There are no shortcuts

National debt, taxes and government inefficiency are regular dinner table talk these days. The discussion usually boils down to: pro-government save the poor vs. anti-(big)-government do-it-yourself arguments. Both sides have valid points and deserve being listened to, but when push comes to shove, there is no denying that the services we take for granted cost lots of money. Fire trucks, roads, schools, hospitals are expensive and cuts are harder than most people think.

Working in China in 2005 was my first in-depth experience in a emerging country. Of all the things I learned there, the lack of public services really hit home. It was only by going to China and later to other developing countries, that I realized the vast amount of relatively high quality services we have. From retirement homes, to the justice system, to free healthcare and honest police; our government provides a lot of services.

Could some of our services be delivered more efficiently, handed over to the private sector or given back to the citizens? Of course. But on the whole, I firmly believe that high quality and costly services are a required ingredient of a free society. To deliver those services, we need large and robust intitutions. Michael Ignatieff’s point that “government is the granite under our feet” is accurate. Yet, what matters most is not the rate of taxation or the size of government, but rather the perceived value of those taxes. As when you go shopping, we want our money’s worth.

Unsurprisingly, we continue to think there is a better, faster and easier way – the grass is always greener on the other side. Way back in the late 20th century, we were proclaiming the rise of the Asian Tigers as a new economic powerhouse. Their growth was a steady 10% and they seemed invincible, yet it all came to a screeching halt in 1997 with the asian financial crisis. Paul Krugman’s seminal paper The Myth of Asia’s Miracle on the frailty of South East Asian economies in 1994 prophetically predicted the outcome. His point can be boiled down to diminishing returns on investment as your economy grows. Infrastructure in an emerging country is an easy win, it’s easy to get 10% growth when you dodge environmental laws, build basic infrastructure, skip over worker’s rights and pay minimal heed to a functioning justice system. For a while, you can achieve amazing growth – the Soviet Union did it between 1930 – 1970 and China is doing it now, but eventually, your lack of institutional human infrastructure catches up with you. (see Three little pigs case study)

Some countries avoid the pitfalls of relying on easy growth – South Korea comes to mind, but most fail. While we bemoan the low growth in the EU and the US, we fail to realize it is the natural evolution of the system. It is not that you cannot continue to grow once you are a developed economy, but rather that economic growth becomes harder and harder. However, the value of the extra dollar of growth in a developing country has far more resilience than in a country lacking infrastructure. Not all dollars are equal, an extra GDP point in a country where you respect the environment and worker’s rights is more valuable than a GDP point where you do not. Not morally more valuable, but tangibly more valuable; the dollar of GDP is more durable, can withstand more shock and is more robust. Canada’s Tar Sands driven growth is a mirage, just as Baku was once a prosperous economy, Alberta’s growth is based on a depleting resource with increasing extraction costs. Alberta, and Canada, should follow the Norwegian practice and pour oil profits into a safe fund for the future.

There are many instances of decisions we have taken as society to reduce growth in the name of social stability and human rights. From union protecting laws to our complex justice system, we place citizens before GDP. Building up intelligent environmental laws might slow economic growth temporarily, but it will reinforce the foundation of our economy and lay the ground for long term stability.

Our admittedly imperfect legal system is a prime example of doing the right thing despite gigantic costs. It is extremely expensive to have due process and it’s much, much cheaper to torture or just toss people in jail. China’s failure to modernize its legal system will inevitably bite it in the butt. In fact, the lack of due process already drives many wealthy Chinese to flee their homeland for Canada and the US.

So, the next time a discussion turns to taxation rates, unions or the cost of environmental regulations, remember that it is not the individual value of a service or law that matters, but its role in sustaining a vibrant and robust human society.

Also see KPMG report on cost-cutting via Rob Ford in Toronto and the privatization of services in Denver, Colorado on This American Life.

Published on August 5, 2012