Exchange

Exchange
 
Retreat From Growth: Atlantic Canada and the Negative-Sum Economy
by Fred McMahon
Published by the Atlantic Institute for Market Studies, Halifax, 2000
 

Government help or government hindrance?
This slim volume serves up a scathing review of regional economic policies aimed at Atlantic Canada. Pivoting on one dramatic empirical relationship-as government spending in the region increased in the late 1960s, private investment correspondingly slumped-McMahon mixes extracts from the theory of regional development, snippets of local economic history and a thinly veiled contempt for political meddling to explain the Maritimes' relative decline. The recurring theme is the "negative sum" policies whereby economic progress is continually inhibited by interventions to prop up old industries, to retain inefficient processes and, above all, to entrench low-productivity labour. Welfare economists refer to this as a benefit:cost ratio less than one.

Well known but no less depressing illustrations of ham-fisted policy are woven through the text -including interventions into coal, steel, fisheries and forestry as well as construction of roads to nowhere. An alphabet soup of economic development programs-ACOA, ADA, DEVCO, DREE, DREI, ECOA and others-is exposed as unimaginative variations on the general theme of government getting in the way. Of course, the soup's broth is flavoured with pork.

McMahon's account of ill-fated regional policies suggests a common cause of failure- the poisoning of commercial incentives (to both capital and labour) and hence the discouragement of industrial restructuring.

Perhaps the most penetrating criticism of policy is pointed at Canada's federal:provincial "cost-sharing" programs-best known in transportation, health and education but also in lesser fields of local government spending. Cost-sharing has the effect of inducing provinces to increase their "tax effort," which typically means higher tax rates, to raise provincial revenues to attract federal funds. In a vicious cycle, the weight of taxation increases to the detriment of the private sector while government consumption perversely adds to politicians' capacity to buy their political fortune.

The recount of past problems is convincing. Politics can be economically corrosive. But what to do about Atlantic Canada's economic plight? McMahon ends with a list of bromides that seems straight out of Chicago. For example, eschew anything that targets the region. Restrict government spending-federal, provincial or fed-prov-to infrastructure (roads) and human capital (education and health). Above all, no industrial support and no labour immobilizing largesse.

Lower taxes.
Indeed, a hardhearted, hands-off U.S.-style approach to regions-as if they were not there -may have something to it. On the other hand, those more in tune with political history may argue that Canada's fumbling efforts at regional development represents "the cost of Confederation," an economic price paid to bind together a far flung set of regions that is more a political concept than a logical economic union.

by Donald J.S. Brean, professor of finance and economics at the University of Toronto.