Atlantic region needs economic freedom

Among the Atlantic Provinces’ economic challenges is a dearth of entrepreneurship. It could even be argued that most of their challenges, including the youth exodus, stem from having too few entrepreneurs.

Newfoundland and Labrador and Prince Edward Island have relatively high levels of entrepreneurship, ahead of British Columbia but behind Alberta. But Nova Scotia and New Brunswick have entrepreneurship levels barely higher than Quebec’s, which is dead last.

The relevant variable to explain these levels is not government support programs, but rather the level of economic freedom. This measure is strongly correlated with entrepreneurship, not only in Canada, but all over the world.

While political discourse is often confused on this issue, touting public spending as a boon to entrepreneurship, economists have come to clearer conclusions. The more that the laws of a country, of a province or state, or of a metropolitan area leave economic choices in the hands of individuals instead of submitting them to the political process, the more entrepreneurs there will be and the more their companies will be engaged in productive activities.

Economic freedom is promoted through such measures as reducing government spending, limiting public investment, lowering barriers to internal and external trade, liberalizing the credit market for small businesses, and simplifying labour market regulations and the administrative formalities required to start a business. These public policies facilitate the creation of any kind of business, including in the green economy and the social economy.

While the most frequent measure used to promote entrepreneurship is subsidies in one form or another, these subsidies have to be financed, and several studies show that taxation is anathema to entrepreneurship.

There are several complementary explanations for this phenomenon. The more sectors have been taken over by the government, the less room there is for entrepreneurs. This is especially true in the case of public monopolies, which exclude entrepreneurship outright.

Moreover, with a generous welfare state, the incentive to become financially independent, for example by creating a company, are reduced by public spending. And since external funding is an imperfect substitute for the investment of one’s personal funds, when one is less financially independent, it is more difficult to start a business.

A government that spends a lot must also be financed, and high taxes are another factor which reduces economic freedom and affects entrepreneurship, but which we rarely hear mentioned when it comes time to encourage business creation. Nor is it just a matter of taxes paid by companies or taxes on profits. Personal income taxes, even at the lowest tax brackets, also have a significant effect on business creation.

This is because business start-up capital is often self-financed, and high tax rates discourage saving. High taxes also discourage entrepreneurs who would like to offer goods and services that they can produce or provide themselves from home.

Government regulation also affects economic freedom. Excessive regulations impose a burden on new businesses, often in the form of prohibitive start-up costs that act as barriers to entry. Also, a heavily regulated economic environment may nudge entrepreneurs toward rent-seeking endeavors rather than economic activities. When there is more to gain from wooing public officials than consumers, entrepreneurship can become unproductive, or even destructive, affecting its quality.

Government intervention into the economy comes at a price, and one way to think about this price is the entrepreneurship level. Instead of resorting to more government intervention, which reduces economic freedom, the attitude that should be adopted to increase the quantity and the quality of entrepreneurship is to reduce government intervention, both in the Atlantic Provinces and throughout Canada.

Mathieu Bédard est économiste à l'Institut économique de Montréal. Il signe ce texte à titre personnel.