CANADA
Rank: 10 Regional Rank: 2 of 29
C
anada’s economy is 78.7 percent free, according to our 2007 assessment, which makes it the world’s 10th freest economy. Its overall score is unchanged from last year. Canada is ranked 2nd out of 29 countries in the Americas, and its overall score is well above the regional average. As a developed Western democracy, Canada scores well in business freedom, property rights, labor freedom, and fiscal freedom. Opening a business is fast and painless, and closing one is equally simple. A strong rule of law ensures property rights, a low level of corruption, and transparent application of the country’s admittedly thorough commercial code. Inflation of consumer prices is low, as are the top commercial and income tax rates. On the other hand, freedom from government scores comparatively poorly. As in many European democracies, government spending is high because Canada maintains elaborate social programs and a welfare state. Regulation of foreign investment discourages liquid capital transfers, and foreign investment in several areas of the economy is heavily restricted. The banking sector, however, is becoming more open to foreign capital as the government loosens restrictions. BACKGROUND: Canada is one of the world’s leading freemarket democracies. It enjoys a large trade surplus, thanks to oil and mineral exports. Because of its bilateral trade relationship with the United States, its economy tends to track that of its larger southern neighbor. A protracted dispute with the United States over softwood lumber was settled in 2005. Despite maintaining one of the Organisation for Economic Co-operation and Development’s most restrictive foreign ownership policies in telecommunications, publishing, broadcasting, aviation, mining, and fishing, macroeconomic fundamentals remain strong, and unemployment is at a 30-year low.
The economy is 78.7% free
100
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Americas Average = 62.3 World Average = 60.6
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1995
2007
QUICK FACTS
Population: 32 million GDP (PPP): $999.6 billion 2.9% growth in 2004 3.0% 5-yr. comp. ann. growth $31,263 per capita Unemployment: 7.2% Inflation (CPI): 1.8% FDI (net inflow): –$41.2 billion Official Development Assistance: Multilateral: None Bilateral: None External Debt: $439.8 billion (2005) Exports: $377.6 billion Primarily motor vehicles and parts, industrial machinery, aircraft, telecommunications equipment, chemicals, plastics, fertilizers, wood pulp, timber Imports: $336.7 billion Primarily machinery and equipment, motor vehicles and parts, crude oil, chemicals, electricity, durable consumer goods 129
How Do We Measure Economic Freedom? See Chapter 3 (page 37) for an explanation of the methodology or visit the Index Web site at heritage.org/index.
CANADA’S TEN ECONOMIC FREEDOMS
Business Freedom Trade Freedom Fiscal Freedom Fdm fm Government Monetary Freedom Investment Freedom Financial Freedom Property Rights Fdm fm Corruption Labor Freedom 96 78.2 83.9 61.8 80.6 60 70 90 84 82.7
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for some agricultural sectors. Consequently, an additional 10 percent is deducted from Canada’s monetary freedom score to adjust for measures that distort domestic prices.
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50 100
INVESTMENT FREEDOM — 60%
The government regulates foreign investment. A federal agency, Investment Canada, must approve direct foreign investments, whether through a new venture or through an acquisition. Restricted sectors include broadcasting and telecommunications, newspapers, energy monopolies, book publishing, filmmaking and distribution, banking and insurance, and air transport. There are no restrictions on current transfers, repatriation of profits, purchase of real estate, or access to foreign exchange.
100 = most free,
= world average
BUSINESS FREEDOM — 96%
Starting a business takes an average of three days, compared to the world average of 48 days. Entrepreneurship should be easier for maximum job creation. Obtaining a business license is simple, and closing a business is very easy. The regulatory system is thorough but essentially transparent. The overall freedom to start, operate, and close a business is strongly protected by the national regulatory environment.
FINANCIAL FREEDOM — 70%
Canada has a strong, sound financial system. The six large domestic banks that dominate the sector controlled over 90 percent of banking assets in 2005. The 50 foreign banks operating in Canada in 2006 accounted for a very small portion of sector assets. The government owns the Business Development Bank, which makes loans to the small and medium enterprise sector. The government has loosened restrictions on financial institutions, giving them more freedom to offer financial services. Mergers between large banks are restricted, and large banks are not permitted to buy large insurance companies. Banks are permitted to open their own insurance subsidiaries but may not sell policies in their bank branches. Securities markets are well developed.
TRADE FREEDOM — 78.2%
Canada’s weighted average tariff rate was a low 0.9 percent in 2005. However, the government maintains some non-tariff barriers, at both the federal and provincial levels, that impede access to the Canadian market. Canada closely restricts imports of certain domestic “supply managed” agricultural products such as dairy products, eggs, and poultry and restricts access to the telecommunications and media sectors. Issues involving the enforcement and protection of intellectual property rights also contribute to the cost of trade. Consequently, an additional 20 percent is deducted from Canada’s trade freedom score to account for these non-tariff barriers.
PROPERTY RIGHTS — 90%
Private property is well protected in Canada. The judiciary is independent. Judges and civil servants are generally honest, and bribery and other forms of corruption are rare.
FREEDOM FROM CORRUPTION — 84% FISCAL FREEDOM — 83.9%
Canada has a moderate income tax rate and a moderate corporate tax rate. The top income tax rate is 29 percent, and the top corporate tax rate is 22.1 percent. Other taxes include a value-added tax (VAT), a tax on insurance contracts, and a property tax. In the most recent year, overall tax revenue as a percentage of GDP was 33 percent. Corruption is perceived as minimal. Canada ranks 14th out of 158 countries in Transparency International’s Corruption Perceptions Index for 2005.
LABOR FREEDOM — 82.7%
The labor market operates under flexible employment regulations that enhance employment and productivity growth. The non-salary cost of employing a worker is moderate, and dismissing a redundant employee is relatively costless. The labor law does not mandate retraining or replacement before firing a worker. Canada’s labor market flexibility is one of the 20 highest in the world.
FREEDOM FROM GOVERNMENT — 61.8%
Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 39.9 percent of GDP, and the government received 3.1 percent of its total revenues from state-owned enterprises and government ownership of property.
MONETARY FREEDOM — 80.6%
Inflation in Canada is low, averaging 2.2 percent between 2003 and 2005. Relatively low and stable prices explain most of the monetary freedom score. The market determines most prices, but the government regulates the prices of some utilities and subsidizes and controls prices
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2007 Index of Economic Freedom