2009 Index of Economic Freedom

Quick Facts

Population:

• 0.3 million

GDP (PPP):

• $7.9 billion
• 3.4% growth
• 2.3% 5-year compound annual growth
• $23927 per capita

Unemployment:

• 7.6%

Inflation (CPI):

• 2.4%

FDI Inflow:

• $705.8 million

The Bahamas' economic freedom score is 70.3, making its economy the 27th freest in the 2009 Index. Its overall score is 0.8 point lower than last year, primarily due to lower scores in freedom from corruption, property rights, and business freedom. The Bahamas is ranked 3rd out of 29 countries in the South and Central America/Caribbean region, and its overall score is higher than the regional average.

The Bahamas scores well in government size, monetary freedom, fiscal freedom, and labor freedom. There is no income or corporate tax, and the regulatory environment remains generally business-friendly. The labor market is highly flexible. A focus on transparency reinforces the best traditions of English common law in protecting private property.

Despite a healthy respect for law and a relatively positive economic environment, heavy tariff and non-tariff barriers still hold down the Bahamas' overall economic freedom score. Reform is also needed to improve fiscal governance, tighten budget control of public entities, and privatize state-owned telecommunications and electricity enterprises.

Background Back to the top

The Bahamas is a prime tourist destination for Americans, over 4 million of whom visit the islands each year. Tourism generates about half of all jobs, but banking and international financial services also contribute heavily to an economy that is one of the most prosperous in the Caribbean. The Bahamas archipelago is a way station for drug smugglers and illegal aliens seeking to enter the United States. Aggressive efforts against money laundering have caused some offshore banks to incur losses and leave the country.

Business Freedom 74.7 Back to the top

Overall, the regulatory environment is conducive to vibrant development of the private sector, but obtaining a business license can be difficult as the process is not transparent and officials have substantial discretionary power.

Trade Freedom 56.0 Back to the top

According to the World Bank, the Bahamas’ weighted average tariff rate was a high 17 percent in 2006. High tariffs and a “stamp” tax on certain imports, high duties that protect a few agricultural items and consumer goods, occasional import bans, some import licensing and permits, and trade bans in certain services add to the cost of trade. Ten points were deducted from the Bahamas’ trade freedom score to account for non-tariff barriers.

Fiscal Freedom 96.5 Back to the top

The Bahamas' tax burden is one of the world's lowest. The government imposes national insurance, property, and stamp taxes but no income tax, corporate income tax, capital gains tax, value-added tax (VAT), or wealth tax. First-time home owners now also have to pay the stamp tax. In the most recent year, overall tax revenue (mainly from import tariffs) as a percentage of GDP was 18.7 percent.

Government Size 84.4 Back to the top

Total government spending, including consumption and transfer payments, is low. In the most recent year, government spending equaled 22.8 percent of GDP. Authorities are committed to improving the transparency of budget planning.

Monetary Freedom75.5 Back to the top

Inflation is relatively low, averaging 2.2 percent between 2005 and 2007. Fifteen points were deducted from the Bahamas’ monetary freedom score to adjust for measures that distort domestic prices for such “breadbasket” items as drugs, gasoline, diesel oil, and petroleum gas.

Investment Freedom40.0 Back to the top

Activities reserved exclusively for Bahamian citizens include wholesale and retail operations, commission import–export agencies, real estate and property management, newspaper and magazine publication, advertising and public relations firms, nightclubs and certain restaurants, security services, distribution and building supplies, certain construction, personal cosmetics and beauty services, certain fishing operations, auto and appliance service operations, and public transportation. All other foreign direct investment must be approved by the central bank. New foreign ventures perceived as competing with existing Bahamian businesses may face loss or refusal of business licenses. All outward capital transfers and inward transfers by non-residents require approval, but exchange controls are not known to hamper repatriation of approved investment capital. To buy real estate for commercial purposes or to buy more than five acres, foreigners must obtain a permit from the Investments Board.

Financial Freedom70.0 Back to the top

The Bahamian financial sector, open to foreigners and foreign scrutiny, accounts for more than 35 percent of GDP and employs more than 3 percent of the labor force. The Bahamas was removed from a financial watch list in 2001 after establishing a Financial Intelligence Unit and taking other steps, and the number of licensed banks and trust companies declined to 245 as of December 2007, down from 415 in 1999. The government has adopted incentives to encourage foreign financial business, and further banking and finance reforms are in progress. The government plans to merge the regulatory functions of the key financial institutions, including the Central Bank of the Bahamas (CBB) and the Securities and Exchange Commission. Restrictions and controls on capital and money market instruments exist, and the CBB administers exchange controls. The Bahamas International Securities Exchange, founded in 2000, has been somewhat revitalized. As of June 30, 2008, the stock market listed 20 companies with a total market capitalization of over $3.5 billion.

Property Rights75.0 Back to the top

The Bahamas has an efficient legal system based on British common law. The judiciary is independent. The judicial process tends to be very slow, and some investors have complained of malfeasance by court officials. Existing copyright laws are widely ignored, resulting in widespread piracy of video and music recordings and broadcasts.

Freedom From Corruption50.0 Back to the top

Piracy of software, music, and videos is a problem. Illegal drug trafficking and money laundering are also significant and reportedly involve police, coast guard, and other government employees. Violent crimes have escalated sharply. Even though Internet gambling is illegal, more than 10 Internet gambling sites are reportedly based in the Bahamas. The Bahamas has neither signed nor ratified the U.N. Convention Against Corruption.

Labor Freedom80.4 Back to the top

Flexible employment regulations generally enhance overall productivity growth and job creation. Employment contracts, though not mandatory, are often used. There is no legal entitlement to notice of termination, but one pay period of severance pay is customarily provided.