Economic Freedom in the Bahamas
The Bahamas is a stable, relatively prosperous nation of some 314,000 people inhabiting an archipelago of approximately 700 islands off the coast of the southeastern United States. An independent, parliamentary democracy and member of the British Commonwealth, its economy depends on tourism (60 percent of GDP) and offshore banking (15 percent of GDP). Although tourism contracted following the September 11, 2001, attacks on the United States, 4.4 million travelers visited the country in 2002—an increase of 5.2 percent over 2001—according to the Economist Intelligence Unit. Construction of hotels, second homes, and large projects such as the Freeport container port will continue to add jobs to the economy. There is a shortage of skilled workers, but unskilled labor abounds. Thus, the unemployment rate remains at about 9 percent. The government remains the largest employer with a total workforce close to 22,000.
No serious political movement in Bahamian history has ever advocated the nationalization of foreign property. There is little history of political violence or instability in The Bahamas, although semi-violent labor union protests erupted in early 1999 over Government plans to downsize the phone company. The political issue of most interest to the business community is openness to foreign investment — both intellectual and financial capital — which is the driving force behind the Bahamian economy.
Trade Policy Score:5.0
According to the World Bank, the Bahamas had an average tariff rate of 34 percent in 2003. The U.S. Department of Commerce reports that the government “charges a 7 percent ‘stamp tax’ on most imports. Higher stamp taxes are charged on some duty free goods, including tourist items such as china, crystal, wristwatches, clocks, jewelry, table linens, leather goods, perfume, wine and liquor.” The government also restricts imports of some agricultural goods through import permits.
Fiscal Burden Score:1.5
The Bahamas has no income tax, no corporate income tax, no capital gains tax, no inheritance tax, and no value-added tax. As a result, tariff rates (or “duties) are very high; the Bahamas raises some 60 percent of its revenues from import tariffs. The general rate of duty charges on imports is 30 percent. In addition to high tariffs, the Bahamas also charges a 7 percent stamp tax on imported goods.
There are no other significant barriers to trade. According to the Central Bank of The Bahamas, government expenditures as a share of GDP fell more in 2002 (0.5 percentage point to 20.2 percent) than they did in 2001 (0.2 percentage point). On net, the Bahamas’ fiscal burden of government score is unchanged this year.
Government Intervention Score:2.0
According to the Central Bank of The Bahamas, the government consumed 12.6 percent of GDP in 2003. In 2002, based on data from the International Monetary Fund, the Bahamas received 4.2 percent of its revenues from state-owned enterprises and government ownership of property.
Monetary Policy Score:1.0
From 1990 to 1999, the Bahamas’ weighted average annual rate of inflation was 1.23 percent. From 1994 to 2003, the Bahamas’ weighted average annual rate of inflation was 2.67 percent.
Foreign Investment Score:3.0
The Bahamas seeks increased foreign investment. However, the government restricts foreign investment in a number of sectors: wholesale and retail operations; commission agencies engaged in import–export trade; real estate and domestic property management agencies; media and advertising; nightclubs and restaurants (except specialty, gourmet, and ethnic restaurants); security services; domestic distribution and building supplies; most construction companies; personal cosmetics and beauty establishments; some fishing operations; auto and appliance service operations; and public transportation.
All outward capital transfers and inward transfers by non-residents require exchange control approval, and outward transfers by residents are restricted. Lifting these exchange controls could improve the Bahamas’ capital flows and foreign investment score in future editions of the Index. According to the U.S. Department of Commerce, “Large foreign investors may be held to higher labor, health and safety standards than our local entrepreneurs.” Foreigners purchasing real estate for commercial purposes or purchasing more than five acres must obtain a permit from the Investments Board, and non-residents must receive approval to sell real estate locally.
Banking and Finance Score:2.0
The U.S. Department of Commerce reports that as of May 2002, 321 banks and trust companies were licensed, down from 410 in 2000. The contraction is a result of stricter regulation and supervision that has led the government to suspend licenses for a large number of licensed banks that could not show proof of an actual physical presence. The financial sector accounts for 7 percent of GDP and employs about 3 percent of the labor force. The government maintains ownership of the Bahamas Development Bank, which primarily provides financing for commercial, industrial, and agricultural development projects. The financial sector is extremely open to foreigners. In an effort to secure its removal from the Organisation for Economic Co-operation and Development’s list of jurisdictions with a non-cooperative record on money laundering, the Bahamas passed a package of legislation to tighten controls on such activity. The new legislation imposes extra regulatory costs on the financial sector but does not significantly reduce the level of economic freedom. The Financial Action Task Force, an intergovernmental body, made up of 29 countries, that is designed to combat money laundering, removed the Bahamas from its list of jurisdictions with a non-cooperative record on money laundering in June 2001.
Wages and Prices Score:3.0
According to the central bank, “Price controls exist on 25 food items, 11 drug items, as well as lead free gasoline, diesel oil, liquefied propane gas, batteries, new & used automobiles, automobile parts and accessories, and public transportation.” A minimum wage for all non-salaried public-sector workers was established in 1996, and legislation establishing a minimum wage for the private sector was passed in 2001.
Property Rights Score:1.0
Private property is easy to acquire and protect in the Bahamas, which has an advanced and efficient legal system based on English common law. The judiciary is independent, and the likelihood of expropriation is low.According to the U.S. Department of Commerce, however, “while generally fair, the Bahamian judicial process tends to be much slower than the norm in the United States and the [U.S.] Embassy has received occasional reports of malfeasance on the part of court officials.”
Regulation Score: 2.0
The Bahamian government generally follows a hands-off approach to business, but the U.S. Department of Commerce reports that “the discretionary issuance of business licenses can result in a lack of transparency in decisions to authorize or to renew the authority of a business.… Obtaining required permits, especially immigration permits, can take an inordinate length of time.”
Labor laws can be burdensome, especially for domestic business. According to the U.S. Department of State, “The Fair Labor Standards Act requires at least one 24-hour rest period per week, paid annual vacations, and employer contributions to National Insurance (social security). The Act also requires overtime pay (time and a half) for hours in excess of 48 or on public holidays. A 1988 law provides for maternity leave and the right to re-employment after childbirth.… Local business leaders complain that some of the laws are too restrictive….” In addition, “allegations of improper conduct on the part of Government officials surface regularly….”
Black Market Score: 2.0
Software, music, and video piracy is a problem. According to the International Intellectual Property Alliance, the Bahamas repeatedly violates its international agreements regarding intellectual property rights. The Economist Intelligence Unit reports that illegal drug trafficking and money laundering are also significant.
In an effort to cut down on piracy of video and audio tapes and discs, the 1999–2000 budget reduced tariffs on these products from 65 percent to 15 percent. The government announced plans to enforce the new copyright law, although it has not done so yet. In a similar move in 1998, it eliminated duties on computer software, discs, and some medical goods.