Bangladesh: Economic-Freedom 2008

Bangladesh's economy is 44.9 percent free, according to a 2008 assessment, which makes it the world's 149th freest economy.

Its overall score is 3.1 percentage points lower than last year—one of the biggest declines in the world, reflecting lower investment, business, and labor freedom.

Bangladesh is ranked 27th out of 30 countries in the Asia–Pacific region.

Bangladesh's fiscal freedom and government size score relatively well, which probably reflects severe underdevelopment and black market activity.

Restrictions on starting new businesses and obtaining commercial licenses are fairly loose. Closing a business, however, is not simple.

Bangladesh's barriers to trade freedom are disastrous. The country also suffers from weak investment freedom & property rights.

Corruption is common.

Chaotic regulations and restricted market sectors impede greater foreign investment, as does a haphazard and politicized approach to the rule of law.

The banking sector is plagued by similar problems.

Background:
Bangladesh, formerly a parliamentary democracy, is now run by a military-backed regime that overthrew the elected government in January 2007. The generals have promised to hold elections by the end of this year.

One of the world's poorest nations, Bangladesh had made progress in recent years with growth in its export sector, particularly in the garment industry.

The formal financial system remains weak. The majority of Bangladeshis work in agriculture, though service industries now account for around half of GDP.

Natural disasters and inadequate infrastructure hamper economic development.

Business Freedom
The overall freedom to start, operate, and close a business is limited by Bangladesh's national regulatory environment. Starting a business takes an average of 74 days, compared to the world average of 43 days.

Obtaining a business license requires less than the world average of 19 procedures. However, commercial regulations can be unclear and inconsistent, and the lack of transparency raises start-up and operational costs.

Closing a business is a lengthy process.

Trade Freedom
Bangladesh's weighted average tariff rate was 55.8 percent in 2005. Import and export restrictions; numerous border taxes and fees; restrictive labeling requirements; burdensome import licensing rules; export subsidies and other support programs; government monopolies and state trading boards; complex, non-transparent government procurement; inefficient and corrupt customs administration; and weak enforcement of intellectual property rights also add to the cost of trade. An additional 20 percentage points is deducted from Bangladesh's trade freedom score to account for these non-tariff barriers.

Fiscal Freedom
Bangladesh has moderate tax rates. The top income tax rate is 25%, and the top corporate tax rate is 30%. Other taxes include VAT & property tax.

In the most recent year, tax revenue as a percentage of GDP was 8.7%.

Freedom from Government
Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 15.1 percent of GDP. Privatization has been hindered by bureaucratic resistance.

Monetary Freedom
Inflation is moderate, averaging 6.5 percent between 2004 and 2006. Relatively unstable prices explain most of the monetary freedom score.

An additional 15 percentage points is deducted from Bangladesh's monetary freedom score to adjust for price-control measures that distort domestic prices for goods produced in state-owned enterprises & some pharmaceuticals.

Investment Freedom
Officially, foreign investment is generally welcomed, but utilities and other critical sectors are not open to the private sector, and potential investors face a host of challenges: bureaucratic procedures, unnecessary licenses, high levels of corruption, an unpredictable security situation, and uncertainty about contract and regulatory enforcement. Bangladesh is deeply in need of public administration reforms. Most capital transactions are controlled or prohibited.

Non-resident companies are subject to a higher corporate tax rate (37.5 percent) than are publicly traded companies (30 percent).

Financial Freedom
Bangladesh's financial services sector is small and underdeveloped. Financial supervision is weak, and fraudulent transactions, mismanagement, and political influence in lending are common. The central bank is not independent.

In 2006, the banking system consisted of 4 nationalized banks, 5 development financial institutions, 30 private commercial banks, and 10 foreign banks.

Foreign banks are generally restricted to foreign trade business. Nationalized banks dominate the system, controlling over half of banking assets.

An extensive microfinance presence is largely unsupervised. There are 30 private insurance companies, including a foreign-owned firm, but the major portion of insurance activity is controlled by two state-owned companies. Bangladesh has two stock exchanges, but market capitalization is low. In 2006, the government strengthened the criteria for the listing of firms on either stock market.

Property Rights
Bangladesh has a civil court system based on the British model. Although the constitution provides for an independent judiciary, the lower courts are considered part of the executive branch and suffer from corruption. Contracts are weakly enforced, and dispute settlement is further hampered by shortcomings in accounting practices and real property registration.

Freedom from Corruption
Corruption is perceived as pervasive. Bangladesh ranks 156th out of 163 countries in Transparency International's Corruption Perceptions Index for 2006.

Labor Freedom
Bangladesh's labor market is burdened by relatively inflexible employment regulations that hinder employment creation and productivity growth. The non-salary cost of employing a worker is low, but dismissing a redundant employee can be difficult. The difficulty of laying off workers creates a risk aversion for companies that would otherwise hire more people and grow.

Via Bangladesh-Blogger