2009 Index of Economic Freedom

Quick Facts

Population:

• 0.2 million

GDP (PPP):

• $1.0 billion
• 1.8% growth
• 3.5% 5-year compound annual growth
• $5148 per capita

Unemployment:

Inflation (CPI):

• 6.0%

FDI Inflow:

• $1.7 million

The 2009 Index resumes coverage of Samoa and assessment of its economic freedom for the first time since the 2001 Index because of the improved availability of relevant data for the country. The country’s economic freedom score is 59.5, making its economy the 86th freest in the 2009 Index. Samoa ranks 15th out of 41 countries in the Asia–Pacific region, and its overall score is approximately the world average.

Samoa scores well above average in fiscal freedom, property rights, and labor freedom. Its mone-tary freedom score is just above average, and business freedom and trade freedom are slightly below average. Scores for financial freedom and investment freedom are extremely low.

Taxes are moderate in Samoa, and the corporate tax rate has been reduced to 27 percent in the past year. Further tax reforms for 2008 have been delayed, but when implemented they are set to include further reductions in corporate taxes and the introduction of an income tax. Budget reforms for 2008 have also been delayed, and government expenditures remain high. The inflation rate is moderately high but is kept stable by an exchange rate peg. Although the main contributors to the economy are remittances and tourism, the offshore financial sector is playing an increasing role in foreign exchange earnings. The financial sector as a whole, however, is very weak.

Background Back to the top

Samoa, a small South Pacific archipelago with a population of less than 200,000, became independent from its U.N. mandate in 1962. It is an electoral democracy but historically has been dominated politically by the Human Rights Protection Party. The economy is based mostly on fishing, agriculture, and tourism. Remittances from Samoans working abroad account for about 24 percent of national income. In 2006, the United Nations recommended that Samoa’s status be upgraded from “least developed country” to “developing country.” Samoa applied for membership in the World Trade Organization in 1998.

Business Freedom 61.5 Back to the top

The overall freedom to conduct a business is constrained by Samoa’s regulatory environment. Starting a business takes 35 days, compared to the world average of 38 days. Obtaining a business license requires less than the world average of 225 days, but closing a business is a lengthy and costly process.

Trade Freedom 70.0 Back to the top

Samoa’s weighted average tariff rate was 10 percent in 2007. Some high tariffs, import restrictions, import taxes and fees, and some limitations in regulatory and trade capacity add to the cost of trade. Ten points were deducted from Samoa’s trade freedom score to account for non-tariff barriers.

Fiscal Freedom 86.2 Back to the top

Samoa’s taxes are moderate. The top corporate tax rate is 27 percent, reduced from 29 percent in 2007. Other taxes include a recently increased value-added tax (VAT) and excise taxes. In the most recent year, overall tax revenue as a percentage of GDP was 25.5 percent. Tax reforms intended for 2008, including the introduction of an individual income tax and reduction of the corporate tax, have not yet been enacted

Government Size 56.2 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 38.2 percent of GDP. Political uncertainty delayed passage of the 2008 budget and much-needed reforms in public administration. Weak revenues and high public spending have resulted in a poor fiscal position. The national airline and mobile telephone companies were privatized in 2006.

Monetary Freedom75.7 Back to the top

Inflation is moderately high, averaging 5.1 percent between 2005 and 2007. The central bank maintains an exchange rate peg based on a basket of the currencies of Samoa’s six main trading partners. The basket peg has kept the inflation rate relatively stable. Ten points were deducted from Samoa’s monetary freedom score to adjust for measures that distort domestic prices

Investment Freedom30.0 Back to the top

Foreign investment is generally welcome, but certain sectors of the economy are reserved for Samoan citizens. Investment is screened and subject to government approval. Underdeveloped private markets, non-transparent regulation, cumbersome and burdensome bureaucracy, difficulty obtaining work permits for foreign labor, and inadequate infrastructure deter investment. Foreign exchange and capital transactions are subject to some restrictions and controls. Land ownership is restricted, and leases can be difficult to obtain.

Financial Freedom30.0 Back to the top

Samoa’s small financial sector is dominated by banking. There are four commercial banks. The country’s offshore financial sector, first launched about two decades ago, plays an increasingly important role as a source of foreign exchange earnings, though it is still a minor contributor compared to remittances and tourism. The offshore financial sector accounts for about 1 percent of GDP, and the contribution of the total financial sector (combined domestic and offshore) is close to 10 percent of GDP. A significant portion of the population still remains outside the formal banking sector, and limited access to banking and financial services is a barrier to entrepreneurial activity. Capital markets are poorly developed.

Property Rights60.0 Back to the top

Samoa’s efficient legal system is based on British common law. The judiciary is independent and conducts generally fair public trials. More than 80 percent of the land in Samoa is owned by extended families represented by their chiefs (Matai). Such land cannot be sold, and leases, even though they are legally possible, are difficult and expensive to arrange. These customary practices are seen as a major impediment to further tourism development and intensive agriculture.

Freedom From Corruption45.0 Back to the top

Corruption is perceived as present. Samoa ranks 57th out of 179 countries in Transparency International’s Corruption Perceptions Index for 2007. The law provides criminal penalties for official corruption, and the government generally implements the law effectively. Penalties range from several months to several years of imprisonment if convicted. There have been isolated reports of government corruption.

Labor Freedom80.2 Back to the top

Samoa’s relatively flexible labor regulations facilitate overall employment and productivity growth. The non-salary cost of employing a worker is moderate, and dismissing a redundant employee is relatively easy. However, the formal labor market is not fully developed.