How Ottawa Spends, 2010-2011: Recession, Realignment, and the New Deficit Era 9780773590908

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How Ottawa Spends, 2010–2011

the school of public policy and administration at Carleton University is a national center for the study of public policy and public management. The School’s Centre for Policy and Program Assessment provides research services and courses to interest groups, businesses, unions, and governments in the evaluation of public policies, programs and activities.

School of Public Policy and Administration Carleton University 10th Floor Dunton Tower 1125 Colonel By Drive Ottawa, on Canada K1S 5B6 www.carleton.ca/sppa

How Ottawa Spends, 2010–2011 Recession, Realignment, and the New Deficit Era Edited by

g . bruce d oern and christopher stoney

Published for The School of Public Policy and Administration Carleton University by McGill-Queen’s University Press Montreal & Kingston • London • Ithaca

© McGill-Queen’s University Press 2010 ISBN 978-0-7735-3728-6 Legal deposit third quarter 2010 Bibliothèque nationale du Québec Printed in Canada on acid-free paper that is 100 % ancient forest free (100 % post-consumer recycled), processed chlorine free. McGill-Queen’s University Press acknowledges the support of the Canada Council for the Arts for our publishing program. We also acknowledge the financial support of the Government of Canada through the Book Publishing Industry Development Program (bpidp) for our publishing activities.

Library and Archives Canada has catalogued this publication as follows: How Ottawa spends. 1983– Imprint varies. Includes bibliographical references. Continues: How Ottawa spends your tax dollars, ISSN 0711-4990. ISSN 0822-6482 ISBN 978-0-7735-3728-6 (2010/2011 edition) 1. Canada – Appropriations and expenditures – Periodicals. I. Carleton University. School of Public Policy and Administration HJ7663.H69

354.710072'2

C84-030303-3

This book was typeset by Interscript in 10/12 Minion.

Contents

Preface

vii

1 Double Deficit: Fiscal and Democratic Challenges in the Harper Era 3 G. Bruce Doern and Christopher Stoney pa r t o n e : t h e m a c r o p o l i t i c a l - e c o n o m i c recession context 2 The Drama of Parliament under Minority Government Jonathan Malloy

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3 Canada-US Relations in the Obama Era: Warming or Greening? Geoffrey E. Hale 4 The Global Financial Meltdown and Financial Regulation: Shirking and Learning – Canada in an International Context Stephen L. Harris

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5 The Canadian Escape From the Subprime Crisis? Comparing the US and Canadian Approaches 87 Derek Ireland and Kernaghan Webb pa r t t w o : n e w a n d o l d i n d u s t r i a l - i n n o vat i o n a n d r e c ov e ry p o l i c y ? 6 Harper Government Industrial Strategy and Industrial Policy in the Economic Crisis 109 Markus Sharaput

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Contents

7 Buy American or Buy Canadian?: Public Procurement Politics and Policy Under International Frameworks 128 Melissa Haussman and David Biette 8 The Auto Industry Bailout: Industrial Policy or Job-Saving Social Policy? 150 Christopher Waddell 9 Science and Technology Spending: Still No Viable Federal Innovation Agenda 168 Peter W.B. Phillips and David Castle 10 The Recession and Aboriginal Workers Senada Delic and Frances Abele

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pa r t t h r e e : p u b l i c m a n a g e m e n t c h a l l e n g e s and choices 11 The Precarious State of the Federal Public Service: Prospects for Renewal 219 David Zussman 12 The Officers of Parliament: More Watchdogs, More Teeth, Better Governance? 243 John A. Stilborn 13 Temporary Help Agency Employment in the Federal Government 261 Tim J. Bartkiw Appendix A: Canadian Political Facts and Trends Appendix B: Fiscal Facts and Trends Contributors

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Preface

This is the thirty-first edition of How Ottawa Spends. As always, we are especially indebted to our roster of contributing academic and other expert authors from across Canada and abroad for their insights and for their willingness to contribute to public debate in Canada. Thanks are also due to Rob MacDonald and Kimmie Huang at the School of Public Administration for their excellent research and technical support and to Joan McGilvray and her colleagues at McGill-Queen’s University Press for their always professional editorial and publishing services and expertise. None of this work would have been possible without the continuing support and scholarly stimulation provided by our colleagues at the School of Public Policy and Administration at Carleton University and in the Politics Department at Exeter University. G. Bruce Doern and Christopher Stoney Ottawa, March 2010

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How Ottawa Spends, 2010–2011

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1 Double Deficit: Fiscal and Democratic Challenges in the Harper Era g. bruce doer n and christopher stoney

introduction In the fifth year of Harper Conservative minority government, both the Tories and Canadians overall face a double deficit, one fiscal and the other democratic, and both cobwebbed in intricate ways.1 The fiscal deficit is somewhat easier to describe. One can quantify it easily in that the Harper government inherited in 2006 a healthy budgetary surplus from the previous Liberal years but enters a new decade with a $56 billion deficit, the largest in Canadian history in total dollars but smaller as a proportion of gdp than the deficits of the 1980s and 1990s. Most of it was incurred in 2009 in response to the global recession and related banking crisis but also domestic failures.2 The main response to the economic crisis was the Conservative’s $62 billion stimulus program with spending spread over two fiscal years. The challenge of how to reduce the deficit while ensuring economic growth and social fairness is immense and is simultaneously national, global and regional. It is replete with both strategic and tactical choices and with the need to think through the laws of both intended and unintended consequences. What mix of tax changes and spending paves the road to renewed fiscal virtue? What kinds of spending are not “spending” but rather constitute “investment”? When does “shovel-ready” fiscal stimulus discourse and action get replaced and by what? Will social policy and spending, still the largest part of the federal budget, be cut significantly, as it was in the mid1990s and in the 1980s? Canada’s deficit now, and into the deficit reduction years ahead, also needs comparison with other countries. oecd data on planned government

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borrowing as a percentage of gdp in 2007 and 2010 shows that the level of deterioration was 7.5 percentage points for Canada compared to 8.3 for the U.S., 11.3 for the uk, and for oecd countries overall, an average of 7.4.3 When it looked at future fiscal trends projected to “beyond the crisis” in the medium term, the oecd groups countries into three categories, those requiring no consolidation, three years of consolidation and those needing seven years. Fiscal consolidation refers to percentage points of gdp improvement in the underlying fiscal balance, including the removal of fiscal stimulus packages in operation in 2010. Canada sits in the middle three year group whereas both the U.S. and the U.K. are in the seven year consolidation group.4 Somewhat analogous to scoring in Olympic high diving competitions, Canada’s ranking in this kind of “degree of difficulty” calculus improves under the Economist magazine’s use of combined imf and oecd data and projections. It measures projected gross debt (rather than just deficits) in 2014 compared to debt in 2007 and projects the overall fiscal adjustment required for government debt as a percentage of gdp. The adjustment is projected to be just 1 percent for Canada (ranking in the top three countries) compared to 5.7 for the U.K. and 3.5 for the U.S.5 We return to these notions of the fiscal deficit and national debt since they have implications for our discussion in the next section of the chapter regarding what political and economic factors drove the current federal deficit. They are also relevant, given the Harper government’s 2010 Budget and Speech From the Throne agendas (see more below). And they matter regarding what degrees of difficulty might actually mean, and for whom, when solutions are sought for a possible medium term return to surpluses after Canadians live for a few years at least , as they did in the mid-1990s, “under the knife.”6 The democratic deficit is partly quantifiable but not nearly as readily as a fiscal deficit, nor is a democratic surplus. The Harper years have embellished but, not for the first time, shown the diverse criteria through which democratic deficits can emerge and are assessed: super-centralized control by a Prime Minister and his entourage where, among other things, Parliament is prorogued when representative democracy becomes too stressful; a tactical hyper partisan and demoralizing “politics as continuous warfare;” a minority (or even a coalition-based) more representative Parliament that is a crucible for competitive party short-term tactical politics and policy but by definition more democratic; a majority Parliament that is majoritarian and can perhaps govern in a more long term strategic and democratic way, even though the government rarely garners more that 40 percent of the votes cast in any given national general election and where voter turnout is on a long term decline; and interest group pluralistic and civil society democracy where groups are numerous and activist but which are also often single issue oriented and

5 Fiscal and Democratic Challenges in the Harper Era

deeply suspicious of broader forms of representative government and, with Internet and social networking, can both mobilize citizens but, alas also practice their own version of the dark arts of divisive discourse and politics.7 While our focus is on the Harper government’s policies and budgets, we also look closely at the Ignatieff Liberals as the only political party than might defeat the Conservatives in the next election. However, the Liberals are hardly the exemplars in this coming of the double deficit or on how to produce surpluses under either the fiscal or democratic columns. Ignatieff became leader in 2009 as a successor to Stephane Dion’s weak tenure as Liberal leader but did so without a normal democratic party convention or leadership race and debate. For most of his first year as Liberal leader, Ignatieff floundered. He and his party also practiced politics and policy at the tactical end of the spectrum rather than the strategic end. This is more inevitable one might say for Opposition party leaders who can only talk but not act, but Ignatieff undoubtedly wobbled and weaved aimlessly on issues such as unemployment insurance, determined promises to defeat the government followed by tactical retreats in the face of public opinion, and also early hesitation on what kinds of stance to take on the deficit and on the stimulus package. Ignatieff was also, however, far more reluctant than Harper to play the game of attack politics, both an asset and also a liability. It can be argued that only Harper’s tactical blunders kept Ignatieff in the game with Tory gains in opinion polls then countered by declines in public opinion when Harper blunders reappeared despite his supposed tactical brilliance. As we see below, the Liberals can take credit for some of the longer term focused policies of the Chretien era (with Paul Martin as Minister of Finance) when fiscal cuts occurred and then surpluses emerged within four years; when reasonably sensible bank and financial regulation was maintained despite pressures to deregulate; and, when key new investments took place in universities and overall research and development, and in the financing of the Canada Pension Plan. But as the new deficit era emerged, the Liberals were a weakened, less confident and less coherent political force. They were many steps removed from their own political memories as Canada’s so-called natural governing party and were forced to bob and weave in the politics of a four party minority Parliament where past Liberal sins and corruption in the Sponsorship scandal were still strongly and understandably remembered.8 Our account in this chapter focuses on the double deficit and on the inherent realignments that are occurring in policy, politics and public money. We look first at the forces and factors that have produced the double deficit and how these were initially revealed in the economics and politics of the Tory economic stimulus program, announced in the 2009 Budget but whose provisions extend into 2010 and 2011 as well. The second section then sets out

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the Harper Conservative agenda as set out in the March 3, 2010 Speech from the Throne and the March 4th Budget. The agendas and tactical situations of the Opposition parties are also referred to briefly, in particular that of the Michael Ignatieff-led Liberals. We then preview our authors’ chapters in this edition. These are grouped into three clusters of policy, spending and political-economic analysis: the macro political-economic and recession context; new and old industrial, science and technology and innovation policy; and public management challenges and choices. Finally, with these analyzes fully in mind, we offer our concluding views about the double deficit overall. These include some necessary conjecture about whether ultimately Prime Minister Harper is changing Canada or Canada is changing Stephen Harper. We also examine tightly linked key challenges such as: Canada’s changing relations with the U.S. Obama Administration now under its own state of siege and double deficit; climate change in the post-Copenhagen era; the potential return of industrial policy in a post-deficit and innovation policy era; and public management and institution building.

the driving forces of t h e d o u b l e d e f i c i t While the global economic downturn during 2008–2009 is the primary cause of Canada’s growing fiscal deficit, it is also a product of the fragile minority endured by the Conservatives and the political manoeuvering that it produces. Faced with the looming recession, similar stimulus measures in other countries and the threat of losing power to a proffered Liberal-ndp coalition, the government, in order to survive, had little option but to deliver a sizeable stimulus package both to deal with the recession and to secure continuing support in the House. Cornering the government through the coalition move was a shrewd but also a high risk tactical move by the opposition parties. It allowed them to claim initially that the stimulus package was a barely adequate response to a deepening crisis that amounted to too little too late, but also ensured that they could later criticize the government for running up a record deficit and undermine the Conservatives’ reputation for fiscal competence. Moreover, huge government spending in Ottawa was always likely to play out badly in the Tory heartlands and it is no coincidence that in Alberta the Wildrose Alliance party has flourished in the wake of massive provincial and federal public spending, a ballooning deficit and a dirigiste role for a Conservative government that appears to fly in the face of Harper’s stated commitment to free market principles and ‘open’ federalism in which the federal government sticks to national responsibilities leaving provinces to govern and manage their own jurisdictional responsibilities.9

7 Fiscal and Democratic Challenges in the Harper Era

While the Conservatives may have been reluctant to stimulate the economy through massive government spending, they certainly learned that they had to and soon began to exploit the opportunities for political capital that stimulus funding provides. Nowhere was this more apparent than in the case of infrastructure and stimulus spending. Even in his pre-recession 2007 budget, Harper had already committed $33-billion over seven years to his Building Canada Plan and this plan has been topped up with another $4-billion of the current stimulus money. This fiscal year, there is more than $7-billion in cost-shared infrastructure funding available. As we see below, Budget 2010 confirmed that $19 billion in new federal stimulus under Year 2 of the Canada Economic Action Plan’s total commitment of $62 billion. Waves of federal funding announcements trumpeted the funding, accompanied by a barrage of staged photo shots in which Harper, a minister or local Conservative mp were pictured handing over giant publicity cheques to grateful municipal recipients. Although the Harper government is certainly not the first government to milk infrastructure spending in this way, it was criticized for handing over cheques that carried the Conservative party logo and/or the pm’s signature. Branding Government of Canada spending as though it were a gift from the Conservative Party breaches the protocol on public spending announcements and party logos were subsequently removed, but not before the tawdry and party political nature of infrastructure stimulus spending had been graphically symbolized. Concern over “pork barrel” infrastructure stimulus funding continues with some reports suggesting a significant funding bias in favour of Conservative ridings.10 While it is too soon to know the extent to which Conservative ridings have been targeted, the use of the Infrastructure Stimulus Fund (isf) as opposed to the per-capita based funding of the Gas-Tax Fund (gtf), certainly increases the potential for party political interests to influence which projects are funded and raises a number of other important and related issues. In terms of the future of federal investment in municipal infrastructure it remains to be seen if the isf signals a longer-term policy shift whereby investment in strategic, transformative infrastructure is compromised in favour of “shovel ready” projects that focus on short-term employment and economic growth (see more below). The stimulus package has also raised questions about the lack of transparency and evaluation associated with the programs. Given that the isf’s central rationale and objective is to create jobs, the House of Commons Government Operations Committee were “shocked” to learn from the Deputy Minister and Associate Deputy Minister of Transport, Infrastructure and Communities that job creation is not being tracked by the department which has only “anecdotal evidence” for the number of jobs created, raising serious questions about how the stimulus spending will ultimately be evaluated.11 Also, although the stimulus spending on infrastructure has been reported on

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the Building Canada website, there is insufficient detail to allow precise calculation of where the money has been spent at the level of individual ridings. The race to “get the money out of the door” has also posed significant challenges for public servants faced with the task of spending quickly while remaining responsible for due diligence and accountability. This dilemma has in part been created by the Conservative’s own Federal Accountability Act (faa), which has increased reporting and accountability requirements, and by their decision not to use the above mentioned Gas Tax Fund to distribute the stimulus funds, slowing down the process by several months. The faa (2006) was also responsible for creating the position of Parliamentary Budget Officer (pbo), whose mandate is to “provide objective analysis to the Senate and to the House of Commons about the state of the nation’s finances and trends in the national economy, to undertake research into the nation’s finances and economy when requested to do so by certain Parliamentary committees.”12 Having appointed Kevin Page to the position, Prime Minister Harper has witnessed the federal spending watchdog take his mandate seriously including a review of stimulus spending. However, the pbo has complained that he has not been given enough information to assess the effectiveness of billions of dollars worth of government stimulus spending on infrastructure projects and that without the necessary quarterly progress reports his office is unable to assess whether the spending is supporting growth and creating jobs. The pbo has also been frustrated by attempts to get complete information about how the stimulus money is flowing. “The government initially dumped several bankers’ boxes full of print-outs of spreadsheet files on [the pbo’s] staff. Only when pressed did the government provide an electronic version of the data.”13 Given the level of stimulus spending and the predicted size of the fiscal deficit, the lack of transparency and credible evaluation will continue to raise serious concerns about the economic impact of the stimulus spending. Stimulus spending has always been controversial regarding actual job creation that can be attributed directly to it. Even in the 2010 Budget Speech (see more below) regarding the post–July 2009 job gains of 135,000 that occurred in the Canadian economy, the Tories avoid making direct claims that this was due mainly to the stimulus program per se. However, the lack of valid job impact data and reporting has serious political implications because it plays into the potentially damaging narrative of this accountability aspect of Canada’s growing democratic deficit. In spite of his election promises to promote open and transparent government, Harper appears to be continuing and perhaps even accelerating the previously observed centralization of executive and prime ministerial powers.14 A case could be made that many of the actions which appear to centralize power and restrict transparency are necessary responses for a minority Conservative government facing institutions dominated by Liberal appointments

9 Fiscal and Democratic Challenges in the Harper Era

such as in the senior public service bureaucracy and the Senate. The challenge for this government is that actions such as proroguing parliament, attacking public servants, firing parliamentary watchdogs, and appointing Conservative senators reinforce the prime minister’s Machiavellian and controlling image in the media and in the eyes of the public. Harper’s decision to prorogue parliament from January to March 2010 was defended by the party using a plethora of justifications: it was a chance for the government to “recalibrate”; an opportunity to focus on the March budget; a chance to attend and watch the Vancouver Winter Olympics; and, in any case, prorogation is not unusual and something that Liberal governments have done when politically expedient to do so. While the latter point is not innaccurate, public opinion polls indicated that the shutting down of parliament has done considerable damage to the Conservative party and to the prime minister’s image. Having enjoyed a steady and growing lead in the opinion polls for several months prior to prorogation, the Conservatives fell back in early February 2010 into a tie with the Liberal party in polls taken during the prorogation period. In shutting down parliament it appears that the Conservatives may well have mis-calculated by underestimating public disapproval and concern.15 There are a number of reasons why many Canadians appear to have reacted more negatively than anticipated to prorogation. Prorogations in normal majority parliaments typically occur about every 15 to 18 months. The fact that this was the second prorogation in a one year period in a minority parliament suggests an alarming trend that parliament can simply be shut down when it becomes inconvenient to the government and this perception reinforces this aspect of the anti-democratic Harper narrative. The casual and surreptitious manner of the prorogation – Harper called the governor general by telephone to request a prorogation on New Year’s Eve 2009 – also plays on the prime minister’s image as a conniving masterful tactician. This was further reinforced by Harper’s decision to use the prorogation to make Conservative appointments to the Senate, establishing a de facto Senate majority in the process, and closing down the committee investigating the Afghan detainee revelations brought forward by diplomat Richard Colvin. Even Tom Flanagan, normally one of Harper’s staunchest supporters, interpreted his decision to prorogue parliament as a means to shutting down the Afghan inquiry.16 These and other perceived ploys have been effectively used by the Liberal party to portray Harper as a sinister and Machiavellian prime minister with a hidden agenda that is gradually being enacted by an unquestioning set of government ministers, an intimidated bureaucracy and now a Tory dominated Senate. How the Conservatives handle the electorate’s growing concerns about a widening democratic deficit at the heart of their government may be just as important as their record in managing the fiscal deficit come the next election. We return to this issue in the final section of this chapter,

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especially when asking the question of whether Harper has changed Canada or Canada has changed Harper.

t h e h a r p e r c o n s e r vat i v e a g e n d a The Harper Conservative agenda emerged in the closely twinned events of the March 3, 2010 Speech from the Throne (sft) and the Budget Speech on March 4. We highlight the key features of both but reserve comments until the final section of the chapter. The Speech From The Throne The Harper 2010 sft is a much longer and more discursive agenda document than previous sfts since 2006. Its key priority themes and commitments are:17 Completing Canada’s Economic Action Plan (mainly the second year of the federal stimulus program plus related tax cuts and enhanced Employment Insurance benefits, which since July 2009 had produced, as claimed in Budget 2010, more than 135,000 net new jobs) Planning for Recovery: Returning to Fiscal Balance (but also stating that a “balanced budget is not an end in itself, but the foundation of a strong resilient economy.” • Balancing the nation’s books will not come at the expense of pensioners, or by cutting transfer payments for health care and education or by raising taxes; • The first step will be to wind down stimulus spending by March 31st 2011 • The second step will be to restrain federal program spending overall, while • protecting growth in transfers that directly benefit Canadians. Building the Jobs and Industries of The Future (by combining the best of our intellectual and natural resources to create jobs, growth and opportunity). (Some initiatives listed include) • enhanced support for skills, apprenticeships and training for workers; • strengthen Aboriginal education • a digital economy strategy to drive the adoption of new technology • open Canada’s doors further to venture capital and to foreign investment in key sectors including satellite and telecommunications industries; • aggressive pursuit of free trade • create a new Canadian securities regulator • secure Canada’s place as a clean energy superpower and a leader in green job creation

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Making Canada the Best Place for Families (selected measures include) • national strategy on childhood injury prevention • establish a prime ministerial award for volunteerism • several measures to further crack down on crime (including white collar • crime) • action to address the disturbing number of unsolved cases of murdered and missing Aboriginal women. Standing Up for Those Who Helped Build Canada (selected items include) • meeting the demands of the aging population • bringing individuals, groups and businesses together to build community war memorials • continue to build on the government’s historic apology to Aboriginal people for the treatment of children in residential schools Strengthening a United Canada in a Changing World (items referenced here included) • address the under-representation of Ontario, British Columbia, and Alberta in the House of Commons • continue to support the renewal of the Public Service • several measures related to Canada’s North and Canada’s Arctic Strategy • principled policy backed by action, especially regarding climate change and the Copenhagen Accord. The Budget Speech The 4 March Budget Speech by Finance Minister Jim Flaherty and its accompanying summary and detailed documents obviously built on many of the same sft themes and priorities but with much more detail on actual budgetary plans, costs and projections.18 The Speech stressed the much better position that Canada was in compared to other countries regarding the recession and global crisis on both the fiscal and banking aspects. It then went on to set out its key budgetary plans including some smaller new spending initiatives linked to some of the earlier sft measures.19 These plans and measures included: The Three-Point Plan to Return to Budget Balance • Follow through on exit strategy built into the Economic Action Plan • Restrain spending, with Budget 2010 proposing $17.6 billion in savings over five years • Comprehensive review of government administrative functions and overhead costs • As a result the deficit is projected to decline by almost a half over the next two years and eventually to $1.8 billion in 2014–15.

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• As a result federal program spending as a share of gdp is expected to decline from 15.6 percent in 2009-10 to 13.2 percent in 2014–15. New Investments in Jobs and Economic Growth (described as a limited number of new and targeted actions (such as) • extensions to work-sharing • $600 million over three years to help develop and attract talented people • $300 million in annual duty savings for manufacturers • measures to encourage energy projects and clean energy. • new targeted infrastructure investments such as Atlantic ferry services • increasing the International Assistance Envelope by $364 million • $45 million over five years to establish a post-doctoral fellowship program • an additional $75 million for Genome Canada for genomics research. • $48 million over two years for research, development and application of medical isotopes • establishing a new Red Tape Reduction Commission • modernizing the regulatory system for project reviews Through the above agenda, the Harper Conservatives hope to position themselves not only with respect to extricating Canada from its fiscal deficit, but also to secure their long sought achievement of a majority government likely in an election called or triggered before major budget cuts begin in 2011. Responding to concerns about the democratic deficit is also a part of Tory hopes and fears. Before commenting further on the Harper agenda, we highlight the core analytical focus and conclusions in each of our contributing author’s chapters. The editor’s assessment of the 2010 sft and Budget Speech build on their insights as well as our own observations.

an o v e r v i e w of the c h a p t e r s jonathan malloy examines Parliament since 2004 under both Liberal and Conservative minority governments. He argues that Parliament and particularly House of Commons votes, because of their uncertain outcomes, have become more important and central to Canadian politics. But he also argues that Parliament has entered a dangerous new era of hyper-partisanship, in which rules and unwritten conventions are constantly bent and manipulated to suit short-term agendas. Some writers argue that minority government, though messy, can be effective and is ultimately more responsive and democratic. He concludes that while the drama of Parliament Hill attracts national attention, the era of minority government has further undermined the relevance and standing of Parliament in Canadian politics. In this larger sense, Parliament continues to be a curious institution in Canadian politics whose role and purpose remain contested and unclear.

13 Fiscal and Democratic Challenges in the Harper Era

geoffrey hale explores the development of bilateral relations between the Harper government and the U.S. Obama Administration in the context of ongoing changes to the broader global economy. In particular, it focuses on the interaction of each country’s energy and environmental policies as a case study that illustrates the Harper government’s efforts to work cooperatively with the Obama administration while maintaining some degree of policy discretion in light of Canadian domestic policy challenges. Hale argues that Ottawa’s approach to these files reflects the multi-level character of policy processes in both Canada and the United States. It has attempted to accommodate different provinces’ varied economic and environmental strategies on a number of fronts tailored to their different resource endowments, crossborder networks, and strategies for balancing and integrating their respective economic and environmental objectives. It is not clear whether the Harper government – or any other prospective Canadian government – can successfully broker the accommodation of Canadian interests in U.S. policies by working with complementary American economic interests in Washington. stephen harris analyzes the meltdown in global financial markets and Canada’s response set in an international context. He argues that, at the global systemic level, the financial catastrophe can plainly be attributed to the phenomenon of “shirking.” In short, those responsible for preserving a safe and sound financial system did not do their jobs effectively. Another factor contributing not only to the crisis itself, but also to its severity, was the absence of policy learning by key global state actors about past financial crises. His assessment shows that in Canada, the impact of the global meltdown was less severe than it was in virtually every other industrial democracy. This appears due to the more conservative management practices in the country’s largest banks and to a lesser extent to the character of aggregate prudential oversight by regulators. However, there were a number of episodes that did threaten financial instability in the country. The collapse of the asset-backed commercial paper (abcp) market represents the most serious one and was accompanied by the Office of the Superintendent of Financial Institutions (osfi) denying any culpability for the market’s collapse despite osfi’s overarching mission. derek ireland and kernaghan webb examine the American subprime mortgage boom and why, the subsequent bust and debacle did not also take place in Canada. Particular emphasis is placed on the consumer protection issues and the insights provided by recent advances in the literature on information, behavioural and industrial organization economics and financial literacy. They argue that, while the mortgage aspects of the Canadian financial regulatory regime may be superior to its American counterpart, Canadian pride in the “superiority” of our regulatory regime and our current complacency that

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such a crisis “could never happen here” could be misplaced. The lending practices and subprime mortgage agents, lenders, and insurers that were major causes of the American crisis were starting to creep into Canada just before and then during the period when American subprime boom turned into the subprime bust. They also suggest that non-regulatory factors are also important in preventing an American style subprime crisis in Canada. These include timing, Canada’s more protected and less competitive financial sector, the “second-mover” advantages that are at times associated with more conservative and cautious governments, regulators, financial service providers and their customers. markus sharaput assesses the Harper Government’s industrial strategy, both in the context of the recession and economic crisis, and with reference to its pre-recession initiatives and spending in this field. It also locates central concepts of industrial strategy versus industrial policy in a larger historical context. He argues that the primary goal of the Harper government in response to the crisis seems to have been mitigation, rather than using the crisis as an opportunity for strategic economic transformation. It has been largely non-interventionist, at least in terms of directing or selecting particular patterns of national strategic economic development. Where government intervention has occurred, it tends to be regional and sectoral (to the extent that competition between regions / sectors for federal aid has become a dominant theme), and rather than being coordinated around national goals of economic transformation and development, intervention and spending is focused overwhelmingly on short-term economic relief. melissa haussman and david biette explore how Ottawa and Washington “buy” in the context of historic attempts to make national procurement policies conform to international trade agreements such as nafta and the wto. They examine the recent Canadian responses to the recent “Buy American” provisions in the first round of U.S. national stimulus legislation, the American Recovery and Reinvestment Act (arra). Three main arguments are advanced. The first is that procurement policies in Canada and the United States, and the methods of their formulation, are unique to each country, informed by differences such as separation of powers and federal divisions of power. The second is that Canada is an “outlier” in the wto government procurement pluri-lateral agreement since it has excluded subnational procurement. Finally, they argue that with respect to both current recession-era concerns and the historical underpinning of trade and procurement rules, exceptions, and politics, it is clear that the United States and Canada have negotiated their trade procurement laws so that each can “have their cake and eat it too.” Whether bound by wto rules, nafta rules,

15 Fiscal and Democratic Challenges in the Harper Era

or other trade agreements, certain industries and realms of procurement remain protected. Loopholes also give important political cover. christopher waddell examines how Ottawa negotiated the bailout of General Motors and Chrysler in 2008–2009. He shows how the negotiations involved an intense fast moving multi-party process involving the departing Bush and new Obama Administrations in the U.S., the companies, the Government of Ontario, and the Canadian Auto Workers (caw). Waddell argues that the auto bailout was social policy as much as industrial policy as it kept the companies in business despite talk as 2009 began of sudden collapse and closures that could devastate large parts of the economies and related employment in both countries. He also contends that the joint response crafted by the federal and Ontario governments was a one-off approach dictated by expediency. The analysis suggests, however, that the federal government hopes to translate the unprecedented co-operation it enjoyed with the Obama administration on the auto sector into some degree of joint analysis and action that could both restructure manufacturing on a continent-wide basis and address potential trade irritants before they emerge. Finally, Waddell stresses that despite the rescue there remains no ability for government to enforce any of the commitments made by the companies about production, research and development or investment should their revival not go well. peter phillips and david castle assess federal spending and policies in support of science, technology and innovation and how they have been realigned in recent years to conform to new theories of economic growth and innovation. They show that spending has been increased, partnerships have been developed, talent has been attracted and programs have been implemented. Yet the message has been lost in a rush to get “shovel ready” projects underway to provide economic stimulus to the Canadian economy, by ministerial gaffs, and by some miss-communication about program changes. They argue that perhaps most troubling however, is the potential that the policies, programs and priorities of the government’s S&T agenda pose regarding both theoretical and practical challenges. They argue that innovation requires more than science and technology. They suggest that the root of the Canada-US productivity gap is also a matter of scale and governance, and thus the Canadian strategy of supporting S&T, education and entrepreneurship may not make much of a difference. Ultimately, governments may need to look to their own structures, and create conditions that will reduce the burdens of scale and over-governance. senada delic and frances abele document the immediate impact of the recession on the labour market outcomes of Aboriginal people in Canada

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and assess the possible implications for the suite of federal policies and programs aimed at reducing the gaps between Aboriginal workers and other Canadians. They argue that the effectiveness of these programs in eliminating the gaps between Aboriginal well-being and that of the general Canadian population is important first on grounds of equity, but given the growing size of the Aboriginal labour force, it is also significant for Canada’s overall economic well-being. The analysis shows that Conservative government spending on Aboriginal labour market programs has increased across the Harper government’s four budgets. But Delic and Abele argue that there is also reason for concern about quality and emphasis. They argue that the Conservatives may be hasty in turning away from complementary social measures that may have a longer term beneficial effect. david zussman probes the current precarious state of the federal public service and its prospects for renewal. His analysis is set in a historical context but also in the complex politics and governance as a new decade begins. Zussman shows that the federal public service is facing a potent cocktail of interlocking realities – high paced growth combined with significant turnover; a changing governance structure with new, and powerful, players; a web of rules accentuating accountability while simultaneously choking innovation and creativity. He stresses that this precarious state should be of enormous concern to Canada and Canadians but that more often than not, it is an institution that is taken for granted. The analysis calls for a major review but also highlights a number of more modest improvements that could be implemented to help the federal public service deal with some of its most immediate challenges. john a. stilborn examines the recently expanded officer of Parliament universe. He argues that the officers of Parliament are not displacing Parliament in its accountability roles, but rather are performing new “professional” accountability tasks that were not previously being performed at all, and which Parliament is inherently ill-fitted to perform. Stilborn also examines the issue of the “single-mindedness” with which the officers pursue their roles and thus imparts an inherently negative bias to their assessments of government performance, partly because governments endlessly face the need to balance conflicting priorities and the constraints of finite resources. He argues that the fundamental problem here is the low credibility of governments, not the excessive credibility of the officers of Parliament. But he does suggest that the extraordinary independence of the officers of Parliament, strengthened by the budgetary protections established in recent years, is clearly not counter-balanced by an equally robust accountability regime on the officers themselves.

17 Fiscal and Democratic Challenges in the Harper Era

tim bartkiw reviews recent patterns of expansion in temporary help agency employment (thae) in the Government of Canada. thae is one of the alternatives to direct employment available to government managers in meeting human resource needs. Under thae, a private sector temporary help firm enters a contract with a client organization (here a department, agency, crown corporation or other organization controlled by the federal government) to supply a worker, formally employed by the temporary help firm, to work for and under the direction of the client for a fee. He shows that the federal government has recently undertaken a significant expansion in its use of temporary help services and that this expansion has been disproportionate to growth in alternative human resource arrangements such as forms of employment and services contracting. Bartkiw argues that these trends tend to erode the scope and effects of certain public policies operating through a platform of employment, including labour market and equity policies, as well as those aimed at ensuring certain characteristics of the public service and rights of workers labouring in the federal government. Collective bargaining as an instrument for determining terms and conditions of work in the public service is also undermined, with the growth of either contracting or temporary help services. The scope of collective bargaining coverage is further narrowed with the apparent substitution of temporary help services for non-standard employment, given the partial extension of various benefits of bargaining to those workers. Lastly, for various reasons, union responses to the relative growth in temporary help services have been limited.

challenges and choices in the double deficit era The Harper Conservative government’s 2010 Throne Speech and Budget give a reasonable indication of its planned fiscal deficit reduction agenda and some of its overall political priorities but of course these are again being put into a minority Parliament where other parties have a democratic say and which in 2010–2011 may be less averse to having or triggering another election. The government’s agenda has much less to say about the existence of, let alone remedies for, a democratic deficit but it is not totally silent on the subject either. The product of the previously discussed new darker arts of “proroguery” by the Harper Tories, their supposedly recalibrated agenda looks after the two-month prorogation of Parliament much the same as the one in the period before. Indeed, both agenda documents are filled with phrases such as “building on,” “extensions of,” and “continuing with.” Our authors’ chapters raise key political and economic issues and challenges that face the Harper government and its main opposition, the Ignatieff Liberals, but also the ndp and the Bloc. We draw upon and extend these

18 G. Bruce Doern and Christopher Stoney

analyses as we look in conclusion at five sets of challenges and choices that are either a part of the March 2010 sft and Budget Speech or are absent from them or fudged. The Double Deficit Challenges On the fiscal deficit side, the Tories promise a continuation of the stimulus program in 2010 and into 2011 to help ensure that fragile growth is not shut off by global or Canadian economic weakness and uncertainty. Their plan to wind down the deficit by 2014 is premised on an undertaking not to increase taxes but to reduce them further; and, not to touch federal-provincial social and health transfer programs or national defence. Hence major cuts have to occur within a smaller chunk of the federal program budget. Here there is room for the Tories to cut programs not only that they and others may regard as inefficient or no longer justified but also programs and client groups that they simply do not like or that offer up opportunities to play the now familiar game of wedge politics that involve aggressively identifying groups or issues that their core supporters do not like or agree with and thus to appeal to and preserve their own political voter base. There is no discussion in the Tory fiscal deficit discourse of whether Canada has a structural deficit as opposed to a cyclical-recession-focused deficit. The former has been stressed as a key reality by the Parliamentary Budget Officer that the Harper government established and by other private sector economists.20 A structural deficit is one in which larger underlying weaknesses or features of the Canadian economy and its potential gdp mean that deficit policy must deal with these, including weaknesses in innovation and deeper productivity gaps, the increasingly aging population and its effects on both who is available to pay taxes in the near term future and on the growth or characteristics of near term public services. Indeed, the Harper agenda speaks of the government’s commitment to meet “the demands” of senior citizens, a growing demographic and voter population, and thus not necessarily just their needs. Infrastructure stimulus that is “shovel-ready” may or may not be the kind of infrastructure investment needed to address productivity needs or related issues such as new green industries and procurement (see more below). On the democratic deficit, the Harper agenda continues in a state of tactical confusion and strategic inconsistency. Jonathan Malloy’s analysis of Harper era minority parliament demonstrates that there are underlying ambiguities and contradictions in what constitutes democracy. In some senses, a minority parliament is more democratic almost by definition in that decision making power is shared to a greater extent. But he also shows that the partisan excesses harm voters’ sense of being a part of a civil democracy. Harper is not alone among prime ministers in practicing the politics of division. There

19 Fiscal and Democratic Challenges in the Harper Era

can be little doubt, however, after more than four years in power that the dark arts of politics as continuous partisan war are more deeply wired into his political and personal dna than with any previous prime minister, including Liberal Prime Minister, Jean Chretien. Eminent scholars of Canadian public policy and administration refer to these traits of centralized control and war-like partisanship variously as the new democratic dictatorship or the new political governance.21 Regardless of the labels applied, Canadians would probably much prefer a more elevated style of democracy. The democratic credentials of the Harper Conservatives have also not been enhanced, even among its own political base, by his reversals on the Senate. His core Reform and Alliance Party roots are anchored in a call for an elected Senate but, as noted earlier, he has morphed into a politician of the old school by appointing a stack of new Tory Senators to gain control of the Senate. It is impossible to separate the democracy debate (deficit or surplus) not only from the varied meanings and criteria of democracy but also from the question of whether overall it is Stephen Harper that is changing Canada or that Canada is changing Harper. The former view refers not only to the ways in which Harper resurrected the Conservative Party so that it could compete seriously and democratically with the Liberals but also to some of his policies as prime minister on Quebec, on establishing an Accountability Act, and new Parliamentary accountability officers; Arctic sovereignty and northern development, gst tax reductions, arguing that Canada is an energy superpower including strong support for Alberta-centered oil sands development; and a more muscular defence policy and support for the Canadian military. In other words, these choices are seen by many Canadians as evidence of enhanced democracy precisely because they include new or changed policy shaped by a twice elected prime minister of a minority government. The alternate democratic thesis of Canada changing Harper is centered on views about other policies and decisions where, in a minority government context and in a reading of Canadian public opinion, Harper shifted significantly away from many or his strong right wing instincts. Examples of these mixed kinds of political calculus, learning, and an appreciation of the power of others include: his early acceptance of increases in public spending, including health care spending and federal transfer payments initially introduced by the previous Martin Liberal government; his shift to fiscal deficits less than a year after arguing in the October 2008 election that he would never incur a deficit; his government’s bailout of the auto industry; his forced withdrawal by the Liberal-ndp coalition strategy from abortive efforts to eliminate public funding of political parties; his praised appointment of former Manitoba ndp Premier Gary Doer as Canada’s ambassador to Washington; and his muting of the religious right in his own party by staying away from the abortion issue. His many critics also see these kinds of policies as

20 G. Bruce Doern and Christopher Stoney

good reasons why the Harper Conservatives should never be given a majority government by voters lest he revert to his earlier or supposed still strong right wing and pro-market political instincts. However, in the 2010 Budget and fiscal reduction strategy, Harper has again insisted that cuts will not come at the expense of pensioners, or transfer payments regarding health and education (where the Chretien Liberals had cut in the mid-1990s deficit cuts). So tactically and thus far substantively, Harper has shifted overall to the governing and political centre or right of centre. But there are also some deregulatory and pro-market initiatives in the 2010 Budget regarding foreign investment in the telecommunications sector and regarding tariffs in the manufacturing sector. Thus, in the real political world, majority and minority parliaments included, prime ministers both act as they promised in some areas of policy and retreat where they are confronted or have learned about the limits of power, or about the far from perfect impacts of public policy in a fast changing world. In short, a majority government would not mean the end of philosophical inconsistency or tactical calculation. The Changing U.S. and Obama Administration Dynamics Geoffrey Hale’s analysis of Canada-U.S. relations both more generally, and in the context of President Obama’s first year in office, shows in some detail that Canada’s approach to the U.S. under Harper (as under previous Canadian prime ministers) involves complex multi-level games of policy and politics, substance and process, all the more so because of the U.S. separation of powers Congressional system of government. Harper began his approach to Obama with some skill in that he recognized Obama’s initial popularity both in the U.S., and among Canadians overall. Good personal relations between the two leaders also seemed to pay-off in two difficult recession era policy situations. Christopher Waddell’s account of the auto bailout decision shows that there was a high level of strategic and tactical cooperation regarding the joint Canada-U.S. measures needed to strike a fast moving workable, though by no means, fool-proof deal. Similarly, as the Melissa Haussman and David Biette chapter shows, the Harper government was eventually able to secure some qualified exemptions for Canada in some aspects of the Buy America provisions of the U.S. stimulus program and simultaneously advance its own pro-internal free trade goals by breaking down some domestic provincial barriers to procurement-based trade. Canada’s overall “macro” policy in the recession and deficit era was also necessarily U.S.-focused and relevant in two other realms, banking and financial services regulation, and the housing and mortgage markets. As the chapters by Harris on banking and by Ireland and Webb on housing and the

21 Fiscal and Democratic Challenges in the Harper Era

U.S. sub-prime crisis both stress, Canada’s deficit crisis ultimately was caused by the global and North American impacts of U.S. system failures in both these regulatory and policy realms. As the 2010 agenda speeches show, the Conservatives stress how Canada’s own regimes in these two linked fields functioned reasonably well and indeed claim credit for it even though success is due to a longer track of past policies, more risk-adverse banking practices by Canada’s banks themselves and also by better consumer regulation. Nonetheless, the U.S. impacts and its economic implosion, fed directly into Canada’s recession and hence the need for Harper government deficits and its $62 billion stimulus package. Both the Harris and the Ireland and Webb analyses are careful to stress as well that Canada’s record on both fronts was not without serious faults. Harris argues that considerable shirking of responsibility was evident among some of Canada’s financial regulators as well and that more of the relative success of Canada’s banking system was due to the big six Canadian banks themselves. A similar kind of a “dodging of bullets” cautionary tale about supposed policy virtue is found in the chapter by Ireland and Webb on Canada’s own near-miss on much bigger sub-prime related adverse impacts. Other reports also indicate that Canada’s major banks have been urging the federal government to tighten mortgage rules and to be pre-emptive in avoiding a much larger mortgage and credit crisis, a pressure to which the Finance minister eventually responded with more controls.22 In 2010–2011, the context of Canada-U.S. relations is likely to be even more difficult and mine field-like simply because the Obama Administration is itself now under siege from both volatile U.S. public opinion and highly angered and mobile interests reacting to the ambitious and complex multifront Obama agenda on health care, jobs, bank regulation, not to mention huge deficits and debt, and national security and the fighting of two wars. The 2010 sft and Budget Speech are actually very low key about CanadaU.S. relations per se. Rather they function as the proverbial elephant in the room in that the key unstated feature of the Harper deficit reduction plan and its efficacy will partly depend on whether the U.S. economy will grow significantly and thus help Canadian export-led growth with its accompanying rush of new tax dollars into the federal coffers. Climate Change: The Tories and a “Made in the U.S.” Canadian Climate Change Policy Canada’s climate change policy and politics could easily be added to the above Obama and U.S. agenda discussion as in Geoffrey Hale’s chapter, but it compellingly needs treatment as a separate national agenda issue as well.

22 G. Bruce Doern and Christopher Stoney

Following the December Copenhagen Climate Change conference where Prime Minister Stephen Harper kept a low profile and assigned his environment minister, Jim Prentice, to do most of the difficult and embarrassing talking, Canada announced on 31 January what its new targets on cuts to greenhouse emissions will be. These reductions will be 17 percent from 2005 levels by 2020, and replaced the older Harper government targets announced in 2007 which were to reduce emissions by 20 percent from 2006 levels.23 The new targets were intended to follow and fit within the Obama Administration’s climate change emission reduction goals (both base year and targets) but without any guarantee of course that these would actually become U.S. policy following Congressional debate and jockeying. This Harper government position had been fairly consistently presented and hence easily attracted the label of a “made in the U.S.” climate change policy. This early 2010 announcement came in the same week that Harper at the Davos Switzerland conference had spoken about the need in the banking sector to practice what he called “enlightened sovereignty,” nationally focussed but internationally responsible. But Canada’s climate change policy was without doubt “sovereignty lite.” In a very real sense, Harper’s climate change minimalism ran counter to expressed Canadian public opinion which supported stronger action and targets. But the Tory view was underpinned by a desire to project Canada internationally as a global energy superpower, to protect the national and regional economic engine of the Alberta oil sands and to support its own Western Canadian political base even though it interspersed such support with periodic gentle comments that the oil sands had to be more environmentally responsible.24 Moreover, the Conservatives were also always able to find political cover (and still arguably can now) by pointing out that the Chretien and Martin Liberals’ climate change commitments to much deeper Kyoto Protocol emission reduction targets from 1990 levels had resulted in no reductions at all but rather were among the world’s worst emission increases.25 The 2010 sft and Budget Speech reveal the hard tactical calculus on climate change. Climate change is the very final item in the sft and thus the Conservatives seem to be virtually daring the Opposition parties and voters to think and vote differently than the Tories. But the sft shifts the political discourse a bit by saying that Canada aspires to be a “clean energy” superpower rather than an “energy” superpower, the language still preferred in the 2010 Budget Speech. The Harper government has had some stronger instinctive support for technology first solutions to climate change, including support for Alberta’s investment in carbon capture technology but these approaches and their link to green industries are perhaps best discussed in the context of the next section on policy and budgetary challenges relating to industrial, s&t and innovation policy.

23 Fiscal and Democratic Challenges in the Harper Era

Old Versus New Industrial, Science and Technology and Innovation Challenges A deep recession and banking crisis era is not necessarily the best time to peer through the policy and political fog that already characterizes the old and new mixes of industrial, science and technology (s&t) and innovation policy, challenges which easily slide into old and new policy discourse and underlying realities such as productivity and the above mentioned green industry strategies. As we have seen, the Harper stimulus program is mainly on the needed proverbial shovel-ready infrastructure and related projects but it also contains policy snippets and gestures to different industries and to a few aspects of innovation and science and green industry technologies. Our authors bring several different insights to bear on this diverse realm of economic policy and its social consequences. Markus Sharaput’s chapter makes a distinction between more strategic industrial strategies and regular more everyday industrial policy. If the former means some kind of state-led strategic intervention, his analysis suggests that the Harper Conservatives do not have one nor do they believe in such policies. If such strategic approaches involve a view that the state should withdraw from or lessen government interventions, then Sharaput argues that this is closer to their view but that they have not had political or economic room to follow such ideological urges. Instead, for most of the first four Harper years, they have practiced some traditional sectoral industrial policy. Until 2009, this was through modest spending in support of natural resource sectors such as forestry, mining, and oil and gas, again a part of their Western Canadian political base. Then of course, along came the deep recession and the need to intervene in a major way in the auto sector bailout, as analyzed in the Waddell chapter. However, the auto sector has always been somewhat of an exception in earlier historical periods as well. The 2010 sft and Budget agendas do not say much about the auto bailout or its likely future impacts (budgetary and otherwise) but, as we have seen, it does indicate that the Tories plan to develop a digital strategy. And it contains further modest spending initiatives for natural resource sectors such as forestry and mining, including the uranium industry. Peter Phillips and David Castle’s chapter on science and technology spending shows that under the Harper Conservatives there has been considerable continuity with s&t support levels that were significantly increased in the Chretien-Martin Liberal years. But they also argue that like the Liberals, the effort by the Harperites to transform older forms of science and technology policy into innovation and commercialization has still not been viably carried out or made evident. In part this is because of weaknesses in underlying productivity and the inability to even have productivity properly discussed and understood in basic political terms because of its almost immediate association in political discourse with job losses. The current Harper government

24 G. Bruce Doern and Christopher Stoney

science minister also did not increase the confidence of the scientific and technical community when his sceptical views about Darwinism emerged and when other concerns emerged about what might be in store for Genome Canada, and related genome research and hence an important health field and industry. The 2010 sft and Budget Speech both try to indicate that innovation, new industries, and research will not be lost sight of during the eventual crunch of federal program cuts starting in 2011. Genome Canada gets new funding as do the granting councils but there are far too many uncertainties about exact future budget cuts to make this a very convincing innovation, let alone productivity, narrative in the Harper agenda. The chapter by Senada Delic and Frances Abele on the recession impacts on Aboriginal workers is the only one in this volume of How Ottawa Spends to deal with some of the social and employment impacts of the recent stimulus package and of broader Harper government views on Aboriginal policy generally. On the one hand, they show that the Conservatives have increased spending support in economically-focused job training programs. However, Delic and Abele argue that the Conservatives have also unwisely shelved other social measures that, given past injustices to Aboriginal people, still need and deserve support. Interestingly, in the 2010 sft and Budget Speech, the Harper government does offer new promises regarding both Aboriginal education and also the issue of delving into the murder and disappearance of Aboriginal women. The previously mentioned reference to green industries and their deliberate fostering through regulatory policy and incentives can be seen as a current and future related policy challenge both within the rubric of industrial and innovation policy. Other countries (not to mention some Canadian provinces) are certainly putting such policies into practice to good effect. As noted above, and as further revealed in the 2010 sft and Budget agendas, there is some Conservative government interest in such technology first climate change and environmental policy but mainly only through the vehicle of modest but in some areas reduced seed money and exhortation rather than through tough environmental-energy regulatory-induced changes. Given Harper Conservative climate change policy overall, this would be, for the Tories, an overt step too far along the government intervention continuum. It may, however, begin to happen if climate emission targets are actually met and enforced and/or if Conservative hopes for a national cap and trade system linked to a U.S. one is ever actually implemented. Public Management and Democratic Institution Building Our final group of chapters raise a number of policy and democratic challenges tied closely to public management overall and also to democratic institution building and accountability in specific contexts and arenas. These

25 Fiscal and Democratic Challenges in the Harper Era

span both the current Harper era but also have deeper historical links under previous Liberal and Conservative governments. David Zussman’s chapter characterizes the federal public service as being in a precarious state and that this precariousness seems to be slipping well below the radar screens of all parties and of the media as well. Part of the problem is that the Conservatives often come into power (both the Harper Conservatives now and the Mulroney Conservatives in the 1980s) with a strong instinctive view about a Liberal dominated public service. There is also a tendency to run for office by invoking the evils of insensitive bureaucracy and bureaucrats in the abstract. Both of these elements tend to downplay and even denigrate the proper and important role of a merit-based politically neutral public service, including its capacity to deliver good policy advice in the larger public interest. The above features are among Zussman’s concerns but there are other issues as well, including the need for renewal of a public service facing high levels of retirement. Buried in the 2010 sft there is reassurance offered by the Harper Government that they realize the importance of a strong federal public service and the need for its renewal but in practical terms this may not square well in the short to medium term with the deficit reduction strategy where the focus for future cuts is on federal program spending and on administrative overheads and therefore likely federal civil service job cuts. Tim Bartkiw’s chapter raises issues about a related but far less well known feature of federal public sector employment, namely the increase in recent years in the use of temporary help agency employment. Encouraged by governments (Liberal and Conservative) to generate greater flexibility and economy in the supply of human resource needs, Bartkiw also shows how these practices have the potential to undermine both the core notions of a career public service and also existing collective bargaining rights with neither changes openly debated and decided upon in broader democratic fora. Instead, current changes are buried in the discourse of private-managerial reform and its logical supposed “inevitability.” It is John Stilborn’s chapter on independent officers of Parliament that even more overtly brings out accountability and related democracy issues. These accountability issues were of course a central concern of the Harper Conservatives in their first two years in office when they passed the Accountability Act and added new watchdogs to the list of such Parliamentary officers. Stilborn’s analysis carefully assesses key features about the democratic accountability of this array of officers and in general is quite positive about them overall. Their role in a minority Parliament garners some criticism not about the agencies but about governments and parties overall. Nothing stands out with a greater sense of Harper era contradiction than with the other non-Parliamentary watchdogs and the treatment of some of these by the Harper Government once they had tasted power. These other

26 G. Bruce Doern and Christopher Stoney

watchdog agencies were arms-length executive agencies all created by Parliament but which incurred the wrath of the government and of the Prime Minister and his office in particular in highly centralized and controlled government. The range of these agencies subject to overt decisions to fire or none too subtle pressure to resign included the head of the Nuclear Regulatory Commission, the rcmp Public Complaints Commission, and the International Centre for Human Rights and Democracy (Rights and Democracy, based in Montreal) and created by the Mulroney Conservative government in 1988. These examples, along with the Harper government’s 53 Senate appointments, also reveal the concerted degree to which the power of appointment is being used in a way that seems to contradict the initial pro-accountability urges forged by Harper when the Conservatives were an opposition political party rather than a governing one. They are by no means the first governing party to display such contradictions but these actions are nonetheless an important feature of Harperstyle democracy, five years on. For the Opposition parties, there are both opportunities and high risks in this double deficit context. For the ndp, there is the continuing reality of never being able to win a federal election but also of having to criticize what they regard still as a very right wing party and to push for new social initiatives when new money is scarce. The Bloc Quebecois has beat back the Tory threat in Quebec but as a social democratic party themselves they are in much the same position as the ndp but functioning only in Quebec on a separatist or sovereigntist agenda that now is in decline at least as measured by recent Quebec opinion polls. Meanwhile, the Ignatieff-led Liberals have managed to stay close in the polls, made gains because of the prorogation issue, and have timidly trial-ballooned new social initiatives such as a fiscally expensive federal day care program. But there is no sense yet that Ignatieff’s leadership registers sufficiently well with voters or that the Liberals would approach the politics and practice of deficit reduction all that much differently than the Harper Conservatives, or at least differentially enough to secure enough votes that would put them back into power, probably in a minority government context and all it implies.

notes 1 Special thanks are owed to our colleague Michael Prince for very helpful comments on an earlier draft of this chapter. 2 On Canada’s previous budget deficit eras and responses to them, see Bruce Doern, “Evolving Budgetary Policies and Experiments: 1980 to 2009–2010,” in Allan M. Maslove, How Ottawa Spends 2009–2010: Economic Upheaval and Political Dysfunction (McGill-Queens University Press, 2009) 14–46, and Gene Swimmer, ed. How Ottawa Spends 1996–1997: Life Under the Knife (Carleton University Press, 1996).

27 Fiscal and Democratic Challenges in the Harper Era 3 4 5 6 7

8 9

10

11 12 13 14 15 16

17 18

19

oecd, Economic Outlook 85 (Paris, oecd, 2009), Table 4.4, p. 231. Ibid, 231. The Economist, Briefing: Government Debt, The Economist, 13 June 2009, p. 73. See Gene Swimmer, ed. How Ottawa Spends 1996–1997: Life Under the Knife. See Sanford Borins and David Brown, “E-consultation: Technology at the Interface between Civil Society and Government” in David Siegel and Ken Rasmussen, eds. Professionalism and Public Service: Essays in Honour of Kenneth Kernaghan (University of Toronto Press, 2009) 178–206. Bruce Doern, “Evolving Budgetary Policies and Experiments: 1980 to 2009–2010.” See Keith G. Banting and Roger Gibbins et al “Open Federalism: Interpretations, Significance”, The Institute of Intergovernmental Relations (iigr) at Queen’s 2007 – collection of six essays discussing open federalism, a key theme in the Conservative Party’s campaign of 2005–06. Steven Chase, Erin Anderssen and Bill Curry, “A stimulus program favours Tory ridings,” Globe and Mail, Wednesday, Oct. 21, 2009. See also Stephen Maher, “Spreading the wealth unevenly,” The Chronicle Herald, 13 October 2009 Kathryn May “No one tracks stimulus spending job tally,” The Ottawa Citizen, 25 November 2009. Federal Accountability Act http://www.faa-lfi.gc.ca/faa-lfi/faa-lfi00-eng.asp accessed 14th February 2010. Glen McGregor, “Scant stimulus data paints murky picture,” The Ottawa Citizen, 12 December 2009. See Donald Savoie, Court Government and the Collapse of Accountability in Canada and the United Kingdom (University of Toronto Press, 2008). Campbell Clark, “pmo has too much power, poll finds,”Globe and Mail, 23 February 2010, 5. Andrew Davison, “Flanagan lays into prorogation defence” The cbc News, 12 January 2010, see interview at http://www.cbc.ca/politics/insidepolitics/2010/01/flanaganlays-into-pms-prorogation-defence.html See Canada, Speech from the Throne, A Stronger Canada. A Stronger Economy Now and for the Future (Canada, March 3, 2010). See Canada, The Budget Speech 2010 Leading the Way on Jobs and Growth (Canada, 4 March 2010), and Canada,The Budget in Brief 2010, Leading the Way on Jobs and Growth (Canada, 4 March 2010). The list below is drawn mainly from the Budget in Brief document reference above but a cautionary note must be offered. This is because there is often a lack of clarity in the Budget documents as to which spending initiatives are new to Budget 2010 as opposed to being already included in the Action Plan from the previous year. There is obviously a need to convey both that stimulus and other spending and tax reductions are continuing for another year but that the government is already being savings-conscious and prudent by having new initiatives kept to small targeted items, including those on innovation and new industry development but also selected social initiatives as well.

28 G. Bruce Doern and Christopher Stoney 20 See Office of the Parliamentary Budget Officer, Estimating Potential gdp and the Government’s Structural Budget Balance (Office of the Parliamentary Budget Officer, January 13, 2010). 21 See Donald Savoie, Breaking The Bargain: Public Servants, Ministers and Parliament (University of Toronto Press, 2003, Governing From The Centre (University of Toronto Press, 1999) and Peter Aucoin, “New Public Management and New Public Governance: Finding the Balance,” in David Siegel and Ken Rasmussen, eds. Professionalism and Public Service: Essays in Honour of Kenneth Kernaghan (University of Toronto Press) 16–33. 22 See Boyd Erman and Tara Perkins, “Big Six Banks urge Ottawa to tighten mortgage rules,” Globe and Mail, 6 February 2010, 6, and Jeremy Torobin and Bill Curry, “Jim Flaherty Tightens Mortgage Rules,” Globe and Mail, 16 February 2010, 2. 23 Gloria Galloway and Nathan Vanderklippe, “Canada ties new emissions-cuts targets to U.S. goals,” Globe and Mail, 1 February 2010, 1. 24 See Burkard Eberlein and Bruce Doern, eds. Governing the Energy Challenge (University of Toronto Press, 2009), 3–37. 25 Nic Rivers and Mark Jaccard, “Talking Without Walking: Canada’s Ineffective Climate Effort,” in Burkard Eberlein and Bruce Doern, eds. Governing the Energy Challenge (University of Toronto Press, 2009) 285–313.

part one The Macro Political-Economic Recession Context

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2 The Drama of Parliament under Minority Government j o n at h a n m a l l o y

introduction For the first time in many years, Parliament has become the most significant institution in Canadian politics in practice and not just as symbol. While our entire system of responsible government rests on the government’s ability to retain the confidence of the House of Commons, Parliament as a functioning institution has long been seen as weak with its exact roles contested and unclear. In times of majority government, Parliament and particularly the House of Commons are often seen as little more than rubber stamps, in which governments rely on their disciplined members to pass their legislative agenda with little dissent. This has led to perennial calls for reforms that would make Parliament matter. The advent of three minority governments since 2004 has dramatically changed things. Parliament has become a “theatre” of great drama and pivotal votes and decisions. But this has not been in the way envisaged by decades of would-be reformers. Instead of relaxed party discipline, greater freedom for mps and powerful and autonomous parliamentary committees, Parliament has become a place of constant brinksmanship. With a shifting configuration of four established parties and no government commanding a majority, the House of Commons has seen numerous showdowns and nailbiting votes, and the remarkable crisis of December 2008 which culminated in the proroguing of Parliament. Furthermore, the Senate has entered an uncertain era in which the Conservative government has tried to reform it – or perhaps undermine it – by incremental means. These include, introducing bills for Senate elections and

32 Jonathan Malloy

fixed terms and leaving large Senate vacancies unfilled and then suddenly appointing Conservative senators en masse. Parliament is no longer the dignified but unimportant institution that many accuse it of being under dominant majority governments. Yet while parliamentary proceedings are far more significant, this is not necessarily beneficial for the institution or Canadian democracy. This chapter discusses Parliament since 2004 under both Liberal and Conservative minority governments. It argues that Parliament and particularly House of Commons votes, because of their uncertain outcomes, have become more important and central to Canadian politics. But it also argues that Parliament has entered a dangerous new era of hyper-partisanship, in which rules and unwritten conventions are constantly bent and manipulated to suit short-term agendas. Some writers argue that minority government, though messy, can be effective1 and is ultimately more responsive and democratic.2 But this chapter argues that while the drama of Parliament Hill attracts national attention, the era of minority government has further undermined the relevance and standing of Parliament in Canadian politics. In this larger sense, Parliament continues to be a curious institution in Canadian politics whose role and purpose remain contested and unclear.

t h e p u z z l e o f pa r l i a m e n t Parliament is a longstanding puzzle in Canadian politics. While loaded with historic and symbolic importance as the centrepiece of Canadian democracy, its actual impact is often questioned and debated. For some, this has been a decline from a supposedly golden age of one time or another.3 But whether or not there was once a better age, for decades now there has been an ongoing debate – in both academic and popular circles – about the purpose(s) of Parliament, with varying diagnoses of its problems and plenty of prescribed solutions. Yet always unresolved is the basic question of what exactly Parliament is supposed to do. What is the role of a representative body in the running and holding to account of a modern state? This question can be asked of legislative bodies around the world. But the Canadian Parliament seems to struggle, particularly with basic questions about its role and purpose. While other western democracies also experience high public cynicism and disillusion with state institutions, their legislatures do not seem to struggle with the basic relevance and legitimacy dilemmas that we see in Canada. Graham White writes of “the unsatisfactory status quo that has immobilized and neutered Parliament for far too long” and asks “does anyone seriously think Parliament ain’t broke?”4 Even aside from the arguably unique Senate, the House of Commons leaves few satisfied. In David Smith’s recent The People’s House of Commons, he writes “[T]he House of Commons has a problem, and it knows it

33 The Drama of Parliament under Minority Government

– no one is happy with its performance5 and later that the Commons “confronts a conflict of alternatives and choice over the role it should play.”6 Smith pays particular attention to competing conceptions of democracy rooted in constitutional and judicial structures and/or direct democracy and plebiscitary institutions, arguing that parliamentary representation faces serious competition from each. Parliament is no longer taken for granted. Hence much of the study of Parliament in Canada revolves around the perennial questions of what Parliament is for and what it is supposed to do.7 But as C.E.S. Franks argues, “reform of parliament is not simply a technical matter of making parliament more effective and efficient, though it is often presented in those terms. Reform is also a question of the purposes for which political power is to be used in Canada and how various interests and viewpoints succeed or fail to influence political choices and outcomes.’.8 In short, Parliament resists simple questions and answers, and poses a complex and intricate puzzle in Canadian politics and political science.

majorities and minorities For many years, under the majority governments of Pierre Trudeau, Brian Mulroney and Jean Chretien, the most common diagnosis of Parliament’s problems – at least in the media and among mps themselves – was stifling party discipline imposed by majority governments. When a governing party controlled a majority of seats in Parliament, it was able to pass legislation with few impediments, as mps voted largely along party lines.9 The problem, therefore, was seen to be the allegedly mindless enforcement of party discipline at all times and diminishment of mps’ autonomy to act either as delegates of their constituency (as argued by the Reform Party) or as independent-minded trustees using their best judgement (as argued by many individual mps ). Majority governments used their disciplined parliamentary majority, along with control of the legislative agenda, supposedly to ram through whatever policies they wanted, while ignoring contrary views and ideas. When governing parties did not hold a majority of Senate seats there was a greater possibility of delays or even outright blockages, and even governing party senators sometimes held up their own party’s agenda. But majority governments, especially if they controlled the Senate, enjoyed considerable prerogative and the assurance that their legislation would rarely encounter serious impediments. Criticisms of majority governments were not limited to their control of the procedural agenda but also about their apparently sluggish nature and lack of responsiveness. In contrast, minority governments were considered more dynamic and innovative. The Liberal minorities under Lester Pearson (1963–65, 1965–68) and Pierre Trudeau (1972–74) were noted for their productivity

34 Jonathan Malloy

and notable achievements such as national medicare, the Canada Pension Plan and Petro-Canada. Similar observations were made about other minority governments like those in Ontario from 1975–81 and 1985–87. These examples lead Peter Russell to argue it is better to be governed by a minority than a majority government – particularly what he calls a “false majority” when the government wins a majority of Commons seats but not a majority of the popular vote.10 Russell sees minority governments as much more responsive and democratic, since governments must seek the support of other parties (and hence a greater number of voters) to pass their legislation and stay in power. Furthermore, minorities “restore vitality to Parliament,” he says11 because of this need to seek the support of other parties and the reduced ability of the Prime Minister to control the outcome. Tom Axworthy agrees that Parliament’s influence “waxes” in a minority government: “The energy level in a house of minorities is high, and the attention level of ministers is sharpened,” he writes, and “as Parliament’s influence waxes, the bureaucracy’s influence wanes.”12 Nearly all recent minority governments were characterized by deals and agreements between political parties, and especially between the Liberal and New Democratic parties. In a chamber of three parties, a minority government could rely on the support of one of the other parties to pass its legislative agenda and insulate it from votes of non-confidence. Normally these were informal and often day-by-day arrangements, but in 1985 the Ontario Liberals and ndp signed a formal accord in which the Liberal government promised a series of policies, and in return the ndp pledged its support for two years. Even apart from this exceptional agreement, there was a certain level of stability and predictability to the deal-making and agreements of minority governments in this era of three significant parliamentary parties (along with the waning Social Credit party in the 1960s and 1970s). This stability has not been so evident in the current multi-party era. In the early 1990s, when the Reform Party and Bloc Quebecois joined the traditional three parties as serious electoral contenders, some writers speculated about how a five-party parliament could possibly work. But the ability of the Liberals to maintain majority governments through three elections meant the five-party Parliament worked much as before with only minor adjustments.13 In particular, the same perennial complaints about majority government dominance and party discipline continued. While the later Chretien years saw an increased assertiveness among veteran backbenchers,14 Paul Martin among others argued that Parliament itself suffered from a “democratic deficit” that hobbled mps and the institution as a whole, and proposed a series of changes to address this.15 Thus, past Parliaments have been seen to have somewhat more influence under minority governments as parties strike deals with one another. But in both majority and minority situations there have been the same complaints

35 The Drama of Parliament under Minority Government

about too much party discipline and constraints on individual mps , along with the perennial discussions of parliamentary reform and the overall purpose of Parliament. However, the most recent series of minority governments since 2004, and the presence of four rather than three strong parliamentary parties, has meant a very different set of dynamics and a very different role for Parliament.

pa r l i a m e n t s i n c e 2 0 0 4 Several events in 2003–2004 dramatically changed the dynamics of the Canadian Parliament. Damaged first by their own internecine fighting and then by the sponsorship scandal, the Liberals under Paul Martin were re-elected with a minority of seats in June 2004. Furthermore, the Canadian Alliance and Progressive Conservatives merged into a new and stronger Conservative Party, while the ndp and Bloc Quebecois remained strong in their traditional areas of support. Consequently, the House of Commons moved into a new configuration with four significant parties of varying strength and size. Neither the traditional three party configuration of the 1970s and 1980s nor the 1990s arrangement of a strong governing party and four comparatively weak opposition parties were in effect. Most significantly, the Liberals and ndp could not command a majority together – the traditional underpinning of most previous minority governments. With some adjustments, this configuration continued through the 2006 and 2008 elections and significantly affected the place of Parliament in Canadian politics. And while power passed from the Liberals to the Conservatives in 2006, we have seen similar patterns of parliamentary behaviour throughout this period. Since 2004, the House of Commons has displayed repeated brinksmanship and manoeuvring, as each party calculates and advances its interests in terms of political “plays” and strategic “ploys.” House of Commons voting has become far more interesting, with numerous government defeats and occasional ties broken by the Speaker. The parties have repeatedly adjusted their stance on matters of confidence, alternately pledging to support or bring down the government of the day, as their interests dictate. Inter-party agreements have been weak and fleeting, lasting for a few months at best. What has gone out the window is talk of relaxing party discipline, the traditional preoccupation of reformers under majority governments. While a number of mps have crossed the floor to sit as independents or with another party, party caucuses are more disciplined than ever, as they closely count votes in their inter-party manoeuvring. Committees have become highly polarized and most observers decry the apparent decline of basic civility and the “extreme tribalism”16 across party lines. Since 2004, governments have lost numerous votes in the House of Commons. The Martin government lost 40 votes; in comparison, the Pearson

36 Jonathan Malloy

governments of the 1960s saw three defeats and Pierre Trudeau’s 1972–74 minority government saw 8 defeats.17 The majority governments of the 1970s, 1980s and 1990s enjoyed long stretches without any significant defeats (although they encountered long delays, such as the 1982 bell-ringing incident that paralyzed Parliament for two weeks). In addition to outright government defeats, the House has seen five tie votes since 2004 – the same number it had in the previous 137 years since Confederation.18 These ties were broken by Speaker Peter Milliken, who follows the precedent that speakers should uphold the status quo. Most significantly, in 2005 the Speaker had to break a tie vote on a motion of non-confidence – an unprecedented action in Canadian parliamentary history. These new voting patterns have given the House of Commons a level of nail-biting attention and significance it has not enjoyed for many years. Commons votes are no longer as predictable as they were under both majority and past minority governments, making them far more compelling and uncertain. Combined with these votes is the multi-polar and multi-level nature of inter-party manoeuvring. On some bills, the various parties continue to consult one another and the government may modify proposals to ensure parliamentary support. But at another level, governments – especially the Harper government – have gone ahead with bills and motions without support from the other parties, essentially daring them to oppose the legislation. At times, the government has even declared legislation to be a matter of confidence, in which defeat would trigger an election – even when the subject (such as changes to youth offender legislation) is not traditionally considered a confidence matter. Finally, the opposition parties have worked together, or tried to work together, to bring down governments through more direct motions of non-confidence. This has led to almost every possible combination of alliances between parties. In many cases the parties have negotiated more or less in public through the media as they attempt to explain their reasoning and logic, especially when they abruptly change strategies. This new world of unpredictable votes and intense party manoeuvring is what has made the House of Commons so pivotal in Canadian politics. It is no longer the proverbial rubber stamp. The leading champion of minority government, Peter Russell, argues that this has meant a considerable curbing of prime ministerial power to do as they wish and various specific concessions and deals in both the Liberal and Conservative regimes.19 For example, the Martin Liberal government avoided almost certain electoral defeat in the spring of 2005 after striking a deal with the ndp for $4.6 billion of new social policy expenditures. Russell also notes that the Harper government was forced to address the successful passage of a 2007 private member’s bill that called for Canada to meet its Kyoto environmental commitments along with other apparent compromises.20 Perhaps most significantly, the House of Commons held almost unprecedented votes in 2006, 2007 and 2008 over the

37 The Drama of Parliament under Minority Government

Canadian military mission to Afghanistan. In 2006 the Commons voted narrowly, 149–145, to extend the mission until 2009; the next year, a motion to definitely withdraw at that time was narrowly defeated, 134–150, and a third vote in 2008 extended the commitment to 2011. Not since the Second World War had mps voted so explicitly on a military mission abroad.21 In short, under minority government there has been much more attention paid to parliamentary votes, and what happens in the Commons (and Senate) is much less predictable than in times of majority government and even previous periods of minority governments . But so much of this has been achieved through bluffing and bullying and other forms of partisan warfare. All parties act inconsistently as they concentrate on short-term tactical manoeuvres with no larger strategy or objective beyond immediate advantage. Thus, for example, the Afghanistan vote of 2006 was likely prompted less by a genuine commitment to parliamentary consultation and more by the Harper government’s calculation that it would provoke a split in the Liberal ranks (which it did). This means greater attention is paid to parliamentary votes and actors but Parliament remains perhaps more puzzling, and with less agreement over its proper role and effectiveness, than ever.

bending the rules All parties appear to have twisted the rules and conventions of Parliament to suit their short-term advantages. While both the House of Commons and Senate have written rules (standing orders) determining their behaviour, along with other relevant statutes, much parliamentary business operates on unwritten conventions and understandings, following the tradition of the organic, partly-unwritten Canadian constitution. Indeed, one of the acknowledged strengths of the Westminster parliamentary tradition is the flexibility provided by its mix of written and unwritten rules, allowing it to respond and adapt to new situations to produce legitimate and stable outcomes and avoid absurd or undesired outcomes forced by the constraints of formal rules. This inherent flexibility means that the rules are continually tested and bent, though not broken. However, the current minority governments have seen an alarming degree of rule-bending. Arguably the most important of these rules is the confidence convention, determining whether a government has retained the confidence of the House and the consequent legitimacy to govern. Gary Levy argues that recent history has seen the “repeated abuse of the most important principle of responsible government, the confidence convention.”22 Levy and others focus especially on the vote of May 10, 2005, when the government of Paul Martin lost (by 150–153 votes) a motion attached to a committee report calling for the government to resign. The government refused to consider this a motion of confidence and won another vote nine days later (on a 152–152 tie broken

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by the Speaker). Andrew Heard argues the first vote should have been considered a motion of confidence and argues that “from a constitutional perspective, the prime minister asserted a false authority.”23 This vote and surrounding controversy is worth remembering as we consider the 2008 parliamentary crisis below. Other unwritten understandings have also been bent under partisan stress. House of Commons committees have always faced a “dilemma.”24 as they attempt to exercise autonomy while remaining relevant and in line with their parties. Nevertheless, some committees have been able to act effectively with some consensus (if not total agreement).25 But under the minority governments, committees have emulated the dynamics of the larger chamber, with members closely following party lines, manoeuvring for advantage, and attempting to accelerate or block proceedings for partisan advantage. In May 2007, particular controversy ensued over a Conservative party “obstruction manual” which allegedly advised Conservative mps how to manage committees for partisan advantage and how to disrupt or shut down proceedings to the party’s advantage.26 Both government and opposition parties have used committee powers in dubious ways to exploit damaging issues, such as oppositiondriven investigations of former Conservative prime minister Brian Mulroney or Conservative attempts to investigate Liberal mp Ruby Dhalla over alleged abuses of domestic workers. Perhaps most surprising of these bent rules is fixed election dates. The Conservative government pledged and passed a bill in 2006 establishing four-year fixed election dates, as already found in several provinces and other parliamentary democracies. But (as with other jurisdictions), this bill allowed exceptions for matters such as the government losing a vote of confidence, stating “Nothing in this section affects the powers of the Governor General, including the power to dissolve Parliament at the Governor General’s discretion.”27 Of course, in September 2008 Prime Minister Harper asked for and was granted a dissolution, leading to the October 2008 election. The audacity of introducing this new rule but exploiting its (necessary) loophole is remarkable.

t h e s e n at e A particularly remarkable case of unconventional behaviour and rule-bending is found in the Harper government’s Senate reform agenda.28 Senate reform has of course been a perennial issue in Canadian politics and various governments – especially Pierre Trudeau’s and Brian Mulroney’s – proposed ambitious changes to the upper chamber that required the agreement of at least two-thirds and sometimes all the provinces. None were successful. The Harper government chose a very different, incremental strategy that asserted the federal government’s ability to change aspects of the Senate without provincial agreement. In 2006, the new government introduced two bills, one to

39 The Drama of Parliament under Minority Government

fix Senate appointments to terms of eight years (later amended to a single non-renewable term), and a second to provide for the appointment of Senators following “consultative” elections by the provinces (i.e., retaining the formal power of appointment as enshrined in the constitution). Hailed by some provinces, the bills were opposed by others and at the very least raised significant concerns about their constitutionality. The bills were not passed; the most recent versions died on the order paper with the 2008 dissolution of Parliament and have not been reintroduced as of the time of writing. The Harper government also did not appoint new senators as vacancies arose due to retirements and other departures, with two exceptions. Michael Fortier was appointed to cabinet and the Senate in February 2006 to ensure a Montreal-based member of cabinet. (Fortier pledged to resign his Senate seat and run for a Commons seat in the next election and did so, going down to defeat in the 2008 election.) It also appointed Bert Brown, who had been twice elected in Alberta’s unilateral province-wide Senate elections, when an Alberta seat became vacant in 2007. But other seats remained unfilled, presumably waiting for the proposed new system of fixed terms and consultative elections. Then, following the December 2008 crisis (see below), the government filled the then-18 vacancies with new senators under the traditional system of appointment, and largely with Conservative partisans. Another batch of nine senators were appointed in August 2009 to fill further new vacancies. In both cases, the government faced the possibility of an imminent election, and this is almost certainly why it suddenly exercised its right to fill the Senate seats, just in case it was defeated. The Harper government has thus embarked on an unusual and questionable Senate reform agenda that lacks the support of the other parties and raises important constitutional questions and uncertainties. But in the context of all the other rule-bending in the minority era, it is only one more example of how unwritten understandings and conventions have been disrupted and heavily bent to suit partisan agendas. In short, Parliament under both Liberal and Conservative minority governments since 2004 has attracted more attention but arguably lost standing and respect. Rules are heavily bent as the House of Commons follows a pattern of showdowns, close votes, occasional government defeats, and general bluffing and bullying. All parties are driven by immediate tactical advantage, bending rules and unwritten conventions as needed. And all this is the backdrop to the remarkable crisis of late 2008.

t h e 2 0 0 8 pa r l i a m e n ta r y c r i s i s Following the 2008 election and its inconclusive return of a second Conservative minority government, it was widely expected that the House of Commons

40 Jonathan Malloy

would begin to stabilize, and party officials suggested a new tone of respect and cross-party cooperation..29 As late as November 20, the Globe and Mail reported that “since being re-elected in October, the Tories have purposely adopted a new, less confrontational approach toward opposition mps in the House of Commons.”30 However, despite this talk of a kinder, gentler Parliament, the government announced a “fiscal update” on November 27 that was highly confrontational in both tone and substance. In a time of global economic crisis and widespread stimulus spending in other countries, it announced no significant stimulus and proposed to outlaw public service strikes and suspend pay equity redress. These provisions were unacceptable to the other parties. But even more unacceptable was the sudden government proposal to end public subsidies to political parties – a provision that would seriously damage the Liberals and Bloc Quebecois in contrast to the Conservatives who were far less reliant on the subsidies. The Conservative actions were stunning in their unilateral and confrontational tone and shattered the expectations of a less fractious Parliament. The following days saw several remarkable events.31 The Liberals and ndp negotiated an agreement to form a coalition government, supported by the Bloc Quebecois. To do this, they needed to show that the House of Commons had no confidence in the Harper government. An “opposition day” (a day when the opposition controls the Commons agenda and can introduce such motions) was scheduled for Monday, December 1, but the government quickly postponed it for a week. After several more days of posturing and national television addresses by party leaders, on December 4 Governor-General Michaelle Jean granted Prime Minister Harper’s request to prorogue Parliament until January 26, 2009. Prorogation meant the end of the parliamentary session that had just begun two weeks before and, of course, no chance for the opposition to express non-confidence and bring down the government. Parliament was at the heart and centre of the 2008 crisis, but again, in a way that diminished rather than enhanced its legitimacy. The government was able to avoid defeat by postponing the opposition day and then shutting down Parliament for a crucial six weeks. Others have debated the constitutionality of the prorogation32 but, at the very least, this was the most stunning example yet of bending the accepted conventions and rules of the parliamentary system. Furthermore, the prime minister and his supporters made disturbing arguments that coalition governments were unconstitutional and that Canadians had directly elected the prime minister and the Conservative Party to power and no other party or leader had a right to govern. Neither of these arguments is true. But this further confused the existing understandings and agreements about the rules of the system, and further undermined public understanding of the role of Parliament. All these elements help to explain

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why the political showdown of winter 2008–09 is widely seen as a “crisis” – a time of uncertainty that posed a danger to our democratic system as actors argued over the basic constitutional legitimacy of each other’s actions. The opposition parties as well must shoulder their responsibility for the crisis. The coalition, headed by a lame-duck leader, was assembled in great haste and was clearly an opportunistic attempt to take advantage of the Conservative miscalculation rather than a coherent plan of governance. After the dramatic prorogation of December 4, the final elements of the crisis slowly emerged, ending the crisis not with a bang but a whimper. A new parliamentary session began on January 26 and the new Liberal leader Michael Ignatieff (hastily installed after his competitors withdrew) pledged to support the government’s budget under the condition that the government issue regular reports on its stimulus spending that the opposition could then vote on as matters of confidence. But as spring and summer passed, these reports followed the now-familiar patterns of bluffing and brinksmanship as each opposition party calculated its electoral prospects and acted accordingly, and the government was able to win again and again. By the fall of 2009, it seemed clear that little had been learned from the crisis and that Parliament was back to the established patterns of posturing, bluffs and showdowns. In August, Michael Ignatieff announced that his party would no longer support the government and pledged to bring it down through a vote of non-confidence in September. But with almost clockwork precision, ndp leader Jack Layton then announced that his party would support the government if it supported ndp priorities on several issues. The Conservatives said they had no interest in negotiations and an election seemed imminent. But by the time the scheduled vote of non-confidence was held, the parties fell into line and the government was sustained by 141 votes to 117. This was undoubtedly influenced by opinion polls showing strong public opposition to yet another election during a deep recession, and so costly and so soon after the last one, and likely to produce similar inconclusive results. No opposition party wished to be blamed for causing yet another trip to the polls, while the Conservatives calculated they could probably benefit by arguing they deserved a majority that could end the instability. But it was clear Parliament would continue to lurch from showdown to showdown, as all parties jockeyed for position and prepared for an imminent election that no one – save perhaps the government – wanted. Yet another episode of rule-bending was the prorogation of December 30, 2009, when the prime minister telephoned the governor-general in the holiday season to request an end to the current session of Parliament, with a new session to begin in March. This was widely interpreted by the opposition and others as a chance to shut down damaging committee hearings into possible government knowledge of the torture of Afghan detainees.33 The government argued correctly that prorogation was not uncommon and had been

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used for questionable purposes by the Liberals in the past. However, the stealthy nature of the prorogation in the middle of the holiday season, without a formal prime ministerial visit to Rideau Hall, suggested a continuing indifference to the spirit of parliamentary and constitutional rules, and a willingness to bend them as necessary.34 The December 2008 crisis then was merely the most notable of the continuing string of smaller crises and showdowns that have characterized this period of minority government. It is in some ways gratifying that the parliamentary system – while bent in unusual directions – was ultimately able to contain and defuse the crisis, allowing the government and opposition to fall back into familiar fractious patterns without the sense of emergency and near-chaos unleashed by the crisis. But throughout it, Parliament was the centre of attention but not of admiration.

n e w r u l e s f o r s ta b i l i t y Writing in early 2008 before that year’s election and parliamentary crisis, Peter Russell titled his book on minority government Two Cheers for Minority Government, holding back a third cheer because of the greater instability of minorities.35 And both before and after the 2008 parliamentary crisis, Russell and other scholars have discussed how the instability and general stress of minorities might be mitigated in a way that enhances not only the significance but the legitimacy of Parliament, along with other political institutions. What new written or unwritten rules might be introduced to guide and stabilize the system? And how can these be protected and not routinely bent as far as they can go, as so many others have been since 2004? Some suggestions, like fixed election dates, have already been shown to be easily broken at the government’s convenience. Another issue, which received far more attention after December 2008, was the governor-general’s reserve power – that is, her ability to act independently of the prime minister’s advice. We have already mentioned the arguments that Michaelle Jean should have refused Stephen Harper’s 2008 request for prorogation, and Mark Chapman writes that “the lack of clarity surrounding the constitutional rules and conventions on which the Governor-General must base her decisions risks creating a perception of arbitrariness.”36 Hence Lorne Sossin and Adam Dodek argue that governors-general should publicly justify and explain their reasons for granting requests for prorogation or dissolution, providing not only greater transparency but also a record of precedents to guide future actions.37 Peter Russell argues vividly that “the time has come to bring those spooky unwritten constitutional conventions down from the attic of our collective memory and try to see if we can pin them down in a manner that is politically consensual and popularly accessible.”38 The Canadian experience with minority government and particularly questions of constitutional conventions has attracted international attention,

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and not always favourably. Robert Hazell, reflecting on experiences in various Westminster-style jurisdictions, says that “Canada illustrates the difficulties which can arise when the rules are not clear, especially the rules governing the key constitutional conventions around government formation and dissolution.’39 In contrast, New Zealand, with considerable experience of multi-party governance since the 1990s, has codified many of these rules, and Lori Turnbull and Peter Aucoin suggest a similar written protocol should be developed in Canada,40 a proposal also supported by Chapman.41 Related to this is the perennial call for more civic education and public understanding of Canadian political institutions. The December 2008 crisis clearly showed widespread confusion among the public (and notably parts of the media as well) about the nature of the reserve power, confidence convention, coalition government and the government’s assertion that prime ministers and governments are directly elected. This in turn fits with other misconceptions or blurred understanding of the role of Parliament, mps , and party discipline. Greater public awareness and knowledge about our democratic system, it is argued, might curb much of the rule-bending and manipulation seen in the minority government era or at least make what is being done more apparent.42 Other suggestions have focused on the need to accept coalitions as a normal aspect of Canadian parliamentary government, countering the inaccurate Conservative arguments in 2008 that coalitions were illegal or otherwise unacceptable in the Canadian system of government. William Cross argues that “Canadians may have largely rejected the proposed coalition, but they should get used to the idea”43 and Lawrence Leduc, noting the widespread practice of coalitions in many other parliamentary systems, states that “Canada will very likely someday have a coalition government of some type.”44 Along with Russell and others, these writers all argue that the pattern of multiple party-parliaments and minorities is likely to continue, and that both politicians and the public must accept more formal coalitions as a normal and even desirable practice. Yet this is not likely to happen – as even many of the above writers admit – as long as Canadian parties, and especially the Conservatives and Liberals, see majority governments as within their reach. Hence Mark Chapman concludes that “perhaps the greatest obstable to making [minority government] work has been the reluctance of the Conservative and Liberal parties to accept that minority government is here to stay for the foreseeable future.”45 A final possibility is what Peter Russell calls “the ultimate stabilizer”46 – electoral reform. Proponents of more proportional electoral reform schemes argue that they will eliminate “false majorities” once and for all and force parties to work together. Ben Yong argues that New Zealand’s experience of multi-party governance since the introduction of the Mixed-Member Proportionate (mmp) system, while not without hiccups, “has led to relatively

44 Jonathan Malloy

stable and durable government.”47 Similarly, Scotland’s Additional Member System has produced a series of relatively stable minority and coalition governments.48 Thus Russell argues that “one of the benefits of electoral reform is the stability it would bring to the operation of minority government.”49 But the likelihood of electoral reform is increasingly slim. Proposals have been rejected in three provinces (Ontario, pei and bc, the latter twice) and, while reform proponents argue this was due to insufficient citizen education, enthusiasm has dwindled considerably since those initiatives,.51

c o n c lu s i o n s The series of minority governments since 2004 has made Parliament, and particularly the House of Commons, the centre of political attention because of the constant brinksmanship and uncertainty of parliamentary votes. But this significance has come at great cost to the overall legitimacy and health of the institution. The constant state of instability and uncertainty has created a hyper-partisan atmosphere, in which tribalism and partisan advantage are paramount and rules are bent or even possibly broken to serve immediate short-term advantage. Parliament has become very important, but perhaps more unsatisfying and less convincing than ever. There is little doubt that Canada’s flexible Westminster system of democracy will continue under the stresses of minority government and the possible futures of either coalition governments or the return of majority government. The system allows for many configurations and varieties52 and even the chronic rule-bending of recent years does not mean an overall breakdown. But more than ever, the role and purpose of Parliament is a continuing puzzle in Canadian politics. What is Parliament supposed to do? How well does it do it? The minority government era has created an entirely new set of dynamics, but the perennial questions remain.

notes 1 Robert Hazell and Akash Paun, eds., Making Minority Government Work: Hung Parliaments and the Challenges for Westminster and Whitehall (London: Institute for Government, 2009). 2 Peter H Russell, Two Cheers for Minority Government (Toronto: Emond Montgomery, 2008). 3 See Jonathan Malloy, “The House of Commons Under the Chretien Government” in G. Bruce Doern, ed., How Ottawa Spends 2003–4: Regime Change and Policy Shift (Toronto: Oxford University Press, 2003), 60–61; and Thomas Axworthy Everything Old Is New Again: Observations on Parliamentary Reform (Kingston: Centre for the Study of Democracy, Queen’s University, 2008) 9.

45 The Drama of Parliament under Minority Government 4 Graham White, “The Coalition That Wasn’t: A Lost Reform Opportunity” in Peter H. Russell & Lorne Sossin, eds., Parliamentary Democracy in Crisis (Toronto: University of Toronto Press, 2009), 151. 5 David E. Smith The People’s House of Commons: Theories of Democracy in Contention (Toronto: University of Toronto Press, 2007), 9. 6 Smith, The People’s House of Commons, 19. 7 Jonathan Malloy, “The ‘Responsible Government’ Approach and Its Effect on Canadian Parliamentary Studies.” Parliamentary Perspectives (Ottawa: Canadian Study of Parliament Group, 2002). 8 C.E.S. Franks, The Parliament of Canada (Toronto: University of Toronto Press, 1987), 7. 9 Jonathan Malloy, “High Discipline, Low Cohesion? The Uncertain Patterns of Canadian Party Parliamentary Groups.” Journal of Legislative Studies 9:3 (2003). 10 Russell, Two Cheers for Minority Government. 11 Russell, Two Cheers for Minority Government, 129. 12 Axworthy, Everything Old Is New Again, 27. 13 David Docherty, “It’s Awfully Crowded in Here: Adjusting to the Five Party House of Commons.” Parliamentary Perspectives (Ottawa: Canadian Study of Parliament Group, 1998). 14 Malloy “The House of Commons Under the Chretien Governmen.t” 15 Peter Aucoin and Lori Turnbull, “The Democratic Deficit: Paul Martin and Parliamentary Reform.” Canadian Public Administration 46:4 (2003). 16 Axworthy, Everything Old Is New Again, 13. 17 Russell, Two Cheers for Minority Government, 126. Note that “government defeats” can be counted in different ways, on government bills and motions, but also opposition supply day motions carried against the will of the government, amendments to bills, committee business, etc.. 18 John Ward, “Commons Speaker Marks Milestone.” New Brunswick Telegraph-Journal October 12, 2009, p. A8. 19 Russell, Two Cheers for Minority Government. 20 Russell, Two Cheers for Minority Government. 21 Jonathan Malloy, “The Canadian Parliament and the War on Terror” in John E. Owens and Riccardo Pelizzo, eds. The “War on Terror” and the Growth of Executive Power? (London: Routledge, forthcoming 2010). 22 Gary Levy, “A Crisis Not Made in a Day” in Peter H. Russell and Lorne Sossin, eds., Parliamentary Democracy in Crisis (Toronto: University of Toronto Press, 2009), 19. 23 Andrew Heard, “Just What is a Vote of Confidence? The Curious Case of May 10, 2005.” Canadian Journal of Political Science (2007), 412 24 C.E.S.Franks “The Dilemma of the Standing Committees of the House of Commons.” Canadian Journal of Political Science, 1971. 25 Jonathan Malloy, “Reconciling Expectations and Reality in House of Commons Committees: The Standing Committee on Finance and the 1989 gst Inquiry.” Canadian Public Administration 37:3 (1996).

46 Jonathan Malloy 26 Don Harper, “Harper Government Whips Tories into Line with Secret Handbook.” Calgary Herald, May 18, 2007. 27 Government of Canada. Bill C-16, An Act to Amend the Canada Elections Act. 39th Parliament, 1st Session. 28 See Jennifer Smith, ed., The Democratic Dilemma: Reforming the Canadian Senate (Kingston: Institute of Intergovernmental Relations, School of Policy Studies, Queen’s University, 2009) 29 Michael Valpy, “The ‘Crisis’: A Narrative” in Russell and Sossin, eds., Parliamentary Democracy in Crisis. 30 Brian Laghi and Steven Chase, “Facing a crisis, Harper Instructs MPs to Be Less Confrontational.” The Globe and Mail. Nov 20, 2008. pg. A.4 31 See Valpy, “The ‘Crisis’” for further details. 32 See C.E.S. Franks, “To Prorogue or Not to Prorogue: Did the Governor General Make the Right Decision?” and Andrew Heard, “The Governor General’s Suspension of Parliament: Duty Done or a Perilous Precedent?” in Russell and Sossin, eds., Parliamentary Democracy in Crisis. 33 “Democracy Diminished, Accountability Avoided.” Globe and Mail, December 31, 2009, A1. 34 Jonathan Malloy, “Tories Aren’t the Only Ones to Play Parliamentary Games.” Ottawa Citizen, January 6, 2010, 8. 35 Russell, Two Cheers for Minority Government. 36 Mark Chapman, “Canada’s Dysfunctional Minority Parliament” in Hazell and Paun, eds., Making Minority Government Work, p 36. 37 Lorne Sossin and Adam Dodek, “When Silence Isn’t Golden: Constitutional Conventions, Constitutional Culture, and the Governer General” in Russell and Sossin, eds., Parliamentary Democracy in Crisis. 38 Peter Russell, “Learning to Live with Minority Governments” in Russell and Sossin, eds., Parliamentary Democracy in Crisis, 148. 39 Robert Hazell, “Lessons for Whitehall and the Palance” in Hazell and Paun, eds., Making Minority Government Work, 73. 40 Lori Turnbull and Peter Aucoin, “Removing the Virtual Right of First Ministers to Demand Dissolution.” Canadian Parliamentary Review 27:2 (2004). See the guidelines at http://cabinetmanual.cabinetoffice.govt.nz. 41 Chapman, “Canada’s Dysfunctional Minority Parliament,” p. 29. 42 See for example Russell and Sossin, eds., Parliamentary Democracy in Crisis. 43 William Cross, “And the Future Is … Coalition.” The Globe and Mail January 26, 2010. 44 Lawrence Leduc, “Coalition Government: When It Happens, How It Works” in Russell and Sossin, eds., Parliamentary Democracy in Crisis, 132. 45 Chapman, “Canada’s Dysfunctional Minority Parliament,” 36. 46 Russell, Two Cheers for Minority Government. 156. 47 Ben Yong. “New Zealand’s Experience of Multi-Party Governance” in Hazell and Paun, eds., Making Minority Government Work, 38

47 The Drama of Parliament under Minority Government 48 Akash Paun, “Learning From Scotland’s Parliament of Minorities” in Hazell and Paun, eds., Making Minority Government Work. 49 Russell, Two Cheers For Minority Government 157. 50 See Laura B. Stephenson and Brian Tanguay, “Ontario’s Referendum on Proportional Representation: Why Citizens Said No.” Institute for Research on Public Policy Choices 15 (10), 2009. 52 Graham White, “The Coalition That Wasn’t: A Lost Reform Opportunity” in Russell and Sossin, eds., Parliamentary Democracy in Crisis.

3 Canada-US Relations in the Obama Era: Warming or Greening? geoffrey e. hale

introduction The cyclical character of Canada-US relations has long been the subject of scholarly investigation. American political scientist Charles Doran points out that these cycles, which reflect both variations in American foreign policy styles and the domestic cycles of political and economic activity in both countries, do not always coincide.1 Rather, the two sets of cycles reflect the interaction of domestic politics and foreign policies in each country – a phenomenon described as “two-level games.” This reality is central to understanding the dynamics of Canada-US relations, including those since the presidential election of 2008, and the implications for Canada’s international economic and environmental policies and related domestic policies. Historically, Canada-US relations in the broader “political-strategic” sphere2 of international relations have been closest when American foreign policies emphasize the projection of American power and values through the leadership of, and cooperation with, international institutions, and weakest during periods emphasizing unilateral actions (e.g. actions taken independently of or without consultation with allies) in defence of American strategic interests. The election of Barack Obama in November 2008 symbolized for many observers a shift from an emphasis on the latter strategy to the former – whatever the relative continuity between substantive American policies during the later Bush years and those of the new administration. This symbolic shift has greatly facilitated the domestic political environment for the Harper government in its support for a series of US foreign policy initiatives. Harper has sought to position Canada as a “useful ally” at the

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margins of US foreign policy, whether on broader political-strategic issues such as Canada’s continued, but time-limited military involvement in Afghanistan, incremental reforms to international economic policies emerging from the financial crisis of 2007–09, or cooperation within the Major Economies Forum, which brokers mutual accommodation among major industrial and developing countries on international climate change policies. The character of Canada-US economic (or “trade-commercial”) relations remains heavily influenced by periodic economic cycles which may cushion or reinforce the fundamental asymmetry of the bilateral relationship. Canada is far more dependent on international trade and investment in general than the United States – with goods exports accounting for 31.9 and 7.8 percent of gdp respectively in 2006, and American markets in particular – which accounted for more than 80 percent of Canada’s exports until 2007. Although the US economy is far less dependent on trade than its Canadian counterpart, the former’s large and rising trade and current account deficits during the past decade, combined with the stagnant or declining living conditions of many Americans, have greatly increased the influence of domestic protectionist forces.3 These realities, which are reinforced by Congressional dominance of the “nuts and bolts” of US economic policy-making, tend to relegate trade relations with Canada to a subset of US domestic economic policies during times of relative prosperity4 and, more generally, to increase the relevance of US domestic politics in shaping its international trade and economic policies.5 The greater the degree of economic insecurity within the United States, the greater the extent to which Canadian governments must engage American policy processes to deflect or manage the resulting protectionist pressures. Ironically, rather than Canada cultivating greater distance in the politicalstrategic dimension of bilateral relations, while seeking closer trade-commercial relations with the United States, as has often been the case during the past twenty years, the Harper government has pursued greater strategic cooperation with the Obama administration to offset a growing distance in trade-commercial relations arising from continuing American economic insecurity and ongoing exchange rate shifts. The sharp economic downturn of 2008–09 and high unemployment rates (exceeding Canada’s) have created political conditions in the United States that place the Canadian government on the economic defensive, attempting to maintain Canada’s relatively secure access to American markets while preserving a degree of domestic policy discretion and adapting to a changing international economic environment in which American leadership and support for open trade and investment can no longer be taken for granted. This chapter explores the development of bilateral relations under the Harper government and the Obama Administration in the context of ongoing changes to the broader global economy. In particular, it focuses on the

50 Geoffrey E. Hale

interaction of each country’s energy and environmental policies as a case study that illustrates the Harper government’s efforts to work cooperatively with the Obama administration while maintaining some degree of policy discretion in light of Canadian domestic policy challenges,

i n t e r n at i o n a l p o l i c y r e l at i o n s : a theoretical perspective Several political theorists6 have characterized international trade (and related economic) policies as a series of two-level games in which national governments attempt to negotiate international agreements in specific policy areas, while building or maintaining supportive coalitions of domestic interests which anticipate benefits from the details of such agreements, and attempting to diffuse domestic opposition from groups whose interests may be adversely affected. These processes are characterized as “games” for several reasons. The presence of overlapping and competing political, bureaucratic (or institutional), economic, and societal interests, all of which are attempting to incorporate their particular interests into related legislative, regulatory or diplomatic processes, encourages these actors to “game” (or compete to control or influence) policy processes, often bargaining (explicitly or indirectly, through proxies) with one another. In contrast to the traditional “high politics” of international relations among authoritative state actors, these processes are heavily influenced by “low politics” in which governments do not consistently function as unitary actors. The related decentralization of policy processes may contribute to international cooperation by limiting the range of domestic actors who should be consulted or accommodated to secure domestic legitimacy on any one issue or set of related issues. It may also foster the creation of cross-border epistemic communities that develop a shared outlook on relevant aspects of the public good and appropriate means to achieve it.7 These processes help to explain the diversity of transgovernmental relations among officials of dozens of Canadian and US government departments and agencies which are a central feature of cross-border relations,8 along with a growing array of crossborder (and international) interest group networks. However, the greater the complexity and range of domestic interests affected by particular negotiations, the greater the challenge of mobilizing political, bureaucratic and interest group support to manage and reconcile cross-cutting interests and policy objectives. As a result, relatively simple “two-level” games of balancing international cooperation and domestic legitimacy may be transformed into complex “multi-level games” that further constrain the capacity of national governments to serve as unitary, let alone autonomous actors in

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international policy relations. These realities are visible within individual governments (as with inter-departmental or inter-agency competition in setting priorities or competing for scarce resources), between different governments (as in Canada’s relatively decentralized federal system), or between independent branches of government (as in relations between the US executive branch and Congress and between the two houses of Congress.

c a na da a n d o b a m a : wa r m i n g u p t h e r e l at i o n s h i p The extensive transgovernmental, economic and societal networks which help to structure the Canada-US relationship often function independently of relationships between senior political leaders of the two countries. However, these relationships and how they are managed by leaders and their advisors certainly affect the political context for cross-border cooperation, and the degree of flexibility available to department or agency-level decisionmakers in each country. Canadian politicians and policy-makers initially viewed the November 2008 election of President Barack Obama as a way of thawing bilateral relations after the political tensions of the Bush years. The Chretien, Martin, and Harper governments all maintained close working relationships with the Bush administration on multiple files at both ministerial and officials’ levels. However, broader strategic initiatives on borders, trade, and broader issues of economic policy cooperation within North America were effectively frozen by a combination of public antipathy to the Bush administration in Canada and the President’s own increasingly lame duck status after the Democrats took control of Congress in January 2007.9 The Harper government was eager to begin its relations with the Obama administration on a strong footing. However, the latter’s understandable preoccupation with the US and global financial crises, the looming collapse of the American auto industry, the politics of the Congressional economic stimulus package, and the glacial process of nominating and confirming thousands of senior and middle-ranking officials as part of the traditional post-election transition diverted its attention from less pressing priorities, including most bilateral dealings with Canada. As demonstrated on several occasions, not least, his brief visit to Ottawa in February 2009, Canada was far more ready for Obama than Obama was for Canada. The President’s visit was a public relations triumph. Obama acknowledged Ottawa’s shared interest in the survival of the North American auto industry, enabling Canadian officials to coordinate their activities more closely with US counterparts in negotiations leading to the eventual bailouts and restructuring of General Motors and Chrysler, as discussed in chapter 8.10 However,

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the Harper government’s efforts to secure cooperation on energy and environmental issues and to repel Congressional “Buy-American” initiatives were shuffled off initially with anodyne reassurances and promises to discuss options for “clean energy” – scarcely the “new era in cooperation” trumpeted in some over-enthusiastic newspaper headlines.11 Even so, federal cabinet ministers logged at least 30 visits over the next four months to meet with their newly appointed counterparts and re-establish the informal relations central to managing the bilateral relationship in recent years.12 Most of Ottawa’s initiatives on bilateral files have involved incremental adaptations of Canadian policies, often in other institutional settings, in response to the priorities of the new administration. As with previous governments, the reality of minority parliaments tends to reinforce government preferences for small policy adaptations on a wide range of issues, ranging from security and border management, to foreign investment and related competition policies, to energy and environmental policies, rather than seeking to negotiate bilateral agreements. The federal government continued its support of US commitments in Afghanistan, the Middle East, and Latin America – despite the prime minister’s mid-campaign announcement in October 2008 confirming the planned termination of Canada’s commitment of combat troops to Afghanistan in mid-2011. The author’s conversations with US government officials suggest that this decision has had no adverse political effects in Washington, given the vagaries of American “Af-Pak” strategies and the almost three year lead time prior to its implementation; indeed, Canadian support in Afghanistan was still cited by some US media voices as a rationale to reject increased protectionist measures at home.13 Similarly, Canadian and US interests have been broadly aligned on most major issues of international economic policy. Both countries have been supportive of a stronger international framework for financial regulation through bodies such as the G-20 and the imf, while emphasizing national leadership capable of managing the distinctive financial sector policies of each country. The strength of Canada’s financial system was a major theme of several national television interviews arranged by the Prime Minister’s Office (pmo) during the first few months of 2009.14 Mr Harper has used virtually every opportunity on the international stage, from the Summit of the Americas in Panama in April 2009 to G-8 meetings in June to the nafta summit in August of the same year, to trumpet Canadian support for maintaining free trade and an open environment for international investment, and the importance of US leadership in preventing a reversion to the global protectionism of the 1930s.15 The pmo even retained two former Presidential press secretaries from the Clinton and Bush eras to secure regular access to major US media outlets to press Canada’s messages.16 Viewed as a whole, these rhetorical and policy initiatives suggest that the Harper government has taken a complementary, generally supportive approach

53 Canada-US Relations in the Obama Era: Warming or Greening?

to US foreign and international economic policies. This approach is rooted both in its perceptions of Canadian interests and its efforts to build an effective relationship with the new administration by publicly acknowledging and often supporting its international priorities. These initiatives have had limited effect on US domestic debates in which, like George W. Bush, President Obama has generally deferred to Congress on the details of legislation. However, they have provided practical support for those elements of the administration that are more disposed to more open trade and economic policies, and accumulated political capital as a “friend and ally” of the US that allow Canadian officials to challenge specific administration or congressional policies that place Canadian interests at an actual or potential disadvantage.

t h e e n v i r o n m e n t a n d e n e r g y: n e g o t i at i n g m u lt i - l e v e l g a m e s Perhaps the most challenging set of issues on which Canadian governments have engaged their American counterparts involves emerging climate change and related energy policies. American policies are slowly taking shape through a highly competitive process involving different elements of the Obama Administration, Congress, and domestic special interest groups. At the same time, the White House is actively engaged with foreign governments in a multi-cornered game of economic and policy brokerage. Canada’s climate change policies are inherently subject to North American influences – the cross-cutting effects of economic, environmental, and political interdependence with the United States and of the latter’s interdependence with Mexico. Macdonald and VanNijnatten emphasize that North American influences are multi-dimensional. They reflect the influence of state and non-state actors in the United States and in Canada, and are shaped by competing regional, federal, economic and societal interests in both countries.17 Climate change, economic and energy policies are interdependent, anticipating and responding to the overlapping and competing expectations of citizens and interest groups upon government policies. A series of ministerial speeches, reinforced by interviews with Canadian federal officials, strongly suggest that their efforts to promote environmentally sustainable energy and transportation systems are deeply sensitive to the need to accommodate economic and regional considerations to make these changes politically and administratively viable.18 Independent studies suggest that Canada is likely to pay a substantially higher cost than the United States or other industrial countries to achieve the same proportional levels of emissions reductions. These findings are rooted in Canada’s relatively greater use of non-emitting sources of power generation than Europe in 1990 or the United States today, its higher transportation costs for goods and people due to its relatively small, widely dispersed population,

54 Geoffrey E. Hale

the necessity of continuing population growth for the fiscal sustainability of its public services, and its relatively colder climate. Although American studies suggest the possibility of meeting the Obama Administration’s 2020 emissions targets with a price of $16–30 per metric ton, Canadian studies suggest that, even under the most favourable conditions, meeting comparable targets in Canada would require a carbon price in the range of $100 per metric ton. Both countries envisage limits on the degree to which emissions would be reduced through the purchase of carbon credits overseas, putting a premium on domestic adjustments.19 As a result, federal environmental and energy policies under the Harper government resemble a multi-level game in which American policy, legislative, and international diplomatic initiatives are central to Canadian calculations, while Canadian concerns are only selectively of interest and, more often, are peripheral to American policy-makers. Moreover, the Harper government faces the additional handicaps of working within an unstable minority parliament, and of needing to coordinate its policies with a series of cross-cutting provincial initiatives to enhance both the political and technical viability of its policy initiatives. Responsibility for this complex, constantly shifting process has been given to Environment Minister Jim Prentice and his senior officials. Environmental policy specialists in the Canadian Embassy have similar responsibilities for diplomatic coordination in Washington. The government’s engagement with the American political system on climate change policy takes place on five different levels. Each of these will be explored in more detail: • global diplomacy; • bilateral regulatory and research initiatives involving federal officials in both countries; • engagement with US Congressional processes aimed at producing some combination of renewable energy and cap-and-trade legislation during the life of the present Congress; • engagement with provincial and state level regulatory initiatives; and • separate regulatory (and market-related) initiatives relating to different segments of Canadian energy industries which are integrated to varying degrees within North American and global markets.

global diplomacy International negotiations to address global climate change issues help to shape the context for cross-border policy discussions on energy and the environment. Canada’s extensive economic integration with the US, shared dependence on fossil fuels, high levels of CO2 emissions, and shared vulnerability to economic

55 Canada-US Relations in the Obama Era: Warming or Greening?

competition from developing nations have all prompted the Harper government to align its international climate change negotiating strategy with that of the Obama Administration. Initially, these discussions were conducted through the Major Economies Forum in preparation for the December 2009 United Nations climate summit in Copenhagen. Although the un process requires the development of a consensus among the 192 participating countries, the emergence of such a consensus remains elusive, and heavily dependent on parallel negotiations between China and the United States, the world’s two largest emitters of greenhouse gases (ghg s), accounting for about 40 percent of global totals in 2006.20 By contrast, Canada accounts for only about 2.1 percent of global ghg production, albeit ninth on a per capita basis. In a series of speeches intended to frame policy discussions during the spring of 2009, Environment Minister Prentice described four major principles guiding Canada’s climate policies. He emphasized that policy changes should safeguard economic growth, contribute to the renewal of Canada’s capital stock, including major energy and transportation sector assets, over the next twenty to thirty years, and support technological changes capable of promoting improved energy efficiency and reduced ghg emissions from domestic sources. Finally, the government seeks to link Canadian policies to actions undertaken by major emitting countries, especially the United States and China.21 The close integration of Canadian and American economies has led to close cooperation between the two countries. However, unlike the process leading to the Kyoto Agreement, it is highly unlikely that the Harper government – or any potential successor emerging from a possible election within the next year – will commit Canada to firm targets in the absence of legislative action by a US Congress that has proven quite capable of resisting White House pressures on such issues over many years. It is more likely that Ottawa will quietly track the positions taken by more centrist elements of the Democratic Party which will provide the swing votes in these debates. Recognizing the serious gap between industrial and developing countries on the application of binding, verifiable commitments, and “compensation” to developing countries for the cost of their policy adjustments, the Harper government actively sought to lower expectations for any outcomes of the Copenhagen summit.22 The loosely worded “political agreement” that emerged from Copenhagen allows climate talks to continue at least until the next conference in Mexico City in 2010. However, any measures emerging from this process are likely to be quite tentative in the absence of Congressional legislation that actually commits the United States to specific ghg reduction targets, along with some policy framework for interacting with other countries’ climate change measures.

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e n g a g i n g t h e o b a m a a d m i n i s t r at i o n : r e s e a r c h a n d r e g u l at i o n Although the Harper government has sought to engage the Obama administration on a range of issues related to climate change, energy and other environmental policies from its earliest days in office, its initial efforts were rebuffed as premature in the context of the slow pace of staffing the new administration following the January 2009 inauguration and the uncertain outcomes of Congressional processes.23 The principal outcome of President Obama’s February 2009 visit to Ottawa was the launching of the Clean Energy Dialogue between the two countries, subject to cabinet-level oversight by Prentice and US Energy Secretary Samuel Chu. While denigrated as a “technical information exchange process” by some environmental activists,24 it reflects a deliberate effort by Canadian officials to engage their American counterparts on issues of mutual benefit in order to institutionalize bilateral discussions as part of broader policy development processes within the US Executive Branch. Reports tabled for Prime Minister Harper’s September 2009 meeting with President Obama note the formation of three working groups to prepare recommendations for joint initiatives in the following areas: • developing and deploying clean energy technologies, with a focus on carbon capture and storage (ccs); • expanding clean energy research and development; and • building a more efficient electricity grid based on clean and renewable generation.25 These initiatives align with the carbon reduction strategies of oil and gas producing provinces, especially Alberta and Saskatchewan, and neighbouring American states, especially Montana and North Dakota, as well as efforts to develop a stronger regional grid to take advantage of the widespread distribution (but current operational limitations) of wind power generation across the region. Although numerous observers have raised concerns about the costs, technical challenges and potential environmental risks of using ccs technologies on a large scale, these measures have the practical advantage of addressing the substantial dependence of US electric utilities on coal-fired power generation. (A bill passed by the US House of Representatives in June 2009 requires all new coal fired plants built after 2020 to use ccs.) Following more than $250 million for a ccs demonstration product in Canada’s 2008 federal budget, the 2009 budget committed $ 1 billion over five years for “research … development and demonstration of promising technologies,” including ccs.26 About 80 percent of this funding has been allocated for projects under the Clean Energy Dialogue – some of which were

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announced by the Prime Minister during the fall of 2009.27 Several provinces have also committed substantial funding for sustainable energy research and development, although there is substantial competition among firms and industry groups representing nuclear, wind power, and other “renewable” energy interests. These issues will be explored further in the chapter’s section on regionalism, federalism, and cross-border relations. Canada has also followed regulatory changes announced by the US Environmental Protection Agency in increasing fuel efficiency requirements for cars and light trucks produced in North America by 25 percent to 35.5 miles per US gallon between 2012 and 2016.28 Environment Minister Prentice has also announced plans to use regulatory measures to ensure that automotive tailpipe emissions parallel future American regulatory initiatives.29 These developments point to three inescapable realities shaping North American energy and environmental policies. First, the economic interdependence, and often integration, of major industry sectors across national borders create strong pressures for the coordination of regulatory policies in both countries, whether through collaborative policy processes or unilateral processes originating in the United States and subsequently paralleled in Canada. Second, the long-term process of moving towards more environmentally and economically sustainable energy production and distribution systems create costs for businesses and consumers as well as economic opportunities. Third, perhaps most importantly from a political perspective, the political debates are heavily influenced by complex interaction of interest group competition, rent-seeking, and coalition-building to capture the prospective benefits and shift the probable costs of future policy developments. While this interaction frequently takes place behind the closed doors of bureaucratic and federal-provincial policy-making in Canada, they are frequently on open display in the highly decentralized, competitive processes of Congressional policy-making.

congressional pro cesses: presidents propose – congress disposes … e v e n t u a l ly The most significant policy hurdle in bilateral environmental and energy policy relations has been the slow, highly contested process of assembling environmental and related energy legislation in the US Congress. The centerpiece of this legislation to date has been the development of competing House and Senate proposals for a cap-and-trade system capable of supporting the progressive reduction of greenhouse gas emissions – 17 to 20 percent during the decade between 2010 and 2020 and as much as 80 percent by 2050, as structural economic and technological changes work their ways through the renewal of North America’s electricity generation and transportation stock, as well as that

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of other industries. The concept of cap-and-trade is based on market-based pricing for permits for a specific volume of carbon emissions, so that a firm regulatory limit on overall emissions, reduced over time, will increase the cost of emissions and so provide incentives to emitters to find more effective ways of reducing them or purchase permits from companies that have succeeded in doing so. (However, the real-world realities of such systems often fall short of this ideal, as discussed below.) These “top line” figures may be symbolically important and necessary to contribute to global climate change negotiations. However, they are ultimately less important to the American political process – and to collateral effects on Canada – than the technical details of pricing carbon emissions, allocating permits, designing carbon markets, promoting alternative energy sources, and supporting regulations. So indeed are the related processes of interest group competition that determine which economic activities will be privileged or penalized by the process, and the consequences for American (and Canadian) consumers and Canadian-based businesses operating in or exporting to the United States. A significant feature of this process has been the relative independence from the White House or from Canadian notions of centralized party discipline demonstrated by Democratic Congressional leaders in framing and negotiating the details of this legislation. This reality reflects enduring realities rooted in the US constitutional separation of powers, especially on domestic legislation, combined with substantial divisions within the Democratic Party. Procedural rules in Congress also enable powerful Committee chairs, caucuses of House members with similar interests and, frequently, individual Senators to bargain with party leaders over various aspects of legislation. It may also be seen in President Obama’s apparent decision to defer to Congress on matters of legislative detail to avoid becoming embroiled in the details of interest-group politics and related sectoral or micro-policy trade-offs. (The White House’s prospective use of regulation under the present Clean Air Act to pressure Congress into action, while further complicating cross-border relations, does not affect Congressional leadership of the legislative process – even if it may give the President greater leverage in brokering an eventual compromise among competing elements of the Democratic Party.) Not surprisingly, initial Canadian hopes of negotiating an integrated cap-and-trade policy framework with the United States – never very realistic to start with – have been subordinated to the trade-offs of US domestic politics, leading some Canadian journalists to bemoan that Canadian climate policies will be written by President Obama.30 Given similar levels of energy consumption and greenhouse gas emissions per capita between the two countries, the Harper government has clearly signaled its intent to parallel whatever system-wide carbon reductions may emerge from Congress, together with any elements of “flexibility” built into the legislative package.

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These policy goals are intended to maintain the competitive position of Canadian businesses and workers and to avoid the imposition of “border measures” – penalties on US imports from Canada resulting from Congressional efforts to protect US industries from “unfair competition” from industries not subject to comparable carbon regimes. These measures could take effect in 2020 or even earlier. The proverbial devil is in the details of these arrangements, which are likely to vary on a sector-by-sector basis. For example, the “WaxmanMarkey” legislation (named for its two leading sponsors) passed by the House of Representatives in June 2009, contains 397 regulations and 1,090 mandates, including standards for many products traded between the two countries.31 However, for reasons discussed below, it is far from clear that Waxman-Markey (or any comparable measures negotiated with the US Senate) will achieve its objective of reducing US emissions by 17 per cent by 2020. Under these circumstances, technical specialists suggest that the nature and pace of Canadian adaptation may hinge on whether the criteria for imposing “border measures” to protect US industries from “unfair competition” will be linked to the percentage of reductions in emissions made by particular firms and/or industries in foreign countries, costs incurred to reduce overall emissions, or some combination of both approaches. These issues are of particular importance to the Canadian government’s emerging technology strategy, and the terms on which it can be incorporated into future North American and international agreements aimed at emissions reduction. Michael Martin, Canada’s climate change ambassador, has signaled Canadian efforts to ensure that any trade measures which emerge from international (or bilateral) negotiations will be based on comparable producer costs incurred to reduce emissions.32 Cap-and-trade’s slow progress through Congress has provided ample evidence of the challenge of brokering a legislative compromise amid the competing pressures of interest group lobbies, and their convoluted implications for different sectors of Canadian industry or even individual firms. The Obama Administration’s preference for a primarily “auction-based” system in which carbon credits would be sold off (as suggested by many economists) rather than distributed at the discretion of Congress was rapidly discarded. Henry Waxman, head of the powerful Energy and Commerce committee, was forced to negotiate with centrist Democrats from industrial and coal-dependent states who sought to protect their constituents from sharp increases in energy costs. As a result, Waxman finally agreed to distribute 85 percent of overall credits to various industries, especially electricity generation and manufacturing, a process cross-subsidized by fewer permits for the oil and gas industry and related sectors.33 It is clear that the debates over the sectoral, regional, and incomebased distribution of costs and benefits over the adjustment costs of climate change policies in Canada are as contentious in the United States.

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Waxman-Markey also contained escalating renewable energy mandates for electricity generation and distribution to take effect after 2012, together with widespread subsidies for a variety of renewable energy industries. However, in doing so, two major forms of electricity generation with minimal ghg impacts – “large hydro” and nuclear – were “zeroed out” of the calculations, excluding them from the calculations of both total and “renewable” power generation, a further illustration of the influence of American environmental lobbies.34 These provisions, if sustained by the Senate, would directly affect the investment plans of major Canadian utilities in Quebec, Manitoba, British Columbia and elsewhere which have often exported surplus power to the United States in order to finance the expansion of their peak load capacity, by removing hydro-electric power from consideration as part of states’ “renewable energy portfolios”35. They could also negate most Canadian provinces’ otherwise substantial advantage in the non-carbon intensive electricity generation needed to balance probable growth in the carbon “footprint” arising from future growth from oil sands production, much of which is exported to the United States US and Canadian environmental groups, led by the Washington-based National Resources Defense Council, have made Alberta’s oil sands a major symbolic target in their public relations, lobbying of Congress, and litigation within the United States. A 2007 federal energy bill sought to restrict US Defense Department purchases of non-conventional oil, a measure primarily seeking to curb American shale oil production, but also imports of oil-sands derived crude oil that exceed conventional oil’s “lifecycle” ghg emissions. Energy interests failed to reverse “Section 526” before the 2008 Presidential election.36 These tactics appear to be part of a broader strategy of promoting the use of a wide range of regulatory tools to limit oil exploration and development in North America, thus forcing up prices of conventional oil and making the development of alternative energy resources more economically viable. These issues are frequently caught up in parallel American debates over the tradeoffs between energy security and policies promoting a substantial shift in US energy consumption to “renewable” fuels – a term whose definition remains highly politicized.37 For this reason, Canadian diplomats in Washington and provincial governments actively encourage visits by American policy-makers, congressional staff, journalists and other opinion-leaders to inspect the oil sands, related reclamation efforts and carbon capture facilities as part of an ongoing public relations offensive to counter the efforts of the anti-oil sands lobby.38 Obama administration officials have acknowledged the oil sands’ importance for US energy security. In August 2009, Deputy Secretary of State James Sternberg formally authorized the building of Enbridge’s “Alberta Clipper” pipeline to carry oil sands crude to US Midwest.39

61 Canada-US Relations in the Obama Era: Warming or Greening?

Following passage of Waxman-Markey, Environment Minister Prentice indicated that Canada would parallel both the broad measures ultimately to be adopted by Congress and the “flexibilities” extended to particular industries.40 Such policy parallelism is not uncommon in cross-border policy issues, particularly when broad policy similarities mask differences in both the institutions and the technical policy regulations that have been negotiated in each country.41 Such considerations are particularly relevant for Canada given provincial governments’ control of provincial energy utilities and natural resource development. The extensive trade-offs for sectoral interests likely to be contained in eventual US legislation gives the Harper government badly needed flexibility in negotiating arrangements to accommodate the wide variety of carbon reduction measures introduced by various provincial governments, let alone the significant differences in the sectoral composition of provincial and regional economies. At time of writing, it is unclear what trade-offs will be embodied in Senate cap-and-trade legislation which ultimately must be reconciled with WaxmanMarkey. The Senate bill must navigate the political crossfire from six major committees, four of which are chaired by coal or oil state senators. While Canadian interests are scarcely “front-of-mind” for most of these Senators, the extensive presence of overlapping interests suggests the possibility of legislative compromises that will accommodate significant cross-border concerns, but also risks that special interest log-rolling will simply externalize the costs of US climate change policies to foreign exporters, including Canada.

regionalism, federalism a n d c r o s s - b o r d e r r e l at i o n s As suggested earlier, the regional effects of cross-border issues play a significant role in shaping federal priorities and strategies on “intermestic” issues: traditionally domestic policy fields which are influenced to varying degrees by the international dimensions of public policy, and economic and social relations. These factors are reinforced by major regional differences in the production of electricity – the largest single source of ghg emissions – in both countries, by Canada’s heavily regionalized economic structure (including the concentration of manufacturing industries in Central Canada, and varied resource sectors in different parts of the country), and by the effects of provincial jurisdiction and resource ownership on its regionally diverse patterns of energy production and consumption. These issues are further complicated by the institutionalization of shared jurisdiction over environmental policies between Ottawa and the provinces.42 The challenges of balancing these interests while pursuing substantial reductions in carbon emissions were highlighted by an October 2009 report sponsored by the Pembina Institute and the David Suzuki Foundation, two

62 Geoffrey E. Hale

major environmental groups. Reminiscent of Stéphane Dion’s “Green Tax Shift,” which prompted a sharp voter backlash in the 2008 federal election, it proposed a series of measures, including carbon prices ranging from $40 per metric ton in 2011 to $100 per metric ton in 2020, to meet Ottawa’s announced targets, partly offset by significant reductions in personal and corporate income taxes and by sizeable subsidies for home heating fuels.43 Although the report suggested that under carefully defined conditions (including parallel measures by Canada’s major trading partners), economic growth and job creation could be largely sustained over this period, the result would be a massive shift of wealth and economic activity from Alberta (and Saskatchewan) in order to maintain a “business-as-usual” level of economic activity in Ontario (and Manitoba).44 However, the Pembina/Suzuki report’s recommendations are unlikely to have much political traction in Ottawa unless the Liberal Party opts to stage a re-run of the 2008 federal election. The Harper government’s approach to these questions – and to some extent, that of opposition leader Michael Ignatieff to date – have been shaped by memories of the bitter political debates surrounding federal energy policies during the 1970s culminating in the National Energy Program (nep) of 1980. Environment Minister Prentice has emphasized Ottawa’s commitment to a “balanced” approach so that “no industries or regions of the country are singled out”45 to bear a disproportionate share of adjustment costs arising from federal climate change policies. This is similar to the approaches previously taken by the Chrétien and Martin governments. Harper and Prentice have emphasized the development of “domestic offsets” rather than paying for Ottawa’s emissions reduction targets through large-scale international transfers to subsidize ghg reduction in development countries, a major goal of ongoing climate negotiations.46 Four provinces – British Columbia, Manitoba, Ontario, and Quebec – have joined the Western Climate Initiative, which plans to implement a cap-and-trade system for participating members in 2010, along with other climate adjustment policies. The scheme also includes seven western US states, with another six US states, one Canadian province and six Mexican states having formal “observer” status.47 Ottawa has accommodated the provinces’ cross-border activities for several years as a form of “discovery process” on emerging trends in climate mitigation policies while waiting for more definitive policies to emerge from Washington. However, provincial governments in Alberta and Saskatchewan have committed themselves to an alternative approach: the payment of a carbon tax to provincial technology funds on emissions over assigned caps. The purpose of these funds is to limit the inter-provincial (and international) wealth transfer inherent in emissions-trading programs, while creating a revenue flow to finance the development of new technologies that can assist their own

63 Canada-US Relations in the Obama Era: Warming or Greening?

industries to adapt more rapidly to the likelihood of a carbon-constrained North American economy. The federal government has committed itself to extensive consultations with provinces on environment and energy policies relating to climate change, the development of cap-and-trade systems, and the accommodation of varied provincial strategies closely linked to provincial energy endowments and industrial structures. For example, the Ottawa-Saskatchewan agreement signed in June 2009 is based on the principle that Ottawa will design national programs to allow the province to retain revenues raised within the province to service its own climate change policies. Negotiations with Alberta premised on a similar approach are ongoing. Similarly, it is anticipated that any federal policy will accommodate British Columbia’s carbon tax, combined with its participation in emerging regional or North American emissions-trading programs. The Harper government signaled the centrality of federal-provincial environmental negotiations to its agenda in August 2009 with its appointment of Michael Horgan as its deputy minister of finance. Mr Horgan’s background includes service as deputy minister of Environment, responsibility for intergovernmental coordination and for excise and international tax policies while at the Department of Finance during the gst debates of the late 1980s and early 1990s. Combined with Finance Minister Jim Flaherty’s strong commitment to implementing a harmonized sales tax regime with both Ontario and British Columbia, these measures suggest that Ottawa’s preference is to work with the provinces and recognize their diverse interests, rather than attempt to impose a one-size-fits-all policy reminiscent of the nep. Ultimately, the severity of Canada’s fiscal and economic adjustments will depend on the policy direction that emerges from the Congressional policy process, and the degree to which American policy makers subsequently follow through on their commitments. Both of these remain open questions given the deep divisions within the Democratic Party over the pace and costs of climate change policy, the intensity of partisan opposition, and the uncertain outcomes of Congressional contests in 2010 – even before the complexities of international negotiations are taken into account.

c o n c lu s i o n s The Harper government has quietly pursued the politics of accommodation on cross-border policies during the Obama administration’s first year in office – reflecting the cyclical character of bilateral relations. Enabled by the more collaborative tone of US international policies, Ottawa’s engagement with Washington on broader foreign policy issues has been designed to facilitate closer cooperation on bilateral concerns emerging from Congressional politics and US domestic debates – especially those relating to energy and the environment.

64 Geoffrey E. Hale

Ottawa’s approach to these files reflects the multi-level character of policy processes in both Canada and the United States. It has attempted to accommodate different provinces’ varied economic and environmental strategies on a number of fronts tailored to their different resource endowments, crossborder networks, and strategies for balancing and integrating their respective economic and environmental objectives. To date, a shared commitment to fiscal stimulus in response to the recession of 2008–09 has provided a political and fiscal backdrop to lubricate the wheels of cooperation on both fronts, although pressures for fiscal restraint, with their related political challenges, will undoubtedly increase as the economy recovers. Critics of federal policies suggest that Ottawa has little chance of actually meeting its carbon reduction targets by 2020 – currently between five and six electoral cycles distant at the pace set by minority parliaments since 2004.48 This may well be true. However, the standard to which a Canadian electorate concerned about its economic security holds its political leaders will not be set by foreign diplomats in faraway Europe and Asia but by the actual achievements of the American avatar of “hope and change” and his fractious Congressional allies. It is not clear whether the Harper government – or any other prospective Canadian government – can successfully broker the accommodation of Canadian interests in US policies by working with complementary American economic interests in Washington. However, to the extent that Congressional log-rolling facilitates the capacity of American industries, consumers and home-owners to adapt to medium and longer-term climate adjustment policies, it is probable, if not guaranteed, that these processes will provide Ottawa with at least some of the political and regulatory flexibility it needs to adapt Canadian policies to changing conditions.

notes 1 Charles F. Doran, “Canada-US Relations: Personality, Pattern and Domestic Politics,” in Handbook on Canadian Foreign Policy, edited by Patrick James, Marc O’Reilly and Nelson Michaud, (Lanham, md: Lexington, 2006), 391–410. 2 Charles F. Doran, Forgotten Partnership: US-Canada Relations Today (Baltimore: Johns Hopkins University Press, 1984). 3 Geoffrey Hale and Stephen Blank, “North American Economic Integration and Comparative Responses to Globalization,” in Borders and Bridges: Canada’s Policy Relations in North America, edited by Monica Gattinger and Geoffrey Hale (Toronto: Oxford University Press, 2010), 21–40. 4 Allan Gotlieb, I’ll be with you in a minute, Mr. Ambassador: The Education of a Canadian diplomat in Washington (Toronto: University of Toronto Press, 1991).

65 Canada-US Relations in the Obama Era: Warming or Greening? 5 Judith Goldstein, “International Forces and Domestic Politics: Trade Policy and Institution Building in the United States,” in Shaped by War and Trade: International Influences on American Political Development, edited by Ira Katznelson and Martin Shefter, (Princeton: Princeton University Press, 2002), 211–35. 6 For example, see Robert Putnam, “Diplomacy and Domestic Politics: The Logic of Two-level Games,” International Organization 42:3 (1988): 427–60; Helen V. Milner, Interests, Institutions, and Information: Domestic Politics and International Relations (Princeton: Princeton University Press, 1997). 7 Anne Marie Slaughter, A New World Order (Princeton: Princeton University Press, 2004). 8 Dieudonné Mouafo et al, Building Cross-Border Links: A Compendium of CanadaUS Government Collaboration (Ottawa: Canada School of Public Service, 2004); Monica Gattinger and Geoffrey Hale, “Borders and Bridges: Canada’s Policy Relations in North America,” in Borders and Bridges: Canada’s Policy Relations in North America, edited by Monica Gattinger and Geoffrey Hale (Toronto: Oxford University Press, 2010), 1–20. 9 Geoffrey Hale, “Sharing a Continent: Security, Insecurity, and the Politics of ‘Intermesticity’,” Canadian Foreign Policy 12:3 (Winter 2005–06): 31–43; Geoffrey Hale, “Getting Down to Business: Rebuilding Canada-US Relations,” in How Ottawa Spends: 2007–2008, edited by G. Bruce Doern (Montreal: McGill-Queen’s University Press, 2007), 65–86; The Strategic Counsel, “Views on Canadian Foreign Policy and the Mulroney-Schreiber Saga” (Toronto: December 10, 2007). 10 Shawn McCarthy, Karen Howlett and Jacquie McNish, “The War over Chrysler,” The Globe and Mail, May 1, 2009, B1 11 Campbell Clark, “A new era of cooperation,” The Globe and Mail, Feb. 20 2009. 12 Confidential Interviews, Foreign Affairs Canada, June-July 2009; John Higginbotham and Jeff Heynen (2005), “Managing Through Networks: The State of Canada-US Relations,” in Canada Among Nations 2004: Setting Priorities Straight, edited by D. Carment, F.O. Hampson, and N. Hillmer (Montreal: McGill-Queen’s University Press), 123–40 13 Confidential Interviews, US Department of State, 2009; Mary Anastasia O’Grady, “Stephen Harper, a resolute ally in the war on terror,” The Wall Street Journal, Feb. 27, 2009. 14 For example, see; Neil Reynolds, “Harper takes the straight talk express to US,” The Globe and Mail, Mar. 4, 2009, B2; Heather Scoffield, “Harper sells Canada’s strong banks as example for the world,” The Globe and Mail, Mar. 30, 2009. 15 For example, cnn News, “Harper on cnn: Protectionism could turn recession into a depression,” National Post Online, Feb. 18, 2009; Craig Offman, “Harper goes on international media blitz,” National Post, Apr. 3, 2009, A4; Jake Tapper, “Interview with Canadian pm Stephen Harper,” (New York: abc News, Aug. 10, 2009). 16 Sheldon Alberts, “pmo hires two former White House strategists,” National Post, Apr. 16, 2009, A4

66 Geoffrey E. Hale 17 Douglas Macdonald and Debora VanNijnatten, “Canadian climate policy and the North American influence”, in Borders and Bridges: Navigating Canada’s Policy Relations in North America, edited by Monica Gattinger and Geoffrey Hale (Toronto: Oxford University Press, 2010), 177–93. 18 Confidential interviews, government of Canada, June 2009; Hon. Jim Prentice, “Address to 39th Conference of the Council of the Americas” (Ottawa: Environment Canada, May 13, 2009); Hon. Jim Prentice, “Canada’s climate change plan”, Notes for address to C.D. Howe Institute (Ottawa: Environment Canada, June 4, 2009); Hon. Jim Prentice, “Canada’s Offset System for Greenhouse Gases”, notes for address to Economic Club of Canada (Toronto: June 10, 2009). 19 Canada School for Energy and Environment, “Banff Dialogue: The Search for a Canada-US Climate Change Accord” (Calgary: June 2009); US Environmental Protection Agency, epa Analysis of the American Clean Energy and Security Act of 2009 – H.R. 2454 in the 111th Congress (Washington, dc: June 23, 2009); M.K. Jaccard & Associates, “Exploration of two Canadian greenhouse gas emissions targets: 25% below 1990, and 20% below 2006 levels by 2020” (Vancouver: David Suzuki Foundation and Pembina Institute, Oct. 18, 2009), 2. 20 United States. Energy Information Agency, “World Carbon Dioxide Emissions from Consumption and Flaring of Fossil Fuels,” International Energy Annual: 2006 (Washington, 8 December 2008). 21 Prentice, “Canada’s climate change plan.” 22 Campbell Clark, “China diminishes hope for global climate deal,” The Globe and Mail, Sept. 23, 2009; Shawn McCarthy, “Ottawa dashes hope for treaty in Copenhagen,” The Globe and Mail, Oct. 23, 2009, A1. 23 Confidential interview, Government of Canada, June 2009. 24 Sheldon Alberts, “Green coalition plans to disrupt pm’s visit to US”, The Calgary Herald, Sept. 15, 2009, A11; Jane Taber, “Canada’s carbon diplomat,” The Globe and Mail, Sept. 23, 2009, A1. 25 US Department of Energy and Environment Canada, “US Clean Energy Dialogue: Backgrounder” (Washington and Ottawa: Sept. 16, 2009). 26 Canada, Canada’s Economic Action Plan: Budget 2009 (Ottawa: Department of Finance, Jan. 27, 2009), 179. 27 For example, see Dave Cooper, “Harper, Alberta Premier announced $ 779M in carbon-capture funding,” Oct. 15, 2009, A9. 28 Brian Laghi and Shawn McCarthy, “Canada to match US car fuel rules,” The Globe and Mail, May 20, 2009. 29 Hon. Jim Prentice, “Speaking Points: Economic Edge Forum, Toronto” (Ottawa: Environment Canada, Oct. 21, 2009). 30 Jeffrey Simpson, “Twiddling our thumbs while waiting for a US climate-change bill,” The Globe and Mail, Sept. 28, 2009. 31 Peter Clark, “US climate bill threatens Canada,” Financial Post, July 3, 2009, FP11. 32 McCarthy, “Ottawa dashes hopes for treaty in Copenhagen”; Lee Berthiaume, “Costs key to climate change talks,” Embassy, Oct. 28, 2009.

67 Canada-US Relations in the Obama Era: Warming or Greening? 33 Tom LoBianco, “Lobbyists help Dems draft climate change bill,” The Washington Times, May 4, 2009; “Cap and trade, with handouts and loopholes,” The Economist, May 21, 2009. 34 Leslie Campbell, “Congress gives big pass on Canadian Hydro Power,” Embassy, July 1, 2009, 1. 35 Ibid. 36 Dufferin Harper and Nikki Stewart-St.Arnault, “Section 526 of the US Energy Independence and Security Act Remains Alive and Well – Effect on Alberta Oil Sands Still Unknown” (Toronto: Blake, Grayson and Cassels, Nov. 3, 2008). 37 Aldyen Donnelly, “Federal low carbon fuel standard (lcfs) dropped from climate change bill” (Toronto: Energy Probe, June 25, 2009); Michael A. Levi, The Canadian Oil Sands: Energy Security vs. Climate Change, Special Report # 47 (New York: Council on Foreign Relations, May 23, 2009); Fred Barnes, “Worthwhile Canadian Initiative – Really,” The Weekly Standard 15:6, Oct. 26, 2009. 38 Taber, “Canada’s carbon diplomat”; Barnes, “Worthwhile Canadian initiative”; Campbell Clark, “The struggle to bend an ear in Washington,” The Globe and Mail, Oct. 23, 2009, A4. 39 Tom Zeller, Jr., “Oil sands: destroyer or savior,” The New York Times, Sept. 7, 2009. 40 Shawn McCarthy, “Canada to match US climate rules,” The Globe and Mail, July 1, 2009, B3; Hon. Jim Prentice, “Speaking Points: Economic Edge Forum, Toronto” (Ottawa: Environment Canada, Oct. 21, 2009). 41 Gattinger and Hale, “Borders and Bridges: Canadian policy relations in North America”, 13. 42 Mark Winfield and Douglas Macdonald, “The Harmonization Accord and Climate Change Policy: Two Case Studies in Federal-Provincial Environmental Policy”, in Canadian Federalism: Performance, Effectiveness and Legitimacy, edited by Herman Bakvis and Grace Skogstad, 2nd ed., (Toronto: Oxford University Press, 2008), 266–88. 43 M.K. Jaccard and Associates, “Exploration of two Canadian greenhouse gas emissions targets”. 44 Shawn McCarthy, “Canada can meet its climate goals, but the West will write the cheques,” The Globe and Mail, Oct. 29, 2009, A1. 45 Prentice, “Speaking Points: Economic Edge Forum”. 46 Kevin Libin, “Climate ‘debt’ comes due,” National Post, Oct. 10, 2009, A1. 47 Chris Lau and Nicholas Bianco, “Bottom Line on Regional Cap-and-Trade Programs (Washington, dc: World Resources Institute, July 2009). 48 Jeffrey Simpson, “Once again, climate change promises Ottawa can’t keep,” Oct. 29, 2009, A21.

4 The Global Financial Meltdown and Financial Regulation: Shirking and Learning – Canada in an International Context stephen l. harris

introduction The overarching mission of prudential regulators of financial services is to preserve a safe and sound financial system. This is a widely accepted, simple and straightforward objective. The meltdown in global financial markets began in early 2007, but reached crisis proportions in September 2008. The central argument in this chapter is that, at the global systemic level, the financial catastrophe can plainly be attributed to the phenomenon of “shirking.”1 In short, those responsible for preserving a safe and sound financial system did not do their jobs effectively. Another factor contributing not only to the crisis itself, but also to its severity, was the absence of policy learning2 by key global state actors. Government policy actors, the regulators and central bankers in the industrial democracies learned little it seems from the earlier episodes of global financial calamity caused by the imprudent behavior of private actors and institutions they are authorized to oversee. Financial safety and soundness were not protected. This was a crisis that surely did not have to occur. In addition, the scope of responsibility for the global economic and financial collapse extends to risk committees of boards of directors of financial institutions who feigned knowledge of what they in fact did not know, and to ceo s whose ignorance of the complex instruments their financial engineers were fashioning approached gross negligence. The regulators and private non-government actors – particularly those in the US, the uk, Iceland, and a number of countries in continental Europe, as well as in Asia and Canada can

69 The Global Financial Meltdown and Financial Regulation

be presumed guilty of not adequately protecting the financial system from calamity. It is not simply that these actors shirked; they can be accused of creating a reality for themselves about how financial markets behave – a reality which turned out to be absolutely incorrect. In Canada, the impact of the global meltdown was less severe than it was in virtually every other industrial democracy. This appears due to the more conservative management practices in the country’s largest banks and to a lesser extent to the character of aggregate prudential oversight. However, there were a number of episodes that did threaten financial instability in the country. The collapse of the asset-backed commercial paper (abcp) market represents the most serious one and was accompanied by the Office of the Superintendent of Financial Institutions (osfi) denying any culpability for the market’s collapse despite osfi’s overarching mission.3 Two commercial banks had to raise additional capital to meet osfi requirements and the Bank of Canada’s provision of extraordinary liquidity to the money market peaked at $37 billion in late 2008 to prevent it from totally seizing up and causing further damage to the economy. The provision of liquidity continues but at more modest levels and, at the end of October 2009, stood at about $28 billion.4 In addition, the minister of finance directed the Canada Housing and Mortgage Corporation (cmhc) to buy mortgages from the chartered banks to supplement their liquidity positions. Purchases have totalled about $60 billion, of the $125 billion authorized by the Minister of Finance.5 It is important to determine why Canada fared better than most other countries since 2007. Is Canada’s performance attributable to measurably better prudential supervision or is it attributable to better management in the financial services industry? Or some combination of both? Also, at the global level, we will explore whether past financial calamities have informed regulators’ activities, ex ante. A good deal of the public discourse has focused on how the crisis manifested itself – crudely characterized by greed and irresponsibility by private non-state actors. On the other hand, public statements of key government actors claim to understand why the meltdown occurred and have sought to assure observers that each of them was carrying out their respective responsibilities; however, these actors also advised the public to check the other actors, suggesting they may have been at fault, or that market participants behaved in unexpected ways, or it was really someone else’s responsibility. In short, everyone claims to have done his or her job. The purpose of this chapter is first to validate the hypothesis of shirking: did those with an official role in this debacle in fact carry out their responsibilities, both globally and domestically within Canada? And, second, the purpose is to explore the extent of policy learning from previous national and global systemic crises. The chapter proceeds as follows: the first section

70 Stephen L. Harris

provides an explanation of the role of the state in prudential supervision of the financial services industry; the second section examines how the global financial meltdown materialized; the third section then analyzes Canada’s abcp crisis and the regulatory response; and, finally, the fourth section explores the phenomenon of “policy learning” in finance. Conclusions then follow.

t h e c h a n g i n g f i na n c i a l s t ru c t u r e a n d t h e s tat e The structure of global finance has changed over the past 25 to 30 years, in large part because of the commingling of traditional banking, investment banking and insurance which over time gave rise to financial mega-institutions in the Anglo-Saxon countries. Commingling – or one-stop financial shopping – had begun and evolved into a well-established practice in continental Europe. There were benefits for both the users of financial services and the owners (shareholders) and employees of the industry. There was clearly an incentive for the segmented industry in North America and the uk to strive for the more efficient model. Furthermore, the establishment of mono-line financial service providers whose sole business was the issuance of credit cards, and mortgage lenders and/or originators whose primary focus was the residential market served to change the competitive environment in finance, particularly in the United States. While there were risks associated with this new structure, including power and market concentration, and conflicts of interest, regulations at the global level recognized these risks and responded with new institutional structures. For example, the uk established the Financial Services Authority, the Australians established a new prudential regulator and a securities commission, osfi was established in Canada, and the US introduced strict accountability and reporting standards (corporate governance) for all public companies. In addition, regulators, central bankers and treasury officials convened at frequent intervals under the auspices of the Bank for International Settlements (bis) and the Financial Stability Forum (now the Financial Stability Board),6 the International Monetary Fund (imf), the Organization for Economic Cooperation and Development (oecd), and the World Economic Forum (wef) to review economic and financial stability issues. The establishment of the mono-line institutions precipitated a commoditization of finance, which underpinned the whole financial crisis. Commoditization in finance is the situation where the street level originators of loans, led by the mono-lines and as well adopted by some traditional financial institutions, immediately sell these assets in the market with no intention of establishing a relationship with the borrower. The profitability of these

71 The Global Financial Meltdown and Financial Regulation

transactions is based on both the loan origination fees and the interest rate spreads on the subsequent sale of the loans. The historic “relationship banking” paradigm did not form part of the marketing strategy of this “new financial services” model. Institutional activities were focused on the “bottom line” and so-called “shareholder value,” and on compensation rewards for activities that increase shareholder value. It is fair to say that the public interest was not on the radar screen. This commoditization gave rise to innovations facilitating the transformation of high yielding and highly risky assets (mortgage loans and credit card receivables) into complex above average yielding financial market instruments, sold mainly to institutional investors. This complexity was clearly not understood by the regulators,7 risk committees, ratings agencies and importantly the ultimate investors whose risk taking during and after the crisis was subsequently underwritten by the state – or more accurately the taxpayers. However, the phenomenon of the commoditization of financial services and the rise of instrument complexity were not accompanied by parallel regulatory developments within states. The riskiness of the “originate to sell” phenomenon was all but ignored by US and global investors who subsequently purchased the resulting derivative instruments without being sufficiently familiar with evolving institutional-client autonomy to introduce the appropriate risk calculus into their investment decisions. The US institutions who bought these instruments from the originators did not undertake adequate due diligence because their primary goal was to sell them in short order. In addition, the ratings agencies gave comfort to investors in these highly risky and misunderstood assets by assigning investment grade assessments to them. Ultimate investor comfort was provided by default insurance (known as credit default swaps) on these instruments sold by such institutions as the American International Group (aig) in the United States. It is clear in retrospect that aig did not understand what they were insuring and so the cost of the default risk insurance was low – reflecting everyone’s assessment of the low probability of default. However, bank capital was indeed exposed. It is important to note that, while Canada was not caught up in the severity of the collapse in the fall of 2008, its financial services industry was not exempt from the global negligent behaviour that has already been discussed. Canadian banks and non-bank entities began to repackage similar cash generating assets into short-term instruments. The total size of the market in Canada was about $116 billion8 before the global financial collapse and the chartered banks had originated some 75 percent of the total.9 Globally, regulators, ex post, were diligent in explaining what they were particularly responsible for and how the crisis emerged, but have been unable to adequately explain, ex ante, why they were unable to stem the activities that would ultimately debilitate global finance and wreak havoc in the global

72 Stephen L. Harris

economy. Part of the explanation of course is in the structure of power in the industrial democracies and part is information asymmetries. If the state was acting in the public interest, then those who had the power to at least flag the risks should have been using their leadership positions to arrest the imprudent behaviour. As explained below, implicitly the state was acting at the behest of finance and not of the public interest. And, while the words of the regulators suggest support for safe and sound financial system, their deeds did not provide compelling evidence that this was their objective. Regulators at the global level did not adjust their practices to fully account for the riskiness and complexity associated with this new financial structure.

t h e g l o b a l f i n a n c i a l m e lt d o w n in the us There were a number of crosscurrents at work in the US economy which caused the germ of imprudent behaviour to spread like a virus around the globe. First, there was a glut of global savings in the world economy that caused longer- term interest rates to fall to historic low levels. Among other activities, this precipitated strong demand for both residential property and mortgage financing and refinancing. This strong demand fuelled a bubble in housing prices. Because Americans viewed the resulting increase in house equity as a source of spending power, many mortgages were refinanced at prevailing lower interest rates. This allowed Americans to purchase all kinds of goods from offshore – particularly from China and elsewhere in Asia – which exacerbated the US current account deficit and contributed to another set of global financial troubles that continue to percolate. Second, home ownership was an important public policy objective in the US, facilitated not only by the favorable personal income tax treatment on mortgage interest, but also by the federal Community Reinvestment Act (cra) which was designed to encourage, among other financial services, the provision of mortgages in low- and moderate-income neighborhoods.10 In the case of the refinancing of existing mortgages, the financing of new home purchases and cra-facilitated home financing, the mono-line mortgage originators captured an increasing share of the mortgage financing business by providing credit to borrowers who clearly did not have the resources to carry the liability they were taking on. As has been widely reported, moreover, many borrowers did not understand the terms of the mortgage instrument itself. These individuals were known in the market as NINJAs (no income, no job, no assets) – or subprime borrowers. By late 2007, the number of outstanding subprime mortgage loans totaled some 8 million, or about 15 percent of the overall mortgage market.11

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Third, the clear risks and potential carnage associated with the subprime mortgage lending activities were well know by the principal US banking and financial regulator – the Board of Governors of the Federal Reserve System (the Fed). Indeed, as early as 2000, the late Ned Gramlich, a Governor of the Fed, proposed to the central bank Chairman, Alan Greenspan, more intensive oversight of the institutions involved in subprime lending. However, the proposal never went to the full Board after it had been submitted to Greenspan.12 Some seven years later, only days before he passed away and a year before the US financial system virtually collapsed, Gramlich set out a plan to fix the percolating subprime crisis.13 It too fell on deaf ears. This is a rare example of what Bachrach and Baratz identified as a non-decision – “the practice of limiting the scope of actual decision-making to ‘safe’ issues by manipulating the dominant community values, myths, and political institutions and procedures.”14 The structure of power in finance prevented the Fed from tightening regulation to dampen the market’s enthusiasm for what was thought to be high yielding but low risk investments because Greenspan did not think the market would act to its own detriment and he also feared a backlash against the Fed in the Congress and the Administration15 – even though the central bank is assumed to be “independent” of political influence. Fourth, the originate-to-distribute culture that permeated American finance contributed to the spreading of the subprime virus around the world. The originators of the subprime mortgages, because they had no intention of keeping these assets on their books, failed to undertake the typical due diligence in which lenders engage before approving a loan. These loans were subsequently off-loaded to commercial and investment bankers who ‘sliced and diced’ these mortgages, creating the so-called derivative instruments, and then sold them to investors around the world. These derivative instruments were attractive to global investors because their yields were relatively high in a world with a glut of savings and low long-term interest rates. Fifth, in addition to the high yield on these derivatives, demand was also fuelled by the decision of the bond ratings agencies to give these instruments an investment grade evaluation. Moreover, these instruments had names like jp Morgan, Lehman Brothers and Goldman associated with them in addition to the insurance provided by aig. Because of these names and default insurance, investors assumed there was little to no risk and consequently failed to undertake their own due diligence. So we had a perfect storm.

c a n a d a’ s s u b p r i m e c r i s i s : t h e a b c p m e lt d o w n The global financial meltdown has clearly had less impact on the Canadian institutional structure than was experienced in most of the other industrialized democracies – although the “real” economy has clearly been negatively

74 Stephen L. Harris

impacted. The popular press has heaped praise on the Canadian regulatory system as being the “best” in the world, and the chartered banks being among the strongest, safest and best managed.16 Current and former elected officials have taken credit for this state of affairs despite their own policy actions that did little to nurture the Canadian financial services industry as national champions. Indeed, “bank bashing” was a national sport not many years ago when there were moves afoot in the industry to consolidate.17 The fact that our banks avoided the full consequences of the meltdown is unmistakable. The cause of this state of affairs is less clear. It could be because of the regulatory system is robust; it could be that the culture of the key actors in the industry is more conservative and risk averse than in other jurisdictions; or it may just have been fortuitous. To understand this better, it is useful to explore the collapse of the abcp market in the summer of 2007 to provide some insight and understanding about the character of Canada’s oversight regime. In August 2007 the Canadian abcp market seized up because issuers of this paper could not rollover their maturing liabilities into newly issued paper. The confidence squeeze in this market was clearly attributable to the problems in the US subprime and banking markets. The uncertainty was such that the typical market operators withdrew from the market and simply parked their funds until the air cleared and special liquidity facilities were established by the key global central banks. This event, however, underscored serious shortcomings in the Canadian regulatory regime, including its fractured nature, which appeared to inhibit proper communication among the key regulators and a clear reluctance of the key state actors to take the lead to preserve a safe and sound system. Officialdom, at both the federal and provincial levels, performed their functions in a balkanized structure that resulted in no one working to preserve a safe and sound financial system. Some $32 billion of non-bank sponsored abcp effectively defaulted leaving both sophisticated institutional investors and individuals at the mercy of a restructuring process designed not to make them whole, but to preserve the legitimacy of the public authorities that failed to carry out their responsibilities. Most of the paper was in the form of credit default swaps (cds), collateralized debt obligations (cdo), and consumer and mortgage receivables. The abcp crisis in Canada had similar characteristics as the subprime mortgage catastrophe in the US. First, it was rooted in the phenomenon of “originate to distribute”, as discussed above. This characteristic undermined the due diligence in which lenders and borrowers traditionally engage before consummating a “deal”. The sponsors of the organizations established to distribute this paper were known as conduits.18 This paper typically had terms to maturity of money market instruments – less than one year. The conduits used the proceeds of the sale of their paper to purchase additional assets from

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originators – mortgages, household sector loans including credit card receivables, commercial leases, cds s and cdo s. The underlying assets clearly had a longer term to maturity than the liability used to acquire them. This mismatch was not unlike other term-to-maturity mismatches that characterized many financial crises during the latter part of the 20th century. Second, investors’ understanding of the abcp instruments was as opaque as the underlying assets in the US subprime paper crisis. Importantly, the Provincial Securities Administrators (psa s) did not require a prospectus for the issuers of abcp because there was a legal exemption for “knowledgeable” investors, although collectively they had the power to require one. It is probably the case that the Administrators themselves did not understand the inherent risks in these instruments, particularly the cds s, and therefore failed to properly protect both institutional and individual investors.19 As it turned out, the abcp “was not the type of investment that many holders appear to have imagined”20 they were. Third, it was not only the psa s who failed to understand, ex ante, the underlying problems in the abcp market. The Bank of Canada, whose implicit responsibilities extend to assessing and reporting upon systemic financial stability, ex post, was able to effectively point to all the market anomalies that gave rise to the observed disruptions generally, but failed to wave the “red flag” before authorities had to intervene and give life to moral hazard.21 Henri-Paul Rousseau, ceo of the Caisse de dépôt et placement du Québec, noted in testimony before the provincial legislature’s public finance committee that “there was some thinking out there that this was very risky. We thought it was not plausible and it happened. That’s it.”22 The real problem is that very few people responsible for prudential oversight and systemic stability understood what was taking place, ex ante. Indeed, in June 2007, the Bank’s Financial System Review stated: “Our assessment is that the Canadian financial system is sound and is likely to remain so for the foreseeable future.”23 The purpose in highlighting this point is to demonstrate the extent of the ignorance of the risks percolating in the Canadian financial system, rather than to point the finger of blame at the central bank for the events that ultimately materialized. Admittedly, the Bank on a number of occasions leading up to the abcp fiasco and the global turmoil more generally had pointed to the fact that financial risk had been under-priced. All regulators, however, failed to implement measures that would have quashed this imprudent behaviour by market participants before harm was done. Regulators were in effect not regulating; they were observing. Society would have been better served if the market innovations had been better understood – or even removed from the market place until proper transparency and comprehension had been achieved. Fourth, while David Dodge absolved the ratings agencies for providing comfort to investors in the abcp debacle,24 it is obvious that the Dominion

76 Stephen L. Harris

Bond Rating Service (dbrs) did not fully understand these structured instruments. If they had fully understood the liquidity and market risk associated with them, they would not have been evaluated in a manner that would have so readily enticed investors into them. This assertion can be interpreted as an oversimplification. However, the Bank’s defense of these agencies essentially calls for the status quo in respect of the oversight of the work of these actors.25 The Bank’s conclusion, while suggesting that the rating agencies have erred in the past, concludes that on balance they have done a good job as measured by their ability to properly predict “actual default experience.”26 This is certainly a problematic conclusion. Fifth, as discussed above, the problems associated with the “originate-todistribute” or “acquire-to-distribute” phenomena have contributed to financial instruments being put on the market by financial institutions to unsuspecting investors as prudent investment vehicles. It would to be unfair to accuse institutions of conspiring to sell risky assets as safe assets. However, because of the ignorance associated with so-called innovations in financial markets both individuals and institutional investors have been lulled into complacency by relying on expert opinion, opinion which in hindsight was not expert at all. The historical rule of “know your client” is not as important as it once was even when the client is a state sponsored investment fund or an institutional investor. The public interest has not been well served as a consequence. Sixth, the key actor regulating financial institutions in Canada, the osfi, was really an observer of the abcp meltdown. Indeed, the Superintendent stated publicly that it was not her role to tell investors what to do. While the technical correctness of this statement cannot be debated, it is fair to speculate why a senior bureaucrat with the key responsibility of preserving a safe and sound financial system did not use her bully-pulpit to warn investors of the imprudence of the abcp venture. The Superintendent has built a wall around OSFIs responsibilities and took little initiative while the crisis was percolating to warn the market of the risks associated with these abcp instruments. Indeed, the Office of the Superintendent of Financial Institutions Act requires the osfi “to monitor and evaluate system-wide or sectoral events and procedures that may have a negative impact on the financial condition of financial institutions.”27 The Superintendent clearly did not do this. In testimony before the House of Commons Finance Committee, responding to questions regarding the sluggishness of the osfi’s response to the emerging abcp problems, the Superintendent stated: It’s not a market that we oversee. We’ve spoken in the past about the kind of work we do, which is focused solely on bank safety and soundness. We would put investor alerts on our website if we saw someone saying it was a bank and taking money from Canadians when it’s not really a bank. There

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would be an investor alert on that. But when you’re talking about assetbacked commercial paper and the fact that the market was different from what existed elsewhere, we would look more to other agencies that have responsibility for investor protection.28 The Superintendent also failed to convince Parliamentarians that osfi understood the complexities of the abcp market by shifting blame to the institutions that created them: First of all, it’s the institutions that have to say whether they’re understanding it or not. One institution can say they don’t understand it and another can say they understand it completely … This is what institutions are doing around the world. We need to be able to compete. We would see the boards of directors, we would do reviews of what we were seeing, and we would be explaining to the boards that it is their responsibility to know what they’re doing.29 The Bank of Canada, appearing before the same Committee and responding to a question about the role of the ratings agencies in providing false comfort to investors, Deputy Governor Pierre Duguay noted: Obviously, we are not directly responsible for ratings agencies. Generally speaking, as regards the commercial paper crisis, there were problems with ratings agencies. Commercial paper was greatly lacking in transparency. Certain structured products were very opaque, and few people knew what they truly were. Ratings agencies were specifically assessing what we call credit risk, and not liquidity. After the losses, investors who were buying up abcp like hot cakes suddenly decided that they did not want any of it anymore.30 So those responsible for a safe and sound financial system claimed no responsibility for the collapse. Obviously, this is not good enough. Seventh, with a multi-agency regulatory system at the federal level and dispersed securities regulation at the provincial level, it is unclear who speaks for the system as a whole. It is not the central bank (although it does provided a semi-annual assessment of the system’s stability), it is not osfi (although osfi does have the mandate to monitor system-wide activities), and it is not the provincial regulators. Indeed, this decentralized structure allows bureaucrats to avoid responsibility for ensuring a safe and sound financial system. There is no authority representing the interests of Canadians generally. Each institution defends its own interests, while Canadians pick up the tab for errors or negligence.

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Eighth, despite the balkanization of the financial regulatory system in Canada, there are a number of bureaucratic institutions designed to provide coherence to the objective of prudential oversight. At the federal level, the Financial Institutions Supervisory Committee (fisc) chaired by the osfi Superintendent comprises the governor of the Bank of Canada, the chairman of the Canada Deposit Insurance Corporation, the deputy minister of Finance, and the commissioner of the Financial Consumer Agency. In addition the minister of Finance indicated that the Canadian Securities Regulator, contingent on the establishment of a single securities market regulator, would also be a member of this coordinating committee.31 The minister, in a speech in August 2009, identified the work and the composition of the fisc – but did not identify the Committee by its legal name, nor did he reaffirm that the osfi Superintendent would continue as its chair. The minister did point out that “the Department of Finance … has the ultimate authority for the financial system and for all financial sector regulation and legislation. It is our job to ensure effective coordination of all of the pillars as well.”32 However, no state actor yet speaks with legitimate authority to preserve a safe and sound financial system. So what can we conclude about regulatory and stability oversight? The central bank, responsible for assessing systemic stability, clearly underestimated the risks to Canadian financial stability associated with offshore spillovers. The market regulators, because of their fractured character and the complexity of the instruments being sold in the market, were unable to dampen the demand for financial instruments whose risk was clearly opaque. The senior regulator, the osfi, simply washed its hands of the mess, telling Canadians it was someone else’s’ responsibility.33 Finally, it should be noted that the Conservative government attempted to introduce competition into the mortgage insurance business, a carryover of an initiative of the previous Liberal government. In its Budget 2006, the Conservatives permitted zero down, 40-year mortgages and were encouraging companies such as aig to come to Canada to “help” increase home ownership in the country. The banks approved such loans. Thus, it was possible that the events in the US and Europe, at least partially, could have been replicated in Canada. Indeed, in 2007 cmhc was on track to insure such mortgages, but for the intervention of David Dodge, then governor of the Bank of Canada, who criticized the proposal for a number of reasons. The proposal was ultimately dropped by the cmhc and such high-risk mortgages legislatively banned by the government in June 2008.34 Governor Dodge was the only senior federal or provincial bureaucrat to step outside his direct sphere of responsibility and raise the red flag about imprudent lending practices. Other bureaucrats (and politicians) were quiet or suggested these matters were others’ responsibilities. Dodge provided an important lesson for others involved in oversight activities to emulate.

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t h e c h a rt e r e d ba n k s a n d t h e c a n a d i a n r e g u l at o r y c l i m at e The banks in Canada have not in recent years been respected as national champions. Ordinary citizens, following the lead of politicians at the national level, have taken every opportunity to “bash” the banks. The complaints have ranged from fees for withdrawing funds from atm machines unaffiliated with the customers’ bank, overcharging for credit card balances, the opaqueness of rules regarding loans and accounts; inadequate services the small business enterprise (sme) sector, to a general perception by ordinary Canadians that their needs are not served by the banks. This bank-bashing phenomenon was behind the Chretien-Martin administration’s refusal to allow consolidation in the banking industry for purely political reasons, to prohibit cross-pillar consolidation – particularly between banks and insurance companies, and by refusing to allow the banks to propose remedies to address the issues raised by the competition authorities when its report was issued on the bank merger question.35 More recently, there has been renewed bashing of the banks, this time with the Conservative government’s efforts to eliminate the banks’ insurance offerings on the Internet. This is being undertaken at the behest of the Insurance Brokers Association.36 As was the case about a decade earlier, particularistic interests are being put ahead of the public interest. Similarly, Canadians were never told that the quality, choice and efficiency of the services provided by Canadian banks far exceeded anything offered by their American and European counterparts.37 For example, in most European countries all one can do with an atm machine is withdraw cash. Customers cannot pay bills or transfers funds between accounts, for example. And, with the exception of one or two institutions, Canadian banks did not manage their risk exposures in an imprudent fashion. It is for this reason that the Canadian banks were not sucked into the global financial meltdown, as a result of the recent historical pattern of action and policies pursued by Canadian banks. So, if Canadian banks are on balance both prudent risk managers and service oriented, can this behaviour be at all related to their performance leading up to the meltdown? The answer is obvious and the evidence is displayed in Table A.38 Canadian banks managed their capital positions in a much more prudent fashion than did their counterparts in other countries. Part of the explanation for the more robust capitalization of Canadian banks relative to their international counterparts is explained by the limits imposed by the osfi on banks’ leverage (capital to asset) ratios. This ratio is limited to 20 times (that is, assets can exceed non-risk weighted capital by a factor of 20). This is about the same leverage ratio as in place in the United States, but considerably less leveraged than institutions in the Euro-zone.39 Internationally, “Canadian banks are generally seen as strong counterparties as they tend to be more

80 Stephen L. Harris Table A Average Capital Adequacy of Major Peer Banksa Region

Tangible common equity

Canada

7.2

7.4

United States

5.7

4.8

United Kingdom

6.1

5.2

Euro area

6.0

6.3

Tier 1 capital

2007Q2

2009b

Percentage of risk-weighted assets

Canada

9.7

10.7

United States

8.3

10.4

United Kingdom

8.6

8.6

Euro area

7.8

8.7

a. Peer groups include 6 major Canadian banks, 8 major US commercial banks, 6 major uk banks, and 7 major banks in the euro area. b. Latest available data: Canada, fiscal 2009Q2; US, calendar 2009Q1; uk and euro area, calendar 2008Q4.

conservative” than many other banks.40 Having said that, there is not a lot to distinguish Tier 1 capital in Canada and the United States, although the quality of the capital in Canada is higher as measured by common equity. And, North American banks are clearly better capitalized than their European counterparts. So we are still left with the conclusion that the Canadian banks are more conservatively managed than are their counterparts elsewhere in the world.

policy learning in finance I reach the conclusion that the most recent financial crisis was in a fundamental sense not unlike earlier ones, only more severe. In the case of the Asian financial crisis in the 1990s for example, traditional offshore bankers and dealers were lending to South Korea and to other South East Asian nations at interest rate spreads that clearly did not reflect the inherent risk.41 If the cost of borrowing does not reflect the inherent risk of the asset in question then default materializes. This in part is what happened during the evolution of the current crisis. The regulators were shirking in the late 1990s, as they were most recently, in the face of the inadequacy of the due diligence undertaken by the institutional actors. The Long-Term Capital Management (ltcm) crisis almost sank the global financial system because the Federal Reserve was unaware of the connected risks that ltcm had spread around the financial system. The Fed was of the view that any miscues by their large banks would only amount to “rounding errors.”42 That premise was clearly incorrect and the key actor responsible for the safety and soundness of the US financial system was asleep at the switch.

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In addition, the Nordic financial crisis of the late 1980s and early 1990s occurred in the aftermath of a significant period of deregulation, when the banking system was permitted to participate in new household lending activity. The lesson here is that a nation cannot simply deregulate and hope that markets will behave. I have already explored how the US subprime crises and the abcp fiasco in Canada can be laid at the doorstep of the regulatory community. The obvious lesson therefore is that there is a need for regulators to learn from past financial crises in order to preserve a safe and sound financial system. Ex ante avoidance of a financial crisis would undoubtedly result in a welfare improvement vis-à-vis ex post bailouts and economic collapse. So how is it that what seems so obvious did not materialize? Part of the explanation lies undoubtedly in the structure of power in democratic capitalist countries. That is to say, finance can engage in risky imprudent behavior on the one hand and rightly assume that the state will bail them out somehow, a lesson reinforced by the dramatic fallout of the decision to permit the exit of Lehman Brothers. On the other hand, finance can coerce the state into supplying policies that are advantageous to itself. In crude terms, the power of information (the information asymmetry problem) clearly favors the financial institutions. And only the institutions know if they will have to go to the state for a bailout (the adverse selection problem). Moreover, the states implicitly understand that if they get in the way of finance with tough prudential regulations, the consequences for general economic performance may be harmful because finance is mobile. For example, this was the case of the deregulation of finance in the US following the 1960s growth of the Eurodollar market that wreaked havoc on New York as the world’s financial capital to the benefit of London. And, there are many other examples.43 The poor record speaks for itself. Regulators are not up to the task of preserving a safe and sound financial system because of an unreasonable belief in the efficiency of markets. Canada was fortunate to have a conservative business and investment culture and thus the strength of the Canadian financial system has more to do with the private sector actors than it does with the quality of oversight. Unfortunately, the same cannot be stated for other jurisdictions. We seem to have entered a period in global finance where moral hazard is the accepted principle for large institutions. Nothing has occurred in Canada or elsewhere to put at rest the assumption that the state will ultimately step up with its unlimited resources to bail out imprudent risk taking. That has been the pattern of action since the 1980s and it continues as of this writing.44 That is what private financial actors have learned, but public actors have not really changed their patterns of actions or learning skills. The policy response in the industrial democracies to the meltdown was to give life to moral hazard. The bank bailouts began in the uk with the

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$42 billion rescue of Northern Rock, spread to the ubs who needed $7 billion from the Swiss government, the purchase of Bear Stearns by jp Morgan in the US, the failure of Lehman Brothers which triggered the stock market meltdown in September 2008, the US government takeover of aig, the sale of Dresdner Bank to Commerzbank by Allianz in Germany, the acquisition of Merrill Lynch by Bank of America, the takeover of ihbos by tbs in the uk with the help of a $21 billion bailout by the uk government, the failure of Washington Mutual and Wachovia – both essentially bailed out by the US government, the rescue of Citigroup by the state, the failure of Hypo Real Estate Bank in Germany to the tune of $68 billion, the takeover of aig by the US government … and the story goes on. And, in Canada, the central bank and the cmhc had to take extra-ordinary actions to deal with the abcp crisis and the externalities of the global crisis. Generally, these actions are not the story of regulators doing their job, but of regulators observing and hoping for a better outturn – and ultimately the state bailing out the imprudent actors.

c o n c lu s i o n s The international response to the crisis is the story of shirking and the absence of learning. There have been proposals to restructure the international financial architecture; discipline market participants by regulating their compensation contracts; mitigate procyclicality regulation; create special rules for systemically important institutions; improve the imf surveillance; change the name of the Financial Stability Forum and broaden its membership; formally create the G-20 institution to at least partly replace the G-7. So far not much has occurred, except for the creation of the Financial Stability Board. The eu has attempted to strengthen the regulation of offshore ratings but the consequences are difficult to assess at present. In one from or another, this backward looking response has been tried before and it does not work. Rules cannot be fashioned for all potential risky activities. This is the clear lesson of the official meetings in Basle and Washington over the past 30 years. Thus, this buffet of suggestions and initiatives to cure the frequent burdens of financial crises is not very helpful. The real requirement is to regulate the domestic regulators. Individual states must take measures to appoint regulators who can speak truth to power and who are not fearful of warning when the market is behaving in a fashion that cannot be easily understood. These powers already exist. They should have been used. And proportionate penalties for those who instigate systemic meltdowns should provide an incentive for sober second thought before imprudent ideas are turned into action. In Canada, for example, the penalties incurred by the institutions that “engaged in activities contrary to the public interest”45 in the abcp fiasco amounted to only $140 million46 – some .04 percent of the $32 billion “default.”

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This is clearly not a proportionate penalty and moreover no individuals have been held directly accountable. In addition, unlike the public disgrace and incrimination that occurs in the US (and imprisonment at times), the deliberations by the Canadian regulatory authorities were held in camera. This is clearly a reflection of the power structure in Canada. In the Canadian case, the state did not incur any direct costs for the abcp collapse although holders of the debt have incurred enormous costs – particularly in the cases of the Caisse de dépôt et placement du Québec and the City of Hamilton. The central bank and the cmhc have had to alter their lending and investment practices to deal with both the fallout of the abcp and global financial crises; while in a number of countries the state is now key shareholder in financial institutions (particularly the US and U.K.). It seems unreasonable for the state to act as the lender or owner of last resort without having an unequivocal opinion about the conditions under which an entity can borrow in credit markets. This is clearly not a responsibility that should be left to an unregulated actor (the ratings agency) who is accountable to the entity underwriting the cost of the rating. This should have been learned long ago. The situation in the US and uk are broadly similar, where solutions do not seem to be directed at the problem but rather at absolving state actors for their shirking and ignorance. Activist regulators and central bankers will be vilified by the market, but the costs of such vilification – both private and public – will be less than the social costs incurred as a consequence of events under consideration here. There is no need for any grand reregulation plan at the national or global level. There is a need for state actors to reflect upon and act in the public interest. This is the learning that is required. In Canada, the current Governor has recently reflected on the household debt situation. There may be a time when the Governor’s bully pulpit will be inadequate to the task at hand. It may be that the central bank will have to use a long dormant tool of moral suasion – direct coercion of the credit grantors to change their lending practices or activities. It is this direct incursion that is required not only in Canada, but also globally. Markets make mistakes, as Alan Greenspan, Ben Bernanke, and Mervyn King have belatedly admitted, and it is the role of the state to preserve safety and soundness. Subtlety to this end just does not work. Moreover, prudential regulators should be placed in the same position. If financial market activities seem opaque or misunderstood, then the oversight responsibility requires action, ex ante. It is hard to imagine a regulatory error ex ante exceeding the ex post costs of a calamity. There will of course be headlines in the financial press and questions in the legislatures about state interference. However, markets left to adjust on their own do from time to time err. This has been the history of finance. Of course market participants and regulators will worry about stifling innovation and competition, but this

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has all been heard before. The answer to the question were we better off before the financial engineers got hold of subprime mortgages or abcp and turned them into cdo s and cds s is obvious. The familiar argument that severe sanctions would stifle innovation cannot be accepted anymore. We have known for a long time what does not work. It is time to approach the regulation of finance by regulating the regulators – not repeating the “solutions” that have failed in the past.

notes * Work on this paper began during winter term 2009 while I was a visiting scholar at the Gerald R. Ford School of Public Policy, University of Michigan. I am grateful to Jan Svejnar and the staff of the International Policy Center for their support. 1 Shirking refers to bureaucrats and other actors (agents in principal-agent relationships) who take actions that do not advance the objectives or policies of the organization of which they are a member. 2 Policy learning reflects evidence to adjust present policy decisions in the face of the consequences of past policy and new information to realize the objectives of governance – in the present case a safe and sound financial system. See Peter Hall “Policy Paradigms, social learning, and the state: the case of economic policy making in Britain,” Comparative Politics, 25(3), 275 – 96. 3 Rita Trichur, “Watchdog calls capital rules ‘robust,’” Toronto Star. 2 October 2007, B8. 4 Bank of Canada, Weekly Financial Statistics, various issues. 5 Canada Mortgage and Housing Corporation, Press Release, various issues. 6 The Financial Stability Forum, established by the G-7, provides opportunities for regulatory authorities to review and promote international financial stability. Membership also included Australia, the Netherlands, Singapore, the Bretton Woods Institutions, and international regulators. In April 2009, at the London Summit, membership was expanded to the G-20 and renamed the Financial Stability Board (fsb). Its Secretariat is housed at the bis in Basle Switzerland. See Financial Stability Forum, Press Release, 2 April 2009. 7 Alan Greenspan, on cnbc s “House of Cards,” admitted that he was puzzled by the more complex mortgage-backed securities on the market. cnbc broadcast Sunday, 28 July 2009. 8 Bank of Canada, Weekly Financial Statistics, various issues. 9 The incentive for banks to sell balance sheet assets is first to generate resources to make new loans and keep such lending from impinging on regulatory capital. 10 See Federal Reserve Banks of Boston and San Francisco, Revisiting the cra: A Policy Discussion, February 2009, at 11 Randall S. Kroszner, Board of Governors of the Federal Reserve System, Speech “The Challenges Facing Subprime Mortgage Borrowers,” at the Consumer Bankers Association 2007 Fair Lending Conference, November 5, 2007 Washington, D.C.

85 The Global Financial Meltdown and Financial Regulation 12 Craig Torres, “Edward Gramlich, Fed Governor Under Greenspan, Dies” Bloomberg.com, September 5, 2007, at and Patricia Sullivan, “Fed Governor Edward M. Gramlich,” Washington Post September 6, 2007, B07. 13 Edward M. Gramlich, “Booms and Busts: The Case of Subprime Mortgages,” presented in Jackson Hole Wyoming (read by David W. Wilcox), August 31, 2007. 14 Peter Bachrach and Morton S. Baratz, “Decisions and Non Decisions: An Analytical Framework, American Political Science Review 57, no. 3 (September 1963) 632–42. 15 Alan Greenspan, on cnbc s “House of Cards.” 16 Canwest News Service, “Canada’s banks ranked the soundest,” October 9, 2009 at ; Doug Alexander and Sean B. Pasternak, “Canadian Banks, World’s Best, Step Up Job Cuts,” Bloomberg News, June 10, 2009 at 17 Stephen L. Harris, “Financial Sector Reform in Canada: Interests and the Policy Process,” Canadian Journal of Political Science 37, no. 1 (March 2004), 161–84. 18 The distribution agents for the conduits were: Bank of Montreal, bnp Paribas, cibc World Markets, Dejardins Securities, Deutche Bank Secuities, hsbc Securities, Laurentian Bank Securities, National Bank of Canada, rbc Dominion, Scotia Capital and Societe General Securities. See John Chant, “The abcp Crisis in Canada: The Implications for the Regulation of Financial Markets,” A Research Study Prepared for the Expert Panel on Securities Regulation,” 46. 19 John Chant, “The abcp Crisis in Canada.” 20 John Chant, “The abcp Crisis in Canada,” 39. 21 See David Dodge, “Turbulence in Credit Markets: Causes, Effects and Lessons to be Learned,” Remarks by Governor of the Bank of Canada, to Vancouver Board of Trade, Vancouver, British Columbia, 25 September 2007; Mark Carney, “Reflections on Recent International Economic Developments “ Remarks by Governor of the Bank of Canada to the Canadian Club of Montreal, Montréal, Quebec September 25, 2008. 22 Bertrand Marotte, “Caisse has $13.2–billion of abcp,” Globe and Mail, November 28, 2007, at http://www.theglobeandmail.com/report-on-business/article799959.ece 23 Bank of Canada, Financial System Review: June 2007, 2. 24 David Dodge, Governor of the Bank of Canada, Remarks to the Canadian Club of Toronto and Empire the Empire Club of Toronto, Toronto, December 10, 2007. 25 Mark Zelmer, “Reforming the Credit-Rating Process,” Bank of Canada, Financial System Review: December 2007, 51 – 7. 26 Mark Zelmer, “Reforming the Credit-Rating Process,” 56. 27 Canada. Office of the Superintendent of Financial Institutions Act, S. 4(2)(d) 28 Canada. House of Commons, Standing Committee on Finance, Number 050, Evidence, 16 June 2008. 29 Ibid.

86 Stephen L. Harris 30 Ibid. 31 Jim Flaherty, “Speech to the 63rd Congress of the International Fiscal Association,” Vancouver, bc, August 30, 2009. 32 Flaherty, Speech to the 63rd Congress. 33 These conclusions are supported in testimony, by the same actors, before the House of Commons Finance Committee. See Table A. 34 Jacquie McNish & Greg McArthur, “Special investigation: How high-risk mortgages crept north,” Globe and Mail, Mar. 31, 2009 at http://www.theglobeandmail.com/ report-on-business/article727831.ece 35 Stephen L. Harris, “Financial Sector Reform in Canada.” 36 Tara Perkins, “Ottawa scuttles online insurance marketing by banks,” Globe and Mail, 8 October 2009, B1; Steve Chase and Tara Perkins, “How scattered army of insurance brokers outmuscled the Big Five,” Globe and Mail, October 9, 2009, B1; Derek DeCloet, “Flaherty’s blow to banks goes one click too far,” Globe and Mail, October 10, 2009, B2. 37 Recent surveys undertaken by the Strategic Council for the Canadian Bankers Association suggest that Canadians overall have favorable impression of these institutions. See Canadian Bankers Association, “Assessment of Canada’s Banks – Fall 2008: An Update,” conducted by the Strategic Council, November 2008. 38 Bank of Canada, Financial System Review: June 2009. 27. 39 Bank of Canada, Financial System Review: December 2008, 24 40 Julie Dickson, “Remarks by the Superintendent, Office of the Superintendent of Financial Institutions of Canada to the Financial Services Institute,” Toronto June 24, 2008, 1. 41 Stephen L. Harris, “Financial Governance and Policy Learning in Korea: Analyzing the Post-Crisis Experience,” Journal of Asian Public Policy, November 2008; “Korea and the Asian Crisis: The Impact of the Democratic Deficit and oecd Accession,” in eds., Geoffrey Underhill and Xiaoke Zhang, International Financial Governance under Stress: Global Structures versus National Imperatives (Cambridge University Press, 2003). 42 Based on confidential interviews at the Federal Reserve Bank of Boston, December 2003. 43 For a detailed discussion of the power phenomenon see Stephen L. Harris, “Regulating Finance: Who Rules, Whose Rules?” Review of Policy Research 21, no. 6 November 2004. 44 cmhc s mortgage insurance cap has been raised to $600 billion from $350 billion in 2007 with problematic prudential oversight. See Boyd Elman and Tara Perkins, Report on Business, October 16, 2009, B1. 45 Ontario Securities Commission, In the matter of The Securities R.S.O. 1990, c. S.5, as amended and In the matter of the Canadian Imperial Bank of Commerce and cibc World Markets Inc, Statement of Allegations, Staff of the Ontario Securities Commission, December 18, 2009. 46 Sunny Freeman, abcp penalties near $149–million,” Globe and Mail Report on Business, 21 December 2009 at http://www.theglobeandmail.com/globe-investor/ abcp-penalties-near-140-million/article1408089/ 47 Remarks by Mark Carney, Governor of the Bank of Canada, The National Forum (Canadian Club of Toronto and Empire Club of Canada), December 16, 2009.

5 The Canadian Escape from the Subprime Crisis? Comparing the US and Canadian Approaches derek ireland and k e r n a g h a n we b b “… I didn’t see the subprime crisis coming … I was aware a lot of these [questionable lending] practices were going on, I had no notion of how significant they had become until very late. I didn’t really get it until very late in 2005–2006 … There’s nothing to look into particularly because we knew that there was a number of such practices going on, but it’s very difficult for banking’s regulators to deal with that.”1 “Bankers – and the rating agencies – believed in financial alchemy. They thought that financial innovations could somehow turn bad mortgages into good securities, meriting AAA ratings. But one lesson of modern finance theory is that, in well functioning financial markets, repackaging risks should not make much difference … Worse, banks failed to understand the first principle of risk management: diversification only works when risks are not correlated, and macro-shocks (such as those that affect housing prices or borrowers’ ability to repay) affect the probability of default for all mortgages … The only thing we got wrong was how bad banks’ lending practices were, how non-transparent banks really were, and how inadequate their risk management systems were”.2

introduction The American subprime mortgage crisis of 2007 and the first half of 2008 has now “morphed” into (i) the global housing bubble and financial crisis, (ii) an American and then global economic recession that is now judged to be the most serious since the Second World War, (iii) unprecedented declines in virtually every stock exchange in the global economy though 2008 with only modest and fitful recovery since then, (iv) the bankruptcy of one sovereign state, Iceland, and (v) the bankruptcy, government bailout and/or partial nationalization of major international (and once highly profitable) commercial and investment banks and insurance companies.3

88 Derek Ireland and Kernaghan Webb

The purpose of this chapter is to explore the American subprime mortgage boom and attempt to answer why, the subsequent bust and debacle did not also take place in Canada, and what this might mean for future financial market regulatory reform in Canada and the global economy. Particular emphasis is placed on the consumer protection issues and the insights provided by recent advances in the literature on information, behavioural and industrial organization economics and financial literacy. These insights are relevant not only to the original household purchasers of these high-risk mortgages but also to the purchasers of the subsequent “innovative financial products” that packaged together these subprime mortgages into what were first considered to be high-grade mortgage backed securities but are now called “toxic assets.” Our major argument is that, while the mortgage aspects of the Canadian financial regulatory regime may be superior to its American counterpart, Canadian pride in the “superiority” of our regulatory regime and our current complacency that such a crisis “could never happen here” could be misplaced. The lending practices and subprime mortgage agents, lenders, and insurers that were major causes of the American crisis were starting to creep into Canada just before and then during the period when American subprime boom turned into the subprime bust. We also argue that non-regulatory factors are also important in preventing an American style subprime crisis in Canada. These include timing, Canada’s more protected and less competitive financial sector, the “second-mover” advantages that are at times associated with more conservative and cautious governments, regulators, financial service providers and their customers, and arguably Canadian political decisions at the end of the previous decade that prevented full deregulation and the bank mega-mergers, which their proponents argued were imperative for Canada’s major banks to reach global scale and become fully integrated into the American and international financial markets. The structure of the analysis is straightforward. The first section examines the American sub-prime mortgage crisis from a consumer protection perspective. The second section looks at why Canada was largely spared a serious subprime problem. The third section probes the Canadian financial regulatory system in a complementary way to the analysis in chapter 4 by Harris, with a focus on mortgages and housing.

t h e a m e r i c a n s u b p r i m e m o r ta g e c r i s i s from a consumer protection perspective4 For over a decade, subprime mortgages in the United States were a good news story that had strong political, financial sector and voter support, which included but went beyond the second Bush administration and its political

89 The Canadian Escape from the Subprime Crisis?

and ideological advocates. As described in Figure I, the number of subprime mortgages grew slowly during the 1990s but became much more popular in the first half of the current decade, accounting for more than 20% of all home mortgages in the mid-2000s. These mortgages, which charge higher interest rates to higher risk households with weak credit ratings or no credit history, allowed a large number of lower income, often minority, households in the inner cities and working class suburbs to own their first home and thus participate in the “American dream” of building equity and wealth through home ownership. As a consequence, the overall home ownership rate in the United States increased from 64% in the early 1990s when subprime mortgages were first introduced to 69% in the mid-2000s, moving the US into the top tier of countries based on this indicator.5 The financial service provider that originates the mortgage loan normally carries the risk of default. However, through using a form of financial engineering or “product innovation” called securitization, the higher risks to mortgage issuers of lending to lower income households were mitigated, shared and passed up the value chain to typically larger investment banks, pension funds, hedge funds and other investors first in the United States and subsequently throughout the global economy. This was accomplished though packaging these subprime mortgages into residential mortgage backed securities (rmbs), which often were then repackaged (through “resecuritization”) in whole or in part into collaterized mortgage obligations (cmo) or collaterized debt obligations (cdo), in order to further improve their investment quality and attractiveness to mutual and pension funds and other investors.6 These “wonders of securitization” received high ratings for a long time from the credit rating agencies. In the process, all participants in the value chain except the original homebuyer earned huge fees.7 This “win-win” situation collapsed like a house of cards starting in late 2006, when relatively small increases in interest rates resulted in sharp declines in house prices, major increases in mortgage defaults and foreclosures particularly by holders of adjustable rate mortgages, and the start of the American subprime market meltdown. By that time, subprime mortgages often required no down payment, no mortgage insurance and 40 years to repay the principal and interest. In addition, 80% of these subprimes were adjustable rate mortgages, which contained a low “teaser” interest rate at the outset which increased significantly a few years later. The most extreme example of questionable lending practices was the “ninja mortgage” which was provided to borrowers with no income, job or assets.8 The adjustable interest rate mortgages were often set at rates that many households could no longer afford, particularly after the American economy turned downward and gasoline prices moved sharply upward. The dramatic increase in defaults therefore was the combined result of higher interest rates, falling house prices, deteriorating household budgets, the end of the “teaser”

Figure 1 Overview ot the American Subprime Mortgage “Value Chain” american and global regulatory regime: virtually non-existent for cross-border transactions and an American regime with many serious gaps (no regulation of the “shadow banking system”), limited regulator understanding of and interest in the transactions and products that comprise the value chain, and under political, business and ideological pressures and related incentives to apply regulatory forebearance (shirking), intervene rarely, and respond hesitantly to emerging subprime crisis.

Buying and selling subprime mortgage backed securities in an expanding secondary market, which in time included Fannie Mae and Freddie Mac (whose charters limited them to the prime secondary market) plus financial intermediaries in other advanced and some developing countries, which allowed them to “more fully share in” the American housing boom and higher subprime yields and the subsequent American subprime crisis and global financial contagion.

other financial intermediaries, including many that are not mortgage lenders and therefore have limited knowledge of the real estate market, purchase the mortgage backed securities in order to benefit from the higher interest rates and yields and future income flows, their apparently lower risk and high credit ratings, and the expanding secondary market.

High safety ratings from credit rating agencies, partly because the subprime business generated high fees for them and all other participants in the value chain. Rating agencies as well started to be investment bankers – a clear conflict of interest.

Mortgage originators sell mortgages to special purpose vehicles (spv) for packaging (securitization) into rmbs, which sell them up the value chain under very rigid pooling and service agreements (psa). spv s, which are passive managers and cannot file for bankruptcy in order to save on income tax, add to the rigidity of rmbs and the entire value chain through effectively precluding the renegotiation of the psa and underlying mortgages.

Banks and other mortgage originators conduct (often minimal) due diligence using automated underwriting/ loan approval techniques, and then receive and process the mortgage agreement and sell the agreement along with many others up the value chain. Originator incentive is to supply as many high-rate subprime mortgages as possible and sell them as quickly as possible to transfer the risk. This allows them to ignore questionable and declining borrower and subprime product quality as the subprime market became saturated by the mid-2000s. If low income households default, the bank can simply foreclose and sell the house at a profit because of the housing boom.

Independent mortgage brokers, acting on behalf of mortgage lenders, compete vigorously and sell adjustable rate mortgages largely to lower income minority families with poor credit histories and limited financial literacy skills and experience who live for the most part in inner cities and suburbs. Broker incentive is to sell as many mortgages as possible – regardless of the socioeconomic circumstances and ability to repay of the borrower – leading to fraudulent and predatory lending and deceptive selling practices. Borrower incentive is to accept the adjustable rate subprime mortgage given: limited understanding and high pressure selling tactics, the hope that household income will be much higher in a few years time (despite limited gains for most lower income households for decades), the hope that the house will appreciate in value allowing later refinancing at more affordable terms, the fear that this is their last chance to “live the American dream” and own their own home, and perhaps the knowledge that the costs of default and “walking away” are serious but bounded especially when declines in house prices make the default option comparatively attractive.

91 The Canadian Escape from the Subprime Crisis?

rates, and other features of the zero down, no insurance, floating-rate interestonly mortgages that made default the preferred option of many householders. Another factor was the overly rigid contracts for both the mortgages and the mortgage backed securities that made modification of these contracts in response to rising interest rates and the collapse of the housing market virtually impossible.9 Recent estimates and projections indicate that from 1998 to 2007, about seven million homeowners used subprime mortgages to purchase their homes. About one million had already defaulted on their loans before the end of 2007 and this number is expected to exceed two million foreclosures before the crisis is over. Moreover, more than 40 million homes in the same neighbourhoods will experience price declines because of their proximity to these foreclosed properties.10 As defaults and foreclosures accelerated, the financial intermediary buyers of rmbs found themselves with too many highly complex and rigid low and no value assets with virtually no buyers. Once it became abundantly clear that the high quality of the subprime mortgage based securities had been seriously exaggerated by their sellers, purchasers and credit rating agencies,11 their market value dropped like a rock to junk bond status, and the safe high quality securities of the recent past became “toxic assets”. Despite assurances from government regulators and financial experts in 2007 that the crisis would be contained within the American mortgage and real estate markets, the subprime crisis was transformed within a year into the global financial crisis of 2008 and the global economic recession of 2009. The impacts of the subprime crisis on global financial markets and the real economy are exacerbated because all of the “bubbles” made possible by deregulation are interrelated.12 The macroeconomic, financial market, regulatory and other supply-side causes of the subprime meltdown have been well understood and documented, at least after the fact. Interest rates were too low for too long, resulting in excessive leverage in the American and global financial systems and too much money chasing too few high yield low risk investments. The large investment and other banks at the start of this decade were looking for new innovative financial products that provided higher returns with little risk. Mortgage based securities filled this gap for a number of years. Current account and savings imbalances between the United States and its major trading partners particularly China resulted in dissavings in the United States, and households using their houses as “piggybanks” by acquiring subprime mortgages to buy their first home, refinance their existing home, or finance regular consumption.13 Deregulation in the US had gone too far. Many subprime mortgage lenders, brokers and transactions, including the mortgage backed assets, were not regulated under federal law. State law was often weak, poorly enforced or non-existent, and there was a reluctance by all regulators to apply the rules to

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a market that was providing such obvious economic, social and political benefits. By 2005, only 20% of subprime loans were made by banks and thrifts (savings and loan companies) that were supervised by federal regulatory entities. The remainder were sold by state regulated entities and by totally unsupervised mortgage lenders.14 In many ways, the subprime market and the markets for subprime mortgage based assets collapsed under the weight of their own success. When subprime mortgages to higher risk borrowers represented only 5% of the home mortgage market in the mid-1990s, the situation was for the most part manageable and beneficial. However, ten years later, the market share of subprime mortgages had increased by four times and the absolute value of subprimes issued by mortgage lenders had increased almost twenty times. As a consequence, the mortgage market and the total American and global financial system became much too dependent on high-risk subprime mortgages. Moreover, as the subprime market became larger and even more profitable, subprime mortgages by 2006 were being provided to increasingly high-risk borrowers at more favorable terms which approached those of more conventional mortgages. Therefore, the quality of the borrowers and the subprime product declined, despite evidence of expanding defaults among subprime borrowers. This was the result in part of automated underwriting, which allowed approval of new mortgage applications within thirty seconds.15 The demand-side, consumer protection and related perspectives and causes of the subprime crisis have also been addressed in detail in academic, think-tank, and other research, using the insights provided by recent advances in information, behavioural, institutional, financial literacy and other economics literatures. However, to date, these demand-side insights have played little role in current discourse on how catastrophic events and “wicked problems” such as the American subprime debacle and subsequent global financial crisis and economic recession can be avoided in the future. The remainder of this section will summarize some of the major insights from this largely American demand-side literature. The information asymmetry, behavioural biases, incentive, agency, and related problems associated with the questionable lending practices in the initial transaction between the mortgage broker and the lower income households with limited financial literacy skills, were compounded throughout the value chain. This was due to the packaging of these high risk mortgages into mortgage backed securities and because many of the subsequent purchasers and government regulators shared many of the same information, behavioural, incentive and agency problems. The latter included: (i) the financial intermediary purchasers of the highly complex rmbs which are now considered as “toxic”; (ii) the American and global financial industries which were too confident in their information, rationality and intelligence, and overly optimistic that the global housing boom and economic upturn would

93 The Canadian Escape from the Subprime Crisis?

last forever;16 and, (iii) the central banks, financial and other regulators, politicians and other government “consumers” of the advice from financial intermediaries and their experts and lobbyists that the American and global financial sectors knew what they were doing, would not place their financial corporations and the total financial sector at risk, and therefore there was no cause for concern. In short, greed, stupidity, irrationality, lack of foresight, and a total inability to understand risk were not confined to lower income households.17 The behavioural bias of over-confidence is particularly important to understanding the rise and collapse of the subprime market. All participants in the value chain in Exhibit I suffered from too much confidence in their information, their own rationality, cognitive capacities, and decision-making abilities, and in those of their financial service providers and advisers, as well as their honesty. They all suffered as well from over-confidence in the “self-healing” abilities of markets to solve all financial and other problems in a relatively rapid and painless fashion; and all of us were overly confident that the good times would continue in the North American housing sector and the international economy. Similar to the global financial crises of the past, too much confidence and optimism were also displayed by the central bankers of the major G20 economies, the global central bank, the International Monetary Fund, and other international financial institutions such as the World Bank, who ignored the warning signs of impending financial collapse and therefore were taken by surprise when the contagion started by the American subprime crisis spread so quickly and in so many unanticipated ways to “infect” the entire global financial system and economy.18 Incentive and agency problems leading to moral hazard and adverse selection also permeate all parts of the subprime value chain. The purchaser of the subprime mortgages knew that, while the economic and social costs of default were significant, these costs were limited to the value of the property itself since the mortgage issuer typically had no recourse to the household’s other assets. The mortgage brokers were compensated based on the number of loans they wrote, and earned even higher commissions from writing complex adjustable rate mortgages. The broker therefore had no reason to be worried about the ability to repay of their low income clients. The financial intermediaries issuing the mortgage conducted limited due diligence, and often did not require mortgage insurance since they were using mortgage backed securities to shift the risk up the value chain. Moreover, securitization and inadequate screening by the issuers and packagers of subprime mortgages facilitated predatory and abusive lending practices, since subprime lenders were able to cover up their predatory and other high-risk loans through securitization, resulting in the adverse selection or “lemons” problem.19 The crisis was the result as well of too much dependence on, confidence in and deference to so-called financial experts whose incentives were

94 Derek Ireland and Kernaghan Webb

very different from the recipients of the advice and the purchasers of the subprime mortgages and mortgage backed assets. At times, many financial advisors and experts were in conflict-of-interest situations – leading to information asymmetry and agency problems – while suffering as well from many of the same information and product choice overload and overconfidence problems as the other contributors to the subprime mortgage value chain and crisis. Many of these incentive and agency problems have focused on the role of rating agencies in the subprime meltdown and subsequent global financial crisis. Under financial deregulation, American governments transferred significant regulatory power to rating agencies, which now have the mandate to determine the securities that are safe enough to be purchased by regulated financial intermediaries.20 Rating agencies nearly always provided the mortgage backed assets with high safety ratings, despite the growing evidence on the low quality of these assets and declining underwriting standards. Based on these high ratings, the mortgage based assets with their higher yields were purchased at premium prices by banks, pension and hedge funds and other regulated and non-regulated intermediaries. These assets therefore became a very important line of business for rating agencies operating in a highly competitive market, where lower ratings would mean the loss of future business.21 Some rating agencies also became part-time investment bankers and therefore started to rate products that they helped to structure – resulting in another conflict of interest.22 Two ironies arise when the above developments are compared with the more conservative prime mortgage market which features easy-to-understand fixedrate, long term mortgages that are sold to higher income households under tight regulatory controls. The more complex adjustable rate subprime mortgages are sold mainly to lower income households, with less financial market experience, literacy and self-confidence, who were desperate to own a house for the first time; compared with conventional mortgages, these much higher risk and more complex subprime mortgages issued to lower income households were often not covered by existing financial market regulatory regimes in the United States. Perhaps most importantly, the American housing bubble and subprime mortgage crisis and the subsequent global financial crisis provide abundant evidence that adding more suppliers and greater competition and product choice to financial and other experience and credence goods markets can diminish rather than increase consumer welfare and aggregate economic efficiency. The crisis points out the limitations of competition and other supplyside solutions to the challenges and risks posed by financial and many other markets to consumers, businesses, regulators and governments. In many American cities, there were large numbers of brokers and issuers of adjustable rate subprime mortgages; and competition for what appeared to be a

95 The Canadian Escape from the Subprime Crisis?

highly profitable business was intense, leading to misrepresentations and other forms of predatory and fraudulent practices by mortgage brokers and other sales agents directed towards a relatively vulnerable and even desperate group of consumers. Lack of competition was not the problem; and more product choice, competitors and competition and other supply-side interventions is often not the solution to the subprime and other financial market crises and “wicked problems.”23

e v i d e n c e o n w h y a n d t o w h at e x t e n t c a n a d a wa s s pa r e d This section explores the available evidence on the hypotheses, conjectures and possible reasons for why Canada had no equivalent to the US subprime crisis and was spared from the worst of the American subprime market collapse – although not from the subsequent global financial crisis and economic recession already examined in Chapters 1 and 4 of this book. This analysis is based on the very sparse Canadian literature (mainly media reports and a few articles and speeches),24 the authors’ interviews and our previous work on consumer policy and consumer protection law in Canada and their implications for financial markets and consumers. Figure ii summarizes the quite different histories between the American crisis and Canada’s more modest problems with subprime mortgages. Four aspects of the Canadian story are particularly important to our analysis. Media reports provide an interesting shifting narrative. In 2006 and 2007, the media generally said the crisis could not happen here. In the first half of 2008, the media tended to say it did happen here but to a very modest degree. From the middle of 2008 and especially in 2009, the media reports more often argued that Canada had a quite serious problem. There are more affected homeowners than is generally believed, especially in bc and Alberta. Moreover, the Canadian problem would have been much worse if the American crisis had started later and if a few key stakeholders, starting with David Dodge who was then governor of the Bank of Canada, had not pointed out the dangers of too much subprime lending. As chapter 4 on overall financial regulation has shown, in many respects, the Canadian story begins in the late 1990s when the Government of Canada under Prime Minister Chrétien and Finance Minister Martin decided, based on an interesting mix of competition and political factors, not to allow the Royal Bank/Bank of Montreal merger and subsequently the td Bank/cibc merger. Based on the four banks’ stated rationale for their two mergers, a positive unintended consequence of this decision arguably is that the major Canadian banks failed to achieve the greater scale and scope that they believed were needed for them to become more competitive and innovative, and more integrated into the American and global financial markets. Remaining small, conservative, risk

Figure 2 Short History of the Subprime Mortgage Crisis in the United States and the Smaller Problem in Canada Much deeper financial market deregulation and restructuring in U.S. compared with Canada United States

Canada

Introduction of subprime mortgages in early 1990s and some growth for the rest of decade 2000−2004: Major growth in subprimes, mostly to lower income households, the result of housing boom, low interest rates, no insurance, no down-payment and/or income verification, mortgage backed securities (rmbs), and political support and lax regulatory oversight from the Bush administration/Congress.

Subprime mortgages became visible in the Canadian housing market only in the 2000s Small growth in subprime and other non-standard mortgages with greatest advances in B.C. and Alberta where housing markets were most similar to US. Critics say Canada is behind the US in “innovative financial products”.

2005−2006: Housing prices and subprimes move up together and reach their peak; subprimes account for over 20% of all mortgages, and 80% of subprimes are rate adjustable. Serious deterioration in quality of subprime borrowers and of mortgages and rmbs products; while growing number issued to households eligible for regular mortgages. First signs of subprime crisis in late 2006 as interest rates show modest increase and house prices begin their rapid descent.

Some entry of US mortgage insurers (e.g. aig) and subprime lenders, brokers and agents into Canada, as American housing and subprime markets start to deteriorate. Arguably encouraged by provisions in first budget of new “laissez faire” Harper government in May 2006.

First Half of 2007: Rapidly falling house prices, rising interest rates and increasing foreclosures result in full subprime crisis – but “experts” contend that crisis will be fairly modest and contained within the American housing and subprime markets.

Subprime lenders, insurers and mortgages (e.g. 40 years, nothing down, interest-only payments, no proof of income) expanding in Canada, but governments and experts still say that crisis will be limited to US and will have little impact on more stable and better regulated Canadian housing and financial markets and economy.

Second Half of 2007: US housing and subprime markets in freefall. Growing concerns that the subprime crisis will not be contained to US but concerns largely ignored by governments and financial experts.

Subprime penetration on the rise, reaching a peak of 5% by 2007, but conventional wisdom is that looming US crisis will have no impact on the Canadian housing and financial markets.

Falling house prices and some increase in defaults and foreclosures, especially in bc and Alberta, indicate Canada is not totally immune (e.g. 10,000 foreclosures with 50% subprime); but extent of problem and risk obscured by limited published data, media coverage and academic, government and ngo research and more stable and stronger Canadian housing market and economy in most regions. Subprime and other non-standard mortgages continued in Canada for 18 months after subprime crisis began in US.

2008−2009: Subprime crisis morphs into the global financial crisis in 2008 and the worst global recession of the post-war period in 2009 – dramatized by the near collapse and forced takeover of Bear Stearns, bankruptcy of Lehman Brothers, federal conservatorship for Fannie Mae and Freddie Mac, and government bailouts and restructuring of most other major American banks and many other global financial institutions in second half of 2008. With much discourse especially on the supply-side causes and solutions, but little progress on financial re-regulation since then – and with growing financial sector opposition including from the same banks that were bailed out by government.

Subprime problem smaller, Canadian subprimes fewer in number and higher in borrower and product quality e.g. fewer variable rate and no interest products, insurance on all higher risk mortgages, less rigid products and bankers. American subprime firms retreat (cmhc a clear winner in insurance market), and federal government bans 40-year no down payment mortgages (now 35 years and 5% down). Canadian banks experience drop in profits but no restructuring and government bailouts. Canada still affected significantly by global financial crisis and Canadian economy into recession in last quarter of 2008. With less discourse and even less progress on financial re-regulation – while contending that Canada provides the financial regulation model for other countries.

97 The Canadian Escape from the Subprime Crisis?

averse, boring, and “Canadian” may have saved them and us from the full fury of the American subprime crisis.25 Growth in the Canadian subprime mortgage market and entry by important American players continued up to the summer of 2008, which is more than 18 months after the subprime and housing markets started to collapse in the United States. Claims that the Government of Canada responded quickly to the US crisis may be overstated. Finally, media reports suggest that, while the Canadian problem is much smaller, there could be a delayed reaction in about four years time when banks and other mortgage lenders may refuse to renew 3 to 5 billion dollars worth of high-risk mortgages involving 25,000 households – except at very high interest rates. Canadian banks are now more risk-averse and reportedly capital has dried up for high-risk borrowers, including those that have never missed a payment. This has led to arguments that government support for mortgage holders who are making their payments will be needed in the future.26 Most of the discussion in media reports and blogs on why the subprime problem was smaller in Canada focuses on differences between the two countries in financial market regulation, banking, business and consumer cultures and the structure of financial markets. Differences in tax and banking rules are clearly important. Mortgage interest is not tax deductible in Canada, which reduces the financial incentive to own your own home. Canadian home owners who walk away from their mortgage place more than their home at risk. Compared to the United States, despite some financial sector regulatory reform and deregulation in the 1990s and shared responsibilities with the provinces, the Canadian financial regulatory framework is more conservative, comprehensive and concentrated in a comparatively few federal regulators, with more rules, fewer regulatory gaps, better enforcement at both the federal and provincial levels, and better cooperation between the two levels of government. However, as Chapter 4’s analysis by Harris on the sub-prime linked asset backed commercial paper crisis in Canada shows, some gaps and failures to act nonetheless occurred. It is difficult to ascribe causation and different outcomes to national differences in business and consumer culture. Nonetheless, the much lower takeup of subprime mortgages in Canada is consistent with the “conventional wisdom” that Canadian financial institutions are more prudent, conservative and risk averse, and are less aggressive, competitive and innovative than their American counterparts. Also, Canadian business customers and final consumers are arguably less demanding and innovative and more risk averse, are more loyal to familiar brand names, and less likely to conduct product searches and comparisons and switch financial service providers in response to small differences in interest rates, fees or product quality.27 The more riskaverse behaviour of Canadian banks, non-financial businesses and final consumers can be ascribed in part to Canada’s less diversified and more vulnerable economy, which continues to be overly dependent on the natural

98 Derek Ireland and Kernaghan Webb

resource sectors, motor vehicles, a few high technology companies led until recently by Nortel, and strong growth in the three most westerly provinces. The major Canadian banks, operating in a quite concentrated and stable oligopolistic market, enjoy a well protected, secure, and profitable retail business and therefore had less incentive than their American counterparts to diversify into higher risk wholesale products such as mortgage based securities in order to expand and remain profitable. Investment banks in Canada are a division of rather than separate from and competing with the major commercial banks. This helps to explain why the Canadian banks were comparatively minor purchasers of rmbs and were never issuers of their own mortgage based securities. This limited their exposure to the downside financial and reputational risks of these securities. Moreover, the smaller number of subprimes originated by Canadian banks and other mortgage lenders were for the most part insured, were less often adjustable, typically had shorter amortization periods, employed more thorough underwriting practices, and were issued to higher quality borrowers with reasonably stable incomes. Compared with the United States, Canada has comparatively few independent mortgage brokers, issuers and insurers, and most mortgage brokers and agents are employees of regulated financial institutions. Fewer financial institutions and market participants can mean less competition and consumer choice, but can result as well in fewer information problems and confused consumers, lower incentives for aggressive inter-firm rivalry and questionable lending practices, and easier enforcement of financial regulations. Among these three inter-related factors, the Canadian sources28 give special attention to the protection from foreign and domestic entry provided to the major Canadian banks that result from the remaining regulatory restrictions on foreign entry, the loyalty and inertia of the major banks’ customer base, and the high (largely sunk) cost of establishing an extensive retail branch banking network that would be needed for an entrant to compete on equal terms with the incumbents. Without that investment, new domestic and foreign entrants are for the most part niche players in the Canadian banking market. Home ownership is important in both countries, but is a more integral part of the American culture and dream and has been given prominent support by previous American administrations, especially the Bush presidency from 2000 to 2007 when the subprime market experienced unprecedented growth. While both countries have comparatively large and expanding lower income populations who in the past were unable to secure a mortgage to purchase a home, the American underclass is much larger in absolute terms and much more concentrated in the inner cities and working class suburbs of its many major cities. While the subprime mortgage crisis affected many parts of the US, one-half of these mortgages were concentrated in eight American cities. All eight cities had easy to identify and target neighbourhoods of lower income financially vulnerable households, which included

99 The Canadian Escape from the Subprime Crisis?

ethnic minority and immigrant families as well as households led by older people and single women.29 Canada also has lower income communities, but these are located in a fewer number of cities and their absolute size is much smaller. Like honest businesses, unregulated mortgage brokers, predatory lenders and fraudulent marketers tend to target large highly concentrated markets that are easy to service. Lower income Canadian households also appear to be more conservative and less influenced by the dream of home ownership, and many urban Aboriginal people and new Canadians do not have the financial resources to even dream of owning their own home.30 In sum, the United States has much larger, easier to identify and geographically concentrated ethnic minority and other groups of vulnerable consumers who have limited financial experience and literacy, are desperate to own a home for the first time, and have just enough income to be credible targets for predatory and fraudulent mortgage lending practices. As a consequence, the available data (which admittedly is incomplete) indicate that the much smaller number of higher risk subprime mortgages issued by Canadian financial institutions was for the most part provided to Canadian middle income households located in regions experiencing a significant and rapid increase in housing prices, especially in bc and Alberta.

the canadian financial r e g u l at o r y s y s t e m In examining the regulatory system, it should be noted at the outset that policy analysis, publications and related work on financial consumer issues, scams and frauds by key Canadian government and non-governmental actors over the past decade and a half have led to a greater appreciation of the needs and vulnerabilities of consumers to predatory and fraudulent practices.31 It should also be noted that subprime mortgages were introduced much later into the Canadian economy, had insufficient time to develop a strong presence and so reach a dangerous “saturation point” within our mortgage market, and was starting to build momentum only when the American crisis started to emerge (see Figure ii). Timing and luck therefore play some role in explaining why the subprime market was a problem but not a crisis north of the border. These characteristics of the Canadian financial consumer landscape should be considered in conjunction with the fact that, on the whole, the regulated Canadian financial services sector is more concentrated, and is for the most part regulated by a more centralized and smaller group of government institutions.32 “The great bulk of all lending in Canada takes place within the banking system itself, not through a largely unsupervised secondary market for bundles of loans and securities supposedly backed by other bundles of loans and securities – the ‘shadow banking system.’”33 In 2005, there were an

100 Derek Ireland and Kernaghan Webb

estimated 8000 banks in the United States.34 In contrast, the Canadian banking sector in 2003 consisted of 18 domestic banks, 29 foreign bank subsidiaries, and 22 foreign bank branches for a total of 69 banks.35 Moreover, six banks account for more than 90% of total bank assets and for about 76% of the total assets of the deposit taking sector.36 Three of the ten largest mutual fund companies and all of the large securities dealers are bank owned, and banks also own insurance companies.37 In Canada, pursuant to the Constitution Act, 1867, the federal and provincial governments share jurisdiction over the financial services sector,38 which by itself is not unlike the situation in the United States. However, under the Constitution Act, 1867, the Canadian federal government has exclusive responsibility for the prudential and market conduct regulation of banks in Canada. The life and health insurance sectors are largely regulated for financial soundness by the federal government;39 and over 90% of the insurance sector is federally incorporated under federal legislation since most operate in more than one province or are subsidiaries of foreign companies.40 Although the credit unions and caisse populaires are provincially regulated, there is no provincial equivalent to the state chartered banks common in the United States.41 Accordingly, except for the failure to establish a national securities regulator, Canada has a relative concentration of regulatory capability at the federal level and a concomitant concentration of regulated actors in comparison with the United States. The major federal regulatory actors are the Bank of Canada, the Department of Finance, the Office of the Superintendent of Financial Institutions (osfi), the Financial Consumer Agency of Canada, the Competition Bureau, the Canadian Mortgage and Housing Corporation, and the Canadian Deposit Insurance Corporation. Many of the Canadian regulators have applied a “prudent” approach to promoting competition and protecting the consumer that served Canada well as the subprime mortgage crisis unfolded in the United States. The Financial Consumer Agency of Canada has a legislative mandate to enforce the consumer-oriented provisions of federal financial institution laws, to monitor the industry’s self regulatory initiatives to protect the interests of consumers and small businesses, to promote consumer awareness and to respond to general consumer enquiries.42 The Department of Finance, osfi, and the Competition Bureau in Canada have been decidedly more reluctant to entertain bank mergers43 compared with the United States, where “merger mania” among US banks has been taking place under the approving eyes of US regulatory authorities, with the result that the number of banks has fallen from 14,000 to 8,000 over the last several decades.44 The main function of the Canadian Mortgage and Housing Corporation (cmhc) is to provide mortgage insurance of residential mortgage loans to Canadian home buyers. This insurance protects mortgage lenders against mortgage defaults on mortgages of less than 20% down.45 Commentators

101 The Canadian Escape from the Subprime Crisis?

have commented favourably on its role on the sub-prime issue. “The cmhc exerts a prudential influence over mortgage underwriting. Banks rely extensively on it for default insurance, which is conditioned on comparatively strict criteria for creditworthiness. (Private insurers operate as well, but they, too, are held to relatively exacting standards since they benefit from a partial government guarantee.) Sub-prime mortgages are not unheard of in Canada, but the stiffer standards for lending have kept them to a minimum.”46 All this having been said, some commentators have warned of a possible imminent cmhc-induced housing bubble in Canada: they argue that Canadian banks have a reduced incentive to fully and properly test the creditworthiness of home purchasers putting only 5% down on home purchasers, because the banks know that there is a cmhc 100% guarantee on the purchase.47 As a result, financially precarious home purchases are being made while the interest rates are low, and the mortgage payments may not be sustainable should interest rates increase precipitously. While bearing this point regarding the cmhc in mind, the above description suggests that, on the whole, a small group of Canadian federal agencies, working together, was better able to control a more concentrated grouping of financial service providers than their American counterparts, and thereby steer “the financial ship” away from many of the extremes of sub-prime mortgage lending experienced in the United States. At the same time, other commentators have suggested that there exists in Canada a culture less inclined towards risktaking: “When it comes to comparing the track record of the US and Canadian banking systems, it is worth noting that Canada’s regulations did not prohibit the sale or purchase of asset-backed securities. Early in this decade, Canada’s Toronto-Dominion bank was among the world’s top 10 holders of securitized assets. The decision to exit these products four to five years ago, TorontoDominion’s ceo Ed Clarke told me, was simple. “They became too complex. If I cannot hold them for my mother-in-law, I cannot hold them for my clients.” No regulator can compete with this standard.”48 While it is difficult to objectively substantiate the existence or nonexistence of a pervasive culture against risk-taking, anecdotes of this type are consistent with such a conclusion. Nonetheless, the mortgage aspects of the overall Canadian financial regulatory regime did not function without flaws as chapter 4’s more particular analysis of the Asset Backed Commercial Paper crisis has also shown.

c o n c lu s i o n s The advantages of Canada’s overall financial regulatory system, including its consumer regulation and mortgage-related aspects, did spare Canada from the worst of the US subprime mortgage crisis. However, as we have seen, it did not prevent subprime mortgages from making inroads into the Canadian

102 Derek Ireland and Kernaghan Webb

market from 2005 to 2008, including during an 18–month period when the perils of the American subprime mortgage crisis were becoming apparent. During this period, similarities in policy environments, discourse and rhetoric were more important than comparatively small differences in the financial rules, particularly when financial regulators are applying forebearance. The superiority of Canada’s financial regulations is viewed therefore as only one of many factors that “saved” Canada from the subprime meltdown south of the border. Other factors are just as important, and Canadian governments should learn from the subprime crisis and consider demand-side and related regulatory reforms to better protect Canadians from the next financial sector crisis in one of our major trading partners. Space does not allow us to provide a detailed set of recommendations for re-regulating the Canadian financial system or its particular mortgagerelated aspects in order to better protect this country from a future national or global financial crisis precipitated largely by demand-side considerations. The demand-side perspective adopted for this chapter does however provide some regulatory insights and options for further consideration. Financial sector regulatory reform should take full account of the information asymmetries, behavioural biases, and the agency, incentive and collective action problems and resulting sub-optimal decisions and outcomes of all participants in the subprime value chain, including financial sector regulators. Consumer protection proposals for mandatory information disclosure to financial consumers who are considering the purchase of a mortgage or other financial product should take account of recent advances and studies in the information and behavioural economics literatures. These studies indicate that mandatory requirements, which force the disclosure of too much or overly complex information, or the disclosure of the wrong information that is not helpful to the consumer, can hurt rather than help the decisions and outcomes of consumers and other market participants.49 Any new regulations should protect against overly complex and rigid products and contracts that involve significant information asymmetries, are difficult to understand and are even more difficult to modify for all participants.50 Financial products that are too rigid and therefore difficult to modify in response to falling prices, higher interest rates, recessions, and other external shocks should be given special attention in financial reregulation. Improved regulatory oversight is particularly needed for overly rigid and complex products at a higher stage of the value chain, which generate information asymmetry, collective action and negative externality problems that make products and contracts at lower stages involving final consumers, sme s, and other more vulnerable customers even more rigid and difficult to modify. These kinds of products make loan default, foreclosure, and consumer, small business and other bankruptcies all but inevitable.

103 The Canadian Escape from the Subprime Crisis?

The first two insights suggest that priority consideration for re-regulation and possible elimination from the market should be given to financial products and contracts that: (i) are highly complex, non-transparent and difficult to understand, (ii) are very rigid and difficult to modify, (iii) actually or potentially raise serious moral hazard, adverse selection and related information failure problems, and (iv) generate significant negative externalities and outcomes.51 Current efforts of the Government of Canada through the National Financial Literacy Task Force and other mechanisms to improve the financial literacy skills and awareness of consumers and other market participants are laudable. However, these efforts should be used as complements to rather than as substitutes for improved demand-side regulations that better protect households and other purchasers of increasingly complex financial products.52 Finally, less is known about the extent of the subprime problem in Canada because of the limited information that is collected and made available by the major financial institutions and regulators, starting with cmhc. The inferiority of Canadian publicly available information on subprime mortgages and other financial products and transactions compared with the United States must be addressed in Canada’s future efforts to improve the regulation and transparency of our financial sector.

notes 1 Alan Greenspan, interviewed on the cbs program 60 Minutes, September 2007. 2 Joseph Stiglitz interview on “Financial Alchemy,” September 18 2008. 3 D. Reiss “Fannie Mae and Freddie Mac and the Future of Federal Housing Policy: A Study of Regulatory Privilege” Brooklyn Law School Legal Studies: Research Papers Working Paper Series, Research Paper No. 134 March 2009; and A. Fell “Remarks on the Global Financial Crisis” Speech to the Toronto Board of Trade Annual Dinner, January 26, 2009: 10. 4 This section is essentially a shorter and updated version of a case study that one of the authors, Derek Ireland, prepared for the Office of Consumer Affairs (oca), Industry Canada, in the Spring of 2008. All of the usual disclaimers apply. 5 For purposes of comparison, Canada had a similar home ownership percentage in 2006 despite income per capita that was 23% below the American figure (based on purchasing power parity). 6 A. Gelpern and A. Levitin “Rewriting Frankenstein Contracts: Workout Prohibitions in Residential Mortgage-Backed Securities” Georgetown University Law Center: Business, Economics and Regulatory Policy Working Paper Series Research Paper No. 1323546, May 15 2009 Version: 26–27. Throughout the rest of this chapter, the terms rmbs and mortgage based securities will be used to cover all of these securitization products.

104 Derek Ireland and Kernaghan Webb 7 A. Fell “The David Dodge Lecture: Humber College” April 15, 2008:14. The two wayarrows on the right hand side in Figure I capture how information asymmetries, overly rigid products and contracts, behavioural biases, and incentive, agency and collective action problems at one stage generate negative externalities that affect preferences, decisions, and outcomes at other stages of the subprime mortgage value chain. 8 T. Daglish, J. Garfinkel and J. Sa-Aadu “Default Risk in the U.S. Mortgage Market,” Unpublished Article Available on the Internet, September 23, 2007; and A. Fell “The David Dodge Lecture,” April 15, 2008:11. 9 Daglish et al “Default Risk in the U.S. Mortgage Market” and Gelpern and Levitin “Rewriting Frankenstein Contracts.” 10 J. Atlas and P. Dreier “The Conservative Origins of the Subprime Mortgage Crisis” The American Prospect: Liberal Intelligence, December 18, 2007: 1–2; and Center for Responsible Lending “Updated Projections of Subprime Foreclosures in the United States and Their Impact on Home Values and Communities,” crl Issue Brief, August 2008. 11 Fell “The David Dodge Lecture” 2008:15–16 notes that many of these very complex structured products received Triple A ratings, which gave them the same credit rating as the U.S Treasury and the Government of Canada, which of course have the ability to tax and print money. When the subprime crisis hit, the ratings on many of these products were downgraded not by one or two levels but rather by up to 15 levels. 12 Robert Kuttner “The Bubble Economy: The financial meltdown is the logical consequence of deregulation. Will we reverse field in time to prevent another 1929?” www.Prosepct.org October 2007, 20–25:20. 13 David Dodge “Rebuilding the Global Financial System: A Question of Leadership” Third Annual Thomas d’Aquino Lecture on Leadership, Toronto Club, November 25, 2008: 2–3. 14 Urban Institute “The Subprime Mortgage Crisis” No. 4, February 5, 2008. 15 Daglish et al “Default Risk in the U.S. Mortgage Market” and Demyanyk Yuliya and Otto van Hemert “Understanding the Subprime Mortgage Crisis” This Draft, December 5, 2008 (Available on the Internet). 16 Fell “The David Dodge Lecture” and “Remarks on the Global Financial Crisis”. 17 Ibid. 18 Ibid. 19 G. Akerlof, “The Market for 'Lemons: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84 (1970): 488–500; and K. Engel and P. McCoy “Turning a Blind Eye: Wall Street Finance of Predatory Lending,” Fordham Law Review 75 (2007) 101–65: 102–03. 20 C. Calomiris “Not (Yet) a Minsky Moment” Columbia University and the National Bureau of Economic Research, revised October 5, 2007 (Available on the Internet). 21 Kuttner “The Bubble Economy.” 22 Fell “The David Dodge Lecture.” 23 J. Stiglitz “Capital Market Liberalization, Economic Growth and Instability” World Development 28, no. 6 (year?): 1075–1086; “Information and the Change in the Paradigm in Economics,” Columbia Business School, Columbia U., New York, Prize

105 The Canadian Escape from the Subprime Crisis?

24

25

26 27

28

29

30 31

32

Lecture, December 8, 2001; and, “On the Fallen Standing of U.S, High Finance” Project Syndicate, February 3, 2008. See in particular: McArthur Greg and Jacquie McNish “Canada’s Dirty Subprime Secret,” Globe and Mail, March 14, 2009 and “Lenders Seek Ottawa’s Aid as Thousands Risk Losing Their Homes” Globe and Mail, March 26, 2009; McNish Jacquie and Greg McArthur “Special Investigation: How High-Risk Mortgages Crept North” Globe and Mail, December 12, 2008; Carrick Alex (2008) “Canada’s Version of the Sub-prime Mortgage Problem” Market Insights, December 18, 2008; and Chronicle Herald “Subprime crisis a failure of values, June 19, 2008. An alternative conjecture which also has merit is that, after the bank mergers, Canadian financial markets would become even more concentrated and profitable and the major banks would have had even less interest in participating in more innovative but higher risk products and markets. McArthur and McNish “Lenders Seek Ottawa’s Aid,” Globe and Mail, March 26, 2009. See e.g.: M. Porter and the Monitor Company (1991) Canada at the Crossroads: The Reality of a New Competitive Environment Business Council of National Issues (bcni) and the Government of Canada; S. Lipset Continental Divide Canadian-American Committee, New York: Routledge 1990; and, M. Adams Fire and Ice: The United States, Canada and the Myth of Converging Values (Toronto: Penguin Press 2003). L. Ratnovski and R. Huang “Why Are Canadian Banks More Resilient” International Monetary Fund imf Working Paper wp/09/152 July 2009; and, J. Kiff “Canadian Residential Mortgage Markets: Boring but Effective?” International Monetary Fund, imf Working Paper wp/09/130, June 2009. Chronicle Herald “Subprime crisis a failure of values”; E. Gramlich Booms and Busts: The Case of Subprime Mortgages Urban Institute September 2007; aarp Public Policy Institute fyi: The Subprime Market: Wealth Building or Wealth Stripping for Older Persons June 2007; D. Indovino “Women – Low Pay and Subprime Mortgages” Socialist Alternative.org, March 6, 2008; and A. Lusardi and O. Mitchell Planning and Financial Literacy: How Do Women Fare, nber Working Paper 13750, January 2008. For example, in Winnipeg, less than 15% of Aboriginal households own their own home. For example, the federal Ministry of Finance, the Office of Consumer Affairs, the Financial Consumers Agency of Canada, the provincial and territorial governments through e.g. the Consumer Measures Committee (under the Agreement on Internal Trade), consumers associations and other ngos. For the purposes of this section, the financial services sector is defined as banks, trust and loan companies, credit unions and caisses populaires, life and health insurance companies, property and casualty insurance companies, securities dealers and exchanges, mutual fund companies and distributors, finance and leasing companies, as well as independent financial advisors, pension fund managers and independent insurance agents and brokers. This definition drawn from Department of Finance, The Canadian Financial Services Sector, is downloadable at http://www.fin.gc.ca/toc/2002/ fact-cfss_-eng.asp

106 Derek Ireland and Kernaghan Webb 33 P. Nivola and J. Courtney, “Know Thy Neighbor: What Canada Can Tell Us About Financial Regulation,” Brookings Institution Paper, April 23, 2009, downloadable at: http://www.brookings.edu/papers/2009/0423_canada_nivola.aspx 34 J. Houpt, “Prudential Regulation: A View from the Fed,” in F. Milne and E. Neave, eds., Current Directions in Financial Regulation (Montreal-Kingston: McGill-Queen’s, 2005). 35 Department of Finance, The Canadian Financial Services Sector, op cit. 36 P. Hogg, Constitutional Law of Canada (Scarborough, Ontario: Carswell, 2008). 37 Department of Finance, The Canadian Financial Services Sector. 38 Ibid. 39 Department of Finance, The Canadian Financial Services Sector. 40 Ibid. 41 P. Nivola and J. Courtney, “Know Thy Neighbour”. 42 Department of Finance, The Canadian Financial Services Sector, op cit. 43 Baillie, op cit. 44 J. Houpt, “Prudential Regulation.” 45 M. Kravis, in “Regulation didn’t save Canada’s Banks,” Hudson Institute, May 7, 2009, downloadable at: http://www.hudson.org/index.cfm?fuseaction=publication_ details&id=6228, notes that “In the US, Federal Housing Administration programs allowed mortgages with only a 3% down payment, while the Federal Home Loan Bank provided multiple subsidies to finance borrowing. In Canada, if a down payment is less than 20% of the value of a home, the mortgage holder must purchase mortgage insurance. Mortgage interest is not tax deductible.” 46 P. Nivola and J. Courtney, “Know Thy Neighbour.” 47 D. Francis, “cmhc bubble is 100% made in Canada,” Financial Post, October 22, 2009. 48 As reported in M. Kravis, “Regulation didn’t save Canada’s Banks.” 49 R. Thaler and C. Sunstein Nudge: Improving Decisions About Health, Wealth and Happiness (New Haven & London: Yale University Press 2008); J. Lacko and J. Pappalardo “The Effect of Mortgage Broker Compensation Disclosures on Consumers and Competition: A Controlled Experiment,” Federal Trade Commission Bureau of Economics Staff Report, February 2004, and “Improving Consumer Mortgage Disclosures: An Empirical Assessment of Current and Prototype Disclosure Forms,” Federal Trade Commission Bureau of Economics Staff Report, June 2007; and D. Hirshleifer, S. Seongyeon Lim and Siew Hong Teoh “Disclosure to an Audience with Limited Attention,” October 11, 2004 (available on the Internet). 50 Dodge “Rebuilding The Global Financial System.” 51 See e.g. Dodge “Rebuilding The Global Financial System,” 5–6 and Fell, “The David Dodge Lecture” and “Remarks on the Global Financial Crisis.” 52 Edward Waitzer “Education no substitute for regulation,” Globe and Mail Report on Business, July 13 2009, B2.

pa r t t w o New and Old IndustrialInnovation and Recovery Policy?

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6 Harper Government Industrial Strategy and Industrial Policy in the Economic Crisis markus sharaput

introduction This chapter’s purpose is to examine the Harper Government’s industrial strategy, both in the context of the recession and economic crisis, and with reference to its pre-recession initiatives and spending in this field. It also locates central concepts of industrial strategy versus industrial policy in a larger historical context. The role of Industry Canada as the lead department also looms large as, inevitably, do all of the current political-economic constraints and factors affecting industrial policy, namely minority government, Harper Conservative ideology about the role of the state versus markets, and whether crisis situations create windows of opportunity for strategic and unexpected policy change. This chapter also complements in terms of policy field coverage and boundaries the analysis in chapter 8 of the federal auto bailout and in chapter 9 of science and technology spending and innovation. In discussing industrial policy as a policy realm, it is important to distinguish between more limited understandings of the concept, and a definition of industrial policy as industrial strategy, associated with views of national economic development. The former casts the basic definition of industrial policy as the aggregate effect of multiple subordinate policies intended to affect how business operates in the economy. This definition groups together a broad array of government statements and actions, including fiscal, regulatory, and stimulus policy, under a single broad umbrella. In this sense, any policy and related actions that deliberately affect the conditions of business operation, whether explicitly identified as “industrial” or not, becomes industrial policy. As seen below, this involves a number of federal economic and natural resource departments and agencies, only one of which is Industry Canada.

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When this broad array of policy becomes strategically coordinated such that industrial policy acts as a framework, intended to achieve a specific coherent overall goal, it can be labelled an industrial strategy.1 It is in this latter sense that this chapter will mainly discuss Harper era initiatives, but not exclusively so. Four main arguments are advanced in the analysis. The first is that the primary goal of the Harper government in response to the crisis seems to have been mitigation, rather than using the crisis as an opportunity for strategic economic transformation. While the federal government certainly possesses significant capacity for the development and implementation of an industrial strategy of this more interventionist kind, this capacity has not been evoked in the current crisis. The second argument is that the Harper government does not lack an industrial strategy, in the sense that its view of the role of the government in shaping the economy has been clearly articulated since 2006. The role envisioned for the federal government, however, despite the recent spending surge in response to the recession, is largely non-interventionist, at least in terms of directing or selecting particular patterns of national strategic economic development. Third, it is argued that Harper government intervention, where it has occurred, still tends to be regional and sectoral (to the extent that competition between regions / sectors for federal aid has become a dominant theme), and rather than being coordinated around national goals of economic transformation and development, intervention and spending is focused overwhelmingly on short-term economic relief. This behaviour is not inconsistent, however, with their industrial policy dating before the current recession. Since taking office, the Harper government has demonstrated a general reluctance to use the power and influence of government to “steer” the private sector. Only its current degree of intervention in the auto sector (see chapter 8) is an exception to this pattern. Finally, it is argued that, while the current economic crisis may present an opportunity for a more state-led industrial strategy as defined above, the extent to which Harper Government intervention in the crisis will achieve economic transformation will depend on its willingness to demonstrate a high degree of changed political will. To date, however, the response of the Harper government suggests this is unlikely. Divided internally to some extent around the issue and nature of appropriate economic intervention, and facing the ongoing limitations of minority rule, the Harper government seems an unlikely champion of such nationally-coordinated change. The likely outcome of the government’s intervention will be a retrenchment of existing patterns of behaviour and the existing division of power and influence in the economy – as the success of the auto manufacturers in converting the crisis into wage and benefit rollbacks suggests (see chapter 8).

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The chapter is organized into four sections. The first looks at industrial strategy and industrial policy in a brief longer term historical context. The second section looks more closely at industrial policy in the more immediate preHarper era context. The third section then examines Harper policies and actions in this field since 2006, a period covering two pre-recession years and then the crisis and high deficit period still underway. Conclusions then follow.

i n d u s t r i a l s t r at e g y a n d p o l i c y in br ief h isto rical c ontext As we look briefly in this section at the historical phases and examples of industrial strategy summarized below, some key analytical imperatives need to be flagged from the outset. First, the most compelling reason for adopting an industrial strategy at the national level is to achieve a developmental goal, to define a national economy, and to encourage it to assume a particular form.2 Second, Canada is notable among many countries in recent years for the relative scarcity of industrial strategy coordinated at a national scale. The third feature is that despite a strong theoretical association between crisis and opportunity for policy change, periods of crisis and political debate in Canada have not tended to be exploited as policy windows, at least at the level of national industrial strategy.3 Fourth, in the past, the failure of the federal government to produce a national industrial strategy can be attributed to a series of reoccurring preventative constraints. These include: a) the absence of a federal department both willing and able to assume an effective coordinating role for such a strategy across the government; b) the previously mentioned historical tendency to frame Canadian industrial policy in narrower regional and sectoral terms; and c) the frequent reluctance on the part of federal political authorities to assume the risk of political controversy in the formation and implementation of an industrial strategy. Historically, industrial strategy in Canada has been most successful when it functions more at more at the level of technical prescription, rather than open political debate and explicit political direction. Taken together, these constraining factors have either inhibited the development of a capacity for national coordination, or constrained the deployment of the capacity exists.4 The earlier stages of industrial policy in Canada can be described as a slow shift from one industrial strategy to another, with three emerging historically as summed up in Table 1. The first, interventionist nationalism, involved the use of industrial policy as an instrument for creating and sustaining a distinct national economy in the face of external competitive pressures. The second, interventionist continentalism, involved the use of national industrial policy as an instrument for gaining access to other national markets, notably the US, and fostering economic activity within the country that could successfully

Table 1 Three Canadian National Industrial Strategies at a Glance Major components

Strategic orientation

Political Themes

1st National Policy (1867 to 1945 Approximately)

Border tariff, development of transportation infrastructure (canals, railway) and immigration. Primary trading relationship is with Great Britain. Federal redistribution primarily in the form of patronage, government works / infrastructure spending.

Interventionist nationalism

Formation of a nationally integrated economic space Emergence and early negotiation of the federal relationship, in part to compensate for changes associated with integration of the national economy.5

2nd National Policy (1950s to 1980s)

Border tariff encourages US foreign direct investment as Canadian economy becomes integrated with that of US.6 National infrastructure projects expand to accommodate technological improvements in transportation and communications (Air Canada, microwave relay stations)/ Macro-demand management (partial Keynesian) policies prominent.Federal redistribution increasingly takes the form of transfer funding for large joint service programs.

Interventionist continentalism.

Problematic negotiation within federal system. Emergence of the large joint service programs, and accompanying federal transfers. Emergence of explicit regional development programs.7

3rd National Policy (1980s to present)

Growing importance of trade policy as industrial strategy. cufta / nafta facilitate deeper integration of Canadian economy into emerging north American economy.8 Sectoral exceptionalism retained for politically sensitive sectors.9 Regional development reframed in terms of innovation / competitiveness.

Liberal continentalism, with nationalist / interventionist exceptions

Formal, constitutional negotiation of federal relationship. Renegotiation of transfer / joint service programs. Trade and other international regulation imposes constraints on government intervention.

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exploit such markets. The third, liberal continentalism, was centred on free trade. Distributed across three “national policies,” this transition set the stage for the period immediately prior to the Harper government’s rise to power which we sketch out further in the next section. As indicated above, each ostensible national policy period gave emphasis to key identifiable components, an overall strategic orientation, and central political themes and narratives. They also contain some policy elements and ideas that continue to this day.

industrial policy in the pre-harper context By the 1990s, industrial policy in Canada had become a complex endeavour. Overt industrial strategy, controversial since the political difficulties surrounding the highly interventionist National Energy Program (nep) in the early 1980s, was generally avoided. Industrial policy, given the nature of the Canadian economy, was de facto broadly distributed across multiple federal policy portfolios. Key sectors of the economy, such as agriculture, natural resources, fisheries and oceans, energy, and transportation, routinely generated business-affecting policy, but lay outside the aegis of both Industry Canada (and its predecessor departments) and the Minister of Industry. This configuration was the product of the federal institutional structure, the historical association between industrial policy and patronage, and the consequent association between regional and sectoral development. In addition, policy instruments critical to the implementation of strategic national policy (such as tariffs and other tax instruments or international treaty obligations) remained under the jurisdiction of other departments, notably Finance, Foreign Affairs, and International Trade (with the latter two involved in a historical dance of bureaucratic fusion and separation). Within these limits, overarching industrial strategy existed, insofar as federal promotion of, and participation in high-level free trade regulatory regimes like the nafta and the wto process consisted of an effort to set conditions of operation for business. But it typically operated as an accepted constraint on, rather than explicit vision for, interventionist policy formation by Industry Canada. Although the general effect of free trade was to remove tariff barriers, some protections remained, as did the selective (and reduced) use of subsidies and other means of sectoral support. Industrial policy in the late 1980s and 1990s tended to be less concerned with the coordination of national strategy, and more focused on sectoral strategies, or cross-sectoral frameworks that established guiding principles which allowed for the accommodation of sectoral distinctiveness.

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A favorite focus of industrial policy in the 1990s were the “innovative” sectors based around emerging technologies. Biotechnology, informationcommunications technology, and others, with their wide applications that crossed traditional sectoral boundaries, provided industrial policy makers with an entry into sectoral policy schemes without the necessity of drafting hard and fast national rules. Through the 1990s, under the Chretien government, and particularly during the period in which John Manley was minister, Industry Canada was a key player at this game, primarily because such framework oriented or crosssectoral policies gave the department a more concerted access to some of the remaining non-subsidy-based, post-free trade tools of industrial policy such as competition, intellectual property, corporate governance, and aspects of consumer policy.10 The bulk of Industry Canada’s intervention into innovative sectors was grouped within an overall framework policy, beginning from 1993 on, which reached its mature expression with the 2002 publication of a joint White Paper on innovation by Industry Canada and Human Resources and Development Canada (hrdc). The innovation strategy articulated in this framework policy was significant in that it represented one of the first long-term policy projects to completely internalize the basic rationale of the globalization project and the expansion of trade regulation, that national economies could no longer compete on the basis of tariff protections, subsidies, or border restrictions (all classic instruments of an interventionist strategy), and more importantly, that new sectors could not be expected to develop under such conditions without penalty. As an industrial strategy, the innovation project was predicated on the understanding that governments had to adapt their policy instruments and economic strategies in order to retain their economic relevance without violating the restrictions mandated by regulatory trade and related treaties. Crucially, it was also aligned to changed views about science and technology spending. The analysis in chapter 9 looks at this spending more closely, including its innovation links. What is important to stress here is that the innovation strategy allowed Industry Canada to shift the terms of debate and discourse by adopting the language of innovation theory, and particularly, innovation systems (organised both at a national and regional/local level). The innovation framework developed by Industry Canada, and disseminated through both horizontal policy files and through cross-sectoral processes such as the reports of the science and technology advisory councils, consisted of a dual effort to develop the existing innovation system, while defining a place for Industry Canada as the central coordinator of that system, by rearticulating the neoliberal project in terms that required some significant action by the state.11 The focus on integrating regionally located, and sector-specific, clusters of innovation provided a basis for connecting the pockets of industrial activity and policy that had developed

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to date within Canada, and the flexibility of the innovation discourse provided a rationale for doing so. A national innovation system (nis) consists of the network of institutions that host and channel the process of innovation, as well as the interaction between them and their larger supporting context.12 It is this dynamic interplay between a set of innovative institutions and their environment that allows change to occur and to have an effect. An innovation system’s primary functions are the integration of component elements and the transmission of information and knowledge between both the elements themselves and between the system and its environment. An innovation system thus involves more than innovative capacity or the process of innovation; it also incorporates the various systemic elements which support this process; an innovation system implies not just a way of doing (innovation), but a way of being (innovative). Within any particular innovation system (national or regional/local), core elements such as industry, academy and government are integrated in networked clusters with reflexive lines of communication, and are grounded in a structure which permits flows of information and knowledge between this integrated structure and the market as a whole, so as to allow the system to quickly respond to market demands. This focus on institutional organization links discussion of innovation systems to the broader debates surrounding globalization, the state, science and technology, and policy overall. If one’s focus is on the specific dynamics of institutional organization, then the analytic importance one assigns to those dynamics becomes a critical question. The environment of these innovating agencies is sustained by financial and government institutions and organizations that fund, regulate, and support innovation. These organizations are linked by flows of personnel, funding, information, and regulations, as well as cooperative agreements and competition. But the relative importance of the three main components (academia, government-run labs, and industry) as well as the type of links between them, vary from one country to another.13 When the public and financial environment is included, one is defining a national system of innovation.”14 As with other institutional literature, early studies of innovation systems focused on the idiosyncrasies of, and differences between, different systems.15 The nis in Canada has historically been characterized by a number of important limitations. Among these are relatively low overall spending on r&d, particularly when expressed as Gross Expenditure on Research and Development (gerd), or the spending on r&d expressed as a proportion of Gross Domestic Product (gdp). Low overall spending levels are accompanied by proportionately low levels of spending by industry, and a relatively high proportion by the Canadian government. Compounding this factor is the high degree of foreign direct ownership of the Canadian economy.16 A telling indicator of the combined effect of these limitations is that more than 80 per cent of patents filed in Canada originate outside the country.17

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The net effect of these behaviour patterns has been to encourage Canadian firms to adopt, rather than develop, technology; the bulk of what innovative activity did occur tended to be concentrated in areas with pre-existing resources and cultures of innovative activity, namely, the core urban metropoles dominating the Canadian economy. These limitations also account for the strong variation in innovative specialization by region.18 It is the material assets distinct to the region (what Wolfe terms “untraded interdependencies”) which create the supporting linkages of the innovation system.19 Similarly, the historical accumulation of these assets and interdependencies tend to frame the development of local competencies, which in turn reinforce the tendency to build on what is already known.20 Although articulated as a transformative industrial strategy from the outset, the scale of the transformation associated with the innovation strategy changed over time. Initially, the goal of transformation was limited to the government, insofar as it focussed on implementing methods of regulating and governing “better.”21 By the time of its maturation in the 2002 Innovation White Paper, however, the project had expanded. The focus on embedding innovative behaviour within the larger fabric of society meant that the innovation strategy was concerned with changing how the country worked. While at a conceptual and discursive level the project was successful, the ability of Industry Canada to use the framework to position itself as the arbiter of an industrial strategy of this kind was ultimately hampered by the same contextual constraints on industrial strategy discussed above. The kind of transformation implied by the innovation strategy required access to critical policy instruments, notably the ability to open the spending “tap.” The political weight given to deficit-fighting by the Liberal government in the mid 1990s, however, ensured this never happened. Making the innovation strategy a transformative project required the ability to direct how spending resources were allocated, and the ability to set critical conditions for business operation. However, for key sectors, the former remained under the control of departments other than Industry Canada, while the latter remained under the control of departments such as Finance Canada. Consequently, although the innovation strategy led to a series of industrial policies generated by Industry Canada, and the horizontal distribution of an innovation discourse, it never assumed a transformative role as industrial strategy. Industrial policy in Canada remained distributed, and its formation subject to the restrictions on intervention imposed by international treaty and the fiscal constraints of deficit fighting. From 2003 until the present day, as the analysis in chapter 8 by Phillips and Castle shows in detail, there has been little progress in successfully implementing the innovation project. The various shifts in government, first from Jean Chretien to Paul Martin, then from the Liberals to the Tories under Stephen Harper, have done little to ameliorate this problem. As a portfolio,

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Industry Canada suffered from a lack of consistent leadership, having no less than five ministers in the last six years. This lack of stability has been compounded by the controversy that the portfolio, and those who hold it, seem to generate. Given that the formation of the innovation strategy occurred under a period of unusual stability (being essentially a product of John Manley’s leadership under the Liberals), and that as a project, it required consistency of vision and implementation, it is perhaps unsurprising that it has failed to flourish under the ministerial musical chairs of Tory leadership in the Industry Canada portfolio.

i n d u s t r i a l s t r at e g y a n d p o l i c y under the harper government The charter document outlining the Harper government’s industrial policy is Advantage Canada, released in 2006, tellingly, by the Department of Finance, rather than Industry Canada.22 In contrast to their Liberal predecessors, whose stated industrial strategy sought to reconcile a liberal market with an interventionist government, the industrial strategy of the Harper government primarily consisted of getting government out of the way of the market, helping “in creating the right conditions for Canadians – and Canadian businesses and organisations – to thrive.”23 The pre-recession 2006 Advantage Canada strategy is based on overall reduction of taxation, regulation, and government debt, along with the development of skills in the workforce, and selected infrastructure funding, particularly for border security and the road transportation network. During this period, with overall industrial strategy coordinated by the Department of Finance, Industry Canada increasingly emerged as a concentration of services, to both market actors and other branches of government, rather than as a strategic economic coordinator.24 Interventionist industrial policy was to be limited, specific in focus, and required justification, rather than being the default option. With a few strong exceptions, notably the energy sector, even the traditionally strong areas of interventionist Canadian industrial policy (i.e., sectoral and regional development) seemed to atrophy from 2006–08. The primary focus of federal budgets during this period was tax relief, while the primary focus of activity by Industry Canada seemed to be the expansion and entrenchment of regulatory harmonisation.25 While Industry Canada retained the language of the innovation strategy as part of its core mandate, and continued to produce documents articulating the innovation strategy, the impact of the strategy was far less visible, and projects associated with it received only nominal funding. Industrial policy under the Harper government in the pre-recession period was dominated by the framing of regulation friendly to market expansion, and, with a few exceptions, the primary use of tax incentives rather than spending as the basis

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for intervention, with selective use of spending, primarily in infrastructure, security-related initiatives, and sectors politically beneficial to the Conservative support base such as some natural resource sectors. The overall theme seems to have been prioritising market-led economic development, while minimising the federal regulatory burden on that development. One example that illustrates this approach is the Tories’ long-standing support for the energy sector, particularly the oil-sands project in Alberta. Support by the Tories for the energy industry in Canada dates back to their assumption of power, and tends to be concentrated in western Canadian energy sectors. Primarily, it takes the form of the formation of a sympathetic regulatory environment. Examples include the hearings held for the Mackenzie gas project in the Northwest Territories, or the federal government’s laissez faire approach to the Athabasca Oil Sands project, in the face of mounting criticism from both public advocacy and environmental groups. The Mackenzie Gas Project involves the construction of a $16.2 billion pipeline from the Beaufort Sea through the North-West Territory to Alberta and the Oil Sands project. It is supported by a consortium of major oil corporations, including Imperial Oil Ltd., ExxonMobil Corp., ConocoPhillips, Royal Dutch Shell plc, along with the Aboriginal Pipeline Group, representing local aboriginal and Inuit communities. Despite general condemnation by a range of environmental groups, a final report by the mgp review panel that indicates minimizing the environmental impact of the project depends on the initiation and maintenance of long-term mitigation programs (none of which currently exist), and an environmental assessment that suggests there exists insufficient information to gauge the actual impact of the project, the project received regulatory approval in December 2009, on the basis that it will provide for economic development of the region.26 What seems distinctive about the federal approach to such sectoral regulation is the shift in regional emphasis. For example, the federal government has come under criticism both at home (from Ontario Premier Dalton McGuinty and Quebec Premier Jean Charest) and abroad (at both the recent commonwealth and climate conferences) for proposals to “stack” possible cap-and-trade regulation on carbon emissions in Alberta’s (and hence the oil sands) favour.27 Consistently, the role of the Harper government has been to remove impediments to, and facilitate the progress of, western and northwestern energy projects, while showing reluctance to intervene in or develop other sectors and regions. To the extent that these policies were consistent with the overall vision for government described in Advantage Canada, pre-recession industrial policy in the Harper era can be considered an industrial strategy, but one that was characteristically non-interventionist. It was not until the recession and economic crisis emerged that the government’s reluctance to more than selectively intervene was overcome, at least in part by a general public demand for action.

Table 2 Harper Government Industrial Policies: Pre and Post-Recession Period

Orientation of Market Regulation

Primary Instruments

Selected Spending Programs

Pre-Recession

Regulation permissive / market supporting Eg. lax environmental regulation (notably on climate change), crtc directive to rely on market forces in framing legislation,

Tax incentives, eg. the expansion of Capital Cost Allowance (cca) and Advanced cca programs, grandfathering of existing and planned oil sands projects under acca to 2010, Home-renovation or transportation tax credit, overall reductions in both business and personal taxes, reduction of gst, Mineral Exploration Tax Credit Reduction in costs associated with regulatory compliance, eg. reduction of tax compliance burden, streamlined environmental impact assessments on mega-projects

Infrastructure, particularly transportation (highways) and security (borders), Health Care,

Post-Recession

Making the market “work again”, eg. market stimulus through spending, abandonment of deficit / debt restrictions (credited to G20 obligation of 2% of gdp stimulus by government), direct government participation in market (ownership of auto firm shares), market stimulus through regulation (encouraging consumer spending in such areas as housing market)

Retention of existing instruments, but rearticulated as part of the recession response (especially tax credits, for eg. Home renovation tax credit now articulated as stimulus to consumer spending, rather than environmental in intent), Expansion of direct spending programs (but limited in scope, eg. Controversy when the federal government failed to offer forestry in Northern Ontario a bailout similar in scope to the auto bailout), Recession impact mitigation (funding for skill retraining, modifications to the ei program)

Bailout packages (Automotive, to a lesser extent Forestry, Agriculture, Mining, Tourism, and Culture) Infrastructure

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With the collapse of the US real-estate market, the resultant global recession, and the consequent impact on both the larger Canadian economy and critical sectors (such as autos), the ability of the federal government to remain “hands off ” regarding industrial policy was challenged. While the response to economic crisis has had a sectoral and regional flavor (such as the auto bail-out and the formation of the Federal Economic Development Agency for Southern Ontario), specific programs have clearly been articulated as part of a larger project, namely, the succession of “Canadian Action Plans” produced by the federal government.28 Although closer examination reveals that much of the 2009 Action Plan consists of repackaged policies from earlier years, there has been a distinctive shift in the federal government’s willingness to directly influence market activity (notably on the demand side). Recent activity by both the Canadian and US governments (notably the variety of bail-out packages) suggests that some of the restrictions imposed in the past have temporarily loosened. This is particularly the case where spending is concerned. The Federal government has allocated the equivalent of 9.7 billion dollars to the auto sector, with another billion distributed across other sectors (notably Forestry, Agriculture, Mining, Tourism, and Culture). Coupled with the trend towards reorganization in core industries such as the auto sector (see chapter 8) public and related political demands for accountability and regulation, and the potential for greater coordination with the new Obama US administration, a window of opportunity may have emerged. What casts a shadow over this possibility is the generally haphazard nature of the federal government’s intervention to date, and its general replication of past practice. The removal of spending constraints, at least initially, and growing criticism of the neoliberal banking-led policies that helped produce the global recession, in and of themselves, do not necessitate a resurgence of interventionist industrial policy, let alone an industrial strategy overall. While there certainly seems to be a greater willingness on the part of the federal government to spend in the economy, the Action Plan to date gives little indication of a strategic purpose to this spending, other than the short term palliative amelioration of the recession. Moreover, the Action Plans to date have reiterated the federal government’s commitment to the principles outlined in Advantage Canada; the post-recession spending boom is framed as a necessary short-term response, rather than as a new strategic direction for the federal government.29 Goals and targets for spending in the Action Plan remain sectoral (and given the distributed nature of the Canadian economy, regional). Aside from the automotive case, sectoral spending hovers between 70 and 170 million dollars (per sector). In comparison to the more than $9.6 billion allocated for basic infrastructure spending, this suggests that the action plan is being guided less by a long term vision for economic change, and more by the need to be able to demonstrate the proverbial “shovel ready” action.30

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At the same time, Industry Canada remains a marginal player in what the Action Plan reports describe as an “extraordinary and unprecedented” degree of economic intervention.31 Since 2008, Industry Canada has been producing a series of reports that conjure up the language and ideas of the innovation strategy more accurately than anything since John Manley left the portfolio in 2000.32 Yet these reports bear only the most tenuous connection to the government’s response to the economic crisis. The strategic vision outlined within these documents is supported by a funding stream which represents only a fraction of that spent as part of the action plan. While the Action Plan includes a component focused on “Creating the Economy of Tomorrow,” it consists of 1.87 billion (about 6.4% of the total budget) earmarked for the renewal of s&t infrastructure – notably refurbishing university and government labs. In contrast, the total operating budget of Industry Canada in 2009–10 is just over 1.2 billion dollars, with just over 652 million earmarked for projects supporting the knowledge-based economy.33 These numbers can be contrasted with the total expenditure on the Action Plan for 2009–10, which is more than 29 billion dollars, of which 26 billion dollars consists of spending. Funding for innovation-related programs by Industry Canada was 67.3 million in 2006, 63.4 million in 2007, and 110.6 million in 2008 (the sudden growth in funding was related to the launch of the federal government’s new Science and Technology (s&t) strategy). In addition, the government provided several hundred million dollars in ancillary funding to such agencies as the national granting councils, and directed funding for Information and Communications Technology (ict) research. An additional innovation-related program, Technology Partnerships Canada, intended to facilitate the commercialization of new technology, was phased out beginning at the end of 2006. The release of a new federal Science and Technology strategy in 2007 involved a significant discursive and conceptual reorientation in regards to the role of government and Industry Canada. While in the past, the role of Industry Canada as an active coordinator was clear, the new strategy rearticulated the role of government as one that would “ensure a competitive marketplace and create an investment climate that encourages the private sector to compete against the world on the basis of their innovative products, services, and technologies. Canada must maximize the freedom of scientists to investigate and of entrepreneurs to innovate.”34 In other words, as with other components of the government’s relationship with economic activity, innovation was now a hands-off project for government, whose role would be to create competitive conditions that would compel innovation on the part of market actors. While spending totals are not the only measure of political priorities (and are to some degree problematic when discussing a project intended to shift the primary impact of government from spending to capacity building and

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coordination), they do provide a convenient shorthand for what the government sees as important or politically necessary. Clearly, in relative terms, the capacity of Industry Canada to mount industrial policy programs and long-term investment in economic change and development are not among these priorities. Recession mitigation and a return to market-led growth are the priorities.

c o n c lu s i o n s The purpose of this chapter has been to examine the Harper Government’s industrial strategy in the context of the recession and economic crisis but with reference also to its pre-recession initiatives and spending as well. It has also located central concepts of industrial strategy versus industrial policy in a larger historical context and in the more immediate context of the preHarper period. In discussing industrial policy as a policy realm, the analysis has stressed the need to distinguish between more limited understandings of the concept, and a definition of industrial policy as industrial strategy, associated with more strategic views of national economic development. Four main arguments have been advanced in the analysis. The first is that the primary goal of the Harper government in response to the crisis seems to have been mitigation, rather than using the crisis as an opportunity for strategic economic transformation. While the federal government certainly possesses significant capacity for the development and implementation of an industrial strategy of this more interventionist kind, this capacity has not been forged or drawn on in the current crisis. The second argument to emerge is that the Harper government does not lack an industrial strategy in the sense that its view of the role of the government in shaping the economy has been clearly articulated since 2006. The role envisioned for the federal government, however, despite the recent spending surge in response to the recession, is largely non-interventionist, at least in terms of directing or selecting particular patterns of national strategic economic development. While the Harper government is willing to facilitate the development of, and remove impediments to, existing marketdriven mega-projects, it is unwilling to stimulate or support governmentcoordinated equivalents Third, the chapter has shown that Harper government intervention, where it has occurred, still tends to be regional and sectoral (to the extent that competition between regions / sectors for federal aid has become a dominant theme), and rather than being coordinated around national goals of economic transformation and development, intervention and spending is focused overwhelmingly on short-term economic relief. This behaviour is not inconsistent, however, with their industrial policy dating before the current recession. Since taking office, the Harper government has demonstrated a

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general reluctance to use the power and influence of government to “steer” the private sector. Finally, the analysis indicates that while the current economic crisis may present an opportunity, for a more state-led industrial strategy as defined above, the extent to which the Harper government intervention in the crisis will achieve economic transformation will depend on its willingness to demonstrate a high degree of changed political will. To date, however, the response of the Harper government suggests this is unlikely. Divided internally to some extent around the issue and nature of appropriate economic intervention, and facing the ongoing limitations of minority rule, the Harper government seems an unlikely champion of such nationally-coordinated change. The likely outcome of the government’s intervention will be a retrenchment of existing patterns of behaviour and the existing division of power and influence in the economy. While Industry Canada seems to have retained, or perhaps rediscovered the language and operating vision of the innovation strategy, Industry Canada itself remains a marginal player when it comes to strategic economic intervention. The Department of Finance, and the various sectoral ministries, remain the main agents of intervention in the economy, and Finance, as author of both Advantage Canada and the Action Plan, has made clear that the degree of intervention characteristic of the government’s response to the economic crisis is a temporary anomaly. The goals of the federal industrial strategy predating the crisis have been retained. A focus on debt reduction, and reducing the regulatory and tax burden on business, remains the government’s default position. It seems evident at this point that while inherited constraint may inhibit projects of change, and crisis may provide opportunities for it, the critical element for institutional and economic transformation is a high degree of focussed political will. The federal government continues to operate within parameters consistent with inherited patterns of constraint not because it has to, but because it chooses to. The industrial strategy developed by the Harper Conservatives, and articulated in Advantage Canada, is one where government facilitates market expansion, rather than seeking to coordinate or direct it. The rise in spending in response to the recession, rather than comprising a resurgence of interventionist industrial strategy, comprises nothing more than a short term set of industrial policies, specific to, and rationalized by, the conditions that emerged from recession and economic crisis. The failure of the federal government to seize the opportunity for change suggests that economic crises will recur. As long as the Canadian economy remains closely integrated with, and consequently vulnerable to, instability in our trading partners, as long as we fail to diversify and develop our economy to allow us to better weather crises, the more uncertainty we will face. At

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the same time, emergent and concurrent crises, such as the effects of climate change, suggest that the economy will not be the only place in which a national coordinating capacity will be needed. It will only be by surpassing our historical constraints – the absence of a federal institution positioned to coordinate, the development of sectoral and regional industrial policy, rather than national policy, and the reluctance on the part of the federal government to assume the risk of political controversy, that we will be able to move past mitigating crises to solving them and anticipating them.

notes 1 The distinction is drawn from J. Gillies, “Globalization and Canadian Industrial Strategy: Past, Present and Future”, in J. Dermer, ed., Meeting the Global Challenge: Competitive Position and Strategic Response, 2nd ed. (North York: Captus Press, 1995), 88–103. See also N. Bradford, Commissioning Ideas: Canadian National Policy Innovation in Comparative Perspective (Toronto: Oxford University Press, 1998). 2 The common discussion of the role of the state in development produces a cross-over between the literature discussing industrial strategy and that of the developmental and comparative studies. This crossover is observed primarily within structural and institutionalist approaches. For the former, see G. Arrighi. The Long Twentieth Century. (New York, 1994). For the latter, see Bradford, Commissioning Ideas. 3 For a discussion of crisis, policy windows, and policy change, see F. Baumgartner and B. Jones, Agendas and Instability in American Politics (Chicago: University of Chicago, 1993). 4 For example, see the discussion of the Industry Canada innovation strategy, later in this chapter. 5 For an analysis, see A. Cairns (1986) “Embedded State: State-Society Relations in Canada,” in K. Banting, Ed., State and Society (Toronto: University of Toronto Press, 1986), 154–77. 6 The issue of foreign ownership and the take-over of Canadian firms by American capital had been a recurring concern among nationalists in the post-World War ii period, and had been highlighted in a succession of studies beginning with the Gordon Commission in 1955–57. See Bradford, op. cit. 7 In the Trudeau mandate, the Department of Regional Economic Expansion (dree) under Jean Marchand was responsible for the allocation of mixed grants for both capital costs and job creation, although these were granted to a wider range of areas, including existing regional centres. 8 The expansion of treaty-based trade regulation, such as the cufta and nafta, was contemporary to, and associated with, the growing influence of the neoliberal project and arguments about the pressures states faced from globalization. Such regulation was advocated by proponents as a necessary accommodation to globalisation, and a process that would pressure state economies to organize in competitively successful

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9

10

11

12

13 14

ways. Trade policy, by setting the terms for, and contextual constraints of, such reorganization, became a form of industrial policy. Moreover, because trade regulation was understood (by neoliberals and other market proponents) to be beyond the control of any one state, it was also understood to be a better form of industrial policy, as it was not (or at least less) subject to state interference. For a discussion and overview of the relationship between trade and industrial policy, see D. Jurkowski, “Federal Government’s Industrial Strategy to Regional Economic Disparities: A Historical Overview,” in D. Jurkowski and G. Eaton, eds. Between Public and Private: Readings and Cases on Canada’s Mixed Economy (Toronto: Captus Press, 2003), 45–68; G. Bruce Doern, Leslie Pal, and Brian Tomlin “The Internationalization of Canadian Public Policy,” in G. Bruce Doern, Leslie Pal and Brian Tomlon, eds. Border Crossings: The Internationalization of Canadian Public Policy (Toronto: Oxford University Press, 1996), 1–26.; S. .Hartt, “Hollowing Out: Protectionism Is Part of the Problem, Not the Solution”, in Policy Options, (July-August 2007); J. Maxwell and R. Saunders, “Adjusting to Freer Trade: Two Policy Failures,” in Policy Option (April 2007), 8–10. The removal of the national tariff was not universal. Certain sectors, notably those with political significance (such as Quebec’s dairy industry) continued to enjoy a degree of tariff protection. Sectoral / regional distinctions of this kind have remained a factor in regional industrial development, and regional / federal politics, to the present day. Consider ongoing debates in the current economic crisis over which regionally concentrated industries are “worth” federal intervention, or the charges leveled by some sectors (forestry in Northern Ontario, coastal fishing) that the federal government plays favorites. See Bruce Doern,“Looking for the Core: Industry Canada and Program Review,” in Gene Swimmer, ed. How Ottawa Spends: 1996–97: Life Under the Knife (Ottawa: Carleton University Press, 1996), 73–98. A recurring theme in the innovation strategy was the idea of the federal government as a steward. The strategy continually reiterated that the changes they sought would occur in society and the economy, but that these changes could only occur, and their positive potential could only be harnessed, if government took appropriate action. If globalization was to be a positive experience, it had to be deliberately fostered by government in desirable ways. In discussing innovation systems, a first priority is to distinguish between the concepts of innovation, innovation policy, and the innovation system. Innovation implies more than incremental improvements in technology. It also refers to the ways those incremental improvements are embedded in the social fabric. See J. Niosi, “National Systems of Innovation: In Search of a Workable Concept,” Technology in Society: An International Journal 15. 2 (1993): 41–54. See Bruce Doern and Christopher Stoney, eds. Research and Innovation Policy: Changing Federal Government-University Relations (Toronto: University of Toronto Press, 2009) J. Niosi, “Canada’s National r&d System,” in R. Anderson et al., eds. Innovation Systems in a Global Context: The North American Experience (Kingston: McGill-Queen’s University Press, 1998), 35–48.

126 Markus Sharaput 15 For an early analysis of the Canadian nis, see D. McFetridge, “The Canadian System of Industrial Innovation,” in R. Nelson, ed. National Innovation Systems. (Oxford: Oxford University Press, 1993), 122–138. More recent developments of innovation systems theory suggest that the dominant institutional and organizational phenomenon central to the idea of an innovation system is now resident within regional spaces of activity. Regional innovation systems approaches thus attempt to map out the interrelationships between the regional, national and global when analyzing innovative activity and innovation systems. See for example,M. Gertler et al. “No Place Like Home? The Embeddedness of Innovation in a Regional Economy,” in Review of International Political Economy 7 no.4 (2000): 144–55. 16 See G. B. Doern and T. Reed, “Canada’s Changing Science-Based Policy and Regulatory Regime: Issues and Framework”, in G. B. Doern and T. Reed, eds., Risky Business: Canada’s Changing Science-Based Policy and Regulation Regime (Toronto: University of Toronto Press, 2000), 3–31. R. Gualtieri, “Science policy and basic research in Canada”, in Susan Philips, ed. How Ottawa Spends 1994–95: Making Change (Ottawa: Carleton University Press, 1994), 150–65. 17 L. Roberts et al., eds. Recent Social Trends in Canada 1960–2000 (Montreal: McGillQueen’s University Press., 2005), 50. 18 J. Niosi and T. Bas, “The Competencies of Regions and the Role of the National Research Council,” in J. Holbrook and D. Wolfe, eds, Innovation, Institutions and Territory: Regional Innovation Systems in Canada (Kingston: McGill-Queen’s University Press, 2000), 45–68. 19 D. Wolfe, “Social Capital and Cluster Development in Learning Regions,” in J. Holbrook and D. Wolfe, eds, Knowledge, Clusters, and Regional Innovation: Economic Development in Canada (Toronto: isrn, 2001). 20 J.Niosi and T. Bas, “Competencies of Regions.” 21 Industry Canada, Building a More Innovative Economy (Ottawa: Industry Canada, 1994). 22 Department of Finance, Advantage Canada: Building a Strong Economy for Canadians (Ottawa: Department of Finance, 2006). 23 Ibid., 9. 24 The Industry portfolio is currently composed of a series of regulatory and service agencies, including the Canadian Intellectual Property Office, the Canada Radiotelecommunications and television commission, the national research granting councils, and the business development bank. The portfolio is also increasingly a service clearinghouse for both public and private sector actors. 25 See Department of Finance, The Budget in Brief 2006: Focusing on Priorities (Ottawa: Department of Finance, 2006); Department of Finance, The Budget in Brief 2007: Aspire to a Stronger, Safer, Better Canada (Ottawa: Department of Finance, 2007); and Department of Finance, The Budget in Brief 2008: Responsible Leadership (Ottawa: Finance Canada, 2008). 26 See Ministry of the Environment, Foundation for Sustainable Northern Future: Report of the Joint Review Panel for the Mackenzie Gas Project. Ottawa: Ministry of the

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27

28

29 30 31 32

33 34

Environment, 2009). http://www.naturecanada.ca/take_action_raise_voice_ protect.asp See R. Benzie, “Ottawa Wasted Climate Talks, McGuinty Says,” Toronto Star, Dec. 23, 2009., p1. and S.Rennie, “Harper Leaves Copenhagen as Talks End in Confusion,” Canadian Press, Dec. 18, 2009, p. 3. See Government of Canada, Canada’s Economic Action Plan: A First Report to Canadians (Ottawa: Department of Finance, 2009); Government of Canada, Canada’s Action Plan: A Second Report to Canadians (Ottawa: Government of Canada, 2009); and Government of Canada, Canada’s Economic Action Plan: A Third Report to Canadians (Ottawa: Government of Canada, 2009). Ibid., First Report (2009), p6. Ibid., Second Report (2009). Ibid., Second Report (2009), 14. See Industry Canada, Industry Canada Business Plan: 2008–09. (Ottawa: Industry Canada, 2008); and Industry Canada, Industry Canada Business Plan: 2009–10 (Ottawa: Industry Canada, 2009). Industry Canada (2009), 19. Canada, Mobilizing Science and Technology to Canada’s Advantage (Ottawa; Finance Canada, 2007), 13.

7 Buy American or Buy Canadian? Public Procurement Politics and Policy Under International Frameworks m e l i s s a h au s s m a n a n d d av i d b i e t t e

introduction This chapter examines how Ottawa and Washington “buy” in the context of historic attempts to make national procurement policies conform to international trade agreements such as nafta and the wto, which have increasingly pushed for liberalization in the procurement sector. The central contention of this chapter is that national and subnational procurement are always highlypoliticized issues in any country, especially in the two which form the world’s largest integrated trading partnership. We examine the recent Canadian responses to the recent “Buy American” provisions in the first round of US national stimulus legislation, the American Recovery and Reinvestment Act (arra). The responses simultaneously included threats by Canadian mayors to “tighten up” municipal procurement practices while, at the same time, there was increasing federal and provincial interest in negotiating with the United States to liberalize subnational procurement practices. This controversy was inherently nothing new, simply the most recent but highly interesting iteration of the attempts to keep national and subnational procurement prerogatives intact while trying to conform to the liberalizing agenda increasingly demanded by international agreements. The contextual part of our analysis is centered mostly on the international agreements taking place since the 1990s, including nafta and the Agreement on Government Procurement (gpa) of the wto (See Appendix I and ii for relevant summary details). Since the 1990s, there have been concurrent pressures on governments to either join the wto government procurement plurilateral agreement (the only remaining part of the wto in which membership is

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voluntary) or to increasingly liberalize procurement for current members (including the United States and Canada). During the formative years of the gatt, from 1947 until the 1970s, national government procurement was politically untouchable for trade negotiators. While the 1979 Tokyo Round produced the first Government Procurement Agreement, the Code contained more exemptions than inclusions.1 Three main arguments are advanced. The first is that procurement policies in Canada and the United States, and the methods of their formulation, are unique to each country, informed by differences such as separation of powers and federal divisions of power. It is not surprising then that each country has formulated its procurement policies in a different fashion and has different domestic constituencies. These constituencies in turn push the particular policy levers that deliver the desired domestic help. The second argument advanced is that Canada is an “outlier” in the wto government procurement plurilateral since it has excluded subnational procurement since it joined the gpa in 1996, and did not at the time seek guaranteed access to other countries’ subnational markets.2 This strategic issue has come to haunt Canada, particularly during the recent recession and specifically with reference to the United States. Last but not least, we argue that with respect to both current recession-era concerns and the historical underpinning of trade and procurement rules, exceptions, and politics, it is clear that the United States and Canada have negotiated their trade procurement laws so that each can “have their cake and eat it too.” Whether bound by wto rules, nafta rules, or other trade agreements, certain industries and realms of procurement remain protected. Loopholes also give important political cover. The structure of the chapter includes the following. First, we look briefly at the context for procurement politics and policy. Second, we discuss the Canadian and US agreements on procurement, as well as their exemptions, as part of the nafta and wto 1996 gpa plurilateral frameworks. Third, we look at some of the main controversies in the current recession and immediate pre-recession periods under both the Obama administration and the Harper government. Our conclusions round out the analysis.

t h e c o n t e xt f o r c a na da- u s procurement politics and policy Members of Parliament, the prime minister, members of Congress, the president, and other officials must simultaneously represent their own country as a bloc in international agreements, yet at the same time each also represents constituents (variously defined) in national policy. One role often contradicts the other, and there is no better place to see the results of this dichotomy than in trade policy. Indeed, the existence of loopholes in the application of

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international trade agreements to national government procurement policies indicates how complicated – and how political – this issue area remains. Trade policy, particularly concerning government procurement, is inherently a political area in which national and subnational governments seek to pay back their most ardent supporters. Trade policy is caught in the nexus between law and politics; as former House Speaker Thomas P. (Tip) O’Neill famously said, “all politics is local.” Related to the interlocking nature of trade policy, politics, and the local involved in government procurement, Steven McGuire notes that “the type of firm involved in trade policy began to change by the 1980s.”3 Citing Michael Hart, McGuire notes that mostly through the 1970s (i.e., until the Tokyo Round of 1973–1979), most firms involved in international trade were export-oriented, and there was a relatively clear line between international and domestic trade politics.4 Hart and McGuire both argue that through the 1970s, states were usually able to pursue a wide range of domestic policies without getting dragged into a gatt dispute. It cannot be assumed that national governments were not acting in a protectionist manner; government procurement has always been problematic in that area, according to Sahaydachny and Wallace.5 The rise of multinational corporations in the service industry and “the emergence of sectors where intellectual property, rather than goods, was the key competitive component, changed the trade landscape.”6 By their very nature, the types of exchanges in which the newer firms dealt emphasized the need for domestic protection for their products, leading to a linkage of the domestic and the international in trade policy. McGuire also cites Dymond and Hart’s characterization of the gatt trading system from 1947 to 1994 as enforcing “negative” actions on the part of states, whereby states were primarily committed to treating foreign and domestic firms in the same manner (the “most favored nation” principle).7 In this framework, states were constrained from taking trade-distorting actions (and in cases where they were pursuing distortions, such as in preferential procurement, there were no gatt procedures addressing this issue until the end of the 1970s). Dymond and Hart characterize the wto trade framework, in effect since 1 January 1995, as “post-modern” in that trade policy was an area in which many national government decisions (such as environmental or health protection) could be implicated by international firms as “trade distorting” and become fodder for a wto dispute. Given increasingly complicated types of economic activity, such as banking and telecommunications services involved in trade, and the ever-expanding international market, it was inevitable that more and more national policy questions would go before wto dispute panels. Dymond and Hart’s characterization of the move from the gatt framework of “negative” national actions to the “post-modern” (or “positive”) incentive for national governments to act under the wto is

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important to our understanding of the centrally political and protectionist nature of government procurement agreements, as governed by the wto and nafta. Their succinct portrayal of the different incentive systems of the gatt versus wto is helpful. In the former, the “negative” incentive system simply required national governments to stop doing something that irritated trading partners. In the wto “positive” system of rule-making, “nations actively adopt new policies to facilitate trade liberalization.”8 As McGuire further notes, the “widespread perception that rival firms benefit from government support shapes firms’ policy preferences in favor of a complex mix of deregulation, state intervention and outright protectionism.”9 While protectionism certainly existed in the gatt years from 1947 to 1994, it was difficult to turn national trade policy into international issues. Since 1995, with the new and different types of economic activity regulated by the wto, the door has been opened for international trade partners to accuse other nations of undertaking protectionist acts. This is the state in which we find the Canada-US relationship since nafta in 1994 and the wto in 1995. It is important to note some key differences between the United States and Canada regarding government procurement policy provisions in international trade agreements. The first is that in Canada, the articulation of procurement policy is an administrative responsibility. Federal departments such as Public Works and Government Services Canada, Treasury Board, and the Canadian International Trade Tribunal (citt) (the latter established by nafta), have jurisdictional authority over the national “Canadian Content Premium Policy.”10 The Departments of Finance and Foreign Affairs and International Trade also play a role in negotiating procurement policy vis-à-vis wto and nafta agreements. This arrangement still allows for political considerations to affect procurement policy. Sahaydachny and Wallace note that “in a number of countries following the United Kingdom’s … administrative law approach … it has been more difficult to obtain tighter enforcement of procurement rules and proper practices in a modern context.”11 They also state that difficulties with the administrative approach “have arisen in particular where there has not been a sufficiently strong auditing body or parliamentary oversight.”12 As will be seen later in the discussion of current problems of Canadian procurement policy, there have been some high-profile shortcomings to the Canadian administrative procedure for procurement oversight. In the United States, procurement policy is mostly legislatively formulated, and thus mainly belongs to Congress. With respect to foreign policy, the US Senate has constitutionally been given the final role in treaty ratification. Thus, political factors to which legislatures must respond are built into the processes of procurement and trade. These factors are often publicly acknowledged. The executive branch, including cabinet agencies and those

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within the Executive Office of the President (such as the US Trade Representative), also have legally designated roles to play in negotiating treaties. As with all policy relationships in the US system, there is a constant system of checks and balances between the legislative and executive branches. Those checks belonging to Congress include its authority over “interstate” (and international) commerce, the power to tax and spend, and the responsibility to make public contracts through the Contract Clause. The Executive Office of the President (analogous to the Privy Council Office) also contains the Office of Management and Budget (omb), which has jurisdiction over the administration of government contracts such as those included in the 2009 stimulus legislation. Finally, the International Trade Commission, an independent agency, exists to “give advice” to both the president and the Congress on trade matters such as unfair competition and possible remedies.13 The role of federalism in trade policy also differs in the two countries. In the United States, a series of Supreme Court cases has upheld the division of powers, with Congress controlling interstate and international commerce, and states covering commerce only within their own borders. In Canada, the constitutional division of powers over trade differs considerably, and allows provinces to work to increase their trade flows with other countries by establishing provincial trade offices abroad. However, provinces cannot represent the Canadian federal position abroad. Since the ratification of the US Constitution in 1791, judicial interpretation of the national supremacy clause in Article vi has said that no state law may contradict national law, the Constitution, or treaties. On the one hand, it can be argued that states are much more dependent on the federal government to negotiate foreign economic relationships on their behalf than is the case in Canada. On the other hand, it also means that the US federal government can distribute stimulus money to identified state and municipal projects on a more direct, streamlined basis than can be done in Canada, which has, for example, parallel systems of laws in place on foreign economic relations and on labor policy, two areas governed by national economic stimulus legislation. Finally, given the different relative weights of the United States and Canada in the global economy, we know that trade with the United States matters much more to Canada as a percentage of gdp than Canada’s contribution to the US gdp. The Department of Foreign Affairs and International Trade states that about 25 percent of Canada’s gdp is represented by export of goods and services to the United States. The US Department of Commerce reports that the United States depends on exports for 12 percent of its gdp; exports to Canada account for one-fifth of that percentage.14 Overall, government procurement generally represents between 10 and 15 percent of a nation’s gdp, with the government representing the largest purchaser of goods and services in most jurisdictions.

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It is thus not difficult to appreciate that preserving what looks like a good trading relationship is much more important to Canada. Conversely, the US policy process on trade, including its national government procurement policies, is much more overtly political, including specified roles for Congress at every step of the way. One should not conclude that Canadian procurement relationships are not politicized; it may just be harder to find and highlight the politics.

p r o c u r e m e n t p o l i c y: w h at ’ s c o v e r e d a n d w h at ’ s n o t u n d e r n a f ta a n d t h e w t o Canada As noted by Trebilcock and Howse, nafta improved the previous language on government procurement found in the Canada-US fta of 1989 and the Tokyo Round (1973–1979). nafta’s implementation in 1994 coincided with the last throes of the Uruguay Round (1986–1995), after which the wto was built onto the gatt infrastructure. The Government Procurement Agreement (gpa) was negotiated during the Uruguay Round, as was the wto agreement. Both the wto enabling document and the gpa were signed in 1994 in Marrakesh.15 Only industrialized countries signed on to the gpa plurilateral and only signatory countries can take actions against each other. The procurement language adopted in the gpa was essentially repeated from the language of nafta’s Chapter 10; Trebilcock and Howse note that the 1996 gpa “largely had the effect of harmonizing the gatt code with the nafta Agreement on Government Procurement.”16 The nafta agreement and the gpa thus closed gatt 1979 government procurement loopholes on construction and service contracts, two of the largest areas for government spending. The new language also forbade previous practices of “offset requirements,” including related deal-making, which governments had essentially extorted from contractors. It also led to the establishment of effective bid challenge procedures17 that were mandatory, “by which aggrieved foreign suppliers may challenge alleged breaches of the Agreement directly.”18 However, if the aggrieved bidder wins, the compensation awarded may be as low as the coverage of bid tender preparation costs, which does not constitute a strong incentive for other states to issue challenges. The newly expansionist language of nafta and the 1996 gpa also included contracting by government enterprises. The thresholds for triggering a competitive bidding process in the newly covered sectors were set fairly high, at US$6.5 million for construction, and US$8 million for “government entities” buying construction services.19 The monetary thresholds are adjusted over time.

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The gpa (and nafta Chapter 10) contains “positive lists” regarding services and construction to be contracted, and only the entities covered are considered included. The wto reports an estimated tenfold increase in the value of government procurement covered by the newer gpa of 1996.20 The main components of the strengthened wto 1996 gpa included all aspects of the procurement process to favor transparency and fairness, setting up “minimum procedural standards in the selection process,” which include “using objective, performance-based and non-discriminatory technical specifications; use of non-discriminatory criteria for assessment of essential qualification; using open tendering procedures as a norm; when using selective tendering, using only competitive solicitation procedures; giving minimum time frames for tender submission; using the required contents and forms of transmission for tender solicitation documents, using standard procedures for the submission, receipt and opening of tenders and awarding of contracts; dealing with information on outcome of procurement proceedings, and adhering to standard bid challenge procedures.” (gpa Articles 6– 20, cited in Sahaydachny and Wallace, 465). Canada also excluded the following in nafta and the gpa according to Kukucha: research and development, health and social services, utilities, communications, education and training, financial services, and “activities related to the delegation of government services to private corporations.”21 More importantly, Kukucha observes that “unlike other signatories, Canada did not grant foreign parties equal status with domestic suppliers when it came to bids for government procurement contracts.”22 The federal negotiators also excluded municipal, regional, and provincial governments from the gpa Code. As Kukucha states, “Canada is not able to bid on government contracts in the jurisdictions of other signatories.” States and provinces may make “side agreements” with each other outside the gpa.23 Between these exclusions, and the fact that the provinces were excluded from nafta and the gpa procurement sections, much of Canadian government procurement remained off-limits to international competition. Kukucha adds, however, that provinces and states are able to pursue agreements individually. nafta and the gtp also allow exemptions to the covered entities in the cases of “national security, defense or safety.” Article xxiii of the gpa notes: 1. Nothing in this Agreement shall be construed to prevent any Party from taking any action or not disclosing any information which it considers necessary for the protection of its essential security interests relating to the procurement of arms, ammunition or war materials, or to procurement indispensable for national security or for national defence purposes.

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2. Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent any Party from imposing or enforcing measures: necessary to protect public morals, order or safety, human, animal or plant life or health or intellectual property; or relating to the products or services of handicapped persons, of philanthropic institutions or of prison labour.24 States can change their list of covered entities on the gpa Appendix at will. In the event that potential major changes to the framework are requested by a state, the wto Committee on Government Procurement (established by the 1996 agreement) will get involved.25 Finally, at the same time the Uruguay Round was concluded in 1994, Canadian provincial finance ministers signed the Agreement on Internal Trade (ait), which took effect 1 July 1995. The language in Chapter 5 on government procurement is similar to Canada’s language in nafta and the gpa regarding government procurement: Governments are not permitted to discriminate against suppliers of another province or territory. This includes means such as local price preferences, biased technical specifications, unfair registration requirements or unreasonable time constraints. Governments must make opportunities known to suppliers through the use of an electronic tendering system, advertising in daily newspapers or the use of source lists. These must be accessible to all Canadian suppliers.26 A comparison of the covered entities and thresholds in the ait, nafta, and gpa of 1996 is listed in appendix I to this chapter. The table comes from the wto’s most recent Canadian Trade Policy Review in March 2007.27 The fundamental notion of the co-existence of national and subnational procurement policy exemptions and multilateral trading agreements (or multi-party in the case of the ait) is that one can “have one’s cake and eat it too.” As we all know, this aphorism is true for a successfully re-elected politician. The degree to which the players in the wto, particularly those bound by the 1996 gpa, know that the current system works for them in certain ways is shown in the following example. While the wto Committee on Government Procurement has been working with member countries to strengthen the gpa since 1996, a question has arisen regarding countries wanting to accede to the gpa, particularly those with large state sectors, such as China. A strengthened gpa had been formulated among wto partners to be put in place in 2007, but China wished to accede to the gpa under the “old” 1996

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rules rather than the strengthened 2007 version. Each round of tightening of governments’ wiggle-room on procurement, as found in the 1979 and 1996 gpa s and the newest agreement not yet in place, is viewed with suspicion and resistance by countries not yet in the “gpa club.” As for China, trade scholar Ping Wang has noted that, “there is no sign that the negotiations can be concluded within 2009.”28 United States The 1996 wto gpa set out to open up as much government procurement as possible to international competition; it was designed to make laws, regulations, procedures and practices regarding government procurement more transparent and to ensure they “do not protect domestic products or suppliers, or discriminate against foreign products or suppliers.”29 The current version of the gpa extended coverage also to services, including construction services, and procurement at the subnational level (states, provinces, departments, prefectures) as well as procurement by public utilities. 30 The gpa is to date the only legally binding agreement in the wto focusing on the subject of government procurement. The gpa is based on a system of affirmative commitments – parties are bound only to the extent that they have affirmatively agreed to subject particular procurement opportunities to the gpa rules. Commitments made by each party to the gpa are listed in an appendix to the agreement, which contains annexes that identify the party’s central government entities, local government entities, and other public entities that the party commits to be bound by the gpa. The United States submitted to the World Trade Organization Committee on Government Procurement the following list of its laws and regulations relating to federal government procurement: • The Uruguay Round Agreements Act (1994) approves trade agreements resulting from the negotiations • The Trade Agreements Act of 1979, as amended, implements US obligations under the gpa and authorizes the president to waive the application of any discriminatory government procurement laws for all procurements subject to the gpa • Federal Acquisition Regulation, in particular Part 25, which specifies that the restrictions of the Buy American Act do not apply to procurements that are subject to the gpa • Armed Services Procurement Act of 1947, the precursor to the Federal Acquisition Regulation • Federal Property and Administrative Services Act, which established the General Services Administration

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• The Office of Federal Procurement Policy Act of 1949, authorizes the Office of Federal Procurement Policy to provide overall direction for governmentwide procurement policies, regulations and procedures and to promote economy, efficiency, and effectiveness in acquisition processes31 32 In the United States, 37 states have agreed to procure (generally for executive branch agencies) in accordance with the provisions of the gpa beyond the threshold of 355,000 Special Drawing Rights (sdr) (approximately US$565,000) for supplies and services and 5 million sdr 33 (approximately US$8 million) for construction services. State government procurement in the United States is governed by the laws of the individual states concerned. The remaining states and the District of Columbia are not bound by gpa restrictions. The gpa appendix also includes annexes that identify a positive and negative list of the types of services, as well as the types of construction services, that will be covered by the party’s commitments.34 The US General Services Administration (gsa),35 the Department of Defense, and the National Aeronautics and Space Administration (nasa) maintain the Federal Acquisition Regulation (far), which codifies and publishes uniform policies and procedures for acquisition by all US executive agencies.36 gpa participants receiving waivers under far Section 25.402(a) for supplying goods and services to the United States are not subject to most Buy America requirements.37 The far is updated regularly as new trade agreements are signed and as new laws come into force. c a n a d a - U S f r e e tr a d e a g r e e m e n t As global trade negotiations progressed to include discussions of government procurement, Canada and the United States embarked in 1985 on their own bilateral free trade agreement, at Canada’s request. After two years of substantive negotiations, an agreement was reached in October 1987.38 There was little political opposition in the United States to the fta; few Americans were aware their government was pursuing free trade with Canada. Chapter 13 of the fta was dedicated to government procurement; it outlined some generalities on the benefits of the liberalization of procurement policies, procedural obligations, and a desire to continue negotiations. The bulk of the chapter covered entities in both governments to be bound by the agreement, as well as a list of equipment subject to the free trade provisions (as well as certain exceptions). nafta nafta’s Chapter 10 on government procurement established contract thresholds for federal government entities, enterprises, and state and provincial entities (listed in amended annexes to the agreement, including 53 agencies of the US government), tendering procedures, and challenges to bids.

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The agreement’s annexes also outline in detail procurement thresholds for various government entities and goods and services and construction services. Trade negotiators were aware that for political reasons the agreement would be interpreted to favor domestic sources, and they were careful to add specific language to curtail potential abuses. Chapter 10 specifically and tersely spells out that governments may not structure any procurement contract in order to avoid the procurement obligations of Chapter 10.39 Additionally, the chapter was firm in stating that no contracting entity may select a valuation method or divide a procurement requirement into separate contracts to avoid obligations of the chapter.40 National treatment is discussed in tendering procedures. Chapter 10 left some areas of government procurement protected, notably national security interests relating to the procurement of defense and national security materials. The chapter also permitted the three parties to adopt measures to protect public morals, order, and safety; human, animal, or plant life or health; intellectual property; or relating to goods or services of handicapped persons, of philanthropic institutions, or of prison labor.41

t h e t h i r d wav e o f p r o c u r e m e n t p o l i c i e s i n c a n a d a a n d t h e u n i t e d s tat e s : continuing protectionist impulses Canada In many ways, the 1996 wto Agreement on Government Procurement contained “baby steps” toward improving the issue of government procurement in an international framework. First, the agreement is still only a voluntary club of like-minded members, not a multilateral framework like the rest of the wto; the wto agreement of 1996 only added eight more countries to the gpa.42 Trebilcock and Howse note that the “numerous derogations and the adoption of a reciprocity rule” often mean that parties will retaliate against each other by refusing to open up a sector or level of procurement if the other country in question does not.43 For example, the Canadian anxiety over “Buy American” legislation to include only US-made steel under the arra of 2009 seemed disproportionate, since Canada has never included steel in its listed areas of government procurement policy liberalization under nafta or the gpa. This is also true for coal and public utilities.44 The perennial question of whether the “glass is half full or empty” is found in the following observations on steel trade between the United States and Canada a few days apart in early 2009. While on one hand, it is correct to note that “Canada exported more than $11 billion worth of steel to the United States in 2007, it is equally true that only a very small amount of structural steel used in buildings, bridges, and other products is

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made in Canada.”45 Therefore, one could argue that worries over the exclusion of Canadian-made steel from short-term US infrastructure projects in the arra were vastly overstated. Somewhat unusually, the Harper government paid attention to government procurement under the 2006 Accountability Act. In Canada, legislative provisions on this topic are much more rare than in the US and to the extent they happen are typically framed to entrench administrative changes to the wto gpa. Through the 2006 legislation, the federal government established a new Government Procurement Ombudsman to oversee the awarding of government contracts. The Act contains an important set of procedures, the “Advanced Contract Award Notice” (acan s), for specified circumstances under which bids can be awarded in a non-competitive process, i.e. “solelysourced” to a “pre-identified bidder.” According to earlier rules established in the 1990s,“acan s are to be used for government contracts for goods with value under $25,000 or services under $100,000,” which have been posted for 15 days on the government’s electronic bidding system and which meet one of the three exemption criteria also contained in Canada’s legislation concerning gpa codes. These include national emergency or national security, or if there is proof that only one supplier can do the job.46 The Office of the federal Procurement Ombudsman was formed in 2007 as an independent agency. The first holder of that office, a long-term member of the Auditor General’s office, was appointed in May 2008.47 Many criticisms have already been noted by the Procurement Ombudsman and are listed on the agency’s website, including the statement that tenders (bidders) for government contracts do not feel that the process is fair, transparent, advertised for the length required, and that it is arbitrary. Government departments post criticism as well.48 A very public critique made by the Ombudsman was that “the federal government should close loopholes that allowed more than $1.7 billion to be handed out over three years to preferred suppliers without competition.”49 Most of these problems arose by wrongly applying “sole source” rules to contracts that were worth considerably more than the established ceilings. The recession-based response of the Harper government has been to try to preserve Canadian firms’ access to the US subnational procurement market by attempting to change the Canadian negotiating strategy. For the first time, a suggestion has been made to the United States that Canada would be willing to open up subnational procurement in exchange for a lessening of the Buy American provisions.50 This proposal remains under consideration in Washington, although it, with most of the bilateral agenda, has taken a back seat to health-care negotiations. The gpa is flexible in that goods and services can be added to the list of covered entities if two states agree, unless a third party objects, in which case the dispute goes to the wto. There are examples where provinces, which are not

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signatories to the gpa agreement, have negotiated independently with US states on procurement. One example was in New York State, which ran an “I Love ny” campaign in the 1990s and awarded an Ontario company the contract to produce the tourist brochures.51 In response, the state legislature passed a bill in 1999 enabling it to designate “foreign sourced” contracts as “discriminatory.” Ontario responded by opening its procurement policies in this sector (and Quebec in certain areas as well), enabling them to be removed from New York’s “bad” list. Kukucha notes that Quebec and New York eventually committed to working on further consultative mechanisms and that Ontario later “committed to collaborating with New York State on transportation infrastructure, environmental, natural resource, and job-creation programs.”52 It would seem that when there is political incentive to make foreign procurement work (i.e. more money to be gained perhaps by cooperating with each other than not), provinces and states can indeed work together. Interestingly, though, according to both the Canadian International Trade Tribunal and the wto “Government Procurement Gateway,” most of the challenges to Canadian procurement policy come from within Canada itself. Looking simply at the 61 challenges reviewed by the Canadian International Trade Tribunal in 2009, more than half were dropped when the tribunal either dismissed the case outright or “decided not to proceed with further action.” In cases where awards were given, in response to a system designed to measure the “complexity of the process” undertaken by the complaining party and reward it proportionately, most awards were in the area of $1,000 to $2,500.53 The other factor to note is that many of the companies appearing on the wto/ citt lists are “repeat players” from one year to the next, indicating that they can afford to mount challenges and wait for them to be heard. Government procurement is contentious. Governments and the private sector can and do cross permissible legal boundaries, as was seen in Montreal and Quebec in 2009. Improper construction contracting procedures of several years’ standing were revealed at the municipal level in Montreal, as was an illegally sole-sourced contract for water meters. While the latter likely was not subject to the ait since public utilities are exempt, the water meter contract violated provincial law. Similarly, the construction contracts violated provincial procurement and election laws, since companies are not allowed to donate to candidates. The scandals reached the assistant to mayor Gérald Tremblay of the Union Montreal Party, the opposition candidate for mayor, Benoît Labonté, the Montreal City Manager, and up to the provincial Assemblée. There were numerous ramifications, including the cancellation of the largest public-works contract “ever to be awarded by the city,” the $355 million watermeter contract, to Simard-Beaudry, part of the consortium known as “GENIeau”.54 Consistent and serious violations of the provincial tendering code were also noted whereby a series of companies known as the “Fabulous 14” had been given sole-sourced contracts in the amounts above the permissible

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threshold for such contracts. Finally, the Quebec Auditor General, Renaud Lachance, stated in his report that Quebec was paying more than one-third too much for its construction and public works contracts, and that “the federal Competition Bureau suggests collusion in the construction industry can jack up prices 20 percent and more.”55 United States st imulus bil l of 2009 “Buy American” has long been a fixture of American trade policy and tends to gain support when the economy is weak and protectionist sentiment runs high. The Buy America Act of 1933 remains the basis from which procurement provisions in new trade agreements and legislation are written.56 Although the 1933 act has been amended several times and parts of the act have been superseded by more specific requirements of subsequent trade agreements, the Buy America Act still guides much of US federal procurement. In an effort to stimulate the moribund US economy and save or create jobs that had been disappearing as the US economy grew worse in 2008–9, the US Congress passed the “American Recovery and Reinvestment Act of 2009.” The bill was signed by President Obama and became law on 17 February 2009, committing $787 billion over the 2009–10 period. The act includes measures to modernize aging infrastructure, “enhance energy independence, expand educational opportunities, preserve and improve affordable health care, provide tax relief, and protect those in greatest need.”57 Most of the funds will be distributed by state and local authorities. The act includes two sections dealing with “Buy American” provisions. Section 604 requires the US Department of Homeland Security to procure USmanufactured uniforms and other textile products, subject to certain exceptions. Section 1605 requires that public works projects funded by the act use only US-produced iron and steel and manufactured goods, with some exceptions relating to cost, availability, and the “public interest.” Both sections require that the Buy American provisions be applied “in a manner consistent with US obligations under international agreements.”58 The bill was not specifically aimed at Canada, though Canada has been the most vocal of the United States’ international trade partners with respect to the passage of the bill. Industries affected by this section, as well as legal scholars, law firms, and legislators are wrestling with the meaning of the various terms of this section, which is to be interpreted in light of previous statutes, going back to the Buy America Act of 1933, related executive orders, and implementing legislation.59 “The provision may reassure constituencies that are more protectionist or suspicious of the politics of the new Obama administration, such as organized labor, those in Congress opposed to further trade liberalization, or sectors with more international competitors.”60

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While some of arra’s provisions are specifically new, the provisions continue down a well-worn path. Government procurement is part of the larger tension between trade and protectionism that has been part of the history of the United States. So while the president and the US trade representative may be seeking to expand trade, opening the world to US exports, the Congress, ever protective of local interests, is much more concerned about local jobs and wary of foreign products that may supplant demand for the American-made. Tension between what the United States proposes on the international level and domestic political issues is endemic to the trade issue. There is continual friction between domestic trade laws and international rules agreed to by the United States under the wto, particularly when certain industries are facing competition from abroad or during an economic downturn.61 Those who see the benefits of freer trade never cease to run into the anti-trade protectionists in the legislature. Although the United States has the largest economy in the world and the wto/gatt system is inspired and shaped by the United States, the route to those institutions has not been an easy legislative ride.62

c o n c lu s i o n s This chapter has examined the different postures taken by the United States and Canada towards each other’s procurement policies during tough economic times. The stretched economies have been a catalyst for each country to point the finger at the other, rather than observing that the procurement chapters of nafta and the wto are inherently limited. Domestic political pressures in the United States brought on the stimulus package, yet during the debate surrounding the Recovery Act, President Obama publicly acknowledged that the act might be seen as protectionist and could incite other countries to reciprocate. Congress did revise the legislation to include a stipulation that the Buy American provision “be applied in a manner consistent with United States obligations under international agreements.”63 This statement was only vaguely reassuring since Buy American was already consistent with the loopholes under the wto gpa. Since changes to the Canadian procurement lists of included and excluded entities typically do not come about through national legislation but rather as amendments to the wto gpa, Canada has not had a legislative response to the United States’ Recovery Act. Instead, the Canadian strategy was to start mentioning the possibility of opening up subnational procurement to US firms. What this discussion has shown is that procurement policy has always been a straight line between the “all politics is local” maxim and the claim of policymakers to be national figures. At the same time, national policymakers must be able to claim to the world that they represent the country on the world stage. While the international trading system under gatt began in 1947, government procurement was not included in agreements until 1979,

143 Public Procurement Politics and Policy

which was the first step towards rationalizing the different imperatives of international trade liberalization with the need for protectionism by national and subnational governments for electoral gain. As with other trade-distorting policies such as anti-dumping, countervailing duties, and rules of origin, getting states to scale back on protectionism to fulfill their international trading commitments has always been a delicate balancing act. As the international economy changed during the 1980s and 1990s, with the rise of more multinationals, particularly in the services sector, a “push-pull” set of behaviors between state and international imperatives emerged even more strongly. A number of industries remain protected in both countries by loopholes that provide domestic political cover and at the same time exclude the industries from liberalized international trading rules. Different types of states with differing mixes of natural resources, manufacturing, services and the state sector, and different sizes of gdp, have shown varied ways of “having their cake and eating it too” between preferential treatment for domestic producers and maintaining their membership in the 1996 wto gpa (and nafta). As was shown by Kukucha, the Canadian way of dealing with this tension was to specifically embed in the agreement that it was not going to grant “mfn” status to other nations’ goods and services under the gpa, a rather blatant contradiction of wto principles. Similarly, Canada exempted all levels of government below the national as regards procurement, continuing this exemption from the fta of 1989 through the gpa in 2009.64 The US strategy has been one of passing “Buy American” legislation, particularly regarding subnational infrastructure contracts. While the United States did include state governments in the gpa, it has used the “reciprocity” rule alluded to by Trebilcock and Howse to deny Canadian companies the right to bid on government procurement below the national level.65 As we also know, the fact that provinces are exempted under the Canadian implementing legislation for the gpa means that provinces can in fact continue to cut their own deals with states, such as was shown in the New York State “I Love ny” campaign in the 1990s. In addition to Canadian and US policy differences giving themselves maneuvering room between international treaties and the demands of domestic politics, we know that the two countries also differ on institutional implementing frameworks. Canada has followed the British approach of administrative implementation, which can prove ineffective. The addition of a “Procurement Ombudsman” to the national structure by the Harper government since 2007 may go some way toward adding teeth towards Canadian procurement policies. In the United States, 535 members of Congress (House and Senate) can potentially have their fingers in the procurement pie, creating an irresistible temptation to “lard up” the budget through Appropriations riders. More realistically, not every member of Congress has an equal shot at such earmarks since only those with good access to the House and Senate Appropriations

144 Melissa Haussman and David Biette

committees can play that game. The bottom line is that such practices show that the US government is inconsistent on its trade policies both at home and abroad. Interestingly, the paradox for future recommendations could be described, as per Harper government procurement negotiation responses to the recession, as one of Canada needing to open up its procurement policies more by including provincial and municipal contracts in its gpa schedule. However, according to some trade specialists, the US economy has historically “been the most open in the world” and needs to implement reciprocity rules more toughly, so as to protect the economy.66 Lovett essentially states that the United States needs to get on the stick more and recognize that “all too often, US trade negotiators failed to grasp the degree of teamwork, support and nurturing supplied by foreign governments for their significant industries, companies, or entrepreneurs abroad … thus, government procurement practices abroad still favor domestic companies.”67 Protection of domestic industries through restrictions of government procurement is easy to implement in difficult economic times, and nearly impossible to remove when things improve. Canada and the United States continue to promote liberalization of trade internationally, being careful to carve out appropriate loopholes to appease domestic constituencies. Each has cake, and eats it, too.

Appendix I Agreements Covering Government Procurement Agreement

Coverage, exclusions, and selected features

Thresholds

ait (Chapter 5)

Equal market access opportunity to procurement of “Canadian” suppliers (meaning those that have a place of business in Canada, as defined under Article 518 of the ait) Covers 97 federal government departments and agencies, 10 provincial governments and two territories (excludes Nunavat) Also covers mash entities (except in Yukon) Covers 38 of the 43 federal crown corporations Does not apply to procurement related to cultural industries or aboriginal culture For procurement not subject to the gpa or nafta: tenders may be limited to Canadian goods or suppliers; also a preference (up to 10%) for Canadian value added may be required Provinces may have their own procurement agencies, thresholds and policies under the general framework of the ait

Federal departments and Agencies Goods: Can$25,000 Services and construction: Can$100,000 Federal Crown Corporations Goods and services: Can$500,000 Construction: Can$5,000,000 mash entities Goods and services: Can$100,000 Construction: Can$250,000

(Annex 502.3 for entities of a commercial or industrial nature or that have been granted exclusive rights (Crown Annex); Annex 502.4 for the MASH sectora nafta Equal market access opportunity to procurement subject to (Chapter 10) thresholds and exclusions Covers 100 Federal government departments and agencies and 11 of the 43 crown corporations Excludes procurement by provinces and territories A number of specific goods and services are excluded (similar to gpa below)

Federal departments and agencies Goods: Can$32,400 (Canada-United States); Can$84,000 (Canada-Mexico) Services: Can$84,000 Construction: Can$10,900,000 Crown Corporations Goods and Services: Can$420,000 Construction: Can$13,400,000

wto gpa

Applies only to federal procurement and does not include subfederal procurement, mash entities or crown corporations

Goods and services: sdr 130,000 (Can$245,000)c

In addition to general exceptions, a number of specific goods and services are excludedb

Construction contracts: sdr 5,000,000 (Can$9,400,000)c

Canada also extends the benefits of the gpa to least developed countries a mash entities include: municipalities, academic institutions, social service agencies and hospitals. Not all of the provisions of the ait apply to mash entities (permissible discrimination is treated in part F.2 of Annex 502.4 of the ait). Provisions of the Annex may also not apply to procurements under certain circumstances (Parts I and L of Annex 502.4) or for economic development purposes under exceptional circumstances (Part K of Annex 502.4). b These include: shipbuilding and repair; urban rail and transportation components; transportation services; some communications, detection and coherent radiation equipment; oil purchases related to any strategic reserve requirement; purchases made in support of safeguarding of nuclear materials; dredging work; and some office equipment and special industry machinery for the Departments of Transport, Communications, and Fisheries and Oceans; research and development; utilities; and health and social, financial, communications, photographic, mapping, printing and publications services. c Threshold values in national currency for 2006-07 as notified by the Canadian authorities to the wto (wto document GPA/W/295/ Add.3). Source: wto Secretariat; and the Canadian authorities.

146 Melissa Haussman and David Biette Appendix ii citt Procurement Review Activities (Fiscal years 2003–06) 2003/04

2004/05

2005/06

number of complaints Carried over from previous fiscal year Received in fiscal year Remanded Total

15 83 3 101

11 62 1 74

8 58 1 67

cases resolved Withdrawn or resolved by the parties Abandoned while filing Subtotal

8 n.a. 8

6 3 9

4 2 6

inquiries not initiated Lack of jurisdiction Late or improper filing No valid basis/no reasonable indication of a breach/premature Subtotal

7 14 27 48

2 16 20 38

3 14 20 37

inquiry results Dismissed Complaint not valid Complaint valid or valid in part Remand decisions Subtotal Outstanding at end of fiscal year

3 14 15 2 34 11

n.a. 6 10 3 19 8

3 4 10 n.a. 17 7

n.a. Not applicable. Source: citt Annual Report. Viewed at: http://www.citt-tcce.gc.ca/publicat/index_e.asp#4.

notes 1 From Michael Trebilcock and Robert Howse, The Regulation of International Trade, 3rd ed (New York: Routledge, 2005), 293; exemptions to the Code included first of all that only about 20 countries subscribed to it; national defence, one of the largest areas of government procurement, was excluded; it only applied, as of 1979, to government contracts covering nearly US$200,000; many government departments could exclude themselves from the list, and it did not include service contracts. 2 Terence Corcoran, “Say ‘No’ to Buy Canadian,” Financial (National) Post, 9 June 2009. 3 Steven McGuire, “Firms and Governments in International Trade,” in Brian Hocking and Steven McGuire, eds., Trade Politics (London: Routledge, 2004), 2nd ed., 280. 4 Michael Hart, A Trading Nation: Canadian Trade Policy from Colonialization to Globalization (Vancouver: ubc Press, 2002), 432, cited in McGuire, 280. 5 Simeon Sahaydachny and Don Wallace, Jr., “Opening Government Procurement Markets,” in Miguel Rodriquez Mendoza, Patrick Low, and Barbara Kotschwar, eds.,

147 Public Procurement Politics and Policy

6 7

8 9 10 11 12 13

14 15 16 17 18 19 20 21 22 23 24 25 26

27 28

29

30

31

Trade Rules in the Making: Challenges in Regional and Multilateral Negotiations (Washington, dc: Brookings, 1999), 462. McGuire, 280. William Dymond and Michael Hart, “Post-modern Trade Policy: Reflections on the Challenges to Multilateral Trade Negotiations after Seattle,” Journal of World Trade 34 (2002): 22, cited in McGuire, 281. Dymond and Hart, 22, in McGuire, 281. McGuire, 281. Michael J. Trebilcock and Robert Howse, The Regulation of International Trade (London: Routledge, 2005), 3rd ed., 297. Sahaydachny and Miller, 474. Ibid., 474. www.usitc.gov. The International Trace Commission was established in 1916 as the US Tariff Commission. Its name and focus were changed to its current name by the 1974 Trade Act. www.buyAmerica.gov. The wto took effect on 1 January 1995, and the gpa on 1 January 1996. Trebilcock and Howse, 295. Trebilcock and Howse, 298. Ibid., 295. Ibid., 298. Sahaydachny and Wallace, 466. Christopher Kukucha, The Provinces and Canadian Foreign Trade Policy (Vancouver: ubc Press, 2008), 108. Ibid., 108. Ibid., 108. wto, Agreement on Government Procurement, Article xxiii. Trebilcock and Howse, 295. Industry Canada website, Government of Canada, www.ic.gc.ca, accessed 20 November 2009, concerning the Agreement on Internal Trade (ait), specifically Chapter 5, “Government Procurement.” Accessed at www.wto.org, Government Procurement Gateway, Trade Policy Reviews (Canada, March 2007) 10 December 2009. Ping Wang, “China’s Accession to the wto Government Procurement AgreementChallenges and the Way Forward,” Journal of International Economic Law 12 (3), 10 September 2009, 666. World Trade Organization, “Understanding the wto: The Agreements: Plurilaterals: of minority interest.” http://www.wto.org/english/thewto_e/whatis_e/tif_e/ agrm10_e.htm. Accessed 23 November 2009. Members include Canada, the European Union’s member states, Hong Kong, Iceland, Israel, Japan, Korea, Liechtenstein, the Netherlands with respect to Aruba, Norway, Singapore, Switzerland, Chinese Taipei, and the United States. White House Office of Management and Budget, Office of Federal Procurement Policy. http://www.whitehouse.gov/omb/procurement_default/. Accessed 24 November 2009.

148 Melissa Haussman and David Biette 32 wto Committee on Government Procurement, Notification of National Implementing Legislation – Communications from the United States, wt/98-2803 (15 July 1998), 1–5. 33 International Monetary Fund Special Drawing Rights. As of 30 September 2009, 1 sdr = US$1.586570. 34 David Palmeter and Niall P. Meagher, “wto Issues Relating to US Restrictions on Participation in Iraq Reconstruction Contracts,” asil Highlights, December 2003. http:// www.asil.org/insigh123.cfm, accessed 23 November 2009. 35 The gsa was established by President Harry Truman on 1 July 1949 to streamline the administrative work of the US federal government. The Federal Acquisition Service is one of the largest agencies within the gsa and is the only source solely dedicated to procuring goods and services for US government. 36 World Trade Organization, Committee on Government Procurement. Notification of National Implementing Legislation and Summary of Legislation. gpa/23, 15 July 1998, p. 1. 37 World Trade Organization, Committee on Government Procurement. Review of National Implementing Legislation and Replies to the Questions from Canada and the European Community. gpa/50 15 June 2001, p. 1. 38 The negotiations had been given “fast track authority” by the US Congress whereby the executive could negotiate the agreement and the Congress could vote it up or down. Prime Minister Brian Mulroney and President Ronald Reagan signed the Free Trade Agreement on 2 January 1988. It entered into force on 1 January 1989. Foreign Affairs and International Trade Canada, “Canada-United States Free Trade Agreement (fta): Canada-US fta Fast Facts,” http://www.international.gc.ca/trade-agreementsaccords-commerciaux/agr-acc/fast-facts-US.aspx?lang=en. 39 nafta. Article 1001(4), Scope and Coverage 40 nafta, Article 1002(4), Valuation of Contracts 41 nafta, Article 1018: Exceptions. 42 Trebilcock and Howse, 295. 43 Ibid., 295. 44 wto Website, “Gateway to Government Procurement Policy,” Annexes 2 and 4 detailing Canada’s lists of included and excluded services in the gpa, www.wto.org, “Government Procurement,” accessed 10 October 2009. 45 John Ibbitson, “Global Trade Wars or Voter Revolt? Let Obama’s Difficult Decisions Begin,” The Globe and Mail, 30 January 2009, A1; Greg Keenan, “Canadian Steel Good Enough for Iraq, but not Bridges?” The Globe and Mail, 3 February 2009, A6. 46 Kathryn May, “Federal Contract Loopholes too Big: Watchdog,” Ottawa Citizen, 2 December 2009, A1, 8. 47 Office of the Procurement Ombudsman, http://opa-boa.gc.ca, accessed 11 December 2009. 48 http://opa-boa.gc.ca. 49 May, “Federal Contract Loopholes Too Big,” A1. 50 See Les Whittington, “Deal Close on Buy usa – With Strings,” Toronto Star, 4 December 2009, 4.

149 Public Procurement Politics and Policy 51 Christopher Kukucha, The Provinces and Canadian Foreign Trade Policy (Vancouver: ubc Press, 2008), 162. 52 Ibid., 162. 53 Canadian International Trade Tribunal, www.citt.gc.ca, “Government Procurement,” “Case Dispositions-2009,” accessed 5 December 2009. 54 “Montreal’s City Hall Run by Mafia-Like System: Ex-Opposition Leader,” www. CBCnews.ca, 22 October 2009, accessed 1 December 2009. 55 “Construction Firms Colluded to Boost Prices: Report,” www.CBCnews.ca, 15 October 2009; “Transport Ministers Must Resign over Contracting Issue: pq,” www. CBCnews.ca, 18 November 2009, and “Mayor Cancels Montreal’s $355M Water _Contract,” www.CBCnews.ca, September 22, 2009; all accessed 1 December 2009. 56 Joseph S. Smyth, “The Impact Of The Buy American Act On Program Managers – defense program managers,” Acquisition Review Quarterly, Summer 1999. Accessed at http://findarticles.com/p/articles/mi_m0JZX/is_3_6/ai_78177457/, 23 November 2009. 57 American Recovery and Reinvestment Act of 2009, General Services Administration. http://www.gsa.gov/Portal/gsa/ep/contentView.do?contentType=GSA_OVERVIEW&contentId=25761. 58 World Trade Organization, Committee on Government Procurement. Notification of National Implementing Legislation and Notification of the United States of the American Recovery and Reinvestment Act of 2009 and Implementing Measures Relating to Government Procurement Pursuant to Article xxiv:5(b) of the Agreement. gpa/98, 24 April 2009, 1–2. 59 41 usc. § 10a – 10d. 60 Susan M. Schmidt and Thamar Gonzalez-Kauffman, “Buy American: Domestic, International Policy Collide.” Law360, 25 September 2009. 61 “Our law, your law,” The Economist, 26 November 2002, pp. 20–25. 62 Daniel J. Ikenson, “A Protectionism Fling: Why Tariff Hikes and Other Trade Barriers Will Be Short-Lived” cato Center for Trade Policy Studies Free Trade Bulletin 37, March 12, 2009. http://www.cato.org/pub_display.php?pub_id=10651, Accessed 30 October 2009. 63 Ikenson, “A Protectionism Fling.” 64 Kukucha, 108. 65 Trebilcock and Howse, 295. 66 This is the argument of William Lovett in William Lovett, Alfred E. Eckes Jr., and Richard L. Brinkman, US Trade Policy: History, Theory and the wto, 2nd ed. (Armonk, ny: Sharpe, 2004), 139. 67 Ibid., 139.

8 The Auto Industry Bailout: Industrial Policy or Job-Saving Social Policy? c h r i s t o p h e r wa d d e l l

introduction This chapter examines how Ottawa negotiated the bailout of General Motors and Chrysler in 2008–09. For the Harper Conservative government, it was an intense fast moving multi-party process involving the departing Bush and new Obama Administrations in the US, the companies, the Government of Ontario, and the Canadian Auto Workers (caw). This analysis examines the key stages of negotiations and offers overall conclusions on the extent to which the process and decisions were an exercise in both industrial policy and job-saving social policy in the midst of a deep recession. Industrial policy in its older and current forms has been discussed in chapter 6 and so in some respects this chapter complements that analysis, with the important caveat that the auto industry has always been exceptional, as highlighted in other existing literature on its earlier place in industrial and trade policy.1 Four overall arguments are advanced. The first is that the auto bailout was social policy as much as industrial policy as it kept the companies in business despite talk as 2009 began of sudden collapse and closures that could devastate large parts of the economies and related employment in both countries. The second is that the joint response crafted by the federal and Ontario governments was a one-off approach dictated by expediency. Third, and in contrast, the federal government hopes to translate the unprecedented cooperation it enjoyed with the Obama administration on the auto sector into some degree of joint analysis and action that could both restructure manufacturing on a continent-wide basis and address potential trade irritants before they emerge.

151 The Auto Industry Bailout

Last but not least, despite the rescue there remains no ability for government to enforce any of the commitments made by the companies about production, research and development or investment should their revival not go well. The analysis proceeds in four sections. The first sets some of the immediate context for negotiations, including the core crucible of relations between the Harper government and President Barack Obama. The second then looks at how governments assessed the corporate plans put forward by gm and Chrysler and the key initial decisions that emerged. This is followed by an analysis of negotiations on related issues, including union contracts and pensions. The final section then considers the very unclear road ahead for both companies and offers tentative conclusions.

t h e i m m e d i at e c o n t e x t Sergio Marchionne repeated the refrain used by every political party that moves into government after an election. Chrysler was in worse shape than expected, the chief executive officer of Fiat Automobiles SpA told journalists at the Frankfurt auto show in September 2009. “There’s a whole pile of stuff that we didn’t see when we came, that we were not expecting,” he said. “Probably the single largest surprise to us was how little had happened in the past 24 months to get [Chrysler] competitive.”2 It is not that ironic that the corporate executive would use a political rationalization to describe the problems that may haunt his company’s takeover of a bankrupt Chrysler Corp. The financial rescue of both Chrysler and General Motors in the first half of 2009 by the US and Canadian governments was a US$60 billion political exercise. The immediate goal was to prevent at virtually any cost the rapid collapse of one or both companies rippling like falling dominoes through the manufacturing sector of both countries. Some predicted that would have a cataclysmic impact on workers, communities and whole states and provinces at a time when the North American and world economies were already reeling from a credit squeeze produced by an international series of apprehended bank failures. The Canadian and Ontario governments had a secondary goal – to preserve Canada’s approximately 20 per cent share of North American vehicle production when the prospect of a massive injection of capital from Washington into the two companies seemed likely to be matched by Congressional demands that it all be spent exclusively on protecting US jobs and manufacturing. While there was never much public support for an auto bailout, it was clear throughout late 2008 and early 2009 there was no appetite in the administrations of outgoing Republican President George W. Bush or incoming Democratic President Barack Obama for the sudden failure of either company. That sentiment was shared in Canada where Conservative Prime Minister Stephen Harper and Liberal Ontario premier Dalton McGuinty announced on 20 December 2008 they would work together to try to keep the

152 Christopher Waddell

car makers alive. The two governments agreed to provide interim loans to Chrysler Canada for $1 billion with gm Canada offered $3 billion3 to give both time to develop survival plans. It was an unexpected federal-provincial alliance. For months the two governments had been feuding. In March, federal Finance minister Jim Flaherty, himself a former Ontario finance minister, criticized the province for having high business taxes, suggesting Ontario was the last place any corporation would make a new business investment if it was concerned about taxes.4 In reply Ontario Finance Minister Dwight Duncan called Flaherty “an embarrassment to his government.”5 That sniping faded in the fall as both governments realized the breadth of the broader economic crisis they were suddenly facing. Any animosity at the political level was not matched at the top levels of the bureaucracies of the two governments. Ontario and Ottawa had been independently monitoring the increasingly precarious state of the car companies in the late fall. gm and Chrysler were quickly running out of money, victims of years of unsuccessful competition with Asian car makers and their dependence on fuel-guzzling models as oil prices shot through the roof in 2008 followed by the sales collapse triggered by the autumn’s expanding economic and credit crisis. Seeing this building, officials from Industry Canada had started discussions with the Bush administration about the auto sector. The December political decision that Canada had to try to save its share of Chrysler and gm production suddenly meant Ottawa and Ontario needed a plan and a process to implement it. Both emerged after difficult negotiations. The federal government proposed splitting the interim loans to gm and Chrysler 50–50 with Ontario but the province balked. It took a political deal between Harper and McGuinty to settle on a two-thirds-Ottawa – one-thirdOntario formula. The governments would give the companies until mid-February 2009 to present long-term survival plans that might justify additional financial support. That matched the US approach with interim loans provided by Congress. In exchange the companies had to provide Ottawa and Ontario with Canada-specific corporate and financial data. After operating for more than 40 years first under the Canada-US auto pact and then under Canada-US and North American free trade agreements, gm and Chrysler were completely integrated on a continental basis. The immediate challenge was carving out their Canadian activities so Ottawa and Ontario could determine what the governments should require in production and related commitments in exchange for a rescue package. Industry Canada and Ontario’s Economic Development ministry were the key departments involved and they soon established a federal-provincial deputy ministers steering committee to keep all those involved in both governments up to speed as analysis and discussions with the companies accelerated. The committee met at least weekly by video conference and included the

153 The Auto Industry Bailout

Finance departments of the two governments as well as Privy Council Office and provincial cabinet secretary’s representatives. Events were moving rapidly and the weekly briefings were essential for quick decision-making as the need required. A key early objective was to persuade the Obama administration that Canada should be a partner with the US in dealing with the auto makers. Seeking production guarantees, the Canadian governments pledged 20 per cent of the cost of whatever government rescue package would be offered. Prime Minister Harper successfully pressed the point that the auto industry was North American in scope and therefore required a North American solution when President Obama visited Ottawa on 19 February. That prime minister-president consensus on the way forward proved critical for Canada. The timing of the Harper-Obama meeting in Ottawa was ideal for those working on the bailouts. It came days after the two companies had filed restructuring plans with the US administration and a day before their Canadians subsidiaries had to deliver their own plans to Ottawa and Toronto. When the governments received those plans on 20 February 2009, they found the two companies proposing sharply different approaches and a much larger request for money than had been discussed to date – $10 billion. gm’s parent told the US government it needed $16 billion but promised that would be its last request for aid.6 In its detailed plan, gm Canada indicated there would be no further job cuts or plant closings7 but within five years the company would shut about one third of its 700 Canadian dealerships. It also wanted reductions in wage rates and benefits from its caw workforce. A day before presenting the plan gm had hinted at a media briefing that it also wanted Ontario to assume the company’s multi-billion dollar unfunded pension liability.8 That would become an issue between the two governments later in the negotiations. Instead of a detailed plan, Chrysler Canada President Reid Bigland almost cavalierly sent Ottawa a four-page letter saying there was no need for Canada to be given a specific separate proposal as the company’s Canadian and US operations were too integrated to be separated. He attached the 177–page plan its parent company had delivered to the US administration earlier that week. Federal Industry Minister Tony Clement was frustrated and unimpressed in telling ctv Question Period and Chrysler that it needed to do better. “If we’re talking about Canadian taxpayers dollars, we do want to have some specifics about what exactly is going to be going on in Canada. I think that message got through,” Clement said.9 Chrysler did respond with more details but it was the first of several times that the company acted as if it was confident that despite Clement’s bravado, Ottawa and Ontario really had no option but to cough up cash to keep Chrysler going.10 Government officials simply put Chrysler’s attitude down to management shortcomings as the company had been run into the ground by owner Cerberus Capital Management.

154 Christopher Waddell

t h e c o r p o r at e p l a n s a n d t h e k e y initial decisions Government attention now turned to assessing the corporate plans they had received, heading to a March 30 deadline to determine the fate of both gm and Chrysler. Canada and the US could accept the plans and give the companies the money they sought to continue operations. They could reject the plans, refuse to give the auto makers any more money and let Chrysler and gm live or die on their own or they could offer money with conditions. Assessing those options meant daily conversations between Ottawa and Washington with lots of talks as well between Ottawa and Toronto. The key contact in Washington for Canada became Ron Bloom, a former investment banker and adviser to the United Steelworkers, appointed by the president to oversee the auto bailout as an adviser to US Treasury Secretary Timothy Geithner. The fact that Bloom’s wife is Canadian, that he had worked closely with the Ontario government on the bankruptcy and reorganization of Stelco Inc. in 2005–06 and that he had often visited Canada gave Canadian officials an advantage in building the personal relationship vital for pushing Canada’s case and its participation in such an unprecedented and highpressure process. Although not stated at the time, the late February corporate plans were the first step in the managed bankruptcy of the two companies. On 23 February the Wall Street Journal reported that outside advisers to the US Treasury department were lining up $40 billion in debtor-in-possession financing for gm, anticipating a bankruptcy filing, while both companies continued to insist they could avoid it.11 A week later a published auditor’s report stated gm was on the road to bankruptcy followed first by stories sourced to insiders that gm was more open to a bankruptcy filing than previously thought and then a public denial from the company that it had softened its aversion to bankruptcy.12 While Chrysler’s ceo was telling employees the company would collapse by the end of March without $5 billion from the US government,13 as late as mid-March, General Motors ceo Rick Wagoner and auto task force leaders were all still publicly proclaiming they could avoid bankruptcy14 After Chrysler’s worldwide search for a savior came up empty, Italian carmaker Fiat, with its Italian-Canadian ceo Sergio Marchionne, began discussions with Chrysler about a non-cash transaction that would see Fiat take 35 percent of Chrysler in exchange for transferring Fiat’s small car and engine technology to Chrysler for North American production. The lack of any small cars among its products had crippled Chrysler as oil prices hit almost US$150 a barrel in 2008. Chrysler told the US government Fiat would also assume 35 per cent of Chrysler’s debt then quickly recanted in the face of a Fiat denial,15 further confirming the sense that Chrysler was

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poorly managed. The company also pushed its dealers to write to US Treasury Secretary Geithner to beg for more money for the company. By the third week of March the three governments had jointly made the key decisions. They believed that under the right conditions gm had a future, but without Fiat, Chrysler had none. That was the core of the 30 March Presidential task force report on the two companies – a devastating critique of both their past performance and future prospects. Before releasing it, the US government fired gm ceo Wagoner.16 After examining all aspects of gm’s operations – products, dealers, production, price, market share and international operations – the task force concluded that progress towards restructuring was far too slow and that the company’s plan was not viable. The task force called for substantially more action.17 Governments would provide gm with 60 days of working capital “to develop a more aggressive restructuring plan and a credible strategy to implement such a plan.”18 The task force view of Chrysler was much harsher. “Chrysler’s limited scale in an increasingly capital-intensive global business, the inferior quality of its existing product portfolio and its heavy truck mix leave the company poorly positioned. Chrysler’s plan to address these issues is based on overly optimistic assumptions yet are inconsistent with its current products and its resources.”19 The government prescription for Chrysler was tougher too – 30 days of working capital to conclude an agreement with Fiat that was accepted by all parties followed by up to $6 billion in additional support to help the partnership. “If an agreement is not reached, the government will not invest any additional taxpayer funds in Chrysler.”20 Canadian officials had no involvement in the decision to fire Wagoner nor any input into the writing of the Presidential task force reports but held their own 30 March news conferences, echoing Obama’s remarks in a cross-border communications offensive. Clement endorsed the US view that the Canadian aspects of the plans as submitted were insufficient as well to get additional government support without changes and repeated that in any final agreement Canada needed production guarantees. He also placed some constraints on the money Canada and Ontario would offer the companies. It could not be used to pay debts to the parent company, for back taxes (Chrysler Canada owed the federal government $500 million) or to cover unfunded pension liabilities. The money couldn’t be used for executive bonuses or golden parachutes for departing managers. Any transactions in excess of $125 million had to be reported to government and the governments required regular reports on restructuring plans and liquidity, production and revenue. Finally, foreshadowing what was going to happen, money could be used for debtor-in-possession financing if either or both companies went into voluntary bankruptcy. Chrysler Canada received $250 million immediately split by the governments twothird – one-third.

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The Industry minister also provided a rationale for his announcement, stating that the auto sector has 150,000 direct employees, another 340,000 indirect employees and is the country’s largest single manufacturing sector producing 14 percent of overall manufacturing output and 23 per cent of exports.21 With all that, gm would finally now use the $3 billion made available in December but wanted an additional $1 billion in short-term support and $7.5 billion in long-term assistance. The $250 million advanced to Chrysler was part of its December $1 billion and a $4 billion overall request for money.

m o r e b a r g a i n i n g : au t o wo r k e r s a n d r e l at e d i s s u e s The focus for Ontario and Ottawa was now on three separate sets of negotiations – bargaining with the Canadian subsidiaries of the two companies to determine how much money the governments would contribute to Chrysler and gm in exchange for production and other commitments; pressuring the Canadian Auto Workers to accept pay and benefits cuts to bring production costs at the two companies into line with those of foreign-owned non-union auto plants and continuing to work with the US government to protect Canadian interests in the rescue package, including bankruptcy processes in the US. Along with the task force report came predictions that in the United States gm would be forced into bankruptcy by mid-May22 with a much shorter time line for Chrysler’s bankruptcy filing. The new gm ceo Fritz Henderson underlined the company’s change of heart on bankruptcy saying on 31 March that he would do anything including going through bankruptcy proceedings to reorganize the company.23 After March 30 Ottawa and Ontario turned their sights directly onto the caw. From this point forward there was no pretense that government would adopt a middle position between labour and management. Government was a vocal and active player criticizing the union for its reluctance to make concessions on wages and benefits to bring labour costs in line initially with Japanese auto manufacturers in the US. Premier McGuinty backed by Clement was blunt in describing the potential stumbling block to success. “We can’t come to the table with additional dollars unless we are provided with some assurance that the restructuring plan is viable. The parties have to go back. They have to do more work to get costs down.”24 caw president Ken Lewenza responded by stating his union would not open its contract with gm for the third time in a year – one of many lines in the sand the caw drew throughout this process that it was continually forced to cross. The union’s strategy of delivering ultimatums and then backing down did nothing for its credibility. The caw even found it had little support from its political allies in the New Democratic Party, which remained almost

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completely silent throughout the whole process of government pressure and bargaining with industry for concessions. There was no public support across the country either for the union or for a government-backed bailout. A late March Leger Marketing poll found 15 per cent of Canadians and 17 per cent of Ontario residents supported government money for the two car makers. As Toronto Star political columnist Chantal Hebert sharply noted in an 1 April column, “as things stand today, more Canadians believe that the Bloc Quebecois should continue to enjoy taxpayer support than want gm and Chrysler bailed out with public money.” Forcing the caw to give up even more had come after the union already made a March round of concessions eliminating 10 special holidays, freezing cost of living increases and reducing health care benefits, school tuition, and legal fee benefits amounting to a reduction of about $7 per hour.25 Critics immediately suggested it wasn’t enough. That, plus a wage freeze, was the deal the caw and gm reached a few days later. In fact the agreement was reached largely by making an exchange rate assumption about the value of the Canadian dollar that neither gm nor the caw had any ability to control and as a result, did not last long. Bargaining with Chrysler later in March was tougher as the caw wanted to employ its traditional pattern approach to negotiations – what’s good enough for gm should be good enough for Chrysler too. That rationale did not last long either as governments continued to turn up the pressure. Taking another step to prepare for bankruptcies, Ottawa and Ontario announced they would spend up to $185 million to support gm and Chrysler car warranties. That matched a plan already announced by the US government to keep customers coming through the doors who might otherwise be worried about losing their warranty protection as bankruptcy rumours gathered steam. In the end none of that money was used. Another sign of the approaching inevitable came in mid-April when the New York Times reported that gm had been instructed by US Treasury officials to prepare for a bankruptcy filing by June 1.26 Meanwhile at Chrysler, Fiat moved closer to making a deal by its end-of-April deadline as ceo Marchionne threatened to walk away and leave Chrysler high and dry without more uaw and caw concessions. “The minute you talk to me about historic entitlement in an organization that is technically bankrupt, that’s a nonsensical discussion. There is no wealth to be distributed,” he told the Globe and Mail.27 Clement piled on the pressure the next day saying the caw had to cut wages and benefits at both gm and Chrysler by $19 an hour to about $57 per hour, a demand Lewenza called unreasonable stating it “was not going to happen.” Without that there would be no deal, Clement responded, even though the $57 figure, supposedly the hourly wage cost for producing Toyotas in Canada, was nothing more than a rough estimate by governments of Toyota’s labour costs. Ontario added its own threat, as McGuinty stated if

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gm went bankrupt, the province would not bail out the pension plan, saying that many residents of the province had no pensions at all so why should they be asked to bail out gm pensioners.28 With Chrysler’s end-of-April US deadline approaching, the Globe and Mail revealed the extent of the government’s plans. According to people familiar with the matter, federal and provincial officials are in the final stages of discussions with the US Treasury and senior auto executives toward a contribution of as much as $6 billion (US) for unique cross-border financing that would see gm and Chrysler through the initial phases of creditor protection. Canada would contribute about 15 per cent of the fund, which could reach $40 billion (US) reflecting the bulk of the country’s share of North American production for the two companies. The companies had had initially proposed that the governments lend or guarantee a staggering $125 billion in bridge or long-term loans, but the numbers were whittled down over months of difficult negotiations led largely by Treasury officials in Washington.29 The next day the Wall Street Journal reported Chrysler would file for bankruptcy protection to reduce its liabilities whether or not it reached a deal with Fiat.30 The same day the caw, back at the table with Chrysler, was now reduced to seeking a guarantee it wouldn’t be targeted in a bankruptcy filing while Lewenza conceded his attempt to maintain pattern bargaining was in a shambles, saying “there is no pattern anymore.”31 With that admission, a deal quickly followed that included cutting semiprivate hospital coverage, tuition rebates for family members, vacations, Christmas bonuses, paid breaks and incentives to buy Chrysler cars and trucks, and having workers contribute to their pension plan for the first time. It all equalled about $19 an hour and contradicted everything the union leader had been saying, yet left Lewenza concluding “I think it is a victory considering what we’ve been through and considering the alternative and the consequences that were ahead of us if we didn’t get a deal.” 32 As the Chrysler deadline approached, gm also released its third different restructuring plan in the previous four months. gm Canada would cut manufacturing employment to 4,400 by 2014 from its 10,300 workers in 2008 while its dealer network would shrink to between 395 and 425 from the current 705, matching similar cuts announced in the US.33 By late April the major elements of the packages for the two companies began to emerge. gm would seek an extra $11.4 billion beyond the $15.4 billion it had already received and governments would end up as majority owners of the company, with the uaw also owning 39 per cent of gm through stock contributed to a separate health care plan set up for gm retirees and employees. At Chrysler the union would own 55 per cent of a restructured company

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while Fiat would have up to 35 per cent over time and governments the remaining 10 percent. On April 30 Harper and McGuinty announced their governments would provide $3.8 billion to Chrysler (including the $1 billion previously announced of which $750 million had been used at that point)34 in exchange for two per cent of the company’s shares, a seat on Chrysler’s nine-person board and a promise to keep 20 per cent of the company’s production in Canada.35 All this was part of a US$15 billion loan package announced by the US government and Fiat’s agreement to take an initial 20 per cent interest in a restructured Chrysler rising to 35 per cent over time if Fiat met a series of production and related commitments and majority control only after all US and Canadian government loans were repaid. Chrysler would have eight years to repay the loans from the Canadian governments that carried a minimum 7 per cent interest rate. As a result Chrysler Canada did not file for bankruptcy protection. Canada’s involvement, Harper stated, flowed from the decision he and McGuinty announced in December. Throughout the months of negotiating ups and downs, their rationale for the bailout did not change. “Otherwise, through a politically directed restructuring in the United States, we would stand a serious risk of a complete restructuring of the industry outside of this country,” Harper said. If Chrysler falls below 20 per cent in vehicle production and investment, the governments could demand repayment of their loans but there were no job commitments in the agreement. “We’re choosing between a smaller company or if we had stayed out of this, simply allowing the collapse of the company,” Harper added. If the governments let Chrysler and gm shut down “we’d see something on the order of half a million job losses overnight,”36 adding that the bailout “was not a perfect decision, but far better than the alternatives.”37 As the Chrysler deadline passed with a deal in place, the focus turned to the General Motors end-of-May deadline. Early in that month gm Canada received $500 million of the interim loan (unsecured and made at commercial rates through the Export Development Corp.) promised by Ottawa and Ontario to help complete its restructuring plan. That was followed by a May 7 meeting involving the two governments, gm Canada and the caw that included discussion of gm seeking bankruptcy protection, the demand from government for yet another round of concessions from the union to match Toyota’s labour cost of $57 and the need to address a gm pension shortfall as large as $6 billion. A committee representing all four participants would consider the pension issue but the federal government was firm at the meeting that pensions are an Ontario problem as the province was both regulator and guarantor of pension plans.38 For its part Ontario argued privately that the pension plan is part of the overall problem so cannot be separated from the rest of gm’s

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needs within the restructuring. Meanwhile Harper and McGuinty kept up the pressure on the caw, reiterating in Toronto days later that governments won’t be involved without agreements between the company and union. As with Chrysler the result was a gm-caw deal with days to go before May 31. Basic wage rates stayed unchanged as did pensions for those already retired but existing workers gave up a $3,500 lump sum payment to compensate them for lost holiday time as well as changes to health benefits, work practices and improvements to productivity. In return gm would take those savings as well as $2 billion from government contributions to make up about $4 billion of the pension shortfall with six years to eliminate the remaining $2–3 billion shortfall. To maintain the illusion that the federal government did not participate in rescuing the pension plan, that money would come from Ontario’s contribution to the overall package. In total the latest deal with the caw would reduce gm wages to about $57 an hour – meeting the governments’ Toyota target.39 With deals in place with both companies ratified by caw members, Lewenza acknowledged what had really happened. “We were bargaining with government just as much as we were with the company. It was very strange.”40 As with the Chrysler rescue, specifics of the gm plan emerged in the final countdown to May 31. The United Auto Workers in the US would own 17.5 per cent of gm as the company used its shares to finance its part of a new union health-care trust. A regulatory filing in the US on May 27 revealed before Canadian officials had announced it, that Ottawa and Ontario would receive common and preferred shares in gm in exchange for their contribution to the bailout expected to be about $10 billion.41 On May 29 the Wall Street Journal reported that the US government would push gm into bankruptcy at a cost of billions more than anticipated, turning the auto maker into a government-owned corporation. By filing for Chapter 11 protection on May 31, General Motors Corp. became after WorldComm in 2002, the second largest industrial bankruptcy in history.42

t h e u n c l e a r roa d a h e a d The final package would ensure Canada retained about 16 per cent of gm’s North American manufacturing, as well as 11.7 per cent of gm’s common shares (and $450 million in new preferred shares as well as holding $1.3 billion in gm bonds) and one seat on gm’s 13–member board of directors. “We don’t intend to run automobile companies. We don’t intend to be equity shareholders in the long term,” Prime Minister Harper told a 1 June news conference called to announce the agreement. To that end the government planned to sell 5 per cent of their holdings annually starting in 2010, hoping 65 per cent will be sold by 2016 with the remainder going by 2018.

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gm Canada will use $4 billion for its pension shortfall and also made a range of other Canadian commitments including no more plant closings; assembling 5 new vehicles in Canada, including new hybrid vehicle production while maintaining a 16 per cent share of gm’s North American vehicle assembly; keeping transmission and engine production in St. Catharines and spending almost $1 billion over the next seven years in green research, development and innovation focusing on energy diversification, fuel economy improvements and vehicle electrification. In total the June deal meant that the United States, Canada and Ontario were adding about $40 billion to the $19.5 billion already given gm and the US government would get 60 per cent of the company’s equity. The caw defended the deal and Lewenza even suggested “that the restructuring assistance could ultimately impose no cost whatsoever on Canadian government or taxpayers, once the companies stabilize, auto sales recover and the loans and other forms of support are repaid.”43 That view was not shared by the Canadian government. Stephen Harper conceded at the news conference announcing the deal, that the federal government would write off its contribution. “Clearly taxpayers will get some money back when the day comes that we begin to sell our equity share, but to be frank, we’re not counting on that. We’re not factoring that into our budgetary plans.”44 As the succeeding weeks and months would demonstrate, the road ahead remained far from clear despite the speed with which new companies began operations. On June 10, Chrysler with Fiat in control came out of bankruptcy protection after only 42 days. A new General Motors Co. started business in the United States exactly one month later – a month earlier then its bankruptcy filing had originally anticipated. By September car sales showed signs of only slight recovery from their collapse over the previous year and General Motors had other problems. A commitment by US negotiations during the process that one of the first moves would be to replace gm’s perceived weak financial management and leadership had not happened by late fall. gm failed to meet its third quarter target of cutting hourly employees to 40,000, with 49,000 still on the payroll, also not quite hitting the 23,000 salaried employees target. Its market share in the United States was down to 19.5 per cent in the third quarter of 2009 from 22.5 per cent a year earlier.45 The sale of its Hummer division had not closed on time and plans to sell its Saturn and Saab divisions collapsed. In November gm announced a US$1.15 billion loss for the period ending Sept 30 but would still start to repay the Canadian and US governments. It proposed repaying $192 million to Canadian governments for each of the next eight quarters starting in December 2009 from a pool of more than $40 billion in cash gm now had on hand after seeing its debts eliminated by the restructuring. Still

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gm was losing about $1,225 on average on each vehicle it produced in the quarter while Ford was making about $721 in operating profit on each vehicle it sold in the period.46 Slow sales also hurt Chrysler. In November Marchionne outlined the new company’s plans, asserting Chrysler will be profitable by 2011 and repaying its loans by 2014.47 That is far from assured. The best hope for Chrysler’s survival lies in the desperately needed complete overhaul of management launched by Fiat. Even if North Americans do decide they like Fiats, they won’t be available from Chrysler plants until 2011 or 2012. Until then the company is marketing only its outdated and inferior models. If Chrysler runs out of cash before then, governments say the company is on its own. If that happens, what is left could be no more a couple of plants that will manufacture Alfa Romeos (a car Fiat had already been negotiating with Ontario to produce in the province) and a dealership network to sell the car in competition with the likes of upscale brands Audi and bmw.

c o n c lu s i o n s In the end the auto bailout was as much job-saving social policy as industrial policy. In late 2009 both Chrysler and gm faced hugely uncertain futures in Canada and the United States but they were still operating and relieved of their debts through the bankruptcy restructuring process. In itself staying in business was a major accomplishment considering the state of the companies earlier in the year and the talk at the start of 2009 of sudden collapse and closures that could devastate large parts of the economies and related employment of both countries. Instead Canadian and US governments cajoled the companies into bankruptcy filings, reorganizations and at least temporary rescue. Governments successfully countered the broader uncertainly about the implications that would come from the failure of the companies by giving billions of dollars to Chrysler and gm to keep them going the same way governments around the world gave hundreds of billions of dollars to the disintegrating financial sector in late 2008 and 2009. Throughout months of bargaining that frequently seemed on the verge of collapse, the federal and Ontario governments together crafted a joint response to the risk posed by the possible elimination of a major part of the country’s auto industry but that process appears to have been a one-off approach dictated by expediency. It was much more successful than even the participants thought was possible in that it achieved the desired result despite hugely complex government, industry and union negotiations, all of which required political approval from three jurisdictions against impossibly tight deadlines. There is no sign though that the federal government has any interest in institutionalizing such a joint federal-provincial crisis management approach

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for responding to future challenges that threaten the national economy. The federal government has little desire to share its primacy in national economic policymaking. On the other hand, the federal government hopes to make the unprecedented co-operation it enjoyed with the administration in Washington on the auto sector into something broader. In September 2009, Ron Bloom went from the auto task force to becoming the President’s senior counselor for manufacturing policy with a goal of reviving the US manufacturing sector. Canada is exploring ways to work with the US on this front using the connections and credibility build through the auto experience as a potential model for joint analysis and action that could both restructure manufacturing on a continent-wide basis and address potential trade irritants before they emerge. The auto bailout process began with the political decision that Canada and Ontario had to participate to prevent the sudden collapse of a large part of the country’s auto industry, even before analyzing the costs and benefits of rescuing the companies and without imposing any ceiling on the amount of money governments would spend in pursuit of that goal. The result kept the two companies alive and extracted commitments that Canada’s share of gm and Chrysler vehicle production would not fall below current levels into the future. What looks on the surface like a success though, leaves no ability for government to enforce any of the commitments made by the companies about production, research and development or investment should their revival not go well. Chrysler and gm may have the best of intentions but if their market share continues to decline, they will do whatever they think is necessary to survive. If that means violating production or investment guarantees to Canada so be it. The companies also know governments won’t call their loans and shut them down for failing to meet conditions negotiated at the time of the bailouts. In the end both the Canadian and Ontario governments got pledges that are only as good as the continued recovery of the companies. gm and Chrysler may survive but they face a tough fight if for no other reason than that their Japanese, Korean, and European competitors (and even Ford which has returned to profitability with no government aid) are not waiting for Chrysler or gm to catch up. They are all anxious to increase their market share at the expense of two of the former US Big Three while Chinese auto makers are waiting in the wings, keen to enter the North American market to build on the great leaps forward they have made in design and quality thanks to the explosive growth of their domestic automobile market. By 2011 or 2012 it may be obvious that the second stage of this process – the decision to use government money to give gm and Chrysler a second (or in Chrysler’s case a third chance following the 1979 bailout) – was as much about social policy as industrial policy. In 2009 Ottawa and Ontario bet $13 billion that Chrysler and gm might survive even if they are much smaller

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than before their collapse. Some of the loans may be repaid. Government may also recover more of the money they put into the ventures by selling their equity but there will be political pressure and pressure from the companies as well that will be tough to resist, on the governments to sell as quickly as possible. That could minimize the return Canada and Ontario otherwise might get for the money they have invested, cementing taxpayer losses even if the companies do stay in business. When governments in Canada decided to get involved they feared that in 2009 they would be coping with a depression or at least a deep long-lasting recession. That did not happen but that was not clear until long after Canada and Ontario were committed to the auto bailout process. If the companies ultimately do not survive, it will only be after a multi-year, drawn-out decline that should give suppliers, workers, communities and governments time to adapt while providing other manufacturers and parts makers the opportunity to increase their production to move into the room in the market left by the departure of Chrysler, gm or both of them. Even if the bailouts fail, by stretching out that failure it may turn out to have been money well spent.

notes 1 See for example, Keith Acheson, “Power Steering the Canadian Auto Industry: The Auto Pact and Political Changes,” Carleton University Department of Economics, Carleton Industrial Organization Research Unit. June 1987; Sidney Weintraub and Christopher Sands, eds. The North American Auto Industry Under nafta (Washington, dc: Centre for Strategic and International Studies, 1998); and Tod Rutherford, “The Canadian Auto Industry: Work Reorganization and Industrial Relations Change,” Employee Relations 12, no. 2, (1990): 27–37. 2 Eric Reguly, “Chrysler worse off than Fiat expected” Globe and Mail, 16 September 2009. http://www.theglobeandmail.com/report-on-business/chrysler-worse-off-thanfiat-expected/article1289471/. 3 Greg Keenan, “Auto industry teeters as deadline looms,” Globe and Mail, 17 February 2009. http://business.theglobeandmail.com/servlet/story/RTGAM.20090215. wrgm0214/BNStory/Business/home. 4 Canadian Press, 1 March 2009. http://www.cbc.ca/canada/toronto/story/2008/03/01/ flaherty-budget.html. 5 Ibid. 6 Bill Vlasic and Nick Bulky, “gm says new loan is adequate to save it,” New York Times, 19 February 2009. http://www.nytimes.com/2009/02/19/business/ 19auto.html?_r=1&ref=business. 7 A truck plant in Oshawa closed in 2009 and a transmission plant will close in 2010 leaving gm Canada with an assembly plant in Oshawa and an engine and parts plant in St Catharines, Ont.

165 The Auto Industry Bailout 8 Greg Keenan and Karen Howlett, “gm seeks government pension aid,” Globe and Mail, 19 February 2009. http://business.theglobeandmail.com/servlet/story/RTGAM. 20090219.wrgm19/BNStory/Business/home. 9 Greg Keenan, “Ottawa needs more detail on Chrysler: Clement” Globe and Mail, 22 February 2009. http://business.theglobeandmail.com/servlet/story/RTGAM.2 0090222.wclementbailout0222/BNStory/Business/home The governments wanted details about Chrysler’s product plans for assembly plants in Windsor and Brampton, Ont. 10 Chrysler Canada gave no advance notice to the federal government or any indication in its February correspondence with Ottawa of its 3 March cut of 1200 jobs at its Windsor minivan plant. 11 Jeffrey McCracken and John Stoll, “Bankruptcy funding solicited for carmakers,” Wall Street Journal, 23 February 2009. http://online.wsj.com/article/ SB123535613910745405.html. 12 Sharon Terley, “gm says position on bankruptcy hasn’t changed,” Wall Street Journal, 6 March 2009. http://online.wsj.com/article/SB123637628686156901.html#mod= testMod. 13 Alex Kellogg and Joseph White, ”Chrysler presses request for further loans,” Wall Street Journal, 17 March 2009. http://online.wsj.com/article/SB123721812476242685. html?mod=article-outset-box. 14 John Stoll, “Wagoner confident gm would fare better outside of bankruptcy,” Wall Street Journal, 17 March 2009. http://online.wsj.com/article/ SB123729863349255921.html#. 15 Colleen Barry, “No Chrysler debt for us Fiat says,” Globe and Mail, 20 March 2009. http://business.theglobeandmail.com/servlet/story/RTGAM.20090320.wrautos20/ BNStory/Business/home. 16 Neil King and John Stoll, “Government forces out Wagoner at gm,” Wall Street Journal, 30 March 2009. http://online.wsj.com/article/SB123836090755767077.html. 17 US Treasury Dept., Auto Task Force, “gm February 17 plan viability determination,” 30 March, 2009. 18 US Treasury Dept., Auto Task Force, “Obama Administration New Path to Viability for gm and Chrysler,” 30 March 2009. 19 US Treasury Dept., Auto Task Force, “Determination of viability summary Chrysler llc,” 30 March 2009. 20 US Treasury Dept., “New Path to Viability,” 30 March 2009. 21 Tony Clement, “Restructuring plans for General Motors of Canada Ltd. and Chrysler Canada Inc.,” 30 March 2009. http://www.ic.gc.ca/eic/site/ic1.nsf/eng/04536.html. 22 Neil King and John Stoll, “Government Forces Out Wagoner.” http://online.wsj.com/ article/SB123836090755767077.html. 23 John Stoll and Monica Langley, “New gm chief bends to US pressure,” Wall Street Journal, 31 March 2009. http://online.wsj.com/article/SB123850236944873521.html#. 24 Greg Keenan and Karen Howlett, “Find more cuts, gm tells gm and caw,” Globe and Mail, 3 March 2009. http://business.theglobeandmail.com/servlet/story/RTGAM. 20090331.wgm0331/BNStory/Business/home.

166 Christopher Waddell 25 Tony Van Alphen, “caw, gm stake out positions,” Toronto Star, 6 March 2009. http://www.thestar.com/Business/article/597437 26 Michelene Maynard and Michael de la Merced, “Surgical bankruptcy possible for gm,” New York Times, 12 April 2009. http://www.nytimes.com/2009/04/13/business/ 13gm.html?_r=1&ref=business&pagewanted=all. 27 Eric Reguly and Greg Keenan, “Fiat to Chrysler: cut costs or we walk,” Globe and Mial, 15 April 2009. http://business.theglobeandmail.com/servlet/story/rtgam.20090414.wrfiat15/BNStory/Business/home. 28 Jacque McNish, Greg Keenan and Karen Howlett, “Canada prepared to put up $6 billion in bankruptcy filing for auto giants,” Globe and Mail, 22 April 2209. http://business.theglobeandmail.com/servlet/story/RTGAM.20090422.wautos0422/ BNStory/Business/home. 29 Ibid. 30 Jeffrey McCracken, John Stoll and Stacey Meichtry, “Chrysler near bankruptcy filing,” Wall Street Journal, 23 April 2009. http://online.wsj.com/article/ SB124052424835850015.html. 31 Greg Keenan and Karen Howlett, “caw to Chrysler: no more concessions in bankruptcy,” Globe and Mail, 23 April 2009. http://business.theglobeandmail.com/servlet/ story/RTGAm.20090423.wcaw0423/BNStory/Business/home. 32 Greg Keenan, Jacque McNish and Karen Howlett “caw gives ground in attempt to save Chrysler,” Globe and Mail, 25 April 2009. http://business.theglobeandmail. com/servlet/story/rtgam.20090424.wchryslerdeal0424/BNStory/Business/home. 33 Greg Keenan, “gm Canada to shed jobs, dealers,” Globe and Mail, 27 April 2009. http://business.theglobeandmail.com/servlet/story/RTGAM.20090427.wgm0427/ BNStory/Business/home. 34 Tony Van Alphen, Les Whittington, and Robert Benzie, “All aboard with Chrysler’s plan,” Toronto Star, 1 May 2009. http://www.wheels.ca/reviews/article/542555. 35 cbc News, 4 May 2009. http://www.cbc.ca/money/story/2009/05/04/g-governmentloan.html The Chrysler loan included an initial interim loan of $1.2 billion, $1.45 billion contributed to the US debtor-in-possession financing to keep the company going while in bankruptcy protection and a restructuring loan of about $1.1 billion. 36 Karen Howlett and Richard Blackwell, “Ottawa, Ontario to lend Chrysler $3.8 billion,” Globe and Mail, 30 April 2009. http://business.theglobeandmail.com/servlet/ story/RTGAM.20090430.wchryslercanada0430/BNStory/Business/home. 37 Tony Van Alphen et al., Toronto Star, 1 May 2009. http://www.wheels.ca/reviews/ article/542555. 38 Greg Kennan and Karen Howlett, “Ottawa to gm: Cut costs for be cut off,” Globe and Mail, 8 May 2009. http://business.theglobeandmail.com/servlet/story/ RTGAM.20090508.wrautos08/BNStory/Business/home. 39 J. McCarthy, “gm Canada, union reach deal,” Globe and Mail, 22 May 2009. http://www.theglobeandmail.com/report-on-business/gm-canada-union-reach-deal/ article1148545/.

167 The Auto Industry Bailout 40 Derek deCloet, “Calling it a victory won’t make it so,” Globe and Mail, 23 May 2009. http://www.theglobeandmail.com/news/opinions/columnists/derek-decloet/callingit-a-victory-wont-make-it-so/article1149801/. 41 Greg Keenan and Karen Howlett, “Canadian taxpayers to hold gm shares,” Globe and Mail, 28 May 2009. http://www.theglobeandmail.com/report-on-business/canadiantaxpayers-to-hold-gm-shares/article1157160/. 42 Neil King and J. Terrell, “gm collapses into government’s arms,” Wall Street Journal, 2 June 2209. http://online.wsj.com/article/SB124385428627671889.html#mod= article-outset-box. 43 Canadian Auto Workers, News release, “gm Canada restructuring plan is approved,” 1 June 2009. http://www.newswire.ca/en/releases/archive/June2009/01/c9741.html. 44 Greg Keenan, Karen Howlett, “gm faces high stakes, high costs and high hopes,” Globe and Mail, 2 June 2009. http://www.theglobeandmail.com/report-on-business/ gm-faces-high-stakes-high-costs-and-high-hopes/article1164148/. 45 Dee-Ann Durban and Tom Krisher, “gm US sales chief leaves,” Globe and Mail, 7 October 2009. http://www.theglobeandmail.com/report-on-business/gm-us-sales-chiefleaves/article1315256/. 46 L.Terlep, “gm reports $1.15 billion loss, plans repayment,” Wall Street Journal, 16 November 2009. http://online.wsj.com/article/ SB10001424052748704431804574539284255805824.html?mod=WSJ_hps_LEFTWha tsNews. 47 Greg Keenan, “Chrysler pledges to repay Ottawa,” Globe and Mail, 5 November 2009. http://www.theglobeandmail.com/report-on-business/chrysler-pledges-to-repayottawa/article1351366/.

9 Science and Technology Spending: Still no Viable Federal Innovation Agenda p e t e r w. b . p h i l l i p s a n d d av i d c a s t l e

introduction Federal spending and policies in support of science, technology and innovation have been realigned in recent years to conform to new theories of economic growth and innovation. Spending has been increased, partnerships have been developed, talent has been attracted and programs have been implemented. While changes over the last decade have raised Canada’s absolute and relative performance in Research and Development (r&d) and innovation, the past few years have been problematic. The national Gross Expenditure on r&d (gerd) rose to 2.09% in 2001, but has since dropped to below 1.9%; meanwhile Organization for Economic Co-operation and Development (oecd) member states, including Canada, have committed to pushing towards 3%. Few achieve this goal, with Sweden being a notable exception. Most states, including Canada, hover around 2%. The Harper Conservative government has reiterated that it is committed to raising Canada’s gerd, and has undertaken some measures to support that goal. Yet the message has been lost in a rush to get “shovel ready” projects underway to provide economic stimulus to the Canadian economy, by ministerial gaffs, and by some miss-communication about program changes. The government also received a thrashing in op-eds and open letters from various quarters for months about the apparent loss of comparative advantage (or at least momentum) relative to the United States, where the new Obama administration raised the profile of s&t and innovation through a number of high-level cabinet appointments and by positioning increased s&t spending as a core part of the US stimulus package. Perhaps most troubling, however, is the potential that the policies, programs and priorities of the government’s s&t

169 Science and Technology Spending

agenda pose both theoretical and practical challenges. While it is important and helpful to have an excellent s&t base in Canada, that may not be adequate – innovation requires more than science and technology. This chapter examines the underlying features of the Government’s policies and programs and how they are contributing to or challenged by the political economy of innovation. The first section reviews Canada’s relative and absolute policy stance on s&t. The second section lays out the theoretical justification and rationale for current s&t policies. In the third section, the structure and efforts in the current policy are reviewed. The final section examines the challenges the government faces with respect to communicating its intentions and accomplishments. Conclusions then follow which assess a number of theoretical and operational issues that pose a more fundamental challenge to the government policy.

s c i e n c e a n d t e c h n o lo g y i n c a na da The federal government has been keen to remind the Canadian public that it takes seriously the role of federally supported science and technology r&d. Prime Minister Harper told the 2009 gathering for the Natural Sciences and Engineering Research Awards that “scientific and technological innovation is fundamental to economic and social progress. It creates good jobs, raises living standards and underlies improvements in medicine, communications and family life. No country can hope to remain prosperous and healthy without reinvesting a substantial portion of its wealth in science and technology.”1 Federal s&t investments exceed $10 billion per year. While that number sounds, and actually is, quite large, it needs to be contextualized to have meaning. One of the main measures of s&t effort is the estimate of gross domestic expenditure on r&d (gerd). The oecd compiles this measure for 31 member states and a number of other key nation states. Based on their calculations, Canada has improved both its absolute and relative position in recent times. In 1981, Canada expended only 1.22% of its gdp on r&d. By 2001 that reached 2.09% but it has since slipped to below 1.9%. The five year average performance of Canada has risen from 1.35% in 1981–1985 to 2.04% in 2001–2005. Relative to the oecd and the US, our performance has improved significantly (Table 1). In 1981–85, Canada’s gerd was only 52% of the US level and only 65% of the oecd average. By 2001–05, Canada’s relative effort had risen to 77% of the US and about 92% of the oecd average. The latest release shows that Canada as a whole expended US$23.8 billion on r&d in 2008, equal to about US$719 per capita or 1.87% of our current gdp. The average for the oecd was about US$747 per capita or 2.29% of gdp (table 2). This measure ranged from a high of about 3.6% in Sweden to a low of about 0.5% in Mexico. The US expended US$1,215 per capita or about 2.68% of its current gdp on r&d.

170 Peter W.B. Phillips and David Castle Table 1 Gross Expenditure on Research and Development, Canada, the US, and eu, 1981–2008 gerd

1981–85

Canada 1.35 US 2.56 oecd 2.06 Canada’s gerd as % US 52% oecd 65%

1986–90

1991–95

1996–2000

2001–05

2006–08

1.46 2.66 2.22

1.66 2.56 2.09

1.76 2.64 2.14

2.04 2.66 2.22

1.92 2.67 2.26

55% 66%

65% 79%

67% 82%

77% 92%

72% 85%

Source: oecd, oecd Factbook 2009: Economic, Environmental and Social Statistics, http:// oberon.sourceoecd.org/vl=3167516/cl=13/nw=1/rpsv/factbook2009/07/01/01/index.htm

Table 2 s&t indicators, Canada, US, and oecd

Gross expenditure on r&d, US$ billion ppp, 2008 l $ per capita, 2008 % gdp, 2008 % gdp, average 1981–2007 % financed by – industry – government % performed by – industry – higher education – government fte researchers, 000, 2007 – per million population

Canada

US

OECD

$23.8 $719 1.87 1.68

$368.8 $1215 2.68 2.62

$886.3 $747 2.29 2.16

50 31

66 28

64 29

56 34 10 134 4.1

72 13 11 1,426 4.7

70 17 11 3,997 3.4

Source: oecd, 2009, Main Science and Technology Indicators 2009–1, http://www.oecd.org/dataoecd/9/44/ 41850733.pdf

These aggregate numbers mask some important features of our relative performance in science and technology related r&d. Canada has about 20% more researchers per capita than the oecd average (but about 20% fewer than the US) and publishes approximately 4.5% of all basic research in academic journals,2 yet at the same time the cost of each scientific publication is above the oecd average.3 Conventional wisdom says if there is a strong science and technology r&d base acting as an “ideas pump” into the economy, resulting wealth and prosperity described by Prime Minister Harper should be in evidence. In reality, the distribution of research funding and economic performance diverges significantly in Canada. One critical issue is that the private sector is

171 Science and Technology Spending

relatively less engaged in r&d in Canada than in either the rest of the oecd or the US. Firms in Canada fund only about 50% of the research and undertake about 56% of the activity whereas in the US they fund 66% and undertake 72% of the activity. The average in the oecd is 64% and 70%. In Canada, governments and universities take up the slack. Governments funded 31% of r&d in Canada, compared with 28% and 29% in the US and oecd respectively while universities funded almost 15% of the research and performed more than onethird of r&d in Canada, compared with only 13% and 17% in the US and oecd respectively. Some assert that while Canada produces a considerable amount of world class science,4 the relatively smaller role for industry in Canada impedes the commercialization of science and technology. In Canada, the federal government is a key actor, contributing about 79% of all the government funds provided for r&d, or about 25% of all the funds devoted to r&d in Canada. Statistics Canada estimates the 2009–10 federal budget provides approximately $10.4 billion for r&d, up 3% from the previous year (Table 3). Sectoral departments (e.g. Agriculture, Environment, Fisheries and Oceans, Health, Industry, National Defence and Natural Resources) either directly or through grants and contributions funded about $3.4 billion of s&t activity, Industry Canada directly or through grants supported another $455 million of industrially focused research. The three national granting councils combined were allocated $2.7 billion and special operating agencies such as the National Research Council (nrc), Canada Foundation for Innovation (cfi) and the Space Agency were allocated $2.5 billion. In addition to the direct funds allocated by the federal government, the Department of Finance estimates a tax benefit of approximately $4.4 billion in 2008 to industry through its scientific research and experimental development (sr&ed) investment tax credit, helping to lower the taxable income of firms investing in r&d activities. A recent international comparison of income tax support for r&d in oecd countries showed that taking account only federal incentives, Canada’s income tax treatment for r&d investments was the second most favourable among the G-7 countries for large firms and the most favourable for small and medium sized firms, with implicit subsidies of about 18% and 32% respectively.5 An earlier study by the federal Department of Finance surveyed firms about what types of support they viewed were most important, and the sr&ed tax credit was rated 7.8 out of 10 (with 10 being most important), compared with government grants and contracts at 5.1 out of 10.6

t h e o r i e s o f s c i e n c e , t e c h n o l o g y, a n d i n n o vat i o n p o l i c y Competing views about the role of science and technology in the innovation process create competing policy perspectives. For several decades, the federal

172 Peter W.B. Phillips and David Castle Table 3 Estimates of Federal science and technology spending by major department and agency, 2009–10, $ millions Total

10,664

Agriculture and Agri-Food Canada

367

Atomic Energy of Canada Limited

387

Canada Foundation for Innovation

580

Canadian Institutes of Health Research

966

Canadian International Development Agency

368

Canadian Space Agency

355

Environment Canada

672

Fisheries and Oceans Canada

286

Health Canada

536

Industry Canada, of which

445

– Technology Partnerships Canada Program

144

– Canada Foundation for Innovation

129

– Genome Canada

89

– Automotive Innovation Fund

69

– Bombardier CSeries Program

53

– Strategic Aerospace and Defence Initiative

51

National Defence

534

National Research Council Canada

780

Natural Resources Canada

548

Natural Sciences and Engineering Research Council of Canada

1,056

Social Sciences and Humanities Research Council of Canada

690

Statistics Canada

641

Other

1,454

Source: http://www.statcan.gc.ca/pub/88-001-x/2009006/t006-eng.htm

government’s approach to science, technology and innovation has been to create public supports for private activity, including basic and applied research funding, programs to mobilize technology transfer, and tax credits for the private sector to initiate research and development programs of their own or to add value to pre-commercial, publicly funded science and technology. Underlying this approach is the view that publicly supported strategic incentives will reduce entry and operating barriers otherwise faced by the private sector. Crucial to this point of view, and perhaps its central weakness, is that the private sector will respond to market cues and add the most significant value – essentially turning inventions and discoveries into innovations. The economic theory of technological change has for many years focused on the firm as the primary research unit (e.g. Nobel Prize winning economists Kenneth Arrow and Robert Solow) and, in the footsteps of Joseph Schumpeter,

173 Science and Technology Spending

has examined the microeconomic incentives and impacts of private research and commercialization. More recently economists have examined the role of firms in “endogenously” generating innovation through planned, systematic effort to add value through research and development. This is generally modeled as a rational linear process where basic research leads successively to applied research, development, commercialization and use.7 The policy challenge, however, is that the outputs from the research and development phases are usually non-rival and non-excludable ideas, recipes or business models. Without some intervention, investors are unlikely to invest optimally in these stages as they cannot be certain of recouping the costs of their investments through commercialization and use of the resulting invention. Much of the federal government’s s&t policy and programming fits with this firm-centric view of innovation. The federal support for strong intellectual property (ip) protection through patents, industrial trade secrets and other ip mechanisms is a major instrument in the nation’s innovation policy. In addition, government funding and performance for primary and applied research in public labs, combined with generous tax incentives for private sector r&d and extensive grants and contributions for scientific and research activities in universities, all are attempts to provide incentives for individuals and entrepreneurs to undertake science and technology activities that will lead to economic and social innovation. A group of political economists and sociologists with more of an interest in the influence of institutions offer as an alternate (or enhancement) a range of theoretical “systems” approaches to innovation. The starting point is the observation that innovation is a diffuse process, where no single firm or region can truly be viewed as self-sufficient or self-sustaining. Economists Stephen Kline and Nathan Rosenberg explicitly identify the potential for open research systems in their “chain-link model of innovation,” which begins with a basically linear process moving from potential market to invention, design, adaptation and adoption but adds feedback loops from each stage to previous stages and the potential for the innovator to seek out existing knowledge or to undertake or commission research to solve problems in the innovation process.8 This dynamic process has been variously modeled as a regional innovation system, an industrial cluster or a triple helix of governments, universities and firms. Michael Gibbons and a number of colleagues posit that two modes of knowledge generation flow from such systems.9 Mode 1 knowledge, which they call traditional knowledge, is generated within disciplinary, primarily cognitive, contexts and generally commercialized through the linear, firm centric innovation system. Mode 2 knowledge, which is created in broader “transdisciplinary” social and economic dynamic systems, creates a profound challenge to the traditional governing system because communications tends increasingly to take place across institutional boundaries and not simply

174 Peter W.B. Phillips and David Castle

within established hierarchies. This conception of innovation suggests that policy needs both to remove barriers to and create incentives for these dynamic systems to develop and operate. One can see some of this new approach reflected in the last twenty years and also in recent federal policy under the Harper Conservatives. The federal s&t Strategy released in May 2007, for example, commits the government to developing, entering or supporting a range of initiatives in support of industrial clusters, regional innovation systems and partnerships, including the Automotive Innovation Fund, the Genome Canada competition on applied genomics for bioproducts and crops and Technology Partnership Canada.

implementing the plan Canada is not alone in being uncertain about how to proceed to address the innovation challenge. While more money is clearly part of the solution, it is unclear where and when it should be applied. Should the government sustain or increase its investments upstream in science infrastructure and activity, expand efforts to facilitate technology development, adapation and adoption, focus on incentives for commercialization of new technologies and products or work to increase demand by effective, efficient, and liberal market policies? In absence of unambiguous advice from scholars and policy think tanks, most governments do a bit of all four, hoping that they are making things better. The government of Canada is no exception. After more than a century of “industrial” policy, the Liberal government led by Jean Chrétien in 2001 began a process of developing an explicit “innovation agenda,” ultimately embodied in two statements entitled Achieving Excellence and Knowledge Matters. The threepart agenda focused on creating a policy climate to support innovation, policies and programs to help Canadians create, adopt and commercialize knowledge and efforts to increase the supply of highly qualified people who create and use knowledge. The near term goal was to raise Canada to rank among the top five countries in terms of r&d and commercialization outputs by 2010. The agenda envisaged a strategic role for the federal government as funder, facilitator and performer of knowledge-based growth activities. Specific programs in support of this policy included a new mandate for the nrc to develop at least 10 new national innovation clusters by 2010, expanded support for the Canadian Foundation for Innovation, creation of Genome Canada and the development and expansion of the Canada Research Chairs and Millenium Scholarship programs. Many of those goals were achieved well before 2009. The nrc reports success in nurturing 11 clusters across Canada (nrc Newslink Fall 2009, p. 6), the cfi had directed $5.2 billion to more than 6350 projects, the crc program had invested $300 million per year in approximately 2,000 chairs and an estimated $3.2 billion was invested in more than 700,000 students through the Millennium Scholarships program.

175 Science and Technology Spending

In 2006, a new Conservative Government under Prime Minister Stephen Harper assumed power and has worked over the intervening four years to put a new face on economic policy, if not an entirely new orientation on the policy. The main difference between the two governments has been the packaging and strategizing of the policy. Whereas the Liberal government created an inclusive framework for its innovation related activities, the Conservatives have downplayed the need for a comprehensive strategy or framework and instead narrowed the focus to science and technology and to specific policies, programs and activities that they believe will yield positive outcomes. One way to interpret the difference is that earlier, Liberal efforts set in place the public sector supports for science and technology innovation, whereas the Conservative approach has been to leave the public sector supports mostly in place, instead concentrating on elements that would improve the climate for business to make more of public investments in science and technology. In November 2006, the federal government released Advantage Canada, its economic plan. The plan involved five commitments: to reduce taxes for all Canadians and establish the lowest tax rate on new business investment in the G7; to eliminate Canada’s total government net debt in less than a generation; to reduce unnecessary regulation and red tape and lower taxes to unlock business investment; to create the best-educated, most-skilled and most flexible workforce in the world; and to create modern, world-class infrastructure (roads, bridges, ports, gateways and public transit) to ensure the seamless flow of people, goods and services. Then, in May 2007, the Harper government released a science and technology (s&t) strategy – Mobilizing Science and Technology to Canada’s Advantage. The strategy proposed to spur innovation through creating entrepreneurial, knowledge and people advantages. The strategy focuses on four specific action areas. First, the strategy seeks to create world-class excellence in science and technology, mostly by sustaining and increasing financial support for intramural research, the three national granting councils, the special research agencies (e.g. cfi, Genome Canada), the Chairs and scholarships programs including the newly created Vanier Scholarship, and, as part of the fiscal stimulus package, an incremental $2 billion Knowledge Infrastructure Program to support infrastructure repairs and enhancement at Canadian universities and colleges. Second, the strategy proposes to focus on four specific sectoral priorities: environmental science and technologies, via Manufacturing 20/20 and technology road maps; natural resources and energy, including $230 million over four years for research, development, and demonstration of clean-energy technologies and for investments in Genome Canada, health and related life sciences and technologies; and information and communications technologies. Third, the strategy identifies a number of existing or new partnerships the government expects to support. In addition to a number of ongoing programs

176 Peter W.B. Phillips and David Castle

– e.g. Industry Canada’s National Centres of Excellence Program, including the new Centres of Excellence for Commercialization and Research, announced in 2007, Genome Canada, Technology Transfer Partnership Canada and the cfi – the government signalled it would engage more as a partner rather than simply as a funder in many grant-based systems. In short, it wants to provide more direction on how, where and why the money should be spent. Programs such as the Canada Research Chairs, for example, now require universities to identify strategic priorities in order to access the opportunities. Similarly, a number of new Tri-Council programs have emerged from partnership between operating departments (such as Industry Canada, dfo, irdc/cida, and nrcan) to direct funds within the peer-reviewed councils towards areas of specific federal interest. In support of this more focused or directed strategy, the federal government in the 2008 budget capped the Millennium Scholarships (which will end in July 2010) and proposed to investigate the potential for transferring or devolving specific federal labs (both within National Research Council and beyond) to university or other regional authorities in order to strengthen regional economic prospects. While there was great excitement in many cities around this possibility, to date only Natural Resources Canada’s canmet materials technology laboratory has been devolved, in this case from the department in Ottawa to McMaster University Research Centre in Hamilton; the move is to be completed by 2010. Finally, in a nod to “enhancing accountability,” the government amalgamated three s&t related advisory councils – the Council on Science and Technology, the Council of Science and Technology Advisors, and the Canadian Biotechnology Advisory Committee – into a single new council, the Science, Technology and Innovation Council (stic). stic, composed of 18 individuals who largely “represent” different constituencies interested and engaged in science, technology and innovation, has so far issued a brief and somewhat cryptic innovation roadmap and a comprehensive “state of the nation” report on the strengths and weaknesses of the Canadian innovation system, but has not offered any substantive advice on policy yet. Following the October 14th federal election, one of the first acts of the government was to introduce an Economic and Fiscal Statement on November 27, 2008. While the purpose of that statement was largely to shore up the banking sector and the markets, a number of interim measures could be construed as contributing to the s&t strategy goals (e.g. an increase of $700 million for business and export financing through the Business Development Bank of Canada and Export Development Canada) but the statement was silent on that connection. The statement never drew any links to their s&t strategy or Advantage Canada. The 2009 federal budget was filled with what might charitably be called stabilization and recovery measures, but a number of the more significant measures fit with the previously articulated s&t strategy. The government

177 Science and Technology Spending

offered targeted tax relief in a number of areas (e.g. temporary 100-per-cent capital cost allowance rate for computers acquired between 27 January 2009 and 1 February 2011, and extending the temporary 50-per-cent straight-line accelerated cca rate to investment in manufacturing or processing machinery and equipment undertaken in 2010 and 2011). It announced plans to eliminate tariffs on certain machinery and equipment (worth an estimated $440 million over the next five years), and then provided sector-specific industrial support programming, including a new Automotive Innovation Fund, $170 million for the forest sector, $28.6 million over the next two years to the Canada New Media Fund and a new Clean Energy Fund to support clean energy research, development and demonstration projects, including carbon capture and storage. The economic statement also announced plans to provide an additional $87.5 million over three years to temporarily expand the Canada Graduate Scholarships program, $3.5 million over two years for 600 more graduate internships through the Industrial Research and Development Internship program, $2 billion to repair, retrofit and expand facilities at post-secondary institutions, $750 million for the Canada Foundation for Innovation, $50 million to the Institute for Quantum Computing in Waterloo, $87 million over the next two years for Arctic research facilities and $250 million over two years for deferred maintenance at federal laboratories. Unlike with the earlier fiscal statement, the budget offered a five-page synoptic review of how the budget measures supported the Advantage Canada s&t strategy, but the brick and mortar announcements of shovel ready projects dominated the post-budget communications plan – so much so that the Canadian Medical Association Journal suggested that medical research would suffer for not being “shovel-ready” to the detriment of all Canadians and the long-term contribution of biomedical science to the Canadian economy.10

f e d e r a l s&t p o l i t i c a l c o m m u n i c at i o n p r o b l e m s a n d t h e o b a m a c o m pa r i s o n The federal government has not reaped much benefit from its efforts in science, technology and innovation. The government’s policy is relatively expansive and potentially comprehensive, but so far has not generated much new activity. While the government invested significant energy and funds in the s&t strategy, the global banking crisis after September 2008 pushed their efforts to the margins of news and debate. The science, technology and innovation (sti) focus has been largely lost in a rush to get “shovel ready” mostly community-based and directed projects underway to provide economic stimulus to the Canadian economy. In addition, ministerial lapses and poorly communicated changes in programs have created unnecessary controversy. While this might not be catastrophic to policy in normal times, federal politicians and

178 Peter W.B. Phillips and David Castle

the government have fared relatively poorly in comparison to Barak Obama’s fresh, new, energetic and telegenic administration. One way to evaluate the challenge is to directly compare the two governments and the political messaging around their actions. The Canadian effort might have started earlier and appeared to include a number of potentially popular and effective measures that should accelerate s&t investments and innovation. But the public view is different. While Canada’s investments in s&t are budgeted to rise by 3% in 2009–10, the same rate of growth as in the US, the general impression is that Canada is “lagging” the US. The headlines on a series of articles in a policy briefing on innovation in The Hill Times on April 6 says it all: “Canada is missing its opportunity in future knowledge economy, say experts, scientists”; “Current federal government doesn’t get innovation”; and “Canada does ‘very well’ at supporting discovery-oriented research, but not getting it ‘out the door.’” In addition to apparent lags, there was general furor regarding perceived imbalances in how Ottawa spends, attributable in part to the previously mentioned problem about apparent lacunae being interpreted as funding discontinuities. One reading of Budget 2009 is that cfi support appeared more generous than the tri-Councils, an imbalance described by Eliot Phillipson, president and ceo of cfi, as a “myth.”11 University professors and presidents and a number of peer groups piled on. A Canadian Medical Association Journal editorial on February 5 asserted “the budget’s message to medical science: Quick! Get a Shovel!” Meanwhile, a group of scholars produced and solicited support for an open letter entitled “Don’t leave Canada behind” to the prime minister. The letter, supported by 2,248 scholars as of October 2009, asserted that “US President Barack Obama is taking advantage of the current financial crisis to push his country forward in new directions by greatly boosting funding to scientific research and education as a means to jump start innovation in a new economy … President Obama is … pledging to ‘restore science to its rightful place’ with billions in new investments.”12 The letter challenged the overall size and positioning of sti measures and a number of specific measures, especially related to the size and allocations of funds within the three major national granting councils. Critics of the cuts, especially a team of neuroscientists who lost funding, argued that when coupled with the Obama administration’s increased funding for science, the cuts could produce a brain drain as researchers move to the United States to secure funding.13 The fear of brain drain – which was partly responsible for many of the Chrétien era investments – continues to be a political highcard played by spending critics, the most vocal contemporaries of which are often Canadian scientists finding international outlets for their views.14 In contrast, the new Obama administration has been riding a wave of relatively positive news regarding s&t. This actually started during his presidential campaign, when in October 2008 Obama released an 11-page “plan for science and innovation” outlining aggressive investments in science and technology,

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including doubling funding over ten years at the National Institutes of Health (nih). At the same time, 61 US Nobel science laureates endorsed Obama – the largest number ever to make their voices heard during a presidential campaign. In an “open letter to the American people,” they wrote: “The country urgently needs a visionary leader who can ensure the future of our traditional strengths in science and technology and who can harness those strengths to address many of our greatest problems: energy, disease, climate change, security and economic competitiveness. We are convinced that Senator Barack Obama is such a leader.”15 On 17 February 2009, US President Barack Obama signed into law the American Recovery and Reinvestment Act of 2009 at a ceremony at the Denver Museum of Nature & Science in Colorado. Obama stated at the signing that the $787 billion stimulus spending plan “represents the biggest increase in basic research funding in the long history of America’s noble endeavour to better understand our world … And just as President Kennedy sparked an explosion of innovation when he set America’s sights on the moon, I hope this investment will ignite our imagination once more, spurring new discoveries and breakthroughs in science, in medicine, in energy, to make our economy stronger and our nation more secure and our planet safer for our children.” In September 2009 the President, in collaboration with the National Economic Council and the Office of Science and Technology Policy, issued a “strategy for American innovation.” The three-part plan – involving investment in s&t, skilled labour and infrastructure; competitive markets; and “breakthroughs for national priorities,” including clean energy, advanced vehicle technologies, health technologies and a number of “grand challenges” such as educational software – created a “buzz” around innovation unmatched in Canada.16 At least part of Canada’s messaging problem stems from the people involved. Prime Minister Harper and his cabinet lead a minority government that has generated significant angst among some of the electorate, especially those from the scientific and academic community. Shortly after forming government, Mr. Harper decided to end the direct reporting relationship between the Prime Minister and the National Science Advisor, Dr. Arthur Carty, the former President of the nrc, and ultimately to eliminate the job when Dr. Carty retired in 2008 despite his hopes that he would, “as a national science advisor, help make this a permanent institution in the government of Canada as it is in a number of countries.”17 In 2007 the government also eliminated three expert panels that focused on sti and replaced them with the high-level Science Technology and Innovation Council – it is unclear yet whether this will affect the nature of the advice offered, but in one sense it represents a narrowing of the advice from experts. A further complication is that the mandate for publicizing and promoting the government’s sti agenda has been assigned to the Hon. Gary Goodyear, minister of state for science and technology, a relatively minor post in the

180 Peter W.B. Phillips and David Castle

current government yet one deliberately positioned to receive political flack and thus shield the minister of Industry. For example, Goodyear, as minister, was somewhat unfairly blamed for $147.9 million in funding cuts for science programs that were mostly triggered by Treasury Board program review initiated a number of years earlier and then Genome Canada was not provided with any additional equity in the budget, which led to a delay in a new competition call; there is some suggestion that the accelerated budget cycle may have closed the door to Genome Canada as many of the projects would not be “shovel ready” until summer or fall 2010. Then in a March 2009 interview with The Globe and Mail, Goodyear responded to a question about evolution with: “I am a Christian, and I don’t think anybody asking a question about my religion is appropriate.” Many scientists and educators expressed shock at what they interpreted as a creationist or anti-science view.18 Thinking that the Globe and Mail reporter might have selectively or misquoted Goodyear, editorials suggested he clarify his position. He worsened his position by characterizing “evolution” as the sort of thing that happens to bodies through their lifetimes. To call this neo-Lamarkian is to give too much credit when the evidence shows no basic grasp of evolutionary theory as an inter-generational phenomenon. The timing was even more problematic, as Mr. Goodyear’s comments came on the eve of the 150th anniversary of Charles Darwin’s Origins of the Species, the landmark work laying out the theory of evolution, and within days of the Minister making announcements of new funding through Genome Canada. While Mr. Goodyear’s personal beliefs have little relevance for the policy stance of the government, the perception of many was that this was just one more indication that the government does not, or perhaps cannot, fully support science, technology and innovation, especially related to the life sciences if the minister in charge cannot provide basic scientific definitions. In contrast, the new Obama administration was getting kudos for taking science seriously, having reversed many perceived anti-science policies of the Bush administration. For example, an executive order on 9 March 2009 removed certain restrictions on federal funding for research involving new lines of human embryonic stem cells. Obama also appointed a new cadre of senior officials that were more acceptable to the scientific community, the sentinel appointment being Steven Chu, director of the Lawrence Berkeley National Laboratory and co-recipient of the 1997 Nobel Prize in physics, as the Energy Secretary. He was an early advocate for scientific solutions to climate change, a policy the previous administration downplayed. In addition, the President announced plans to restore the presidential science advisor to a position that reports directly to the president and showed continued personal interest and support for science, technology and innovation policies and programs. Finally, even without this difficult comparison, the federal s&t strategy faces serious practical administrative challenges. At least one unrecognized

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challenge is that there are real and significant impediments to spending money in Canada, either through traditional programs or through new partnerships. The federal system is still reeling from the controversy surrounding undocumented and apparently misallocated spending on jobs programs at Human Resources Development Canada and the Sponsorship Program. As one of the first acts of the new Harper government, the Federal Accountability Act was passed and implemented in December 2006.19 The Act, supplemented by significant expansion in the powers of Treasury Board, the Public Service Commission and the Auditor General, has raised the cost of doing business in Ottawa. Programs, contracts and partnerships, in addition to the normal business of government, now are much more tightly constrained in what they can do and how they can do it. The result is that it now takes longer and costs more to conclude and comply with agreements. sti activities are especially difficult, as they tend to be hard to programme and hard to evaluate, creating the classic principal-agent problem that makes contracting so difficult.

c o n c lu s i o n s Most individuals and groups involved in science, technology and innovation policy agree that Canada can and should do better in terms of innovation. Many studies critical of Canadian science and technology innovation have focused on different problems within the innovation system and its implications for productivity,20 global competiveness,21 drivers of commercialization,22 and the productivity gap.23,24 These and other studies conclude that Canada invests heavily in science and technology, but does not have a well coordinated governance system to efficiently and effectively commercialize and use technologies in a timely and sustainable manner. In an earlier study of science and technology innovation in Canada, The Council of Canadian Academies observed that “Canada has built significant strength in many fields of research and there is optimism that we are gaining ground in several of the newer areas. Based on survey commentaries, and in the view of the committee, we do less well in converting strength in basic science into sustained commercial success. This is a long-standing deficiency in Canada’s innovation system which requires resolution for the full benefit of Canada’s considerable s&t strengths to be realized. [ … ] Where are the hurdles in translating Canadian strengths in s&t into innovation and wealth creation that will enhance the quality of life of Canadians? How can those barriers be overcome?”25 The May 2007 s&t strategy, the Conference Board of Canada first “How Canada performs: A report card on Canada”26 and the Science, Technology and Innovation Council report on the “State of the Nation 2008”27 all conclude that the significant (and some suggest growing) gap in investments in s&t and innovation is the root cause of the lower value added

182 Peter W.B. Phillips and David Castle

per person in Canada relative to the US. Ultimately, this gap limits our capacity to achieve our economic and social goals. The current federal strategy (and most predecessor plans) asserts that federal effort and complementary action by provinces, universities and industries should focus on expanding entrepreneurial activity, strategically directing research to some specific, high impact areas and increase the supply of high quality personnel – otherwise called skilled and experienced workers. In short, the strategy seeks to link strong minds and new or innovative ideas through private and entrepreneurial action. Overall, there is a focus on research excellence as the key goal of the plan. While this sounds on first hearing to be a plausible approach, it suffers upon further reflection. In the first instance, we may not need a “science and technology” strategy – rather, we may need an innovation agenda or strategy. The Federal strategy, largely confirmed by the Conference Board Report Card, notes that Canada has a strong basic science, technology and research capacity – concentrated in a number of relatively well-networked, strategic, cutting-edge areas, as assessed by the Council of Canadian Academies. But where we face difficulties is getting that knowledge into use in Canada. The federal benchmarking here is more problematic. It shows that Canada appears to be somewhat weaker in terms of the skills and talents of our workforce – we have the largest portion of our population with tertiary education but rank below average in our share of the population with either PhDs or natural science and engineering degrees or in related jobs – and that our public sector and universities contribute a relatively larger portion of r&d in Canada than in most other oecd countries. The implication is that private activity is somehow weak or ineffectual, an implication borne out by private sector investment in r&d which has plateaued.28 In essence, one might conclude that the basic problem in Canada is not about how Ottawa spends on s&t but is more about what happens to science and technology that is created in public laboratories and at universities, which is either left to languish there, or is pushed out to an unwilling or incapable private sector. If this is the root of the productivity gap, then Ottawa is unlikely to be able to spend its way out of this private sector problem. An investigation of federal activities offers a tantalizing glimpse of the issue, but it is far from clear how federal efforts can overcome the private sector weakness. Before governments invest, they should at least be clear about whether they are addressing the symptoms or a set of underlying problems. One way to look at the problem would be to examine how Canada differs from the US. Canada appears to be relatively well endowed with good science, to have many of the same industries and firms as the US, to have a labour force that is as well or better trained than the US and to have as many entrepreneurs per capita as in the US. Most of the measures presented by the federal strategy do not explain the gap but merely further define the scope of the gap.

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Two fundamental differences between Canada and the US that could be the underlying cause of Canada’s relatively poor innovation performance are not addressed by the federal strategy. First, Canada simply lacks the scale of the US. Recent research indicates that value added per employed person rises as the population of a local economy rises.29 The underlying logic is that larger centres offer bigger, more sophisticated markets that can allow land, labour, capital and ideas to be employed in their best uses. This makes intuitive sense. If a lawyer, for instance, is trained and experienced in intellectual property law for biotechnology, they would likely make more money if they are able to solely practice using their advanced capacity. If the local market is too small to allow them to specialize fully, then they will be forced to offer less differentiated services that will earn less. The effect of scale is significant. A recent survey of the literature showed that doubling any city’s size will increase productivity between 3–8%. Thus moving from cities of 50,000 (e.g. Cornwall or Shawinigan) to 200,000 (e.g. Regina or Saskatoon) would increase productivity 9–24%. Increasing to one million (e.g. urban Ottawa, Calgary or Edmonton) would raise productivity 15–40%. Cities the size of Toronto (5.3 million) would have productivity about 50% higher than in the cities of 50,000. Overall, approximately 45% of our population lives in million plus cities, compared with 53% of the US population. And our larger cities are smaller. New York and la, with 18 and 12 million population each, dwarf Toronto, Montreal, and Vancouver. While Canada cannot and probably does not want to become just like the US, policy should not exacerbate the challenges of small market size. Currently federal development policies and provincial and municipal strategies create barriers or provide incentives that artificially subdivide our economic sectors. While economic development is appropriate, it should be used to truly build on areas of strength and not myopically spread the wealth around in ways that undercuts the economies of scale. A second difficulty with the federal s&t plan is that successful commercial and economic development often has little or nothing to do with research excellence. The evidence is in – Canada does high quality research; that is not the problem. The best ideas or products are not assured of surviving and thriving. Rather, success often flows to the fleet of foot and most adaptable and flexible actor – here Canada lumbers. Once again, this is an area where Canada faces a challenge. Those who deal with regulatory or development agencies in Canada assert that that Canadian decision making processes are slow, overlapping and sometimes inconsistent. Canadian governments are focused on excellence and accountability rather than speed, adaptability and effectiveness. One structural factor that contributes to this is that federal, provincial and municipal governments tend to want to work together, sometimes emulating the “Three Stooges” as they attempt to coordinate and collaborate on far too many activities.

184 Peter W.B. Phillips and David Castle

Moreover, governments in Canada are not really in the business of change; instead they are in the business of managing change. Governments like to do things in an organized, “rational” way. But “management” of innovation is an oxymoron. Innovation by nature is chaotic. It only truly thrives where there are competing models, competing structures, competing ideas, competing investments and competing organizations. In contrast, the US has more of a distributed system, where different governments sometimes do complementary but more often do competing things, often without reference to other levels of government. Moreover, the US has strong proponents for action – while state governments tend to be relatively weaker than Canadian provinces, the combination in the US of relatively strong and independently-minded municipalities using funds raised locally and aggressive private venture capital corporations are a hallmark of the American model. What distinguishes these actors is their decisiveness – they act and react quickly and effectively. If the root of the Canada-US productivity gap is scale and governance, then the Canadian strategy of supporting s&t, education and entrepreneurship may not make much of a difference. Ultimately, governments may need to look to their own structures, and create conditions that will reduce the burdens of scale and over-governance. Theory suggests three possible policy responses. First, governments need to create the room to innovate and try new things. Canada does not have that in many regions and sectors. Canadian governments frequently set rules that require single solutions to complex and differentiated problems – either at the community, provincial, regional or national level. Monopoly solutions often strangle innovation. Second, innovation needs the right reward structures. This requires governments look at the entire public policy framework and specific supply chains. Too often governments spend a disproportionate amount of time worrying about losers from change, and seeking ways to tax winners and subsidize those losers. While some redistribution may be necessary, it should not be the only or even prime focus. In almost all cases of innovation and development if one does a cost-benefit analysis, an early stage innovation in the short term will not produce adequate returns to fully compensate losers. Almost every new product, technology, process, organization and market will undercut somebody else’s value. If the winners in Canada always have to compensate the losers, then fewer truly novel innovations will be tried here first. Experience shows that the biggest gains from innovation accrue to early adopters – if they are discouraged from acting in Canada, the benefits will be lost. Third, Canadian policy needs to be more tolerant of failure. Innovation inevitably delivers lots of failed experiments. Currently municipalities, provinces and the national government in Canada spend an inordinate amount of time, energy and financial capital examining why something has failed and trying to attribute blame. As a result, governments often end up actually

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adding to the losses of failed enterprises. Governments instead need to find ways to efficiently and effectively release and recycle the resources that are stranded in failures. Accountability is important, but it becomes counterproductive if it ends up dissipating the value left in the investments.

notes 1 Prime Minister Stephen Harper. Address to Natural Sciences & Engineering Research Council Excellence Awards, March 2009. 2 D.King, “The scientific impact of nations.” Nature 430 (2004): 311–16. http:// www.berr.gov.uk/files/file11959.pdf. 3 L.Leydesdorff and C. Wagner, “Macro-level indicators of the relations between research funding and research output”. Journal of Informetrics 3 (2009):353–62. 4 Science, Technology, and Innovation Council. State of the Nation 2008: Canada’s Science, Technology, and Innovation System.(Science, Technology and Innovation Council, 2009) Available at http://www.stic-csti.ca/eic/site/stic-csti.nsf/eng/h_00011.html. 5 http://investincanada.gc.ca/eng/publications/rd-tax-incentives.aspx#can; http://titania.sourceoecd.org/vl=2514117/cl=28/nw=1/rpsv/sti2007/Gc3-1.htm. 6 Finance Canada, The federal System of Income Tax Incentives, Evaluation Report (Finance Canada 1998). 7 See E. Rogers, Diffusion of Innovations, 5th ed. (New York: Free Press, 2003). 8 S. Kline and N. Rosenberg, “An overview of innovation,” in R. Landau, and N. Rosenberg, (eds), The Positive Sum Strategy: Harnessing Technology for Economic Growth (Washington: National Academy Press, 1986). 9 M. Gibbons, C., Limoges, H. Nowotny, S. Schwartzman, P. Scott and M. Trow, The New Production of Knowledge: The Dynamics of Science and Research in Contemporary Societies (London: Sage 1994). 10 Canadian Medical Association Journal (cmaj) The budget’s message to medical science: Quick! Get a shovel!. cmaj, March 3, 2009. 11 E.Phillipson, “Canadian research funding imbalance a myth,” Research Money, March 30, 2009, p.8. 12 http://dontleavecanadabehind.wordpress.com/open-letter-to-the-prime-ministerand-leader-of-the-opposition/#openletter. 13 Anne McIlroy, “Neuroscientists fear brain drain as crucial funding disappears.” The Globe and Mail, March 11, 2009. http://www.theglobeandmail.com/servlet/story/ RTGAM.20090311.wresearch11/BNStory/National/home. 14 H. Hoag,”Cash concerns for Canadian scientists,” Nature 457 (2009):646. 15 Business Standard. 2009. An Open Letter to the American People … Nobel laureates write to support Obama, October 11, 2009, 0:06 isthttp://www.business-standard. com/india/news/an-open-letter-toamerican-people/372889/. 16 http://www.businessweek.com/innovate/next/archives/2009/09/obamas_ strategy.html.

186 Peter W.B. Phillips and David Castle 17 Globe and Mail. “Science advisor to Ottawa stunned by termination,” Globe and Mail, February 2, 2008, A4. 18 Anne McIlroy, “Science minister won’t confirm belief in evolution.” The Globe and Mail. March 17, 2009. http://www.theglobeandmail.com/servlet/story/RTGAM. 20090317.wgoodyear16/BNStory/National/home. 19 http://www.faa-lfi.gc.ca/faa-lfi/faa-lfi00-eng.asp. 20 Conference Board of Canada, How Canada Performs: A Report Card on Canada (Conference Board of Canada, 2008) http://sso.conferenceboard.ca/hcp.aspx. 21 Competition Policy Review Panel. Compete to Win (Industry Canada, 2008) http:// www.ic.gc.ca/eic/site/cprp-gepmc.nsf/vwapj/Compete_to_Win.pdf/$FILE/ Compete_to_Win.pdf). 22 Expert Panel on Commercialization. People and Excellence: The Heart of Successful Commercialization. (Industry Canada, 2006) http://dsp-psd.pwgsc.gc.ca/Collection/ Iu4-78-2006E-I.pdf. 23 Science, Technology, and Innovation Council. State of the Nation 2008: Canada’s Science, Technology, and Innovation System.(Science, Technology and Innovation Council, 2009) Available at http://www.stic-csti.ca/eic/site/stic-csti.nsf/eng/h_00011.html. 24 Council of Canadian Academies Expert Panel on Business Innovation, Innovation and Business Strategy: Why Canada Falls Short. (Council of Canadian Academies Expert Panel on Business Innovation, 2009). 25 Council of Canadian Academies. The State of Science and Technology in Canada. (Council of Canadian Academies, 2006). http://www.scienceadvice.ca/documents/ Complete%20Report.pdf. 26 http://sso.conferenceboard.ca/documents.aspx?DID=2763. 27 http://www.stic-csti.ca/eic/site/stic-csti.nsf/eng/h_00011.html. 28 Research Money. “Corporate r&d spending stagnates with little prospect of improvement in short term,” Research Money, November 9, 2009, p. 5. 29 S. Rosenthal and W. Strange. “Evidence on the nature and sources of agglomeration economics” in V. Henderson and J. Thisse, eds, Handbook of Urban and Regional Economics (Amsterdam: North Holland, vol. 4, 2004).

10 The Recession and Aboriginal Workers senada delic and frances abele1

introduction This chapter documents the immediate impact of the recession on the labour market outcomes of Aboriginal people in Canada2. It then considers possible implications for the suite of federal policies and programs aimed at reducing the gaps between Aboriginal workers and other Canadians. The effectiveness of these programs in eliminating the gaps between Aboriginal well-being and that of the general Canadian population is important first on grounds of equity, but given the growing size of the Aboriginal labour force, it is also significant for Canada’s overall economic well-being. Federal government programs to narrow the income and labour market gaps between Aboriginal people and the general Canadian population have passed through a number of phases, from the frankly assimilative Indian residential schools to well-capitalized programs to develop an Aboriginal business sector and to bring Aboriginal people into the workforce. The ChrétienMartin years saw the elaboration of policies and programs which drew new lines of collaboration among business, government and a variety of Aboriginal organizations, accompanied by significant commitments of funds. As we show below, the Harper governments have in some respects continued largely as the Liberals began, even while stepping back from the more comprehensive and far-reaching Liberal initiatives. Our analysis of trends in the Aboriginal labour force is drawn from the 2006 Census and the 2008–2009 Labour Force Survey (lfs) data. The lfs data show that the recession affected Aboriginal workers disproportionately, in part because Aboriginal people are still clustered in the “bust-sensitive” sectors of

188 Senada Delic and Frances Abele

construction and resource development and also because as a group they have labour market characteristics that render them more vulnerable to loss of work. Some measures introduced in the Conservative budgets address this disadvantage. It is too early to determine whether these are sufficient, though in the analysis below we find some evidence that they are not. If recovery continues to be slow and jobless and, as seems likely, current Aboriginal labour force trends continue, some further measures will be warranted.

characteristics of the ab original lab our force The Aboriginal population in Canada is growing much faster than the overall Canadian population. In the last decade alone, the total Aboriginal identity population has increased by 47 percent, compared to the 8 percent increase among the non-Aboriginal identity population, reflecting a trend established over the last several decades.3 Statistics Canada’s projections of the continuation of this trend well into the future have attracted a significant amount of attention among labour market analysts, given projected future systematic labour shortages caused by low fertility rates and the rapid aging of Canadian population.4 Because the Aboriginal population is relatively young and growing, Aboriginal workers are seen to have the potential to augment the labour force. Given the current state of affairs, it remains unclear, however, how ready this potential labour force will be to assume its role in the Canadian labour market. As indicated in table 1, the figures from the most recent Census show that the total Aboriginal population is much younger than the total Canadian population, with a median age of 27, compared to the non-Aboriginal median age of 40. Statistics Canada projects that, in the coming decade, the number of working-age individuals of Aboriginal identity will rise to close to a million, with a large number of young adults just entering the labour force.5 The most recent Census data, however, also reveal that, despite some improvements, substantial gaps in literacy and educational attainment persist, as do the gaps in labour market participation and employment rates between Aboriginal and non-Aboriginal Canadians, for all groups except Métis. While recent years have recorded some improvements in the educational attainment of Aboriginal people in Canada, the general levels of literacy and education of Aboriginal people are still drastically lower than those of their non-Aboriginal counterparts.6 As indicated in table 1, the proportion of the total Aboriginal population with less-than-high school education in 2006 was 43.6 percent while the proportion of those with a university certificate or degree was only 5.8 percent. In the same year, 18.5 percent of non-Aboriginal people had a university degree or certificate and only about 23 percent had less-than-high school education. The gaps in educational attainment are

189 The Recession and Aboriginal Workers Table 1 A Statistical Snapshot of Aboriginal and non-Aboriginal Workforce, Canada, 2006 Non-Aboriginal and Aboriginal Identity Population and Identity Groups in the 2006 Census

Selected Labour Market Characteristics of Total NonTotal On-Reserve Total Urban the Populations Aboriginal Aboriginal Aboriginal Aboriginal NAI Métis Inuit Identity Identity Identity Identity Identity Identity Identity Population counts

539,483

633,307

40

27

–

–

Working age population

24,840,255

819,855

204,075

Population in the labour force

Median age

30,068,240 1,172,790

698,025 389,785 25

50,485

30

22

448,060

473,235 291,310

32,775

278,460 204,155

20,100

16,626,830

517,375

106,550

302,410

Less-than-High School diploma (%)

23.1

43.6

59.5

36.3

48.4

34.6

60.7

University Certificate or Degree (%)

18.5

5.8

3.0

7.7

5.2

7

2.7

Participation rate (%)

66.9

63.1

52.2

67.5

58.8

70.1

61.3

Employment rate (%)

62.7

53.8

39.3

59.8

48.2

63.1

48.9

Unemployment rate (%)

6.3

14.8

24.7

11.5

18.0

10

20.3

Full-time full-year workers (%)

51.2

42.3

–

–

–

45.6

37.9

Proportion of self-employed (%)

12.0

6.8

3.7

6.5

5.8

8.5

3.3

Source: Statistics Canada, the 2006 Census. Notes: Included in the total Aboriginal identity population are those persons who reported identifying with at least one Aboriginal identity group, that is, North American Indian, Métis or Inuit, and/or those who reported being a Treaty Indian or a Registered Indian, as defined by the Indian Act of Canada, and/or those who reported they were members of an Indian band or First Nation. The last three columns listing the three identities separately are based on singlereporting identity counts. The nai counts are affected by the incomplete enumeration of certain Indian reserves and Indian settlements.

particularly prominent in the case of the Inuit and North American Indian (nai) identity groups and in the case of on-reserve residents.7 Historically, Aboriginal Canadians have had much different labour market experiences from those of non-Aboriginal Canadians, characterized by substantially lower participation and employment rates and higher unemployment rates.8 As shown in table 1, the difference in participation rates between the total Aboriginal and non-Aboriginal identity populations in 2006 was close to 4 percentage points while the employment rate discrepancy was almost 9 percentage points. In disaggregating the total Aboriginal identity population counts, however, it becomes clear that these collective labour

190 Senada Delic and Frances Abele

market discrepancies are strongly influenced by the experiences of the Inuit and nai identity populations and in particular by those of the on-reserve residents, whose employment rate discrepancy in 2006 was over 23 percent. In contrast, in the same year, the Métis population had a slightly higher employment rate and a much higher participation rate than the non-Aboriginal population. The unemployment rates of the Aboriginal identity population were also historically consistently higher than the unemployment rates of the nonAboriginal population. In 2006, the 14.8 percent unemployment rate of the total Aboriginal identity population was more than twice the 6.3 percent unemployment rate of the non-Aboriginal identity population. Again, the unemployment rates were significantly higher among the Inuit and nai identity populations while the unemployment rates of the nai on-reserve residents were four times the non-Aboriginal unemployment rate. Even the off-reserve Aboriginal identity population had an unemployment rate that was almost twice the unemployment rate of the non-Aboriginal population. Métis unemployment rates were also higher than non-Aboriginal unemployment rates, but not nearly as much higher as those of the other Aboriginal groups9. When employed, Aboriginal workers have also historically been less likely to hold full-time full-year employment. As illustrated in table 1, in 2006, the proportion of full-time full-year workers was substantially larger among the non-Aboriginal than among the Aboriginal populations, with about a 9 percentage point gap between the total Aboriginal identity and non-Aboriginal identity populations and an over 13 percentage point gap between Inuit identity and non-Aboriginal identity populations. The gap between Métis and non-Aboriginal Canadians was significantly smaller, amounting to 5.6 percentage points. Table 1 also illustrates that, except for Métis, Aboriginal people had much smaller proportions of self-employed individuals in 2006 than non-Aboriginal Canadians. This was particularly the case for First Nations on-reserve and for Inuit. While Aboriginal workers are employed in all industries of the Canadian economy, they are concentrated in different industry sectors than non-Aboriginal workers. As table 2 shows, in 2006 the proportion of Aboriginal workers in the natural resource industries and in public administration was more than twice the proportion of non-Aboriginal workers. In 2006, Aboriginal workers (particularly First Nations living on-reserve) were also somewhat more concentrated in construction, agriculture, forestry, fishing and hunting as well as in health care and social assistance jobs. On the other hand, Aboriginal workers were less likely to be working in manufacturing then non-Aboriginal workers and they were half as likely to be employed in the finance and insurance industries and other professional, scientific and technical service industries as were non-Aboriginal workers. Once again, the differences from the non-Aboriginal population are greater for First Nations on-reserve and Inuit than for other Aboriginal people.

Table 2 Industrial Distribution of Aboriginal and non-Aboriginal Workforce, Canada, 2006 Non-Aboriginal and Aboriginal Identity Population and Identity Groups in the 2006 Census Industry Distribution (%)

Agriculture, Forestry, Fishing and Hunting Mining and Oil and Gas Extraction Utilities Construction Manufacturing Wholesale Trade Retail Trade Transportation and Warehousing Information and Cultural Industries Finance and Insurance Real Estate and Rental and Leasing Professional, Scientific and Technical Services Management of Companies and Enterprises Admin, Support, Waste Management and Remediation Educational Services Health Care and Social Assistance Arts, Entertainment and Recreation Accommodation and Food Services Other Services (except Public Admin) Public Administration

Total OnTotal Total NonTotal Reserve Urban Aboriginal Aboriginal Aboriginal Aboriginal NAI Métis Inuit Identity Identity Identity Identity Identity Identity Identity 3.1

4.1

7.3

1.5

4.6

3.6

1.6

1.4 0.8 6.3 12.0 4.4 11.4

3.0 0.9 8.8 8.0 2.4 10.3

2.1 1.1 9.0 3.7 0.6 6.8

2.8 0.75 8.6 9.0 3.2 11.7

2.3 0.8 8.6 7.5 1.9 9.3

3.9 1.0 9.4 9.0 3.1 11.3

3.7 1.9 5.8 2.6 1.3 12.3

4.9

4.9

3.3

5.0

4.3

5.5

5.7

2.5 4.2

1.4 1.7

0.6 0.4

1.8 2.2

1.2 1.2

1.6 2.3

1.6 0.8

1.8

1.3

0.7

1.6

1.1

1.5

2.6

6.8

7.0

1.4

3.5

2.5

3.3

1.6

0.1

0.07

0.04

0.08

0.06

0.07

0.1

4.3 6.8

4.9 6.6

4.4 10.5

5.6 5.3

5.3 7.2

4.4 5.6

3.5 9.7

10.1

11.7

14.6

11.1

12.5

10.6

12.8

2.0

2.5

2.5

2.7

2.8

2.2

2.3

6.6

8.3

4.7

9.9

8.1

8.9

5.7

4.9 5.6

4.6 11.6

2.5 23.5

5.2 8.4

4.1 14.4

5.3 7.4

3.8 20.7

Source: Statistics Canada, the 2006Census. Notes: Industry distribution is based on the 2002 North American Industry Classification System [naics], which refers to the general nature of the business carried out in the establishment where the person worked. If the person did not have a job during the week (Sunday to Saturday) prior to enumeration (May 16, 2006), the data relate to the job of longest duration since January 1, 2005. Persons with two or more jobs were required to report the information for the job at which they worked the most hours.

192 Senada Delic and Frances Abele

the policy challenge Given the labour force characteristics just described, and the current Canadian economic climate, Aboriginal workers and potential workers might be expected to face more economic difficulties than the non-Aboriginal population. This suggestion is supported by the latest data available to us. The comparative analysis that follows uses the latest data from the Canadian Labour Force Survey (lfs) and discusses separately the current labour force states of the male and female Aboriginal identity population groups living offreserve.10 The analysis covers the time period from July 2008 to September 2009 and the intent is to assess if the current economic downturn has a different effect on Aboriginal than on non-Aboriginal identity populations. October 2008 is taken as the month of the onset of recession, which is when Statistics Canada started recording a sharp deterioration in the Canadian labour market.11 The focus of the analysis is primarily on employment, underemployment, and unemployment and, although the figures illustrate the trend over the 15-month-period, the comparisons are made on a year-over-year basis since the data presented here have not been seasonally adjusted. Starting with the labour market participation rates, the lfs data suggest that the current difference in these rates between the total Aboriginal and nonAboriginal identity populations is due to the lower participation of the Inuit and nai identity population groups. As illustrated in figure 1, the Métis population had consistently higher participation rates than the non-Aboriginal population from August 2008 to September 2009. This finding is worth further exploration since, as illustrated in table 2, in 2006 Métis workers were not concentrated in the sectors of the economy that are deemed recession-proof – or are least, “recession-resistant.” On the contrary, Métis concentration in the natural resources and in the construction sector was much higher than that of non-Aboriginal workers and even higher than that of the nai identity workers. Their concentration in the manufacturing sector was also high and in transportation and warehousing sector it was even higher than the concentration of non-Aboriginal identity workers. The employment figures from the lfs reveal a similar outcome for the two Aboriginal identity populations. As illustrated in figure 2, the employment rate gaps between the total non-Aboriginal and Métis populations are relatively small, averaging to 1.5 percentage points, while the same gaps between the total non-Aboriginal and nai population are drastically higher, averaging 10 percentage points. The employment rate gaps are much more pronounced in the case of women than men, although for men they have increased significantly since the onset of the recession. As illustrated in figure 3, the employment rate gap between non-Aboriginal and Aboriginal men has increased from 1.5 percent in September 2008 to 6.9 percent in September 2009. The same gap between

Figure 1 Participation Rates by Identity, Canada, July 2008 – September 2009

75.0% 70.0% 65.0% 60.0% 55.0% 50.0%

Ju

r r r r r e y y 8 9 il h st st ly l-0 ugu mbe tobe mbe mbe an-0 ruar arc Apr Ma Jun Ju ugu mbe e J M b t A pte Oc ove ece A p Fe D N Se Se Non-Aboriginal identity Aboriginal identity Metis nai

Source: Statistics Canada, Labour Force Survey, July 2008 – September 2009 Notes: The data exclude people living on reserve or in the territories. Our estimates for Inuit people living offreserve are included in the total “Aboriginal Identity” category only as they were too small for separate presentation, according to Statistics Canada’s disclosure guidelines.

Figure 2 Employment Rate Gaps by Identity, Canada, July 2008 – September 2009 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 3.0% -2.0%

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Gap (Non-Aboriginal ‒ Aboriginal) Gap (Non-Aboriginal ‒ Metis) Gap (Non-Aboriginal ‒ nai) Source: Statistics Canada, Labour Force Survey, July 2008 – September 2009 Notes: The data exclude people living on reserve or in the territories. Our estimates for Inuit people living offreserve are included in the total “Aboriginal Identity” category only as they were too small for separate presentation, according to Statistics Canada’s disclosure guidelines.

194 Senada Delic and Frances Abele

non-Aboriginal and Aboriginal women has decreased slightly, from 8.4 percent to 7.1, for the same time period, although it remained well above the gap of their male counterparts. According to Statistics Canada, the recessionary employment losses overall have been concentrated primarily in the full-time positions. This does not seem to be the effect on the Aboriginal identity population. As illustrated in figure 4, the proportions of full-time workers were consistently higher for Aboriginal than for non-Aboriginal identity populations since the onset of the recession. A breakdown of these figures reveals similar rates for male workers of Aboriginal and non-Aboriginal identities and for female workers of Aboriginal and non-Aboriginal identities, with a similar between-gender male-female gap of about 15 percentage points and essentially no withingender gap in full-time employment. The underemployment figures from the lfs reveal a more acute situation among the Aboriginal identity population, although the proportions of involuntary part-time employment have risen for both Aboriginal and nonAboriginal identity populations over the latter part of the recessionary time period.12 As illustrated in figure 5, Aboriginal workers, and in particular those with nai identity, have significantly higher proportions of underemployment then non-Aboriginal workers. A breakdown by gender shows much greater proportions of underemployed among Aboriginal identity than among non-Aboriginal identity men. The proportions of underemployment among Aboriginal identity women also exceed the proportions of underemployment among non-Aboriginal identity women and in some instances they even exceed the proportions of underemployment among non-Aboriginal identity men. The proportions of self-employed workers among non-Aboriginal population have remained more or less constant at about 17 percent for nonAboriginal men and about 10.5 percent for non-Aboriginal women. Figure 6 shows slight fluctuations in the proportions of self-employed workers among Aboriginal population, particularly in the case of Aboriginal identity women. The proportions of self-employment average to about 10 percent among Aboriginal identity men and about 7 percent among Aboriginal identity women. The lfs data show that the recessionary unemployment has increased more for the Aboriginal than for non-Aboriginal identity population, thus further widening the unemployment rate gap between the two population groups. As shown in figure 7, over the past year, the unemployment rate for the total non-Aboriginal population has increased by 2.2 percentage points, from 6.2 percent in August 2008 to 8.4 percent in August 2009. During the same time period, the unemployment rate for the total Aboriginal identity population has increased by 3.5 percentage points, from 9.2 percent in August 2008 to 13.8 percent in August 2009. Thus the unemployment rate gap between the two groups has increased by 1.3 percentage points in the past year, from 4.1 percent in August 2008 to 5.4 percent in August 2009.

195 The Recession and Aboriginal Workers Figure 3 Employment Rate Gap by Identity and Gender, Canada, July 2008 – September 2009 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 3.0% -2.0%

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Gap Men (Non-Aboriginal ‒ Aboriginal) Gap Momen (Non-Aboriginal ‒ Aboriginal) Source: Statistics Canada, Labour Force Survey, July 2008 – September 2009 Notes: The data exclude people living on reserve or in the territories.

Figure 4 Proportion of Full-time Workers by Identity, Canada July 2008 – September 2009 85.0% 84.0% 83.0% 82.0% 81.0% 80.0% 79.0% 78.0% 77.0% 76.0% 75.0%

Ju

r r r r r e y y 8 9 il h st st ly l-0 ugu mbe tobe mbe mbe an-0 ruar arc Apr Ma Jun Ju ugu mbe e J M b t A pte Oc ove ece A e p F D N Se Se Non-Aboriginal identity Aboriginal identity Metis nai

Source: Statistics Canada, Labour Force Survey, July 2008 – September 2009 Notes: The data exclude people living on reserve or in the territories. Our estimates for Inuit people living offreserve are included in the total “Aboriginal Identity” category only as they were too small for separate presentation, according to Statistics Canada’s disclosure guidelines.

The unemployment rate for Métis identity population has increased by 2.8 percentage points, from 7.5 percent in August 2008 to 10.3 percent in August 2009 while for nai identity population this increase amounted to 4.1 percentage points, from 13.2 percent in August 2008 to 17.3 percent in August 2009. Thus the increase in the unemployment rate gap was slightly smaller for Métis population, only 0.8 of a percentage point increase, but for the nai identity group, the increase in the unemployment gap was a full 2 percentage points, from 7 percent in August 2008 to 9 percent in August 2009.

196 Senada Delic and Frances Abele Figure 5 Proportion of Involuntary Part-time Workers by Identity, Canada, July 2008 – September 2009 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

Ju

r r r r r e y y 8 9 il h st st ly l-0 ugu mbe tobe mbe mbe an-0 ruar arc Apr Ma Jun Ju ugu mbe e J M b t A pte Oc ove ece A p Fe D N Se Se Non-Aboriginal identity Aboriginal identity Metis nai

Source: Statistics Canada, Labour Force Survey, July 2008 – September 2009 Notes: The data exclude people living on reserve or in the territories. Our estimates for Inuit people living offreserve are included in the total “Aboriginal Identity” category only as they were too small for separate presentation, according to Statistics Canada’s disclosure guidelines.

Figure 6 Proportion of Self-Employed Workers by Identity and Gender, Canada, July 2008 – September 2009 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

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r r r r y h st ril be obe be be n-09 uar gu arc Ap Ja M br Au ptem Oct ovem ecem e F D N Se Non-Aboriginal Identity (Men) Aboriginal Identity (Men)

ay

M

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Ju

ly

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st

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Au

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S

Non-Aboriginal Identity (Women) Aboriginal Identity (Women)

Source: Statistics Canada, Labour Force Survey, July 2008 – September 2009 Notes: The data exclude people living on reserve or in the territories.

Within both Aboriginal and non-Aboriginal identity groups, recessionary unemployment has increased more for men than for women. However, as illustrated in figure 8, the unemployment rates of Aboriginal identity women were significantly above the unemployment rates of both non-Aboriginal men and women. From the onset of the recession, the highest unemployment rate gap between Aboriginal and non-Aboriginal women was in March

197 The Recession and Aboriginal Workers Figure 7 Unemployment Rate by Identity, Canada, July 2008 – September 2009 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

8

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Ju

r r r r y h st ril be obe be be n-09 uar gu arc Ap r Ja M Au ptem Oct ovem ecem eb F e D N S

Non-Aboriginal identity Aboriginal identity

ay

M

ne Ju

r st ly Ju ugu mbe e A pt e S

Metis nai

Source: Statistics Canada, Labour Force Survey, July 2008 – September 2009 Notes: The data exclude people living on reserve or in the territories. Our estimates for Inuit people living offreserve are included in the total “Aboriginal Identity” category only as they were too small for separate presentation, according to Statistics Canada’s disclosure guidelines.

2009 at 9.3 percentage points while the highest unemployment rate gap between Aboriginal and non-Aboriginal men was in February 2009 at 7.9 percentage points. Over the recessionary time period, the proportions of permanently laid off workers have increased for both Aboriginal and non-Aboriginal identity groups.13 As illustrated in figure 9, for the most part, the proportions were slightly higher among the total non-Aboriginal than among the total Aboriginal identity population. The one exception that stands out was in May 2009, where the proportion of permanent layoffs among nai was about 6 percentage points higher than the proportion among non-Aboriginal population and over 10 percentage points higher than the proportion among Métis population. In terms of gender, the proportions of permanent layoffs were much higher for men than for women in both Aboriginal and non-Aboriginal population groups. Within the gender, in most instances the proportions of permanent layoffs among men were similar, although the permanent layoffs among Aboriginal men show pronounced fluctuations over the recessionary period. The situation was slightly different in the case of women, as the proportions of permanent layoffs were consistently higher for Aboriginal women than for non-Aboriginal women in the period from January to May 2009. Recent reports from Statistics Canada indicate that the majority of recessionary job losses have occurred in the manufacturing, construction, natural resources and transportation industries. Our analysis of labour market

Figure 8 Unemployment Rates by Identiy and Gender, Canada, July 2008 – September 2009 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

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r r r r y h st ril be obe be be n-09 uar gu arc Ap r Ja M Au ptem Oct ovem ecem eb F e D N S Non-Aboriginal Identity (Men) Aboriginal Identity (Men)

ay

M

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Au

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Non-Aboriginal Identity (Women) Aboriginal Identity (Women)

Source: Statistics Canada, Labour Force Survey, July 2008 – September 2009 Notes: The data exclude people living on reserve or in the territories.

Figure 9 Proportion of Permanently Laid Off Workers by Identity, Canada, July 2008 – September 2009 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

Ju

r r r r r e y y 8 9 il h st st ly l-0 ugu mbe tobe mbe mbe an-0 ruar arc Apr Ma Jun Ju ugu mbe e J M b t A pte Oc ove ece A e p F D N Se Se Non-Aboriginal identity Aboriginal identity Metis nai

Source: Statistics Canada, Labour Force Survey, July 2008 – September 2009 Notes: The data exclude people living on reserve or in the territories. Our estimates for Inuit people living offreserve are included in the total “Aboriginal Identity” category only as they were too small for separate presentation, according to Statistics Canada’s disclosure guidelines.

199 The Recession and Aboriginal Workers Figure 10 Proportion of Permanently Laid Off Workers by Identity and Gender, Canada, July 2008 – September 2009 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

8

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r r r r y h st ril be obe be be n-09 uar gu arc Ap Ja M br Au ptem Oct ovem ecem e F D N Se Non-Aboriginal Identity (Men) Aboriginal Identity (Men)

ay

M

e

n Ju

r st ly Ju ugu mbe te A p Se

Non-Aboriginal Identity (Women) Aboriginal Identity (Women)

Source: Statistics Canada, Labour Force Survey, July 2008 – September 2009 Notes: The data exclude people living on reserve or in the territories.

outcomes by industry centers primarily on the construction and natural resource sectors, because these two sectors are where the Aboriginal workforce is concentrated the most. We also examine the differentials in the employment and unemployment rates between Aboriginal and non-Aboriginal identity populations in the public administration sector. Arguably, this sector has not been as affected by the current economic downturn as have the other sectors but it holds a significantly denser concentration of Aboriginal workforce, relative to the concentration of non-Aboriginal workforce. Although important, we do not discuss the effects of recession on the Aboriginal workforce in the manufacturing sector. As mentioned earlier, the proportions of Aboriginal workforce in this sector are relatively small, compared to the proportions of non-Aboriginal workforce. Figure 11 illustrates the proportions of permanent layoffs among Aboriginal and non-Aboriginal workers in the construction industry. As can be noted above, the proportions of permanently laid off workers among nonAboriginal workers have been increasing steadily since the onset of recession, from about 22 percent in October 2008 to about 50 percent in August 2009. The situation was more volatile for Aboriginal workers, with proportions ranging from low 24 percent in November 2008 to high 60 percent in July 2009. In September 2009, the proportions of permanent layoffs decreased for both identity groups, and more so for the Aboriginal workers. A closer look at the same data reveals that the most adversely affected identity group in the construction industry was the group of nai workers. As shown in figure 12, in almost each month, the proportions of permanent

200 Senada Delic and Frances Abele Figure 11 Proportions of Permanently Laid Off Workers in Construction Industry, Canada, July 2008 – September 2009 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%

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r r r r y h st ril be obe be be n-09 uar gu arc Ap r Ja M Au ptem Oct ovem ecem eb F e D N S Non-Aboriginal Identity

ne

ay

ly

Ju

Ju

M

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Aboriginal Identity

Source: Statistics Canada, Labour Force Survey, July 2008 – September 2009 Notes: The data exclude people living on reserve or in the territories.

Figure 12 Proportion of Permanently Laid off Workers in Construction Industry by Identity, Canada, December 2008 – September 2009

80.0% 60.0% 40.0% 20.0% 0.0%

c De

8

-0

-0

Jan

9

a ru

b Fe

ry M

h arc

ril Ap

M

Non-Aboriginal identity

ay

ne

Ju

Metis

ly

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Au

be

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S

nai

Source: Statistics Canada, Labour Force Survey, July 2008 – September 2009 Notes: The data exclude people living on reserve or in the territories. The July 2008 data for NAI and the data from July to November 2008 for Métis people entailed very small estimates and thus had to be suppressed to preserve confidentiality. Our estimates for Inuit people living off-reserve are included in the total “Aboriginal Identity” category only as they were too small for separate presentation, according to Statistics Canada’s disclosure guidelines.

layoffs among nai workers were clearly much higher than the proportions of permanent layoffs among non-Aboriginal workers, with an over 19 percentage points gap in July 2009 and about 15 percentage points gap in July 2009. There were only three instances where the proportions of permanent layoffs among Métis workers where higher than the proportions among nonAboriginal workers, in December 2008 and in January and July 2009, and in those instances the gaps were not as nearly as high as those of nai workers.

201 The Recession and Aboriginal Workers Figure 13 Employment Rates in Constraction Industry by Identity, Canada, July 2008 – September 2009 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0%

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ay

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Ju

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st

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Aboriginal Identity

Source: Statistics Canada, Labour Force Survey, July 2008 – September 2009 Notes: The data exclude people living on reserve or in the territories.

The fall in the employment rates for the two groups in the construction industry appears to have followed a similar trend. However, as illustrated in figure 13, the employment rate gap between the total Aboriginal and nonAboriginal workforce in the construction industry has widened from less then one percentage point and a half in October 2008 to over 16 percentage points in April 2009. From April 2009, the gap started narrowing, closing at just above five percentage points in September 2009. In terms of individual groups, the employment rate gap was more pronounced in the case of nai than in the case of Métis identity workers. A similar trend appears in figure 14, which illustrates the unemployment rates for Aboriginal and non-Aboriginal workforce in the construction industry during the recessionary time period. While in July 2008, the two groups of workers had about the same unemployment rates, from then on the unemployment rates for Aboriginal workers increased and remained well above the unemployment rates of the non-Aboriginal identity workers throughout the recession time period. These two groups of workers entered the recession with a 3 percentage point gap in unemployment rates. The gap then increased to about 12 percentage points in February 2009, although it started decreasing after that, to end in September 2009 with a two percentage point gap. Again, this gap was more pronounced for the nai identity workers than for Métis workers. As in the construction industry, in the natural resource industry, the proportions of permanent layoffs for non-Aboriginal workers have been increasing steadily throughout the recessionary time period, although at a slower pace. However, except in April 2009, the proportions of permanent layoffs among Aboriginal workers were higher from those of non-Aboriginal workers. In June 2009, the gap in permanent layoffs between non-Aboriginal and Aboriginal identity workers in natural resource industry amounted to 23 percentage points.

202 Senada Delic and Frances Abele Figure 14 Unemploymnet Rates in Construction Industry by Identity, Canada, July 2008 – September 2009 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

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ay

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Aboriginal Identity

Source: Statistics Canada, Labour Force Survey, July 2008 – September 2009 Notes: The data exclude people living on reserve or in the territories.

Figure 15 Proportions of Permanent Layoffs in Natural Resource Industry, Canada, July 2008 – September 2009

90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%

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r r r r y h st ril be obe be be n-09 uar gu arc Ap r Ja M Au ptem Oct ovem ecem eb F e D N S

Non-Aboriginal identity

ay

M

ne

Ju

ly

Ju

st

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Au

r be

tem

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Aboriginal identity

Source: Statistics Canada, Labour Force Survey, July 2008 – September 2009 Notes: The data exclude people living on reserve or in the territories. Natural resource sector includes mining and oil and gas extraction. The data pertaining to the Aboriginal identity people from July 2008 to February 2009 had to be suppressed because of very small estimates.

The employment rates for the two groups of workers in the natural resource industry were very close up to December 2008. The employment rates for the Aboriginal identity workers dropped down after December 2008 and remained well below the employment rates of the non-Aboriginal identity workers. The employment rate gap between the two groups of workers increased from just above one percentage point in December 2008 to over 15 percentage points in May 2009, although it closed at about 12 percentage points in September 2009.

203 The Recession and Aboriginal Workers Figure 16 Employment Rates in Natural Resource Industry by Identity, Canada, July 2008 – September 2009 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0%

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Aboriginal Identity

Source: Statistics Canada, Labour Force Survey, July 2008 – September 2009 Notes: The data exclude people living on reserve or in the territories. Natural resource sector includes mining and oil and gas extraction.

Figure 17 Unemployment Rate in Natural Resource Industry by Identity, Canada, July 2008 – September 2009 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

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Aboriginal Identity

Source: Statistics Canada, Labour Force Survey, July 2008 – September 2009 Notes: The data exclude people living on reserve or in the territories. Natural resource sector includes mining and oil and gas extraction. The Aboriginal identity data from August to November 2008 had to be suppressed because of very small estimates.

Similarly, the unemployment rate for the Aboriginal identity workers in the natural resource industry was about half a percentage point lower than the unemployment rate for the non-Aboriginal identity workers in December 2008. However, after that point, their unemployment rate increased and remained well above the unemployment rate of their non-Aboriginal identity counterparts. Thus the unemployment rate gap between the Aboriginal and nonAboriginal identity workers increased to almost 10 percentage points in May 2009, although it went down to about 6 percentage points in September 2009.

204 Senada Delic and Frances Abele Figure 18 Employment Rates in Public Administration Industry by Idenity, Canada, July 2008 – September 2009 100.0% 95.0% 90.0% 85.0% 80.0% 75.0% 70.0%

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r r r r y h st ril be obe be be n-09 uar gu arc Ap r Ja M Au ptem Oct ovem ecem eb F e D N S Non-Aboriginal Identity

ay

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Ju

ly

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Aboriginal Identity

Source: Statistics Canada, Labour Force Survey, July 2008 – September 2009 Notes: The data exclude people living on reserve or in the territories.

Figure 19 Unemployment Rates in Public Administration Industry by Identity, Canada, July 2008 – September 2009 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

8

l-0

Ju

r r r r y h st ril be obe be be n-09 uar gu arc Ap Ja M br Au ptem Oct ovem ecem e F D N Se Non-Aboriginal Identity

ay

M

ne

Ju

ly

Ju

st

gu

Au

r be

em

t ep

S

Aboriginal Identity

Source: Statistics Canada, Labour Force Survey, July 2008 – September 2009 Notes: The data exclude people living on reserve or in the territories.

Although we do not have the permanent layoffs figures for the Aboriginal identity workforce in the public administration sector the employment and unemployment figures we present indicate that the Aboriginal identity workers in this sector also fared worse than the non-Aboriginal identity workers during the recessionary time period. As illustrated in figure 18, the prerecession employment rate gap between the Aboriginal and non-Aboriginal identity workers in the public administration sector was about 9 percentage points in September 2008. This gap was closing slowly, reaching par in April

205 The Recession and Aboriginal Workers

2009, but it then increased again in June 2009 to 8 percentage points and closed at about 4 percentage points in September 2009. There seems to be no major differences in employment rates between the nai and Métis identity workers in this sector. The volatility of the labour market outcomes of the Aboriginal identity workers in the public administration sector is even more pronounced when looking at the trend in the difference of unemployment rates between the non-Aboriginal and Aboriginal groups of workers. As illustrated in figure 19, during the recessionary time period the unemployment rates for the nonAboriginal identity workers in the public administration sector were revolving around 2.5 percent, coming close to 3 percent only in September 2009. The unemployment rates of the Aboriginal identity workers in this sector, however, fluctuated from about 6 percent at the onset of the recession to about 2 percent in the later part of the recessionary period, and closing at about 4.5 percent in September 2009

s o m e p o l i c y i m p l i c at i o n s Notwithstanding some of our data limitations, our analysis reveals that, in many respects, the economic recession that has prevailed since fall 2008 has affected Aboriginal identity workers more negatively than it has non-Aboriginal workers. It also reveals that there are a number of importantly different patterns and trends among Aboriginal workers as a group. The differential effect of the recession on Aboriginal workers does not come as a surprise, given the current demographic and socioeconomic profile of the Aboriginal populations in Canada – they are relatively younger, have less labour market experience and less education than the non-Aboriginal population, all factors that make them much more vulnerable during the periods of layoffs and economic slowdowns in general. Our analyses of the lfs data reveal a notable heterogeneity among the different Aboriginal groups identified by Statistics Canada. Compared to the overall Canadian population, the labour market outcomes of the Inuit and nai identity populations have deteriorated further, widening the already sizeable gaps in their participation, employment and unemployment rates. In contrast the labour market outcomes of the Métis identity population are very close to those of the non-Aboriginal identity population, although their unemployment rate remains well above the unemployment rate of the nonAboriginal identity workers. Aboriginal women have been affected differently than Aboriginal men. For example, the employment rate for Aboriginal women is much lower than the rate for non-Aboriginal women but the gap decreased slightly during the recession. In contrast, the gap between the employment rate for Aboriginal and non-Aboriginal men increased markedly.

206 Senada Delic and Frances Abele

Interestingly, despite this trend, our analyses also reveal that the current economic slowdown has not (yet) adversely affected the proportions of fulltime workers in the Aboriginal identity workforce. This is contrary to what is the case for non-Aboriginal workers. While a far smaller proportion of Aboriginal workers have full-time employment than do non-Aboriginal workers, those who do have it have so far been less likely to lose it. On the other hand, part-time Aboriginal workers are significantly more likely to have been affected by the recession, and in key industry sectors, particularly the construction industry, they have experienced sizable permanent layoffs.

policies and programs: shifting and settling Although many federal, provincial and territorial departments and agencies have programs for the employment of Aboriginal people, two federal departments are responsible for most of the programs directed towards overall development of the Aboriginal labour force. These are the Department of Indian Affairs and Northern Development (diand) and Human Resources and Skills Development Canada (hrsdc). Under the Harper Conservatives, diand has become more important in Aboriginal labour market programming – and its programs more “statusblind.”14 For decades, the Department of Indian Affairs and Northern Development restricted its ambit to Inuit and to “status” Indians (now referred to as First Nations members). The department did not interact with or develop programming for “non-status” First Nations people or for Métis. Since 1985, these latter groups have been the responsibility of the Federal Interlocutor for Métis and Non-Status Indians, a position without a department, served by a small secretariat. The “status” distinction is incongruent with Section 35 of the Constitution Act, which recognizes the “existing aboriginal and treaty rights of Indians, Inuit and Métis”, seemingly implying a basis for similar treatment within groups and, with respect to Aboriginal rights, among them. Since 1982, the practical distinction with regard to status under the Indian Act has been very gradually eroding, with a move to more status-blind programming in the areas of social and economic development. An early signal was the appointment of the last Liberal Minister of Indian Affairs and Northern Development (Andy Scott), who was also appointed Federal Interlocutor in 2004. The Conservatives have continued the practice of appointing the same individual to both portfolios. Very early in their first mandate, the Conservatives chose also to centralize dispersed responsibilities for Aboriginal people to diand. The Office of the Federal Interlocutor was moved from the Privy Council Office to diand, as was the Inuit Secretariat. They also moved

207 The Recession and Aboriginal Workers

Aboriginal Business Canada (a status blind program) from Industry Canada to diand, where it continues to serve First Nations, Métis and Inuit. Thus, the Department of Indian Affairs and Northern Development now houses programs specific to First Nations members with status, and some other programs of general application. Of particular importance here is diand’s role in developing analysis and programs related to economic development. In August 2009, the Federal Framework for Aboriginal Economic Development was released, the first new policy statement in this area in twenty years.15 A prominent quotation from the prime minister identifies economic development as “the first priority.” Four features of the Federal Framework are highlighted: focusing so that roles and responsibilities are aligned to maximize impact; supporting skills and training that will create new opportunities and choices; leveraging investment and promoting partnerships with the private sector; removing barriers to Aboriginal entrepreneurship and improving access to capital for Aboriginal businesses. As we go to press, there has hardly been time for the approach outlined here to have an effect in society, but two early observations may be made. First, these features of the federal framework are in line with the principles that guided much Aboriginal economic development policy under the last two Liberal governments. They do not endorse, however, the second characteristic of the Liberal approach, the all-ofgovernment, multifaceted approach to dealing with Aboriginal disadvantage that reached its apogee in the Kelowna Accord.16 Secondly, the four features are congruent with the specific measures announced in successive Conservative budgets, particularly the last, “recession” Budget of 2009. Human Resources and Skills Development Canada houses two important Aboriginal labour force programs, the Aboriginal Human Resources Development Strategy (ahrds) and the Aboriginal Skills and Employment Partnership (asep). ahrds, launched in 1999, was designed to “expand the employment opportunities of Aboriginal people across Canada” by means of a system of decentralized granting agencies. Federal authorities negotiate community-level Aboriginal Human Resource Development Agreements with Aboriginal organizations, who make funding decisions under federally set accountability and performance standards. Along with these measures, the Aboriginal Human Resource Council of Canada was established to create opportunities for networking and resource-sharing among individuals and organizations active in this field. The Aboriginal Skills and Employment Partnership is the second major Aboriginal labour market program at hrsdc. asep funding is available to partnerships between corporations and Aboriginal partner organizations, many of whom are ahrds agreement holders. The partners develop joint proposals comprehensive, multi-year “training-to-employment” programs.

208 Senada Delic and Frances Abele

To ensure that the federal subsidies available through this program actually lead to job creation for Aboriginal participants, the industry partners must guarantee a specific number of long-term jobs for Aboriginal people by the completion of the project. ahrds and asep were both created under Liberal governments. They are characteristic federal programs of the post Program Review era since 1997, in their reliance upon partnerships, measurable results, targeted programs, the initiative of non-governmental actors, and upon the importance of “place-based” or regionally specific programming. In their design, they would seem welladapted to respond to some the specific features of Aboriginal labour market participation that we outlined earlier in this chapter, in at least two ways: decentralized decision-making about subsidies will allow adaptation to local needs; and asep support for some of those sectors in which Aboriginal people are particularly concentrated (such as construction and natural resources). Other federal departments have an important if less direct impact on Aboriginal labour force participation. For example, the Office of the Federal Interlocutor for Métis and Non-Status Indians through the Urban Aboriginal Strategy supports the self-organization of urban Aboriginal people for better services and more relevant and better coordinated government programming. The Aboriginal Healing Foundation (ahf), established in response to recommendations of the Royal Commission on Aboriginal Peoples for measures to support community and individual healing, addresses some of the causes that keep people from optimum educational or workforce engagement. These programs have not been strongly supported under the Conservatives, and indeed, the Aboriginal Healing Foundation is being wound up. Like the Kelowna Accord, the uas and the ahf can be seen as attempts to complement programs such as ahrds and asep meant to address immediate and specific labour market issues. The uas, the Healing Foundation, and especially the Kelowna Accord have a broader, and longer term purpose, to address in different ways the historical and social roots of labour market disadvantage. Some observers, including the leadership of the Assembly of First Nations and the Royal Commission on Aboriginal Peoples, would argue that addressing these factors is crucial to eliminating labour market disadvantages in the long term, and empowering Aboriginal people to create vital and sustaining communities.

c o n s e r vat i v e p r i o r i t i e s a n d l a b o u r force programs In the area of policy and programming for the Aboriginal labour force, the Harper Conservatives have in general stayed the course set by preceding Liberal governments. Financial commitments in successive Conservative budgets (and Throne Speech statements as well) have avoided political and

209 The Recession and Aboriginal Workers

constitutional flashpoints, emphasizing instead infrastructure development and labour force participation. This was the case before, as well as after, the great recession made “infrastructure spending” and “job creation” breakfast table expressions. Very early in their mandate the Conservatives drew back from the comprehensive measures outlined in the Kelowna Accord, evincing a reluctance to support broader brush and more ambitious kinds of partnerships with Aboriginal authorities that is a consistent feature of Conservative policy on Aboriginal matters. The Conservative governments have, however, continued with modern treaty and self-government negotiations on the pattern established by the Liberals. In addition, they moved to resolve a long-standing bottleneck in the relations between First Nations and the Crown. This is the improvement of measures for dealing with “specific claims.” Across Canada there are many “specific” land claims – outstanding matters related to federal treaty compliance with treaties already signed or with federal management of First Nations’ funds. In 2008, the Conservatives replaced the advisory Indian Claims Commission with the Specific Claims Tribunal, an independent body empowered to make binding decisions about claims and compensation.17 Two other important achievements, both admittedly completions of processes begun under the Liberals, were the 2006 negotiation of a final agreement between the Tsawwassen First Nation, the Government of British Columbia and the Government of Canada, and the 2007 signing of an agreement-inprinciple with the Inuit of Nunavik (northern Quebec) and the Government of Quebec concerning the formation of the Nunavik Regional Government.18 The 2006 Budget, produced soon after the first Harper Conservative government was elected, focused on “Aboriginal Communities.” It made relatively modest new financial commitments in the areas of on-reserve infrastructure and socio-economic conditions ($450 million) and specifically, for Aboriginal housing off-reserve ($300 million) and in the territorial north ($300 million). These perhaps responded to public discussion at the time of poor housing conditions for Aboriginal people; they certainly represented a radical scaling back of the very large commitments in a diverse areas of need earmarked under the Martin government as a result of the Kelowna Accord. On the other hand, and notably, there are similar commitments in the 2006 budget made for Aboriginal people living on and off reserves, and no mention at all is made of status. By the time of the 2007 Budget, the focus on support for market-driven social development continued, in an emphasis on “community development” and the need to increase Aboriginal participation in the labour market. There is recognition of the nature of the Aboriginal population, in the targeting of the needs of Aboriginal youth for special mention. There was by this point a distinctive Conservative stamp to the “announce-able” new measures. Funding to asep, the skill-developing industry partnership program, was increased

210 Senada Delic and Frances Abele

modestly billed as promotion of the “Knowledge Advantage – Creating a More Skilled and Inclusive Workforce.” New funds were allocated to “Investing in Canadians”: $300 million for the development of a housing market in First Nations communities, $20 million for First Nations Participation in Integrated Atlantic Commercial Fisheries, and $14.5 million over the next two years to for improving community justice programs – a closely targeted set of programs. Surprisingly to some observers, there were no reductions announced to any programs serving Aboriginal people as a specific group. The 2008 Conservative Budget was largely an extension of the commitments introduced in the previous two budgets. In this Budget, the Government claimed that “it has made significant progress in supporting Aboriginal Canadians over the past two years with a new practical approach that is paying off,” suggesting that the approach is effective in closing the gap in socioeconomic conditions faced by Aboriginal Canadians and increasing their workforce participation. Strengthening partnership with Aboriginal Canadians under the 2008 Conservative Budget involved $660 million in funding for different projects in Aboriginal economic development, First Nations education, improvement of health outcomes of First Nations and Inuit people, prevention-based models of child and family service on reserves, and safe drinking water in First Nations communities. The 2009 Conservative Budget stressed the continuation of partnershipbased approach to Aboriginal community economic development and the development of skilled Aboriginal workforce. It also contains a veritable blizzard of specific funding commitments, at levels much higher than was the case for all preceding budgets. The Aboriginal-specific financial commitments in this budget were listed under five separate headings: Enhancing the availability of training ($100 million over three years for asep), $75 million for a new, two-year Aboriginal Skills and Training Strategic Investment Fund, and $25 million for one year to ahrds); Strengthening partnerships with Aboriginal Canadians ($305 million over two years to improve health outcomes for First Nations and Inuit people; $20 million over two years for child and family services on-reserve); Investments in First Nations Infrastructure ($515 million over two years for “ready-to-go” First Nations projects in three priority areas, namely schools, water, and critical community services); Investments in Housing for Canadians ($400 million over the next two years for new social housing projects in First Nations communities; $200 million over the next two years for social housing in the North for all northern residents); Helping All Regions Prosper ($50 million over five years to establish a new regional economic development agency for the North; $90 million over five years to renew the Strategic Investment in Northern Economic Development program; $37.6 million in support of environmental assessments, regulatory conditions, science and Aboriginal consultations related to the Mackenzie Gas Project.). Only some of the expenditures under this last heading will

211 The Recession and Aboriginal Workers

benefit Aboriginal people, though they are the majority in two of the three territories where the regional funding is destined. The 2009 Budget asserts that the Conservative government has already surpassed the $5 billion figure suggested in the Kelowna Accord and has achieved impressive results in improving the socio-economic conditions of Aboriginal Canadians.19 Of course there cannot yet be any evidence that Conservative government expenditures have achieved results in improving the socio-economic conditions of Aboriginal Canadians – it is far too soon for that and, as we have argued, the recession has had a very important, and differential, impact. The claim that Conservative government commitments of new money have exceeded $5 billion is difficult to credit. The Budgets we have reviewed announce a total of about $3.6 billion, on the most generous interpretation.20 Nonetheless, while the grander claims of the 2009 Budget cannot be supported, the array of new programs announced and the total amount of funding committed ($1.8 billion, some over two years) command attention. The programs supported by these expenditures all follow the model established in the 1990s, emphasizing partnerships, targeting and individual and community self-sufficiency. The remaining question is how much these new programs and funds will address the widening gaps between Aboriginal and non-Aboriginal populations.

c o n c lu s i o n s The chapter has shown the complex nature of the Aboriginal labour market and of the disadvantages faced in both the pre-recession and recession periods. It has also shown that Conservative government spending on Aboriginal labour market programs has increased across the Harper government’s four budgets. Looking at what is missing in the 2006–09 Conservative budgets for Aboriginal Canadians is as informative as it is to look at what they contain for them. If, as many suggest, one important source of the labour market disadvantage of Aboriginal people in Canada has to do ultimately with the legacy of colonialism and forced assimilation, inter-generationally transmitted, then surely the work of such community-building organizations as the Aboriginal Healing Foundation and the Urban Aboriginal Strategy (uas) and such “contracted out” programs as Aboriginal Head Start still have an important role to play. Funding to the uas and Aboriginal Head Start has continued (at reduced levels in the case of the uas), but the Aboriginal Healing Foundation (ahf) is being wound down. The Aboriginal Healing Foundation was established in 1998, as one important aspect of Gathering Strength, the broad federal response to the final report of the Royal Commission on Aboriginal Peoples.

212 Senada Delic and Frances Abele

With a strong Aboriginal board and a multiyear commitment of $350 million, the ahf developed a Canada-wide program of funding communitybased healing initiatives. Although the ahf did not lack critics, it appears to have devised and executed an effective and efficiently managed approach to stimulate community development, expanding its original endowment and over fourteen years, spending and dispensing nearly one-half billion dollars in a transparent process. It funded 1,345 projects in every region of Canada, all community-based and most multi-year initiatives that took a holistic approach to community healing and development.21 The Conservative government transferred $125 million over five years to the ahf, pursuant to the Indian Residential School Settlement Agreement, representing about a 50% reduction in annual funding. If, as appears likely, no further funds are provided, the ahf will permanently close its doors in 2012. There is also reason for concern about quality and emphasis. If the Conservative Government’s initiatives to ensure that Aboriginal Canadians receive skills and training that will lead to their increased participation in the Canadian labour market revolve around post-secondary schooling below the university level, then such initiatives are bound to produce very limited results and, potentially, exacerbate gender inequalities. asep funding, for example, is tied to industrial activity (often mineral extraction projects) and it has a limited impact on overall skills development in the population. Even more telling is the focus on adults, even though elementary and secondary school completion are established to be strongly associated with success in the labour market. If the Conservatives have been wise, then, in continuing some important established programs that have been of considerable and immediate value, they may also be hasty in turning away from other, complementary measures that may have a longer term beneficial effect. As this volume goes to press, it is possible to look past the spending measures designed to prevent the recession from becoming another great depression, to the next few years, when the deficit and the national debt may rise to the top of the policy agenda. It will be important that the response to this urgency does not lead to measures that destroy what has been learned about successful approaches.

notes 1 We are grateful to Gustave J. Goldmann, Russell LaPointe, Clarissa Lo and Saul Schwartz for helping us to improve this analysis. 2 In Canada, “Aboriginal people” is a collective name used in general reference to the original peoples of North America and their descendants. The Canadian Constitution (the Constitution Act, 1982) recognizes three distinct groups of Aboriginal peoples:

213 The Recession and Aboriginal Workers

3

4

5 6

Indians, Métis, and Inuit. In collecting statistical information on these three groups of Aboriginal peoples, the Census of Canada employs two methods: the first method uses the general “ethnic origin” question, which allows derivation of the most inclusive definition of “Aboriginal ancestry” population while the second method uses the more specific “Aboriginal identity” question, which allows the most precise identification of the members of each group of Aboriginal peoples. In the most recent censuses, the Aboriginal identity question was phrased in such a way as to accommodate multiple responses – that is, a respondent could identify with more than one Aboriginal identity group. When discussing the labour market outcomes of individual groups, we limit our discussion in this chapter to the single-response “Aboriginal Identity” population groups, that is those individuals aged 15 and older who on the Census and Labour Force Survey questionnaires self-identified themselves as belonging to one of the three Aboriginal identity groups – North American Indian, Métis, or Inuit. The labour market outcomes we present for the total Aboriginal identity population include both the single and multiple response counts of the three population groups. Our Census data covers all Aboriginal identity individuals, living on and off reserve, who were enumerated in the 2006 census. Our lfs data pertain only to those Aboriginal identity individuals who live off-reserve. Indian Affairs and Northern Development Canada, Aboriginal Demography: Population, Household and Family Projections, 2001–2026. (Indian and Northern Affairs of Canada, Strategic Research and Analysis Directorate, Policy and Research Division. Catalogue no. R3-63/2007. Statistics Canada, Projections of the Aboriginal Populations, Canada, Provinces and Territories, 2001–2017. (Ottawa: Minister of Industry, June, 2005).Catalogue no. 911547-XIE. Statistics Canada. A 2008 federal government report associated with the development of a new economic development framework estimates that “over 600,000 Aboriginal youth will enter the labour market between 2001 and 2026.” Indian Affairs and Northern Development, 2008. Toward a New Federal Framework for Aboriginal Economic Development. Discussion Guide, Ottawa: Public Works and Government Services Canada), p. 3. A number of other reports also emphasize this; see for example Jeremy Hull, “Aboriginal Youth, Education, and Labour Market Outcomes,” in Jerry P. White, Julie Peters, Dan Beavon and Nicholas Spence, eds. Aboriginal Education: Current Crisis and Future Alternatives. (Toronto: Thompson Educational Publishing, 2009) p. 249–266 and Statistics Canada, Projections of the Aboriginal Populations, Canada, Provinces and Territories, p. 9. Statistics Canada, Projections of the Aboriginal Populations, Canada, Provinces and Territories. See M. Mendelson, Aboriginal Peoples and Postsecondary Education in Canada. (Ottawa: Caledon Institute of Social Policy, 2006) and B. Biswal, Literacy Performance of Working-age Aboriginal People in Canada: Findings Based on the International Adult Literacy and Skills Survey (ialss) 2003. Research report prepared for the Human Resources and Social Development Canada, Learning Policy Directorate, Strategic Policy and Research, July 2008, Catalogue no.: HS28-147/2008E-PDF.

214 Senada Delic and Frances Abele 7 It should be noted here that all of the reported official figures on the socio-economic conditions of nai living on-reserve are likely underestimated because in every Census taken up to now there has been a sizable downward bias in the Census counts for the on-reserve population due to incomplete enumeration and refusals by some Indian reserves and settlements to participate in the census-taking. 8 Statistics Canada classifies the working age population into three mutually exclusive groups: employed, unemployed, and not in the labour force. The “employed” are considered those individuals who, during the week (Sunday to Saturday) prior to Census Day, did any work at all for pay or in self-employment or without pay in a family farm, business or professional practice or who were absent from their job or business, with or without pay, for the entire week because of a vacation, an illness, a labour dispute at their place of work, or any other reason. The “unemployed” are considered those individuals who, during the week (Sunday to Saturday) prior to Census Day, were without paid work or without self-employment work and were available for work and either had actively looked for paid work in the past four weeks, or were on temporary lay-off and expected to return to their job, or had definite arrangements to start a new job in four weeks or less. These two populations (employed and unemployed) combined make up the total labour force. All other civilian, noninstitutionalized individuals, aged 15 years and over, who were neither employed nor unemployed, are classified as being out of labour force. Hence the participation rates are derived by expressing the total labour force as a percentage of total population, aged 15 years and over. The employment rates are derived by expressing the employed population as a percentage of total population aged 15 years and over. The unemployment rates are derived by expressing the unemployed population as a percentage of the total labour force. See Statistics Canada, Guide to the Labour Force Survey. (Ottawa: Minister of Industry, January 2009). Catalogue no. 71-543-G. 9 High participation rates of Métis are not inconsistent with their high unemployment rates. This seemingly paradoxical outcome illustrates how an increase in the unemployment rate can occur simultaneously with an increase in employment. For instance, a large number of new workers could enter the labour force, pushing up the participation rate, but if only a small fraction of them became employed, the end result has to be that the increase in the number of unemployed workers outpaces the growth in employment. Theoretically speaking, this outcome in our analysis could be signaling an unusually strong labour market attachment of Métis working-age population. The discouraged worker phenomenon would suggest an inverse relationship between unemployment and participation rate – that is, generally speaking participation rates tend to fall when unemployment rates are high, and vice versa, because when unemployment is high some active job-searchers can become discouraged and decide to opt out of the active labour force. See R. Donald Williams, “Young Discouraged Workers: Racial Differences Explored”. Monthly Labor Review, June 1984, 36 – 38. In our analysis, this does not seem to be the case with Métis population. At this point we have no explanation for the pattern, but the matter certainly warrants further investigation.

215 The Recession and Aboriginal Workers 10 The lfs is a monthly national household survey that produces information used in the calculation of Canada’s official participation, employment and unemployment rates. The survey has recently introduced the Aboriginal identity question to its questionnaire and is now regularly collecting comprehensive information on labour market outcomes of Aboriginal people, aged 15 years and over, living off-reserve in all provinces and territories. Since in our analysis we have employed the national files of the lfs, which contain only information for the provinces, results for Inuit population were based on a too small sample size to be released for publication, according to Statistics Canada’s release criteria. Hence, we limit our individual identity group discussion in this part of the chapter to the other-than-Inuit Aboriginal identity groups living off-reserve. The results for Inuit population, however, are still contained in the Figures, under the total Aboriginal identity label. 11 Statistics Canada, Labour Force Survey, October 2009. (Ottawa: Statistics Canada. The Daily, November 6, 2009). 12 The term “underemployment” is generally used to describe the labour that is not fully utilized. The two most common applications of the term are to describe individuals who are working at jobs for which they are over-skilled or to describe individuals who are working fewer hours a day than they would prefer. Our lfs data describe the latter group of individuals – that is, we are looking at the individuals who are involuntarily part-time employed. These individuals have reported in the lfs that they have looked for full-time employment but could not find it due to economic or business conditions. 13 The proportions of permanent layoffs were calculated by excluding the self-employed population from the analytical samples in each identity group since the concept of permanent layoff applies only to employees. Permanent layoffs covered in this study are those that occurred for structural or cyclical reasons, in particular the cases where the company moved, the company went out of business, a business slowdown occurred and business was sold or closed down, or the employee was dismissed. The question was posed to all lfs respondents who were not currently employed but who worked within the previous twelve months. 14 First Nations people (in the Census, nai) who have status under the Indian Act are eligible for federal programs and services, and subject to the restrictions, imposed by that Act. There are many Aboriginal people who do not have status under the Indian Act, including some people who would identify as First Nations, and all Inuit and Métis. Historically, First Nations members who do not have status under the Act have been referred to as “non-status” or “non-status Indians.” “Status-blind” programs ignore this distinction; the term is used to describe programs that are available to all Aboriginal people. 15 Indian Affairs and Northern Development, Federal Framework for Aboriginal Economic Development. (Ottawa: Indian Affairs and Northern Development, 2009), p. 2. Twenty years earlier, in 1989, the Canadian Aboriginal Economic Development Strategy was announced, a big ticket program that emphasized Aboriginal business development. 16 The 2005 Kelowna Accord was a Martin Liberal government achievement, the result of an elaborate and highly participatory process that unfolded over a couple of years,

216 Senada Delic and Frances Abele

17

18

19 20

21

engaging senior public servants from a number of federal departments, senior representatives from the national Aboriginal organizations, and ultimately provincial and territorial governments as well. After these deliberations, very substantial ten-year commitments to funding and collaborative action were made by all these parties in priority areas – education, housing, economic opportunities and health. Before the Accord could be implemented by the federal government, an election produced a change of government. The new Conservative government, led by Stephen Harper, did not fulfill most of the commitments made in the Kelowna Accord. The first Conservative Minister of Indian Affairs, James Prentice, had served on the Indian Claims Commission before being elected to Parliament. For more information about the Tribunal, see See http://www.ainc-inac.gc.ca/al/ldc/spc/jal/fct3-eng.asp Between 1975 and 2008, (counting the Yukon Umbrella Agreement as one agreement of many parts) ten modern treaties were negotiated by Aboriginal nations and peoples in Canada, covering Inuit Nunaat (all of the Inuit territories), Cree lands in Quebec, most of the Northwest Territories and Yukon, and the Nisga’a lands in British Columbia. There are outstanding land and modern treaty negotiations in British Columbia and parts of the nwt. Government of Canada, Canada’s Economic Action Plan: The Budget in Brief 2009. (Ottawa: Department of Finance, 2009). That is, including funds committed to the North, where Aboriginal people are the majority or, in the case of the Yukon, a large minority – but do not comprise the total population that will benefit directly from spending commitments. See Aboriginal Healing Foundation, Annual Report, (Aboriginal Healing Foundation 2009); and John Graham and Laura Mitchell. 2009, A Legacy of Excellence: Best Practices Board Study, Aboriginal Healing Foundation (Ottawa: Institute on Governance, May 29, 2009).

pa r t t h r e e Public Management Challenges and Choices

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11 The Precarious State of the Federal Public Service: Prospects for Renewal d av i d z u s s m a n

introduction This chapter examines the current precarious state of the federal public service and its prospects for renewal. It is set in a historical context but also in the complex politics and governance as a new decade begins. Donald Savoie has argued that past public service reform efforts “have been built on fantasies rather than on theories” leading him to conclude that “another public service reform measure is pointless.”1 One of the concerns behind Savoie’s claim is that all too often public service reform is conducted without a realistic assessment of the state of the public service and the array of problems facing public servants. For some, like Savoie, public service reform efforts appear to be nothing more than shuffling the deck chairs of the Titanic, leaving the major problems untouched. As the Government of Canada begins its five-year review of the Public Service Modernization Act (psma), we find observers describing the current state of the federal Public Service as business as usual. But other advocates of good governance, including this author, argue, as does this chapter, that it is in a precarious state, facing a potent cocktail of interlocking realities – high paced growth combined with significant turnover; a changing governance structure with new, and powerful, players; a web of rules accentuating accountability while simultaneously choking innovation and creativity. All of this is occurring while facing both immediate and longer term challenges, including the global financial meltdown, economic recession, accessibility to health care, H1N1 and an aging infrastructure, to name only a few.

220 David Zussman

The chapter also argues to Canada and Canadians, the precarious state of the federal public service should be of enormous concern.2 More often than not, however, it is an institution that is taken for granted despite the well-recognized correlation between successful countries and a high quality, high-performing public service.3 Thomas Friedman, the noted author and columnist of the New York Times made the argument in 1999 when he pointed out “in a globalization system … one of the most enduring competitive advantages that a country can have today is a lean, effective, and honest civil service.”4 The federal public service will continue to play a critical role in the success of our nation, perhaps no more so then over the next decade as the country steers a new course out of the difficult economic times that we have experienced these past few years. As a new generation of leaders prepares to take over the reins of responsibility, significant and meaningful changes will be needed to ensure Canada’s public service is able to respond to the challenges ahead. These changes will need to respond to four factors that collectively hold the key to understanding the complex dynamics involved in managing the renewal process: new people: Recruitment efforts have already paid off as over 100,000 new employees have been hired in the past decade. As well, there are significant numbers of workers doing new jobs within the public service that did not exist a decade ago. new environment: The complexity of government has been steadily increasing. Global challenges are the norm, new tools and competencies are needed to lead departments and agencies and public servants are required to work in new, more integrated ways to tend to the business of government. new rules: Often referred to as the “Gomery Effect” within Ottawa circles, there is an increased focus on public accountability and transparency across the Public Service and the resulting web of rules has made day-today management arduous. new players: The growing influence of political advisors has become institutionalized across the Canadian government. Their numbers have grown and their role within the machinery of government has shifted the traditional relationship between elected officials and the Public Service. Understanding the dynamic between these factors will help us to (1) better understand the current state of affairs within the federal Public Service; (2) assess whether recent renewal efforts will achieve their goals during the coming period of significant change and (3) suggest ways to guide the federal public service away from its increasing precarious state to a more stable and attractive workplace for current and future employees.

221 The Precarious State of the Federal Public Service

In carrying out this analysis, both primary and secondary source data were used. An extensive review of published academic articles, meetings at the Centre on Public Management at the University of Ottawa, countless meetings and interviews with public servants (both executive and entry level) form the analytical basis for this chapter. The recently released 2008 Public Service Employee Survey has been a valuable input and more than 20 interviews were completed with current and former senior public servants. The consistency of comments from leaders across government provides reliability in those instances where subjective opinions have been sought. The structure of the chapter is quite straightforward. The first section looks at how we got to where we are now with a brief historical review. The second section then examines the current state of the federal public service. This is followed by an analysis of key issues about renewal. Conclusions then follow.

p u b l i c s e r v i c e r e n e wa l : how did we get here? The Early Years The roots of renewal and reform in the federal public service can be traced back to the mid-1800s with the British statute entitled an Act for improving the organization and increasing the efficiency of the Civil Service of Canada. As the public service continued to evolve, the Public Service Commission was created in the early 20th century to ensure Canada benefited from an independent, professional public service in which patronage and its associated corruption had no place. It has been faithfully pursuing this mandate for over a century.5 The past 50 years have been characterized by waves of reform through both legislative changes and new government-wide policies to respond to those pressures that existed at the time of the reforms. One of the more critical shifts came in the 1960s through the work of the (Glassco) Royal Commission on Government Organization with its emphasis on letting the managers manage. In the 1970s the (Lambert) Royal Commission on Financial Management and Accountability shifted the focus to accountability – from letting managers manage to making them manage. At the end of that decade, the D’Avignon Special Committee on Personnel Management and the Merit Principle started the shift toward a values-based Public Service.6 Integrity, accountability, neutrality, efficiency, effectiveness, responsiveness and representativeness became the values upon which management practices were based. These were complemented by the ever-present merit principle, along with newly articulated principles, including equity and a greater emphasis on responsiveness, efficiency and effectiveness.7

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Moving into the 1980s, the federal Public Service had proven itself to be a global leader in public service reform. While it had not adopted a truly ideological approach to reform like some of its global contemporaries, it had consistently pushed new boundaries in governance and excellence influenced by global trends, management pressures, new information technologies and political realities. Perhaps one of the most widespread and enduring influences that has shaped the Canadian Public Service is new public management and its emphasis on private sector practices. With governments growing larger and larger each year and struggling with layers of management and red tape, new public management introduced a bottom-line mentality with an overriding focus on efficiency and greater client and customer focus. Beginning in earnest in the early 1990s, leaders in the public sector around the world became focused on measurement and performance reporting. Many fads came and went, and some governments committed themselves to radical public sector changes. Canada, being quite non ideological, did not join any of the new management waves with any enthusiasm but rather chose a course of selective incremental change over time. Nevertheless, the resulting shift towards private sector management practices have been significant and long lasting within Canada since it has created a culture of performance measurement, contracting out and increased personal accountability. Unfortunately, over the past three decades Canada’s reputation has slowly eroded and it is no longer considered at the leading edges of reform and renewal. One strand of evidence that indicates Canada’s general decline as a leader in global governance is Transparency International’s corruption rankings where Canada slipped to 14th in the world in 2006 although we have bounced back to 8th spot in 2009. The Quiet Crisis In the late 1990s, Jocelyne Bourgon, then clerk of the Privy Council and head of the Public Service, reported to Prime Minister Jean Chretien that a “quiet crisis” existed within the federal public service. She believed that the public service was suffering from a crisis of identity and of purpose.8 After years of downsizing, some public servants, for the first time, were questioning their career choice. Others were not convinced that their skills and abilities were being used effectively. Still others, after an exemplary career, stated they would not advise there children to follow in their footsteps. Research also showed that some students would not consider a career in the public service if presented with other options.9 The years of restraint, hiring freezes, deregulation, downsizing, pay freezes and cutbacks had taken their toll. The problems were recruitment, retention, executive succession, staff training, and employee morale.10 This “malaise” of

223 The Precarious State of the Federal Public Service

crisis proportions, in the opinion of the clerk, “was reflected in indications that staff morale was pitiably low, that many public servants questioned their career choice, and that many others no longer viewed the public service as an ideal employer.”11 The clerk also warned that the public service was at risk of not being able to replenish its human resource talent because many younger Canadians no longer viewed employment in the federal public service as a desirable career option.12 She concluded, that “the attention given to human resource management at all levels has been insufficient to prepare adequately the organization and its people for the future.”13 She placed public service renewal squarely on the agenda of the Prime Minister and on the shoulders of the leadership of the public service. The result was a government-wide focus on renewal that came to be known as “La Releve” (re-awakening). It was also the acronym for leadership, action, renewal, energy, learning, expertise, values and experience. La Releve brought to the forefront discussions about recruitment and retention, staff training and development, and the need to heighten senior management capability. Also moving ahead during this period was an emphasis on doing more with less, fiscal prudence, more citizen involvement, consultation and participation in decision making, and improved service delivery. The key driver of this era of renewal was a recognition that a critical mass of baby boomer public servants would begin retiring in a decade. The demographic data were stark indicating the potential for huge losses, both in terms of numbers and knowledge, across the ranks of the public service. By the turn of the century there was some debate as to whether there was a real crisis. But crisis or not, the use of the word did kick start a discussion about recruitment and retention, staff training and development, and “heightening of senior management capability.”14 The clerk had successfully attracted attention to this issue like no one before her and public service renewal became a critical pillar in Canada’s ability to retain a leading edge, competitive governance regime. Public Service Modernization The appointment of Mel Cappe as the new clerk of the Privy Council in 1999 provided an opportunity to build on the work of his predecessor but to also look at modernizing the human resources (hr) regime at a broader level. Moving into the 21st century meant competing for talent in the open market at a time when workforces were becoming increasingly diverse and global. While the market was demanding efficiency and flexibility, the federal public service was operating inside of a risk-averse environment with a complex, slow moving hr system. It had become clear that the government’s human resources practices had failed to keep up with the pace of change in the marketplace. In 2001 the Task Force on Modernizing Human Resources Management in the Public Service was created and headed up by Ran Quail. The mandate

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given to the Task Force recognized that the “current laws and rules which cover how people are managed in the Public Sector are neither flexible nor responsive enough to allow the Public Service to compete for and retain the talent needed in today’s knowledge economy, and to replace those planning to retire over the next decade.”15 The Quail Task Force stressed the need for greater clarity in roles with respect to human resources management, the need for managers to have greater responsibility in this area, the need for more efficiency in human resources management, and the importance of ensuring fairness in the treatment of employees. The work of this Task Force set the stage for the changes currently underway across the public service. The torch of human resources renewal was passed from Mel Cappe to Alex Himelfarb, the new clerk of the Privy Council appointed in 2002. Himelfarb ushered in the centrepiece of the modernization effort – The Public Service Modernization Act (psma), passed in 2003. The new Act included improvements to labour-management relations, a new Public Service Employment Act, the creation of the Canada School of Public Service and several delegated authorities to deputy minsters for human resources management. As articulated by Himelfarb, these changes contributed to the conditions for successful renewal: “In the end, the success of our efforts to modernize our human resource management regime will be measured by whether these reforms helped us to renew ourselves and recruit and develop the people we need, whether they helped create a climate in which excellence and innovation thrive, and whether we are representative of the diverse country we serve.”16 This modernization initiative was described as “perhaps the most dramatic reform to the way [the federal government] manages its human resources in more than 35 years.”17 The psma set an important milestone in public sector reform by reinforcing key elements of the public service culture, including accountability, fairness and transparency. It assigned greater flexibility to departments and agencies in managing people so that the right people are put in the right jobs on a timely basis. The changes also underscored the federal government’s commitment to merit, non-partisanship, public service values and a culture of learning. Streamlining Public Sector Governance However, despite these important changes across the Public Service, there still remained a great deal of complexity with duplicate, and perhaps unnecessary, rules. With a new clerk, Kevin Lynch, moving into the Privy Council Office in 2006, there remained four separate federal organizations with responsibility for different aspects of human resources management within the federal government.

225 The Precarious State of the Federal Public Service

In order to advise the clerk in addressing the structural, cultural and demographic challenges facing the public service, the government formed an External Advisory Committee on the Public Service under the leadership of Paul Tellier and Don Mazankowski.18 It’s mandate focused on the following five areas: • recruitment and retention principles, strategies and practices for ensuring continued capacity to deliver excellence in public policy, programs and services; • the removal of policy and legislative barriers to ensuring a diverse, flexible and adaptable workforce; • improved development programs for ensuring excellence, leadership and teamwork; • effective human resource management policies and practices; and • branding the public service as a trusted and innovative institution of national importance. With the advice of the Committee and from leaders inside the public service, the clerk of the Privy Council re-focused attention on recruitment and development activities early on in his mandate followed by significant structural reform, the effects of which are still playing out today. Lynch moved ahead on two key fronts: (1) providing primary responsibility and accountability for employee management with deputy ministers, and (2) focusing the role of central agencies on corporate activities, such as the broad framework for people management and responsibility for the compensation framework. One of the key structural shifts was the creation of the Office of the Chief Human Resources Officer (ochro). In March, 2009, the Canada Public Service Agency and the parts of the Treasury Board Secretariat that dealt with pensions and benefits, labour relations and compensation were consolidated into a new ochro. It was given a mandate to make human resources management across the public service more effective and to reduce overlap and duplication of roles. It is housed within the Treasury Board Secretariat and managed by a deputy minister-level leader. Accompanying this structural shift was a recognition that primary responsibility for human resources management needed to be at the departmental level. Accordingly, deputy ministers are now required to spend more time and effort on hr management and to develop and implement multi-year human resources plans which are integrated with departmental business plans. Current modernization efforts also recognize that successful public sector renewal is as much a culture challenge as a question of changing policies and processes.

226 David Zussman Figure 1 Indeterminate Employees

180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000

09

08

20

07

20

06

20

05

20

04

20

03

20

02

20

01

20

00

20

99

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94

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93

0

t h e c u r r e n t s tat e o f t h e p u b l i c s e r v i c e After decades of renewal efforts, where do we currently stand? The data paint a clear picture. Baby boomers are retiring at an advanced pace, the federal public service is larger than ever and the public service is confronted with new challenges in the wake of the web of rules, declining trust in government, new management practices and successive minority governments. It is within this environment that we observe four critical factors which, when taken as a whole, is cause for the precarious state of the public service today: new people + new environment + new rules + new players = a precarious state New People The first critical factor involves new public servants in two different senses of the term. Through one lens, it means the number of individuals who are being newly hired into the public service for the first time. As demonstrated in Figure 1, the public service is larger now than it was before its peak prior to Program Review in the mid-1990s. In this sense, renewal efforts have been successful in attracting new people into the public service to offset the large-scale retirements and to fill the thousands of new jobs that have been created in security related fields, health services, oversight and auditing. Of the more than 200,000 public servants currently working in government, over 100,000 have been hired since 1999.

227 The Precarious State of the Federal Public Service Figure 2 Movements In and Out of the Public Service

250,000 200,000 150,000 100,000

1999

50,000

2007

0 Core Public Service hired before 1999

New Employees hired since 1999

Departed between 1999 and 2007

Total full time employees

But the term “new” does not just refer to new hires. It also extends to individuals who are working in new jobs inside of the public service. For example, the number of individuals who have been promoted into the executive community for the first time has increased almost every year for the past decade. By 2009, the number of new executives promoted within the public service was more than double the number a decade earlier. The issue of short tenure and churn became an issue for the Public Service Commission (psc) when it noticed that public servants were moving from job to job at a rapid pace. In its, 2007 annual report for example, the psc noted that the level of movement “reached 40%, up from 35% the year before and 30% the year before that.”19 The churn issue has also continued to attract the attention of a number of other research organizations that have noted the amount of time deputy ministers spend in their positions reached almost historic lows during the past decade. For instance, the length of each deputy assignments fell to only 2.7 years between 1997 and 2007, down from an average tenure of four years during the previous decade.20 Moreover, in an impassioned plea for a greater appreciation of the complexity and demands of the typical dm job, Tom Axworthy and Julie Burch have recently argued that, rapid turnover forces “public servants to constantly readjust to new management, which affects their ability to do their job.”21 According to many of those interviewed for this chapter, the significant numbers of new hires in combination with individuals who are taking on newly created positions inside of the public service has created a sense of instability within departments and agencies since there are so many managers with little content expertise in their areas of responsibility. This is especially

228 David Zussman Figure 3 New ex’s Hired into the Public Service

800 700 600 From inside

500 400

From outside

300 200 100

08 20

07 20

06 20

05 20

04 20

03 20

02 20

01 20

20

00

0

true at the executive levels where new executives often bring to the organization a new leadership style and new agendas, sometimes pushing aside much of what was already in progress under the previous leadership team. The new hiring and promotion activity across the public service has also resulted in a loss of corporate knowledge where many public servants today have less job related knowledge than their predecessors of 20 years ago.22 The large number of individuals who have left the public service in recent years also fans the sense of uncertainty and dislocation. Since the beginning of the decade, almost 60,000 public servants working in indeterminate (full time) positions have left the federal government either to retire or to find employment in another sector. The trend line is ominous since from 2000 to 2003, there were less then 5,000 departures per year while there were 9,000 departures in the fiscal year 2008/2009. Given the age distribution, the sound of the revolving door will grow louder in recent years as the full impact of the baby boom generation is felt. New Environment The centre of government has grown in size, complexity, influence, and visibility, and as a result, “making things happen” in government takes more time, effort, patience and expertise than ever before. The impact of technology on the work world such as mobile devices (blackberries) has created the 24/7 work day. One manifestation of this development has been the increased workload of senior officials. For example, a recent survey of the deputy minister community indicated that they work on average almost 69 hours per week with a typical

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weekday lasting 12 hours plus an additional 8 hours or more on evenings and weekends. Perhaps most telling about the results of this study is that deputy ministers consider this is an acceptable and necessary work schedule given their responsibilities, the complexity of their duties and the demands on their time23. Moreover, underpinning these realities is a constant culture of political uncertainty and risk aversion across the public service. Minority governments, the anti government sentiment of the two most recent governments, and the pressure for more public accountability feed the fire of fear and insecurity. Over time, this has had an effect. In the 1970s and early 1980s, many senior public servants frequently clashed over big policy ideas and these passionate clashes were inspiring to young public servants (future deputy ministers). Despite the culture of debate, the norm was a deeply held respect for the individual and his or her ideas. However, the current working environment across the senior ranks of the Public Service shows less tolerance for strongly held differences of opinion. In addition, the senior public service of today displays less inclination to challenge authority and places more emphasis on process.24 While lip service is given to innovation and risk-taking, a risk-averse culture predominates. One former deputy minister stated, “if the public service was a hockey team, it would be composed entirely of goalies.”25 While risk aversion is wide spread across government, it would be incomplete to leave this thought in isolation. Part of the increased complexity within the public service environment stems from an inability to formulate and debate policy exclusively on the “inside.” The reality of this day and age is that pressure groups and think tanks have become even more important players. Their numbers have multiplied, their sophistication has increased and their impact on politics and public policy is discernibly greater. And what would life as a public servant be like without the ubiquitous and demanding media? The media is a constant companion to government and the 24/7 media cycle cannot be ignored and can become even more challenging in an era of minority government. Parallel to the rise of think tanks, pressure groups and the aggressiveness of the media has been a subtle shift in the political dimension of governance in Canada. Although political parties have weakened over the past twenty years, political leadership has become stronger and more dominant, and, as chapter 2 shows, a more partisan system of politics has emerged. Within government, this has translated into the growth of a strong centre, to the extent that some key political staff within the Prime Minister’s Office can have more power than most ministers. As the centre of government becomes more dominant, the pressure increases for public servants to be compliant with the established direction. As a result, as Savoie has noted the performance of the public service is increasingly assessed based on its ability to abide by and execute the will of the centre, as opposed to its ability to identify policy alternatives or create space for debate.26

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New Rules Perhaps most disconcerting in recent years are the number of incidents which have served to undermine trust in government across Canada resulting in the creation of new rules. Media headlines have made many references to “rogue public servants, criminal activities and false invoices.” And these incidents relate only to the sponsorship scandal and the resulting Gomery Inquiry. Moreover, the confrontation between Parliament and George Radwanski, the privacy commissioner, brought to light personal spending habits and abuse of power by a public office holder and forced the Treasury Board to bring in a significant number of “management improvements” to ensure that this kind of behaviour was never repeated. To add further ammunition to the media’s search for bureaucratic wrong doings, a number of high profile inquiries have kept public service failures front and centre in the minds of the Canadian public. The Dennis O’Connor inquiry looked into the complicity of Canadian officials into the affair of Maher Arar. Justice Frank Iacobucci led an inquiry into the role of Canadian officials in three torture situations. The Air India Commission focused on the 1985 Air Canada bombing and the inadequacy of accountability systems 25 years after the fact. The list goes on: Omar Khadr at Guantanamo and the rights of Canadian citizens; residential schools and the abuse of Aboriginal children in the 1950s, and failed audits at the Department of Human Resources Development Canada. It extends to the present day where the Harper government has resorted to attacking Richard Colvin, a middle ranking foreign affairs officer, for sending notes to his superiors about the possible use of torture in Afghanistan by Afghani troops. The response of the public pervice to these failures has been the creation of a web of rules that is so complex and limiting that it has become almost impossible to operate and manage efficiently. At the political level, the Harper Conservative government passed the Federal Accountability Act in an attempt to demonstrate to voters that it was putting affairs in order and rooting out corruption and mis-spending. This has resulted in the creation of 8 new oversight agencies, the tightening of conflict of interest and post employment rules to control the interaction between the public service and outside communities, and intensifying the legislation that regulates lobbying activities in Canada. New public servants operating within a new environment are also forced to contend with an internal web of rules, described by the Treasury Board Secretariat as the sum total of unclear, unnecessary and ineffective rules, reporting requirements and administrative processes within the government that discourage innovation and impairs the ability of the public service to deliver services to Canadians. Rules of course have always been an important safeguard within the public pervice, and this needs to continue. They are in place to ensure the safe, fair,

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stable and accountable functioning of government. However, when rules accumulate excessively they can diminish the efficiency and effectiveness of government programs and services. The post-Gomery environment has heightened public and Parliamentary concern over transparency and accountability. This has been amplified by the media and at times in Parliament, where error free government, not risk management by government, has become the benchmark for success or failure.27 As a result, public servants are faced with prescriptive, overlapping, and opaque rules and reporting requirements, coupled with outdated and inefficient administrative processes and systems. The complexity of the human resources management regime has proven to be particularly onerous in recent years, and more broadly, the internal reporting requirements and “paperwork” have steadily increased. The transactional costs of trying to efficiently manage within the federal government system are creating a heavy burden on managers who want to be creative and responsive in the execution of their responsibilities. These systemic challenges have started to be addressed by the Treasury Board Secretariat. A modernization and streamlining process is underway to ensure that the right rules are in place to clarify accountabilities, give departments and agencies more control over their decisions and focus Treasury Board oversight on higher-risk, more complex programs and projects. The human resources regime is also in the midst of a restructuring effort with the creation of the Office of the Chief Human Resources Officer. In these areas, the Public Service is moving in the right direction. Perhaps of greater concern, however, is the effect that these new rules have had on the culture of the public service. Rather than increasing transparency and accountability, the web of rules has created an even more pronounced culture of risk aversion. Public servants at all levels have lost the ability to take a balanced approach to reasonable risk taking. Too many rules and procedures have had negative implications on timely decision-making, productivity, and innovation, ultimately hindering effective service delivery to the public. Good work is underway systemically across the centre of government to reduce the complexity of rules and to reward and recognize innovation and to limit the punishment for failure. It remains to be seen whether the culture of risk aversion is so engrained in the system that only heroic efforts on the part of the “whole of government” will change the current risk averse behaviour. New Players Even as management practices have evolved inside of government, Public Service leaders are simultaneously responding to shifts in the political environment within which the federal Public Service resides. The recent string of minority governments has resulted in a focus on short-term initiatives, a

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preference for projects with high political leverage, and a constant need for both politicians and public servants to operate in “election ready” mode. In keeping with the need to respond to an increasingly complex environment, government observers have witnessed subtle but significant changes to the organization of government itself. Over the past 20 years, the decision making process has become more complex and with complexity has come a tendency to centralize decision-making. In other words, political direction is more involved than ever before and all indications show that this is likely to continue. To add further complexity to this issue has been the spectacular growth in recent federal government stimulus spending that has opened the door to accusations of “pork barrel” spending and favouritism in the allocation of federal funds. The growing partisanship of successive governments has been a theme of Donald Savoie’s who has, for some time, noted the emergence of “court government” in Canada where successive governments have centralized policy making and general administration in the office of the prime minister.28 Corresponding to the centralization of decision-making has come an increase in the size of political offices of cabinet ministers. And, not only has there been an increase in the overall size of their offices, but also a growth in the number of inexperienced cabinet ministers and a trend of hiring young and inexperienced political advisors (known as exempt staff in Canada) at the federal level in order to deal with some of the elements of the Conservative’s Federal Accountability Act (faa). As a result, experience in various oecd countries indicates that political offices may not function or relate as well to the public service as they have in years past. In keeping with these shifts is a significant increase in the influence and importance of political advisors. Ministers are increasingly relying on these individuals for advice, both politically and in the formation of policy. This represents a significant change in their status since, previously, political advisors were often politically active volunteers and not viewed as professional government officials.29 Political advisors are here to stay and they represent one of the most widespread developments in governance that practitioners have witnessed in many years. Political advisors are hired directly into a minister’s office at the pleasure of a minster (by-passing the merit-based approach used for entry into the public service) and they are terminated when the minister leaves office. They provide the minister with political, partisan and policy advice on issues of the day. Over the past two decades, their numbers have grown, their influence has amplified and their role within the machinery of government has become permanent.30 The traditional monopoly that the public service has enjoyed in being the single most important source of advice for ministers has shifted to the Minister’s offices and their outside advisors.

233 The Precarious State of the Federal Public Service

Public Service

Political Advisor

Minister

The traditional Weberian model upon which many modern governments are based espouses a clear division of labour between politicians and public servants. Neutrality and competence are seen as the hallmarks of public service with ministers possessing ultimate decision-making authority. This relationship has often been described as a bilateral monopoly. However, the establishment of political advisors as an enduring feature of governance in this day and age has become the norm and with it the machinery of government has shifted from a dual to a tripartite structure.31 One of the key areas of responsibility of political advisors often revolves around policy – commenting on policy options developed by the public service, providing a source of new policy ideas, and putting together policy proposals in specific areas of interest identified by the minister. In one sense, the political advisor can be viewed as just one more policy player in a landscape that already includes a large cast of characters. But upon closer inspection, political advisors are far more than just “players” on the scene. They are the only element, other than the public service, that is located inside of the machinery of government. Not only are they located on the inside, but their advice bypasses all bureaucratic red tape and hierarchy and goes directly to the minister. On a positive note, political advisors have the potential to strengthen the functioning of governments when they operate with transparency and in a cooperative manner with the public service. They bring an important challenge and contestability function to policy development. They can shield the public service from being pressured to undertake political functions on behalf of ministers and they can strengthen a minister’s ability to manage complex political dynamics. However, with advantages come the potential for weaknesses. The challenge is to embrace the benefits that political advisors bring to the table while minimizing possible vulnerabilities. In reality, concerns still exist that political advisors have contributed to a growing separation between the public service and political leaders. This scenario can be heightened in the case of minority governments. The federal public service needs to guard against this

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tendency and ensure that it retains appropriate leadership within a neutral, non-partisan structure.

m o v i n g f o r wa r d : a s y s t e m at i c review of key issues The public service has grown substantially over the past ten years without any coordinated policy direction and political agenda. The growth has taken place in all areas but particularly, in the areas of security, health and safety, and oversight. All the growth is the logical result of events – government priorities (arming border guards), royal commissions (procurement policies), the auditor general, media attacks on the management of government (due to real and imagined events), and crises such as September 11th, sars, and h1n1. This has led to two dramatic waves of human resource changes. First, the retirements of baby boomer employees many of who delayed their retirements in order to allow the generous salary increases awarded during the past decade to fully enhance their pension provisions. The second wave of change was the hiring of more than 100,000 new public servants (almost exclusively at the entry level in a wide range of job classifications) to fill the openings that were the result of retirements and the new jobs that were created to meet the government’s needs. It is this double “cohort” dimension that is especially placing the federal public service in such a precarious situation. While all recent Secretaries to the Cabinet have tried valiantly to address these changes in their own ways, the fact remains that the current organizational challenges are massive and, more important, will overwhelm the modest efforts that have characterized the reform efforts to date. More important, the signals from the “troops” (middle level managers) have been muted but consistent over the past few years to those that have been seeking out feedback. Published studies and media reports consistently note the high level of turnover (churn) among new staff, the mental health of the public service, the state of the public service, repeated efforts by employee groups to find safe spaces for conversations about the future of the public service, complaints that management is looking for managers who are more interested in “giving the government what it wants,” more resources devoted to oversight than policy development, the spread of the web of rules and increased levels of risk aversion, and increased tension between ministerial staff and the public service. These factors suggest that the precarious state of the public service cannot be addressed until there is a better understanding of the attitudes and behaviour of the middle managers, many of which are relatively recent arrivals in the federal public service.32

235 The Precarious State of the Federal Public Service

Since Australia is such an interesting comparator for Canada, it is worth noting that Prime Minister Rudd has recently completed a review of the Australian Public Service (aps). The renewal process, which had very short timelines, was managed by his Cabinet Secretary but also involved a nation wide consultation with Australians as well as public management experts. As a former public servant himself, he recognized the signs of an aging and potentially outdated institution. His approach involved experts and stakeholders alike and was designed to produce a forward-looking document that would transform the aps into the best public service in the world.33 Perhaps now is the time for Canada to make a similar bold decision and systematically look at the public service as a national institution. Change is never easy in large or small organizations. The status quo is a powerful force against change. As former Prime Minister Tony Blair once stated, “I bear the scars” in reference to the many reforms that he initiated in the United Kingdom. But given the precarious state of the federal public service, Canada has little choice but to continue to renew its workforce and reform its systems. Regardless of whether or not we take the bold approach of Australia, there are a number of more “modest” issues that will need to be taken into account in any reform efforts. Not Enough Is Being Done for New Employees As indicated, there are more people in new jobs now over a shorter period of time than there have ever been. Since the preoccupation of public service leadership in recent years has been on recruitment – and significant gains have been realized, based on our conversations with new hires, it appears that not enough is being done for new employees to prepare them for the challenges that have been outlined in this chapter. Despite the emphasis on learning plans that is one of Kevin Lynch’s legacies as Head of the Public Service, there is not much evidence of sustained learning or an ongoing commitment to using the learning plans as the means of introducing new employees to the values and ethics of the federal public service. The Public Service Employee Survey Should Be Used The Public Service Employee Survey has proven to be an important and valuable initiative, demonstrating that over 80% of public servants are relatively satisfied with their current work arrangements and they like their job. Not surprisingly, perhaps, the staffing system continues to be raised as an issue, but overall, most employees are satisfied or neutral about their career progress. These types of indicators provide leaders with useful evidence of the pulse of the public service on a bi-yearly basis. However, the data also show that there is a building sense of scepticism that senior management will try to

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resolve concerns raised in the survey. For the survey to continue to be used effectively, departments and agencies must demonstrate that change can and will happen as a result of employee feedback. Of greater interest are specialized surveys that could concentrate on specific target groups that are management priorities34. The Key To Renewal Is the dm Community Traditionally, responsibility for human resources management across the public service has rested primarily within central agencies. The modernization initiatives described earlier in this chapter have shifted responsibilities and have delegated authorities out to the deputy minister community. This shift recognizes that deputy ministers are best placed to identify the skills and knowledge their business requires, to select those most suitable to meet these needs, to see to their employee ” development and to assess and manage performance.35 Despite the fact that deputy ministers should play a critical role in managing their human resources regime, these leaders are often overburdened and become unable (or unwilling) to take on these management responsibilities. It is now less common for newly appointed deputies to have a background in the department or agency they are leading, and because the demands of the deputy job have become more urgent and complex, the learning curve is steep and short. They have little time to master the essentials of a department before they are tested in a crisis or before they are subject to the persuasion and influence of established interests, including their own department.36 Prioritizing human resources management often becomes very difficult when trying to respond to constant demands from disparate interests. Confused Leadership from the Centre One of the most difficult tasks that the Public Service has faced is the reorganization of the human resources function at the centre. The most recent effort in 2009 has been the simplification of the central agency machinery, combining the Canada Public Service Agency (cpsa) and the human resources elements of the Treasury Board Secretariat into the newly created Office of the Chief Human Resources Officer (ochro). In its first organizational form in 2003, the newly created Public Service Human Resources Management Agency (pshrmac) was soon after reorganized into the Canada Public Service Agency (cpsa) that existed for less than three years. Over a five-year period, these various organizational structures have been led by four deputy ministers with three different titles. Moreover, work is still underway to rationalize the role of the six different federal agencies and departments that have some responsibility for human resources across government. As much as it is the right decision to push responsibility for human resources

237 The Precarious State of the Federal Public Service

primarily out to the deputy minister community, it is difficult to achieve optimal performance when no one has a clear view of what is going on at the centre of government. A further example of the need for greater cohesion at the centre of government is the fact that it was not until 2007 when Jim Lahey completed the first systematic compensation study of the federal government that anyone had a clear appreciation of what human resources actually cost Canadian tax payers. Given that personnel accounts for more than $35 billion of spending each year the Lahey study underscores the need for more data collection and analysis.37 Talent Management Remains a Challenge Talent management has become a popular buzzword across governments and the private sector in recent years. All organizations, both public and private, have realized the importance of retaining and growing talent. Within the federal public service, further work is needed to rethink the value proposition for new employees. Specifically, why should someone work for the government today other than for the generous benefits that come with the job? What incentives are needed to encourage superior quality work (not just hours on the job)? How can leaders identify and penalize underperformance? What is the role of the unions in talent management? Talent management means different things depending on within which department or agency an official resides. The human resources community needs to better identify what talent management means for the federal public service and how departments and agencies can develop a talent management system that supports excellence. Lack of Public Discourse and Expertise in Public Management Government has done very little hr analysis over the past decade and analytical expertise has migrated and morphed into different functions. There has been an absence of reliable and consistent data that in turn has undermined the government’s collective ability to make reasoned and defensible decisions. Moreover, clear indications in Ottawa have been given to demonstrate that blunt talk from outside organizations is neither welcomed nor encouraged. There exists an almost pious hope that the human resources challenges might go away if not discussed in public places. The most worrisome element associated with the current system is that it is very difficult for the clerk and the prime minister to hold deputy ministers to account for the management of human resources. People responsibilities, as we have seen, are only one of many competing priorities placed on a deputy’s shoulders and the high turnover of deputy ministers make it particularly difficult to hold individual deputy ministers to account for their own

238 David Zussman

performance when their average tenure in a department is for a relatively short period of time. The ability of the deputy minister community to take leadership of human resources management and to be accountable for renewal and excellence within their departments is crucial. In so doing, public service leaders should consider the following recommendations. Deputy Minister Appointments The appointment and reassignment of deputy ministers is not an easy task. However, moving individuals through these positions in only short stints (as discussed earlier in this chapter) results in significant organizational disruption. Evidence shows that not enough emphasis is placed on the expertise and interests of leaders in relation to their proposed assignments.38 When a poor fit between a deputy and the department is combined with high turnover in the deputy position, it comes as no surprise that the management of human resources becomes subservient to other priorities. The learning curve is steep, the demands on a deputy are significant and people management takes a back seat to such things as parliamentary affairs, policy advising and crisis management. In order to offset these challenges, consideration should be given to appointing deputies with a minimum term of office of three to five years. Using a term of office approach will send a signal to the organization that leadership is committed to the department and it allows for improved performance management of deputies. While flexibility will need to be built into the system to respond to unanticipated change, using a term of office approach would allow a deputy enough time to build and effect change, and be accountable for managing the people side of the organization. The Role of the Associate Deputy Minister The current philosophy associated with associate deputy minister appointments focuses on preparing an individual to assume deputy minister responsibilities. Unfortunately, these individuals tend to rotate even faster than deputies themselves. As a result, the learning experience within the associate deputy minister community tends not to prioritize human resources management. How can it when individuals are moved in and out of appointments before they can dig into these issues? Perhaps a more suitable approach would be to use the associate position more strategically and encourage these leaders to take responsibility for key operational areas of the department. In this sense, the associate position could adopt a “chief operating officer” approach with responsibilities related

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to the management of the department. This would provide needed support to the deputy minister community in the area of human resources management and would expose associates to the challenge of building a high performing organization. In keeping with the comments made earlier regarding terms of office for deputies, this recommendation applies equally to associate appointments to ensure leaders are able to fulfil their mandates. Until the senior-most ranks of the public service take people management responsibilities seriously, real reform will not take place and the status quo will continue. To contribute to this culture change across the federal government, additional structural reform is necessary: Helping Deputy Ministers Improve their Human Resources Management Encouraging deputy minister to become competent managers is not easy in light of the many other responsibilities that make up their position. Many individuals on the inside of government get caught up in the primacy of policy and crisis management. Therefore, consideration should be given to creating external management committees in each department to hold deputies accountable. The use of external advisory committees is currently being used to strengthen the audit function in the federal government with the creation of the departmental audit committees. The expansion of the mandate of these committees to include management more broadly could be the most cost effective way to place a greater emphasis on human resources and to systematize the way in which human resources are managed. In an unpublished paper, Peter Aucoin has explored the role of the management committee of the Canada Revenue Agency and has developed the view that “improved public management requires improved governance of management, not more controls.”39 As a result, the key characteristics of the cra model: “statutory authority for the governance of management, independence from management, chaired by an independent member who is appointed in such as way to be independent from the government of the day” could be the ideal model for a more significant expansion of this experiment.40 Create a Chief Human Resources Officer for Each Department Deputies retain ultimate responsibility for their own performance however they also realize that they need strong executive teams to support them. In order to raise the profile of human resources management and send a signal that it is a priority, a chief human resources officer could also be created in each department, reporting directly to the deputy who has the delegated responsibility for staffing, development, succession planning and long term planning.

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c o n c lu s i o n s The public service is in precarious circumstances due to the four factors discussed in the chapter. Given the wide range of contributing factors and the overall complexity of the current system, there is a need for a systematic review along the lines being followed by the Australian government. As stressed throughout the analysis, it is facing a potent cocktail of interlocking realities – high paced growth combined with significant turnover; a changing governance structure with new, and powerful, players; a web of rules accentuating accountability while simultaneously choking innovation and creativity. All of this is occurring while facing both immediate and longer term challenges, including the global financial meltdown, economic recession, accessibility to health care and an aging infrastructure, to name only a few. For Canada and Canadians, the precarious state of the federal public service should be of enormous concern. More often than not, however, it is an institution that is taken for granted despite the well-recognized correlation between successful countries and a high quality, high-performing public service. In the meantime, however, the chapter has shown that there are a number of more modest improvements that could be implemented to help the federal public service deal with some of its most immediate challenges. The federal public service is too important an institution to be left in such a precarious state.

notes 1 Donald Savoie, Breaking the Bargain: Public Servants, Ministers and Parliament, (Toronto: University of Toronto Press, 2003), p. 256. 2 The author wishes to thank Jim Lahey, Luc Juillet, Robert Asselin, and Joseph McDonald for their comments on an earlier draft of this chapter. 3 Kevin Lynch, Canada’s Public Service in the 21st Century – Destination: Excellence, Public Policy Forum, 2008, p. 7. 4 Tom Friedman, The Lexus and the Olive Tree (New York: Harper Collins, 1999), p. 394. 5 For a complete historical analysis of the Public Service Commission, see Luc Juillet and Ken Rasmussen, Defending a Contested Ideal: Merit and the Public Service Commission, 1908–2008 (Ottawa: University of Ottawa Press, 2008). 6 Canada, Special Committee on the Review of Personnel Management and the Merit Principle in the Public Service, Report (Ottawa: Supply and Services Canada, 1979). 7 Kenneth Kernaghan, ed The Changing Nature of the Public Service (Brussels; International Institute of Administrative Sciences, 1987). 8 David Johnson and A. Molloy, “The quiet crisis and the emergence of La Releve: A study of crisis perception and executive leadership within the Canadian federal public service, 1997–2002,” Canadian Public Administration 52, no. 2 (June 2009): 203–23.

241 The Precarious State of the Federal Public Service 9 10 11 12 13 14 15 16 17 18

19 20 21

22 23 24 25 26 27 28 29

30 31

32

Canada, Privy Council Office, 1997: 1–2. Johnson and Molloy “A quiet crisis.” Ibid., p. 204. Ibid., p. 204. Canada, Privy Council Office, 1997, pp. 2–3. Johnson and Molloy, “A quiet crisis,” p. 205. Privy Council Office, Prime Minister Announces Formation of Task Force on Modernizing Human Resources Management in the Public Service, 3 April 2001. Alex Himelfarb, Twelfth Annual Report to the Prime Minister on the Public Service of Canada, March 2005. Harvey Sims, Human Resources Management in the Government of Canada: Mandates, Programs, Activities, Resources, Issues and Risks (Ottawa; Sussex Circle October 2007). Paul Tellier is a former secretary to the Cabinet who served Brian Mulroney for more than seven years and Don Mazankowski is a former Mulroney cabinet minister who served in many high profile Cabinet positions and earned a reputation for being a first rate administrator. Public Service Commission, Annual Report, 2007, p. 12. Public Policy Forum, Is Deputy ‘Churn’ Myth or Reality?, November 4, 2007. Thomas Axworthy and Julie Burch, Closing the Implementation Gap: Improving Capacity, Accountability, Performance, and Human Resource Quality in the Canadian and Ontario Public Service, The Centre for the Study of Democracy, School of Policy Studies, Queens University, p. 5. Kevin Malone, A Millennium of Service: 30 Leaders Share Reflections on their Experience in Government, (Ottawa: Canada School of the Public Service, 2009). Ibid. Ibid. Ibid, page 47. Donald Savoie, Breaking the Bargain. Kevin G. Lynch, “Perceptions and Realities of Today’s Public Service,” Speech at Embassy of Canada in Berlin, May 6, 2009. Donald Savoie, “The Rise of Court Government in Canada,” Canadian Journal of Political Science 32, 4, (1999): 635–64. For more information about the growing importance of political advisors, see David Zussman, Political Advisors, Expert Group on Conflict of Interest, Organization for Economic Cooperation and Development (oecd), 2009. Ibid. For more on this topic see David Zussman, The New Governing Balance: Politicians and Public Servants in Canada, The Tansley Lecture, Johnson-Shoyama Graduate School of Public Policy, March 13, 2008. The importance of the middle manager as a “culture carrier” in government has been explored in some detail in David Zussman and Jak Jabes, The Vertical Solitude: Managing in the Public Sector (Montreal: Institute for Research in Public Policy, 1989).

242 David Zussman 33 A good example is the report, Public Service Commission, Joining the Core Workforce: A Preliminary Report on the Survey of Newly Hired Indeterminate Employees in the Federal Public Service (Ottawa: Public Service Commission, March, 2001). 34 Privy Council Office, Background Paper on Public Service Renewal: The Rationale for Changes in How Human Resources are Managed (Ottawa: Privy Council Office, February 2009). 35 Kevin Malone, A Millenium of Service. 36 For more information see Treasury Board Secretariat, Expenditure Review of Federal Public Sector Compensation Policy and Comparability, 2007. http://www.tbs-sct.gc.ca/ report/orp/2007/er-ed/er-ed-eng.asp. 37 Kevin Malone, A Millenium of Service. 38 Peter Aucoin, Management Boards for Government Departments: Addressing the ‘Governance-of-Management Vacuum, unpublished document, 2007, p. 20. 39 Ibid, p. 1. 40 For more information about the Reform of Australian Government Administration see Reform of Australian Government Administration: Building the World’s Best Public Service and visit http://forums.pmc.gov.au/

12 The Officers of Parliament: More Watchdogs, More Teeth, Better Governance? jack a. stilborn

introduction The creation of several new officers of Parliament by the Federal Accountability Act of 2006 reflects the growing prominence, in Canada, of this distinctive group of arms-length “watchdog” functions. As well, mandates of the established officers have expanded over the years, and 2005 marked the creation of a new in camera parliamentary process designed to reduce the danger that the independence of the officers could be undermined by Treasury Board control of their budgets. This chapter provides an overview of the officer of Parliament universe, focusing on recent changes, and then explores three key issues and questions:1 • Are the officers of Parliament actually supporting Parliament, or are they instead sidelining Parliament by holding governments directly accountable before the public? • Do their single-issue mandates foster standards that governments are unlikely to meet, and thus bias the officers in favor of criticism? • Is there a danger that the exceptional independence of the officers insulates them from the need to be accountable, either for their internal practices or for responsiveness to broader public interest considerations and priorities? In addition to demanding attention on their own, these questions point to an underlying question of special relevance at the time of writing, when the government is responding to enormous pressures to implement economic stimulus measures speedily. Will the officers of Parliament contribute to

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good governance during this period or a “gotcha” mentality that fosters unfair criticism or paralysis?

t h e o f f i c e r s o f pa r l i a m e n t : canadian version Officers of Parliament have been established widely among Westminster parliaments, starting with the auditor general of the U.K., whose distinctive role in supporting the accountability functions of Parliament and arms-length relationship to the government have become defining characteristics of the officers of Parliament.2 In Canada, most of the officer of Parliament positions preceded the emergence of the “officer of Parliament” concept, which has yet to become entirely precise.3 With differences of emphasis, however, there seems to be general agreement on three core officer of Parliament characteristics: reporting to Parliament through the Speakers; distinctive independence including requirements that one or both Houses of Parliament concur in dismissal (at a minimum); and a role in serving Parliament. These core characteristics provide a basis for the list of officer positions currently provided on the House of Commons website:4 • • • • • • • •

the Auditor General the Chief Electoral Officer the Official Languages Commissioner the Privacy Commissioner the Access to Information Commissioner the Conflict of Interest and Ethics Commissioner the Commissioner of Lobbying; and the Public Sector Integrity Commissioner.

It should be noted that the recently created Parliamentary Budget Officer (pbo) position is not included on this list. The pbo reports to the Parliamentary Librarian (not directly to the Speakers or Parliament) and is narrowly mandated to provide independent analysis to Parliament (not to act on behalf of Parliament, as officers of Parliament are also mandated to do). For these reasons, the pbo position is not discussed in the chapter. The Established Officers Over the years, the mandates of most officers of Parliament have expanded. The trend in these expansions has been the growing importance of officer roles relying on independent judgment and initiative in the performance of sensitive tasks on behalf of Parliament. In some cases, officers of Parliament

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perform these tasks alongside initial roles more narrowly focused on direct support to Parliament. The original Canadian officer of Parliament – the Auditor General – was initially a Department of Finance official. Established as a separate function in 1887, it still combined the executive comptrollership function with an auditing function until the creation of a separate Comptroller of the Treasury in 1931. The original auditing mandate underwent a significant expansion in 1977, when traditional auditing of the accuracy of financial statements was joined by the broad examination of administrative and managerial practices and their effectiveness (performance auditing). Since 1977, aside from the addition of the Commissioner of the Environment and Sustainable Development function in 1995, mandate changes have been incremental but consistently expansive. The Chief Electoral Officer, established in 1920 specifically to take the administration of elections out of the hands of Parliament, combined from the beginning a central reporting role (election results and violations of the Canada Elections Act) with a sensitive administrative role undertaken on Parliament’s behalf – the administration of elections.5 The mandate of the chief electoral officer has not added qualitatively different roles since that time, although changes such as the passage of election expenses legislation in 1974 have resulted in substantial additional workloads. The Commissioner of Official Languages was created in 1969, to perform both of the broad types of function pioneered by the Auditor General and the chief electoral officer. The Commissioner performs a monitoring/auditing and reporting to Parliament function, as well as administrative duties relating to the implementation of the Official Languages Act. In 1988, in the wake of the Charter, the Act was considerably broadened and the role of the Commissioner was expanded to include several additional proactive activities: carrying out public education, court interventions and promotional activities directed broadly at improving Canada’s performance in the area of minority language rights.6 The Information and Privacy Commissioners were established under 1982 legislation that prescribed roles reflecting both elements of the emerging officer of Parliament job description. Both were charged with a monitoring/ audit function that provided the basis for reports to Parliament on the government’s performance concerning the rights in their mandates. Both were also made responsible for the administration of quasi-judicial complaint adjudication processes. While their Acts have not been generally broadened to include public education and outreach, the Privacy Commissioner’s mandate expanded significantly between 2001 and 2004, as the Personal Information Protection and Electronic Documents Act came into effect. It provides the Privacy Commissioner with broad authority to undertake research, public education and promotion activities related to that Act.7

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the new officers The Federal Accountability Act, 2006 (FedAA) created three new officers of Parliament. They have relatively narrow mandates, and given the substance of their duties, probably only limited opportunities for growth. The Conflict of Interest and Ethics Commissioner administers the conflict of interest code to which mps are subject, as well as a conflict of interest regime for a range of other public officials. The Commissioner administers a disclosure regime and information registry, investigates alleged or suspected infractions, and reports to the House of Commons through the Speaker. The Commissioner’s 2008–9 Annual Report indicates that, since June 2007, educational activities (both public and for those subject to the Code) have been a mandatory part of the Commissioner’s job. Reflecting this, a learning and communications group was developed during the year.8 The Commissioner of Lobbying assumes responsibility for the registry of lobbyists previously maintained by the Ethics Counsellor, as well as for the development and enforcement of a code of conduct for lobbyists.9 It is noteworthy that, in addition to expanded investigative and enforcement powers, the new position is explicitly mandated to establish educational and public awareness programs, especially for lobbyists, their clients and public office holders. The FedAA amendments that created the Public Sector Integrity Commissioner came into effect in April 2007. The Commissioner superseded the Public Service Integrity Officer, a position that had existed since 2001 within the Treasury Board Secretariat for the purpose of protecting public service whistleblowers.10 The mandate of the Commissioner includes the review of disclosures by public service whistleblowers or other Canadians, investigating allegations and making recommendations to public service executives responsible, and protecting complainants against reprisals.

t r e n d s : g row t h , p roac t i v e ro l e s , t h e c o n s o l i d at i o n o f i n d e p e n d e n c e Over the years, the officer of Parliament universe has gradually expanded. Combined, the eight officers of Parliament will spend $280 million in 2009–10 and employ some 1,570 people.11 These figures are distorted by the size of the two largest organizations, the Office of the Auditor General (oag), which will spend $93.1 million and employ 620 fte s, and the Office of the Chief Electoral Officer (oceo), spending $119.6 million and employing 404 fte s. The budgets of the oag and oceo approach that of the Privy Council Office ($133.3 million) and the combined fte s of the officer of Parliament establishments are comparable to those of the Treasury Board Secretariat (1,714).12 Aside from the growth story – numbers, mandates and budgets – the central theme suggested by the emergence of Canada’s officer of Parliament universe

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is the growing prominence of sensitive administrative or quasi-judicial roles that relate to matters evidently deemed important by Parliament, but making no obvious direct contribution to Parliament and its proceedings. While most of the officers continue to support Parliament’s capacity to hold governments accountable by providing information and assessments of government performance, the larger part of their resources is now devoted to administrative or quasi-judicial functions. Among the most recently-created officers of Parliament, the Conflict of Interest and Ethics Commissioner role stands as an exception to the trend, harking back to the “services to Parliament” focus of the Elections Commissioner and (initially at least) the Auditor General. Not only have administrative functions emerged as the major role (in dollar and fte terms) of the officers of Parliament, but there has been a clear evolution within this category. To a greater or lesser degree, most officers of Parliament are becoming progressively more involved in “proactive” approaches that focus on public education, outreach and promotion as a means of increasing public awareness and, in theory, reducing the incidence of compliance problems and complaints. Appointments and Independence The FedAA made the appointment process for officers of Parliament more consistent. The new uniform procedure provides that, with the exception of the Chief Electoral Officer, appointments will only be made following consultation with the leader of every recognized political party in each House of Parliament and by joint resolution of the Senate and House of Commons. Previously, most officers of Parliament were appointed by resolution of the Senate and House of Commons, but without consultation.13 In effect, the new procedure combines, for each officer of Parliament, the protections previously distributed among the various appointment processes. The broadening of the requirement for all-party consultation is especially significant, because it strengthens the multi-partisan character of an appointment that could previously have been made by a majority government over objections from one or more opposition parties. While this does not alter the formal independence of the officers, it reduces the likelihood that an officer could be seen as having a residual attachment to one or the other of the political parties, thus compromising that officer’s credibility among parliamentarians and practical scope for action. Budgets and Independence The central formal limitation upon the independence of officers of Parliament has remained the budget setting process. In this process, as required by the principle of the Royal Recommendation, it is the exclusive prerogative of

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the Crown to place recommendations for spending before Parliament, and Parliament is left with no capacity to increase budgets beyond the levels proposed in the Estimates.14 No officer of Parliament overtly accused governments of using their budgetary authority to compromise the independence of officers. However, concerns about inadequate resources and the potential for interference were voiced by several officers in the wake of the 1990’s restraint era. These were subsequently taken up by three parliamentary committees that proposed variants on the model already in use in the U.K., where an all-party committee of M.P.s sets the budget for the National Audit Office by recommendation to the government.15 The House of Commons Advisory Panel on the Funding and Oversight of Officers of Parliament was established in the fall of 2005 as a two-year pilot project. It is an informal mechanism, not embodied in the Standing Orders of the House of Commons, and now continues on an ad hoc basis.16 It is composed of 13 Members of the House of Commons, including the Speaker (who serves as chairperson). Its central role is to enable parliamentarians to provide recommendations to the Treasury Board concerning requests by officers of Parliament for additional funding or issues raised by officers relating to Treasury Board directives and other central agency oversight. The panel thus provides Parliament with a means of influencing Treasury Board decisions without conflicting with the Royal Recommendation principle, since final budgetary decisions and their proposal to Parliament remain formally in the hands of the Treasury Board. Since its inception, the panel has met periodically to consider budget submissions from individual officers of Parliament, relying on advisory assessment documents provided by Treasury Board Secretariat (tbs) officials and analysis provided by the Library of Parliament. It is noteworthy that, in most cases to date, the officer of Parliament and tbs officials have reached agreement on the submission before it is received by the panel, thus avoiding any need for the panel to resolve disagreements, and Treasury Board decisions have reflected this agreement. On one occasion, in 2005, the panel differed from the advice provided by tbs officials (recommending more than the tbs officials had been prepared to support, but not the full amount the officer had been seeking), and the Treasury Board adopted the panel’s recommendation. In 2009, a second exception to the prevailing pattern occurred when the Treasury Board did not accept the full amount of a funding increase for the Access to Information Commissioner that the panel had recommended. As a result, the 2009–10 Supplementary Estimates (A) did not provide for advocacy and systemic initiatives that had been supported by both the panel and tbs officials.17 Issues relating to Treasury Board directives and other central agency oversight have not yet comprised a significant aspect of the panel’s business.

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A potential area of concern is signaled by the 2009 decision of the Treasury Board to scale back the Access to Information Commissioner’s funding request, contrary to the recommendation of the panel. There may well be reasonable grounds for skepticism about the various “proactive” activities in which a number of officers of Parliament have become increasingly involved over the years. However, the fact that the Treasury Board chose to set aside the recommendation of the panel and was able to do so without inspiring discernible reaction from Parliament, suggests that the advisory panel process does not guarantee that officers of Parliament are insulated from unilateral government budgetary action. To date, therefore, what has been achieved is a modest additional formalization of the arms-length relationship within a governance culture in which the independence of the officers of Parliament was already generally respected by all parties. The role of the panel in providing officers with recourse in the event of disputes with Treasury Board Secretariat officials may well prove useful. It should be recognized, however, that disputes that may arise are likely to reflect tbs concerns about administrative or management issues, rather than a politically-driven hostility to the mission or conduct of an officer. Recurring differences between tbs officials and officers over budget proposals could create difficulties not directly related to the intent behind the panel, facing members with the challenge of serving as a fiscally prudent arbiters between officers of Parliament with significant political clout and tbs officials whose technical concerns may be less intelligible to panel members.

w h at a b o u t a c c o u n ta b i l i t y ? The final element requiring a place in the evolving picture of officers of Parliament and their functions is accountability, or the lack thereof. For the purpose of exploring this picture, it is useful to distinguish administrative and managerial accountability from political accountability, which relates to broad accountability to Parliament for priorities and policy as well as management competence. Like other organizations within the federal universe, at the management/ administrative level the officers of Parliament have been broadly subject over the years to waxing and waning cycles of centralized control and decentralized empowerment. Changes in recent years appear to have mingled both of these emphases, involving both the highly publicized “controls” put in place in the wake of the sponsorship scandal within a broader context generally shaped by a neo-New Public Management “let the managers manage” culture. Ultimately, the Treasury Board remains responsible for the prudent management of resources, but within a universe now composed of organization heads whom the FedAA has designated as “accounting officers,” personally responsible for the management of their organizations.

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The importance of audit and evaluation processes has received new emphasis in recent years, consistent with the broader emphasis on letting managers manage and then holding them accountable. Most recently, this has been reflected in the major recent accountability development for officers of Parliament: the FedAA requirement for the establishment of internal audit capacities, similar to those of other government organizations.18 In addition to the internal audit process, annual attest audits by the Auditor General validate financial figures, and periodic performance audits initiated by the Auditor General assess and report on the performance of officers of Parliament. Of the eight officers of Parliament discussed in this chapter, three are too recent to have been given performance audits, and the Auditor General cannot audit her own office.19 For the other four, the performance audit track record since 1981 is as follows: • • • •

Elections Canada: 1989 (follow-up in 1992) and 2005; Access to Information: none; Official Languages: 1983; and Privacy Commission: 2003 (responding to a recommendation of the House Standing Committee on Government Operations and Estimates).20

With respect to political accountability, the officers are accountable directly to Parliament. Most rely on ministers to place their estimates before Parliament, but in practice the officers are accountable directly, appearing on their own before the standing committees that review their estimates. The central recent change in this political accountability regime was the creation of the Standing Committee on Access to Information, Privacy and Ethics in 2004, with a mandate exclusively focused on the work of the Information and Privacy Commissioners, as well as the (then) Ethics Commissioner. Among the other officers, the Auditor General and the Commissioner of Official Languages appear before committees narrowly focused on their mandates, and the Chief Electoral Officer receives substantial attention from the Procedure and House Affairs Committee. The Public Sector Integrity Commissioner and the Commissioner of Lobbying have been added to the mandates of more broadly scoped committees. Although their overall consequences remain to be seen, the accountability impacts of the “accounting officer” model and other FedAA changes appear to be neutral to positive with respect to the accountabilities of officers of Parliament in comparison to those of other organization heads. They may be expected to make the oversight of officers of Parliament more consistent with that applying to other federal organizations because of the common application of the “accounting officer” model bolstered, now, by the availability of internal audit information in both cases. The main concern here relates to the capacity of the officers of Parliament, like other small organizations, to establish fully effective internal audit functions.

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With respect to external performance review, the main challenge continues to be the capacity of the Auditor General to review the officers of Parliament with adequate frequency. While the challenges for the Auditor General imposed by the immensity of the federal organizational universe must be acknowledged, the infrequency of performance audit attention to the officers of Parliament does not support confidence in the effectiveness of this dimension of their accountability. Committee scrutiny provides, in principle, a means for Parliament to communicate general concerns about performance to the officers, including their responsiveness to changing national priorities. However, this aspect of parliamentary accountability remains subject to important caveats, going well beyond the weaknesses in scrutinizing estimates that have been bluntly recognized by committees themselves.21 Centrally, the prominence of disciplined government and opposition political parties in the House and its committees potentially undermines the capacity of either to deliver unambiguous messages to an officer of Parliament. Genuine differences among the parties over priorities (and thus potentially over the responsiveness of officers to priorities of the government of the day) combined with strategic imperatives affecting the parties create the likelihood of muddied or highly compromised accountability discourse and messages. The fact that the officers of Parliament serve as champions for rights and good practices broadly supported by the public, and enjoy generally positive relationships with parliamentarians themselves, can only contribute to the challenges faced by Parliament in scrutinizing their activity and holding them meaningfully accountable. The existence, for most officers of Parliament, of standing committees with unusually specific mandates focused on their work might, at first glance, appear to strengthen Parliament’s capacity to hold the officers accountable. However, in practice, it may have the opposite effect. The work of most of the officers of Parliament committees depends heavily on the information and analysis provided by the officers, and on good working relationships between the officers and committee members. As a result, the committees tend to function as champions of the missions of the various officers and supporters of their work, rather than as accountability agents performing a robust challenge function. For example, during hearings on the advertising and sponsorship findings of the Auditor General, members of the Standing Committee on Public Accounts reflected the deep divisions between their political parties over these events. However, the Auditor General was treated with elaborate deference by all sides, none of which undertook to subject the Auditor General’s findings or public statements to critical scrutiny, or sought responses to critical comments that had surfaced in the media as the Committee hearings got underway.22 In contrast, during the hearings relating to the Privacy Commissioner held by the Standing Committee on Government Operations in 2003, the Committee operated on a consensus basis concerning behavior that was seen by all members to be offensive to Parliament. However, exceptional conditions

252 Jack A. Stilborn

within the Liberal Party during the late Chretien period may well have contributed to the willingness of some Liberal committee members to scrutinize an officer whose appointment was seen to be associated with the Chretien team, although substantive information relating to Mr. Radwanski’s management practices that subsequently came into the possession of the Committee clearly determined the substance of its findings and recommendations.23 While Parliament is capable of holding officers of Parliament accountable, the challenges of actually doing so present continuing difficulties. The accountability of officers of Parliament to Parliament will likely continue to be less robust than their independence.

key issues The developments surveyed in this paper point to growth in the number of officers, mandates (especially functions not directly related to serving Parliament) and independence, but not significantly in the accountability of the officers. These trends return us to the questions and the issues involved that were raised at the outset of this chapter. Helping Parliament or Supplanting it? Over the years, concerns have been raised that the officers of Parliament are competing with Parliament as accountability agents, and (perhaps the central source of this concern) appear to be winning the competition.24 While the high profile of the Auditor General and her reports has made the oag the primary target of these anxieties, in principle they apply to the other officers as well. There are possible concerns where officers of Parliament do something that Parliament was actually doing before they were established, and would have continued to do in their absence. However, the overview of the formation of these functions and their development provided in this chapter provides little support for this basis of concern about the officers. In all cases, the officers of Parliament provided specialized information and analysis not previously available to Parliament, and in most cases the newly-created administrative or quasi-judicial functions for which they were made responsible contribute to the generation of this information. If the officers pose a competitive threat to Parliament, therefore, it relates to functions that Parliament could have undertaken to perform rather than the displacement of substantive functions already in existence. Arguments supporting or opposing this proposition are necessarily speculative, however, and so provide at best a fragile basis for indignation concerning the displacement of Parliament. It could be argued, for example, that Parliament itself could undertake the work currently done by officers of Parliament, relying on an expansion of the staffs reporting to the Speakers and/or Parliamentary Librarian. Parliamentary

253 The Officers of Parliament

employees currently provide non-partisan support for Parliament in the form of legal advice (Parliamentary Law Clerk), procedural advice (Clerks of the respective Houses), policy research and analysis (Library of Parliament analysts) and a range of additional information and logistical services. However, with the possible exception of the law clerks, these types of support do not often involve the elements of discretionary professional judgment and opinion provided by, for example, the Auditor General. In no case do they involve the broader assessment of government performance, public outreach and advocacy roles of many officers of Parliament.25 The role of disciplined political parties in all dimensions of parliamentary life would pose major obstacles for a parliamentary body such as a standing committee attempting to provide direction to staff relating to the more sensitive and discretionary roles now performed by the officers of Parliament. While the Speakers could, in principle, provide the coherent management direction that is unlikely from bodies such as committees, it is far from clear that their responsibility for functions that are frequently critical of governments would be easily compatible with the extremely delicate balances they must maintain in presiding effectively over highly partisan assemblies. Arguably, the capacity of the officers of Parliament to provide specialized and authoritative information to the public as well as Parliament, much less the neutral administration of quasi-judicial processes and credible assessments of government performance, require “arms-length” from Parliament as much as from governments, and for identical reasons. Some expressions of concern about the new importance of the officers of Parliament leave the impression that responsible government itself is at stake, because the officers instead of Parliament are holding governments accountable before an observing public.26 This variant of the “supplanting Parliament” concern, however, requires an assumption that the principle of responsible government prescribes that Parliament’s role in holding governments accountable must be an exclusive role, exercised by Parliament alone. In the context of modern democratic governance, in which the primary accountability relationship is between governments and electors, this is an extremely questionable assumption. Neutral Monitoring or Institutionalized Negativity? The Auditor General Act provides that the Auditor General “shall” call attention to anything of a nature that the Auditor General believes merits the attention of the House of Commons, including “any” cases of inaccurate or incomplete accounts, poorly maintained records, money expended outside Parliament’s authorities, inefficiency, deficient procedures for assessing effectiveness, and inadequate environmental practices.27 The mandate thus requires the identification and reporting of deficiencies, and provides discretion only concerning the reporting of other information (progress, extenuating circumstances) that the Auditor General may deem relevant. Similarly, although in

254 Jack A. Stilborn

less detail, the mandates of the other officers of Parliament oblige the officers to monitor the performance of governments (in most cases) with respect to specified rights or practices and report their findings to Parliament. The legislative mandates of the officers of Parliament provide the basis for a series of further characteristics associated with the model: concentrations of specialized employees with skills and knowledge required by the organizational functions; mission-centric cultures that foster advocacy and promotion; and hierarchical organization structures vesting directive authority in a single figure at the apex of the organization without advisory or management boards or other bodies that might curb over-zealousness. In combination, these characteristics predictably generate predominantly critical perspectives concerning government performance, if only because the single-issue mandates of the officers of Parliament do not provide a basis for taking into account the challenges of balancing the multiple and competing demands faced by governments. For the same reason, the officer of Parliament model may be claimed to be inherently unresponsive to the changing circumstances and broader public interest considerations that governments sometimes invoke in order to justify their actions. It is important to recognize, however, that the organizational characteristics enumerated above do not strongly differentiate the officers of Parliament from a host of other single-mandate organizations and specialized groups that populate the public sector universe. The tendency of specialized groups and organizations to embrace internally-developed perspectives that may be perceived as inflexible or narrow by outsiders is widely shared, if not universally characteristic. The activity of the officers is more public than most of these organizations and, reflecting their legislative mandates, more consistently critical, but this only makes them unusually visible instances of a much wider governance challenge. The officers of Parliament exercise significant powers, given the potential political impacts of their work, and Parliament created them to do this. The solution to concerns about the impact of these powers is not to render them ineffective by dilution, however, or to expand them still further into realms of discretionary judgment that go beyond anything attributable to the substantive expertise deployed by these officials. Instead, the central remedy is to ensure that officers of Parliament, are ultimately accountable for their performance and the judgments reflected in it. This brings us to the third issue identified at the outset of this chapter. Independence and Accountability – An Elusive Balance Several of the developments reviewed above have implications for the independence of the officers, or their accountability. As has been seen, however, the implications are relatively minor. This leaves the “balance” between independence

255 The Officers of Parliament

and accountability in the officer model much as it has traditionally been, heavily skewed in favour of independence. The 2005 Panel process discussed above responded primarily to concerns about ensuring budgetary independence, and has provided a modest measure of additional protection to the independence of officers of Parliament concerning both budgets and administrative oversight by the central agencies. While independence has received additional protection, however, the accountability arrangements governing the officers of Parliament have remained more constant. The FedAA requirement for the establishment of internal audit units may be seen as a positive step, but the existence of such units cannot substitute for active auditing by the Auditor General, ideally combined with periodic internal program evaluation. With respect to accountability to Parliament, it is far from clear that the major innovation in recent years – the expansion of the group of dedicated committees – represents a positive step. While it has slightly increased the frequency of formal accountability moments such as meetings on estimates and performance reports, there is no reason to believe that it provides a remedy to Parliament’s congenital weaknesses in the area of financial scrutiny and management accountability. It is important to keep these concerns in perspective. While Parliament remains an extremely potent mechanism for holding governments broadly accountable before electors, its effectiveness in more specific accountability tasks relating to government departments and officials is subject to approximately the same limitations as those concerning officers of Parliament. The challenges of holding officers of Parliament accountable are thus not fundamentally different from those of holding ministers and governments accountable, especially for prosaic competencies in management and administration. In terms of political responsiveness, the combination of the distinctive independence of these officers and Parliament’s accountability limitations pose a distinctive problem but, clearly, it is not more serious than the accountability problem posed by disciplined parliamentary majorities unconditionally supporting governments and ministers.

c o n c lu s i o n s While the developments examined in this chapter warrant renewed attention to longstanding accountability concerns, these concerns and their implications need to be seen in the light of three important conclusions. First, the officers of Parliament are not displacing Parliament in its accountability roles, but rather are performing new “professional” accountability tasks that were not previously being performed at all, and which Parliament is inherently ill-fitted to perform. This is not a displacement of Parliament, but a critically important support for the accountability role traditionally performed by

256 Jack A. Stilborn

Parliament. As modern democratic governance has replaced the more limited parliamentary governance of the mid-nineteenth century, political accountability has ceased to be a monopoly of Parliament, achieved uniquely on the floor of the House of Commons. It has become a set of dispersed and multiform relationships, reflecting an evolving division of the “accountability labor” that may be seen as a subset of the pervasive progress of specialization and the division of labor elsewhere in government and society. From this perspective, Parliament’s creation of the expanding family of officers of Parliament should not be seen as an unwitting form of self-supersession. Rather, we need to see it as a kind of “parliamentary” reform, enhancing the effectiveness of parliamentary functions now performed both inside and outside the walls of Parliament, and involving modest steps in a direction taken much more extensively (and expensively) by the executive side of government. Second, the “single-mindedness” with which the officers pursue their roles imparts an inherently negative bias to their assessments of government performance, partly because governments endlessly face the need to balance conflicting priorities and the constraints of finite resources. But a great deal of what may appear to be the undue influence of officers of Parliament is more properly ascribed to the failure of governments to adequately specify, explain and justify their actions, especially when normal practices are being set aside under the pressures of a perceived emergency such as the national unity crisis that set the stage for the sponsorship “scandal.” The fundamental problem here is the low credibility of governments, not the excessive credibility of the officers of Parliament. The solution is not to treat the credibility achieved by the Auditor General and other officers as, somehow, a “problem.” We need to focus on increasing the legitimacy of public institutions, not reducing it to the lowest common denominator. Third, the extraordinary independence of the officers of Parliament, strengthened by the budgetary protections established in recent years, is clearly not counter-balanced by an equally robust accountability regime. The management accountability of the officers is subject to limitations that became clear during the Radwanski period at the Privacy Commission, when the Government Operations and Estimates Committee uncovered a range of management problems that appeared to have flourished despite the existence of internal controls, the Treasury Board Secretariat and its challenge function, the Public Service Commission and the Auditor General. While the FedAA and associated developments reviewed in this paper may have brought improvements, the ultimate effects of establishing “accounting officers” at the top and more auditors in the middle remains to be seen, with respect to both the officers of Parliament and the broader public sector. A separate dimension of the accountability challenge relates to the conduct, performance and judgment of the officers of Parliament themselves,

257 The Officers of Parliament

and it is up to Parliament to address these issues. Here, again, it is useful to see the limitations as a subset of more general issues, rather than being unique to the officers. Parliament holds governments politically accountable on a daily basis through an adversarial process that fuels democratic accountability, but has little resemblance to the more conventional accountability relationships that apply, for example, to employers and employees. This “political accountability” is what Parliament uniquely does, and its capacity to hold the officers of Parliament accountable outside the distinctive processes applying to ministers and governments is, as has been argued above, chronically limited. However, as the Radwanski episode of 2003 vividly demonstrated, an aroused Parliament faced with egregious practices can be a brutally effective accountability agent with respect to its officers. The political accountability of the officers of Parliament may suffer from periods of parliamentary inattention, but it is not altogether inferior to that of ministers, especially when they can rely upon the support of parliamentary majorities. These considerations suggest some expectations concerning the officers of Parliament and good governance in the context of the pressures associated with the stimulus package. Predictably, the Auditor General and potentially other officers will find this program to be of interest, either directly or because of its indirect impact on activities in their mandates. Should the officers of Parliament undertake to qualify their findings in the light of special circumstances, or assess the impact of the financial emergency on the actions of the government? While such a practice might appear to introduce an element of fairness, potentially mitigating the strategic exploitation of reports by Opposition parties and possible over-reaction by the public, the answer to this question should be “no.” The officers of Parliament preside over singlemandate organizations staffed with narrowly specialized experts and should not be expected to tackle the extremely complex, and extremely political, challenges involved in “making allowances.” Instead, the primary solution to this problem lies with governments, and their conduct. Where special circumstances warrant the “bending” of rules, governments need to make this transparent at the time the actions are taking place, not defensively, after the fact, and seemingly only in response to criticism by an officer of Parliament. Where the report of an officer of Parliament alleges impropriety or poor performance, governments need to respond fully and respectfully; but where there are well-founded reasons for disagreeing with an officer of Parliament, governments need to avoid the excess of deference too often apparent in political responses to the officers. The officers of Parliament have a duty to act responsibly, but the other players – Parliament, the government and the public – also need to play their roles in holding the officers accountable, producing good public policy and maintaining democratic governance in Canada during a time of economic challenge.

258 Jack A. Stilborn

notes 1 The author is grateful to the Library of Parliament for providing access to its collection and related assistance during the development of this chapter. 2 See Oonagh Gay, Officers of Parliament – A Comparative Perspective, Research Paper 03/77, House of Commons Library, United Kingdom., 20 October 2003. 3 In 1985, G. Bruce Doern and Sharon Sutherland explored the implications of the emergence of what they portrayed as a “watchdog bureaucracy for Parliament.” See Sharon L. Sutherland and G. Bruce Doern, Bureaucracy in Canada: Control and Reform, University of Toronto Press, Toronto, 1985, 47. Paul Thomas traces the development of officer of Parliament concept in “The past, present and future of officers of Parliament,” Canadian Public Administration 46 3, (Fall 2003): 88–100. 4 See: http://www2.parl.gc.ca/Parlinfo/compilations/OfficersAndOfficials/OfficersOfParliament.aspx?Language=E. For a useful overview of the development of this group, and a cogent argument in favour of the “agent of Parliament” title favored by Privy Council Office and Treasury Board officials to differentiate these officers from parliamentary officers such as the Clerk of the House, see Jeffrey Graham Bell, Agents of Parliament: The Emergence of a New Branch and Constitutional Consequences for Canada,” Institute on Governance, 2006. 5 See Office of the Chief Electoral Officer of Canada, A History of the Vote in Canada, Second Edition, Ottawa, 2007. 6 Office of the Commissioner of Official Languages, Annual Report – Special Edition, 35th Anniversary 1969 -2004, Volume 1, Minister of Public Works and Government Services, Ottawa, 2005, pp 1–12. 7 Personal Information Protection and Electronic Documents Act, 2000, c.5, s. 24. 8 See Conflict of Interest and Ethics Commissioner, 2008–2009 Annual Report in Respect of the Conflict of Interest Code for Members of the House of Commons, p. 2, where it is noted that the House Standing Committee on Procedure and House Affairs has the authority to provide such direction. 9 It is noteworthy that the Commissioner’s website refers to the position as “an independent Agent of Parliament.” See Note 4 above, and http://www.ocl-cal.gc.ca/eic/ site/lobbyist-lobbyiste1.nsf/eng/h_nx00264.html. 10 See Public Service Disclosure Protection Act, 2005, c. 46. 11 Figures compiled from Reports on Plans and Priorities, 2009–10 for the respective organizations (except for the Office of the Conflict and Interest Commissioner, which does not release rpps, and for which estimates were developed based on the Annual Report, 2008–9). The “people” figures are fte’s, which do not equate directly with employee numbers, but provide a rough indication of the size of organizations. 12 See respective Reports on Plans and Priorities, 2009–10. 13 The appointment of the Chief Electoral Officer continues to require ratification by the House of Commons only. Previously, the Auditor General was appointed by the Governor in Council following all-party consultation, but with no requirement for a resolution of either House.

259 The Officers of Parliament 14 When parliamentary committees review spending estimates as part of the annual financial cycle, they have the authority only to accept, reduce or reject them, as does Parliament. 15 See, for example, Auditor General, Report of the Auditor General of Canada to the House of Commons – Reflections on a Decade of Serving Parliament, February 2001, Office of the Auditor General, Ottawa, pp. 80–81. See also the Auditor General’s November 2003 Report, Matters of Special Importance, which reiterates this proposal).The issue was examined by one Senate and two House of Commons standing committees. See Standing Senate Committee on National Finance, Twelfth Report, May 2005; House of Commons Standing Committee on Public Accounts, Seventh Report, February 2005 and House of Commons, Standing Committee on Access to Information, Privacy and Ethics, Fourth Report, May 2005. 16 The information provided below reflects the author’s experience on the research staff of the panel prior to retirement in 2008. The fact that its proceedings occur in camera precludes disclosure of confidential information relating to proceedings and decisions. Aside from positive references by several officers of Parliament in appearances before standing committees, the only other public information available, to the author’s knowledge, is a brief description in Elise Hurtubise-Loranger, “Commonwealth Experience 1 – Federal Accountability and Beyond in Canada,” Chap. 6 of Oonagh Gay and Barry K. Winetrobe, Parliament’s Watchdogs: At The Crossroads, U.K. Study of Parliament Group, The Constitution Unit, University College of London, 2008, pp. 71–80. There is also a reference in Paul Thomas, “Parliamentary Scrutiny and Redress of Grievances,” Canadian Parliamentary Review, Spring 2007, p. 11. Thomas expresses interest in the potential impact of the Panel on the balance between independence and accountability of the officers. 17 See House of Commons Standing Committee on Access to Information, Privacy and Ethics, Evidence, June 3, 2009, especially Mr. Marleau’s introductory statement and responses to questioning by Mr. Bill Siksay. 18 Clauses 258 and 259 of the FedAA amended the Financial Administration Act to make deputy heads of large federal organizations responsible for maintaining an adequate internal audit capability (and made the officers of Parliament subject to this requirement). 19 The Office of the Auditor General receives an annual financial audit by an outside audit firm, and in 2004 initiated a process of periodic performance review by international peers. 20 Listed in the Auditor Genera’s searchable database of reports to Parliament, see: http://www.oag-bvg.gc.ca/internet/English/parl_lp_e_927.html. 21 See, for example, House of Commons, Standing Committee on Procedure and House Affairs, Fifty-first Report, The Business of Supply: Completing the Circle of Control, December 1998 and House of Commons, Standing Committee of Government Operations and Estimates, Fourth Report, Meaningful Scrutiny, September 2003. 22 At least one Committee member, the Hon. Walt Lastewka, raised concerns, but only outside the Committee room. See Paco Francoli, “Top Grit mps question ag’s sponsorship report,” The Hill Times, April 12, 2004. For concerns raised by observers, see

260 Jack A. Stilborn

23 24

25

26

27

John Chenier, “The ag and sponsorship: a commentary,” Inside Ottawa, 12, 4, Feb. 11, 2004, and Gilles Paquet, “The $100 million mirage: a cautionary note,” Optimum, 34, 1, Apr. 2004, pp 2,3. These observations reflect the author’s experience on the research staff of the Committee during this period. See Sharon Sutherland, “Biggest Scandal in Canadian History,”: hrdc Audit Starts Probity War, Working Paper 23, School of Policy Studies, Queen’s University, August 2001, especially comments on the Auditor General p. 25 ff. See also, David E. Smith, The People’s House of Commons – Theories of Democracy in Contention, University of Toronto Press, Toronto, Buffalo, London, 2007, pp 10–11, 63 ff. The creation by the FedAA of a Parliamentary Budget Officer position, reporting to the Parliamentary Librarian but mandated to provide independent analysis to Parliament on highly public and frequently controversial issues, has initiated an interesting test of the capacity of the “in-house” staff model to deliver analytical support similar to that provided by several of the officers of Parliament. Unfortunately, issues relating to the conduct of the current Parliamentary Budget Officer have clouded the instructiveness of experience thus far (see Joint Committee on the Library of Parliament, Report on the Operations of the Parliamentary Budget Officer Within the Library of Parliament, June 2009). Referring to the emergence of a range of “competitors,” including the officers of Parliament, David E. Smith writes: “The Commons is under siege, figuratively, by trespassers. It’s pre-eminence is in danger. Here is the political science equivalent of the ‘tragedy of the commons,’ the destruction by all of what is valuable to all.” (See Note 24). The Auditor General Act, s 7 (2).

13 Temporary Help Agency Employment in the Federal Government ti m ot hy j. ba rt k i w

introduction This chapter reviews recent patterns of expansion in temporary help agency employment (thae) in the Government of Canada. thae is one of the alternatives to direct employment available to government managers in meeting human resource needs. Under thae, a private sector temporary help firm enters a contract with a client organization (here a department, agency, crown corporation or other organization controlled by the federal government) to supply a worker, formally employed by the temporary help firm, to work for and under the direction of the client for a fee.1 This chapter provides a discussion of the background and context regarding thae growth in the federal government in recent years. Growth in thae in the broader economy has generated recurring policy dialogue on problems associated with thae growth and the need for further regulation of thae. The chapter assesses recent trends in thae usage in the federal government, by illustrating patterns of growth in thae expenditures, and comparing these to trends in expenditures on the main alternatives to thae as a human resource strategy: forms of direct employment of workers, and forms of contracting for services. Analysis of data suggests that thae growth in the federal government has been significant, and in fact suggests that thae growth has occurred disproportionately to alternative human resource strategies, in spite of broader labour policy concern around the precarious nature of thae from the perspective of the workers labouring under these arrangements. The chapter then examines some of the potential causes and policy implications of these trends, particularly the impact of these trends on federal

262 Timothy J. Bartkiw

public service labour relations. It is argued that these trends stand to mute the effect of certain labour market policies, as well as the effect of policy aimed at safeguarding characteristics of the federal civil service. It is also argued that these trends threaten to erode public service collective bargaining, and that unions have been limited in their ability, or inclination, to undertake strategic responses to the growth in thae in the federal government.

b a c kg r o u n d a n d c o n t e x t As noted above, the temporary nature of work within the Federal Public Service (fps) has in recent years been identified as a growing policy concern. This includes concerns expressed over patterns in the hiring of students, casual/term employees, and contract employees of various sorts, including those contracted through temporary help firms.2 The salience of concerns around the effects of non-standard employment in the fps is illustrated by the Public Service Commission (psc) undertaking two studies in 2007 assessing, inter alia, the extent to which “casual” and “term” employees subsequently become recruited into permanent employment in the fps. Later, in May 2009, the President of the psc announced that the psc would carry out a further study specifically focused on the use of workers supplied by temporary help agencies throughout the fps.3 Specifically, concerns identified over increased use of temporary workers in the fps include the lack of long-term commitment of temporary workers, the tangible and intangible costs of turnover, effects on institutional continuity and memory, and the possibility of cost inefficiencies due to wage cost “markups” added by the temporary help industry. A further concern, as the Zussman analysis in Chapter 11 shows, is that retirement rates, particularly due to retirement of the “baby boomer” generation, have in recent years accelerated significantly, exacerbating the problems of continuity, institutional memory and stability. A 2008 study by Statistics Canada illustrates that the annual retirement rate in the fps increased from 1.6% in fiscal year 2000/01 to 3.3% in 2006/07, resulting in a current recruitment and retention challenge for the fps.4 Of further concern is the broader labour market context and the extent to which the federal public service, as the largest employer in Canada, may be exacerbating precarious employment trends in the labour market. The rise of precarious employment, including various non-standard forms of employment, has been identified as a defining feature of the Canadian labour market.5 Evidence suggests that temporary help agency employment is often the most precarious of the alternatives to the standard employment relationship. For example, a recent study of non-standard employees found that the average annual income for temporary help agency workers was well below the average for other non-standard categories in Canada.6 Similarly, other evidence suggests that temporary help workers are far less likely to receive benefits like

263 Temporary Help Agency Employment in the Federal Government Table 1 Temporary Help Services Industry: Revenues in Proportion to Total Labor Income (billions) Year

Temporary Help Industry Revenues

Total Labor Income

Industry Revenue as % of Total Labor Income

1993

$1.411

$394.815

.354 %

2005

$5.60212

$694.041

.807 %

Sources: Statistics Canada, Cansim, Tables 361-0001, 382-0001, 382-0006, and Daood Hamdani, The Temporary Help Service Industry: Its Role, Structure, and Growth (Ottawa: Statistics Canada, Analytical Paper Series No. 10, 1997).

extended health care, dental care, and paid sick leave, than both permanent workers and other types of temporary workers7 and that temporary workers generally experience negative health effects such as psychological stress.8 There is evidence of substantial growth in thae within the Canadian labour market in recent years, with growth in temporary help industry revenues being a useful indicator of this phenomenon.9 Table 1 displays industry trends for two specific years for which data is available, showing revenues for the temporary help industry. The data reveals that between the years 1993–2005, there was not only significant growth in industry revenues, but also that this growth significantly surpassed the growth rate in total labour income. In fact, the share of total labour income earned under thae arrangements grew by 128% between 1993 and 2005.10 These trends have generated increased policy dialogue around the need for regulation of thae.13 For example, the 2003 Report of the Bernier Commission established by the Quebec government14 identified thae as being a precarious form of employment for various reasons. Concerns include the erosion of wages and benefits, reduced enforcement of existing labour standards driven by employer practices in this industry, as well as reduced access to legal standards due to access requirements based on a paradigm of continuous employment.15 Similarly, the 2006 report of the Federal Labour Standards Review Commission16 also identified thae as raising serious policy concerns in the federal domain, which the Commission suggested warranted both further study as well as the taking of certain immediate actions by the federal government. Specifically, the Commission noted the “vulnerable” status of thae workers, in terms of the inferior levels of wages and benefits they receive relative to comparable workers in standard employment relationships, and also cited concerns about the regularity of unacceptable employer behavior in this industry, such as a lack of adherence to labour standards and outright nonpayment of wages and benefits earned by workers. The Commission recommended that the federal government arrange for the undertaking of a study designed to identify labour practices in this industry requiring specific regulation, but also suggested that in the more immediate term, the industry

264 Timothy J. Bartkiw

ought to self-regulate through the enforcement of an industry-wide code of labour practices, and the federal government ought to lend weight to the enforcement of such a code by refusing to contract with any temporary help firm not complying with it. Lastly, the Commission also recommended that the federal government amend the Canada Labour Code to impose joint liability on client organizations with respect to any unpaid wages and benefits owing to thae workers. The federal government has yet to comply with any of these recommendations. In 2009, the Ontario government adopted legislation to regulate temporary help agency business practices, and improve labour standards regulation concerning these workers.17 Indeed, rather than choosing to move towards regulating thae in this manner, the federal government has taken steps to liberalize its procurement process for temporary help services, making it easier for managers to use the process, and removing some previous restrictions on its use. In 2009, Public Works and Government Services Canada (pwgsc) increased the maximum length of each temporary help placement under its Standing Offer process for procuring temporary help workers to 48 weeks, which can then be extended by a further 24 weeks upon request made to pwgsc. The maximum monetary value of each procurement of a temporary help worker was also increased from $89 thousand to $400 thousand, allowing for much more flexibility in terms of volume of work, and much higher financial payments to temporary help firms, significantly increasing the ability of managers to use thae to fill relatively higher paid positions and functions in the future. Further, the requirements of the Standing Offer process, in which managers may hire directly from pre-authorized ths suppliers at bid rates submitted on a weekly basis for pre-specified job classifications, were also simplified to some extent, in that managers were no longer required to request and review resumes from three or more firms, under each separate procurement. Instead, managers need merely comply with the “right of first refusal” procedure, under which they review resumes supplied by the lowest price bidder first to determine if the worker meets their requirements, and if the worker is not qualified, then they must review resumes from the second lowest price bidder, and so on. This system leaves much of the discretion around the qualitative appropriateness of the individual worker to managers, with their being no requirement to set up any competition of sorts as between candidates. The procurement system’s “right of first refusal” rules also generate pressure on thae firms to compete on the basis of price and, by extension, the wages paid to the workers. While a 2006 Report by the Conference Board of Canada stated that the government desired at that time to reform the system with a goal of re-orienting supplier competition to be based more on efficient levels of wage mark-ups than on wages,18 such reform was not undertaken. pwgsc has also recently devised a process enabling managers to negotiate directly

265 Temporary Help Agency Employment in the Federal Government

with firms for larger and more complex thae supply arrangements at reduced prices, using the pre-negotiated Standing Offer rates as ceilings. This new framework potentially lays the basis for further expanded use of thae in the future. Overall, the broader context is that of a major recruitment and retention challenge for the fps, against the backdrop of major expansion of thae in the broader labour market, increased recognition of its precariousness, and other related policy concerns, and growing policy dialogue on the need for further regulation of thae. In this context, understanding patterns of growth in thae usage in the fps, the largest employer in Canada, seems warranted.

pat t e r n s o f e x p e n d i t u r e s o n e m p l o y m e n t a n d i t s a lt e r n at i v e s Aggregate growth patterns were examined19 by the author in relation to the following categories of employment expenditures within the Government of Canada:20 Personnel; Civilian Regular Time – Continuing Employment (also commonly referred to as “indeterminate employment,” but hereinafter referred to as “regular employment”); Civilian Regular Time – Part-Time, Seasonal & Casual (defined in the Government-Wide Chart of Accounts21 to also include “term” employment) (hereinafter collectively referred to as “non-standard employment”); and termination/severance expenditures.22 It was not possible to obtain more detailed data for the various sub-categories of non-standard employment. Spending patterns were also examined for two key substitutes for employment: aggregate Professional and Special Services (capturing a large range of services sub-contracting categories), and Temporary Help Services23 (a separately itemized “object of expenditure” in the Public Accounts of Canada).24 Analysis was performed for fiscal years 1994/95 to 2006/07, using data from the Public Accounts of Canada, sourced by pwgsc. Table 2 provides data on federal government expenditures on employment in the selected categories. Some basic patterns are readily apparent. First, there was a significant negative trend in aggregate personnel spending in the period of 1994/95 to 1997/98, occurring in a period witnessing relatively high fiscal deficits and the adoption of the “Program Review” process beginning in the 1994 budget. This era of restraint involved explicit efforts by the government to reduce the size of the permanent fps workforce, illustrated by the negative trend in regular employment expenditures for 3 years. As aggregate personnel and regular employment spending declined, termination/ severance costs rose, as these are essentially transactional costs of workforce reduction. After 1997/98, there was a substantial rebound in regular employment and aggregate personnel expenditures. Non-standard employment expenditures grew for a 7 year period after 1995/96, with less of a clear pattern subsequently.

266 Timothy J. Bartkiw Table 2 Federal Government Employment Expenditures – Selected Categories (dollars) Fiscal Year (ending in)

Personnel

Regular Employment

Non-standard employment

Termination and severance

1,111,458,656

231,733,679

1995

19,442,807,000

1996

19,268,819,000

8,539,458,134

1,047,446,796

385,447,035

1997

17,933,430,000

8,009,032,848

1,108,291,687

885,685,214

1998

17,807,433,000

7,751,252,587

1,223,546,581

629,335,218

1999

18,299,807,000

7,766,714,330

1,253,763,139

499,829,816

2000

19,779,063,000

8,453,624,490

1,492,786,487

210,703,404

2001

23,901,812,000

8,665,415,953

1,708,554,208

93,416,842

2002

23,164,609,000

10,130,695,182

1,795,449,299

102,524,359

2003

25,120,140,000

11,402,108,161

1,846,408,513

112,669,797

2004

26,360,408,000

12,195,060,769

1,672,662,919

139,869,769

2005

27,699,761,000

12,671,906,190

1,542,354,696

175,249,950

2006

29,186,276,000

13,624,218,914

1,665,259,019

209,177,173

2007

30,635,869,000

14,375,576,884

1,711,331,313

268,269,632

Source: Public Works and Government Services Canada, 2009.

Table 3 provides expenditure data for Professional and Special Services, and for Temporary Help Services. Both categories exhibit a stable growth pattern throughout this period. Expenditures on professional and special services grew each year. Temporary help services expenditures declined for one year after 1994/95, but then grew each year thereafter. Overall, a further pattern that can be gleaned from this mere presentation of the data is that during most of the years of fiscal restraint in the first half of the period of study, while regular employment expenses declined, spending on each of the alternatives to regular employment grew. To assess the relative magnitudes of regular employment and the various alternatives within the federal government, Figures 1, 2, and 3 provide graphs of expenditures on non-standard employment, professional and special services, and temporary help services, respectively, calculated as a ratio of spending on regular employment. These graphs suggest the following trends. Spending on non-standard employment grew in proportion to permanent employment from 1995/96 to 2000/01, but subsequently there was a significant negative trend in this ratio. Also, from 1998/99 to 2004/05, growth in permanent employment expenditures outpaced the rate of growth in professional and special services expenditures resulting in a decline in this ratio for these years, with some growth in this ratio beginning again in 2005/06. Lastly, there has been a fairly robust long-term positive trend in temporary

267 Temporary Help Agency Employment in the Federal Government Table 3 Federal Government Expenditures on Professional & Special Services, and Temporary Help Services (dollars) Fiscal Year (ending in)

Professional and Special Services

Temporary Help Services

1995

4,255,341,000

95,333,693

1996

4,412,744,000

87,459,225

1997

4,503,958,000

96,446,158

1998

4,467,634,000

108,948,755

1999

5,160,818,000

114,350,331

2000

5,559,603,000

118,023,112

2001

5,589,446,000

147,077,900

2002

6,489,516,000

169,287,386

2003

6,538,126,000

179,038,216

2004

6,577,794,000

160,578,882

2005

6,644,790,000

187,285,873

2006

7,241,082,000

238,155,279

2007

7,847,368,000

282,127,283

Source: Public Works and Government Services Canada, 2009.

help services expenditures relative to permanent employment expenditures (although there was a modest short term decline in this ratio from 2000/ 01–2003/04). These graphs suggest that, despite nominal growth trends in non-standard employment and professional and special services expenditures, there has not been a recent significant expansion in spending on these categories relative to growth in permanent employment expenditures. On the other hand, it seems that there has been a disproportional growth trend in temporary help services expenditures. Given this disproportional growth in thae, it raises the question of whether there has also been a substitution of thae in place of the other alternatives to regular employment. Figure 4 provides a graph of the ratio of temporary help services expenditures to each of professional and special services and non-standard employment expenditures. The graph shows positive growth in both of these ratios. The graph illustrates that temporary help service expenditures have grown in proportion to both non-standard employment expenditures and professional and special services expenditures, making thae the most rapidly expanding alternative to regular employment. There seems to have been some substitution effect away from each of these other alternatives, with the largest potential substitution effect being thae in place of non-standard employment.

Figure 1 Ratio of Non-standard Employment Expenditures to Regular Employment Expenditures

0.20 0.18

Ratio

0.16 0.14 0.12 0.10 1994 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Fiscal year (ending in March of)

Figure 2 Ratio of Professional and Special Services Expenditures to Regular Employment Expenditures

0.7000

Ratio

0.6500

0.6000

0.5500

0.5000 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Fiscal year (ending in March of)

Figure 3 Ratio of Temporary Help Services Expenditures to Regular Employment Expenditures

2.00000

Ratio

1.80000 1.60000 1.40000 1.20000 1.00000 1994 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Fiscal year (ending in March of)

Figure 4 Ratio of Temporary Help Services Expenditures to Non-standard Employment Expenditures, and to Professional and Special Services Expenditures

0.20000

Ratio

0.15000

0.10000

0.05000

0.00000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Fiscal year (ending in March of) Temp Help Svces / Profil Spcl Svces

Temp Help Svces / PT. Seas. Term & Cas

270 Timothy J. Bartkiw

i m p l i c at i o n s f o r p u b l i c p o l i c y and collective bargaining While empirical analysis of the precise causes of these trends was beyond the scope of this chapter, some discussion of this is nonetheless necessary. One common explanation for the growth in thae usage is a perceived need for increased managerial flexibility, both in terms of numerical and functional human resource needs. This perception may arise from objective need for greater flexibility due to environmental factors, and/or an increased prevalence of theoretical justifications for seeking such flexibility, provided for example by the rise of new public management theory.25 It may be that thae provides greater flexibility to public sector managers relative to forms of employment, in terms of reduced managerial commitment to the worker, and greater ease in both obtaining and terminating the supply of work. In the public sector, certain additional barriers to hiring exist such as regulated hiring processes, traditionally based on protecting the principle of “merit” in the civil service. Interestingly, the disproportional expansion of thae has in fact occurred recently despite legislative changes in 2003 liberalizing the concept of merit, and empowering departmental managers within the hiring process. Under changes made to the Public Service Employment Act (“psea”), an appointment was subsequently based on merit when a person meets “the essential qualifications for the work to be performed, as established by the deputy head, including official language proficiency.” This change removed the previous, longstanding concept of merit based on relative superiority of the candidate being hired. Under the new law, deputy heads also acquired various new powers to simplify hiring, including the right to sub-delegate hiring authority, and their new powers.26 It is possible that, despite these reforms, recruitment through thae remains attractive to managers for its simplicity, familiarity, and flexibility. For example, in addition to avoiding the requirements of the formal appointments process (in the case of term or continuing employees), pwgsc rules on temporary help placements also allow for significant flexibility in terms of length of duration of work, with up to 48 weeks of work allowed per placement, plus another 24 weeks upon request. By comparison, a casual employee may be employed for a maximum of 90 days. A further explanation for the expansion of thae may lie in the way in which funds are budgeted and distributed for employment within the federal public service, and the pressures placed on growth in employment expense budgets beginning in the mid to late 1990’s. While this study did not involve direct empirical analysis of this phenomenon, union bargaining agent personnel expressed the belief that many public service managers were increasingly using funds allocated to their organizations for non-employment purposes to purchase labour power (eg. through thae) simply to ensure that minimum nec-

271 Temporary Help Agency Employment in the Federal Government

essary work functions continued to be performed following the top-down enforcement of job reductions in the mid 1990’s Program Review era.27 Another theoretically contributing factor explaining recent growth in thae practices relates to its durability or “stickiness,” once it becomes used regularly. This may be because of its familiarity and ease of use, creating a preference for it held by managers. Further, this stickiness may also be caused in part by barriers to direct hiring experienced by the pool of workers supplied through these arrangements, such as hiring fees or penalties in contracts with temporary help firms, which then may reinforce both the supply of, and demand for, thae. The presence of these sorts of hiring barriers in services contracts is a widespread phenomenon in this sector. Evidence suggests that temporary help workers within the federal government face similar hiring barriers, since pwgsc has established a system of fees it charges to users of thae within the federal government if they enter into an employment relationship with a worker supplied by a temporary help firm prior to 20 weeks of service.28 Indeed, Public Works and Government Services Canada has stated in its “System Protocol” for temporary help services acquisition by federal government managers that: “departments and agencies are not permitted to initiate casual, term or permanent staffing arrangements with a pre-qualified supplier’s temporary help service employee(s) … Such action could create a liability for the federal government department or agency.29 (emphasis added).” The quantitative analysis above suggested that, while federal spending on all forms of direct employment and services sub-contracting has grown in recent years, the use of thae has expanded out of proportion to direct employment (both regular and non-standard). This raises concerns about the compromised efficacy of related policy instruments that operate on the basis of a platform of direct employment. For example, the scope of the Canadian Human Rights Act, insofar as it applies to “employment,” would not generally extend to temporary help workers labouring in the federal government. This means that the rules governing pay equity in the federal jurisdiction, also contained within this statute, would not extend to these workers. Although provincial pay equity legislation might apply to some of the large number of relatively smaller temporary help agency “employers,” many of these much smaller establishments would be excluded under comparable provincial law due to size thresholds, reducing the scope of this policy. As well, since existing pay equity laws generally only impose obligations on employers to conduct intra-organizational job category comparisons and adjustments, outsourcing work to multiple, smaller temporary help firms results in pay equity policy being muted by the limits of comparisons made within smaller organizational boundaries. By similar intuition, the scope and effect of the federal Employment Equity Act may also be muted by an expansion of thae within the federal government, particularly given the lack of comparable legislation at the provincial level.

272 Timothy J. Bartkiw

The effects of other safeguards of qualities of the civil service are similarly eroded, insofar as they operate primarily through direct employment. This would include rules applying to the appointment of civil service workers such as formal requirements of “merit,” as well as official languages restrictions, and other forms of worker rights or restrictions set out in the Public Service Employment Act (“psea”). Examples of such rules applying to civil servants include certain worker mobility rights, rights to priority status for other positions, rights to participate in fps internal appointment processes, access to complaint processes, as well as restrictions on political activities and partisanship.30 It should be noted that, while these rights/restrictions apply to regular full-time, part time, and term employees, they do not apply to casual employees, as defined by the psea.31 Thus, the more that thae displaces employment in categories other than casual, the greater the eroded effect of these policies. As the use of thae expands, collective bargaining is eroded as an instrument of regulating the terms and conditions of work in the fps. Specifically, both regular and term employees are provided collective bargaining rights by legislation, but independent contractors, and workers assigned by temporary help agencies, are not.32 Indeed, employees of temporary help services firms in Canada are rarely unionized. Despite their lack of formal inclusion, even casual employees nevertheless enjoy some limited de facto benefits from collective bargaining. Most importantly, they typically receive the rates of pay assigned to their job category and level, which are determined under collective bargaining.33 Union bargaining agents say that, in contrast, it is quite common to find temporary help workers working alongside comparable public service employees for inferior wages and benefits34. Rates paid to workers supplied through temporary help services are not directly regulated or standardized by pwgsc or other federal government authority, and are generally not subject to collective bargaining at all. Term employees generally benefit much more from collective bargaining than casual employees. In addition to collectively negotiated wage rates, they also usually have access to most other collective agreement rights and protections, such as greater job security, voice and complaint mechanisms, benefits, etc.35 Of course, regular employees enjoy the greatest inclusion under, and benefits from, collective bargaining. A few comments about union responses to recent trends may also be made. The expansion of temporary help services erodes collective bargaining units and reduces relative union membership in the workplace, making this a potentially serious concern for union organizations. However, as noted above, recent growth in temporary help usage has occurred during a simultaneous expansion in public service employment. Thus, while erosion of bargaining units may have taken place, many of the unions have experienced

273 Temporary Help Agency Employment in the Federal Government

membership growth, possibly reducing the unions’ perceived need for strategic responses to thae growth.36 Further, although temporary help services experienced the fastest growth, other forms of sub-contracting remain collectively a much larger aggregate phenomenon, and conceivably a larger priority for unions. In certain occupations and categories, sub-contractor or “consulting” arrangements are far more prevalent than thae, and thus are the main focus of union attention.37 Union responses have also been limited by the level of collective bargaining and by union structure. For example, unions often have limited coordinated knowledge of management practices regarding thae, since these decisions are often made on a decentralized basis by local managers, often without the knowledge of the union. While they certainly have some information, unions lack reliable information regarding the use of temporary help services within their bargaining units.38 Unions could potentially press the employer for access to this information, perhaps through notification obligations, as a demand during bargaining, but there is no evidence of any recent attempts to bargain for such disclosure schemes. Instead, the Public Service Alliance of Canada (“psac”) has developed an internal initiative called “tempwatch,” a program designed both to educate members about union concerns regarding temporary help agencies, and to gather and pool knowledge from the dispersed membership on the use of thae to perform work normally performed by workers in the various bargaining units.39 Other bargaining strategies recently adopted include more general demands by unions for restrictions on “contracting out” in general, but with limited success. In place of such an outright restriction, in the most recent round of bargaining, psac was able to expand the coverage of the Workforce Adjustment provisions of each of the central collective agreements. These provisions had already required departments and organizations to review the use of temporary help agency personnel, term employees and other non-indeterminate employees, and where practicable, to refrain from re-engaging such workers where this will facilitate the appointment of surplus or laid-off employees. As a result of the most recent negotiations, these provisions now additionally provide for a similar review of the use of “consultants” and “contractors” as well.40 However, no other new rules relating specifically to temporary help services were adopted. The unions may be limited in their bargaining options on this subject, as the scope of collective bargaining may not interference with any employment or staffing rules established by statute.41 Reliable data on patterns in the predominant levels or locations at which permanent employment has been eroded by thae was not available, and thus such analysis was beyond the scope of this chapter. Yet it is possible to speculate about this question using certain available information. In 2007, Bartkiw and Swimmer identified a trend of “professionalization” in the fps, based on declining proportional spending on employment in lower-ranked

274 Timothy J. Bartkiw

job categories. Additionally, in a recent study of the temporary help services procurement practices conducted on behalf of the federal government, the Conference Board of Canada claimed that approximately 60% of federal government temporary help services spending is for labour in what it labels the “administrative/clerical stream” (other streams being professional, and technical/operational).43 If there is a tendency for administrative/clerical positions to be relatively lower level positions, then proportional growth in temporary help services would result in a relative erosion of bargaining units at lower levels, contributing to an increasingly professional composition of bargaining units.

c o n c lu s i o n s This chapter has shown that in the context of a retirement boom, a recruitment and retention challenge for the federal government, and in spite of the growing awareness of the precarious nature of temporary help agency employment, the federal government has recently undertaken a significant expansion in its use of temporary help services. This expansion has been disproportionate to growth in alternative human resource arrangements such as forms of employment and services contracting. Although expenditures on employment and services contracting remain much larger in an aggregate sense, there is some evidence of a degree of substitution away from each of these towards thae, with the largest potential substitution effect being from non-standard forms of employment. These trends tend to erode the scope and effects of certain public policies operating through a platform of employment, including labour market and equity policies, as well as those aimed at ensuring certain characteristics of the public service and rights of workers labouring in the federal government. Collective bargaining as an instrument for determining terms and conditions of work in the public service is also undermined, with the growth of either contracting or temporary help services. The scope of collective bargaining coverage is further narrowed with the apparent substitution of temporary help services for non-standard employment, given the partial extension of various benefits of bargaining to those workers. Lastly, for various reasons, union responses to the relative growth in temporary help services have been limited. Overall then, patterns in thae use and their consequences stand to increase the precarious nature of work in the federal government, and possibly beyond. Recent reforms of pwgsc rules around the use of thae in the federal government, designed to increase the availability of thae to federal government managers, suggest an intention to preserve and perhaps expand upon these practices in the future.

275 Temporary Help Agency Employment in the Federal Government

notes 1 For federal government departments and agencies wishing to hire temporary help workers, Public Works and Government Services Canada (“pwgsc”) has created a special online automated purchasing system designed to simplify the process, and increase managers ability to identify rates, potential suppliers and issue “call-ups” for temporary help workers online. Under this system, pre-qualified suppliers submit offers online. 2 See Kathryn May, “Public Service goes on youth hiring spree,” Ottawa Citizen, July 9, 2007 available at: http://www2.canada.com/ottawacitizen/news/story.html?k= 59995&id=abb90b53-4860-45c9-9946-a0524ba26ff2&p=1; Kathryn May, “Watchdog hones in on temporary government workers”, Ottawa Citizen, May 19, 2009, available at http://www.ottawacitizen.com/Watchdog+homes+temporary=government+ workers/1608301/story.html. See also comments about temporary workers made by Maria Barrados to the House of Commons Standing Committee on Government Operations and Estimates, June 18, 2009. 3 It does not seem that the parameters, or objectives, of such a study have been announced publicly. This announcement is noted in Kathryn May, 2009, Ibid. 4 Dan Fox, “Federal Public Service Retirements: Trends in the New Millenium,” Statistics Canada Analytical Paper (Ottawa: Statistics Canada, 2008). 5 Leah Vosko, ed., Precarious Employment: Understanding Labour Market Insecurity in Canada (Kingston: McGill-Queen’s University Press, 2006). 6 See Tony Fang and Morley Gunderson, Employment Patterns of Non-Standard Workers: Analysis Using slid (Ottawa: Human Resources and Skills Development Canada 2005). 7 Leah Vosk, Temporary Work: The Gendered Rise of a Precarious Employment Relationship, (Toronto: University of Toronto Press, 2000). 8 Research suggests that the extent to which temporary arrangements are involuntary influences the degree of the negative health effect. See C. E. Connolly and D.G. Gallagher, Emerging Trends in Contingent Work Research, 30 Journal of Management 959 (2004); K. Isaksson and K. Bellagh, “Health Problems and quitting among female ‘temps,’” 11 European Journal of Work and Organizational Psychology 27 (2002): 99–113. 9 Other measures such as the number of workers employed under these arrangements, are not only rarely available from official sources of labour market data, but also do not capture the size of the phenomenon given the high degree of turnover and the diversity in the duration of work assignments performed by temporary help agency workers. 10 This assumes that industry revenues provide a stable proxy for the value of the underlying labour being provided by workers employed under these arrangements. 11 This figure is provided in Daood Hamdani, The Temporary Help Service Industry: Its Role, Structure, and Growth (Ottawa: Statistics Canada, Analytical Paper Series No. 10, 1997). 12 This amount is based on the statement published by Statistics Canada that in 2005, temporary help services accounted for 78% of the revenues for the “employment services industry.” See Statistics Canada, The Daily, May 16, 2007, 9.

276 Timothy J. Bartkiw 13 See Bartkiw, Timothy J., “Baby Steps? Towards the Regulation of Temporary Help Agency Employment in Canada,” Comparative Labor Law and Policy Journal 31, 1 (2009): 163-206. 14 Jean Bernier, Guylaine Vallee, & Carol Jobin, Les Besoins de Protection Sociale des Personnes de Travail Non Traditionnelle, Rapport Final (Quebec: Ministere du Travail, 2003). Available at http://www.travail.gouv.qc.ca/publications/rapports/ alphabet.html. 15 For a summary of the various law reform recommendations of the Bernier Commission relating to temporary help agency employment see Bartkiw, “Baby Steps.” 16 Harry Arthurs, Fairness At Work: Federal Labour Standards for the 21st Century (Gatineau: Human Resources and Skills Development Canada, 2006). 17 An Act to Amend the Employment Standards Act, 2000 in relation to temporary help agencies and certain other matters, c. 9, S.O. 2009. 18 The Conference Board of Canada, Temporary Help Services Pre-Consultation Report, (Ottawa: Conference Board of Canada, 2006). 19 Data for relevant “objects of expenditure” as defined by pwgsc and used in the Public Accounts of Canada were obtained under an access to information request to pwgsc, and data was reviewed by the author in July of 2009. 20 The Public Accounts of Canada define the reporting entity of the Government of Canada to include “all departments, agencies, corporations, organizations, and funds, which are controlled by the Government … all organizations defined as departments and as crown corporations by the Financial Administration Act are included in the reporting entity. Other organizations not listed in the Financial Administration Act may also meet the definition of control and they are included in the Government’s reporting entity if their revenues, expenses, assets or liabilities are significant. 21 The Government Wide Chart of Accounts is the framework established by the Receiver General for identifying, aggregating and reporting financial transactions to satisfy the government’s corporate information requirements. 22 The Object of Expenditure Codes assigned to these four categories of expenditures in the Public Accounts of Canada are 01, 0101, 0102, and 0107 respectively. 23 The Object of Expenditure Codes assigned to these four categories of expenditures in the Public Accounts of Canada are 04 and 0813 respectively. 24 Measures of the number of temporary help agency workers in use at a point in time, or over a period of time, are generally considered less reliable an indicator of the magnitude of thae than expenditure measures, since they do not account for the variation in work assignment duration. 25 See for example, J. Atkinson, “Manpower strategies for flexible organizations,” Personnel Management, 16, 1984, 28–31. 26 These changes to the psea were part of the Public Service Modernization Act, S.C. 2003, c. 22. See s. 24, psea. 27 Interview with Howie West, Work Reorganization Officer, Programs Branch, psacafpc, June 30, 2009.

277 Temporary Help Agency Employment in the Federal Government 28 These fees are on a sliding scale which decreases with each week of service. See “Section 6 – Staffing Arrangements” of the “Annex D to Part A – Protocol and Standards for the Online System Applicable to Federal Department Users and Suppliers”, available at http://www.tpsgc-pwgsc.gc.ca/app-acq/sat-ths/fournisseurs-suppliers/ offcmm-stdoff-annexd-eng.html. 29 See discussion under heading “System Parameters,” available at: http://www. tpsgc-pwgsc.gc.ca/acquisitions/text/ths/protocol-e.html 30 Generally, term employees have the same rights under the psea (as well as the Canadian Human Rights Act and the Employment Equity Act) as do regular (indeterminate) employees. 31 See section 50 of the psea. 32 Both casual employees and employees hired under designated student employment program are excluded from the definition of employee in the Public Service Labour Relations Act, S.O. 2003, c. 22. 33 Interview with Howie West, Work Reorganization Officer, Programs Branch, psacafpc, June 30, 2009. 34 Interview with Loren Crawford, psac, July 18, 2008; Interview with Alain Picher, psac, June 2008. 35 In some instances, employees may have to work for specified periods in order for certain benefits to accrue. 36 Interview with Loren Crawford, psac, July 18, 2008. 37 In the area of information technology, for example, all three forms are used extensively. However, recent federal government plans are for bundling of shared it services on a massive basis, potentially biasing expenditures towards contractors, who may in turn utilize the services of temporary help agencies to perform the work under their contracts. 38 It was explained to me in an interview at psac that it is only the result of recent arrangements that psac will be entitled to receive from the government reliable contact information for its own members. 39 Ibid. 40 See for example, section 1.1.27 of Appendix D to the Agreement between the Treasury Board and the Public Service Alliance of Canada, for Program and Administrative Services (all employees), expiring June 20, 2011. 41 Section 113, Public Service Labour Relations Act, c. 22, S.O. 2003. 42 Timothy J. Bartkiw and Gene Swimmer, “Federal Public Service Labour Relations: Business as Usual?” in G. Bruce Doern, ed. The Harper Conservatives – Climate of Change, How Ottawa Spends, 2007–08 (Kingston: McGill University Press, 2007). 43 The Conference Board of Canada, Temporary Help Services.

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appendix a Canadian Political Facts and Trends

12 march 2009

Parliamentary budget officer Kevin Page writes to Prime Minister Harper and the opposition party leaders to help him in the face of a funding crunch and to resolve issues regarding his independence. 17 march 2009

Environment Minister Jim Prentice announces in Calgary that for the next two years certain public projects will be excused from rigorous federal environmental assessment processes in order to get Canadians working again and to stimulate the economy. 18 april 2009

At the Summit of the Americas at Port of Spain, Prime Minister Harper pushed for an expanded free trade agenda with 15 Caribbean countries. 20 april 2009

The Sierra Club of Canada announces it is going to court to try to overturn the federal government’s decision to exempt about 2000 federally funded infrastructure projects from having to pass environmental assessments. 28 april 2009

Environment Canada announces that greenhouse gas emissions in Canada increased at the fastest pace on record in 2007. Emissions were now 26 percent above their 1990 level, violating a Canadian commitment to reduce them by 6 percent under the Kyoto Protocol.

280 Appendix A 30 april 2009 The federal and Ontario governments announce that they will contribute about $3 billion of the U.S.-Canada fund to rescue Chrysler in an auto bailout. 2 may 2009

Michael Ignatieff is formally confirmed as Liberal leader at a Liberal Party convention in Vancouver. He succeeds Stephane Dion who had resigned after the 2008 election defeat. 9 may 2009

John Baird, Minister of Transport, Infrastructure and Communities, defends the processes for handing out federal infrastructure funds over two years. He stresses the high volume of applications being received and processed and promised a speedy handout of funds. 19 may 2009

Environment Minister Jim Prentice confirms that Canada will match tough new U.S. vehicle emission standards 19 may 2009

Natural Resources Minister Lisa Raitt announced in Edmonton that Ottawa would spend $1billion over the next five years on clean-energy research and demonstration projects with an emphasis on reducing carbon dioxide emissions. 27 may 2009

Liberal Leader Michael Ignatieff called in Parliament for the resignation of Finance Minister Jim Flaherty after the disclosure that the federal government will run a record $50 billion deficit, one third more than the Finance Minister had projected in his January budget. 1 june 2009

The Canadian and Ontario governments have agreed to lend General Motors about 16 percent of the total $59 billion rescue package. In return Canada will retain 16 percent of gm’s North American vehicle production until 2016. It also gets one seat on a new thirteen member board of directors and 11.7 percent of the company’s common shares. 17 june 2009

Stephen Harper and Michael Ignatieff announce they have reached an agreement to jointly appoint a working group that will examine ways of improving employment insurance benefits. The agreement means that no summer election will be needed and that the Liberals will pass the government’s spending bill.

281 Canadian Political Facts and Trends 30 june 2009 A report by Dalhousie University economist, Lars Osberg, concludes that jobless benefits in Canada are well below the average for oecd countries. It also shows that the benefits are less generous than in previous recessions despite recent improvements to the system. 1 july 2009

Environment Minister Jim Prentice says that Canada will adopt climate change regulations comparable to those of the United States, to avoid punitive U.S. green tariffs. These rules will include rules for the oil sands and refineries. 7 july 2009

The Parliamentary Budget Officer, Kevin Page, announces that he is predicting deeper budget deficits through to at least 2014. These projections are much greater that those of Finance Minister, Jim Flaherty whose plans aim to eliminate the deficit in four years. 23 july 2009

The Bank of Canada announces that Canada’s recession is officially over in that gross domestic product will expand in this quarter at an annual rate of 1.3 per cent. 29 july 2009

The Conservatives announce the establishment of a six member Conservative Aboriginal Caucus, chaired by Rod Bruinooge, mp for Winnipeg South. 11 august 2009

Prime Minister Stephen Harper says that Ottawa will not block the sale of Nortel as suggested by Canadian company Research in Motion. The federal government will instead allow it to be reviewed in the regular way under provisions of the Investment Canada Act. 18 august 2009

On an Artic visit, Prime Minister Stephen Harper announced that the new Canadian Northern Economic Development Agency (CanNor) will have its headquarters in Iqaluit 22 august 2009

The Canadian Government announces that it has offered the U.S. guaranteed access to Canada’s provincial public procurement spending in exchange for a quick reciprocal waiver of Buy American provisions that have left Canadian companies out of American stimulus-spending contracts.

282 Appendix A 28 august 2009 Prime Minister Stephen Harper announces the appointment of Manitoba ndp Premier, Gary Doer, as Canada’s new Ambassador to the United States. 1 sept 2009

Liberal Party leader Michael Ignatieff announces that the Harper government’s “time is up” and that the Liberals will actively seek to defeat it rather than prop up the minority Conservative government. The intent was to force final responsibility for propping up the government on the ndp and Bloc Quebecois parties in Parliament. 10 sept 2009

Newspapers reported on a September 2 off the record speech by Prime Minister Harper to a meeting of Conservative Party workers, in which he said they had to work for a majority Conservative government, saying that the alternative was a Liberal government propped up by “the socialists and the separatists” 10 sept 2009

In an earlier than usual fall economic update, Finance Minister Jim Flaherty, said that this year’s deficit had grown to almost $56 billion and predicted shortfalls that will be deeper than previously acknowledged. The report also projected that budget deficits would be reduced to a manageable level of $5.2 billion by 2014–2015. 21 sept 2009

Liberal Leader Michael Ignatieff announces in a Toronto speech what he believed were the key differences between his party and the Harper government. These differences are that the Liberals believed in an activist good governance and that taxes are not evil but valuable. 26 sept 2009

World leaders meeting in Pittsburgh announce a historic G-20 summit agreement which will put the G-20 at the centre of their efforts to work together to build a durable recovery while avoiding the financial fragilities that caused the crisis. As a result, the G-8 would now deal primarily with international relations and foreign policy. 28 sept 2009

Prime Minister Harper defended the federal record as he released the third report on the progress of the federal stimulus program. He said that 90 percent of the funding had been allocated and that the Canadian economy was starting to recover. He also urged the opposition parties to avoid

283 Canadian Political Facts and Trends

toppling his government and forcing an election in the still difficult economic circumstances. 10 oct 2009

Parliamentary Budget Officer Kevin Page issues a report criticizing the Harper Government’s reporting on progress regarding the federal stimulus program. He argues that it falls well below the standards and completeness of reporting in the United States on the U.S. stimulus initiatives. 17 oct 2009

The Harper Government announces that it is asking the Supreme Court to rule on whether Ottawa has the power to create a national securities regulator. The impetus for the request is that the government is drafting legislation for the spring of 2010 to create a single commission that could replace the current system of 13 provincial and territorial securities regulators. The Quebec government in particular opposes both the single commission idea and the federal constitutional grab for jurisdiction. 20 oct 2009

An Ottawa Citizen-Halifax Chronicle Herald study shows that Conservative ridings are receiving a bigger share of stimulus project funding. It shows that 57 percent of the projects with more than $1million in federal funding nationwide went to Conservative ridings. The Conservatives hold only 46 percent of the seats in the House of Commons. 21 oct 2009

In a Toronto speech, Prime Minister Stephen Harper says that Canada and the world are in a rare period where deficits are not only necessary but also actually advised as a short term phenomenon. He also said that the government would wind back its stimulus program by Spring 2011 and that Canada’s deficit was very manageable. 28 oct 2009

Finance Minister Jim Flaherty proposes reforms to pension plans at federally regulated companies such as in the banking, airlines and communications sectors. Improvements would apply only to 10 percent of pensions because the other 90 percent are governed by the provinces. Improvements include changes in federal tax law to encourage firms to hold bigger pension plan surpluses. 28 oct 2009

Liberal leader, Michael Ignatieff announces a shake-up in his own office by appointing a former key Chretien era senior advisor, Peter Donolo, as his new chief of staff.

284 Appendix A 29 oct 2009 A report financed by the Toronto Dominion Bank and conducted by the Pembina Institute and the David Suzuki Foundation concluded that the Conservative’s goal of reducing greenhouse gas emissions by 20 percent by 2020 can be achieved. It concluded, however, that this could only be done by limiting growth in Alberta and Saskatchewan, with a resulting transfer of income to the rest of Canada, in particular Ontario and Quebec. Federal Environment Minster Jim Prentice replied that the report’s conclusions are irresponsible. 2 nov 2009

The Parliamentary Budget Officer, Kevin Page reported again that the federal government is sinking into a serious structural deficit, one that will still be 18.3 billion by 2013–2014. His projections are denied by the Harper Government who project only a $5.3 billion deficit by then. 12 nov 2009

Citizenship and Immigration Minister, Jason Kenney unveils a new guide for the 250,000 immigrants who take the Canadian citizenship test every year. The new Discover Canada document is seen by some as a Harper government effort to re-brand Canada into a conservative country with a heavier focus on military history, the maple leaf and Canada’s heroes. 19 nov 2009

A report by the Canadian Institute for Health Information indicated that Canada’s health care spending is expected to rise to a record $183.1 billion this year or an estimated 11.9 percent of gdp. Though much lower than the U.S., Canada is still one of the top 20 percent of countries in terms of per capita spending on health. 20 nov 2009

Heritage Minister James Moore advises arts groups to diversify their sources of funding to ensure that they remain financially viable. The minister acknowledged last year’s controversy over arts funding cuts which lost the Conservative’s votes in the 2008 election. He emphasized the government’s commitment to the arts and pointed out that federal financing for arts organizations had been approved for five years, a step never previously made by the federal government. 24 nov 2009

Foreign Affairs Minister Laurence Cannon reasserts that Canada is an “energy superpower” when it comes to the North. He says in a speech to the Economic Club of Canada that “Canada is in control of its Arctic lands and waters and takes its responsibilities very seriously.”

285 Canadian Political Facts and Trends 26 nov 2009 Alberta Premier Ed Stelmach urges that all provinces unite behind a realistic climate plan in the run-up to the Copenhagen summit. Quebec and other provinces have advocated different more aggressive plans than both Alberta and the federal Harper Conservatives. 28 nov 2009

Prime Minister Harper announces that Canada and India have reached an agreement that would allow Canadian companies to resume sales of uranium to India for the first time since India used Canada’s nuclear technology to develop nuclear warheads 35 years ago. The announcement is also a part of the Conservative effort to court Indo-Canadian voters. 1 dec. 2009

Liberal Leader Michael Ignatieff announces that the Liberals will support the Harper Government’s proposals on the harmonized sales tax (hst) for Ontario and British Columbia. This will allow the two provinces to harmonize their sales taxes with the federal goods and services tax (gst). 2 dec. 2009

The Conservative Government’s fourth report on the fiscal stimulus program is released. It says that 97 percent of the $62 billion program has been committed but not necessarily spent. It also stresses that if all funding has not been allocated by the end of January, the government will reallocate it to other priorities or allow it to lapse. 3 dec. 2009

An expert panel report commissioned by Natural Resources Canada is released that proposes the need for a new $1.2 billion multipurpose reactor to enable Canada to stay in the radio isotope supply business and to prevent another global isotope shortage. The report also recommended adopting supplementary production methods. The report had been commissioned after the shut-down of Atomic Energy of Canada’s nru reactor at Chalk River due to a heavy water leak. 4 dec. 2009

Environment Minister Jim Prentice says that Canada’s policy for cutting greenhouse gases at and after the Copenhagen climate change summit would be lock-step with the United States. 6 dec. 2009

Prime Minister Stephen Harper completes a successful trip to South Korea and China. The visits were intended to convey the government’s view that Canada’s trade focus had to shift to the Asia Pacific region.

286 Appendix A 9 dec. 2009 Over 35 former Canadian ambassadors have banded together to speak out against The Conservative government’s attacks on diplomat Richard Colvin after the latter’s testimony on Afghan–detainee abuse. 30 dec. 2009

Prime Minister Harper prorogues Parliament for a two month break, and in the process kills an embarrassing inquiry into Afghan detainees, stalls more than 30 government bills, and allows the Conservatives to take control of the Senate by appointing five more Senators. Parliament is to resume sitting with a new Speech from the Throne on March 3th 2010 and a Budget Speech on March 4th. 13 jan. 2010

Kevin Page, Canada’s Parliamentary Budget Officer, predicts that the Canadian structural deficit will reach $18.9 billion by the 2013–14 fiscal year. This is a manageable sized deficit if it is dealt with currently , but it could balloon over time and become problematic. Page’s view is challenged by Finance Minister, Jim Flaherty, who does not see it as a major problem over the longrun. Flaherty’s optimism is based on the assumption of continued economic growth over the next several years, but the level of that anticipated growth is doubted by Page. 15 jan. 2010

Canadian Government announces that it will match donations for the Haiti Earthquake relief that are donated to specified charities involved in the aid project, dollar-for-dollar. The period to be covered for the matching funds runs from January 12, 2010 to February 12, 2010. Other parameters of the find-matching are that the donations have to be made by individual Canadians and they have to be made directly to registered charities involved in responding to the earthquake. 18 jan. 2010

The Canadian Government commits $135 million dollars to the Haiti relief fund, on top of the deployment of 2000 troops (soldiers, sailors, air crew), along with two war ships and the deployment of the Disaster Assistance Response Team (dart). Donations from Canadian citizens that will be matched by the federal government have reached $40 million. 25 jan. 2010

Montreal Conference on aid for Haiti commits to a ten year aid plan for the earthquake-stricken nation. Canadian Prime Minister, Stephen Harper, comments that sustainability is key, noting, “We need to commit to Haiti for the

287 Canadian Political Facts and Trends

long term … [and] we must hold each other accountable for the commitments we make.” No specified financial aid figure is committed by Canada at this time, however. 26 jan. 2010

Canada commits to two new international projects. The first is a ten year commitment to help the rebuilding project in Haiti. The second is a new focus on the health of the world’s mothers and children to be a main focus of the upcoming Group of 8 meeting in Ontario in June, 2010. Once more, it is not clear how these commitments will be funded with the coinciding aim of the government to reduce the federal budget deficit. 28 jan. 2010

Canadian government announces that the reopening of the Chalk River nuclear plant will be delayed by a month and will now not be operational until April, 2010. 1 feb. 2010

The Home Renovation Tax Credit, which allowed home owners to claim up to $1,000 on their income tax for home improvements, ended today. The tax benefit will not be a part of the new federal budget despite the positive response it has received. 7 feb. 2010

Quebec’s Immigration and Cultural Communities Minister, Yolande James confirms that Quebec would temporarily relax its immigration policy to allow more Haitian refugees into the province. An additional 3000 people will be allowed to immigrate between February 17, 2010, and December 31, 2010. This number is in addition to the 1500 immigrants already approved for reunification with relatives in Quebec for this year. 11 feb. 2010

Donations by Canadians for Haitian earthquake relief have reached $145 million. Of this amount, $124 million is eligible to be matched by the federal government, which would bring the government’s aid total to $259 million. 15 feb. 2010

Prime Minister, Stephen Harper, visits Haiti to observe how the Canadian relief efforts are progressing in Jacmel and Leogane. There are 2,000 Canadian troops in Haiti in what is the largest relief effort in Canadian history. The troops are expected to stay in Haiti until early March, 2010, when they will then return to Canada. Donor nations will convene on 22 and 23 March, 2010 at the United Nations in New York.

288 Appendix A 22 feb. 2010 A federal official announces that the upcoming federal budget is projected to include no new spending or tax measures for 2010. Fiscal plans for 2010 that included $19 billion in stimulus spending from last year’s recession budget will still go ahead. 22 feb. 2010

The federal government announces that more than 6,000 infrastructure projects have been approved since the stimulus spending program was introduced last year, which includes $9.4 billion dollars of federal funds committed to the program. It is projected by the government that the program will result in a flood of infrastructure projects in the spring of 2010. Some critics wonder whether the construction industry will be able to handle the volume of projects in a congested period, which could result in mixed outcomes. Some cite delays in handing out money when it was needed most after the program was first introduced as the reason for the late rush for applications. Ottawa had set a deadline for the end of January 2010 for municipalities and provinces to have their paperwork in order to apply for different infrastructure projects that were available for funding help.

appendix b Fiscal Facts and Trends

Figure B. 1 Sources of Federal Revenue as a Percentage of Total, 2007–08

Indirect Taxes 17.1%

Other Revenue 10.6%

Corporate Tax 12.6%

Source: Department of Finance, Fiscal Reference Tables 2009, Table 3.

Personal Tax 59.7%

290 Appendix B Figure B.2 Federal Budgetary Expenses by Type of Payment 1999–2000 to 2008–09

Billions of Dollars (current) 90.0 80.0 Other Expenses 70.0 60.0 50.0 40.0 30.0 Social Transfers to Governments 20.0 10.0 0.0 99–00

Social Transfers to Persons

Public Debt Charges

National Defence 00–01

01–02

02–03

03–04

04–05

05–06

06–07

07–08

2008-09

Source: Department of Finance, Fiscal Reference Tables 2009, Table 7.

Figure B.3 Federal Revenue, Program Spending, and Deficit as Percentages of gdp 1999–2000 to 2009–10

Percentage of gdp 25 20

Budgetary Revenue

15 Program Spending

10 5

Budgetary Balance

0

a) 0(

–9 09

–1

08 20

20

–8 20

07

7 20

06

–0 05

Fiscal Year

–0

6

5 20

04

–0

4 20

03

–0

3 20

02

–0

2 20

01

–0

1 20

–0 00 20

19

99 –0

0

-5

Source: Department of Finance, Fiscal Reference Tables 2008, Table 2; Department of Finance, Budget, Jan. 27, 2009 (re: estimates); site last accessed Feb. 26, 2010. Note: Budgetary revenue and program spending are based upon fiscal years, while gdp is based on the calendar year. Revenues, program spending, and the deficit are on a net basis. Program spending does not include public interest charges. gdp is nominal gdp. (a) estimates

291 Fiscal Facts and Trends Figure B.4 Federal Revenue, Expenditures and the Deficit 1999–00 to 2009–10

Billions of Dollars (current) 300 Budgetary Revenue

250 200 Total Expenditures

150 100 50

Budgetary Surplus / deficit 0

20

09

–1

08

0(

–0

a)

9

8 20

07

–0

7 20

06

–0

6 20

05

–0

5 20

04

–0

4 20

03

–0

3 20

02

–0

2 20

01

–0

1 20

–0 00 20

19

99 –0

0

-50

Fiscal Year Source: Department of Finance, Fiscal Reference Tables 2009, Tables 1 and 3; Department of Finance, Budget, Jan. 27, 2009 Note: Expenditures include program spending and public interest charges on the debt. (a) estimates

292 Appendix B Figure B.5 Growth in Real gdp 1998–2008

Annual Change (per cent) 6.0 4.0 2.0 0.0 -2.0 -4.0 1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Year Source: Statistics Canada, CANSIM, Table 380–0017: Gross Domestic Product (gdp), expenditure-based, annual (Constant 2002 Prices).

293 Fiscal Facts and Trends Figure B.6 Rate of Unemployment and Employment Growth 1998–2008

Per cent 12 10 8

Unemployment Rate

6 4

Employment Growth Rate

2 0 -2 -4 1998

1999

2000

2001

2002

2003 Year

2004

2005

2006

2007

Source: Statistics Canada, CANSIM, Tables 109–5004, 109–5304, 281–0023. Note: Employment growth rate and the unemployment rate apply to both sexes, 15 years and older.

2008

294 Appendix B Figure B.7 Interest Rates and the Consumer Price Index (cpi) 1998–2008

Rate (per cent) 15

10

Prime Rate 5 Bank Rate CPI 0 1998

1999

2000

2001

2002

2003 Year

2004

2005

2006

2007

2008

Source: Bank of Canada, Bank of Canada Review, Banking and Financial Statistics, Table F1, various years; Statistics Canada, CANSIM, Table 326-0021. Note: The Prime Rate refers to the prime business interest rate charged by chartered bank, and the Bank Rate refered to the rate charged by the Bank of Canada on any loans to commercial banks. Note: The Prime Rate and Bank Rate are rates effective at year end. Note: The Trend line for the cpi shows annual percentage change in the index.

295 Fiscal Facts and Trends Figure B.8 Productivity and Costs 1997–2007

Annual Change (per cent) 6 5

Labour Productivity (a)

4 3 2 1 0 -1 -2

Unit Labour Costs (b)

-3 -4 1997

1998

1999

2000

2001

2002 Year

2003

2004

2005

2006

2007

Source: Statistics Canada, CANSIM, Table 383–0008 (a) Labour Productivity is the ratio between real value added and hours worked in the business sector. This trend shows the annual percentage change in the index. (b) This is a measure of the cost of labour input required to produce one unit of output, and is equal to labour compensation in current dollars divided by real output. This trend shows the annual percentage change in the index.

296 Appendix B Figure B.9 Balance of Payments (Current Account) 1997–2008

Billions of Dollars (Current) 80 70

Bilateral (Canada/US)

60 50 40 30

Total

20 10 0 -10 -20 -30 1997

1998

1999

2000

2001

2002 Year

Source: Statistics Canada, cat.# 67-001, various years.

2003

2004

2005

2006

2007

2008

297 Fiscal Facts and Trends Figure B.10 Growth in Real gdp Canada and Selected Countries 1998–2010 Annual Change (per cent) 8.0

United States Japan Germany U.K. Canada

6.0 4.0 2.0 0.0 -2.0 -4.0

Year Source: Organization for Economic Cooperation and Development (oecd), Economic Outlook, no.86, Nov. 2010, Annex Table 1.

11 20

10 20

09 20

08 20

07 20

06 20

05 20

04 20

03 20

02 20

01 20

00 20

19

99

-6.0

298 Appendix B Figure B.11 Standardized Unemployment Rates Canada and Selected Countries 1999–2011

Standardized Unemployment Rate (per cent)

United States Japan Germany U.K. Canada

14.0 12.0 10.0 8.0 6.0 4.0 2.0

Year Source: Organization for Economic Cooperation and Development (oecd), Economic Outlook, no.86, Nov. 2009, Annex Table 13.

11 20

10 20

09 20

08 20

07 20

06 20

05 20

04 20

03 20

02 20

01 20

00 20

19

99

0.0

299 Fiscal Facts and Trends Figure B.12 Annual Inflation Rates Canada and Selected Countries 1998–2011

United States Japan Germany U.K. Canada

Inflation Rate (per cent) 6 5 4 3 2 1 0 -1 1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010 2011

Year Source: Organization for Economic Cooperation and Development (oecd), Economic Outlook, no.86, Nov. 2009, Annex Table 18.

300 Appendix B Figure B.13 Labour Productivity Canada and Selected Countries 1999–2011

Year Source: Organization for Economic Cooperation and Development (oecd), Economic Outlook, no.86, Nov. 2009, Annex Table 12. Note: Labour productivity is defined as output per unit of labour input.

11 20

10 20

09 20

08 20

07 20

06 20

05 20

04 20

03 20

02 20

01

United States Japan Germany U.K. Canada

20

00 20

19

99

Annual Change (per cent) 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0 -5.0 -6.0

301 Fiscal Facts and Trends Table B.1 Federal Revenue by Source 1997–98 to 2007–08 As a Percentage of Total Fiscal Year

Personal Taxa

Corporate Tax

Indirect Taxesb

Other Revenuec

Total Revenue

Annual Change (%)

1997–98

59.8

13.2

19.4

7.7

100.0

7.3

1998–99

59.9

12.8

19.2

8.1

100.0

2.9

1999–00

60.3

12.5

18.9

8.3

100.0

6.6

2000–01

58.8

14.6

18.4

8.2

100.0

10.2

2001–02

58.5

13.2

20.2

8.2

100.0

-5.4

2002–03

58.1

11.7

21.7

8.6

100.0

3.6

2003–04

57.2

13.8

20.8

8.1

100.0

4.2

2004–05

56.4

14.1

20.2

9.3

100.0

6.7

2005–06

56.1

14.3

20.8

8.8

100.0

4.8

2006–07

56.0

16.0

19.2

8.8

100.0

6.2

2007–08

55.7

16.8

18.2

9.2

100.0

2.7

Source: Department of Finance, Fiscal Reference Tables 2008 , Table 3 and 5. Revenue by Source is on a net basis. (a) Employment Insurance and other income taxes are included in the total. (b) Consists of total excise taxes and duties. (c) Consists of non-tax and other tax revenue

302 Appendix B Table B.2 Federal Deficit/Surplus 1996–97 to 2009–10 in billions of dollars (current) Fiscal Year

Budgetary Revenue

Total Expenditures

Budgetary Deficit/Surplus

As % of gdp

1997–98

160.9

157.9

3.0

1998–99

165.5

159.7

5.8

0.6

1999–00

176.4

162.2

14.3

1.5

2000–01

194.3

174.5

19.9

1.8

2001–02

183.9

175.9

8.0

0.7

2002–03

190.6

183.9

6.6

0.6

2003–04

198.6

189.4

9.1

0.8

2004–05

211.9

210.5

1.5

0.1

2005–06

222.2

209.0

13.2

1.0 0.9

0.3

2006–07

236.0

222.2

13.8

2007–08

242.4

232.8

9.6

0.6

2008–09a

236.4

237.5

-1.1

-0.1

Source: Department of Finance, Fiscal Reference Tables 2008, Tables 1 and 2; Department of Finance, Budget Plan, January 2009 Note: While revenue, expenditures, and deficit categories refer to fiscal years, nominal gdp is based upon a calendar year. Total expenditures include program spending and public debt charges. a) Figures for this year are estimates

303 Fiscal Facts and Trends Table B.3 International Comparisons 1998–2010 Percentage Change from Previous Period 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Growth in Real gdp Canada

5.5

5.2

1.8

2.9

1.9

3.1

3.1

2.9

2.5

0.4

-2.7

2

3

U.S.

4.8

4.1

1.1

1.8

2.5

3.6

3.1

2.7

2.1

0.4

-2.5

2.5

2.8

Japan

-0.1

2.9

0.2

0.3

1.4

2.7

1.9

2.0

2.3

-0.7

-5.3

1.8

2

Germany

1.9

3.5

1.4

0.0

-0.2

0.7

0.9

3.4

2.6

1.0

-4.9

1.4

1.9

U.K.

3.5

3.9

2.5

2.1

2.8

3.0

2.2

2.9

2.6

0.6

-4.7

1.2

2.2 8.1

Unemployment Rates Canada

7.6

6.8

7.2

7.6

7.6

7.2

6.8

6.3

6.0

6.1

8.3

8.7

U.S.

4.2

4.0

4.8

5.8

6.0

5.5

5.1

4.6

4.6

5.8

9.2

9.9

9.1

Japan

4.7

4.7

5.0

5.4

5.3

4.7

4.4

4.1

3.9

4.0

5.2

5.6

5.4

Germany

8.2

7.4

7.5

8.3

9.2

9.7 10.5

9.8

8.3

7.2

7.6

9.2

9.7

U.K.

6.0

5.5

5.1

5.2

5.0

4.8

4.8

5.4

5.4

5.7

8.0

9.3

9.5

Labour Productivity Canada

2.9

2.7

0.6

0.5

-0.5

1.3

1.6

0.9

0.2

-1.1

-1.1

1.2

1.2

U.S.

2.8

2.4

1.2

3.0

2.5

2.5

1.4

0.9

1.3

1.0

1.3

2.7

1.2

Japan

0.7

3.1

0.7

1.5

1.6

2.5

1.5

1.6

1.9

-0.3

-3.6

2.7

2

Germany

0.5

1.6

0.9

0.6

0.7

0.3

1.0

2.7

0.9

-0.4

-4.8

3

2.3

U.K.

2.1

2.7

1.6

1.3

1.8

1.9

1.1

1.9

1.9

-0.2

-2.6

3.6

2.8

Source : Organization for Economic Cooperation and Development (oecd), Economic Outlook, no. 86, Nov. 2009, Annex Tables 1, 12, 13.

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Contributors

f r a n c e s a b e l e is Professor in the School of Public Policy and Administration at Carleton University. t i m o t h y b a r k i w is Assistant Professor in the Ted Rogers School of Management at Ryerson University in Toronto. d av i d b i e t t e is Director of the Canada Institute, an integral program of the Woodrow Wilson International Center for Scholars in Washington, D.C. Prior to this, he served as executive director of the Association for Canadian Studies in the United States, and as a political/economic officer at the Canadian Consulate General in New York City. d av i d c a s t l e is a Professor and Canada Research Chair in Science and Society in the Faculty of Arts and Faculty of Law, University of Ottawa. s e n a d a d e l i c is completing her Ph.D. in Public Policy at the School of Public Policy and Administration, Carleton University. Her research focuses on social and labour market policies and in her dissertation she is examining the link between Aboriginal identity and economic success in the Canadian labour market. g . b r u c e d o e r n is Professor in the School of Public Policy and Administration at Carleton University and in the Politics Department at the University of Exeter in the uk.

306 Contributors

g e o f f r e y h a l e is Associate Professor of Political Science at the University of Lethbridge. and author of The Politics of Taxation in Canada. s t e p h e n l . h a r r i s is Adjunct Research Professor, School of Public Policy and Administration and a member of the Center for Financial and Monetary Economics at Carleton University. He was formerly Associate Professor at the Lee Kwan Yew School of Public Policy of the National University of Singapore and has also worked at the oecd and the Bank of Canada. His research focuses on the political economy of finance. m e l i s s a h au s s m a n is Associate Professor of Political Science at Carleton University. d e r e k i r e l a n d has a ba in Economics and Asian Studies from the University of British Columbia and an ma in Economics and Phd in Public Policy from Carleton University. Dr. Ireland has worked as an economist, policy analyst and manager in the Canadian public and private sectors for over 38 years. He also teaches in the School of Public Policy and Administration at Carleton University. j o n at h a n m a l l o y is Associate Professor of Political Science at Carleton University. p e t e r w. b . p h i l l i p s is Professor in the Johnson-Shoyama Graduate School of Public Policy, University of Saskatchewan. m a r k u s s h a r a p u t holds a Ph. D. from York University, and is currently teaching at Lakehead University in Thunder Bay, Ontario. His publications and research focus on the intersection of global and national policy in Canada, particularly in the areas of industrial, innovation, and science and technology policy. j o h n a . s t i l b o r n recently retired from the Parliamentary Information and Research Service, Library of Parliament. He does consulting, teaches part-time and writes on Parliament and democratic governance issues. c h r i s t o p h e r s t o n e y is Associate Professor in the School of Public Policy and Administration at Carleton University and Director, Centre of Urban Research and Education (cure). c h r i s t o p h e r wa d d e l l is Professor of Journalism in the School of Journalism at Carleton University.

307 Contributors

k e r n a g h a n we b b is Associate Professor, Faculty of Business, at Ryerson University. He has published extensively on policy implementation and legal issues. Prior to joining Ryerson, he was Senior Legal Policy Advisor and Chief of Research at the Office of Consumer Affairs, Industry Canada, and Adjunct Research Professor in Carleton University’s School of Public Policy and Administration, and Department of Law. d av i d z u s s m a n is Professor and the Jarislowsky Chair in Public Sector Management in the Graduate School of Public and International Affairs, University of Ottawa.