Foreign Affairs Committee on May 9th, 2012

[Joyce Murray, Liberal, Vancouver Quadra, BC]

Okay.

In this total accounting approach, an important approach, what are we doing in Canada? If we are saying we should be helping a total accounting approach in another country, do we not need to start actually developing and using that in Canada first?

[The Chair, Conservative, Dean Allison]

Mr. Heaps, just a quick response.

[Toby A.A. Heaps]

We have the best data set in the world on natural capital. There's a gentleman named Rob Smith at Stats Canada who's been tracking all these data series. It's not presently integrated into any system of national accounts, and there are some initiatives trying to get that done, but there's a massive potential for us to lead.

[The Chair, Conservative, Dean Allison]

Thank you very much.

That completes our first round.

I think we have time for a second round, so why don't we start with Mr. Dechert for five minutes.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

Thank you, Mr. Chair.

Gentlemen, thank you for being here today and sharing this information with us.

My first question is for Mr. Reilly-King. You are probably aware that coming out of the G-8 conference a little over a week ago at Camp David, President Obama launched the new alliance for food security and nutrition. As part of that initiative many multinational companies have been pledging their contributions. As such, I understand the pledges currently stand at about $3 billion.

Some of these companies have committed to more than handouts, and they're providing their expertise in various areas. For example, Vodafone intends to establish the connected farmer alliance in Tanzania, Mozambique, and Kenya, to increase the productivity, incomes, and resilience of over 500,000 smallholder farmers by strengthening the communications between the farmers and the agribusinesses they deal with—I guess to sell their produce—thereby decreasing their cost of doing business.

Can you comment on that initiative and how you feel about it?

[Fraser Reilly-King]

Last week was our AGM, so I wasn't able to read as much as I wanted to on the G-8 initiative. If some of these initiatives are core to the business operations of the company involved, they're willing to bring their expertise and some money, and they're of benefit to countries, then I think they can only be helpful. That said, I want to emphasize that they need to be core to their interests, to their business model, because that's going to ensure good development practice, but they also need to respond to a gap or a need that's been identified.

One of the biggest gaps in food security is addressing the needs of smallholder farmers. I think in Africa around 60% to 70% of the population are farmers. Despite Canada's admirable contributions to the L'Aquila initiative—it was one of the first to complete all of its commitments there—this is still a key problem. Smallholder farmers still haven't been addressed. There's still a huge number whose needs aren't being met. This was one of the things that came out in the Africa Progress Panel.

It's good that these initiatives are moving the agenda forward, but it would be even better if they responded to genuine needs and demands.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

So if there were private sector companies that could lend their expertise in helping smallholder farmers connect with markets, lower their costs of production, and increase their productivity, presumably that's something you would support.

[Fraser Reilly-King]

I think it's a good direction, as long as it's sustainable.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

You mentioned in your opening comments that the development of local private sectors in these countries is key. We know that companies from different countries often work in different ways when they're developing, say, resource industries in those countries. I understand that many Chinese companies, for example, rather than training people locally will often bring in lots of temporary workers from China and other places to work in those resource industries. Canadian companies, for example, are much more likely to train local populations in the skills they need to work in those companies.

CIDA has a number of initiatives where they use the expertise of Canadian companies to help develop local private companies as suppliers to those Canadian companies that are active in developing the resource industries in those countries. For example, CIDA is in partnership with World Vision and Barrick Gold in Peru, which is providing 134,000 residents with educational services, water, and sanitation. I wonder if you can comment on that project and what Barrick Gold is doing there, compared to what you know about Chinese resource companies and what they might be doing in those countries.

On another example, in Burkina Faso there's a project between Plan Canada and IAMGOLD that is providing 10,000 youth with skills training. I wonder if you can comment on that. Are these initiatives, where the Canadian government is partnering with private companies, producing results that wouldn't otherwise be produced if it were left to a resource company from another country—or with no support at all?

[The Chair, Conservative, Dean Allison]

Can you do that all in under 30 seconds, Mr. Reilly-King?

[Fraser Reilly-King]

The local private sector is key. China has a very bad track record in Africa, and I don't think we can really compare the actions of Canadian companies to Chinese companies. We would probably all expect Canadian companies to be the best in practice.

I'm less familiar with World Vision and Plan Canada. I looked at the intervention made by WUSC, and one of the things I think is positive about that project, which I think they've done in collaboration with IAMGOLD.... IAMGOLD isn't even operating in the country anymore. There are still resources committed to this. The operations are taking place 200 miles away from where the mine is.

WUSC is beyond education, health initiatives, and training initiatives. It's working with local government to try to ensure that the real benefits from that project come to the local community. So it's trying to take the royalties that the country gets and bring them down to the local level. So I'd say that the practice there is guided less by corporate interests than by development interests.

[The Chair, Conservative, Dean Allison]

Thank you.

That's all the time we have.

Sorry, Mr. Dechert. We may catch you in the last round after Mr. Saganash.

[Romeo Saganash, NDP, Abitibi—Baie-James—Nunavik—Eeyou, QC]

Thank you, Mr. Chair.

I'd like to come back to Mr. Reilly-King and his recently completed analysis of the budget cuts.

You state from that analysis that it is extremely difficult to assess what exactly the criteria were for making this decision.

The analysis also mentions that Colombia, Peru, Indonesia, and Bangladesh have become important trading partners for Canada in recent years. To that list we can add Ukraine and Honduras, which recently concluded FTA negotiations in August 2011.

Some might see it as mere coincidence that more and more of our aid and development dollars are going to countries where we have increased economic interests. What are your thoughts on this change in direction? Is it the right direction we are taking in all of this?

[Fraser Reilly-King]

It's difficult to say whether it's the right direction. It's the direction that the current government has taken.

But just to go back—you raised this issue before—it's fine if the government decides that it wants to pursue trading initiatives with different countries, but ultimately when it comes to development and aid money—and especially in the context of the ODA Accountability Act—I hope that the government, through CIDA, will prioritize the countries that have the greatest needs. In this context that would be low-income countries. They are the ones that need the most money. There are still populations within middle-income countries that need it, but I hope the government will continue to prioritize those that need the resources most.

[Ève Péclet, NDP, La Pointe-de-l'Île, QC]

Thank you very much.

Mr. Reilly-King, you raised a good point: local development. Developing countries are often almost controlled through humanitarian aid. Countries that provide humanitarian aid tell themselves that developing countries don't have the resources for local development and that they will work on that for them. Based on how we currently view international aid, I fear that there will be even more patronage if that aid is provided by private companies. Developing countries are told that, since they are lacking the necessary resources, we will give money to our companies so they can work on local development in those countries' stead.

In international development, we should instead try to fund local companies, and not give money to a company that may not be familiar with all the needs of the population and the public institutions. This is a matter of public institutions and good governance. These issues are not at all part of those institutions' policies.

This has to do with the direction humanitarian aid is taking. Is this the right direction to take in terms of humanitarian aid? Should we not, as Mr. Reilly-King said, invest in private local development instead of using major private companies for large-scale development?

[Fraser Reilly-King]

Earlier I referenced CIDA's private sector development strategy from 2003, and it puts the development of the local private sector at the heart of its strategy. I think if you haven't already you should read that part of the private sector strategy, and I think it's something that Canada should continue to do.

Ultimately to be sustainable.... A number of individuals will comment about how aid hasn't been effective. We need to put in context that aid is a very small resource. A huge amount of direct foreign investment or capital is fleeing countries, tax isn't accrued in countries. So aid can only achieve so much. We would hope that the small amount of resources it's used for would prioritize the needs of low-income countries to help develop the local private sector.

That doesn't mean that large companies shouldn't engage in philanthropy. It's great if companies want to invest large amounts of money in pursuing interests that advance development in countries, or there's also the possibility.... I think there are some good public-private partnerships out there, as long as they start with the needs of local individuals. When they are top down, when they're supply driven, they're not going to work. But first and foremost, as I said, especially given declining aid resources, prioritizing the local private sector is key.

[The Chair, Conservative, Dean Allison]

Thank you. That's all the time we have.

Ms. Grewal, you're going to start but probably for three or four minutes, and we'll cut you off. Thanks.

[Nina Grewal, Conservative, Fleetwood—Port Kells, BC]

Thank you, Chair.

Mr. Heaps, I understand that during your December 2009 committee appearance, you told members that no company can succeed in a society that fails. You stated that you have faith that there is a strong self-interest for companies to engage in commerce in a way that strengthens social and critical stability. You also stated your support for Canadian companies in the aspect that companies must be at the heart of big solutions, or there will be no big solutions.

Can you describe why private sector investment is so critical to the development of less developed nations and how the private sector can contribute to the alleviation of the overall problems of health, education, and poverty?

[Toby A.A. Heaps]

Sure. Thank you for your question.

When you look at the scale of investment that we need to help these economies emerge and be able to feed their citizens and keep them healthy and give them jobs and give them electricity so they can read at night, the scale is many orders of magnitude beyond what direct aid could ever do.

Direct aid, as Fraser says, plays a valuable role in places where people are starving and in some disease eradication, but as far as helping countries rise and achieve sustainable development, the private sector is where the capital flows are. In context, the $95 trillion for global bond markets is many times more than any aid budget, and the bond issues are growing every year.

Our financial system is plugged up in many ways and in need of plumbing. It tends to finance what it's financed before with some exceptions like mortgage-backed securities in the U.S. So it looks at track records for this type of new investment, for this country, and it has a bias toward financing what it's financed before and with whom it's financed before.

If we want to achieve sustainable development in relevant timeframes, we're going to have to scale up private sector finance, redirect the trillions of dollars that are already flowing, and start tilting them toward more sustainable development investments. That's where we can make the biggest contribution, and that's what's so exciting about being Canadian. We have penetration in more countries. We have more countries with penetration in us, and we have more stable financing than almost any country in the world. So if we can marry all those things.... EDC is a great institution to work through, it is superbly well positioned to lead this new vanguard of sustainable development, but it will need a nudge to ramp it up.

[The Chair, Conservative, Dean Allison]

Thank you.

That's all the time we have.

I want to thank Mr. Heaps and Mr. Reilly-King very much for their discussion today.

With that we are going to suspend so we can let these witnesses go and bring our other witnesses for our next hour. Thank you very much, gentlemen.

[The Chair, Conservative, Dean Allison]

Let's get started with our second hour.

I'd like to welcome Mr. Romer here today to talk to us a little bit about some of the things he's been working on. Mr. Romer is with the Stern School of Business in New York City. I know that he's done some work with the Macdonald-Laurier Institute here in Ottawa.

I'm just going to turn it over to you, sir. We'll give you 10 minutes or so to make your opening presentation, and then we'll go around the room and maybe follow it up with some questions.

Once again, thank you for coming up here today and spending some time with us. We look forward to hearing what you have to say.

[Dr. Paul Romer, Professor, Stern School of Business, New York University, As an Individual]

Mr. Chairman and members of the committee, it's a great pleasure to be asked to come to testify here.

There is one part of my career you didn't mention, and maybe you don't know. I spent the middle year of my graduate education at Queen's University in Kingston. It was actually the most productive year of my graduate career, so I have a special fondness for Canada.

I want to start by saying that I'm here to describe an initiative of the government in Honduras that I've been advising on. The President of Honduras sent a letter, which will be available in the original Spanish, with an English and French translation, indicating how much he appreciates the interest expressed by Parliament in this experiment Honduras is undertaking and how much he values Canada as a potential partner as this project goes forward.

To step back and motivate what they're doing, let me describe for you a more familiar context of domestic unemployment. Suppose you saw massive amounts of persistent unemployment in your society. A natural impulse to deal with that would be the charitable impulse to try to put people on what we used to call the dole, or welfare, to provide income support for people who aren't working. If that's a pervasive problem, it will, of course, be a very expensive program for a government to maintain. And it's actually one that we now know can be quite harmful, since the additional disincentives to work that those kinds of charitable grants can offer can actually end up keeping people out of the labour force, which reduces their skills and reduces their sense of accomplishment and dignity.

In a case like that, we know that instead of that expensive and harmful solution, there's another very low-cost solution, which is to identify the impediment that is preventing people from working, to recognize that every human has the capacity for creating value and being productive, and to remove that impediment so that all those people who were idle can become productive. We get the benefits of their labour, but especially, they get the benefits of the extra skill and the hope and the dignity that come from work.

In the national domestic context, it seems obvious to us that the role of the government is to remove those impediments and to then let people produce as they can. It's not generally the role of the government to provide assistance or replacement income.

We have worked our way in North America through that kind of line of logic in recent decades, but we haven't yet gone through a comparable transition in our thinking about development assistance. When we look at people in poor countries, we still reach too quickly for the solution that involves the gift, the charity, or the aid. There are clearly some circumstances in which this is appropriate. Humanitarian aid in times of crisis can be the difference between life and death, and is something we should certainly stand ready to provide. But it's not the solution when we see chronic, persistent poverty in poor countries, and we see people who are not productive and who are not acquiring skills.

The other thing that is revealing is that this is not something that represents a flaw of the people. For example, when someone from Honduras who was idle or who was working at a very low wage in Honduras moves to Canada or to the United States, the person comes to a new environment and earns much more immediately on arrival. So we don't need to look inside the people for the immediate impediment. We have to ask what it is about the environment that's holding everyone back.

The jargon economists use for the potential impediments is “institutions”. I don't like that language, because I think it obscures. I think the right language to use here is “rules”. Every society, every group of people, follows a set of rules that structure how people interact with each other.

Those rules are partly codified in law, but they're also instantiated in our norms about right and wrong.

The rules that a Honduran can get access to if she moves to Canada involve both the legal requirements for honesty, but also the prevalent social norms about honesty and about trust. The challenge in a country like Honduras that wants to reform is that it can copy the laws of Canada easily enough, but it can't copy the norms of Canada, at least instantly.

Even if people in Honduras know they would all rather live in a society with high levels of trust, where people are more honest and where trade can take place much more easily because of that trust and honesty, they're looking for a mechanism to escape from a set of rules that were bequeathed to them by a history of colonial imposition of near-feudalism in the early stages in Honduras and of persistent fear of opportunism and violence—fear by peasants of landholders who might take advantage of them, might repress them, and fear by landholders of peasants who might engage in land invasions and takings.

What the leadership in Honduras has concluded is that in that kind of circumstance, if the key is to develop norms of, for example, trust and honesty, sometimes a neutral third party can come in as the trusted arbiter and can help create the conditions of safety, which they can then use to build honesty and trust and engage in the process of rapid development, which they know they're capable of. The government has amended their constitution and passed a law to create the potential for what they're calling a reform zone, where in that zone, foreigners could come in and undertake some of these key conditions—create these key conditions that help establish trust and safety and help evolve the norms of honesty.

To go back to the point in the beginning, this is something that doesn't cost the foreigners anything. If anything, I think any foreign government that wants to be helpful in this project should immediately.... Someone asked earlier today: what can donor nations do to help? I said don't be donor nations. Don't think about giving money. That's not what's relevant. We heard in the testimony before that the money here is just a pittance compared to the value that can be created, but things like providing the seed of trust, from which broader social trust can grow, can be enormously valuable.

I'll give you one specific example of how this is playing out, and then perhaps we could turn it over to more general discussion.

The legislation providing for this special reform zone says that courts will be created in this new zone. Right now in Honduras the courts and the police are not trusted, and for good reason. Many of the police and courts and lawyers engage in bribes and do not enforce the law honestly. A lawyer told me once that when he is in a proceeding and the judge doesn't ask for the bribe, he knows he's in trouble because the other side has already bribed the judge and won the case.

So how can you escape from conditions where everyone knows this is wrong, but it's so prevalent and so pervasive and no one knows whom they can trust? One provision in this new reform zone is that it will have its own courts. The judges who staff these courts can be appointed from anywhere in the world, but Mauritius has agreed that its supreme court will act as a court of appeal for the new courts in this zone in Honduras. The informal agreement at this point is that the zone will compensate the supreme court through filing fees or whatever mechanism they work out, so that this doesn't impose any net costs on Mauritius.

But what Mauritius can do then is provide the neutrality and credibility of its legal system as the anchor, through the appeals process, of a new judiciary that can be put in place immediately in this new zone.

You might ask, why implement this just in a special zone? Why not do this for all of Honduras? The answer is that this kind of participation by a foreign body would be objectionable to some people in Honduras. Rather than say this is a measure that will be forced on all people of Honduras, what the government has said is that it will create a new place where this will be available to people, and if you as a Honduran citizen feel comfortable going into that zone and getting matched with an employer who might come and hire people in that zone—you might use infrastructure that is funded by investors looking for a return on their investment in the airport, port, or power system—you are free to go operate in this new environment, but it's not forced on anyone.

That possibility of choice in opting in is important not just for initial acceptability of this kind of change, but also because it means that these new norms and these new rules have a legitimacy that comes from universal assent to those norms that they never would have had if they were imposed on some people who didn't want them—not just norms but legal arrangements. The idea is to create the space and use the resources, which don't really cost anything but which can provide so much as the nucleus for creating the kind of opportunities that people have to move to North America to get now. Create that in the zone, and then as it succeeds, find a mechanism to let that system, if it is judged to be attractive to the rest of Honduras, spread throughout the country and hope it is a model for the rest of the world about how social reform can take place. And incidentally, how we can provide urban environments and opportunity for the billions of people who want to move into urban areas.

That is the venture. The example of what Mauritius has done is an indication of the new style of development assistance that a country like Canada could provide. With that hint of the possibility that things could be very different from what we are used to, perhaps I should turn it over to the members of the committee for questions.

[The Chair, Conservative, Dean Allison]

Thank you very much.

We're going to start with the opposition.

Mr. Saganash, please, for seven minutes.

[Romeo Saganash, NDP, Abitibi—Baie-James—Nunavik—Eeyou, QC]

Thank you, Mr. Chair. Thank you for your presentation. I appreciate that.

I have to tell you that I was sent the link just before the weekend, before leaving for the bush for fishing back in northern Quebec, and I watched you on video and the example you gave about Hong Kong. It was quite amusing having to watch you way up north in northern Quebec over the weekend.

First I have a very quick question. Is this idea of charter cities applicable to Canada and first nations in a first nations setting? How does it differ from the third party management policy we have in this country for first nations communities?

[Dr. Paul Romer]

That is a very good question, and it's one that comes up in the U.S. context as well.

There are several elements in play here. One is the notion of autonomy, and giving some geographic space an autonomous system of government. We see things that more or less are like that with various first nation arrangements in North America.

The other element in this proposal, though, is the purely economic imperative of urbanization as the path to opportunity. Almost everything people do is more productive in a dense urban area. The only exceptions are things like farming or mineral extraction, which require lots of land.

The key here is not just to provide conditions of trust and opportunity and employment, but also all the benefits that come from a dense urban productive environment and living environment.

This zone in Honduras will be open to migration from all of Central America and Latin America—even all of the world. For example before 2008, a million people a year left Central America and Latin America to come to the United States. At a flow of a million people a year, this zone could get to the size of a city of 10 million people within about 10 years.

The difference in the legal environment in Canada, I'm sure, and the United States is that no one right now is willing to contemplate letting millions of people who want to move into cities come as landed immigrants or permanent residents in our countries. For a variety of reasons, we're not ready to contemplate that kind of inflow.

You could create a special autonomous region in Canada or the United States, but it wouldn't have a viable chance to become a city of 10 million people that is a global hub that can compete for the best talent of the future.