Measuring Inter-provincial “Barriers”

Marc’s recent post prompted me to look at transcripts from the Senate hearings on “issues dealing with interprovincial barriers to trade.” The following passage caught my attention:

The Chairman: Let me suggest something that tantalized me when I first looked at this question well over 30 years ago, and more recently — the economics of it. I think one of the answers to the positions of Senator Massicotte, Senator Eyton and Senator Angus is this frustration that we do not have political will. One reason is because we have not brought to the public’s attention the cost in terms of real wealth for the lack of productivity in the economy.I am surprised, frankly, that we did not hear about that this morning. Maybe our other panel of witnesses might give us this, but I was looking for the economic costs of a fragmented economy with interprovincial trade barriers. A study was done, based on the research in 1998, which estimated a loss of 1 per cent of the GDP — this estimate was by the Canada Alliance of Exporters and Manufacturers in 1991. That number is serious, if you compare the fact that in the last 20 years, real incomes in households have not risen. If we do not make our economy more productive, we reduce the wealth for each Canadian family. This issue, to my mind, has an impact on the spending power of each Canadian family.Can you give us up-to-date statistics that demonstrate what the current costs to the economy are — based on whatever model you choose to suggest? What does it cost every family in the country because of this laggard political will not to address these issues? Can you help us with that? Can you cite statistical information that will support our contentions that this issue hurts the Canadian economy?

Senator Massicotte: How much is one per cent of GDP, chair? How much money are Canadians losing?

The Chairman: I cannot estimate it. Mr. McMahon, can you help us?

Mr. McMahon: It would be $10 billion to $15 billion.

The Chairman: My estimate is between $10 and $25 billion. That amount of money is huge. It impacts the family. I thank Senator Massicotte for that.

We have to demonstrate — and you have to help us, that the problem is not just political — it hurts the growth and productivity of our country, and it is getting worse; it is not getting any better.

Can you direct us to statistics that support this position? The latest statistics we have are from 1998, based on estimates in 1991 and things like that. We know the situation is worse.

Mr. Knox: I will avoid that question, chair, because I have a long history, going back 20 years, of trying to find out the number, as did the Macdonald commission. All I can do is to tell you that sad history, where we never did come to a number — the closest was the one in 1991.

It’s strange that a question about how much inter-provincial barriers cost today morphed into a question about how much 1% of GDP constitutes ($14 billion in 2006, for the record), without any debate about whether or not inter-provincial barriers currently cost 1% of GDP.

The 1991 study is deeply flawed. As Dr. Copeland noted, it examined only the material costs of alleged barriers but not the material benefits of these policies. Comparing costs and benefits yields a net cost of no more than 0.05% of GDP. As Marc and I noted, the “barriers” in question have mostly been eliminated since 1991.

Knox’s implication that the Macdonald Commission did not generate a number is misleading. Its researchers also suggested a cost of no more than 0.05% of GDP. This percentage implies a monetary value of less than $1 billion nationwide. Since the barriers in question have mostly been eliminated, the cost of whatever remains must be closer to $0 than to $1 billion – a far cry from the “between $10 billion and $25 billion” suggested by the Chair, Senator Grafstein.