Economic Freedom of North America 2024

Executive Summary

Economic Freedom of North America in 2022

Economic freedoms are a subset of human freedoms. And when people have more economic freedom, they are allowed to make more of their own economic choices— choices about work, about buying and selling goods and services, about acquiring and using property, and about forming contracts with others.

The indices published in the Economic Freedom of North America 2024 (EFNA) report measure the degree to which provincial, state, and local governments in North America permit their citizens to make their own economic choices. These governments can limit economic freedom through taxes, regulations, barriers to trade, and manipulation of the value of money, or they can safeguard economic freedom by protecting people and their property.

Economic Freedom of North America 2024 is the twentieth edition of the Fraser Institute’s annual report. It measures the extent of economic freedom in each of the 10 Canadian provinces, 50 US states, the US territory of Puerto Rico, and all 32 Mexican states.

It includes four distinct indices. The all-government index, which includes all 93 jurisdictions, takes account of federal government policies and should be used to compare jurisdictions across all three countries. Three separate subnational indices—one for each country—account for provincial/state and local government policies and these indices should be used to compare jurisdictions within the same country.

In the subnational indices, we employ 10 variables for each provincial/state government in three areas: 1) Government Spending; 2) Taxes; and 3) Labor Market Freedom.

The all-government index builds on the subnational indices to account for federal policies in two ways. First, we add federal spending and taxes in the provinces and states to the provincial/state and local totals used in the subnational index.

This accounts for the fact that federal policies may differentially affect one state relative to another or one province relative to another. Second, the all-government index incorporates six variables from the Economic Freedom of the World (EFW) index to account for differences in economic freedom between the coutries. These include three additional areas: 4) Legal Systems and Property Rights; 5) Sound Money; and 6) Freedom to Trade Internationally. And it includes three additions to existing areas: It expands on EFNA’s Area 1 to include federal government investment (variable 1C in EFW), Area 2 to include federal top marginal income and payroll tax rates (variable 1Dii in EFW), and Area 3 to include federal credit market regulation and business regulations. These additions help capture restrictions on economic freedom that arise from federal policy.

Results for Canada, the United States, and Mexico

The all-government index

The all-government index should be used to compare jurisdictions across the three countries. Canada and the United States have similar national scores in Economic Freedom of the World, and both have typically been among the top 15 nations in that report. In the 2024 Economic Freedom of the World index, the US ranks fifth while Canada is eighth. Mexico, on the other hand, typically ranks much lower and is 65th in the 2024 report. These different country rankings in the Economic Freedom of the World report affect state and provincial rankings in the all-government Economic Freedom of North America index.

The top jurisdiction in the all-government index of Economic Freedom of North America 2024 is New Hampshire at 8.13 on the 0 to 10 scale. New Hampshire is followed by Idaho (8.07), Oklahoma and South Carolina (8.06) tied for third, and Florida and Indiana (8.05) tied for fifth.

The lowest-ranking jurisdictions are all Mexican states. In last place is Ciudad de México (5.62) at 93rd. Above that is Colima (5.78) at 92nd, Campeche (5.98) at 91st place, Tamaulipas (6.06) at 90th, and Zacatecas (6.09) at 89th.

The subnational indices

For the purpose of comparing jurisdictions within the same country, the subnational indices are the appropriate choice. There is a separate subnational index for each country. In Canada, the most economically free province in 2021 was again Alberta with 6.26, followed by Ontario and Manitoba, over a full point behind, tied with 5.12. The least free by far was Quebec at 2.67, following Prince Edward Island at 4.01, and Nova Scotia at 4.04.

In the United States, the most economically free state on the subnational index was New Hampshire at 7.96, followed by Florida at 7.80, Tennessee at 7.73, Texas at 7.64, and South Dakota at 7.59. (Note that since the indices were calculated separately for each country, the numeric scores on the subnational indices are not directly comparable across countries.) The least-free state was again New York at 4.09, following California and Vermont at 4.27, Oregon at 4.56, and Hawaii at 4.58. For the second year, we have made a preliminary attempt to include the US territory of Puerto Rico in the US subnational index. It came in with a score of 2.85. The next lowest score was 43% higher.

In Mexico, the most economically free state was Michoacán de Ocampo at 5.96. Baja California was second at 5.85, followed by Chihuahua at 5.52. The least free Mexican states were Quintana Roo Zacatecas at 2.41, Campeche at 2.86, and Tabasco at 2.99.

Alberta (8.01) is the highest-ranking Canadian province, tied for 12th place with Tennessee, South Dakota, Colorado, and Texas. The next-highest Canadian province is British Columbia (7.84) which is tied with Massachusetts, Minnesota, and New Mexico for 43rd place. Canada’s four Atlantic provinces rank below all 50 US states: New Brunswick (7.64) is 57th, Prince Edward Island (7.63) is 58th, Nova Scotia (7.62) is 59th, and Newfoundland & Labrador (7.58) is 60th.

Puerto Rico and all the Mexican states are more than a full point behind the lowest- ranking Canadian province, Newfoundland & Labrador. Puerto Rico (6.57) is in 61st place. The highest-ranked Mexican state is close behind, Baja California (6.54) at 62nd place. The next-highest ranked Mexican state is Chihuahua (6.46) in 63rd place, followed by Jalisco (6.44) in 64th place, Puebla (6.43) in 65th place, and Guanajuato (6.42) in 66th place.

The lowest-ranking US state is Delaware (7.65) at 56th place. The next-lowest is New York (7.68) at 55th, Hawaii (7.73) at 52nd, and Alaska (7.76) which is tied with Saskatchewan in 50th.

Averaging across all 93 jurisdictions, economic freedom in North America peaked in 2004 at 7.76 then fell to a low of 7.30 in 2009. Average economic freedom in North America then rose slowly to 7.50 in 2017, but it has remained more than a quarter- point below its 2004 peak ever since. Average economic freedom across all 93 jurisdictions has fallen every year since 2017 and is now only 0.02 points above its all-time low.

Economic freedom and economic well-being at the subnational level

Economically free places tend to prosper. One way to see this is to compare economic freedom with income per person. Among those North American jurisdictions that were in the bottom 25% for all-government economic freedom (averaged from 2013 to 2022) income per person in 2022 was US$2,997. But among those jurisdictions that were in the top 25% on all-government economic freedom, income per person was US$62,184. In other words, incomes in the freest North American jurisdictions were 21 times higher than in the least-free jurisdictions.

Incomes are not only higher in economically free places, but they tend to grow faster in these places as well. From 2013 to 2022 total income in the freest 25% of North American jurisdictions grew 29% after adjusting for inflation. In the least-free jurisdictions, however, inflation-adjusted income fell 13%.

The same patterns hold when we compare jurisdictions within countries. In those places that were the most-free relative to the rest of their country, incomes were, on average, about 3% higher than in the rest of the country. But among those places that were the least-free relative to the rest of their country, incomes were 6.8% below the country average.

Among the freest US states, population grew 10 times faster than it did in the least-free from 2013 to 2022. Total employment in these states also grew about three times faster than in the least-free states over this time.

These general patterns have been corroborated by independent scholars using careful statistical analyses that control for possibly confounding factors such as geography, climate, and historical development. There are now nearly 400 articles by independent researchers examining subnational economic freedom using the data from Economic Freedom of North America. Appendix C lists some of the most recent ones.

Much of that literature focuses on economic growth or entrepreneurship but the list also includes studies of a variety of topics such as income inequality, eminent domain, and labor markets. The vast majority of the results find higher levels of economic freedom to be correlated with positive outcomes such as economic growth, lower unemployment, reduced poverty, and so on. The results of these studies tend to mirror those found for these same relationships at the country level using the index published in Economic Freedom of the World.

Chapter 1

Economic Freedom of Canada, the United States, and Mexico in 2022

Economic freedom and the index

The indices published in Economic Freedom of North America (EFNA) are an attempt to gauge the extent to which governments in North America permit their citizens economic freedom. The indices published here measure economic freedom at two levels, the subnational and the all-government. There are three separate subnational indices, one each for Canada, the United States, and Mexico. These indices measure the impact of provincial/state and local governments on economic freedom and should be used to compare jurisdictions within the same country. The all-government index builds on the subnational indices to measure the impact of all levels of government—federal, provincial/state, and local—in all three countries. The all- government index should be used to compare jurisdictions across countries. All 10 Canadian provinces, 50 US states, 32 Mexican states (including Ciudad de México), and the US territory of Puerto Rico are included (figures 1.1, 1.2a, 1.2b, and 1.2c). The most recent data available for the report are from fiscal year 2022.

What is economic freedom and how is it measured in this index?

Economic freedoms are a subset of human freedoms. They concern economic activity such as transacting, working, acquiring and using property, and contracting with others. When people have more economic freedom, they are allowed to make more of their own economic choices. On one hand, governments can prevent people from making their own economic choices through regulations, taxes, barriers to trade, and manipulation of the value of money. On the other hand, governments can safeguard individual economic choice by protecting persons and their property from fraud or force.   

The Fraser Institute has been measuring economic freedom for nearly three decades, beginning with the first Economic Freedom of the World (EFW) report, published in 1996.^[1] Since that first publication, independent researchers have used the EFW to conduct about 1,000 studies assessing the relationship between economic freedom and various measures of human wellbeing. These studies find overwhelming evidence that economic freedom is associated with better outcomes. For example, economic freedom is positively correlated with higher per-capita income, faster economic growth, greater life expectancy, lower child mortality, stronger democratic institutions, better protection of civil and political freedoms, greater tolerance, and more trust.^[2] While the goal of the Economic Freedom of the World index is to measure the economic freedom of countries on an international basis, the goal of the Economic Freedom of North America index is to measure economic freedom across Canadian provinces, US jurisdictions, and Mexican states.

In 1999, the Fraser Institute published Provincial Economic Freedom in Canada: 1981–1998 (Arman, Samida, and Walker, 1999), a measure of economic freedom in 10 Canadian provinces. Economic Freedom of North America updates and expands this initial endeavor by including the 50 US states, the 32 Mexican states, and the US territory of Puerto Rico. This latest edition includes data from 1981 through 2022 for all Canadian provinces and US states, data from 2000 through 2022 for Puerto Rico, and data from 2003 through 2022 for all Mexican states.

All jurisdictions are ranked on economic freedom at both the subnational (state/ provincial and local) and the all-government (federal, state/provincial, and local) levels. This helps isolate the impact of different levels of government on economic freedom in each jurisdiction. The subnational index provides a comparison of how individual jurisdictions within a country measure up against other jurisdictions in that country. The all-government index provides a comparison of how individual jurisdictions in different countries compare to each other.

We examine state- and provincial-level data in three areas of economic freedom: government spending, taxes, and labor-market regulation. To account for factors that vary primarily across countries but not subnational jurisdictions, our all-government index includes additional variables found in Economic Freedom of the World.

For the third time, we have included the US territory of Puerto Rico in the report. It was introduced in the subnational index in the 2022 report and into the all- government index in 2023. Chapter 3 provides more details on Puerto Rico’s inclusion in the indexes.

Results on the all-government index

As figure 1.1 on page 10 indicates, in the all-government index, the highest-ranked jurisdiction is again New Hampshire with a score of 8.13, followed by Idaho (8.07), Oklahoma and South Carolina tied for third (8.06), and then Florida and Indiana tied for fifth (8.05). Alberta is the highest-ranked Canadian province, tied with four US states for 12th place with a score of 8.01. British Columbia, the province next highest after Alberta, is now tied with three US states at 43rd with 7.84. The lowest-ranked Canadian province in the all-government index is Newfoundland & Labrador at 60th (7.58). The next-lowest are Nova Scotia (7.62) at 59th, Prince Edward Island (7.63) at 58th, and New Brunswick (7.64) at 57th. These four Canadian provinces rank below all 50 US states in all-government economic freedom (last year, seven of the 10 provinces ranked below all 50 US states). The lowest-ranked US state, Delaware, is 56th with 7.65. The next lowest-ranked states in the United States are New York (55th, 7.68), Hawaii (52nd, 7.73), and Alaska (50th, 7.76).

Thanks to the efforts of Ángel Carrión-Tavárez of the Instituto de Libertad Económica, two years ago we made a preliminary attempt to include the US territory of Puerto Rico in the US subnational index. Last year we built on that by making a preliminary effort to include it in the all-government index as well. Several improvements have been made in that effort and both data sets have been expanded back to 2000. Puerto Rico comes in at 61st in the all-government index with 6.57. This is 1.01 points below the lowest-ranked Canadian province and only 0.03 above the highest-ranked Mexican state.

The highest-rated Mexican states are again Baja California at 62nd (6.54) and Chihuahua at 63rd with 6.46, behind all 50 US states and 10 Canadian provinces, and below the lowest-ranked Canadian province by 1.04. Jalisco (6.44) and Puebla (6.43) are next highest at 64th and 65th, respectively. The lowest rated jurisdiction in North America is Ciudad de México (93rd with 5.62). The next lowest are Colima at 5.78 and Campeche at 5.98. For a more detailed discussion of the Mexican results, see Chapter 2: Economic Freedom of the Mexican States in 2022.

Figure 1.1: Summary of 2022 Ratings at the All-Government Level

Results on the subnational indices

For comparisons of jurisdictions within the same country, the subnational indices are most appropriate. Figures 1.2a, 1.2b, and 1.2c show the subnational indices for Canada, the United States, and Mexico.

Canada

Alberta, with a score of 6.59, was the most economically free province in Canada in 2022 (figure 1.2a), as it has been for many years. However, since 2014 that lead has shrunk substantially, falling from 2.29 points in 2014 to 1.19 in 2022 (after bottoming out at 0.78 in 2020). The next highest provinces in the subnational index were Ontario at 5.40 and Manitoba at 5.14, followed by Newfoundland & Labrador at 4.82. British Columbia has now fallen to fifth at 4.75 from second in 2018 when it scored 5.73. Quebec was at the bottom of the subnational economic freedom index with 3.41, well below Nova Scotia at 4.22, Saskatchewan at 4.46, and Prince Edward Island at 4.69.

Figure 1.2a: Summary of 2022 Canadian Ratings at the Subnational Level

United States

Figure 1.2b shows the subnational scores for the US states. New Hampshire (8.12) again earned the top spot. South Dakota (8.05) rose to second, and Florida fell to third with 8.03, followed by Tennessee (8.01) and Texas (8.00).^[3] The least-free state was again New York with 4.25, well behind California (4.44), Hawaii (4.68), New Mexico (4.81), Vermont (4.96), and Oregon (5.11).

The US territory of Puerto Rico again had by far the lowest score, 2.13. The next lowest score was nearly twice as high. See chapter 3 for a more detailed discussion of economic freedom in Puerto Rico.

Figure 1.2b: Summary of 2022 US Ratings at the Subnational Level

Mexico

The subnational scores for the Mexican states can be found in figure 1.2c. Chapter 2 contains a more detailed discussion of the Mexican index. The most economically free state by this measure was Michoacán de Ocampo at 6.30, followed by Baja Caifornia at 5.67, and Morelos at 5.56.^[4] This year, Zacatecas was the least free Mexican state at 2.60, followed by Campeche (2.99) and Tabasco (3.47).

Figure 1.2c Summary of 2022 Mexico Ratings at Subnational Level

Economic freedom and economic well-being

The economic freedom indices published by the Fraser Institute have spawned a large and ever-growing body of research. According to Google Scholar, Economic Freedom of the World has now been cited about 14,000 times. And according to the Social Science Citation Index, it has been used in nearly one thousand peer- reviewed studies to assess the relationship between economic freedom and human well-being. Most of this research finds that economic freedom positively correlates with well-being. One recent review of the literature, for example, looked at 721 peer-reviewed studies and found that a majority associate economic freedom with good outcomes (Lawson, 2022). Among other things, economic freedom is positively correlated with higher incomes, faster growth, increased immigration, more entrepreneurship, better labor outcomes, more investment, cleaner environments, greater trust, more tolerance, less conflict, less corruption, and better protection of human rights (Lawson, 2022; Mitchell, 2024). Moreover, despite what one might think, economic freedom does not seem to be correlated with higher income inequality (Lawson, Miozzi, and Tuszynski, 2024).

Our measure of economic freedom in North America adds to this sizeable literature. Since the publication of the first edition of Economic Freedom of North America in 2002, there have been nearly 400 academic and policy articles exploring the relationship between our measure of economic freedom and other indicators such as economic growth and entrepreneurial activity. Findings have been similar to those using the national index. Among 155 papers using the EFNA, two-thirds associate it with good outcomes such as faster growth and only one associates it with a bad outcome, with the rest finding mixed results (Stansel and Tuszynski, 2018). In one recent example, a 10% increase in economic freedom was found to be associated with a 5% increase in real per-capita gross state pro uct (Hall, Lacombe, and Shaughnessy, 2019).

This evidence matches intuition: it makes sense that when individuals are allowed to make their own economic choices—guided by the market signals and incentives of prices, profits, and loss —they will tend to pursue opportunities that improve their lives.

References

Arman, Faisal, Dexter Samida, and Michael Walker (1999). Provincial Economic Freedom in Canada, 1981–1998. Critical Issues Bulletin (January). Fraser Institute.

Godin, Keith, Milagros Palacios, Jason Clemens, Niels Veldhuis, and Amela Karabegović (2006). An Empirical Comparison of Labour Relations Laws in Canada and the United States. Studies in Labour Markets 2 (May). Fraser Institute.

Gwartney, James, Robert Lawson, and Walter Block (1996). Economic Freedom of the World, 1975–1995. Fraser Institute.

Gwartney, James, Robert Lawson, and Ryan Murphy (2024). Economic Freedom of the World: 2024 Annual Report. Fraser Institute. <https://fraserinstitute.org/studies/economicfreedom-of-the-world-2024-annual-report>, as of November 6, 2024.

Hall, Joshua C., Donald J. Lacombe, and Timothy M. Shaughnessy (2019). Economic Freedom and Income Levels across US States: A Spatial Panel Data Analysis. Contemporary Economic Policy 37, 1 (January): 40–49.

Lawson, Robert (2022). Economic Freedom in the Literature: What Is It Good (Bad) For? In James Gwartney, Robert Lawson, Joshua Hall, and Ryan Murphy, Economic Freedom of the World: 2022 Annual Report (Fraser Institute): 187–199. <https://www.fraserinstitute. org/studies/economic-freedom-of-the-world-2022-annual-report>; <https://www.

fraserinstitute.org/studies/economic-freedom-in-the-literature-what-is-it-good-bad-for>, as of November 6, 2024.

Lawson, Robert, Vincent Miozzi, and Meg Tuszynski (2024). Economic Freedom and Growth, Income, Investment, and Inequality: A Quantitative Summary of the Literature. Southern Economic Journal 90, 4 (April): 1099–1135.

Mitchell, Matthew D. (2024). Economic Freedom: What Is It? How Is It Measured? And How Does It Affect Our Lives? Fraser Institute. <https://www.fraserinstitute.org/studies/ economic-freedom-what-is-it-how-is-it-measured-and-how-does-it-affect-our-lives>, as of November 6, 2024.

National Right to Work Legal Defense Foundation (2024). Right to Work States. National Right to Work Legal Defense and Education Foundation, Inc. <http://www.nrtw.org/ rtws.htm>, as of November 8, 2024.

Stansel, Dean, and Meg Tuszynski (2018). Sub-National Economic Freedom: A Review and Analysis of the Literature. Journal of Regional Analysis and Policy 48, 1: 61–71.

Statistics Canada (2023). Government finance statistics, fourth quarter 2022.  <https:// www150.statcan.gc.ca/n1/daily-quotidien/230323/dq230323c-eng.htm>, as of October 13, 2023.

Chapter 3

Economic Freedom in Puerto Rico

Ángel Carrión-Tavárez

Puerto Rico was included preliminarily in Economic Freedom of North America for the first time in 2022. This chapter provides an overview of the process involved in fully incorporating Puerto Rico into the report, along with a concise analysis of the results obtained in the 2024 edition. It also presents several laws and regulations that restrict economic freedom on the Island, identifying areas where regulatory burdens impact individuals and businesses alike. By addressing these issues, this chapter highlights both the challenges and potential pathways for enhancing economic freedom in Puerto Rico.

The integration of Puerto Rico in this report was a gradual process. In 2022, we began by collecting the relevant statistical information for the subnational index variables. The following year, a decision was made to gather comparable data from Puerto Rico for one reporting year to estimate the Island’s score across all components and subcomponents used in the all-government index.^[5] To increase the accuracy of the Island’s data in the 2024 edition, the co-authors agreed to conduct a survey to obtain the necessary information for scoring Puerto Rico on the qualitative variables of the all-government index.

Economic Freedom of North America assigns each subnational jurisdiction their nation’s federal government score in the areas Legal System and Property Rights, Sound Money, and Freedom to Trade Internationally of the all-government index. For instance, all US states receive the United States’ national score in the Economic Freedom of the World report, based on an assumed equivalence across the country. Since available data indicated that this assumption might not be accurate for Puerto Rico, a decision was made to conduct the survey to gather comparable data for those areas in the all-government index.

The first part of the questionnaire consisted of sociodemographic data on participants, including age, education, stakeholder type, economic sector, and the region of Puerto Rico in which they operate. The second part included 14 questions addressing the following variables: 3Av. Hiring and Firing Regulations, 3Avi. Flexible Wage Determination, 3Ax. Foreign Labor, 3Cii. Bureaucracy Costs, 3Ciii. Impartial Public Administration, 4A. Judicial Independence, 4B. Impartial Courts, 4C. Property Rights, 4E. Integrity of the Legal System, 4H. Police and Crime, 6Bi. Non-tariff Trade Barriers, and 6Div. Protection of Foreign Assets.

The questions were modeled verbatim in most cases or, in a few others, as closely as possible to those in the Economic Freedom of the World: 2023 Annual Report used for scoring Canada, the United States, and Mexico. This approach ensured the comparability of question sources for the all-government index. The sources of these questions were the World Economic Forum’s Global Competitiveness Report, the World Bank’s Doing Business, IHS Markit’s Regulatory Burden Risk Ratings, the V-Dem Institute’s Varieties of Democracy, and the PRS Group’s International Country Risk Guide.

The data collection method was an online survey, chosen for its ability to reach a large number of potential respondents; the accuracy it provides in data collection (Fleming and Bowden, 2009);^[6] the accessibility and convenience it offers to participants (Callegaro et al., 2015); and the opportunity to gather and verify information until the last moment. The survey was disseminated, and participation was promoted through professional organizations.^[7] The target of 200 responses was reached within two months.

The calculation of Puerto Rico’s scores was based on the methodology of the Economic Freedom of the World: 2023 Annual Report (specifically, the descriptions and formulas published in its “Appendix Explanatory Notes and Data Sources”). Using the data obtained through the survey and the scores for both Puerto Rico and the United States, we calculated a series of variable-specific ratios in the all-government index to (a) review and adjust the estimated scores for Puerto Rico in the 2023 edition and (b) complete the historical series from 1985 to 2022.

Puerto Rico in Economic Freedom of North America 2024

Puerto Rico’s data in the United States subnational index was backdated to 2000, though the situation remains largely unchanged from last year. In this new edition, the Island ranks 51st overall for the third consecutive year, with a score of 2.13. For comparison, the next lowest jurisdictions are New York, at 50th with 4.25 (nearly double Puerto Rico’s score); California, at 49th with 4.44; and Hawaii, at 48th with 4.68 (figure 3.1). At the top of the subnational index, New Hampshire held the highest score among the states with 8.13.

As shown in table 3.1 (page 46) the Island ranks 51st across all three areas of the subnational index. Puerto Rico is also last in four of the ten variables, ties for last in three others, and ranks 47th and 40th in two of the remaining three. It is significant to highlight that the Island’s overall score is about one-third of the US average, and Puerto Rico’s per-capita income is 60% lower than the US national mean in 2022. Despite these results, no public policy changes have been implemented in Puerto Rico to improve its economic freedom situation.

Figure 3.1: Summary of the Ratings of the Bottom 10 US States and Puerto Rico for Economic

Table 3.1: Economic Freedom at the Subnational Level in Puerto Rico, 2022

In the all-government index, which includes the 10 provinces of Canada, the 50 US states (and now Puerto Rico), and the 31 states and capital of Mexico, for a total of 93 jurisdictions, the Island ranks 61st again this year, with a score of 6.57. The lowest-ranked jurisdictions in the United States and Canada are Delaware at 56th, with 7.65 and Newfoundland & Labrador at 60th, with 7.58. The highest-ranked Mexican state, Baja California, ranks 62nd with a score of 6.54 (figure 3.2, page 47); thus, Puerto Rico aligns more closely with Mexico than with the United States and Canada.

Figure 3.2: Summary of the Ratings of Selected North American Jurisdictions and Puerto Rico for Economic Freedom in the Third Quartile at the Subnational Level, 2022

Among all the jurisdictions of Canada, the United States, and Mexico in the all- government index, Puerto Rico ranks second to last in Government Spending (including last place on Insurance and Retirement Payments), 28th on Taxes, and 61st on Labor Market Freedom. Additionally, the Island is last on two of the economic freedom indicators used exclusively in this index; it ranks 61st on three of them, and 33rd, 11th, and 1st on the remaining three (table 3.2, page 48). Puerto Rico’s scores and ranks in the all-government index this year reflect the results of the conducted survey.

During the 10-year period from 2013 to 2022,^[8] the Government of Puerto Rico declared itself unable to pay its debt; the US Government established an oversight board to manage the Island’s fiscal crisis; the Government of Puerto Rico filed for bankruptcy; and the Island was struck by two hurricanes, a series of earthquakes, and the COVID-19 pandemic. Yet, Puerto Rico’s overall score was 2.13 at both the beginning and the end of this decade. This suggests that the Island’s low score is tied more closely to the public policies of the Government of Puerto Rico and the regulatory framework they have established than to the net effect of these economic events.

Table 3.2: Economic Freedom at the All-Government Level in Puerto Rico, 2022

The regulatory environment of Puerto Rico

Puerto Rico has been subject to state control over productive assets, strong government intervention in the market, and significant income redistribution for decades.^[9] These conditions have created economic distortions that have discouraged private investment, reduced entrepreneurship, and limited individuals’ and businesses’ appropriability, among other effects. Consequently, the Island has experienced a historically slack labor market, low labor force participation, low wages, high poverty levels, high levels of dependence on federal transfers, and substantial outward migration.

A report published by the Institute for Economic Liberty in October 2024 presented a sample of over 50 laws and regulations exemplifying the regulatory excesses of the Puerto Rican government.^[10] The laws and regulations included in the report stem from centrally planned, paternalistic, and protectionist public policies that failed to achieve their intended purposes, ultimately harming those they aimed to help or benefiting some at the expense of others. The following paragraphs provide examples of the topics and regulatory burdens outlined in the document.

Occupational licensing. Puerto Rico regulates over 140 occupations, of which at least 131 are currently subject to active occupational regulations.^[11] Among these, 34 licenses are required in fewer than five states, including 13 that exist solely on the Island.^[12] This raises questions about the necessity of requiring licenses in Puerto Rico for occupations that, in most US states, are unregulated—that is, which are practiced in all or nearly all US jurisdictions without the need for an occupational license, thus allowing broader access to employment and entrepreneurial opportunities.

Property registration. Puerto Rico uses the Spanish registration system, which is complex and costly; for example, the cost of processing the deed for a commercial property with similar characteristics in Charlotte, Durham, Greensboro, and Raleigh is $26.00, while in San Juan it is $1,940.85.^[13] This difference highlights the lack of competitiveness of the Island’s property registration system compared to other markets and the need for a more robust and efficient mechanism that safeguards private property and facilitate secure, quick, and cost-effective transactions.

Ease of doing business. The lack of a public policy supportive of entrepreneurship, along with bureaucracy and government hurdles, has made Puerto Rico an inhospitable place to start and run businesses. In fact, San Juan ranked last among 83 US jurisdictions in the Doing Business North America 2022 Report. Most variables relevant to entrepreneurship, such as obtaining permits, getting electricity, employing workers, using land and space, and paying taxes are controlled at the state level on the Island; therefore, San Juan’s results in the study reflect Puerto Rico as a whole.

Taxes. The income tax system and the intricate fiscal structure of the Island restrict economic freedom, discourage productive effort, and lead to tax evasion and informality, thereby reducing the tax base. Puerto Rico has the second highest corporate tax rate in the world at 37.5%, while the combined federal and state corporate tax rate in the United States is 25.77%. This tax climate is a deterrent for local investors and represents a competitive disadvantage in attracting private investment from the United States and other countries.

Inventory tax. Municipalities in Puerto Rico impose an inventory tax that affects both businesses and consumers. This tax applies to the value of inventories in the form of finished products (ready for sale), partially assembled products, and raw materials. Due to this tax, businesses maintain inventory levels below optimal, resulting in product shortages, higher prices, and reduced competitiveness. The inventory tax has been eliminated in 36 US states, and the remaining 14 states have inventory taxes that are significantly lower than those on the Island.

Labor laws. US federal labor and civil rights laws, such as the Fair Labor Standards Act of 1938, the Equal Pay Act of 1963, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990, and the Family and Medical Leave Act of 1993 are in effect in Puerto Rico; however, over 25 additional labor and civil rights laws—many of them redundant and tautological— have been passed on the Island, creating an overloaded regulatory environment that hinders the creation of jobs and the hiring of workers.

Private parking lots. The Government of Puerto Rico considers the private parking business to be of public interest and controls the rates that owners and operators can charge.^[14] This government intervention discourages economic activity, reduces private investment, limits market competition, generates operational inefficiencies, and restricts the sector’s growth potential. As private property, parking facilities should operate without undue government intervention, in accordance with their operational costs and market conditions.

Freight transportation. Freight transportation prices are also controlled by the Government of Puerto Rico, resulting in rates that are 2.5 times higher than in most US jurisdictions and increasing the cost of goods, especially groceries.^[15] The fixed-rate system on the Island creates market rigidity, with bureaucratic processes that prevent economic agents from responding effectively to emergencies and unforeseen situations, such as a hurricane or a pandemic; as well as from adapting to changing market conditions, improving efficiency, and providing greater stability.

Distribution contracts. The Distribution Contracts Act regulates relationships between principals or grantors and their distributors in Puerto Rico, with the aim of protecting local distributors.^[16] The government’s duty under the Rule of Law is neither to favor nor to disfavor either party but to uphold contracts entered into freely and voluntarily within a free market, both efficiently and swiftly. Under no circumstance should the state act as both judge and party, using the law to benefit nor harm any party in a contract.

Inspection of containers. In Puerto Rico, the Government requires that 100% of the containers arriving on the Island be inspected. Since its implementation in 2009, universal container inspection has cost over $20 million annually, which has a significant impact on Puerto Rican consumers within the value chain. This practice has become an additional tax for consumers, without providing a practical benefit to society, as there have been no reported findings of weapons, illegal drugs, or other restricted materials in the 15 years of inspecting 100% of containers.

Certificates of need. The Secretary of Health of Puerto Rico has complete authority over the “orderly planning” of health facilities and the “costs of healthcare services” (Ley Núm. 2, 1975: 1). It is, thus, mandatory to obtain a certificate of need granted by this official before constructing or acquiring a pharmacy, a blood bank, a clinical laboratory, or a health facility; offering or developing a new health service; making capital investments of $500,000 or more in an existing health facility; or acquiring highly specialized medical equipment valued at $250,000 or more.^[17]

Municipal businesses. Municipalities in Puerto Rico have the authority to acquire, create, operate, and sell businesses and commercial franchises. Municipalities can manage all types of for-profit businesses or corporate entities using public funds. Additionally, corporate entities owned or operated by municipalities are exempt from paying duties, licenses, tariffs, and taxes. This constitutes unfair competition from the Government against private businesses—which are a substantial source of public funds—in offering goods and services that the private sector can provide.

Government size. Puerto Rico has the highest number of government employees as a percentage of total employment among all US jurisdictions. As of May 2024, the Island had 166,122 positions occupied in state and local government, which represents approximately 510 public employees per 10,000 residents. Additionally, Puerto Rico has 132 state agencies and entities, while states with similar populations operate with fewer than 38 agencies. This raises the question of why Puerto Rico requires nearly 100 more agencies.

The cited report not only highlights the laws and regulations that limit economic freedom in Puerto Rico but also offers recommendations for establishing and implementing a new public policy. The included proposals aim to promote (a) the cessation of undue interference in economic freedom, (b) the elimination of government control over productive assets, (c) the decentralization of economic planning, and (d) the reduction of tax burdens that discourage wealth creation, in order to reduce poverty and dependence.

Conclusion

The inclusion of Puerto Rico in the Economic Freedom of North America represents an effort to measure and evaluate the Island’s economic freedom within the broader United States and North American context. Puerto Rico’s poor performance in the US subnational index reveals significant challenges within its public policies, particularly in areas affecting individual liberty, market competitiveness, efficiency, and innovation. These results underscore critical issues in the Island’s regulatory framework, suggesting that current policies may be hindering, rather than fostering, economic dynamism.

In reviewing Puerto Rico’s regulatory landscape, it is evident that a variety of policies and laws have created significant barriers to economic freedom on the Island. From occupational licensing to price controls on freight transportation and the extensive reach of government, this regulatory regime often inhibits competition, limits access to essential goods and services, and places a unique strain on local businesses and consumers. Together, these restrictions result in an environment where economic growth is stifled, leaving Puerto Rico at a disadvantage compared to other jurisdictions.

Economic freedom is one of the most fundamental rights of free people. Where economic freedom is protected, there are greater opportunities, more entrepreneurship, more employment, more prosperity, and less poverty. It is not surprising, then, that Puerto Rico’s long-standing social and economic challenges reflect a lack of freedom. Addressing these policy constraints could be crucial to enhancing Puerto Rico’s economic freedom and giving each person the opportunity to prosper and contribute to the sustainable development of Puerto Rican society.

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Ley Núm. 75 de 24 de junio de 1964. Ley de Contratos de Distribución. Oficina de Gerencia y Presupuesto, Gobierno de Puerto Rico / Office of Management and Budget, Government of Puerto Rico. <https://bvirtualogp.pr.gov/ogp/Bvirtual/leyesreferencia/ PDF/75-1964.pdf>, as of August 22, 2024.

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