Economic Freedom of North America 2018

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Economic Freedom of North America 2018 is the fourteenth edition of the Fraser Institute’s annual report. This year it measures the extent to which the policies of individual provinces and states were, in 2016, 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 enterprises and 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
In Economic Freedom of the World (Gwartney, Lawson, Hall, and Murphy, 2018), for several years Canada has been ahead of the United States, which is in turn even further ahead of Mexico. The United States has once again pulled ahead of Canada, though only by 0.05 points: the United States ranks 6th, Canada, 10th. The inclusion of variables from that report in our all-government index allows us to display more accurately the gap between Canada, the United States, and Mexico. Thus, in last year’s report, in the all-government index for 2015 the top jurisdiction was Canadian, with Alberta in first place with a score of 8.0, though tied with New Hampshire. Starting in 2015, however, both Canada and Alberta elected new political leaders who have been making changes in taxation, spending, and regulation that are already having a significant negative effect on their economic freedom. As a result, after six years in the top position, in this year’s index Alberta has fallen to a tie for 6th place at 7.99. The top state is New Hampshire at 8.08, followed closely by Florida at 8.07. The next highest Canadian province, British Columbia, is now down to 22nd at 7.94 (tied with three US states); Saskatchewan and Ontario are tied for 45th (with two US states) at 7.83.

The highest-ranked Mexican state is Nuevo Leon at 61st with 6.63, followed closely by Guanajuato with 6.61. They are nearly a full point behind those ranking lowest in Canada and the United States. The lowest-ranked state is Ciudad de México at 5.54, following Colima at 5.72, and Campeche at 5.88. The lowest-ranked Canadian provinces are all within less than one tenth of a point of each other and behind all 50 US states. Nova Scotia is 60th with 7.58, just behind Prince Edward Island (59th), New Brunswick (58th), and Quebec and Newfoundland & Labrador (tied at 56th). The lowest-ranked states in the United States are New York at 7.67 in 55th place, following Delaware (7.68, 54th) and Kentucky (7.73, 53rd).

Historically, economic freedom had been declining in all three countries until recently. From 2004 to 2013, the average score for all 92 jurisdictions fell from 7.64 to 7.10. Canadian provinces saw the smallest decline, only 0.08, whereas the decline in the United States was 0.58 and in Mexico was 0.63. However, economic freedom has increased in the United States and Mexico since 2013. 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 2016 was Alberta with 7.29, followed by British Columbia with 6.37, and Ontario at 5.93. However, the gap between Alberta and second-place British Columbia continues to shrink, down from 2.3 points in 2014 to 0.92 in 2016. The least free by far was Quebec at 2.89, following Nova Scotia at 4.06 and New Brunswick at 4.54.

In the United States, the most economically free state was Florida at 7.87, followed by New Hampshire at 7.65 and Texas at 7.52. Tennessee is fourth at 7.43 and South Dakota is fifth at 7.37. (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 3.90, following Kentucky at 4.45. West Virginia was 48th at 4.48, California was 47th at 4.71, and Alaska was 46th at 4.80.

In Mexico, the most economically free state was Guanajuato at 6.71. Nuevo Leon was second at 6.47, followed by Baja California at 6.41. The least free Mexican states were Campeche at 2.29, Tabasco at 2.74, and Chiapas at 3.37.

In addition to the tables found in chapter 3, our new interactive website at www.fraserinstitute.org/economic-freedom/map 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 2016, an average per-capita income of just US$1,892, compared to US$46,347 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 more than 10% below the national average, while the most-free quartile was over 7% 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 250 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 articles that either use or cite Economic Freedom of North America.) 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.

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