2009 Index of Economic Freedom

Quick Facts

Population:

• 0.5 million

GDP (PPP):

• $1.4 billion
• 10.8% growth
• 6.1% 5-year compound annual growth
• $2697 per capita

Unemployment:

• 21.0%

Inflation (CPI):

• 4.4%

FDI Inflow:

• $121.7 million

Cape Verde's economic freedom score is 61.3, making its economy the 77th freest in the 2009 Index. Its overall score is 3.4 points higher than last year, mainly as a result of enhanced trade freedom because of much-reduced tariffs. Cape Verde is ranked 7th out of 46 countries in the Sub-Saharan Africa region, and its overall score is much higher than the regional average.

Cape Verde scores well in monetary freedom, investment freedom, and especially property rights. Inflation is low, although the government does subsidize some staples. Property rights are very well secured by the rule of law in comparison to the situation in neighboring countries. Cape Verde graduated from least-developed-country status in January 2008.

Lingering challenges threaten Cape Verde's progress. Government taxation and expenditure, coupled with corruption, still hold down the level of economic freedom. Burdensome business regulations impede more vibrant private investment and entrepreneurship. Labor laws were revised recently to make labor contracts more flexible, but overall labor market rigidity still hurts employment and productivity growth.

Background Back to the top

Cape Verde, an archipelago located off the west coast of Africa, is a stable multi-party parliamentary democracy in which power has changed hands peacefully since 1991. Cape Verde has few natural resources and is subject to frequent droughts and serious water shortages. The economy is dominated by services, but light industry, agriculture, and fishing employ a majority of the workforce. Cape Verde has close economic and political ties to the European Union, and its currency is pegged to the euro. In 2007, the EU agreed in principle to grant Cape Verde special partnership status, under which Cape Verde and the EU will cooperate to improve governance, security and stability, regional integration, and antipoverty efforts. It is estimated that remittances from Cape Verdeans who live abroad account for roughly 20 percent of GDP.

Business Freedom 57.1 Back to the top

The overall freedom to start, operate, and close a business is restrained by Cape Verde's regulatory environment. Starting a business takes an average of 52 days, compared to the world average of 38 days. The government has tried to streamline cumbersome bureaucracy and increase transparency. Obtaining a business license requires less than the world average of 225 days, but closing a business is difficult.

Trade Freedom 65.4 Back to the top

In 2004, Cape Verde's average tariff rate was cut almost in half, to 12.3 percent. Some import restrictions, inadequate regulatory capacity, non-transparent sanitary and phytosanitary regulations, and export incentives add to the cost of trade. Such products as fuels and lubricants, tobacco, and chemical-pharmaceutical products are subject to special rules and imported under an exclusive regime by select enterprises. Ten points were deducted from Cape Verde's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 65.5 Back to the top

Cape Verde has a high income tax rate and a moderate corporate tax rate. The top income tax rate is 45 percent, and the top corporate tax rate is 30 percent. Other taxes include a value-added tax (VAT) and a special consumption tax. In the most recent year, tax revenue as a percentage of GDP was 23.0 percent.

Government Size 62.2 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 35.5 percent of GDP. Spending on social infrastructure remains high, privatization of the national airline and ports management is underway, and stated policy goals center on fiscal consolidation.

Monetary Freedom76.9 Back to the top

Inflation is relatively moderate, averaging 4.3 percent between 2005 and 2007. The market determines most prices, but the government controls the prices of water and electricity and regulates some others, including those for petroleum products and basic food items. Ten points were deducted from Cape Verde's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom60.0 Back to the top

Foreign investment is officially encouraged and receives equal treatment. Most sectors are open, but all foreign investment requires prior authorization. The government has simplified and expedited registration, opening most privatization to foreign investors. Residents and non-residents may hold foreign exchange accounts, subject to approval and regulations. Most payments and transfers are subject to controls. Most capital transactions are permitted but are also subject to advance approval by the central bank.

Financial Freedom60.0 Back to the top

Cape Verde's financial sector includes an independent central bank, four commercial banks, two insurance companies, and 13 offshore financial institutions. Two dominant commercial banks account for around 90 percent of assets and deposits. Credit is allocated on market terms and is available to foreign and domestic investors without discrimination. Credit to the private sector climbed to around 50 percent of GDP in 2006. The non-performing loan ratio has improved significantly. Legislation implemented in 2002 gave more independence to the central bank, promoting its financial intermediary role, and the financial sector has been strengthened by improved regulations and monetary policy autonomy. The government remains active through financial institutions that handle public investment and international aid. The legal and institutional framework for the Cape Verde Stock Exchange has been strengthened. With increasing market capitalization, the stock market has been reinvigorated.

Property Rights70.0 Back to the top

Private property is fairly well protected. The constitution provides for an independent judiciary, and the government generally respects this provision. The right to an expeditious trial is constrained by an overburdened, understaffed, and inefficient judicial system. The case backlog leads to delays of six months or more. Several recently signed treaties provide protection for intellectual property rights.

Freedom From Corruption49.0 Back to the top

Corruption is perceived as significant. Cape Verde ranks 49th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Its political and economic governance is generally regarded as Africa's third best, behind Botswana and South Africa. The economy is about 40 percent informal. The government has acknowledged the existence of corruption in the customs department and has adopted laws and regulations to combat corruption, which is criminally punishable.

Labor Freedom46.9 Back to the top

The labor market operates under relatively rigid employment regulations. The non-salary cost of employing a worker is moderate, but the relatively high cost of dismissing a worker creates a disincentive for companies that would otherwise hire more people.