Proceedings of the Standing Senate Committee on
Social Affairs, Science and Technology

Issue 22 - Evidence, December 9, 1998


OTTAWA, Wednesday, December 9, 1998

The Standing Senate Committee on Social Affairs, Science and Technology met this day at 3:45 p.m. to consider the dimensions of social cohesion in Canada in the context of globalization and other economic and structural forces that influence trust and reciprocity among Canadians.

Senator Lowell Murray (Chairman) in the Chair.

[English]

The Chairman: Our witness today is Professor John F. Helliwell of the Department of Economics at the University of British Columbia. I will say a biographical word about Professor Helliwell before we begin. He studied at U.B.C. and Oxford, where he was a Rhodes Scholar, and taught at Oxford before returning to U.B.C., which has been his base since 1967. His recent research has emphasized comparative macroeconomics and growth, including especially the influence of openness and institutions. From 1991 to 1994, he was Mackenzie King Visiting Professor of Canadian Studies at Harvard. In 1995-96, he was back at Harvard as a Fulbright Fellow. He is a Research Associate of the National Bureau of Economic Research and an Officer of the Order of Canada. His most recent publication is a book called How Much Do National Borders Matter? published in August of this year.

Professor Helliwell has filed a pretty thorough and interesting brief to the committee. He will speak briefly to it, and then we will open the floor for questions and discussion.

Professor Helliwell, please proceed.

Mr. John F. Helliwell, O.C., Professor, Department of Economics, University of British Columbia: Mr. Chairman, it is a pleasure to be here with you.

[Translation]

It's a pleasure to be here with you to present the data from our research.

[English]

The brief is more a survey of research in the field, a very selective survey of things that I have been involved in that seemed important to me or that others have done relating to your issues. The first point I make relates to the research on social capital and the linkage between social capital and economic growth. I trace the roots of that particular version of social capital that is referred to in the literature I am involved with as a description of a set of norms that permit societies, when they have them, to function better. It is typically measured by the extent to which people say they trust other people in general and also how much they participate in a whole range of horizontal institutions, typically, though not always, in the voluntary sector.

Some of the early work in this area brought Robert Putnam into this field. It was his 20-year study of Italy. I got dragged into the field on his heels because I heard the book in a seminar form before it was produced.

He pointed out the fact that the regions of Italy with higher levels of social capital according to those measures in fact had higher levels of satisfaction with the government. According to surveys, they perceived better government by having phones answered faster and questions answered better, and they also had much higher standards of economic life. I had known at the time that there was some evidence of the southern regions of Italy converging in levels of income to the north, so I wondered then whether it was true that social capital was good for growth. To find that out, it was necessary to combine the forces for convergence which we have seen around the world, the poor countries catching up to the rich, with the fact that we know social capital measures were much higher in the north of Italy than in the south.

We found that if we put all the bits together in a complicated way, it was possible to winkle out some evidence that, other things equal, those regions with higher levels of social capital did grow faster in Italy. Then when new powers were devolved to the regional governments in Italy in 1980, those with higher levels of social capital according to those measures used those new powers to better effect and grew faster. Of course, since those were already the richer regions, the gap between rich and poor widened as the regions with higher levels of social capital found themselves with powers that they could use better than did the regions with lower social capital. The convergence is presumed to start again once those new powers have been digested.

Attempts to do similar work among Canadian provinces, among U.S. states and among the industrial countries have been less productive of tight linkages between those measures of social capital and economic growth, although it remains true that regions with higher levels of income tend to have higher measures of social capital. In the brief I talk quite a lot about the linkages between democracy in an institution and social capital and growth. In the interest of a brief introductory statement, I will pass over that part.

The next section deals with education, where we have discovered through a whole range of empirical work dealing with data from Canada and the United States explicitly, gathered at the individual level, that the strongest determinant of both trust and participation in various voluntary activities is the individual's own level of education. As I note in the brief, there has been a challenge to this idea that more education is good for everything by some influential U.S. political scientists who have argued that education is perhaps more a sorting device, with those who are relatively better educated getting the positions of leadership and using them, which would mean that as average levels of education went up, there would not be a corresponding pay-off to additional social capital.

I am happy to report that the research that I have been able to do with Putnam on this question -- we are using very large samples of U.S. data -- has managed to support the notion that when relative education is properly defined, most measures of participation grow with one's own level of education and also with the levels of education of one's peers. As general levels of education rise, it remains true that both trust and participation tend to rise.

An increasing amount of literature focuses on another of the issues facing you: the linkages between inequality and insecurity and both economic performance measures of social capital and physical health. A relationship has been discovered between inequality and the distribution of income and the level of economic growth, looking across countries. There is much less evidence so far across states and provinces, although it may be there. There is evidence that average quality of health outcomes are worse where inequality of incomes is higher. There is also some evidence that the level of social capital is again measured by the trust and participation and is lower where levels of inequality are greater.

I turn then to consider various government institutions that are important. Naturally, those that secure a good and well-distributed access to education and health care are important. There is also a positive link between health status and measures of trust and participation to augment the other indirect linkage.

Some of this work relates to what has to be done to secure a transition from a non-democratic, poorer society to the kind of society that we have. I note that at the time of transition in Eastern Europe, how crucial the central institutions of a civic society were to the achievement of that transition was not understood. Many believed that taking down the wall, getting rid of the Communist Party and providing free markets would somehow be enough to permit a healthy transition. As you know, the levels of income per capita on average in the countries that are supposed to be having a transition have fallen roughly in half, and there have been very big differences among those countries as well. It has been a very difficult time.

Even though education levels were really quite high among all of those countries, quite a fast transition on conventional criteria was predicted. It did not happen because social capital of the sort that you and we have been considering simply was not there.

What key bits of social capital were not there? First was trust. The measured levels of trust were very weak. There was no rule of law, which is often a substitute for trust and a supplement for it at its rough edges. The whole set-up for the administration of justice was not there.

In the absence of those legalistic institutions, if the level of trust were high enough, the institutional vacuum would draw in common efforts that were not always at the expense of one's neighbour during that intervening period while the institutions were being developed in a collaborative way. Without that trust, without that sense of common purpose, without sufficient shared values, the vacuum was filled by what one might call bottom-feeding fish. The fastest growing industry in Russia turned out to be the Mafia, rather than anything that we thought they had a comparative advantage in. The post-transition experience in the former Iron Curtain countries has emphasized, to those who knew in principle that institutions were important, that the institutions and softer measures of the effectiveness of a civil society are far more important than any of us had thought. That has been an expensive lesson to learn, and it should not now be ignored.

Finally, I will say a word on globalization and whether it constrains national policies that attempt to achieve higher degrees of social capital, cohesion, redistribution, equality, and a variety of the mechanisms I have spoken about before, or to be very practical, health care systems and social safety nets that both support and are supported by a sense of social cohesion.

International competition and the global economy have generally been used to say that competitiveness demands that our systems be as cheap, in the sense of our tax rates being as low, as those in any of the countries with whom we have serious trading links. The burden of the research that we have been doing on the effects of national borders is exactly to the contrary. It says that the structure of national economies is 10 or more times tighter internally than across borders. That means that there is roughly 10 times more ability to have independent national policies than most individuals, political leaders or anybody else thought a mere two or three years ago.

That does not mean that there is scope for governments to do things that are not in the best interests of their voters or not done efficiently, but it means they have much more ability to design things that their voters want and to do them without feeling that they have to match what is done in other jurisdictions.

I quote some data on the social safety nets, for example, in Canada and the United States, that finds that they are extraordinarily different from one another. A mid-1980 study showed that if they had been applied to the U.S., the Canadian rules would have cut their poverty by more than half. By the same token, the Canadian rules would have dramatically increased the cost of the social safety nets in the United States. The conventional social safety nets, including welfare, cost roughly 1.7 per cent of GDP in the U.S. in the mid-1980s. I think the number for Canada was 4.7 per cent.

However, while the Canadian health care system is believed, at least by Canadians, and I think correctly, to be better than the U.S. system and while the Canadian system covers all of the population rather than 85 per cent of it, the U.S. system costs roughly 3 per cent to 4 per cent of GDP more than the Canadian system. If you combine the social safety nets and the health care system, which I regard also as a social safety net policy, the combined cost of the two is the same share of GDP in Canada and the United States, even though both aspects of the Canadian system are broader and provide better coverage and much more reduction of poverty than in the United States.

As I have described that system, perhaps nobody would want to vote against it since its cost of the share of GDP is no higher than the U.S. system, but no doubt there are other policies in Canada that cost more than those in the United States. My point is that as long as the voters and taxpayers are willing to support them and they are getting what they think of as collectively good value for money, you do not have to look over your shoulder at what is being done by your neighbours.

To amplify that, I conclude by noting that a discussion of the linkage between taxation and the brain drain, which is a way of emphasizing the point that in Canada it is difficult to do things differently than in the United States, is more rhetoric than fact. I report that the number of Canadian-born living in the United States has been on a steady downward trend over the last 15 years, and it continues to drop year by year, so that the new people going off to live in the United States are not keeping pace with those who were previously born in Canada and are dying in the United States.

[Translation]

Senator Robichaud: I would have liked to have a bit more time to examine your presentation. I am only replacing a regular member of this committee, but I must say that your presentation contains an enormous amount of information that would take a lot of time to digest. You talk about globalization.

[English]

You talk about globalization. You say that it provides governments with more ability to act. Would you elaborate a bit on that, please?

[Translation]

Mr. Helliwell: «Mondialisation» is the French term, but I have an English expression.

[English]

Globalization is more "globaloney" than fact. It is not globalization that makes policy easier. It is the fact that globalization does not exist that makes policy easier. National economies have an integrity and a structure that is many times tighter than the global links between countries.

Most people think that that is not true. For example, according to surveys, most people think that trade linkages between Canadian provinces and U.S. states are, if anything, tighter than those between Canadian provinces. The data show the reverse; even after the big trade increases post-FTA, Canadian provinces trade 12 times more intensely with each other than they trade with U.S. states of similar size and distance.

Other countries have similar national structure tightness. Therefore, it is the lack of globalization that gives countries more power to choose their own policies and to act more independently than people think they will, because people think these international linkages are tighter than in fact they are.

[Translation]

Senator Robichaud: Is globalization not the cause of the alarming situation we now have in agriculture, because of the Asian crisis? It does not make the government's role easier in that kind of situation. You seem to say that globalization does not exist. I am sort of lost.

Mr. Helliwell: There is certainly a very strong increase in international and world bonds. Even if the present State is a state where nations remain rather distinct, there are bonds.

[English]

There is also a dispute in the literature about the extent to which growing inequality among individuals is due to increased international trade. Another theory suggests that it is due to technical progress that favours the well-educated over the poorly-educated. The resolution of that debate is not here yet. Most people think that there may be some international trade sources of that inequality, but they will not be a very large share of the total.

Yes, there may be some sense in which increasing trade and international linkages have exacerbated the income disparities in the rich countries. However, a problem with that is that the widening of the income distributions has taken place even in poorer countries, so it is not easy to say it is just because the middle income and lower income jobs have been pulled out and sent to the other countries since, in some sense, they have not arrived there.

I should give you one word about the Asian and current global crisis, which was very much the discussion at the UN meeting I was at yesterday. How is it that this research that I have been telling you about, which shows that national economies are very separate, is consistent with what seems to have been a situation of almost domino-like contagion? I suppose I would say that the degree of contagion and the extent to which the banking problems of Thailand became the banking problems of Korea and Malaysia and Russia, and hence Brazil, are simply not given by economic linkages. The real economic linkages of trade and capital mobility between those in some of those regions are essentially zero. However, a combination of financial fragility and some institutional gaps in a couple of countries led to a severe banking crisis which, in turn, led some of those who had been touched, or not touched, to ask whether similar problems could exist elsewhere.

There had been a narrowing of spreads between the risks of high-quality countries and the risks of other countries, until they had got very small. All it needed was one case of a country having a serious problem and then everybody lending to developing countries immediately started raising their risk premium, which led to a withdrawing of funds from a number of countries, a calling of a number of loans. If long-term assets are financed by short-term debts and they get called, then you are in trouble. There was some contagion but it was not caused by the real economic linkages. In part, the ideas moved and the perceptions of the riskiness of lending to developing countries changed, and there was a snowballing effect from that.

Senator Johnstone: Dr. Helliwell, I should like to join in welcoming you here today. I have read your paper, "Combining Social Cohesion and Sustainable Growth", with considerable interest and have done some highlighting.

One thing that stood out for me is that you feel there is a correlation between advanced education and business success. I want to come back to that theme again, but with the thought that there might be some exceptions. I am thinking of Ross Perot in the United States, whose teachers thought he was so stupid he would never amount to anything. He probably will not be president but he certainly has excelled himself in the business world. William Gladstone was so stupid in arithmetic that his teacher wrote him off and yet he became a prime minister of Great Britain that we remember to this day.

I note that you were a Research Fellow with Nuffield College. I have something in common with you there. I was a Fellow in 1955. Lord Nuffield was alive at that time. I was fortunate to have dinner with him one night, so I had two and a half hours of discussion with him. He introduced himself as "just a farm boy at heart", although at that time he had given away the equivalent of $80 million Canadian. He lived for a few years after that to give away some more money, along with Lady Elizabeth.

His father was a farm worker. The only reason Lord Nuffield got into business was that he asked his boss for a wage of five shillings a week and was refused. By the time he was 14 years old, he had gone into business for himself, as you know, repairing bicycles into motorcycles, the MG. By the time I sat down with him, he was the owner and president of the third largest motor corporation in the world at the time, the British Motor Corporation.

I just wanted to ask you if you do not think that there might be some exceptions to the rule and if we should entirely overlook those people who have special abilities but appear to be so stupid.

Mr. Helliwell: I did not know Lord Nuffield, although I was an usher at his funeral.

It would be a great mistake ever to confuse education with formal education. The most important education that any of us learn is from living our life, from the contacts we have with others and from the books we read. Indeed, the discussions of social capital and issues of that sort that you have been having emphasize precisely that it is the values learned in the family and in the community and the knowledge acquired in the workplace that are the really important forms of education.

If formal schooling works, it makes people better learners. It does not teach them enough to make them run a proper life or run a proper business or anything. It just gets them along the road a little further. A good school is not as good as a good family for inculcating an education and the ability to learn.

Those who are best off have good families, good communities and good schools, and a little more of any of those would be good for any of us. People who have enough basic skills and good luck in any one of those three kinds of education will do pretty well. Even though as measurements we talk about years of schooling and so on, because that is all we can measure, it would be a mistake to say that they represent that which is most important, let alone everything that is important.

Senator Johnstone: I thank you for that. I should like to stay on and question you more but I am sure the other senators will do that. I have to move on to another committee. I can assure you it will not be half as interesting as the one that we have here today.

Senator Butts: I have a couple of questions that I should like to get straightened out. I am very surprised by the statistics showing a decline in the out-migration to the United States, because we hear so much about what is happening to all our educated people. I was wondering if you have a breakdown of those people who go to the United States. Are they professional people, highly educated people? Has there been an increase in the group including scientists and medical doctors? Have you broken down those statistics?

Mr. Helliwell: I can offer you a bit of information on that. Statistics Canada released some information that showed that the major occupational groupings for whom there has recently been an out-migration increase are doctors and nurses. As you can imagine, people in those professions have their own special reasons, related to policy. Of course, no one would suggest Canada is short of doctors. The lines to get into the medical schools are longer than they ever have been and the line-ups to get a residency spot are longer than they ever have been, too.

Most of the recent migration of nurses was essentially driven by major cutbacks in two provinces that left a lot of nurses unemployed. Thank goodness for the nurses and for the patients of the world they were able to find jobs in the United States. In a better world, maybe neither of those migrations would have happened, but you can understand why they both did happen.

There has been a complicated educational exchange on medical grounds between the two countries for a long time, and so a lot of medical people end up with careers to some extent in both countries. Typically, people who prefer a different kind of practice pattern may prefer one country over the other. In the long run, that is not likely to cause a continuing problem with the supply, although getting some of those nurses back and retraining them when the budget situation changes may well be a problem in the shorter term. However, better they were properly and gainfully employed in the United States than sitting unemployed in Canada.

As for other categories, there was some talk of computer scientists. The Statistics Canada numbers show that the inflows of the scientifically-trained and managerial categories are much bigger than the outflows, although as in a lot of occupational structures, there is a bigger flow from offshore to Canada, net, coming from other countries to Canada than from Canada to the United States. That has been true for a century or more, and I do not think there is anything unusual about that pattern at the moment. Even at the higher skill categories, the Statistics Canada numbers would suggest that Canada is a net gainer.

To the United States, the migration is more of the higher educated than average. Of course, we know that people in general are more likely to migrate to higher their levels of education. That is true interprovincially as well as from Canada to the United States, so that is not a surprise.

We are doing a survey of all the graduates of U.B.C. and where they are living now by field and degree. When it is complete, it may be possible to be more precise about that for at least one university's graduates.

Senator Butts: I have read that the out-migration of medical specialists was a result of the United States concentrating for a long time on GPs while we were going the opposite way. Now that the thing is balancing, they will turn out enough of their own specialists and they will not be taking ours.

Mr. Helliwell: I think it is the other way around. I think that they did not produce enough GPs and now there is a bigger demand for GPs there. I think Canadian GPs moving, but I may be wrong about that.

Senator Butts: Of course, they have much more money for medical research there because they are funded by corporations, not by government. Since most of the corporations do not have their headquarters here, we cannot get the same money.

Mr. Helliwell: We certainly see that in the medical people associated with universities. There is no question. It is true right across the universities that research funds, both government funds and industry funds, but especially the latter, are more widely available there. Endowment funds are more available there. For researchers, that has been an extra twist.

Senator Butts: I was also very interested in your conclusion. You say that your main message is not just the scope, but the need for national policies. I am wondering what you would include in national policies in the national institutions that you also talk about. For example, we talk about the meetings of the provinces and what they like to call the social union. I do not know how many national policies would ever come out of a plan like that because the provinces will be able to opt out. If somebody opted out of it, would it still be national policy?

Mr. Helliwell: I am among those who think that there is a difference between a national policy and a federal government policy. I think, in one sense, what matters for the citizens is the linkage among the systems in place. We often say with respect to health care that it is a reasonable sense of full portability, full access and reasonably comparable standards that determine the national system, leaving much that might differ by province. One might make the same case about other systems.

Health care is especially important because all the surveys indicate that Canadian citizens regard it as the most important feature of their nation. Perhaps that is because they focus too much on defining Canada in terms of how it differs from the United States. The Canadian health care system is quite like that of many other industrial countries, but it has become sort of a Canadian symbol. To threaten that is to threaten some people's idea of their citizenship.

Senator Butts: Of course, another factor is that the really have-not provinces cannot afford it on their own. They had better get it from Ottawa or they will not have it.

Mr. Helliwell: I celebrate that a little bit in this paper and I have much more in other papers about the Canadian system of interprovincial redistribution. Canada's equalization payments are unparalleled in any other country for their efficiency, expanse and efficacy. That should be celebrated as an important national institution that Canada has. In my view, it then makes possible the withdrawing of regional considerations for all other expenditure programs. They can be done according to other determinants if you have a properly set up fundamental system for intergovernmental redistribution.

[Translation]

Senator Ferretti Barth: Professor, you mentioned Italy. In the north of Italy, with the "Social Capital Economy" we did manage to get better government. I come from Italy and I can tell you that the Italian government is very fragile. It has to do with the Mediterranean temperament. The Italians live well. They enjoy an exceptional standard of living. I have not had the opportunity to see that there was any social cohesion in Italy. You say the north and the south are totally divided. Even if, in the north, we have seen economic and commercial progress, the south is still poor despite the efforts made to help people get educated and up to the same standard of living as the people in the north. It is very difficult. It is also a matter of culture.

As for Canada, some witnesses we have heard were always comparing Canada to other countries. For the time being, it is our own problem. You say there is a lack of social cohesion today because of many major factors. I am talking about Canada with all its provinces and the diversity of peoples we have. In your opinion, what are the major causes preventing social cohesion in Canada?

Mr. Helliwell: It is hard to identify exactly what are the greatest risks. There are risks in the future.

Senator Ferretti Barth: You may express yourself in English. I understand English well, but I don't express myself very well in that language.

[English]

In both health and education, the risks rest perhaps more in the future than in the past. Researchers have studied the sense that people have of being part of the same community with their fellow citizens and the extent to which they trust one another and trust governments. There have been large drops in the extent to which citizens trust their governments, although much smaller drops in Canada than in other countries.

There is a worry about what will happen in the future, although there is not, in Canada, such evidence of big declines in the measures of social capital as has been found in the United States. In comparison to Italy, where there has been some convergence of the standards of living between north and south, the convergence in Canada has been of longer standing and more continuity. Canada is not a failure wanting to be re-started. It is a country where, according to those measures, there is some fragility, to use your term, but there is not complete disarray.

People worry about the increase of family breakdowns. Why? Because a number of the measures of social capital suggest that divorce is terrible for the individuals involved and terrible for their children, both the first generation and the second. That is one of the tendencies that is up rather than down. If something bad is tending upward, then you worry about it.

There is some indication of growing inequality, which masks two things. One very favourable change is that poverty among the elderly has fallen by a factor of four in the last 30 years. It was a problem that was big and is now very small. However, poverty among young people and single-parent families has grown. While their group is not growing, poverty among young people is important. The number of single-parent families is growing and poverty and low levels of social capital among them are important.

[Translation]

Senator Ferretti Barth: You know that there is a lot of disparity in our community and our society. The government is making efforts to eliminate these disparities. You have seen pay equity. There is also reform of legislation like the Divorce Act and child visiting rights. There are a lot of things the government is doing to get our society onto an equal footing. I am concerned. Will it be possible for us all to live on the same horizontal line? Nobody will lack an education any more as everyone will have an education. I am a bit afraid of that. This social cohesion concerns me somewhat. I prefer a bit of diversity to see movement, excitement, motivation to do something. Even volunteer groups have done remarkable things. In future, will we still be seeing remarkable things?

[English]

Mr. Helliwell: Diversity is not about to disappear. Equality is not about to arrive. When my students complain too much about their lot or the lot of the poor in Canada, I show them something from other countries.

The challenge of getting anything like quality at a global level, even up to standards of basic life and existence in an environmentally and socially sustainable way, is beyond us. We must accept that as a big challenge. The worry that if all those challenges were met, life might be dull is a worry I can wait to face until the risk gets bigger.

Senator Poy: Professor Helliwell, you mentioned that social capital is a combination of measures of trust among people and between people and the government and of participation of the voluntary sector. It is easy to measure the participation of the voluntary sector. It is also not difficult to measure trust between the population and the government. How do you measure trust among people?

Mr. Helliwell: As is often the case, you stand on the shoulders of your predecessors in order to get comparability, among other things. There is a classic question that has been asked of citizens all over the world for 50 years in various surveys. That question is: "In general, do you think people can be trusted or that you cannot be too careful?" It turns out that that double question is answered positively more often by males than by females. However, if you take away the riding question and just ask: "In general, do you think people can be trusted," women answer more positively than men which, of course, means that women are more careful than men, and rightly so.

So, the moral of my story is this: It matters what question you ask and it matters to whom you ask it, but the answers are pretty comparable across countries and over time. People ask different sorts of questions to see what they are getting at and to see why there appear to be differences between males and females as well as other kinds of differences.

There are large regional and international differences in the measures of trust. Trust levels were low in the Soviet Union. They are high in China and in the Nordic countries. They are pretty high in Canada.

Senator Poy: Why do you think trust levels are very high in China?

Mr. Helliwell: I do not know.

Senator Poy: Which people were surveyed?

Mr. Helliwell: I should know more than I do. I do not know the details of that particular survey.

Senator Poy: If there is a low level of trust, how can government increase that trust? What can the Canadian government do to increase trust?

Mr. Helliwell: Government, as an institution, wants to focus primarily on how trustworthy it is regarded as being. There has been a drop in trust in government, and that drop has exceeded the drop in people's trust in general.

Therefore, from the perspective of government, the first thing to do is to ensure, as much as possible, that promises are kept. There is a whole range of issues relating to honesty and straightforwardness, issues that link directly to how much people trust their governments.

Government that works by creating cleavages -- and sometimes electoral politics works by creating cleavages when it is perceived to be effective to set up an "us" and a "them"-- probably diminishes levels of trust between groups of people in the general population. It is often feasible to construct a devil. Xenophobia operates at national boundaries, but it can operate internally along linguistic, cultural, educational, and income levels. A government sometimes falls into the trap of exploitation, in order to look after one interest group, to receive a critical mass in the polls. That is probably corrosive at the level of general social trust, even though it may look usable in the short run.

Senator Poy: Are you saying that government could create a lack of trust among people, not just between people and the government? It is the atmosphere that they create?

Mr. Helliwell: I think so.

Senator Poy: You talked about growing inequality due not to an increase in international trade but to lack of it. Could you expand on that?

The Chairman: Lack of globalization, you said.

Mr. Helliwell: What I hoped to have said was that the lack of globalization, or the low level of globalization, was responsible for national economies having more independence than they thought they had. That in itself did not create inequalities; inequalities are not created by the lack of globalization. There was only a limited amount of evidence that globalization created inequalities. The debate continues about how much of that influence was there.

Senator Poy: In other words, at this point, globalization has very little to do with social capital or social cohesion. Is that what you are saying?

Mr. Helliwell: Let me qualify that. There is some evidence of a link between trade and inequality of incomes, but the amount is not yet fully established.

The Chairman: Is that within a country?

Mr. Helliwell: Yes. There is clear evidence that inequality is bad for growth. There is some evidence, however, that some measures of social capital, both trust and participation, are lower among those who have had access to television during their growing-up years. Why? In part, it is because television takes time away from them. You cannot spend time with people while you are watching television. However, it may also be what is watched and the kind of message.

A lot of the message that comes so easily and quickly now comes from far away, and probably either is destructive of people's sense of well-being and trust or provides evidence of other cultures. Often the best aspects of people are not depicted. Rather, people are depicted shooting one another. That has the effect of diminishing one's knowledge of society and thus one's ability to sympathize with members of his or her community. In that sense, then, the global outreach of information may have some negative aspects.

I am sure there are some positive aspects, especially in terms of building a global community, but in terms of local community cohesiveness, there may be some fracturing forces in it. There is some evidence to suggest that those who were brought up before television came along have higher levels of trust and participation than those who were not so fortunate.

[Translation]

Senator Robichaud: Social capital is that whole network of organizations that people belong to and where they get together. Where do you put the family in all that? If we talk about the family, where do you put the church as a structure that unites us and, in some areas of the country now, plays a perhaps a smaller role than what I knew in my time? Has this vacuum been filled, if there is indeed a vacuum?

[English]

Mr. Helliwell: I have reported that the breakdown of families was bad for individuals, not only economically but also with respect to their feelings of trust and their own participation. That suggests that the family, when it works, is an important creator and sustainer of such activities and attitudes.

The evidence about whether involvement in the church positively or negatively affects trust is a bit uncertain. It is true that involvement in religious organizations does not move exactly in line with involvement in other kinds of organizations. My personal view, which certainly is not based on research, is that it probably matters what church and what kind of involvement is at stake. Many churches have played important roles in communities; sometimes they are the centre of the community. Others have sometimes played divisive roles within communities, and still others have been more formal organizations.

Church attendance generally has dropped significantly. There is a big difference between Canada and the United States in terms of affiliation to churches. Church participation is much higher in the United States than in Canada. Participation in unions is much higher in Canada than the United States.

You might ask, what is the effect of the higher participation in churches in the United States than in Canada? I am not sure, and I am not sure how we can determine that. However, as these institutions change, it is important to try to understand better what is taking their place where they have done important things.

Senator Robichaud: What kind of role has the media played in this general sense of trust that individuals have towards one another and also towards our institutions, like governments? Do you have any opinion on that?

Mr. Helliwell: I have no research results that count, but I have a fear which is by way of an opinion. One thing I have felt to be a fault of the media, as I have watched them change over the last 20 or 30 years, has been the shortening of the attention span of the report or the story as well as the increased emphasis on generating conflict even where it did not exist.

I have many times been interviewed by producers who wanted me desperately to take an opposing view, in other words, to fight with someone else on the show. They did not want to hear that in general there was a strong consensus in favour of X or Y, or that it was a complicated issue requiring those particular nuances to be felt.

There was recently a story about the MAI in our Vancouver media. It featured two opposing views of the MAI, one from the Fraser Institute who was in favour, and the other from the Council of Canadians who was opposed to the MAI. In that story, no information was provided about the MAI or about the issues. The educational content of that program was zero. The story's focus was on opposing views and divisive policies.

The media can present a story in such a way as to provide an under-the-story message, thus increasing the sense of social dissidence beyond what the reality really is. Often, life imitates art in these things, and if people perceive conflict to be normal, they are more inclined to adopt conflictual behaviour. There is enough psychological support for that. I fear that my worry is not baseless.

Senator Robichaud: Would this have a direct effect on trust?

Mr. Helliwell: It would have a direct effect on social trust, on individual trust.

The Chairman: This has been an interesting afternoon for all of us. I wish there were time for you to expand on your statement that globalization is "globaloney". What some of us understand by globalization is the ability of some corporations to move their production facilities, at will, to various parts of the world, to lower-cost regions of the world. Consequently, there is less need for companies to maintain permanent or integrated workforces. Hence, an increasing number of people in this country have part-time temporary jobs, with little security, few benefits and, indeed, low pay. That is contrasted with another group in the workforce who have reasonably secure, reasonable well-paid jobs with decent benefits. The phenomenon of a growing proportion of the workforce in temporary, part-time, low-paid work is attributed by many to the forces of globalization and technology.

The second aspect of globalization that keeps coming up is the question of capital flows, the instantaneous movement of capital around the world and the ability of the hedge funds, backed by the banks and other speculators, to turn entire national economies on their ear. That is what has happened in Asia in recent months.

I would not say that the governments of those countries have very much freedom of action. They have the freedom to do what the IMF is telling them to do. I am under the impression that a great deal of the problem was not really of their own making. You, as a professional economist, may want to correct me on that. I would like some comment on it.

In your brief, you quote Professor Tobin. I assume that it is the same Professor Tobin who has become famous for the proposed "Tobin tax". So far, that has been a non-starter for some reason, perhaps because the United States was not interested in it.

The questions that arise are the Tobin tax on those capital flows and the idea of a social component in trade treaties. Perhaps we have unfairly attributed elements of an approach to the economic and social fallout to the forces of technology and globalization. If that is unfair you can certainly tell us.

Every trade treaty that any country enters into involves a surrender of some sovereignty. With a trade treaty, you voluntarily accept some constraints on your freedom of action as a nation. In the past 10 years, we have signed the free trade agreement with the United States, NAFTA, and the WTO, the successor to the GATT.

We have had before us, not in the legislative sense but in front of the government and public opinion, the proposed Multilateral Agreement on Investment. Do you believe that the constraints that we have accepted through those treaties, and even through a proposed MAI, are entirely appropriate? Have they been good for our economy, or is it not important, not significant in terms of constraining our governmental freedom of action?

Finally, there is the whole question of a productivity gap, which is the higher cost of doing business in this country. Of course, "the higher cost of doing business" is just a polite way of talking about higher taxes.

Next is the whole question of social capital. If it is like any other kind of capital, is there a danger that it can be hoarded by people, that people who have it want to exclude others from enjoying it?

In this country, if it is really a community of communities, are we talking about social cohesion within a multiplicity of communities? Does that add up to a social cohesion in the country as a whole?

Mr. Helliwell: Let me start with the questions about social capital and cohesion. It is quite right, as your question suggests, to think of it existing in communities at all dimensions. Putnam emphasizes the importance of face-to-face contact in these communities.

From the perspective of the nation, one of the reasons that national trade densities and capital movement densities are so much tighter than the international ones is that there is a pool of shared information, trust and institutions that makes it less costly and risky to do business with those you know and trust as opposed to those abroad.

Foreign capital came in too fast to those countries that had trouble. It gave them over-valued exchange rates and much more capital than they knew what to do with, and then something went wrong and they all tried to pull out. One reason for that was that they were coming in last and they did not know what they were investing in. Therefore, they were in trouble. Capital from far away tends to be last in and first out, which sometimes causes more problems than it solves.

The discussions yesterday at the UN were precisely on the issue of capital mobility and the architecture of international financial institutions, so I can tell you a little bit about the experience of affected countries and what the perceived opinion is. First, on the tax side, proper income tax treatment of international capital flows would be much more effective than a Tobin tax and hard to achieve. However, one of the reasons that this capital sloshes about is that the profits on it are often booked through a tax haven, which then doubles the profits from what they should have been or what they would have been relative to other kinds of activity. That would be an important new kind of international treaty, that is, harmonization of taxes on capital income. It would stop countries from being pulled by the capital mobility forces you are talking about, just having much lower tax rates on capital and labour income because labour is less mobile than capital. So you have low rates on capital to stop it moving. The world would be a better place if all countries had a more equal level of tax on capital and income.

There was some feeling that part of the problem for the Asian countries was not related to high capital and mobility but that both the banks lending to the southeast Asian countries and the banks borrowing did not apply proper prudential standards of foreign exposure risk. It was, in part, internal standards as well as bad judgment on the part of the bankers. They lived with a situation of fairly stable exchange rates and did not understand the risks inherent in an unmatched foreign exchange portfolio.

So, everyone would agree that international mobility would probably be less if banks kept balanced foreign exchange books, just as our banks do. There is now a view that proper regulation and exposure of the banks' foreign exchange risks could have prevented that problem, just as the 1929 stock crash could probably have been avoided had there not been the same ability to purchase on margins at that time. Hence, the next generation's institutions are developed in order to solve the problems of the last. There are institutional changes under way in those countries.

I was at a conference last week in Malaysia that dealt with those issues. It was apparent that they were looking at matters of corporate governance, of the structure, regulation and survey of banking sectors, and that they will not want to be caught out again.

Malaysia has also put in a lot of restrictions on foreign capital mobility in an effort to ensure that, whatever type of system they have, they will not be taken hostage in the future. For most countries, it will make sense to do as Chile has done, that is, to put some tax on incoming short-term flows. The effect of that will be to prevent the countries that do everything right from becoming the darlings of financial markets and, therefore, from drawing in all the capital, which has the effect of raising the currency and twisting the trade balance, thus creating unemployment followed by a current account imbalance, which then causes the currency to drop, and the cycle to begin again. Therefore, to stop that cycle altogether, short-term money should be taxed as it comes in, for a start. It does not have much salience for a country like Canada; however, it has some potential for being adopted in more countries. It is too early to tell, but that is my reading of the discussions.

Turning to the MAI, it has been a controversial item. I referred to the lack of public information about it. The media conducted an information-free contest on their time rather than talking about the issues. Before the MAI was dead, had I been asked, I would have said, "The MAI is dead, but let us talk about the issues that might lead somebody to want to have an MAI and what you might want to put in it."

The MAI, as it was written, was really a charter of rights for corporate investors. Most of those who design charters of rights properly make them charters of rights and responsibilities. There should be some mix of rights and responsibilities.

You spoke of labour standards being important. Environmental standards are important, social standards are important. It would be very easy. I used to argue in environmental circles that the right way to achieve international environmental standards would be to put them in a code of conduct for direct investors. That code of conduct would include the regulation that no country will undertake a direct investment project in a foreign country that could be constituted as environmental dumping because they will agree not to use environmental standards that are worse than some agreed international standard. That agreed-to standard may not be quite as high as that in their own country, and they could choose to exceed that standard, but at least they will not fall below some international standard. The same applies to social and labour standards.

If you had an MAI that set out the ground rules for investors so that investors would not be tempted into environmental dumping because none of their competitors would be allowed to do it, many people would be prepared to take socially responsible action. The trick is to have a set of rules that everybody agrees would make the world a better place, and then provide some guarantees that everyone will live by. Everybody has to live by the same set of rules.

That is the social order that your committee is considering in its international guise. A properly designed MAI could be an important part of that. It would be different from the MAI that was under discussion. It would have different implications and consequences, but it might characterize a better world order than the one we are backing into.

I have dealt with all of your questions except the one on the productivity gap. I have spent a great deal of time studying that issue; however, I cannot talk about it this afternoon.

The Chairman: As to the FTA, NAFTA and the WTO, do you take it that the constraints we accepted are entirely appropriate, good for the economy, and/or unimportant in terms of our freedom of action as a country?

Mr. Helliwell: The WTO is, by and large, all good and not bad, seen from a global perspective. The overall gains in Canada's share of them are almost certainly more than the cost. The FTA is a more clouded issue. The FTA has created more trade between Canada and the United States than anyone guessed. However, the productivity gains that are said to be coming out from it have not appeared.

One view as to why that is says that at the pre-existing levels of trade intensity between the two countries -- even though they were a fraction of the inter-provincial ones -- we had probably managed to wrest the main comparison advantages and scale from trade so that the extra trade we have generated since then has not had a very big productivity dividend. It is too early to be sure about that.

If that is true, then it means that the FTA did not produce a whole lot . If it did not produce many gains, it was then a special two-country arrangement that did not contribute easily to the world, so you would have to say it was in the class of things that did not make much difference.

The Chairman: The same applies to NAFTA.

Mr. Helliwell: NAFTA is more important, not for Canada, but for Mexico, because NAFTA was a very big move for Mexico, potentially a move that will transmit itself further down into Latin America.

The Chairman: Mr. Helliwell, we thank you very much for a stimulating and interesting afternoon.

This is our last meeting before the holidays. Let me take the occasion to wish each and all of you and your families a most happy Christmas and a Happy New Year. Let me extend the same wishes to our clerk and to all the staff here who do so much to make our life pleasant and agreeable.

The committee adjourned.