Tilting at Economic Freedom

The Fraser Institute released its annual report on economic freedom yesterday. As always, the report attempts to establish a causal relationship between its measure of “economic freedom” and economic growth.

The first major problem is that economic growth is clearly driven by other more important factors. With respect to Newfoundland and Labrador, the Fraser Institute acknowledges, “the province has benefited from oil and gas development and it would be hazardous to draw any connection to economic freedom” (page viii of the full report). This same logic should also apply to Alberta, the Canadian star of the Fraser Institute’s ranking.

The Fraser Institute emphasizes that the five provinces with the highest economic-freedom rankings are more prosperous than the other five provinces. However, four of the top five – Alberta, BC, Newfoundland and Saskatchewan – are the provinces that have gained most from skyrocketing commodity prices. The other top-five province, Ontario, is Canada’s commercial centre. The relative prosperity of these provinces reflects their underlying economic structures rather than the public policies emphasized by the Fraser Institute.

The second major problem is that the Fraser Institute’s variables are biased to almost automatically show less economic freedom in poorer jurisdictions. For example, the size of government is measured by public spending as a share of GDP and labour-market freedom is partly measured by public employees as a share of the workforce. Since all Canadian provincial governments must provide an essentially similar set of public services, government spending and employment will inevitably loom proportionally larger in poorer provinces.

Likewise, the Fraser Institute measures minimum wages relative to per-capita GDP. Therefore, the poorer provinces naturally appear to have higher minimum wages and hence less “economic freedom”.

Finally, the phenomena criticized by the Fraser Institute – unionization, government spending, minimum wages, etc. – are needed to translate economic growth into rising living standards for working people. The recent Census revealed that, despite healthy economic growth, Canadian workers’ earnings stagnated during the past quarter-century. Therefore, policy-makers should pay more attention to the distribution of prosperity, something that the Fraser Institute does not even consider.

UPDATE (July 11): This post is quoted in today’s Vancouver Sun, Ottawa Citizen, and a few other CanWest papers. In the same story, Sylvain Schetagne of the CLC correctly points out that the Fraser Institute conceives of “economic freedom” mainly as the freedom of business from any countervailing social forces, such as governments and unions.