Economist Intelligence Unit, to be based on sound legal grounds. Bureaucracy in the court system lends itself to varied interpretations, making appeals the norm rather than the exception. As an alternative to civil suits, the government has established a Settlement and Arbitration Center to improve investment relations.

REGULATION Score: 3–Stable (moderate level) Establishing a business can involve a lengthy process because of the number of applicable regulations. President Jorge Batlle’s government, however, has made some effort to deregulate the Uruguayan market. The U.S. Department of State reports that “a law on promotion and protection of investment [approved in 1997] establishes some automatic tax exemptions and incentives for several industrial sectors.” The labor market is somewhat tight. According to the Economist Intelligence Unit, “employer–employee relations are governed by hundreds of regulations scattered among various laws and decrees…. Uruguayan jurisprudence tends to favor workers in labor claims.” Although there have been investigations of corruption, it is not considered an impediment to business.

BLACK MARKET Score: 3–Stable (moderate level of activity) Transparency International’s 2001 score for Uruguay is 5.1. Therefore, Uruguay’s black market score is 3 this year.

2003 Index of Economic Freedom

Tashkent

UZBEKISTAN Rank: Score: Category:

Trade Policy Fiscal Burden

5 3.5

Government Intervention 3 Monetary Policy 5

Foreign Investment 4 Banking and Finance 5

Rich in gold, natural gas, oil, coal, silver, and copper, Uzbekistan is the world’s ninth largest producer of gold and among its 10 largest suppliers of natural gas. Despite significant economic potential, however, it remains underdeveloped. Uzbekistan’s import-substitution industrialization has failed; the country remains primarily an exporter of raw materials and low value–added goods. Industrial output is being driven almost exclusively by the UzDaewoo auto plant. Living conditions continue to deteriorate; in 2001, the average monthly wage in agriculture was just US$9, a 30 percent decrease from 2000. To secure US$100 million in loans and assistance, the government has vowed to implement an International Monetary Fund program that involves major economic reforms; observers, however, have expressed strong skepticism about the government’s willingness to fulfill its commitments to the IMF. A January 2002 referendum, which was boycotted by international observers, extended the presidential term from five to seven years. U.S. forces in Afghanistan have destroyed the militant Islamic Movement of Uzbekistan, which is associated with the Taliban and Osama bin Laden. Other Islamic opposition movements still challenge President Islam Karimov’s regime, however, and the continuing persecution of Muslims seeking to practice their religion free from state supervision is likely to stir further discontent among the Uzbek population. Uzbekistan’s fiscal burden of government score is 1 point better this year. As a result, its overall score is 0.10 point better this year.

TRADE POLICY

149 4.25 Repressed

Wages and Prices 4 Property Rights 4

Regulation Black Market

Scores for Prior Years: 2002: 4.35 1999: 4.40 1996: n/a

2001: 4.45 1998: 4.50 1995: n/a

2000: 4.40 1997: n/a

2000 Data (in constant 1995 US dollars) Population: 24,752,000 Total area: 447,400 sq. km GDP: $19 billion GDP growth rate: 4.0% GDP per capita: $767 Major exports: cotton, gold, natural gas, mineral fertilizers, ferrous metals, textiles, food products, automobiles Exports of goods and services: $3.6 billion Major export trading partners: Russia 16.7%, Switzerland 8.3%, UK 7.2%, Kazakhstan 3.1%

Score: 5–Stable (very high level of protectionism) The International Monetary Fund reports that in 2001, Uzbekistan’s average tariff rate was 29 percent, up from the 15 percent reported in the 2002 Index. According to the U.S. Department of State, “Uzbekistan continues to use an arbitrary set of technical standards based on outdated Soviet methods…. [C]ustoms officials routinely reject foreign certifications of conformity to these standards. Perishable goods are subject to burdensome phytosanitary tests, making it difficult, for example, for restaurants and hotels to use imported foodstuffs.”

Major imports: machinery and equipment, chemicals, metals, foodstuffs

FISCAL BURDEN OF GOVERNMENT

Foreign direct investment (net): $68.7 million

Score—Income and Corporate Taxation: 2.5–Better (moderate tax rates) Score—Government Expenditures: 4–Better (high level of government expenditure) Final Score: 3.5–Better (high cost of government) The Economist Intelligence Unit reports that Uzbekistan has reduced tax rates in an effort to boost compliance. Information from Central Asia & Caucasus Business Report indicates that Uzbekistan’s top income tax rate has been lowered to 33 percent from the 45 percent reported in the 2002 Index and that the top corporate tax

Chapter 6: The Countries

5 4

Imports of goods and services: $3.9 billion Major import trading partners: Russia 15.8%, South Korea 9.8%, Germany 8.7%, US 8.7%, Kazakhstan 7.3%

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rate has been reduced to 24 percent from the 33 percent reported in the 2002 Index. Information from PriceWaterhouseCoopers indicates that the marginal rate for the average taxpayer is 13 percent, down from the 15 percent reported in the 2002 Index. In 2000, according to the Asian Development Bank, government expenditures equaled 29.5 percent of GDP, down from the 32.2 percent reported in the 2002 Index. Based on lower tax rates and a lower level of government expenditure, Uzbekistan’s overall fiscal burden of government score is 1 point better this year.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Stable (moderate level) The World Bank reports that the government consumed 19.7 percent of GDP in 2000. According to the Economist Intelligence Unit, “The government is hostile to allowing the development of an independent private sector, over which it would have no control.” In addition, “The country’s main goldmine…is owned by…a Soviet-era, state-owned mining firm that the government refuses to privatise or reform.”

MONETARY POLICY Score: 5–Stable (very high level of inflation) Data from the International Monetary Fund’s 2002 World Economic Outlook indicate that from 1992 to 2001, Uzbekistan’s weighted average annual rate of inflation was 29.01 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 4–Stable (high barriers) According to the U.S. Department of State, “while the Government of Uzbekistan (GOU) in principle seeks foreign investment, it has yet to create the necessary conditions to attract the investment it needs…. [S]everely restricted access to foreign exchange, cumbersome banking procedures, and other bureaucratic problems discourage investment. Moreover, the Government has not grasped the importance of predictability and transparency to foreign investors. It often unilaterally revises the conditions under which investments are made, leaving investors with little recourse.” Foreign firms experience more bureaucratic tangles and currency conversion difficulties when they represent competition for government-owned or locally owned businesses. The International Monetary Fund reports that enterprises may enter into joint ventures with foreign investors after registering with the Ministry of Justice, and foreign investors may own up to 100 percent of a business. The same source reports that the central bank must approve most foreign exchange accounts. Various limits apply to payments and transfers, including limits and bona fide tests. Nearly all capital transactions, including capital and money market instruments, derivatives, credit operations, and real estate transactions, are subject to controls.

BANKING AND FINANCE Score: 5–Stable (very high level of restrictions) According to the U.S. Department of State, “The banking system in Uzbekistan remains closely controlled by the state through a complex set of regulatory actions, decrees, proclamations and

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practices. Most banking assets remain in state-owned or controlled banks, and most loans are directed by the government, financed through the Central Bank of Uzbekistan (CBU), and guaranteed by the Ministry of Finance. Government officials generally consider these loans to be risk-free despite the fact that the government has defaulted on its obligations several times since July 2000.” Private banks are few and very small.

WAGES AND PRICES Score: 4–Stable (high level of intervention) Uzbekistan’s many state-owned enterprises influence wages and prices. The Economist Intelligence Unit reports that “Soviet-era practices of controlling energy prices remain in force.” According to the U.S. Department of State, “The state determines what crops will be grown on what land, provides farms with the needed inputs at subsidized prices, and buys the crop at a state-determined price, generally far below its market value.” The Ministry of Labor sets the minimum wage in consultation with the Council of the Federation of Trade Unions.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) Property protection is weak in Uzbekistan. According to the Economist Intelligence Unit, “The judiciary is subordinate to the government, since it is appointed by the executive. Judicial procedures fall a long way short of international standards and corruption is widespread.” In addition, “Reforms in the agricultural sector have…been undermined by the prohibition on the private ownership of land, which can only be leased. There is no land market, and leasehold rights, although legally permanent and inheritable, can in practice be curtailed by virtue of the considerable discretion that local authorities have over the rights of private farmers.”

REGULATION Score: 5–Stable (very high level) The process for establishing a business can be time-consuming and includes numerous bureaucratic barriers. According to the U.S. Department of State, “Lack of transparency in the regulatory system is a major concern. Sudden legislative and regulatory changes are common; many decrees have secret provisions. The involvement of state bodies in commerce, including those with regulatory authority, produces inherently anti-competitive pressures.” The Economist Intelligence Unit reports that “Corruption is a serious and all-pervasive problem in Uzbekistan that weakens the effectiveness of the state and creates considerable popular discontent. The political elite dominates business.”

BLACK MARKET Score: 4–Stable (high level of activity) Transparency International’s 2001 score for Uzbekistan is 2.7. Therefore, Uzbekistan’s black market score is 4 this year.

2003 Index of Economic Freedom

VENEZUELA

Caracas

Rank: 119 Score: 3.50 Category: Mostly Unfree Trade Policy Fiscal Burden

4 3

Government Intervention 2 Monetary Policy 4

Foreign Investment 3 Banking and Finance 3

Populism and unrestrained public spending sent Venezuela’s poverty rate from 27 percent in the 1980s to more than 60 percent in the mid-1990s, and the traditional political elite fell into disrepute. Hugo Chávez Frías, a former coup plotter and court-martialed army lieutenant colonel who billed himself as a reformer and savior of the poor, was elected president in 1998. Instead of leading the country in a different direction, however, Chávez enacted even more populist measures, added to the corruption, and pushed Venezuela into full-blown political crisis. In 2001, he announced 49 presidential decrees to tighten state control over various industries and permit the government to confiscate property it defined as unused. This led to an unprecedented national strike, called jointly by Venezuelan labor and business leaders, on December 10, 2001. Another anti-Chávez march, held in Caracas in January 2002, drew more than 200,000 protestors. In February, Chávez replaced the head of the state oil company, Petroleos de Venezuela, with a crony who shared his desire to divert more of the company’s revenues into government coffers. That triggered a production slowdown among the company’s 40,000 workers. On April 1, civic leaders announced plans to call a referendum on Chávez’s presidency. On April 11, there was a brief coup d’etat, but the opposition lacked a unified vision, and the same military officers who had deposed Chávez soon returned him to power. Chávez promised to be more conciliatory but seems instead to be tightening his grip. He has refused a military request to disband his “Bolivarian Circles”— groups of armed partisan supporters who reportedly receive government stipends— and has yet to back off from such radical measures as his decree allowing the government to expropriate property. Now more than ever, the Venezuelan population is polarized between a core of Chávez supporters among the country’s majority poor and others in the middle and upper classes. Whether Chávez stays in power or leaves, Venezuela’s traditions of centralized authority, corrupt administration, state intervention, and populist economics will have to change if the country is to retreat from the brink of collapse. Venezuela’s fiscal burden of government score is 0.5 point worse this year; however, its government intervention and monetary policy scores are both 1 point better. As a result, Venezuela’s overall score is 0.15 point better this year.

TRADE POLICY

Wages and Prices 4 Property Rights 4

Regulation Black Market

Scores for Prior Years: 2002: 3.65 1999: 3.30 1996: 3.50

2001: 3.55 1998: 3.40 1995: 3.00

2000: 3.30 1997: 3.40

2000 Data (in constant 1995 US dollars) Population: 24,170,000 Total area: 912,050 sq. km GDP: $78.6 billion GDP growth rate: 3.2% GDP per capita: $3,300 Major exports: petroleum, bauxite and aluminum, steel, chemicals, agricultural products, basic manufactures Exports of goods and services: $24.3 billion Major export trading partners: US 60.0%, Brazil 5.5%, Colombia 3.5%, Italy 3.5%, Spain 3.4% Major imports: raw materials, machinery and equipment, transport equipment, construction materials Imports of goods and services: $22.4 billion Major import trading partners: US 35.8%, Colombia 6.8%, Italy 3.9%, Germany 3.1% Foreign direct investment (net): $3.9 billion

Score: 4–Stable (high level of protectionism) According to the World Bank, Venezuela’s weighted average tariff rate in 2000 (the most recent year for which World Bank data are available) was 13.4 percent. The U.S. Department of State reports that Venezuela restricts imports of certain agricultural products (including wheat, grains, rice, pork, poultry, oilseeds, edible oils, oilseed meals, and milk) through a price band mechanism; in addition, “the import licensing system calls for purchasing of domestically produced commodities before granting licenses to importers—an item under WTO review.”

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FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 3–Worse (moderate tax rates) Score—Government Expenditures: 3–Worse (moderate level of government expenditure) Final Score: 3–Worse (moderate cost of government) Venezuela’s top income tax rate is 34 percent; the marginal rate for the average taxpayer is 6 percent. The top corporate tax rate is 34 percent. In 2000, based on data from the International Monetary Fund, government expenditures equaled 21.4 percent of GDP, up from the 19.3 percent reported in the 2002 Index. Based on a clarification in the methodology used to calculate the income and corporate taxation score, as well as the higher level of government expenditure, Venezuela’s overall fiscal burden of government score is 0.5 point worse this year.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 2–Better (low level) The World Bank reports that the government consumed 7 percent of GDP in 2000. In the same year, according to the International Monetary Fund, Venezuela received 33.64 percent of its total revenues from state-owned enterprises and government ownership of property. Based on the correction of a scoring inaccuracy in the 2002 Index, Venezuela’s government intervention score is 1 point better this year.

MONETARY POLICY Score: 4–Better (high level of inflation) From 1992 to 2001, Venezuela’s weighted average annual rate of inflation was 15.98 percent, down from the 21.90 percent from 1991 to 2000 reported in the 2002 Index. As a result, Venezuela’s monetary policy score is 1 point better this year.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Stable (moderate barriers) The constitution accords foreign investors national treatment, and most sectors are open to foreign investment, but the political and economic changes that have marked the Chávez administration generate uncertainty among prospective investors. “Despite the uncertainty,” reports the U.S. Department of State, “several sectors continue to attract significant foreign investment, specifically telecommunications, electrical generation and distribution, and oil and natural gas.” The International Monetary Fund reports that mass media, communications, Spanish newspapers, and security services must be at least 80 percent owned by a Venezuelan national. New investments must be registered with the government. Foreign investment in mining and petroleum is restricted. A lack of transparency in the regulatory system and government intervention in the economy continue to concern foreign investors. The IMF reports that foreign exchange accounts are permitted. There are no restrictions on payments and transfers.

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Government authorization is required for residents to sell or issue bonds, shares, or securities abroad and for non-residents to sell or issue bonds, shares, or securities in Venezuela.

BANKING AND FINANCE Score: 3–Stable (moderate level of restrictions) The banking sector is still recovering from the mid-1990s financial crisis, which was caused by lax supervision, directed lending, and poor credit practices and is estimated to have cost Venezuela at least 15 percent of GDP. The government permits 100 percent foreign ownership in banking and financial services. Foreign banks may acquire shares of existing financial institutions, establish a new wholly owned financial institution, or establish a branch. Foreign participation in Venezuela’s banking sector was 39 percent of equity in 2000. The government also has continued to intervene in some troubled banks, most recently in April 2000 when it took over Cavendes, a domestic investment bank. The Embassy of Venezuela reports that government participation in the banking sector includes 7.49 percent of assets, 8.39 percent of liabilities, and 3.4 percent banking sector equity. In November 2001, according to The Wall Street Journal, President Chávez imposed through decree a requirement that banks make at least 15 percent of their loans to poor farmers in need of credit (up from 8 percent) and threatened to nationalize banks that did not meet the requirement.

WAGES AND PRICES Score: 4–Stable (high level of intervention) The government has the authority to control most prices. According to the Economist Intelligence Unit, “The government maintains price controls on petrol, a handful of agricultural products and some medicines…. The Ministry of Agriculture has the power to fix minimum prices temporarily on certain goods within the framework of the Andean System of Prices and Tariffs on a bi-weekly basis. These include pork, milk, wheat, rye, yellow and white maize, soy grain, unprocessed soy and palm oil and sugar. The Ministry of Agriculture may also fix the domestic wholesale price of a number of products, including maize, sorghum, rice, milk and certain vegetables…. [T]he Ministry of Production and Commerce may set maximum wholesale and retail prices and establish special conditions for the circulation, sale and consumption of articles declared to be of prime necessity [and also has the power to] set maximum rates for internal transport of persons and goods…. Public services rates, especially utilities and telephony, are strongly controlled.” Venezuela maintains a minimum wage.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) Venezuela’s protection of private property is weak. The Economist Intelligence Unit reports that “legal conditions in Venezuela remain murky. A survey in June 2001 by Datanalisis, a local polling firm, showed that four out of ten local businesses had frozen their investments because of legal uncertainties…. [T]he government still appears prone to back away from inconvenient contractual agreements on populist grounds or to seek more favorable terms, particularly in the oil sector.”

2003 Index of Economic Freedom

REGULATION Score: 4–Stable (high level) Regulation can be applied arbitrarily. The Economist Intelligence Unit reports that “regulatory agencies in telecommunications, transport and electricity industries have repeatedly delayed rate increases that had been contractually agreed. They have also made arbitrary decisions affecting businesses.” According to the U.S. Department of State, “Venezuelan laws are complicated, even more so since many activities are regulated, not only by laws, but also by presidential decrees or specific regulations. The bureaucracy and paperwork are often complicated.” The same source reports that the rule of law is not reliably enforced, and corruption continues to be a major impediment to business.

BLACK MARKET Score: 4–Stable (high level of activity) Transparency International’s 2001 score for Venezuela is 2.8. Therefore, Venezuela’s black market score is 4 this year.

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2003 Index of Economic Freedom

VIETNAM

Hanoi

Rank: 135 Score: 3.70 Category: Mostly Unfree Trade Policy Fiscal Burden

5 3

Government Intervention 3 Monetary Policy 1

Foreign Investment 4 Banking and Finance 4

U.S. congressional ratification of the bilateral trade agreement (BTA) with Vietnam marked a sea change in the thinking of both the government in Hanoi and the international business community. Before the BTA, foreign investors were leaving Vietnam in droves because of their disappointment with the glacial pace of economic reform. Now foreign investment has improved noticeably, and Vietnam is expected to benefit from this renewed confidence throughout 2003. Party bureaucrats, who appeared to have no fundamental understanding of a market economy, are now permitted to own businesses themselves. The private sector is growing, as evidenced by the quickened pace of “equitization” (privatization); the transformation of state-owned enterprises (SOEs) into private-sector entities is viewed as a signal victory for party reformists. Observers now believe that accession to the World Trade Organization could occur before the expected 2005 deadline based on the level of progress currently exhibited by the country’s reform program. Vietnam is almost entirely unaffected by the war on terrorism and is ranked as one of the Southeast Asia’s most politically stable countries. Nevertheless, economic change continues to proceed slowly. Corruption is still a significant factor in most business transactions, and the Communist Party–controlled judiciary cannot be considered independent. Politics or bribes may influence interpretation of contract disputes. Vietnam’s fiscal burden of government score is 0.5 point worse this year; however, its government intervention and wages and prices scores are both 1 point better. As a result, Vietnam’s overall score is 0.15 point better this year.

TRADE POLICY

Wages and Prices 3 Property Rights 5

Regulation Black Market

Scores for Prior Years: 2002: 3.85 1999: 4.30 1996: 4.45

2001: 4.10 1998: 4.35 1995: 4.50

2000: 4.30 1997: 4.45

2000 Data (in constant 1995 US dollars) Population: 78,522,700 Total area: 329,560 sq. km GDP: $27.9 billion GDP growth rate: 5.5% GDP per capita: $356 Major exports: crude oil, marine products, rice, coffee, rubber, tea, garments, shoes Exports of goods and services: $16.7 billion Major export trading partners: Singapore 19.3%, Japan 18.3%, Taiwan 13.3%, South Korea 12.1%, China 10.7%

Score: 5–Stable (very high level of protectionism) According to the World Bank, Vietnam’s weighted average tariff rate in 1999 (the most recent year for which World Bank data are available) was 18.7 percent. The Economist Intelligence Unit reports that “the government tries to control trade by licensing companies for import-export trade in particular items…. Foreign companies should check with the Vietnam Chamber of Commerce and Industry…to make sure that a particular trader is licensed to deal in a specific commodity or item.” According to the U.S. Department of State, “In practice, customs valuation remains non-transparent and is highly discretionary.”

Major imports: machinery and equipment, petroleum products, fertilizer, steel products, raw cotton, grain, cement, motorcycles

FISCAL BURDEN OF GOVERNMENT

Foreign direct investment (net): $733 million

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) According to the International Monetary Fund, Vietnam’s top income tax rate is 50 percent, down from the 60 percent reported in the 2002 Index; the marginal rate for the average taxpayer is 0 percent. The top corporate tax rate is 32 percent. (This is the top

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Imports of goods and services: $17.3 billion Major import trading partners: Singapore 18.2%, Japan 14.8%, Taiwan 12.5%, South Korea 11.4%, China 9.4%

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rate for companies with no foreign-owned capital; Vietnam taxes companies with foreign-owned capital at a top rate of 25 percent.) In 2000, according to the Asian Development Bank, government expenditures equaled 23.8 percent of GDP, up from the 19 percent reported in the 2002 Index. As a result, Vietnam’s overall fiscal burden of government score is 0.5 point worse this year.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Better (moderate level) The World Bank reports that the government consumed 6.4 percent of GDP in 2000. In 1999, according to the International Monetary Fund, the government received 4.49 percent of its total revenues from state-owned enterprises and government ownership of property. However, the evidence suggests that these data seriously understate the level of government involvement in the economy. According to the Economist Intelligence Unit, “the state is heavily involved in many sectors, such as finance, telecommunications, energy and manufacturing. Private enterprise is permitted in some of these areas—particularly manufacturing; in others, varying degrees of restriction still apply…. Even where private firms may participate, the state-owned sector is often given preferential treatment over the private sector in areas like tendering for public projects or access to tax breaks…. This, together with the fuzzy lines of command and control between ministries and the enterprises they own, makes it unlikely that the goal of non-discriminatory treatment will be realized in the short term.” Based on the apparent unreliability of the foregoing figures, 2 points have been added to Vietnam’s government intervention score: 1 point for questionable data on government consumption data and 1 point for questionable data on total revenues (instead of the 0.5 point that would have been added had the data on total revenues been fully reliable). Overall, however, Vietnam’s government intervention score is 1 point better this year.

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, Vietnam’s weighted average annual rate of inflation was 0.35 percent. This number should be viewed with caution, however, because the government influences prices both through direct price controls and through subsidies administered by state-owned enterprises.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 4–Stable (high barriers) The Vietnamese government has recently amended its foreign investment policies—at least relative to past policies—including a new foreign investment law that permits up to 30 percent foreign ownership in companies not owned by the state in 25 different sectors of the economy. Foreign exchange control policies that had hampered the repatriation of profits have been amended so that profits ostensibly may be converted into dollars before repatriation. Labor regulations that took effect

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in December 1999 streamlined the application process for foreign work permits. The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts with government approval and provided the foreign exchange used to open the accounts originated outside of Vietnam; in addition, all transactions require individual authorization from the Ministry of Finance, except for payments involving authorized imports, and foreign enterprises have been allowed since November 2000 to buy foreign currency from commercial banks for permitted activities. Controls apply to all transactions in money market and capital instruments, derivatives, commercial credits, and direct investments. Foreigners may not own land. According to the Economist Intelligence Unit, “Despite the decade and a half of market reforms, Vietnam remains a difficult business environment…. The regulatory framework for foreign investment remains highly restrictive in Vietnam, placing major limits in the industries in which foreign investors may operate, the structure of their investment vehicles, their ability to finance their operations and their capacity to respond to changes in economic circumstances.” Overall, barriers to foreign investment remain significant.

BANKING AND FINANCE Score: 4–Stable (high level of restrictions) Vietnam has taken some initial steps to modernize the financial system. Since the central bank ended its commercial activity and assumed a supervisory role, the banking sector has assumed increased market orientation. In 2001, the State Bank of Vietnam supervised four state-owned commercial banks, private joint-stock banks, joint-venture banks, and foreign bank branches that have been established in Hanoi and Ho Chi Minh City; however, the four state-owned banks continue to dominate the banking sector. The U.S. Department of State reports that “Vietnam is making progress in developing the basic infrastructure to support a modern banking system and financial markets. Recent projects to modernize the inter-bank market, create an international accounting system, and allow outside audits of major Vietnamese banks are encouraging. However, the banking system continues to suffer from a lack of consumer confidence, inexperience in capital markets and the slow pace of institutional reform.” Vietnam’s banks do not adhere to the Basel capital accords, are not audited by reputable auditing firms, and remain overexposed to the state sector. The government maintains caps on interest rates. The Economist Intelligence Unit reports that 70 percent of bank lending in 2001 went to state-owned enterprises; however, “The quality of loans made by the state-owned commercial banks (SOCBs) is dubious, and probably did not improve during the massive (38%) expansion of bank credit in 2000. The SOCBs continue to lend to state-owned enterprises as a matter of policy rather than because the loans are commercially promising, although there is some evidence of growing caution in their lending practices. The government has agreed in principle to separate policy lending (that is subsidised loans and grants) from commercial lending, but has delayed implementing this change.”

2003 Index of Economic Freedom

WAGES AND PRICES Score: 3–Better (moderate level of intervention) According to the Economist Intelligence Unit, “Price setting represents something of a problem for the government. On the one hand, it is trying to promote competition and market mechanisms; on the other, it is concerned about controlling inflation and ensuring that prices for basic goods are within the reach of the majority of the population. The government continues to set rates for electricity, telecommunications, and water and also fares for train and air travel. In most of these areas, the rates have traditionally been higher for foreigners, although harmonization is underway.” The government also influences prices through Vietnam’s large state-owned sector. The labor law requires the government to set a minimum wage. Overall, based on evidence of reduced government control of prices, Vietnam’s wage and prices score is 1 point better this year.

be some of the most difficult to work with in Asia [and] can still be very obstructionist.” Red tape and lack of transparency continue to plague business. The Economist Intelligence Unit reports that “the National Assembly has approved amendments to the labour code, with the new provisions due to take effect from the start of 2003…. The measure will go some way towards easing recruitment problems for foreign firms.”

BLACK MARKET Score: 4–Stable (high level of activity) Transparency International’s 2001 score for Vietnam is 2.6. Therefore, Vietnam’s black market score is 4 this year.

PROPERTY RIGHTS Score: 5–Stable (very low level of protection) Property is not well-protected in Vietnam. According to the Economist Intelligence Unit, “Contractual agreements are backed by the force of law, but the legal system is complex, opaque, cumbersome and sometimes inconsistent. The courts are not transparent and cannot be relied upon to produce fair decisions. Bribes and political influence often determine the outcome. Laws and regulations overlap and can be changed retrospectively over time…. Because of the lack of faith in the Vietnamese legal system, many foreign investors include clauses in their contracts allowing disputes to be dealt with by the Singapore Court of Arbitration.”

REGULATION Score: 5–Stable (very high level) Vietnam presents many obstacles to private enterprise. The high level of state involvement in the economy is a substantial impediment to the development of private business, although a few reforms have been enacted. The U.S. Department of State reports that “Vietnam remains a difficult investment environment. Currently in a period of transition from a command economy to a ‘state-supervised’ market economy in which the state sector retains a ‘leading role’, Vietnam is trying to implement a series of gradual reforms that will enable the economy to function more efficiently. As the government engages in this complex process, foreign investors must cope with a wide range of problems and costs. These include poorly developed infrastructure, underdeveloped and cumbersome legal and financial systems, an unwieldy bureaucracy, non-transparent regulations, high start-up costs, arcane land acquisition and transfer regulations and procedures, and shortage of trained personnel. Issuance of investment licenses and implementation of projects often is a lengthy process during which the investment environment in areas such as taxes and procedures frequently changes.” According to the Political and Economic Risk Consultancy, “Civil servants in Vietnam can

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2003 Index of Economic Freedom

YEMEN Sanaa

Trade Policy Fiscal Burden

3 4.5

Government Intervention 3 Monetary Policy 3

Rank: 131 Score: 3.65 Category: Mostly Unfree Foreign Investment 3 Banking and Finance 4

Wages and Prices 3 Property Rights 4

Regulation Black Market

Yemen, a poor country with few resources, is located on the Red Sea coast of the Arabian peninsula. In the 19th century, the northern part of the country was ruled by the Ottoman Empire and the southern portion was controlled by the British Empire. Northern Yemen became independent in 1934, and Southern Yemen gained its independence in 1967, becoming a pro-Soviet socialist state. North and South Yemen united in 1990 after two decades of political and civil turmoil. Civil war erupted again in 1994 and undermined the limited progress that had been made toward economic liberalization. Yemen remains a cauldron of political intrigue with an economy that is hamstrung by central planning and a weak central government. President Ali Abdallah Saleh, who led Northern Yemen before the merger, faces strong opposition from southern Yemeni political parties, autonomous tribes, and Islamic radicals. Tourism and foreign investment have been hampered by violence and kidnappings targeted against foreigners. Although Yemen has undertaken an International Monetary Fund structural adjustment program, it continues to resist implementation of sorely needed economic reforms, particularly privatization and civil service reform, largely because of concerns over possible job losses. Yemen’s capital flows and foreign investment score is 1 point better this year. As a result, its overall score is 0.10 point better this year.

Scores for Prior Years:

TRADE POLICY

Major export trading partners: China 35.6%, South Korea 17.0%, Singapore 10.7%, Saudi Arabia 3.5%

Score: 3–Stable (moderate level of protectionism) Based on data from the Yemeni central bank, Yemen’s average tariff rate in 2000 was 7.4 percent (based on import duties as a percent of total imports). Import licenses are still required and sometimes are used to restrict imports. According to the U.S. Department of State, “The government prohibits importation of seven items: pork and pork products, coffee, alcohol, narcotics, some types of fresh fruits and vegetables during their local production season…and rhinoceros horns.” The Economist Intelligence Unit reports that “excessively complex customs procedures” act as a trade barrier.

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 3.5–Better (high tax rates) Score—Government Expenditures: 5–Stable (very high level of government expenditure) Final Score: 4.5–Stable (very high cost of government) Yemen’s top income tax rate is 35 percent; the marginal rate for the average taxpayer is also 35 percent, up from the 30 percent reported in the 2002 Index due to an increase in average income. The top corporate tax rate is 35 percent. Data from the central bank indicate that in 2000, government expenditures equaled 34.9 percent of GDP. Based on a clarification in methodology, Yemen’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, which is unchanged.

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2002: 3.75 1999: 4.05 1996: 3.85

2001: 3.85 1998: 4.10 1995: 3.80

4 5

2000: 3.85 1997: 4.00

2000 Data (in constant 1995 US dollars) Population: 17,507,160 Total area: 527,970 sq. km GDP: $5.1 billion GDP growth rate: 5.2% GDP per capita: $314 Major exports: crude oil, coffee, dried and salted fish Exports of goods and services: $2.7 billion

Major imports: food and live animals, machinery and equipment Imports of goods and services: $2.3 billion Major import trading partners: Saudi Arabia 11.4%, United Arab Emirates 8.7%, US 7.6%, France 5.2%, Italy 3.8% Foreign direct investment (net): –$118 million

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GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Stable (moderate level) The World Bank reports that the government consumed 14.1 percent of GDP in 2000. Yemen has had a privatization program for several years, but the Economist Intelligence Unit reports that “progress has been extremely slow, in part because of the government’s reluctance to address the question of forced redundancies, which will doubtless be necessary if larger enterprises are to be sold. A privatization bill was finally passed by parliament in late 1999, but it skirted the question of redundancies, suggesting that each sell-off would be subject to negotiations with the government and the potential buyer on the number of employees to be retained.”

MONETARY POLICY Score: 3–Stable (moderate level of inflation) From 1992 to 2001, Yemen’s weighted average annual rate of inflation was 11.31 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Better (moderate barriers) Yemen has streamlined its investment laws and procedures in an attempt to attract more foreign investment and permits foreign investment in most sectors. A new policy grants equal treatment to all investors, domestic and foreign. According to the U.S. Department of State, “While Yemen has fundamentally sound investment laws, labor laws, customs tariff regulations and tax laws, transparency of implementation and enforcement is elusive. The next steps required in Yemen’s civil service and administrative reform process are to clarify procedures, create implementing regulations and build a mechanism by which to enforce these standards.” Foreign investment in the exploration for and production of oil, gas, and minerals is subject to production-sharing agreements. Foreign investment is not permitted in the arms and explosive materials industries, banking and money exchange, industries that could cause environmental disasters, or wholesale and retail imports. Other barriers to foreign investment are ongoing security concerns and the lack of infrastructure. The International Monetary Fund reports that foreign exchange accounts are permitted. There are no restrictions on payments and transfers. Yemen prohibits short-term foreign loans to the private sector. The evidence indicates that Yemen’s investment policies have improved, but security problems, a lack of transparency, and a lack of implementing regulation to support those policies hinders their effectiveness. Overall, however, Yemen’s capital flows and foreign investment score is 1 point better this year.

BANKING AND FINANCE Score: 4–Stable (high level of restrictions) According to the Economist Intelligence Unit, Yemen’s “banking system is comprised of the Central Bank of Yemen, 13 commercial banks and three specialized state-owned development banks. Of the 13 commercial banks, seven are private domestic banks (including three Islamic banks), four are private foreign banks and two are state-owned…. The largest commercial bank…is the

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Yemen Bank for Reconstruction and Development (YBRD), which is majority state-owned and accounts for over 20 percent of commercial bank assets.” The YBRD is being restructured for privatization, but it also has a high level of non-performing loans and is undercapitalized; the three state-owned development banks are also financially unsound. The government awarded a new banking license in February 2002, and the Shamil Bank of Yemen and Bahrain opened its first branch in March 2002. The Economist Intelligence Unit reports that the inadequacy of the legal system discourages loans to other than certain preferred clients.

WAGES AND PRICES Score: 3–Stable (moderate level of intervention) The Economist Intelligence Unit reports that “while the wheat and flour subsidy was finally eradicated in mid-1999, the government has been reluctant to tackle the all-important subsidy on diesel fuel…. In 2001, however, in the face of extreme pressure from the IMF and the World Bank, the government finally moved to reduce it, raising prices by 70%. This still leaves a substantial subsidy in place…. Other substantial subsidies still exist on utility tariffs, particularly on electricity.” Yemen’s labor law specifies that the minimum wage for a private-sector worker may not be less than the minimum wage for a civil servant.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) According to the Economist Intelligence Unit, “The judiciary is generally under-trained, inefficient and seen as corrupt.” The U.S. Department of State reports that enforcement of laws and contracts “remains problematic at best and nonexistent at worst.” Also, “in cases involving interest, most judges use Shari’a (Islamic) law as the guideline, under which claims for interest payments due are almost always rejected.”

REGULATION Score: 4–Stable (high level) Bureaucratic inefficiency and corruption present serious impediments to business. The government has agreed to implement further privatization and to reform the bloated civil service as part of negotiations with the International Monetary Fund. Regulations are applied haphazardly. According to the U.S. Department of State, “While Yemen has fundamentally sound investment laws…transparency of implementation and enforcement is elusive.”

BLACK MARKET Score: 5–Stable (very high level of activity) According to the Economist Intelligence Unit, “Smuggling forms a large and unrecorded part of trade….” Black market activity includes such goods as cars, parts, appliances, and other consumer goods. Protection of intellectual property is weak, and piracy of such products is substantial.

2003 Index of Economic Freedom

YUGOSLAVIA, FEDERAL REPUBLIC OF Belgrade

(SERBIA–MONTENEGRO) Rank: Score: Category:

Podgorica

Trade Policy Fiscal Burden

4 3.5

Government Intervention 4 Monetary Policy 5

Foreign Investment 5 Banking and Finance 4

Serbia, the dominant republic in the rump state of Yugoslavia, along with a restive and largely autonomous Montenegro, is worse off economically than almost all of the other transition economies of Central and Eastern Europe. The devastation caused by a series of wars culminating in the Kosovo campaign of 1999, which involved the bombing of Yugoslavia by NATO, was exacerbated by the chronic mismanagement of Slobodan Milosevic’s regime, including extensive corruption among the elite who prospered under Milosevic. However, since the overthrow of Milosevic, there have been some promising signs. In March 2002, Serbia and Montenegro agreed, at least temporarily, to resolve their constitutional dispute over whether Montenegro should remain part of a broader Yugoslavia. A new political entity, to be called Serbia and Montenegro rather than Yugoslavia, allows both entities to run their own economies, currencies, and customs unions while remaining part of a decentralized state; the agreement is likely to be ratified by both parties. The Serbian government of Prime Minister Zoran Djindjic is committed to far-reaching reforms. In June 2001, the Serbian parliament passed new privatization legislation to sell 4,000 enterprises in the next four years; in January 2002, the Djindjic government raised $140 million by selling three cement plants to companies in France, Switzerland, and Belgium. Vast problems remain, however, most notably a corrupt judiciary that needs radical reform. Unemployment remains at around 22 percent (accounting for a large gray economy), while inflation, though down, was still running at 40 percent annually as of June 2001. As the country becomes more open, much of Serbia’s remaining decrepit industry will have to close down, throwing even more people out of work. The desperate need for aid explains the new government’s decision to cooperate with the Hague in exchange for significant Western aid. Yugoslavia’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.

TRADE POLICY Score: 4–Stable (high level of protectionism) According to the government of Yugoslavia, “tariffs range between 1% and 30% depending on the kind of product, and the average customs burden is 9.37%.” Yugoslavia reportedly maintains non-tariff barriers mainly through an inefficient customs system.

149 4.25 Repressed

Wages and Prices 3 Property Rights 4

Regulation Black Market

Scores for Prior Years: 2002: 4.05 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: 10,637,000 Total area: 102,350 sq. km GDP: $13.2 billion GDP growth rate: 5.0% GDP per capita: $1,240 Major exports: machinery, metals, electricity, tobacco Exports of goods and services: $2.4 billion Major export trading partners: Italy 16.4%, Bosnia andHerzegovina 13.1%, Germany 12.1%, Macedonia 9.2% Major imports: machinery, transportation equipment, fuels, petroleum products, electricity, fertilizer, foodstuffs, clothing Imports of goods and services: $3.8 billion Major import trading partners: Russia 14.2%, Germany 12.2%, Italy 10.3%, Greece 4.5% Foreign direct investment (net): $26.6 million

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 1.5–Better (low tax rates) Score—Government Expenditures: 5–Worse (very high level of government expenditure) Final Score: 3.5–Worse (high cost of government) Yugoslavia’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 2000, government expenditures equaled 41 percent of GDP, up substantially from the 20.6 percent reported in the 2002 Index as a consumption figure. (In the previous Index, data on government expenditures were unavailable; therefore, government consumption data were used as a proxy.) Based on a clarifica-

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tion in methodology, Yugoslavia’s income and taxation score is 0.5 point better this year; however, this is offset by new evidence indicating a higher level of government expenditure. As a result, Yugoslavia’s overall fiscal burden of government score is 1 point worse this year.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 4–Worse (high level) The World Bank reports that the government consumed 25.3 percent of GDP in 2000, up from the 20.6 percent reported in the 2002 Index. As a result, Yugoslavia’s government intervention score is 1 point worse this year. According to the Economist Intelligence Unit, “a new privatisation law was passed by the Serbian legislature on June 27th 2001. Under the new law, some 4,000 enterprises are scheduled to be sold off over the next four years. However, there are no plans to sell off majority stakes in the big utilities.” The same source reports that in April 2000, Montenegro approved a plan “to sell off most of the country’s state-owned industries…. By April 2001 only 4% of Montenegro’s total social capital had been privatised.”

MONETARY POLICY Score: 5–Stable (very high level of inflation) Between 1994 and 2001, based on data from the Economist Intelligence Unit, Yugoslavia’s weighted average annual rate of inflation was 74.87 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 5–Stable (very high barriers) The lifting of sanctions in October 2000 has made foreign investment in Yugoslavia possible; however, there is insufficient institutional support for investment, and accountability is largely absent, although the government has made progress in privatization. According to the U.S. Agency for International Development, “The commercial law and accounting frameworks are not consistent with a market economy and impede private sector development and foreign investment. Interventionist and market-distorting policies inhibit producers and processors.” The International Monetary Fund reports that both residents and non-residents may hold foreign exchange accounts with permission from the central bank. Convertibility of the dinar is partial and limited for capital transactions, according to the Economist Intelligence Unit. In January 2002, the government adopted a new foreign investment law that it hopes will attract new investment and address these problems. If this law proves successful, Yugoslavia’s capital flows and foreign investment score could improve in future editions of the Index.

BANKING AND FINANCE Score: 4–Stable (high level of restrictions) The International Monetary Fund reports that Yugoslavia had 48 banks at the end of March 2002 compared with 71 in June 2001. This reduction is due to an aggressive restructuring of the banking system to address crippling losses and unrecoverable claims by many banks, as well as the sector’s generally weak nature. The government has adopted modern banking standards, includ-

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ing minimum capital requirements, and has closed insolvent banks. According to the IMF, “19 small, undercapitalized, and inefficient banks, accounting for approximately 10 percent of the total book value of assets were closed; in addition 4 large banks, accounting for almost 60 percent of the total book value of assets, were closed…. [S]ix new licenses have been issued since late 2000, including for 5 new foreign banks.” The banking sector remains dominated by state-owned banks, and the government founded a National Savings Bank in January 2002.

WAGES AND PRICES Score: 3–Stable (moderate level of intervention) The government sets prices of utilities, and many state-owned enterprises drain finances. Many losses are the result of price distortions. The Economist Intelligence Unit reports that, following the failure of guaranteed agricultural prices in 2001, “the state will not attempt to guarantee prices [in 2002], but will encourage farmers and food-processors to come to stable agreements on deliveries and prices, and will offer credits for purchase of fuel and fertilizer.” The Federal Republic of Yugoslavia has a minimum wage.

PROPERTY RIGHTS Score: 4–Stable (low level of protection) Protection of property rights is weak in Yugoslavia. The U.S. Department of State reports that “government officials and politicians exercised influence on the judiciary and judicial corruption remained a problem.”

REGULATION Score: 5–Stable (very high level) According to the International Monetary Fund, “the authorities are…taking steps to address key remaining obstacles to the expansion of the private sector, namely onerous registration and inspection requirements, inefficiencies in the domestic payments system, and constraints on access to financing for investment and working capital…. At present, there is no unified registration system because the Federal Company Law requires registration of legal entities with Commercial Courts and the Federal Law on Private Entrepreneurs requires registration of sole proprietors with municipalities.” The state still owns a considerable amount of land and plays a significant role in agricultural production despite plans to discontinue subsidies and liberalize the agricultural structure.

BLACK MARKET Score: 5–Stable (very high level of activity) According to the Economist Intelligence Unit, “There is a large black economy, estimated at the equivalent of about 35% of SP [social product, or GDP minus government services].”

2003 Index of Economic Freedom

ZAMBIA Rank: 119 Score: 3.50 Category: Mostly Unfree

Lusaka

Trade Policy Fiscal Burden

4 4

Government Intervention 2 Monetary Policy 5

Foreign Investment 3 Banking and Finance 3

The socialist policies of the one-party government that ruled Zambia until 1989 devastated the national economy. Since then, the government has pursued economic liberalization, including an ambitious program under which 251 of 287 stateowned companies were either privatized or liquidated. Agriculture is the largest employer and accounts for over 16 percent of GDP. Mining of copper and cobalt is the economic mainstay, supplying over 75 percent of exports; but production has been declining since the 1970s, and the country’s rich mines are struggling to remain profitable as international prices decline. Prospects for the sector were hurt by the Anglo–American Company’s announcement that it would not proceed with anticipated investments in Zambia’s largest mines, the Konkola Copper Mines. Corrupt politicians, chronic mismanagement, and unproductive labor have eroded the value of the mines and caused investors to be skeptical. In addition, Zambia shares its borders with eight other countries, many of which have turbulent histories or are currently unstable. The deteriorating crisis in neighboring Zimbabwe has made international donors reluctant to criticize irregularities surrounding the victory of Patrick Levy Mwanawasa in the December 2001 presidential elections. From 1991 to 2000, according to World Bank data, compound growth in GDP averaged 0.7 percent annually and per capita GDP fell dramatically from $463 to $392 (in constant 1995 U.S. dollars) as population growth exceeded economic growth. Zambia’s trade policy and capital flows and foreign investment scores are both 1 point worse this year, and its fiscal burden of government score is 0.5 point worse. As a result, Zambia’s overall score is 0.25 point worse this year.

TRADE POLICY Score: 4–Worse (high level of protectionism) According to the World Bank, Zambia’s weighted average tariff rate in 1997 (the most recent year for which World Bank data are available) was 13.1 percent, up from the 8.7 percent (based on import duties as a percentage of total imports) reported in the 2002 Index. As a result, Zambia’s trade policy score is 1 point worse this year. Import licenses have been abolished, but the government still requires “import certificates” for such items as meat, poultry, plants, pharmaceuticals, and firearms and ammunition. The government bans ivory imports.

Wages and Prices 3 Property Rights 3

Regulation Black Market

Scores for Prior Years: 2002: 3.25 1999: 2.90 1996: 3.00

2001: 3.15 1998: 2.90 1995: 3.10

2000: 2.90 1997: 2.75

2000 Data (in constant 1995 US dollars) Population: 10,089,000 Total area: 752,614 sq. km GDP: $3.9 billion GDP growth rate: 3.6% GDP per capita: $392 Major exports: copper, cobalt, electricity, tobacco Exports of goods and services: $1.84 billion Major export trading partners: UK 25.2%, Saudi Arabia 24.5%, Switzerland 9.4%, Malawi 7.5% Major imports: machinery, transportation equipment, fuels, petroleum products, electricity, fertilizer, foodstuffs, clothing Imports of goods and services: $1.6 billion Major import trading partners: South Africa 67.1%, UK 9.8%, Zimbabwe 7.5%, US 5.9% Foreign direct investment (net): $183.3 million

FISCAL BURDEN OF GOVERNMENT Score—Income and Corporate Taxation: 3–Worse (moderate tax rates) Score—Government Expenditures: 5–Worse (very high level of government expenditure) Final Score: 4–Worse (high cost of government) Zambia’s top income tax rate is 30 percent; the marginal rate for the average taxpayer is 10 percent. The top corporate tax rate is 35 percent. (Banking profits in excess of 100

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4 4

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million kwachas are taxed at 45 percent. This one exception to an otherwise uniform corporate tax rate was judged not significant enough to earn Zambia a grade of 4, which is reserved for countries in which the top corporate rate is between 36 percent and 45 percent.) In 2000, according to the African Development Bank, government expenditures equaled 31.2 percent of GDP, up from the 27.6 percent reported in the 2002 Index. Based on the higher level of government expenditure and a clarification in the methodology used to score the income tax portion of this factor, Zambia’s overall fiscal burden of government score is 0.5 point worse this year.

although Commerce Bank was in the process of liquidation and Union Bank was taken over by the central bank. There are three international banks and one government-owned bank. The government has received no bids for its 35 percent share of the stateowned Zambia National Commercial Bank (Zanaco), which is wracked by huge non-performing loans. The government of Zambia affects the allocation of credit. According to the U.S. Department of State, “There exist also banks constituted by Acts of Parliament, being set up to service sectors of the economy whose needs government feels will not be met by the commercial banks.” All foreign banks must be incorporated locally.

GOVERNMENT INTERVENTION IN THE ECONOMY

WAGES AND PRICES

Score: 2–Stable (low level) The World Bank reports that the government consumed 10.6 percent of GDP in 2000. In 1999, according to the International Monetary Fund, Zambia received less than 1 percent of its total revenues from state-owned enterprises and government ownership of property.

Score: 3–Stable (moderate level of intervention) The government has removed price controls and has eliminated most subsidies, but state subsidizing of government-owned enterprises distorts the pricing system, particularly in agriculture. The government imposed price controls on the staple maize meal in February, according to Agence France-Presse. Since agriculture is one of the most important economic sectors, influencing its prices can distort the economy. There is a minimum wage for non-unionized workers. Wages for unionized workers are established through collective bargaining.

MONETARY POLICY Score: 5–Stable (very high level of inflation) From 1992 to 2001, Zambia’s weighted average annual rate of inflation was 23.3 percent.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3–Worse (moderate barriers) Zambia welcomes foreign investment. According to the U.S. Department of State, “Subsequent to the conclusion of the privatization of its vast mining business, Zambia has now opened the doors for foreign investment…. Privatization has now shifted to large utilities and state monopolies, namely the electricity, telephone, railway, and oil companies…. [S]tructural reforms have been made, eliminating major market distortions and reducing government intervention in commercial activities.” However, Anglo–American’s decision to leave Zambia because of corruption, mismanagement, and the unprofitability of its investment in Konkola Copper Mines may lead other potential investors to reconsider. An investment board screens all proposed foreign investment, but the process is open to appeal, and the board reportedly reaches decisions within 30 days. Foreign investors receive national treatment, and there are no local content, equity, financing, employment, or technology transfer requirements. The Economist Intelligence Unit reports that exchange controls were reintroduced on April 8, 2002. Based on the reintroduction of foreign exchange controls and evidence of corruption in the investment process, Zambia’s capital flows and foreign investment score is 1 point worse this year.

BANKING AND FINANCE Score: 3–Stable (moderate level of restrictions) Zambia’s commercial banking sector includes private international banks, private domestic banks, and state-owned banks. The Bank of Zambia, which is the central bank and reports to the Ministry of Finance, supervises the banking sector. Zambia had 16 banks in 2001, according to the Economist Intelligence Unit,

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PROPERTY RIGHTS Score: 3–Stable (moderate level of protection) The judicial system is independent, but it suffers from inefficiency and a lack of resources, and it may be weakening. According to the Economist Intelligence Unit, “The 1996 constitution circumscribes the power of the judiciary to pronounce legislation as unconstitutional and also empowers the president to remove High Court judges if he decides they have committed ‘gross misconduct’. Despite this, the spirited Zambian judiciary has been fairly successful in preserving its independence from the executive and legislature.” The U.S. Department of State reports that, although the courts are fairly independent, “contractual and property rights are weak and final court decisions can take a long time.”

REGULATION Score: 4–Stable (high level) Business in Zambia is hampered by outdated laws that do not reflect, and therefore cannot be applied effectively to, current business practice. Acquiring a business license involves complex procedures and delays. An investment board screens domestic investment. According to the U.S. Department of State, “Governmental corruption and bureaucratic inefficiency are continuing problems that affect the business environment.”

BLACK MARKET Score: 4–Stable (high level of activity) Transparency International’s 2001 score for Zambia is 2.6. Therefore, Zambia’s black market score is 4 this year.

2003 Index of Economic Freedom

ZIMBABWE Harare

Trade Policy Fiscal Burden

5 4

Government Intervention 3 Monetary Policy 5

Rank: Score: Category: Foreign Investment 5 Banking and Finance 5

Since gaining its independence from the United Kingdom in 1980, Zimbabwe has been ruled by Robert Mugabe’s Zimbabwe African National Union. Mugabe’s policies—such as threatening to nationalize businesses, imposing price controls, increasing government salaries with little regard for budget constraints, and fueling inflation by printing money to finance government expenditures—have severely damaged the economy. The Economist Intelligence Unit estimates that the government ran a deficit of 11.5 percent of gross domestic product in 2001, with the economy shrinking by over 7 percent. Inflation was well over 100 percent in 2001, and unemployment is over 60 percent. In an effort to increase support for his presidency, Mugabe set in motion a plan to confiscate farmland without compensation, later urging his supporters to occupy land owned by political rivals. This policy was pursued openly even though the Zimbabwean Supreme Court ruled the invasions unconstitutional. With a monopoly on broadcast media, the government has outlawed criticism of Mugabe and harassed independent print media. The Economist Intelligence Unit reports that Mugabe has employed “state-sponsored political violence against supporters of the opposition, Movement for Democratic Change (MDC), measures to suppress the judiciary and the media, and attempts to manipulate the electoral register.” Government-sanctioned violence against Mugabe’s political rivals led directly to over 30 deaths in 2002 alone, as well as numerous beatings and other assaults and the willful destruction and damage of private property. From 1991 to 2000, according to World Bank data, compound growth in GDP averaged 1.1 percent annually and per capita GDP fell from $673 to $621 (in constant 1995 U.S. dollars) as a result of instability and population growth that exceeded economic growth. Zimbabwe’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, Zimbabwe’s weighted average tariff rate in 1998 (the most recent year for which World Bank data are available) was 16.4 percent, up from the 12.6 percent reported in the 2002 Index. As a result, Zimbabwe’s trade policy score is 1 point worse this year. According to the U.S. Department of State, the government “maintains a ‘negative list’ of prohibited items that require special permission from the government to import. The list includes nuclear reactors, radioactive materials, arms and ammunition, precious and semiprecious gems, gold jewelry, carbonated beverages for resale, and textiles and clothing for resale.” The same source reports that “Periodic instances of corruption and a lack of uniform application of the law by customs officials continue to concern importers and users of imported goods or components.”

Chapter 6: The Countries

153 4.40 Repressed

Wages and Prices 4 Property Rights 5

Regulation Black Market

4 4

Scores for Prior Years: 2002: 4.30 1999: 3.90 1996: 3.75

2001: 4.25 1998: 4.00 1995: 3.80

2000: 3.90 1997: 3.75

2000 Data (in constant 1995 US dollars) Population: 12,627,000 Total area: 390,580 sq. km GDP: $7.9 billion GDP growth rate: –5.1% GDP per capita: $621 Major exports: tobacco, gold, ferroalloys, cotton Exports of goods and services: $3.2 billion Major export trading partners: South Africa 13.1%, UK 9.3%, Japan 8.4%, Germany 6.5%, China 5.9% Major imports: machinery and transport equipment, other manufactures, chemicals, fuels Imports of goods and services: $3 billion Major import trading partners: South Africa 41.8%, UK 7.1%, Mozambique 3.9%, US 3.2%, Germany 2.6% Foreign direct investment (net): $13.7 million

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FISCAL BURDEN OF GOVERNMENT

BANKING AND FINANCE

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) Zimbabwe’s top income tax rate is 40 percent (income taxed at 40 percent is also subject to a 25 percent surcharge tax); the marginal rate for the average taxpayer is 0 percent. The top corporate income tax rate is 30 percent, down from the 35 percent reported in the 2002 Index. In 2000, government expenditures equaled 48 percent of GDP.

Score: 5–Stable (very high level of inflation) From 1992 to 2001, Zimbabwe’s weighted average annual rate of inflation was 66.43 percent.

Score: 5–Stable (very high level of restrictions) Zimbabwe’s relatively sophisticated financial system, developed under British colonial rule, has been squandered in recent years as the government has become ever more involved in the financial sector. The Reserve Bank of Zimbabwe has allowed the government to use it to finance deficit spending and direct loans to state-owned enterprises. According to the U.S. Department of State, the current environment of “high inflation, the hard currency shortage and Zimbabwe’s declining credit standing make all forms of financing, including trade and project, a challenging task.” The government’s 90-day interest rate on negotiable certificates of deposit was approximately 30 percent in early 2002; combined with an inflation rate of well over 100 percent, this resulted in a real interest rate of –80 percent, according to the Economist Intelligence Unit, and non-performing loans are growing rapidly. The Reserve Bank issues currency and government loans, controls foreign reserves, and serves as lender of last resort for Zimbabwe’s banks but is limited in its supervisory role because the Ministry of Finance issues banking licenses. The five main banks in 2001 were Standard Chartered Bank, Barclays Bank of Zimbabwe, Standard Bank of South Africa, the Commercial Bank of Zimbabwe (privatized by the government), and the majority state-owned Zimbank. According to the Economist Intelligence Unit, “In the absence of monitoring powers the [Reserve Bank] has been unable to enforce standards effectively, and the regulation of the banking sector has become increasingly political.” Rising debt has exacerbated the instability of an already shaky sector and could lead to the collapse of the system.

CAPITAL FLOWS AND FOREIGN INVESTMENT

WAGES AND PRICES

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 3–Stable (moderate level) The World Bank reports that the government consumed 24 percent of GDP in 2000 and is very active in the economy. According to the U.S. Department of State, “Regarding privatization of Zimbabwe’s parastatal companies, progress has been very slow in the decade since it was identified as a priority, with only six organizations out of the 57 earmarked making the transition. Arguments about the allowable extent of foreign investment, retention amount for indigenization, pricing and means of offering have yet to be clearly or transparently resolved.”

MONETARY POLICY

Score: 5–Stable (very high barriers) The government will consider foreign investment up to 100 percent but applies pressure for eventual majority ownership by Zimbabweans. Zimbabwe passed a new foreign investment code in 1998, but significant restrictions on foreign participation remain in effect. According to the U.S. Department of State, “over the last two years the investment and operating climate in Zimbabwe has substantially worsened. Potential investors need to assess carefully this tougher environment, and to also factor in and plan for the government’s goals for indigenization (black economic empowerment), privatization, and land reform/resettlement…. The local ownership requirement and the large areas of the economy where foreign investment is not allowed are other hindrances to business establishment and free cross-border capital and equity flows.” The International Monetary Fund reports that both residents and non-residents may open foreign exchange accounts with the government’s approval. The Reserve Bank of Zimbabwe must approve access to foreign exchange to make payments and transfers. According to the IMF, “Inward transfers of capital through normal banking channels are not restricted. Outward transfers of capital are controlled.” Virtually all capital transactions between residents and non-residents are subject to controls and government approval.

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Score: 4–Stable (high level of intervention) Zimbabwe maintains many price controls. The U.S. Department of State reports that the prices “of many major commodities and food staples [are] controlled, formally or informally, by the government (for example sugar, oil, bread, flour, dairy products and mealie meal, or ground maize)…. Price controls and mismanagement have resulted in huge losses at some of Zimbabwe’s largest parastatals, including the Posts & Telecommunications Company, the national railways, the national oil company and the Zimbabwe Electricity Supply Authority.” The Herald, a Harare newspaper, reported in May 2002 that “Minister of State for Information and Publicity Professor Jonathan Moyo said contrary to false and inflammatory media reports on price increases appearing in the opposition press, the Government was in fact vigorously implementing price controls on designated products as per existing policies adopted last August.” Price controls have been instituted for cement, paraffin, fertilizer, seed, agricultural chemicals, milk, bread, flour, meat, maize meal, margarine, sugar, poultry, soap, and salt. The government also has intervened in the pricing of goods for export, including tobacco, one of the country’s most important exports. The government maintains a minimum wage.

2003 Index of Economic Freedom

PROPERTY RIGHTS Score: 5–Stable (very low level of protection) According to the U.S. Department of State, the judiciary enjoys some independence, but “cases involving high or prominent ruling party or government officials usually do not reach court, regardless of the magnitude or egregiousness of the offense.” The U.S. Trade Representative reports that “Zimbabwe is currently engaged in an aggressive, chaotic land occupation and resettlement program that has economic consequences that have not been fully realized…. [T]he government has proceeded with its ‘fast track’ land resettlement program without benefit of a transparent, coherent plan, and in defiance of orders by the supreme court instructing compliance with the law….” Since June 2000, reports the U.S. Department of State, “the Government has orchestrated a campaign of violence and intimidation against the judiciary….”

REGULATION Score: 4–Stable (high level) Businesses face considerable impediments in Zimbabwe. The bureaucracy is extremely arbitrary and not transparent. The U.S. Department of State reports that “many bureaucratic functions in this still heavily controlled economy are less than fully transparent and can by no means be considered streamlined. Corruption within the regulatory system is increasingly worrisome.” In addition, “corruption at all levels within government is increasing. Many companies and the police do not have appropriate tools or skills for investigating and checking corruption, though the legislative and criminal law framework exists (for example, acceptance of bribes is a criminal offense).”

BLACK MARKET Score: 4–Stable (high level of activity) Transparency International’s 2001 score for Zimbabwe is 2.9. Therefore, Zimbabwe’s black market score is 4 this year.

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Per Capita Income Per-Capita Income Throughout Throughout the the World World (Expressed US Dollars) Dollars) (Expressed in in Purchasing Purchasing Power Power Parity Parity and and in in Constant Constant 1995 1995 US This table is provided for those readers interested in measures of purchasing power parity per capita income compared to per capita income measured in constant US dollars.

Country Albania Algeria Angola Argentina Armenia Australia Austria Azerbaijan Bahamas, The Bahrain Bangladesh Barbados Belarus Belgium Belize Benin Bolivia Bosnia and Herzegovina Botswana Brazil Bulgaria Burkina Faso Burma Burundi Cambodia Cameroon Canada Cape Verde Central African Republic Chad Chile China Colombia Congo, Dem. Rep. Congo, Rep. Costa Rica Croatia Cuba Cyprus Czech Republic Denmark Djibouti

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2000 per capita GDP measured in purchasing power parity* $3,506 5,308 2,187 12,377 2,559 25,693 26,765 2,936 17,012 15,900 1,602 15,494 7,544 27,178 5,606 990 2,424 1,700 7,184 7,625 5,710 976 1,500 591 1,446 1,703 27,840 4,863 1,172 871 9,417 3,976 6,248 600 825 8,650 8,091 1,700 20,824 13,991 27,627 1,300

2000 per capita GDP measured in 1995 constant dollars** $899 1,606 506 7,933 976 23,838 32,763 506 13,928 9,406 373 8,282 2,760 30,830 3,141 414 952 1,526 3,951 4,624 1,503 252 140 141 297 675 22,541 1,519 339 218 5,354 824 2,290 88 841 3,912 5,146 N/A 14,063 5,311 38,521 783

2003 Index of Economic Freedom

Per-Capita Income Throughout the World (Expressed in Purchasing Power Parity and in Constant 1995 US Dollars) This table is provided for those readers interested in measures of purchasing power parity per capita income compared to per capita income measured in constant US dollars.

Country Dominican Republic Ecuador Egypt, Arab Rep. El Salvador Equatorial Guinea Estonia Ethiopia Fiji Finland France Gabon Gambia, The Georgia Germany Ghana Greece Guatemala Guinea Guinea-Bissau Guyana Haiti Honduras Hong Kong, China Hungary Iceland India Indonesia Iran, Islamic Rep. Iraq Ireland Israel Italy Ivory Coast Jamaica Japan Jordan Kazakhstan Kenya Korea, North Korea, South Kuwait Kyrgyz Republic

Chapter 6: The Countries

2000 per capita GDP measured in purchasing power parity* $6,033 3,203 3,635 4,497 15,073 10,066 668 4,668 24,996 24,223 6,237 1,649 2,664 25,103 1,964 16,501 3,821 1,982 755 3,963 1,467 2,453 25,153 12,416 29,581 2,358 3,043 5,884 2,500 29,866 20,131 23,626 1,630 3,639 26,755 3,966 5,871 1,022 1,000 17,380 15,799 2,711

2000 per capita GDP measured in 1995 constant dollars** $2,062 1,425 1,226 1,752 1,599 4,431 116 2,395 32,024 29,811 4,378 370 499 32,623 413 13,105 1,558 603 210 941 367 711 24,218 5,425 31,304 459 994 1,649 N/A 27,741 17,067 20,885 743 1,785 44,830 1,616 1,512 328 N/A 13,062 13,546 885

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Country Lao PDR Latvia Lebanon Lesotho Libya Lithuania Luxembourg Macedonia, FYR Madagascar Malawi Malaysia Mali Malta Mauritania Mauritius Mexico Moldova Mongolia Morocco Mozambique Namibia Nepal Netherlands New Zealand Nicaragua Niger Nigeria Norway Oman Pakistan Panama Paraguay Peru Philippines Poland Portugal Qatar Romania Russian Federation Rwanda Saudi Arabia Senegal

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2000 per capita GDP measured in purchasing power parity*

2000 per capita GDP measured in 1995 constant dollars**

$1,575 7,045 4,308 2,031 8,900 7,106 50,061 5,086 840 615 9,068 797 17,273 1,677 10,017 9,023 2,109 1,783 3,546 854 6,431 1,327 25,657 20,070 2,366 746 896 29,918 7,700 1,928 6,000 4,426 4,799 3,971 9,051 17,290 20,300 6,423 8,377 943 11,367 1,510

$450 2,597 2,891 551 N/A 2,056 56,372 2,530 246 169 4,797 288 10,223 496 4,429 3,819 636 428 1,370 191 2,408 241 30,967 17,548 466 203 254 37,954 6,848 516 3,279 1,700 2,368 1,167 4,223 12,794 21,730 1,460 2,455 242 6,729 609

2003 Index of Economic Freedom

Country Sierra Leone Singapore Slovak Republic Slovenia South Africa Spain Sri Lanka Sudan Suriname Swaziland Sweden Switzerland Syrian Arab Republic Taiwan Tajikistan Tanzania Thailand Togo Trinidad and Tobago Tunisia Turkey Turkmenistan Uganda Ukraine United Arab Emirates United Kingdom United States Uruguay Uzbekistan Venezuela, RB Vietnam Yemen, Rep. Yugoslavia, Fed. Rep. Zambia Zimbabwe

2000 per capita GDP measured in purchasing power parity*

2000 per capita GDP measured in 1995 constant dollars**

$490 23,356 11,243 17,367 9,401 19,472 3,530 1,797 3,799 4,492 24,277 28,769 3,556 17,400 1,152 523 6,402 1,442 8,964 6,363 6,974 3,956 1,208 3,816 22,800 23,509 34,142 9,035 2,441 5,794 1,996 893 2,300 780 2,635

$147 28,230 4,160 11,659 3,985 17,798 860 319 994 1,476 31,206 46,737 839 13,372 386 190 2,805 327 5,123 2,470 3,134 1,377 348 896 17,276 21,667 31,996 6,115 767 3,300 356 314 1,240 392 621

Note: *Purchasing Power Parity (PPP) GDP is gross domestic product converted to international dollars. An international dollar has the same purchasing power over GDP as the US dollar has in the United States. Hence the phrase "purchasing power parity." PPP GDP per capita equals PPP GDP divided by population. **The term "Constant 1995 US dollars" refers to GDP in US dollars for the year 2000, adjusted for inflation using the 1995 GDP deflator. Source: The World Bank. World Development Indicators on CD-ROM 2002. Central Intelligence Agency. World Factbook 2001.

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2003 Index of Economic Freedom

Major Works Cited

he following sources provided the basis for the country factor analyses in the 2003 Index of Economic Freedom. In addition, the authors and analysts of the various elements of the Index relied on supporting documentation and information from various government agencies and sites on the Internet, numerous news reports and journal articles, and official responses to inquiries. These sources are cited in each chapter where appropriate. All statistical and other information received from government sources was verified with independent, internationally recognized nongovernmental sources as well. African Development Bank, ADB Statistics Pocketbook 2002; available at http://www.afdb.org/knowledge/ publications/pdf/statistics_pocket_book2002.pdf. Asian Development Bank, Key Indicators of Developing Asian and Pacific Countries 2001, Vol. XXXII; available at http://www.adb.org/Documents/Books/Key_Indicators/2001/default.asp?p=ecnm. Country statistical agencies, central banks and ministries of finance, economy, and trade; available at http://www.un.org/Depts/unsd/gs_natstat.htm, http://www.census.gov/main/www/stat_int.html, http://www.centralbanking.co.uk/links/mof.htm ,http://www.bis.org/cbank s.htm , a n d http://dir.yahoo.com/Government/Statistics/. Economist Intelligence Unit Limited, Country Profile, London, U.K., 2001 and 2002. ———, EIU Country Report, London, U.K., 1996 to 2002. ———, Country Commerce, London, U.K., 2001 and 2002. Ernst & Young International, Ltd., The Global Executive, New York, N.Y., 2002. ———, Worldwide Corporate Tax Guide, New York, N.Y., 2002. ———, direct correspondence with Paris Office. European Bank for Reconstruction and Development, Country Strategies, 2001 and 2002; available at http://www.ebrd.org/about/strategy/index.htm. Freedom House, Freedom in the World: The Annual Survey of Political Rights and Civil Liberties 2001–2002; available at http://www.freedomhouse.org/research/index.htm. Inter-American Development Bank, at http://www.iadb.org. International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions 2001, Washington, D.C., 2001. ———, Government Finance Statistics Yearbook, Vol. XXV (2001), Washington, D.C., 2001. Chapter 6: The Countries

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———, International Financial Statistics, Vol. LIV (2001), Washington, D.C., June 2002. ———, International Financial Statistics on CD–ROM, Washington, D.C., 2002. ———, Selected Issues and Statistical Appendix, various countries, Washington, D.C., 2000 to 2002. ———, World Economic Outlook: Recessions and Recoveries, Washington, D.C., April 2002; available at http://www.imf.org/external/pubs/ft/weo/2002/01/index.htm. O’Driscoll, Gerald P., 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., 2001). Organisation for Economic Co-operation and Development, OECD Economic Outlook No. 71, June 2002, Annex Table 26: General Government Total Outlays; available at http://www.oecd.org/EN/document/ 0,,EN-document-20-nodirectorate-no-2-21578-20,00.html. ———, OECD on-line; available at http://www.oecd.org/statistics/. Standard & Poor’s, Sovereigns Ratings Analysis, New York, N.Y., 2002; available at http:// www.standardandpoors.com/Forum/RatingsAnalysis/Sovereigns/. Transparency International, The Corruption Perception Index 2001 and 2000, Berlin, Germany, 2001 and 2000; available at http://www.transparency.org/cpi/2001/cpi2001.html and http://www.transparency.org/ cpi/2000/cpi2000.html. United States Department of State, Country Reports on Economic Policy and Trade Practices, 2001 and 2002; available at http://www.usatrade.gov/website/ccg.nsf/. ———, Country Reports on Human Rights Practices for 2001, released by the Bureau of Democracy, Human Rights, and Labor, February 2002; available on U.S. Department of State Internet site, at http:// www.state.gov/g/drl/rls/hrrpt/2001/. United States Departments of State and Commerce, Country Commercial Guides, Washington, D.C., 2001 and 2002; available at http://www.usatrade.gov/website/ccg.nsf/. United States Trade Representative, Office of the, 2002 National Trade Estimate Report on Foreign Trade Barriers (Washington, D.C.: U.S. Government Printing Office, 2002); available at http://www.ustr.gov/ reports/nte/2002/index.htm. World Bank, World Bank World Development Indicators on CD–ROM 2002, Washington, D.C., 2002. ———, World Development Indicators 2002; available with subscription on-line at http://publications.worldbank.org/WDI/. ———, World Development Report 2002: Building Institutions for Markets (Oxford, U.K.: Oxford University Press for the International Bank for Reconstruction and Development/World Bank, September 2001). World Trade Organization, Trade Policy Reviews, 1995 to 2001; available at http://www.wto.org/english/ tratop_e/tpr_e/tpr_e.htm.

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