Fraser Forum A Fraser Institute review of public policy in Canada
ECONOMIC FREEDOM OF THE WORLD Learning from the economic crisis The benefits of economic freedom
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From the editor
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The Fraser Institute’s vision is a free and prosperous
world where individuals benefit from greater choice, competitive markets, and personal responsibility. Our mission is to measure, study, and communicate the impact of competitive markets and government interventions on the welfare of individuals. Founded in 1974, we are an independent research and educational organization with locations throughout North America, and international partners in over 70 countries. Our work is financed by tax deductible contributions from thousands of individuals, organizations, and foundations. In order to protect its independence, the Institute does not accept grants from government or contracts for research.
For additional copies, or to become a supporter and receive Fraser Forum, write or call the Fraser Institute, 4th Floor, 1770 Burrard Street, Vancouver, BC V6J 3G7 Telephone: (604) 688-0221; Fax: (604) 688-8539; Toll-free: 1-800-665-3558 (ext. 580—book orders; ext. 586—development) Copyright © 2009 Fraser Institute ISSN 0827-7893 (print version) | ISSN 1480-3690 (online version) Printed and bound in Canada. Return undeliverable Canadian addresses to: Fraser Institute, 4th Floor, 1770 Burrard Street Vancouver, BC V6J 3G7 The contributors to this publication have worked independently and opinions expressed by them are, therefore, their own and do not necessarily reflect the opinions of the supporters, trustees, or other staff of the Fraser Institute. This publication in no way implies that the Fraser Institute, its trustees, or staff are in favour of, or oppose the passage of, any bill; or that they support or oppose any particular political party or candidate. Fraser Institute Board of Trustees Hassan Khosrowshahi (Chairman), Edward Belzberg (Vice Chairman), Mark W. Mitchell (Vice Chairman), Gwyn Morgan (Vice Chairman), Salem Ben Nasser Al Ismaily, Louis-Philippe Amiot, Gordon E. Arnell, Charles B. Barlow, Everett E. Berg, T. Patrick Boyle, Peter Brown, Joseph C. Canavan, Alex A. Chafuen, Elizabeth Chaplin, Derwood Chase, Jr., James W. Davidson, John Dielwart, Stuart Elman, Greg C. Fleck, Shaun Francis, Ned Goodman, Arthur N. Grunder, John A. Hagg, Paul Hill, Stephen A. Hynes, David H. Laidley, Robert H. Lee, Brandt Louie, David MacKenzie, Hubert Marleau, James McGovern, Eleanor Nicholls, Roger Phillips, Herb C. Pinder, Jr., R. Jack Pirie, Con S. Riley, Gavin Semple, Rod Senft, Anthony Sessions, William W. Siebens, Anna Stylianides, Arni C. Thorsteinson, Michael A. Walker, Catherine Windels, Michael Perri (Secretary-Treasurer)
T
hose who cannot remember the past are condemned to repeat it.” This remark, made by George Santayana in his 1905 book The Life of Reason, has particular significance this month, as we observe Remembrance Day. Since the first Armistice Day was held on November 11, 1919, millions of people have observed the occasion each year, taking time to remember those who have fought and, in many cases, died to protect our values and institutions, our fundamental rights and freedoms, and our democratic right to choose our own government. It seems quite fitting, I think, that this month also marks the twentieth anniversary of the fall of the Berlin Wall, on November 9, 1989. The event was precipitated by a number of other similar events in Eastern Europe, but as a symbol of the fall of communism and the restoration of freedom, both political and economic, in the area, it is unrivalled. Remembering this event gives us an opportunity to remember the horrors of tyranny and the failure of centrally planned economies, but it also serves as a reminder of the incredible benefits of economic and political freedom. As this issue of Fraser Forum shows, the benefits of economic freedom are numerous. First, economic freedom has a significant impact on economic growth. James Gwartney and Robert Lawson, authors of the Fraser Institute’s Economic Freedom of the World reports, have found that economic freedom strongly promotes investment and increases productivity (“The benefits of economic freedom,” pg. 15). Research shows that economic freedom also reduces poverty and increases the general well-being of the population of free countries. In addition, economic freedom has been shown to contribute to the emergence of civil liberties and political freedom, both of which are essential to human rights and liberal democracy (“Economic freedom in francophone countries,” pg. 20). In fact, economic freedom is considered a necessary condition for democracy as it liberates people from dependence on government and allows them to make their own economic choices. Unfortunately, many countries around the world today still lack political and economic freedom. These nations should follow the example of countries like Mauritius (“Economic freedom in francophone countries,” pg. 20), which has, through institutional reform, created an environment that allows economic and political freedom to flourish. At the same time, countries that are economically free should do their utmost to safeguard that freedom, particularly during this time of economic uncertainty when some are promoting policies that would expand the role of government and reduce our freedoms (“Will economic freedom survive the crisis?” pg. 17). We must remember what we have learned from the mistakes of the past and choose policies that will encourage economic freedom and prosperity.
Lest we forget
Kristin Fryer (kristin.fryer@fraserinstitute.org)
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Fraser Forum
Contents 8
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From the editor
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Forum authors
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Comparing economic downturns Jason Clemens and Niels Veldhuis Some claim that the current recession is as severe and serious as the Great Depression. But the facts say otherwise.
Increasing trade with Europe
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A step in the right direction Jean-François Minardi A free trade agreement between Canada and the European Union could increase trade on a global scale.
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The problem with relative measures of poverty Niels Veldhuis and Amela Karabegović
The origins of economic freedom
Relative measures of poverty overstate the number of people living in poverty, hindering our ability to identify and help those who are most in need.
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Getting more for less Nadeem Esmail Sensible health care reform in Ontario would help the province save money and improve care.
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Annual conference in Poland
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ECONOMIC FREEDOM OF THE WORLD
Key Concepts:  Public goods William Watson What are public goods and who should provide them?
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The private cost of public queues, 2009 Nadeem Esmail In 2009, Canadians waiting for health care endured an estimated private cost of at least $596 million, if not substantially more, in lost productivity and leisure time.
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The history of Economic Freedom of the World Fred McMahon
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The benefits of economic freedom Fred McMahon
Will economic freedom survive the crisis? James Gwartney and Robert Lawson Some opponents of economic freedom are trying to use the economic crisis as an excuse for government expansion.
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Economic freedom in francophone countries Jean-François Minardi Francophone developing countries need to create an institutional environment that allows economic and political freedom to flourish.
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Measuring economic freedom in Mexico
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Poland hosts annual economic freedom conference
Nathan J. Ashby
Andrzej Kondratowicz
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Forum Authors Nathan J. Ashby is an Assistant
Professor of Economics at the University of Texas at El Paso. He has a Ph.D. in economics from West Virginia University.
James Gwartney is a Professor of
Economics and the Director of the Gus A. Stavros Center for Free Enterprise and Economic Education at Florida State University.
Andrzej Kondratowicz (kondra
towicz@wne.uw.edu.pl) is a former Director General of the Adam Smith Research Centre in Poland. He teaches economics at the Lazarski School of Commerce and Law and at the Warsaw University in Poland.
Jean-François Minardi (jean-fran
cois.minardi@fraserinstitute.org) is a Senior Policy Analyst, Québec et la Francophonie, at the Fraser Institute. He holds a Master’s degree in economics from the Université Paris XII.
Contributors Jason Clemens is the Director of Research at the
Pacific Research Institute. He is a former Director of Fiscal Studies at the Fraser Institute and is now a Senior Fellow. He holds a Master’s degree in business administration from the University of Windsor and a post-baccalaureate degree in economics from Simon Fraser University.
Nadeem Esmail (nadeem.esmail@fraserinstitute. org) is the Director of Health System Performance Studies at the Fraser Institute. He has an M.A. in economics from the University of British Columbia. Amela K arabegović (amela.karabegovic@fraserins
Robert L awson is an Associate
Professor in the Department of Finance, Co-director of the Center for International Finance and Global Competitiveness, and Director of the Economic Freedom Initiative at Auburn University.
titute.org) is a Senior Economist in the Fiscal Studies department at the Fraser Institute. She has an M.A. in economics from Simon Fraser University.
Niels Veldhuis (niels.veldhuis@fraserinstitute.org) is the Director of Fiscal Studies and a Senior Economist at the Fraser Institute. He has an M.A. in economics from Simon Fraser University. William Watson is an Associate Professor of Eco-
Fred McMahon (fred.mcmahon@
fraserinstitute.org) is the Director of the Centre for Trade and Globalization Studies at the Fraser Institute. He has an M.A. in economics from McGill University.
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nomics and Chair of the Department of Economics at McGill University in Montreal, Quebec. He holds a Ph.D. in economics from Yale University.
Comparing economic downturns Jason Clemens and Niels Veldhuis
F
rom kitchen tables to office water coolers to the corridors of power in Ottawa and Washington, there has been no shortage of comparisons of the current recession to previous economic downturns. In the United States, the Obama administration has repeatedly reminded the American public of the severity of the current crisis and has likened it to the Great Depression in order to justify its calls for sweeping reform and government action. While no one would disagree that the current recession has imposed great hardship on too many of our fellow citizens, the notion that the current recession is as severe or serious as the Great Depression is simply not based on evidence. There are numerous ways to compare one economic period to another. We have chosen to rely on three core measures of economic well-being: decline in economic output (gross domestic product), length of the recession, and unemployment rates.
Changes in GDP An economy’s gross domestic product (GDP) is the value of all goods and services produced in that economy during a particular period. Using this measure to gauge an economic downturn and compare it to others allows us to focus on the decrease in the production of goods and services relative to previous periods. Donald Marron, a former member of President George W. Bush’s Council of Economic Advisers and a former director of the Congressional Budget Office, has calculated the cumulative decline in GDP (output) for the
eight most severe recessions since the Great Depression (figure 1). His analysis rests on the increasingly accepted assumption that the US economy will begin to grow again in the third quarter of this year (see, for example, Murray and Zimmerman, 2009, Sep. 16). As is clear in figure 1, the current recession does not compare to the downturns of either 1929-33 or 1945-47 in terms of the decline in economic output. Indeed, the current recession looks far more like the downturn of 1957-58, which, incidentally, was also based on a contraction in credit markets (see Bradley, 2009). The main conclusion to be drawn from comparing declines in output is that the current recession appears to be the worst since the post-World War II recession.1
Length of recession There is another related way to measure and compare the severity of recessions: their length. The National Bureau of Economic Research (NBER) is charged with officially dating the start and end of recessions in the United States (NBER, n.d.). This approach simply examines how long an economic contraction lasted as opposed to the severity of the contraction. It is an important dimension
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Figure 1: Major economic downturns in the United States since 1929
Table 1: US business cycles, 1899 to present Month of peak
Month of trough
Percent change in GDP (real)
0 -5
-2.7
-2.9
-3.2
-3.4
-3.7
-3.9
-10 -15
-12.7
-20 -25 -26.7
-30
8 4 2 8 5 9 7 3 3-5 1-8 4-7 193 957-5 008-0 945-4 929-3 195 198 197 1 2 1 1
Note: Data prior to 1947 is based on annualized rather than quarterly GDP. Source: Marron, 2009a. Based on data from the Bureau of Economic Analysis.
of assessing recessions that is not captured in the first measure. Table 1 shows the length of each recession in the United States since 1899. As above, this analysis assumes that the current US recession will end in the third quarter of 2009. Based on its expected length (21 months), the current recession is comparable to the recessions of 1910-1912 (24 months), 1902-1904 (23 months), 19131914 (23 months), 1899-1900 (18 months), and 19201921 (18 months). It is certainly not comparable to the 43 months of recession that occurred between 1929 and 1933. However, the expected length of the current recession is greater than the length of all recessions since the Great Depression.
Unemployment rates US unemployment rates measure the proportion of workers looking for employment who are unable to secure work.2 Prior to 1948, unemployment rates were not calculated as they are currently, which makes pre-1948 historical comparisons difficult. However, figure 2 illustrates the monthly unemployment rate in the United States since 1948. It’s fairly clear that the current recession is the second most severe in terms of unemployment rates; it is second only to the recession of 1981-82. The current US unemployment rate is 9.7% (as of August), and many economists expect it to surpass 10.0% in the coming months. During the 1981-82 recession, the
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Duration in months
June 1899
December 1900
18
September 1902
August 1904
23
May 1907
June 1908
13
January 1910
January 1912
24
January 1913
December 1914
23
August 1918
March 1919
7
January 1920
July 1921
18
May 1923
July 1924
14
October 1926
November 1927
13
August 1929
March 1933
43
May 1937
June 1938
13
February 1945
October 1945
8
November 1948
October 1949
11
July 1953
May 1954
10
August 1957
April 1958
8
April 1960
February 1961
10
December 1969
November 1970
11
November 1973
March 1975
16
January 1980
July 1980
6
July 1981
November 1982
16
July 1990
March 1991
8
March 2001
November 2001
8
December 2007
August 2009*
21
*Based on a series of comments, including those of Federal Reserve Chairman, Benjamin Bernanke, regarding likely growth in the third quarter of 2009. Source: NBER, n.d.
unemployment rate exceeded 9.0% from March 1982 to September 1983, and reached 10.8% in both November and December 1982. Everyone hopes that the US unemployment rate will not reach these levels, or that high unemployment will not last as long as it did in the early 1980s, but only time will tell. A recent book on the Great Depression called The Forgotten Man by Amity Schlaes (2007) includes some empirical data and discussion of the severity of unemployment during the 1930s.3 Unemployment rates spiked from a little over 5.0% in 1930 to over 17.0% in 1931. They exceeded 22.0% in 1933 and remained above this level until 1936. Unemployment rates fell during 1936 and 1937, declining to a little over 13.0% before beginning to rise again during the 1938 recession. Thankfully, there is no expectation that current unemployment rates will reach this level.
3 For another interesting examination of the Great Depression see Robert Murphy’s Politically Incorrect Guide to the Great Depression and New Deal. A summary article of the book is available at <http://mises.org/story/3426>.
Figure 2: Monthly US unemployment rates, January 1948 to August 2009 12
Unemployment rate (%)
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References 8
Bradley, Michael D. (2009). As Bad as the 1958 Recession? That works…. Blog (February 1). Bradley and Company, LLC. <http://bradleyandco.blogspot. com/2009/02/as-bad-as-1958-recess ion-that-works.html>.
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4
2 1948
1958
1968
1978
1988
Source: Bureau of Labor Statistics, 2009.
Conclusion There are essentially two insights to be gained from looking at these three measures of economic performance during US recessions. First, the current recession is one of the most severe recessions of the last century. It ranks third overall in terms of GDP decline, fifth in terms of length, and at least third in terms of the unemployment rate, although it may surpass the unemployment rates of the 1980s over the next year. However, no economists are expecting unemployment to reach the levels recorded during the Great Depression. Second, and equally as important, the current recession is not comparable to the Great Depression. The declines in output, the length of the recession, and the almost unimaginable rates of unemployment that occurred during the Great Depression far surpass anything experienced to date or expected in the future. While likening the current decline to that of the Great Depression may make for rousing speeches and media sound-bites—and it may ultimately aid the Obama administration in passing its ambitious reform plans—it is absolutely not factual.
1998
2008
Bureau of Labor Statistics (2009). Table A-12. Alternative Measures of Labor Underutilization. Last updated September 4, 2009. United States Department of Labor. <http://www.bls.gov/news. release/empsit.t12.htm>.
Marron, Donald (2009a). Still Not the Great Depression 2.0. Blog (August 2). <http://dmarron.com/2009/08/02/still-not-the-greatdepression-2-0/>. Marron, Donald (2009b). We’re #1 (Unfortunately). Blog (August 1). <http://dmarron.com/2009/08/01/were-1unfortunately/>. Murray, Sara, and Ann Zimmerman (2009, September 16). Bernanke: Recession ‘Likely Over’. Wall Street Journal: A1. <http://online.wsj.com/article/SB125301730771311713. html>. National Bureau of Economic Research [NBER] (n.d.). US Business Cycle Expansions and Contractions. <http://wwwdev.nber.org/cycles/cyclesmain. html>, as September 30, 2009. Schlaes, Amity (2007). The Forgotten Man. HarperCollins.
Notes 1 This was also Dr. Marron’s conclusion after looking at the GDP data (see Marron, 2009b). 2 This does not include workers who prefer full-time work but can only secure part-time work. That situation is referred to as under-employment.
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A step in the right direction
iStockphoto
A free trade agreement with the EU could increase trade globally
Jean-François Minardi
T
he announcement last May of the launch of free trade negotiations between the European Union and Canada has not aroused much interest in Canada or Europe. And yet, provided that the parties involved manage to overcome numerous obstacles inherent to such negotiations, by 2011 we could have a comprehensive economic and trade agreement (CETA) that has the potential to greatly increase economic prosperity on both sides of the Atlantic. Such an agreement would certainly constitute an opportunity to increase trade. According to a joint study by the government of Canada and the European Commission published in October 2008, a further liberalization of trade in goods and services would bring benefits to both the EU and Canada. The study estimates annual real income gains of approximately €11.6 billion ($18 billion) for the EU (representing 0.08% of EU GDP) and €8.2 billion ($12 billion) for Canada (representing 0.77% of Canadian GDP) within seven years following the implementation of an agreement. Total EU exports to Canada could go up by 24.3% or €17 billion ($26 billion) by 2014, while Canadian bilateral exports to the EU could go up by 20.6% or €8.6 billion ($13 billion) (European Commission and Canada, 2008: vi). The European Union is Canada’s second most important trading and investment partner (European Commission and Canada, 2008: iv). With a population of 33 million, Canada has a considerably larger market to gain in a free trade agreement than the European Union, which has a population of 491 million (CIA, 2009a, b). Canada is only the EU’s 11th most important goods trading partner (European Commission and Canada, 2008: iv). Total trade between the EU and Canada is about the same size as the EU’s total trade with India, even though the Canadian economy is one and a half times larger than India’s (European Commission and Canada, 2008: 18). However, a CETA would be of greater value to the Europeans if it
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could eventually become a springboard for a transatlantic agreement that includes the United States. Although the result of the current negotiations between the EU and Canada remains uncertain, EU Trade Commissioner Catherine Ashton believes that the goal is to achieve much more than just a free trade agreement (Ashton, 2009). The CETA has been described as a second generation free trade agreement, a kind of “NAFTA plus” that would cover not only trade in goods and services, but also investment, government procurement, regulatory cooperation, intellectual property, temporary entry of business persons, competition policy and other related matters, labour, and the environment (FAIT, 2009). However, Jagdish Bhagwati, a Columbia University economist well known for his advocacy of free trade, believes that the creation of regional trading blocs is only a second-best solution that should not be achieved to the detriment of multilateral agreements like those being discussed at the Doha negotiations currently underway at the World Trade Organization (WTO). He argues that preferential trade deals, such as NAFTA, the Association of Southeast Asian Nations (ASEAN), and the envisioned CETA, jeopardize the “most-favoured nation” (MFN) principle, which requires that any tariff cuts offered to one country must be offered to all. According to Bhagwati’s theory, the risk with preferential trade deals is that such regional trading blocs end up having open borders between member states while imposing steep trade and investment barriers on outsiders. This would undeniably be a form of protectionism insofar as it discriminates against non-member states, notably poorer countries, by diverting trade from lower-cost outsiders. Multilateral trade agreements are indeed preferable to regional agreements since they usually cover more nations. However, a regional trade agreement like the one between Canada and EU is a step in the right direction if we consider how difficult it is for the WTO’s 153 member states to agree at the WTO negotiations.
Moreover, Canada and the EU remain committed to advancing negotiations at the WTO within the context of the Doha Development Agenda (European Commission and Canada, 2009). For all these reasons, the possibility of a freer flow of goods, services, and capital across the Atlantic and the huge potential for wealth creation that it represents for all parties involved deserves our enthusiastic support. Yet, according to Knox and Karabegović (2009), the Canadian governments should take these trade negotiations with the EU as an opportunity to tackle the interprovincial barriers that have prevented Canada from creating a single economic market within the country. Canadian and European negotiators should also use this opportunity to deliver on one of the promises made at the Doha round of world trade talks launched in 2001 (which broke down last July): to liberalize trade in agricultural products. The CETA negotiations offer a good opportunity for Canada and Europe to move forward and boost multilateral trade talks by eliminating agricultural protectionism and subsidies to farmers on both sides of the Atlantic. Europe’s Common Agricultural Policy (CAP) has always been an obstacle to free trade. It is a complex system of subsidies and protections for farmers that has led to protectionism and distortions in production, resulting in overproduction and waste (Oxford Economic Forecasting, 2005). In Canada, the current system of subsidies and supply management, with its harmful quotas, high tariffs that restrict imports, and centrally determined prices, is likewise a major obstacle to global free trade in farm goods (Minardi, 2009). Unfortunately, Canadian and European governments do not appear to be ready to make compromises on their respective agricultural policies. The Canadian government has already promised not to threaten its protectionist supply management system during the CETA negotiations (Bellavance, 2009, May 6b). Moreover it would be surprising if France, which has so much to gain from the preservation of the CAP (Oxford Economic Forecasting, 2005; The Economist, 2008, Nov. 20), would agree to include agriculture in the talks. This is a pity because a cut in farm subsidies and a dismantling of import barriers would not only be good for taxpayers and consumers, who ultimately pay the costs of these subsidies in the form of higher prices and taxes, but also for poor farmers in developing countries who cannot compete with the heavily subsidized and protected European and Canadian farmers. On the whole, CETA is a good thing for free trade and a step in the right direction. However, Canadian and European negotiators should use this opportunity to increase global trade by dismantling Europe’s CAP and Canada’s supply management system and thus reinforce the Doha Development Agenda.
References Ashton, Catherine (2009). Open Trade and Investment: Driving Global Recovery. Speech given at the Conférence de Montréal, June 10, 2009. <http://tinyurl.com/lnonsj>, as of July 21, 2009. BBC News (2008). Q&A: Common Agricultural Policy. <http://news.bbc.co.uk/2/hi/europe/4407792.stm>, as of July 21, 2009. Bellavance, Joël-Denis (2009, May 6a). Libre-échange avec L’UE : Harper confiant. La Presse. Bellavance, Joël-Denis (2009, May 6b). Ottawa défendra la gestion de l’offre en matière agricole. La Presse. Central Intelligence Agency [CIA] (2009a). European Union. The World Factbook. <https://www.cia.gov/libr ary/publications/the-world-factbook/geos/ee.html>, as of July 21, 2009. Central Intelligence Agency [CIA] (2009b). Canada. The World Factbook. <https://www.cia.gov/library/public ations/the-world-factbook/geos/ca.html>, as of July 21, 2009. The Economist (2008, November 20). The Coddle and Protect Policy. The Economist. European Commission and Canada (2008). Assessing the Costs and Benefits of a Closer EU-Canada Economic Partnership. Foreign Affairs and International Trade Canada. <http://tinyurl.com/y87c4b5>, as of July 21, 2009. European Commission and Canada (2009). Joint Report on the EU-Canada Scoping Exercise. Foreign Affairs and International Trade Canada. <http://tinyurl.com/coju7m>, as of July 21, 2009. Foreign Affairs and International Trade Canada [FAIT] (2009). Canada-European Union: Comprehensive Economic and Trade Agreement (CETA) Negotiations. Government of Canada. <http://tinyurl.com/ybmpvwm>, as of July 21, 2009. Knox, Robert, and Amela Karabegović (2009). Canada’s Problem with Interprovincial Trade Barriers. Fraser Forum (July/August): 20–21. Le Cours, Rudy (2009, April 28). Vers le libre-échange Canada-Europe. La Presse. Minardi, Jean-François (2009). What Does the Future Hold for Quebec Agriculture? Fraser Alert. Fraser Institute. Oxford Economic Forecasting (2005). Trade Liberalisation and CAP Reform in the EU. Open Europe. <http://www. openeurope.org.uk/research/report.pdf>, as of August 17, 2009. World Trade Organization [WTO] (2008). Members and Observers. WTO. <http://tinyurl.com/pvldre>, as of July 21, 2009.
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The problem with relative measures of poverty Niels Veldhuis and Amela K arabegović
A
ccording to the Conference Board of Canada, Canada’s record on poverty is among the worst in the developed world, and is slipping. That conclusion comes from the Conference Board’s latest report, How Canada Performs, which measures Canada’s “social performance” in such areas as “social cohesion, equity and self-sufficiency” (Conference Board of Canada, 2009a). While many politicians and poverty advocates will be eager to trumpet these findings and use them as a basis for ill-formed policy solutions, the Conference Board’s conclusion is simply not true. Poverty in Canada has decreased, not increased (Sarlo, 2006). The Conference Board’s report may have made for good headlines, but it deserves an “F” in rigour and measurement. First, consider how the Conference Board measures poverty. An individual is considered “poor” if his or her disposable income is less than 50% of the median income in the country. The Conference Board considers
people to be living in poverty “if their income cannot afford them the goods and services that are customary in a given society” (Conference Board of Canada, 2009b; emphasis added). The problem with this measure of poverty is that it is relative, rather than absolute; it simply shows the extent to which some Canadians are less well-off than others. It does not show whether individuals can provide themselves with the basic necessities to maintain a standard of life that is minimally decent in our society. Being able to buy goods and services that are “customary” is much different from being able to buy goods and services that are essential. Furthermore, under the Conference Board’s measure, poverty will likely never be alleviated. There will always be a portion of the population living on less than 50% of the median income. For example, most young people start out with significantly lower incomes than the median income in Canada. In fact, many students
Fotolia
Are we really losing ground?
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(i.e., future doctors, teachers, and nurses) would probably be considered “poor” according the Conference Board’s poverty measure. In addition, many immigrant families come to Canada with little in the way of assets and often earn significantly less than the median income during their early days in Canada. But by working hard, saving, and investing, they move up the income ladder, just as students and others do. Unless Canada significantly ramps up income redistribution, the existence of poverty, according to the Conference Board’s definition, is almost inevitable. Perhaps more income redistribution is what the Conference Board desires. It does, after all, highlight that “leading countries boast strong traditions of wealth distribution” (Conference Board of Canada, 2009b). The report also suggests that more social spending is in order, along with “national anti-poverty strategies.” This recommendation misses the fact that increased income redistribution will have the opposite effect. Taking more money from successful Canadians and redistributing it to lower income Canadians will only decrease the incentives for lower income Canadians to become successful. Perhaps even more damaging than the Conference Board’s misleading measure of poverty is its conclusion that poverty is increasing in Canada. Using the Conference Board’s measure, poverty among adult Canadians has increased from 9.4% in 1995 to 12.2% in 2005. Child poverty, defined as children “living in households where disposable income is less than half of the median in a given country,” has similarly increased from 12.8% in 1995 to 15.1% in 2005 (Conference Board of Canada, 2009b). These figures are “unacceptable,” claims Anne Golden, president and CEO of the Conference Board. “Not only are we not making progress; we are losing ground. Poverty rates among children and working age people are rising” (Conference Board of Canada, 2009a). But are we really losing ground? Consider a superior, “basic needs” approach to evaluating poverty, which was created by Chris Sarlo, a professor of economics at Nipissing University. A “basic needs” standard of living is the level of income needed to meet such basic needs as a nutritious diet, satisfactory housing, clothing, health care, public transportation, household insurance, telephone service, and a host of other items. Thus, a “basic needs” approach to measuring poverty counts the number of individuals who cannot provide for their basic necessities, rather than counting those who are less well-off than their neighbours. Professor Sarlo calculates that approximately 4.9% of all Canadians and 5.8% of children were in poverty in 2004, the most recent year for which data are available (Sarlo, 2006). While these levels indicate that poverty remains a serious issue in Canada, grossly overstating the
problem by using flawed estimates, as the Conference Board has done, results in a misleading depiction of reality. True poverty in Canada is about 2.5 times lower than the Conference Board estimates. More importantly, Professor Sarlo’s poverty calculations also show that both child and overall poverty rates actually fell substantially between the mid-1990s and the mid-2000s. Approximately 6.8% of all Canadians were in poverty in the mid-1990s compared to 4.9% in the mid-2000s. Similarly, child poverty is down from 9.1% in the mid-1990s to 5.8% in the mid-2000s (Sarlo, 2006). While a broader review of the Conference Board’s How Canada Performs report is not possible here, many of the report’s other 15 indicators of social performance raise additional red flags. For instance, the report gives Canada a “C” grade on the Gender Income Gap, which is measured as the ratio of male to female income per capita. According to this measure, males in Canada earn 21% more than females (Conference Board of Canada, 2009b). However, the male-female income gap depends on a number of factors, such as education, occupation, and number of years of experience, none of which are captured by the Conference Board’s measure. Consider, for example, that women aged 25 to 29 with a graduate degree or professional diploma earned 96% of the income of their male counterparts in 2005 (Statistics Canada, 2008). A more appropriate measure of the gender income gap would be a comparison of male and female wages within the same occupations. Effective public policy must rely on accurate depictions of reality. Overstating poverty estimates by using flawed measures, as the Conference Board has done, does not help. In fact, it hinders our ability to identify those who are most in need and determine how best to help them.
References Conference Board of Canada (2009a). Canada’s Record on Poverty Among the Worst of Developed Countries—and Slipping. News release (September 17). <http://www.con ferenceboard.ca/press/newsrelease/10-21.aspx>. Conference Board of Canada (2009b). How Canada Performs, Details and Analysis, Society. <http://www.con ferenceboard.ca/HCP/Details/Society.aspx>. Sarlo, Chris (2006). Poverty in Canada: 2006 Update. Fraser Alert. Fraser Institute. <http://www.fraserinstitute.org/ commerce.web/product_files/PovertyinCanada2006.pdf>. Statistics Canada (2008). Earnings and Incomes of Canadians Over the Past Quarter Century, 2006 Census. Catalogue No. 97-563-X. <http://www12.statcan.ca/english/census 06/analysis/income/pdf/97-563-XIE2006001.pdf>.
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The history of Economic Freedom of the World Fred McMahon
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erhaps the most famous statement about economic freedom was made almost 250 years ago in The Wealth of Nations. When Adam Smith famously wrote, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest,” he was talking about economic freedom. Neither benevolence nor coercion brought Smith his supper. Instead, it was voluntary economic exchange. Yet, until 25 years ago, economic freedom was an intuitive concept, unmeasured and with no rigorous definition. Michael Walker, then executive director of the Fraser Institute, first noted this significant gap in knowledge during the 1984 meeting of the Mont Pelerin Society in Cambridge, England. As he later wrote: In the course of a comment on a paper by Paul Johnson, I made reference to the famous passage in Capitalism and Freedom written by Milton Friedman and Rose Friedman, in which the authors note that, “Historical evidence speaks with a single voice on the relation between political freedom and a free market. I know of no example in time or place of a society that has been marked by a large measure of political freedom, and that has not also used something comparable to a free market to organize the bulk of economic activity.” … It became clear during the course of [the following] discussion that while Milton and Rose Friedman’s comment had been extant for three decades there had been no serious attempt to explore the relationship between economic and political freedoms in a scholarly way. (Walker, 1996: 1)1
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That launched a still ongoing research project that would define and measure economic freedom. At the same meeting, Walker invited Milton and Rose Friedman, both of whom were in attendance, to join him in investigating economic freedom throughout the world. The three ultimately became the co-leaders of what would become the economic freedom project.
Developing the economic freedom index The project began with a series of symposia on economic freedom, which were supported financially by Liberty Fund, Inc. of Indianapolis. Three Nobel Laureates and 61 of the world’s top scholars participated in these seminars, which led to the publication of three books of essays exploring the topic (Walker, 1988; Block, 1991; Easton and Walker, 1992). In his description of the development of the economic freedom project, Walker highlighted the contribution of Alvin Rabushka of the Hoover Institute: Building on the work of John Locke, Adam Smith, Milton Friedman, Murray Rothbard, and his own extensive empirical and theoretical analysis, Rabushka … argued that private property and rule of law provided the foundation—the institutional basis—for economic freedom. Rabushka applied the concept of economic freedom to five basic areas—taxation, public spending, economic regulation of business
WORLD
and labour, money, and foreign trade—and outlined some ideas about how it might be measured in each of these areas. This work proved to be quite important in focusing subsequent discussion at the other symposia. (Walker, 1996: 3) These categories evolved into the five areas currently measured by the Economic Freedom of the World Index: size of government; legal structure and security of property rights; sound money; freedom to trade; and regulation of credit, labour, and business. The seminars and the books fully explored the theoretical and philosophical questions surrounding the nature and meaning of economic freedom. Thanks to these discussions, the concept of economic freedom is now rigorously defined, but that definition can also be made intuitive and presented simply. Economic freedom is the ability of individuals, families, and businesses to make their own economic decisions, free of coercion. The classic summary is: Individuals have economic freedom when (a) property they acquire without the use of force, fraud, or theft is protected from physical invasions by others and (b) they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others. An index of economic freedom should measure the extent to which rightly acquired property is protected and individuals are engaged in voluntary transactions. (Gwartney et al., 1996: 12)
When they began to actually construct the economic freedom index, the leaders of the project faced an important question regarding the nature of the measurement: should it be subjective, based on experts’ opinions, or should it be objective, based on third-party measurements? Several surveys of experts were undertaken, but comparisons between different countries proved difficult since few of those surveyed possessed expert knowledge of more than one or two nations. Developing an objective measure of economic freedom was an attractive option for a number of reasons. In particular, the use of third-party data would mean that the index could be reproduced by other researchers, a key principle of empirical research. The index now contains 42 separate variables to measure economic freedom. Most are based on hard economic data, but some variables (particularly those measuring legal structures, where hard data is typically not available) are based on surveys, such as the Doing Business survey by the World Bank which surveys professionals in various nations about institutional factors. While hard data would be preferable, the use of thirdparty surveys maintains the reproducibility of the survey, since other researchers have access to those surveys. More importantly, it maintains objectivity. The authors and any expert panel chosen by them would have biases that would influence the results, and perhaps even influence scores for nations they liked or disliked for entirely non-economic reasons. The use of third-party data maintains the necessary distance between the researchers and the results. Participants experimented with several ideas for constructing the index, but the first comprehensive model was developed by James Gwartney, Robert Lawson, and Walter Block. It was developed for the fourth symposium on economic freedom and refined during the fifth, leading to the publication of the first full index in 1996.
The economic freedom index today The economic freedom index has allowed researchers around the world to test the impact of economic freedom on people’s lives. Put simply, researchers have found that individuals and families, when free to do so, know their wants and needs and look after themselves better than even the most benevolent government. Economic freedom has also been linked to democracy and other
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This pinpoints policy areas that need improvement and directs participants to best practices models. Because the economic freedom index provides a comprehensive description of a nation’s economic policy, it can also be used to develop an economy-wide prescription for increasing prosperity and reducing poverty. The influence and spread of the Economic Freedom of the World project has grown beyond the expectations of its founders. It has provided, for the first time, an empirical measure to test Milton Friedman’s argument that people in economically free nations live better lives than people in nations that lack economic freedom. Because of this, the index has had a strong effect on policy around the world. As Michael Walker notes:
freedoms. When the government has economic power over its citizens—over their ability to get a job, support their family, find housing, choose where they live, get a promotion—it has powerful tools of coercion (see “The benefits of economic freedom,” pg. 15). Since the publication of the first edition of Economic Freedom of the World in 1996, about 350 scholarly and policy articles have used the economic freedom indexes to explore the relationship between economic freedom and other socioeconomic outcomes. For example, it was used as the key measure of good institutions in the International Monetary Fund’s 2005 report on institutions, World Economic Outlook: Building Institutions. The index now measures economic freedom in 141 nations and territories, representing 95% of the world’s population. Members of the Economic Freedom Network, which publishes the report, promote economic freedom in 76 different nations and territories, including Israel and the Gaza Strip, Pakistan and India, Cambodia and Vietnam, Georgia and Russia, and Colombia and Venezuela, to name a few. A new tool has recently been developed by the Fraser Institute and the International Research Foundation of Oman: the Economic Freedom Audit, which was first undertaken in Oman. An audit brings together a nation’s top political leaders—usually at the cabinet minister level— policy makers, members of the media, opinion leaders, and business people to examine the nation’s score on the 42 policy areas examined in the economic freedom index and compare it to the world and regional average scores and to the scores of the top 10 nations and territories.
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I don’t think that there is any question but that the index has changed the world in a very fundamental way. Most importantly, it has provided those who seek freedom a way to discuss it with their governments in an objective, unemotional, and comparative way. (Michael Walker, personal communication, September 2009)
Note 1 The opening section of this article depends largely on Walker (1996).
References Block, Walter (ed.) (1991). Economic Freedom: Toward a Theory of Measurement. Fraser Institute. Easton, Stephen T., and Michael A. Walker (eds.) (1992). Rating Global Economic Freedom. Fraser Institute. Gwartney, James, Robert Lawson, and Walter Block (1996). Economic Freedom of the World: 1975–1995. Fraser Institute. International Monetary Fund (2005). World Economic Outlook: Building Institutions. International Monetary Fund. Walker, Michael A. (ed.) (1988). Freedom, Democracy, and Economic Welfare. Fraser Institute. Walker, Michael A. (1996). The Historical Development of the Economic Freedom Index. In James Gwartney, Robert Lawson, and Walter Block, Economic Freedom of the World: 1975–1995 (Fraser Institute): 1–7.
The benefits of economic freedom Fred McMahon
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conomic freedom creates positive social and economic dynamics. In economically free nations, people succeed by creating goods or services that others want to buy. In other words, people get ahead by creating benefits for other people. Where economic freedom does not exist, economies grow slowly, if at all, and people gain by seeking political favours (â&#x20AC;&#x153;rent-seekingâ&#x20AC;?) and limiting the possibilities of others. Where economic freedom does exist, the biggest gains are achieved by people who increase the size of the economic pie for everyone; without economic freedom, the biggest gains are achieved by those who cut a bigger slice of the pie for themselves to the disadvantage of others. This is a key reason why economic freedom has been shown to promote democracy and other freedoms (Griswold, 2004). The dynamics of a society in which individuals gain by promoting the well-being of other individuals (by efficiently creating goods and services people want) differ dramatically from the dynamics of a society in which, in the absence of economic freedom, rent-seeking and power-hoarding is the path to increased wealth and power. The first dynamic is conducive to a stable, peaceful, civil society marked by freedom; the latter dynamic creates incentives for reducing freedoms. Since the publication of the first edition of the Economic Freedom of the World in 1996 and, more recently, national and regional indexes such as Economic Freedom of North America, about 350 scholarly and policy articles using the economic freedom indexes to explore the relationship between economic freedom and other socioeconomic outcomes have been published. In this article, I will focus briefly on the relationship of economic freedom to economic growth and prosperity.1
Intuitively, one would expect that economic freedom would have a positive impact on economic growth because economic freedom creates a climate that allows individuals and business to allocate their resources to the highest end use. However, the question is ultimately an empirical one. Easton and Walker (1997), in one of the first studies on economic freedom and economic growth, found that changes in economic freedom have a significant impact on the steady-state level of income, even after the level of technology, the level of education of the workforce, and the level of investment are taken into account. De Haan and Sturm (2000) showed empirically that increases in economic freedom boost economic growth, while reductions in freedom slow growth. Using the economic freedom index published in Gwartney et al. (1996) and per capita GDP data for 80 countries, they found that after accounting for educational level, investment, and population growth, increased economic freedom has a significant impact on economic growth. Gwartney and Lawson (2004) examined the impact of economic freedom on economic growth but with a specific focus on investment and productivity. They found that economic freedom strongly promotes investment. Nations with an economic freedom of the world (EFW) score below 5 (on a scale from zero to 10, where a higher value indicates a higher level of economic freedom) attracted US$845 in investment per worker and only US$68 per worker in foreign direct investment over the period of 1980 to 2000. Nations with an economic freedom score above 7 attracted US$10,871 in investment per worker, including US$3,117 of foreign direct investment, over the same period of time.
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Moreover, investment is more productive in economically free nations. Holding constant factors thought to affect growth and productivity, such as initial per capita GDP, tropical location, coastal location, change in human investment, and public investment, Gwartney and Lawson (2004) found that an increase of one percentage point in the ratio of private investment to GDP leads to increases in the growth rate of per capita GDP by 0.33 percentage points in an economically free country. The same increase in private investment in a less economically free country increases the growth rate of per capita GDP by 0.19 percentage points. In other words, investment in economically free nations (with a EFW score above 7) had a positive impact on growth that was 70% greater than investment in nations with poor levels of economic freedom (having a score below 5). Using the same regression model, Gwartney and Lawson also calculated the impact of economic freedom on overall growth through both direct and indirect effects. They found that if a nation increased its economic freedom by one unit (on a scale from zero to 10) in the 1980s, it would have seen increased GDP growth of 1.9 percentage points per year over the period of 1980 to 2000. They also found that, because of the high rates of growth associated with economic freedom, over the long term, economic freedom explains over two-thirds of cross-country variation in GDP. Increases in economic freedom also reduce poverty (Norton and Gwartney, 2008). Specifically, the population-weighted $1-per-day poverty rate was 29.7% in 2004 for countries with EFW ratings of less than 5, but only 7.7% for countries with EFW ratings between 6 and 7; the $2-per-day poverty rate declines from 51.5% to 46.2% to 38.9% as one moves from the least to the most free economies. Moreover, a one-unit increase in the EFW rating between 1980 and 1995 was associated with a 5.21 percentage-point reduction in the $1-per-day poverty rate and a 5.22 percentage-point reduction in the $2-perday poverty rate. Norton and Gwartney also examined the relationship between economic freedom and other measures of well-being. In the mostly unfree economies, 72.6% of the population have access to safe water compared to nearly 100% in the mostly free economies. The life expectancy of people in the mostly free group is over 20 years greater than that of people in mostly unfree economies. Mostly free economies have more than twice as many physicians per 1,000 population than mostly unfree economies. For
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every 1,000 births, 64 more babies survive in mostly free economies per year than in mostly unfree countries. For every 1,000 children under the age of five, 109 more children survive in mostly free countries each year than in countries that are mostly unfree. A large body of peer-reviewed empirical research shows similar results, as well as economic freedom’s relationship with other positive outcomes. For a sample of the literature on economic freedom, visit <http://www. freetheworld.com>. For a summary of the literature on economic freedom and economic prosperity, see Berggren (2003) and Doucouliagos and Ulubasoglu (2006).
Note 1 This article is largely based on Al Ismaily et al. (2008).
References Al Ismaily, Salem, Amela Karabegović, and Fred McMahon (2008). Economic Freedom of the Arab World: 2008. Friedrich Naumann Foundation for Liberty, International Research Foundation, and the Fraser Institute. Berggren, Niclas (2003). The Benefits of Economic Freedom: A Survey. Independent Review 8, 2 (Fall): 193–211. Doucouliagos, Chris, and Mehmet Ali Ulubasoglu (2006). Economic Freedom and Economic Growth: Does Specification Make a Difference? European Journal of Political Economy 22, 1: 60–81. De Haan, J., and J-E. Sturm (2000). On the Relationship between Economic Freedom and Economic Growth. European Journal of Political Economy 16: 215–41. Easton, S.T., and M.A. Walker (1997). Income, Growth, and Economic Freedom. American Economic Review 87, 2 (May): 328–32. Griswold, D.T. (2004). Trading Tyranny for Freedom: How Open Markets Till the Soil for Democracy. Trade Policy Analysis No. 26. Cato Institute. Gwartney, James, and Robert Lawson (2004). Economic Freedom of the World: 2004 Annual Report. Fraser Institute. <www.freetheworld.com>. Gwartney, James, Robert Lawson, and Walter Block (1996). Economic Freedom of the World: 1975–1995. Fraser Institute.
Will economic freedom survive the crisis?
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James Gwartney and Robert Lawson
ccording to the most recent Economic Freedom of the World (EFW) report, there has been a gradual but steady movement toward economic freedom in recent decades (Gwartney et al. 2009). Since the 1970s, monetary policy has been more stable, trade barriers have declined, high marginal tax rates have been reduced, and exchange rate controls virtually eliminated. Consider the following: the median inflation rate was 4% in 2007, down from 14% in 1980. Among the 93 countries with data for both periods, only 17 had a double-digit average annual rate of inflation during 20032007, compared to 61 countries during 1976-1980. The mean tariff rate fell from 26.2% in 1980 to 9.0% in 2007. The number of countries imposing marginal tax rates of 50% or more fell from 62 in 1980 to nine in 2007. In 1980, fifty countries imposed exchange rate controls that generated a black market premium over 10% higher than official rates in 1980, but only three did in 2007. These underlying factors have contributed to rising EFW scores for most countries. As figure 1 shows, the average value on the EFW index has risen from 5.5 in 1980 to 6.7 in 2007.1 In addition, the economic progress during this era has been impressive. The worldâ&#x20AC;&#x2122;s inflation-adjusted per capita income rose from $5,400 in 1980 to $8,500 in 2005, an average annual growth rate of approximately 2%. Over that period of time, the $1-per-day poverty rate fell from 34% to 19%, life expectancy rose from 64.4 years to 68.1, and the infant mortality rate fell from 53 to 36 deaths per 1,000 births. Other quality of life indicators such as
school attendance, literacy, and access to clean water have all improved (Shleifer, 2009). Economic growth is primarily the result of gains from trade, capital investment, and the discovery of improved products, lower-cost production methods, and better ways of doing things. Numerous studies have shown that countries with more economic freedom grow more rapidly and achieve higher levels of per capita income than those that are less free (De Haan et al., 2006). Similarly, there is a positive relationship between changes in economic freedom and the growth of per capita income. Given the sources of growth and prosperity, it is not surprising that increases in economic freedom and improvements in quality of life have gone hand in hand over the past 25 years.
The global recession Despite tremendous economic progress, the world is currently facing yet another economic downturn; it is critically important that we learn the right lessons from this experience. At this point, two things are clear. First, government regulation and improper monetary policy were major contributing factors to the crisis (see Gwartney et al, 2009, for details). Risky lending practices, highly leveraged financial institutions, imprudent relations between bond dealers and risk-rating agencies, and high-pressure marketing all played a role. Global financial markets quickly spread the risky mortgage-backed securities throughout the world.
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Figure 1: Average Economic Freedom of World Index rating, 1980 to 2007
Rating (out of 10)
(1963) have shown, the downturn was brought about by a contraction in the money supply. In the United States, the money supply fell by more than 30% be10 tween 1929 and 1933. While monetary 9 expansion was present from 1934 to 8 1936, the central bank once again shifted toward monetary contraction in 1937. 7 6.7 6.7 6.6 Restrictive trade policies added 6 6.3 5.9 to the downward spiral. The infamous 5.6 5.5 5 Smoot-Hawley trade bill enacted in June 4 1930 increased tariff rates in the United 3 States by more than 50%. Predictably, other countries retaliated—60 in total— 2 with similar trade restrictions and world 1 trade fell by nearly two-thirds in the three 0 years that followed. Reed Smoot and Wil1980 1985 1990 1995 2000 2005 2007 lis Hawley argued that the higher tariffs were needed to save jobs. The unemploySource: Gwartney et al., 2009. ment rate, which was 7.8% when the bill was enacted, tripled to nearly 25% over the following three years. Many history But the foundation of the crisis was provided by books tell us that the Great Depression was caused by the government regulations and central bank policies that October 1929 stock market crash. But they often do not mandated the risky loans and supplied the massive credit tell us that the stock market rose steadily for five months that created the boom and bust in the housing industry. beginning in November 1929, and had returned to the Furthermore, the key players in the United States, includOctober 1929 level by mid-April 1930. However, as it being the two huge government-sponsored lenders, Fannie came obvious that the Smoot-Hawley bill was going to Mae and Freddie Mac, were doing what their regulators pass, stock prices plummeted once again. wanted them to do: extend more and larger loans with As if that was not enough, in 1932 the Hoover adlower down payments to households with low and modministration and the Democratic Congress passed the erate incomes. largest tax increase in American history. The top marSecond, it is clear that opponents of economic freeginal rate was raised from 25% to 63% and other rates dom are blaming the crisis on the operation of markets were increased by similar proportions. The Roosevelt adand are hoping to use it as an excuse for a vast expansion ministration followed with still higher tax rates, pushing in government. the top marginal rate to 79% in 1936. The policies of the Roosevelt administration also included price controls, the cartelization of more than 500 industries, the destrucThe Great Depression revisited tion of agriculture products in order to drive their prices higher, and numerous other policy shifts that generated The closest parallel to the current situation is the Great uncertainty and prolonged the recession until the beginDepression. At this point, both the severity and expected ning of World War II. duration of the current downturn are mild compared to One would think that government failure on the the Great Depression. But the downturn of 1930 did not massive scale that generated and prolonged the Great start out as a decade-long catastrophe, nor did it have to Depression would lead to reforms that would curtail the be one. More than any event in economic history the Great role of government. But this was not the case; ironically, Depression illustrates the tragic results of perverse governmany people felt that the Great Depression strengthened ment policies. As Milton Friedman and Anna Schwartz the case for government action.
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What are we learning from the current crisis? Is the current crisis going to increase or reduce economic freedom? Does it make any difference whether countries adopt policies that are consistent with economic freedom? It matters because there is a dramatic difference in the incentive for productive action in a market economy and in one that is managed and directed by the political process. With markets, profits and losses will direct people toward productive actions and away from unproductive and counterproductive ones. If a business is going to be successful in a market economy, it must bid resources away from others and use them to supply goods that people value enough to pay prices sufficient to cover their costs. Profits can properly be viewed as a reward for using resources productively—that is, in ways that increase their value. In contrast, losses are a penalty imposed on those who use resources in ways that reduce their value. Markets also provide people with a strong incentive to innovate and discover lower cost production methods and new products that people value highly relative to cost. This incentive to use resources productively and discover better ways of doing things is the driving force underlying economic growth and progress. The incentive structure of the political process is vastly different. There is nothing comparable to profits and losses that will consistently direct resources into productive projects and away from counterproductive ones. Politicians will allocate resources toward the politically powerful—those who can provide them with the most votes, campaign funds, high-paying jobs for political allies, and, yes, even bribes. There is no reason to expect that this incentive structure will channel resources into productive projects and away from counterproductive ones. Innovators and entrepreneurs will be at a disadvantage in this system because it will not be enough for them to produce products that consumers value highly relative to cost; they will also have to compete for political favours and cater to the views of the political class. The result: more resources will be used to obtain political favours— economists refer to this as “rent-seeking”—and fewer channelled into productive activities. This process will stifle entrepreneurship, growth, and economic progress. In this time of crisis, our political leaders may be acting with good intentions and trying to do what is
right, but this will not protect us from unsound policies. Consider a medical analogy: the leech doctors of the eighteenth century also had good intentions. They thought that applying leeches would draw various diseases out of the blood stream and lead to recovery. But their good intentions did not protect their patients from the adverse consequences of unsound practices. Neither will good intentions protect the citizenry from unsound policies today. Both economic theory and real world experience indicate that the core ingredients of economic freedom— voluntary exchange, reliance on markets, monetary stability, and protection of property rights—create the best environment for growth and prosperity. In contrast, policies that conflict with economic freedom—price controls, trade restrictions, monetary instability, high taxes, political favouritism of some businesses and sectors relative to others, and government management of the economy— lead to stagnation, slower growth, and increased poverty. These are the great lessons to be learned from history and the current economic downturn. As philosopher George Santayana noted long ago, if we do not learn from the mistakes of the past, then we are prone to repeat them.
Note 1 This average was computed using the same group of countries. The average was not weighted by population.
References De Haan, Jakob, Susanna Lundström, and Jan-Egbert Sturm (2006). Market-Oriented Institutions and Policies and Economic Growth: A Critical Survey. Journal of Economic Surveys 20, 2: 157–35. Friedman, Milton, and Anna J. Schwartz (1963). A Monetary History of the United States, 1867-1960. Princeton University Press. Gwartney, James D., and Robert Lawson with Joshua C. Hall; with Herbert Grubel, Jakob de Haan, Jan-Egbert Sturm, and Eelco Zandberg (2009). Economic Freedom of the World: 2009 Annual Report. Economic Freedom Network. <www.freetheworld.com>. Shleifer, Andrei (2009). The Age of Milton Friedman. Journal of Economic Literature 47, 1: 123–35.
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Economic freedom in francophone countries Jean-François Minardi
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rancophone nations have some of the lowest levels of economic freedom in the world, according to the 2009 Economic Freedom of the World report. This is bad news for Francophones because economic freedom not only drives economic growth and prosperity, but it also contributes to the emergence of civil liberties and political rights, two pillars of liberal democracy, in less free nations (Gwartney and Lawson, 2009: 22; Al Ismaily et al., 2008: 13). For these reasons, the developing countries of the Francophonie—defined as the global community of French-speaking people living in countries where French is an official language or is commonly used by the population1—should increase their levels of economic freedom in order to ensure economic growth, reduce poverty, and develop political freedom.
Francophones lack economic freedom According to James Gwartney and Robert Lawson (2009: 3), authors of the 2009 Economic Freedom of the World report, the key ingredients of economic freedom are personal choice, voluntary exchange coordinated by markets, freedom to enter and compete in markets, and protection of persons and their property from aggression by others. In the report, economic freedom is measured in five areas: (1) size of government; (2) legal structure and security of property rights; (3) access to sound money; (4) freedom to trade internationally; and (5) regulation of
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credit, labour, and business. Economic freedom is measured on a scale of zero to 10 where a higher value indicates a higher level of economic freedom. Francophone countries can be divided into two groups, industrialized and developing, which face completely different realities. Apart from a few exceptions like Switzerland (ranked 4th out of 141 countries in 2007, the latest year for which data are available), Canada (8th), Luxembourg (14th), and Mauritius (16th), the majority of French-speaking countries have low levels of economic freedom. Two French-speaking industrialized countries have relatively low levels of economic freedom. France, which was 33rd in the rankings for 2007, had an average score of 6.79 out of 10 for the last 37 years. Belgium, another poor performer, was 47th in this year’s ranking, with an average score of 7.31 for the last 37 years. Both countries have similar problems with state intervention in the economy, heavy taxes, and rigid labour markets. However, France has improved recently. In 2007, France’s score was 7.43, its highest in 37 years. All of the francophone developing countries, except Haiti, are in Africa. With the exception of Mauritius, they all have low levels of economic freedom. Out of the 21 developing francophone countries, eight had a rating between 6 and 6.5 in 2007, 11 had a rating between 5 and 6, and two had a rating of less than 5. By comparison, Hong Kong, the world’s top country for economic freedom, had a rating of 8.97. The best performer among the developing francophone nations was Haiti, with a rating of 6.44; the worst was the Republic of Congo, with a rating of 4.44. Three
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oil-producing countries—Gabon, Algeria, and the Republic of Congo—were among the worst countries in the world for economic freedom, ranking 122nd, 131st, and 137th, respectively. However, Algeria has shown some improvement recently; its score, which was as low as 3.79 in 1990, was 5.44 in 2005 before decreasing slightly to 5.33 in 2007. These are undoubtedly disappointing results. However, some countries, such as Madagascar, Mauritius, and Togo, have made substantial progress and have become economically freer over the last three decades.
A missed opportunity The low level of economic freedom in developing francophone countries is a problem because numerous studies have shown that countries with more economic freedom grow more rapidly and achieve higher levels of per capita income than those that are less free (Norton and Gwartney, 2008: 27). According to the World Bank’s (2009) Country Classification, 14 francophone countries are low-income and five are lower-middle-income. Consequently, the most urgent goal of these countries should be to reduce poverty. Thus far, the solution adopted by these countries has been “official foreign aid” (ODA), a system in which wealthy nations subsidize poor ones. Jeffrey Sachs, the author of The End of Poverty who also played a key role in the UN Millennium Project,2 argues that a significant increase in foreign aid is needed to help poor countries escape the “poverty trap” which, according to his view,
prevents poor nations from experiencing economic growth (Easterly, 2006: 33). However, as William Easterly (2006: 34) notes, Africa has received $568 billion in aid over the past four decades, and the results have been far from impressive in terms of poverty reduction and economic development. As China has demonstrated over the past two decades, during which 300 million Chinese people were lifted out of extreme poverty, increasing economic growth by increasing economic freedom is a more efficient and successful way to reduce poverty in developing countries (Norton and Gwartney, 2008: 33). That is why increasing economic freedom in African countries is so important. Economic freedom also contributes to the emergence of civil liberties and political freedom, both of which are essential to human rights and liberal democracy. Academic research has shown that economic freedom is a necessary, though not sufficient, condition for liberal democracy (Berger, 1992: 11). It liberates people from dependence on government and allows them to make their own economic and political choices. According to the Freedom in the World survey by Freedom House (2008a), which measures individual freedom in terms of political rights and civil liberties,3 nine francophone developing countries are “not free,” and 10 are only “partly free.” Just two low-income countries, Mali and Benin, which have low levels of economic freedom (with scores of 6.28 and 5.89, respectively), are defined as “free.” Unfortunately, Mauritius is the only Francophone developing country that has enough economic freedom to maintain a functioning liberal democracy.
The way forward The goal for francophone developing countries should be to increase their levels of economic freedom in order to ensure economic growth and poverty reduction and to develop political freedom. Because gains from trade, entrepreneurship, and investment are at the core of economic growth and are the result of institutions and policies that support economic freedom (Norton and Gwartney, 2008: 33), the best strategy for developing countries would be to create an institutional and policy environment that is conducive to the smooth operation of markets and the realization of gains from trade and entrepreneurial activities (Gwartney and Lawson, 2004: 28).
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According to Norton and Gwartney (2008: 35), “Africa needs institutional reforms that will reduce trade barriers, provide legal protection for property rights, and reduce business regulation. Until such reforms are instituted, doubling or tripling of foreign aid will not have much impact on the poverty rates of Africa.” Francophone developing countries can follow the example of Mauritius, which has experienced relative economic and political development since its independence in 1968. As mentioned above, Mauritius has one of the freest economies in the world, having a higher economic freedom rating than industrialized countries like France and Belgium. Mauritius has developed from a low-income, agrarian economy, dependent on sugar cane, to an uppermiddle-income country that has created for itself niches in the textile, tourism, and financial services industries (Ng Ping Cheun, 2007: 1). The country has been a liberal democracy since its independence and is defined as a “free country” by Freedom House (2008a). Its economic freedom rating, which was 5.23 in 1975, is now 7.70. This high level of economic freedom has allowed Mauritius to grow much faster than other developing nations while also enjoying political freedom. Since becoming independent, francophone developing countries have suffered from poor economic policy and governance. However, Mauritius has shown that there is an alternate path towards liberal democracy and relative economic prosperity. That is why francophone developing countries should follow Mauritius’ example and create an institutional and policy environment that allows economic and political freedom to flourish. Developed countries can and should help by opening their markets and supporting policies that encourage competition, entrepreneurship, investments, civil liberties, and political rights.
Notes 1 According to this definition, the list of francophone countries is as follows: Switzerland, Canada, Luxembourg, Mauritius, France, Belgium, Haiti, Tunisia, Madagascar, Mali, Rwanda, Morocco, Côte d’Ivoire, Mauritania, Togo, Benin, Burkina Faso, Gabon, Cameroon, Senegal, Burundi, Algeria, Niger, Chad, Congo (Dem. Republic), Central African Republic, and Congo (Republic of). 2 In 2002, the Millennium Project was commissioned by the United Nations Secretary-General “to develop a concrete ac-
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tion plan for the world to achieve the Millennium Development Goals and to reverse the grinding poverty, hunger and disease affecting billions of people” (Millennium Project, 2006). 3 According to Freedom House (2008b), “Political rights enable people to participate freely in the political process, including the right to vote freely for distinct alternatives in legitimate elections, compete for public office, join political parties and organizations, and elect representatives who have a decisive impact on public policies and are accountable to the electorate. Civil liberties allow for the freedoms of expression and belief, associational and organizational rights, rule of law, and personal autonomy without interference from the state.”
References Al Ismaily, Salem, Amela Karabegović, and Fred McMahon (2008). Economic Freedom of the Arab World: 2008 Annual Report. Friedrich Naumann Foundation for Liberty, International Research Foundation, and the Fraser Institute. Berger, Peter L. (1992). The Uncertain Triumph of Democratic Capitalism. Journal of Democracy 3, 3 (July): 7–17. Easterly, William (2006). Freedom versus Collectivism in Foreign Aid. In James Gwartney and Robert Lawson (eds.), Economic Freedom of the World: 2006 Annual Report (Fraser Institute): 29–41. Freedom House (2008a). Map of Freedom 2008. <http://www. freedomhouse.org/template.cfm?page=21&year=2008&d isplay=map>, as of September 9, 2009. Freedom House (2008b). Methodology. <http://www.freed omhouse.org/template.cfm?page=351&ana_page=34 1&year=2008>, as of October 13, 2009. Gwartney, James D., and Robert Lawson (2004). Economic Freedom of the World: 2004 Annual Report. Fraser Institute. Gwartney, James D., and Robert Lawson, with Joshua C. Hall (2009). Economic Freedom of the World: 2009 Annual Report. Economic Freedom Network. Millennium Project (2006). Millennium Project. <http://www. unmillenniumproject.org/>, as of October 13, 2009. Ng Ping Cheun, Eric (2007). A Highly Open Economy. Conjoncture 26 (October): 1, 6–7. Norton, Seth W., and James D. Gwartney (2008). Economic Freedom and World Poverty. In James Gwartney and Robert Lawson (eds.), Economic Freedom of the World, 2008 Annual Report (Economic Freedom Network): 23–40. World Bank (2009). Country Classification. <http://tinyurl. com/8786o>, as of September 9, 2009.
Wikipedia Commons
Measuring economic freedom in Mexico Nathan J. Ashby
A
s markets in North America become more integrated, cross-border analyses of US states and Canadian provinces with the Mexican states will become more appealing to policy makers. Various cross-national and sub-national studies on the impact of economic institutions on economic development have shown that differences in institutional quality are the main cause of the stark differences between Mexico and the two northern countries. For example, Mexico, despite its abundance of natural resources, severely lacks institutions that facilitate the efficient use of its resources. Measuring those differences within Mexico and relative to the Canadian provinces and US states will be invaluable in demonstrating the necessary institutional prerequisites for development to occur.
Economic freedom in Mexico For the 2008 Economic Freedom of North America report, I wrote a chapter that discussed a preliminary index of economic freedom in the Mexican states for the year 2003, using seven of the 10 components currently used to measure state- and province-level economic freedom in the United States and Canada (Ashby, 2008). I also included another component that measured property rights and legal structure at the state level, as this is clearly an important measure in estimating economic freedom in Mexico. I demonstrated that economic freedom is associated with a higher GDP per capita in the Mexican states, a finding consistent with most economic freedom research. This past summer I commenced a more rigorous effort to gather data for Mexico with the assistance of some
undergraduate students at the University of Texas at El Paso.1 We were able to gather data using nine of the 10 components included in the index for the United States and Canada in 2005 and 2006. The components used in the measurement of economic freedom are included in table 1.2 The Mexican measure of economic freedom for 2007 will be available shortly, once estimates of GDP are available at the state level in Mexico. This will give us the ability to analyze economic freedom over a five-year period. Although it is unlikely that we will be able to estimate economic freedom for the Mexican states prior to 2003, there is now a mechanism in place to gather these data with relative ease in future years.
Integrating the index The biggest challenge in integrating economic freedom scores for the Mexican states with those for its northern counterparts is making the scores consistent with what we know Mexicoâ&#x20AC;&#x2122;s relative position to be based on measures of national economic freedom constructed by the Fraser Institute. In past Economic Freedom of North America reports, the authors have ignored various measures of economic freedom in Canada and the United States at the state and provincial level, such as sound money, freedom to trade, and legal structure and property rights. The limited variation in these measures at the sub-national level in Canada and the United States, as well as the fact that both countries score comparably in these areas at the national level, suggests that this omission is innocuous. In the case of Mexico, however, this omission is quite significant. In fact, in measures
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of government size and taxation, Mexico actually ranks ahead of the United States and Canada. To exclude some of Mexico’s weaker areas would be a serious omission in developing economic freedom measures. The problem is that many of the measures used in the national index are not available at the sub-national level. In the case of Mexico, measures of legal structure and property rights have been constructed by the Instituto Mexicano para La Competividad for 2003 and 2006 (IMCO, 2008). Using these measures, we have constructed
estimates of heterogeneity within Mexico and normalized these around the legal structure and property rights measure in the national index constructed by Gwartney and Lawson (2008). We take the measure for Canada and the United States and hold them constant for every state/ province in every given year. This method is imperfect. For instance, in 2006, there was one Mexican state that ranked higher than the United States. Nonetheless, this seems to be the best method of measuring the differences within Mexico and between countries. We also intend to include the measures for sound money and freedom to Table 1: Description of the components used in economic trade from the national indexes in our index of economic freedom for Mexico. freedom measures for the Mexican states
Area 1
Size of Government
1A
Government consumption at all levels of government as a percentage of Gross State Product (INEGI, 2009a)
1B
Government transfers and subsidies at all levels of government as a percentage of Gross State Product (INEGI, 2009a)
Area 2
Takings and Discriminatory Taxation
2A
Total Tax revenues at all levels of government as a percentage of Gross State Product (INEGI, 2009a; CEFP, 2009)
2B
Top marginal tax rate and the threshold at which it applies (Gwartney and Lawson, 2008)
2C
Total indirect taxes at all levels of government as a percentage of Gross State Product (INEGI, 2009b; CEFP, 2009)
2D
Total value-added taxes as a percentage of Gross State Product (CEFP, 2009)
Area 3
Labour Market Freedom
3A
Population-weighted daily minimum wage salary as a percentage of daily average wage in a given state (Conasami, 2005)
3B
Percentage of the employed that are employed by the government (INEGI, 2009b)
3C
Union density (INEGI, 2009b)
3D
The percentage of workers employed in the formal market as a percentage of total employment (INEGI, 2009b)
Area 4
Legal System and Property Rights
4A
Impartiality of judges (IMCO, 2008)
4B
Institutional quality of judicial system (IMCO, 2008)
4C
Trustworthiness and agility of public property registry (IMCO, 2008)
4D
Control against piracy of software (IMCO, 2008)
Source: Ashby, 2008.
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Analyzing the data Figure 1 depicts the relationship between economic freedom and GDP per capita in North American states and provinces. Since economic freedom measures for Mexico are not compatible with those for the United States and Canada, I cannot conduct a direct analysis of the relationship between economic freedom and income. However, I can analyze the relationship between higher levels of economic freedom and income quintiles within each country. Figure 1 shows the percentage of states and provinces in the highest economic freedom quintile that belong to each income quintile in a given country in 2005.3 As the figure shows, 66.67% of the Mexican states in the highest economic freedom quintile were in the top income quintile; 50% of the US states and Canadian provinces in the highest economic freedom quintile were also in the highest income quintile. In only one case did a state (Georgia) belonging to the highest economic freedom quintile also belong to the third income quintile. Significantly, none of the states or provinces in the highest economic freedom quintile were in either of the two lowest income quintiles.
Figure 1: Percentage of North American states/provinces in the top economic freedom quintile per GDP per capita quintile, relative to home country states/provinces, 2005
Percent
80 70
United States
60
Canada
50
Mexico
References Ashby, Nathan J. (2008). Economic Freedom in the United Mexican States. In Amela Karabegović and Fred McMahon, Economic Freedom of North America (Fraser Institute): 69–76.
40 30 20 10 0
Bottom
different from that used for Mexico. These differences would not affect the relative ranking of these countries since the data used for Mexico are not available at the state level.
2nd
3rd
4th
Top
GDP per capita quintiles (country specific) Source: Karabegović and McMahon, 2008.
Conclusion These results are preliminary. There is much statistical analysis that remains to be done to shed additional light on the issues discussed in this article. In the coming years such analyses will be made possible with the construction of an integrated economic freedom index for North America.
Notes 1 Deborah Martinez and Avilia Bueno were of great assistance to me in gathering data for additional years and communicating with various officials in Mexico. Their assistance was made possible by a grant from the University Research Institute at the University of Texas at El Paso.
Centro de Estudio de las Finanzad Públicas [CEFP] (2009). Estadisticas Estatales Indicadores de Finanzas Públicas. <http:// www3.diputados.gob.mx/camara/001_ diputados/006_centros_de_estudio/02_ c e nt r o _ d e _ e s t u d i o s _ d e _ f i n a n z a s _ publicas/03_bancos_de_informacion/03_ estadisticas_estatales/>, as of September 15, 2009.
Comisión Nacional de los Salarios Mínimos [Conasami] (2005). Salarios Mínimos: Vigentes a Partir del 1 de Enero de 2007. <http://tinyurl.com/yjjkzte>, as of September 15, 2009. Gwartney, James, and Robert Lawson (2008). Economic Freedom of the World: 2008 Annual Report. Economic Freedom Network. Instituto Mexicano Para la Competividad [IMCO] (2008). Preparando a las Entidades Federativas para la Competividad: 10 Mejores Prácticas. <http://www.imco.org.mx/imco/re cursos/webestados/home.html>, as of September 15, 2009. Instituto Nacional de Estadística Geografía e Informática [INEGI] (2009a). Finanzas Públicas Estatales y Municipales. <http://www.inegi.org.mx/inegi/default.aspx?c=10 961&s=est>, as of September 15, 2009. Instituto Nacional de Estadística Geografía e Informática [INEGI] (2009b). Encuesa Nacional de Ocupación y Empleo. <http://interdsap.stps.gob.mx:150/302_0058enoe.asp>, as of September 15, 2009.
2 For some of the components, including 3B, 3C, 4A, 4B, 4C, and 4D, we did not have data for every year. In the case of 3B and 3C, we used data from 2005 and made note of this in our spreadsheets. The data for Area 4 are only available for 2003 and 2006. 3 Keep in mind that the methodology used to measure economic freedom in the United States and Canada is slightly
Karabegović, Amela, and Fred McMahon (2008). Economic Freedom of North America: 2008 Annual Report. Fraser Institute.
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Poland hosts annual economic freedom conference Andrzej Kondratowicz Rafal Dutkiewicz, Mayor of the city of Wrocław
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n accordance with the Economic Freedom Network’s (EFN)1 decision, this year’s annual economic freedom conference was organized by the Adam Smith Research Centre (ASRC), a long-time member of the Network located in Poland.
Historical and regional context This year’s conference was earlier than previous EFN conferences: between September 30 and October 2. These dates were not chosen at random. September 2009 was a special month for the ASRC, for Poles in general, and, in a sense, for all of the countries in the region that share an unfortunate communist past. First of all, in September we celebrated the twentieth anniversary of the Polish Solidarity-led political victory that ended communism in Poland and paved the way for the subsequent fall of the Berlin Wall and everything that happened later in that part of Europe. In June 1989, the anti-communist sentiments of the Polish society were finally reflected in the results of the (semi-free) parliamentary elections: Solidarity movement representatives were elected to Parliament. After some unsuccessful efforts by the communists to form a coalition government, the other political parties, which had been cooperating with the ancien régime, refused to continue this alliance and joined the Solidarity party in an independent effort to form a new government. On August 29, 1989, the Polish parliament nominated a Solidarity candidate, Tadeusz Mazowiecki, for prime minister of Poland, and on September 12 his Cabinet—the
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first non-communist government in Eastern Europe—was installed. In October, a comprehensive economic program was announced. The program is now known as the Balcerowicz Plan.2 It was named after the minister of finance and deputy prime minister at the time, who was a key figure in developing Poland’s blueprint for reform and implementing it in subsequent years. This change of government was both peaceful and bloodless. Following Poland’s success, the movement spread to other long-suffering nations in the region, culminating in the end of communism in its heartland, Russia itself. Our road to serfdom ended there and, as a result, all nations in the region could, one after another, embark on a journey to freedom, both political and economic. This journey would have been much longer and more difficult if not for the existing grassroots social support which, after the regime change, could finally be institutionalized in the form of non-governmental organizations. The Adam Smith Research Centre, which was formally registered on September 16, 1989, was the first independent, non-governmental, non-partisan think tank in Eastern Europe after the long night of communism. The ASRC’s statutory goal is to promote the ideas of a free market economy based on private property, freedom of parties to enter into contractual relations, and well-defined limits to government intervention into economic processes. Essentially, our goal is to promote economic freedom; thus, our commitment to the ideas behind the efforts of the Economic Freedom Network seems quite natural. And this commitment is as strong today as it was 20 years ago. The ASRC is happy to have been the co-host of this year’s EFN conference.
Conference theme The past must not be forgotten, but it should not dominate our thinking about economic freedom. The present and the future are even more important. Wanting to choose a topic that would strike a proper balance between the past, the present, and the future, we chose “Economic Freedom in Times of Crises” to be the theme of this year’s conference. Economists know that there have been economic crises of various types, depths, and shades in the past, and that economic crises with predictable and less predictable characteristics will occur in the future. The connection between various kinds of crisis-like situations and economic freedom is extremely important and interesting to analyze. Crises may be considered exogenous shocks, influencing institutions and policies in the short, as well as the long, term. They tend to break the linearity that seems to characterize economic and social development. They generate threats, but can also give societies a chance to “start over,” if only by breaking the entrenched social and political structures. This year’s conference explored a number of questions surrounding the current economic crisis. For example, is the current crisis unique, as some claim, or does it share many characteristics with similar events in the past? Will it lead us into a new, post-capitalist era? How would a significant change to our current economic system affect economic freedom and our measurements of it next year and over a longer period of time? Does the present situation alter what we have discovered through our freedom-related research over the past 20 years? As noted, some of the answers may lie in history: single economies, groups of countries, and even whole regions have experienced what may be called economic crises in the past. Some 20 years ago, Poland, along with many other nations, plunged into the deep political and economic abyss that marked the end of communism. These countries stood at the crossroads of history. They could have suppressed their people’s desire for economic freedom or let it flourish. Many options, paths, and ideologies were open then. Re-examining them now may be of interest to students of the current crisis. At this year’s conference, we were especially keen to have papers that offered various national and regional analyses exploring the relationship between critical situations and institutional and policy responses to those situations, in relation to economic freedom. The conference
Mike Walker, founding Executive Director of the Fraser Institute, at the conference in Poland.
featured presentations on a number of regional issues concerning North America, South America, Arab countries, and Francophone countries, as well as southeastern Europe, Germany, and Russia.
Conference venue In closing, I would like to say a few words about the conference’s venue, the Polish city of Wroclaw. Wroclaw is a symbol of the changes taking place in this part of the world. With its long and fascinating, though convoluted, history, this area of Europe was often divided in the past. But it is now more united than before as Poles, Germans, and others work towards a new, freer Europe. One sign of this change was the invitation we received from the city of Wroclaw to hold the 2009 EFN conference here. We gladly accepted the invitation.
Notes 1 The Economic Freedom Network is a group of 75 institutes from around the world that, under the leadership of the Fraser Institute, work together on the Economic Freedom of the World Project. 2 The Plan’s main goals were to stabilize the economy in the short term, mainly by combating hyperinflation and reducing the government’s budget deficit, thereby paving the way for the deep structural changes that were needed in the long term.
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Getting more for less Health care reform would improve care and help Ontario reduce spending Nadeem Esmail
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hanks to poor fiscal management, the government of Ontario is now in a difficult fiscal situation: it must find a way to eliminate the significant budget deficits that are expected until at least 2015/2016 (Ontario, Ministry of Finance, 2009a). Given that tax increases would certainly hinder the province’s economic recovery, Ontarians should instead begin contemplating reductions in government spending. And there is no better place to start than health care. According to the 2009 budget, health expenditures are expected to consume 43% of government program expenditures this year (Ontario, Ministry of Finance, 2009a). In recent times, health spending has been rising faster than government revenues, and has, over the long run, also risen faster than GDP (Skinner and Rovere, 2008), meaning that its share of revenue is likely to continue growing over time. The reality is that health care spending will have to be cut to avoid future tax increases. If past experience is any guide, a government that is looking to reduce health care expenditures should expect backlash from the public who do not want to see increased rationing of health care services. But this need not be the case. A look at the realities of Medicare suggests that there is a great deal of room to cut expenditures while actually decreasing rationing. The key to achieving this is sensible health care reform. Consider that Canada maintains the developed world’s second most expensive universal access health insurance system on an age-adjusted basis (Esmail and Walker, 2008). Within Canada, provincial health expenditures in Ontario are only slightly below the national average (CIHI, 2008). In spite of these high expenditures, Ontarians endure relatively poor access to medical
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professionals and technologies, are cared for with far too many old and outdated pieces of medical equipment, and must wait for health care in some of the longest queues for treatment in the developed world (Esmail and Walker, 2008; Esmail, 2008). Ontario should learn a lesson from other nations that are able to purchase more health care for less money. Getting more for less in health care, however, will require adopting two key health policies that are common in other nations with universal access health care: consumer cost sharing and competition in the delivery of publicly funded care. Cost sharing—that is, requiring patients to share in the cost of their care—is essential to providing a less expensive and more accessible universal health care system. The reasoning is straightforward: people spend their own money more wisely than they spend someone else’s. According to research and international evidence, when patients are responsible for some of the cost of their care, they use fewer resources—making more available for other patients and saving money overall—and end up no worse off in terms of health outcomes (Esmail and Walker, 2008). Just how much money might such a policy save? A 2004 Fraser Institute study of cost sharing in Alberta found that a 25% co-insurance payment (with reasonable annual limits for patients, old-age and low-income exemptions, and exemptions for hospital care for children and the elderly) would reduce total Medicare spending (including the additional out-of-pocket payments made by Albertans under the scheme) by some 12%. The resulting reduction in public spending on health care would be approximately 20% (Ramsay and Esmail, 2004; calculations by author).
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The same approach in Ontario could be expected to reduce the $42.6 billion the province plans to spend on health in 2009/2010 by approximately $8.5 billion (Ramsay and Esmail, 2004; Ontario, Ministry of Finance, 2009a; calculations by author). Another way to reduce spending and improve the state of health care in Ontario would be to change the way hospitals are funded and allow more competition in the delivery of publicly funded services. To that end, Ontario should scrap its current global budget funding model for hospitals, through which hospitals receive a set amount of money each year and thus see every patient as a drain on their budget. Instead, the province should move to activity-based funding, through which hospitals would be paid per patient. This would save Ontarians significant resources, while at the same time providing them with a greater quantity and quality of services from hospitals that would be operating more efficiently (Esmail, 2007). Sweden’s experience with moving to activity-based funding provides some insight. Gerdtham, Rehnberg, and Tambour (1999) studied the move to activity-based funding by the Swedish county councils (provinces) in 1993 and 1994 and estimated that the cost savings resulting from this reform were approximately 13%. For Ontario, a 13% cost savings on hospital care would be equal to about $2.5 billion in 2009/2010 (Gerdtham et al., 1999; Ontario, Ministry of Finance, 2009a; calculations by author). In total, a rough calculation shows that by introducing just those two sensible health policies, Ontario could have reduced public health spending by an estimated $11 billion in 2009/2010. That reduction in spending would have cut the $18.5 billion forecast deficit by 60% (Ontario, Ministry of Finance, 2009b; calculations by author). At the same time, the allocation of medical resources in the system would have improved, actually leading to better access to health care services for Ontarians.
The provincial government’s poor fiscal management is likely to result in a reduction in public spending in the future. But those reductions in spending need not reduce the quality of public services. Indeed, the level of misallocated and wasted resources in health care is high enough to allow the province to substantially reduce spending through sensible health care reform while actually improving access to health care.
References Canadian Institute for Health Information [CIHI] (2008). National Health Expenditure Trends: 1975-2008. CIHI. Esmail, Nadeem (2007). More Efficient and Higher Quality Hospital Care through Better Incentives. Fraser Forum (June): 22–25. Esmail, Nadeem (2008). How Good is Canada’s Medical Technology Inventory? Fraser Institute. Esmail, Nadeem, and Michael Walker (2008). How Good is Canadian Health Care? Fraser Institute. Gerdtham, U.G., C. Rehnberg, and M. Tambour (1999). The Impact of Internal Markets on Health Care Efficiency: Evidence from Health Care Reforms in Sweden. Applied Economics 31, 8 (August): 935–45. Ontario, Ministry of Finance (2009a). 2009 Ontario Budget: Confronting the Challenge, Building Our Economic Future. Government of Ontario. <www.fin.gov.on.ca>. Ontario, Ministry of Finance (2009b). Ontario Finances; 200910 First Quarter; Quarterly Update – June 30, 2009. Government of Ontario. <www.fin.gov.on.ca>. Ramsay, Cynthia, and Nadeem Esmail (2004). The Alberta Health Care Advantage: An Accessible, High Quality, and Sustainable System. Fraser Institute. Skinner, Brett, and Mark Rovere (2008). Paying More, Getting Less: 2008 Report. Fraser Institute.
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PUBLIC GOODS How should they be provided? William Watson
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he term “public goods” is one of the most misunderstood in economics. One misinterpretation is that it is synonymous with “the public good,” which is what governments are supposed to pursue but which they so often seem to lose sight of. Another is that “public goods” are goods and services supplied by the public sector. There are many publicly provided goods and services, but relatively few are “public goods”; the great majority are “private goods.” So what do economists mean by “public goods”? We use the term to refer to goods (or services) characterized by a particular set of technical characteristics—namely, that people can consume them jointly and cannot be excluded from consuming them, or at least can only be excluded at a substantial cost.
Are there many “public goods” like the lighthouse? Many economists would argue that knowledge is a public good. Your knowing that 2 + 2 = 4 does not prevent me knowing it too, and it would be hard for anyone to exclude others from that knowledge; word about 2 + 2 = 4 could get around easily. Anyone who claimed the right to that knowledge and tried to police it would have a hard time doing so. National defence is often thought to be a public good. If an army defends a city, it defends everyone in the city, whether or not they have helped pay for the army. Most armies simply do not have the technology to let enemy shells fall on districts that have not paid their defence tax, but block barrages on districts that have. If some people within a district have paid their tax and others have not, exclusion becomes impossible. The army cannot defend the citizens who have paid their taxes and not defend those who are in arrears (unlike a fire department, for example, which could put out fires in houses whose owners are fully paid up and not put out fires in homes whose owners elected not to pay their taxes).
KEY CONCEPTS
The classic example is a lighthouse. You and I could both get our bearings from the same lighthouse at the same time and your doing so would not reduce the usefulness of the lighthouse to me. Moreover, it would be hard to exclude people from using the lighthouse as anyone sailing by could use it simply by looking at it. The lighthouse owner could not put a turnstile on the ocean and prevent sailors from looking at the lighthouse unless they paid a fee. If he wanted to exclude others from using the lighthouse, he would probably need to have a navy at his disposal. Compare this idea of a “public good” with the idea of a “private good.” A hamburger is an excellent example of a private good. The hamburger you eat is not available to me to consume. Our consumption is not and cannot be joint. If we are both to have a hamburger, then there must be two—one for each of us. If we share a hamburger, then we each only get some fraction of it. We cannot both get a whole hamburger out of the experience. Plus, it is relatively easy to exclude someone from eating a hamburger. McDonald’s does it every day. If you don’t pay, you don’t get a Big Mac.
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Most things are a matter of degree, of course. In some cases of joint consumption, the consumption experience of various people is not exactly the same. For example, we could both see the same play at the same time but it is unlikely that we would sit in the same seat. You may be front row centre and I may have to sit in the balcony. Or I may have a short theatre patron in front of me and therefore enjoy a completely unobstructed view, while you may have a seat behind someone who is very tall. In the same way, the ability to exclude isn’t zero to one— either perfectly costless or completely impossible—but is usually a question of cost. The formula for the world’s most famous soft drink probably is not that much more complicated than 2 + 2 = 4, but at considerable expense
number than was optimal. Why would anyone provide a lighthouse, for instance, if they could not charge people for its use? The obvious corollary was that only governments could or would provide public goods. That notion was overturned by University of Chicago economist and 1991 Nobel Prize-winner Ronald Coase, who, in a characteristically exhaustive article in 1974, traced the history of private lighthouses. He found that people with important shipping interests would provide for the safe passage of their ships even if this enabled other people to steer by their lighthouses too.
Fotolia
Similarly, economist David Levine, a professor at Washington University in St. Louis, argues that intellectual property, which is conventionally thought to be a public good, does not need protection via patents and copyrights, the traditional means of providing artists and inventors with the legal monopoly power to charge others for the use of their ideas. In his obviously controversial view, the sometimes substantial cost of using another person’s inventions acts as natural protection for the income those ideas can generate, while the head start that innovators have on their competitors is another source of commercial advantage. Not surprisingly, you can read Professor Levine’s book on intellectual property for free online; he has chosen not to try to exclude readers from its benefits by charging them for it.
to itself, the Coca-Cola company has managed to keep it a secret for more than a century. Over-the-air television signals can be jointly consumed by millions of people at once, but it is possible, also at some expense, to exclude those who have not paid a fee. For example, the British government finances the British Broadcasting Corporation with a license fee charged to every television set owner (currently ₤135.50 for a colour TV), and it has at times policed the fee—at great cost, presumably—by having agents in signal-detecting trucks drive through neighbourhoods trying to uncover TV-signal poaching by people who have not paid for a license. How public goods should be provided is the question about them that worries economists most. In the past, academics believed that the free market would not provide any public goods, or would provide a smaller
In the 1950s and 1960s, most economists thought that if public goods were not provided by governments, then they would not be provided at all. Thinking and research since then suggest that there may be many cases—examples include roads, parks, lighthouses and, Professor Levine would argue, intellectual property—where the market does a perfectly good job of providing public goods. Even in some of these areas, government may not be as crucial as is often thought.
Suggestions for further reading Boldrin, Michele, and David Levine (2008). Against Intellectual Property. Cambridge University Press. Coase, Ronald (1974). The Lighthouse in Economics. Journal of Law and Economics 17, 2: 357–76. Schmidtz, David (1991). The Limits of Government: An Essay on the Public Goods Argument. Westview Press.
*Key Concepts is a series of essays on the fundamentals of economics and markets. In addition to appearing in Fraser Forum, these essays will form the basis of a live Ask the Professor discussion, held at www.fraserinstitute.org each month. Please join us on November 25 at 11:00 am Pacific time for an online discussion of this essay with Prof. William Watson.
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The private cost of public queues, 2009 The cost for Canadians waiting for care was almost $600 million in 2009 Fotolia
Nadeem Esmail
T
his past October, the Fraser Institute released its nineteenth annual measurement of waiting times for medically necessary treatments in Canada (Esmail, 2009). This most recent measurement shows that the national median waiting time from specialist appointment to treatment fell from 8.7 weeks in 2008 to 8.0 weeks in 2009. But the measurement of waiting times, or the examination of the absolute delay Canadians must endure in order to receive medically necessary care, is only one way of looking at the burden of waiting for health care. We can also calculate the privately borne cost of waiting: the value of the time that is lost while waiting for treatment.1 While the absolute delay Canadians endured from specialist to treatment (which is but one stage of the total wait Canadians endure) in 2009 was shorter than in 2008, it is entirely possible that the value Canadians place on time has changed over the past year in such a way that the impact of this component of wait times for treatment has not improved.2
The privately borne cost of waiting for care One way of estimating the privately borne cost of care in Canada was originally developed by Steven Globerman
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and Lorna Hoye (1990).3 They calculated the cost of waiting by estimating the amount of time that could not be used productively by a patient while waiting for treatment. Globerman and Hoyeâ&#x20AC;&#x2122;s methodology is relatively simple. First, the number of patients who are waiting for treatment is multiplied by the wait times for those treatments in order to derive an estimate of the total number of weeks all patients will spend waiting for care. This value is then multiplied by a measure of the proportion of time spent waiting for treatment that is rendered unproductive by the physical and emotional impact of an untreated medical condition. The monetary value of this lost productive time is then estimated. In 2009, an estimated 694,161 Canadians were waiting for care after an appointment with a specialist (table 1). These Canadians waited, on average, 8.0 weeks for treatment, though those wait times varied significantly when broken down by province and medical specialty (table 2). Multiplying the number of Canadians waiting in each of the 12 medical specialties in each of the 10 provinces by the weighted median wait time for that medical specialty in that province gives a rough estimate of the total amount of time that Canadians waited for treatment in 2009: about 6.92 million weeks. This estimate is less than the estimate of 9.14 million weeks for 2008 (Hazel and Esmail, 2008).
Globerman and Hoye’s original estimate for the cost of waiting, which came from responses to a survey of physicians, used specialty-specific measures of the proportion of patients who were “experiencing significant difficulty in carrying on their work or daily duties as a result of their medical condition.” The proportions they estimated ranged from 14% of patients in gynecology to 88% in cardiovascular surgery, and averaged 41% overall (Globerman and Hoye, 1990; Esmail, 2009). However, the estimates of lost productivity measured by Globerman and Hoye cannot necessarily be applied today because of advances in medicine and the medical system’s ability to deal with pain and discomfort through pharmaceuticals. These advances may allow many Canadians who are suffering significant difficulties to function at a higher level today than they would have in 1990, or even to maintain their normal activity levels. For this reason, this author’s estimation of the cost of waiting in 2009 uses a Statistics Canada finding that 11.0% of people were adversely affected by their wait for non-emergency surgery in 2005 (Statistics Canada, 2006). This percentage is below even the lowest specialty-specific measure estimated by Globerman and Hoye (1990).4 An assumption that 11.0% of people waiting for treatment in 2009 experienced significant difficulties in their daily lives as a result of their medical condition, and thus lost productivity while waiting for treatment, results
in an estimate that nearly 761,000 weeks were “lost” while patients waited for treatment. However, because this estimate is based on the assumption that all individuals face the same wait time for treatment in each specialty/ province combination, it is mathematically equivalent to assuming that 11.0% of the productivity of all Canadians waiting for care was lost to a combination of mental anguish and the pain and suffering that accompany any wait for treatment. Multiplying this lost time by an estimate of the average weekly wage of Canadians in 20095 (given in table 3), which provides an estimate of the value of the lost time to each individual,6 gives an estimate of the cost of the productive time that was lost while individuals waited for medically necessary treatment in 2009 (table 4). The estimated cost of waiting for care in Canada for patients who were in the queue in 2009, according to calculations based on the methodology produced by Globerman and Hoye (1990), was slightly less than $600 million—an average of about $859 for each of the estimated 694,161 Canadians waiting for treatment in 2009. Alternatively, that cost works out to roughly $7,805 for each individual among the 11.0% of patients in the queue who were suffering considerable hardships while waiting for care.7 Of course, this number is a conservative estimate of the private cost of waiting for care in Canada. This
Table 1: Estimated number of procedures for which patients were waiting after appointment with specialist, by specialty, 2009 BC
AB
SK
MB
ON
QC
NB
NS
PE
NL
CAN
Plastic surgery
4,195
1,541
1,535
592
4,089
4,133
569
475
60
273
17,461
Gynecology
4,108
2,874
1,126
881
7,602
5,006
663
768
211
943
24,181
Ophthalmology
8,458
7,470
3,244
2,111
20,449
61,123
2,616
2,700
135
928
109,234
Otolaryngology
4,462
2,834
3,442
1,003
8,258
4,113
962
756
—
368
26,197
General surgery
9,373
8,037
2,701
2,194
20,803
20,365
806
2,412
164
3,008
69,863
Neurosurgery
1,460
762
—
73
2,040
2,656
271
200
—
—
7,461
13,178
8,314
5,457
3,701
23,892
13,135
2,660
6,257
892
881
78,365
151
192
80
98
263
200
191
15
5
—
1,195
Urology
5,226
3,818
2,569
661
11,733
9,513
1,849
4,069
221
1,302
40,961
Internal medicine
6,374
6,642
3,172
1,427
17,216
18,651
538
1,232
12
4,012
59,276
Orthopedic surgery Cardiovascular surgery
Radiation oncology
29
52
—
2
141
170
38
—
2
5
440
Medical oncology
91
163
—
—
585
340
84
41
4
—
1,309
8,841
75,877
61,617
7,091
12,904
1,026
10,049
258,218
21,583 192,948 201,021
18,338
31,830
2,731
21,769 694,161
Residual
35,093
30,609
15,110
Total
92,199
73,308
38,436
Note: Totals may not match sums of numbers for individual specialties/provinces due to rounding. Source: Esmail, 2009; calculations by author.
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estimate assumes that only those hours during the average work week should be counted as lost. It places no intrinsic value on the time individuals spend waiting in a reduced capacity outside of the working week. Valuing all hours of the week, including evenings and weekends but excluding eight hours of sleep per night, at the average hourly wage (given in table 3) would increase the estimated cost of waiting to more than $1.82 billion, or about $2,628 per person. This estimate only counts costs that are borne by the individual waiting for treatment. The costs of care provided by family members (in terms of time spent caring for the individual waiting for treatment) and their lost productivity due to difficulty or mental anguish are not valued in this estimate.8 Moreover, non-monetary medical costs, such as increased risk of mortality or adverse
events that result directly from long delays for treatment, are not included in this estimate (Esmail, 2009). In 2008, the estimated private cost of waiting for treatment using the 11.0% estimate, adjusted for inflation,9 was more than $750 million in total—about $1,005 per patient. If the cost of the hours lost outside of the work week were included, this estimate would increase to about $2.30 billion, or about $3,064 per individual after adjusting for inflation. From 2008 to 2009, therefore, the cost of waiting decreased by roughly $147 per Canadian in the queue if only working hours are valued, or by roughly $436 if all non-sleeping hours are valued. In summary, both the wait time for treatment after seeing a specialist in 2009 and the privately borne cost of enduring that wait time have improved relative to their levels in 2008.
Table 2: Median patient wait for treatment after appointment with specialist, by specialty, 2009 (in weeks) BC
AB
SK
MB
26.6
16.7
35.4
8.7
7.6
8.7
Ophthalmology
7.5
11.5
Otolaryngology
15.9
13.1
Plastic surgery Gynecology
General surgery
ON
QC
NB
NS
PE
NL
CAN
12.1
9.5
19.4
15.7
16.8
12.0
17.6
16.3
7.0
6.0
7.3
8.4
5.9
11.6
10.6
7.2
10.5
7.8
5.9
10.1
14.7
8.6
8.2
8.4
8.8
32.7
10.3
7.7
7.5
10.3
8.6
—
6.5
10.2
7.1
7.6
7.0
5.8
4.7
6.3
4.9
5.8
3.3
12.8
6.0
Neurosurgery
13.9
9.3
—
3.8
6.8
13.7
15.0
9.8
—
—
10.1
Orthopedic surgery
19.1
18.0
32.8
20.5
11.8
15.5
19.9
44.8
38.2
18.0
16.6
0.9
1.9
2.1
4.0
0.6
0.5
6.1
0.4
1.9
—
1.0
Cardiovascular surgery (urgent) Cardiovascular surgery (elective)
5.5
5.7
22.4
14.0
2.5
4.7
14.3
3.8
4.0
—
5.0
Urology
6.0
5.8
11.9
3.3
3.6
4.3
10.6
13.4
11.9
9.4
5.1
Internal medicine
7.2
10.3
10.7
5.6
6.0
8.3
10.8
5.4
5.7
21.1
7.7
Radiation oncology
2.0
4.3
—
3.8
2.3
4.0
2.9
—
1.6
4.2
3.0
Medical oncology
2.0
3.5
—
—
2.1
1.7
4.0
3.2
2.0
—
2.1
Weighted median
9.2
9.6
14.0
8.0
5.8
8.2
11.4
10.9
12.2
13.2
8.0
Source: Esmail, 2009.
Table 3: Average of average hourly and weekly wages,* by province, January to August 2009 BC
AB
SK
MB
ON
QC
NB
NS
PE
NL
CAN
Nominal average hourly wage
$22.10
$24.53
$21.23
$19.73
$22.65
$20.67
$18.55
$18.94
$17.77
$19.27
$21.93
Nominal average weekly wage
$796.18
$924.64
$787.76
$721.60
$829.15
$734.45
$697.59
$706.95
$657.99
$742.07
$800.55
*The wages reported here are earned wages or salaries including tips, commissions, and bonuses before taxes and other deductions Source: Statistics Canada’s CANSIM database; calculations by author.
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Table 4: Calculated cost of waiting for medically necessary health services, by province and specialty from specialist appointment to treatment, 2009 ($ thousands) BC
AB
SK
MB
ON
QC
NB
NS
PE
NL
CAN
Plastic surgery
$9,757
$2,619
$4,706
$571
$3,536
$6,481
$685
$620
$52
$392
$29,417
Gynecology
$3,136
$2,233
$851
$488
$4,139
$2,969
$426
$353
$176
$815
$15,588
Ophthalmology
$5,577
$8,714
$2,954
$1,312
$11,038
$50,064
$2,961
$1,812
$80
$634
$85,144
Otolaryngology
$6,206
$3,769
$9,760
$818
$5,778
$2,476
$763
$504
—
$196
$30,271
General surgery
$5,789
$6,224
$1,639
$1,004
$8,968
$10,359
$303
$1,097
$39
$3,152
$38,575
$718
—
$22
$1,259
$2,937
$312
$153
—
—
$7,174
$15,235 $15,532
$6,008
$25,715
$16,494
$4,058
$31
$14
$8
$90
$1
$1
Neurosurgery Orthopedic surgery Cardiovascular surgery
$1,773 $22,099 $12
$38
$14
$21,785 $2,466
$1,297 $130,688 —
$208
Urology
$2,768
$2,271
$2,642
$172
$3,813
$3,341
$1,507
$4,252
$190
$999
$21,958
Internal medicine
$3,992
$6,986
$2,930
$632
$9,429
$12,534
$445
$514
$5
$6,909
$44,375
$5
$23
—
$1
$29
$55
$9
—
$0
$2
$123
$16
$58
—
—
$111
$47
$26
$10
$1
—
$268
$30,002 $18,316
$5,637
$40,134
$40,892
Radiation oncology Medical oncology Residual (using est. mean data)
$28,274
$6,223 $10,938
$903 $10,865 $192,184
Total cost
$89,403 $78,890 $59,343 $16,697 $113,964 $148,657 $17,807 $42,039 $3,912 $25,261 $595,973
Note: Totals may not match sums of numbers for individual specialties/provinces due to rounding. *The “residual” count is a count of the number of non-emergency procedures for which people are waiting in Canada that are not included in the Fraser Institute’s survey. The wait time used for calculating the residual cost is each province’s weighted median wait time for all specialties included in Waiting Your Turn. Sources: Esmail, 2009; Statistics Canada’s CANSIM database; Statistics Canada, 2006; calculations by authors.
Conclusion The rationing of health care in Canada through queues for medically necessary health services imposes direct costs on those waiting for care. The ability of individuals who are waiting to enjoy leisure time and earn an income to support their families is diminished by physical and psychological pain and suffering. In addition, friends and family may be asked to help those waiting for treatment, or may suffer similar reductions in their productive lives because of their own psychological pain. In 2009, the estimated 694,161 Canadians who were waiting for treatment endured an estimated private cost of at least $596 million, if not substantially more, in lost productivity and leisure time. That cost was, on a per patient basis, lower than the cost in 2008.
Notes 1 The measurement below measures only the cost of the wait time from specialist to treatment and does not capture the cost of the wait time from general practitioner referral to seeing a specialist. Thus, this estimate of the privately borne cost of waiting is an underestimate of the true privately borne cost of waiting.
2 A brief review of the literature on the privately borne cost of waiting for care in Canada and the United Kingdom is available in Esmail (2009). The most recent estimate of the privately borne costs of waiting for care in Canada using the methodology employed in this article was published in 2008 (Hazel and Esmail, 2008). The analysis in this article reproduces the calculations undertaken in Hazel and Esmail (2008), using the most recent wait times and wage/salary estimates available. 3 Globerman and Hoye employed this methodology in 1990 to develop an estimate of the cost of waiting for medically necessary treatment in the first measurement of waiting times in Canada published by the Fraser Institute. Follow-up examinations of the privately borne cost of queuing in 2004, 2005, 2006, 2007, and 2008 also employed this methodology. 4 Statistics Canada’s findings are based on the percentage of survey respondents who reported that “waiting for nonemergency surgery affected their life.” Globerman and Hoye’s estimate measures the number of patients who “experienced significant difficulty carrying on their work or daily duties as a result of their medical condition.” Notably, in a 2003 survey of Canadians, only 13% of those who reported being affected by their wait in the Statistics Canada study reported a loss of income, while 14% experienced loss of work. At the same time, 60% experienced worry, anxiety, and stress, 51% experienced pain, and 31% experienced problems with activities of daily living (Sanmartin et al., 2004). In the most recent Statistics Can-
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The rationing of health care in Canada through queues imposes direct costs on those waiting for care.
ada survey, 49% of those who were affected by their wait for care experienced worr y, anxiety, and stress, 51% experienced pain, and 36% experienced problems with activities of daily living (Statistics Canada, 2006). The methodology employed here for the estimate of the private cost of waiting attempts to measure much more than just lost work or lost income. Rather, it estimates lost productivity in total, including lost on-the-job productivity, lost enjoyment of life, inability to play sports, etc. In other words, the private cost of waiting for care estimated here values the amount of time Canadians spend waiting for care during which these individuals are unable to participate fully in their lives. Also, this estimate does not necessarily assume that 11.0% of individuals are losing all of their productivity while 89.0% are completely unaffected. Rather, the estimates are constructed in such a way that the lost productivity can be 100% for 11.0% of patients, or 11.0% for 100% of patients, or any combination thereof. 5 At the time of publication, wage data for September to December 2009 were not available from Statistics Canada. An average of the average monthly wages (weekly and hourly) for the first eight months of 2009 was used to estimate the average wage for the year. 6 Though extending this value of time to all individuals may seem questionable, given that some children and retired seniors will be included in the number of patients in the queue, one need only understand that the lost leisure or ability to concentrate suffered by these individuals must have some value. Since most seniors are enjoying increasing opportunities to seek at least part-time employment in the service sector, their labour/leisure trade-off will be such that the last unit of leisure enjoyed by a senior citizen is equal in value to the last unit of work that is undertaken. Seniors who do not choose to work are clearly placing a higher value on their leisure time than the labour market will offer for their labour. For children, the value of their leisure (which can potentially be viewed as time for personal growth) or productivity at school (which can be viewed as an investment for the future) is assumed to be, for simplicity, not significantly different from that of a working
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adult. Furthermore, as there are likely to be few children waiting for treatment, any variation from adult reservation wages is not likely to have a marked affect on the average calculation. 7 Globerman and Hoye estimated the cost of queuing for medically necessary care to be about $2,900 per patient in 1989. In 2009 dollars (using the average of the monthly Consumer Price Index for the first seven months of 2009 to estimate the price index for the year), this works out to approximately $4,426. 8 A 2003 Statistics Canada survey found that 20.2% of individuals whose wait times affected their lives reported increased dependence on family or friends (Sanmartin et al., 2004). 9 Since data for the full year were not available at the time of publication, the average of the monthly Consumer Price Index for the first seven months of 2009 was used to estimate the price index for the year. In addition, the estimate from Hazel and Esmail (2008) was revised and is now based on average wage data for all 12 months of 2008 (the original figures were based on an average of average wage data for January to October 2008).
References Esmail, Nadeem (2009). Waiting Your Turn: Hospital Waiting Lists in Canada (19th ed.). Fraser Institute. Globerman, Steven, and Lorna Hoye (1990). Waiting Your Turn: Hospital Waiting Lists in Canada. Fraser Institute. Hazel, Maureen, and Nadeem Esmail (2008). The Private Cost of Public Queues. Fraser Forum (December/January): 25â&#x20AC;&#x201C;29. Sanmartin, Claudia, François Gendron, Jean-Marie Berthelot, and Kellie Murphy (2004). Access to Health Care Services in Canada, 2003. Catalogue No. 82-575-XIE. Statistics Canada, Health Analysis and Measurement Group. Statistics Canada (n.d.). CANSIM Database. <http://www. statcan.gc.ca/>. Statistics Canada (2006). Access to Health Care Services in Canada: January to December 2005. Catalogue No. 82575-XIE. Statistics Canada.â&#x20AC;&#x192;