|Montreal, March 30, 2002 / No 101|
by Harry Valentine
The French economist, Frédéric Bastiat wrote an essay about what is seen and what is not seen in an economy. Bastiat's work has special relevance for Canada's domestic economic policies. The governments keep trying to show us the alleged benefits of their economic policies, until we use Bastiat's approach to examine what they do not want us to see. One of those popular programs is the economic partnership program, in which the government is portraying itself as the driving force behind new economic development. Public announcements are frequently made with regard to how government is "investing in the economy as a partner."
Government schemes usually achieve the opposite of what was originally
intended. The initial partnership system can be traced back to the early
1970's and the DRIE, the Department of Regional Industrial Expansion. Under
the DRIE grant program, businesses opening in or relocating to regions
of high unemployment were entitled to federal grant funding for a period
of up to two years. Marginal enterprises and companies which had union
problems were the main types of business which relocated to such regions.
When the federal funding ran out, most of these businesses relocated to
areas where they would again receive federal funding.
People living in regions where the DRIE programs were in effect grew disenchanted with them because any jobs they would get would be short term only. They preferred to remain on welfare or social assistance, rather that go through the emotional unpheavals of being hired and fired. The DRIE program took a toll on the people it was supposed to help. Alcohol abuse increased in affected regions while people remained on social welfare assistance for longer periods of time. The program ended up demoralizing the people it was supposed to have helped.
Trained for non existent jobs
Part of the original program involved training them for new jobs. Hundreds of unemployed people and people on social assistance went through various forms of government-funded job training and job retraining programs in various educational institutions. These training institutes did a box-office business at the taxpayer's expense. In some areas, up to 90% of the people who went through the government-funded job training programs could not find work in the fields for which they had been trained. Some had even been trained for jobs that did not exist in the areas in which they lived. Many of the highly paid people who delivered the training programs enjoyed job security and gradually formed themselves into networks. The taxes and the wages of the few people who actually did get jobs that resulted from the training programs were less than the hidden and unseen losses incurred by funding transfers from elsewhere within the economy.
The government recognised that most new jobs in recent years were occurring in small to medium sized business and acted on this recognition. Free government-funded programs were begun to train people to start up and run their own small businesses. After completing the program, it is estimated that fewer that one in five of the students actually started up a small business. Of those who did start a small business, only 20% were still actually running some form of business after a three-year period, following completion of the free training program. After a five-year period, the number was down to less than 5% in high-unemployment areas such as Eastern Ontario and the Maritimes.
The people who benefitted most from the program were those who delivered the training sessions and the government bureaucrats who supplied the funding. The government may have tried to create a job boom by initiating free training programs to create new small businesses. In reality, far less was achieved than whatever government economic planners may have originally envisioned. Government transferred funding from the wealth creating sectors of the economy, through hidden and indirect means, to be squandered on flawed programs. The taxes and earnings generated by the few businesses that did start up as a result of the programs and survive do not compensate for the cost of providing the training programs. Neither do they compensate for the hidden costs or unseen losses that occurred elsewhere in the more productive areas of the economy, where the taxes to fund these programs originated.
During 1997, an independent report done in Atlantic Canada condemned federal government economic assistance programs in that region as a dismal failure. At the time, the federal Human Resources Department came under scrutiny for its funding and accounting practices. Millions of dollars were given out, but very few records existed to indicate where the funding went and to whom. Funds were transferred from productive, wealth producing sectors of the economy and used less efficiently. Many highly-paid consultants undertook publically-funded studies into numerous areas of economic potential for disadvantaged areas. Their conclusions were compiled into reports, most of which ended up on shelves gathering dust.
As late as early 2002, announcements were still being made as to new federally funded partnership initiatives aimed at future economic development planning in so-called economically disadvantaged regions. This in spite of the fact that some of these areas having experienced a drop in their unemployment rates. Purely private initiatives in the economic development field are strongly discouraged, if not rebuffed by public sector players. A privately planned high-tech industrial park proposal for an area in Eastern Ontario was eventually shelved for this reason.
Undermining long-term competitiveness
The state's industrial planners are convinced that certain sectors of the economy need some kind of governmental assistance. What is seen are the government grants and low interest loans that are given to certain companies located in certain regions. Also seen are public announcements in the news media touting the partnership between government and the private sector. What is not seen is where in the economy the money came from. The resulting long-term economic impact at the point of origin is also hidden from view.
Businesses and industries at these points of origin often have to delay or cut back on their plans to develop new products and services or improving their existing offerings after the state enacted the funding transfer. The initial short-term impact on these and other businesses and industries may seem to be minor, if not immeasurable. However, there is also a long-term cumulative effect. What is often not seen is how the government's partnership policy undermines the long-term competitiveness of politically non-favoured businesses, by removing funding from them. Instead, their management may be blamed for poor business practices, a lack of strategic foresight, or for failure to understand the nature of the competition they were facing in a rapidly changing marketplace.
A secure supply of government funding does not necessarily help either. It often increases the likelihood of politically favoured businesses malinvesting, developing products that have less than optimal market appeal. Governmental records show which industries received funding for product research and development. Some of the high-profile market failures over the past twenty years that were funded by government includes an articulated highway motorcoach, a high-speed intercity tilting train, a business jet, a few debacles in the high-tech and information sectors and often involves some of the Who's Who of the business world. It is ironic that subsidy funding, grants and low-interest loans given to some of this elite Who's Who of the Canadian business world was tax money taken directly and indirectly from the unsung "So What" of Canada's business world.
More recently, government funding has been committed into certain business areas even after the market response became favourable. These are the areas into which uncoerced private sector investors would have directed venture capital. By duplicating what the unrestrained private sector investors would have done, government economic planners may merely be acting to gain credibility for a flawed state partnership program. There is simply no justification for government to forcibly confiscate money from one productive sector of the economy, then put it into another productive sector of the economy. It merely provides jobs for bureaucrats and could still have a harmful long-term aftereffect in the economy.
Fellow QL commentator Pierre Lemieux wrote a news media article over the past year about governmental partnerships in Canada's and Brazil's subsidized aircraft manufacturing industries. He argued that trade tariffs and subsidies are actions whereby governments punish their own citizens, for the benefit of a few people whom the government favours. Pierre then discovered that the business sector he had commented about was prepared to counter-attack in the news media, to highlight the alleged benefits of the government-industry partnership. No mention was made of the harmful, long-term economic aftereffects such a governmental policy has elsewhere in the economy. The effects remain hidden until after other businesses in other regions close their doors or undergo major downsizing in the face of increasing competition in the marketplace.
Ultimately, the government partnership program entails a hidden cost in the unseen and in the lesser seen areas of the economy. While governments may be enthusiastic about expanding their partnership programs, the long-term toll on the rest of the economy could still be more harmful than the benefits being enjoyed by the privileged and politically favoured business minority.
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