FEATURE ARTICLE:
Three Perspectives on Marketing Boards

by Herbert G. Grubel, Isabella Horry and Filip Palda, J.D. Forbes

Editor's notes

I WAS TELEPHONED RECENTLY by one of the large polling companies. I spent 50 minutes answering all sorts of questions designed to solicit my opinion on everything from the environment to native issues to my shopping habits. One series of questions concerned agricultural marketing boards. Did I think they were beneficial? What areas did I think were covered by marketing boards? Were farmers being overpaid? How did I think that the money that Canadians pay for eggs, cheese, milk, poultry, etc. was apportioned?

I found it quite revealing that someone out there is actively monitoring public opinion about marketing boards. We are rapidly (one hopes) approaching end of the Uruguay round of the GATT talks. Agricultural subsidies and their fate are to be a key feature of the deal, if there is one. But while the farm lobby groups are pushing the government hard to present their case actively at the upcoming GATT talks, in the end, their success will be largely dependent upon public opinion. Government negotiators will fight only as hard as the public wants them to. Their success, in turn, will be determined to a large degree by international sentiment.

The following "Three perpectives on marketing boards" form this month's Feature Article: "The coming end of supply management and its consequences," "The unbearable lightness of hidden taxes," and "Save your sympathy for the consumer." All are responses to the growing clamour for action on the marketing board issue. The farmers and their lobby groups want Canadian negotiators at the GATT talks to insist that the marketing boards are not open for discussion, that they are to remain intact at all costs.

Canadian consumers are torn between wanting to pay as little as possible for agricultural products, and having sympathy for the farming community. Our writers offer their viewpoints. I'm certain you'll find their comments challenging and informative.

Read on!

The coming end of supply management and its consequences

Herbert G. Grubel
Professor of Economics,
Simon Fraser University

IN THE MIDDLE 1970S THE government of Canada gave farmers one of the most effective instruments possible for enriching themselves at the expense of consumers and the rest of the world. That instrument was supply management administered by marketing boards. Sure, the system is advertised as a method for assuring fair prices to farmers and consumers and for guaranteeing fresh supplies and the survival of the family farm. In fact, however, the farmers have used their legislated privilege as we all would if we had been in their position.

They helped set a formula for the determination of the official price which processors have to pay for their products. This formula is advertised as reflecting--fairly of course--only increased production costs. In reality, it totally neglects the fact that the productivity of farm activities is rising all the time. As a result, there has been an ever widening gap between the official formula-determined price and the true cost of producing such products as milk, eggs, turkeys and chicken. This gap would attract many new farmers were it not for the quota limitations on output administered by the marketing board and enforced by the coercive power of the police and courts.

The consequences of this system have been horrendous. The difference between price and production costs gives great value to production quotas. The capitalized value of all such quotas in Canada now is about 6 to 8 billion dollars. To purchase a dairy farm in B.C., the price of quotas is twice the price of the land, equipment and live-stock. The inflated consumer prices for supply managed products are one of the main stimulants for cross-border shopping, which has brought well-known troubles for Canadian retailers, employers and tax revenue.

The operation of the system also requires tight import controls since without them foreign competition would force Canadian farm prices down from their artificially high prices. This import licensing system is now almost certain to be dismantled. And with it will come the end of Canadian supply management.

GATT is an international organization which has served the world well by facilitating several major reductions in international trade barriers during the post-war years. In its latest effort, it has linked for the first time the liberalization of trade in agriculture to further progress in the liberalization of trade in merchandise. In particular, there will be no deals on merchandise unless the EC and the U.S. agree to a reduction in its subsidies to grain producers and Canada abandons its import quotas on supply managed agricultural commodities.

It is easy to see that Canadians have a great stake in the outcome of these negotiations. A trade war in manufactures would be a disaster, dependent as we are on international trade generally. Failure to reach agreement on grain subsidies would deepen the crisis for prairie farmers or further aggravate the deficit problem of Canadian governments bailing them out. Subsidies to grain farmers this year are already about $3 billion.

The GATT agreement will replace import quotas with tariffs. These reflect the difference between the world price and the inflated Canadian price, 325 percent for cheese and 200 percent for butter. During the next 6 years, these tariffs will be lowered by 36 percent and scheduled new negotiations in 5 years will probably result in further cuts.

The GATT procedures will lower prices and output for the affected Canadian agricultural products. There will be serious economic hardships for some producers, though most will survive and simply will have less wealth than they thought they did a few years ago. Some who adjust quickly and cleverly will flourish. One of the most important effects will be the elimination of quota values. This will leave many banks without collateral for the loans farmers are unable to service. However, the bank losses would be less than the $8 billion of outstanding quota values since a large proportion of them were never traded and do not serve as a collateral.

I am torn between the feeling that the farmers will get what they deserve and sympathy with their position. They should have known that they were ripping off the public and that the system could not last. On the other hand, it is easy to understand farmers who believed that the government legislated benefits were their just desserts and were permanent. Perhaps they also deserve what they get for having been naive. However, my practical nature suggests that social harmony and financial stability would be served by some transitional aid from the government. The most defensible of such aid would be for the government to compensate farmers who bought quotas in the past, paying a declining fraction of the purchase price the longer ago the transaction took place.

In all the discussions over the cost of dismantling supply management, people lose sight of the fact that there will be many winners. The liberalization of the world grain market will help Canadian prairie farmers. It will permit the government to save the large subsidies it now pays them. In fact, these savings in just a year would probably exceed the cost of compensating recent quota buyers.

The biggest winners will be Canadian consumers who will enjoy drastically lower food prices and greater variety. Canadian retailers will regain many sales lost to U.S. competition and pay more taxes. The processing industry will be revitalized and modernized as it breaks the shackles supply management has placed on it. Young people will once again have the opportunity to enter farming and food processing without the need to buy quotas. And free trade in processed foods under the Canada-U.S. Agreement can go ahead without the need for subsidies that compensate them for the high prices of the inputs they have to buy from Canadian marketing boards.

The unbearable lightness of hidden taxes

Isabella Horry and Filip Palda

CANADIAN INDUSTRY IS one of the most heavily protected in the G7 trading block. This protection comes, of course, at the expense of consumers. Some academics and journalists are aware of the problem but most people have no idea how much they pay to protect their producers. It is very difficult for consumers to attribute a rise in the price of a product, such as milk, to a reduction of the dairy quota, or to a rise in dairy tariffs. This difficulty makes it possible for governments to redistribute money secretly, by imposing hidden taxes. The twist is that producers, an unelected, unanswerable group, collect the taxes. The tragedy is that these taxes are perhaps the biggest drag on Canadian economic progress.

Measuring hidden taxes

Unfortunately there is no good estimate of the hidden taxes Canadians pay because it is difficult to account for every government regulation which shows up as an increase in prices. Even if all regulations were identified, economic science has not come up with a good model of the economy and all its interactions (a so called "general equilibrium" model). Such a model is needed to trace the effect a single regulation may have on the prices of many different goods. A model also shows how much of a price rise is due to regulation and how much is due to basic forces such as costs and preferences.

One effort to measure what Canadians pay in hidden taxes is due to Moroz and Brown [1987] who studied tariffs and import quotas. Their estimates are probably accurate to within an order of magnitude (meaning they are in the ballpark). The first column in Table 1 is based on their results. It is the dollar value of protection to each industry in 1979 due to tariffs and non-tariff barriers such as import quotas. The sum of such protection across industries was $32.2 billion in 1991 dollars, or 10.4 percent of the total value of production. Most of the protection went to textiles, agriculture, and forestry. In sum, each Canadian paid $1,355 in hidden taxes on internationally traded items in 1979.

Click here to view Table 1: Two measures of hidden taxes by major industry (millions of 1991 dollars)

But 1979 was a long time ago. Are the Moroz-Brown figures still relevant? Do they not overestimate the costs of protectionism, especially since the advent of free trade with the U.S.? Probably not. The free trade agreement of 1988 did not cover agriculture or textiles, which are among the largest beneficiaries of hidden taxes. Nor did the agreement deal forcefully with non-tariff barriers such as import quotas. A recent study released by the Organization for Economic Development and Cooperation estimated that in 1990 the hidden tax to consumers of agricultural products was $3.5 billion. This is almost exactly what Moroz and Brown calculated for 1979. (Please see table 1.)

Missed opportunities

What their study did not mention was that quotas and tariffs give rise to hidden taxes which no one collects, so-called "deadweight losses." Cox and Harris [1985] noted that a significant but hitherto unstudied cost of protectionism was that it lowers the volume of trade and keeps industries at small, inefficient levels. They asked, if certain industries were allowed to grow through trade, how much would they be able to reduce their costs and how much of this reduction would be passed on to consumers? The second and third columns of the table show the dramatic benefits possible from unilateral and multilateral free trade agreements. Most of the Cox-Harris figures are larger than the Moroz-Brown figures because, in addition to measuring the hidden tax of protectionism, they also measure the lost opportunities from staying small.

More than tariffs needed

These measures of the hidden costs of international trade protectionism also incorporate the effects of domestic trade restrictions. Tariffs and import quotas could not have their full impact without the help of inter-provincial trade barriers and domestic marketing boards. By restricting the flow of goods and services between provinces, such barriers stifle competition between domestic producers. Without these added barriers, competition could force prices below the level set by tariffs. For example, until very recently the beer trade was heavily protected from American imports. Moreover, beer had to be sold in the province which produced it. This gave brewers an incentive to produce only in one province because there are cost advantages to large scale production. As a result, Canada was divided into ten separate beer fiefdoms where lords of the vat reigned unchallenged either by American or other Canadian brewers.

Similarly, food marketing boards ensure that domestic producers will, as a group, be able to take advantage of import restrictions. Without domestic quotas on production, competition between rival domestic producers forces prices to reflect costs, and these are probably far below the level of tariff protection. The point is that it is difficult to disentangle the effect of any one regulation meant to increase prices, because it may be working in tandem with other measures to restrict trade.

What we can't measure

The above estimates focus on traded goods, but hidden taxes fall on almost every item people consume. To our knowledge, there is no general account of the cost of other hidden taxes due to government held or granted monopolies in the distribution of alcohol, postal services, medicine, education, telecommunications, and power. Nor has the effect of our restrictive labour laws on the cost of consumption been tallied. Examples of such laws are the ban on Sunday shopping which protects workers who like to rest on Sundays against competition from others who do not. This forces consumers to budget their time more severely. Minimum wages protect unionized labour from competition by cheaper, less skilled workers. Complicated provincial trade certification procedures protect local labour markets from the arrival of out-of-province labourers willing to accept lower wages. Lower wages would eventually be reflected in lower product prices.

Loss of competitiveness

There are two reasons to be alarmed by the enormous revenues that hidden taxes generate for select producers. First, Canadians consumers, especially those who can least afford to pay heavily for basics such as food and clothes, are being taxed without their knowledge. Second, schemes used to generate these hidden taxes keep valuable resources artificially locked up in declining parts of the economy. Import quotas that raise the price of textiles interfere with market signals telling workers and entrepreneurs to take their talents where they are most valuable. Such protection dulls the incentive and eventually the ability of Canada to compete with other countries.

The industrial strategies and high-technology master plans being proposed to make Canada more competitive miss this point. More hope lies with the government's recent move to knock down provincial trade barriers and with international protests against Canada's agricultural marketing boards.

References and further reading

Organisation for Economic Co-Operation and Development, Agricultural Policies, Markets and Trade, Monitoring and Outlook Monograph, Paris, 1991.

Ahmad, Jaleel, Trade-Related, Sector-Specific Industrial Adjustment Policies in Canada: An Analysis of Textile, Clothing, and Footwear Industries, Discussion paper No. 345, Economic Council of Canada, March 1988.

Cox, David and Richard Harris, "Trade Liberalization and Industrial Organization: Some Estimates for Canada," Journal of Political Economy, 1985, 93:115-145.

Moroz, Stephen L. and Andrew L. Moroz, Grant Support and Trade Protection for Canadian Industries, Institute for Research on Public Policy, April 1987.

Save your sympathy for the consumer

J. D. Forbes [Mr. Forbes is a professor of Business Administration at the University of British Columbia and co-author of the first Consumer Association of Canada study on the impact of marketing boards. He wrote this letter to Paul Grant of CBC Radio's "Saturday Morning Show" on February 29, 1992, after hearing one farmer give his views of marketing boards in an interview on that program. Grant referred to Mr. Forbes' letter in a subsequent broadcast, but did not read it out for his listeners.]

Dear Paul:

I listened with interest to your interview with the Fraser Valley dairy and turkey farmer. It was an extremely moving piece that illustrated the plight of that individual.

However, while you presented some of the arguments against marketing boards, you did allow the farmer to state his views without interviewing someone on the consumer and public policy side who could have pointed out both the errors in his statement and the other side of the issue. Indeed, many of his points simply were false, even although the farmer probably believed them to be true.

I recently did some calculations on the results of the B.C. Milk Board pricing formula and determined that each dairy producer in the province is subsidized by $70,000 annually by British Columbia's dairy consumers. The data presented by the farmer you interviewed pointed out the silliness of the present scheme. Unfortunately, neither you nor he recognized it.

The farmer had paid $300,000 for quota, enough for "about two dozen cows." He paid another $200,000 for the land, buildings, and other equipment. If you work that out, he paid $12,500 per cow for the right to sell the milk--the quota rights. He spent only two-thirds of that, or about $8,333 per cow, for the price of the cow, the land, and the equipment to produce the milk. Does that not seem a little silly? The reason he thought he could do this is that the price for the milk is about 30 percent above his total cost of production (i.e., the total of all costs except the cost of the quota).

The farmer is right when he said that quota costs were not included in the formula for calculating the cost of production. But what he failed to understand is that the B.C. Milk Board's artificial pricing formula so overprices milk that new entrants, or existing farmers who wish to expand their herds, know that they can pay for all their production costs and still have enough left over to pay off the quota costs. In other words, the farmer was willing to invest $300,000 to go into this business because he knew that he would get a return from that investment.

From the consumer point of view, consider the case of the mother on welfare with two children, each of whom drink a litre of milk a day. This overpricing adds $219 per year to her food bill. Higher prices of eggs, chicken and, maybe once a year, turkey, raise that number to something over $300 annually.

The current spate of articles about marketing boards is the result of Canadian farm lobby groups reacting to the possible outlawing of such monopoly arrangements from the GATT negotiations. But we must realize that our Canadian system of supporting dairy and poultry producers is different only in method, not effect, from those in place in the U.S., Europe, or Japan. These other countries accomplish similar goals to ours, but in different ways. While the problem is too complex for me to detail here, we should not give up on our system without gaining access for our farmers to European and other markets where we are able to compete.

The marketing board problem is complex. However, while it is much easier to find a farmer than a consumer who has a tough story, the farmer you interviewed made a bad decision (and there are many in agriculture who would have advised him not to do what he did), and consumers deserve equal time. I have worked in this area since 1973, and I know that the other side is not as compelling, and is much more difficult to present in a way that is interesting for your listeners. However, it does exist and should be presented.

Sincerely yours,

J.D. Forbes
Forbes Fraser Wines Ltd.

Russia's malfunctioning bread machine

Michael Walker

A NUMBER OF YEARS AGO, Mr. R.D. Grant penned a very important poem entitled Tom Smith's Incredible Bread Machine which in the space of a few pages tells the story of how free market bread production works and how its functioning is often interrupted by the actions of well-meaning governments and bureaucrats. The title, Tom Smith's Incredible Bread Machine, was meant as an analogy to the economy overall, since when it was written, the term "bread" was often used as slang for money.

A recent article in The Wall Street Journal by Laurie Hayes and Adi Ignatius tells a story about another bread machine. It should be read by every resident of North America. It describes the problems of converting Moscow's state owned bread industry into a free market private enterprise system. The mills which mill the flour, the factories which bake the bread, and the stores which sell the bread are all state owned. Moscow's 31 bread producers are organized under a bread consortium which according to the authors not only "advises them" but also keeps their books and is their sole source of flour.

So the price of bread is "free to fluctuate" but none of the structure of a market is present. In consequence, the bakers of bread, the stores, and the consortium which supplies them are contriving to use their new found freedom to change the prices and to fix them at a new, higher level. That has been their response because they don't know any other system and because the absence of private ownership of the bakeries, the mills and the supply houses is eliminating the most important functional element in a free market system, namely, the opportunity to earn a profit which ownership conveys to those who respond to shortages with increased supplies of the product. Principal among the reasons that this transition to the free market is having such difficulty is the idea that bread prices should be low because bread is the staple of the Russian diet and for that reason its price should be predictable and stable rather than moving to reflect supply and demand. In fact, the very notions of supply, demand and private ownership are foreign to the mentality of Russian managers.

The above mentioned poem by R.D. Grant drew an analogy between the economy at large and the bread machine of Tom Smith. Unfortunate though it seems, the same sort of analogy can be made in 1992 between Moscow's bread machine and the failure of the Russian people, as yet, to make the transition in their thinking to the simplest principles of the free market. Without ownership there can be no profit, but without profit there is no incentive to change and innovate. And without innovation and change in the way of doing things, Moscow's bread machine, no less than the rest of that potentially great country, is doomed to a lengthy period of distress if not total collapse.

The crucial leap of faith that Russians must make is to accept that the key to a stable and predictable supply of bread, at the low and falling prices (relative to an hour's worth of labour) to which we have become accustomed in North America, is freedom for prices to move where the vagaries of supply and demand push them. These variations in price in turn will provide the bakers, the millers and the customers with all the information they need to organize an efficient and effective market for bread. The paradox with which the Russians, no less than many residents of Canada, must reckon is the notion that freedom for prices to move implies more predictability and certainty about the standard of living they can enjoy.

Joe Clark's flying circus

John S.P. Robson

WHEN ALL THE consultations, round tables, conferences and committees on the Constitution began, it looked as though entrenchment of property rights was a cinch and the social charter was a pipe dream. After the consultations it seems that quite the reverse is true. The process has been hijacked, and this is very disturbing.

It is disturbing because a new Gallup Poll reveals that among Canadians support for property rights is overwhelming. Overall, 87 percent of respondents characterized the fundamental right to own property as either very important or important, and 87 percent said it should be in the Charter of Rights. Even more remarkably, a higher proportion of Quebeckers supported a Constitutional guarantee of property than supported a Constitutional guarantee of their distinct society. In other words, we have an overwhelming consensus across Canada in favour of property rights. This is most remarkable. On what other issue do we have 87 percent agreement? The people have spoken!

So why are the Constitutional deliberations going in exactly the opposite direction? As I said, the process was hijacked. But I do not mean to suggest a conspiracy hatched in a smoke-free back room. I'm sure plenty of people did conspire to produce this result, and they succeeded, but it was probably implicit in the process from the beginning. The reason is simple.

Most people dislike politics. They regard it as a necessary evil, and they seek to keep it as far from their lives as possible. In fact, that's what property rights are all about, your right not to be bothered or bullied or bossed around by the government. And because of their dislike of politics, most people would rather undergo dental work without an anaesthetic than discuss Constitutional reform.

But all the people who would voluntarily travel to a distant locale and be shut in a room full of people discussing the Constitution like politics, and therefore the consultations were inherently bound to produce a politicizing result. They were bound to endorse the kinds of ideas that expand, rather than diminish, the role of politics in people's lives. The Jacobins think there is nothing more beautiful than a majority decision made after lengthy, animated public debate. They love plebiscites, endless Constitutional deliberations, heated political campaigns and the virtual elimination of the private sphere from human existence.

Ordinary people, on the other hand, want to be left alone by shrill, distant busybodies so they can go about their business in peace and spend time with their families undisturbed by social workers, thought police or advocates and activists.

What we need from our Constitutional masters, therefore, is a Constitution that limits government, not one that includes the preferences of every special interest group in Canada. Like the men who met in Philadelphia in 1787, our leaders should shut themselves up and write a Constitution that strictly limits the powers of government.

We could then probably tolerate a referendum to ratify it. The same 87 percent of people who want property rights would certainly vote for a Constitution that mandated limited government. What real Canadians want is as fundamental as Magna Carta, though from the point of view of the recent Constitutional flying circus it truly is "something completely different": the right to be left alone.

When land is gone, and money spent...

Filip Palda

A COMMON NOTION, fostered perhaps by books like the recent Generation-X, is that young people now entering the labour market will not have it so good as the baby-boomers who preceded them. The middle class is disappearing and low paying "McJobs" are replacing "good" jobs. There is a nostalgia for the labour market of the 1960s and 70s in which real wages grew at an average rate of 4.5 percent a year. Since 1976 average wages have fallen by 0.3 percent a year and the future holds more of the same.

Should these numbers depress anyone planning a carreer? Is the free market no longer able to provide workers with good opportunities? In both cases the answer has been obscured by too intense a preoccupation with trends in the average wage and a one-sided interpretation of measures of income inequality.

Simple averages tell us less about the labour market than the press believe, and we need to go behind the average to get a feel for the forces which generate wealth and jobs. It is too easy simply to look at the decline of the average wage and to conclude that our economy can no longer provide us with good jobs. A large part of the fall in the average wage is probably due to the entry of more women into the workforce in the 1980s. Many women entered the labour force after years in the home and started with a low level of formal training. This was why new entrants had low salaries. Also, more labour pursuing jobs bid wages down. The point is that changes in who participates can be just as valid an explanation for declining average wages as claims that "bad jobs" are all our economy can produce.

The claim that bad jobs are on the rise is closely tied to the belief that the middle class is on the wane. This belief stems from selected labour market statistics which show that, between 1981 and 1986, the earnings of workers in the upper third income bracket increased in real terms by 2.2 percent, fell in the middle income brackets by 2.1 percent, and stayed constant for the lower third. Many have found it tempting to conclude that even though some workers are moving from middle income jobs to high income jobs, many are downgrading to low income "McJobs."

These data are used to argue for government intervention in the form of retraining programs and industrial strategy. The problem is that we have no good surveys which track the work histories of individual workers over time. So everything is conjecture. It is equally possible that workers in the middle income groups are moving higher by upgrading their skills, that many people with low skills have been drawn into the labour force by a growth in demand for their services, and that the average level of low skilled jobs is rising. The need for industrial policy pales in this light.

Some interesting results for the U.S. support the idea that good jobs are on the rise. U.S. census data indicate that more people are migrating to higher income jobs and that income earners at the bottom do not have low wages. Their earnings are low because because they only work part of the year. As Kosters and Ross explain, "Young workers who have not yet finished high school account for a major share of workers with low earnings... Year-round, full-time workers who are between the ages of 25 and 64, and who have had more than 12 years of schooling, are extremely unlikely to have low annual earnings" (p.16).

These numbers may mean that the decline of the middle reflects better opportunities for all. What was once the middle is now being swept upwards, and the lower part of the income bracket is increasingly being occupied by part time workers such as students, many of whom will one day move upwards. The decline does not show that the rich are getting richer and the poor poorer. Even though the declining middle has led to more inequality in wages and salaries, income inequality has been constant through most of the 1980s. This is because income includes non-labour sources of revenue such as interest and dividend earnings.

Instead of being used to fan the flames of envy, statistics on the declining middle should be used to show prospective job entrants where their best opportunities lie. Workers in high income jobs generally have a high degree of technical skill or a university education. When planning a career it is useful to know that in the 1980s Canadians with university degrees earned on average $10,000 more on the their first jobs than high school graduates. A community college degree was worth $2,000 more. In addition, the educated have faced an ever lower "hazard" of becoming unemployed.

To someone planning a career, these data suggest that it is a good idea to stay in school, or to go back and upgrade one's degree. In short, "when land is gone and money spent, then learning is most excellent." Tales of a declining middle are of minor interest.

References:

"Employment in the Service Economy," Economic Council of Canada Research Report, Ministry of Supply and Services, Ottawa, 1991.

Kosters, Marvin and Murray Ross, "The Shrinking Middle Class?" The Public Interest, Winter 1988.

Fraser Institute "Prize for Economy in Government" awarded

John S.P. Robson

ON FEBRUARY 10TH, IN Ottawa, we gathered the finalists from "The Fraser Institute Prize for Economy in Government" competition for our Awards Dinner and presentation of the prizes by the Minister of State for Finance, the Hon. John McDermid. It was a splendid conclusion to the contest, and we were delighted to present the Minister, and through him his colleague Don Mazan-kowski, with a set of proposals that could bring savings of up to $10 billion to the Canadian taxpayers. We were also delighted to congratulate first place winner Bruce Anderson, who suggested ways of reducing the costs associated with running the mint; second prize winner George Blackburn, who wanted to reform the civil service by reversing the Glassco Commission's 1963 recommendations; and third prize winner Alan Blyth, who targeted waste and extravagance in our Foreign Service. In fact, we congratulated all our finalists, and they all deserved it.

Naturally we were extremely happy with the high quality of the ideas, and with the willingness of the government to give them serious consideration. There was hardly sufficient time for them to be reflected in the current budget--although our first place winner's ideas about the mint may have prompted the idea to privatize it--but we expect many of them to be visible this time next year. And of course we would be happy to meet any minister, any time, anywhere, to pass on these ideas.

But what is most inspiring about the contest is that these were not our ideas. What made this contest a success, and what produced the absolutely astounding range as well as the quality of these ideas, is that we took a problem facing the people of Canada--the gap between what they want from government and what they can pay for--and asked the people of Canada what to do. Neither we nor the government could ever have identified the 773 people--one in 30,000--who had ideas they wanted to submit, nor could we have found the one in a million who could produce the final proposals we handed to John McDermid on February 10th. No attempt to solve this from the top down could have worked.

Instead we worked from the bottom up. We announced our concern, the media informed people that our mailbox was open, and they responded. Across Canada, while we lurked in our offices, people we didn't know, people who had never heard of us, people who often didn't know John McDermid from Adam and vice versa, were working away on ideas that had never occurred to us or to the Minister. And as the deadline approached, the ideas began pouring in.

And this is the thing which is memorable in looking back on the contest. We were happy with the savings we generated, and flattered that the Minister gave us an evening of his time. But we were overwhelmed by the effectiveness of people power. Canadians have come to rely too much on government. Even in the recent, splendid budget speech there was a strong sense from all sides that this budget was the central event in Canadians' lives for the coming year, that this budget would produce prosperity or would fail to, that it would generate happiness or misery. Actually prosperity is produced by the hard work and ingenuity of millions of Canadians, and happiness (or misery) is also generated by individuals and for individuals. When a public problem really exists--rather than being manufactured by advocates and activists to expand their own power and influence--it too is best tackled this way.

We intend to run similar contests at a national and provincial level next year, and these will produce savings because they will rely on the genius of individuals. We hope this is the lesson everyone will take to heart. It is individualism that made this country great. It is time to reduce government, reduce the scope for command and control, reduce the influence of distant decision-makers over the lives of ordinary Canadians.

Competition hurts consumers?

Walter Block,
College of the Holy Cross,
Worcester, MA

CONSIDER THE FOLLOWING statement, which appeared in a recent issue of The Vancouver Sun:

"Coming soon: the 100-channel [T.V.] universe. That is what [communications Minister Perrin Beatty] is talking about when he states that we must set our sights on the 21st century. The Canadian industry has its work cut out for it, to remain competitive in a world that is moving into freer markets everywhere.

"The 100-channel universe might seem like a bonanza for viewers. But think again. The more those signals spread out across the band, the faster the quality of programming declines. With fewer viewers for each channel or network, the programmers spend less money, time and effort on shows. Sports telecasts become cheaper, music shows become tinnier and dramas lose their big-budget, mega-cast appeals.

"That's why we're seeing, in the past couple of years, a crop of new cheapo `reality-based' programs like `Rescue 911' and `America's Most Wanted.' That's why there have been no significant big-name cast additions to continuing dramas like `Knots Landing' and `L.A. Law.' That's why we're seeing so many phone interviews on news programs. And that's why CTV recently announced it plans to reduce the number of hours of coverage of the Summer Olympics."

Isn't it amazing? The Sun has discovered a new economic law, one hitherto unrecognized by the profession. In this view, free market competition is actually harmful to the best interests of consumers. Wait 'till the Soviets hear about this. They'll soon see the error of their (present) ways and convert back to monopolistic central planning. And this is to say nothing of our own Canadian Anti-Combines Branch. When this new dispensation hits them, they will soon fold up their tents and slink away into the night.

One hundred competitors are far too many. The existence of so many alternatives dilutes resources. Perhaps three channels would be best. One, CBC, to show acted programming, the other two to feature announcers telling everyone to tune back into CBC. In that way, all resources could be expended on Mother T.V. Imagine what great shows we could all enjoy: a documentary about a female engineer in Saskatchewan! A Quebec intellectual whining about anglicization of la belle province! "News" analysis calling for more and better socialized medicine! A compelling and dramatic retrospective on Ed Broadbent. Wonderful!

Why doesn't this theory work in other sectors of the economy? Why, for example, does the existence of literally tens of thousands (not a measly 100) restaurants in this country not lead to inefficient dilution of product? Surely, if we only had a handful of eating establishments in Canada, they would all have more resources with which to work. Can you just imagine the culinary delights that would ensue? So what that citizens want choice. Lots and lots of it. Too bad for them, says the Sun.

Nor does this theory work in the agriculture sector. Again we find numerous farms, not just a corporals guard. If the growing of food stuffs were concentrated into the hands of just a few producers, each would undoubtedly have vastly more resources at its disposal. But is there anyone who seriously advocates a move in this direction? Hardly.

Although The Vancouver Sun is clearly barking up the wrong tree with regard to its analysis of competition, it has indeed put its finger--however inadvertently--on the cause of low quality in television programming: lack of free markets, not their presence.

While we're on the subject of The Vancouver Sun and television, here is what a different columnist had to say:

It showed us simultaneously the best and worst that television was and still is: a technological marvel with a limitless potential to create and instruct, and a pervasive, commercial-driven monster with a need to turn a profit.

This is the diametric opposite of the truth. The plight of T.V. is not due to profit, it is precisely because the opportunities for profit have been reduced by a lack of private property. Suppose book, newspaper and magazine publishers were not allowed to own their establishments, and could not charge for their products. As in the case of T.V., they could only recoup expenditures through advertising. They would then be forced to cater to the tastes of the lowest common denominator. Imagine how bland and unchallenging their efforts would be. They couldn't afford specialized audiences, for this would displease the advertisers.

This is why T.V. is in such bad straits. Not because of profits and the free market.

Budget reflections

Michael Walker

THE BUDGET BROUGHT DOWN by Don Mazenkowski last month was written in equal parts by the Reform Party leader Preston Manning and by two American academics, Richard Mackenzie and Dwight Lee. The impact of the Reform Party's agenda on the budget has been widely recognized and it would be folly for any sensible person to deny that a hard line on spending and the high profile cutting of the Prime Minister's salary, that of cabinet ministers, and the jettisoning of the 24 agencies and 14 boards were designed to appeal to the audience which has been generated by the activities of the Reform Party. Whether these gestures will be enough to reclaim the conservative core of the Progressive Conservative Party is another matter but clearly that was the budget's intention. It is often the case that the best things are done for the wrong reasons, for clearly many of the changes brought about by the budget are the right thing to do fiscally speaking.

In general terms the budget achieves the spending target. In fact, it is somewhat below the spending target set by the government during the 1991 budget, and if it were not for the collapse in revenues by $7.5 billion below last year's projection the government would have achieved its deficit target as well. As it stands the deficit will decline during next year from this year's total by $4 billion but nevertheless will be higher by $3.5 billion than the deficit forecast for 1992-93 at this time last year. It is always difficult to know by what standard government policies should be assessed, since any such assessment invariably involves dealing with the world as it is by comparison with what it might have been. Clearly, in the period leading up to this budget, the government was under much pressure to abandon its spending targets to allow spending to rise to "prime the pump" and, allegedly, thereby fight the recession. It got this pressure certainly from members of the New Democratic Party and others on the left. It was also pressured, somewhat surprisingly, from some more market oriented folk like the Bank of Montreal who urged the government to spend half of the saving from the reduction in interest rates on a program of boosting the economy by increased government spending. The fact that the government has steadfastly refused to buy into this notion of pump priming should earn it considerable credit. But some of this credit is also due to Preston Manning, the Reform Party leader, who has put expenditure reduction as well as tax reduction on the public agenda in a way that the present government has, over nearly two terms of office, failed to accomplish.

The other hidden authors of the budget, Dwight Lee and Richard Mackenzie, are the authors of a recent book entitled Quicksilver Capital. This book points out the extent to which technology and innovation are rendering governments powerless to tax and regulate in the ways that they could in past decades. The owners of capital are now capable of avoiding tax because of the greater ease with which they can move their capital away from a taxing regime. The federal government has responded to the fear of a flight of capital by instituting three tax measures which reduce the tax imposed on capital in Canada.

The first of these is the reduction in the tax rate on manufacturing and processing industries from 24 percent to 23 percent. The second is an acceleration of the rate of depreciation which is permitted on manufacturing activities, which further reduces the tax burden associated with any given manufacturing or processing activity. The third is the reduction in the dividend withholding tax from 10 percent to 5 percent. All of these measures will have the effect of making Canada a much more attractive place in which to invest and, one hopes, offset some of the decidedly negative impact of legislation which is being enacted in some provinces, notably Ontario.

Apart from the direct financial effect of these changes, there is also the important effect they will have on the attitude of foreign investors toward investment in Canada. With a federal deficit shrinking rapidly relative to that in the U.S. (which will have a deficit 50 percent larger in relative terms than ours this year), a sound and internationally sophisticated financial system, low interest rates and an inflation rate lower than any other member of the OECD, Canada may soon be able to lay claim to the title "the Switzerland of North America." Such a development would certainly help attract some of the quicksilver capital to Canada.

Died of G.S.T.

John S.P. Robson

WHEN BRIAN MULRONEY'S political obituary is written, if things continue as they are, it may well say on it "Died of G.S.T." This tax has become a highly visible symbol of discontent with his government, and it has few defenders anywhere. There is a lesson here, but it is a very troubling lesson.

The G.S.T. in fact differs from its predecessor, the federal Manu-facturers' Sales Tax, in two important ways. First, because it is much more universally applied, it has far fewer distorting effects. Second, it is visible at the final point of sale.

The first characteristic is unequivocally a good thing. If the old and the new tax each brought in the same total revenue, the G.S.T. would impose a far lighter burden on Canadians because it would not impair the efficient allocation of resources nearly as much.

The second point seems like a good thing too. We at the Institute devote a great deal of time and effort to persuading Canadians that they are very seriously overtaxed, and it surely contributes to a clear public understanding of the size of the tax burden that people see what component of price is tax and what component goes to the manufacturer. In fact, there is a strong case to be made that the government should make all taxes visible, one way or another.

Imagine, for instance, that there were no sales taxes, excise taxes, no indirect taxes of any sort, and no slow, relatively painless bleeding away of deductions from your paycheque. Imagine that, once a year, on April 30, the federal government hit you for your entire tax bill from all levels of government, an average of about 45 percent of your income. Ministry of National Revenue besieged by citizens!

On the other hand, imagine that there was no income tax, and that all revenues were raised from consumption taxes, and were visible at the point of final sale. This would reveal graphically that government takes almost half of everything. Instant tax revolt! Ottawa in flames!

And it would be most instructive if the two methods were combined, with one giant whack at your income on April 30th and all indirect taxes clearly identified at time of sale. Imagine that, in addition to having some 30 percent of your income carved off on tax day, it was also the case that whenever you bought gas, the pump showed a split price, separating the amount the gas company was getting from the tax component. Ditto for purchases of liquor, and so on. Again, there would be an enormous outcry over the tax burden.

Obviously, however, this will not happen. After the experience with the G.S.T., any government would be insane to make a previously hidden tax visible. The reason can be clearly seen when we recall the great anti-Manufacturers' Sales Tax protests of yore. Remember those television news stories with angry protestors carrying "Down with MST" signs? Strange... neither do I.

In fact, Canadians never protested the hidden tax, and very few knew it existed. When Mulroney improved the tax structure, he would have been well-advised to make the G.S.T. just as invisible as the M.S.T. and leave the odium with the private sector. Instead he walked into a buzz-saw.

Superficially the prime minister is taking heat for raising taxes, but really he's taking it for making them visible. We get calls constantly from people asking how many days the G.S.T. pushed tax freedom day forward, and they frequently don't believe us when we say that because it replaced another, hidden tax it had quite a limited impact, moving tax freedom day maybe four days at most. Apparently Canadians believe that taxes are entirely bearable as long as they are hidden in accounting darkness, and that what you can't see won't tax you.

March questions and answers

Isabella Horry

Q: Under what forms does the federal government transfer resources to the provinces?

A: There are basically four ways that the federal government transfers resources to the provinces, territories and municipalities. These are tax abatements, reduction of federal tax so as to provide tax room for the provinces, general purpose, and specific purpose transfers. The latter two are cash transfers. In 1991-92 total transfers are estimated at $36.7 billion: $12.4 billion in tax transfers and $24.3 billion in cash transfers.

Click here to view Table: Estimated transfers, 1991-92

Q: What are equalization payments and how are they determined?

A: Equalization payments are general purpose transfers from the federal government to provinces, municipalities and territories. Their objective is to ensure that a province's revenue does not reflect the tax capacity of the province but that of a notional average. When the province's yield is less than the notional yield, the difference is paid to the province as an unconditional grant. Since 1982 the notional average yield is determined by taking the average of 5 representative provinces: Quebec, Ontario, Manitoba, Saskatchewan and British Columbia. Thirty-seven different revenue sources are included in the base; these range from personal and corporate income taxes, sales taxes, tobacco and gasoline taxes to forestry revenues and water power rentals. Between 75 and 90 percent of general transfer payments was paid out as equalization payments during the period of 1957 and 1991, as seen in the table.

Click here to view Table

Letters

Dear Dr. Walker:

Enclosed please find a cheque for $41. Allow me to explain.

I am an economist with the federal government and as such I am required to be a member of a union--ESSA (Economists', Sociologists', Statisticians' Association). As well, I have been a proud member of The Fraser Institute for two years.

Earlier this year I renewed my membership with the Institute and paid $205 in dues. Since that time I discovered that the union I belong to raised my union dues to $246 for 1991 and to $252 for 1992. Now, I do not consider $246 an exorbitant amount (compared to most unions), but I was furious to find out that $30 of it is being sent to Daryl Bean of the Public Service Alliance of Canada as a form of support and solidarity for PSAC's failed strike earlier this year.

At the best of times I can tolerate unions (when they stick to collective bargaining, etc.), but when my union, which is supposed to act in my best interest, forces me to support a strike that was stupid, abusive and at times illegal, I reach my limit!

After much thought, I have decided that there is only one way I can reconcile my personal beliefs concerning unions and my inherent faith in free markets. The solution is to link my annual donation to The Fraser Institute with my coerced payment to the union. Consequently, please accept my cheque for $41 ($246 less $205).

I hope you find this satisfactory. Given that ESSA has never reduced its union dues, I am sure your organization does not have to worry about my donation not keeping pace with the cost of living!

Name withheld for obvious reasons

Editor's note: Other union members who share this sentiment may wish to consider registering their protest in a similar fashion.

Dear Editor:

I wish to express my surprise in reading the article entitled "Credit cards and the fair rate of interest," published in the December 1991 edition of Fraser Forum.

The article contains some serious misconceptions. In the third paragraph, the article indicates that "to justify intervention, politicians such as Corporate Affairs Minister Pierre Blais must resort to the awkward argument that the credit card companies do not compete." First, I am not in favour of government intervention in the credit card market. In all my statements on this issue over the past few months, I have consistently confirmed my opposition to regulated rate ceilings on credit cards. I have pointed out that such rate ceilings would have the tendency to become floors, thereby reducing competition. In addition, card issuers could offset rate ceilings by increasing other cost factors which would not benefit consumers.

Second, last fall I was concerned at the high level of credit card interest charges. This is why I met with the Canadian Bankers' Association, the Trust Companies' Association of Canada and the Retail Council of Canada and I urged them to lower their interest rates so that there would not be a wide spread between the Bank of Canada rate and credit card interest rates. Already, there are promising signs that some issuers are lowering their interest rates and I am hopeful that this trend will continue in the coming months.

I also believe that a well-informed consumer, able to make discriminating choices, is a key element in ensuring a healthy marketplace. My Department publishes a quarterly report on credit card costs which contains facts and figures for all major credit card issuers such as the interest rates, the length of the grace period, annual fees and the date from which interest is applied. I encourage consumers who carry high unpaid balances on their credit cards to shop around and to consider other credit alternatives, such as a line of credit or a personal loan, as generally these are available at a lower rate of interest.

I hope that the record will be corrected in the next issue of Fraser Forum.

Yours sincerely,

Pierre Blais
Minister of Consumer and Corporate Affairs, Canada

Author Filip Palda responds: We are glad that the Minister is "not in favour of intervention in the credit card market" and has written us to dispel the impression created by the following reports:

"The federal government wants interest rates cut on credit cards and it will press the point in a meeting with the country's bankers, Consumer and Corporate Affairs Minister Pierre Blais said yesterday." John Geddes and Adrian Bradley, The Financial Post, November 19, 1991.

"The interest charged on consumer credit cards is too high and should be lowered in tandem with recent reductions in the trend-setting Bank of Canada rate, says Consumer and Corporate Affairs Minister Pierre Blais." Drew Fagan, The Globe and Mail, November 19, 1991.

"If several members of the parliamentary committee on consumer affairs have their way, Canada will follow the lead of the U.S. Senate and force banks to lower credit card rates to around 15.75 percent." Editorial, The Financial Post, November 20, 1991.

Economic super-weapons

Filip Palda

AT THE RECENT FEDERAL- provincial conference on the economy, the first ministers stated with conviction that the federal government should fund public works and lower interest rates to revive the economy. Both ideas have their place, but the premiers have taken them out of context and presented them as miracle cures. Most countries have abandoned this search for economic "super-weapons" in favour of strategies that limit the role of government. Why should we believe that Canada needs a different course?

The first ministers argue that new roads and airports will lower the costs of doing business. They also claim that public dollars paid to construction companies will have "multiplier" effects which stimulate demand in other sectors. This however was not the experience in Malaysia and Singapore, where a massive public works program in the mid-1980s led to economic hardship. The reputedly savvy governments of both countries forgot that public works are a good investment only if the return is greater than the cost. There is no economic principle that states that it always pays to spend on infrastructures.

Neither are "spillover" effects on the rest of the economy an inevitable consequence of pubic works. The argument is that government spending will put money into the hands of producers who will then go out and consume more goods. But this ignores that the higher taxes needed to finance the government will suppress private spending. It also ignores the possibility that infrastructures may displace private consumption. For example, a mass transit system depresses local industry by making it attractive for private citizens to spend less on cars, fuel, and mechanics, and more on taking the bus. Ironically, a public works program that has no practical use has the maximum impact on private consumption.

The other frequent cry at the conference was that the Bank of Canada should print more money to lower the interest rate. Presumably the first ministers meant the "real" rate of interest. It does not take long to figure out that the Bank has no control over this quantity. The real rate of interest is the rate at which resources of a given value today can be transformed into resources of a higher future value. An industrial robot that costs $1 million to purchase, lasts a year and yields $1.1-million worth of output, adjusted for inflation, has a real return of 10 percent. Investors will be willing to borrow money up to an inflation adjusted rate of 10 percent to purchase such a machine. The real rate of interest reflects the physical productivity of investments and the value which people place on the output produced by those investments. The Bank of Canada only controls the money supply, pieces of coloured paper. It cannot affect industrial productivity or real consumer demand. By printing money at a faster rate the Bank can only create inflation.

A more sensible approach to interest rates would have been to ask whether the complicated regulation of our financial institutions adds to the cost of lending. Countries the world over are recognizing that over-regulation raises costs and makes it hard for an economy to thrive and compete on the international market. Often however, complicated regulations protect established producers from new, more efficient competitors. Canada is particularly well infested with special interests who lobby hard to preserve their favourite piece of protective regulation. Is it any wonder that the first ministers should prefer proposing fantasy cures to a difficult battle for meaningful change?

Lady Diana buys a German auto!

Michael Walker

LADY DIANA, PRINCESS OF Wales, has come under attack recently in Great Britain for having abandoned her Jaguar sports car in favour of the Mercedes Benz 500 series. The onslaught came first from her family, who tried to dissuade her from the choice, according to a recent story in Macleans magazine, but ultimately from British workers who see Diana's choice as a rejection of their efforts at a time when the British automobile industry is already suffering the ravages of recession.

The sympathy of colonials is apt in the first instance to be with the workers. What cheek, what abandonment of noblesse oblige. Does she not know on which side her bread is buttered? However, upon careful reflection, the symbolic importance of this event notwithstanding, we have to recognize that by exercising her choice to select a foreign automobile instead of a domestically produced one the Princess both increased the wealth of Britain now and made it more likely to thrive in the future.

By choosing the Mercedes Benz that she really wanted over the Jaguar which she found to be less desirable, the Princess sent a message to Jaguar about the desirability of owning its automobile. If Jaguar has an eye on the future, instead of rejecting her choice as an indicator of the excesses of the wealthy, it will look more closely at its product and ask why it is less preferred than the Mercedes Benz.

They may find that there is nothing more involved than price. The Jaguar is a more moderately priced automobile, the Mercedes Benz 500 series clearly in the stratospheric level. The one Diana prized apparently cost $155,000, while Jaguars can be purchased for half that price. On the other hand, Jaguar executives may find that there are features of the Jaguar which do in fact make it less attractive to prospective sports car purchasers and one hopes that will cause them to revise their product and hence make it more attractive in the future.

The real issue in Lady Diana's choice, however, is nationalism. British workers are upset that Diana would break with the tribe and buy a foreign-produced automobile. According to this view, purchasing a British automobile is good for Britain while purchasing a foreign auto is bad for Britain. Diana has clearly set a bad example that bodes ill for Britain's future. At the most basic level, this analysis doesn't stand up to careful scrutiny.

First of all, if Mercedes Benz automobiles really are better, then by encouraging the British motorist to purchase them, Diana is actually improving Britain's lot by encouraging an improvement in the average quality of its automobiles.

Secondly and more importantly, Diana's choice should cause Britons to reflect upon the meaninglessness of the notion that an automobile has nationality. The fact is that with the increasing globalization of the automobile market, the exact "country of origin" of an automobile is increasingly difficult to ascertain. It is not unusual for an automobile that is sold in North America to have parts contained within it from dozens of countries--parts which have been selected on the basis of the fact that they are the best for that use at the price. The North American automobile market has only been integrated 50 percent with the rest of the world (because to be regarded as a North American product an automobile must contain at least 50 percent North American value added). Notwithstanding that, it is almost impossible now to say which automobiles in the North American marketplace are produced "in North America" and which are "imported." Household trade names in the United States like the Chevrolet Lumina, the Pontiac Le Mans, the Mercury Capri, the Dodge Stealth, the Plymouth Voyageur, while allegedly "all- American" cars, are all produced outside the U.S. On the other hand, the Honda Accord Coupe is produced in the United States.

With the onset of European integration it will become increasingly difficult to distinguish between the automobiles of different countries as the production process and the part sourcing process of the countries becomes intertwined, reflecting the best of economics and consumer choice. While Diana has taken considerable abuse for her choice, she's at the leading edge of the future, and Jaguar and others ought to listen to the message she is sending.

Political correctness, free speech
and economic liberty

Walter Block,
College of the Holy Cross,
Worcester, MA

A NEW TREND HAS COME upon us. In the olden days, movie script writing was, if not a lonely business--one, two or three authors facing a blank piece of paper--at least a private one. The product of these conferences was nobody's business except the producer, director, actor and investor. Nowadays, however, all this has changed. In the modern era, back seat drivers of all types and varieties have got into the act.

The Gay and Lesbian Alliance Against Defamation objected to screenwriter Jonathan Lawton's depiction of a young woman who, in "Red Sneakers," breaks off an affair with an older woman to take up with a man. According to GLAAD, this script supported the (politically incorrect) view that a lesbian can be "cured" by the right man. Producer Lawton caved into the pressure, and sanitized the story.

Black Robe, an Australian-Canadian movie showing the efforts of the Jesuits to convert the Indians in 17th Century Quebec to Catholicism, was roundly condemned for showing them as savage and uncivilized. Producers are now "working closely with" native peoples' rights groups in an effort to head off such criticism.

Spike Lee, the radical black producer and actor, has been castigated by a prominent black intellectual as a "petit bourgeois negro," for daring to turn Malcolm X's life into a "commercial property" in his next movie.

In addition, environmental groups, orientals (the Association of Asian-Pacific American Artists), Jews (the Bnai Brith), women's organizations (protesting violence against women), animal rights activists (the American Humane Association) have been sticking in their 2 cents worth.

Clearly, these myriad activities-no matter how well intentioned-is an affront and an outrage. They are a clear and present danger to the rights of free speech. They in are violation of the economic liberty of the owners of movie studios, sound stages, cameras, etc.

Where will it end? If Monday morning quarterbacks are allowed to dictate the contents of movies, why not plays? And if plays, why not novels? And if novels, why not newspaper reporting? And if journalism, why not subjects such as economics, history, sociology, anthropology? And if the social sciences why not the physical sciences?

Economic liberty is the ability to do whatever one wishes with one's own person and legitimately owned property, provided that no one else's rights are violated. But mere opinion, even when incorporated into literature, is incapable of doing any such thing, "hate" laws to the contrary not withstanding. If it were, we would all go to jail, since there is not one of us who has not had a bad thought, or said something unkind about someone else.

Gramoz Pashko--a lesson in applied capitalism

Michael Walker

GRAMOZ PASHKO IS A most unlikely politician. A former communist and teacher of Marxist economics at the University of Terrana, he has also been Deputy Prime Minister of his country in a communist-dominated government. The reason this makes him an unlikely politician is the fact that he is a leader of the most freedom oriented party in his country and is now an avid and outspoken advocate for free market economics.

Pashko, an Albanian, was one of twenty participants in a recent Fraser Institute conference dealing with the measurement of economic freedom. The freedom measurement discussions, which reflected the views of people from eight countries, are part of a five year process intended to derive ways of quantifying the extent to which governments in different countries permit their citizens to enjoy economic freedom. The interest emerges from a belief that there may be a causal relationship between economic freedom and the ability to sustain political freedom and between economic freedom and national economic success.

While many of Pashko's former intellectual soul mates in Russia are having great difficulty making the transition to the free market, the former Albanian communist is having no such difficulty. It was fascinating to hear his description of how the former black market for western goods is forming the nucleus of the emerging legal market for all goods. "Nobody has to have a plan to tell the small merchants how many Italian shirts to import or how much cheese to bring from Greece. They simply see that they can make a profit so they go to Italy and they go to Greece and they bring back what they can carry and resell it to the people of my country who are hungry for the products of the West."

A key element in the success of this move to the market was the insightful adopting by Pashko of a policy of not prosecuting people who deal in the black market for Albanian currency. Under the communist regime, trading in currency was illegal and punishable by imprisonment. The then newly elected Deputy Prime Minister, Pashko, was able to foresee that without a market in which currency could be traded the country would not be able to pull itself out of the mire. He reasoned that the key to the resurgence was an ability to import foreign products, and that could not be done unless Albanian currency could be traded more or less freely for foreign currency. While he did not find it possible to establish an official market for the currency, he was successful in abolishing prison sentences for currency trade on the black market, thus officially establishing an unofficial market for foreign currency.

This basic freedom--the freedom to exchange domestic for foreign currency--may well be the critical determinant of the extent to which any country can escape the bonds of economic totalitarianism. Pashko's recognition of this fact earns him a select place amongst the politicians of the world and certainly amongst the converted communists.

March graph

Isabella Horry

Click here to view March Graph

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