economic freedom

Little platoons make the case for economic freedom

New Hampshire has the highest level of economic freedom among all U.S. states in the Fraser Institute’s latest Economic Freedom of North America report (EFNA).

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Economic Freedom of North America 2017

Economic Freedom of North America 2017 is the thirteenth 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 2015, 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, and Hall, 2017), for several years Canada has been ahead of the United States, which is in turn even further ahead of Mexico. This year, Canada and the United States are tied for 11th. 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 2014 two of the top three jurisdictions were Canadian, with Alberta in first place with a score of 8.1 and British Columbia tied for second with New Hampshire at 7.9. Starting in 2015, however, both Canada and Alberta elected new governments who have been making policy changes in taxation and spending that are likely to have a significant negative effect on their economic freedom. As a result, after five years alone in the top position, in this year’s index Alberta is tied for first place with New Hampshire with a score of 8.0. Ten US states are tied for third at 7.9, including Florida, Texas, South Dakota, Nevada, and Georgia. The next highest Canadian province, British Columbia, is now down to 13th at 7.8 (tied with 19 US states); Saskatchewan, Ontario, and Newfoundland & Labrador are tied for 33rd (with 16 US states) at 7.7.

The highest-ranked Mexican states are Jalisco, Baja California, Mexico, and Coahuila de Zaragoza, all tied at 61st with 6.5, a full point behind those ranking lowest in Canada and the United States. The lowest-ranked state is Distrito Federal at 5.5, following Colima at 5.7, and Campeche at 5.9. The lowest-ranked Canadian provinces are New Brunswick, Nova Scotia, Quebec, and Prince Edward Island at 7.5, tied for 56th with New York. The next lowest-ranked states in the United States are Delaware, Minnesota, and Rhode Island, tied with Manitoba at 7.6 in 52nd place.

Historically, economic freedom has been declining in all three countries. Since 2004, the average score for Canadian provinces on the all-government index has fallen from 7.76 to 7.66; the average score for US states fell from 8.20 to 7.78; and for Mexico, from 6.67 to 6.17. However, economic freedom has increased in the United States and Mexico since 2013 and is only slightly lower in Canada.

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 2015 was Alberta with 7.8, followed by British Columbia with 6.6 and Ontario at 6.2. However, the gap between Alberta and British Columbia is shrinking. The least free by far was Quebec at 4.2, followed by Nova Scotia at 5.0 and New Bruns-wick at 5.2.

In the United States, the most economically free state was New Hampshire at 8.3, followed at 8.1 by Florida and Texas. South Dakota is fourth at 8.0. (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 5.3, following California at 5.8. New Mexico and West Virginia were tied for 47th at 6.1.

In Mexico, the most economically free state was Baja California at 8.0. Jalisco was second at 7.7, followed by Coahuila at 7.5. The least free Mexican states were Campeche and Chiapas at 4.9; slightly better were Guerrero at 5.0 and Oaxaca at 5.1.

We have again produced for each province and state a one-page summary that 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. For brevity, these are not included in the report but are available at here.

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 2015, an average per-capita income of just US$2,199, compared to US$46,080 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 nearly 5% below the national average, while the most-free quartile was 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 230 articles by independent researchers examining subnational economic freedom using the data from Economic Freedom of North America. (Appendix C lists some of these 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 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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Economic Freedom of the Arab World: 2017 Annual Report

The Arab world faces a huge challenge. Although the Arab Spring undoubtedly had a political impulse, in large measure it was driven by economic concerns: sky-high unemployment, particularly for youth; under-employment and lack of quality in the jobs that are available; elite control of the economy; economic exclusion; cronyism; and corruption (see, for example, Amin et al., 2012; Malik and Awadalla, 2011; and Sidahmed, 2014, Feb. 23). Sadly, although several nations have implemented limited political change, with Tunisia being the most successful, little if any economic reform has occurred and some nations have back-pedaled on economic policy, as the data in this report shows. The chronic economic problems that plagued the region remain in place. Even the Gulf States face immense challenges in providing quality employment in the face of population growth, the “youth bulge”, and declining oil and gas prices. As Amin and colleagues argue (2012), for the future to be better than the past, economic reform is essential. Successful political change hinges on economic success and economic freedom for all people. If people are excluded from opportunity and hope, stability and democracy are illusive.

Economic Freedom of the Arab World aims to provide a reliable and objective metric of economic policy throughout the Arab World. It measures the extent to which citizens of the nations of the Arab League are able to make their own economic decisions without limitations imposed by the government or by crony elites. The report provides sound empirical measurement of economic policy that can distinguish between phony reform that leaves economic and political power in the hands of crony elites, and real reform that creates new prosperity, entrepreneurship, and jobs, by opening business and work opportunities for everyone no matter whom they know.

Arab and Islamic societies have a rich trading tradition, one that celebrates markets open even to the humblest members of society. Economic freedom is consistent with that proud history and provides a path to a more prosperous and freer tomorrow. Economic freedom is simply the ability of individuals and families to take charge of their fate and make their own economic decisions—to sell or buy in the marketplace without discrimination, to open or close a business, to work for whom they wish or hire whom they wish, to receive investment or invest in others.

As discussed later in this report, economic freedom has a proven fact-based record of improving the lives of people, liberating them from dependence, and leading to other freedoms and democracy. Unfortunately, many in the Arab world believe their nations have already gone through a period of free-market reform and that it hasn’t worked. This misconception deprives many of an economic alternative and vision for the future.

In fact, reform was frequently phony. Economic “reform” before the Arab Spring was all too often crony capitalism dressed up in the language of free markets. In many nations, it simply replaced elite control of the economy through government with elite control through crony capitalism—handing off state assets, monopolies, and other rent-seeking opportunities to friends, supporters, and relatives of the regime. Rather than releasing entrepreneurial drive, it protected privilege.

The data in this report show little progress in increasing economic freedom during the supposed period of “neoliberal” reform. Instead, the old structures largely remained in place and mostly still remain in place. It is our hope that the empirical measure of reform and economic policy in this report will help provide a path for reform and accountability, enabling people to determine whether progress in policy reform is real or illusionary.

Metro areas with more competing cities are more economically free

Considering current amalgamation movements in Canada, there’s strong evidence that many do not yet grasp the importance of decentralization.

Canada no longer among top 10 most economically free countries

Prime Minister Trudeau’s government has embraced deficit-spending.

Freedom takes a hit—we’re now tied with the Americans

By 2015, our top federal plus provincial income tax rates ranged from 40 per cent to 55 per cent.

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Economic Freedom of the World: 2017 Annual Report

The index published in Economic Freedom of the World measures the degree to which the policies and institutions of countries are supportive of economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to enter markets and compete, and security of the person and privately owned property. Forty-two data points are used to construct a summary index and to measure the degree of economic freedom in five broad areas.

  • Area 1: Size of Government—As spending and taxation by government, and the size of government-controlled enterprises increase, government decision-making is substituted for individual choice and economic freedom is reduced.
  • Area 2: Legal System and Property Rights—Protection of persons and their rightfully acquired property is a central element of both economic freedom and civil society. Indeed, it is the most important function of government.
  • Area 3: Sound Money—Inflation erodes the value of rightfully earned wages and savings. Sound money is thus essential to protect property rights. When inflation is not only high but also volatile, it becomes difficult for individuals to plan for the future and thus use economic freedom effectively.
  • Area 4: Freedom to Trade Internationally—Freedom to exchange—in its broadest sense, buying, selling, making contracts, and so on—is essential to economic freedom, which is reduced when freedom to exchange does not include businesses and individuals in other nations.
  • Area 5: Regulation—Governments not only use a number of tools to limit the right to exchange internationally, they may also develop onerous regulations that limit the right to exchange, gain credit, hire or work for whom you wish, or freely operate your business.

Gender Disparity Index
This year the index published in Economic Freedom of the World includes an adjustment for gender disparity to take into account the fact that in many nations women are not legally accorded the same level of economic freedom as men.

Related research
Since our first publication in 1996, numerous studies have used the data published in Economic Freedom of the World to examine the impact of economic freedom. Virtually without exception, these studies have found that countries with institutions and policies more consistent with economic freedom have higher investment rates, more rapid economic growth, higher income levels, and a more rapid reduction in poverty rates.

The EFW index now ranks 159 countries and territories. Data available for approximately 100 nations and territories back to 1980, and for many back to 1970, make it possible for scholars to analyze the impact of cross-country differences in economic freedom and changes in that freedom across three decades.

Economic freedom around the world in 2015

Top-rated countries
Hong Kong and Singapore, once again, occupy the top two positions. The other nations in the top 10 are New Zealand, Switzerland, Ireland, the United Kingdom, Mauritius, Georgia, Australia, and Estonia.

Other major countries
The rankings of some other major countries are the United States, tied with Canada at 11th, Germany (23rd), South Korea (32nd), Japan (39th), France (52nd), Italy (54th), Mexico (76th), India (95th), Russia (100th), China (112th), and Brazil (137th).

Lowest-rated countries
The 10 lowest-rated countries are: Iran, Chad, Myanmar, Syria, Libya, Argentina, Algeria, the Republic of the Congo, the Central African Republic, and, lastly, Venezuela.

Who’s up? Who’s down?
The five nations showing the biggest declines in economic freedom from 2000 to 2015 are Venezuela, Argentina, Bolivia, Iceland, and Greece. The five nations with the largest gains in economic freedom over the period are Romania, Bulgaria, Rwanda, Albania, and Cyprus.

Nations that are economically free out-perform non-free nations in indicators of well-being

Nations in the top quartile of economic freedom had an average per-capita GDP of $42,463 in 2015, compared to $6,036 for bottom quartile nations (PPP constant 2011 US$). ◼ In the top quartile, the average income of the poorest 10% was $11,998, compared to $1,124 in the bottom quartile in 2015 (PPP constant 2011 US$). Interestingly, the average income of the poorest 10% in the most economically free nations is almost twice the average per capita income in the least free nations. ◼ Life expectancy is 80.7 years in the top quartile compared to 64.4 years in the bottom quartile.

Chapter 1: Economic Freedom of the World in 2015
The authors of the report, James Gwartney, Robert Lawson, and Joshua Hall, provide an overview of the report and discuss why economic freedom is important.

Chapter 2: Country Data Tables
Detailed historical information is provided for each of the 159 countries and territories in the index.

Chapter 3: Adjusting for Gender Disparity in Economic Freedom and Why It Matters
By Rosemarie Fike
The adjustment for gender disparity applied this year to Area 2, Legal System and Property Rights, of the index published in Economic Freedom of the World takes into account the fact that in many nations women are not legally accorded the same level of economic freedom as men. The EFW index uses many objective measures that, on their own, implicitly assume that all members of society have equal access to economic institutions, but formal legal restrictions to the economic rights of women in many countries prevent a significant portion of the population from engaging in mutually beneficial exchanges. The negative adjustment factor for gender disparity is smaller in economically free nations than in non-free nations.

Chapter 4: Economic Freedom, Social Protections, and Electoral Support for Anti-Immigrant Populist Parties in 27 Industrial Democracies
By Krishna Chaitanya Vadlamannati and Indra de Soysa
Some propose that the rise of anti-immigrant, nativist populism is the result of economic insecurity arising from globalization and suggest greater social protections can diminish communal disharmony. Others suggest that anti-immigrant sentiment is driven by “welfare chauvinism”, where residents enjoying high levels of social welfare see immigrants as threatening their livelihood. The authors test these propositions and find that the positive effect of a bigger immigrant share of the population on support for nativist populism is conditional upon higher degrees of social welfare, which reduces economic freedom.

Chapter 5: Economic Freedom in South Africa and the Constraints on Economic Policy
By Richard J. Grant
The index published in the Economic Freedom of the World covers two very distinct eras in South African history: the apartheid era and that after the transition to the “new South Africa” in 1994. The author describes in detail the rise in economic freedom and the subsequent decline. He concludes: “As economic freedom has decreased, the GDP growth rate has declined, as would be expected.

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