GROWING TOGETHER OR APART - THE RISKS AND RETURNS OF ALTERNATIVE CONSTITUTIONS OF CANADA

Canada can be viewed as a politically-created portfolio of ten provinc es plus two territories, with weights in that portfolio also determine d by political rather than economic considerations. Viewing Canada in this way allows one to use principles of modern portfolio of provinces . This paper considers the economic efficiency of the current politica l portfolio that is Canada in terms of its growth and risk characteris tics vis-a-vis alternative political arrangements. Consideration is al so given to alternative ways that Canada could be constituted - withou t Quebec, without the far West, and so on. It is shown that the accide ntal weights in the Canadian portfolio of provinces/territories provid e an economic outcome that is close to the efficient frontier which de signates economically efficient combinations of returns and risks, whe re 'return' relates to economic growth, and 'risk' to the volatility o f economic growth. In an efficient portfolio, risk (volatility) is min imized for a given level of return (growth in our context), or alterna tively growth is maximized for a given level of risk. In this portfoli o context, it is shown that Quebec reduces risk but also 'returns' in the Canadian 'portfolio,' while the West reduces risk while also incre asing economic returns. The paper represents the first formal empirica l attempt to apply principles of portfolio theory developed in the fie ld of finance to explore the political organization of a federalist st ate.