Feature Article:                                                                                        In Cold or Hot Blood?
A response to the C.D. Howe forecast of the post-referendum world

Gordon Gibson

The major publicity given to a recent C.D. Howe Institute study on Quebec separation [Cooler Heads Shall Prevail: Assessing the Costs and Consequences of Quebec Separation, Patrick J. Monahan, C.D. Howe Institute, January 1995.] cries out for a rapid and vigorous reply. The work contains many useful insights, but the major scenario outlined sends a very dangerous message to both Quebec and to ROC. [ROC will be used as an abbreviation for the often-required Rest Of Canada.] If Monahan's scenario gains currency as the logical and natural outcome of a "Yes" vote in the Quebec referendum, the net result would be not only a broken country, but unnecessarily severe impoverishment of the residual fragments.

This response begins from the same hypothetical point as the C.D. Howe analysis--a "yes" vote (to separate) of at least 50 percent plus 1. The end point, however, is very different, and far superior for all players, including Ottawa, which while much shrunken, would otherwise essentially vanish as a government.

Introduction

Canada's twin crises of debt and separation grind on, but not forever. 1995 looks to be the year of the crunch. For now, the two problems continue to feed off each other, battering our currency, savaging our interest rates, and paralysing our politics.

Since the election of the Parti Quebecois government in September 1994, there has been a slow but steady climb in the percentage of Quebeckers expressing an intention to vote in favour of separation. The federal authorities pretend that this could no more happen than a man could have a baby (as Montreal Mayor Jean Drapeau once said of the possibility of a deficit after that city's Olympics), but clearly the possibility is well above zero, and may soon close on fifty-fifty. In short, it is past time for consideration of the potential consequences, and Patrick Monahan and the C.D. Howe Institute are to be congratulated for assisting with the frank examination of this deeply uncomfortable topic.

The scholarship is thorough and impeccable. However, the finance and politics of the major scenario are dead wrong, because they proceed from the basis of existing constitutional law and convention, rather than from that of the new world in which we shall be the day after a "Yes" vote. The Monahan scenario is that of a long, drawn-out contest between Ottawa and the Quebec government to try to set aside the separation consequence of a "Yes" vote. My contention is that the likelihood of this disaster scenario is very small, for two reasons: it would not be allowed by a ROC suffering extreme economic distress, and it would not work if tried. The far more likely scenario is a brief period of turmoil, followed by an acceptance of separation, but on terms dictated by ROC.

Normally one would not be so blunt, but we have neither the time nor the resilience for talking around the subject. The situation is very serious, it is immediate, and it is time for everyone--including politicians-- to state their case. The penalty for not so doing, in the most constructive spirit, is very great and unnecessary pain for Canadians.

If Quebec votes "Yes" in a fair and free referendum, we must all get on with our lives as quickly as possible. This will not be good news for the separatists, as we shall see, but at that time the duty of ROC, rejected by its old friends, will be to save itself.

The starting point

Our common starting point is the day after the referendum, upon the assumption that the vote has been "Yes." [This is also the starting point for Plan B: The Future of the Rest of Canada, The Fraser Institute, June 1994. However my analysis here goes into more detail on the immediate post-referendum situation, while Plan B is more concerned with the reorganization of ROC.] Further, we start with the most difficult scenario--the presumption that the majority is but a hair-thin 50 percent plus 1. What are the implications of this result?

I assume that the vote turnout has been high, around 80 percent. I assume in addition that the question will have been "fair," in the sense that people have understood what the vote is about, and it will be a clear "Yes" or "No" choice. As Kenneth McRoberts of York University argued recently,[ The Globe & Mail, January 9, 1995.] the current question is fair enough--more so than the Charlottetown Accord, for example. (The current question asks if Quebeckers agree with a draft law of the National Assembly declaring Quebec a sovereign nation. The text of the draft law will be circulated to all Quebeckers, and no doubt analyzed to a fare-thee-well--perhaps quite literally--during the referendum debate.)

If any single Quebecker is in any doubt about the implications of their vote by the time it is cast, the feds and others on the "No" side will not have done their job. But people are not stupid in such things--they will know what this is all about.

If the question itself is changed to one that is internally deceptive, the obvious response is for the federal government to hold a counter-referendum on the same day with its idea of the correct words. There are enough checks and balances here to assume we may respect the democratic credentials of the result.

So at 50 percent plus 1, we may be fairly sure of the following:

1.The roughly 80 percent of francophones voting will have said "Yes" by about 60 plus percent.

2.The roughly 20 percent anglophones and allophone [Persons historically associated with neither language, often immigrants, often bilingual, but typically biased to the anglophone view on separation.]will have voted "No" by well over 90 percent.

In addition, to put the toughest cast on the situation, let us assume that aboriginal groups in general, and within identifiable voting districts in particular, have rejected the referendum.

So there we are--clearly in a mess. Where to from here?

Common ground

At this time let me list a few of the many points on which I agree with the valuable insights of Patrick Monahan in his C.D. Howe piece. Here are some quotes:

•Speaking of the dangers of (Quebeckers) taking this matter too lightly, he notes, "By the time the true costs involved become apparent, it may be too late. Political events, once set in motion, rarely unfold according to a prepared script." (The same warning should be understood by ROC).

•"The problem is that with the process of separation initiated, reverting to the situation prior to the referendum might well prove impossible."

•On the costs of post-referendum uncertainty, he says that this period ". . . even if relatively brief would be enormously costly to all Canadians."

•On trying to use fear of secession consequences to influence the vote he says, "Once people lose their faith in their current political arrangements, that faith is not likely be restored by an argument that all the available alternatives will make them worse off."

•On a post-UDI [Unilateral Declaration of Independence.] environment, with active federal opposition to the Quebec departure (my emphasis, for reasons to be discussed), he says that this would be ". . . a constitutional, political and economic crisis the likes of which Canadians have never seen. The economic dislocation in parts of the country would be far greater than that experienced in any recession or even the Great Depression of the 1930s. The period of chaos would persist as long as the two rival regimes (Quebec and Ottawa) were contending for power in the province of Quebec. Even if the crisis were resolved relatively quickly--in favour of Canada or Quebec--the social and economic costs would be very high."

All of this is depressing ground indeed, but we agree with each other.

Disagreements

Now to some basic disagreements, which I shall list first in summary form, and then develop an alternate scenario for the "Yes" result. Then, briefly, we will canvass a way of avoiding that result, albeit one that will be resolutely stonewalled by Ottawa initially, and perhaps until it is too late.

•Monahan assumes that ROC (not Canada, which would no longer exist in its old form) would agree to remain liable for all of the federal debt. This would be illogical, unnecessary, and a foolish position for ROC to take.

•He assumes that negotiations would be undertaken within the constraints of the existing constitution--i.e the usual procedures, timetables, interprovincial agreement, unanimity, etc. In my opinion, since this would clearly be impossible in the chaotic circumstances, no one would even try. (This makes much of the Howe paper irrelevant.)

•In his examination of the extra-legal (or illegal, if you prefer) UDI route, he properly notes that this is how the United States was formed, and that all it really requires is the acquiescence of the parent state. He takes it as a given that ROC would not acquiesce. This is the central error in the entire analysis, and leads to the otherwise avoidable horror show outlined above, in addition to encouraging a "strike vote" mentality in Quebec.

•He notes, in part correctly, that ". . . Canadian opposition would dramatically reduce the chances that the Quebec UDI would succeed." This is correct if "success" means "achieved relatively painlessly." ROC would have the ability to cause immense pain. But then he goes on to say, incorrectly in my view, that this ". . . would make it much more likely that Quebec would eventually be forced to withdraw or suspend the UDI and return to the bargaining table, in order to attempt to reach agreement with Canada on the terms of separation."

This is simply not on. Of course it would only be intelligent for Quebec to always be at the bargaining table in whatever circumstances, however bellicose ROC might be from time to time. It is quite unthinkable however that a separatist government would rescind or suspend a UDI, once entered into, for any reason short of an armed rebellion or military force. And of course, once Quebeckers got a chance to change a separatist government at the next Quebec election, even assuming they wished to do so, it would be too late to unscramble the omelette.

•He emphasizes ". . . the pivotal role and responsibility of the government of Canada" in a UDI scenario. However, for reasons explained in Plan B, and even elaborated on in the C.D. Howe text itself, the government of Canada would be shorn of most of its moral authority the day after a "Yes" vote, having by definition failed in its central duty. Legalities would continue for a while but real political power would very quickly shift to the provinces, or to some kind of newly constituted "ROC Council"--see below.

Power would also shift to the provinces as a result of Ottawa's inability to borrow from foreigners, either in Canadian dollars or in external currencies. (See below. Ottawa would still be able to print Canadian dollars, but it would amount to a debasement of the currency if it did so.)

In times of trouble, foreign lenders look for security, and security after a "Yes" vote will certainly not lie in Canadian dollars, which may or may not have much value down the line, depending on many imponderables. And of course, we can't print United States dollars to cover our huge current account imbalance, and so foreign lenders whom we need badly would be nervous about the eventual ability of Ottawa to repay even existing loans, let alone new ones. This arises not because of Quebec, but because of fundamental questions as to whether ROC would hang together at this stage. [Plan B, Chapters 4, 6 and 8.]

This shift of power from Ottawa is important, and a bizarre concept for most Canadians. The financial weakness is one factor, but the political weakness at this point is equally important. ROC is relying on Ottawa to "win" the referendum. If our federal gladiators lose, you don't reward failure.

Moreover, in any ongoing negotiations with Quebec, and with respect to the future shape of ROC, Ottawa is clearly in a deep conflict of interest situation, since the new arrangements would likely cut the heart out of the power and employment in that city. In addition, of course, the chief Ottawa Ministers are from Quebec, and whatever the undoubted facts of their loyalty to Canada, the optics don't work. They would be MPs from a breakaway state.

This is worth a bit of thought. Consciously or not, most Canadians are leaving the situation to Ottawa. What if it suffers a moral and financial collapse, as is very likely after a "Yes" vote?

An alternate scenario

These differences between the approach of Monahan and myself, if elaborated in the post-referendum period, give rise to an entirely different view of the future--mine being a much more desirable one.

Now, it is quite true that if Quebec votes "yes" and the rest of us choose to be bloody-minded, we could produce almost limitless economic and political carnage. But why should we want to do this? Why would we not want instead to simply make the best of a new reality?

The reasons that we would be bloody-minded adduced by Monahan include the debt, emotion, an understandable reluctance to personal self-destruction by the current federal government, and aboriginal peoples. We will deal with each of these points.

May I deal first with emotion? This is the badge of our humanity, just as reason is the badge of our intellect and civilization. Emotion is what makes life worth living. It can also lead one into grievous error, if not discreetly channelled.

Why should we have an emotional attachment to particular lines drawn on the map of North America? There can be no doubt that we do, and there are good reasons for doing so, which have to do with our style of democracy and freedom, with our sense of collective responsibility for our mutual well-being as Canadians, with our history, our Charter, our medicare, and so on. All of these things have to do with our past, of which we are proud. Our true concern is to preserve them in the future. When all is said and done, if a different configuration of lines on the North American map--for example a new national boundary around Quebec--leaves us with all our prosperity, security, rights, and freedoms--how important is this?

Certainly it is of crucial importance to the governments that live in and from those lines on the map, and to the associated politicians and careerists. But what about the rest of us--if we lose nothing but a sentimental and legal connection to a piece of real estate, but no loss of actual rights of visitation, or any of the other fundamentals mentioned above?

In Plan B I quote a remark attributed to the historian Arnold Toynbee: "A national state is not a God. It is a public utility, like a gasworks." Toynbee was no doubt being brutal in language to make a point. Governments are more important than gasworks (though the label is often appropriate). But they are merely public utilities. Unless they are religious or ethnic states, they have no sacred character, and no worth beyond their worth to their citizens.

It is one thing to wax sentimental about the Canadian flag on Remembrance Day as many of us do, or in the schoolroom in the acquisition of history. These are useful reinforcements of appreciation for our history, and for our public utility, which has served us quite well. It is quite another thing to allow sentiment to make life worse for ourselves and our families, if new forms of the old public utility are called for, in terms of a reshaped country. Clearly one cannot often raise such fundamental questions--it is too disruptive--but the day after a "Yes" vote the questions cannot be avoided, nor should they be.

After all, if one can obtain the same services of democracy and freedom and public order from Jacques Parizeau as from Jean Chretien, and the people affected so vote, is the carrying out of their wish a tragedy? Of course not. It may turn out to be a mistake--the Parizeau brand of public utility management might be as good for example, while the (economic) power-plant may not--but that is another issue.

And it may prove to be an advantage or disadvantage to the rest of us in various ways for which we shall want compensation, but that too is another issue.

So the first principle of decision-making in turbulent, discontinuous times is unsentimental self-interest. Our governors and representatives, and even we ourselves, may cry at night over the past as much as we like, but in the real world the next day we must be rational.

The second principle to remember is this: important as this issue of Canadian continuity and land mass may be, the fundamentals of our lives are not in question, unless we make it so. Throughout ROC, while federal matters may have to be taken over by provinces, if we keep our heads there will be zero change in our peace and order, in our legal, education, and medical systems, in our property rights (or property values if we are smart, but only if), in the application of Charter principles, jobs, and trade patterns (again, if we are smart), and so on.

In other words, aside from politics we can arrange things so that even if Quebec goes, our lives don't change too much. (Politics would change dramatically, above all for whatever would be left of Ottawa.)

This continuity message can be stated absolutely for the rich provinces of Ontario, B.C. and Alberta, and conditionally for the rest of ROC. The condition is that we continue to work together to cushion the inevitable economic transitions in the have-not provinces, now underway in any case.

The third principle of the post-referendum era after an assumed "Yes" is that all of the old rules are up for re-examination, including our relationships with our creditors, with Ottawa, and with each other. Nothing can be taken for granted at a time of discontinuity, though as a practical matter and if we work with reality, very little of importance in our lives need change.

The immediate post-referendum environment

Forget the politics for a moment. We lead complex and increasingly dangerous economic lives in Canada. To wit:

•Every single day the Minister of Finance for Canada has to go to the markets to find new money of about $120 million, 365 days a year. This does not count refinancing of old debt, at which time lenders are free to demand their money back. What if lenders lose confidence? Why, the wheels fall off the federal government, that's what.

•Every single day, 365 days a year, Canada as a whole goes to the international debt markets to borrow another $70 million (Canadian) in new money to solve our foreign borrowing problem, which is required to settle our current account balance with other countries. In addition, the daily refinancing of old loans--where again, lenders can demand their money back--is about the same magnitude again. We use this money to prop up our standard of living, and to pay our foreign bills. International lenders are even colder-eyed than local lenders. What if they lose confidence? The wheels fall off our trade and our credit.

(Of course in both of the above instances, activities would continue, but at a much lower level, and much denominated in United States dollars or barter.)

•Every day, on average, the two-way trade across the Ontario-Quebec border runs at about $150 million.

•Every month the federal government collects taxes in and makes payments to Quebec--taxes of something over $2 billion per month, and payments back for a net advantage to Quebec of about $250 million per month. [See Plan B, p.104 for further details. This does not include Quebec's share of the escalating debt every year.]

Now, taking the above into account, let us imagine that foreigners are as foolish as the rest of us have been to date, and that we all arrive the day after the referendum with the assumed "Yes" vote as a big surprise. (In fact rates and prices would have been shifting long before--indeed they have been for months already.) What would happen?

It is quite clear, in general. There would be a brief, huge international and national gasp. Then events would move with blinding speed.

•Most foreign lenders would stop lending, at any interest rate, until matters were sorted out. A few would continue, at very high rates--start at 20 percent say, and work up. Many foreign lenders would demand repayment of their debt as it matured; some would declare events of default and attempt to accelerate payment.

This is extremely important, and it must be underlined. We are not talking here about the usual sums of money to feed our borrowing habit being available at a much higher interest rate, which would be painful enough. We are talking about the loans not being available at all. Why should this be? Because the first duty of any lender, and particularly the conservative institutions that control the really big international money in this world, is not to make a high rate of return--not at all. The first duty is to maintain the safety of the principal.

In no way could that be guaranteed by Canada or the Bank of Canada the day after the "Yes" vote, except to the extent that we actually are prepared pledge our (relatively small) gold stocks, or we obtain commitments from the United States or other major financial powers. We would not get much of this kind of help, prior to sorting out our own problems.

The difficulty is that no foreign lender could have any comfort whatsoever that we would have United States dollars to repay loans, because we don't have enough of them even for present purposes in normal times. We run a big current account deficit.

What about repaying them in Canadian dollars? This is not a satisfactory answer, because the lenders could not have any confidence as to what a Canadian dollar might be worth in a month, or a year, or whenever the loan might fall due. And again, why should this be?

Because the very continuity of Canada and its government would be in question at this point, including the ability of the government to successfully levy taxes across the country. Canadian dollar repayment based on tax sources would therefore not be believable, and of course with our immense deficit, it is hardly believable even now.

Canadian dollar availability to repay loans based on printing new money is of course always a possibility--and there is no possibility so calculated to drive the value of our dollar even lower, if even hinted at by the authorities. For reasons pursued later in this paper, Ottawa may try to run the printing presses anyway. The essential point at this juncture is that foreigners would have every reason to fear for the safety of their principal if they made new loans to Canada, and so they would stop. After all, they have plenty of other places in which to put money in complete safety.

•Other central banks would work with the Bank of Canada to assist with the value of the Canadian dollar. The current huge lack of success in a similar intervention with the Mexican peso gives some flavour of what could happen. Canada is much stronger than Mexico, but the threat to the integrity of the currency would be intense in the separation scenario.

The dollar would fall until either confidence was restored, or it was so low that it would just have to be a good risk. This could be very low--even below 50 cents U.S.--if the federal government were into printing money to pay its bills, for example.

•Many Quebeckers would stop paying federal taxes quite quickly. (Don't view this as a character flaw in Quebeckers. Everyone hates paying taxes, and why waste money you will clearly never see again, to a party on the other side of the table, who has no means of enforcement if you don't pay? ROC citizens would do exactly the same thing in other circumstances.) This might be staunched by an immediate and firm joint statement by Ottawa and Quebec City, undertaking to strictly enforce all existing laws both before and after separation, but it would be tough.

•No one in Ottawa, or any provincial capital would have any idea what to do, unless a contingency scheme along the lines of Plan B has been secretly developed.

Equally importantly, no one would have any authority to do anything that would much matter immediately, except for the Bank of Canada. The confusion would be almost unimaginable. There simply are no precedents.

•ROC would have no legitimate spokesman. Premiers have no mandate outside of their provinces, and as mentioned before, a Parliament and government headed by Quebeckers would have no moral authority, especially having just presided over easily the biggest failure and disaster in Canadian history.

At this point we truly begin to slide quickly towards Monahan's vision of "economic dislocation . . . greater than . . . even in the Great Depression." About this point the reminders about rationality and self-interest would start to bite.

Now what?

There are three basic scenarios from this point. One is the Monahan one, wherein a federal government somehow maintains sufficient authority and irrationality to attempt to keep the old order together in the same old way. [Many will initially balk at the idea that trying to keep the old Canada together after a "Yes" vote would be irrational. The demonstration of this thesis follows.] This would involve a long, drawn-out fight with the dreadful economic consequences predicted by Monahan, ending up at best in a sullen standoff. No one would want that. Monahan's thesis is that whether we would want it or not, traditional political dynamics would force us into exactly such a Greek tragedy. My thesis, below, is that both the financial imperatives and the new political dynamics of the time would force us into quite another (more sensible) route.

The second, best-of-all-worlds scenario would have a conditional consensus in place before the referendum on how matters would be worked out afterwards if the "Yes" side won. These arrangements would have to be known and satisfactory to our creditors. (This is yet another example of how much of our sovereignty has been de facto lost through our accumulation of debt.)

These arrangements would involve extremely painful accommodations such as cross- guarantees of federal and provincial debt, and an avowed and advertised willingness to see Quebec separate in an orderly and cooperative manner. This would not preclude hard negotiations of course, but third parties would be protected. Credit markets would still be very spooky, but we might pull it off.

In the current atmosphere, I would just as soon believe in the tooth fairy. In Plan B I recommended that the Bank of Canada work on such matters through back channels to have a plan ready. Let us keep our fingers crossed.

The third and most likely scenario would be a decision post-referendum to simply accept the wishes of the "Yes" voters to separate, and to set the unilateral conditions that ROC would impose on the new relationship. These terms will be outlined in a moment. First of all, why do I claim a near-term decision to accept the vote, against Monahan's contrary forecast that we would want to fight it?

Simply because the alternative is far worse, and the benefits are negligible. Even if ROC were to make a fight and "win," in the sense of Quebec backing off for the time being, what do we gain except more trouble? Surely no one would see this as any kind of a long-term fix. Indeed, to quote Monahan again, "Thus, the withdrawal of the UDI would in no sense be a solution to the constitutional crisis and would likely lead to further confrontations in the not too distant future." I think most people would say that this kind of "win" is not worth much sacrifice.

These matters have bedeviled our society for a very long time now. There has to come a moment when they are put behind us. As long as Quebeckers still register a majority in favour of trying to work inside Canada, we have a duty to pursue that end. The logical time to abandon that hope is if and when the Quebec majority goes the other way. For those who would rather still fight on, please read on instead, for there is more.

First, how would this acceptance come about? The Monahan objection that an Ottawa establishment would have little enthusiasm for self-sacrifice is no doubt true. As he puts it more gently, "There would be little appetite within the government of Canada for recognizing the validity of a Quebec UDI when such recognition would be the final action of a government that would cease to exist from that point on."

Now, there are a couple of caveats here. The first is that when there is absolutely no alternative sometimes even deeply-conflicted people do the right thing. Secondly, Ottawa is not entirely monolithic, and we may hear isolated demands to get this mess behind us, quickly.

But it will very quickly be seen that there is no choice, in light of the growing financial and political chaos in ROC. The strongest initial impetus will likely come from the business community, and then from the provinces. The former will be severely affected by the interest rate and dollar uncertainty, and by the credit squeeze. They will have no appetite whatsoever for a drawn-out war of attrition with Jacques Parizeau & Co. Business works on both sides of the Ottawa River, and just wants to know the rules. Business will demand fast action.

At this stage, the provinces will likely become the repository of political legitimacy in ROC, which is slight initial comfort as their record of cooperation even on easy questions is not good. On the other hand, great questions and times develop great protagonists, and the pain will be sufficient to sweep away trivial differences between provincial capitals. Here is the form chart:

•The Atlantic, and Saskatchewan/Manitoba will be desperate for a very rapid solution. The alternative would be a collapse of their economies, not just due to interest rates and the credit crunch, but through the inability of Ottawa to sustain the usual financial transfusions. They will agree to virtually any new order that preserves democracy, freedom, and a transitional economic safety net.

•Ontario, too, will want fast answers. Ontario is a powerful province, but much of its wealth and power depends on a continued trade relationship with the rest of the country, including Quebec. (Ontario runs a trade surplus of well over $20 billion annually [ Plan B, p. 57.]with the rest of the country, much of which would be in jeopardy in a breakup scenario.)

•B.C. and Alberta, too, would want fast action. However, in the case of these two provinces, if they don't get acceptable action in cooperation with the rest of the country, they can get it on their own. It is entirely within the realm of possibility that B.C. and/or Alberta would cut loose from a destructive economic and political war between Ottawa and Quebec. The mechanism would be simple: adopt the United States dollar; pay all taxes to Victoria and Edmonton; and institute free trade with the world. In the absence of any other (preferred) mutual solution, these two provinces, alone or jointly, would take this course rather quickly.

All of these pressures spring from the same source: the pain of the uncertainty induced by the "Yes" vote would be such as to cause a large majority of the voters and interests in ROC to demand a very fast means of saving ourselves. (We should never forget that even today, something like 25 percent of the voters in ROC answer "Yes" themselves to questions that ask if it would be better if Quebec just went away. This is before the referendum!)

Thus, the odds-on most likely answer to "What now?" is, "Now we proceed to cut a deal with Quebec, if we can. Moreover, we immediately specify our bottom-line fallback survival conditions in advance, and in case of non-agreement, to provide for our own certainty and security."

The survival mode

"If 'twere done, 'twere well 'twere done quickly."
                                                  --W. Shakespeare

It is not yet clear what transitional governing authority would deal with the immediate aftermath of the Quebec vote situation. After a very costly period of confusion, the most likely entity would be some kind of Interim Governing Council, cobbled together by the provinces with some Ottawa presence (for Ottawa possesses much expertise that would be useful).

In order that we not lose extremely costly and critical time if the need for a transitional governing authority arises, it is most important that the provinces should begin discussing this among themselves now. They will no doubt wish to do this in total secrecy, but they should begin.

I reiterate--Ottawa will have neither the moral nor political nor financial authority to be the manager of overall policy at this point. There is no reason why it should not carry on with running meat inspection and railway safety boards and such routine for the time being, but they will not have the ability to impose their will on any of the provinces, the big three in particular.

Power and responsibility will devolve--if anywhere--to the provinces. They will no doubt wish to cooperate with Ottawa for a number of reasons, not least to keep an eye on the Bank of Canada, but the three large provinces will be the strong entities, with no internal challenges to their legitimacy, and (not unimportantly) the ability to pay their bills as they come due. As it is absolutely obvious that a manager is needed at this time of crisis, a way will be found, or we risk sinking into the Monahan scenario of Great Depression-style economic devastation. Fortunately, whatever the exact transitional governing entity, its short-term necessary actions are fairly clear.

The first requirement is to understand that time will be of the essence. The economic costs of uncertainty will brook no delay.

The second requirement is to create the book of rules and procedures to spell out the following points:

1.Interim relationships with Quebec.

2.Interim relationships within ROC.

3.Establishing a negotiating team and goals vis à vis Quebec.

4.Establishing a procedure for the ongoing association of ROC (if any).

Interim relationships with Quebec

Since there will be no time for negotiating complex agreements in a climate of financial chaos, the initial position of ROC will have to be established unilaterally to provide for our own financial health. The main issues are debt, cash flows, trade, commercial law, and the public service.

On the division of the federal debt, the only feasible position is that ROC will henceforth pay exactly 75 percent (being its population share) of all historic debt. The balance will be the problem of Quebec. If some other arrangement is worked out in negotiation, well and good. This is the fallback. (Provinces and the private sector would of course remain fully liable for their obligations.)

Debt holders will howl, because they may lose money. (Over 30 percent of federal debt is held by foreigners. Most of the balance is held by Canadian financial institutions, including those in Quebec.) So be it. ROC did not start this, and cannot afford 100 percent of the debt with 75 percent of the population. Quebec will take up whatever it sees as being in its interest, probably most of the balance, but we cannot concern ourselves with this. ROC cannot allow itself to become a prisoner of what is morally Quebec's debt.

Moreover, the solution is equitable, and Monahan has some useful citations in this regard from international law. [Op cit., p. 22]

ROC will also need new debt, on an urgent basis, though it must very quickly trim its borrowing habit. Somebody must take 100 percent responsibility for this new money, and pending a new nation-state of "ROC" or "Canada Mark II" or something like that, if that comes to pass, only the rich provinces will be able to borrow in their own names, as only their sovereign tax authority will have a clear continuity.

On the matter of cash flows, a very urgent cutoff will have to be established--perhaps after 30 days. At that point ROC would cease all previous federal payments of any kind destined to governments or persons in Quebec, and would no longer expect to receive any taxes. The monthly "saving" as noted earlier will be about $250 million, but realistically a year's worth of that "monthly saving" will be lost in taxes not paid in the first month's grace period.

In the matter of trade, the only sensible course would be for trade to continue on a total "free trade" basis, pro tem. It would be a silly penalty on Ontario firms to do anything else. Special accommodations for such items as Quebec dairy products would of course be terminated.

In the matter of commercial law, it would be in the interests of all concerned to enforce valid cross-border contracts on a reciprocal basis.

With respect to the public service, this would be a matter of both residency and workplace. Since the Ottawa public service would have to be very rapidly downsized, all Quebec residents would get pink slips except for job offers to the occasional irreplaceable talent. [Fair treatment on public service pensions is a difficult matter. See Plan B, p. 55.]

Special measures would be required for public servants located in Quebec by reason of their federal work--the military and the RCMP in particular. (There are no military overtones in this statement. Canadians will not be using force on each other.)

Other matters such as immigration and external trade would presumably be handled on the common sense basis of the status quo pending further notice. Mobility of persons back and forth across the Ottawa River and citizenship rules could be dealt with at leisure.

Interim relationships within ROC

The important issues are governance, continuity of essential federal services, and transfer payments.

In respect of governance, all great questions relating to the future would have to be the purview of some sort of Interim Governing Council (see above). Ottawa would certainly not be able to act on its own, and would likely be a minor player.

There is no reason why the existing federal public service could not run all other matters of essential federal services on a routine basis, trimmed as cash required, for a few months.

In respect of transfer payments, this is both an important and difficult question. Lacking a guaranteed continuity, Ottawa would find it difficult to borrow. Of course since "ROC" does not actually exist, that entity could not borrow either.

On the other hand, the chances are that federal tax collections would continue within ROC more or less unimpaired, if there is a generally supported plan in place. The courts in all provinces would no doubt do their best to continue to enforce existing federal tax laws, but this would not serve the purpose unless the political will was also there, and this will require a real sense of direction in the general financial mess.

But let us assume these tax revenues (except from Quebec, of course) would continue to be available for traditional federal expenditures. It would then be the borrowed component of existing federal largesse (currently near $40 billion) that would have to be bridged.

The common sense solution to this would be a combination of percentage cutbacks across the (federal) board, and some new borrowing by the three rich provinces to feed a lower level of transfers to all nine provinces on an interim basis. This is not as onerous as it sounds, since the lion's share of such transfers returns to those provinces. On the other hand, this solution is obviously not sustainable for many months.

To guess at the magnitudes, we note that at the moment, about one dollar of four in federal expenditure is borrowed. To immediately cut the cloth to resources available, federal expenditures would therefore be cut by 25 percent, but this observation is only the start, because the funds devoted to the remaining share of the old federal debt could not be cut. When one looks at federal expenditures exclusive of interest outside of Quebec, these non-interest payments would have to be cut by a full 33 percent.

The bottom line is that everyone now relying on the federal government would see their area cut by perhaps 15 percent right away. Cuts to social programs and transfers to persons and provinces would be across-the-board for every pensioner, UI recipient, provinces-in-receipt-of-equalization, and so on. In terms of federal adminstration costs, rather than being across the board, the more likely path would be a combination of some contract cuts, some salary reductions and some layoffs.

Economists will have noted that what has really happened here is a forced, overnight, huge cut in the federal budget deficit. If it is any consolation, this is just an acceleration of what will have to happen anyway--indeed, may have happened in part, voluntarily or involuntarily, by the time of the referendum, depending upon next month's budget.

Note that there is another option to all of the above which will have to be very carefully monitored. An Ottawa disinclined to recognize reality and in need of cash could simply print money through the cooperation of the Bank of Canada, to replace the many tens of billions it would be unable to raise in conventional ways. Of course this would have the most dramatic and dangerous implications for inflation, but desperate people do desperate things. Remember, the Minister of Finance has the legal right to give instructions in writing to the Bank of Canada, whatever the Governor of the Bank may think. Remember, too, that the Directors of the Bank are all federal political appointees, which has never mattered up until now.

Ottawa could thus for a time avoid surrendering its leadership role to the solvent provinces. However, the slightest hint of this sort of behaviour will give a huge new motivation for any region or economic sector that can, to shift into the U.S. dollar orbit. (Minor personal defensive strategies of this kind have of course been underway for some time now.) This matter of the integrity of the currency will be very, very important, if we do not wish to see the destruction of the Canadian dollar as a unit of exchange. It will be important to receive totally unequivocal, verifiable undertakings on this from Ottawa if any "Yes" vote becomes any more likely than it is today. Failing this, anyone with any flexibility in cash management will know exactly what to do, and that will make a bad situation worse. When people feel they cannot trust their currency any longer, real social breakdown begins.

In other words, if allowed, inflation is one way that Ottawa could for a time hang on to irrational dreams of rolling back the Quebec "Yes" vote, and at least begin the devastation of the Monahan forecast.

Establish a negotiating team and goals vis à vis Quebec

This is really far less important at this stage, and could be handled at leisure. The procedures and goals are outlined in Plan B.

One important and emotional factor should be noted in passing, however, and that is that ROC will have its hands absolutely full with its own problems. It will have neither the resources nor the ability to deal with the grievances and appeals for help arising from within Quebec. As long as Quebec is a free and democratic society on the one hand, and allows free exit on the other, ROC should simply stand ready to accept those migrants who arrive, without any attempt to modify Quebec society or its boundaries in any respect whatsoever. [This extremely emotional issue is canvassed in detail in Chapter 5 of Plan B.]

No one should be under any other illusions. A major discontinuity will have happened in Canadian life, and all of the old bets will be off. Unhappy anglophones in West Montreal, disaffected Cree in Ungava, it is all the same. Some Quebeckers may wish to go and complain to Boutros Boutros-Ghali at the United Nations, but it would be more productive to come to an accommodation with Jacques Parizeau. He will be a very reasonable man at that point, needing all the help he can get.

Establish a procedure for the ongoing association of ROC (if any)

It is by no means certain that ways will be found to keep ROC together on terms that will be agreeable to everyone. Once again, the difficulties and potential solutions are outlined in Plan B.

The essential work of the transitional period will be to set up machinery to try to work this out. There is no reason why the premiers shouldn't try this themselves in spite of their abysmal track record; in such sobering times they might come to an acceptable deal that we could all buy in a referendum. I am inclined to believe that a Constituent Assembly would be the better and more certain way to reach a deal. For details, see my 1992 monograph, "What if the Wheels Fall Off the Constitutional Bus?" [Gordon Gibson, Canada West Foundation, Calgary, 1992.]

* * * * * * * * * *

This completes a thumbnail sketch of the "fallback" position post-referendum environment and initial response to a "Yes" vote. It is a most unpleasant scenario. Its virtue is that it is better than the alternative posited by Monahan, which would see far far worse economic damage in all parts of the country.

Many will be very unhappy with this version, and will reject it out of hand--for now.

Many of us feel so emotional about the concept of "Canada" that we will have to see the actual crumbling of the very foundations before we are willing to even contemplate abandoning that concept in the face of a "mere" 50 percent plus 1 "Yes." That is fine, except that leaves less time to think about things when very rapid action will be required.

Some of us will find it utterly impossible from the perspective of today to believe that the mighty Ottawa, Peace Tower and all, symbol of all that is solid and enduring about Canada, could not manage whatever trouble a Quebec vote might cause us. In other days, that may have been true, just as Washington D.C. could easily manage the secession of California, or B.C. the secession of Vancouver Island. It is a question of financial health.

Today Ottawa is nothing more than a pitiful (though still dangerous) giant. At the bottom of everything, its power has come from its ability to raise ever more taxes across the land, and to borrow ever more money, plus a certain moral authority that it has. The money part is over now, though most will not believe that until later this year. The moral authority will go with a "Yes" vote if it happens.

Others will take the position that we ought to fight the situation. Few would push this to the logical limit which involves the use of force, either directly, or in support of local skirmishes in Quebec, should such arise.

Everyone has one vote in such matters. My only plea would be to return to the concept of the state as a public utility, and ask what it is we would fight about that we might not secure in another, far more civilized fashion. In any event, the reality of it all will not hit most people until they see interest rates at 20 or 30 percent, credit impossible to get, a dollar at 50 cents U.S., and massive cuts in social programs. At some point the survival mentality will kick in. Sooner is better than later, of course.

National boundaries have changed on this planet through the centuries and will continue to do so into the future. There is nothing unique about this. What could be unique about Canada would be an orderly and lowest-cost transition. It would be a measure of our civilization.

The sceptics will say, and it is quite true, that there are few precedents--except for two. The USSR fell apart because the strength at the centre was gone. Moreover, the fragmentation was remarkably peaceable in the circumstances. We are far more fortunate than the USSR, in our strong democratic traditions and relatively healthy economy. But the strength at the centre of Canada has been bled away by a generation of profligacy in finance and by manipulative and unprincipled politics.

An older but closer-in-heritage example is the independence of Ireland, granted in peace when the parent country's will to resist was exhausted.

If all of this is distressing for ordinary Canadians, lenders too would be unhappy, but financiers tend to be realists these days. Sovereign debt forgiveness in some measure is no longer unusual, and the likely "haircut" if ROC has to follow the outlined route is unlikely to be more than the (say) five percent that a sovereign Quebec might attempt to get away with. New loans will be available to the creditworthy, which may or may not include Quebec, but that will not be the problem of ROC at that point.

Of course, the far better way is to avoid this whole horror show, by seeing the "No" vote weighing in at something over 50 percent plus 1. There is a perfectly simple strategy to achieve that, to which we now turn.

Some lessons

Who could be happy with the above? Surely no one in ROC, and surely this must stand as a cautionary tale for Quebeckers. In particular, this is applicable to those toying with the "strike vote" idea--that a "Yes" vote is the way to get the attention of Ottawa and ROC, in order to negotiate a better deal for Quebec within Canada.

Whether any Quebecker believes the Gibson scenario or the Monahan one has some relevance from this point of view. The 50 percent plus 1 vote brings unhappy results in either case, though far worse with the Monahan. In my analysis, it portends the end of Quebec's association with ROC because it is in the interest of ROC to simply say "O.K.--we agree, and here are our rules." By analogy the "strike vote" in that case leads to a voluntary company shutdown and division of assets.

In the Monahan scenario where the federal government is somehow able to battle over time with Quebec to try to bring it to heel, the result is much worse. The "strike vote" results in the company going into receivership. Then the fighting creditors, the arguing lawyers, and the paralysis of the business lead very rapidly to the erosion and loss first of business goodwill and customer base, very quickly followed by the fire sale of hard assets and financial meltdown.

A danger with the Monahan scenario, however, is that some Quebeckers could believe that based on the past, as long as there is negotiation, a "strike vote" for the negotiators could be a useful tool. This argument says that Quebec could somehow improve its situation in the end, especially if the alternative for ROC is great misery. That has been the lesson of the past, and for that reason, it is important to understand that this theoretical "improvement of terms of association" possibility is most unlikely in the post-referendum world if the vote is "Yes." This is because we would all be much worse off at the end of the battle, Quebec and ROC both. The only thing to "share" would be the increased misery.

A better way

Beyond that, Monahan and I agree on the better way. After some (very important) disagreements on scenarios, I open this concluding portion by again quoting with approval from his paper. The first is the absolute need for a better way--which applies, in my opinion, even if the vote is below fifty percent.

He writes, "A country cannot be held together through threats or through fear that the political alternatives are unknown. If the only thing that keeps Quebec in Canada is the fear that separation would be too costly, the result will be an increasing sense of malaise, drift, acrimony and frustration. Federalists need something to believe in if Canada is to emerge a dynamic and vigorous country at the end of this process."

In other words, we need something better than either the status quo or separation. What might this be? Quoting again, ". . . the only possible way of accommodating the demands of both Quebec and the other provinces within the existing constitutional framework must involve a decentralization of powers in favour of all of the provinces. This would involve a disentanglement of federal and provincial programs, a reduction in the role of federal-provincial transfers, and an emphasis on the European principle of `subsidiarity'--the idea that the power to act should be as decentralized as possible. The principle of subsidiarity suggests that the role of the national government should be focused on guaranteeing equality of citizenship rights across the country, preserving the common market, and redistributing wealth across individuals and regions." Amen!

Moreover, this is the way to win the referendum. I have before used the image of "Jacques Parizeau's box"--the trap where Quebeckers can only exit through the two unattractive doors of either the status quo, or separatism. Most want neither and yet, to Mr. Parizeau's delight, Ottawa inexplicably refuses to blast open another exit called "new federalism and massive decentralization."

Of course, massive decentralization won't be on the ballot. Mr. Parizeau won't put it there, and Ottawa won't hear of it. But there is no reason why other federalists of good will from across the land who suffer none of the Ottawa conflict of interest should not now carry this message to Quebec--we want decentralization too!

There must be an iron will to carry through, if we deliver this message. Quebec believes it has been betrayed thrice before (in 1982, in Meech, and in Charlottetown), and whatever ROC may think of that we must not now give any new promises that we do not mean to keep. Our challenge is to define the exact new federalism we want, in credible detail, and to do it before the referendum vote. The beauty of decentralization at this point in our history is that it will give us a better country, whether we have to do it, or not. We should do it for ourselves in ROC, even if Quebec did not exist.

Of course, there is another option. We can roll the dice. We might even win, this time around, and the dice game will continue for another round, like Parizeau's famous and interminable "visit to the dentist." But someday, on this status quo gamble, we'll be looking at the losing snake eyes.

What is the Future Worth?

Owen Lippert

Have Canadians decided that a debt-free future is a luxury they cannot afford? Has our society decided to spend it all now and let coming generations fend for themselves?

In the language of economists, have Canadians discounted the future seeing, instead, greater utility in current consumption?

One might easily conclude "yes." Canadians would rather have a big house with a big mortgage rather than a smaller house with no mortgage.

For twenty years, economists at The Fraser Institute have been warning governments about the perils of deficit spending and mounting debt. A central theme is that we are leaving a mountain of debt for our children and grandchildren. Next time you see a sign saying "your tax dollars at work," remember it should read "your children's tax dollars at work."

The cold numbers say the message has gone unheeded. Federal spending and revenues, even accounting for inflation and the increase in population, are about 50 percent higher today than twenty years ago. Net federal debt has increased 1700 percent from $28 billion in 1974 to $508 billion in 1994.

Why have all of the warnings by economists failed to make a difference? Why have governments sought short-term gain despite the long-term pain of servicing a debt load now well above the OECD average?

Economists have often concluded that governments lacked the information to make an informed choice. Decision-makers, some thought, simply did not know about New Zealand and other countries which have been driven to desperate measures to curb their debt. MPs and MLAs just could not figure out the three-colour charts showing the exponential growth of compound interest.

The cynic might say that politicians were just seeking to "buy" political favour. The less charitable would say they were weak in the face of demands by "special interests."

After twenty years, one has to admit the possibility that high-spending politicians were not venal, but instead economic rationalists.

Politicians accurately calculated that a majority of Canadians placed a higher utility on high consumption and high debt than on saving for the future. For them, the greater political utility lay in giving the people what they wanted now. After all, the livelihood of an elected official depends on fulfilling the voters' requests.

The converse proposition is that politicians did not mislead or bamboozle the Canadian people. They got what they wanted. A substantial majority really did want to consume everything they could and as fast as they could.

There are reasons why Canadians might not worry about the debt left to future generations.

Consider some basic demographic data. First, the fertility rate of Canadians has dropped since the 1960s though it has started to climb a small bit in the last four years. The birth rate is now below replacement levels. In the last twenty years the percentage of the population under nineteen years of age has dropped by a full quarter from 36 percent to 27 percent.

If you do not have kids, you are a lot less likely to worry that children will have to pay for their parents' spending. Consider this comparison. After the Second World War, Canada had a high birth rate at the same time it paid down its large war debts. One reason why was that a substantial number of Canadians knew their children would face those debts if not reduced.

Today, it may be Canadians have instead decided a big house with a big mortgage is better rather than a small house with no mortgage. And why not? For a growing number of Canadians no one they know is going to live in the house after they die.

A low-debt future may not only be a luxury but also one that if saved for, will be enjoyed by strangers.

Another view argues that once the train of high spending got rolling, Canadians gave up on holding the brake. A religious analogy comes to mind. If you know you are going to hell, why give up drinking when you are 65 years old?

What is wrong with this view?

The answer is simple enough. If Canadians thought they could avoid the bills, they miscalculated.

The future has arrived a lot sooner than anyone imagined. C.S. Lewis wrote "The future is something which everyone reaches at the rate of sixty minutes an hour, whatever he does, whoever he is."

The Fraser Institute's recent survey of senior pension fund managers indicates that a majority believe Canada will face a fiscal crisis--if the present course remains unchanged--by 1997. Their warning is just one of many.

The generation from 1974 to 1994 that enjoyed an unprecedented growth in government spending may be the one that suffers an equally unprecedented decline. Hard times might hit just when these people hoped to retire in ease.

The lesson we might all learn--soon and hard--is this. You cannot discount the future because no one can predict when it will arrive.

Health Care Waiting is Costly

Michael Walker

Every year the Fraser Institute conducts a survey of hospital waiting lists in Canada. We do this to focus attention on the extent to which rationing is being used as a way of dealing with the rising demand for health care in a time when provincial budgets are being squeezed from every side. While the annual measurements consistently show significant amounts of waiting for a variety of treatments, the measurements have been regarded with a degree of scepticism in some quarters, particularly on the part of those who regard Canada's health care system as the best in the world. For these people, the suggestion of the existence of rationing or of extensive waiting lists for surgeries or diagnostic assessment imply a criticism about the health care system, and they are simply unwilling to entertain any such criticism.

More sophisticated devotees of Canada's health care arrangements point out that of course there will have to be waiting times because we simply cannot afford to provide health care to everybody exactly when they need it and a certain amount of waiting is inevitable. Some even go so far as to suggest that having waiting lists is more efficient since it ensures that the hospital system is used up to full capacity and that therefore, as a country, we are getting the most for our health care dollars.

It is true that in any health care system there will be a certain amount of triage and a certain efficient amount of waiting. The question is, how much of each is tolerable, acceptable, and consistent with preserving the health care status of Canadians. In battlefield conditions it is necessary to sort out (triage) those for whom nothing can be done and those for whom immediate treatment is not necessary in order to provide treatment to those who both will benefit from and require immediate treatment. Similarly, an emergency room staff presented with the victims from a multiple car pile-up involving a bus or some other catastrophe, will have to triage in order to make the supply of medical resources stretch to do the maximum amount of good.

Beyond these emergency situations where there is no possibility for increasing the amount of health care resources available, it is doubtful that the triage model is the appropriate one for economic and social thinking about health care. This is because if there is a demonstrated excess demand for health care, just like in any other area of the economy, there should be a mechanism for increasing the supply of resources. Where there is an increase in the demand for automobiles, bubblegum, movies, plays, the services

of architects, lawyers, tax accountants, interior decorators, automobile mechanics, etc., there is a corresponding and eventual increase in the supply. If there is an increased demand for medical services then, unless it is prevented from doing so, the supply of these services also will increase so as to eliminate the excess demand and the waiting lists which are a manifestation of it.

Note that there are only waiting lists for activities and/or services which are produced in the public sector--like health care and education--where the supply response is artificially determined. Persistent waiting lists for health care or for anything else are potentially a manifestation of the malfunction of public sector resource allocation and ought to be carefully considered for that reason.


It is possible that the amount of waiting is simply a matter of achieving efficiency in the allocation of resources. Rather than having a hospital surgical unit underutilized because somebody has had to cancel an elective surgery at the last moment, the hospital ensures 100 percent utilization by always having somebody waiting to fill a vacancy which occurs for this or other reasons. This kind of queuing is no stranger to the private sector either in the sense that capital facilities ranging from automobile paint shops to foundries producing custom mouldings to the local carpentry shop all like to have a backlog of orders to ensure that their workforce and their machinery are constantly in use. In the private sector generally, competition between suppliers ensures that customers are not kept waiting unduly by this consideration and in general the amount of waiting is reduced to the absolute minimum that is possible given the capital costs required to construct a facility to satisfy the demand for the goods or services.

So the question about hospital waiting lists that must be asked from this point of view is whether customers are getting the best service that is possible consistent with an economically efficient organization of health care. Of course, to some extent this is simply a matter of opinion and for elective surgeries a matter to some extent of people's different attitudes about comfort and pain. But there is also a question of whether or not the waiting endured by patients is detrimental to their health and on this count there is an increasing amount of evidence to suggest that the extent of queuing in Canada, the extent to which we are rationing health care, is indeed negatively affecting the health care status of Canadians.

Two pieces of evidence are considered here. The first comes from The Fraser Institute's waiting list survey and relates the amount of time patients are waiting to the amount of time specialists in Canada feel is clinically reasonable for them to have to wait. Chart 1 shows the average waiting times for a variety of different kinds of surgery in Canada relative to the average time that clinicians feel is reasonable. As is evident in almost every case, the actual waiting time exceeds the clinically reasonable waiting.

Of particular interest in the chart is the difference between the amount of time actually waited and the clinically reasonable time for access to radiation oncology. That is, the use of radiation to stop the growth of cancers. Evidently the non-availability of these treatments have a direct bearing on the health status of Canadians and it is evident that we have a significant problem in this regard.

The second piece of evidence relates to this waiting for radiation oncology but has been constructed by Dr. William Mackillop who is Director of Radiation Oncology at the Kingston Regional Cancer Centre in Kingston, Ontario. As Dr. Mackillop found in examining waiting times in Canada for very specific types of cancer, the time actually waited for radiation therapy exceeded in every case the medically acceptable waiting time for treatment. However, Dr. Mackillop did not stop there. He did the same study for the United States that he had done for Canada and he found a number of very interesting things. [Dr. William Mackillop et al., "Waiting for Radiotherapy in Ontario," Queen's University, Kingston, Ontario.]As shown in Chart 2, for example, he found that the amount of time that is medically acceptable to wait for radiotherapy in Canada is considerably longer than the waiting time that is considered acceptable in the United States. Whether this is a matter of medical science or of expectations in Canada changing to match the available supply of medicine is an interesting question. But even more interesting is Chart 3, which shows the difference between the actual wait experienced in Canada versus the United States for the various treatments. As can be seen, actual waits experienced in Canada are three times longer than those experienced in the United States except in the case of spinal cord compression where in both cases radiation therapy is received within one day in both countries.

It is important in interpreting this information to know that in both Canada and the United States the cancer centres which were surveyed to produce these estimates are government financed and equal access to them is available without payment in both countries, so this is not a manifestation of rationing by price in the United States and rationing by waiting in Canada. The simple fact is that we are not providing as good access to radiation therapy in Canada as the U.S. health care system provides to its health care consumers.

In view of the fact that the waiting times experienced in Canada are uniformly longer than the clinically desired wait, it can be assumed that this waiting is having an impact on the health of Canadians.

February Questions and Answers

Isabella Horry

Q: What percentage of employed persons are employed in small, medium and large enterprises? How does this distribution compare internationally?

A: In 1991, 27.2 percent of employed persons were employed by very small establishments (1 to 19 persons); 22.3 percent were employed by small enterprises (20 to 99 persons); 15.9 percent by medium firms (100 to 400 persons); and 34.6 percent were employed by large enterprises (having 500 or more persons). The percentage of persons employed in very small and small enterprises rose from 44.0 percent in 1988 to 49.5 percent in 1991. Both medium and large enterprises' share of employment fell between 1988 and 1991.

The February graph and Table 1 present an international comparison of the distribution of employment by size of the enterprise. Small and very small enterprises comprise between 44 and 62 percent of employment in this sample of countries. Australia, Denmark, France, the United Kingdom and the United States also experienced increases in the proportion of persons employed in both very small and small enterprises between 1988 and the early 1990s. Employment in medium-sized enterprises consists of 13 to 20 percent of employment; and employment in large enterprises comprises between 21 and 42 percent.



Wilson Report Recommends Equal Pay for Less Work

Karen Selick [A version of this article has also appeared in The Women's Quarterly.]

The legal community in Canada has been in turmoil for several years over gender issues. At least three provincial law societies have published reports alleging that women lawyers face barriers in their careers due to sex discrimination. The controversy reached a boil in August 1993 when the Canadian Bar Association (CBA) published its Report on Gender Equality in the Legal Profession. The report is commonly known as the Bertha Wilson Report, after the chairman of the task force that produced it, (referred to oh-so-correctly in the preface as its "Chair") Bertha Wilson, a former Supreme Court of Canada justice.

One full year later, at the annual CBA convention in August 1994, the task force met with resistance in implementing its recommendations. Some compromise resolutions were passed, but the most controversial portions of the report were tabled, to be fought over another day. Bertha Wilson and her cohorts declared themselves not to be discouraged. Clearly, the battle will resume.

The controversy centres on two recommendations, buried about a third of the way through the 228 recommendations in the report. The first calls for law firms to "set realistic targets of billable hours for women with child rearing responsibilities." The second says that "the reduced target of billable hours should not delay or affect eligibility for partnership nor affect normal compensation" (emphasis added). Both of these recommendations are to be considered a legal duty.

Surrounding these recommendations is a velvet-gloved commentary acknowledging that many different factors would have to be considered in determining a reasonable level of accommodation for each individual woman. However, the iron fist peeps out when the task force cites two reports prepared by other organizations (one a lawyers' group in Boston and one an engineering group of unspecified origin), each of which purportedly recommended that a reduction of 20 percent in working hours would be reasonable, and "should not affect levels of benefits."

Many years ago, feminists campaigned under the slogan "equal pay for equal work." Having achieved that goal, they turned their crusade in the 1970s and 1980s into a quest for the nebulous "equal pay for work of equal value." Now, it appears, the final step in the progression is being taken, and it is outrageous: women lawyers are now demanding equal pay for 20 percent less work.

It is revealing to note that this desire to let lawyers "have a life" (in the words of one proponent of the recommendations) arises only in the context of child-rearing. No slack will have to be given to a childless lawyer who wishes to curtail her office hours and spend the extra time pursuing a hobby of ballroom dancing, marathon running, or novel writing.

Why the difference? The underlying premise seems to be that women who decide to raise children are somehow doing it, not for their own satisfaction, but for the benefit of the world at large. When I have written articles on this subject in the past, letters to the editor have poured in arguing that mothers deserve subsidization or other special treatment because they are raising the children who will someday be our doctors, nurses, secretaries, bakers, tailors and even undertakers.

However, when the time comes for us to employ the services of today's children, they are not going to work for free. We are going to have to pay them for their labour. Built into the price of their services will be an element which will constitute a return of the capital they and their parents have invested in making them into marketable workers. Their future customers should not be obliged to pay for this once (speculatively) in advance, and again (inescapably) at the time of purchase.


After all, some of these children we are being asked to subsidize won't turn out to be good little worker bees. Some of them will turn out to be incorrigible criminals or drunken bums. Until we know which will be which, we cannot say that encouraging women to add children to the population is necessarily a good thing.

Most people recognize that there are benefits to be gained from living in society, rather than on a desert island or as a hermit; we obtain economies of scale and specialization of labour, as well as the emotional rewards of interacting with other human beings. But each of us who participates in society pays for those benefits in kind. Certainly, the existence of a future generation of doctors and bakers will be an advantage to me; but my existence will be a reciprocal advantage to them. They'll need customers. They'll need advice. They'll need examples.

And if there is something especially beneficial to society about the existence of young children--perhaps because of their innocence, or the cute things they say--then each of us has already paid for this benefit in kind, by having once been cute, innocent young children ourselves.

There is something horrifying in the notion that women who bear children are doing it for the sake of society. It makes me think of Winston Smith, protagonist of Orwell's book Nineteen Eighty-four, whose wife referred to the couple's awkward attempts at procreation as "our duty to the party."

The implications of this attitude are far-reaching. If I disapprove of how my future doctor and baker are being raised, do I have the right to intervene to protect my investment? If I think my neighbour is doing a bad job raising her first-born, do I have a right to prevent her from giving birth to a second child? If she is supposedly doing it for me, isn't it logical that I should have a veto?

We can escape these nightmarish consequences only by recognizing that women who choose to raise children do so, not for society's sake, but for their own--and one hopes, their husbands'--sakes. As with every other option in life, they will have to weigh the costs and benefits of their decision.

It may turn out, when we all cash in our chips, that the lawyers who didn't docket 1,700 billable hours a year, who spent evenings and weekends at home rather than at the office, and who treated law as a job rather than an all-consuming obsession, will have had much happier lives than those who did the opposite. We'll never know; it's impossible to compare degrees of happiness between different people. We can almost guarantee, however, that they won't have earned as much money, or gained as much renown.

If the emotional rewards of motherhood will not be sufficient compensation for the loss of income and prestige, women should not choose it. Above all, however, they should not choose the benefits of motherhood, and then demand that their legal colleagues--many of whom have themselves decided to forego those benefits--compensate them for their losses.

Bertha Wilson has argued that if law firms aren't persuaded by what she terms "idealism," they should as least consider adopting her recommendations out of self-interest. They won't get the best new recruits if they refuse to accommodate the increasing percentage of young graduates who are female. Their emphasis on long hours may be creating tired, stressed-out employees who are less productive in all of their working hours than they would be if they were taking more time off for personal pursuits.

These arguments may be true; only the trial-and-error process of the marketplace will tell us for sure. One thing we can count on, however, is that if there is a way for law firms to improve productivity and profits, competitive forces will make them seek it voluntarily. There is no need for the CBA or the legislature to make this a legal duty.

One thing the legal profession could do to maximize satisfaction among all its members is to work for liberalized laws that would allow lawyers to sort themselves out into firms that best match up with their own wishes. Ideally, employees should not be forced into a mold that does not suit them, nor should law firms be required to implement policies that benefit some lawyers at the expense of others.

The problem is, we are all hamstrung in this sorting process by the bugaboo of sexual discrimination charges. Employers can't question prospective employees during their initial interviews about their intentions to take maternity leave or to work reduced hours so that they can spend more time with their children. Such questions would violate the human rights laws.


The result is the confounding of two different groups of women, with destructive results for everyone. Women who place their families first will sometimes be hired by firms with contrary expectations. Women who place their careers first will sometimes be passed over by like-minded recruiters, who have no information to rely on except the published statistics that tell them this candidate, being female, is more likely than a man to take time off, work shorter hours, or leave the profession altogether.

The solution is to encourage the exploration of these issues during job interviews, not to forbid it. Needless to say, the Bertha Wilson report proposes exactly the opposite. The effect of banning this kind of inquiry is to shift the cost of some women's preference for motherhood onto other women who don't intend to become mothers. The latter will not have an opportunity to make this attractive attribute known to prospective employers, and will be viewed with the same caution as their less career-oriented sisters.

The Bertha Wilson task force set itself up as the champion of women lawyers, but the truth is that the increasing polarization of the Canadian legal community is not along male-female lines--it is along ideological ones. Wilson and her supporters advocate a collectivization, a socialization of the legal profession. Jobs and incomes would be redistributed from those who are willing to satisfy the demands of the market to those who aren't. Good-bye capitalism. Good-bye individual responsibility. Good-bye freedom of contract. Hello socialism. Hello victim-worshipping. Hello authoritarianism.

Individuals of both sexes should recognize the split as one between opposing ideological camps, and should refuse to be drawn into a battle against the opposite sex.

Courchene's Social Canada in the Millennium

Chris Sarlo

Tom Courchene, one of Canada's leading economists and, perhaps, its most respected advisor on economic and social policy, has critically examined Canada's social programs and policies in a new book entitled Social Canada in the Millennium. Readers of this Forum will find what he has to say most interesting.

Courchene argues that most of the programs in what he refers to as the "social envelope" were developed and designed in the 1950s and 1960s (somewhat earlier for UI). This was a period of rapid economic growth fuelled by resource rents and a strong manufacturing base. Government revenues were increasing rapidly and program costs were relatively low. The world we now inhabit is much different than it was then. The economy of the 1990s is in the process of transition to knowledge based service industries which face global competition.

In an analysis reminiscent of Milton Friedman, Courchene maintains that some of our social policies actually exacerbate the very problems they were designed to alleviate. For example, equalization payments (a formula-based system which transfers money from Canada's relatively better off provinces to the relatively worse off provinces) have, in his view, kept the Maritimes at a disadvantage and entrenched regional disparities. These payments have served to hamper the natural adjustment process (via wage changes and labour mobility) and have provided no incentive for the poorer regions to help themselves. In Courchene's own words:

it matters not a whit in terms of their [the Atlantic provinces] access to per capita revenues whether or not their policies serve to increase or decrease their economic base since the equalization program will tax away in a confiscatory way any and all revenue increase and will fully compensate any revenue loss. (p. 32)

His evaluation of welfare and UI is much the same. In the case welfare, Courchene notes that recipients with dependent children are "trapped" by high market income equivalencies (the amount they would have to earn to be as well off as they are on welfare) and by confiscatory effective tax rates (currently 80% in Ontario). The design of the programs and built in disincentives to work make it very difficult for people, especially single parents, to achieve independence.

Similarly, Courchene sees UI as a scheme with perverse incentives which encourage abuse by individuals and provinces. Short qualification periods and confiscatory tax rates on extra earnings (above the modest exclusion cut-off) promote repeat


use, cheating and participation in the underground economy. Since UI is a federal transfer program, provinces can "off-load" the costs of certain policies onto the federal government, something Courchene refers to as "intergovernmental gaming." Provincial "make-work" projects are a prime example of this. His quote of Frank McKenna, Premier of New Brunswick, is particularly relevant here: "I inherited a province in 1987 where we had 128 fish plants, every one of them geared to 10 weeks work, because that's all they needed" (p. 35). Courchene minces no words on the need for change. "The mandate for reforming UI is clear, since it is almost universally recognized as a disaster area" (p. 63).

Among Courchene's other policy observations are: rising payroll taxes have contributed to the unemployment problem;


there are strong vested interests who oppose social policy reform; employment equity is one of the most inequitable programs ever conceived; and our method of financing post-secondary education is "regressive," that is, it subsidizes those who are already better off than average taxpayers.

Courchene's chief point, it seems to me, is that good intentions are not sufficient. Well-meaning policies can do (and are doing) great harm to individuals and regions. He quotes McKenna again: "the truth is that the generosity of Canada has in many ways been the principal impediment to our growth. In Atlantic Canada, we've been the victim of your generosity" (p. 35).

Social Canada in the Millennium not only applies a skilled economist's analytical scalpel to expose the pathologies of our major social programs, it also provides, at least in broad outline, remedies for reform. Beginning with a set of basic principles outlining essential features of good policies (bottom up, flexibility, accountability, fiscal coincidence i.e., beneficiaries should be in the same jurisdiction as taxpayers, visibility, strong incentives for self reliance, etc.), Courchene sketches, in blueprint form, new policies for the new Canada. He would, for example, scrap welfare and replace it with a refundable tax credit for low income children as well as a federally-run program aimed at preparing adults for employment (training-fare). His intent is to ensure that people are always better off if they work. He would also scrap the existing equalization scheme in favour of a kind of negative income tax for provinces. This program would continue to embody the principle of "sharing the wealth," but would incorporate strong incentives for economic improvement. In the area of post-secondary education, Courchene recommends portable vouchers for students (the taxpayers' contribution to their education), significantly higher tuition fees, and an income contingent repayment scheme that is fairer and more efficient.

While these policy recommendations take us quite some distance from the status quo, it would be a mistake to consider Courchene a radical. His mission statement: "The role of Social Canada is to provide full opportunity for all Canadians to develop and enhance their skills and human capital so that they can become full citizens in the emerging Canadian and global society" puts him, I think, squarely in the main stream of Canadian populist politics. Nevertheless, his book will appeal to fiscal conservatives. The

emphasis on the deficit/debt problem, which he refers to as a "fiscal crisis"; the willingness to let the market work to a greater extent; the interest in imbedding positive incentives into programs; and the reduction in the discretionary powers of the federal government are consistent with that tradition. Libertarians, on the other hand, will not be greatly encouraged by Courchene's suggested reforms due to the reliance on and acceptance of continuing significant state involvement in Canada's social programs.

Murray Rothbard, Economist                                                    and Free Market Advocate, Dies at 68

Walter Block

Murray Newton Roth-bard died on Saturday, the 7th of January, 1995. It was the end of an era.

An only child, he left his beloved wife Joey, a sister-in-law, two nephews, and a few distant relatives. But what he lacked, numerically, in terms of blood relations is perhaps offset by the hundreds, no, the thousands of people who saw themselves as part of his family: his intellectual and moral children.

He was a giant in the intellectual fight for free enterprise. His notion of the free market economy was a radical one, which lead him to criticize such people as Milton Friedman, George Stigler, James Buchanan, Ronald Coase, and Friedrich A. Hayek--erstwhile champions of the market--for their many compromises, as he saw it, with socialism. For example, he disputed Friedman's negative income tax and school voucher plan, dismissing the former as welfare and the latter as a government intrusion into what should be a full free market in education. Unlike the reformist Stigler, he called for the total elimination of anti-trust law.

His contributions to economics alone are remarkable. As Dean of the Austrian School of Economics--a school more uncompromising in its defense of the free market that its more well-known rival, the Chicago School--Rothbard is best known for his books Man, Economy and State, Power and Market, and America's Great Depression. Ranging over almost every category of the dismal science--from utility theory to business cycles, from monopoly to public goods, from economic history to the history of economic thought, from monetary to trade, from banking to methodology and much more--Rothbard made a significant mark in each.

But this was only the tip of the iceberg. In addition to his chosen field of study, he was active in practically every realm of humane study known. As a revisionist historian, he revised our thinking on such disparate subjects as the American Revolution, U.S. war policy and the progressive era. In the latter field he showed that regulatory agencies were set up not to protect the consumer from rapacious businessmen, but rather to protect these self same rapacious businessmen from competition. As a sociologist, he expanded our knowledge of cults, particularly the one established by Ayn Rand. As a political scientist, he made original contributions to the theory of libertarianism, anarchism and free speech. As a philosopher, he addressed himself to freedom and natural rights. His most notable books in this field include Power and Market, For a New Liberty, and The Ethics of Liberty. As a theoretician of law, he challenged preconceptions on punishment, property rights and environmentalism.

In none of these fields did he shrink from controversy; rather, he took on the leading exponents of the advocates of regulation, imperialism, statism, liberalism, etc. In addition to his writing, he also served as editor of The Journal of Libertarian Studies and The Review of Austrian Economics, directly mentoring a whole generation of scholars involved in these issues.

Nor does his gigantic scholarly output even exhaust his contribution. In addition to writing dozens of books and hundreds of journal articles, he also appeared voluminously in the more popular literature. Nor can we ignore the institutions he was instrumental in helping set up: the Center for Libertarian Studies, the annual series of Libertarian Scholars Conferences and the Mises Institute.

Had he accomplished what he did in any one of these fields of endeavour, his reputation as a scholar of note would have been secure. The fact that he did so in such a myriad of intellectual occupations is nothing short of truly astounding.

In any just world, he would have long ago been awarded the Nobel Prize in Economics, and similar accolades in every other scholarly field he addressed. He would have taught at a prestigious graduate school. His writings would have graced all of the leading academic journals.

In the present one, however, this was not to be. He languished for years teaching engineers at Brooklyn Polytechnic Institute, and only for the last decade at the University of Nevada at Las Vegas. For Rothbard was the odd man out throughout every aspect of his multitudinous career. In an economic profession increasingly devoted to mathematics and scientism, he harked back to an older logical argumentation and literary tradition. He was out of step with the socialism, the interventionism, the finding of "market failure" at every hand so beloved of his fellow economists. He similarly marched to a different drummer amongst "court" historians who justified militarism, amongst philosophers busily aggrandizing egalitarianism, amongst sociologists doing only God knows what, amongst political scientists weaving apologia for the centralization of power, and amongst lawyers given to legal positivism.

In the eyes of critical commentators, he harboured inconsistent viewpoints. Free market in economics, anti war in foreign policy, and profoundly freedom oriented in personal liberties, he saw these positions all as part of a seamless web of liberty.

I first heard of Murray Rothbard in 1965 when I was studying for my Ph.D. in economics at Columbia University. At that time a newly minted libertarian, I had never even heard of Austrianism (which speaks volumes of graduate education at that time). He was described, variously, as an anarchist, as a person who accepted the veracity of the synthetic a priori (an argument claiming that we can have absolutely true knowledge of the real world), and as an opponent of the U.S. in the war in Vietnam. Naturally, I wanted nothing to do with such a maniac, and refused an offer to meet with him.

Happily, several months later, I was argued out of this position, and consented to beard the lion in his den. Boy, was I surprised. I had expected some lean, mean muscle man, say, about 6'2" and 180 lbs., toting a machine gun in one hand and a bomb in the other. Instead, I met this little fat man who kept up a rapid fire of positively wicked jokes; the danger, I soon perceived, was not of going to jail or being blown up, but rather of dying from stomach cramps brought on by uncontrollable laughter. William F. Buckley, Jr. once called him "the joyous libertarian" and no truer words were ever uttered. Instead of the armoury I expected, his apartment was chock full of floor-to-ceiling bookcases, and there were books piled up seemingly everywhere else.

In other ways, however, Murray seemed to be just the sort of person my parents had always warned me about. He kept odd hours, and soon had me staying up to 5:00 a.m., playing, of all things, Risk, and cackling on about how only anarchists could really enjoy the game, since they were the only ones who really didn't want to take over the whole world. As well, there was Joey's magnificent cooking. Under the tutelage of the Rothbards I soon began to put on some weight. When I worried about this, Murray told me that "every calorie says `yea' to life." What could I say? Then, there were the political alliances. In the early days, they were with left wingers, who opposed the war. I'll never forget the time that we in Murray's little band united with Progressive Labour vis à vis the Trotskyists under the Peace and Freedom banner. Under the terms of the agreement, we had to vote for rent control and they had to vote for the gold standard. There were a lot of puzzled Stalinists around that day, as well as a few libertarians. In the more recent epoch, with the passing of the Soviet menace, and with the U.S. taking an increasing multicultural, feminist and egalitarian turn, his alliances were with paleo conservatives, such as those involved with Chronicles magazine.

After knowing Murray for a short time in the mid 1960s, I had changed my mind on quite a few things. How did it happen? I would spend an afternoon reading something of Murray's, for example, Man Economy and State; suddenly, I realized that I would see the great man that very night. A sort of cognitive dissonance would seize me. Was I, insignificant worm that I was, really going to see the great man that night? It seemed impossible. Somehow, I had to make myself worthy of such a great honour. The only way I could do this was by vociferously attacking him on every point of disagreement. In the early days, there were quite a few. How could he have a picture of this guy von Mises on his door? Didn't he realize that Mises favoured government subsidies for operas? How could we be sure that demand curves always sloped downward? What about Giffen goods? How could he say that monopolies didn't misallocate resources? I could show him lots of geometrical diagrams that proved the very opposite. Everyone knew that the great depression was caused by the fed allowing the stock of money to fall in the '30s, not by increasing it in the '20s. How could he take the opposite view?

I fear, intense young lad that I was at that time, that I was a bit of a trial for him. Somehow, he put up with me. It was only many years later that I realized he only wanted to be friends. He would like me even if I didn't pester him incessantly on every jot and tittle of learning I could think of. But how could you be friends with someone you admired so much?

Full of hubris, I once called Murray, wanting to compare productivity levels, one writer with another. Forget about quality; I knew there was no contest there. I just wanted to see how my best day so far (23 double spaced typewritten pages) stacked up against his average output. His exact response to my query as to his typical daily productivity-- I remember this as if it had occurred yesterday--was: "Mrech, mrech! Who keeps count? Leave me alone." But I kept after him, and he knew he was dealing with a world class nudge, so finally he relented and told me: "Eight pages per hour." I knew from others that he rarely edited his own material; straight from his typewriter to the published version. At last I had an explanation for his monumental output (other than the hypothesis that there were actually a platoon of Murrays running around): hard work, for many hours, for many years, all at breathtaking speed.

Murray N. Rothbard lived life to the fullest, and way, way beyond. He had friends and admirers throughout the world. He was not only my intellectual father; this applies, in my opinion, to pretty much everyone else now toiling in the vineyards of the freedom philosophy, whether they know it or not; whether they acknowledge it or not.

He spoke out, his entire life, against coercion in all of its forms. He made not only the economic, but even more importantly, the moral case for laissez faire capitalism. He bore witness to the truth, using the most eloquent writing style ever known to the economics profession. True, the world never paid him his due, neither in prestige nor coin. But for all that he led a happy life. What else can we conclude from his many years of effervescent bubblyness?

His passing is a tremendous blow to the fight for freedom and free enterprise. In the movie The Godfather, when this worthy was shot it was said that his Mafia Family lost 50% of its power, despite having hundreds of armed men under its control, and hundreds of millions of dollars in its coffers.

Something similar applies in this case. Thanks in no small part to his efforts, there are now, literally, thousands of libertarian scholars, and hundreds of Austrian economists. Yet, with his passing, we have in my opinion lost a large part of our ability to move the world in a better direction.

All the more reason, then, for all of us dedicating ourselves, anew, to this purpose. Murray is now up there somewhere, looking down on us and cheering us on, while at the same time delighting himself with the human condition. We can't let him down.

Canadian Pension Fund Managers                                               Call for Spending Cuts to Reduce Deficit

Ted Dixon

Recently The Fraser Institute released results from the first-ever survey of Canada's top executive investment managers. Fifty portfolio managers responded to the survey. These respondents are senior partners and officers from Canada's largest pension fund management firms and corporate pension divisions with responsibility for more than C$200 billion in pension fund assets. The mail survey was sent to 105 investment management firms and institutional investment divisions. It was conducted between November 16 and December 14, 1994. The survey sought to obtain the views of Canada's largest institutional investors on key public policy issues and on the outlook for the Canadian economy.

Canada's fiscal situation

The deficit

When asked to identify the most important issue currently facing the federal government, 86 percent of respondents said "deficit reduction." No fewer than 96 percent of respondents agreed or strongly agreed that the size of the current deficit is not sustainable.

A similar majority (82%) said that the federal government should reduce the deficit through cuts in government spending. Ten percent said deficit reduction should be achieved through both spending cuts and higher taxes. No respondent suggested that the government should allow the deficit to grow.

The Minster of Finance, Paul Martin, has set a target to reduce the federal deficit to 3 percent of Gross Domestic Product (GDP) by the spring of 1997. Pension fund managers in the survey are not optimistic that the Finance Minister will reach his goal; 64 percent said it was somewhat unlikely (20%) unlikely (24%) or very unlikely (20%). Thirty percent said he is somewhat likely to meet his target and only 6 percent agreed that he was likely or very likely to succeed.

In addition, 48 percent of respondents believe the current deficit target is inadequate and that the federal government should seek to achieve either a balanced budget or budget surplus. Thirty-four percent believe the target should be between 3 percent and 0 percent of GDP. Sixteen percent indicated that the target should be eased to a range of 3 percent and 6 percent of GDP.

Financial crisis

A majority of investment managers surveyed believe that Canada is at least somewhat likely to face a financial crisis before the spring of 1997, through either a sharp divergence between U.S. and Canadian interest rates, or the failure of a federal treasury bill or bond auction. Sixty-four percent of respondents indicated a sharp divergence between U.S. and Canadian interest rates was somewhat likely (36%) likely (18%) or very likely (10%) while 56 percent said Canada was somewhat likely (36%) likely (12%) or very likely (8%) to see the failure of a treasury auction. In both cases, 2 percent did not know.

However, 68 percent of respondents stated that the possibility of a government-induced rise in inflation in order to solve the debt problem is somewhat unlikely (14%), unlikely (40%), or very unlikely (14%). Thirty percent indicated that there is either a somewhat likely (24%) or likely (6%) chance that the government would resort to an increase in inflation as a way of dealing with the debt problem. Two percent did not know.

Bank of Canada

Confidence in the Bank of Canada may explain, in part, why respondents express confidence that Canada will not resort to debt monetization. Ninety-eight percent rate the performance of the Bank of Canada as good (55%) very good (39%) or excellent (4%). Only one respondent gave the Bank a poor rating (2%).

Canada's political situation

The Minster of Finance and the federal government

Sixty percent of respondents rate Paul Martin's performance as Minster of Finance as good (47%) very good (11%) or excellent (2%). Thirty-six percent rated his performance as poor, 4 percent as very poor or worse. Our respondents generally believe that the Liberal government will be re-elected with a majority government. Fifty-eight percent expect the Liberals to win a majority government in the next election, while 8 percent do not. Thirty-five percent did not know.

Quebec

Among respondents, when asked to rate the chances of Quebec separating within the next 5 years, 84 percent said it is somewhat unlikely (26%) unlikely (32%) or very unlikely (26%) to happen. Only ten percent said it is somewhat likely and 5 percent said it is likely or very likely. The majority of survey responses were received before the Quebec government announced its sovereignty question on December 6, 1994.

The Canadian economy

Investment managers who participated in the survey generally view the Canadian economy positively, particularly the corporate sector. The consensus forecast among the respondents is for the Canadian economy to grow by 3.7% (high 6%, low 2%) and for corporate profits to grow at a healthy rate of 18% (high 38%, low 0%) in 1995. Inflation is expected to edge up to 2.5% (high 3.5%, low 1.5%).

Canada's top money managers appear to have more confidence in the private sector of the economy and the Bank of Canada than they do in the federal government. According to the results of the survey, the Government of Canada's fiscal problems are being mitigated by a healthy outlook for the economy and the Bank of Canada's reputation for taking a hard line against inflation.

Pension Fund Managers Forecast Solid                                  Growth for Canadian Stocks in 1995, But Most                         Want to Increase Foreign Holdings Above the                          20 Percent Ceiling Imposed by Ottawa

Ted Dixon

The results of a Fraser Institute Survey of 50 senior Canadian pension fund managers show that most of Canada's top portfolio strategists have an optimistic view of Canadian equity markets for the new year. However, the survey also found that federal government capital controls on retirement assets are needlessly restricting international investment opportunities for Canadians.

Canadian financial market outlook for 1995

The Fraser Insitute mailed surveys to 105 investment management firms and insitutional investment divisions between November 16 and December 14, 1994. The survey found that on average, Canadian pension fund managers expect the Toronto Stock Exchange 300 Composite Index to be at 4472 by year end 1995. The highest forecast among respondents was for the composite index to rise to 5100 while the lowest forecast expected the index to drop to the 2750 level. Respondents also expect the Canadian dollar to close out 1995 at $.7390 in U.S. dollar terms, although individual predictions ranged from a high of $.8200 to a low of $.6500. Canadian Government three month T-Bills are expected to yield 6.88 percent, while thirty year Canadian Government treasury bonds are forecast to yield 9.38 percent.

Countries Offering Best Investment Opportunities

Fund managers were asked which countries in order of preference offer the best investment opportunities over the next five years for Canadians.

Canadian pension fund managers surveyed have picked Canada as the country offering the best stock market returns, followed closely by the United States and then Japan. Germany ranked fourth and it was the only European country to make the top five equity list. The Asian equity markets of Hong Kong, Malaysia and Singapore tied for fifth spot. Respondents were more inclined to favour U.S. bonds over Canadian bonds. European bonds from Germany, France, and the United Kingdom ranked third, fourth, and fifth respectively.

Impact of capital controls on Canadian pension funds

Due to federal controls on Canadian pension funds and registered retirement savings plans (RRSPs), Canadians may find it difficult to take full advantage of investment opportunities outside of the country. Government of Canada regulations restrict the maximum foreign content of Canadian pension plans and RRSPs to 20 percent of total assets. The foreign property limit was originally put in place to lower the cost of raising funds for Canadian governments and corporations.

Survey participants were asked what proportion of their investment portfolio they would hold in foreign securities or properties if there were no foreign asset restrictions. Eighty-eight percent of money managers in the survey said they would increase the foreign holdings in their portfolios above the 20 percent ceiling if they had the opportunity. Most (56 percent) would hold between 25 and 35 percent in foreign content.

The 20 percent rule is serving as an effective capital control on the retirement savings of Canadians by limiting the choices of where and how Canadians can invest their money. However, the survey results indicate that there would be little need to worry about a flight of capital outside of the country if the 20 percent rule were eliminated. The over-whelming majority of respondents (82 percent) would invest no more than 35 percent abroad if the foreign investment restriction did not exist. Given the chance to invest freely anywhere in the world, Canadian pension fund mangers surveyed would still keep most of their money in Canada.

Wall Street Journal Sounds Warning

Michael Walker

The following article by John Fund of the Wall Street Journal editorial staff touched off a great wave of concern in Canada and elsewhere about Canada's economic and fiscal situation. Some commentators have suggested that the article was exaggerated. The Prime Minister has suggested that the WSJ and others who have made critical comments about Canada were like armchair quarterbacks and didn't know anything about running a country.

The article was the result of the participation by John Fund in the Fraser Institute conference, "Hitting the Wall--Is Canada Bankrupt?" held in Toronto on November 30 and December 1, 1994. At this conference Mr. Fund was exposed to the most thorough-going examination of this topic ever undertaken. It is not surprising that he came away from the conference with a deep foreboding about Canada's problems. It is unfortunate that the Prime Minister has not availed himself of some of the same information.

John Fund's article is reprinted here so readers of Fraser Forum will know what all the fuss has been about and because it gives me the opportunity to remind those who missed the conference that you can watch it on the CPAC channel. Check the TV listings in your area.

What follows is the complete Wall Street Journal editorial.

"Mexico isn't the only U.S. neighbour flirting with the financial abyss. Turn around and check out Canada, which has now become an honourary member of the Third World in the unmanageability of its debt problem. If dramatic action isn't taken in next month's federal budget, it's not inconceivable that Canada could hit the debt wall and, like Britain in the 1970s or New Zealand in the 1980s, have to call in the International Monetary Fund to stabilize