The economic freedom of a province or U.S. state such as Ontario or California declines when their aggregate population exceeds 9.5 million people, often resulting in higher government spending, higher taxes, and less flexible labour markets, a new study reveals.
The Fraser Institute study (pdf), titled “The Determinants of Subnational Economic Freedom,” analyzed 158 provinces and states in seven countries to determine the correlation between the population size of a province or a state and their economic freedom. It aims to provide “the first-ever multi-country, comprehensive examination of the determinants of subnational economic freedom scores.”
“Government spending and taxes, and labour market flexibility, or what has been referred to as economic freedom, is linked [with] high levels of prosperity, economic growth, and overall well-being,” Russell Sobel, senior fellow at the Fraser Institute and author of the study, said in a news release.
The most notable finding is that there seems to be an “optimal” population size of around 9.5 million people for subnational jurisdictions to maximize overall economic freedom, and beyond that point, “overall institutional quality begins to decline,” the report says.
Sobel used data from an earlier report, Economic Freedom of the World 2020, that studied the factors that influence the economic freedom of countries, showing that nations with better policies and institutions tend to have more economic freedom.
Economically free countries tend to out-perform non-free ones due to having a higher per-capital GDP, higher average income among the poorest 10 percent of the population, less population that experience extreme poverty, and longer life expectancy.
In 2018, Hong Kong was rated in the top position, followed by Singapore, New Zealand, Switzerland, United States, Australia, Mauritius, Georgia, Canada, and Ireland. The report noted that in the case of Hong Kong, increased insecurity of property rights and the weakening of the rule of law caused by Beijing’s interventions in 2019 and 2020 will likely have a negative impact on the city’s score in the future.
Economic Freedom of North America 2020, another Fraser Institute report, compares the economic freedom of 92 provincial and state governments in Canada, the United States, and Mexico.
The annual report found that Canada’s highest-ranking province in 2018 was Alberta—tied for 9th place with U.S. states of Montana and Texas—followed by British Columbia, ranking in 27th place.
“Simply put, being too large is a disadvantage in terms of achieving high levels of economic freedom,” Sobel said.
“This has implications for states and provinces whose populations already exceed 9.5 million as well as those subnational jurisdictions experiencing population growth in terms of their ability to maintain reasonable levels of government spending and taxes.”