2009 Index of Economic Freedom

Quick Facts

Population:

• 156.0 million

GDP (PPP):

• $180.1 billion
• 6.4% growth
• 5.9% 5-year compound annual growth
• $1155 per capita

Unemployment:

• 1.0%

Inflation (CPI):

• 8.4%

FDI Inflow:

• $625.0 million

Bangladesh's economic freedom score is 47.5, making its economy the 160th freest in the 2009 Index. Its overall score is 3.3 points higher than last year, mainly reflecting an improved score in trade freedom. Bangladesh is ranked 36th out of 41 countries in the Asia–Pacific region.

Bangladesh suffers from weak investment freedom, property rights, and financial freedom. Corruption is pervasive, and burdensome 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. Rigid employment regulations create a disincentive for companies to add jobs.

Bangladesh scores relatively well in fiscal freedom and government size, but this reflects severe underdevelopment and black market activity more than genuine freedom. State ownership of enterprises persists. Public spending in the wake of natural disasters heightens the importance of sound budget management. Commercial regulations can be vague and inconsistent, and the lack of transparency increases start-up and overall operational costs.

Background Back to the top

The People's Republic of Bangladesh, formerly a democracy, has been run by a military-backed caretaker regime since January 2007. The government pledged to hold elections by the end of 2008. Bangladesh is one of the world's poorest and most densely populated nations, and the majority of Bangladeshis work in agriculture, though service industries now account for around half of GDP. The formal financial system remains weak, and inadequate infrastructure hampers economic development.

Business Freedom 62.9 Back to the top

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 73 days, compared to the world average of 38 days. Obtaining a business license requires less than the world average of 18 procedures.

Trade Freedom 40.2 Back to the top

Bangladesh's weighted average tariff rate was 19.9 percent in 2006. Import duties serve as a principal source of revenue for the government. 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 and non-transparent government procurement, inefficient and corrupt customs administration, and weak enforcement of intellectual property rights also add to the cost of trade. Twenty points were deducted from Bangladesh's trade freedom score to account for these non-tariff barriers.

Fiscal Freedom 72.8 Back to the top

Bangladesh has moderate tax rates. The top income tax rate is 25 percent, and the top corporate tax rate 45 percent. Other taxes include a value-added tax (VAT) and a tax on interest. The Administration Capacity and Taxpayer Services (TACTS) program was created to enhance transparency and to help authorities encourage tax compliance. In the most recent year, overall tax revenue as a percentage of GDP was 8.5 percent.

Government Size 94.2 Back to the top

Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 13.9 percent of GDP.

Monetary Freedom67.3 Back to the top

Inflation is inching up, averaging 7.8 percent between 2005 and 2007. Fifteen points were deducted from Bangladesh's monetary freedom score to adjust for price-control measures that distort domestic prices for petroleum products, some pharmaceuticals, and goods produced in state-owned enterprises.

Investment Freedom20.0 Back to the top

Officially, foreign investment is welcomed, but certain sectors are restricted, and potential investors face a host of challenges: delays in project approvals, burdensome bureaucratic procedures, high levels of corruption, and uncertainty about contract and regulatory enforcement. The Foreign Investment Act of 1980 guarantees the right of repatriation of invested capital, profits, capital gains, post-tax dividends, and approved royalties and fees. Foreign firms are able to repatriate funds without much difficulty, provided the appropriate documentation is in order. Generally, government laws and regulations and their implementation create rather than reduce distortions or impediments to investment.

Financial Freedom20.0 Back to the top

Bangladesh's financial sector is small and poorly developed. Behind the high level of non-performing loans often stand weak financial supervision, fraudulent transactions, mismanagement, and political influence in lending practices. The financial system consists of the central Bangladesh Bank, four nationalized commercial banks, five government-owned specialized banks, 30 domestic private banks, 10 foreign banks, and 28 non-bank financial institutions. Foreign banks are generally restricted to offshore and foreign trade business. The state-owned commercial banks account for more than 30 percent of total banking system assets. An extensive microfinance presence remains largely unsupervised. There are two stock exchanges, but market capitalization is low. In recent years, the government has strengthened the criteria for the listing of firms on either stock market. There are controls and limits on transactions regarding money market instruments.

Property Rights25.0 Back to the top

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 serious corruption. Contracts are weakly enforced, and dispute settlement is further hampered by shortcomings in accounting practices and real property registration.

Freedom From Corruption20.0 Back to the top

Corruption is perceived as pervasive. Bangladesh ranks 162nd out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Widespread and severe corruption among government officials and police facilitates trafficking in persons. Given that corruption blights all other economic freedoms, this is a key area for improvement.

Labor Freedom52.3 Back to the top

Bangladesh's labor market is burdened by inflexible employment regulations that hinder job creation and productivity growth. The non-salary cost of employing a worker is low, but dismissing a redundant employee can be difficult.