2009 Index of Economic Freedom

Quick Facts

Population:

• 0.1 million

GDP (PPP):

• $0.7 billion
• 4.0% growth
• 1.0% 5-year compound annual growth
• $9236 per capita

Unemployment:

• 13.1%

Inflation (CPI):

• 2.7%

FDI Inflow:

• $33.5 million

The 2009 Index is the first to assess Dominica's level of economic freedom. Dominica's economic freedom score is 62.6, making its economy the world's 70th freest. Dominica is ranked 14th freest among the 29 countries in the South and Central America/Caribbean region, and its overall score is above the world and regional averages.

A relatively open economy, Dominica scores at or above the world average in seven of the 10 freedoms, particularly business freedom and labor freedom. Investment is generally unrestricted, and foreign investors receive mostly equal treatment. However, non-nationals face restrictions when it comes to owning residential or commercial property. The rule of law is strong, with the exception of pirated materials that are bought and sold without consequence.

Only the government size and financial freedom scores are significantly below world averages. Government expenditure equals nearly 40 percent of GDP, and, despite social security reforms and continued fiscal consolidation, the public debt remains high. Dominica's unimpressive score in financial freedom is largely a result of the lack of necessary bank supervision.

Background Back to the top

Dominica has a unicameral parliamentary government with a president and prime minister. The last election was held in May 2005. Dominica is largely volcanic and has few beaches, so tourism is less significant than on other Eastern Caribbean islands, though ecotourists are drawn to the rugged mountains and rain forests. Bananas, citrus, coconuts (including coconut soap), and cocoa dominate the economy, and nearly one-third of the labor force works in agriculture. The government has attempted to diversify the agricultural sector by encouraging the growing of coffee, patchouli, aloe vera, cut flowers, and exotic fruits. The economy has shown modest growth since a series of macroeconomic reforms. In 2008, the government decided to join Venezuela's Bolivarian Alternative for the Americas (ALBA) trade scheme after the Venezuelan government promised millions in funding for agricultural and industrial development.

Business Freedom 76.4 Back to the top

The overall freedom to conduct a business is relatively well protected under Dominica's regulatory environment. Starting a business takes less than half of the world average of 38 days. Obtaining a business license requires 13 procedures, compared to the world average of 18, and almost 50 days less than the world average of 225.

Trade Freedom 74.2 Back to the top

Dominica's weighted average tariff rate was 7.9 percent in 2007. Dominica is trying to improve customs efficiency, modernize customs operations, and address complaints about delays and inefficiencies in the clearance of goods, but some import and export bans and restrictions, import taxes and fees, export fees, restrictions on services markets, import licensing, export subsidies, and limited state trading add to the cost of trade. Ten points were deducted from Dominica's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 67.4 Back to the top

The top income tax rate is 38 percent, and the corporate tax rate is 30 percent. Other taxes include a value-added tax (VAT), a vehicle tax, and an environmental tax. In the most recent year, overall tax revenue as a percentage of GDP was 30.3 percent. The government has committed to achieving greater transparency in the tax regime, particularly by publishing any changes in the complex system of tax concessions.

Government Size 52.2 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 39.9 percent of GDP. Prudent management of aid inflows remains central to sound fiscal management.

Monetary Freedom79.8 Back to the top

Inflation is low, averaging 2.6 percent between 2005 and 2007. Dominica's currency is the Eastern Caribbean Dollar, a regional currency shared among members of the Eastern Caribbean Currency Union. The Eastern Caribbean Central Bank issues the EC$, manages monetary policy, and regulates and supervises commercial banking activities in member countries. In 2003, the government began a comprehensive restructuring of the economy, including elimination of price controls and privatization of the state banana company, that paved the way for an economic recovery. Five points were deducted from Dominica's monetary freedom score to adjust for remaining price controls on fuel.

Investment Freedom60.0 Back to the top

Foreign investment is subject to little restriction, and foreign investors receive national treatment. Foreign investors may hold up to 100 percent of an investment. Dominica reserves a number of small-business opportunities for nationals, permitting foreign suppliers only on the basis of an economic needs test. There are no restrictions on the repatriation of dividends for totally foreign-owned firms; a mixed (foreign–domestic) company may repatriate profits to the extent of its foreign participation. In general, non-national investors must obtain an Alien Landholding License to purchase up to one acre of land for residential use and up to three acres of land for trade or business purposes.

Financial Freedom30.0 Back to the top

Dominica's financial sector is underdeveloped, and the regulatory and supervisory framework is poor. Shallow credit markets and a lack of available financial instruments restrict firms' access to formal financing. The financial sector consists of three foreign commercial banks, one publicly owned national bank, and several offshore banks. In the past few years, there has been a rapid expansion of offshore financial services. Dominica is one of nine members of the Eastern Caribbean Central Bank. By implementing the Financial Services Act, the government aims to strengthen the regulatory and prudential framework for non-bank financial institutions, which are dominated by insurance companies and credit unions.

Property Rights60.0 Back to the top

Dominica has an efficient legal system based on British common law. The judiciary is independent and conducts generally fair public trials. When the male head of household dies without a will, the wife may not inherit or sell the property, although she may live in it and pass it to her children. Pirated copyrighted material is sold openly in Dominica.

Freedom From Corruption56.0 Back to the top

Corruption is perceived as significant. Dominica ranks 37th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. There are criminal penalties for official corruption, but the government has not implemented the law effectively. The supervisory and regulatory framework to monitor non-bank financial institutions needs to be strengthened to deter money-laundering.

Labor Freedom70.0 Back to the top

Dominica's employment regulations are relatively inflexible. The non-salary cost of employing a worker is moderate, and dismissing a redundant employee is not costly. However, the formal labor market is not fully developed.