Economic freedom on the wane across Canada

Economic Freedom of North America 2021

Economic Freedom of North America 2021 is the seventeenth edition of the Fraser Institute’s annual report. This year it measures the extent to which—in 2019, 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 Regulation. 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.

Since the most recent data available for the report are from 2019, they do not capture the effect on economic freedom of COVID-19 and government responses to it.

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, 2021). These data, available only on the national level, enable better comparisons among Canadian, Mexican, and US subnational jurisdictions that take into account national policies affecting all jurisdictions within each country. Canada and the United States have similar scores in the EFW report; both are typically among the top 10 nations, though Canada fell out of the top 10 this year. Mexico ranks much lower, at 75th this year; this is an improvement over past years.

The top jurisdiction is New Hampshire at 8.23, followed by Florida (8.17), Idaho (8.16), and then South Carolina, Utah, and Wyoming tied for fourth (8.15). Alberta is the highest ranking Canadian province, tied for 33rd place with a score of 8.00. The next highest Canadian province is British Columbia in 47th at 7.91. 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).

The highest-ranked Mexican state is Baja California with 6.65, followed by Nayarit (6.62), Tlaxcala (6.61), then Jalisco and Chihuahua (tied at 6.60). 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 5.63, followed Colima at 5.93 and Tamaulipas at 6.16.

Seven of the Canadian provinces are ranked behind all 50 US states. Prince Edward Island is 60th with a score of 7.58, followed closely by the province of Newfoundland & Labrador (7.60), Nova Scotia (7.61), and New Brunswick (7.62). The lowest ranked of the United States are New York (51st, 7.85), Rhode Island (50th, 7.87), and Hawaii (49th, 7.88).

Historically, average economic freedom in all three countries peaked in 2004 at 7.74 then fell steadily to 7.24 in 2011. Canadian provinces saw the smallest decline, only 0.19, whereas the decline in the United States was 0.51 and, in Mexico, 0.58. Since then average economic freedom in North America has risen slowly to 7.43 but still remains below that peak in 2004. 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 2019 was again Alberta with 6.17, followed by British Columbia with 5.44, and Ontario at 5.31. However, the gap between Alberta and second-place British Columbia continues to shrink, down from 2.30 points in 2014 to 0.73 in 2019. The least free by far was Quebec at 2.83, following New Brunswick at 4.09, and Prince Edward Island and Nova Scotia at 4.20.

In the United States, the most economically free state was New Hampshire at 7.83, followed closely by Tennessee at 7.82, Florida at 7.78, Texas at 7.75, and Virginia at 7.59. (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 4.33, following California at 4.68, Vermont at 4.86, West Virginia at 5.00, and New Mexico at 5.01.

In Mexico, the most economically free state was Baja California at 6.01. Michoacán de Ocampo was second at 5.87, followed by Jalisco at 6.01. The least free Mexican states were Campeche at 2.53, Zacatecas at 2.89, and Tabasco at 2.93.

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 2019, an average per-capita income of just US$2,362, compared to US$51,666 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 1.0% below the national average, while the most-free quartile was over 7.5% 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 330 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.

Data available to researchers
The full data set, including all of the data published in this report as well as data omitted due to limited space, can be downloaded for free at <https://www.fraserinstitute.org/economic-freedom/dataset>. The data file available there contains the most up-to-date and accurate data for the index published in Economic Freedom of North America. All editions of the report are available in PDF and can be downloaded for free at <www.fraserinstitute.org/studies/economic-freedom>. However, users are always strongly encouraged to use the data from the most recent data file as updates and corrections, even to earlier years’ data, do occur.