One Law For Canadian and American Companies Poses No Threat to the Environment

Our Environment is Still Safe

by Owen Lippert

Owen Lippert is Director of the Law and Markets project at The Fraser Institute. He received his Ph.D. in History from the University of Notre Dame, Indiana.

It’s hard to defend free trade and not bore people silly. Basic economic arguments for free trade have not changed much since the nineteenth century. Let’s face it, Jerry Springer and Oprah Winfrey have yet to book guests for their “human face of comparative advantage” episodes. It’s easier for free trade opponents. Like magpies, they can roam freely picking up shiny bits of argument. Recently, they found a new bauble.

On September 17, the Council of Canadians, Sierra Club, the Canadian Labour Congress (CLC) and Greenpeace asked the environment ministers of Canada, the US, and Mexico to investigate whether the investor protection rules in Chapter 11 of the North American Free Trade Agreement (NAFTA) pose health and environmental risks. The three ministers constitute the North American Commission for Environmental Cooperation (NACEC) which is supported by a secretariat based in Montreal. The Council of Canadians et al base their claim on a conspiratorial interpretation of the two investment protection cases to date. Both involve American companies alleging they were discriminated against by the Canadian government. (In the Ethyl Corporation case, Ottawa settled and paid out a rumoured $13 million in compensation. The S.D. Myers case is still pending.) NACEC may consider the environmental lobbyists’ request, but for surprising reasons.

It all sounds complicated, but strip away the side issues and two questions remain. One: should international treaties restrain governments from discriminating against foreign investors in favour of domestic investors? Two: if so, what dispute resolution and enforcement mechanisms should be employed? It’s important to keep these two questions separate. Part of the Council’s attack is that flaws in NAFTA’s investor-state dispute resolution process discredit the principle of non-discrimination.

Governments should not discriminate against foreign investors in favour of domestic ones. They should follow a policy of “national treatment” in which all companies face the same rules. The reason to do so is the same as why countries should remove tariffs on trade. Both slow the efficient exchange of goods, services, and capital. They make markets inefficient. Inefficient markets force consumers to pay higher prices for poorer quality goods. Inefficient markets, over time, also depress the earnings of workers and entrepreneurs by shielding them from the pressure to specialize in their most productive activities.

Put another way, the rules of international investment influence international trade. One can either import a good or invest in a local plant to manufacture it. A regulation that forces new plants to be located in cabinet ministers’ ridings has the same effect as a steep tariff. As Canadians now invest almost as much in the US as Americans do here, strong foreign investment rules also protect our savings.

I find it hard to believe that the CLC would support less protection for the portion of its members’ pension fund invested abroad.

When an investor alleges that a government has discriminated as defined by Chapter 11, the dispute resolution process begins, culminating in a three-person arbitration panel’s binding decision. The process is a fair and neutral one.

The Council of Canadians, however, protest that the arbitration panel hearings are not open to the media and public. In this, they’re right. Our Trade Minister, Sergio Marchi, defends the secrecy as necessary to preserve commercial confidentiality. But the US trade representative, Charlene Barshefsky, who represents American companies, has requested open-panel hearings. What Marchi probably wants hidden is the evidence that some Canadian laws and actions do discriminate. The irony here is that the Council of Canadians want more discriminatory laws.

The Council and its allies hope to use the panel’s secrecy to turn public opinion against non-discriminatory treatment of investors. To highlight the secrecy issue, they’ve requested the NACEC to hold a public inquiry into the environmental implications of Chapter 11’s investment protection. Their question can be restated this way: “What happens to the environment when a country has only one set of laws for both foreign and domestic companies?” It’s inventive, but ridiculous. Environmental laws should protect the environment, not domestic companies.

I doubt the NACEC ministers will order an investigation of Chapter 11 as countries are already re-negotiating investment protections in the Free Trade Area of the Americas and the Multilateral Agreement on Investment talks. The request may, however, provide the US with more ammunition to pressure Ottawa into opening up the arbitration panel hearings on our protectionist policies in dairy and poultry products. That exposure just might give free trade an unintended boost. Have you compared the price of milk and butter in Buffalo and in Toronto lately?

Let the sun shine in. Free trade may be boring, but it looks good in the light of day. u

What Has Happened to Canadian Living Standards?

by Chris Sarlo

Chris Sarlo teaches economics at Nipissing University in North Bay, ON. He is the author of Poverty in Canada, published by The Fraser Institute.

Are we better off than we used to be? More to the point, do Canadians now have a higher living standard than they did a generation or two ago? In strictly material terms, has the “well-being” of the average Canadian family or the average Canadian individual improved over time? And what has happened to the middle class? Is it growing or shrinking? And what about the poor? Are the poor getting poorer?

These questions have long fascinated Canadians. As a result, much has been written about Canadian living standards in the popular media, although often with little supporting evidence. Conjectures and myths are passed along as fact from commentator to commentator. The urgent need to bring evidence to bear on these interesting and important questions has prompted me to produce a recently-published report on Canadian living standards (published by The Fraser Institute, 1998). Three major points in the report need to be highlighted:

1. People are much better off now

As this century draws to a close, the overwhelming story of Canadian living standards is that of extraordinary success. Real living standards have increased more than ten-fold in the past 100 years. In the roughly 50 years since the end of World War II, economic growth has continued, and real family incomes and real family consumption have grown about two-and-a-half times during that period. Furthermore, families are much smaller than they were 50 years ago.

Simply put, the average person now is far better off in material terms than his grandparents were in their day. For example, in 1951, there were 3.4 million households in Canada, of which 74 percent had indoor running water, 64 percent had exclusive use of a flush toilet, and 57 percent had exclusive use of a bath or shower. By 1996, Canada had 11.4 million households in which 99.8 percent contained full bathroom facilities. As well, in 1996, 99 percent of households had at least one colour television, 74 percent had cable television service, 84 percent had a video cassette recorder, 53 percent had compact disc players, and 32 percent had home computers. None of these facilities were even available in the early post-war period.

Besides the impressive growth in material living standards, Canadians are now much better educated (only about 12 percent had more than a high school education in 1961 compared with almost 50 percent in 1991), and are living longer (longevity has increased a full 10 years between 1961 and 1991).

The fly in the ointment has been a dramatic slowdown in economic improvement since the 1970s. Economists debate the reasons for the relative stagnation. In my view three considerations dominate: first, the huge increase in the role of the state and the concomitant rise in tax rates in the 1970s have had a detrimental impact on investment and labour market incentives. Second, more rapid structural change in the economy has resulted in higher adjustment costs and worker displacement. Third, the data we use to measure progress in living standards are likely to be less reliable now than before for a variety of reasons detailed in my 1998 report.

2. Poverty has declined dramatically

There is perhaps no better indicator of a rising living standard than the poverty rate. As living standards improve due to economic growth, more and more households will move above the poverty threshold. If we think of poverty as the deprivation of basic necessities, then there has been a sharp decline in the rate of poverty over the years. I have estimated that about one in three Canadians were poor in 1951. Strong economic growth helped reduce that rate to about 5 percent (one in twenty) by the late 1970s, where it has roughly stayed for the past two decades. We can say with confidence that many fewer Canadians (and especially Canadian children) are hungry and ill-housed than was the case in the 1950s.

3. The rich are getting richer, and so are the poor!

Incomes are distributed unequally. This is not surprising. Different workers are at different stages in their careers and it has always been the case that older, more experienced workers earn more than younger workers. As well, different skills command different market rewards. What is interesting, however, is that throughout the great era of economic growth in the post-war period, inequality of total household incomes has not increased. While market earnings are more unequally distributed now, this is largely due to the fact that a smaller portion of adults are working at full time jobs than in earlier decades.

More importantly, consumption spending by people in the lowest income quintile has grown at least as fast as that by people in the highest income quintile. And in terms of the ownership of key appliances and facilities (which contribute so much to a household’s living standard), the growth in ownership by people in the bottom quintile has been much faster than that in any other quintile. The old saw that “the poor are getting poorer” is complete nonsense, at least for Canada. Far more Canadians than ever before are enjoying a middle class living standard. And many fewer Canadians than ever are deprived of basic necessities.

[To order a copy of the complete Critical Issues Bulletin, Canadian Living Standards: 1998 Report by Chris Sarlo, contact Chris Howey at (604) 688-0221, ext. 345. The bulletin costs $16.00, which includes shipping, handling, and GST.] u

SOCIETY’S welfare

Canadian Banks:
Financial Intermediaries or Agents of Redistribution?

by Patrick Basham and Jason Clemens

Patrick Basham is The Fraser Institute’s Director of the Social Affairs Centre. He is completing his Ph.D. in Political Science from Cambridge University.

Jason Clemens is a policy analyst at The Fraser Institute. He has a Masters Degree in Business Administration from the University of Windsor

In 1962, the Nobel prize-winning economist Milton Friedman wrote that if the government wants to redistribute income, the most efficient manner in which to do it (i.e., the one which distorts economic incentives and outcomes the least) is through direct cash transfers. Unfortunately, Friedman’s profound statement regarding redistribution remains neither fully understood nor appreciated.

Three-and-a-half decades later, special interest groups, unions, and other supporters of government intervention in the marketplace still attempt to persuade public opinion that altering the role of private institutions is necessary to achieve redistribution.

The fact that these myriad organizations would have great difficulty persuading the public of the need for an increase in direct subsidization financed by higher taxes is only a partial explanation for their continued insistence on socializing what should be private institutional behaviour.

The other reason is, simply, that they don’t believe in the separation of government from the private sector. That is, they believe a socialist system—one in which the arm of government is stretched into almost every avenue of economic activity—is the appropriate and efficient economic model to follow.

The latest assault has been perpetrated by the National Council of Welfare against the banks. In a recent report, the Council called for the federal government to place a moratorium on bank branch closures and to require that information on gender and income be published for approved loans.

The report further called for the banks themselves to reduce basic service charges on accounts, extend operating hours and teller service during government cheque cashing periods, and to reduce the level of security for opening an account.

In reality, however, banks should pursue commercial, rather than social, objectives. The role of banks (or any financial intermediary) is to facilitate the exchange of financial resources between savers to borrowers.

It’s not the banks’ role to subsidize the financial transactions of a certain segment of the population or to ensure that any particular group has access to financial resources beyond their income and wealth. To demand that the financial industry, or any sector of the economy, pursue social rather than economic objectives is to require the industry to be less efficient that it would be otherwise.

... banks should pursue commercial, rather than social, objectives. The role of banks (or any financial intermediary) is to facilitate the exchange of financial resources from savers to borrowers.

For example, increasing the number of tellers or the hours of service in order to provide in-branch banking for a specific group of customers from whom the banks don’t gain a material amount of income would lead to higher costs, lower revenue, and thus less funds available for shareholders in the form of dividends and funds for re-investment.

This redistribution—that is, either shareholders are penalized by lower dividends or employees are negatively affected by lower salaries, or the firm has less to reinvest in itself, or other customers have to pay higher fees—is for the sole purpose of artificially subsidizing other groups.

A more fundamental problem with the National Council of Welfare’s recommendations relates to the integrity of the financial system. Unfortunately, reducing the level of identification and limiting the verification process for opening an account would increase the opportunity for some customers to illegitimately use the bank’s services to launder money.

Currently, the identification and verification process is an integral part of the account opening process and one which must be maintained, not sabotaged, in order to ensure the future integrity of the financial system.

Many of the problems that the Council cites in its report originate not with the banks but, rather, with the manner in which the government pursues economic redistribution as well as with the Council’s own misunderstanding of the role of financial institutions.

So, what is to be done? First let the banks do banking. Period.

Second, organizations preoccupied with issues of “social justice” should lobby public and private institutions to develop innovative and entrepreneurial rather than anachronistic redistributive solutions to serving those who require assistance. u

FINANCIAL services

Institute Trustee
Passes Away

The Institute noted with sadness the passing of one of its long-time trustees, Mr. Donald McGill. Mr. McGill was a member of the Executive Advisory Board for more than a decade and latterly was an emeritus member. A graduate of the University of Western Ontario, Don served in both the Canadian Navy and the Royal Navy during World War II. His industrial career included nearly 40 years in senior executive positions with Labatt Breweries and postings throughout Canada. In addition to his involvement with The Fraser Institute, he was President of the Vancouver Board of Trade. Don McGill will be missed by everyone who knew him, and his wise council will be particularly missed by the trustees and staff of the Institute.

INSTITUTE NEWS

—Sherry Stein, Director of Development

The past month at The Fraser Institute has been busy with numerous media appearances, interviews, and editorials, all coordinated by the Institute’s new Director of Communications, Suzanne Walters. Patrick Basham, Director of the Social Affairs Centre and Dr. Bill McArthur, Visiting Fellow in Health Policy, participated in television tapings of World Affairs on the topics of the urban drug problem and health reform respectively. The programs will be aired on CBC Newsworld.

The Institute’s recent report on bank mergers, “Bank Mergers: The Rational Consolidation of Banking in Canada” created a lot of interest. Fazil Mihlar and Jason Clemens, two of the report’s authors, were quoted often in the media. Mr. Mihlar appeared on CBC Newsworld’s Counterspin and Mr. Clemens was interviewed by Brian Stewart on CBC’s National.

Ottawa Citizen journalist Charles Gordon recently spent two days at the Institute Head Office in Vancouver gathering information for a major article on the Institute, which subsequently appeared in the October 25th issue.

“Vehicle Emissions Testing,” by Paul Coninx, the Institute’s assessment of British Columbia’s AirCare program, launched with a major article in the Globe and Mail, then was covered extensively by the Ontario and BC media.

The Fraser Institute’s new Director of Health Policy Research, Martin Zelder, acted as the substitute radio talk-show host for Cynthia Ramsay during September on Fraser Forum on Air, AM radio 1040 in Vancouver. Dr. Zelder’s first guest, Simon Fraser University Professor Gary Mauser, talked about the impact of the federal government’s gun control legislation, Bill C-68. His remarks elicited numerous call-in responses.

Dr. Michael Walker, Executive Director of The Fraser Institute, continues to address groups from coast to coast. He attended the golden anniversary meeting of the Mont Pèlerin Society in Washington, D.C.; talked about the global economy to the International Convention of Consulting Engineers in Edmonton; talked about Asian flu to the B.C. Association of Financial Planners; took part in a panel discussion on economic freedom at Queens University in Kingston; spoke on economic freedom to both the Partners in Planning Conference in Canmore, Alberta, and to the Northwest Territories Prospects North conference in Yellowknife; gave a speech on Canadian unity at the Young Presidents Organization conference in Vancouver. As well, Dr. Walker met with major business leaders in Montreal at a private luncheon and dinner.

The 1998/99 Student Seminars on Public Policy began in October with events in Kelowna, Prince George and Vancouver. We are grateful to the many individuals who sponsor our student programs and would like to acknowledge two in particular: The Lotte and John Hecht Memorial Foundation, which covers the costs of four seminars in British Columbia and The W. Garfield Weston Foundation, which sponsors the Toronto seminar.

Last spring the Institute’s release of the first annual B.C. Schools Report Card generated widespread media coverage both regionally and nationally, and provoked interest and discussion among parents and educators throughout the province. The updated study will be released next spring at a significant cost to the Institute. As well, an Alberta Schools Report Card will be produced in 1999. Your support would be greatly appreciated at whatever level you deem appropriate. For additional information please call Sherry Stein, Director of Development, at (604) 688-0221, ext. 306.

In just a few months the Institute will begin to celebrate its 25^th Anniversary. A number of unique events are planned for 1999 which will feature well-known international speakers. Corporate sponsors will be offered the opportunity to support the Institute’s work while simultaneously benefiting from widespread national exposure. For further information, please call Sherry Stein at (604) 688-0221 ext. 306. u

Report Card Focuses on Lack of Innovation

Quebec Government
Policies Assessed

by Michel Boucher

Michel Boucher is Professor of Economics at the École Nationale d’Administration Publique in Sainte-Foy, Quebec.

The Fraser Institute has released an extensive review of the economic and social policies of the Quebec government. The central finding of this French-language report card, Evaluation de la Performance du Gouvernement du Parti Québécois, 1994-1998, is that the government of Quebec has attempted the fiscal restraint of provinces such as Ontario and Alberta. In this role it has been remarkably successful. Not only has it kept tax increases in check, but it has also managed to cut spending in 3 of its 4 years in power.

However, a deeper analysis reveals that the Quebec government’s fiscal reforms are without sound administrative foundations. The government has cut services to its citizens even when those services provide more benefit than cost.

By continuing to both inhibit competition and overregulate, the government has not fundamentally addressed the problems of Quebec’s business climate.

Lack of innovation shows up in health care in the form of resistance to both contracting out and the introduction of market-type incentive mechanisms. Health policy has focused on forcing post-operative people out of hospitals as quickly as possible. Further savings were not reinvested in health as the government promised, but used for deficit reduction. Rather than applying proven cost-saving methods that could have reduced health costs by as much as 30 percent while maintaining services, the government has forced citizens to accept lower levels of service in order to fight the deficit. “Creativity in administration is at a low ebb,” says Boucher.

Lack of an innovative spirit is also evident in education. Rather than decentralizing and giving parents greater choice in how their children are educated, the government has expanded into kindergarten, and is forcing private daycare centres out of business. In addition, the government has not raised university tuition fees, or done anything to sensitize university students to the true costs of an education. As a result, university education continues to be supported by a subsidy from the poor to the rich.

Labour policy persists in creating unemployment. The government has raised the minimum wage (proven to lead to reduced employment), done nothing to lessen the strength of the unions, imposed a needless job-training tax on business, and pursued pay equity schemes that have further eliminated jobs. To make up for the jobs it has destroyed, the government has launched job creation subsidies and job training programs, as well as undertaken an ambitious program of loan guarantees to small business known as the “Plan Paillé.” A survey of such programs gives evidence that they are of dubious value at best. However, the author points out, Quebec does not seem any more misguided than other provinces in this domain.

The government seems to be a victim of the well-established provincial tradition of propping up unprofitable industries, a practice that stifles competition. The government’s failure to consider a major reform of Hydro Québec is troubling, but some minor privatizations are a sign of hope.

On the other hand, the province has interfered with market forces by attempting to regulate book and gasoline prices, suppress smoking, and restrict trade in agricultural commodities (in direct violation of international and interprovincial trade treaties).

The government’s failure to significantly ease regulatory burdens gives the province a reputation for hostility to competition it can ill afford, especially should it choose to separate and expose itself to the buffeting of international markets without the protection of Ottawa’s transfer payments.

Quebec’s policy on municipalities also strikes a blow against efficiency and competition. Instead of following the growing North American trend toward decentralization, the Quebec government has ignored demands by municipalities for greater financial indepen- dence and has continued to micro-manage their affairs.

The Quebec government has proved as resistant to change in politics as it is in economics. Instead of allowing its citizens the right of initiative (rights that governments in Ontario, BC, and Man- itoba are nurturing) the government has jealously guarded its monopoly on setting questions on independence, and has tried to quell citizens’ abilities to express themselves freely during elections.

The overall grade this report gives to the Quebec government is D+. As Professor Boucher explains, “in spite of the harsh assessments made in some sections of the report card we have to acknowledge that the Parti Québécois has faced some formidable obstacles on the road to reform. It inherited a large debt, one of the most hostile tax and regulatory environments to business in North America, and faced a militant unionized sector. The tab for poor management of the province is picked up in part by other Canadian provinces through equalization payments. This has blunted any incentives ordinary Quebeckers have to send the government the message that reforms must be undertaken.”

The D+ grade signifies that the government is walking a fine line. It has paid attention to fiscal reforms and has resisted some union demands, and for this it must be lauded. The government would have obtained a higher grade had it shown at least some willingness to innovate in order to provide its citizens with better quality service. There are vague glimmerings of such a spirit, but no substantial government actions enable us to conclude that the government is on the right track.

[To order a copy of the complete French-laguage only Critical Issues Bulletin, évaluation de la performance du gouvernement du Parti québécois 1994-1998, by Michel Boucher, contact Chris Howey at (604) 688-0221, ext. 345. The bulletin costs $16.00, which includes shipping, handling, and GST.] u

NEW release

Is There a
Global Economic Crisis?

by Michael Walker

Michael Walker is Executive Director of The Fraser Institute. He received his Ph.D. in Economics from the University of Western Ontario. He has written, edited, or co-authored numerous Fraser Institute publications.

President Bill Clinton commanded the rapt attention of world leaders by sending out the call for solidarity in facing what he called the “global economic crisis.” Whatever the facts are, one can understand why he might want to focus attention on something other than his domestic situation! Finance Minister Paul Martin was quick to add his voice to that of Mr. Clinton in calling for controls on the international movement of capital as part of the solution to this problem.

What are the facts? Are we indeed in a global economic meltdown? Is coordinated economic management of this problem by the world’s leading powers a good idea?

First, we must realize that the problems which beset most of the troubled economies of the world are not “global” in nature. Japan’s problems are different than Indonesia’s. The situation in Hong Kong bears little similarity to the issues which South Korea must resolve. Russia’s difficulties are very different than Brazil’s.

Each of these countries faces unique domestic circumstances that have to be dealt with domestically. Japan has to deal with the problems in its banking sector, which, gradually, it has been doing. The reforms Japan needs are more closely linked to that nation’s deeply-rooted cultural attitudes and its expression of the traditional relationship between the government and industry than they are to broader economic policy. Until these fundamental issues have been dealt with, Japan will continue to languish.

Indonesia, which has practised a particularly nasty form of cronyism (which some mislabel crony capitalism), has many domestic reforms to address. The most important of these is to provide its citizens with a measure of economic and political freedom. Unless and until these reforms are accomplished, all the international hand-wringing and exhortations of the IMF will be useless. Indonesia’s problems are domestic and self-inflicted, not essentially foreign or global.

And who really believes that Russia’s problems will be solved by international actions? Isn’t it likely that foreign intervention and the aid packages already provided to that hapless, struggling country have only served to postpone the sorts of changes that are desperately required? A Duma riddled with old-line apparatchiks longing for the good old days of Communist dictatorship must be forced by internal circumstances to change its attitudes. There is probably no easy way to get that job done, but it is highly unlikely that international intervention will do any good.

Similar sorts of comments could be made about Brazil, Mexico, South Africa, and other economic trouble spots. In most cases, their problems are not even economic in origin, let alone part of some global economic crisis. They are individual problems which must have locally-devised solutions. In many cases, the IMF can help these reform packages succeed by giving them credibility in international financial circles, as they did in the case of Argentina and the reform package of Finance Minister Domingo Cavallo. But that is where the IMF’s role should end.

What about the related issue of the collapsing stock markets? Surely that is an international crisis that warrants the capital controls so attractive to Paul Martin?

There has been a world-wide reduction in asset prices which will generate economic consequences. Feeling less wealthy, consumers around the world will reduce their consumption, undoubtedly leading to less economic growth than otherwise might have been the case. Some countries will feel this slowdown more acutely than others. Some of the countries mentioned above, which have major structural reforms to accomplish, will find it more difficult to do so in the face of the economic downturn. Others, such as South Korea and Japan, may find that resistance to change is less pronounced because of a sense of distress.

Whatever the case, the situation is unlikely to be improved by the cure which Mr. Martin proposes. It is easy to sympathize with Mr. Martin’s case. If one could do something about the “destabilizing” capital flows and only permit “good” capital flows, then the economic circumstances of the world would undoubtedly be improved. The problem is knowing which flows are which. Clearly, anything which would harm the “good” capital flows would make the situation worse—particularly for those countries which are most in need of capital. The risks of losing the good capital (which would be the case if capital controls were implemented), are greater than any good that might come from preventing the “bad” flows.

From a Canadian perspective, having our Finance Minister out on the world stage talking about capital controls might do us harm even if there are no international takers for his ideas. After all, Mr. Martin has the power to actually impose capital controls in Canada, and if he thinks they are such a good idea, he might be tempted to try them here. Since even talking about capital controls will cause some capital movements to stop dead in their tracks, perhaps what Mr. Martin ought to consider controlling is this great idea of his. u

Articles You’ll Find in Future Issues of
FRASER Forum

• Results from the 1998 Fraser Institute Survey of Mining Companies Operating in North America
• Should Taxpayers be on the Hook for Small Business Loans?
• Who Tends to Win the Nobel Prize in Economic Sciences?
• How Well has Property Rights Management Worked for the BC Halibut Fishery?
  

These and many more public policy commentaries and economic assessments, featuring original research from Canada’s pre-eminent market think tank, are available to readers of FRASER Forum.

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