On affordable housing and the need for a plan and some dollars

Kitchener-Waterloo’s evolution as a centre for high-tech, post-secondary education and advanced manufacturing makes it easy to forget about the issues that still face the region. Amongst the most important, and of increasing prominence given rising house prices and the gentrification of the urban core, is the topic of affordable housing.

Despite the addition of over 2,000 new affordable and supportive housing units that have been brought online since 2000, including recently announced projects to add 15-19 unites by the local Working Centre, demand still far out strips supply with over 3,500 families across the region still waiting according to Deb Schlicter, the Waterloo Region’s Director of Housing.

The issue is far from a simple one given the number of stakeholders involved, and a recent forum hosted at the Region of Waterloo Museum by Liberal Party Member of Parliament Adam Vaughan (Trinity-Spadina) aimed at opening up a dialogue on the issue here in Kitchener-Waterloo. Vaughan, previously a city councillor in Toronto, has been witness to the extreme end of the issue with over 90,000 households in Toronto on waitlists for affordable and supportive housing. He says that this represents “centuries” of waiting, a sure sign that our current system isn’t working.

Locally, the demand for affordable and supportive housing has been growing and will continue to do so as an aging population, unstable job market and continued pressure on middle-income wages leave many on a precarious financial footing.

Meeting this growing demand faces several challenge. Speaking at the forum Waterloo Mayor Dave Jaworsky noted that in Waterloo, land price increases have been driven primarily by intensification in the core and have crowded out non-profit oriented development out. The same is happening in Kitchener. Kitchener Mayor Berry Vrbanovic adds that the need for housing must be complemented by strategies and dollars for mental health support and community building. Vrbanovic adds that such investments are proven to be effective and provide a positive return on investment. Regional Councillor Karen Redman notes that mitigating these market-driven trends will require a collaborative effort between all levels of government and both private and non-profit partners.

However doing so will ultimately require an infusion of dollars. As it stands just 8 cents of every tax dollar we pay goes to municipalities, this despite the fact that over 60% of the infrastructure we depend on is serviced locally. And as Vaughan noted, “you can’t build supportive housing with tax cuts.”

Rather what’s needed is a vision and a strategy for ensuring safe, stable and affordable housing for all members of our community. Developing a national housing strategy that provides cities with the dollars, and flexibility, to build local solutions will be key. As it stands, Canada is the only G8 country without a national housing strategy.

And so while there’s no doubt that #kwawesome is real, despite the great advances our region has made there’s still lots of work to do.

Tax Free Savings – Who benefits?

My public writing took a bit of a hit in late 2014. Between DEEP, the campaign and a determined push to put together a first draft of my PhD, there weren’t enough work hours left to do much writing. Not much has changed right now but there are a slew of topics that (I think) warrant discussion, in particular changes to Canada’s immigration system, declining oil prices, and what a real middle class economic plan looks like. That said, I’ll start the year with something I’ve been thinking about for about two years now. Tax Free Savings Accounts (TFSAs).

My interest is two-fold. First, assuming part of the TFSA’s purpose is to help increase savings amongst low-income Canadians (traditional non-savers), is the TFSA an effective means of increasing this? And second, dependent somewhat on that outcome, does it actually perpetuate growing inequality given the benefits the TFSA offers to people with wealth over those dependent on income (see Thomas Piketty’s work for example).

In theory TFSA’s are a gift to savers from all income brackets as they allow you to accumulate capital gains tax free. Introduced in 2009 with a contribution ceiling of $5,000 per year, the Conservatives promised in 2011 to double that ceiling to $10,000 per year once the budget was balanced.  I’ve had several people comment to me that they’re looking forward to that move, and from a strictly individual/rational point of view, why wouldn’t they.  They already save, and this will allow them to earn more on their savings. Rational, logical, check.

However from a policy perspective, in particular one that is more concerned about making sure that we let as many people as possible on the economic ladder, I’ve always wondered whether the TFSA actually made sense as an incentive for people who struggle to save in the first place. This is an important question to ask, IMO, as given the impact on tax revenues (eventually upwards of $10 billion if the ceiling is doubled and contributions maxed out according to UBC prof Kevin Milligan), we’re really facing a choice between policy levers (assuming we’re somewhat progressive and want to help those who struggle to save in the first place).

Others have asked the same/similar questions. In a 2012 edition of the Canadian Tax Journal, Maureen Donnelly and Allister Young look at the UK’s Individual Savings Account (ISA), broadly similar to the TFSA, to see what impact it has had for low-income earners.  A decades worth of data from the UK highlights that the ISA has not in fact made a significant impact on the savings behavior of low-income individuals or households. The authors note in fact that “The introduction of ISAs has done little, if anything, to break down the barriers to saving faced by low-income individuals The authors also find that the ISAs, over time, are used increasingly by high-income individuals/families, and are used as a means of transferring income from high-income earning spouses to low-income ones.

At the time of the TFSAs introduction in Canada, analysis by then RBC Chief Economist Paul Ferley and his colleague Derek Holt argued that TSFAs were likely to be used by middle- and upper-income earners, not by lower-income earners. They also noted that it wasn’t certain that we’d actually see increased savings, rather instead we’d see transfers of existing savings into this new tax-free vehicle.

So, have these two scenarios happened? It’s actually quite difficult to tell.

On one hand, participation by those with incomes over $80,000 is approximately double that for those under that threshold. And participation, as expected, decreases significantly as income decreases. And even these levels of participation should come with a rather large asterisk given that about 30% of all TFSA accounts have never received a contribution. It’s a rather safe assumption that a good chunk of those 3.4 million empty accounts are on the low-income side of the ledger.

As for actual contributions, here it’s even harder to see what is happening. In 2013 the Ministry of Finance released some information as part of its annual Tax Expenditures Report as a “Profile of TFSA Account holders”.

The data shows that approximately 50% of total contributions in 2011 were made by those earning less than $50,000. (Note that I’ve eyeballed this as they don’t actually give you the data…..) Based on the participation rates provided, this would work out to an average contribution of approximately $3,000 per account holder. That’s a lot higher than I would have anticipated.  Unfortunately there’s no breakdown of average contributions per income bracket, nor is there any analysis provided as to whether this is new savings or the transfer of existing savings into this new tax-free vehicle.

I find the omission of those two points quite strange. If you were going to defend/advocate for this type of policy, and claim that it helped low-income earners, those are probably the first two data points you’d assume someone would ask for. That they haven’t makes me think they don’t look good.

What we do see in this release is that high-income Canadians use the TFSA aggressively and are far more likely to max it out. They’re rational, logical people so good for them.

But if all of this is premised on wanting to help low-income Canadians save for a rainy day, then, given the data I can find, I’m far from convinced that this is the most effective way to do it. And this shouldn’t surprise anyone. Unless we target the roots of low savings rates, i.e. low incomes and less disposable cash, then we won’t actually make a dent in the percentage of those able to participate in such savings schemes. And if we’re concerned about inequality then this is pretty much the opposite of what we should be doing to address it.

What could we do instead of doubling the TFSA ceiling?

First, cut income taxes for low-income earners/raise the personal credit. This would put more money in the hands/wallets of those who currently need it most. Do it. Do it now. It helps low-income individuals, young adults, single parents, etc etc. Do it.

Second, accompany that cut in income taxes with a matched savings programs for low-income households/individuals. Here’s an example.  As it stands, the Basic Canada Education Savings Grant (RESP) sees parents get upwards of a 20% match from the government for investment in their children’s education. Low-income parents can get an additional 10-20% on the first $500. Why not increase the value of the government match on the RESP for low-income Canadians? And why not offer similar matching schemes for individuals who want to save for further education/reskilling/retraining?  Of if the worry is savings for retirement, why not simply provide a match for low-income savings for specific use post-specific age (…CPP…)?  I’m sure others have better ideas.

Ultimately, the TFSA is great if you have cash to spare. But in a society where far too many have a very different and very real problem involving having too little cash to save, our policy focus should be on helping them. Given the data I have seen, the TFSA doesn’t do an effective job of this given the amount of money spent on the program. There are other, far more effective ways of increasing savings amongst low-income Canadians.

Ebola and Canadian aid

Last weekend I attended a great ebola awareness raising event hosted by Kitchener-Waterloo’s Liberian community. The event sought to raise local awareness and donations towards the ebola crisis affecting Guinea, Liberia and Sierra Leone. Having lived in the latter and having spent time in all three thanks to my work with TakingITGlobal in 2005/2006, I attended as I’d like to do my part to help address the short and long-term issues regarding healthcare in the region. I’m in regular contact with friends who give me first hand accounts of the struggles of lockdowns, price increases and tragedies.

Also in attendance were our two KW Members of Parliament, Stephen Woodworth and Peter Braid. They spoke about the Canadian government’s commitment to region, and to addressing the crisis, in particular as it relates to the government’s contribution of approximately $35 million in aid to be channeled through partner organizations like the World Health Organization and the Red Cross.

While these contributions of our tax dollars are to be applauded, it masks the realities of changes to our overseas development assistance spending that has seen funding to these three countries decrease significantly over the past decade. The decrease in funding to these countries is part and parcel of a shift in strategies regarding our aid disbursements that the ruling Conservative party introduced in 2009. Then, in an effort to focus Canadian aid on countries that were aligned with our foreign policy priorities and had the capacity to absorb and effectively administer these funds, 80% of Canadian ODA was focused on a group of 20 countries. This was more recently altered to see 90% of Canadian ODA focused on 25 countries (see full list here). We’ve essentially abandoned a non-emergency/crisis role in most countries in order to focus on long-term development in a select few.

Now I’m not linking the ebola crisis to these decreases in funding or strategic shifts. However I will argue that withdrawing our long-term support from countries at the bottom of the human development list further limits their ability to build the capacity in their health care systems that is integral to having a fighting chance at limiting the spread of the disease. The focus on 25 strategic countries leaves a significant gap for the poorest countries that need the most assistance. Is this strategy more effective than a broader set of countries? I’d love to see evidence of this.

Perhaps more important, this question of focus builds on a false argument.

This approach leaves us to believe that we’re focusing x dollars on y countries because that’s the total numbers of dollars we have to spend. While I realize that their are multiple spending priorities at home, why not trade short-term bandaids for long-term capacity building in more countries? We rank in the bottow half of OECD spending on ODA as a percentage of gross national income (beside Spain and Portugal) while Sweden, Norway, Denmark, the Netherlands and the UK more than double our per capita spend. Nudging our spending in this regard would allow for the proper funding of long-term capacity building projects in more countries, in particular around health and education, and would gradually shift the focus from emergency to long-term capacity.

My Canada is one that plays a leading role around the world in long-term development initiatives, not one that gradually pulls away as it has for the past decade.  Moreover given the focus on efficiency and effectiveness is a necessary one, our mission should be to collaborate with other countries and organizations on this long-term capacity building so as to ensure the reduction of duplication and administrative hurdles for recipient countries. Our current approach of limiting both our dollars and our targets leaves us with little legitimacy to take on such a role. This needs to change.

If the ebola crisis teaches us anything it’s that we should do more. And given the impending budget surplus, it’s clear that we can do more. Now it’s a question of whether we’ll have the leadership and foresight to do so.


On Canada-China investment protection

The Canada-China FIPA has problems but let’s be clear about what they are.

I was asked today what I thought of Canada’s recent agreement with China on an investment and promotion agreement (FIPA). The individual noted that he had read that we were “selling our souls for short-term gain.” This view is being promoted by some, notably Green Party leader Elizabeth May, who note that the FIPAwith China is tantamount to the undermining of Canadian sovereignty. That’s a rather loaded statement, and given my friends question, I thought it might be helpful to review the agreement and some of the more controversial aspects of it to see if May’s views hold.

First, on all incoming investment, the Investment Canada Act applies and allows for the review and refusal of such investment if it is not found to be of net benefit to Canada. As I’ve written before, this is purposely vague and allows policy makers significant leeway in making this decision. This agreement changes nothing with respect to this.

Second, once an investment is made, does this FIPA mean that Canadian policy makers will be unable to regulate or protect the environment, or other elements of our society such as financial stability or cultural protection? No, not whatsoever. The agreement contains specific language that allows for regulation. Article 33 of the agreement explicitly states allowances for such. The agreement also contains language regarding expropriation, and the ability of the state to takeover private, foreign owned assets. The key to both of these areas is that if we chose to do so, we can’t discriminate against the firms such policies might affect, i.e., we can regulate to our hearts desire but we can’t simply regulate against firms from one place and not equally across all.

Third, while some have made a big deal out of the fact that the agreement would tie future Canadian governments for a term of 31 years, this is actually less than other agreements which have no end date. Article 35 of the Canada-China FIPA highlights a minimum length of 15 years for the agreement. This is, by my count, one of only two Canadian investment treaties that has a minimum length. The other is a recently signed agreement with Tanzania which has a ten year duration. All other agreements, all 26 of them, have no defined timeline for exit.  And some, in fact, have a longer term for the coverage of committed investments (sorry this is somewhat technical). Kuwait and Lebanon, for example, get 20 years of committed coverage versus 15 years across all others including China.

This takes us to the bigger issue of investor-state dispute resolution.  Many use Chapter 11 of NAFTA as a placeholder for the harm such forums of legal arbitration can take. Yet a review of cases submitted under NAFTA highlight that Canada has been ruled against once in 26 total cases.  The Canada-China FIPA allows for arbitration via the International Centre for Settlement of Investment Disputes (ICSID).  Some have stated that the ICSID favours corporations over the rights of states. Is this accurate? A review of case rulings at the ICSID should lead one to say no. As of June 2014, across 473 cases, in approximately 70 percent of cases, the claims against states are rejected through either final arbitration ruling or the rejection of the claim (see this). While that leaves 30 percent of rulings against the state, I’m not in a position to say whether or not those were justified.

If you believe that a government should be able to do whatever it wishes to firms on its territory with no need to pay compensation, then you’ll view the above as a sign that we should never sign up to such a system. If, however, you think that firms require predictability and or compensation in order to attract investment then you’ll see the value of such systems.

Okay, so all this said, am I a fan of the FIPA with China? That’s a complicated question. On one hand, I’m very concerned that we do far too little business with China. Beyond resources our relationship is very limited. Increasing two-way investment is one definite means of increasing the trade of higher-value goods. Now, that said, there is language in the FIPA that I am concerned about.

First and foremost, the agreement has some  language regarding the public nature of arbitration hearings that should be clarified. Every single one of our other agreements begins with the presumption that such hearings will be public. Yet as noted in Article 28 of the Canada-China FIPA, this agreement reverses course and begins with a presumption of privately held hearings. This is both strange and, for want of any explanation from the government, a bit concerning. An allowance is made for the transfer of hearings into a public setting if one of the “Contracting Part(ies) determines that it is in the public interest to do so.” While this presents the opportunity for public hearing, the fact that a party must request proceedings to be made public, creates some possibility that the public will not know if/when potentially important precedent/cases are being arbitrated. This needs to be clarified and all hearings should begin on the assumption of being public.

Second, while China has signed over 100 bilateral investment treaties with trade partners around the world, it has very little experience in defending/arbitrating claims. In fact, the country has been sued only once under the investor-state system and this suit was subsequently dropped. Whether China will respect the findings of an international arbitration panel is unknown. While signing up to a FIPA infers that it will, the country’s domestic laws don’t actually commit to this.

As Julien Ku, professor of law at Hofstra notes in a research paper on the “enforcement of ICSID awards in the PRC”

“the PRCs enthusiasm and interest in the ICSID-BIT system of investment protection and investor state arbitration has not been matched by the creation of a clear domestic mechanism for living up to its obligations under these international agreements.”

He goes on to note that a Supreme People’s Court interpretation and ruling is necessary to “clarify the lower courts’ authority to enforce awards.” Without this interpretation, there is significant ambiguity regarding the country’s actual commitment. This needs to be clarified.

Now, these issues notwithstanding, what remains to be discussed is whether we need BITs / FIPAs in order to attract investment. The recent Australia-Japan BIT highlights that the inclusion of investor-state arbitration is by no means necessary, though as this post notes the reasons for why it was omitted are complex and part of a very healthy/reciprocal relationship between the two parties. Would Australia have omitted investor-state provisions with a trade/investment partner with a less mature judiciary system? Given the prevalence of such arbitration systems across the country’s other agreements, it’s impossible to know yet. I also don’t have a window into the negotiations and as to what would happen should we say no to the negotiation of such deals. Once I’m around the table I’ll let you know.

Ultimately this is a long-winded way to show that we shouldn’t irrationally fear investment agreements such as FIPA without digging into the details.

Startup visa – good policy or bad? It’s good.

I’ve had a couple of questions today about a visit from Chris Alexander, the minister of citizenship and immigration, and his announcement of an improved visa process for foreign entrepreneurs. See story here.

One individual queried why we’d support foreigners and not just our own entrepreneurs. Now I have an evident political bias against the current governing party but I won’t let cloud my policy lens. The answer is that the startup visa, or other programs like it, are good policy, and help create the grounds for significant domestic employment growth.

There’s a wealth of research that highlights the immense contributions made by immigrants to technology or other research and development intensive sectors. The best work I’ve seen was done by Vivek Wadhwa and Annalee Saxenian (and others).[1]

They looked at a sample of 11,000 venture-backed companies in the United States over the period 1990 to 2005. The authors found that 25% of them had at least one immigrant as a key founder of the company. And the impacts of these immigrant-founded companies on the broader American economy is immense, contributing over $52 billion in 2005 sales and creating nearly 450,000 jobs. A subsequent National Foundation for American Policy analysis of the top 50 venture-capital-backed companies in 2011 shows that nearly half of those 50 firms were founded or co-founded by immigrants.

Here in Canada I’ve yet to see similarly rich data, however Industry Canada has a series of papers that looks at the contributions of new Canadians. They find a higher propensity towards entrepreneurship than the Canadian average, and a significantly higher rate of investment into R&D amongst those immigrant-founder and majority-owned businesses. Moreover, immigrant-founded businesses are nearly twice as likely to export their product than other Canadian firms.[2]

Given the link between exporting and investment in technology or research as a driver for high-growth, promoting these firms is very good policy.  Finding a way to bring the best and brightest to Canada to start their entrepreneurial ventures is similarly good policy. These programs bring innovative ideas and jobs to Canadians, new and old. If someone tells you otherwise, ask for some data to back it up.

[1] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=990152

[2] http://www.conferenceboard.ca/press/newsrelease/14-06-24/businesses_owned_by_recent_immigrants_more_likely_to_export_to_the_us_and_beyond.aspx

Entrepreneurial support key to Canada’s future

Published in the Waterloo Record, July 18, 2014: http://www.therecord.com/opinion-story/4636423-entrepreneurial-support-key-to-canada-s-future

Co-authored with Anthony D. Williams

Last Friday’s Canadian jobs report highlights ongoing sluggishness in the Canadian economy and continued concerns about where employment and economic growth will come from in the future. And new research by the Waterloo-based Centre for Digital Entrepreneurship and Economic Performance (a think tank we co-founded in 2012) suggests that while Canada has a strong pool of globally-competitive multinationals, our economy lacks the economic diversity required to support broad-based job creation and prosperity across the country.

We spent most of the past year analyzing Canada’s population of billion-dollar firms. We looked at how this population of Canada’s largest companies has changed over the past decade. And we quantified how much these firms contribute to Canadian employment and innovation.

The results tell us a great deal about the recent transformation in Canada’s economy and what policymakers and business leaders need to do make sure Canadian firms remain competitive in a global economy.

Our study evaluated 169 publicly traded firms with revenues of over CAD $1 billion. Together they employ nearly 1.4 million Canadians. Looking at the period 2003-2012, our study finds that employment in Canada’s largest firms has grown most strongly in resource, service and engineering and construction sectors. In fact, Canada’s strength in natural resources means it has done well, and even exceeded some of its peers (Germany, the US and the UK, for example) in producing billion dollar firms on a per capita basis. If there is a risk, it’s that the majority of growth in large firms is concentrated in one sector and one province (you guessed it,  the energy sector in Alberta). Whether this is a good thing or not is up for debate. What’s clear is that given the  sectors’ environmental impacts, a more nuanced approach would meld Canada’s entrepreneurial ecosystem with technological solutions to those environmental challenges.

Beyond resources, our research also uncovered many encouraging signs that Canadian firms are gearing up to compete on the international stage. For example, we found that leading Canadian firms are more globally engaged than ever, and this global engagement is a significant factor underpinning their growth—both over the past decade and into the future. Canada’s most successful firms generally point to their internationalization as a necessary step given the relatively small size of Canada’s domestic market and the significant opportunities for growth elsewhere.

There are certainly risks associated with this external gaze. Our research shows that international growth often means more emphasis on hiring overseas, and potentially less Canadian employment, particularly as internationalizing firms make strategic decisions to locate their operations closest to the largest centres of global demand. However, our data shows that despite their growing international footprint, domestic employment gains in Canada’s billion dollar firms are double the national average.

Our conversations with executives at Canada’s largest firms make it abundantly clear that there is no room for complacency. Executives recognize that they must invest more in technology to reach new levels of efficiency. They must step up their acquisitions of high-potential companies and get access to the best talent, wherever it may be found in the world.

At the same time, our research also shows that governments at all levels can play significant role in helping younger firms climb on the ladder to fast-growth so that we continue to enlarge the ranks of globally-competitive firms.

Today, just 4.7 percent of all Canadian firms account for 50 percent of Canadian job growth. Finding ways to enlarge this pool of high-growth companies and better support existing ones should be task number one. In particular we need to find ways to boost the number of high-growth firms in sectors that are poised for growth like health care, clean air, clean water and education, all of which will benefit from a growing global middle class that demands such quality of life services and that will build on core Canadian competencies.

How can this be done? The public and private sectors need to collaborate to provide stronger support systems for entrepreneurs that can facilitate the evolution of their companies from start-ups to global enterprises that create significant employment and support large-scale investments in innovation. Among other things, this means better access to the supply chains of anchor customers (like government or large firms in Canada), more expansive mentoring systems to connect new entrepreneurs to experienced business executives, more robust linkages between start-ups and university research centres and export development support to ensure that start-ups can access global markets and bring jobs back home.

Canadian entrepreneurs interviewed by the DEEP Centre also called for more investment in branding Canada as a destination for investment in entrepreneurial ventures, greater inclusion of start-ups in international trade missions, more assistance in competing for the best talent, and streamlined access to research and development support from the government.

All together, this spells out that Canada needs a national competitiveness and innovation strategy that builds new clusters of capability around some of the emerging growth sectors identified above; clusters for green technology, health care services, digital education and more. Kitchener-Waterloo’s world-class technology cluster provides the rest of the country with a great example of how to start.
Anthony D. Williams and Dan Herman are the co-founders of the Waterloo-based Centre for Digital Entrepreneurship and Economic Performance. The DEEP Centre’s report on “Canada’s Billion Dollar Firms: Contributions, Challenges and Opportunities,” is the product of a partnership between the Business Development Bank of Canada, the Canadian Digital Media Network, Export Development Canada and Industry Canada. The study is available for public download at www.deepcentre.com.

Cuts to refugee health fail the evidence test

June 16th marks the 3rd National Day of Action on cuts to Refugee Healthcare. In 2012 the Federal government dramatically cut funding to the Interim Federal Health (IFH) program that delivers healthcare services to refugees in Canada. The results of these cuts are now being shown to have significantly harmful effects on the most vulnerable amongst us. Not only is this decision not supported by evidence, it’s not supported by the values that most Canadians hold dear.

The reality is that cuts to refugee healthcare have increased the overall costs of healthcare provision, and have simply shifted the responsibility for paying them from one level of government to another. Worse yet the cuts have attacked the health and safety of the most vulnerable refugees in Canada, in particular children.

The decision to cut funding to the IFH was premised on the cuts saving $100 million over 5 years by reducing abuse of the system. Despite vocal opposition from health care workers from across the country, who have argued from the outset that blanket cuts to IFH would lead to more serious illness and eventually costlier service, the government has not relented. Luckily, Ontario, and four other provinces, have temporarily accepted to carry the costs of healthcare provision on humanitarian grounds.

Research recently released by The Hospital for Sick Children in Toronto highlights that as a result of the cuts to the IFH, admission rates for children have doubled as the severity of illnesses has increased. Dr. Alexander Caudarella, a family doctor and co-author of the study titled “The Cost and Impact of the Interim Federal Health Program Cuts on Child Refugees in Canada” notes that if refugee claimants “don’t have health insurance, they present themselves later to the doctors (and) by then, the kids are sicker.”

Disregarding evidence is no way to build policy, and certainly no way to treat the health of those who seek refuge in Canada. These cuts must be reversed.