A smarter way for Canada to do aid

In today’s Globe & Mail, MLI’s Brian Lee Crowley lays out how Canada can best direct foreign aid, by improving remittances and removing trade barriers.

A smarter way for Canada to do aid

BRIAN LEE CROWLEY, Special to The Globe and Mail

Published Thursday, May. 02 2013

The recent federal budget’s elimination of the Canadian International Development Agency, whose activities will be subsumed under the Foreign Affairs department, has attracted relatively little notice. That’s unsurprising, given how little the average person cares about what seem to be abstract bureaucratic machinations.

But if done right, this move could prove a courageous opening salvo in an effort to get more value for the world’s poorest, as well as for Canadians, out of our development spending and broader foreign policy.

Canada does aid poorly. For example, administrative costs as a share of the aid dispensed are among the highest in the Organization for Economic Co-operation and Development. Focusing our aid efforts on fewer developing countries helps, but is not enough.
Foreign aid generally has fallen into disrepute for reasons I observed first-hand working for the UN in Africa, such as corruption and clock-watching, self-serving bureaucrats. The developing consensus is that the best antidote to global poverty is economic growth rather than aid dependency.

Aid efforts are unlikely to disappear completely, but many knowledgeable observers have pointed to two areas beyond aid where Ottawa can take concrete steps to make a lot of vulnerable people in developing countries better off, while also improving Canada’s economy.

These two magic bullets are remittances and trade.

Lack of interest in the value of remittances in reducing developing world poverty has always astounded me, but it is positively inexplicable when set against the development power they represent. According to trade expert Danielle Goldfarb, writing several years ago in a report for the Canadian Defence and Foreign Affairs Institute, money sent by migrants back to their origin countries was at least three times the value of global foreign aid, grew at a much faster rate than aid flows, and reduced both the incidence and severity of poverty in developing countries.

We know a lot more about our official foreign aid program than we do about remittances from people in Canada to their home countries, but research shows that remittances have a big impact. Take India, one of the largest source-countries for immigrants to Canada. India is the world’s biggest remittance recipient. Total remittances from overseas Indians, worth more than 3 per cent of Indian gross domestic product, exceed total Indian government spending on health and education, and their influence is particularly noticeable in regions that have had the greatest outflow of emigrants.

What explains this phenomenal remittance growth? According to Muzaffar Chishti of the Washington-based Migration Policy Institute, it is partly that the flows are more transparent as remitters make more use of official channels (terrorism-related concerns have put informal transfer networks under unfavourable scrutiny) and as greater competition emerges in the official money-transfer market.

There has also been an important shift in emigration patterns to high-skilled technology jobs (Indian software engineers and IT management experts, for example). This underlines the importance of emigration to the source country: The higher the earning power of the emigrant, the greater the impact back home. The human capital of India has not being “looted” by Canada or the United States; it has allowed Indian investments in education and skills to earn a far higher return for India than it might have if those emigrants had stayed home.

The second way to help the world’s poor is to get rid of trade barriers. According to Ms. Goldfarb, eliminating all trade barriers in rich countries would result in income gains to developing countries double that of global foreign aid. Canadian consumers, in turn, would benefit from lower prices.

On the trade front, however, Canadians remain prisoners of protectionist special interests. Clothing is made more expensive for Canadians through tariffs and quotas on the imports of textiles and apparel from many developing countries, depriving those places of desperately needed jobs and income.

Canada also sacrifices prestige and bargaining influence at the international trade table by continuing to protect agricultural marketing boards, a policy that costs the average Canadian family hundred of dollars annually in higher food prices.
Fiddling with the bureaucracy that administers our formal aid program is fine, but if Canada really wants to help developing countries, we know what to do: Welcome more immigrants, make it easier for them to transfer their remittances home, and lower our trade barriers.

Brian Lee Crowley (twitter.com/brianleecrowley) is managing director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa.

The Canadian Century in InsiderOnline

InsiderOnline has a post about The Canadian Century that once again shows that the book’s analysis is attracting wide assent among those knowledgeable about conditions in both Canada and the US:

Thanks in part to the U.S. government’s recent spending binges, a group of Canadian authors say that Canada now has the better business environment. “If the United States continues on its current course,” write Brian Lee Crowley, Jason Clemens, and Niels Veldhuis, “Canada will find itself without peer as a magnet for investment, immigrants, innovation, and growth.” They make this prediction in their new book, The Canadian Century: Moving Out of America’s Shadow.

But the issue isn’t just fiscal overstretch by the United States. They point to what they call Canada’s “redemptive decade” from 1988 to 1997, when politicians of all political stripes supported a program of free trade, trimming the extensive Canadian welfare state, and reducing both taxes and the government’s debt burden. Despite some backsliding, those reforms will be the basis of Canada’s prosperity, say the authors.

They’re certainly right about the recent role reversal. In the latest issue of The Heritage Foundation’s Index of Economic Freedom, Canada ranks as the seventh freest economy in the world, one spot ahead of the United States. That’s the first time Canada has been ahead of the United States in the rankings, and most of that switch is attributable to a declining U.S. score.

The Canadian Century in the Vancouver Sun

The Vancouver Sun’s most influential columnist, Barbara Yaffe, is telling her readers to read my new book (co-authored with my good friends Jason Clemens and Niels Veldhuis),  The Canadian Century: Moving Out of America’s Shadow.

To protect and grow its economy, Canada will have to cosy up more aggressively to Uncle Sam — even as this country moves to overtake the American behemoth on economic competitiveness.

That’s the intriguing message from three public-policy gurus writing in a newly published book sponsored by the MacDonald-Laurier Institute, a non-partisan Ontario-based think-tank.

The Canadian Century: Moving out of America’s Shadow, by Brian Lee Crowley, Jason Clemens and Niels Veldhuis, spotlights a “Redemptive Decade” — from 1988 to 1998 — of smart fiscal policy by the Mulroney Conservatives and Chretien Liberals, years that saw the introduction of free trade and the GST, cuts to public spending and an overhaul of entitlement programs such as welfare and pensions.

The U.S. has done none of this work and, as a result, today Canada is poised to “find itself without peer in North America as a magnet for investment, for immigrants, for innovation and for growth.”

We’re in a position, the authors assert, to start offering lower tax rates than the U.S., a significant change from the past, when the U.S., with a smaller government and lower taxes, was always the more appealing place to invest.

But even if Canada takes advantage of this “enormous, historic opportunity,” and even if it manages to further diversify its trade, this country will remain overwhelmingly dependent on the Yanks for its continued well-being.

The reason? Canada does not function as a single economic entity: “We are a deeply integrated part of a continental economy and the border represents perhaps the single greatest threat to our ability to seize the opportunity” afforded by Canada’s fiscal standing.

And so, the three authors are recommending that Ottawa court the U.S. with a new offer of partnership that would feature:

- A jointly administered perimeter border around North America along with a Canada-U.S. customs union.

- A newly created governing body of MPs and members of Congress to manage binational issues, assisted by a tribunal to resolve cross-border disputes.

The pitch for closer integration — always controversial for Canadians, who fret about the destiny of mice who engage too closely with elephants — is not entirely new.

In the past, the notion has mostly gone nowhere because the U.S. government is so preoccupied elsewhere and the concept is likely to prove difficult politically in both countries.

Anyone who remembers the modest initiative Ottawa and Washington sponsored several years ago, the Security and Prosperity Partnership, understands how good intentions — in that case, an effort to harmonize business regulations and standards to expedite trade — can falter.

The SPP became so mired in politics, with nationalist lobbies on both sides of the border raising a stink, U.S. President Barack Obama killed it on coming to office.

The authors probably have a better chance of getting their ideas enacted on the book’s second major theme, Canada’s new-found ability to outmanoeuvre the U.S. when it comes to attracting North American investment.

The book praises Canada for efforts in the ’80s and ’90s that brought federal program spending from 21.7 per cent of GDP in 1994 down to 17.9 per cent by 1998.

But, worryingly, it notes that Ottawa lost its fiscal focus after 2000. Federal spending has jumped from 12.9 per cent in 2008 to 14.5 per cent today.

“There is substantial risk that current federal policy will undo the fiscal reforms of the Redemptive Decade. Indeed a great deal of the progress has already been undone,” the authors write.

The free-spending Harper Government clearly will need to stiffen its spine if it’s to preserve Canada’s hard-won fiscal advantage.

National launch of The Canadian Century

My new book (co-authored with Jason Clemens and Niels Veldhuis), The Canadian Century: Moving Out of America’s Shadow, is coming out soon! We’re having a national launch party in Ottawa on May 20. Click here to register for this event.

Surviving and Thriving in an Irrational World – part two

Last year I spoke to the Alberta Union of Municipal Associations (AUMA) in Red Deer on the theme of “Surviving and Thriving in an Irrational World”. My talk met with such an enthusiastic reaction that David Barber of the Cordillera Institute (a think tank that focuses on excellence in local government), asked me for permission to reproduce the talk for their readership. They published it in two parts. Here is the second one, including an introduction by David Barber. By the way, if you are interested in local government issues, I strongly recommend that you get in touch with the folks at Cordillera and subscribe to their regular e-mail publications.

Surviving and Thriving in an Irrational World (part 2):  Where Should Local Government Be Headed?

Advantages of Decentralizing Local Government
In the previous commentary, I remarked on some of the advantages of local government, and in particular the fact that it is the level of government most able to be relatively aware of the real concrete circumstances of its people, and most able to see and correct the damaging and undesirable consequences of its policies.  But the small scale of local governments, and having several of them, has other advantages.

Taming the Special Interests
For example, organized special interests and pressure groups benefit from centralized political power because that means that they can concentrate their lobbying power on a central point of authority.  When power is widely dispersed to many small units of government, it reduces their lobbying power because it is spread so thinly.  Amalgamation in a large urban area, however, exaggerates the bargaining power of the special interests in local government affairs.  This is crucial to understanding why amalgamation drives up costs when previously different units, which specialized in different services to please their local population, are suddenly put together.

More Wisdom from Professor Husock
“When amalgamation occurs, all the various services and amenities packages of the many individual jurisdictions get put together …  As a matter of political reality, no municipality can long provide certain services only to one area.  All the jogging enthusiasts who’d previously been outnumbered in Jurisdiction A, suddenly can turn to the new Mega-City and demand that, because there are great jogging trails in what used to be Jurisdiction B, they, too, deserve such amenities.  In other words, rather than being reduced, service provision inevitably rises to meet the many tastes that had previously been separate.  Cost increases, as facilities such as basketball courts are built in areas which previously had made them a lower priority.  Public employment must necessarily increase, not decrease.“

In the same vein, decentralization reduces significantly the ability of voters to pass the costs of local decisions along to larger communities, which forces voters to be more fiscally responsible.  When governments cover relatively small geographical areas, it reduces significantly the cost of ‘voting with your feet’.  It is much cheaper to move from one town or suburb to the one next door than it is to move to another state, province, or country.

“Government, in amalgamated cities, inevitably becomes more distant from the individual voter.  It is harder for any one voter, or group of voters, to influence policy.  This situation works to the advantage of well-organized interest groups, with the resources to employ staff to influence policy on their behalf.  Even the most zealous unpaid neighborhood activist is little match for the full-time paid staffs of public sector labor unions, for instance, who know local officials, help elect them, and understand how the system works.  Inevitably, unions will, in representing the interests of their members, resist cutbacks in municipal employment.  They will insist that the efficiency gains of smaller municipalities be eliminated.  Thus, for instance, if Jurisdiction A formerly paid its recreation workers less than those in Jurisdiction B, where recreation was not as important to voters, we can expect that the new amalgamated city will have just one pay scale — at the higher rate.“

More Successful Experiments
The third consequence of the existence of a large number of local government units is that it allows the benefits of successful experiments to be copied by other local and even more senior governments.  Decentralization, when linked to a high degree of competition between localities, increases the likelihood of spreading local policies and practices when these are successful, and getting rid of them when they are not.  Imitation is a powerful force.  The London Borough of Wandsworth, to pick just one example, pioneered in the 1970s many of the innovations that later became the backbone of Thatcherism, including the hugely successful idea of selling council flats (publicly-owned housing) to the tenants for almost nothing, which overnight transformed for the better many public housing developments.

Competition Is Vital
But none of these positive effects can or will be realized without the vital element of competition.  Because municipal officials may not know that much about what their local population wants, about the true costs of various services, and about the potential of new methods to deliver efficiencies and improved service levels, we need a framework for local government that spurs competition, and ends rigid monopolies in the supply of local government services.

Competition is how we find out what works.  Only people who do not understand how to satisfy consumer tastes and preferences would look at the existence of Wal-Mart and Target and Costco and say, “Look at all the wasteful duplication of services, capital facilities, management, inventory, etc.  Let’s have a single giant store to service everyone.”  This is the Soviet model of consumer choice.  Inevitably such a system is run in the interests of management, not customers.

Internal Competition
At the local level, competition takes place on two dimensions.  First, there is competition within municipalities.  By this I mean that the most successful municipalities, places like Charlotte (North Carolina), Phoenix (Arizona), and Indianapolis (Indiana), are more and more getting out of the game of directly supplying traditional local government services where local government employees under a rigid contract supply individual services, such as garbage collection or sewer and water services, to the residents of an entire city as a typical public sector monopoly.  There is now an association of so-called ‘contract cities’ in the United States where municipalities provide almost no services in-house, and act instead as a purchaser of services from many competing suppliers on behalf of their populations.  A former local government minister in the U.K. once famously remarked that his ideal local council would meet only once a year to approve contracts with suppliers of services for the coming year.

The Managed-Competition Model
So the model that is emerging is of a much smaller local government that acts as a kind of buyer’s co-op on behalf of the residents of the locality, an experience that dovetails nicely with the pioneer history of reliance on co-ops throughout rural areas.  Service standards are set, and contracts are let on the basis of those standards, to competitive bidders.  The winning bidder is then held accountable for his success or failure in reaching the agreed standards.  The question of whether the service is provided by public sector or private sector workers and managers is actually becoming irrelevant.

Naturally the monopolists are the ones who resist the most, and especially large centralized service provision bureaucracies and their associated public sector unions, but the benefits are so great from contracting out and privatization — as Jim McDavid at the University of Victoria’s Local Government Institute has been instrumental in documenting with respect, for example, to garbage collection — that the momentum is clearly with the reformers.

External Competition
The other kind of competition that it is vital to preserve is that between municipalities on the local level.  One of the things that drives local government toward reform is the ease with which people vote with their feet.  One strategy for frustrating this crucial means of disciplining and controlling the quality of local policy and holding local officials accountable, is to expand the boundaries of local government to such an extent that the costs of getting away from bad government become prohibitive.

Misplaced Opposition
This movement toward what we call municipal amalgamation is driven, ironically in many cases, by the business community, who believe that we have ‘too many governments’, resulting in ‘overlap and duplication’.  Surely, it stands to reason that having only one mayor, one council, one city hall, and one public works department would save money and promote efficiency.  But as the evidence I’ve outlined here clearly shows, being big in itself is no guarantee of anything and, as I have already remarked, research in local government leads us to think that at least 80% of municipal activities offer little prospect of economies of scale (i.e. saving money because you are bigger).

Overlooking the Evidence
In fact, there are good reasons for thinking that bigger government will be less efficient and responsive, not more.  Certainly in the private sector thinking is running the other way, as the break up of business giants releases hidden value in their assets.  We have seen this, for example, in the decision of companies like Telus [a major Alberta-based firm] to sell many of its large office buildings, because they argue that they are in the telecommunications business, not the property management business.  Almost all conglomerates trade at a discount to the value of their component parts, which has driven many of them to break themselves up in one way or another.  And of course in the municipal world we know now that the experience of amalgamation has been to drive costs up to the highest level, rather than down to the lowest.

The Role of Senior Government
So if amalgamation isn’t the answer, what is?  Our senior governments can usefully play the role of stimulator of competition between local governments, as we see in Australia, New Zealand, and the U.K.  There, local governments undergo regular audits, where service levels and taxation levels are compared, permitting the publication of league tables and other instruments of accountability that grant to local voters much greater insight into the performance of their local government and hence more means to hold them accountable.  Research indicates that people and businesses that move from one municipality to another are actually quite knowledgeable about the conditions in both their old and new municipalities.

Reporting Municipal Performance
AIMS (the Atlantic Institute for Market Studies) has released its own performance report for municipalities in the provinces of Nova Scotia and New Brunswick, and has prepared one for Maclean’s magazine on the 30 largest municipalities in Canada.  Our hope is to introduce and stimulate exactly this kind of competition between municipalities by increasing the knowledge of voters and taxpayers about what they are getting for their money.

Comparing Performance Improves Survival Odds
It is important here to signal that it is not only senior government officials who act irrationally.  Many angry municipal officials are outraged and resentful that anyone would dare to gather information and report on their performance.  My advice to them is, “Get over it.”  In fact, if your future is threatened by politicians at the senior level who hold the power of life or death over you, you shouldn’t wait to fight a rearguard action against policies they’ve already decided.  Take the initiative.  Tell them and your own residents and voters that you take performance seriously and that you intend to be measured against the highest, most stringent levels of public performance.  Don’t resist the drive to open up local government, or to collect important and useful performance data, and to use that data to make meaningful comparisons between municipalities based on those comparisons.  My view is that the lives of your municipalities depend on it.

Customer Service Is the Driver
We must create a customer-service oriented culture in our municipal governments.  We must align the incentives of our elected officials so that they get rewarded for providing efficient, high quality services.  This means we need them to focus on defining service levels, measuring them and rewarding superior performance by service providers.

A New Zealand Example
Consider New Zealand’s municipalities.  There performance pay is a significant portion of management’s compensation.  Municipalities set goals or outcome measures that are important; they might say that they will turn a building permit around in a week or fix a pothole in 24 hours.  With sophisticated measurement systems, the services actually provided are benchmarked against such standards.  Achieving performance goals, or continuous improvement against ever rising benchmarks, results in pay bonuses for management and employees.  It is no longer about spending budgets or losing them, or prolonging and complicating service to minimize effort or maximize overtime.

An Indianapolis Example
In Indianapolis, unionized in-house providers actually proposed and benefited from an internal system called gain sharing where 25% of all savings beyond the bid price went to employees.  With their eye on the ball of efficiency and good service, they outcompeted the private sector several years ago and became the most successful municipal employee union in the U.S., winning the highest pay increases in the country.

Reward Good Performance
High performing entrepreneurial communities measure their services in terms of what they get for their money, not on what they spend or how many employees they have.  That way they can measure and reward performance.  The employees, management, present and future residents and taxpayers all find their interests looked to and positive behavior rewarded.  The behavior that would be rewarded, by the way, would include creation of a co-ordinating tier of government for spillover services that allows economies of scale to be captured in those limited areas where they do exist.

Put Your Financial House in Order
One final observation about irrationality: the financing of much of our local government infrastructure (parks, roads, water, sewers, and the like) is economically irrational and it poisons relations between municipalities and senior government.  I can’t speak to the experience in your jurisdiction, but I can tell you that I spend a lot of time in Nova Scotia giving municipal leaders this message: “Stop complaining about downloading and underfunding.  In many cases you have the power to fix these problems yourselves but the fear of possible political fallout keeps you from taking action.  You will have only yourselves to blame when senior governments decide you can’t get the job done — and merge your municipalities out of existence.”

Stop Subsidizing Servicing Costs
Many municipal services are provided to consumers at considerably less than the real long-term cost, on the assumption that politicians at senior levels will pick up a significant part of the tab after the infrastructure’s useful life is over.  The totally predictable result is both that infrastructure is poorly maintained and that use of the infrastructure is much greater than if consumers had to pay the real cost of that use.  Hence the fact that, for example, a great deal of municipal water in Canada is still unmetered and people pay a flat fee regardless of consumption.  A formula guaranteed to encourage heedless consumption of water as well as needless waste.

Improve Capital Project Management
It is thus absolutely essential that, as New Zealand cost accountant Larry Mitchell constantly reminds us, we “… separate capital and operating budgets for efficient, transparent, and accountable capital investment [as well as using] carefully constructed cost-benefit analyses so that costs and benefits are correctly and completely documented.  Co-ordinate capital projects between local departments and special purpose bodies such as utility commissions …” so that, for example, road and water main maintenance and repair are jointly planned.  Stop doing all that stopgap maintenance.  It is costly and inefficient in many cases compared to doing the proper long term maintenance and repair.  We all know that politicians prefer projects that will happen before the next election, but proper accounting, public reporting, and other accountability measures will reduce this temptation.

Those Who Benefit Should Pay
But the difficulty in achieving these common sense recommendations is nothing compared to the key piece:  ”Municipal infrastructure should be financed, as far as possible, by the residents who benefit from it, because this provides the surest guide to how much should be invested in what.”  This recommendation — which comes from one of Canada’s leading local government experts, Harry Kitchen — however sensible and essential it is, butts up against the reality that some local politicians regard it as a matter of commendable machismo that they can arm twist politicians at senior levels of government to pony up for their pet projects, with the result that the projects are often delayed by political wrangling and the final outcome is serious overbuilding relative to what is really needed.

End Reliance on Capital Grants
Senior government thus contributes to the economic irrationality of municipal infrastructure by essentially bailing out local governments who have failed to account properly for their infrastructure and failed to make people pay the real costs of their use of that infrastructure and now find themselves with their pockets empty when the infrastructure reaches the end of its useful life.  As Harry Kitchen so delicately observes:  ”Economic arguments in support of capital grants are not strong.  Their use should be conditional on recipient governments setting efficient user fees, prices, and local taxes for services provided.  As well, recipients should have proper asset-management programs, along with requirements that asset replacement costs be included in the charge for services.”

Consider Prudent Borrowing
Now I know that many of you will object that municipalities have to share the property tax base with other public agencies (such as your county or the school board) and I agree that this is a problem.  However, the point I have been making is that, where the law allows, there are lots of mechanisms beyond the property tax base that allow the financing of infrastructure.  Ditto for borrowing, again where the law allows.  Where a piece of infrastructure has been subjected to a rigorous cost-benefit analysis and you are satisfied that it will provide a stream of genuine benefits that will exceed the capital cost over the life of the project, you should borrow to finance it, since it makes no sense to make today’s taxpayers foot the bill for benefits to be enjoyed by future citizens.  Borrowing is a way to distribute equitably the cost of the benefits enjoyed across the entire life of the infrastructure.  Borrowing also allows you to cross the divide between today’s system, where we have allowed the capital stock to deteriorate and not set aside any reserves to replace them, and tomorrow’s where we will charge people the full cost of the infrastructure (and many other) services they consume.

Consider Other Financing Sources
There is lots that could be said about the right way for municipalities to finance long term investments, including multi-year capital budgets and dedicated fund accounts, revenue bonds, your own gasoline tax (not a transfer from senior government’s tax), parking lot taxes, congestion and toll charges, and much more use of P3s (public-private partnerships).  This, however, is not the place to do so.  What I can say is that, if you want senior governments to allow you to survive, wrong-foot them by demanding that legislation not only allow but require such measures in order to ensure that municipalities can do their jobs and not constantly be crying poor.

The Bottom Line
Public sector competition, like private sector competition, is not wasteful, but is a healthy discipline that promotes efficiency, accountability, and good service.  Such competition, where it has been introduced into local government, has transformed it for the better.  That’s a lot more than the evidence suggests we can say about forced amalgamation — and most of what else passes for local government reform in Canada.

References
The quotes above from Professor Howard Husock (Director of Case Studies at the John F. Kennedy School of Government, Harvard University) were given in a talk entitled “Why Bigger Local Government Isn’t More Efficient: The Case for Breaking up Cities” on Friday, May 18, 2001 at Montreal’s Omni Hotel.

The Future of Federal Transfers

I was recently invited by the Federal-Provincial Relations Division of Finance Canada to participate in a panel discussion in Ottawa on the future of federal transfers to the provinces. Here is the text of my remarks.

Surviving and Thriving in an Irrational World – part one

Last year I spoke to the Alberta Union of Municipal Associations (AUMA) in Red Deer on the theme of “Surviving and Thriving in an Irrational World”. My talk met with such an enthusiastic reaction that David Barber of the Cordillera Institute (a think tank that focuses on excellence in local government), asked me for permission to reproduce the talk for their readership. They published it in two parts. Here is the first one, including an introduction by David Barber. By the way, if you are interested in local government issues, I strongly recommend that you get in touch with the folks at Cordillera and subscribe to their regular e-mail publications.

Surviving and Thriving in an Irrational World (part 1):  What Threatens Our Futures

A Note from Our Director
This commentary is based on a talk given to the Alberta Urban Municipalities Association at their President’s Summit in Red Deer (Alberta) on April 30, 2009.  Just a little more than 6 months earlier, the cuckoos in Washington (the financial regulatory committees of the U.S. House and Senate) had set off a chain of events which have had devastating effects, not just on the U.S. economy but on economies around the world.  [For more on this fleecing of shareholders and taxpayers, see Issues 03.30 to 03.32.  You can read the summaries of that series here.]  The timing of this chaos, right before a presidential election in the U.S. and a federal election in Canada, inspired the magpies in the major media to dub it as the latest ‘October surprise’.  When it led to the election of their favored candidate for president and sizable majorities for his party in the House and Senate, they marvelled at the ‘brilliance’ of the strategy.  Labelling as brilliant a strategy which gained political victory at the expense of plunging the country and much of the world into recession is just 1 of many irrationalities of these times.

Another is the cheering of the magpies as the new administration in Washington, as well as administrations in Ottawa and other national capitals, launched so-called economic-stimulus packages which are producing the opposite result.  As unemployment continues to rise, as our retirement savings are decimated, as businesses are choked by a scarcity of capital and more punitive regulation, as our senior governments throw around our money — and even more that they have borrowed in our names — as if there is no tomorrow, as officials in Washington and in a number of other capitals are calling for more of the same, those in senior government who are responsible for our municipalities are, once again, talking about municipal reform as a solution to their own financial problems.  And, just what solutions are they considering?  You guessed it — forcing municipalities to merge.  In part 1 of this commentary, Dr. Crowley demonstrates why forced municipal mergers are irrational.  In part 2, which will appear in our next issue, he outlines a rational solution which will not only enable municipalities to survive but to thrive in these irrational times.  Now, here is …

The Big Question
This commentary was inspired by a comment I overheard while I was getting my breakfast on the day of the presentation.  One of the attendees said to one of his colleagues, as he was walking in the door, “I’m here to find out if we¹re even going to be here in five years.”

The question of whether, in fact, some of your municipalities will be here in five years probably depends, more than any other single factor, on what our state or provincial governments do.  And that is a scary thought.  I probably don¹t need to explain why it is a scary thought, but I do think it is important to discuss these matters by way of concrete examples.  So let me tell you a story about the irrationality of senior governments, vis-a-vis municipalities, that comes from my home province of Nova Scotia.

The Chief Cause of Problems Is Solutions!
In the 1990s the decision was made to force the amalgamation of the four municipalities that constituted the Greater Halifax metro area into the Halifax Regional Municipality (HRM).  So if amalgamation was the ‘solution’ what was it supposed to solve and what problems has it created instead?  In my view, to understand the HRM experience, you have to understand three particular circumstances.

The Big Box Scramble
For the first, one might easily make the case that the amalgamation of metropolitan Halifax was caused by the Price Club big box retailer now known as Costco.  This is only a slight exaggeration.  The old municipalities of Halifax and Dartmouth got in a destructive bidding war with each other to attract the Price Club store that had been announced for the metropolitan area.  This was silly, since the benefits of the Price Club went well beyond the boundaries of each municipality.  In the end, Halifax won the right to have the store built within its boundaries at a cost of about $1 million.  That amount was a direct gift from the taxpayers of Halifax to the shareholders of Price Club for zero public benefit, other than sticking it to the municipality of Dartmouth across the harbor.  Ironically, of course, there will shortly be a Costco in the new Dartmouth Crossing shopping center …!  It opens on May 13.

It was events like this that raised great suspicion of the rivalry between these municipalities and convinced many, including in the provincial government, that a single municipality would be cheaper and more efficient because it would abolish such wasteful behavior.

The Spending Spree
Second, the discovery of natural gas off the shores of Nova Scotia triggered a huge flurry of public spending on the assumption that the revenue to pay for it was just around the corner.  Except the corner turned out to be two decades away.  By the early 1990s, as the federal government cut back transfers to the provinces in an effort to fix its own fiscal problems, and Nova Scotia’s debt had reached truly monstrous proportions, the province was in desperate fiscal shape — more so than virtually any other Canadian province — and they were desperate to cut costs.

The Information-Challenged
The third circumstance is that we have in Nova Scotia a culture of what I call executive personalism in government (that is the fancy social science-type term for it; you and I would call it pigheadedness, uninformed by any real information) — the policy formulation process is excessively weak, and fashionable ideas that get into the heads of premiers and powerful cabinet ministers are not subjected to searching analysis.  If an idea sounds good to the right people, things happen — heavy water plants, steel mills, long gun registries, Olympic stadiums, and municipal amalgamation being only a few examples.  I am sure that what I am describing here has absolutely no parallels with your own senior governments, but even if this is a totally foreign experience for you, humor me and hear out the rest of the story.

Lessons Missed
Our premier and his minister of finance got it into their heads that there were major efficiencies to be had in amalgamating municipalities.  Now if they had actually wanted to test these ideas properly, if they had wanted to engage in that dangerously radical practice known as evidence-based policymaking, they could easily have consulted the literature on local government and amalgamation, a literature which is now quite vast.  Had they done so, they would have discovered the following.

Smaller Is More Responsive
First, they would have discovered that local government is not merely a device for supplying municipal services, but also for finding out what services people want and how much they are prepared to pay for them.  The smaller the government unit, the better they are at discovering this, because the evidence is very strong that local government is closest to the people, and the smaller it is, the closer it gets to the population.  Amalgamation tends to undermine this relationship and therefore can only really be justified if there are pretty remarkable efficiencies to compensate for the dilution of responsiveness and democratic accountability.

Bigger Is More Expensive
But, second, they would have discovered that the evidence is quite strong that creating local government monopolies doesn’t reduce costs — it increases them.  It levels costs up to the highest common denominator in the pre-existing units, and seems to result in higher trends of cost growth over time.  This is especially true where amalgamation has eliminated competition between pre-existing municipalities both in terms of attracting residents and industry and in terms of tax and service levels.

Smaller Is More Efficient
It seems that the most dynamic force helping to keep costs down is not a highly centralized and bureaucratic monopoly provider of public services, but a decentralization of authority and decision-making within several municipalities in an urban area or even a mixed rural and urban region where residents cannot vote themselves benefits at the expense of other taxpayers in other parts of the region.  This ensures that people only demand services that they’re prepared to pay for, and municipalities have powerful incentives to keep costs low and satisfaction high, or risk the erosion of their tax base as people and businesses vote with their feet.

The Greater Vancouver Example
Where service provision has serious spillover effects across municipal boundaries (such as transit or water provision, for example), it appears that the correct response is a co-ordinating body that takes over those specific functions.  That’s why Andrew Sancton has written that Greater Vancouver, with its many municipalities and the Greater Vancouver Regional District co-ordinating spillover activities, is the best form of municipal government in Canada.  And this is an initiative you can take yourselves.  Prove to senior governments that you can solve spillover problems and take away one of the main reasons they have to put bull’s eyes on your backs.

Harvard Weighs In
In most amalgamated municipalities, spendthrift city centers vote for big spending and pass the bill along to suburban and rural voters who don’t want it.  I am not aware of a single serious scholar studying municipal amalgamation on a broad scale in Canada or the United States who has concluded that they save money or improve efficiency.  In fact, one of our leading thinkers on this issue, Howard Husock of the Kennedy School of Government at Harvard University, is now arguing that de-amalgamation is the way to go …  Hey, Harvard has to be good for something, and if it is saving your municipality from death by merger, I say “Go for it.”

Here is part of what Husock says:

“[S]tudy after study has shown that the efficiency gains of bigger government do not materialize.  [The evidence in one such study established] that such economies existed in only two areas: fire protection and library services.  Localities … can provide other services — police, recreation, public works, waste management — at equal or less cost than an amalgamated, or, in the U.S. context, county jurisdiction. … Somehow, however, the myth of efficiency through amalgamation lives on, so that it is worth explaining exactly why bigger government won’t save money.  And it is worth considering the possibility that the greatest efficiency gains may actually be realized by moving in the opposite direction: breaking cities up into their component neighborhoods.”

Very Few Economies of Scale
Professor Husock introduces my third point, namely that it is a fairly small part of public services where there are significant ‘returns to scale’ — in other words — where the bigger you are, the cheaper it is to produce a unit of a given service.  Researchers seem broadly to agree that roughly 80% of municipal services enjoy no economies of scale.  The evidence says pretty unambiguously that the lowest observable levels of per unit costs for most services are compatible with very small municipal units (on the order of 5,000 to 10,000 residents).  Moreover, there are significant diseconomies of scale beyond relatively small population numbers — on the order of 250,000 residents.  And, finally, that the supposed savings from smaller councils and elimination of several city halls and other trappings of multiple local governments, is so paltry as to be not even worth mentioning.

The Fruits of Executive Personalism
But of course, given the culture of executive personalism (remember this means pigheadedness of the ‘don’t confuse me with facts; my mind is made up’ variety) that I mentioned, they didn’t consult the literature or the research.  Had they done so, they, like California under Gov. Ronald Reagan, would likely quickly have abandoned their amalgamation policy.

Instead they committed a nearly always fatal mistake — they hired a consultant.  And instead of asking this consultant to review what was known about the dynamics of local government, they asked him to write an abstract report about all the ways one could, theoretically, save money if one were an all-knowing manager and if there were economies of scale in the provision of most municipal services.  The consultant duly told them that there were significant savings to be had at very low cost.  This is not hard to do since any outsider can look at any organization and identify ways that things could be done ‘better’.  In 1996 HRM was duly created.

Halifax Regional Municipality as Test Case
Now what is interesting to note is that the HRM is an extremely valuable test case, because it is the only large scale amalgamation in North America to have been studied from the outset by a team of experts.  A very great deal of what Bob Bish, one of Canada’s leading authorities on local government, learned from his years of studying municipal government, and from the HRM study in particular, became the key material for his extremely illuminating paper for the C. D. Howe Institute a few years ago under the revealing title of Local Government Amalgamations: Discredited Nineteenth-Century Ideals Alive in the Twenty-First.

A Brief Disclaimer
Now before I report on the findings of Professor Bish and his colleagues, let me emphasize that these results were preliminary, and the research team themselves recognized that the five years they gave themselves to study the new entity was not enough for it, and its procedures, to be fully formed.  Still, certain things are clear and I have not seen anything in the subsequent years of HRM’s operation to persuade me that these early results were atypical or unrepresentative.  In our work on our municipal performance report, I see no evidence that the trends I have identified have changed for the better.

What This Test Case Tells Us
So what can we see with hindsight?  Well, for example, the consultant’s implementation study underestimated the cost of amalgamation by a very significant margin.  The final tally, including a new financial management system and labor agreements, reached something on the order of a minimum of $40 million, whereas the estimate was under $10 million.  No cost savings or economies of scale are observable yet, and it is not obvious that they ever will be, or where they might come from.  Both taxes and other charges, as well as debt increased significantly.  User charges rose and average residential property taxes went up about 10% in urban areas and by as much as 30% in suburban and rural areas in the early years, and it has got much worse since.  Polling data show low levels of satisfaction with post-amalgamation services, although again it may be premature to make a strong judgment here.

What about Economic Growth?
Recalling the Price Club fiasco, it was clear that the business community thought that amalgamation would produce a more disciplined and efficient municipality and that this would improve the business climate.  Other than the innovative public-private partnership that now looks after HRM’s economic development, I haven’t seen the evidence that this has occurred.  It is worth noting, as an aside, that those U.S. metropolitan areas with the highest rates of economic growth count many with the most fragmented local government structure.  There is no observable correlation between amalgamation and economic growth.  The expectation that these two things would be correlated shows a misunderstanding of the relationship between local government and economic growth.

What about Service Delivery?
There is still a very high degree of monopolistic in-house provision of services, although there are exceptions in areas like solid waste collection.  An innovative public-private partnership process for the construction of a waste water treatment system collapsed, in large part, in my view, because the powers-that-be in HRM favored in-house monopoly provision for political reasons, ignoring the efficiency losses and loss of innovation and accountability it almost always entails.  Now that that system has been built, it is performing poorly and is going to have to be shut down for months this summer.  Unlike with a private provider, who could have been made to pay penalties for this poor performance, the public sector monopoly sails on serene in its indifference.

To Be Continued

Social change: Paul Wells say Fearful Symmetry shows the way

In this week’s Maclean’s magazine Paul Wells spends a lot of time discussing Fearful Symmetry and the social policy changes it portends:

“For next steps, many conservatives are turning to Fearful Symmetry: The Fall and Rise of Canada’s Founding Values, a new book by Brian Lee Crowley, an economist and founder of the new Macdonald – Laurier Institute.

Crowley does not regard himself as a social conservative. But many who do see themselves that way like what he’s saying. To caricature a complex argument, Crowley says the modern welfare state has overextended itself, is unsustainable, and causes more harm than good to institutions like the family. These trends will only get worse when an aging population sharply increases the cost of delivering most social programs. One size can no longer fit all. Social services will have to be narrowly aimed at those who need them most, and delivered only as long as recipients are willing to improve their behaviour by attending to their family, keeping or seeking a job, and so on.

Government is no good at any of that and, in the opinion of most, shouldn’t try. “It is precisely for this reason, in my view, that we have seen in both the United States and the United Kingdom a growing use of the private sector, including the not-for-profit and so-called faith-based charities, for the delivery of social services,” Crowley writes. “Such private agencies may be more demanding of their clientele and expect more in the way of improvements in behaviour.”

Crowley’s book was published last autumn. It seems to have been barely one step ahead of the news. This month’s Throne Speech contained a single line saying the government “will look to innovative charities and forward-thinking private-sector companies to partner on new approaches to many social challenges.” Such charities and companies were much in evidence at the Manning Centre conference. The changes Crowley anticipates are expected and embraced by social conservatives.

Meanwhile, the federal Liberals are still defending policies from five years ago, policies Harper has taken pains to ensure future federal governments won’t be able to afford, with his GST cuts and his massive cash transfers to the provinces. If the Liberals cannot begin to make a case for a return to larger, more activist — and more expensive — state-run social welfare, then Stephen Harper’s social conservative revolution will only accelerate.

The Windsor Star talks about The Canadian Century

Macdonald-Laurier Institute (MLI) Fellow Jason Clemens was at the University of Windsor yesterday to talk about The Canadian Century: Moving Out of America’s Shadow. Canadian Century will be the first book published by MLI, and is co-authored by Jason, Brian Lee Crowley and Niels Veldhuis. The book is published by Key Porter, one of Canada’s largest publishing houses, and will be available in stores in late May 2010.

The Windsor Star’s Chris Thompson was there, too, and wrote this news story about the event:

If Sir Wilfrid could see us now.

Canada’s seventh prime minister, Sir Wilfrid Laurier, who served from 1896 until 1911, was known for proclaiming the 20th century as Canada’s.

You may also know him as the man on the $5 bill.

But according to a new book co-authored by University of Windsor business alumnus Jason Clemens, Laurier’s prediction was just 100 years ahead of its time.

“Canada sits on the edge of an opportunity, and that opportunity is the Canadian century, which was Wilfrid Laurier’s famous, one of his famous sayings,” Clemens said Thursday at a lecture at the Odette School of Business.

“My authors and I think he was right, he was just 100 years (early). If we do the things that we’ve already done as a nation, as a province, I believe the 21st century will be Canada’s century.”

Clemens said Canada’s strong economic fundamentals, among the leaders of the G8 in most categories, and its ability to keep debts in check have it poised to bolster its stature compared to the debt-burdened U.S.

Clemens has co-authored The Canadian Century: Moving out of America’s Shadow, along with Brian Lee Crowley and Niels Veldhuis. The book hits the shelves in May.

Clemens said Laurier was a classical liberal who believed in small government and low taxes, and Canada followed his core beliefs for about 50 years.

“He was not only interested in policy, he was interested in an aspiration for this country,” said Clemens.

“He was interested in lifting this country up into a leadership position, not only in North America but in the world. Laurier had great plans and great hopes for our country at the turn of the century. For a very long time, even right into the 1950s, we were essentially following Laurier’s principles, in terms of government, in terms of policy, in terms of the role of government in our country. Then we go off course in the mid-1960s.”

Canada’s government was consuming 15 per cent of the economy in 1965, but by 1992 that had grown to 24 per cent.

“As we deviated and started spending more, what we didn’t do is raise taxes,” said Clemens.

“We went from a fairly stable period to a huge mountain of red ink.”

Clemens said the return to Laurier’s values — and the shrinking of the red ink mountain — began with Brian Mulroney and continued under Jean Chretien.

“Canada is a fundamentally more conservative country now when it comes to debts and deficits,” said Clemens.

“I think part of that is the struggle that we as a country, and as a province, went through to balance our books. We felt the pain of restructuring and restraint by the government and understanding what running up debts and what that means to citizens and what that means to the country.”

Clemens said Canada’s position contrasts sharply with that of the U.S., which will be limited in what it can do for a decade or more because of crippling debts.