Germany’s Social Market Economy for China and Canada?

China’s use of a mix of central planning and competitive markets has increased the country’s national income dramatically for two decades. However, recently economic growth has slowed, and some serious planning mistakes have been made.

In the light of these developments, it is interesting that some high-ranking Chinese economic policy makers recently asked two German economists to let them know what policies had been used to create Germany’s rapid economic recovery after the devastation of the Second World War, its solid economic growth thereafter and its protection from the worst effects of the global recessions of 2001 and 2008, implying that China’s leadership may be in search of solutions to the problems its development model has produced.

These two economists sent to China a collection of essays, which explain the Social Market Economy Model (SMEM) that was used by Germany’s Chancellor Konrad Adenauer and his Minister of Economics Ludwig Erhard to shape the country’s early postwar economic policies in spite of much opposition from politicians who preferred socialism and economic planning. The model presently still informs most of Germany’s economic policies.

This model was developed by economists at the University of Freiburg in Germany. It argues that national income is maximized if individual and business incomes are determined in free markets for production and distribution while government regulations and spending are used to meet the requirements of the needy, provide public goods such as defence and construct economic infrastructure such as highways.

The effort of China’s leaders to improve its economic performance by learning about and adapting policies that have been successful elsewhere is not without precedence.  Deng Xiaoping in the 1980s considered the prosperity of market economies and replaced the centralized planning model with one that imitates their economic system.

The SMEM model should also be considered by Canada, which is experiencing a period of growing economic problems: low rates of growth, investment and productivity while unsustainable fiscal deficits are growing. These problems are in part caused by policies that violate the operating principles of the SMEM model in several important areas.

For example, farmers wanting to produce dairy products have to buy quotas and, in effect, join a cartel, which sets production levels and prices at which the farmers are allowed to operate. The farmers earn high and stable returns on their investments, but the industry operates with many inefficiencies and consumers pay much above world prices. The SMEM model suggests that these costs would be avoided if the production and sale of dairy products were left to competitive markets and farmers were paid subsidies out of general tax revenue at levels considered to be socially desirable.

Another example involves the market for medical services. Canada’s governments effectively own and operate institutions and employ health care workers to provide the public with all required medical services at zero cost at the point of use. This policy is designed to ensure that all Canadians have access to medical care regardless of their level of income. The SMEM model suggests that the medical services should be provided by the private sector and that subsidies should be paid to those who cannot afford to buy them.

Yet another example is the housing industry. Many municipalities impose regulations that allow the construction of multiple housing units only if builders spend funds on public art and build units to be sold or rented at below-market prices. These regulations raise the cost of all housing unnecessarily. The SMEM model suggests that builders should be allowed to produce housing without facing these regulations so that it can be constructed and sold at the lowest prices possible. General tax revenue should be used to pay for socially desirable art and subsidize those who cannot afford housing at market prices.

The drift away from SMEM in Canada has reached a peak with the 2019 passage of Bill C-69. It requires private investors in pipelines and other large infrastructure projects to obtain a “social license” by compensating all “stakeholders” whose interests are damaged by these investments. This bill will raise the cost of infrastructure investments and the services they provide for consumers. The SMEM model suggests that these costs should be avoided by allowing these investments to proceed without having to incur the costs imposed by Bill C-69 and that stakeholders’ interests should be taken care of by payments from general tax revenue.

Canadian politicians love imposing on private investors and producers the cost of non-market benefits of the sort just described. It allows them to buy the votes of the recipients of these benefits without having to impose vote-costing taxes on the public. But in the process, they are destroying the free market system that has brought Canada one of the highest standards of living in the world and history. They should consider the cost of the increasing abandonment of SMEM-model based policies, especially Bill C-69.

Herbert Grubel

Emeritus Professor of Economics

Simon Fraser University

Senior Fellow, The Fraser Institute

Canada Needs Immigrants, Just Not So Many

Canada tries to manage its immigration to make it serve the national interest through policies that set the number of immigrants admitted every year and select the candidates to be admitted based on the specific characteristics of the following main groups of applicants: principal economic class immigrants and their immediate families; the extended families of Canadian residents; and refugees and asylum seekers. Several European countries are in the process of revising their immigration systems and are looking at Canadian policies with respect to the economic class immigrants for inspiration. An op ed even recently appeared in the New York Times touting the Canadian system as a model for the United States. So, has it really worked that well?

The selection process for principal economic immigrants under the Federal Skilled Worker Program, which is the largest single program for economic class immigrants, uses a points system to assess an applicant’s prospect for succeeding in Canada’s highly-developed economy by considering six selection factors, namely: English and/or French language skills; education; work experience; age; arranged employment in Canada; and adaptability. Only applicants with a point score of 67 out of 100 or above are approved and are eligible to be admitted. The Canadian Experience Class and Federal Skilled Trades Program, which are also aimed to pick labour-market-ready immigrants impose similarly rigorous criteria and allow for Express Entry.

Unfortunately, as rational and appealing as this process seems at first glance, it is only a small part of an overall system that has failed to deliver on its goal of providing Canada with a flow of immigrants who perform as well as other Canadians in the labour market. The sad fact is that Census data show that immigrants who arrived since the mid-1980s have on average earned incomes and paid taxes much lower than other Canadians, even after they have been in the country as long as 20 years.

A main reason for this surprising outcome is that the so-designated principal applicants, who have passed the points test under the Federal Skilled Worker Program or qualified for the Canadian Experience Class or Federal Skilled Trades Program and were expected to be economically successful in the competitive Canadian labour market, routinely only make up about a sixth of all immigrants.

The rest, who make up most of the immigrants admitted, have not been subjected to the points test or similarly rigorous admission criteria under other programs. They comprise: the immediate family of the principal applicants (spouse and minor children); the numerous so-called family class immigrants, who are members of the extended families of earlier immigrants and refugees; the refugees and asylum seekers; and immigrants admitted under many other smaller economic class immigration programs like Live-in Caregivers and Immigrants Investors, which are problematic in their own right. The Provincial Nominee Program, which varies from province to province and is too complicated to go into here, also is largely labour-market focussed.

The incomes of all these various classes of immigrants, who are not subject to the rigorous points system, are included in the calculation in the average incomes of all immigrants and are likely to be one of the main reasons why this average is so disappointingly low as reported in the Census. Parents and grandparents are a group of family class immigrants whose numbers are not large, but whose earnings are particularly low.

The second pillar of Canadian immigration policy involves the determination of the number admitted annually. The government now sets this number and submits it to parliament in the Annual Report to Parliament on Immigration, where it is passed routinely without debate. This number has increased steadily from an annual figure of under 100,000 in the middle 1980s to 330,800 in 2019 and is proposed to increase further to 350,000 by 2021. It goes without saying that the larger the number of immigrants selected the more difficult it is to find only those with the strongest qualifications likely to be successful.

Moreover, compounding the problem is that during this period, almost 60 per cent of immigrants have settled in Canada’s three largest cities, Toronto, Montreal and Vancouver, where they have raised the cost of housing and created traffic congestion and over-crowding of hospitals, educational institutions and recreational facilities to a much greater extent than have occurred in the rest of the country.

The private sector and government have invested heavily in housing and infrastructure facilities during this period in part to accommodate the inflow of immigrants. But as Canadians can see, they have obviously not done a very good job of relieving the existing shortages, which implies that the number of immigrants is greater than the country can absorb without reducing the well-being of the Canadians already here who have to compete for housing and the use of infrastructure.

How can these problems of Canada’s immigration policies be remedied? Most obvious is the need to curtail or stop entirely the acceptance of immigrants who qualify only because they are members of the extended families of earlier immigrants. Such a policy would make it possible to meet the target number of immigrants and replace the extended family members with principal applicants and their immediate families selected under points-based economic class immigration programs who should be economically much more successful than the extended family class immigrants they replace. This is exactly the opposite of what has been happening in recent years, largely in response to political pressures from existing immigrant groups anxious to bring their family members to Canada.

As an aside, it would also be desirable to reinstate the past practice of having an immigration officer personally interview all candidates for admission. No corporation would ever hire someone sight unseen for a lifetime job. So why should the government do any differently?

Only through a process of trial and error is it possible to determine the number of immigrants that matches the country’s absorptive capacity in the short run. Thus, it makes sense to temporarily reduce the number of immigrants to be admitted to, say, 150,000, as was recently proposed by Maxime Bernier, the leader of the Peoples’ Party of Canada. And then we must watch closely to see what happens to immigrants’ earnings and cost of housing and congestion. If they continue to be a problem, the number admitted needs to be lowered some more. If they improve, the number could be maintained or even raised.

Canadians deserve a public discussion about the merit of the current immigrant selection policies and the numbers admitted annually. The campaign for the upcoming federal election provides a good opportunity to get it underway. Bernier has started the debate, let’s hear what the other parties have to say about the problems he’s identified and the solutions he's proposed.

Herbert Grubel is professor emeritus of economics at Simon Fraser University.
Patrick Grady is with global-economics.ca