Canadian provinces tumble down North American economic freedom ranking

Economic Freedom of North America 2020

Economic Freedom of North America 2020 is the sixteenth edition of the Fraser Institute’s annual report. This year it measures the extent to which—in 2018, the year with the most recent available comprehensive data—the policies of individual provinces and states were supportive of economic freedom, the ability of individuals to act in the economic sphere free of undue restrictions. There are two indices: one that examines provincial/state and municipal/local governments only and another that includes federal governments as well. The former, our subnational index, is for comparison of individual jurisdictions within the same country. The latter, our all-government index, is for comparison of jurisdictions in different countries.

For the subnational index, Economic Freedom of North America employs 10 variables for the 92 provincial/state governments in Canada, the United States, and Mexico in three areas: 1. Government Spending; 2. Taxes; and 3. Labor Market Freedom. In the case of the all-government index, we incorporate three additional areas at the federal level from Economic Freedom of the World (EFW): 4. Legal Systems and Property Rights; 5. Sound Money; and 6. Freedom to Trade Internationally; and we expand Area 1 to include government investment (variable 1C in EFW), Area 2 to include top marginal income and payroll tax rate (variable 1Dii in EFW), and Area 3 to include credit market regulation and business regulations (also at the federal level). These additions help capture restrictions on economic freedom that are difficult to measure at the provincial/state and municipal/local level.

Results for Canada, the United States, and Mexico

The all-government index
The all-government index includes data from Economic Freedom of the World (Gwartney, Lawson, Hall, and Murphy, 2020) which is only available on the national level. These data enable us to make better comparisons among Canadian, Mexican, and US subnational jurisdictions by taking into account national policies that affect all jurisdictions within each country. Canada and the United States have similar scores in the EFW report and are both are typically in the top 10 nations. Mexico ranks much lower, at 68th this year, though that is an improvement over past years.

The top jurisdiction is New Hampshire at 8.16, followed by Florida and Idaho at 8.10 , then Wyoming (8.09) and Utah (8.08). Alberta is the highest ranking Canadian province, tied for 9th place with a score of 8.06. The next highest Canadian province is British Columbia in 27th at 7.98. Alberta had spent seven years at the top of the index but fell out of the top spot in the 2018 report (reflecting 2016 data). In 2015, Albertans elected new political leaders who made changes in taxation, spending, and regulation that had a negative effect on economic freedom. In 2019, Albertans elected politicians who reversed the course of policy and it will be interesting to see what impact this will have on the province’s level of economic freedom in future years.

The highest-ranked Mexican state is Jalisco with 6.70, followed by Tlaxcala (6.66) and Mexico (6.62). They are nearly a full point behind those ranking lowest in Canada and the United States, although that gap has been shrinking. The lowest-ranked state is Ciudad de México at 5.77; slightly better are Colima at 5.95, and Tamaulipas at 6.20.

The four lowest-ranked Canadian provinces are all within less than one tenth of a point of each other and are behind all 50 US states. The province of Newfoundland & Labrador and nearby Prince Edward Island are tied for 59th with 7.61, just behind Nova Scotia (58th) at 7.66, and New Brunswick (57th) at 7.67. The lowest-ranked states in the United States are Delaware at 7.72 in 56th place, following Rhode Island (7.76 in 54th) and New York (7.77 in 53rd).

Historically, average economic freedom in all three countries peaked in 2004 at 7.70 then fell steadily to 7.21 in 2011. Canadian provinces saw the smallest decline, only 0.20, whereas the decline in the United States was 0.48 and, in Mexico, 0.59. Since then it has risen slowly to 7.40 but still remains below that 2004 peak. However, economic freedom has increased in the United States and Mexico since 2013. In contrast, in Canada, after an increase in 2014, it has fallen back below its 2013 level.

The subnational indices
For the purpose of comparing jurisdictions within the same country, the subnational indices are the appropriate choice. There is a separate subnational index for each country. In Canada, the most economically free province in 2018 was again Alberta with 6.61, followed by British Columbia with 5.98, and Ontario at 5.16. However, the gap between Alberta and second-place British Columbia continues to shrink, down from 2.28 points in 2014 to 0.63 in 2018. The least free by far was Quebec at 2.84, following New Brunswick at 4.08, and Nova Scotia at 4.20.

In the United States, the most economically free state was New Hampshire at 7.84, followed by Florida at 7.73. Virginia is third at 7.62; Texas is fourth at 7.61; and Tennessee is fifth at 7.55. (Note that since the indexes were calculated separately for each country, the numeric scores on the subnational indices are not directly comparable across countries.) The least-free state was New York at 4.25, following West Virginia at 4.50. Alaska was 48th at 4.67, California was 47th at 4.71, and Vermont was 46th at 5.08.

In Mexico, the most economically free state was Jalisco at 6.57. Michoacán de Ocampo was second at 6.39, followed by Baja California at 6.04. The least free Mexican states were Zacatecas at 2.77, Campeche at 2.78, and Tabasco at 3.44

In addition to the tables found in chapter 3, our new interactive website at www.freetheworld.com contains all the latest scores and rankings for each of the components of the index as well as historical data on the overall and area scores. The full dataset is also available for download at that same website.

Economic freedom and economic well-being at the subnational level
The jurisdictions in the least economically free quartile (one fourth) on the all-government index had, in 2018, an average per-capita income of just US$2,277, compared to US$50,645 for the most economically free quartile. On the subnational index, the same relationship holds, with the least-free quartile having an average per-capita income 8.1% below the national average, while the most-free quartile was over 4.6% above it.

In addition, economic freedom at the subnational level has generally been found to be positively associated with a variety of measures of the per-capita size of the economy and the growth of the economy as well as various measures of entrepreneurial activity. There are now more than 310 articles by independent researchers examining subnational economic freedom using the data from Economic Freedom of North America. (Appendix C lists some of the most recent ones.) Much of that literature discusses economic growth or entrepreneurship but the list also includes studies of a variety of topics such as income inequality, eminent domain, and labor markets. The vast majority of the results correlate higher levels of economic freedom with positive outcomes, such as economic growth, lower unemployment, reduced poverty, and so on. The results of these studies tend to mirror those found for these same relationships at the country level using the index published in Economic Freedom of the World.