Fraser Forum - December 2009 / January 2010

A Fraser Institute review of public policy in Canada

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EDUCATION POLICY

Impediments to reform

The beautiful tree

Vive l’éducation libre!

Fraser Forum

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Fraser Institute Board of Trustees Hassan Khos-rowshahi (Chairman), Edward Belzberg (Vice Chairman), Mark W. Mitchell (Vice Chairman), Gwyn Morgan (Vice Chairman), Salem Ben Nasser Al Ismaily, Louis-Philippe Amiot, Gordon E. Arnell, Charles B. Barlow, Everett E. Berg, T. Patrick Boyle, Peter Brown, Joseph C. Canavan, Alex A. Chafuen, Elizabeth Chaplin, Derwood Chase, Jr., James W. Davidson, John Dielwart, Stuart Elman, Greg C. Fleck, Shaun Francis, Ned Goodman, Arthur N. Grunder, John A. Hagg, Paul Hill, Stephen A. Hynes, David H. Laidley, Robert H. Lee, Brandt Louie, David MacKenzie, Hubert Marleau, James McGovern, Eleanor Nicholls, Roger Phillips, Herb C. Pin-der, Jr., R. Jack Pirie, Con S. Riley, Gavin Semple, Rod Senft, Anthony Sessions, William W. Siebens, Anna Stylianides, Arni C. Thorsteinson, Michael A. Walker, Catherine Windels, Mi-chael Perri (Secretary-Treasurer)

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From the editor

It’s December. Here in Vancouver, this means three things: all the ski hills are open, the rain is here to stay, and Christmas shopping is in full swing.

I really enjoy Christmas shopping. Yes, the stores are crowded and the lines long, but finding the perfect gift for a friend or family member always makes the hours spent brainstorming ideas and then going from store to store seem worth it. And having the ability to shop online means that it is even more likely that I will find what I am look-ing for. With so many websites catering to so many markets—both broad and niche—the choices are practically endless.

When it comes to shopping for Christmas presents—or any kind of shopping, really—it is easy to see the benefits of choice. It is puzzling then, not to men-tion unfortunate, that we do not see very much choice in many other areas of our lives, particu-larly in areas where the government is involved.

One such area is education. Most children in Canada are as-signed to a public, government-run school where they are taught a centrally determined curriculum that may not result in the best out-comes (“Vive l’éducation libre!” pg. 14). For example, many academic studies have compared the ability of public and independent schools to encourage civic engagement, teach the workings of government, and promote tolerance of others, and have found that freely chosen independent schools are superior to assigned public schools. Research also shows that independent schools consistently outperform govern-ment-run schools in academic achievement, overall efficiency, paren-tal satisfaction, and a number of other areas (“Vive l’éducation libre!”).

Perhaps it should come as no surprise, then, that many parents are rejecting public schools in favour of private schools, even in some of the poorest places on Earth. For the last 10 years, James Tooley, a professor at Newcastle University in England, has been research-ing the development of low-cost private schools in places like Africa, India, and China (“The beautiful tree,” pg. 18). He found that many families living in slums have left the public system, with its huge class sizes and poor quality of teaching, and put their children in “budget” private schools where teachers are accountable to parents and stan-dardized test scores are higher.

Back in Canada, about 6.4% of children attend one of the country’s 1,700 private schools. These schools cater to a wide variety of needs and preferences. There are boarding schools, Montessori schools, and faith-based schools, as well as schools for gifted students, students with unique learning styles and interests, and students with special needs. In the public system, there are far fewer choices: alternative schools (e.g., Montessori schools) and supplemental programs (e.g., International Baccalaureate) are in short supply, and waiting lists for these schools are long (“Impediments to reform in the public school system,” pg. 20).

Clearly, our one-size-fits-all public system is not meeting the needs of Canadian students. Whether you’re shopping for presents or decid-ing what kind of education is best for your children, choice is important.

Kristin Fryer ([email protected])

Why choice is important

2 Fraser Forum 12/09 www.fraserinstitute.org

ContentsFraser Forum

1 From the editor

4 Forum authors

5 eHealth Ontario: A case study in the “fatal conceit” of central planningBrett J. Skinner

Ontario’s failed eHealth project is just one example of why the allocation of resources should be left to the spontaneous ordering of the market.

8 Key Concepts: Spontaneous orderSteven Horwitz

Seeing the market as a spontaneous order gives us an appreciation for the way in which prices, profits, and the other institutions of the market enable us to coordinate our behaviour with millions of other people.

10 A better pharmaceutical strategyBrett J. Skinner and Mark Rovere

The Alberta government could save consumers and taxpayers a lot of money if drug prices were determined by market forces instead of an arbitrary benchmark imposed by government.

12 Ontario’s spending problemNiels Veldhuis and Milagros Palacios

Ontario’s current deficit woes are primarily the result of the government’s wild spending spree. In order to rectify the situation, the government must begin to reduce spending.

5eHealth Ontario

10Drug policy in Alberta

25The “resource curse”


25 Economic growth and the “resource curse”Raaj Tiagi

Strong institutions in countries with natural resources can turn a “resource curse” into a resource blessing.

28 The impact of immigration on Canada’s labour marketPatrick Grady

Since 1980, there has been a substantial decline in the labour market performance of recent immigrants.

14 Vive l’éducation libre!Andrew J. Coulson

Research shows that free and competitive education markets consistently outperform assigned public schools.

18 The beautiful treeJames Tooley

Low-cost private schools are flourishing in some of the poorest places in the world.

20 Impediments to reform in the public school systemPeter Cowley

There are a number of characteristics intrinsic to government-run school systems that, taken together, make real improvement and sustainable high levels of performance almost impossible.

EDUCATIONPOLICY


Forum Authors

Featured Authors

PatricK Grady is an economic consultant with Global Economics Ltd. He is a former senior official in the federal Department of Finance and Bank of Canada. Grady obtained his M.A. and Ph.D. in economics from the University of Toronto.

steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University in Canton, New York. He completed his M.A. and Ph.D. in eco-nomics at George Mason University.

MilaGros Palacios ([email protected]) is a Senior Economist with the Fraser Institute’s Fiscal Studies Department. She has an M.Sc. in eco-nomics from the University of Concepcion in Chile.

MarK rovere ([email protected]) is a Se-nior Policy Analyst, Bio-Pharma and Health Policy, at the Fraser Institute. He holds an M.A. in political sci-ence from the University of Windsor.

Brett J. sKinner ([email protected]) is the Director of Bio-Pharma and Health Policy research at the Fraser Institute. He obtained his Ph.D. in pub-lic policy and political science from the University of Western Ontario.

raaJ tiaGi is a Senior Economist in the Fraser Insti-tute’s R.J. Addington Centre for the Study of Mea-surement. He has an M.A. and a Ph.D. in economics from the University of California, Irvine.

niels veldHuis ([email protected]) is the Director of Fiscal Studies and a Senior Economist at the Fraser Institute. He has an M.A. in economics from Simon Fraser University.

Contributors

andrew J. coulson directs the Center for Educational Freedom at the Washington, DC-based Cato Institute. He was born and raised in Montreal.

Peter cowley is the Director of School Performance Studies at the Fraser Institute. He is co-author of the Institute’s report cards on schools in British Columbia, Alberta, Ontario, Quebec, and Washington state.

JaMes tooley is a professor of education policy at Newcastle University in England. He gained his Ph.D. from the Insti-tute of Education, University of London, and has held educational research positions at the Universities of Oxford and Manchester and the National Foundation for Educational Research.


Ontario’s health minister recently resigned due to a public spending scandal revealed by the provin-cial Auditor General. The incident raises serious

political concerns about the corruption of government procurement processes. It also provides an opportunity for Canadians to discuss one of the many economic pit-falls associated with government-run health care: the futility of central planning.

The details of the scandal are found in the Audi-tor’s report (Auditor General of Ontario, 2009), which charges that since 2003 more than a billion dollars in public spending has been wasted on eHealth Ontario and its predecessor, Smart Systems for Health Agency. Both agencies of the Ministry of Health were responsible for developing centralized electronic medical records for the province’s Medicare system, but have failed to produce anything useful for the money spent.

Yet, on a more fundamental level, the failure of eHealth Ontario is beside the point. Even if eHealth had successfully delivered a working health information sys-tem, the basic economic premise of the project was wrong from the beginning.

Spontaneous market order in health care

The establishment of a government-controlled health information system was justified on the grounds that

it would save the province money by giving authorities the information they need to improve the efficiency of the health care system. The eHealth project was based implicitly on the belief that, with enough information, government bureaucrats could manage the allocation of medical care better than market forces, and that this would reduce public health expenditures.

But Nobel Prize-winning economist Frederic Hayek would have characterized the implied rationale for the creation of eHealth as the “fatal conceit” of central plan-ning.1 Hayek (1945) showed that central planners cannot possibly satisfy all of the individual needs and preferences of consumers (or patients) as efficiently as the market. The allocation of resources in a market is spontaneously ordered by countless individual choices. These choices are determined by needs and preferences that are unique to individuals and informed by various bits of informa-tion. It is absurd (and, in Hayek’s view, somewhat ar-rogant) to believe that a single person, or even a group of experts, could set prices or determine the supply of goods and services and their allocation to individuals bet-ter than the spontaneous ordering of the market.2 Even if theoretically possible, the practical cost and technical barriers to obtaining the information necessary to allow central planners to be as efficient as the market would vastly outweigh the benefits.

Yet, with eHealth, Ontario was spending vast sums of taxpayers’ money on an information system designed, essentially, to make central planning more efficient. This

eHealth Ontario

Brett J. sKinner

A case study in the “fatal conceit” of central planning

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is a wasteful, unnecessary, and ultimately futile exercise because the market does a better job of allocating re-sources, without a centralized information system and the enormous additional cost to taxpayers.

Of course, information technology has the poten-tial to make the delivery of health care goods and ser-vices more efficient. But as with other sectors of the economy, market-driven adoption of technology is a more efficient approach to allocation than centralized government planning. In a market, the value of infor-mation technology would be apparent from its reputa-tion for reducing costs and improving quality, and its allocation within the health care system would be de-termined by cost-benefit choices about its value among medical providers.

If Ontario wants to make its health care system more efficient, all that is needed is the dispersion of informa-tion in the form of market-based price signals, and mar-ket-based competition for the delivery of medical goods and services.

For example, Ontario could simply expose con-sumers to prices for their personal use of publicly in-sured health care. If governments reimbursed patients directly for only 75%3 of the cost of the health care they consumed, then there simply wouldn’t be any need for centrally planned allocation. The 25% out-of-pocket co-payment would act as a price signal that would give consumers (following the expert advice of their physi-cians) the information needed to make appropriate use and substitution choices on their own. Structuring co-payments as a percentage of the cost of consuming medi-cal goods and services effectively creates a price that is proportional and directly relative to the total cost. For non-emergency treatment decisions, even a small price gives patients the economic incentive to weigh the value of medical treatment against alternative uses of their money, and consider the relative value of various types of treatments.

If private sector providers were also permitted to compete for the delivery of publicly funded medical goods and services, then providers would have econom-ic incentives to offer the most efficient combination of quality and cost in the provision of medical goods and services, according to the diverse needs and preferences of individual consumers. Competition and the profit motive would provide sufficient incentives for medical providers to weigh the value of adopting information technologies that could make them more efficient. This market-like approach would encourage efficiency and choice, as well as the sustainable allocation of medical resources.4 Such policies would eliminate the need for central planning (including government-imposed price controls) and therefore the need for a government-run eHealth system altogether.

The politicization of health care decisions

Hopefully the eHealth scandal will lead to a more general discussion about the other economic failures and limita-tions of government-run health care. One of these fail-ures is the politicization of economic decisions. Mitchell and Simmons (1994) explain how economic decisions become politicized when governments are involved in allocating resources. Not surprisingly, governments tend to prefer policies that are politically expedient for self-interested, elected officials, regardless of whether they are economically sensible for the general public.

In general, the management of Canada’s health care system is highly politicized because the government di-rectly controls the allocation of medical resources. When the government becomes a health insurance provider, decisions concerning access, coverage, spending, pric-

ing, funding, and investment are influenced by political incentives, which often conflict with rational economic considerations.

In a new book called Canadian Health Policy Failures: What’s Wrong? Who Gets Hurt? Why Nothing Changes (Skinner, 2009), I refer to a few incidents that show how political considerations often trump economic sensibility in health policy decisions in Canada. In one case from 2004, Ontario’s former health minister banned a US com-pany from operating a mobile ultrasound clinic in the province. The company had planned to offer one-day di-agnostic clinics (charging seniors $60 for each test) in the Hamilton-Niagara area, southwest of Toronto (Bueckert, 2004, July 18). Despite lengthy delays for such services in the province, Ontario’s government rushed through legislation banning the firm’s operations.

Ontario’s policy was a waste of resources.

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In another case, Ontario decided to buy several exist-ing for-profit MRI clinics in order to turn them into non-profit operations. Reports at the time suggested that the move to bring the for-profit clinics into the public sector would cost taxpayers about $14 million (Bueckert, 2004, Sep. 24). But Ontario’s policy was a waste of resources. The for-profit providers who owned the equipment had already paid for it once. Ontario could have spent the money that was required to buy these machines to simply purchase thousands of MRI scans from the private-sector providers and thereby help a large number of patients. Instead, the MRI machines were paid for twice—once by the health providers who owned them and again by the province—and the province still had to pay for MRI scans to be performed.

These examples suggest that the elected officials who made the decisions were influenced by political incentives to protect the popular symbolism of the state’s monopoly over health care, even at the cost of reducing patients’ access to medically necessary health care, while wasting taxpayers’ money. When the government controls health care, economic decisions are often trumped by politics.

Unfortunately, Ontario’s eHealth scandal might be just the tip of the iceberg. eHealth is only one of 615 provincial government agencies that the Auditor Gen-eral plans to investigate. The Toronto Star (Talaga, 2009, Oct. 9) recently reported that Cancer Care Ontario has been identified in a similar scandal. But government fail-ure in health care is not limited to Ontario. The RCMP is currently investigating British Columbia’s electronic health information project for similar problems (Breth-our and Hunter, 2009, Oct. 9), and Alberta’s version of eHealth is being audited (Health Edition, 2009, Oct. 9).

The next time you add up your tax bill or discover that Medicare won’t cover an “expensive” new drug, con-sider the vast sums wasted by central planners who are trying, in vain, to do what market forces do spontane-ously and efficiently every day in every other sector of our economy, at zero additional cost to taxpayers.

Notes

1 This phrase is found in The Fatal Conceit: The Errors of So-cialism (1988), edited by W.W. Bartley, III.

2 Terence Corcoran also discusses the limits of centralized in-formation systems in an excellent commentary on the eHealth scandal (see Corcoran, 2009, Oct. 9).

3 An individual’s price elasticity of demand (i.e., sensitivity to price changes) for medical goods and services determines the optimal size of the co-payment. Under tax-funded insurance, the optimal co-payment rate would be based on the average elasticity. By contrast, if public health insurance was funded

through actuarial (i.e., experience-based or risk-rated) or community-rated (i.e., flat or equal) premiums, the size of the co-payment could be customized by each insured individual, allowing people to trade off lower percentage co-payments against higher premiums, or vice versa.

4 For evidence concerning how user fees reduce unnecessary utilization and encourage efficient trade-offs between treat-ment choices, without negatively affecting health outcomes, see Newhouse et al. (1993).

References

Auditor General of Ontario (2009). Ontario’s Electronic Health Records Initiative. Office of the Auditor General of Ontario. <http://www.auditor.on.ca/en/reports_en/ehealth_en.pdf>.

Brethour, Patrick, and Justine Hunter (2009, October 9). RCMP Probe Alleged Fraud of BC Health Ministry. Globe and Mail. <http://www.theglobeandmail.com/news/national/british-columbia/bc-could-see-charges-in-e-health-scandal/article1317605/>.

Bueckert, Dennis (2004, July 18). Ontario to Buy Private Clin-ics. Canadian Press.

Bueckert, Dennis (2004, September 24). Ontario to Open Nine New MRI Sites, Buy Back More Private Testing Facilities. Canadian Press.

Corcoran, Terence (2009, October 9). Central Planning Strikes Again. National Post. <http://network.nationalpost.com/np/blogs/fpcomment/archive/2009/10/09/terence-corcoran-central-planning-strikes-again.aspx>.

Hayek, F.A. (1945). The Use of Knowledge in Society. Ameri-can Economic Review 35, 4: 519–30.

Health Edition (2009, October 9). Alberta EHR Activities Au-dited. Health Edition Online. <http://www.healthedition.com/viewissue.cfm?id=682>.

Mitchell, William C., and Randy T. Simmons (1994). Beyond Politics: Markets, Welfare, and the Failure of the Bureau-cracy. Westview Press.

Newhouse, Joseph P., and the Insurance Experiment Group (1993). Free for All? Lessons from the RAND Health Insur-ance Experiment. Harvard University Press.

Skinner, Brett J. (2009). Canadian Health Policy Failures: What’s Wrong? Who Gets Hurt? Why Nothing Changes. Fraser Institute.

Talaga, Tanya (2009, October 9). Picnics, Parties Charges as Cancer Care Expenses. Toronto Star. <http://www.thestar.com/news/ontario/article/707819--picnics-parties-charges-as-cancer-care-expenses>.

KEY CONCEPTS


The phrase “spontaneous order” is of twentieth cen-tury origin, but the concept underlying it has been at the core of economics and arguments for eco-

nomic freedom for over 200 years. Spontaneous order (or “emergent order”) refers to the way in which the beneficial outcomes of the market economy are, in the words of eighteenth century philosopher Adam Ferguson, “the products of human action but not human design.” The beneficial order of the market is not the product of one person’s or one group’s conscious design, but the unin-tended outcome of all of the freely chosen actions of hu-man beings. In this way, spontaneous order is a broader restatement of Adam Smith’s famous “invisible hand,” which leads people acting out of self-interest to produce a result that was not part of their intention.

We see examples of spontaneous order around us all the time. Consider an open square on a col-lege campus after an overnight snowfall. Over the course of the next morning, path-ways will appear through the snow, most of which rep-resent very efficient ways of getting from one building to another across the square. This collection of paths is, however, not the product of human design. It is a sponta-neous order that emerged as a result of the self-interested behaviour of students who are only trying to get to class as quickly as possible. The early-rising trailblazers first tromp down the snow, which makes following in their footsteps the easier choice for the next group and eventu-ally results in an easily navigable path through the snow. Without intentional human design, we get an orderly and socially beneficial outcome.

How is it possible that the independent decisions of mil-lions of market participants just so happen to lead to beneficial outcomes for society as a whole, without any prior conscious agreement on what to do or how to do it? The answer is that prices and profits provide people with the incentives and knowledge they need in order to know how best to serve others. As people buy and sell

in the market, the prices of goods move up and down, signalling to producers that their products are now more or less valuable, and providing them with information about which inputs are the most cost-effective. Profits are made when buyers value a product more highly than the seller values the inputs that went into making it. Profits signal that both parties believe they are benefitting from the exchange and provide an incentive for sellers to make

the things that buyers want. These features of markets lead self-inter-ested buyers and sellers to produce order with-out design.

However, individual freedom will only produce unde-signed order if the institutional framework of a society is good. Self-interest will not lead to a beneficial order if people are free to steal and murder. Spontaneous order theory does not contend that greed is always good. What it does argue is that when individuals can own and freely exchange private property and their lives and property are protected against coercion, then their self-interest will be guided by market signals that lead them to take actions that cause a socially beneficial order to emerge. People’s actions will not produce spontaneous order un-less their economic, political, and social institutions give them the freedom to act and protect them from the co-ercion of other individuals and the state.

Spontaneous ordering processes do not ensure that ev-ery single person is better off. For example, when people switch to MP3 players, the makers of portable CD players lose out in the short term because people no longer buy

steven Horwitz

SPONTANEOUS ORDERCooperation in the marketplace


their products. But spontaneous ordering processes do provide the most benefits to the most people, and they enable the always-shifting minority who lose out to have the incentives and information necessary to adjust to the new circumstances.

One of the features of spontaneous orders such as mar-kets is that they are, as F.A. Hayek termed them, “ends-independent.” This means that markets do not require us to agree on a set of goals in order for them to be useful. Instead, they are processes that can be used for the variety of ends that individuals might have. In this way, markets are like language, another spontaneous order: all English speakers need to understand are the basic grammatical rules and the meanings of words in order to use English for whatever purposes they wish. Markets are much the same in that agreement on basic rules enables us to use them to pursue a whole variety of ends. The spontaneous order of the marketplace is thus deeply connected with individuality and human freedom. We can leave people to act freely under good institutions and the market will produce better results than any other economic system.

Viewing the market as a spontaneous order illustrates why attempts to substitute economic planning for mar-kets are doomed to fail, as with the Soviet Union and its imitators. Rather than seeing the complexity of modern markets as necessitating more intentional design, a spon-taneous order perspective suggests that just the opposite

*Key Concepts is a series of essays on the fundamentals of economics and markets. In addition to appearing in Fraser Forum, these essays will form the basis of a live Ask the Professor discussion, held at www.fraserinstitute.org each month.

Please join us on December 10 at 11:00 am Pacific time for an online discussion of this essay with Prof. Steven Horwitz.

is true: our markets are incredibly complex because we have allowed them to be ordered spontaneously. The va-riety of ends people pursue and the millions of inputs that can be used to pursue them create a degree of complexity that no economic planning board could ever completely understand or design.

It is because of our ignorance that we must rely on the spontaneous ordering processes of the market to guide us to act in ways that benefit others. While economic planners try to gather the necessary knowledge in one place, markets enable us to use our individual knowledge in ways that make it available for others to use. In this way, the competitive market is a process that enables us to discover the knowledge we would need, but could not acquire, if we were going to try to plan the economy. As with science, giving people the freedom to experiment and compete produces a better outcome than dictating how things should be done.

Seeing the market as a spontaneous order gives us an appreciation for the way in which prices, profits, and the other institutions of the market enable us to coordinate our behaviour with millions of other people, only a tiny fraction of whom we know personally. As markets extend this cooperation into the evolutionary spontaneous order process, they also expand the range of opportunities for individuals and enrich us all. Attempting to control or design the unplanned spontaneous order of the market will only lead to poverty and conflict. We should instead do our best to ensure that our economic institutions pro-tect life and property and encourage entrepreneurship and competition.

Suggestions for further reading

Hayek, F. A. (1948). The Use of Knowledge in Society. In In-dividualism and Economic Order (University of Chicago Press): 77–91.

Horwitz, Steven (2001). From Smith to Menger to Hayek: Lib-eralism in the Spontaneous Order Tradition. Independent Review 6, 1 (Summer): 81–97.

Read, Leonard E. (2008). I, Pencil: 50th Anniversary Edition. Foundation for Economic Education. <http://www.fee.org/pdf/books/I,%20Pencil%202006.pdf>.

Seabright, Paul (2004). The Company of Strangers. Princeton University Press.

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In mid-October, the Alberta government released the second phase of its Pharmaceutical Strategy. The plan calls for a reduction in public reimbursement rates for

new generic drugs from 75% of the price of the previously patented brand-name drug to 45% (Alberta, Department of Health and Wellness, 2009). In addition, the govern-ment intends to negotiate lower prices for current ge-neric drugs. The annual savings are projected to be up to $50 million for new generic drugs and $150 million for generic drugs already on the mar-ket (Macdonald, 2009, Oct. 21). However, the Alberta government could save consumers and taxpay-ers a lot more money if generic drug prices were determined by genuine market forces instead of an arbitrary benchmark imposed by the government.

The province considers ge-neric drug prices to be too high, and the available evidence sug-gests that they are correct. We con-duct research, published annually by the Fraser Institute, which con-firms that generic prices in Cana-da tend to be significantly higher than prices for identical drugs in other comparable countries. Our most recent study, published in 2008, compared US and Canadian prices for the 100 most commonly prescribed generic drugs in Can-ada. The study found that, on average, Canadian prices were roughly twice as high as commonly available US prices for identical drugs (Skinner and Rovere, 2008).

Bear in mind that public drug programs account for about half of the market for prescription drug spending in Canada. Data from the Canadian Institute for Health Information shows that about 44% of total drug expen-ditures in Alberta were publicly financed in 2008 (CIHI,

2009), while the remaining 56% was paid for through private insurance or direct consumer spending. This means that consumers and taxpayers alike are affected by inflated prices for generic drugs, making efficient drug pricing a matter of public interest.

Our research shows that the artificial inflation of generic drug prices in Canada is caused by government interference with competitive market dynamics (Skin-ner and Rovere, 2008). Many provincial public drug pro-

grams use fixed-percentage reim-bursement rates for generic drugs, as Alberta does. Under this policy, the government offers to pay phar-macies a guaranteed price for ge-neric drugs, set at a fixed percent-age of the price of the previously patented brand-name drug.

This kind of policy removes the incentive for retail pharmacies to compete on the price of generic drugs paid for through the public drug plan. This reimbursement policy appears to create a price ceiling (maximum), but in effect it is almost the same as a price floor (minimum). This is because the pharmacy retailers always charge the guaranteed maximum price, which is fixed at a level that is higher than competitive market prices would be. Retailers have no incentive to offer lower prices to

the public payer when a higher reimbursement rate is guaranteed.

Further, those covered by public drug plans are not exposed to prices because the government is the direct payer, and co-payments (where they have been used) have not been structured in proportion to the cost of prescriptions. Therefore, those covered by public drug plans have no incentive to demand lower prices.

Alberta’s drug reimbursement policy needs re-thinking

Brett J. sKinner and MarK rovere

A better pharmaceutical strategy

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On top of this, governments in most provinces did not, until recently, negotiate prices through competitive tendering of supply. This is because governments do not buy drugs directly from manufacturers, but instead re-imburse drugs sold through retailers to consumers. It is also likely because tendering results in a single source of supply, which can sometimes result in shortages if there are problems with the production or delivery process of single-source supplier, something that has actually oc-curred in the past with the production of some single-source tendered drugs in Canada.

Generic drug manufacturers are also known to ex-change bulk discounts for exclusive distribution rights with pharmacy retailers. This is a legitimate business strategy for the manufacturers, which is not much dif-ferent from a soft-drink company sponsoring a sporting event on the condition that only its products are sold at the event. However, because government drug programs reimburse retail pharmacies for the drugs they dispense instead of individual consumers for the drug expenses they personally incur, any discounts that are negotiat-ed between drug manufacturers and retail pharmacies are not passed on to consumers through lower prices. The discounts end up as windfall profits for retailers because retail-ers can still charge the full public reimbursement rate directly to the provincial payer, which is guaran-teed at a fixed price.

To address the problems cre-ated by public drug reimburse-ment policies, the Alberta gov-ernment plans to simply reduce the reimbursement rate it pays for generic drugs. Despite good inten-tions, this approach is misguided; it attempts to fix a problem cre-ated by government intervention in the market by tweaking the way the government intervenes. If Al-berta’s goal is to have the most ef-ficient drug pricing, then it should adopt market-oriented reimburse-ment policies.

Barring comprehensive health and drug insurance reforms (a conversation for another day), the province should imple-ment direct-to-consumer reimbursement for provincial drug plan recipients. Recipients of public drug benefits should buy their prescriptions and then submit receipts to the province for partial reimbursement. For example, the province could retroactively reimburse 75% of the drug costs to the consumer. Consumers would therefore be exposed to a 25% co-insurance charge for any drug

they purchase. Cumulative co-insurance costs could be capped at 5% of a given person’s income.1

The co-insurance charge would work as a price signal to encourage efficient drug choices. Consumers would have real economic incentives to shop around, both between pharmacies and between drug brands. The resulting price competition would lead to more efficient prices over time.

Alberta’s proposed pharmaceutical reimbursement strategy needs re-thinking. Economic evidence suggests that the best way to make public drug spending more efficient is to allow prices to be determined in a competi-tive marketplace.

Note

1 Research indicates that most of the “price” effect on the utilization of health care is achieved with co-payments equal to between 25% and 30% of the cost of treatment. There are diminishing returns from higher co-payment levels. For evi-dence about this and how user fees reduce unnecessary uti-lization and encourage efficient trade-offs between treatment

choices, without negatively affecting health outcomes, see Newhouse et al. (1993).

References

Alberta, Department of Health and Wellness (2009). Alberta Pharmaceu-tical Strategy. Government of Alber-ta. <www.health.alberta.ca>.

Canadian Institute for Health In-formation [CIHI] (2009). Drug Ex-penditure in Canada 1985 to 2008. CIHI. <http://secure.cihi.ca/cihiweb/dispPage.jsp?cw_page=AR_80_E>.

Macdonald, Jim (2009, October 21). Alberta Going from Highest Generic Drug Prices in Canada to Lowest. Canadian Press. <http://www.google.com/hostednews/canadianpress/article/ALeqM5im0S8gC5u7mlKglmeNbyXTR6FkHQ>.

Newhouse, J. P., and the Insurance Experiment Group (1993). Free for All? Lessons from the RAND Health Insurance Ex-periment. Harvard University Press.

Skinner, Brett, and Mark Rovere (2008). Canada’s Drug Price Paradox 2008. Fraser Institute Digital Publication. Fraser Institute.

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If the first step to recovery is admitting that you have a problem, then Ontarians should be concerned that their government has yet to come clean. Updated bud-

get numbers presented by Finance Minister Dwight Dun-can last month put this year’s provincial deficit at $24.7 billion, with additional deficits of $21.1 billion and $19.4 billion forecast for the next two fiscal years (2010/11 and 2011/12) (Ontario, Ministry of Finance, 2009: 43).

Despite these significant deficits and the additional debt and interest payments they will require, all that the government has offered thus far is a promise to undergo a “strategic spending review” of all programs and services to look for potential efficiencies, and to “engage Ontar-ians in an important conversation” about how to balance the budget.

What Ontario really needs is a detailed plan to re-turn to a balanced budget. Ontario’s current deficit woes are primarily the result of the Liberal government’s wild spending spree during its first term in office. In order to move forward, the government must recognize this problem and begin to reduce spending.

By all accounts, the growth in government spending in Ontario has been startling. During its first term, Pre-mier McGuinty’s government ramped up spending from $73.9 billion in 2003/04 to $96.5 billion in 2007/08, an increase of more than 30% (Ontario, Ministry of Finance, 2009: 52–53).

To finance its four-year spending spree and move from a significant deficit of $5.5 billion in 2003/04 to

surplus of $590 million by 2007/08 (Ontario, Ministry of Finance,

2009: 52–53), the government implemented a number of damaging tax increases (e.g., it introduced a new health premium, cancelled the planned elimination of the per-sonal income surtax, and increased the corporate income tax).

The government’s inability to control its spending is best illustrated by comparing average spending increases to both economic growth and the average increase in spending that would have been needed to compensate for population growth plus inflation in Ontario. Between 2003/04 and 2007/08, government spending increased at an average rate of 6.9%—more than twice as fast as aver-age inflation plus population growth (3.0%) and much faster than the average rate of economic growth (4.4%) (Ontario, Ministry of Finance, 2009: 52–53).

Unfortunately, the most recent budgets do not show a break from this trend. After one year of spending re-straint, the government returned to its big-spending ways, this time in the name of economic “stimulus.” In fact, by the end of its second term (2011/12), the McGuinty gov-ernment will have increased spending by 60% since 2003 (Ontario, Ministry of Finance, 2009: 43, 52–53).

Had the government actually shown some re-straint and increased government spending in a prudent

Ontario’s spending problem

niels veldHuis and MilaGros Palacios

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manner—for example, in accordance with population growth plus inflation—Ontario would have had cumu-lative budget surpluses of $25 billion during McGuinty’s first term (figure 1). The government would also have been in a surplus position throughout the recession and could have reduced the province’s debt and correspond-ing interest payments and cut taxes along the way—a much more sensible and successful way to improve On-tario’s economic performance.

The past is, however, the past, and the critical ques-tion now is how the government should proceed from here. Finance Minister Duncan has indicated that his government will now “have to look at restraint” (Howlett, 2009, Oct. 22). Unfortunately, it’s a little late for restraint. According to the Canadian Oxford Dictionary, restraint is “the avoidance of excess” (Barber, 2004). Restraint would have been an option back in 2003/04, but it is not one that will get the province out of its fiscal crisis quick-ly. What is needed now are spending reductions. And while Minister Duncan may want to continue increasing spending in priority areas like health care and education, those are the obvious places to cut back.

Consider that health care spending increased by 34.8% between 2003/04 and 2008/09, yet Ontarians still endure relatively poor access to medical professionals and medical technologies, are often cared for using old and

outdated medical equipment, and must endure long waits for treatment (Ontario, Ministry of Finance, 2007, 2009).

That other developed na-tions are able to purchase more health care for less money should provide a lesson for On-tario (see Esmail and Walker, 2008). Indeed, Ontario should follow the lead of these nations and consider policies such as cost sharing and allowing com-petition in the delivery of pub-licly funded care, which would save Ontarians about $11 billion a year—nearly one-half of the current deficit (Esmail, 2009).

Similarly, education and other government services could be vastly improved through pro-gram reform, while spending is reduced.

The status quo in Ontario is simply not sustainable. Ontar-ians need and deserve a serious plan to restore fiscal sanity in the province. Since tax increases

will certainly damage the road to economic recovery, re-ductions in government spending are the way forward. Minister Duncan and his colleagues should take action now.

References

Barber, Katherine (ed.) (2004). Restraint. Canadian Oxford Dictionary (2nd ed.). Oxford University Press.

Esmail, Nadeem (2009). Getting More for Less. Fraser Forum (November): 28–29.

Esmail, Nadeem, and Michael Walker (2008). How Good is Canadian Health Care? 2008 Report. Fraser Institute.

Howlett, Karen (2009, October 22). Ontario Falls Deep into Red. Globe and Mail. <http://www.theglobeandmail.com/news/politics/ontario-falls-deep-into-the-red/article1334227/>.

Ontario, Ministry of Finance (2007). 2007 Ontario Budget. Government of Ontario. <http://www.fin.gov.on.ca/en/budget/ontariobudgets/2007/>.

Ontario, Ministry of Finance (2009). Economic Outlook and Fiscal Review 2009. Government of Ontario. <http://www.fin.gov.on.ca/en/budget/fallstatement/2009/>.

Figure 1: Actual government spending and revenue in Ontario, compared to “spending with restraint,” 2003/04 to 2011/12

Note: Figures for 2009/10 to 2011/12 are forecasts. “Spending with restraint” is the level of spending that would have been necessary to keep up with inflation and population growth.

Source: Ontario, Ministry of Finance, 2009; calculations by authors.

EDUCATION POLICYFocusForum


andrew J. coulson

Your refrigerator is looking a little bare, so you drive to the local public nutrition office to which you have been assigned. Once there, you are handed

the bags of groceries that voters have determined are right for your family.

Of course, grocery shopping doesn’t actually work that way, but schooling does. Most children in Canada and the United States are assigned to a publicly run school based on where they live and are taught a centrally determined curriculum. The structure of our education system is not only different from most other fields; it’s dif-ferent even from other fields in which we wish to ensure universal access.

To ensure universal access to food, for instance, the US government operates a “food stamps” program that subsidizes grocery purchases for low-income families, but the grocery stores themselves are privately run. To the extent that the Canadian government plays a role in helping parents feed and clothe their children, it is ex-clusively through financial assistance programs such as the National Child Benefit tax credit (Canada Revenue Agency, 2009). Canada also has a network of private, non-profit food banks (Food Banks Canada, 2009).

Why doesn’t education follow the same pattern? Why do the governments of most liberal democracies not only fund but also operate schools? Public school advocates offer two key justifications for this practice: that a uniform educational experience is needed to equip

children to live in and contribute to a democratic nation, and that education would not benefit from market free-doms and incentives.

Counterexamples to the first argument easily come to mind. The early private school experiences of John F. Kennedy, Jean Chrétien, and Barack Obama do not seem to have stunted their ability to succeed in public life. No doubt readers can think of other examples. But we needn’t rely on anecdotes. Many academic studies have compared the ability of public and independent schools to encourage civic engagement, teach the workings of government, and promote among children a tolerance of people who are different from themselves. That research is seldom cited by those who assert that public schools play an essential civic role, and with good reason.

Political scientist Patrick J. Wolf (2007) surveyed the scientific literature on these questions and found that autonomous, freely chosen schools are superior to assigned public schools in their civic outcomes. Virtu-ally all of the studies he identified compared public to private schools, while the remaining few compared as-signed public schools to parent-chosen public alterna-tives such as “charter” and “magnet” schools.1 Together, these studies reported 36 reliable (i.e., statistically signifi-cant) findings. Thirty-three of them favoured private or chosen schools (figure 1).

The most extensively studied area was political tol-erance, in which students were usually asked to identify

Vive l’éducation libre!

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Figure 1: Civic outcomes of private/chosen schools vs. traditional public schools, number of significant and

insignificant findings

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their least-liked political group and then asked whether they would let members of that group exercise such rights as free speech and pursuit of public office. Only a single finding favoured public school students in this area, while 11 favoured students in private or chosen schools, and nine showed no significant difference between the two types of schools.

In fact, the only area in which public school stu-dents came out ahead was in patriotism (though just one research finding was available in this area, limiting our ability to generalize). Given that 64% of Canadians wish that their fellow countrymen were more patriotic (United Press International, 2009, July 1), this might give some readers pause. And yet, weighed against the advantage of private or chosen schools in every other civic outcome, a modest abatement in national pride might not seem an exorbitant price to pay.

With the first justification for a uniform educational experience addressed, we can examine the other core assumption undergirding the collective ownership and operation of schools: that education is simply not like other fields and that it would not benefit from the free-doms and incentives of a competitive marketplace. This

belief is often treated as an axiom, rather than a testable hypothesis, and on the few occasions when it has been addressed empirically, most of the relevant scientific re-search has been ignored.

To make that research more accessible, I recently compiled the most comprehensive literature review to date (Coulson, 2009) comparing public and private schools across a host of outcomes: academic achievement, efficiency (measured as achievement test score points per dollar spent), parental satisfaction, the orderliness of classrooms, maintenance of facilities, subsequent earn-ings of graduates, and educational attainment (highest grade eventually completed). In all, I identified 65 stud-ies that report 156 separate public versus private sector comparisons, covering some of the richest and poorest nations on Earth. These studies were careful to control for differences in the characteristics of students in the differ-ent types of schools, and so were able to make apples-to-apples comparisons. Furthermore, each of these studies compared public and private schools within rather than between countries, so that country-specific factors re-lated to educational outcomes would not skew the results.

But a “private” school in the United States is not the same as a “private” school in the Neth-erlands or Chile, for example. In virtu-ally all US states, private schools are lightly regulated and receive little or no government funding. In the Neth-erlands and Chile, by contrast, the vast majority of private schools are paid for chiefly or exclusively by the central government and are comprehensively regulated (Glenn and Degroof, 2002). Similar differences exist across the Canadian provinces, which vary dra-matically in the extent to which they subsidize and regulate private schools (Davidson-Harden and Majhanovich, 2006). A study comparing public and private schools in the Netherlands thus tells us about very different institutions than one comparing schools in the United States. As a result, indiscrimi-nately pooling the results of those stud-ies is not particularly enlightening.

To overcome this problem, we can specify operational definitions for the kinds of schools we want to

Private/choice advantage

No significant difference

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Forum EDUCATION POLICYFocus

Figure 2: Outcomes of market vs. monopoly school systems, number of significant and insignificant findings

Source: Coulson, 2009.

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compare, and then only look at studies of those types of schools. Since we want to know whether or not market forces improve out-comes relative to the status quo education system, we need to focus on studies that compare “market” to “monopoly” schools. I define a “market” school as one that is min-imally regulated, is not subject to strict price controls, and receives at least a third of its funding directly from parents.2 I define a “monopo-ly” school as one that does not face substantial competition from the private sector because it enjoys a non-negligible3 government fund-ing advantage over most private schools. When we compare market to monopoly schools (as defined here), the results are overwhelm-ingly one-sided (figure 2).

There are 59 statistically signifi-cant findings showing that market-like education systems outperform government monopoly systems, and only four findings of the reverse, resulting in a ratio of nearly 15 to 1 in favour of market-like education systems. There are only 13 statisti-cally insignificant findings among these market-monopoly comparisons, and every finding comparing the efficiency of market and monopoly systems is both statistically sig-nificant and favours markets. In other words, education can and does benefit from market freedoms and incentives.

To sum up, the conventional wisdom presumes that collectively run schools are essential to the survival of democracy and civil society, and that education cannot benefit from consumer choice and market incentives. But sometimes the conventional wisdom is wrong. Just as science eventually showed us that the world is round and that the sun is at the center of our solar system, it now reveals that free and competitive education markets consistently outperform assigned public schools.

How should we react to this mountain of scientific evidence? We would do well to emulate the economist John Maynard Keynes. When criticized for changing his position on several important issues over the years, Keynes responded, “When the facts change, I change my mind. What do you do?” (Malabre, 1994: 220).

The facts in education policy have changed—or rath-er, it has become clear that our key assumptions about the facts have been completely backward. The rational thing to do would be to change public policy to reflect real-ity—that is, to bring minimally regulated education mar-kets within the reach of all families through a financial assistance mechanism that allows the incentives of the free enterprise system to flourish. Vive l’éducation libre!

Notes

1 Charter and magnet schools are public schools that are ex-empt from some of the regulations that govern their tradi-tional public counterparts. They usually have more autonomy in staffing, for instance, and students must choose to attend them; they are not part of an automatic assignment “catch-ment” area.

2 This cutoff point is admittedly arbitrary, but since most of the private schools that qualify as “market” schools under this paper’s definition actually derive all or virtually all of their funding from parents, the results of this study are robust to alternative cutoff values.

Private/choice advantage

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3 For the purposes of my analysis, “non-negligible” is defined as greater than or equal to 30%—that is, “monopoly” public schools receive at least 30% more government funding than private schools do. While this is an admittedly subjective cut-off point, very few studies deal with private schools that receive any government funding whatsoever, while the public schools they study are fully government funded—a clear monopoly scenario. Hence, the conclusions described here would be ro-bust to a much higher cutoff on the government funding level that qualifies public schools as monopolies.

References

Canada Revenue Agency (2009). Child and Family Benefits. Government of Canada. <http://www.cra-arc.gc.ca/bnfts/menu-eng.html>. Last updated September 1, 2009.

Coulson, Andrew J. (2009). Comparing Public, Private, and Market Schools: The International Evidence. Journal of School Choice 3, 1: 31–54.

Davidson-Harden, Adam, and Suzanne Majhanovich (2006). Privatisation in Education in Canada: A Survey of Trends. In Joseph Zajda (ed.), Decentralisation and Privatisation in Education: The Role of the State (Springer): 31–55.

Food Banks Canada (2009). About Food Banks Canada. <http://www.foodbankscanada.ca/main2.cfm?id=1071852F-B 6A7-8AA0-6DBD8CE5374486A9>.

Glenn, Charles, and Jan de Groof (2002). Finding the Right Bal-ance: Freedom, Autonomy and Accountability in Education (Vol. 1). Lemma.

Malabre, Alfred L. (1994). Lost Prophets: An Insider’s History of the Modern Economists. Harvard Business Press.

United Press International (2009, July 1). Canada Day Poll: We Are NOT Americans. <http://www.upi.com/Top _News/2009/07/01/Canada-Day-poll-We-are-NOT-Ame ricans/UPI-52301246454815/>.

Wolf, Patrick J. (2007). Civics Exam: Schools of Choice Boost Civic Values. Education Next 7, 3 (Summer): 66–72. <http://educationnext.org/files/ednext_20073_66.pdf>.

New publications available at www.fraserinstitute.org!

Economic Freedom of the Arab World: 2009 Annual Report

Canadian Student Review – Winter 2009

Waiting Your Turn: Hospital Waiting Lists in Canada, 19th Edition

Economic Freedom and the "Resource Curse"

The BC Agricultural Land Reserve: A Critical Assessment

Unnatural Regulation: Complementary and Alternative Medicine Policy in Canada

The Effects of Mass Immigration on Canadian Living Standards and Society



School choice advocates in America can gain inspi-ration from the education revolution that is sweep-ing the developing world. In the slums and shanty

towns of Asia and Africa, poor people are abandoning public schools en masse. They’re appalled by its low stan-dards. Instead, they’re sending their children to low-cost private schools that are burgeoning in some of the poor-est places on this planet.

For the last decade I’ve been on an extraordinary journey across sub-Saharan Africa, India, and China. I’ve been cataloguing and, more recently, assisting in the development of low-cost private schools. For anyone in-terested in how the poor are learning to help themselves, it is a wonderfully uplifting story. In slums and shanty towns around the developing world, the majority of poor school children are attending low-cost private schools, affordable even to parents on minimum wages. Against the odds, entrepreneurs have set up these schools where untrained teachers are able to bring out more from their children than those in public schools. And, above all, it’s a story of how parents find the low-cost private schools accountable to them—in stark contrast to the public schools where parents see teachers get away with little or no teaching.

Recently I was in the shanty town of Makoko, Ni-geria, home to 100,000 people who live in wooden huts on stilts over the black waters of the Lagos lagoon. At the entrance to the slum, there are three public schools, all on the same site. Visiting them is dispiriting. In one classroom, the young teacher is fast asleep at his desk, not aroused even when the children rise to chant noisy greetings to their visitor. In another, 95 children sit and do nothing while the teacher reads a newspaper. Other teachers are absent—they’ve been allocated to teach these

slum children, have to travel two or three hours to get there from their homes in the plusher suburbs, and don’t really think it worth their time and effort.

It’s all in stark contrast to what is happening inside the slum proper. In the 32 low-cost private schools my researchers found, teachers are energetically teaching—they have to be, for if they fall asleep in front of their charges, they’ll be fired; the entrepreneurs know that they are accountable to parents. Typical of the schools is KPS—Ken Ade Private School. Its owner set up the school in 1990, starting with only five children in the church hall, with parents paying fees on a daily basis when they could afford to do so. Now he has about 200 children, from Nursery to Primary grade 7. His fees are about $4 per month—around 8% of the expected monthly earnings of a fishermen in the shanty town—but 25 children come for free: “If a child is orphaned, what can I do? I won’t send her away,” he tells me.

Parents at KPS are all poor—the men usually fish-ermen, the mothers fishmongers. They know why they choose private school. One father told me: “We pass the public school many days and see the children outside, doing nothing. But in the private schools, we see them everyday working hard. In the public school, children are abandoned.”

It’s not just in Makoko. My research teams have combed slums and shanty towns of urban areas elsewhere in Lagos State, Nigeria, and in Ghana, Kenya, and India, looking for all schools, public and private—not depending on official data, as many of the private schools are unregis-tered, off the official radar. What we found is remarkable. In the poor urban areas surveyed, the vast majority of school children were found to be in “budget” private schools. For instance, in the poor urban areas of Lagos State, Nigeria,

The beautiful tree

JaMes tooley

How the world’s poorest families are finding ways to educate their children


75% of schoolchildren were in private schools. In terms of quality, teacher absenteeism was lower and teacher com-mitment—the proportion of teachers actually teaching when my researchers called unannounced—higher in the private schools for the poor than in government schools. And private schools outperform the government schools in the key curriculum subjects. In Lagos State, for instance, the mean math score advantage over government schools was about 14 and 19 percentage points, respectively, in pri-vate registered and unregistered schools, while in English it was 22 and 29 percentage points.

Many parents have tried public education but don’t feel it’s good enough for their children and so have moved their children back to private schools. Nowhere is this truer than in countries that have recently brought in free public education—Kenya, for instance, where it was in-troduced in 2003. One father I spoke to lived in Kibera, the largest slum in Africa, where half a million people are crammed into corrugated iron and cardboard huts in an area the size of Manhattan’s central park. He had moved his daughter to the public school on the periphery of the slum when it had been made free, only to become disil-lusioned by huge class sizes and teachers who no longer bothered. He had an understanding of economics that would have warmed the heart of Milton Friedman; he told me, “if you go to the market and are offered free fruit and vegetables, they’ll be rotten. If you want fresh produce, you have to pay for it.”

I like talking to these parents. Talking to those op-posed to school choice—whether in America or devel-oping countries—one is struck by the assumption that ordinary, poor parents cannot possibly be equipped to make proper decisions about their children’s education. Talking to poor parents gives the lie to that every single

time. One family I know well sends their daughter, now 14, to a private school in a fishing village along Ghana’s coconut-lined coast. They’ve thought long and hard about their choice of private school. The father, Joshua, a fine-looking fisherman who takes his boat out at 3 o’clock every morning into the Atlantic surf, understood the vir-tues of a private school very well indeed:

My father didn’t allow me to go to school. I want to strive hard, so that my daughter can go to school. We enrolled her in the government school, but we felt that her learning was declining. The govern-ment school doesn’t have anyone monitoring the teaching or telling them when it’s time for class or time to teach. Classes are not on a fixed schedule … The reason why the private schools are better than the government school is because there is a private owner. If you don’t teach as expected, you’ll be fired and replaced.

His wife, Margaret, who smokes the fish caught by her husband to sell in the market, put it a different way: “I didn’t get very far in school. My father couldn’t afford my education. That’s why I want Victoria to go to school, so that she won’t be disgraced like me. In the private school, they love and care so much for the kids, and are very seri-ous with the teaching and learning. That’s why we decided to put our child there.”

More information about Tooley’s research can be found in his 2009 book, The Beautiful Tree: A Personal Jour-ney into How the World’s Poorest People Are Educating Themselves, published by the Cato Institute. This article was originally published in School Choice Advocate.

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Are Canada’s government-run public schools up to the task of educating the country’s young people?For more than a decade, the Fraser Institute has

published annual report cards on schools in provinces where objective data are available.1 Each of these report cards has rated government-run public schools (and their private counterparts) on their effectiveness as reflected by their students’ results on province-wide tests. Whenever the report cards are released, the Institute receives criti-cism from some administrators and educators, as well as from organizations that represent teachers, school trustees, school superintendents, and principals. (for ex-ample of the reaction of educators and their representa-tive groups, see Barron, 2009, Feb. 11).

In private conversation, these same critics often assert that it is not fair or useful to rate public schools because, due to reasons such as government regulation, collective agreements, or prevailing political philosophy, there is nothing they can do about poor performance.

One could easily reject this criticism as simply an excuse for ineffectiveness. But perhaps it should be taken more seriously. Perhaps it reflects a recognition among at least some of those working within the education sec-tor that there are a number of intrinsic characteristics of government-run school systems that, taken together, make real improvement and sustainable high levels of performance difficult, if not impossible.

It is this same recognition of impediments to better performance in public schools that may have convinced (see American Federation of Teachers, n.d.) a number of the US states and the province of Alberta to enact charter school legislation.2 Under such legislation, a lo-cal board of education or the state education authority may grant an organization or individual the right to operate a school that intends to satisfy a need that is not successfully being met by the local public schools. The charter school receives the same government fund-ing as a local public school, but is not given funds to purchase or rent facilities. Importantly, charter schools do not have to comply with many of the regulations and policies imposed on regular public schools, includ-ing any blanket requirement that the school must hire teachers belonging to the public school union.3 This reduction in the regulatory burden for charter schools suggests that the regulations themselves may have been seen as an impediment to improvement and high lev-els of student performance within the regular public school system.

During private conversations between the author and many Canadian school administrators and teachers over the last decade, a number of possible impediments to improving and sustaining the quality of student outcomes within the public school system were identified. Some of the most important ones are described below.

Peter cowley

Impediments to reform in the public school system


1. There is a general distaste for competition among major education stakeholder groups.

Competition is made possible, in part, by the ability of a consumer of a good or service to compare the quality of the offering of one supplier with that of another. In such an environment, consumers can routinely compare alter-native selections to determine which most fully satisfies their particular needs. In order to convince more potential customers to decide in favour of its product or service, a provider will continually increase the quality of its offer-ing (or reduce its cost) so that the offering compares more favourably with that of its competitors. In this way, com-parison drives competition and competition generates improvements in the goods and services providers offer.

However, there exists a considerable distaste among many educators and administrators—which is reflected in the official positions of virtually all of the education stakeholder groups—for any mechanism that has the potential to encourage competition among schools. This may be the most damaging of impediments to improve-ment within the public school system.

A striking example of this aversion to competition among Canadian educators is the reaction of virtually all stakeholder groups to the installation of a “school finder” feature on the Ontario Ministry of Education website in April 2009. This feature allowed visitors to easily locate and compare schools on the basis of their students’ aca-demic results (for example, province-wide standardized test scores), as well as contextual factors such as the per-centage of special needs students enrolled at the school. (These same kinds of comparisons can be made using the

Fraser Institute’s school report cards.) This was the first time a Canadian ministry of education tried to provide an easy-to-use school comparison tool. The reaction of the education stakeholder groups was unanimously negative4 and led to the removal of the school finder feature from the ministry’s website.

The teachers’ union in British Columbia provides an-other example of this anti-competitive philosophy. For a decade, the British Columbia Teachers’ Federation (BCTF) has waged a war against province-wide testing specifical-ly because an analysis of the results of these tests enables the Fraser Institute to produce school ratings that allow parents and other interested parties to find out how one school compares to others nearby. Clearly, it is a distaste for competition that drives the union’s anti-testing campaign.5

If it is important to continually improve our chil-dren’s education, then the onus is on the official educa-tion stakeholder groups to demonstrate convincingly why competition among schools should not be embraced, de-spite the evidence in competition’s favour from virtually every other sector in society, including education. By dis-couraging comparison and competition, ministries of ed-ucation and vested interests within the public education system have forgotten the interests of those they serve and created a formidable barrier to improving education.

2. Teachers’ collective agreements restrict innovation and leave little room for efficient and effective management of schools.The flexibility of school administrators is often ham-pered by provisions of the collective agreements6 nego-

tiated by the teachers’ unions. Among the most important of these provisions is one referred to as the “professional autonomy” clause. This is-sue is discussed in more detail below. In essence, this provision means that once the classroom door is closed, every teacher has considerable autonomy over how learning and assessment are accomplished. This clause makes it difficult for principals to introduce new teaching techniques into a school or to enforce the use of a particular classroom management technique.

Further, limitations on hours of work make it difficult for individual schools to extend the school timetable, and seniority clauses limit a principal’s ability to select the best teacher for an available position. Finally, the effort required Fo

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to dismiss a teacher for any but the most egregious be-haviour often dissuades principals from undertaking the task.

3. There is no cost to educators when poor performing schools fail to improve.

In at least one Canadian province, there appears to be no cost to teachers for poor results among students. Sev-eral years ago, a Vancouver-based newspaper columnist could find no evidence that any BC teacher had ever lost his teaching certificate due to incompetence. This may have prompted the BC government to note in its Febru-ary 2008 throne speech that “new powers will be given to the College of Teachers to remove the teaching certificate of any member who is found to be incompetent” (British Columbia, 2008).

Attempts to compel teachers to upgrade their skills may lead a teachers’ union to file a grievance on the teacher’s behalf. Indeed, a strange institution called the “Dance of the Lemons” illustrates one of the only ways through which the damage done by inadequate teachers can be minimized within the public system. The informal dance was explained to the author in a private conversa-tion with a Vancouver principal over a decade ago, and its continued existence was recently confirmed. The dance is initiated by a principal with an ineffective teacher on his or her staff. The principal may attempt to make a deal with another principal who is willing to take the poor teacher in trade for a teacher that the second principal wishes to see gone. They come to an agreement if each believes that by making the trade, less harm to their own students will result. The dance is apparently much more effective than an attempt to rid the school of the teacher by the procedure regulated by the collective agreement. However, this means that ineffective teachers continue to provide poor service to their students.

4. There is little in the way of rewards for results.

The idea of compensating educators, at least in part, for the educational outcomes of their students is one that is intended to create comparison and competition among teachers and, by extension, among schools. I have already noted how abhorrent the idea of comparison and compe-tition is to the vested interests that are secure and com-fortable within the current system. They are insulated,

to a large degree, from competition and will battle hard to remain so.

But it is not just monetary rewards for success to which many in the public system are rigidly opposed. The Fraser Institute has for nearly a decade presented the an-nual Garfield Weston Awards for Excellence in Education to school teams—teachers, administrators, and support workers at individual schools—for outstanding achieve-ment in one of three areas of academic performance: im-provement in results, results that exceed prediction based on the socioeconomic status of the school’s families, and improvement in academics. This recognition is a reward for results.

While they may seem quite harmless and potentially motivating, these awards offend many of those with vested interests in the status quo because they encourage com-parison and result in competition. The teachers’ union in British Columbia has been a particularly vocal critic of

No one will benefit more from increased competition in education than the students themselves.

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the awards program and has told its members that they should not be involved with it. In Quebec, the Fédération des commissions scolaires du Québec (the association of school boards in Quebec) has forbidden its members from accepting an award. In both BC and Quebec, private com-munications from individual school administrators attest-ed to the outrage and dismay felt by educators who were forbidden to accept public accolades for their success.

5. Professional autonomy in the classroom inhibits broad-based innovation.

As noted above, an important provision in many teachers’ collective agreements is the notion of “professional auton-omy.”7 This provision gives teachers the responsibility and authority to teach and manage the classroom in the way they deem most appropriate. This provision may seem to make sense as it can be framed as a defence against the imposition of arbitrary policies and procedures at the school, district, or provincial level that make it impos-sible for teachers to be the best they can be. However, this provision assumes that teachers are sufficiently compe-tent to determine, for example, how best to teach grade 1 students to read more effectively or to interest teenaged boys in literature. (As I will show below, this assumption may be naïve.) These professional autonomy clauses in collective agreements strip principals of their role as head teacher, making improvements in pedagogical or class management techniques more difficult to establish.

6. There is no provision for the routine expansion of successful operations.

Among the most troublesome impediments to improve-ment in the public system is the lack of incentive to dis-seminate improvements in teaching and learning in ways that would enable them to be instituted effectively. And because there is a lack of competition between students and schools, there is no hard incentive for educators to accept change. For example, the author has found very few examples of outstanding principals who have been given the opportunity or incentive to replicate their suc-cess in other less effective schools.

The same lack of incentive to improve slows the adop-tion of school models that are both effective and popular with parents. A stunning example comes from Vancou-ver, where the Board of Education established a single elementary school where the instruction was based on the

internationally recognized teaching techniques developed by the Italian doctor Maria Montessori in the 1900s. Tyee Elementary School ran successfully for over 17 years be-fore, in spite of ongoing waiting lists reflecting substantial demand, a second Montessori school was established.

7. Some teachers are not adequately prepared for teaching.

There is some evidence that at least some teachers in Canada are not trained in key aspects of their craft prior to commencing their teaching careers. A 2006 Fraser In-stitute study found that, based on the available evidence, training in sound techniques for teaching reading was not mandatory for elementary school teachers in train-ing at most Canadian faculties of education (Donders and Cowley, 2006). One representative of the office of the dean at the University of Calgary’s education faculty said that it was wrong to assume that the university’s educa-tion faculty trained teachers. Rather, our researcher was told, it was the faculty’s mission to educate professionals.

The extent to which administrators can require teach-ers to take further training or impose certification require-ments beyond the minimums specified by the provincial ministries of education is severely limited by teachers’ col-lective agreements, particularly with respect to the above-noted provision establishing professional autonomy.

What must be done?

It seems likely that, given the impediments to improve-ment described above, change of the kind necessary to bring more rapid improvement in student outcomes and greater sustainable success is unlikely to be accomplished from within the public school system. The impediments to innovation and improvement may simply be too en-trenched and too formidable. Further, it is unlikely that any success among charter schools—relieved as they are from the burden of regulation faced by public schools—could be transferred to the more highly regulated public systems.

However, by eliminating the existing discrimination in funding by which private schools receive substantially less in operating grants than public schools do—in some provinces, including Ontario, private schools receive no provincial funding—the provincial ministries of educa-tion could create a more competitive education sector.



More private sector involvement in education would undoubtedly drive innovation as new competitors vie for patronage. It would also offer a stronger incentive for im-provement within the public school system.

No one will benefit more from increased competi-tion in education than the students themselves. It is time for education to be—as so many educators would say—“all about the kids.”

Notes

1 Visit <http://www.fraserinstitute.org/reportcards/schoolp-erformance/> to view the Institute’s most recent report cards for schools.

2 For an introduction to charter schools, see Center for Educa-tion Reform (2009).

3 While charter schools in most US states are not required to hire unionized teachers, the broad participation of teachers’ unions in charter schools is the subject of considerable interest to the national unions. See, for example, American Federation of Teachers (n.d.).

4 Typical of the teachers’ unions’ reaction to the school finder site was a June 5 news release from the Elementary Teach-ers’ Federation of Ontario (ETFO, 2009). In the news release, ETFO President David Clegg complained that “the website is constructed intentionally to allow for a comparison between schools. Education Minister Kathleen Wynne has repeatedly stated that she is opposed to the ranking of schools. The School Information Finder suggests otherwise.” In a letter to the Min-ister of Education (OPSBA, 2009), the Ontario Public School Boards’ Association implied that the comparison of schools by school boards is appropriate, while such comparisons by parents are inappropriate.

5 The BC teachers’ union’s website, <http://www.bctf.ca>, pro-vides many documents in which competition is pilloried. See, for example, Robertson (2005).

6 Depending upon the province, the teachers’ union’s collec-tive agreement may have both a province-wide component and a local component. For an example of both the provincial and local collective agreements for Vancouver teachers, see Vancouver Secondary Teachers’ Association (2006). For an ex-ample of a locally negotiated collective agreement in Alberta, see Alberta Teachers’ Association (n.d.).

7 For a discussion of “professional autonomy” and its place in a collective agreement from the union’s point of view, see Popp (2009).

References

Alberta Teachers’ Association (n.d.). Collective Bargaining. <http://www.teachers.ab.ca/Salary%20and%20Benefit/Collective%20Bargaining/Pages/Index.aspx>.

American Federation of Teachers (n.d.). Charter Schools. <http://www.aft.org/topics/charters/>.

Barron, Robert (2009, February 11). Fraser Institute School Report Card Stirs Controversy. Nanaimo Daily News. <http://www2.canada.com/nanaimodailynews/news/story.html?id=efcf82e2-b38a-4cb9-a9c1-6021baad6434>.

British Columbia (2008). Speech from the Throne, 4th Session, 38th Parliament. Legislative Assembly of British Colum-bia. <http://www.leg.bc.ca/38th4th/4-8-38-4.htm>.

Center for Education Reform (2009). Just the FAQs – Char-ter Schools. <http://www.edreform.com/Fast_Facts/Ed_Reform_FAQs/?Just_the_FAQs_Charter_Schools>.

Donders, Lindsay, and Peter Cowley (2006). Do New Cana-dian Teachers Have the Skills to Teach Reading to their Elementary School Students? A Preliminary Report. Fraser Forum (September): 9–13.

Elementary Teachers’ Federation of Ontario [ETFO] (2009). Public Education Is Collateral Damage in ‘School In-formation Finder.’ News release (June 5). <http://www.etfo.ca/MediaRoom/MediaReleases/Pages/Public%20Education%20is%20Collateral%20Damage%20in%20School%20Information%20Finder.aspx>.

Ontario Public School Boards’ Association [OPSBA] (2009). Letter to the Honourable Kathleen Wynne, Minister of Education, Ontario, April 9, 2009. <http://www.opsba.org/files/OPSBA_Letter_SchoolFinderWebsite_Apr09-09.pdf>.

Popp, George (2009). Professional Autonomy. Teacher 22, 1 (September): 5. <http://bctf.ca/publications/Newsmag Article.aspx?id=19526>.

Robertson, Heather-Jane (2005). The Many Faces of Privatiza-tion. British Columbia Teachers’ Federation. <https://bctf.ca/IssuesInEducation.aspx?id=5956>.

Vancouver Secondary Teachers’ Association (2006). Provincial Collective Agreement. <http://www.vstaweb.ca/collective_agreement.htm>.


Historically, natural resources such as minerals and metals, oil, agricultural resources,

and so on were considered beneficial to the economic growth of a coun-try. This assumption was reversed by Sachs and Warner’s paper (1995), which found that natural resources lead to negative economic growth, or what is known as the “resource curse.” These findings were contro-versial, not only because they were not in line with the literature at the time, but also because economic the-ory suggests that natural resources, like physical or human capital, should have a positive impact on growth. While earlier research fol-lowing Sachs and Warner’s seminal work supported their conclusions about the negative impact of natu-ral resources on economic growth, recent studies have challenged these findings. Nevertheless, the issue re-mains hotly debated.1

Resource curse aside, a point of agreement that is emerging among researchers is the positive impact that strong institutions (such as the rule of law, which leads to transpar-ency and accountability) have on economic growth and on the ability of a high level of institutional quality

to turn a “resource curse” into a “re-source blessing.”2 These findings are important because they have the potential to shape the development policies of nations around the world. For example, many nations, includ-ing those in Sub-Saharan Africa, are rich in natural resources; con-sequently, this line of research may play a role in their future prosperity.

A recent Fra-ser Institute study by Beland and Tiagi (2009) tested the resource curse hypothesis us-ing the latest data from the World Bank, and exam-ined the role of institutions us-ing the Fraser In-stitute’s Economic Freedom of the World (EFW) Index (World Bank, 2008; Gwartney et al., 2008).3 Eco-nomic growth is measured in terms of the average per-capita growth in gross domestic product (GDP) in each country between 1970 and 2006, while resource dependence is mea-sured in two ways: (1) primary prod-uct exports as a proportion of GDP in

1970, and (2) metals and ore exports as a proportion of GDP in 1970.4

Figure 1 summarizes the rela-tionship between economic growth and resource dependence for the 77 countries in the sample. Whether measured as the share of primary product exports to GDP or as the share of metal and ore exports to

GDP, depen-dence on natural resources is nega-tively correlated with economic growth.

C r i t i c a l ly, Beland and Ti-agi’s results al-so suggest that strong institu-tions (measured in terms of a country’s lev-

el of economic freedom) in high resource-dependent countries (whether measured in terms of the share of primary product exports to GDP or the share of ore and metal exports to GDP) have a positive ef-fect on economic growth. Figure 2 highlights this finding for countries that have a high share of metal and ore exports to GDP.

raaJ tiaGi

Does economic freedom matter?

Economic growth and the “resource curse”

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Share of export of ores and metals, 1970Trend line for data on export of ores and metals

Share of export of primary products, 1970Trend line for data on export of primary products

Average growth rate (%) of (log) GDP per capita

Top third of resource-dependent countries

(EFW score >6.36)

Middle third of resource-

dependent countries(EFW score 6.36–5.43)

Bottom third of resource-dependent countries

(EFW score <5.43)

-0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%

–0.38%

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2.62%


The top third of the resource-dependent countries in the sample (approximately 26 of the 77 coun-tries) are first sorted by their level of economic freedom and then di-vided, on the basis of economic free-dom scores, into three groups. As figure 2 shows, resource dependent countries that are part of the group with the highest level of economic freedom have a higher average rate of economic growth (2.6%) than the other two groups. Moreover, coun-tries that are part of the group with the lowest economic freedom scores have a negative overall average rate of economic growth.

The above evidence concerning the negative relationship between natural resources and economic growth and the importance of eco-nomic institutions for resource-dependent countries is confirmed using a more rigorous empirical analysis. One of the advantages of this empirical analysis is that it al-lows us to compute the level of eco-nomic freedom, or the quality of in-stitutions, needed to turn a resource curse into a resource blessing. The analysis indicates that resource-rich nations can turn the resource curse into a blessing if they have the level of economic freedom above 6.89 (out of 10).5 In other words, countries (such as oil-rich Venezu-ela) that have an economic freedom score lower than 6.89 can turn their low or negative rates of economic growth into positive growth if they are successful at increasing their level of economic freedom (that is, improving their institutions) to this higher level.

Beland and Tiagi’s 2009 study offers empirical evidence that strong institutions in countries with natural

Strong institutions can turn a resource curse into a resource blessing.Figure 1: Association between average growth of (log) GDP per

capita, 1970–2006, and share of exports of primary products; and ores and metals, 1970

Notes: [1] The data set consisted of 77 countries. [2] Primary products include agricultural raw materials, fuel, food, and ores and metals.

Source: World Bank, 2008; calculations by author.

Figure 2: Average growth rate of (log) GDP per capita of the 26 highly resource-dependent countries, by level of economic

freedom, 1970–2006

Notes: [1] There were 26 resource-dependent countries. Of these, nine were in the top third by level of economic freedom (EFW score greater than 6.36); 26 were in the middle third (EFW score from 6.36 to 5.43); and eight were in the bottom third (EFW score lower than 5.43). [2] The last country included in the group of highly resource-dependent countries is the Netherlands, where metal-and-ores exports as a proportion of GDP is 1.38%.

Sources: World Bank, 2008; Gwartney et al., 2008; calculations by author.


resources can turn a resource curse into a resource blessing. Conse-quently, leaders in resource-de-pendent countries should focus on building proper institutions, includ-ing the rule of law, property rights, independent judiciary and impar-tial judges, low taxation, low levels of tariffs and import barriers, and low levels of red tape—all key ele-ments of economic freedom. Doing so will increase prosperity in those countries and enable them to benefit from their natural resources.

Notes

1 A recent study by Ding and Field (2005) shows that when natural re-sources are more precisely measured (in terms of natural resource capital per capita instead of Sachs and War-ner’s general measure, primary exports as a percentage of the economy), the resource curse disappears. For a de-tailed discussion of the resource curse literature, see Karabegović (2009).

2 A resource-rich nation with the “resource blessing” is one that outper-forms resource-poor nations in terms of economic growth. See Acemoglu and Robinson (2008) for a discussion of the positive role of institutions in generating economic growth. Mehlum et al. (2006) show that resource-rich countries with strong in-stitutions can avoid the resource curse.

3 Economic freedom is rated on a scale of zero to 10, where a higher score

indicates a higher level of economic freedom. The EFW Index is not only a broadly accepted measure of the quality of institutions (for example, the International Monetary Fund’s 2005 report, World Economic Outlook: Building Institutions, uses the EFW In-dex as its key measure of institutional quality), but is also a better proxy for institutional quality than other mea-sures that have been used in earlier research. In addition to measuring the rule of law and the level of red tape—measures that have been used in earlier research—the EFW Index measures the size of the government, access to sound money, and freedom to trade interna-tionally.

4 A country that has a higher share of primary product exports as a propor-tion of GDP or a higher share of ores and metals exports as a proportion of GDP relative to another country is more resource dependent. Primary product exports as a proportion of GDP in 1970 include the share of exports to GDP of

agricultural raw materia ls, fuel, foods, and ores and metals. When this measure was disaggregated, the share of metal and ore exports to GDP in 1970 was the only category of primary resources that has a statisti-cally significant impact on econom-

ic growth on its own. Therefore, results were presented using both of these mea-sures. The difference between resource abundance and resource exports is dis-cussed in the main paper.

5 For metals and ores, regression results show that nations with an economic

freedom score above 5.43 (out of 10) benefit from possessing metal and ore resources.

References

Acemoglu, Daron, and James Robinson (2008). The Role of Institutions in Growth and Development. Commis-sion on Growth and Development Working Paper No. 10. World Bank.

Beland, Louis-Philippe, and Raaj Tiagi (2009). Economic Freedom and the Resource Curse: An Empirical Anal-ysis. Fraser Institute.

Ding, Ning, and Barry C. Field (2005). Natural Resource Abundance and Economic Growth. Land Econom-ics 81, 4: 496–502.

Gwartney, James, and Robert Lawson, with Seth Norton (2008). Economic Freedom of the World: 2008 Annual Report. Fraser Institute. <http://www.freetheworld.com>.

International Monetary Fund (2005). World Economic Outlook: Building Institutions. International Mon-etary Fund.

Karabegović, Amela (2009). Institu-tions, Economic Growth, and the “Curse” of Natural Resources. Fraser Institute.

Mehlum, Halvor, Karl Moene, and Rag-nar Torvik (2006). Institutions and the Resource Curse. Economic Jour-nal 116 (January): 1–20.

Sachs, Jeffrey D., and Andrew M. War-ner (1995). Natural Resource Abun-dance and Economic Growth. NBER Working Paper No. 5398. National Bureau of Economic Research.

World Bank (2008). World Development Indicators. World Bank.

Strong institutions can turn a resource curse into a resource blessing.

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Canada’s immigration levels have been very high since the Mulroney government

opened the door more widely in the mid-1980s. Over 250,000 new permanent residents and 113,000 temporary foreign workers were welcomed to Canada in 2006 (Citi-zenship and Immigration Canada, 2006). Bringing in such a large number of permanent and tempo-rary new residents to participate in the Canadian labour market has wide-ranging implications for the Canadian economy, particularly for Canada’s labour market. Yet there is very little understanding of these impacts and their implications for both existing Canadian residents and the new arrivals.

Labour market impact

The impact of immigration on the labour market has many dimen-sions. It encompasses labour force participation rates, employment rates, and unemployment rates for

immigrants. It also includes im-migrants’ wages and earnings and reflects the indirect effects of an increased immigrant labour supply on the labour market outcomes of the Canadian-born and earlier co-horts of immigrants. These impacts are all compounded by the entry of large numbers of temporary foreign workers who also must be absorbed by the labour market.

Up until around 1980, the pat-tern (as revealed by the censuses) was that new immigrants started out earning about 80% or so of the equivalent wage of a Canadian-born, but then moved up to—and even beyond—the average wage over a 10- to 20-year period. But in sub-sequent years—at the same time as Canada’s source countries changed, as did other characteristics of im-migrants, such as language and job experience—there was a substantial deterioration in the labour market performance of immigrants over time (Picot and Sweetman, 2005). In 1993, the point system—which since its introduction in 1967 has

selected immigrants on the basis of “points” earned for such factors as age, education, knowledge of Eng-lish and/or French, work experience, arranged employment, and adapt-ability—was modified to put more emphasis on education. Selecting immigrants based on their educa-tion rather than their specific job

PatricK Grady

The impact of immigration on Canada’s

labour market

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Figure 1: Immigration of family class and skilled workers, 1980-2006

Imm

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(000

s)

Figure 2: Immigrants, 15+ years of age, by level of education, 1980-2006

Source: Citizenship and Immigration Canada, 2007.

Source: Citizenship and Immigration Canada, 2007.

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skills has been called the “human capital” approach. This approach can be contrasted with the “occupational needs” approach, which attempts to identify occupational classes where workers are in short supply and ad-mit immigrants in those classes.

In order to improve the la-bour market performance of new immigrants, starting in 1994 the Skilled Class of immigrants admit-ted on the basis of their qualifica-tions was increased and the Family Class admitted on the basis of their family relationships with Canadian residents was decreased. This move was reinforced in 2002 when the point system was changed so that more points would be awarded for a trade certificate or second degree, and fewer would be awarded for experience. The result of these two policy changes was an increase in the Skilled Class of immigrants relative to the Family Class (figure 1) and a dramatic increase in the education level of immigrants (figure 2).

While there has been some im-provement since 2001 as the labour market has tightened, the employ-ment rate of recent immigrants in 2006 (defined in the census as those arriving between 2001 and 2006) was substantially lower than for the Canadian-born, particularly among women (table 1). The unemployment rate has come down, especially for recent immigrant men, but was al-most twice as high for men and three times as high for women as for the Canadian-born. The labour market performance of recent immigrants is poorest among recent immigrants from Africa and, to a lesser extent, Asia and Latin America (table 2). More ominously, judging from what happened in 2001 when unemploy-ment rose (as shown in table 1), any downturn in the labour market re-sulting from the current economic slowdown is likely to adversely and disproportionately affect recent im-migrants from the source countries with the poorest performance.

Table 1: Employment and unemployment rates (%) of recent immigrants and Canadian-born aged 25 to 54 (%)

Men Women

Emp. Rate Unemp. Rate Emp. Rate Unemp. Rate

Recent immigrants*

2001 74.5 11.4 53.2 15.7

2006 78.6 9.3 56.8 14.3

Canadian born

2001 85.7 6.3 76.3 5.7

2006 86.3 5.2 78.5 5.0

*Note: Recent immigrants are defined as those being in the country for less than five years.

Source: Statistics Canada, 2008a: 30.

Skilled workers

Family class

University

High school or less

Figure 3: Ratio of earnings of immigrants to earnings of the Canadian-born, by level of education and sex

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Source: Statistics Canada, 2008b: 22.

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Male with degree

Female with degreeMale with no degreeFemale with no degree


Over the last 25 years, in spite of the changes in immigration policy introduced by the federal government, the earnings of recent immigrants have continued to dete-riorate relative to those of equiva-lent Canadian-born workers (figure 3). The earnings of new immigrant men with a university degree has fallen dramatically to less than half of that of Canadian-born men, and the earning of new immigrant woman with a university degree has dropped to almost 40% of that of Canadian-born women. In 2005, recent immigrant men earned only $30,332 if they had a university de-gree (compared to $62,566 for Cana-dian-born men) and $24,470 if they did not (compared to $40,235 for the Canadian-born) (table 3). Re-cent immigrant women earned only $18,969 with a degree (compared to $44,545 for Canadian-born women) and $14,233 without (compared to $25,590 for the Canadian-born).

The gap is greatest among those with a university degree; recent im-migrants in that group earn less than half of the wages earned by the Ca-nadian born. The deterioration in wages is largest among women with no degree and men with a univer-sity degree. Most troubling of all is

Table 2: Low-income rates (%) for immigrant economic families, 2000, total and by place of origin

Period of immigration

Total Before 1961

1961-1970

1971- 1980

1981- 1990

1991- 2001

1991- 1995

1996- 2001

Immigrant population 19.1 6.8 8.2 10.4 17,2 33.6 25.2 41.2

Place of origin:

United States 10 4.2 5.8 7.5 9.7 19.2 13.3 23.2

Europe 10.9 6.9 8.4 8.2 10.5 24.7 14.5 33.7

Africa 28.1 7.1 7.2 10 20.7 42.6 34.8 48.8

Asia 26.9 8.7 8.3 11.3 19.4 36.8 27.8 44.6

Note: The figure for the non-immigrant population is 11.2%.

Source: Statistics Canada, 2002.

the downward trend in the relative performance of recent immigrants, which showed no signs of abating even as the labour market tightened between 2001 and 2006. And this decline predates the recent deterio-ration in the labour market caused by the recession, which will only exacerbate the already poor perfor-mance of immigrants relative to the Canadian born.

Why are immigrants doing so poorly?

An appropriate policy response to the poor outcomes experienced by recent immigrants requires a sound understanding of the causal fac-tors at play. Fortunately, Garnett Picot and his colleagues at Statistics Canada have undertaken this task


and produced many high-quality research studies that analyze the available data to find out why im-migrants are doing so poorly in the labour market.

Picot and Arthur Sweetman (2005) have provided a convenient survey of the studies. They attribute the decline in entry-level earnings and increasing low-income rates to: (1) the changing characteristics of immigrants, including country of origin, language, and education, which appear to account for about a third of the increase in the earn-ings gap; (2) the decreasing returns on foreign work experience, which explain another third; and (3) the decline in labour market outcomes for all new labour force entrants, including immigrants. They also discuss a possible reduction in the return on education and differences in education quality. Put simply, the research shows that Canadian em-ployers do not value foreign experi-ence and heavily discount the value of foreign education. A lack of flu-ency in English or French is also a problem (Grondin, 2005). A more recent study by Picot (2008) attribut-ed much of the recent decline to the downturn in high tech, combined with the increasing concentration of immigrants in IT and engineer-ing. This provides a good example of the difficulty the government has in selecting the people most in demand in the labour market.

Relative poverty increasing among immigrants

The poor performance of recent im-migrants in the labour market has caused a much larger proportion of recent immigrants than Canadian -born to fall below Statistics Can-ada’s Low Income Cut-Off (LICO), which is the most widely used, though still controversial, measure of the incidence of low income or “relative” poverty (for a discussion about the difference between rela-tive and absolute poverty, see Sarlo, 2006, 2008). By this measure, the incidence of low income has been highest among recent immigrants from Africa and Asia (figure 3). This increase in the incidence of low in-come among immigrants helps to explain why income inequality has been increasing in the main immi-grant-receiving centers of Toronto, Montreal, and Vancouver, where im-migrants are becoming increasingly ghettoized (Hou and Picot, 2004).

While relative poverty, as de-fined by the LICO, has been rising among the immigrant community, it has been falling among the Canadi-an born (Grady, 2005). As a result, a growing disparity between rich and poor is emerging along ethnic and racial lines. There is a risk that this might undermine the dynamic of intergenerational upward mobility

Table 3: Median earnings, in 2005 constant dollars, of male and female recent immigrant earners aged 25 to 54 ($)

With a university degree Without a university degree

Males Females Males Females

1980 48,541 24,317 36,467 18,548

1990 38,351 25,959 27,301 17,931

2000 35,816 22,511 25,951 16,794

2005 30,332 18,969 24,470 14,233

Source: Statistics Canada, 2008b: 22.

that has made Canadian immigra-tion policy so successful in the past.

Discussion and recommendations

The fundamental problem, which few are willing to acknowledge and even fewer willing to do anything about, is simply that, using the ex-isting selection system, it is not pos-sible to admit annually as many as 250,000 immigrants who are capable of doing well in the Canadian labour market, despite 16 years of economic expansion, during which the unem-ployment rate dropped below 6%. The situation can only worsen as un-employment climbs, as is happening now as Canada faces the worst reces-sion of the post-War period.

Based on the relationship be-tween unemployment rates for im-migrants and the national average exhibited in the most recent data, if the national average unemploy-ment rate were to rise to 9%, then the unemployment rate for immi-grants who have been in Canada for less than five years could reach 17%, and the unemployment rate for im-migrants who have been in Canada for five to 10 years could touch 11% (Grady, 2009). The situation could even be much worse as new im-migrants often find themselves at the end of the employment queue because of their lack of Canadian experience and education and their weak language skills. In the long term, these initial problems with la-bour market integration could eas-ily turn into a life-long problem of marginal labour force attachment and low earnings. If workers do not find employment in their chosen field reasonably soon after landing in Canada, they may be forced to take temporary unskilled jobs and their human capital will depreciate. More fundamentally, there is a real possi-bility that their temporary jobs will, in effect, define them in the eyes of


future employers and prevent them from ever finding professional or skilled jobs.

The only way to ensure that new immigrants will do better in the Canadian labour market is to be more selective in choosing them. This means that the selection system will have to be radically revamped to make sure that it correctly identi-fies the immigrants who will really succeed in the labour market, rather than those who have formal educa-tion but few practical skills. Then the economic performance of the immi-grants who are admitted will have to be monitored much more carefully to make sure that new immigrants are indeed succeeding—that is, on average, doing roughly as well as native Canadians after being in the country for a couple of decades.

To be more selective, it will be necessary to lower the global target for immigration substantially. We could begin by reducing the target to 100,000 immigrants per year. This target, a significant reduction from current levels, would make possible a marked increase in the labour mar-ket readiness of new arrivals. If the lower number of more qualified im-migrants produced the desired im-provement in the immigrants’ eco-nomic performance, then the new immigration target could be main-tained. If not, then it would have to be reduced further until the new immigrants were able to perform satisfactorily in the labour market.

Canadians, including existing immigrants, could expect to reap significant benefits from lower and more selective levels of immigration.

The resulting increase in immi-grants’ earnings would help stop the rise in relative poverty among immi-grants. This, in turn, would make it more likely that the new immigrants would make a net fiscal contribution to the country within a reasonable period of time and thus prevent the emergence of a large, net fiscal drain, which, if allowed to grow, would make it all the more difficult for the government to eliminate its current unsustainably large deficit and re-store its finances to a more healthy position (Grubel, 2005, provides preliminary estimates of the fiscal cost of recent immigration).

More generally, a tighter la-bour market would put upward pressure on the wages and incomes of all Canadians, including im-migrants, which, maybe not coin-cidently, have stagnated in recent years. However, true reform will not be easy to achieve, given the strong political pressure on all par-ties to maintain high immigration levels, regardless of the economic consequences.

References

Citizenship and Immigration Canada (2007). Facts and Figures 2006: Im-migration Overview: Permanent and Temporary Residents. Government of Canada. <http://tinyurl.com/yc3ven8>.

Grady, Patrick (2005). What the Im-migration Minister Should Have Known. Global Economics Ltd. <http://www.global-economics.ca/immigrationstudies.htm>.

Grady, Patrick (2009). Immigration Should Be Cut to Counter Soaring Unemployment. Global Economics Ltd. <http://www.global-economics.ca/immigration_rnu.htm>.

Grondin, Chantal (2005). Knowledge of Official Languages among New Im-migrants: How Important Is It in the Labour Market? Catalogue No. 89-624-XWE. Statistics Canada.

Grubel, Herbert (2005). Immigration and the Welfare State in Canada: Growing Conflicts, Constructive So-lutions. Public Policy Sources No. 84. Fraser Institute.

Hou, Feng, and Garnett Picot (2004). Visible Minority Neighbourhoods in Toronto, Montréal and Vancou-ver. Canadian Social Trends 72: 8–13.

Picot, Garnett (2008). Immigrant Eco-nomic and Social Outcomes in Canada: Research and Data Devel-opment at Statistics Canada. Cata-logue No. 11F0019M – No. 319. Sta-tistics Canada.

Picot, Garnett, and Arthur Sweetman (2005). The Deteriorating Economic Welfare of Immigrants and Possible Causes: Update 2005. Catalogue No. 11F0019MIE2005262. Statistics Canada.

Sarlo, Chris (2006). Poverty in Canada: 2006 Update. Fraser Institute.

Sarlo, Chris (2008). What is Poverty? Providing Clarity for Canada. Fra-ser Institute.

Statistics Canada (2002). 2001 Cen-sus of Canada. Statistics Canada. <http://www12.statcan.ca/english/census01/home/index.cfm>.

Statistics Canada (2008a). Canada’s Changing Labour Force, 2006 Cen-sus. Catalogue No. 97-559-X. Statis-tics Canada.

Statistics Canada (2008b). Earnings and Incomes of Canadians over the Past Quarter Century, 2006 Census. Catalogue No. 97-563-X. Statistics Canada.

Erratum

In the November 2009 issue of Fraser Forum, we incorrectly identified Ronald Coase as the “late Ronald Coase.” In fact, Mr. Coase is alive and is the research advisor to the Ronald Coase Institute in St. Louis, MO. We sincerely regret the error.

Documents

Fraser Forum - December 2009 / January 2010