Academic journal article Journal of Regional Analysis & Policy

Economic Freedom and Economic Development in the Mexican States

Academic journal article Journal of Regional Analysis & Policy

Economic Freedom and Economic Development in the Mexican States

Article excerpt

Abstract. In this paper we describe the methodology for the Economic Freedom of Mexico index published by the Fraser Institute. We will present the scores and rankings for the thirty-two Mexican states which have been calculated for the years 2003 to 2009. The relationship between economic freedom and wages is discussed. There is a significant positive relationship between economic freedom and real wages in Mexico.

1. Introduction

Since the introduction of country-level measures of economic freedom in the 1990s by the Fraser Institute (Gwartney, Lawson, Block, 1997) and the Heritage Foundation (Miller, Holmes, Feulner, 2012), much research has analyzed the relationship between economic freedom and economic develop- ment. The majority of studies have found that economic freedom has a positive relationship with economic growth (Easton and Walker, 1997) and other measures of economic development (Ayal and Karras, 1998; Norton, 1998; Ashby, 2009).

In recent years scholars have begun to analyze the impact of differences in economic freedom at subnational levels. One of the most widely-used indicators is the Economic Freedom of North America index constructed by the Fraser Institute (Ashby, Bueno, McMahon, 2011), which measures economic freedom in the U.S. states and Canadian provinces.1 Studies using this index have also found a generally positive relationship between economic freedom and economic development (Karabegovic et al., 2003; Kreft and Sobel, 2005; Campbell and Rogers, 2007; Ashby, 2007; Ashby and Sobel, 2008; Sobel, 2008). Regional measures of economic freedom at the subnational level have been constructed for Argentina (Pirovano et al., 2012), India (Debroy, Bhandary, Aijar, 2011), and The European Union and Italy (Guggiola and Viroglio, 2011).

Due to the difficulty in gathering the necessary data, Mexico was not included with its North Amer- ican counterparts in the original Economic Freedom of North America index. In 2008, enough data were gathered to construct a measure for the Mexican states, and this index has been updated in 2010 and 2011 (Ashby, 2008; Ashby, Bueno, and Martinez, 2010). Although this measure cannot be compared to U.S. and Canadian states and provinces, it does provide valuable information about variation in economic freedom in Mexico. This paper will dis- cuss the construction and shortcomings of the Eco- nomic Freedom of Mexico index. The relationship between economic freedom and various measures of economic development will also be discussed.

2. Measuring economic freedom in Mexico

In recent years, significant efforts have been made to create an index of economic freedom in the Mexican states comparable to that constructed for the U.S. states and Canadian provinces. In 2008, we published a preliminary measure of economic freedom for Mexican states (Ashby, 2008). Need- less to say, this project has been rife with challeng- es, some of which have been resolved, while others continue to be worked out. The long-term goal is to construct an integrated index for the United States, Canada, and Mexico. Unfortunately, such an informative index is not immediately feasible because we have not yet been able to gather the necessary data. This year's index includes measures of economic freedom for all 32 Mexican states between 2003 and 2009.

The most significant concern is how to measure heterogeneity within the three countries with re- spect to property rights and legal structure. It is essential that additional measures be used in order for Mexico to be comparable to the United States and Canada. At the very least, measures of proper- ty rights would need to be included. There are na- tional indexes constructed for the index published in Economic Freedom of the World (Gwartney, Law- son, and Hall, 2012) that could be included for the subnational jurisdictions corresponding to each country. This would capture cross-country varia- tion but would fail to pick up variation within countries. …

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