Archive for May, 2010

Reinventing CIDA – Second Thoughts

May 20, 2010

“Development is a messy process.” Rieffel and Fox (2008)

Abstract
Reinventing CIDA is the twenty-fifth review of Canada’s main aid organization. Does it offer something new in an already crowded field where previous proposals appear to have failed? Yes, in the sense that it updates and takes advantage of the extensive recent literature on aid administration and offers in Chapter 3, “Introducing Incentives and Competition,” a series of techniques for administering aid in order to increase its probable effectiveness. An extension of this study would be use of the literature on how organizations and contracting is organized to deal with the type of problems faced by CIDA. Other government policies face similar problems especially in areas like research funding of all kinds. Viewing aid delivery in an industry context where agencies and multilateral institutions compete against and collude with each other is another possible approach as is the collection of case studies of successes and failures. One conveniently ignored aspect of aid is immigration policy that seeks to attract those people with the skills that are most needed in the aid recipient countries. The taxation of Canadians for the benefit of foreigners is supported for humanitarian assistance, but less so for development purposes where there are obvious unsolved needs at home for aboriginal peoples.
Report is posted at http://www.cdfai.org/PDF/Reinventing%20CIDA.pdf

INTRODUCTION
For 2010, Canada’s aid budget is about $5.2bn a year (0.33% of GDP) of which CIDA’s share is $3.7bn. In relative terms, the aid budget is about $5 per person per year in the 20 countries that are currently the foci of CIDA’s aid, or perhaps $1 per year for the total population of developing countries. However looked at, the sums received are small change and will not make much of a developmental impact. If they are spent on investment such as schools rather than on current consumption, the impact will be somewhat greater. The annual cost to Canadians is about $158 per capita.

The $5.2bn can be viewed in other ways. It represents the moral obligations that Canadians have to assist those in other countries and is the equivalent of domestic transfers or welfare payments. It also provides publicity for Canada in different countries and international organizations by allowing diplomats and politicians to show that something is being done, especially when votes are needed, for example to support Canada’s bid for a seat at the UN Security Council or in other international fora. All developed countries are similarly motivated, so Canada has to play this game in the interests of trade, investment and Canada’s international ambitions.

Whatever the purpose of aid expenditures, one question concerns the best way to organize aid in order to get the biggest bang for the buck internationally, both directly in terms of aiding development and indirectly to promote Canada globally. It is the organizational dimension of aid that is the focus of Reinventing CIDA, authored by Barry Carin and Gordon Smith and released in May 2010, and an organizational and contractual response that is proposed.

By focusing on the organization of aid delivery, various issues arise.

1. The objectives of any expenditure are often difficult to define and measure. If it is a school, hospital or factory then the purposes are clear in terms of buildings and equipment. If it is to provide a service such as education, policing and health care, then the expenditures are partly on wages and the outcome is hopefully more educated children, a safer environment and better health, none of which will occur immediately. In these cases, it will always be easier to quantify the financial inputs than to evaluate the results, which if measurable, occur over time.

2. Once an aid program is in place, vested interests arise that support the activity and lobby for its continuation. Rent seeking behavior is endemic to any government program where funds are involved. It occurs with respect to culture, agriculture and many other sectors aside from aid. If federal political constituencies have populations from parts of the world that are the recipients of aid, the diasporas in Canada will lobby their MPs for their countries and the MPs may support a more liberal immigration policy and aid for these regions. Over 200 federal ridings (out of 308 that may rise shortly to 338) are estimated to have significant numbers of ethnic groups. MPs are loath to discuss immigration reform in Canada for fear of offending potential voters. In the same way MPs support aid to certain countries and projects in order to enhance their prospects for re-election. These are some of the impediments to discussing revisions to both immigration and aid policy.

3. The two sets of policies often have diametrically opposed objectives. Immigration is a form of reverse aid. Canada and other countries target and compete for those economic immigrants who are the more highly educated and trained persons in developing countries. Aid policy carefully ignores this conflict and aid and immigration are kept in separate silos hoping that no one will notice. Diplomats in Canada from developing countries are not so blind.

4. The boundary of what is included in aid policy is ill-defined. Public opinion supports humanitarian assistance in cases like Haiti and following the Tsunami in Indonesia and other parts of SE Asia. Support for general development funding abroad is much weaker, especially when the domestic circumstances and needs of aboriginal peoples in Canada are noted. Canada has unsolved developmental problems at home that should be a priority is one argument used. CIDA tends to get whipsawed between allocating its limited funds between humanitarian and development assistance. This further limits the sum annually available for development aid. The location of donor and recipient in different countries explains why there is often lukewarm support for development aid, which is an international form of welfare transfer, as opposed to humanitarian assistance which arises for different reasons. When the transfer is made internally then domestic taxpayers assist domestic recipients. With aid the monies go abroad. For example, recent events in 2010 have shown how German holders of Greek bonds are reluctant to help bail out Greece.

5. CIDA outsources much of the delivery of aid to NGOs, consultants and firms. This requires the establishment of a bureaucracy in CIDA and abroad to manage the outsourcing thereby diverting funds from the agency’s main objectives. Any publicly financed organization will have some administrative component but NGOs and others find that the red tape and reporting now diverts too much time and money from the actual delivery of aid. The two authors note (p.6) “Many contractors, including the present authors, have sworn off working with CIDA because of unreasonable and unrealistic reporting requirements.” I use to think this was CIDA’s fault, but now conclude it results from the aura of accountability that surrounds all types of government expenditures due to scandals associated with past misappropriation of funds in other policy areas. The public is now more likely to demand accountability and the elected representatives and the bureaucracy have naturally responded with tighter controls – except when it comes to auditing MPs allowances. Perhaps a better balance will evolve in the future. On the receiving end, Tanzania declared January 2010 as a NGO free month so that their officials could get on with some work.

6. There are other policy areas with publicly funded mandates that have characteristics similar to CIDA which seem to work reasonably well. All funding of research and development whether for health care, academic research, industrial purposes and cultural activities like plays, books, movies, music and video have features that make it difficult to know what will work ex ante, who are the best people and organizations to fund, and how to make recipients of public monies accountable for their use. Academics and others are involved in these processes all the time as applicants for research funds and as referees for other applicants. They learn how to identify phoney applications and to evaluate performance reports submitted to the funding bodies. Not all the misleading submissions and reports are caught but many are. Applicants do game the systems in place but these can be managed. When searching for an organizational structure for aid administration by CIDA, one can look to other policy areas where some or all the same conditions apply.

7. What literature is available to address the organizational needs of aid? Reinventing CIDA focuses on an institutional approach by reviewing how CIDA has operated in the past and using the often negative appraisals that have arisen and the frequent reviews made of its operations – 25 reports over the past 40 years (p.4,fn.8). The four principal recommendations propose that CIDA should be “liberated” and “reinvented” by giving it a focused objective, by becoming a Crown Corporation, by adopting new approaches emphasizing incentives and greater competition among those delivering assistance, and by addressing a number of obstacles to meaningful reform (pp.v-vi). The report includes references, amongst others, to Burnside, Collier, Dollar, Easterly and Moyo, all of whom have been critical of the aid process. A missing name is Peter Bauer who in 1972 wrote Dissent on Development and with Basil Yamey (my PhD supervisor) The Economics of Under-developed Countries in 1957, suggesting perhaps that “everything old is new again.”

8. An alternative approach to exploring the future role for and organization of CIDA is to step back and ask what is the nature and purpose of aid, what are the contractual relationships between aid donor and receiver, and what type of organization(s) can best deliver aid. These conceptual issues can then be related to available empirical research that measures and ranks individual countries in terms of their aid performance. If a rating agency for aid is required (pp.29-31), similar to a bond rating agency, it needs to be based on conceptual foundations. Where does one look for such literature?

9. One starting point is Why do aid agencies exist? by Bertie Martens (http://www.oecd.org/dataoecd/18/61/34353531.pdf). His discussion starts from Ronald Coase’s question, why do firms exist, to ask a similar question re aid agencies. Coase’s work led to a Nobel prize in economics and the foundation of theoretical and empirical work on the nature of the firm and organizations. Concepts such as transactions costs, moral hazard, adverse selection, asymmetric information, non-aligned preferences and conditionality are used to explain how organizations form and decide either to internalize transactions or to contract out to other firms. If aid is a way to transfer tax revenue raised in one country to recipients in another, then the successive stages of transfer offer alternative ways to organize these transactions. The donor-recipient aid gap is filled with various combinations of in-house and arms-length transactions from taxpayer to donor government, aid agency, NGO, private firm and often more than one organization in the aid receiving countries. There is little overlap in the literature references in Reinventing CIDA and in Why do aid agencies exist? reflecting the focus on CIDA in the former and on aid delivery in the latter, with implications for the type of agencies best suited to administer aid.

10. A further approach, based on another bloc of literature, would be to look at aid agencies as an international industry with national agencies and multilateral organizations competing and colluding with each other for the delivery of aid. What mix of competition/cooperation is desirable for delivering effective aid? (I have not developed this line of analysis but it may be worth considering).

11. The proposal for a rating agency for aid delivery (p.29-30) is useful and has foundations in the work of the OECD, Brookings and the Global Development Institute. On best practices in administering aid, Canada ranks 21 out of 37 based on five criteria of aid delivery by donors. Rating aid effectiveness is a companion issue and would benefit from case studies of successes and failures. Donors and their recipients would be unlikely to report accurately on failures without some independent means of review.

12. Case studies of actual projects provide learning experiences. Often the disasters get more attention as they are newsworthy, such as Mark Steyn’s reporting of how Sri Lankan officials engaged in a shakedown of Oxfam officials who were trying to get aid to tsunami victims (p.46). My visit to CIDA projects in a developing country found sewing machines which had been stolen within days of delivery to a village, and the construction of a brick factory where no bricks had ever been made. When meeting with the local council to discuss the projects, the main request was for a new prosthetic limb for the local leader. In another instance involving training, the aid recipients requested that we hand over the funds and let them get on with job. But other examples deal with the provision of clean drinking water, vaccines for health care, materials for schools and the building of roads. There are good and not so good news stories to report and learn from.

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Reinventing CIDA – Some thoughts

May 15, 2010

On May 12th 2010, I attended a presentation by Barry Carin and Gordon Smith, both from the University of Victoria, on their latest publication entitled Reinventing CIDA. It attracted an overflow audience and vigorous discussion. Undoubtedly many in attendance were present or former CIDA employees or those who are, or are not and would like to be, recipients of CIDA’s largesse.

The presentation was first rate and the content thought provoking. It was the twenty-fifth review of CIDA in 40 years, an average of about 1.3 reports every twenty four months since 1969 (fn 8, p.4). To maintain this average, there must even now be a new report in the making. It is difficult to think of any other government organization that has received such scrutiny, suggesting that it is a difficult policy nut to crack, which it is.

As I listened, I started scribbling notes and will try to make these more coherent in a later posting, once I have reread the report. I began reacting to the analysis during the oral presentation before obtaining a copy to study. I have since read it once and learned a great deal more than I was able to absorb during the meeting. It is short, well written, fully documented and at times humorous.

My neighbor in the audience noted that I had jotted down Three Cups of Tea on my copy and asked me why. It is the title of a book authored by Greg Mortenson who singlehandedly took the initiative to raise private funds to build schools in the remote Karakoram Himalaya area of Pakistan. They provided education for both girls and boys in places where there was little if any schooling for either sex and often no school buildings at all. At last count there were 55 schools in what is Taliban breeding ground with no fondness for female education. What lessons are there from this obvious success story, by an individual with no public funding, in one of the harshest regions of the world? Some have suggested that Mortenson should be nominated for the Nobel Peace prize.

Following are some initial reactions to Reinventing CIDA in no particular order.

1. Canada’s annual aid budget is about $5bn. What does $5bn buy in 2010? Not much. In Ottawa, a detached bungalow costs about $330,000. The aid budget in 2010 would buy about 15,000 bungalows a year, spread out say 5,000 to each of all of Africa, Asia and Latin America. Use whatever good or service price you like and see how much can be purchased and distributed throughout the developing world with $5bn. If the aid is sprinkled globally, it will have a negligible impact. Canada is not doing much if the annual aid budget is the measure used. Mortenson’s schools cost about $16,000 per school to construct, staffed by local teachers and serving a number of children now and in the future with, I am guessing, strong prospects for aiding indigenous development.

2. Remittances from Canada mainly to developing countries (p.24) are $10bn a year through official channels and about $5bn more through informal channels, that is three times Canada’s official aid budget. Should remittances be considered a type of aid? It depends what it is used for, but we know that Canadian citizens, permanent residents, and foreign workers send money abroad. There is no large bureaucracy paid to administer these transactions although various financial institutions charge a fee to make the transfers. Some of the money is undoubtedly linked to less than savoury economic activities, and the informal $5bn is probably a low estimate of what is part of the underground economy, which cannot be measured accurately. Remittances are an increasingly important item in the balance of payments of many countries and may have a greater stimulative impact on developing countries per dollar spent than the dollar spent on official aid from Canada or anywhere else.

3. Still with remittances, the costs of transferring monies from Canada to India and Vietnam are 11.8% and 12.6% respectively. From the US the respective costs are 3.5% and 3.7%. Someone or some institutions have found a cozy market in Canada sheltered from competition, something we should be able to cure domestically and help those in developing countries. The comparative costs, US and Canada, suggest there is upward pressure to expand the informal market for remittances from Canada in order to avoid the higher costs.

4. When comparisons are made of a country’s aid as a percentage of GDP, some come off better than others – if a higher percentage is considered to be the objective. But is this a fair comparison? If countries like Canada, the UK, Germany and France (leave aside the US) are providing military support to operations in developing regions like the Middle East and Africa, is this not a contribution to at least the possibilities of future peaceful development, some form of democracy and human rights for these unfortunate countries? I would argue that narrow aid budget comparisons may not provide evidence from which to draw conclusions about donor country contributions.

5. What about the reverse flow of aid from developing to developed countries? Our immigration policy is harmful to development in poor countries that is CIDA’s mandate. Canada encourages the inflow of skilled immigrants to Canada, thereby decreasing the stock of skills where they are most needed. I have never understood the morality of this policy when it is just these people that developing countries need. In 2008, about 149,000 economic migrants came to Canada, most from developing countries. I find unpersuasive the arguments that they send back remittances and may even return and help their former homelands. They are more likely to encourage family members to follow them to Canada. I would. Immigration and aid policy operate in separate silos and their counter effects are seldom raised except by diplomats from these countries.

6. Designing institutions to perform certain functions and deliver particular services is central to the report. Here I am reminded of previous policy related research in which I was involved a longtime ago. How do you design programmes to organize and fund industrial research and development (Rand D), to promote the agricultural sector, cultural activities, health and education, all of which receive government funding, and there are others? Each is an idiosyncratic activity but each has institutional and funding features that may assist in designing an institutional model for aid. Consider the case of R and D and its similarities to aid and development (A and D).

7. Research is an activity similar to exploring unknown lands. You know generally where you want to go. You don’t quite know what you are looking for and certainly not what you will find and how long it will take and cost, but you are motivated by knowing that you might make a discovery that will be valuable to yourself , your country and perhaps even humanity – in that order. Research is an ill-defined process and the most valuable results occur more by chance than good planning. There are opportunities for private and social gain and many chances to misappropriate funds because research is difficult to monitor. Over time many vested interests arise who engage in rent seeking behavior. This does not appear to be the sort of thing that bureaucrats should be involved in given their training to monitor the prudent use of public funds with the Auditor General, Parliament, the press and lobbyists looking over their shoulders. And yet federal and provincial governments organize processes both to undertake R and D, for example NRC (the National Film Board in the cultural arena), and to fund private sector R and D through grants, subsidies and tax incentives. Administering these policies requires public servants to act more like venture capitalists by administering the use of public funds in activities where there is a less than 5% chance of success. Their training in managing the prudent use of public funds does not promote such actions. Reporting annually that 95% of approved expenditures failed is not something a bureaucrat would relish doing, especially year after year.

8. My argument here is that by looking at how other government supported activities in unlikely and risky situations are managed and institutions set up, we may find pointers for reinventing CIDA. In the future I hope to expand on these comparisons as well as react to other parts of the report.

I hope the aid conversation proceeds in a manner that is more fact based and emotional free than occurs for the issue of environmentalism, but I am not overly optimistic. Reinventing CIDA is a good starting point. It puts Canadian aid policy in the starting gate once again. For a reprise of “everything old is new again” see various versions available on YouTube.

Immigration – the demographic deficit

May 12, 2010

Two debated aspects of immigration policy are its relationship to the demographic factors associated with an ageing Canadian population, and the ease with which newcomers are integrated into the Canadian labour force. These topics throw light on whether and how immigration can address the problem of the Canadian work force becoming a declining share of the Canadian population, termed here the demographic deficit.

Demography and economics

Demography receives little attention in economics, although introductory texts frequently refer to the teachings of Thomas Malthus (1766-1834). Malthus, a parson, promoted abstinence because he argued that population growth increased faster than the production of food to support the growth with unfortunate results, especially for poor people. In the long run, he argued, a declining population would address the problem. Today, he might be surprised that the global population of about 1billion in his time (1810) doubled by 1930, doubled again by 1980 and has now reached over 6 billion in 2010 and is still increasing but at a slower rate.

What Malthus failed to forecast was the increase in agricultural production that has supported, with some localised famines, a larger global output of food and other products. Rather than an overall production shortfall, the current problem is that farm surpluses in some areas of the world are not distributed to places in need of them. He was, however, right to point to population factors in understanding the growth prospects for individual national economies.

The current demographic time bomb is now different, and thought to be the age profile of individual nations, where the population is ageing and the birth rate declining. It is now less than the 2.1 children per woman of child-bearing age that is considered necessary to retain the current population, and needs to be above 2.1 to increase population size. Here demography meets immigration policy with the latter seen as one way to address a declining and/or ageing population, an option proposed by some for Canada.

In the next sections I examine two aspects of the relationship between employment and immigration. The first is the contribution that immigration can make to the skill profile and size of Canada’s population, and the second is the integration of immigrants into Canada’s labour force.

The deficit

Demographic factors are leading to a situation where the Canadian labour force will become a decreasing share of the total population. There will be more dependents, old and young, than there will be persons in the labour force. Increased immigration is one proposed solution. Is it? Yes, in the sense that all current members of the labour force are either the result of recent or past generations of immigrants. Without them, Canada would have no labour force.
However, from the perspective of current immigration flows, the labour contribution of newcomers is minimal today and will take time to have an impact on the future size of the labour force. Consider the latest figures for incoming permanent residents of just under 250,000 persons annually categorized as follows: Family Class 26.5%,;Economic Class 60.3%;Refugees 8.8%;Other 4.4%.

The 149,047 economic migrants, the largest category in 2008, are the ones who might be expected to enter the labour force. Of this group, 61,109 or 41% are principal applicants and the remaining 59% dependents accompanying them. The principal applicants added about 0.4% to the Canadian labour force of about 17 million persons. Some dependents may also work at once and certainly the younger ones will in the future. Relative to the total intake of permanent residents in 2008, only 25% will likely add immediately to the current labour force. The contribution of current immigration is positive but small and spread out over time.

Should we worry about this? My answer is no, because in the economy there are forces at work that automatically make adjustments to both shortages and surpluses. In fact, adjustments are taking place as we speak and historical examples show how this has happened in the past. When shortages occur prices (wages) rise, and when surpluses arise prices (wages) fall. Suppliers and customers respond to these changes in familiar ways. Consider the following:

1. As wages rise due to labour shortages, capital is substituted for labour. The automotive production line now has far fewer workers and far more robots per car assembled; banks supply cash from machines rather than tellers; car owners pump their own gas and servicing occurs every 6000kms as opposed to much shorter distances; telephone calls are switched and connected automatically in contrast to banks of operators doing it manually; photographs show Doukhobor women pulling ploughs – these were later replaced with steam tractors; restaurants offer self-service as opposed to waiter/tress service; call centres are outsourced to cheaper sources of labour; typists are replaced by individuals using word processors rather than dictating documents for later typing – typewriters are seldom found in offices or the home. The examples are endless especially with the introduction of information technology.

2. Labour productivity has increased due to technological change. The most glaring example is the agricultural sector that has benefited as a result of rising crop yields due to fertilizers, improved seeds and management practices, as well as increasing use of machinery. We now produce more output with less labour. The share of farm workers in the Canadian labour force has declined both absolutely and relative to other sectors (from one million and 19.6% of the labour force in 1950 to 306,00 and 1.8% in 2010) while Canada’s population have increased.

3. When there is a shortage of labour or wages rise, firms may outsource work either abroad where wages are lower or to other parts of the country where there is a labour surplus. In recent years, workers have migrated internally from Eastern Canada to the resource boom in Alberta.

4. The military has adapted by using drones as opposed to piloted flights and equipment rather than persons to detect and disarm IEDs. Wartime is a good example of how adjustments have occurred. In both world wars, the military absorbed a big chunk of the Canadian labour force while at the same time domestic production expanded with women drawn into the work force. At war’s end, men replaced women for civilian production but since then the participation of women has increased and there is still room for further increase. Policies such as subsidized childcare assist these changes.

In sum, the evidence suggests that there are effective ways to cope with labour shortages aside from the minimal contribution of increasing immigration which has other economic and social costs and consequences. This is not to argue against any immigration but for being flexible to adjust flows and types of migrants as domestic conditions change, and for starting a dialogue on what the total level of population should be as well as its age and skill distribution. I also recognize that there may be more acute shortages in some occupations, such as assistance for the elderly and the young, and for seasonal farm workers, than in others. At present this is partly addressed in Canada by the use of temporary foreign workers.

Singapore is one example of how a small country, but as large as Norway, has addressed the problem. Out of a total population of 4.8 million, there are 3.6 million residents of which 3.2 million are citizens and the remaining 400,000 permanent residents who could become citizens, similar to Canada’s intake of permanent residents. The remaining 1.2 million (4.8 – 3.6) are non-residents or the equivalent of Canada’s temporary foreign workers. Thus 25% of Singapore’s total population, and a higher percentage of the country’s labour force, consists of temporary foreign workers. This represents one example of how a country has used its population policy to meet its employment needs.

Job certification

A second and related aspect of the demographic deficit is the issue of incorporating newcomers into the labour force. These persons are educated abroad and may have received training for skills required in Canada but not at a level that meets Canadian standards. There are repeated stories of Asian trained doctors who end up driving taxis in Canada because the foreign medical training does not meet Canadian standards. In part this is the issue of certifying foreign credentials.

Migrants arrive in Canada with certain levels of education, particular training and skills and varying degrees of ability to work in one or both of the official languages, French and English. In terms of educational and skill levels there is a problem in comparing standards in different countries as well as evaluating qualifications from abroad as a result of different types of training received. It is similar to the problem of evaluating foreign trained students that apply to Canadian universities.

The Ministry of Citizenship and Immigration (CIC) has worked on certification issues but a number of problems remain. First, within Canada, each province has requirements to qualify as a tradesperson or a professional. This often applies to Canadian born persons as well, and is one of the costs of the way we conduct federalism which results in restricted mobility within Canada to practice a certain type of work. This situation is unlikely to change soon.

Second, there are differences in the quality and content of educational and training programs in different countries. A barber trained in Asia may be immediately employable in Canada to cut hair. A surgeon trained in Asia may not have had access to the same equipment and techniques used in hospitals and universities and needs to undertake further training. The same is true for a foreign trained nurse who will be expected to work with equipment in Canada with which she or he has had no experience. The lack of comparability of what may appear to be a similar skill set creates a barrier to immediate employment in Canada.

The impact of different standards is evidenced by Canadians who travel to Mexico and other countries for dental work and other medical procedures, and who find on their return that indeed the cost was lower but the work was not performed satisfactorily and has to be redone resulting in higher costs for the patient.

I have had medical treatment in the US at my own expense due to wait times in Canada. Standards in the US are in my view similar to those in Canada, but I would have thought twice about getting the treatment in a number of other countries even if it was cheaper. Quality differences exist for the receipt of any service within Canada as well as between Canada and other countries. I can also pay more or less for a lawyer and accountant in Canada but the level of service may differ.

Certification is not the only issue. The language ability of the immigrant can be a barrier to employment even if skill levels are approved. Ultimately, the immigrant has to get a job and this cannot be guaranteed by the state but depends on the potential employer-employee interaction.

Conclusion

In sum, the argument that immigration is a cure for the demographic deficit of an ageing population is only minimally true and gives rise to other issues (education, social welfare and security) that are not generally considered. One way to approach this issue is to consider the question that is seldom if ever discussed, namely what size of population does Canada want. By answering this question, which to me seems as fundamental as deciding what size of family to aim for, we can then lay out the various paths to get there and show the implications of the age structure that the alternatives imply.

Each country is different, but there are examples of countries that have had smaller percentage increases, presumably for policy reasons, than Canada. For example, Switzerland’s total population has grown from 6.2m in 1970 to 7.6m in 2007, with the Swiss share of the total population rising from 5.2m to 5.9m while the foreign share rose from 1m to 1.7m over 37 years. In Norway, the population rose from 3.2m in 1950 to 4.9m sixty years later in 2010. These comparisons are made in order to show that there are alternatives to consider. What Canada needs is a conversation on this topic before deciding on the size and nature of immigration inflows

The Pharmaceutical Jungle – A Second Visit

May 11, 2010

Assessing the nature and impact of the Ontario policy to reduce the price of prescription drugs is like wandering into a jungle without a guide. At each turn you think you know where you are going, but discover you are still in unknown territory.

Legislation, introduced in April 2010, aimed at reducing the cost of prescription drugs in Ontario is motivated by the rising cost of drugs in the health care budget of the Ontario government, and in turn the rising share of health care costs in the provincial budget. Prices of generic drugs dispensed in Ontario are substantially higher than in many other developed countries according to the Ministry of Health.

Initial discussion, motivated by the anger of retail pharmacists and supported by drug manufacturers, has focused on the removal of the promotional allowances paid by generic drug manufacturers to pharmacists as an incentive to stock their brands of generic drugs. The provincial government felt that some or all of the allowances should be passed on to those who pay for drugs in the form of lower prices instead of being absorbed by pharmacists.

At first glance, removing a source of revenue for pharmacists seems unlikely to encourage them to lower drug prices, thus reducing their revenues still further. One needs to turn to other parts of the legislation which contain price control provisions. Under the Ontario Drug Benefit (ODB) program for certain Ontario residents, the government will reimburse pharmacists at 25% of the price of the brand name drug that the approved generic drug replaces. At present, pharmacists are reimbursed at 50% of the brand name drug price.

Price control is the measure proposed to cut drug prices and costs to users. Will it work as the new measures will unleash opposing forces? With the reimbursed price changes there is an incentive for drug manufacturers and pharmacists to increase the price of branded drugs. If these rise, drug manufacturers get more revenue per unit and pharmacists are reimbursed at 25% of a now higher price. How this will be controlled is unclear to me.

The next path to explore requires understanding the various payment methods for prescription drugs. Since only some people are covered by the ODB program, there is the question of whether those covered by private insurance schemes and those who pay for their own prescription drugs will benefit from the lower generic prices. The legislation will determine that the generic prices reimbursed by the Ontario government will be the same as the prices paid by all regardless of how they are financed. Procedures for listing drugs in the Ontario formulary (the catalogue of approved drugs) will ensure that this happens.

In my case, prescription drugs are paid for by a combination of the Ontario Government, Great-West Life and myself. Naively, I expected that I would not have to fork out any cash, except for the tax revenues used to pay for the ODB program, and the premiums used to purchase drug benefits via a private insurer. This is not the case because the ODB has a $100 annual deductible for prescription drugs that kicks in on August 1st each year; after the $100 is exhausted, there is still a fee of $6.11 paid per prescription.

So what about my Great-West Life plan, does it pay the $6.11? Yes and no. The private insurer has an annual deductible of $25 per person or $50 per family renewable on January 1st each year. So in order to pay nothing in my case, both deductibles have to be satisfied. Usually sometime in late July, I pay nothing, but for most of the rest of the year it is at least $6.11 per prescription, and there is an incentive for pharmacists to support regulations that limit the size of any prescription so as to collect more dispensing fees. But remember I and others do contribute to both the provincial plan as a tax payer and through the purchase of private health insurance by my previous employer. Will the privately insured Ontario resident (as opposed to the government insured resident) benefit from the lower generic drug prices? Yes, if the insurance premiums paid for private drug coverage are reduced. Will this occur? I don’t know and neither does the government.

Enter the legislative jungle a little further and you come across other provisions in the legislation that look like ways to pacify the irate pharmacists but will not reduce health care costs. At present, there is an allowable dispensing fee of $7 per prescription; this fee is part of the final price of a prescription which is made up of drug cost plus fee. The proposal includes measures to increase the dispensing fee per prescription from $7 to $8 at once and for further increases up to $8.83 in 2013. In addition, a structure of fees is introduced so that pharmacists in rural areas who have lower sales volumes are not disadvantaged. In fact there will be four types of pharmacy locations depending on the calculation of a Rurality Index based largely on population density. The most rural pharmacies will be able to charge a fee of $11 per prescription at once rising to $12.14 in 2013. On its own, this will be an incentive for pharmacies to locate in areas where there are higher dispensing fees. Of course, other factors influence locations decisions as well.

Our trip into the legislative jungle is not quite over. The proposed legislation will also reward pharmacists for dispensing healthcare advice, a service which if presently delivered has been unpaid, or has been paid for out of general pharmacy revenues. A pharmacist as business person might view giving advice to potential buyers as a useful competitive measure to attract customers to her or his retail outlet as opposed to that of a competitor. Pharmacists argue that they are professionals like doctors who should be paid for these professional advisory services, rather than considered as retailers of government approved drugs often mixed with an array of other products, as seen by a visit to a chain operation like Shoppers Drug Mart.

Who will pay for this advisory service and how this will occur is unclear? Will patients be required to receive counseling? Who decides? Is the pharmacist liable for the advice given in the same way a doctor is liable? If so, will they carry liability insurance and does this become an increased cost? So far the Minister has indicated she “…would be open to pharmacists’ views and recommendations related to the specific patient services that should qualify for new compensation, and what fair compensation should be.” As a customer, I have visions of being taken aside by my pharmacist to receive this service.

In sum, I have attempted to identify some of the consequences of the proposed prescription drug legislation in Ontario. I have suggested how some prices and costs will rise and some fall. What the net impact will be now and in the future on patients, taxpayers, pharmacists, drug companies and governments is unclear to me. It will cause the parties to respond in particular ways with short and long run effects that always occur in such circumstances. In the interest of cutting health care costs, the government has crafted legislation aimed at doing this, but with additional provisions that provide a sop to those who feel adversely affected. The pharmaceutical industry is not without influence at election time.

One approach to cutting drug costs, employed in New Zealand and elsewhere is for the provinces to set up a central buying agency which uses its buying power to decrease the prices of generic and even some brand name drugs. Provincial pride is one reason why each Ministry of Health in Canada takes an individual approach and fails to get the benefits of collective action.

    JUNGLE REFERENCE


To help explain the policy jungle I am indebted to Kipling’s Jungle Book series which includes the following description (http://en.wikipedia.org/wiki/Mowgli):
“…how Gisborne, an English foreign ranger in India at the time of the British Raj discovers a young man named Mowgli, who has extraordinary skill at hunting and tracking, and asks him to join the forestry service. Later Gisborne learns the reason for Mowgli’s almost superhuman talents: he was raised by a pack of wolves in the jungle.

Kipling then proceeded to write the stories of Mowgli’s childhood in detail. Lost by his parents in the Indian jungle during a tiger attack, a human baby is adopted by the wolves Mother (Raksha) and Father Wolf, who call him Mowgli the Frog because of his lack of fur. Shere Khan the tiger demands that they give him the baby but the wolves refuse. Mowgli grows up with the pack, hunting with his brother wolves. In the pack, Mowgli learned he was able to stare down any wolf, but his unique ability to remove the painful thorns from the paws of his brothers was deeply appreciated as well.

Bagheera (the black panther) befriends Mowgli, because both he and Mowgli have parallel childhood experiences, as Bagheera often mentions, he was “raised in the King’s cages at Oodeypore” from a cub, and thus knows the ways of man. Baloo the bear, teacher of wolves, has the thankless task of educating Mowgli in The Law of the Jungle.”

I have not yet decided which animal corresponds to which player in the pharmaceutical jungle but I am narrowing in on matching the two sets of characters. I would like to think of myself as Baloo but still have too much to learn about drugs and too little time to learn it.