Media Release
Lack of economic freedom costs individual Canadians
thousands of dollars each year
CONTACT:
Fred McMahon, Director, Centre for Globalization Studies
The Fraser Institute, Tel: (416) 935-2240
Email fredm@fraserinstitute.ca
Release Date: Tuesday, 10 December 2002
TORONTO, ON—Canadians are poorer than they need to be because of limited economic freedom, according to a new study, released today by The Fraser Institute.
"Lack of economic freedom costs each Canadian family thousands of dollars every year," said Fred McMahon, co-author of the study, Economic Freedom of North America, published in conjunction with the National Center for Policy Analysis in the United States.
Measuring economic freedom
Economic freedom measures the extent to which individuals control their own property without onerous taxation, are able to enter into voluntary transactions without having their freedom limited by government activities, and are able freely to enter into non-coercive agreements between potential employers and employees.
This new index contains three sub-indexes designed to measure restrictions on economic freedom: 1) Size of Government, 2) Takings and Discriminatory Taxation, and 3) Labour Market Freedom. The study will appear next year in the European Journal of Political Economy (EJPE) in a special edition devoted to economic freedom.
All Canadians could benefit from increased economic freedom. Econometric testing shows that a one-point increase in economic freedom (on the all-government index's 10-point scale) would increase a province's prosperity by $3,800 per person. "Economic freedom would be increased by allowing Canadians to spend more of the money they earn, by reducing government's role in economy, and by cutting back on regulations," says McMahon.
Freedom Among the Provinces
Ontario, often regarded as Canada's main economic engine, is the 2nd freest province, but ranks with the weakest U.S. states in economic freedom and prosperity. "As detailed econometric testing reveals, low economic freedom means low growth and prosperity. Ontario is poorer than all US states except for West Virginia, Mississippi, and Montana, which also score very poorly on economic freedom," notes McMahon.
Quebec and PEI are the least free provinces. Although Quebec enjoys the same benefits of geography and resource wealth as Ontario, Quebec's even lower level of economic freedom has left it economically well behind Ontario and even the poorest, most disadvantaged US states.
Of the Canadian provinces, only Alberta reaches a middling level of economic freedom and thus enjoys a middling level of prosperity within the North American context.
Detailed information on each of the provinces and states can be found at www.freetheworld.com
Perverse nature of fiscal federalism
A one-point increase in economic freedom in a US state increases prosperity by over $10,000(Cdn) per person -- nearly three times the effect in Canada. The study argues this is likely due to the perverse affects of fiscal federalism in Canada.
Canada's massive federal transfer system moves money from economically-free (and therefore prosperous) provinces to economically-unfree (and thus poor) provinces. This mutes the impact of economic freedom by effectively increasing the tax load in relatively free provinces while rewarding unfree provinces.
"In the United States, voters hold state leaders accountable for economic success or failure," McMahon noted. "In Canada, provincial leaders - particularly in unfree provinces - all too often blame Ottawa for their troubles. Even worse, they are rewarded for suppressing economic freedom. This weakens their provincial economy and attracts a rich menu of federal transfers controlled by the policy-makers who created the problems in the first place. This is like handing out prizes for bad policy."
Worldwide economic research shows that domestic policy - not outside help or resource wealth - is the key to building prosperity and jobs. Previously lagging regions across the United States, Europe, and Japan are catching up with old centers of affluence, and often surpassing them, much more quickly than Canada's have-not provinces.
"The international evidence highlights the failure of Canada's fiscal federalism," McMahon says. "Imagine a school where parents are fined if their children work hard but get a cheque from the school board when their children won't do their homework. That's the perverse structure of fiscal federalism. Provinces with good economic policy are fined. Provinces with bad policy get a cheque."
About the Project
McMahon heads the Centre for Globalization Studies at The Fraser Institute, the lead institute in the Economic Freedom of the World Network, a joint venture involving fifty-six research institutes in fifty-six countries around the world.
The North American index is an intellectual offshoot of the Economic Freedom of the World index, the result of two decades of work by more than 100 scholars including several Nobel Laureates. This year's world report, which ranked 123 countries on their level of economic freedom, was covered by hundreds of media organizations worldwide including the People's Daily (China), The BBC World Service, Pravda, CNN, The Economist, Business Week, Agence France-Presse, The National Post, and Hindustan Times.
Established in 1974, The Fraser Institute is an independent public policy organization based in Vancouver, with offices in Calgary and Toronto.
For further information, or for a copy of Economic Freedom of North America, contact:
Suzanne Walters, Director of Communications, The Fraser Institute,
(604) 714-4582, Email suzannew@fraserinstitute.ca.
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