2009 Index of Economic Freedom

Quick Facts

Population:

• 8.8 million

GDP (PPP):

• $11.1 billion
• 3.8% growth
• 3.6% 5-year compound annual growth
• $1263 per capita

Unemployment:

Inflation (CPI):

• 2.0%

FDI Inflow:

• $63.0 million

Benin's economic freedom score is 55.4, making its economy the 115th freest in the 2009 Index. Its overall score is unchanged from last year because improved scores in trade freedom and freedom from corruption were largely countered by a lower score in business freedom. Benin is ranked 18th out of 46 countries in the Sub-Saharan Africa region, and its overall score is slightly higher than the regional average.

Benin scores well on government size and financial freedom. Though the banking system is not fully developed, the provision of credit is robust and relatively equitable. Government expenditures are moderate. The currency is pegged to the euro, encouraging price stability.

Overall, economic development has been hampered by a serious lack of liberalization in such areas as investment freedom, labor freedom, property rights, and business freedom. Bureaucratic inefficiency and corruption affect virtually all of the economy. Foreign investment is subject to government approval and regulations that require the hiring of native Beninese. Court enforcement of intrusive labor regulations and of property rights is subject to pervasive political interference. High tax rates on income and corporations also impede development of entrepreneurial activity and encourage the growth of informal economic activity.

Background Back to the top

Benin remains underdeveloped and dependent on subsistence agriculture and cotton, which is the primary export and accounts for about 40 percent of GDP and 80 percent of exports. Trade with neighboring countries, particularly Nigeria, is extensive, though much economic activity, including trade, is in the informal sector. Politics has been dominated for much of the post-independence period by former President Mathieu Kérékou, who ruled in Marxist–Leninist fashion for almost 20 years following a military coup, stepped down following a democratic transition in the early 1990s, and later served two five-year elected terms. Current President Boni Yayi, former head of the West African Development Bank, came to power in 2006 in elections that were generally regarded as free and fair.

Business Freedom 43.8 Back to the top

The overall freedom to start, operate, and close a business is significantly limited by Benin's regulatory environment. Starting a business takes an average of 31 days, compared to the world average of 38 days. Obtaining a business license takes more than the world average of 225 days. Bureaucratic procedures are not streamlined and are often non-transparent. Closing a business can be burdensome.

Trade Freedom 67.4 Back to the top

Benin’s weighted average tariff rate was 11.3 percent in 2006. Customs inefficiency and corruption, restrictions on some imports, selected import bans, and import taxes to protect “strategic products” such as rice and sugar from world price fluctuations add to the cost of trade, and the enforcement of intellectual property rights is inadequate. Ten points were deducted from Benin’s trade freedom score to account for non-tariff barriers.

Fiscal Freedom 67.2 Back to the top

Benin has high tax rates. The top income tax rate is 40 percent, and the top corporate tax rate is 38 percent. Other taxes include a value-added tax (VAT), a gas tax, a property tax, and a tax on insurance contracts. In the most recent year, overall tax revenue as a percentage of GDP was 15.4 percent.

Government Size 88.5 Back to the top

Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 19.6 percent of GDP. Despite stated privatization objectives in cotton, ports, and telecommunications, authorities have made virtually no progress and even halted measures to privatize the state-owned Sonapra cotton company in late 2007. The private sector is nearly stagnant, in part because of high electricity costs.

Monetary Freedom79.6 Back to the top

As a member of the West African Economic and Monetary Union, Benin uses the CFA franc, which is pegged to the euro. Inflation is relatively low, averaging 2.7 percent between 2005 and 2007. The government regulates prices in the state-owned water, telecommunications, and electricity sectors, and the parastatal cotton sector benefits from government subsidies and price supports. Ten points were deducted from Benin's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom40.0 Back to the top

Benin officially favors foreign investment, but the bureaucracy is inefficient and subject to corruption. Foreign exchange accounts must be authorized by the government and the Central Bank of West African States (BCEAO), but this is intended to prevent money laundering, not to keep investors from removing money from Benin. Many capital transactions, including direct investment, are subject to reporting requirements and to government and BCEAO approval. There are no restrictions on the remittance of profits by companies that invest in Benin. The remittance of profits by individual resident investors is restricted in certain areas. There are no controls on the purchase of land by non-residents, except for investments in enterprises, branches, or corporations. The government can seize property by eminent domain but is required to pay compensation to the owners.

Financial Freedom60.0 Back to the top

Benin's financial sector is not fully developed but has been expanding. There were 12 licensed banks in 2006, but the largest bank holds 40 percent of market share. Enforcement of contracts, transparency in financial operations, and prevention of fraud are weak. The Central Bank of West African States governs Benin's financial institutions, and regulatory oversight can be unwieldy. Banking is predominantly private, and foreign ownership in banking and insurance is prominent. Credit is allocated on market terms and available without discrimination. Banks experience difficulty with non-performing loans and recovering collateral on those loans. There are many microcredit and savings and loan institutions. The insurance sector accounts for less than 1 percent of GDP but is growing rapidly.

Property Rights30.0 Back to the top

Benin's legal system is weak and subject to corruption. There are no separate commercial courts, and backlogs of civil cases cause long delays. International donor assistance projects aim to improve the judiciary by training staff and expanding physical capacity.

Freedom From Corruption27.0 Back to the top

Corruption is perceived as widespread. Benin ranks 118th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Government corruption blights economic growth and is a significant disincentive to investment.

Labor Freedom50.3 Back to the top

Restrictive employment regulations hinder job creation and productivity growth. Restrictions on increasing or contracting the number of working hours are rigid. The non-salary cost of employing a worker is high, but dismissing a redundant employee can be relatively inexpensive.