2009 Index of Economic Freedom

Quick Facts

Population:

• 1.6 million

GDP (PPP):

• $0.8 billion
• 1.8% growth
• -0.2% 5-year compound annual growth
• $478 per capita

Unemployment:

Inflation (CPI):

• 3.8%

FDI Inflow:

• $42.0 million

Guinea–Bissau’s economic freedom score is 45.4, making its economy the 165th freest in the 2009 Index. Despite declines in four of the 10 economic freedoms, Guinea–Bissau’s overall score is 1.1 points higher than last year, in part because of significant improvements in trade freedom and freedom from corruption. Guinea–Bissau is ranked 40th out of 46 countries in the Sub-Saharan Africa region, and its overall score is well below the world average.

Guinea–Bissau’s economic performance has been unstable, recording negative average growth rates over the past five years. Economic freedom is severely constrained except in the areas of fiscal freedom and monetary freedom. The top income tax rate is relatively low, and the top corporate tax rate is moderate, but state involvement in the economy is widespread and inefficient.

Guinea–Bissau faces serious institutional challenges. The economy scores well below the world average in business freedom, investment freedom, financial freedom, property rights, and freedom from corruption. Normal business operations are extremely difficult. Significant restrictions on foreign investment combine with domestic regulations to create a climate that is hostile to private enterprise. Weak rule of law jeopardizes the protection of property rights. Corruption is so rampant that the informal market dwarfs the legitimate market.

Background Back to the top

Civil war in 1998–1999 displaced hundreds of thousands of Bissau–Guineans, severely damaged the country’s infrastructure, and disrupted the economy. Agriculture accounts for 60 percent of GDP, employs over 80 percent of the labor force, and comprises over 90 percent of exports. Cashew nuts are the primary export. New investments in bauxite promise some economic diversification, and tourism is growing. Former President Joao Bernardo Vieira won the presidency again in 2005 but has struggled to maintain political control.

Business Freedom 24.2 Back to the top

The overall freedom to conduct a business remains severely limited by Guinea–Bissau’s regulatory environment. Starting a business takes more than five times the world average of 38 days. The entry costs of launching a business are very high.

Trade Freedom 66.8 Back to the top

Guinea–Bissau’s weighted average tariff rate was 9.1 percent in 2006. Irregularities in the valuation of imports, difficulty tracking and monitoring goods, inadequate infrastructure and trade capacity, and customs corruption add to the cost of trade. The government intervenes in the export of cashews, the principal export. Fifteen points were deducted from Guinea–Bissau’s trade freedom score to account for non-tariff barriers.

Fiscal Freedom 88.4 Back to the top

Guinea–Bissau has a low income tax rate but a moderate corporate tax rate. The top income tax rate is 20 percent, and the top corporate tax rate is 25 percent. In the most recent year, overall tax revenue as a percentage of GDP was 11.5 percent.

Government Size 49.1 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 41.2 percent of GDP. In May 2008, the state took control of the national telecommunications company, which had been privately owned. The state-owned water and electricity enterprises struggled to maintain even minimal operations during an oil shortage in June 2008.

Monetary Freedom73.5 Back to the top

Inflation is relatively low, averaging 3.3 percent between 2005 and 2007. The government influences prices through the regulation of state-owned utilities and controls prices for cashew nuts, the primary export and source of roughly 30 percent of GDP. Fifteen points were deducted from Guinea–Bissau’s monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom30.0 Back to the top

Political and economic instability, inadequate regulatory capacity and infrastructure, corruption, and an unskilled workforce discourage foreign investment. Non-residents may hold foreign exchange accounts with permission of the Central Bank of West African States (BCEAO), and residents may hold them with the permission of the Ministry of Finance and the BCEAO. Capital transfers to most foreign countries are restricted. The government must approve most personal capital movements between residents and non-residents. The new investment code drafted in 2006 provides for incentives and guarantees against nationalization and expropriation.

Financial Freedom30.0 Back to the top

Guinea–Bissau’s small financial sector remains poorly developed, and its banking system has not been revitalized since the end of the country’s civil war in the late 1990s. Guinea–Bissau is one of eight members of the West African Economic and Monetary Union. The monetary union governs banking and other financial institutions, and its members use the CFA franc, pegged to the euro. Four banks were in operation as of 2007. The government, regional government institutions, and foreign investors participate in the banking sector. Banking has been the main source of funds for the private sector, but a large proportion of the population is still outside of the formal banking sector. High credit costs and scarce access to financing severely impede dynamic entrepreneurial activity. The first microfinance institution opened at the end of 2005 as a subsidiary of a regional development bank. There is no stock exchange in Guinea–Bissau.

Property Rights20.0 Back to the top

Protection of property is extremely weak. The judiciary is subject to executive influence and control. Judges are poorly trained, poorly paid, and subject to corruption. Traditional practices prevail in most rural areas, and persons who live in urban areas often bring judicial disputes to traditional counselors to avoid the costs and bureaucratic impediments of the official system. The police often resolve disputes without recourse to the courts.

Freedom From Corruption22.0 Back to the top

Corruption is perceived as pervasive. Guinea–Bissau ranks 147th out of 179 countries in Transparency International’s Corruption Perceptions Index for 2007. Guinea–Bissau’s informal sector eclipses the formal economy. Trade in smuggled diamonds, food, and fishing products is significant. Corruption and lack of transparency pervade all levels of government. Customs officers frequently accept bribes for not collecting import taxes.

Labor Freedom50.5 Back to the top

Guinea–Bissau’s burdensome labor regulations hinder employment opportunities and productivity growth. The non-salary cost of employing a worker is high, and dismissing a redundant employee is relatively costly. Restrictions on the number of work hours are not flexible.