Page 1

Fraser Forum

December 2009 / January 2010 $3.95

A Fraser Institute review of public policy in Canada

EDUCATION POLICY Impediments to reform The beautiful tree

Canadian Publication Mail Sales Product Agreement Number 40069269.

Vive l’éducation libre!


From the editor

Fraser Forum Publisher Chief Editor Managing Editor Editorial Advisor Coordinating Editor Contributing Editors Art Direction and Cover Design Cover Photo Production and Layout Copyediting Media Relations Advertising Sales

Fraser Institute Peter Cowley Kristin Fryer Kristin McCahon Peter Cowley Nadeem Esmail Amela Karabegović Niels Veldhuis Bill Ray Fotolia Kristin Fryer Mirja van Herk Dean Pelkey Advertising In Print Tel: (604) 681-1811 E-mail: info@advertising inprint.com

The Fraser Institute’s vision is a free and prosperous

world where individuals benefit from greater choice, competitive markets, and personal responsibility. Our mission is to measure, study, and communicate the impact of competitive markets and government interventions on the welfare of individuals. Founded in 1974, we are an independent research and educational organization with locations throughout North America, and international partners in over 70 countries. Our work is financed by tax deductible contributions from thousands of individuals, organizations, and foundations. In order to protect its independence, the Institute does not accept grants from government or contracts for research.

For additional copies, or to become a supporter and receive Fraser Forum, write or call the Fraser Institute, 4th Floor, 1770 Burrard Street, Vancouver, BC V6J 3G7 Telephone: (604) 688-0221; Fax: (604) 688-8539; Toll-free: 1-800-665-3558 (ext. 580—book orders; ext. 586—development) Copyright © 2009 Fraser Institute ISSN 0827-7893 (print version) | ISSN 1480-3690 (online version) Printed and bound in Canada. Return undeliverable Canadian addresses to: Fraser Institute, 4th Floor, 1770 Burrard Street Vancouver, BC V6J 3G7 The contributors to this publication have worked independently and opinions expressed by them are, therefore, their own and do not necessarily reflect the opinions of the supporters, trustees, or other staff of the Fraser Institute. This publication in no way implies that the Fraser Institute, its trustees, or staff are in favour of, or oppose the passage of, any bill; or that they support or oppose any particular political party or candidate. Fraser Institute Board of Trustees Hassan Khosrowshahi (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. Pinder, 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, Michael Perri (Secretary-Treasurer)

I

t’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 looking 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 mention unfortunate, that we do not see very much choice in many other areas of our lives, particularly in areas where the government is involved. One such area is education. Most children in Canada are assigned to a public, government-run school where they are taught a centrally determined curriculum that may not result in the best outcomes (“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 government-run schools in academic achievement, overall efficiency, parental 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 researching 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 standardized 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 deciding what kind of education is best for your children, choice is important.

Why choice is important

Kristin Fryer   (kristin.fryer@fraserinstitute.org)

www.fraserinstitute.org

Fraser Forum 12/09

1


Fraser Forum

Contents 5

1

From the editor

4

Forum authors

5

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

eHealth Ontario

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

10

Key Concepts: Spontaneous order Steven 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.

Drug policy in Alberta

10

A better pharmaceutical strategy Brett 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

25 2

Ontario’s spending problem Niels 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.

The “resource curse”

Fraser Forum 12/09

www.fraserinstitute.org


25

EDUCATION POLICY

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 market

14

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

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

Vive l’éducation libre!

18

The beautiful tree James Tooley Low-cost private schools are flourishing in some of the poorest places in the world.

20

Impediments to reform in the public school system Peter 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.

www.fraserinstitute.org

Fraser Forum 12/09

3


Forum Authors

Featured Authors

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 Institute 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.

Contributors 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 economics at George Mason University. Milagros Palacios (milagros.palacios@fraserinstitute. org) is a Senior Economist with the Fraser Institute’s Fiscal Studies Department. She has an M.Sc. in economics from the University of Concepcion in Chile.

4

Fraser Forum 12/09

www.fraserinstitute.org

Mark Rovere (mark.rovere@fraserinstitute.org) is a Senior Policy Analyst, Bio-Pharma and Health Policy, at the Fraser Institute. He holds an M.A. in political science from the University of Windsor. Brett J. Skinner (brett.skinner@fraserinstitute.org) is the Director of Bio-Pharma and Health Policy research at the Fraser Institute. He obtained his Ph.D. in public policy and political science from the University of Western Ontario. Raaj Tiagi is a Senior Economist in the Fraser Institute’s R.J. Addington Centre for the Study of Measurement. He has an M.A. and a Ph.D. in economics from the University of California, Irvine. Niels Veldhuis (niels.veldhuis@fraserinstitute.org) 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.


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

Fotolia

eHealth Ontario Brett J. Skinner

O

ntario’s health minister recently resigned due to a public spending scandal revealed by the provincial 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 pitfalls associated with government-run health care: the futility of central planning. The details of the scandal are found in the Auditor’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 system, 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 planning.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 information. It is absurd (and, in Hayek’s view, somewhat arrogant) 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 better 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

www.fraserinstitute.org

Fraser Forum 12/09

5


is a wasteful, unnecessary, and ultimately futile exercise because the market does a better job of allocating resources, without a centralized information system and the enormous additional cost to taxpayers. Of course, information technology has the potential to make the delivery of health care goods and services 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 information technology would be apparent from its reputation for reducing costs and improving quality, and its allocation within the health care system would be determined 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 information in the form of market-based price signals, and market-based competition for the delivery of medical goods and services. For example, Ontario could simply expose consumers to prices for their personal use of publicly insured 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 physicians) the information needed to make appropriate use and substitution choices on their own. Structuring copayments as a percentage of the cost of consuming medical 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 economic 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.

6

Fraser Forum 12/09

www.fraserinstitute.org

The politicization of health care decisions Hopefully the eHealth scandal will lead to a more general discussion about the other economic failures and limitations of government-run health care. One of these failures 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 selfinterested, 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 directly controls the allocation of medical resources. When the government becomes a health insurance provider, decisions concerning access, coverage, spending, pric-

Ontario’s policy was a waste of resources. Fotolia

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 company from operating a mobile ultrasound clinic in the province. The company had planned to offer one-day diagnostic 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.


In another case, Ontario decided to buy several existing for-profit MRI clinics in order to turn them into nonprofit 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 General 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 failure in health care is not limited to Ontario. The RCMP is currently investigating British Columbia’s electronic health information project for similar problems (Brethour 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, consider the vast sums wasted by central planners who are trying, in vain, to do what market forces do spontaneously 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 Socialism (1988), edited by W.W. Bartley, III. 2 Terence Corcoran also discusses the limits of centralized information 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 treatment 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-chargesin-e-health-scandal/article1317605/>. Bueckert, Dennis (2004, July 18). Ontario to Buy Private Clinics. 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/terencecorcoran-central-planning-strikes-again.aspx>. Hayek, F.A. (1945). The Use of Knowledge in Society. American Economic Review 35, 4: 519–30. Health Edition (2009, October 9). Alberta EHR Activities Audited. 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 Bureaucracy. Westview Press. Newhouse, Joseph P., and the Insurance Experiment Group (1993). Free for All? Lessons from the RAND Health Insurance 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-partiescharges-as-cancer-care-expenses>.  

www.fraserinstitute.org

Fraser Forum 12/09

7


SPONTANEOUS ORDER Cooperation in the marketplace Steven Horwitz

T

he phrase “spontaneous order” is of twentieth century origin, but the concept underlying it has been at the core of economics and arguments for economic 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 unintended outcome of all of the freely chosen actions of human 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 college campus after an overnight snowfall. Over the course of the next morning, pathways will appear through the snow, most of which represent 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 spontaneous 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 eventually results in an easily navigable path through the snow. Without intentional human design, we get an orderly and socially beneficial outcome.

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-interested buyers and sellers to produce order without design.

KEY CONCEPTS

How is it possible that the independent decisions of millions 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

8

Fraser Forum 12/09

www.fraserinstitute.org

However, individual freedom will only produce undesigned 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 unless their economic, political, and social institutions give them the freedom to act and protect them from the coercion of other individuals and the state. Spontaneous ordering processes do not ensure that every 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


Fotolia, iStockphoto

is true: our markets are incredibly complex because we have allowed them to be ordered spontaneously. The variety 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.

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 markets is that they are, as F.A. Hayek termed them, “endsindependent.” 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 markets 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 spontaneous order perspective suggests that just the opposite

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 protect life and property and encourage entrepreneurship and competition.

Suggestions for further reading Hayek, F. A. (1948). The Use of Knowledge in Society. In Individualism and Economic Order (University of Chicago Press): 77–91. Horwitz, Steven (2001). From Smith to Menger to Hayek: Liberalism 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. 

*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.

www.fraserinstitute.org

Fraser Forum 12/09

9


A better pharmaceutical strategy Albertaâ&#x20AC;&#x2122;s drug reimbursement policy needs re-thinking Brett J. Skinner and Mark Rovere

10

Fraser Forum 12/09

www.fraserinstitute.org

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 (Skinner and Rovere, 2008). Many provincial public drug programs use fixed-percentage reimbursement rates for generic drugs, as Alberta does. Under this policy, the government offers to pay pharmacies a guaranteed price for generic drugs, set at a fixed percentage 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. iStockphoto

I

n 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 government intends to negotiate lower prices for current generic 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 market (Macdonald, 2009, Oct. 21). However, the Alberta government could save consumers and taxpayers 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 generic drug prices to be too high, and the available evidence suggests that they are correct. We conduct research, published annually by the Fraser Institute, which confirms that generic prices in Canada 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 Canada. 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 expenditures in Alberta were publicly financed in 2008 (CIHI,


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 competitive 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 evidence about this and how user fees reduce unnecessary utilization 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 Pharmaceutical Strategy. Government of Alberta. <www.health.alberta.ca>. Canadian Institute for Health Information [CIHI] (2009). Drug Expenditure in Canada 1985 to 2008. CIHI. <http://secure.cihi.ca/cihiweb/ dispPage.jsp?cw_page=AR_80_E>.

Fotolia

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 reimburse 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 occurred in the past with the production of some singlesource tendered drugs in Canada. Generic drug manufacturers are also known to exchange bulk discounts for exclusive distribution rights with pharmacy retailers. This is a legitimate business strategy for the manufacturers, which is not much different 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 negotiated 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 retailers can still charge the full public reimbursement rate directly to the provincial payer, which is guaranteed at a fixed price. To address the problems created by public drug reimbursement policies, the Alberta government plans to simply reduce the reimbursement rate it pays for generic drugs. Despite good intentions, this approach is misguided; it attempts to fix a problem created by government intervention in the market by tweaking the way the government intervenes. If Alberta’s goal is to have the most efficient drug pricing, then it should adopt market-oriented reimbursement policies. Barring comprehensive health and drug insurance reforms (a conversation for another day), the province should implement 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

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/ALeqM5im0S8gC5u7mlKgl meNbyXTR6FkHQ>.

Newhouse, J. P., and the Insurance Experiment Group (1993). Free for All? Lessons from the RAND Health Insurance Experiment. Harvard University Press. Skinner, Brett, and Mark Rovere (2008). Canada’s Drug Price Paradox 2008. Fraser Institute Digital Publication. Fraser Institute. 

www.fraserinstitute.org

Fraser Forum 12/09

11


Fotolia

Ontario’s spending problem

Niels Veldhuis and Milagros Palacios

I

f 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 budget numbers presented by Finance Minister Dwight Duncan 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 Ontarians in an important conversation” about how to balance the budget. What Ontario really needs is a detailed plan to return 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, Premier 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

12

Fraser Forum 12/09

www.fraserinstitute.org

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 personal 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 average 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 restraint, 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 government will have increased spending by 60% since 2003 (Ontario, Ministry of Finance, 2009: 43, 52–53). Had the government actually shown some restraint and increased government spending in a prudent


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

Billions of $

outdated medical equipment, and must endure long waits for treatment (Ontario, Ministry of 120 Finance, 2007, 2009). Government spending That other developed nations are able to purchase more health care for less money should provide a lesson for OnGovernment revenue tario (see Esmail and Walker, 100 2008). Indeed, Ontario should follow the lead of these nations and consider policies such as cost sharing and allowing comSpending with restraint petition in the delivery of pub80 licly funded care, which would save Ontarians about $11 billion a year—nearly one-half of the current deficit (Esmail, 2009). Similarly, education and 60 20 20 20 20 20 20 20 20 20 other government services could 11 10 09 08 07 06 05 04 03 /12 /11 /10 /09 /08 /07 /06 /05 /04 be vastly improved through program reform, while spending is reduced. Note: Figures for 2009/10 to 2011/12 are forecasts. “Spending with restraint” is the The status quo in Ontario is level of spending that would have been necessary to keep up with inflation and simply not sustainable. Ontarpopulation growth. ians need and deserve a serious Source: Ontario, Ministry of Finance, 2009; calculations by authors. plan to restore fiscal sanity in the province. Since tax increases will certainly damage the road to economic recovery, remanner—for example, in accordance with population ductions in government spending are the way forward. growth plus inflation—Ontario would have had cumuMinister Duncan and his colleagues should take action lative budget surpluses of $25 billion during McGuinty’s now. 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 correspondReferences ing interest payments and cut taxes along the way—a much more sensible and successful way to improve OnBarber, Katherine (ed.) (2004). Restraint. Canadian Oxford tario’s economic performance. Dictionary (2nd ed.). Oxford University Press. The past is, however, the past, and the critical question now is how the government should proceed from Esmail, Nadeem (2009). Getting More for Less. Fraser Forum here. Finance Minister Duncan has indicated that his (November): 28–29. government will now “have to look at restraint” (Howlett, Esmail, Nadeem, and Michael Walker (2008). How Good is 2009, Oct. 22). Unfortunately, it’s a little late for restraint. Canadian Health Care? 2008 Report. Fraser Institute. According to the Canadian Oxford Dictionary, restraint is “the avoidance of excess” (Barber, 2004). Restraint Howlett, Karen (2009, October 22). Ontario Falls Deep into would have been an option back in 2003/04, but it is not Red. Globe and Mail. <http://www.theglobeandmail. one that will get the province out of its fiscal crisis quickcom/news/politics/ontario-falls-deep-into-the-red/ ly. What is needed now are spending reductions. And article1334227/>. while Minister Duncan may want to continue increasing Ontario, Ministry of Finance (2007). 2007 Ontario Budget. spending in priority areas like health care and education, Government of Ontario. <http://www.fin.gov.on.ca/en/ those are the obvious places to cut back. budget/ontariobudgets/2007/>. Consider that health care spending increased by 34.8% between 2003/04 and 2008/09, yet Ontarians still Ontario, Ministry of Finance (2009). Economic Outlook and endure relatively poor access to medical professionals and Fiscal Review 2009. Government of Ontario. <http://www. fin.gov.on.ca/en/budget/fallstatement/2009/>.  medical technologies, are often cared for using old and

www.fraserinstitute.org

Fraser Forum 12/09

13


Forum Focus

EDUCATION POLICY

Fotolia

Vive l’éducation libre!

Andrew J. Coulson

Y

our 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 different 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 exclusively 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

14

Fraser Forum 12/09

www.fraserinstitute.org

children to live in and contribute to a democratic nation, and that education would not benefit from market freedoms 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. Virtually all of the studies he identified compared public to private schools, while the remaining few compared assigned public schools to parent-chosen public alternatives such as “charter” and “magnet” schools.1 Together, these studies reported 36 reliable (i.e., statistically significant) findings. Thirty-three of them favoured private or chosen schools (figure 1). The most extensively studied area was political tolerance, in which students were usually asked to identify


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 research 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 earnings of graduates, and educational attainment (highest grade eventually completed). In all, I identified 65 studies 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 different types of schools, and so were able to make apples-toapples comparisons. Furthermore, each of these studies compared public and private schools within rather than between countries, so that country-specific factors related 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 Netherlands or Chile, for example. In virtuFigure 1: Civic outcomes of private/chosen schools vs. ally all US states, private schools are traditional public schools, number of significant and lightly regulated and receive little or insignificant findings no government funding. In the Netherlands and Chile, by contrast, the vast 12 majority of private schools are paid for chiefly or exclusively by the central Private/choice advantage 10 government and are comprehensively regulated (Glenn and Degroof, 2002). No significant difference Similar differences exist across the 8 Traditional public advantage Canadian provinces, which vary dramatically in the extent to which they 6 subsidize and regulate private schools (Davidson-Harden and Majhanovich, 2006). A study comparing public and 4 private schools in the Netherlands thus tells us about very different institutions 2 than one comparing schools in the United States. As a result, indiscrimi0 P nately pooling the results of those studPat So Po Civ Po Vo oli cia liti liti lun ic s rio tic cal cal l ca tee tism al t kill ies is not particularly enlightening. k p p rism s ole no art ita wle ran icip l To overcome this problem, we ce dg ati e on can specify operational definitions Source: Wolf, 2007. for the kinds of schools we want to

Number of findings

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 students 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 freedoms and incentives of a competitive marketplace. This

www.fraserinstitute.org

Fraser Forum 12/09

15


Forum Focus

EDUCATION POLICY

Number of findings

Figure 2: Outcomes of market vs. monopoly school systems, compare, and then only look at studies of those types of schools. number of significant and insignificant findings Since we want to know whether or not market forces improve out20 comes relative to the status quo Private/choice advantage education system, we need to focus on studies that compare “market” No significant difference 15 to “monopoly” schools. I define a Traditional public advantage “market” school as one that is minimally regulated, is not subject to strict price controls, and receives at 10 least a third of its funding directly from parents.2 I define a “monopoly” school as one that does not face substantial competition from the 5 private sector because it enjoys a non-negligible3 government funding advantage over most private 0 Att Sat Ac Effi Fac Ear Or schools. When we compare market de hie ain isfa cie nin ilit r v l i n me i e g c e to monopoly schools (as defined ne cy s tio s me nt ss n nt here), the results are overwhelmingly one-sided (figure 2). Source: Coulson, 2009. There are 59 statistically significant findings showing that marketlike education systems outperform government monopoly systems, and only four findings of The facts in education policy have changed—or raththe reverse, resulting in a ratio of nearly 15 to 1 in favour of er, it has become clear that our key assumptions about the market-like education systems. There are only 13 statistifacts have been completely backward. The rational thing cally insignificant findings among these market-monopoly to do would be to change public policy to reflect realcomparisons, and every finding comparing the efficiency ity—that is, to bring minimally regulated education marof market and monopoly systems is both statistically sigkets within the reach of all families through a financial nificant and favours markets. In other words, education assistance mechanism that allows the incentives of the can and does benefit from market freedoms and incentives. free enterprise system to flourish. Vive l’éducation libre! To sum up, the conventional wisdom presumes that collectively run schools are essential to the survival of Notes democracy and civil society, and that education cannot benefit from consumer choice and market incentives. 1 Charter and magnet schools are public schools that are exBut sometimes the conventional wisdom is wrong. Just empt from some of the regulations that govern their tradias science eventually showed us that the world is round tional public counterparts. They usually have more autonomy and that the sun is at the center of our solar system, it in staffing, for instance, and students must choose to attend now reveals that free and competitive education markets them; they are not part of an automatic assignment “catchconsistently outperform assigned public schools. ment” area. How should we react to this mountain of scientific evidence? We would do well to emulate the economist 2 This cutoff point is admittedly arbitrary, but since most of John Maynard Keynes. When criticized for changing the private schools that qualify as “market” schools under this his position on several important issues over the years, paper’s definition actually derive all or virtually all of their Keynes responded, “When the facts change, I change my funding from parents, the results of this study are robust to alternative cutoff values. mind. What do you do?” (Malabre, 1994: 220).

16

Fraser Forum 12/09

www.fraserinstitute.org


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 cutoff 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 robust to a much higher cutoff on the government funding level that qualifies public schools as monopolies.

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 Balance: Freedom, Autonomy and Accountability in Education (Vol. 1). Lemma.

References

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

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.

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/>.

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

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

www.fraserinstitute.org

Fraser Forum 12/09

17


Forum Focus

EDUCATION POLICY

The beautiful tree

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

S

chool choice advocates in America can gain inspiration from the education revolution that is sweeping 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 standards. Instead, they’re sending their children to low-cost private schools that are burgeoning in some of the poorest 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 interested 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, Nigeria, 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

18

Fraser Forum 12/09

www.fraserinstitute.org

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 fishermen, 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 unregistered, 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,


Fotolia

75% of schoolchildren were in private schools. In terms of quality, teacher absenteeism was lower and teacher commitment—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 private 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 introduced 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 disillusioned 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 opposed to school choice—whether in America or developing 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 virtues 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 government 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 serious 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 Journey into How the World’s Poorest People Are Educating Themselves, published by the Cato Institute. This article was originally published in School Choice Advocate.

www.fraserinstitute.org

Fraser Forum 12/09

19


Forum Focus

EDUCATION POLICY

Fotolia

Impediments to reform in the public school system Peter Cowley

A

re Canadaâ&#x20AC;&#x2122;s government-run public schools up to the task of educating the countryâ&#x20AC;&#x2122;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 studentsâ&#x20AC;&#x2122; results on province-wide tests. Whenever the report cards are released, the Institute receives criticism from some administrators and educators, as well as from organizations that represent teachers, school trustees, school superintendents, and principals. (for example of the reaction of educators and their representative 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 sector 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.

20

Fraser Forum 12/09

www.fraserinstitute.org

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 local 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 funding 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, including 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 levels 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.


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 alternative 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 offering (or reduce its cost) so that the offering compares more favourably with that of its competitors. In this way, comparison 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 improvement 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’ academic results (for example, province-wide standardized test scores), as well as contextual factors such as the percentage 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 another example of this anti-competitive philosophy. For a decade, the British Columbia Teachers’ Federation (BCTF) has waged a war against province-wide testing specifically 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 children’s education, then the onus is on the official education stakeholder groups to demonstrate convincingly why competition among schools should not be embraced, despite the evidence in competition’s favour from virtually every other sector in society, including education. By discouraging comparison and competition, ministries of education 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 hampered by provisions of the collective agreements6 negotiated by the teachers’ unions. Among the most important of these provisions is one referred to as the “professional autonomy” clause. This issue 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 Fotolia

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

www.fraserinstitute.org

Fraser Forum 12/09

21


EDUCATION POLICY

to dismiss a teacher for any but the most egregious behaviour 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. Several 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 February 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 conversation 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 competition is to the vested interests that are secure and comfortable within the current system. They are insulated,

22

Fraser Forum 12/09

www.fraserinstitute.org

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

Fotolia

Forum Focus

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 annual Garfield Weston Awards for Excellence in Education to school teams—teachers, administrators, and support workers at individual schools—for outstanding achievement in one of three areas of academic performance: improvement 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 comparison and result in competition. The teachers’ union in British Columbia has been a particularly vocal critic of


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 communications from individual school administrators attested 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 autonomy.”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 impossible for teachers to be the best they can be. However, this provision assumes that teachers are sufficiently competent 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 improvement in the public system is the lack of incentive to disseminate 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 success in other less effective schools. The same lack of incentive to improve slows the adoption of school models that are both effective and popular with parents. A stunning example comes from Vancouver, 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 before, 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 Institute study found that, based on the available evidence, training in sound techniques for teaching reading was not mandatory for elementary school teachers in training 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 education faculty trained teachers. Rather, our researcher was told, it was the faculty’s mission to educate professionals. The extent to which administrators can require teachers to take further training or impose certification requirements beyond the minimums specified by the provincial ministries of education is severely limited by teachers’ collective agreements, particularly with respect to the abovenoted provision establishing professional autonomy.

What must be done? It seems likely that, given the impediments to improvement 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 entrenched 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 education could create a more competitive education sector.

www.fraserinstitute.org

Fraser Forum 12/09

23


Forum Focus

EDUCATION POLICY

More private sector involvement in education would undoubtedly drive innovation as new competitors vie for patronage. It would also offer a stronger incentive for improvement within the public school system. No one will benefit more from increased competition 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/schoolperformance/> to view the Institute’s most recent report cards for schools. 2 For an introduction to charter schools, see Center for Education 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 Teachers’ 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 Minister 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>, provides many documents in which competition is pilloried. See, for example, Robertson (2005). 6 Depending upon the province, the teachers’ union’s collective 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 example 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).

24

Fraser Forum 12/09

www.fraserinstitute.org

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 Columbia. <http://www.leg.bc.ca/38th4th/4-8-38-4.htm>. Center for Education Reform (2009). Just the FAQs – Charter Schools. <http://www.edreform.com/Fast_Facts/Ed_ Reform_FAQs/?Just_the_FAQs_Charter_Schools>. Donders, Lindsay, and Peter Cowley (2006). Do New Canadian 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 Information Finder.’ News release (June 5). <http://www. etfo.ca/MediaRoom/MediaReleases/Pages/Public%20 Education%20is%20Collateral%20Damage%20in%20 School%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_Apr0909.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 Privatization. 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>. 


Economic growth and the “resource curse”

H

istorically, natural resources such as minerals and metals, oil, agricultural resources, and so on were considered beneficial to the economic growth of a country. 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 controversial, not only because they were not in line with the literature at the time, but also because economic theory suggests that natural resources, like physical or human capital, should have a positive impact on growth. While earlier research following Sachs and Warner’s seminal work supported their conclusions about the negative impact of natural resources on economic growth, recent studies have challenged these findings. Nevertheless, the issue remains 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 transparency and accountability) have on economic growth and on the ability of a high level of institutional quality

to turn a “resource curse” into a “resource 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, including those in Sub-Saharan Africa, are rich in natural resources; consequently, this line of research may play a role in their future prosperity. A recent Fraser Institute study by Beland and Tiagi (2009) tested the resource curse hypothesis using the latest data from the World Bank, and examined the role of institutions using the Fraser Institute’s Economic Freedom of the World (EFW) Index (World Bank, 2008; Gwartney et al., 2008).3 Economic 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 measured in two ways: (1) primary product exports as a proportion of GDP in

www.fraserinstitute.org

1970, and (2) metals and ore exports as a proportion of GDP in 1970.4 Figure 1 summarizes the relationship 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, dependence on natural resources is negatively correlated with economic growth. C r i t i c a l l y, Beland and Tiagi’s results also suggest that strong institutions (measured in terms of a country’s level 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 effect on economic growth. Figure 2 highlights this finding for countries that have a high share of metal and ore exports to GDP. iStockphoto

Raaj Tiagi

Fotolia

Does economic freedom matter?

Fraser Forum 12/09

25


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

Strong institutions can  

Average growth of (log) GDP per capita, 1970–2006

0.06

0.04

0.02

0.00

-0.02

-0.04 0.0

0.1

0.2

0.3

0.4

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

0.6

0.5

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

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

Top third of resourcedependent countries (EFW score >6.36)

2.62%

Middle third of resourcedependent countries (EFW score 6.36–5.43)

Bottom third of resourcedependent countries (EFW score <5.43)

1.28%

–0.38%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

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

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.

26

Fraser Forum 12/09

www.fraserinstitute.org

The top third of the resourcedependent countries in the sample (approximately 26 of the 77 countries) are first sorted by their level of economic freedom and then divided, on the basis of economic freedom 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, countries 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 economic institutions for resourcedependent countries is confirmed using a more rigorous empirical analysis. One of the advantages of this empirical analysis is that it allows us to compute the level of economic freedom, or the quality of institutions, needed to turn a resource curse into a resource blessing. The analysis indicates that resourcerich 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 Venezuela) 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


turn a resource curse into a resource blessing.

resources can turn a resource curse into a resource blessing. Consequently, leaders in resource-dependent countries should focus on building proper institutions, including the rule of law, property rights, independent judiciary and impartial judges, low taxation, low levels of tariffs and import barriers, and low levels of red tape—all key elements of economic freedom. Doing so will increase prosperity in those countries and enable them to benefit from their natural resources.

Notes

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 Index as its key measure of institutional quality), but is also a better proxy for institutional quality than other measures 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 internationally.

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

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

Fotolia

2 A resource-rich nation with the “resource blessing” is one that outperforms 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 institutions can avoid the resource curse.

4 A country that has a higher share of primary product exports as a proportion 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 materials, 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 statistically significant impact on economic growth on its own. Therefore, results were presented using both of these measures. The difference between resource abundance and resource exports is discussed in the main paper.

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

www.fraserinstitute.org

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. Commission 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 Analysis. Fraser Institute. Ding, Ning, and Barry C. Field (2005). Natural Resource Abundance and Economic Growth. Land Economics 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 Monetary Fund. Karabegović, Amela (2009). Institutions, Economic Growth, and the “Curse” of Natural Resources. Fraser Institute. Mehlum, Halvor, Karl Moene, and Ragnar Torvik (2006). Institutions and the Resource Curse. Economic Journal 116 (January): 1–20. Sachs, Jeffrey D., and Andrew M. Warner (1995). Natural Resource Abundance and Economic Growth. NBER Working Paper No. 5398. National Bureau of Economic Research. World Bank (2008). World Development Indicators. World Bank. 

Fraser Forum 12/09

27


The impact of immigration on Canada’s labour market Fotolia

Patrick Grady

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

28

Fraser Forum 12/09

immigrants. It also includes immigrants’ 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 cohorts 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 pattern (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 subsequent years—at the same time as Canada’s source countries changed, as did other characteristics of immigrants, 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

www.fraserinstitute.org

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

Fotolia

C

anada’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 (Citizenship and Immigration Canada, 2006). Bringing in such a large number of permanent and temporary 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.


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

Immigrants (000s)

150

Skilled workers

120 90 60

Family class

30 0

80

82

84

86

88

90

92

94

96

98

00

02

04

06

Source: Citizenship and Immigration Canada, 2007.

Figure 2: Immigrants, 15+ years of age, by level of education, 1980-2006 150 Immigrants (000s)

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 admit immigrants in those classes. In order to improve the labour market performance of new immigrants, starting in 1994 the Skilled Class of immigrants admitted on the basis of their qualifications 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 improvement since 2001 as the labour market has tightened, the employment 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 almost 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 unemployment rose (as shown in table 1), any downturn in the labour market resulting from the current economic slowdown is likely to adversely and disproportionately affect recent immigrants from the source countries with the poorest performance.

120

University

90 60

High school or less

30 0

80

82

84

86

88

90

92

94

96

98

00

02

04

06

Source: Citizenship and Immigration Canada, 2007.

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

2001

74.5

11.4

53.2

15.7

2006

78.6

9.3

56.8

14.3

2001

85.7

6.3

76.3

5.7

2006

86.3

5.2

78.5

5.0

Recent immigrants*

Canadian born

*Note: Recent immigrants are defined as those being in the country for less than five years. Source: Statistics Canada, 2008a: 30.

www.fraserinstitute.org

Fraser Forum 12/09

29


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

Before 1961

19611970

19711980

19811990

19912001

19911995

19962001

19.1

6.8

8.2

10.4

17,2

33.6

25.2

41.2

10

4.2

5.8

7.5

9.7

19.2

13.3

23.2

Place of origin: United States 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.

30

Fraser Forum 12/09

Figure 3: Ratio of earnings of immigrants to earnings of the Canadian-born, by level of education and sex 1.0 Ratio to Canadian born

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 deteriorate relative to those of equivalent 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 degree (compared to $62,566 for Canadian-born men) and $24,470 if they did not (compared to $40,235 for the Canadian-born) (table 3). Recent 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 immigrants in that group earn less than half of the wages earned by the Canadian born. The deterioration in wages is largest among women with no degree and men with a university degree. Most troubling of all is

0.8 0.6 0.4 0.2 0.0

1980

1990

Male with degree Female with degree

2000

2005

Male with no degree Female with no degree

Source: Statistics Canada, 2008b: 22.

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 deterioration in the labour market caused by the recession, which will only exacerbate the already poor performance of immigrants relative to the Canadian born.

www.fraserinstitute.org

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 factors at play. Fortunately, Garnett Picot and his colleagues at Statistics Canada have undertaken this task


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

Without a university degree

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.

and produced many high-quality research studies that analyze the available data to find out why immigrants 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 earnings 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 employers do not value foreign experience and heavily discount the value of foreign education. A lack of fluency in English or French is also a problem (Grondin, 2005). A more recent study by Picot (2008) attributed much of the recent decline to the downturn in high tech, combined with the increasing concentration of immigrants in IT and engineering. 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 immigrants in the labour market has caused a much larger proportion of recent immigrants than Canadian -born to fall below Statistics Canadaâ&#x20AC;&#x2122;s Low Income Cut-Off (LICO), which is the most widely used, though still controversial, measure of the incidence of low income or â&#x20AC;&#x153;relativeâ&#x20AC;? poverty (for a discussion about the difference between relative 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 income among immigrants helps to explain why income inequality has been increasing in the main immigrant-receiving centers of Toronto, Montreal, and Vancouver, where immigrants are becoming increasingly ghettoized (Hou and Picot, 2004). While relative poverty, as defined by the LICO, has been rising among the immigrant community, it has been falling among the Canadian 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

www.fraserinstitute.org

that has made Canadian immigration 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 existing selection system, it is not possible 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 unemployment rate dropped below 6%. The situation can only worsen as unemployment climbs, as is happening now as Canada faces the worst recession of the post-War period. Based on the relationship between unemployment rates for immigrants and the national average exhibited in the most recent data, if the national average unemployment rate were to rise to 9%, then the unemployment rate for immigrants who have been in Canada for less than five years could reach 17%, and the unemployment rate for immigrants who have been in Canada for five to 10 years could touch 11% (Grady, 2009). The situation could even be much worse as new immigrants 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 labour market integration could easily 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 possibility that their temporary jobs will, in effect, define them in the eyes of

Fraser Forum 12/09

31


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 identifies the immigrants who will really succeed in the labour market, rather than those who have formal education but few practical skills. Then the economic performance of the immigrants 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 market readiness of new arrivals. If the lower number of more qualified immigrants produced the desired improvement in the immigrants’ economic performance, then the new immigration target could be maintained. 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 immigrants’ earnings would help stop the rise in relative poverty among immigrants. 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 restore its finances to a more healthy position (Grubel, 2005, provides preliminary estimates of the fiscal cost of recent immigration). More generally, a tighter labour market would put upward pressure on the wages and incomes of all Canadians, including immigrants, which, maybe not coincidently, have stagnated in recent years. However, true reform will not be easy to achieve, given the strong political pressure on all parties to maintain high immigration levels, regardless of the economic consequences.

References Citizenship and Immigration Canada (2007). Facts and Figures 2006: Immigration Overview: Permanent and Temporary Residents. Government of Canada. <http://tinyurl.com/ yc3ven8>. Grady, Patrick (2005). What the Immigration Minister Should Have Known. Global Economics Ltd. <http://www.global-economics.ca/ immigrationstudies.htm>.

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.

32

Fraser Forum 12/09

www.fraserinstitute.org

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 Immigrants: How Important Is It in the Labour Market? Catalogue No. 89624-XWE. Statistics Canada. Grubel, Herbert (2005). Immigration and the Welfare State in Canada: Growing Conflicts, Constructive Solutions. Public Policy Sources No. 84. Fraser Institute. Hou, Feng, and Garnett Picot (2004). Visible Minority Neighbourhoods in Toronto, Montréal and Vancouver. Canadian Social Trends 72: 8–13. Picot, Garnett (2008). Immigrant Economic and Social Outcomes in Canada: Research and Data Development at Statistics Canada. Catalogue No. 11F0019M – No. 319. Statistics 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. Fraser Institute. Statistics Canada (2002). 2001 Census of Canada. Statistics Canada. <http://www12.statcan.ca/english/ census01/home/index.cfm>. Statistics Canada (2008a). Canada’s Changing Labour Force, 2006 Census. Catalogue No. 97-559-X. Statistics Canada. Statistics Canada (2008b). Earnings and Incomes of Canadians over the Past Quarter Century, 2006 Census. Catalogue No. 97-563-X. Statistics Canada. 

Fraser Forum - December 2009 / January 2010  

Fraser Forum is a monthly review of public policy in Canada, with articles covering taxation, education, health care policy, and a wide rang...