The New Nation - Internet Edition

BUSINESS REPORT

Bangladesh has been ranked 149th among 179 countries in freedom of trade in the 'Index of Economic Freedom' report released by The Heritage Foundation, a Washington-based think-tank and The Wall Street Journal yesterday.

Making an assessment, the Heritage Foundation said Bangladesh's economy is only 44.9 percent free.

Countries with scores from 49.9 and below are rated as economically repressed. They included Maldives, Bhutan, Bangladesh, Djibouti, Seychelles, Comoros and North Korea.

The Heritage Foundation said Bangladesh's overall score is 3.1 percentage points lower than last year-one of the biggest declines in the world, reflecting lower investment, business, and labor freedom. Bangladesh is ranked 27th out of 30 countries in the Asia-Pacific region.

Bangladesh's fiscal freedom and government size score relatively well, which probably reflects severe underdevelopment and black market activity more than genuine freedom. Restrictions on starting new businesses and obtaining commercial licenses are fairly loose. Closing a business, however, is not quite as simple.

Bangladesh's barriers to trade freedom are disastrous. Tariffs are prohibitively high. The country also suffers from weak investment freedom, property rights, and financial freedom. Corruption is common. Chaotic 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.

The 'Index of Economic Freedom' is produced annually by The Heritage Foundation and The Wall Street Journal, appraises economic freedom based on 10 categories, namely trade freedom, labour freedom, fiscal freedom, business freedom, government size, investment freedom, property rights, financial freedom, freedom from corruption and monetary freedom.

Countries whose scores fall between 80 and 100 percent in the index are said to have free economies while mostly free economies are those scoring between 70 and 79.9, moderately free (between 60 and 69.9) and mostly non-free (between 50 and 59.9).

Countries with scores from 49.9 and below are rated as economically repressed.

Background:

The People's Republic of Bangladesh, formerly a parliamentary democracy, is now run by a military-backed regime that overthrew the elected government in January 2007. The generals have promised to hold elections by the end of this year. One of the world's poorest nations, Bangladesh had made progress in recent years with growth in its export sector, particularly in the garment industry.

The formal financial system remains weak. The majority of Bangladeshis work in agriculture, though service industries now account for around half of GDP. Natural disasters and inadequate infrastructure hamper economic development.

Business Freedom - Not Graded

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 74 days, compared to the world average of 43 days. Obtaining a business license requires less than the world average of 19 procedures. However, commercial regulations can be unclear and inconsistent, and the lack of transparency raises start-up and operational costs. Closing a business is a lengthy process.

Trade Freedom - Not Graded

Bangladesh's weighted average tariff rate was 55.8 percent in 2005. 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, non-transparent government procurement; inefficient and corrupt customs administration; and weak enforcement of intellectual property rights also add to the cost of trade. An additional 20 percentage points is deducted from Bangladesh's trade freedom score to account for these non-tariff barriers.

Fiscal Freedom - Not Graded

Bangladesh has moderate tax rates. The top income tax rate is 25 percent, and the top corporate tax rate is 30 percent. Other taxes include a value-added tax (VAT), a property tax, and a tax on interest. In the most recent year, overall tax revenue as a percentage of GDP was 8.7 percent.

Freedom from Government - Not Graded

Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 15.1 percent of GDP. Privatization has been hindered by bureaucratic resistance and opposition from labor unions.

Monetary Freedom - Not Graded

Inflation is moderate, averaging 6.5 percent between 2004 and 2006. Relatively unstable prices explain most of the monetary freedom score. An additional 15 percentage points is deducted from Bangladesh's monetary freedom score to adjust for price-control measures that distort domestic prices for goods produced in state-owned enterprises, some pharmaceuticals, and petroleum products.

Investment Freedom - Not Graded

Officially, foreign investment is generally welcomed, but utilities and other critical sectors are not open to the private sector, and potential investors face a host of challenges: bureaucratic procedures, unnecessary licenses, high levels of corruption, an unpredictable security situation, and uncertainty about contract and regulatory enforcement. Bangladesh is deeply in need of public administration reforms. Most capital transactions are controlled or prohibited. Non-resident companies are subject to a higher corporate tax rate (37.5 percent) than are publicly traded companies (30 percent).

Financial Freedom - Not Graded

Bangladesh's financial services sector is small and underdeveloped. Financial supervision is weak, and fraudulent transactions, mismanagement, and political influence in lending are common. The central bank is not independent. In 2006, the banking system consisted of four nationalized commercial banks, five development financial institutions, 30 private commercial banks, and 10 foreign banks. Foreign banks are generally restricted to offshore and foreign trade business. The nationalized commercial banks dominate the system, controlling over half of banking assets. An extensive microfinance presence is largely unsupervised. There are 30 private insurance companies, including a foreign-owned firm, but the major portion of insurance activity is controlled by two state-owned companies. Bangladesh has two stock exchanges, but market capitalization is low. In 2006, the government strengthened the criteria for the listing of firms on either stock market.

Property Rights - Not Graded

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

Freedom from Corruption - Not Graded

Corruption is perceived as pervasive. Bangladesh ranks 156th out of 163 countries in Transparency International's Corruption Perceptions Index for 2006. Given that corruption blights all other economic freedoms, this is a key area for improvement.

Labor Freedom - Not Graded

Bangladesh's labor market is burdened by relatively inflexible employment regulations that hinder employment creation and productivity growth. The non-salary cost of employing a worker is low, but dismissing a redundant employee can be difficult. The difficulty of laying off workers creates a risk aversion for companies that would otherwise hire more people and grow.