GUINEA–BISSAU
Rank: 148 Regional Rank: 37 of 40
uinea–Bissau’s economy is 45.7 percent free, according to our 2007 assessment, which makes it the world’s 148th freest economy. Its overall score is 1.4 percentage points lower than last year, partially reflecting new methodological detail. Guinea–Bissau is ranked 37th out of 40 countries in the sub-Saharan Africa region, and its overall score is lower than the regional average.
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The economy is 45.7% free
100
80
Sub-Saharan Africa Average = 54.7 World Average = 60.6
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Guinea–Bissau scores well in fiscal freedom, and somewhat well in monetary freedom. The top income tax is a low 20 percent, but the top corporate rate is higher. Taxes are not excessive as a percentage of GDP. Inflation is low, and the government directly distorts prices in only one area (cashew nuts), although it does influence the market slightly through state-owned enterprises. Guinea–Bissau’s business freedom, investment freedom, financial freedom, property rights, labor freedom, and freedom from corruption all score poorly. Normal business operations are intensely difficult. Significant restrictions on foreign investment combine with domestic regulations and an inflexible labor market to create a business-hostile climate. Partially as a consequence, Guinea–Bissau has the West African Economic and Monetary Union’s weakest financial system. Weak rule of law jeopardizes the protection of property rights. Corruption is so rampant that the informal market (mainly diamonds) dwarfs the legitimate market. BACKGROUND: Guinea–Bissau is one of the world’s poorest countries and has a history of instability. A September 2003 military intervention forced President Kumba Yala to resign. The military appointed a civilian transitional government, and legislative elections were held in March 2004. In August 2005, former President João Bernardo Vieira was declared the winner of the presidential election. Agriculture, forestry, and fishing account for the bulk of GDP and employ most people. Cashew nuts are the primary export. Instability has greatly hindered economic growth, the infrastructure is dilapidated, and corruption is substantial. How Do We Measure Economic Freedom? See Chapter 3 (page 37) for an explanation of the methodology or visit the Index Web site at heritage.org/index.
60
40
20
0
1995
2007
QUICK FACTS
Population: 1.5 million GDP (PPP): $1.1 billion 2.2% growth in 2004 0.3% 5-yr. comp. ann. growth $722 per capita Unemployment: n/a Inflation (CPI): 0.8% FDI (net inflow): $4.5 million Official Development Assistance: Multilateral: $59 million Bilateral: $29 million (0.4% from the U.S.) External Debt: $765 million Exports: $71 million (2003 estimate) Primarily cashew nuts, shrimp, peanuts, palm kernels, sawn lumber Imports: $101.5 million (2003 estimate) Primarily food, machinery and transport equipment, petroleum products
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GUINEA-BISSAU’S TEN ECONOMIC FREEDOMS
Business Freedom Trade Freedom Fiscal Freedom Fdm fm Government Monetary Freedom Investment Freedom Financial Freedom Property Rights Fdm fm Corruption Labor Freedom 27.2 52.8 88.6 59.9 80.7 40 40 20 10 37.9
0
INVESTMENT FREEDOM — 40%
Political and economic instability, a weak infrastructure, and an unskilled workforce discourage foreign investment in Guinea–Bissau. The investment code provides for investment incentives and guarantees against nationalization and expropriation. Non-residents may hold foreign exchange accounts with permission of the Central Bank of West African States (BCEAO), and residents may hold them with permission of the Ministry of Finance and the BCEAO. Capital transfers to most foreign countries are restricted. The government must approve most personal capital movements between residents and non-residents, such as personal loans, gifts or inheritances, or transfers of assets.
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L L L L L L L L L
50 100
100 = most free,
= world average
BUSINESS FREEDOM — 27.2%
Starting a business takes an average of 233 days, compared to the world average of 48 days. Entrepreneurship should be easier for maximum job creation. Despite government efforts to streamline the registration process and reduce bureaucracy, obtaining a business license is difficult, and closing a business is very difficult. The overall freedom to start, operate, and close a business is seriously limited by the national regulatory environment.
FINANCIAL FREEDOM — 40%
Guinea–Bissau has the weakest, least developed financial sector among the eight members of the West African Economic and Monetary Union (WAEMU). The BCEAO governs banking and other financial institutions. The eight BCEAO member countries use the CFA franc, pegged to the euro. Three banks were operating in the first half of 2006, including the country’s first microfinance institution (a subsidiary of a regional development bank) that began operations at the end of 2005 and the new Banco da União that opened in early 2006 with the government, a regional development bank, and the WAEMU as shareholders. A fourth bank is expected to open in late 2006. The government, regional government institutions, and foreign investors participate in the banking sector. There is a regional development bank as well as a regional stock exchange based in the Ivory Coast.
TRADE FREEDOM — 52.8%
Guinea–Bissau’s weighted average tariff rate was 13.6 percent in 2004. Abuses in customs, including irregularities in the valuation of imports and difficulty tracking and monitoring goods, add to the cost of trade. Consequently, an additional 20 percent is deducted from Guinea–Bissau’s trade freedom score to account for these non-tariff barriers.
FISCAL FREEDOM — 88.6%
Guinea–Bissau has a low income tax rate but a high corporate tax rate. The top income tax rate is 20 percent, and the top corporate tax rate is 35 percent. In the most recent year, overall tax revenue as a percentage of GDP was 9.1 percent.
PROPERTY RIGHTS — 20%
Protection of property in Guinea–Bissau is extremely weak. The judiciary is subject to executive influence and control. Judges are poorly trained, poorly paid, and subject to corruption. Traditional practices still prevail in most rural areas, and persons who live in urban areas often bring judicial disputes to traditional counselors to avoid the costs and bureaucratic impediments of the official system. The police often resolve disputes.
FREEDOM FROM GOVERNMENT — 59.9%
Total government expenditures in Guinea–Bissau, including consumption and transfer payments, are high. In the most recent year, government spending equaled 40.4 percent of GDP, and the government received 5.9 percent of its total revenues from state-owned enterprises and government ownership of property.
FREEDOM FROM CORRUPTION — 10%
Guinea–Bissau’s informal market is so large that it eclipses the legal market. Trade in smuggled diamonds is very large, as is trade in food and fishing products. There is a substantial level of corruption.
MONETARY FREEDOM — 80.7%
Inflation in Guinea–Bissau is relatively low, averaging 2.1 percent between 2003 and 2005. Relatively low and stable prices explain most of the monetary freedom score. The government influences prices through the regulation of state-owned utilities and controls prices for cashew nuts, the country’s primary export. Consequently, an additional 10 percent is deducted from Guinea–Bissau’s monetary freedom score to adjust for measures that distort domestic prices.
LABOR FREEDOM — 37.9%
The labor market operates under highly restrictive employment regulations that hinder employment and productivity growth. The non-salary cost of employing a worker is high, and dismissing a redundant employee is relatively costly. Guinea–Bissau’s labor freedom is one of the 20 lowest in the world.
198
2007 Index of Economic Freedom