SASKATCHEWAN ECONOMICS JOURNAL Volume 5 2003 Edition

i SASKATCHEWAN ECONOMICS JOURNAL Volume 5 2003 Edition

ARTICLES

NATHANAEL J GLUBISH THE FREE RIDER PROBLEM AND THE MODERN-DAY CHURCH: AN ANALYSIS FROM A PRIVATELY-PROVIDED PUBLIC GOOD PERSPECTIVE 1

ANNAMARIE SENKIW QUEBEC’S CHILD CARE POLICY 15

SHAUN DRIVER ASSESSING THE SOFTWOOD LUMBER TRADE DISPUTE BETWEEN CANADA AND THE UNITED STATES 25

HARRY H. CHARTRAND THE FUTURE OF GENOMIC IPR’S 41

KURT MANZ SOUTH AFRICA AFTER APARTHEID: A CASE STUDY 61

JASON HEIT RURAL DEVELOPMENT AND THE AGRARIAN REFORM PROCESS IN CHILE 71

ZIVA KOKOLJ EXPLAINING HOUSEHOLDS’REPRODUCTIVE BEHAVIOR: AN ANALYSIS OF COMPETING MODELS 83

Graduate Editors: Undergraduate Editors: Faculty Advisors: Christopher Hajzler Ziva Kokolj Morris Altman Adrienne Robb Kara Mitchell Mobinul Huq Daniel Hawkins ii

The SASKATCHEWAN ECONOMICS JOURNAL is an annual publication. It is a joint collaboration between the graduate and undergraduate students of the Department of Econmics at the University of Saskatchewan. The Journal is dedicated to providing opportunities for students to expand their knowledge and appreciation of economics through debate and publication on relevant issues in the field.

One goal of the Journal is to encompass as broad a range of relevant topics as possible. As a result, the Journal solicits submissions from various other departments in the college of Arts and Science and the colleges of Agricultural Economics, Commerce, and Law. The Journal also invites the submission of manuscripts from universities worldwide. Our hope is to encourage a deeper understanding through discussion of economics oriented issues across the academic spectrum.

To Potential Contributors: The Saskatchewan Economics Journal is interested in publishing any papers in economics of superior quality. Please send two complete print- ed copies of submissions, double spaced, using underlining in place of ital- ics, and footnotes rather than endnotes; suggested length 40 pages maximum, notes included. The use of recycled paper is encouraged. Please include a disk copy in MS Word or WordPerfect for Windows format. Send to: ATTENTION EDITORS SASKATCHEWAN ECONOMICS JOURNAL Arts Building Room 819 University of Saskatchewan 9 Campus Drive Saskatoon, Saskatchewan Canada S7N 5A5 Ph: (306)966-5197 or (306)966-5201 Fax: (306)966-5232 The Journal is distributed to universities, private corporations, and government agencies. The Journal is also made available online at: http://www.usask.ca/economics/skjournal/ As can be expected, with a venture of this magnitude, costs are substantial. In order to maintain the high standards achieved by the initial publication, continued financial support is necessary. We gratefully accept your donation, and invite you to join our Academic’s Corner. Please visit our website for details.

The Saskatchewan Economics Journal appreciates the support provided by Professor Morris Altman and the Department of Economics at the University of Saskatchewan.

Published at the University of Saskatchewan, 2003 THE FREE-RIDER PROBLEM AND THE MODERN-DAY CHURCH: AN ANALYSIS FROM A PRIVATELY-PROVIDED PUBLIC GOOD PERSPECTIVE

NATHANAEL J GLUBISH*

I. INTRODUCTION Churches as Public Goods The free-rider problem, as described by economists, permeates the realm of public goods and even plagues the church. The church has many parallels and similarities to public goods. As with most public goods, churches are not by any means pure public goods, as they do not perfectly satisfy the necessary characteristics of being non-rival and non-excludable in consumption. However, James Buchanan argues about these requirements in “The Demand and Supply of Public Goods” by stating “no good or service fits the extreme … definition in any genuinely descriptive sense. In real-world fiscal systems, those goods and services that are financed publicly always exhibit less than such pure publicness” (Buchanan 1968: 49). Rather, it is because the church exhibits traits that satisfy these elements to a reasonable extent that we justify an analysis from a purely public good perspective. For example, once a church building is constructed, the staff is on payroll and the programs are in place, the marginal cost to the church for another person's consumption of its services is nearly zero. However, once the church building is filled to capacity and the staff members have no room in their schedules to accommodate additional service, the element of congestion becomes a factor in the non- rival nature of the church. On the other hand, while exclusion of additional “consumers” is very possible (i.e. the church could simply close its doors and limit services to specific members only) it is, in practice, unlikely. The very nature of a church is to reach out to anyone who is in need of the services it provides; to exemplify the teachings of the Christian bible. In other words, it would be contradictory to the church's purpose to exclude anyone's attendance or involvement.1 To assess the free-rider problem in the church, a case study of Elim Tabernacle, one of 58 Pentecostal Assemblies of Canada * Nathanael Glubish is a undergraduate student in Finance and Business Economics at the University of Saskatchewan, Canada. 1. The following analysis proceeds from the standpoint of the Western Christian tradition. A biblical example of the attitude that Jesus set for the Christian church is found in John 4: 7-26, where He speaks with a Samaritan woman. His demonstration of kindness to her was rather uncharacteristic of the local Jewish culture; traditionally Samaritans had been discriminated against by the Jews. 2 SASKATCHEWAN ECONOMICS JOURNAL

FIGURE 1: ELIM TABERNACLE AVERAGE SUNDAY MORNING ATTENDANCE

1200

1080

1003 1000

872

800 740 702 650 609 600 576 547 556

Attendance 480

400

200

0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year Source: Elim Tabernacle Annual Meeting 5 November 2002. (PAOC), is conducted. Senior administrator Wes Carlisle stated at Elim's latest annual meeting (November 5, 2002) that Elim has nearly tripled in size over the last decade. According to Figure 1, average Sunday morning attendance rose from 480 in 1992 to 1030 in 2002. However, while Sunday morning's attendance on November 3, 2002 was at a year high of over 1300, Elim is 7.3% under-budget in revenues this quarter (See Table 1). So what is the problem? With three times the congregation size it should be a much lighter burden per person to fund the church operations but this is not so. In fact, while attendance has increased by nearly 2.5 times over the past ten years, real revenues (after inflation) have only doubled.2 In light of

TABLE 1: ELIM TABERNACLE - GENERAL TITHES - JULY THROUGH OCTOBER 2002

Budget Actual Surplus (Deficit)

July $63,700 $58,803 ($4897) August 77,900 71,700 (6200) September 98,900 105,608 6708 October 82,900 63,605 (19,295)

Total$ 323,400 $ 299,716 $ -

Source: Elim Tabernacle Annual Meeting, 12 November 2002 THE FREE-RIDER PROBLEM AND THE CHURCH 3 these statistics, an analysis from a pure public good perspective will provide valuable insight into how individual preferences and market incentives affect the action of church members and adherents and help the church leadership to better understand the collection patterns.

II. DEFINING THE FREE-RIDER PROBLEM Free-Riders Explained The Samuelson condition for efficient provision of a pure public good is to provide the quantity of a good where the sum of all individuals' marginal rates of substitution for the good is equal to the cost of the good.3 So if a group of individuals is collectively willing to pay for the good, then the good should be provided. The problem arises when enough individuals are involved that one can reasonably assume the good will be provided at a desirable level regardless of their personal contribution. In this case, individuals have an incentive to misrepresent their preferences for the good and to contribute less than they would normally be willing to pay. By observing the resulting shortfall of funds, one can intuitively agree with what Rosen states: the free-rider problem leads to a less than efficient quantity provided of a public good (Rosen 2001: 60). James Buchanan (1965) describes this inefficiency and gives us some intriguing insight into the motiva- tions for individual choices and particular market outcomes relating to the effects of the free rider problem. Accordingly, for churches such as Elim Tabernacle whose revenues come primarily from the donations of their adherents, the free-rider problem is an ever-present hindrance to providing a socially optimal level of services.

Elim Tabernacle's Background and Structure Elim was founded in 1917, and is entering its 86th year of ministry in Saskatoon. Elim is the largest affiliate of the Pentecostal Assemblies of Canada (PAOC) in Saskatchewan and it continues to grow; since its inception, Elim has relocated twice, and attendance has nearly tripled in the past ten years alone. In 1992, the average attendance on a Sunday morning was 480. The most recent data available from church administrator Wes Carlisle shows that the average attendance for the year ending in June of 2002 was 1030. Even more 2. Revenue figures were taken from Elim Tabernacle's 1993 and 2002 Annual Reports, and adjusted for inflation using the average inflation rate for SK found in Table A.1 in the Appendix.

3. Σ mrsi = c 4 SASKATCHEWAN ECONOMICS JOURNAL recently, on November 3, 2002 Elim had over 1300 people in attendance. Elim's Senior Pastor, Marvin Wojda, has been a minister for 22 years, ten of which have been with Elim. He notes that November and December are very strong months for attendance, typically increasing the annual average. Accordingly, 2002's average attendance is expected to be higher than the 1030 recorded up to June. So as Elim experiences a period of sustained growth, senior leadership plans for the future and hopes to anticipate the future needs of the community. Elim currently employs six full-time and two part-time pastors who oversee the various areas of ministry in the church. In addition, Elim has full-time positions for the administrator and the bookkeeper, two part-time receptionists, as well as one full-time and two part-time caretakers. Elim hosts a myriad of programs for all ages, including a youth church on Fridays for young people in grades seven to twelve, kids' church on Sundays for children up to grade six, and a young adult/ young married program on Mondays. These are all in addition to the regular services for the congregation every Sunday. Because the building cannot comfortably seat the average Sunday morning attendance that is now regularly over 1000, Elim schedules three identical services in the morning and one in the evening to ease the logistical strain caused by large crowds. Nevertheless, the building is fully employed nearly every weeknight with meetings, choir and music practices, and other events. Some programs cannot function efficiently because the facilities are too limited to support the necessary equipment or staging. For example, every Thursday night a few volunteers spend several hours setting up the sound equipment, staging, and seating arrangement necessary for the Friday night youth church in the gymnasium because it is used throughout the week for other functions and the equipment cannot be left in place. Consequently, several volunteers must also pack up the equipment every Friday night following the service. Other events that Elim hosts each year include weddings, funer- als, and special events. In addition to the programs it hosts in the building, Elim contributes to the PAOC Saskatchewan District Office, and supports missionaries in Ethiopia, China, Thailand, Estonia, Romania and Columbia.4

4. See Elim Tabernacle's 2002 Annual Report for more details. 5. Interest income accounts for most of the other income. 6. Under the assumptions of identical preferences the tithing is interpreted as the constant (optimal) income share devoted to church services, although higher donations in absolute terms does not necessarily translate into a proportional rise in the volume of services consumed. 7. Tithes and undesignated offerings were $1,002,926 and other offerings were $48,827 (2002 THE FREE-RIDER PROBLEM AND THE CHURCH 5

Elim's Current Financial and Demographic Structure Elim receives the majority of its funding from collections or tithes from its congregation.5 While a measure of the disparity between individual donations would be a useful indicator of the magnitude of the free-rider problem, records of individual donations are generally not, and indeed should not be, made public. However, one can alternatively consider the discrepancy between aggregate contributions and revenues based on the expected average tithing.6 The tithe principle dates back to biblical account of Abraham. Gen 14:20 records that Abraham gave a tenth of all he owned to a priest of God. Later, in Lev 27:30-33 the author writes that “every tenth animal” belongs to God. These passages set the beginning framework for what Christians today call tithing. According to Wojda, it is generally interpreted that Christians are to give ten percent of their incomes back to God (i.e. to their local/home church). For accounting purposes, Elim's fiscal year end is June 30. The 2002 annual report shows that tithes received during the year totaled $1,051,753.7 This is an increase of 20% over 2001 tithe receipts, and is just over double the $408,824 received in 1992 after accounting for inflation.8 However, the average donation per person is only $934 for the year9 which, although it is very close to the provincial average charitable donation, seems significantly lower than a tithe according to what the donors' incomes should be. Intuitively, we can begin to see in monetary terms that there is a problem here. We will analyze this in more detail in How Big is the Problem? Elim's general expenditures for 2002 total $993,090. More than half the total ($505,357) was spent on employee salaries and benefits. This figure should increase for 2003 as two full-time pastors and a part-time pastor were recently hired. Administration and operation expenses totaled just under $250,000 while repair and maintenance to the facilities cost $118,359. The balance of $119,812 funded the various programs run throughout the year, including the youth and kids departments. In addition to general expenditures, Elim also spent $73,000 to purchase a strip of land on 8th Street adjacent to its existing property, as well as $110,000 to replace its existing furnaces and air conditioners and $75,000 to upgrade its carpets, chairs, sound and Annual report). 8. Average inflation in SK for the past 10 years has been 2.5% (Table A.1). $408,824 received in 1992 equals: $408,824 x 1.02510 = $523,329 in 2002 dollars, or just under half of the tithe receipts for 2002. 9. The tithe base represents the number of people who call Elim their church home - in other words, it is Elim's core members and adherents who could be expected to tithe. A derivation of this figure will follow shortly. 6 SASKATCHEWAN ECONOMICS JOURNAL lighting equipment and computers. All of these expenditures were necessary to continue operations as usual, but will decrease the cost of planned future expansions. It is worthwhile to note that the government effectively subsi- dizes the church to an extent, as Elim is a registered non-profit corporation. As a result, Elim issues tax receipts to donors for income tax purposes. As of this writing, the Canadian Customs and Revenue Agency (CCRA) allows 16% of the first $200 and 29% of any additional contributions (to a maximum of 75% of the individual's gross income) for non-refundable federal income tax credits.10 The provincial rates are 11.25% and 15.5% respectively. Following these tax credit guidelines, the approximate effective subsidy for Elim in 2002 totals almost $430,00011 for Federal and Provincial combined using the appropriate marginal tax rates. This subsidy works like a condi- tional matching grant because the more the congregation gives to the church, the higher the tax credit issued by the government. However, for my analysis I will ignore the effects of this subsidy, as it is not direct revenue to the church, but rather a refund or tax credit to the donor. Based on the tithe revenues of $1,051,735, one might venture to say that the income base of those who attend and support Elim is just over $10 million. However, we will see upon further analysis that a more plausible estimate exceeds triple that amount. With that figure in mind, it becomes clear that not everyone is tithing, the resulting lack of funds restricting the programs and services that Elim can offer. And considering that the average attendance is growing and will soon triple 1992 levels, Elim's leadership recognizes a serious need to expand its facilities.12 Elim is home to 326 active members and 55 inactive members.13 Inactive members consist mostly of shut-ins, snowbirds and those who have moved but not yet found a new church home.14 Members are eligible to vote on any major decisions for the church, including election of the Board of Deacons. The Board members are all volunteers who work with the Senior Pastor (Wojda) to handle day-to-day decisions as well as handling the budgeting with Administrator Wes Carlisle.

10. See the Canadian Tax Guide for more information. 11. Using the tithe base of 1126 as a starting point for how many people were issued tax receipts during 2002, the average donation per "tither" was $934. 12. The seriousness of the problem would depend on the degree to which members rely upon the church to provide, in addition to regular weekly services, other philanthropic activities. 13. See 2002 Annual Report for further demographic statistics. 14. Shut-ins are people who cannot leave their home because of illness or physical condition. Snowbirds are people who live in a more tropical climate for part of the year (usually during THE FREE-RIDER PROBLEM AND THE CHURCH 7

Those who have not formalized their membership with Elim represent the remainder of the congregation. On any given Sunday, only half the congregation attends the morning services, says Wojda. He adds that approximately 2500 people are listed in the church records as current attendees (only a small portion of the congregation are actually members). Wojda estimates that about 800 of the non-member adults are regular attendees who call Elim their home church. Elim's congregation represents a vast diversity of ages, occupations and family structures. Wojda estimates that approximately 60% of regular attendees are married couples, and the remaining 40% is split evenly between single men and women. Because the University of Saskatchewan is located in Saskatoon, Elim has a large proportion of single young adults and young married couples in its congregation. Wojda also mentions that approximately twenty doctors attend his church, or nearly 1% of the adult congregation, which is higher than the provincial average of doctors per capita.15 Wojda adds that Elim is home to a significant amount of educators and professors. He believes that the congregation is a good representation of provincial norms, and that perhaps the average income would be slightly higher among those attending Elim compared to the provincial average.

Relevant National Statistics16 Inflation in Canada has averaged 2.01% in the past 10 years; in Saskatchewan that figure is 2.50%. The average earnings in 1999 for Canadian men and women were $35,169 and $22,535 respectively (see Table 2). After accounting for inflation, the 2002 dollar estimates are $37,333 and $23,921. The average income for families in Saskatoon in 1995 was $53,196 (see Table 3), which in 2002 dollars would be $63,233 and $31,617 per worker (assuming two income earners per family). In 2000, 25.53% of Canadians who filed tax returns donated $5.4 billion to charities. In Saskatchewan, 27.31% of those who filed tax returns donated $176 million. This amounts to an average donation per person of $985.91 in Canada, while the average for Saskatchewan donors was $931.61 (Table 4). the winter season). 15. There are 1530 doctors in Saskatchewan, or about 0.15% of the population of almost 1 million people (Mandryk). 16. All these statistics are from the Statistics Canada Website www.statcan.ca. I use the average inflation figures in Table A.1 of the Appendix to bring all figures to 2002 dollars. For figures stated as Canadian averages, I use the Canadian average inflation rate, while for Saskatchewan figures I used the Saskatchewan average. 8 SASKATCHEWAN ECONOMICS JOURNAL

Table 2: Average Annual Earnings by Sex

All Earners Year Women Men

1995 $21,449 $32,988 1996 $21,244 $32,901 1997 $21,380 $33,700 1998 $22,384 $34,769 1999 $22,535 $35,169

Source: Statistics Canada Website 10 November 2002.

TABLE 3: FAMILY INCOME IN SELECTED CANADIAN CITIES

Average Household City Income (1995 dollars)

Saskatoon 53,196

Calgary 63,586

Edmonton 56,090

Vancouver 60,438

Toronto 64,044

Ottawa 64,243

Quebec 52,570

Winnipeg 53,759

Regina 56,849

Source: Statistics Canada Website 10 November 2002. THE FREE-RIDER PROBLEM AND THE CHURCH 9

TABLE 4: CHARITABLE DONATIONS BY CANADIAN PROVINCE IN 2002

Taxfilers Donors Number Number Percentage of taxfilers

Canada 21,611,830 5,516,420 25.53% Newfoundland and Labrador 383,130 81,140 21.18% Prince Edward Island 98,370 26,550 26.99% Nova Scotia 658,460 159,400 24.21% New Brunswick 545,100 127,930 23.47% Quebec 5,406,500 1,223,120 22.62% Ontario 8,083,210 2,275,620 28.15% Manitoba 803,810 232,610 28.94% Saskatchewan 694,870 189,770 27.31% Alberta 2,129,160 532,790 25.02% British Columbia 2,751,930 658,260 23.92% Yukon 19,500 3,670 18.82% Northwest Territories 24,420 3,950 16.18% Nunavut 13,370 1,620 12.12%

TABLE 4 CONTINUED

Donation Donors' Gross Income Provincial Amount Median Average Median (thousands $) $$ $

Canada$ 5,438,672 $190$ 985.91 $ 39,300 Newfoundland and Labrador 56,092 290 691.30 30,600 Prince Edward Island 20,312 300 765.05 31,700 Nova Scotia 124,561 250 781.44 35,400 New Brunswick 112,365 260 878.33 33,400 Quebec 556,820 100 455.25 37,800 Ontario 2,727,379 230 1,198.52 42,100 Manitoba 237,107 240 1,019.33 34,400 Saskatchewan 176,790 270 931.60 33,600 Alberta 632,341 230 1,186.85 40,600 British Columbia 787,187 230 1,195.86 39,400 Yukon 3,012 180 820.71 50,200 Northwest Territories 3,179 160 804.81 63,200 Nunavut 1,527 340 942.59 57,600

Source: Statistics Canada Website 10 November 2002. 10 SASKATCHEWAN ECONOMICS JOURNAL

So How Big IS the Problem? It was pointed out above that the actual income base of the congregation was over $30 million. In this section I plan to explain the assumptions I made in my calculations of this estimate. My motivation for calculating these figures is to find out what Elim's revenues from tithes should be if the estimated tithe base actually tithed 10% of their incomes. The balance between what the revenues should be and what the actually are equals the monetary free rider cost to Elim.17 For this analysis we need to establish a base congregation that can be expected to tithe. For our purposes an appropriate congrega- tional tithe base is 1126 people, comprising the 326 active members and Wojda's estimate of 800 committed regular attendees who have not formalized their membership. These 1126 people can be broken down by the 60-40 ratio mentioned earlier, into 338 couples and 225 single men and 225 single women. The total income of the tithe base, then, is simply the sum of the product of these numbers and their corresponding average income described in the previous section. According to these assumptions, the income of Elim's tithe base is $35,154,609, which should provide tithe revenues to Elim of $3.5 million. Given that actual tithes measured just under $1.1 million, the

TABLE 5: FREE RIDER COST TO ELIM TABERNACLE IN 2002

Corresponding Average Tithe Base Number Annual Earnings Wage Base

60% Couples 675.6 $63,233.33 $21,360,217.98 20% Single Men 225.2 $37,332.60 $8,407,302.01 20% Single Women 225.2 $23,921.36 $5,387,089.50

Total 1126 Total Wage Base: $35,154,609.49

Expected Tithes at 10% of Wage Base: $3,515,460.95 Actual Tithes: $1,051,753.00 Free Rider Cost: $2,463,707.95

Note: annual earnings are adjusted for inflation, and the wage base for couples was calculated for 337.8 couples.

17. There are a few adjustments that I will address later on. 18. See Table 5 for the calculations. Essentially I broke down the tithe base of 1126 people to 60% couples and 40% singles (equal men and women). From there I used the family income average from Table 3 to calculate the income base for couples, and the single income earner THE FREE-RIDER PROBLEM AND THE CHURCH 11 free rider cost to Elim is approximately $2.5 million a year!18 Looking a Little Deeper A number of factors could result in adjustments to this estimate either up or down. One factor that could change our results is that some of Elim's members give to more than one church or ministry. These people may very well be tithing 10% to Christian organizations overall, while our model assumes that this 10% is solely donated to the individual's local church. Our numbers are also contingent upon our assumption that the average incomes for Saskatoon families and Saskatchewan singles are representative of the incomes of Elim's core congregation. As already mentioned, Elim has an inordinately high number of physicians, educators, and professors. Even with the large University crowd,19 the average incomes at Elim likely exceed the national and provincial averages, which would lead to a higher income base, expected tithe, and free rider cost. Another possible explanation for some of the difference between the expected and actual tithe figures is that some individuals may just not be able to afford to tithe. In today's society of easy consumer credit, often at extremely high interest rates, it is difficult not to overextend oneself into debt.20 If a family is living beyond their means, then perhaps the 10% tithe they are not contributing is not because they choose not to, but because they simply cannot afford to make the donation. Cases like this would decrease the calculated free rider cost. Nevertheless, even after adjusting the initial $2.5 million figure for these alternative deficien- cies (or extras in the case of higher average incomes), the difference between expected and actual tithes is still expected to be large.

III. RESOLVING THE PROBLEM What Now? Elim can reasonably conclude that the free rider problem has a monetary cost that results in a negative effect on its tithe revenues, in turn causing a less than socially optimal level of service to be provided. By targeting specific causes of disparities between expected and actual tithe revenues, Elim can increase commitment and involvement of its members and adherents, and improve revenues and increase services. For example, to reduce the problem of people not being able to afford to tithe, Elim can offer free expert financial planning.21 averages from Table 2 to calculate the income base for singles. The sum of the income bases equals the tithe base, of which 10% equals the expected tithe of $3.5 million. 19. University students are typically in a lower income bracket while they study. 20. E.g. TD Green Visa charges an 18.99% Annual Percentage Rate. 21. The PAOC has done this in the past; Elim could implement such a program. 12 SASKATCHEWAN ECONOMICS JOURNAL

With proper budgeting and investment plans, most people will be better off financially and in the long-term be better positioned to tithe. Regardless of net worth and income level, there will always be people who do not tithe. If one person dislikes the style of music on Sunday mornings, he may stop tithing. If another person cannot find a program she enjoys, she may not feel a need to contribute funds. One solution is to work carefully to understand the individual needs and desires of the congregation and to try to be representative of everyone's tastes. Elim should choose music for the young and the old, offer meals and events for those who wish to fellowship, and provide training and mentoring for those who want to learn. If everyone is plugged in somewhere, they will feel pride and ownership of Elim. Such realization of pride and ownership forms the basis of collectively supporting one's church.

APPENDIX

TABLE A.1: CONSUMER PRICE INDEX ON ALL GOODS

1992 (Base Year) 2002 Average inflation

Canada 100 120.1 2.01% Newfou ndland & Labrado r 100 118.1 1.81% Prince Edward Island 100 119.2 1.92% Nova Sco tia 100 121.2 2.12% New Brun swick 100 120.1 2.01% Quebec 100 116.3 1.63% Ontario 100 121.2 2.12% M an itoba 100 123.9 2.39% Saskatchewan 100 125.0 2.50% Alberta 100 125.9 2.59% British Columbia 100 118.8 1.88%

Source: Statistics Canada Website, November 2002. THE FREE-RIDER PROBLEM AND THE CHURCH 13

REFERENCES

Browning and Zupan. (2002). Macroeconomics Theory and Applications. 7th Edition. New York: John Wiley and Sons. Buchanan, James. (1968). The Demand and Supply of Public Goods. Chicago: Rand McNally Co.. Parkin and Bade. (2000). Microeconomics Canada in the Global Environment. 4th Edition. Toronto: Addison Wesley Longman. Rosen, Dahlby, Smith, and Boothe. (2003). Public Finance in Canada. 2nd Edition. Toronto: McGraw-Hill Ryerson. Samuelson, Paul. (1962). Problems of the American Economy. London: Athlone Press.

Articles

Mandryk, Murray. (2003). “Doctors face uphill PR battle.” Saskatoon: Star Phoenix B12. May 9.

Data and Other Sources

Carlisle, Wes. ‘Annual Meeting.’ Elim Tabernacle, 5 November 2002. Elim Tabernacle, 2002, Annual Report, Saskatoon. Elim Tabernacle, 1993, Annual Report, Saskatoon. Statistics Canada. ‘Average Earnings by Sex and Work Pattern.’ 25 October 2001/10 November 2002. . Statistics Canada. ‘Charitable Donors.’ 8 November 2002/10 November 2002 . Statistics Canada. ‘Selected Income Statistics for Individuals, Families and Households.’ 5 November 2002. 10 November 2000 . Wojda, Marvin. Interview with Nate Glubish. Elim Tabernacle, 12 November, 2002. 14 SASKATCHEWAN ECONOMICS JOURNAL QUEBEC’S CHILD CARE POLICY

ANNAMARIE SENKIW*

I. INTRODUCTION In 1997, the Quebec Government implemented $5 a day child care as part of their new Family Policy. By offering all-income level families access to affordable child care, Quebec intended to increase: birth totals - which has been Quebec's defense against the assimilation of the English culture; number of hours worked by females - lower childcare costs would enable women to work more hours; and labour force participation rates - women who previously were not working due to high daycare costs would now be able to enter the work force. However, the outcomes Quebec received were quite different from the outcomes they had expected. This paper will explore the generalities of the policy, followed by a critical analysis of what policy makers expected to accomplish and the actual results that were achieved. Quebec's $5 day care policy was designed to increase women's labour force participation while still promoting an increase in birth totals in the province. While the policy seemed to be sound in theory some negative, unforeseen consequences arose. Such things as excess demand for the $5 day care program, decreased quality of daycare offered and adverse effects on childcare workers. All of these problems arose while the labour Force Participation rate of women only followed national trends, average hours worked by women did not increase significantly and birth rate totals continue to decline in the province.

II. GENERALITIES OF THE NEW POLICY Eligibility Regardless of how high one's yearly income, one is eligible for $5 a day child care. For lower-income families, the government will subsidize child care by $3 a day, leaving one to pay only $2 a day. If a family is receiving child care that is not subsidized due to location or insufficient spaces, they are able to receive a significant reim- bursable tax credit. Families receiving social assistance have had access to free child care since 1997.

* Annamarie Senkiw is a undergraduate student in Finance and Economics at the University of Saskatchewan, Canada. 16 SASKATCHEWAN ECONOMICS JOURNAL

Demand In 1997, there was an estimated 54,000 child care spaces available in Quebec. The government planned on having approximately 73,000 new spaces by 2006 in order to meet the anticipated increase in quantity demanded under the policy. The locations of the new child care facilities were to be dispersed across the province providing approximate equal access for everyone. This enabled people who did not live in central areas access to the facilities without having to travel great distances.

Funding The discrepancy between what one pays for daycare and the actual cost of providing daycare services is absorbed by the Quebec government. With the not-for-profit community-based and regulated child care centers, the funds are transferred directly from the government using tax payers' dollars. For-profit daycares, which are not regulated, are also subsidized but not nearly to the extent of regulated daycares. This is an indirect way of enticing for-profit daycares to convert into non-profit childcare centers.

Expectations After starting a family, many households confront the problem of having to choose between paying for daycare or having one parent stay at home to raise the children. For some low income families, there is no choice between the two due to high daycare costs. Having a parent stay at home can lead to a loss of income for the family, which in turn decreases the amount of resources available for investment in children in other areas. “Finding affordable, quality daycare is crucial for most single parents and dual-earner couples if their children are not to be penalized” (Blau et al., 2002). The expectation from the policy is to have affordable, quality daycare for all families, so that mothers and/or fathers are able to re-enter the workforce without paying high daycare costs, thus increasing the labour force participation rates. This will lessen the impact of the “baby penalty” because women are re-entering the workforce more quickly than in previous years. With an expected increase in the number of women entering the workforce, the amount of taxes Quebec government can collect will increase. The revenue generated from these taxes is therefore expected to offset the cost to the government of subsidizing the new policy. Another expectation of the child care policy is for Quebec to increase their current birth rate. One is able to go back to the 1800's and take QUEBEC’S CHILD CARE POLICY 17 note of the high fecundity of the French women. This has been Quebec's biggest defense against assimilation of the English culture. “The power of the State is related to the number of people it controls,…” (Schuster, 2001). Since 1991, however, Quebec's birth rate has been on a steady decline, which implies that the previous “Baby Bonus” had no positive impact on the birth rate. Quebec hoped that women would have opted to have more children because they would not have the burden of high daycare costs. According to Mclean (1998), the anticipation was to raise the birth rate from the current 1.35 to a target rate of 2.2 (the minimum children per family required to maintain a population).

III. PROBLEMS WITH THE NEW POLICY Excess demand The increase in demand for child care slots that the government initially anticipated was not near the amount that was actually observed. In turn, failure in accurately forecasting demand led to more problems than the government expected. Figure 1 shows the relationship of market demand for daycare service at different prices. Supposing anticipated demand DF, a lowering of the price of child care to $5 per day results in a forcasted increase in demand for afford-

FIGURE 1: DEMAND FOR CHILDCARE AT $5 PER DAY P S

Cost to Government Per Child Subsidy $5 DA

q1 qF qA Q 18 SASKATCHEWAN ECONOMICS JOURNAL

able care qF. By controlling the price of such services, the new regulated child care policy aimed in this way to make daycare more accessible by controlling the price of such services. Yet in order for the new policy to be meaningful, the government must correctly predict the number of spaces demanded and ensure that the necessary resources are available. Given actual demand DA, an increase to qA translates into higher per unit subsidies to daycares and a higher cost to government (represented by the shaded segment of Figure 1) than would be anticipated under demand DF. In the first year of the policy alone, the cost of the new daycare policy exceeded Quebec's initial budget by $300 million due to unanticipated demand. By the end of 2002, upon full implementation, it is estimated the policy will cost the government $1.2 billion a year to run. The initial estimated cost was $250 million per year. The failure of the government to provide adequate facilities has resulted in excess demand so vast that children are being placed on three-year waiting lists. This implies that some families may never have the opportunity to utilize the new child care program.

Effects on Quality Daycare enrollment limits are currently set by the amount of floor space. Outside of Quebec the average floor space per child is around 3.25m2, and in Quebec it is 2.75m2.1 Although this leads to overcrowded daycares, the most important measure of a child care center's quality is the ratio of children to caregiver (the higher the ratio the lower the quality). Quebec has always had one of the highest ratios in the country. Philip (1997) notes in the Globe and Mail that before the new policy, Quebec had a child to caregiver ratio of 8:1 compared to Ontario which has a ratio of 5:1.2 These ratios demonstrate that Quebec's child care has not been of the highest quality, and with the current demand surplus it is predicted to only get worse. According to the same source, the excess demand for child care spaces has encouraged the government to propose a relaxation of provincial standards that restrict the number of children that a center can enroll. The maximum enrollment would thus increase from 60 to 80 children, which means an increased child to caregiver ratio from 8:1 to 10:1. One could assume that this would lead to a decline in the quality of child care provided. Does this mean that in order for everyone to have access to sub- 1. See “Unaffordable daycare.” 1999. Montreal Gazette, 2 April, Editorial / Op-Ed, p. B2. 2. See Margaret Philip (1997). “Child-care plan makes Quebec distinct: an ambitious, European- style social program provides cradle-to-grade-school subsidies for all families, rich and poor.” QUEBEC’S CHILD CARE POLICY 19 sidized childcare, there must be a decrease in quality? Drawing upon Human Capital Theory, one could argue that quality should come before quantity. Quality education results in higher productivity and hence higher marginal returns to other education and employment in the future.3 With current conditions in Quebec, the policy seems to be focusing more on quantity than quality. Yet, even daycare directors have expressed their concern about quality: “I'd love to say this policy is going to mean affordable, accessible childcare for everyone,” said Barbara Kaiser, director of Montreal's non-profit Garderie Narnia daycare centre. “I'd love to utter those words. But I don't feel I can. The word missing here is quality, and it's a very important word” (Philip, 1997).

Effects on Childcare Workers When the new policy was implemented, the government made it mandatory that at any point in a day, 2 out of 3 child care workers must have certified training. Due to the cost of training and the increase in children to care for, the government proposed an increase in wage from $10 an hour to $15 an hour (Gyulai, 2002). The Quebec government also discussed establishing a pension fund for child care workers. The chances of child care workers receiving these benefits are highly unlikely due to the tremendously high demand, the increasing costs to the government, and insufficient funding. The daycare workers know that there is a lack of funds and hostility within the workplace has grown. One childcare worker, Claudette Carbonneau, has a different point of view as to why they have not received what they were promised. Carbonneau claims, “It's an old story of systemic discrimination” (Gyulai, 2002). She says this because ninety-five percent of child care workers are women. The child care workers are looking for pay-equity, but that might take awhile because the government has not found a male-dominated job that is comparable to a child care workers wage. Premier Bernard Landry is now blaming the Federal Government claiming, “If the province would get $50 million more a week from Ottawa, it would be easier for the government to increase its pay for nurses and daycare workers”(Gyulai, 2002). This is unlikely to occur because it would mean $2.6 billion a year to Quebec, as well as each other province and territory.

Globe and Mail, 17 June, p. A1, A9. 3. See Blau et al. (2002) for a complete discussion. 20 SASKATCHEWAN ECONOMICS JOURNAL

Effects on Labour Participation Rates of Women As stated earlier, the Quebec government was hoping that the reduction in daycare costs would increase labour force participation rates. “Child care may allow parents to be employed when their children are young, and this provides both private and public benefits” (Cleveland et al.1998). Berger et al. find that single mothers who receive child care subsidies are more likely to be employed. Analyzing Figure 2, one notices that labour force participation rates in Quebec have risen. Is one able to then make the assumption that the new policy has contributed to this effect? The Quebec government would likely say yes. Looking at the labour participation rates in Canada, one can observe that the Canadian average is increasing by just as much. Therefore, Quebec's increase in labour force participation is only following the nation's trend rather than rising because of the new policy. It is important to note that Quebec has a lower participation rate than the Canadian average to begin with, and continues to stay lower even after implementation of the new child care policy. Therefore, even after the vast amount of resources that were used to maintain the new policy, there are no significant increases in labour force participation rates. This means that although expenditures will keep rising in order to fund the daycare, the amount of taxes collected will stay relatively constant. Eventually this will lead to either cuts in other social programs or an increase in taxes. Either way the citizens of Quebec are worse off.

FIGURE 2: LABOUR FORCE PARTICIPATION RATES

64 Quebec Canada 62

Participation R ate s 60

58 1997 1998 1999 2000 2001 2002 Ye ars

Data Source: Statistics Canada QUEBEC’S CHILD CARE POLICY 21

Effects on Average Hours Worked One would expect that due to the huge increase in utilization of daycare, that the amount of hours a woman worked (in the market) would increase. Having access to subsidized daycare enables a woman to increase the amount of hours she works, therefore causing a rise in the income of the household. Looking at Figure 3, this expectation is not met. In 1999 and 2000, there was a slight increase in the average amount of hours worked by a female living in Quebec, but it was still lower than the Canadian average. Also in 2001, Quebec's average actually decreases while the Canadian average increases. This difference leads to the biggest gap between Canada and Quebec since 1998. Considering no other province has child care that is subsidized as greatly as Quebec, why are women in these other provinces working more on average?

Increase in Birth Totals Previously, Quebec had a program called the “Baby Bonus” which was supposed to induce families to have more children. This program assumed that having children was purely a financial decision. Although the Baby Bonus did have positive effects in the short run, the birth totals ended up falling dramatically later on. The failure was due to the fact that having a third child is not so much of an economic decision as it is a personal preference. The new child care policy is

FIGURE 3: AVERAGE WEEKLY HOURS WORKED

33.9

33.7

33.5

Quebec (Female)

Hours 33.3 Canada (Female)

33.1

32.9 1997 1998 1999 2000 2001

Years

Data Source: Statistics Canada 22 SASKATCHEWAN ECONOMICS JOURNAL

FIGURE 4: ANNUAL BIRTH TOTALS IN QUEBEC

90000

85000

80000

75000

70000 Total Births Total

65000

60000 1996 1997 1998 1999 2000 2001

Ye ar

Data Source: Statistics Canada also expected to increase birth totals by allowing women access to less expensive daycare. Low-cost daycare perhaps suffers from the same faulty assumption of the Baby Bonus, with the exception in this case that women can both satisfy their preference for children and pursue career interests. What are the effects on the birth totals in Quebec since the implementation of the new child care policy? Looking at Figure 4, one can see that there has been no growth in birth totals whatsoever. From 1998, to 2000 the birth totals leveled off somewhat, but whether it was the effect of the child care policy or not is a question left unanswered.

IV. CONCLUSION Quality child care provides children with increased education, which in turn will result in greater productivity in the future. If Quebec implemented this policy because they wanted to invest more into their children, then part of their goal was met. With the new policy, more children have gained access to early education through the daycare centers, but at the expense of quality. Quality child care in Quebec has decreased dramatically due to the unanticipated demand for the service. With increasing children to caregiver ratios and overcrowding of daycare centers, one must wonder if the children of Quebec were better off before the new policy was implemented. If Quebec implemented the policy with the intent of increasing their population, this is perhaps the government’s most obvious fail- QUEBEC’S CHILD CARE POLICY 23 ure. Birth totals in Quebec are lower than in previous years, and once birth rates start to decline, they are difficult to reverse. Finally, if Quebec expected that affordable child care would increase the number of women in the labour force, the policy has yielded little success. Although statistics show an increase in Quebec's labour force participation, this rise is no more impressive than the Canadian average. In turn, there is little reason to believe that the rise in labour force participation rates of women in Quebec is a result of the implementation of the $5 a day child care. These failures can be attributed to several misconceptions within the Quebec government. First of all, the policy assumes that having children is a financial decision. In the future, research should focus on why women decide to have children to garauntee a better understanding of women's preferences. Another miscalculation involved the inaccurate forecasting of demand for low-cost care. Excess demand for limited spaces in daycare has dramatically raised costs to government, while at the same time jeopordizing the quality of the service.

REFERENCES Berger, Mark, and Black, Dan. (1992). “Child Care Subsidies, Quality of Care, and the Labor Supply of Low-Income, Single Mothers.” Review- of-Economics-and-Statistics, 74 (4): 635-42. Blau, Francine D., Marianne A. Ferber, and Anne E. Winkler. (2002). The Economics of Women, Men, and Work. Upper Saddle River: Prentice Hall. Cleveland, Gordon, and Krashinsky, Michael. The Economic Rationale for Public Investment in Young Children- A Policy Study [online]. March 1998, Chapter 2. [cited November, 2002]. Available from World Wide Web: . Tougas, Jocelyne. A Snapshot of Quebec's Current Early Childhood Education and Child Care Reform: A Short History [online]. [cited 10 November 2002]. Available from the World Wide Web:

Articles Gyulai, Linda. (2002). “Daycare walkout looming: Three April strike days could affect 45,000 kids.” Montreal Gazette, 25 March, p. A1 / FRONT. Mclean, Candis. (1998). “Go forth and multiply: Quebec makes a bid to restore fertility through cheap day care.” Alberta Report, 11 May, vol. 25, no. 21, p. 34. 24 SASKATCHEWAN ECONOMICS JOURNAL

Philip, Margaret. (1997). “Child-care plan makes Quebec distinct: an ambi tious, European-style social program provides cradle-to-grade-school subsidies for all families, rich and poor.” Globe and Mail, 17 June, p.A1,A9. Schuster, Eli. (2001). “No subsidy, no baby; Quebec's cash-for-kids program worked, and its new daycare substitute incentive does not.” (Brief Article). The Report Newsmagazine, 5 March, p. N/A. “Unaffordable daycare.” (1999). Montreal Gazette, 2 April, Editorial / Op- Ed, p. B2 ASSESSING THE SOFTWOOD LUMBER TRADE DISPUTE BETWEEN CANADA AND THE UNITED STATES

SHAUN DRIVER*

I. INTRODUCTION The last twenty years has seen the advent of protectionism in natural resources and resource based products from the United States. The brunt of the guardianship has been faced by the softwood lumber industry. Since the first countervail duty investigation on Canadian softwood in 1982, a series of intermediary resolutions and subsequent counteractions have been undertaken. The industry has repeatedly been forced to respond to intrusion after intrusion by government as three different duties and two agreements to restrict exports to the U.S. have been used over the past twenty years. The result has been an industry forced to survive the traditional impositions of the market, such as operational costs, as well as the new burden of excess duty costs and voluntary export restrictions. The softwood lumber trade dispute stands as the longest running trade disagreement between Canada and the United States. Despite the time, energy, and money devoted to resolving this contentious dispute, neither side has been able to find anything but intermediary resolutions. The intent of this paper is to give a historical perspective of the dispute, analyse the statistical data of the past twenty years relating to government involvement, and highlight options towards a more common ground. The present investigation will examine the validity of the United States lumber manufactures argument for a countervailing duty against subsidies to Canadian lumber while investigating options that may mitigate or satisfy US demands. Specifically, the paper explores two economic alternatives that may help to end the dispute and to find a light at the end of the tunnel. Focus is placed on eliminating system friction by changing the Canadian forest tenure structure from a government allocated fee-based framework to a competitive bidding arrangement used in the United States.1 The second option involves the removal of appurtenance clauses which ensure that trees are

* Shaun Driver is an Undergraduate Student in Economics and Political Studies at the University of Saskatchewan, Canada. 1. Canada's System of allocating long-term rights to harvest a specified area is referred to in industry as "stumpage." Provincial governments typically charge logging companies based on an arbitrary fee schedule and require the industry to supply capital required to build infrastruc- 26 SASKATCHEWAN ECONOMICS JOURNAL processed in the region where they are cut giving access to raw logs to sawmills south of the border.2

II. THE BASIS OF THE DISPUTE Government involvement in the industry is frequent and intense which makes an economic analysis of the topic difficult. The catalyst for action from government, on either side of the border, has been to gain advantage from significant highs or mitigate lows in housing starts in the United States.3 The intervention is also prompted on the side of the U.S. by Canada's significant market share for processed lumber in the United States, which has hovered between 25%-35% for the last twenty years (Percy et al. 1989). Each government's move was correspondingly matched by the other and the market is yet to be placed in an environment where it can operate on its own. The difficulty in attempting to find resolve for the dispute is the divergent nature of the two systems. The two nations have varying means of allocating timber harvesting rights to respective softwood lumber producers. Canadian provinces own roughly 90 percent of the forest lands in Canada, while United States ownership is primarily in private hands and therefore is witness to “...a significantly higher volume of private timber transactions in the United States. In those instances, sawmills may negotiate forest tenure prices directly with private landholders” (Aldonas, 2003). The difference between administered tenure pricing, largely characteristic of Canadian lumber markets, and a competitive bidding structure remains a contentions issue. Canada must also deal with an inhibiting federal government structure. Enumerated powers in section 91 and 92 of the Constitution Act of Canada have allocated natural resources as a provincial respon- sibility and manufactured goods and exports as a federal responsibili- ty (Archer 1995). The political structure causes hardships in effective internationally lobbying about Canada's position on the dispute. The systemic differences are an obvious cause of friction and complicate an assessment of the softwood lumber dispute.

III. FIRST COUNTERVAIL INVESTIGATION DUTY (1982) The history of the softwood lumber dispute has roots that pre- date Confederation with the first skirmishes occurring between Maine ture to access the raw logs and reforest the land to provide for future logging. See also Percy, Michael B, and Christian Yoder. The Softwood Lumber Dispute & Canada~U.S. Trade in Natural Resources. Halifax: The Institute for Research on Public Policy. (1987). 47-78. 2. Both options are derived by numerous scholars and politicians as responses to direct com- plaints made by the United States during the course of the dispute. See Grant Aldonas “Proposed Analytical Framework for Changed Circumstances Reviews of the Outstanding THE SOFTWOOD LUMBER TRADE DISPUTE 27 and New Brunswick in the1820s which led to the Reciprocity Treaty of 1854-1866. Following the termination of the Reciprocity Treaty, the access to raw timber in Canada ended leading Lower (1938) to note that “...the public mind was prepared to accept the fact that the United States would probably never again be a free market for Canadian raw material.” The result was an era of nationalism and self-reliance. The form of nationalism that developed prior to Confederation continues to exist. A significant aspect of the current round of discussions is whether lumber producers and politicians are willing to move away from nationalism and accept alternatives that may be contingent on granting access to the United States of Canada's raw timber. The countervail investigation duty of 1982 was the impetus to a twenty-year international trade struggle. The Coalition for Fair Lumber Imports, an association of lumber producers in the United States, have been the leading lobbyists in initiating countervail inves- tigations and brought forward a petition to the US Department of Commerce. The catalyst to the petition was the poor economic climate of the United States. The country was, according to Duvall and Garton (2002), “...in the midst of a severe recession, falling housing starts and declining lumber prices.” Statistics Canada data show a decline in housing starts in the United States from 1,832,000 in the final quarter of 1979 to 843,000 in the first quarter of 1982. The initial countervail investigation established and formalised the means by which the United States would determine if the imposition of a duty was warranted. The process determined was to apply the petition to the Tariff Agreements Act, 1979. The act reads in para- graph 1671: 1671. Countervailing duties imposed (a) General Rule. If- (1) the administering authority determines that - (A) a country under the Agreement, or (B) a person who is a citizen or national of such country, or a corporation, association, or other organisation organised in such a country, is providing, directly or indirectly, a subsidy with respect to the manufacture, production, or exploration of a class or kind of merchandise imported into the United States, and

Countervailing Duty Order on Imports of Softwood Lumber from Canada.” U.S. Department of Commerce (2003), 9. 3. Housing starts in the United States saw significant declines from 1980-1981 (1,832,000 in 1979 to 843,000 in 1982); in 1986 (decade high quarter of 1,972,000 starts); and 1991 (lowest quarter of housing starts since reporting period began in 1959 of 798,000). These figures can be found in Statistics Canada. Table No. V4510004. United States Construction, Seasonally Adjusted at Annual Rates: Total Private Housing Starts. 28 SASKATCHEWAN ECONOMICS JOURNAL

(2) the Commission determines that - (A) an industry in the United States - (i) is materially injured, or (ii) is threatened with material injury, or (B) the establishment of an industry in the United States is materially retarded, by reason of imports of that merchandise, then there shall be imposed upon such merchandise a counter vailing duty, in addition to any other duty imposed, equal to the amount of the net subsidy. 4

According to the Tariff Agreement Act, the Department of Commerce had to prove not only that a subsidy to Canadian lumber producers was evident but that material injury to US producers was real. Two different quasi-judicial bodies of the Department of Commerce were utilised to address questions raised in the Trade Agreements Act. The International Trade Administration (ITA) was used to determine if subsidies are specific to an industry, and not generally available.5 Finally, the International Trade Commission (ITC) undertook the task of ensuring that material injury to US softwood producers was real (Percy et al. 1987). The complex nature of the softwood lumber dispute was realised during the investigation as the multiple uses for raw timber was uncovered. Tenure for Canadian raw logs are not allocated on an industry by industry basis. The findings showed that inputs to production are used, or re-used, in the lumber, furniture manufacturing, plywood, and pulp and paper industries. This resulted in the1982 specificity test finding that a subsidy was not applicable to a countervailing duty because of the broad scope and general availability of raw timber to many industries (Duvall et al. 2002). These particular findings were later reversed, as will be discussed later in the paper, as the definitions of the specificity and general availability tests have developed. The most interesting aspect of the 1982 findings was in regards to the search of material injury. The Department of Commerce concluded that a comparison of Canadian stumpage prices with U.S. prices would be arbitrary and capricious in view of the wide differences between species composition; size, quality, and density of timber; terrain and accessibility of the standing timber through the United States and Canada (Duvall et al. 2002). During the process, the 4. Legislation is found in Percy, Michael B, and Christian Yoder. The Softwood Lumber Dispute & Canada~U.S. Trade in Natural Resources. Halifax: The Institute for Research on Public Policy. (1987). 82. 5. During the Uruguay Round the World Trade Organization (WTO) developed structured THE SOFTWOOD LUMBER TRADE DISPUTE 29

FIGURE 1: SUBSIDY-INDUCED SHIFT IN THE CANADIAN SUPPLY CURVE

economic grounds for material injury claims received negligible support in what was primarily a politically moderated and motivated debate. The problem was addressed by Percy and Yoder (1987, p.73) who commented that “[t]he public and the media have been distracted by cross-border stumpage comparisons or by dwelling on the politics of the dispute both within Canada and within the United States. The basic economic issues in the dispute - the role of market forces versus timber-pricing policies in the provinces - have not been given the proper attention.” The U.S. claim made in 1982 continues to be debated today. The U.S. position has been that the Canadian administration has forced the supply curve to the right by granting tenure for most logging areas at a cost below the market value, acting as a subsidy to the industry. The lower costs encourage industry to increase their output because more products and services can be provided at each price level. The result is that the price of standing timber in Canada is lower than the competitive market value (see Figure 1). The inherent difficulty of such an argument lies in estimating what a competitive market price for timber is, since existing market practices have prevailed throughout the nation's history. One approach involves the search for disparities tests and definitions to specificity and availability industry subsidies. Tax credits and man- power training regulations are examples of subsidies by government that are generally available. Generally available subsides are referred to by the WTO as “Green Light subsidies.” See also. “WTO: Subsidies and Countervailing Measures overview” 30 SASKATCHEWAN ECONOMICS JOURNAL in costs between the Canadian administered system and the U.S. market-based tenure allocation, which would quantify the effect of a Canadian subsidy on market prices. Determining the presence and the scope of a subsidy is an arduous task. Transportation costs, which include the cost of building and maintaining roads, is borne by harvesters and the subsequently administered long-term tenure costs to harvest a specified area, referred to as stumpage charges, are lowered in Canada to compensate this cost. The effect of the lowered charge means a portion of the subsidies compensate the industry for outlays that are considered justifi- able public expenditures in the American market. Second, differences in terrain cause variations in the cost of foresting and are represented in variations in stumpage fees. Third, environmental standards inter- nalise costs to harvesters in the Canadian system and stumpage fees are reduced in order to allow loggers to implement necessary environmental and siviculture standards. Fourth, stumpage is paid as the timber is harvested. The winning bids, therefore, often include an allowance for inflation and for movement in relative timber prices. Fifth, U.S. forest tenure often restricts supply leaving an allowable cut less than what the market demands and allowing for Canadian timber to fill the gap. The result of restricting supply forces the US domestic supply curve to the left in the United States which increases price and exacerbates the difference between the rents collected via the two nation's stumpage systems (Percy et al. 1987). All of the above factors create a challenge in determining the actual difference between the administrative and the market-based models. Overall, the importance of the 1982 investigation cannot be ignored. The findings that emerged are still relevant today. The notable differences in the present dispute are marked by the introduction of the World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA) quasi-judicial boards that afford Canada additional arenas to voice its opposition to the imposed duties.

IV. SECOND COUNTERVAIL INVESTIGATION DUTY (1986) The U.S. Coalition for Fair Lumber Imports returned to an active lobbying position in 1986. A petition was filed with the ITC and ITA claiming again that rents received from provincial governments for harvesting Crown lands were underpriced and acted as a subsidy. The economic climate of the softwood industry had improved. Housing starts in the United States had increased substantially from 843,000 first quarter starts in 1982 to a decade high first quarter in 1986 of 1,972,000 starts.6 The increase in consumption required an increase THE SOFTWOOD LUMBER TRADE DISPUTE 31 in imports from Canada, resulting in an increase in the percentage of Canadian lumber used for US consumption from 27.3% in 1982 to 31.6% after 1985 (Percy et al. 1987). In reaction to the loss in market shares, the U.S. Coalition led the request for another investigation into Canada's subsidization polices. However, the underlying cause of rising Canadian competition was not related to a change in the economics of the industry or of the administration of forest tenure but, rather, due to the evolution of specificity and preferentiality requirements employed by the ITA and ITC. In April of 1986, the ITA underwent a review of specificity and preferentiality due to the Black Carbon trade dispute the United States was having with Mexico. Specificity tests determine if the allocation of resources are distorted by a subsidy that is not available to other sectors of the economy. During the review of the Black Carbon situation, it was determined that “...the absence of other actual purchases of a subsidized good or service meant that the specificity test was sat- isfied” (Percy et al. 1987, p.48). The resulting decision changed the precedence on specificity established in 1982 and under the new standard of specificity a Canadian subsidy was found to exist. Subsequently, a countervail of 15% was deemed to be the amount of material injury caused to U.S. Lumber Producers. The decision was faced with a series of appeals and lobbying from Canadian producers and provincial governments and the dispute received an enormous amount of media coverage, especially considering the prominence of the Canada/U.S. Free Trade Negotiations during the mid-80's (Mach 2002). Despite the appeals of Canadian producers, the definitions of specificity found in the Black Carbon case remained and the ruling would not be reversed.

V. S OFTWOOD LUMBER MEMORANDUM OF UNDERSTANDING (1986-1991) The negotiation and appeal process did bring about one positive outcome for Canadian producers. There was the option for Canada to impose an export tax of fifteen percent, allowing the country to collect the funds that would have been normally collected by the U.S. Treasury (Mach 2002). The voluntary export restriction, being a 15% tax on Canada's softwood exports to the United States, was capsulat- ed in the Softwood Lumber Memorandum of Understanding (MOU). The agreement was designed to effectively shift Canada’s supply curve to the left and to raise timber prices (see Figure 2), while promoting Canadian provinces to implement changes to their forest

6. See Statistics Canada. Table No. V4510004. 32 SASKATCHEWAN ECONOMICS JOURNAL

FIGURE 1: TAX-INDUCED SHIFT IN THE CANADIAN SUPPLY CURVE

tenure and stumpage practices. The replacement measures were voluntary. Provinces, independently in control of their own natural resources, determined their course of action of whether to add costs to their tenure system totalling 15%, or to simply pay the export tax. Further, any systemic changes required labouriously difficult consultations where each province negotiated, individually, with the U.S. government to determine the value of the replacement measures. The measures increased the cost of administrative systems and legal responsibilities, and included slight changes to the tenure allocation process. Alberta and Ontario preferred to pay the tax while British Columbia and Quebec opted to implement the required changes to increase their stumpage fees to appease the U.S. British Columbia supplied, in the Forest Renewal Act of 1996, the most enterprising changes with the creation of the comparative value pricing system and super stumpage. According to Mach (2002, p.289), at the end of about five years “roughly eighty percent of the value of [timber] exports was no longer subject to the fifteen percent export tax, being in large measure replaced by increased provincial charges.” The provinces had undertaken the millions of dollars of additional charges to the industry and despite the changes, the dispute raged on.

7. See "Factors affecting the international softwood lumber market, 1987-93." Monthly Labor Review. 117 (February 1994). United States Bureau of Labor Statistics: Washington. 24. THE SOFTWOOD LUMBER TRADE DISPUTE 33

VI. THIRD COUNTERVAIL INVESTIGATION DUTY (1991-1996) After forcing significant charges upon the industry between 1986 and 1991, Canadian interests felt that the increased charges to the softwood lumber industry were enough. The federal government gave notice of their termination of the Softwood Lumber MOU. The Canadian reaction was in response to export prices that continued to rise after 1987, even though expansion was achieved in the non-traditional markets of Japan and the European Union.7 The response was also contingent on the lowest quarter of housing starts since reporting began in 1959 of 798,000.8 Canadian softwood lumber producers, especially in British Columbia and Quebec, had seen their costs increase substantially and were now witnessing the detrimental effect of decreased demand for their product. The result was met with objec- tion from the U.S. and subsequent action was undertaken to apply yet another countervail. The third investigation was accompanied with new twists to the softwood lumber dispute. The structural changes to Canadian forest tenure and increased stumpage charges were disregarded by the United States and, for the first time, constraints on access to Canadian timber were raised. Appurtenence clauses require that timber must be processed in the region it was cut. The U.S. perception of the clauses are that they limit demand for standing timber as only select producers are permitted to bid on cut allowances. The new determination was that “Canadian log export restrictions provided a countervailable benefit to Canadian producers” (Mach 2002, p.287). The result was the final creation of a countervail duty of 6.51%, a reduction from the 14.48% countervail originally recommended by the ITC and ITA. The Canadian federal government attempted to increase involvement in the softwood lumber dispute. During numerous consultations it was realised that the Canadian federal government was not in a situation where it could explain provincial government forest management systems. The new concerns brought by the U.S., such as the appurtenance clauses, were unable to be effectively countered. The consultation process continued to be active until 1996. However, the interest of provincial governments in the process was divergent. The provinces that had implemented significant replacement measures to their tenure structure during the MOU, such as British Columbia and Quebec, were interested in negotiating an agreement but a consensus amongst all Canadian provinces and industries was unattainable.

8. Data taken from Statistics Canada. Table No. V4510004. 34 SASKATCHEWAN ECONOMICS JOURNAL

According to Mach (2002), determining a resolve to the dispute was inhibited again by varying provincial forestry management practices. The vulnerable nature of Canadian federalism in dealing with the softwood lumber dispute created pressure for action to stem the cost of the U.S. imposed countervail. Canada continued its political reac- tionary nature by attempting to create a Canadian national export restraint program based on a quota system for all of Canada. The Softwood Lumber Agreement was developed and acted as the guiding force behind U.S. and Canadian Softwood Trade from 1996-2001. The voluntary export quota achieved its mandate of driving lumber prices up, as they increased by almost one hundred dollars per thousand board feet (Mach 2002). The quota, combined with the millions of dollars applied to the forest tenure structure during the MOU, significantly raised costs to the softwood lumber industry in Canada. The Softwood Lumber Agreement was not without problems. The most significant issue was the realisation that the agreement inhibited entry and exit to the softwood lumber market. The quota was distributed to mills that had a history of shipping to the U.S. market. Therefore the new lumber producers' avenue to the international market was limited to other nations such as Japan or the European Union. The unfairness of the Softwood Lumber Agreement was evident. This realisation of inequity pushed the dispute into the most recent round of discussion. However, a consensus from the individual provinces on how Canada should proceed into the next round of negotiation with the U.S. has not yet been attained.

VII. FOURTH COUNTERVAIL INVESTIGATION DUTY (2001-PRESENT) The Softwood Lumber Agreement expired five years after Canadian interests were unable to justify continuing with the agreement. The most significant benefit of operating under the Softwood Lumber Agreement was the ability of producers' to plan for the future with the knowledge of expected cost. The agreement acted as a voluntary intermediary to the issue but no systemic changes were made to forest tenure allocation during the years the agreement was in effect. By letting the agreement expire, Canadian lumber manufactur- ers opted to accept the risk of another countervail duty being applied to exports rather than continue under the quota formula. As expected, the U.S. Coalition for Fair Lumber Imports petitioned again claiming the subsidy to the Canadian market continued. The result of the newest investigation by the ITA and ITC was the assessment of an 9. See the Canadian Department of Foreign Affairs and Interntational Trade, “Volume and Value of Exports to the U.S: Softwood Lumber Industry.” (April 1 2001 to March 7, 2002) 10. See the Canadian Department of Foreign Affairs and Interntational Trade (2001). 11. See Sage Birchwater, "Riverside curtails production" (Williams Lake Tribune. 24 April THE SOFTWOOD LUMBER TRADE DISPUTE 35

18.79% ad valorem countervailing duty and an additional anti-dump- ing duty of 12.58%.9 The duties applied appear inordinately high considering the imposition of the countervail from 1991 to 1996 was only 6.51% and in special consideration of the costs of replacement measures many provincial governments implemented to appease U.S. interests. The initial reaction to the recent countervail was unexpected. Primary mills continued, and in many instances even increased production, in an attempt to increase operational efficiency by lowering the cost of processing. The continuation of production was validated by statistical data which shows that exports to the United States have decreased by only 2.05%.10 Recently, the countervail has caused sharper reduc- tions in production due to the inability to ship lumber and a significant oversupply.11 However, The hardest hit to Canadian industry appears to be in the new value-added sector. The ad valorem nature of the duties (the cost is measured on the value of the softwood lumber) has meant the branch of the industry that “adds value” to the product is increasingly punished by being forced to pay increased duty charges. The history of the softwood lumber dispute has been repeatedly focussed on quasi-judicial factors and developing a system to moder- ate the dispute with a limited focus on understanding the true nature of the system friction that occurs between the two nations. The subsequent section summarises the unchanged U.S. perspective and addresses the validity of accomplishing proposed structural changes to the Canadian softwood lumber industry in an attempt to finally find a more durable solution to the debate.

VIII. ALDONAS PROPOSAL (2003) On January 6th of 2003 undersecretary of the U.S. Department of Commerce, Grant Aldonas, released the “Proposed Analytical Framework for Changed Circumstances Reviews of the Outstanding Countervailing Duty Order on Imports of Softwood Lumber from Canada.” The report contains significant structural changes to the Canadian forest tenure system to satisfy U.S. concerns of Canadian government subsidies. Canadian interests have resisted substantive changes to forest tenure. However, the largest softwood lumber producing province, British Columbia, has surprisingly come forward and announced that, “[c]onceptually, this approach could form the basis of a long-term solution.”12 The Aldonas report claims to provide a roadmap for changes in Canadian provincial stumpage prac- 2003). 12. De Jong, Michael "B.C. Government Statement on U.S. Softwood Bulletin." January 7, 2003. 36 SASKATCHEWAN ECONOMICS JOURNAL tices that would move Canada toward a market-based system of timber sales. The roadmap includes the United States' expectations of competitive market based sales which still permit a combination of administered pricing. Specific expectations in the report include the elimination of appurtenance clause conditions on timber that specify harvested timber must be produced in the region the logs were harvested and the basis for province by province countervail revoca- tion by monitoring independent provincial pricing systems to ensure that the tenure allocation is market based. In attempting to determine whether any modifications to administered tenure have achieved market-based prices two specific tests have been developed. The first listed in the report involves a standard regression analysis that would make use of market prices gathered from competitive auctions to predict prices for timber on non-auctioned lands, while the other consists of a residual value calculation that would back out harvesting and hauling costs from competitively sold logs to derive a market price for standing timber. The tests address the two most contested issues sur- rounding the dispute - the U.S. requirement for forest tenure that responds to signals from the market and Canadian claims that significant savings must be awarded to harvesters to mitigate transportation costs. The concept of a competitive market based system is likely to garner the most significant attention from Canadian interests. The proposal requires a fundamental change to the Canadian tenure allocation process. The Canadian argument has consistently been that as long as a “fair-market” value is achieved, even through administered pricing policy, then the requirement for a market based system is moot. During debate on the British Columbian Speech from the Throne an MLA of the Liberal caucus commented on changes to the forest industry by stating “[f]orest reforms will diversify tenure, provide for market-based stumpage, elimination of waterbedding, cut controls and appurtenance requirements all improving the industry's ability to compete.”13 However, as was found previously, market- based stumpage is difficult, if not impossible, to attain as Canadian lumber producers are insulated from market signals because rents are paid as the timber is harvested and not collected when the license is allocated. The removal of risk means the Canadian system is not reacting to market signals. The tests outlined in the Aldonas Report

13. See Chutter, "Official Report of Debates of the Legislative Assembly: Hansard" Legislative Assembly of British Columbia (13 Feb. 2002 Afternoon. Vol. 11 No. 4). 14. The pine beetle attack effects 100% of the Prince George Forest Area, 90% of the Quesnel Forest Area, and 70% of the Williams Lake Forest Area. The Cariboo Lumber Manufactures THE SOFTWOOD LUMBER TRADE DISPUTE 37 appear to be a significant move to attempting to determine the cost of standing timber and attempting to accomplish the goal of developing an administered pricing policy that is capable of responding to the market. The discussion regarding transportation requirements and terrain difficulties as the rationale for administering tenure pricing is insub- stantial. The provincial governments are adequately equipped to undertake the process of transportation infrastructure creation in the province. Experience and economies of scale methodology would perpetuate the notion that the provincial government is best suited to build the necessary transportation network of access roads and, therefore, should focus on receiving full remuneration on timber sales and providing the necessary road infrastructure. The Canadian principle of internalising environmental externali- ty costs to forest harvesters, as a means of sustaining public land by allocating long-term tenure, is valid. Yet the process of allocating long-term tenure does not inherently imply that a competitive bid process cannot attain the same goal. There is no justification for the tenure being administered rather than competitively bid upon. There is some consternation on the part of the U.S. which believes that long- term tenure inhibits entry and exit into the market. However, one of the core principles of the Aldonas report states: - [T]he Department is... aware that sales of standing timber are an integral part of any government's broader forest management objectives. The Department intends to ensure that the Department's policy guidance and the methodology it applies do not inhibit changes in provincial forest practices that are consistent with sustainable forestry, as long as those practices do not confer a competitive benefit on Canadian lumber producers. The possibility exists that a change permitting the flexible transfer- ability of forest tenure will satisfy U.S. demands for the removal of entry and exit barriers to the market. The second significant change to Canadian softwood lumber practices involves the removal of the appurtenancy requirements. The limitation of competition for lumber processing would be removed, satisfactory to U.S. demands. However, some significant considerations still need to be addressed. Permitting the transfer of raw timber across jurisdictions could increase the spread of biological wood diseases, such as the pine beetle in northern British Columbia which has been depleting northern British Columbian forests. The appurtenance Association (CLMA) and Council of Forest Industries (COFI) held a workshop for civic politicians, that I attended, to express the environmental damage caused by the pine beetle, which kills trees leaving them unmerchantable and destroys the natural habitat. 38 SASKATCHEWAN ECONOMICS JOURNAL clauses were initially created to stimulate regional growth through job creation. The clauses are also useful in restricting the transportation and spread of pine beetles from destroying an exorbitant amount of natural forest. Nevertheless, with strict environmental guidelines in place to restrict the transport of infected raw timber the only concrete fear to be addressed is the loss of Canadian jobs as raw timber heads across the 49th parallel to be processed in the United States. From an economist's perspective, the determining factor in considering opening up raw timber trade is the concept of comparative advantage. If the United States is indeed the most cost-effective softwood lumber producer, it should undertake the role of primary producer and Canada should readjust its focus on an industry in which a comparative advantage exists. An alternative view is that, upon removing market and administrative frictions between the two nations, Canada could succeed in proving its strength in softwood lumber production. Regardless of which nation truly has a comparative advantage, the benefit to the world economy, in the language of the Ricardian theory of trade, would be the gains from trade captured by the two nations specializing in their respective market strengths. However, continued negotiations should not be one-sided. The restrictions the U.S. places on Canada to undergo significant changes to its tenure practices should be reciprocated and matched. The United States should also lower the cost of production by undertaking structural changes to ensure its timber supply is open for harvesting, alleviating the upward pressure on U.S. domestic prices. The Aldonas discussion paper has ushered the softwood lumber dispute into a new era. The previous political, policy-oriented, and judicial nature of the dispute have overshadowed the economic difficulties and system friction that exist between Canada and the United States. However, the Canadian lumber industry is still forced to undertake a significant decision and the Aldonas proposal is the catalyst for further discussion. Should the Canadian lumber industry pressure the provincial governments for change in the allocation of forest tenure or to continue the battle with the United States in the hopes that preferential treatment will eventually go undetected? Hopefully, the industry will realise that, with additional negotiation on the matters of U.S. timber supply and the need for international environmental standards, the world's economy would be better served by Canada's shift to a market-based softwood tenure system. THE SOFTWOOD LUMBER TRADE DISPUTE 39

REFERENCES Aldonas, Grant. (2003). Proposed Analytical Framework for Changed Circumstances Reviews of the Outstanding Countervailing Duty Order on Imports of Softwood Lumber from Canada. U.S. Department of Commerce. Anderson, M. (2001). “The Softwood Lumber Dispute.” Canada-United States Law Journal, 27: 296-308 Archer, Kevin et al. (1995). Parameters of Power: Canada's Political Institutions. Scarborough: Nelson. Begley, Joy et al. (1998). “Assessing the impact of export taxes on Canadian softwood lumber.” Canadian Journal of Economics. 31, 207-219. Birchwater, Sage. (2003). “Riverside curtails production.” Williams Lake Tribune 24 (April). Boyd, Roy and Kerry Krutilla. (1989). “The welfare impacts of U.S. trade restrictions against the Canadian softwood lumber industry: a spatial equilibrium analysis.” Canadian Journal of Economics 20: 17-35. Cashore, Benjamin. (1997). Flights of the Phoenix: Explaining the Durability of the Canada-U.S. Softwood Lumber Dispute. Bangor: Furbush-Roberts Printing Co. Chutter, D. (2002). Official Report of Debates of the Legislative Assembly: Hansard Legislative Assembly of British Columbia, Vol. 11 No. 4(13 Feb., Afternoon). Department of Foreign Affairs and International Trade. (2003). Softwood Lumber. Government of Canada. De Jong, Michael. (2003). B.C. Government Statement on U.S. Softwood Bulletin. Ministry of Forests - British Columbia (7 January). Duvall, James and Billy Garton. (2002). “The Canada-U.S. Softwood Lumber Dispute: Is Canada Stumped Again?” Canadian Business Law Journal, 36: 201- 237. Hayter, Roger. (2002). “International trade relations and regional industrial adjust ment: the implications of the 1982-1986 Canadian-US softwood lumber dispute for British Columbia.” Journal of Environment and Planning A 24: 153-170 Herman, Lawrence. (2001). “Introduction: The Softwood Lumber Dispute.” Canada- United States Law Journal, 27: 285-286. Lower, A.R.M. (1938). The North American Assault on the Canadian Forest: A History of the Lumber Trade Between Canada and the United States. Toronto: Ryerson Press. Mach, Helmut. (2001). “The Softwood Lumber Dispute.” Canada-United States Law Journal, 27: 287-295. Nagy, András, ed. (1988). International Trade in Forest Products. Oxon: A B Academic Publishers. Percy, Michael B, and Christian Yoder. (1987). The Softwood Lumber Dispute & Canada~U.S. Trade in Natural Resources. Halifax: The Institute for Research on Public Policy. Shoch, James. (2001). Trading Blows: Party Competition and U.S. Trade Policy in a Globalizing Era. Chapel Hill: The University of North Carolina Press. 40 SASKATCHEWAN ECONOMICS JOURNAL

Articles “B.C. Government Statement on U.S. Softwood Bulletin.” Government of British Columbia. 7 January 2003. “Factors affecting the international softwood lumber market, 1987-93.” Monthly Labor Review, 117 (February 1994). United States Bureau of Labor Statistics: Washington: 21-29 “Forest Gloom: British Columbia.” The Economist. 10 July, 1999. 33. “O'Neill downplays risks of growing trade deficit.” USA Today. 5 February, 2002. “U.S. Gives final OK to tariff on Canadian Lumber.” USA Today. 5 February, 2002. “You've Stumped Us: A quarrel with Canada.” The Economist. 30 March, 2002. 26

Data and Other Sources Statistics Canada. (Table No. V1408963.) Logging Industries, By North American Industry Classification Systems (NAICS): Value Added; Logging. Statistics Canada. (Table No. V4510004). United States Construction, Seasonally Adjusted at Annual Rates: Total Private Housing Starts. THE FUTURE OF GENOMIC IPRS

HARRY HILLMAN CHARTRAND*

I. INTRODUCTION A tidal wave is fast approaching the coast line of modern society. The wake of its bow has already arrived and the contours of the economy are slowly being eroded and reshaped. When its full crest hits sometime this decade it will likely sweep deep inland altering the landscape of human life forever. The tidal wave is genomics, the science of molecular genetics. Initiated by an earthquake in the ocean depths of fundamental science, genomics began some fifty years ago with the discovery by Watson and Cricks of the DNA double helix. Their suggestion that it could split into complementary strands established the physical basis for the encoding and transmission of genetic information within an individual organism and between generations. In this regard, the New York Times on June 13, 1953 ran an article entitled “Clue to Chemistry of Heredity is Found” call- ing DNA “a substance as important to biologists as uranium is to nuclear physicists.” (Overbye 2003). Gathering momentum ever since, genomics achieved critical mass in 1980 with the U.S. Supreme Court decision in Diamond v. Chakrabarty (447 U.S. 303, [1980]). The decision led the U.S. Patent and Trademark Office (USPTO), after initial resistance, to grant genetic patents. As they say, the rest is history. In this article I will provide a wide angled view of the genomic tidal wave. First, I will survey its impact on eight sectors of the economy. Second, I will consider its implications for intellectual property rights (IPRs) - the principal legal channel for directing knowledge towards the public good. Third, I will investigate the principal breakwaters that impede but cannot, in my opinion, stop the tidal wave advancing deep into the heartland. Breakwaters vary significantly between and within nation- states. In one State, a given breakwater - for example, culture, law or politics - may successfully resist specific tidal pressures while the same breakwater yields before the tide in another country. Fourth, I conclude with a forecast of probable and preferred futures of the interaction of genomics and intellectual property rights (IPRs). I make no pretense to scientific competence in genomics (consult your local geneticist) or legal competence in IPRs (consult your lawyer).

* Harry Hillman Chartrand is a Sessional Lecturer in Economics and Ph.D. candidate at the University of Saskatchewan, Canada 42 SASKATCHEWAN ECONOMICS JOURNAL

I am, however, an economist capable of reasoning from the facts and pre- senting an arguable vision of what is, and likely will be, the interaction of genomics and IPRs and their economic impact. The paper is not exhaus- tive but rather illustrative. It is a 'think piece' to serve, funding permitting, as a guide for future research.

II. THE GENOMIC TIDAL WAVE Genomics involves manipulation of the genetic code (deoxyribose nucleic acid or DNA). The code is written in chemical units called nucleotides. Each nucleotide consists of a 5-carbon sugar (deoxyribose), a nitrogen base attached to the sugar, and an acidic phosphate group. There are four nucleotides differing only in their nitrogen base. These are adenine (A); thymine (T); guanine (G); and cytosine (C). These are always paired A -T or C-G. A sequence of three pairs is called a codon encoding an amino acid. Amino acids combine to form proteins “the molecular machines of life” (Hood 2002). DNA encodes the instructions for constructing proteins within a cell. Proteins, in turn, are responsible for the structure and functioning of the living cell and, thereby, of any higher order organism to which it is a constituent part. Manipulation of the code, in turn, assumes one has (Chartrand 2003): a) the tacit knowledge or 'know-how' required to effect a desired change; b) the codified knowledge documenting the code's norm state as well as the success or failure of previous manipulations; and, c) the tooled knowledge or instrumentation required to effect change in the living code. Different sections of code generate specific proteins, either natural or artificial, i.e., not existing in nature, or not naturally produced by a given organism. It is production of specific proteins, their higher order con- structs (such as enzymes) and the pathways of production that are the instrumental objectives of genomics realized in its sister science, proteomics, i.e., the science of proteins. Given the vast array of living things on planet Earth and the different proteins developed and coded by each in its evolutionary struggle for survival, there exists a veritable cornucopia of possible protein codes that may be transferred from one organism to another and/or between types of organisms (transgenetic). Human ingenuity may also introduce novel variations not existing in nature (Economist, February 14, 2003). This implies the ability to adapt every evolutionary success of every life form on the planet to the benefit of humanity. THE FUTURE OF GENOMIC IPR’S 43

To demonstrate the impact of genomics, to date, I will consider eight sectors of the economy: agriculture, art, defense, the environment, health, informatics, justice and materials technology. The survey is not exhaus- tive but rather illustrative. From it, I hope, a sense of the scale and scope of the tidal wave and its effects on the contemporary economic landscape will emerge.

Agriculture Agriculture is the food chain for human life. It also supplies fibers, oils and other outputs that are processed into consumer goods, e.g., cloth- ing, and producer goods, e.g., industrial lubricants. Essentially, agriculture is the original biotechnology. Over its ten thousand years, agriculture has selected and crossed species - animal and plant - to improve and expand the human food chain. This chain, however, is constantly at risk to other life forms competing with humanity for survival - bacteria, fungi, insects, molds, plants (weeds), reptiles and other mammals. While protective measures have historically been effective against larger complex life forms, it is the smaller - bacteria to insect as well as weeds - that present the clearest and most present danger to the human food chain today. They are small, numerous, evolve rapidly and are voracious. Primarily, it has been plant agriculture that has felt the impact of the leading edge of the genomic tidal wave on two fronts - predation and yields. Ideally, food, fiber and oil crops have been genetically altered directly to resist predation, and indirectly, to resist chemical herbicides, fungicides and pesticides targeted at specific pests and no other living thing, e.g., Round Up Ready canola. Yields of all crop types have also been enhanced by application of genomic technology. A lesser, more indirect but nonetheless tangible, impact has been felt in animal agriculture. Yields of animal protein have been enhanced, e.g., using hormones to enhance milk production by cows and growth hormones to 'fatten' cattle and other livestock. Such hormones are increasingly produced using genomic technology. Similarly, cloning has also been used to promote improved breeding stock lines.

Art It has been suggested that what is imagined in the mind of the artist today becomes the reality of tomorrow (Bell 1976: 33-35). That biotechnology has captured the artistic imagination is evidenced in the fine or art- for-art's-sake (Boxer 2003) and the entertainment arts (Chartrand 2000a). In the fine arts, one author - David Lindsay (Lindsay 1997) - has tried to copyright his DNA with the U.S. Copyright Office (without suc- 44 SASKATCHEWAN ECONOMICS JOURNAL cess) and mounted a web page: “The Genome Copyright Project.” Since his initial effort in 1997 a private firm - the DNA Copyright Institute - has appeared on the world-wide web (DNA Copyright Institute 2001). It claims that it: “… provides a scientific and legal forum for discussion and research, as well as access to valid DNA Profiles, among other Services, as a potential legal tool for deterrence and resolution of situations where there is suspected DNA theft and misappropriation.” Steve Tomasula speculatively writes about the rabbit Alba, the first mammal genetically engineered as a work of art in "Genetic Arts and the Aesthetics of Biology" (Tomasula 2002). He compares incipient gene artists with Marcel Deschamp (1887-1968). While the above remain speculative, the fact is that Mike Manwaring, a graduate student at the University of Utah has created what appears to be the first real piece of genetic art: a version of the Olympic Rings entitled "the living rings" made from nerve cells (BBC News On- Line, January 15, 2002). And at least one geneticist, Willem Stemmer, vice president for research and development at Maxygen, is considering transposing code into music to create ‘DNA ditties’ (Fountain 2002) In the entertainment arts, the plots of seven films or television programs serve to highlight the impact of genomics: i) Andrew Niccol's 1998 film: Gattaca (Niccol 1998) Plot: Before one is born, one's DNA is analysed and future capabilities established. There is, however, a black market for superior DNA used to escape one's genetic destiny and the DNA police; ii) Bruce Sterling's 1990 short story: “The Swarm” (Sterling 1990) Plot: the most intelligent species in the galaxy knows that intelli- gence is dangerous so genetically turns it off (genetically represses the trait) until threatened by another intelligent species; iii) Bryan Singer's 2000 film: X-Men (Singer 2000) Plot: Through spontaneous and genomic induced mutation, children are born with extraordinary powers. While the ‘norms’ struggle to deal with the strangers among them, a battle rages between mutants who want to co-exist and those who want to rule; iv) John Carpenter's motion picture, The Thing (Carpenter 1982) Plot: the most successful species in the galaxy ‘snaps on’ the DNA of every species with which it comes into contact insuring survival in any environment by morphing into an appropriate form; v) J. Michael Straczynski's television series Babylon 5, (Straczynski 1993-1998) Plot: the most ancient and intelligent species in the galaxy use quasi-sentient self-healing biotechnical devices and vessels; THE FUTURE OF GENOMIC IPR’S 45

vi) Patrick Lau and Richard Laxton's British television min-series Invasion Earth (Lau and Laxton 1998) Plot: the most intelligent species in the galaxy genetically modifies and 'farms' all other life forms across trans-dimensional space. vii) Ridley Scott's motion picture Blade Runner (Scott 1982) Plot: dangerous jobs including in the military are filled by specially cloned and genetically modified human beings known as 'Replicants' who have false life memories, short lives and a dangerous desire to survive;

Defense If what is imagined in the mind of the artist today becomes the reality of tomorrow, then the military technology of tomorrow is in the planning stage today. With respect to genomic-related technologies this is evident in a U.S. study by the Committee on Opportunities in Biotechnology for Future Army Applications (COBFAA 2001). Fourteen development areas were identified: assay analysis, biocomputing, bioinspired & hybrid materials, biological sources of energy, biomolecular hybrid devices, detection methods, drug delivery, functional foods, genomics & proteomics, miniaturization technologies, protein-based devices, renewable resources, tissue engineering and therapeutic drugs & vaccines. In these areas, forty- five specific biotechnologies were identified and ranked according to investment priority by the Army. A separate ranking was also made of potential commercial application - high/medium/low. For military purposes, the highest ranked technologies included: · genomics-based vaccine developments; · protein-based three-dimensional volumetric memories; · tissue engineered self-replicating systems; and, · vaccine stratification by genomics and toxicogenomics In commercial application, the highest ranked opportunities included: · affinity reagents; · biocapsules for drug delivery · genomics-based vaccine development; · genetically engineered food; · microfabrication/microfluidics; · miniaturization technologies based on biochip architectures and biological nanotechnology; · optical detectors & detector arrays using DNA chips and protein chips; · renewable fuels; 46 SASKATCHEWAN ECONOMICS JOURNAL

· small-molecule and protein therapeutics; · somatic gene therapy · tissue engineered cartilage; and, · vaccine stratification by genomics and toxicogenomics;

Environment As noted above, genomics achieved critical mass in 1980 with the U.S. Supreme Court decision in the case of Diamond v. Chakrabarty (447 U.S. 303, [1980]). The case involved a genetically engineered microor- ganism designed to clean up oil spills. It was the Court decision to grant a patent for this organism that opened the flood gates of genomic technology. Developments since have extended the range of genomic products and processes used in environmental clean up. According to Biotechnology Industry Organization, a U.S. trade association, industries currently using environmental genomic-related technologies include: · The chemical industry: using biocatalysts to produce novel compounds, reduce waste byproducts and improve chemical purity; · The plastics industry: to decrease the use of petroleum for plastic production by making “green plastics” from renewable crops such as corn or soybeans; · The paper industry: to improve manufacturing processes, including the use of enzymes to lower toxic byproducts from pulp processes; · The textiles industry: to lessen toxic byproducts of fabric dying and finishing processes. Fabric detergents are becoming more effective with the addition of enzymes to their active ingredients; · The food industry: for improved baking processes, fermentation- derived preservatives and analysis techniques for food safety; and, · The livestock industry: adding enzymes to increase nutrient uptake and decrease phosphate byproducts.

Health Perhaps the most significant impact of genomics has been on the health of humanity itself. Well known contributions already made, or in the process of being made, include: diagnostic tests for traditional disease and genetic defect; drugs to treat traditional disease and infection; gene therapies to treat formerly incurable pre-existing and environmentally induced genetic conditions; and, transplant organs grown from stem cells (fetal or adult) or extracted from transgenetic hosts, e.g., genetically altered pigs. THE FUTURE OF GENOMIC IPR’S 47

Informatics The information capacity of DNA exceeds all known forms of information storage by an order of magnitude, e.g., computers. The economic impact is two-fold - indirect and direct. Indirectly, the shear volume of information generated by genomic research is such that the information technology industry is investing heavily in the development of cus- tomized hardware and software (Reuters, January 11, 2002). Directly, research is currently underway to develop so-called DNA computers to capitalize on its enormous information storage and processing capacity applied to traditional forms of information (Reaney 2001). The indirect linkage between genomics and informatics can be characterized as ‘dryware’ based on silicon chips, circuits and computers. The direct link can be characterized as ‘wetware’ using carbon-based DNA and other biological components. It is important to appreciate the symbiotic link between dryware and genomics. Genomic progress is accelerating in an instrumental slip stream laid down in the 1950s by developments in solid state physics starting with the transistor. Entangled with emergence of computer science, solid state physics has ushered in a new era in scientific instrumentation. Through devices such as the gene decoder (Hood 2002) and the Hubble space telescope, human senses have been extended outward towards the theoretical limits of macrocosmic time and space and descended into the microscopic building blocks of the physical universe and of life itself. It was, in fact, the combination of this new order of instrumentation married to the initial Cricks/Watson model of DNA that gave birth to genomics as an applied science. It is, accordingly, somehow appropriate that the enormous informational demands of genomics feed- backs on and encourages development of improved dryware while, at the same time, promising an entirely new and different form of informatics technology - wetware.

Justice The impact of genomics on the justice system has been profound - both with respect to effectiveness and cost. The criminal justice system relies on physical evidence as a primary component in its deliberations. In addition to other genomic-based forensic technologies, the advent of “DNA finger printing” has dramatically increased both the quantity and quality of such evidence. The presence and identity of a person - perpe- trator or victim - at a crime scene can be conclusively determined by the presence of his or her DNA contained in minute quantities of bodily fluids, hair follicles and other biological detritus. It significantly reduces 48 SASKATCHEWAN ECONOMICS JOURNAL the probability that the innocent will be charged and the guilty escape justice. From a strictly economic perspective the definitiveness of genomic evidence reduces the enormous costs associated with wrongful convic- tions - investigative, prosecutorial, incarceration and legal damages sought by wrongly convicted persons.

Materials Technology As noted above, genomics can effectively access code for the production of proteins and its derivatives of any living organism. In most cases, such materials exceed the strengths, tolerances and other characteristics of comparable man-made materials because they are built up from the molecular level. For example, spider silk is stronger and more flexible than steel. By transferring the relevant code to goats, spider silk is currently being produced in goat milk in quantities that may support a com- mercially viable specialized textile industry (Noble 2002). In theory, the genetic code that generates inorganic materials in some organisms such as biosilicates may be used to make silicon chips. The range of materials that can be produced using genomic technology is limited only by the genetic codes of living things and the human imagination.

III. IPR CHANNELS OF CHANGE Formal intellectual property rights (IPRs) such as copyrights, patents, registered industrial designs and trademarks, are created by the State as a protection of, and incentive to, creativity which otherwise could be used freely by others. In economic terms, without such legislated rights, knowledge suffers the free-rider problem. In return, the State expects creators to make their work available and that a market will be created in which such work can be bought and sold. But while the State wishes to encourage creativity, it does not want to foster harmful market power. Accordingly, it builds in limitations to the rights granted to the creator. Such limitations embrace both time and space. Rights are granted: · for a fixed period of time, i.e., either for a specific number of years or for the life of the creator plus a fixed number of years; and, · only for the fixation of creativity in material form, i.e., it is not ideas but rather their expression in material form (a matrix) that receives protection. Eventually all intellectual property (all knowledge) enters the public domain where it may be used by anyone - without charge or limitation. This public domain or ‘intellectual commons’ exhibits characteristics different from the physical commons, e.g., the atmosphere and oceans. By nature and law, the public knowledge domain grows and increases. In law, IPRs are justified as a way of increasing the public knowledge THE FUTURE OF GENOMIC IPR’S 49 domain. Even while rights are in force, there are exceptions such as ‘fair use’ or ‘fair dealing’ with copyright. In the case of patents, national statutes and international conventions generally permit ‘research’ using patented products and processes by profit, nonprofit and public agents. Governments also retain the authority to waive all rights in “situations of national emergency or other circumstances of extreme urgency…” (WTO/TRIPS 1994, Article 31b). To demonstrate the interaction of genomics and IPRs I will outline the nature of each IPR type and demonstrate how genomics qualifies for protection - in fact or theory. Before doing so, however, a question needs to be answered: Why does an “idea” not receive protection? In the case of copyright, it is not the idea but its expression fixed in a physical matrix that receives protection; in the case of patents, it is the form not the function of an invention that receives protection. The answer lays in the opinion of Justice Yates in the critically important 1769 copyright case of Millar v. Taylor (Chartrand 2000b): - Mr. Justice Yates had very clear and definite notions as to the limits of property, but a reference which he makes to the civil law throws a stronger light on his view of the whole subject than any of his direct reasoning. What the Institutes have to say relating to “wild animals,” he observes, “is very applicable to this case.” And he then proceeds to draw a comparison between these two singularly related subjects. Animals ferae naturae are yours “while they continue in your possession, but no longer.” So those wild and volatile objects which we call ideas are yours as long as they are properly kenneled in the mind. Once unchain or publish them, and they “become incapable of being any longer a subject of property; all mankind are equally entitled to read them; and every reader becomes as fully possessed of all the ideas as the author himself ever was.” (Sedgwick 1879) Ideas are not protected because they are like wild animals that once free belong to no one and everyone at the same time, i.e., they are in the public domain. It is only their specific expression fixed in material form - com- monly known as a work or an invention - that qualifies for protection.

IV. IPRSASBUNDLES OF RIGHTS IPRs act as ‘bundles of rights.’ Exhibit 3 from a previous paper provides an overview of such rights. Exhibit 3: Intellectual Property as a ‘Bundle of Rights’ Patents Industrial Designs Copyrights Genetic Rights Adaptation Assignment 50 SASKATCHEWAN ECONOMICS JOURNAL

Breadth Duration Eligibility Licensing National Treatment Scope Subject Matter Transfer Translation Trademarks Other

Copyrights Copyrights are rights traditionally granted to creators of artistic and literary works. They have, however, been extended over time to include: · artistic works such as choreography; drawings, motion pictures, musical compositions, paintings, photographs, sculptures and works of architecture; · literary works such as novels, poems, plays and reference works, and, · commercial or utilitarian works such as advertisements, computer programs, databases, maps and newspapers. Copyrights are granted to natural and legal persons. When granted to a natural person they endure for the life of the artist/creator plus a fixed number of years that varies between countries, e.g., in Canada for fifty years and in the United States for seventy-five years. Copyrights granted to legal persons are for a fixed number of years that also varies between countries. Furthermore, in the Civil Code tradition, natural persons including employees receive certain imprescriptable rights not available or transferable to legal persons, e.g., droit de suite or rights of following sales in the visual arts and moral rights. Some Civil Code rights introduced in Anglo-American countries but such rights remain transferable to legal persons extinguishing rights of the original creator. This reflects the Common Law tradition of extending all rights available to natural to legal persons. No formal registration is required. Copyright adheres to a work on creation. Copyright cannot be renewed. Indirectly, it is arguable that copyright adheres to genomic databases and other documentation - hard-copy, electronic or in any future matrix. The question of what constitutes a matrix, however, is problematic, changing as it does through time. Directly, it is arguable that copyright adheres to gene segments themselves. The question in law appears to be originality. Naturally occurring sequences, according to some, are ‘facts of nature’ and hence copyright cannot adhere. In the case of ‘original’ sequences, however, i.e., those created through human ingenuity - a.k.a. artificial, there appears no reason for copyright not to adhere as in soft- THE FUTURE OF GENOMIC IPR’S 51 ware computer programs. Designs Industrial design involves the arrangement of elements or details that contribute a distinctive aesthetic appearance rather than a function to a good or service. In this sense there is a relationship between copyright protecting a work of art and industrial design. Both involve aesthetics but in the case of a copyright the aesthetic element is fixed in a matrix that has no utilitarian value. By contrast the aesthetic element of industrial design is fixed in a utilitarian matrix, e.g., a coffee cup without a design retains its function. In addition, an original work of art tends to be unique while an industrial design is usually produced in large numbers. Industrial design protection can be obtained by both natural and legal persons. Industrial design emerges from the Arts. It is important to note, however, that industrial design evolved from copyright in the British Commonwealth but from patents in the United States. Design protection is granted for a fixed time period (for, example, 14 years in the United States) after which the design enters the public domain. Registration and payment of fees are required. Industrial design cannot be renewed. It is arguable that the ‘living rings’ (see above: Art) is the precursor of a family of aesthetic, rather than functional, genomic applications. Indirectly, such logos could include marking the growth, development and diversification of an institutional host - public, profit and nonprofit. Directly, it is arguable that genomics in industrial design is just a matter of time, i.e., until the industry becomes crowded and product diversification generates ‘genomic boutiques’ selling the genomic equivalent of the Chia planter. Patents Patents are granted for new and useful compositions of matter (e.g., chemical compounds, foods, and medicinal products), machines, manufactured products and industrial processes as well as to improvements to existing ones. In some jurisdictions, patents can also be granted to new plant and new animal forms developed through genetic engineering. Through case law and amendment, U.S. patents have, over time, extended to three basic types: patents of invention, design patents and plant patents. In all cases, registration is required and fees must be paid. To be patentable, an invention, design or plant must be novel, useful and, non-obvious “to one of ordinary skill in the art.” A description of the invention must be deposited, in writing and drawings, sufficiently detailed to allow one of ordinary skill in the art to replicate the invention. This insures that new knowledge enters the public 52 SASKATCHEWAN ECONOMICS JOURNAL domain while the rights of the inventor are protected. In the case of microorganisms, description can take the form of a deposit of a sample with an authorized depository. Patent protection is for a fixed period of time (in the U.S., currently 20 years from the date of filing) after which it enters the public domain. It can be obtained by both natural and legal persons. In general, these terms and conditions hold in all countries in the Anglo-American tradition. Patents cannot be renewed. Directly, with Diamond v. Chakrabarty in 1980 genomics became patentable. From the growth of the biotechnology industry since that decision, one can reasonably infer the effect of this 'change in the rules'. The financial incentive of a temporary monopoly was established. The question of how far up the chain of life patents will extend remains problematic. In the United States and the European Union, for example, a patent has been granted on the ‘Harvard mouse’; in Canada, by contrast, a patent was recently rejected by the Supreme Court. Most First World countries are actively engaged in debate about human cloning, perhaps to foreclose the ‘Blade Runner’ scenario (see above: Art). In most Second and Third World nation-states, the debate has not been engaged because of more pressing socio-economic problems. Indirectly, it can be argued that as genomics matures the equivalent of ‘business process patents’ will emerge similar to those granted by the USPTO. Professional researchers can already call commercial labs and have specific sequences delivered to their door. How such labs organize their future business processes may permit patenting. Sui Generus Sui generis in Latin means “of its own kind.” There are two internationally recognized types of sui generis genomic-related intellectual property rights. These are: · breeders' rights for 'lines' of plants and animals generated using pre-genomic 'selective breeding' technology; and, · a special depository right for microorganisms in lieu of traditional patent requirements of a written description and drawings. Given such special legal recognition, it can be argued that a whole new class of legal hybridomas (sui generis) rights made up of elements drawn from copyright, design, patent, trademark and trade secret & know-how rights may be in order. Such rights would more effectively legally treat and financially encourage specific lines (and by default, discourage others) of genomic intellectual property. What types is problematic because it is political in nature (see below: Politics). Trademarks THE FUTURE OF GENOMIC IPR’S 53

Trademarks (and marks of origin) are devices such as a word, logo or other mark pointing to the origin or ownership of a good or service that is reserved for the exclusive use of its owner as maker or seller. Today, its application has, de facto, extended to ‘domain names’ on the internet or world-wide web. The World Intellectual Property Organization (WIPO) has established dispute settlement mechanisms to resolve ‘cyber squatting’, i.e. registering a domain name using the name or trademark of an established business enterprise or celebrity, e.g. Julie Roberts, with the intention of selling that registration to its recognized trademark holder for a profit. At the international level, however, only the Common Industrial Property Regime of the Andean Community of 2000 makes explicit reference to web domain names (Chartrand 2001). Registration and the payment of fees are required. A trademark is granted only for new marks so as not to confuse the public. It is available to both natural and legal persons. Unlike other forms of IPRs, however, trademarks can be renewed and can potentially be extended in perpetuity. Indirectly, (as previously argued above: Designs) the ‘living rings’ may be the precursor of a family of aesthetic, rather than functional, genomic applications including corporate logos. Such logos could mark the growth, development and diversification of any institutional host. Directly, it is arguable that ‘lines’of patented genomic sequences will bear an invisible ‘housemark’ (Kayton 1984, 214n) that will serve as trademark, a mark of quality assurance; its absence or forgery a sign of copyright, design, patent and/or trademark infringement. Trade Secrets & Know-How Trade secrets and know-how are the least protected of any form of intellectual property right. Know-how refers literally to knowing how to do something, e.g., how to run a construction project. It includes knowledge and experience of an administrative, commercial, financial or technical nature used in running a business or performing a profession. It is experiential in nature, i.e., it is acquired through practice and experience. It also tends to be ‘tacit’ rather than ‘codified’ (OECD 1996) and embodied in an individual rather than in an external matrix. In most countries, know-how is protected by contract binding employees and other agents to confidentiality. When a natural or legal person (including a government) discovers that know-how has been revealed by an agent without permis- sion, legal recourse is available through breach of contract before the courts. No registration is required. Know-how can be protected without time limit. 54 SASKATCHEWAN ECONOMICS JOURNAL

Trade secrets can be defined as information of a technical or commercial nature that is not in the public domain nor generally available. It may be a formula, pattern, physical device, idea, process, compilation of information or other information that provides a competitive advantage in the marketplace. It is generally protected by contract binding employees and other agents to confidentiality. Normally the courts require that a trade secret be treated by its owner in such a manner that it can reasonably be expected to prevent the public or competitors from learning about it except by improper acquisition or theft. In the case of electronic data this includes using encryption and “password” technologies. The most famous trade secret is the formula for Coca-Cola. A trade secret may be embodied in written or other codified form or it may be tacit. No registration is required. There is no time limit on a trade secret as long as it remains secret. While know-how and trade secrets are often used as synonyms they need not be so. In the case of management and franchises, for example, know-how is usually accessible to third parties when being used. Single elements may be kept secret but the overall concept cannot be. Indirectly, trade secrets such as the formula for Coca-Cola and know-how are protected in genomics by private contract enforceable in the courts. Where in a nation's judicial hierarchy such cases will be heard, however, varies, e.g., in the United States it is at the State level. Some international conventions, e.g., TRIPS and the Andean Pact Industrial Property Convention recognize infringement of both. In effect, when a senior executive moves from one ‘major’in one country to one in another, an international form of ‘legal’ lobotomy is enforced; the executive and new employer may both be held liable. In William Gibson's future world of Neuromancer, corporations protect their know-how and trade secrets by implanting genomically designed “neural bombs” (Gibson 1984). If an employee's loyalty slips, the bomb goes off killing or mentally maiming: the bottom line, the knowledge is protected. Directly, know-how or ‘lab bench knowledge’ and team work in genomics is similar to that in the Arts. A group of highly talented and creative individuals generate what in economics is called ‘economies of team production’. Division and specialization of labour combined with experience and growing trust generates know-how that leads to excellence. Such excellence, in turn, becomes embodied in the trademark of the team or firm together with the financial goodwill associated with it. In this sense, business goodwill is also a form of intellectual property (Commons 1924).

V. B REAKWATERS While IPRs act like channels directing knowledge towards the public good, there are breakwaters to slow, stop or deflect the floodtides of THE FUTURE OF GENOMIC IPR’S 55 change. These act like a counterpart to Schumpeter's ‘creative destruction’ (Schumpeter 1950). The major breakwaters are culture, law and politics. Culture Culture refers inclusively to, but not exhaustively of: art, custom, economics, habit, language, law, life ways, religion, science and technology. All organically interact and collectively leave a footprint in time called the history of a nation-state. Passage and integration of significant new bodies of knowledge and technologies through the living tissue of a society has always confronted institutional, legal and other impediments. Consider three historical examples. First, the ancient Indus Valley culture (about 3,000 to 1,500 B.C.E.) appears to have rejected a new technology of war - the socket-headed axe - then fell under the blows of invaders who adopted it. Second, medieval China had gunpowder and transoceanic sailing ships but repressed them until European gunboats humiliated and partitioned the Middle Kingdom in the 19th century. Third, medieval Islamic medicine was the best of its time. But the human body, created in God's image, is, in Moslem tradition, a temple not to be violated. When surgery emerged as the next step in medical progress, Islam inhibited its use and rapidly fell behind the West. The breakwaters of these societies succeeded in stopping change but at the price of decline and fall. Unlike these historical examples, however, genomics is not a single technology but rather a new technological complex affecting every sector of the economy. Resistance, accordingly, is sectoral rather than global. This is evident in the clashing positions of nation-states regarding fetal tissue research. Sweden has embraced it; Britain regulates it; the United States rejects it; and, figuratively, Canada can't make up its mind. The breakwater appears to be religion as is the case with xenogenetic trans- plants, particularly from pigs. It is unlikely that Islamic or orthodox Jewish cultures will accept, let alone support, this line of genomic research. The fact that the European Union is more resistant to genetically modified foodstuffs but more accepting of medical genomics than the United States highlights the sectoral and selective nature of the cultural breakwater. In short, every culture has its own distinct sense of what the Greeks called kosmos - the right ordering of the multiple parts of the world. This sense is grounded in aesthetics. What to some is beautiful and inviting to others is ugly and disgusting. What is the best of food to one is franken- food to another. Taste thus plays a critical role in the sectoral resistance of nation-states to genomics. In effect, the tidal wave of genomics cannot be stopped but the breakwater of culture slows and/or deflects it according to national taste. 56 SASKATCHEWAN ECONOMICS JOURNAL

Law In the Anglo-American Common Law tradition there are two principal types of law: statutory and case law. The first is established by the legislature in its role as lawmaker; the second is determined by the courts in its role as interpreter. The dynamic between the two is critically important as is evidenced by Diamond v. Chakrabarty wherein the U.S. Supreme Court concluded because the legislature had not explicitly excluded genetic patents in the statute - the Patent Act - they were legal. Precedent plays a critical role in case law but it extends beyond prior legal decision to customary business practice. J.R. Commons identified the practice of common law courts accepting and then enforcing customary business practices as emanating from the Statute of Monopolies of 1624. The next hundred years, until the Act of Settlement in 1700, was substantially the struggle of farmers and business men to become members of the Commonwealth, whereby they might have courts of law willing and able to convert their customary bargains into a common law of property and liberty. The court which abolished the power of the gilds began to take over the work of the gilds. Their private jurisdiction became a public jurisdiction. And the very customs which the gilds endeavored to enforce within their ranks became the customs which the courts enforced for the nation. The monopoly, the closed shop, and the private jurisdiction were gone, but the economics and ethics remained. Much later, in the modern commonwealth, other functions of the gilds, such as protection of the quality of the product and the qualifications of practitioners, have also been taken over by courts or legislatures (Commons 1924: 230). As genomics matures, this process of absorbing customary business practice into law will likely continue. With respect to genomics, as a new genre of business, the courts may well be pressed to interpret what will likely become a flood of statutory law. This probability is higher because of the tender state of tort law, i.e., non-contractual benefit and damage. It is here, as well as in intellectual property rights, that differences between the Anglo-American tradition of decision by precedent and the European Civil Code tradition of decision by ‘principle’ becomes most evident. Product liability attains a higher order when the product becomes ‘genetic.’ The law of torts appears, to me at least, the most resistant legal breakwater to the genomic tidal wave. Intellectual property rights, on the other hand, have, to date, been one of the most accommodating. Politics Politics is about power: Economics is about profit. When political power arises from economic profit and profit arises from political power, then one has political economy as Adam Smith understood it. Setting THE FUTURE OF GENOMIC IPR’S 57 enterprise free from government interference was to be matched by its divorce from political power. To the degree that the law is political in origin and to the degree that customary business practice becomes accepted and enforced as Common Law, the divorce has not been finalized. Smith had Continental competitors - the Physiocrats. They too believed in: … laissez faire, laissez passer, meaning thereby freedom to do, or freedom to make, and freedom to pass; or, as Marshall put it, “let people make whatever they like and move wherever they like.” (Samuels 1962, 157). Unlike Smith, however, they believed in government interference, not with the market, but with definition of property rights. They wanted private self-interest and gain to drive the economy towards socially desirable goals. In fact they believed that the economy, by definition of property rights, was fundamentally legal in nature. It was by changing the rewards, rather than rules of the game, that the Physiocrats hoped to make France the most competitive of nations. In many ways the current situation with genomic IPRs poses the same challenge to all modern nation-states. What is the right ‘rights’ regime?

VI. IPRS AND THE PHYSIOCRATIC PARADIGM In the main text I failed to stress, to my satisfaction, the nature of the Physiocratic policy paradigm. Exhibit 2 from a previous paper provides an overview of such rights. Exhibit 2: The Neo Physiocratic Policy Paradigm OBJECTIVE: the economic and cultural growth of the nation, absolutely, and relative to its rivals STRATEGY: choice of a core sector whose health and development contributes most in attaining the national objective TACTICS: creation of instruments- property rights and mutable legal structures of institutions - to direct individual and collective behaviour towards development of core capabilities LOGISTICS: deployment of core enhancing instruments into a free wheeling, private property, laissez faire, laissez passer marketplace

VII. QUE SERA SERA: WHAT WILL BE, WILL BE! Unlike the tragic inhabitants of the island nation of Naru, we need not simply stand on the beach watching the wave front approach (in their case a typhoon) or bury ourselves deep to wait for the wave to pass. In effect, genomics provides our species with the means to consciously re- shape itself and all life on the planet literally from the ground up. The 58 SASKATCHEWAN ECONOMICS JOURNAL evolutionary implications are approximated in Edgar Zilsel's comparison of geological and historical time: - Dividing lines between different sciences have barred scientific progress so often, that it certainly is useful and even necessary to consider history from a naturalist's point of view. But if this is done, it must be done correctly. Since the crust of the earth became solid 1 or 2 x 10 9 years have passed, whereas the whole history of mankind since the period of the first Egyptian and Sumerian kings until present times has lasted about 5000 years. So “geological” to “historical” time is as 300,000 to 1. History, therefore, even from the naturalist's point of view is scarcely one section among other sections of the evolution of life. To think e.g. that the biological rise of mammals during the tertiary period and the political rise of Germany since 1933 belong to one line of evolution is the same as to consider the transition from winter to summer a continuation of the dying away of the glacial period (Zilsel 1940, 121-122). In one generation genomics can accomplish what evolution would have taken forever to achieve! Time has changed - not chronological time - rather the evolutionary rate of humankind. In a manner of speaking, humanity has attained if not exceeded the evolutionary rate of insects and microbes. What is its probable and preferred future? One preferred future is, perhaps, a New Renaissance in which the geneticist, like the 15th century artist/engineer/humanist/scientist, claims godlike powers of creation, i.e., creating out of nothing - ex nihilo (Nahm 1947, 1950). In turn, the geneticist may wash the ‘dirty hands’ of physicists whose atomic bomb was dedicated to the destruction of life, while genomics is dedicated to its proliferation and diversification under the guiding hand of humanity. Another is that the overarching questions raised by genomics are consciously answered in a holistic system of statutes. This would include enunciation of ethical and moral standards reflecting national taste. It would provide explicit definition of statutory genomic property rights that are, and are not, recognized and for which a temporary monopoly is offered as reward for change and innovation. Tort protection would be changed to recognize customary business practices in genomics - what constitutes primae facia evidence of due diligence. Explicit recognition would be given to opportunities foregone and an acceptance of the challenge of competitiveness represented by nation-states that choose to go down such forbidden trails. Like the Physiocrats we would define property rights and let the games begin - laissez faire, laissez passer. What is the probable future? Probably, unrelated and fragmentary sectoral reactions will take place in response to specific manifestations of the technological imperative and the forces of international competitive- THE FUTURE OF GENOMIC IPR’S 59 ness. Assuming genomics has reached the stage of ‘normal science’ (Kuhn 1996) then puzzle solving can be expected to generate a plethora of innovations, breakthroughs and/or perceived threats to the existing social order keeping the legislature and the courts busy for some time to come. There will be piecemeal responses until one morning, like Smith in Orwell's 1984, we will wake up to the fact that the revolution happened more than a decade ago and we didn't even know it! Que sera sera: What will be, will be!

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Bell, D. (1976). The Cultural Contradictions of Capitalism. New York: Basic Books. Chartrand, H.H., (2000a). “Towards an American Arts Industry” in The Public Life of the Arts in America, Joni Cherbo and M. Wyszomirski (eds), Rutgers University Press. Chartrand, H.H., (2000b). “Copyright C.P.U. Creators, Proprietors & Users.” Journal of Arts Management, Law & Society, 30(3) (Fall). Chartrand, H.H., (2001). The Compleat Multilateral Trademarks and Industrial Design Agreements, Conventions & Treaties 2001 (ISBN 0-9689523-3-X). COBFAA, Opportunities in Biotechnology for Future Army Applications, National Academy Press, http://books.nap.edu/books/0309075556/html/index.html, 2001/06/20. Commons, John R., (1939). The Legal Foundations of Capitalism - Chapter VII: ‘The Price Bargain.’ © 1924, MacMillan, NYC. DNA Copyright Instiute, Welcome, http://www.dnacopy.com/index.html, 2001. Diamond v. Chakrabarty (447 U.S. 303, [1980]) Gibson, W., (1984). Neuromancer. New York: Ace. Hood, L., (2002). “A Personal View of Molecular Technology and How It Has Changed Biology.” Journal of Proteome Research, 1 (5): 399-409. Kayton, I., (1982). “Copyright in Living Genetically Engineered Works.” George Washington Law Review. 50(2) (January): 191-218. Lindsay, D., (1997). “The Genomic Copyright Project,” http://ourworld.com- puserve.com/homepages/madnessbook/genome1.html. Nahm, M.C., (1947). “The Theological Background of the Theory of the Artist as Creator.” Journal of the History of Ideas. 8(3) (June): 363-372. Nahm, M.C., (1950). “Genius and Aesthetic Relation of the Arts.” The Journal of Aesthetics and Art Criticism. 9(1) (September): 1-12. OECD, (1996). The Knowledge-Based Economy. Paris: Organization for Economic Cooperation and Development. Schumpeter, J.A., (1962). Capitalism, Socialism and Democracy (3rd Ed), - Chapter VII - ‘The Process of Creative Destruction.’ New York: Harper Torchbooks. Samuels, W.J., (1962). “The Physiocratic Theory of Economic Policy.” Quarterly Journal of Economics, 76(1) (February): 145-162. 60 SASKATCHEWAN ECONOMICS JOURNAL

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KURT MANZ*

I. INTRODUCTION In 1993, former South African President Nelson Mandela declared that the primary motivation of the African National Congress's economic policies was to place South Africa on the path of rapid economic development, with a view to address three key problem areas: slow growth, severe poverty, and extreme inequalities in living standards (Handley and Mills, 1996). The intention of this paper is to study the economic and social consequences of apartheid that are still plaguing the South African economy and restricting its economic development. Section II of this paper compares South Africa's geographic, social and economic indicators to those of its neighbors and to other middle-income countries. Section III provides a brief historical overview of South African development, while Section IV outlines some prevailing problems in South African society and relates these problems to the economic challenges that can be expected in the years ahead. In Section V we consider policies need- ed to bring about social development in South Africa. Section VI summarizes the findings in this paper.

II. STATISTICAL AND COMPARATIVE ANALYSIS OF SOUTH AFRICA South Africa is the largest country in Southern Africa. With 1.22 million square kilometers, it has the largest population of 42.8 million people (see table 1). Comparable to Mozambique and Namibia population growth rates, South Africa's was 2.23% per annum in 2000. Based on its real gross domestic product (GDP), South Africa has been classified as a middle income country. The rich endowment of mineral resources had allowed for significant growth in South Africa's real GDP in the early years. However, with the exception of short periods of gold market booms, the South African economy has grown very slowly since the early 1970s. Annual GDP growth declined from approximately six percent in the 1960s to below four percent the following decade, and has barely reached one percent during the 1980s. The economy contracted sharply during the recession-bound 1990s, and in all but one of the past 12 years per capita incomes have declined (Handley and Mills, 1996).

* Kurt Manz is an Undergraduate Student in Economics at the University of Saskatchewan, Canada 62 SASKATCHEWAN ECONOMICS JOURNAL

TABLE 1: SOUTH AFRICAN REGIONAL PERSPECTIVE

Area (sq km) Population (m) Population Growth

Botswana 600,400 1.6 0.87 Lesotho 30,400 2.04 1.32 Namibia 823,100 1.76 2.23 Zimbabwe 390,600 12.6 1.91 Mozambique 801,600 17.7 2.24 South Africa 1,220,000 42.8 2.23

Source: Lachman & Bercuson (1992)

TABLE 2:COMPARATIVE ECONOMIC INDICATORS FOR SOUTH AFRICA AND LOW MIDDLE-INCOME COUNTRIES (2000)

GDP In fan t (U.S. dollars) Life Morality (million) Expectancy (per 1,000)

South Africa 128,000 47.8 62.8 Algeria 53,300 71 33.3 China 1,080,000 70.3 32 Egypt 98,800 67.5 41.8 Russian Federation 260,000 65.3 16.2 Turkey 199,000 70 34.5

Source: World Bank

Although, South Africa is considered to be a low-to-middle income country, the development status of South Africa shows the country to be decidedly inferior to other low-middle income countries. In other countries the life expectancy indicator ranges from Russia's 65.3 years to Algeria's 71.0 years, whereas South Africa's is a mere 47.8 years (see Table 2). In comparing infant mortality rate, South Africa's is 62.8% whereas for most of the low-middle income countries infant mortality is in the 30th percentile. These observations suggest that South Africa is more suitably classified with its low- income African neighbors. Referring to Table 3, one can see that South Africa's life expectancy, infant mortality rate, and adult literacy are all comparable to other Southern African countries. SOUTH AFRICA AFTER APARTHEID 63

TABLE 3: COMPARATIVE ECONOMIC INDICATORS FOR SOUTH AFRICA AND ITS NEIGHBORS

GDP Per Capita Infant Adult (U.S. dollars) Daily Calorie Life Morality Literacy (million) Supply Expectancy (per 1,000) (15+, in percent) 2000 1988 2000 2000 1985

South Africa 128,000 3,035 47.8 62.8 85 Botswana 5,290 2,269 40 58.1 70 Lesotho 899 2,307 44 44 72.6 Mozambique 3,810 1,632 42.4 129.3 27.6 Namibia 3,480 1,889 47.2 62.5 73 Zimbabwe 7,200 2,232 40 69 62.3

Source: World Bank TABLE 4: HDI RANKING ACCORDING TO THE HUMAN DEVELOPMENT REPORT

South Africa Canada Guinea

HDI ranking 93 1 173 Life expectancy at birth 62.2 77.2 43.9 (years) (1992) Adult Literacy rate (%) 80.0 99.0 26.9 Mean year of schooling 3.9 12.2 0.9 Literary Index 0.80 0.99 0.27 Schooling Index 0.26 0.82 0.06 Educational attainment 1.86 2.80 0.06 (1992) Real GDP per capita 3,885 19,320 500 (PPS$) (1992) HDI (1992) 0.650 0.932 0.191

Source Handley & Mills (1996)

Table 4 shows human development as ranked by the United Nations. South Africa's human development is 93 out of 173. Canada is ranked number 1 and Guinea is ranked at 173 (Handley and Mills, 1996).

III. STAGES OF DEVELOPMENT The early discovery of diamonds in the Kimberley region and gold in the Witwatersrand gave South Africa hope. It was the location of these resources in South Africa's interior, however, which fueled the rapid economic growth. The extraction and the processing of the ore required heavy equipment, power supplies, and large forces of organized labor. These factors were responsible for the establishment of a 64 SASKATCHEWAN ECONOMICS JOURNAL rail system, the opening up of the coal fields for generation of electric- ity, the establishment of urban concentrations, commercial farming and manufacturing interests of the interior (Abedian, 1992). At the Union of 1910, the economy was based mainly on farming and mining, but both these sectors suffered setbacks during the build- up towards the Great Depression of 1929. Since that time agriculture has decreased in importance domestically, and contributed only 6.21 per cent to overall GDP in 1990. In the manufacturing sector, the political victory of the Pact government (a coalition comprising of Afrikaner nationalists and representatives of immigrant labour) in 1925 replaced the laissez-faire economic philosophy with the subsequent promotion of manufacturing by the state. This state intervention in the economy eventually resulted in the implementation of import substitution policies. The coming of power of the Nationalist government in 1948 marked the beginning of the apartheid. The apartheid was the Nationalists' program for reshaping the economy and the society along racial lines to ensure the prosperity of the white Afrikaners. Apartheid imposed restrictions on the rights of blacks to own or occupy property in designated “white” areas as well as regulations preventing direct labor market competition between blacks and whites (Lowenberg, 1997). The Population Registration Act (1950), which required that each person's race be identified, was the first piece of legislation that would initiate the classification and separation of the races in South Africa. Other pieces of legislation followed, which would have dire economic and political consequences on the future of South Africa, such as the Bantu Education Act (1952). This act instituted state control of education for Africans and established a new curriculum designed to prepare them for a lower place in the economy and society (Lewis, 1990). Twenty years later, apartheid policies had resulted in South Africa having one of the most skewed distributions of income in the world. By 1985, the homelands, representing 33 per cent of the population, produced only 2.5 percent of South Africa's total GDP. Per capita urban income, by contrast, was nearly thirty times greater than that of the homelands. However, two important changes in the labor market contributed to a narrowing of the wage gap. First, a dramatic increase in wages paid to labor in the gold mines increased the workers' real wage over 160 per cent between 1970 and 1975. The wage increases were large enough to affect the rest of the economy, and wages in manufacturing also increased. The second important change was the legalization of black trade unions following the SOUTH AFRICA AFTER APARTHEID 65

Wiehahn recommendations. This paved the way for black labor cohe- sion and further helped reduce the wage gap (Abedian, 1992). South Africa's apartheid system eventually became to costly to maintain and ultimately collapsed in 1994. The demise of the system was largely a result of the inefficiencies caused by the apartheid policies on South Africa's weak economic structure. Labor market regulation and industrial decentralization policy inhibited efficient resource utilization, especially as the manufacturing sector became more prominent in national output. In addition, apartheid educational policies generated skill shortages. An import substitution strategy distorted trade patterns, exacerbated dependence on foreign capital inflows, and created chronic balance of payments difficulties. These internal weaknesses enhanced South Africa's vulnerability to capital flight, changes in world prices and business cycle conditions, and political changes abroad. The collapse culminated with the system being completely dismantled, the legalization of the ANC, and the democratic election of a black majority government. (Lowenberg, 1997).

IV. SOCIAL CHALLENGES IN SOUTH AFRICA FOLLOWING APARTHEID The legacy of the apartheid is that South Africa, a member of the semi-industrialized economies as classified by the World Bank, continues to perform like a typical low-income country when social indicators are considered (Luiz, 1996). Even though expenditure on social services compare very well with international norms, South Africa's human development index was 0.65 in 1992 (see Table 4 of the previous section). The consequences of the racially discriminatory policies and unequal distribution of income are also apparent in the inability of the health and educational systems to meet the needs of the South African population as well as in the rapid growth of unemployment and the spread of poverty. Despite the end of apartheid, South Africa continues to display extreme inequalities in the distribution of wealth. From 1991 to 1996, as apartheid was being dismantled, the poorest 40 percent of black households experienced a decline in income of 20 percent. In 1996, the income of the richest 20% of households is some 45 times that of the poorest 20% (Handley and Mills, 1996). Over the years income inequality has increased significantly, the Gini Coefficient rising from 0.55 in 1960 to 0.68 in 1994 (see table 5). In 2000, average per capita disposable income for black South Africans was only 14.9 per cent of that of white citizens (Ho and Schneider, 2002). 66 SASKATCHEWAN ECONOMICS JOURNAL

However, John Luiz (1996) TABLE 5: GINI COEFFICIENT states that inequality is no longer ASSUMING INCOME EQUALITY simply a racial issue, as inequal- WITHIN RACIAL GROUPS ity within the black population is estimated by a coefficient of Year Gini Coefficient 0.62 (a sharp increase from 1975 Personal Income when it was 0.47). Among whites this measure has risen 1960 0.55 from 0.36 to 0.46. Of income 1965 0.56 differences, 75 per cent can thus 1970 0.53 be attributed to intra-group dis- 1975 0.49 1980 0.5 parities while only 25 per cent 1985 0.51 represents the black-white gap. 1987 0.48 This implies that inequality 1994 0.68 between races has diminished and yet South Africans of all Source:Handley & Mills (1996) races are worse off then they were two decades ago. The poor quality of health care that was available to blacks during apartheid continues today. Even though government expenditure on health has been about 3 per cent of GNP, an appropriate or expected proportion given South Africa's current stage of development, the country's health indicators are among the worst for the upper-middle income countries. In 2001, South Africa's health care system ranked 151st out of 191 countries in health attainment (Ho and Schneider, 2002). The low ranking is due to South Africa's poor utilization of its economic resources in meeting health needs. Regression results per- formed by Van der Berg (1990) indicate that South Africa's actual health performance compares poorly with its expected performance given its level of income, medical personnel and overall food supply. The results also show that anticipated life expectancy is 66 years compared to 61 years in actuality, while infant mortality should have been 47 (per 1,000 births), a predicted value that represents only 35 per cent of the actual infant mortality recorded (Luiz, 1996). In addition to these indicators, South Africa's poor health system has been reflected in a number of epidemics, most notably a massive cholera outbreak that infected more than 80,000 people. As well, the AIDS pandemic has only exacerbated the poor quality of health in the country (Ho and Schneider, 2002). A similar picture emerges in the education sector. South Africa's expenditure on education is comparatively high by international standards; the average proportion spent on education in industrialized countries is 5 per cent of GDP compared to 5.2 per cent of South SOUTH AFRICA AFTER APARTHEID 67

Africa's GDP in 1983. Nevertheless, it is widely held that education in South Africa is in a crisis. The matric pass rate has consistently hovered around 40 per cent, while the average educational attainment of the adult population is only seven years of schooling (Luiz, 1996). In 2000, South African students had among the worst numeracy, literacy, and life skills in Africa (Ho and Schneider, 2002) - 12.5 million South Africans (30% of the population) are said to be illiterate (Handley and Mills, 1996). The main problem is that approximately 90 per cent of schools are still racially homogenous, with vast quality differences associated with the racial composition of students. In 1989, per capita expenditures in education was 3,082 Rand for whites and only 765 Rand for blacks (Luiz, 1996). Finally, an important measure of social and economic stability is a country's level of employment. In South Africa, the unemployment problem has worsened since the fall of apartheid with the loss of 500,000 jobs during the neo-liberal reforms. According to the reform policy of the ANC, 126,000 jobs should have been created in 1996, but instead the number of formal sector jobs fell by more than 100,000 (Michie and Padayachee, 1998). In 2000, the official black unemployment rate of 31.6 per cent was 4.6 times greater than the white unemployment rate. At current rates of growth (the population is predicted to rise to 58 million in 2010 and 73 million in 2025), it is predicted that jobs will be found for only 7% of new entrants into the labor market compared to an absorption rate of 80-85% between 1965-70. Almost half of the unemployed people are younger than 30, and almost 90% of them do not possess any skills or training suitable for the jobs available (Handley and Mills, 1996)

V. T HE PROBLEM WITH ANC'S GEAR STRATEGY AND THE NEED FOR POLICY REFORMS Inequality, poor health care, poor education, and unemployment have all lead to high levels of crime and low levels of productivity, undermining South Africa's economic growth potential. The ANC, under the supervision of the IMF and the World Bank, instituted a variety of neo-liberal reforms aimed at reversing the stagnant performance of the South African economy. These policy reforms were part of the “Growth, Employment, and Redistribution” (GEAR) strategy in June 1996. These policies possessed a heavy deflationary bias, marked by a rapidly falling fiscal deficit, lowering of import tariffs, tax breaks for the corporate sector, the elimination of exchange controls and positive real interest rates supported by generally tight credit conditions (Handley and Mills, 1996). The economic logic of 68 SASKATCHEWAN ECONOMICS JOURNAL

GEAR was that prioritizing the interests of capital was necessary for growth and in the long-term interests of the poor and the unemployed, promoting equity in the long run (Michie and Padayachee, 1998). However, social and economic instability, brought on by low levels of productivity, and crime, have prevented the neoliberal policies from attracting the levels of investment necessary to make those policies work. In fact, neoliberal policies actually hastened the economic decline by making it easier to take money out of South Africa and easier for educated South Africans to leave the country (Ho and Schneider, 2002) The circular connection between economic and social stability and long-run development implies that a laissez-faire approach alone cannot be relied upon to lift South Africa out of its trap of underdevel- opment. Policy reforms that are directly focused on redistributing incomes through educational and health systems must also be implemented to bring about socio-economic development. To begin with, an appropriate policy goal relating to community health is to shift resources from tertiary and secondary health care to primary health care. Increasing proportional expenditure on primary health care clin- ics in relation to provincial and academic hospitals is said to be more effective in achieving better health outcomes, as it is more efficient and accessible to dispersed populations (Human Development Report, 2000). In redistributing resources to the primary health care system, this will ensure that children, especially poor children, will be treated for diseases such as tuberculosis, measles, typhoid and diarrhea. A preliminary step in the direction of achieving quality education in South Africa is to remove the racial and geographic disparities in the system. To achieve this goal, the first ten years of schooling should be made free and compulsory to all children. The provision of more non-formal education services should be initiated as well; i.e. adult education, early childhood development, and special school education (Human Development Report, 2000). In doing so, under- resourced provinces with poor educational indicators would have the opportunity to catch up to the rich provinces in educational attainment. In addition, labor skills could be upgraded at a “high, but fea- sible rate,” which, according to the World Bank, would more than double the long term growth rate of the economy (from 2.4% to 5.9% per annum) (Handley and Mills, 1996). Finally, the expansion of the export sector must continually be promoted and, to some extent, protected by subsidies. This allows for further expansion of “traditional lines” but also for diversification into manufacturing (Ho and Schneider, 2002). In attracting multinationals to the South African export sector, financial incentives, such as tax SOUTH AFRICA AFTER APARTHEID 69 breaks and low interest rates on credit, and non-financial incentives, such as establishing Special Economic Zones that are free from labor and environmental regulation, could all be employed. Given the magnitude of unemployment, even increased employment in multinational corporations, which are usually characterized as low skilled, low productivity jobs, would add significantly to average labor productivity. In the process absolute poverty and income inequality would be dramatically reduced (Handley and Mills, 1996).

VI. CONCLUSION The racial discrimination and segregation of apartheid in South Africa subjected the black majority to a poorer standard of living than the white minority. Great inequalities in health and education have led to instability and low levels of productivity, undermining South Africa's economic performance. With the election of the ANC party in 1994 came the promise of addressing and rectifying the policies of apartheid and redeveloping South Africa. However, it is becoming apparent that a program truly designed to reconstruct and to develop the South African economy and society will require something very different from the sort of economic orthodoxy implemented by the ANC in its GEAR strategy. South Africa cannot wait patiently to allow the ‘trickle-down’ effect from high growth rates to raise the incomes of the poor and the unemployed. Policies must be developed to directly redistribute incomes by promoting the export sector as well as to remove the racial bias in the health and educational systems. In doing so, South Africa's economic position will regain the potential to become as bright as the gold and diamonds that began its economic development more than a hundred years ago.

REFERENCES

Abedian, Iraj and Barry Standish. (1992). “The South African economy: an historical overview.” In Abedian, Iraj and Barry Standish, editors. Economic Growth in South Africa: Selected Policy Issues. Oxford: Oxford University Press. Abedian, Iraj and Barry Standish. (1992). “The way forward: policy guidelines for the 1990s.” In Abedian, Iraj and Barry Standish, editors. Economic Growth in South Africa: Selected Policy Issues. Oxford: Oxford University Press. Handley, Antoinette and Greg Mills. (1996). From Isolation to Integration? The South African Economy in the 1990s. South African Institute of International affairs (SAIIA), Chapters 2 and 8 70 SASKATCHEWAN ECONOMICS JOURNAL

Ho, P Sai-wing and Geoffrey Schneider. (2002). “African drama: Myrdal and progres sive institutional change in South Africa.” Journal of Economic Issues, v36 (June): 507- 515. Lachman, Desmond and Kenneth Bercuson. (1992). Economic Policies for a New South Africa. Washington: International Monetary Fund (IMF) publication, Chapter 2. Lewis, Stephen R. (1990). The Economics of Apartheid. New York: Council of Foreign Relations Press, Chapter 1. Lowenberg, Anton D. (1997). “Why South Africa's apartheid economy failed.” Contemporary Economic Policy, v15 n3 (July): 62-72. Luiz, John M. (1996). “The socio-economic restructuring of a post-apartheid South Africa.” International Journal of Social Economics, v23 n10-11 (November): 137-150. Michie, Jonathan and Vishnu Padayachee. (1998). “Three years after apartheid: growth, employment and redistribution?” Cambridge Journal of Economics, v22: 623-635. UNDP (2000). South African Human Development Report. United Nations. (website: www. undp.org.za/sahdr2000/sahdr20002.html) World Bank Group. (2000). World Development Indicators Database. (website: www.worldbank.org/data/countrydata/countrydata.html) RURAL DEVELOPMENT AND THE AGRARIAN REFORM PROCESS IN CHILE

JASON HEIT*

I. INTRODUCTION It is generally assumed that equitable land distribution and the holding of legal title to such land is a precondition to the economic growth of impoverished agrarian systems of production. In Chile, as in much of Latin America, the agrarian structure of land distribution including latifundios1 and minifundios2 has long been characterized as unproductive and oppressive. This paper examines the agrarian reform process in Chile and its role in the evolution of Chile's agricultural sector; furthermore, it analyzes the various periods of agrarian reform according to the scale of the sector and its movement along the long-run average cost (LRAC) curve. It contends that the process of agrarian reform that commenced in the mid-1960s provided the basis for the economic success that the sector has recently experienced, and that the interruption of this reform process by succeeding political regimes has to this day hindered the economic development of agrarian communities and peoples in Chile.

II. INITIATION OF THE AGRARIAN REFORM PROCESS In Chile, the process of agrarian reform and, in particular, land reform was initiated when in 1964 the Christian Democrats, led by Eduardo Frei, introduced legislation to amend the constitution - legislation that included amendments to existing property rights. According to Stallings, the essential purpose of this constitutional change was to establish the legal basis for agrarian reform (1978, 100). The process was advanced in 1967 when the government introduced a land reform and union legislation law. “[The] law meant to modernize and consolidate the capitalist mode of production and obtain a base of political support for the Christian Democrat party from the peasantry” states Kay (1976, 79). It was with this political

* Jason Heit is an Undergraduate Student of Economics at the University of Saskatchewan, Canada. 1. Todaro defines latifundio as “[a] very large landholding in the Latin American agrarian system, capable of providing employment for over 12 people, owned by a small number of land- lords, and comprising a large proportion of total agricultural land” (2003, 801). 2. Todaro defines minifundio as “[a] landholding in the Latin American system considered too small to provide adequate employment for a single family. A minifundio is too small to provide the workers with levels of living much above the bare survival minimum” (2003, 802). 72 SASKATCHEWAN ECONOMICS JOURNAL motive and legal basis that the Christian Democrats began to implement their plan for agrarian reforms. The reform plan had the following goals: 1) to increase production and productivity of the agriculture sector; 2) to create 100,000 new peasant proprietors; 3) to incorporate peasantry into the economic, social and political decision making process; and 4) to raise rural living standards (Kay, 1976). Specifically, the reform process included the following mechanisms and conditions, described extensively in Kay (1976). First, the Christian Democrats restricted the capital inputs that could be expropriated. They did not provide for the expropriation of livestock or machinery; as well, they allowed for landowners to choose a parcel of good irrigated land equal to 80 hectares (ha) as a reserve. Second, the expropriated lands were managed by the state land reform agency, Corporación de Reforma Agraria (CORA), which established a form of rural co-operative referred to as an asentamiento consisting of local peasant households which farm the newly expropriated land. The asentamiento was developed as a transitional apparatus that was to last three-to-five years, during this time CORA maintained ownership of the land and capital and was responsible for major administrative decisions. After this period had passed the peasants would be able to divide the property into individual plots, or if the members agreed they could establish a mixed property arrangement. Third, the government enacted a series of production promotion policies that served to increase the price of basic foodstuffs at the farm level and to promote agricultural sectors where it was identified that Chile had a comparative advantage. According to the Food and Agriculture Organization (FAO), “[t]he program[s] included the provision of long-term credit, technical assistance, public investment in basic food processing infrastructure, improved wine production, milk processing and cellulose plants” (1998, electronic copy). Fourth, the Government discouraged the seizure and expropriation of land by groups or individuals other than CORA. Finally, the government's willingness to withhold from expropriating land from latifundios that re-organized themselves to increase productivity encouraged these farms to subdivide and become more efficient. The Christian Democrats' agrarian reform policy is remarkable in a number of respects. In the first instance, it was relatively effective in expropriating land from the wealthy latifundios. Frei's agrarian reforms provided for the expropriation of nearly one-third of Chile's latifundios between the years 1965-70. The FAO (1998) puts the total land area at 3.6 million ha or 12 percent of the country's agricultural land. In addition, there was a new incentive for latifundias to reform and increase their productivity, resulting in higher growth in the agri- AGRARIAN REFORM PROCESS IN CHILE 73 cultural sector. According to the FAO, growth in the gross value of production jumped from the sluggish 1.8 to 2 percent recorded since the 1930s to a sizeable 5 percent per annum. This growth was substantially aided by the government directed funds toward the establishment of an agrarian infrastructure.

III. RADICALIZATION OF THE REFORM PROCESS In 1970, Salvador Allende's Popular Unity coalition formed the government. It was the intention of this government to advance the nation's transition to socialism. They utilized the property rights legislation of the Christian Democrats to expand and accelerate the land reform process and, according to Kay (1976, 82), “one of the main aims of the agrarian reform policy was to expropriate all latifundia,” which was defined as “every farm exceeding 80 ha in size, regardless of their efficiency.” Another goal of the reform process was to reverse the traditional outflow of economic resources from the rural to the urban sector in order to augment rural investment and to raise peasant living standards. However, the government's eagerness to accelerate the land reform process, its failure to adequately supervise the expropriation of land, combined with other fiscal policy reforms such as the nationalization of the banking system, slowed productivity in the agricultural sector. The numerous events and policies that compromised the success of the reforms under the Allende Government can be summarized as follows. First, the number of land seizures increased sharply; these seizures of land were not government authorized expropriations. This was particularly notable in the south of Chile where the Mapuche Indians began to seize land from latifundia (the Mapuche had long considered this land to be theirs). However, the willingness of the Popular Unity government to overlook this illustrates the shift in perspective of the Popular Unity government from its Christian Democratic counterparts which advocated that land seized by peasants and workers should not be expropriated. Furthermore, toward the end of the expropriation process, two of the six parties that constituted the Popular Unity Coalition3 began endorsing further seizures from the latifundistas, including expropriation of all cattle and farm machinery. Additionally, they held that the latifundistas should not be left with any reserve land. Another problem arose when land seizures expanded to include smaller holdings, encompassing farms smaller than 80 ha.. These

3. The Popular Unity Coalition consisted of six groups: the Socialist party, the Communist party, the Radical party, the Movement of United Popular Action (MAPU), the Social Democratic party, and the Independent Popular Action party. 74 SASKATCHEWAN ECONOMICS JOURNAL tended to be the more productive farmlands, benefiting from the modernization and fiscal supports provided by the Frei government. Initially the Popular Unity government did not want to expropriate land from these farms in the hope of maintaining unity among the middle and lower classes. Nevertheless, the point was soon lost as half of the land seizures occurred on farms smaller than 80 ha (Kay, 1976). The asentamientos were soon replaced by alternative organizations. Two alternatives to the asentamiento were the Centro de Reforma Agraria (CERA), and the comite campesino, a type of reformed CERA. The CERA would, according to Kay (1976, 89), "bring together various neighboring farms to rationalize the use of infrastructure and capital equipment and to incorporate landless seasonal laborers who had traditionally worked on these farms." The comite had a role similar to the asentamiento, except that under the comite all differences between members are eliminated, extending equal rights in the running of the farm and in the distribution of production fringe benefits. The comite soon became the most widespread reformed unit; however, like the asentamiento, for the most part, it did not include seasonal workers and minifundistas. Because the Allende government failed to regulate the adjustment process from latinfundio to collective ownership, tensions between the nation's economic classes increased dramatically. Specifically, the government failed to provide the appropriate incentives for increased productivity, as the anticipo or stipend paid to collective workers was not based on the collective's performance. Rather, each member received an equal monthly wage regardless of the number of days worked or the various skills and efforts required by particular tasks (Kay, 1998). The government also failed to provide the necessary capital resources to allow the workers to properly exploit the land base. As a result, much of the expropriated land was left uncultivated. This shortcoming was largely due to the rapid pace of the land reforms, rendering it difficult for the government to allo- cate resources to all of the reformed units. The resulting productivity slowdown was exacerbated by the emergence of a black market for agricultural produce. The development of state marketing agencies as the sole purchasers of the collectives' output meant that producer prices were often set well below the equilibrium price, and the peasantry soon began to misappropriate resources from the collective in search of higher returns through unof- ficial sales. Incentives for collective production dissipated. This development, combined with the above mentioned points, resulted in a “collapse in agricultural production, which fell by 4.8 percent per AGRARIAN REFORM PROCESS IN CHILE 75 annum between 1970 and 1973” (FAO, 1998). As the heavily subsidized agricultural sector became more and more unproductive class antagonism heightened, leading to the military coup of September 1973.

IV. REVERSAL OF THE AGRARIAN REFORM PROCESS In September of 1973, a military coup led by General Augusto Pinochet ended the turbulent reign of the socialist Allende government. It is important to note that the military response was a reac- tionary one; according to Martinez and Diaz (1996, p.11), “[t]he military took power not in favor of a project of social recomposition but rather against what the Popular Unity government was trying to bring about.” However, the policies that ensued - the privatization of state operated entities (SOEs), price liberalization, trade regime reforms, liberalization of the domestic financial market, liberalization of the capital account, and reform of labor legislation - were clearly designed to ensure that socialism never returned to Chile. The redistribution of agricultural land was pursued in conjunc- tion with the other reforms mentioned above. This process of redistribution, or regularization, was completed or was near completion by 1979. This section details the redistribution of the seized and expropriated lands. According to both Meller (1992) and Martinez/Diaz (1996), the dictatorship returned approximately 30 percent of the 10 million ha of expropriated land to its former owners, and around 30 percent of the remaining expropriated land was allocated to peasants. Martinez and Diaz (1996) note that 10 percent of the land was reserved for the state, and approximately 30 percent as sold to new owners, whereas Meller (1992) attributes 20 percent auctioned land to purchases made by non-rural dwellers (see Table 1). These estimates show that 60 percent of the expropriated land [a + c + e] was removed from the hands of the rural population that had previously benefited from the agrarian reform process. For these peasants and other benefactors of the land reform process, the loss was furthered, according to Meller (1992), by the curtailing of state programs that supported peasants through special credit lines and technical assistance. According to the FAO (1998), “the reduced support from the state and the high interest rates of the recently liber- alized market (in some years reaching 60 percent in real terms) meant that these new owners did not have the means to farm their land properly and were forced to sell at very low prices.” Meller (1992) also notes that by the end of the 1970s about one-third of these peasants have had to sell their land and work as farmers for the new 76 SASKATCHEWAN ECONOMICS JOURNAL

TABLE 1: REDISTRIBUTION OF LAND BY MILITARY DICTATORSHIP ACCORDING TO SOURCE Re distributio n of Land by M ilita ry D ictatorship Martinez and Meller Diaz

Returned to former owners (a) 30% 30% Allocated to peasants or former tenants (b) 29% 30% Reserved for the State (c) 10% n/a Sold to new owners (d) 31% n/a Sold to non-rural dwellers (e) n/a 20%

Total 100% 80% owners. However, Meller's “one-third” figure is contradicted by other sources; the FAO (1998) estimates that by the mid-1980s, nearly 50 percent had sold their land despite the growing efforts of non-govern- mental organization (NGO) movements to maintain the level of services previously provided by the state. According to the evidence provided above, it would seem that the laissez faire approach of the military resulted in the effective abandon- ment of the rural reform process, returning the rural peasantry to the margins of the Chile's agrarian society. Furthermore, economic conditions did not improve. The value of production between 1974 and 1984 returned to an average of merely 2 percent per annum of the 1930-1960 period, although considerable differences exist between the sub-sectors and regions (FAO, 1998). This laissez faire approach continued until the 1982-83 debt crisis which forced the country to readjust its macro-economic policies. The readjustment, which included substantial currency devaluation, was part of an International Monetary Fund (IMF) adjustment program that focused on servicing the nation's external debt. More specific to agriculture, the dictatorship implemented a proactive agricultural policy that included a price band system, special credit programs, and technical assistance. The reintroduction of support policies to the agricultural sector resulted in immediate increases to the sector's productivity. According to the FAO (1998), production expanded by 7 percent per annum between 1983 and 1989. A return to economic normalcy has allowed the agricultural sector to once again prosper, with production increasing at an annual rate of 4 percent during 1990-1996. However, apart from this, Chile has also inherited an agricultural sector that remains heavily segment- ed. According to the FAO (1998), Chile's small farm sub-sector accounts for 25 to 30 percent of total agricultural production but rep- AGRARIAN REFORM PROCESS IN CHILE 77

TABLE 2: HOLDINGS OF FARM ESTATES

S o le ly H e ld F a r ming E sta te s N umb e r Area (Hectares)

Ownership 234,803 21,266,432 Tenant Farming 13,946 793,579 Sharecropping 4,497 79,375 As part of the wages 4,024 11,885 Informal Assignments 16,546 354,966 Squatting 3,000 124,125

Source: ODEPA, 1999 Chilean Agriculture Overview, based on INE data; VI Censo Nacional Agropecuario, 1997. resents about 70 percent of all agricultural producers and owns about one-third of all agricultural land. Furthermore, this minifundio sub- sector which comprises a larger share of low-value traditional crop production and a lower share of high-value fruit and wine production, is concentrated on marginal lands and has outstanding legal title issues (see Table 2). The fact that, to this day, these issues remain a concern of the Chilean agricultural sector indicates a failure on the part of the Pinochet regime to adequately redistribute expropriated lands, and more specifically to address the issues of legal title and support for agricultural outreach service programs that target small farmers.

V. A C OST-ANALYSIS APPROACH TO INTERPRETING AGRARIAN REFORM This section will examine the agrarian reform process specifically as it pertains to the expropriation and/or re-allocation of capital (land) and in terms of movement of the short-run average total cost (SRATC) curve along the long-run average cost curve (LRAC) curve. The LRAC curve is an effective analytical tool for examining the various periods of Chile's agrarian reform process. Movement along the LRAC curve requires an adjustment in all factor inputs, for agricultural firms or farm units such an adjustment is made possible when a firm's land base is variable. Figure 1 documents changes in aggregate production according to the historical events previously discussed by depicting movements of the SRATC curve along LRAC curve for selected periods of Chilean agrarian reform, where the SRATC curve indicates scale of the agricultural sector for the respective period.4

4. Please note that the positioning of the SRATC curves along the LRAC curve is presented according to the historical evidence provided in the previous sections, or failing this with 78 SASKATCHEWAN ECONOMICS JOURNAL

FIGURE 1: SCALE OF THE CHILEAN AGRICULTURAL SECTOR DURING SELECTED PERIODS OF AGRARIAN REFORM

A Cost per C LRAC Unit D B

qm Output per Period

Curve A indicates the average scale of Chile's agricultural production during the Alessandri government. At this time, the sector was characterized by the concentration of the majority of the agricultural land holdings in the hands of a relatively few wealthy landowners. Todaro (2003, 431) notes that “[t]he economic and social ramifi- cations of heavy land concentration in the hands of a few large landowners are compounded by the relative inefficiency of latifundios in comparison with other Latin American farm organizations.” The large and inefficient size of the production unit in Chile is also supported by the empirically by the FAO (1998). For this reason, Curve A is positioned to the extreme right of the LRAC curve which indicates an inefficient level of production characterized by an increase in costs greater than the increase in output. This is largely the result of transaction costs including labor and management that are much higher for latifundios than minifundios or family farms. However, there existed according to Todaro (2003) a number of other reasons why latifundios were generally inefficient. First, landowners often valued these holdings not for their potential contributions to national agricultural output but rather for the power and prestige they bring. The land therefore tended to be farmed less intensively than under the minifundios arrangement. Curve B corresponds to the scale of Chile's agricultural production during the Frei government. As discussed earlier, during regard to general economic assumptions regarding the productivity of agricultural sector in Latin America, particularly as it applies to a system comprised of minifudios and latifundios. AGRARIAN REFORM PROCESS IN CHILE 79 this period the agricultural sector was undergoing a period of reform which provided for the redistribution of land to members of the rural lower class. In addition, the government had initiated programs that provided increased investment and support to the agricultural sector. Central to the productivity gains experienced by the agricultural sector, however, was the government's mandatory subdivision of the latifundios into smaller holdings. These reforms included the expropriation of 3.6 million ha of land (FAO, 1998) and effectively contributed to the development or further development of an agrarian middle class in the Chile agricultural sector through the development of a base of medium-sized farms. As a result, curve B is positioned at the base of the LRAC curve near output qm, where qm is defined as the lowest possible per unit cost of production for the given technology and factor prices.5 The more efficient scale of production largely contributed to the productivity increases in Chile’s agricultural sector, with the gross value of production rising to 5 percent per annum (FAO, 1998). Todaro (2003, 431) correctly observes that “[t]hese farms [family farms and medium-sized farms] use a more efficient balance between labor and land, and studies show they have a higher total factor productivity than either latifundios or minifundios, as the law of diminishing returns would suggest.” During the Allende government, the accelerated reform process involved the expropriation of some 6.4 million ha of land from both latifundia and medium-sized farms, re-organizing these lands into various forms of farmer collectives or state-run farms. However, these farms failed to increase the productivity of the agricultural sector as agricultural production fell by 4.8 percent per annum between 1970 and 1973 (FAO, 1998). Many of the peasants who worked on the collective reserved a small piece of land for household production, the product of which became an important commodity in the black market. The development of black markets, the misappropriation of collective resources, and the neglect of collective workers to fulfill their duties are all pertinent in accounting for the observed decrease in productivity and ensuing failure of the collective system. The positioning of the SRATC curve corresponding to the Allende era is an important matter of discussion since, given the many factors attributed to the fall in the efficiency of agricultural production during this period, the role of scale is a point of contention. The reformed units being collectives could be characterized as having attributes similar to medium-sized or even large-sized agricultural

5. Whether SRATC curve B is correctly indicated as lying to the left of qm is difficult to determine; the positioning of SRATC curve B to the left of qm is, in this discussion, a simplifying assumption. 80 SASKATCHEWAN ECONOMICS JOURNAL firms. However, in Chile, not all of the reformed units included or incorporated the minifundios as it remained the decision of the collective members (who were primarily agricultural workers who had previously been employed by the latifundio) whether or not they would accept the inclusion of the minifundio to the collective. Thus, a large number of the minifundio remained as such. With the emergence of the black market and reduced incentives for collective production, a large proportion of the collective land base was either underutilized or not utilized at all. This meant that the actual productive area of these farms remained small as the workers favored to employ their labor on their own small household enterprise, often consisting of land areas too small to allow for the efficient use of capital and labour. As a final matter to consider, the rapid pace of the reforms translated into inadequate stocks of capital resources and technical and managerial support services to effectively farm collective holdings, explaining in part the lower productivity growth in this sector. Given the underutilization of collective land and the rise of unregulated, small-scale private production, Curve C corresponding to the Allende period is positioned at the extreme left of the LRAC curve Curve D indicates the scale of Chile's agricultural sector during the Pinochet regime. The reversal of the land reform process meant that some 60 percent of the expropriated land was removed from peasant worker or collective production. Additionally, as noted by Meller (1992) and the FAO (1998), a large percentage (33 to 50 percent) of the peasantry that was provided or permitted to keep expropriated lands had to sell these lands as result of the discontinuation of support services or as a result of their inability to secure credit. Furthermore, the extension of land ownership rights to foreign entities and non-rural dwellers further marginalized the small land owner, and has been a likely source of inefficiency in the agricultural sector. However, the increased availability of agricultural inputs and the existence of an agricultural infrastructure (inherited from the Frei government) allowed the new land-owning class, particularly the middle to large-sized farms to more fully exploit the potential productivity of their land base. As a result, SRATC curve D is located toward the base of LRAC curve, to the right of qm, but below SRATC curve A. As mentioned above, between the years 1974 and 1984 the value of agricultural production in Chile returned to the 2 percent per annum growth experienced during the period 1930-1960. It later increased to 7 percent per annum growth between 1983 and 1989 (FAO, 1998). However, Figure 1 only presents one SRATC curve for the period of the Pinochet regime. Here, the assumption has been made that the AGRARIAN REFORM PROCESS IN CHILE 81 curve is positioned correctly; therefore, the growth in agricultural production that occurred during the second half of the Pinochet regime is explained by a movement along Curve D toward optimal production as represented by the LRAC curve. This movement toward optimal production can be attributed to a number of policy and program changes that occurred during this period, some of which are discussed below. First, the de-valuation of the currency allowed Chilean farmers to become more competitive in the world market. One effect of an over- valued exchange rate is to penalize the traditional primary-product export sector due to artificially high prices of exports in terms of foreign currencies (Todaro, 2003). Second, the establishment of the price-band system for wheat, oilseeds, and sugarbeet allowed internal prices to follow the trend of international prices while at the same time preventing day-to-day fluctuations from causing large disturbances in domestic markets (FAO, 1998). Finally, the return of special credit and technical assistance programs allowed farmers to renew investment in their farm business and to actualize production benefits from investment in improved technologies and other capital resources such as seed and fertilizer. Thus, with the de-valuation of the currency combined with the moderating effects of a price band system and renewed investment in the agricultural sector, the reformed agricultural sector was finally able to make economic gains.

VI. CONCLUSION The regulated and moderately paced agrarian reforms of the Frei government, including the expropriation of land and government investment in sectors where it had been identified that Chile had a comparative advantage, provided Chile's agricultural sector with strong growth and a lasting infrastructure. Additionally, Frei's agrarian reforms put Chile's agricultural sector in a position where the sector's capital resources could be optimally employed. Analysis of the Chilean agricultural sector according to movement along the LRAC curve replicates this outcome. Although the agricultural sector later realized significant gains under the Pinochet regime, it is important to note that these gains came at high social and economic cost for Chile's agrarian peasantry which, to this day, has not fully shared in the development and success of the sector. With this in mind, an important first step toward improving Chile's redeveloped agrarian sector is for the current Chilean Government to address the lingering issues of land ownership. Specifically, to implement a mechanism that provides the country's approximately 3,000 squatters (see Table 2) 82 SASKATCHEWAN ECONOMICS JOURNAL with some form of permanent status to their occupied land. This would mark an important first step in the recognition of this large and relatively unproductive part of Chile's agriculture sector, and provide a basis for further support and infrastructure development.

REFERENCES Bosworth, Barry P., Rudiger Dornbusch, and Raul Laban. (1994). The Chilean Economy: Policy Lessons and Challenges. Washington D.C.: The Brookings Institution. de Janvry, Alain. (1981). The Agrarian Question and Reformism in Latin America. Baltimore: John Hopkins University Press. Eicher, Carl and John Stoatz. eds. (1984). Agricultural Development in the Third World. Baltimore: Johns Hopkins University Press. Food and Agriculture Organization. (1998). The State of Food and Agriculture. FAO Agriculture Series No. 31. Rome: The Food and Agriculture Organization of the United Nations. Hogendorn, Jan S. (1996). Economic Development. 3rd ed. New York: Harper Collins Publishers Inc.. Kay, Cristobal. (1976). “Agrarian Reform and the Transition to Socialism” In Philip O'Brien (Ed.), Allende's Chile. New York: Praeger Publishers. Kim, Linsu and Richard R Nelson. eds. (2000). Technology, Learning, and Innovation: Experiences of Newly Industrializing Economies. United States: Cambridge University Press. Lipsey, R.G. and Ragan, C.T.S. (2001). Microeconomics. (10th edition). Toronto: Addison-Wesley. Martinez, J and Diaz, A. (1996). Chile: The Great Transformation. Washington D.C.: The Brookings Institution. Meller, Patricio. (1992). Adjustment and Equity in Chile. Christain Morrison (Ed.) Paris: Development Centre of the Organisation for Economic Co-operation and Development. Murphy, Sophia. (2002). Managing the Invisible Hand: Markets, Farmers, and International Trade. Institute for Agriculture and Trade Policy. ODEPA. (1999). Panorama de la Agricultura Chilena / Chilean Agriculture Overview 1999. Oficina de Estudios y Politicas Agrarias. Ministerio de Agricultura, Agosto. Oficina de Estudios y Politicas Agrarias (1999). Chilean Agriculture Overview 1999. Santiago: Ministerio de Agricultura. Stallings, Barbara. (1978). Class Conflict and Economic Development in Chile, 1958-1973. Stanford: Stanford University Press. Todaro, Michael P. (2003). Economic Development. (8th ed.). Toronto: Addison-Wesley. EXPLAINING HOUSEHOLDS’REPRODUCTIVE BEHAVIOUR: AN ANALYSIS OF COMPETING MODELS

ZIVA KOKOLJ*

I. INTRODUCTION For more than four decades, trends in population growth and reproductive behaviour have been researched, subject to theoretical speculation, and targeted by numerous social and economic policies.1 Despite all the attention, however, there exists relatively little consensus on the underlying determinants of fertility behaviour or on the policy measures that may affect population growth (Simon, 1985: 12). While demography per se has become a well established, empirical discipline, it remains “badly in need of theoretical guidance” (Robinson 1997: 63). Although population changes have traditionally been analyzed in the context of macroeconomic development, a significant paradigm shift has taken place since Gary S. Becker's introduction of the ‘new household economics’ in the 1960s. Consequently, microeconomic factors became the prime explanatory variables of household's fertility behaviour. Indeed, it has been noted: “It is a shared tenet […] of almost everyone who works in the area today that fertility tends to respond to shifts in the balance of economic benefits and costs […]. So ubiquitous is the use of such reasoning in discussions of the demographic transition that it [the economic approach] has become virtual- ly the only mode of explanation” (Clealand and Wilson 1987: 5). Despite the general acceptance of the economic framework, however,

* Ziva Kokolj is an Undergraduate Student in Political Studies and Economics at the University of Saskatchewan, Canada. 1. Over the past four decades, reproductive behaviour has changed rapidly in much of the developing world. Between the early 1960s and the late 1990s the largest fertility declines occurred in Asia (-52 per cent) and Latin America (-55 per cent), and the smallest in sub- Saharan Africa (-15 per cent). Although in the 1970s and 1980s the United Nations Population Division predicted widespread fertility declines by 1990s, the actual levels in the 1990s have been lower than the projections indicated. Consequently, the UN 2002 Revision of the official world population projections now estimates “a lower population in 2050 than the 2000 Revision did: 8.9 billion instead of 9.3 billion according to the medium variant.” [See Appendix 1]. For further discussion on the fertility rates trends and population trends see: J. Bogarts, “The End of the Fertility Transition in the Developing World,” and J. Caldwell, “The Contemporary Population Challenge” < http://www.un.org/esa/population/publications/com- pletingfertility/RevisedCaldwellpaper.PDF> 84 SASKATCHEWAN ECONOMICS JOURNAL the standard microeconomic approach - as espoused by Becker and the Chicago school economists - has been subjected to fervent criticism, particularly by those adhering to the institutional, cultural, and behav- ioural schools of economics. As it has been appropriately remarked, “the dilemma is that there is no consensus on an alternative theory […] the debate [thus] continues with a plethora of contending theoretical frameworks, none of which has gained wide adherence” (Bogarts and Watkins 1996: 641). In light of this impasse, it is the aim of this paper to examine the theoretical frameworks of three competing approaches to explaining households’ fertility behaviour: G.S. Becker’s 'new household economics’ approach, the so-called ‘social determinants’ methodology developed by R.E. Easterlin, and the ‘cooperative conflict’ framework espoused by A.K. Sen. The paper will provide for theoretical assumptions of the three models, as well as for empirical data in their support or opposition. On the basis of this analysis, particular emphasis will be given to the framework developed by A.K. Sen. It will be suggested that the ‘cooperative conflict’ framework has a considerable advantage over the standard economic approaches; not only in light of its capacity to better explain households’ fertility behaviour but also due to its clear implications for appropriate public policy measures. More specifically, this paper concurs with the claim that households’ reproductive behaviour necessitates a gender-based analysis; one that differentiates between gender-specific preferences, accounts for potentially conflicting behaviour within households, and promotes the enhancement of women’s status as an appropriate policy aimed at the reduction of fertility rates.

II. EXPLAINING FERTILITY TRANSITIONS The New Household Economics Approach The ‘new household economic’ theory, introduced by G.S. Becker in 1960, provides for the first specific microeconomic model of households’ fertility behaviour. It is based on the familiar neoclassical assumptions of fixed homogeneous preferences, maximizing behaviour, and the existence of an equilibrium solution for all decision situations.2 The “price” of children and households’ real income are used as primary variables for explaining, among other things, why a rise in the wage rate 2. The theory has been variously referred to as the 'demand theory', the 'Chicago School approach' or the 'new household economics.' Becker has developed his theory in numerous articles since 1960. The discussion in this paper is largely based on Becker's 1991 publication of The Treatise of the Family, (Cambridge: 1991), Robinson, 63 3. Household's Utility Function: U = U (n, q, Z1 … Zm). See Becker (1960, 137). Π 4. Household's Budget Constraint: pn n + z Z = I, where I is the total income of a house- HOUSEHOLDS’ REPRODUCTIVE BEHAVIOUR 85 of working women typically reduces households’ fertility, and why families with higher income have traditionally had - but do not anymore - more children than the lower income households (Becker 1991: 135). Moreover, Becker extends this basic analysis to consider the special interaction between quality (q) and quantity (n) of children. According to Becker, this interaction “explains why the quantity of children often changes over time, even though there are no close substitutes for children and the income elasticity of quantity of children is not large” (Becker1991: 135). Becker’s central argument is that “fertility decisions are economic in that they involve a search for an optimum number of children in face of the economic limitations”(Simon 1985: 37). In line with the axioms of consumer theory, Becker maintains that households maximize a joint utility function, subject to the lifetime budget constraint they are faced with. This assumption implicitly assumes homogenous preferences of all members within the household. As Becker puts it, “the optimal reallocation results form the altruism and voluntary contributions, [as] the group preference function is identical to that of the altruistic head, even when he does not have the sovereign powers”(Becker 1981: 192). The utility function of a household thus includes: the number of children (n), the expenditures on children - assumed as their quality (q) - and the quantities of all other commodities a household consumes.3 Becker relates the idea of utility maximizing to the notion of a household production function. That is, the household itself is the unit producing its own utility by using internal and purchased resources, its own time and labour, and employing a particular ‘household technology’ (Robinson 1997: 63). In other words, the household’s utility is a function of services yielded by the commodities produced within the household, whereby children are modeled as one such commodity (Altman 1999: 30). Since children, along with other commodities, are produced within a household by using time and labour of its members, their costs (p ), Π n and the cost of other commodities ( z), are incorporated in the household’s budget constraint.4 The household maximizes its total utility by using the constrained total resources available, so as to equate marginal cost to marginal utility of an additional child. This leads to a utility maximizing equilibrium, whereby no reallocation of available resources would increase the total utility of a household (Robinson 1997: 64). hold. In subsequent analysis, whereby Becker includes the interaction of quantity and quality of children, the budget constraint is expanded to include the constant cost of a unit of quality of children (pc) and the total quality of each child (q). The total expenditure on all children within the household thus equals pcqn and the new budget constraint is: pcqn + pzZ = I. This budget constraint is non-linear and depends multiplicatively on n and q. The non-linearity of the budget constraint is in turn responsible for the interaction between quantity and quality described by Becker, 138 -145. 86 SASKATCHEWAN ECONOMICS JOURNAL

According to Becker (1991: 14), the demand for children equals “the number of children desired when there are no obstacles to the production or prevention of children.” This demand depends on the relative prices of children and the household’s full income. The relative prices are affected by the direct costs of childrearing (i.e. nutrition, health-care, education) and the net costs of children (i.e. determined by the contribution of children to the household’s income or production function). If relative prices increase, that is if the household’s opportunity costs of having children increase, the demand for children effectively decreases. For example, an increase in the cost of education would increase the relative cost of children, thereby decreasing the household’s demand for children. Similarly, as the costs associated with the time consumed in raising children is an integral part of thid relative cost, and changes in the value of time would significantly affect the demand for children. Indeed, an increase in the value of mother’s time, represented perhaps by a rise in the market wage rate, directly increases the opportunity cost to a woman for having a child, and decreases the demand for children.5 As Becker (1991: 140) asserts, “the growth in the earning power of women during the last hundred years in developed countries is a major cause of both the large increase in labour force participation of married women and the large decline in fertility.” Although an increase in real income of a household generally increases the demand for normal commodities, Becker recognizes that the relationship between children (formulated as normal commodity) and income has largely been violated in the developed world. He contends: “Sometime during the nineteenth century […] fertility and wealth became partially or wholly negatively related among urban families.” While the negative relation between income and fertility would indicate that children’s relative price also increases with income, Becker stipu- lates: “The interactions of the quantity and the quality of children is the main reason why the effective price of children rises with income” (144). Introducing the notion of ‘child quality’ to the model potentially solves the conceptual problem of a negative relationship between household’s income and the demand for children.6 Moreover, although quality (q) and quantity (n) of children appear to be substitutes, in Becker’s formulation their relationship is multiplicative and interactive; “they do not trade-off against one another, but each is partly determined by the other” (146). Since q and n interact in the demand functions,

5. According to Becker (1991: 140), “household surveys provide direct evidence on the relation between the demand for children and the value of time of husbands and wives. The number of children is strongly negatively related to the wage rate or other measures of the value of time of wives, and is more often positively rather than negatively related to the wage rate or HOUSEHOLDS’ REPRODUCTIVE BEHAVIOUR 87 which depend on the market prices and income, they are subject to the usual income and substitution effects. Thus, an exogenous increase in q (or n) of children would reduce the demand for n (or q) of children. This reduction would, however, further increase the demand for q (or n) - again via their multiplicative relationship. The interaction between q and n would continue until a new equilibrium between the two variables is reached. If q and n are close substitutes, the substitution continues until the value of either q or n is negligible. Thus “the ‘special’ relation between quantity and quality of children […] does not presume that they are close substitutes”(Becker 1991: 147). According to Becker it is the interaction between q and n which explains the fertility decline in the developed world. The key change over time, Becker contends, has been a preference shift towards ‘higher quality’ children. In this way the production of children can be said to have become costlier, particularly in terms of increased education and health expenditures (Robinson 1997: 64). Becker (1991: 147) asserts that “the interaction between quantity and quality explains why the education of children […] depends closely on the number of children - even though we have no reason to believe that education per child and number of children are close substitutes.” Furthermore, although women’s participation in the labour market has substantially increased the households’ total income, the time-intensive childrearing has raised women’s opportunity costs of having ‘good quality’ children (Robinson 1997: 64). The combined increase in the relative costs of children has, therefore, led to a decreased demand for children. Similarly, Becker maintains, while family planning programmes can take the credit for initiating the decline of fertility, it is primarily due to the interaction between quantity and quality of children that fertility fell so drastically in the developed world. Becker provides for similar explanation regarding the effects of child mortality and economic development on the fertility decline (151-154). This perspective offers little guidance in terms of potential public policies in countries or regions where fertility rates are particularly high. In a Beckarian world, the households’ fertility behaviour is envisaged as nothing more that a special case of consumer demand, thus subject to changes in income and relative prices (Robinson 1997: 65). The interaction between quantity and quality of children will, according to Becker, inflict higher costs on households, determine lower demand for children, and thus drive the fertility transition and an effective fertility decline. earnings of husbands.” 6. W.C. Robinson notes that the interaction between the quantity and quality of children implies that the demand for children is highly responsive to price and perhaps to income, even when children do not have close substitutes. 88 SASKATCHEWAN ECONOMICS JOURNAL

Critique Since its first formulation in the 1960s numerous criticisms have been made of Becker’s household economics. The critique focuses primarily on Becker’s crude assumption of households’ homogeneous preferences, and the improbable postulation of households’ market behaviour.7 Becker’s assertions that changes in relative prices and income are the exclusive determinants of fertility transitions have also been starkly critiqued; the assertions appear not only limited in their explanatory value, but also ignorant of environmental and instrumental conditions which may affect costs, income, and preferences of households.8 The ambiguity of income and substitution effects additionally dis- credits the realism of Becker’s microeconomic framework. The vague- ness of the effects’ strength (i.e. which one will predominate in the process of price or income changes) effectively limits the predictive power of Becker’s model. Finally, Becker’s concentration on empirical evidence from the developed world, as well as the model’s limited applicability to the experiences of the developing countries, have been contradicted by various empirical surveys.9 The above criticisms have led to a series of modifications of Becker’s early formulations of household’s reproductive behaviour. Particular emphasis has thus been laid on the dynamic relationship and the trade-offs between quantity and quality of children, as well as the specification of household preferences.10 Nevertheless, the central tenets of Becker’s analysis remain for some scholars “too narrow to be a significant challenge to demographic transition theory” (Kirk 1996: 370). As W.C. Robinson (1997) critically notes: The theory [Becker/Chicago demand theory of fertility] has become complex and somewhat esoteric. In fact, most of its assumptions and prepo- sitions are not essential to the theory’s ability to explain fertility declines as economic development occurs. [Moreover] most of the theoretical complexity is self-driven and far removed form policy considerations … It has become dominant because of its rigour, its elegance and its simplic- ity.… Yet, this theory leaves out many important considerations and glosses over important difficulties which seriously impair its usefulness as a guide to policy interventions.11

7. For elaborate criticism on these two counts see Sen (1990). 8. For details on these see W.C. Robinson (1997), 443-454. 9. Surveys of individuals in 42 developing countries did not find the expected dominant influence of socio-economic characteristics of fertility (Clealand and Wilson 1987). This and other surveys have demonstrated that there is no tight link between development indicators (i.e. GDP per capita, relative prices etc.) and fertility. Most traditional societies do have high fertility when compared to modern industrial societies, but the transition itself is poorly pre- HOUSEHOLDS’ REPRODUCTIVE BEHAVIOUR 89

III. THE SOCIAL-DETERMINANTS SCHOOL OF THOUGHT In the ‘new home economics’ approach espoused by Becker, the burden of explanation is put on income, relative prices and the interaction between quantity and quality of children. A number of authors, however, suggest that families differ fundamentally in the value they place on children, and that social and biological constraints placed on families are the primary determinants of fertility rates. Thus, they argue, a microeconomic model of household reproductive behaviour should treat preferences and biological bias of reproduction as explanatory variables (Simon 1985: 42). R.E. Easterlin makes a sophisticated effort to combine economic decision-making process with the social and biological constraints to which it is subject (Clealand and Wilson 1987). He broadens the traditionally defined factors of demand, supply, and cost of fertility regulation, thereby providing for a model of much greater flexibility and scope than the strict microeconomic approach allows (Clealand and Wilson 1987). Under the category of ‘demand factors’ influencing fertility, Easterlin includes the standard socio-economic determinants associated with the economic development and modernization. Moreover, while the ‘supply factors’ are comprised of cultural elements that constrain natural fertility, costs of fertility regulations are the monetary, time and psychic constraints incurred by the use of birth control (Kirk 1996: 370). According to Easterlin (1985: 370), “all determinants of fertility operate through one of these variables.” In keeping with the economic theory of household choice, Easterlin assumes the immediate determinants of the demand for children to be: income, prices, and tastes. Like Becker, Easterlin assumes homogenous preferences, expressed by the joint utility function of households. The latter contains as its arguments the number and the quality of children, as well as other goods consumed by the parents (Simon 1985: 45). Easterlin (1985: 14) defines the demand for children (Cd) as “the number of surviving children parents would want if fertility regulation were costless.” The potential supply of children (Cn) is, according to Easterlin, “the number of surviving children a couple would have if they made no deliberate attempt to limit family size” (1985: 14). The supply of children reflects both the couple’s natural fer- dicted by customary quantitative measures of development. See also J. Bogarts and S. Cotts (1996), 639 - 682. 10. See Becker’s “A reformulation of the Economic Theory of Fertility” in G.S. Becker The Treatise on the Family (1991). 11. Robinson (1997) provides an elaborate critique on the drawbacks of Becker’s theory on pages 65 - 70. 90 SASKATCHEWAN ECONOMICS JOURNAL tility and the chances of child survival. Moreover, it is directly influenced by cultural conditions “such as prolonged breastfeeding that inad- vertently reduce fertility.” Critical to Easterlin's model is the introduction of fertility regulation costs (RC) born by the household. These include two types of costs: physic costs - caused by the displeasure associated with the very idea of fertility control - and market costs - embodied in time and money necessary to learn about specific fertility control techniques. The costs, in turn, are determined by the attitudes in society toward fertility regulation, and the degree of access to fertility control. Easterlin also accounts for the motivation necessary for implementing fertility regulations. According to Easterlin (1985: 17), motivation is jointly determined by potential supply and demand for children: if the former exceeds the latter - leading to an ‘excess supply’ situation - parents may be faced with the prospect of having ‘unwanted children.’ Thus, the greater is the potential burden of children to the household, the stronger is the motivation to limit fertility. Motivation for fertility regulation is, however, also affected by the costs of fertility regulation. Easterlin (1985: 18) contends: “Given the strength of the motivation, the lower the cost of fertility regulation - […] - the greater would be the adoption of fertility regulation and the more nearly would the number of children parents have correspond to the number they desire.” According to Kirk (1996), “Easterlin’s framework envisages modernization as influencing fertility through intervening variables of supply, demand, and cost of controlling births.”12 In his model, supply and demand for children are not a function of price, as it is the case in the standard microeconomic model, but rather of the process of modernization (i.e. of time) (Altman 1999: 30). This assumption allows Easterlin to explore a number of equilibrium solutions for the individual household, as well as for society as a whole, as it moves through time from situations of excess demand to the those of excess supply and of restricted fertility (Simon 1985: 46). According to Easterlin (1985: 25), “modernization tends, on balance, to lower the demand for children, raise the potential supply, and reduce the regulation costs.” Since early in the modernization process the demand for children exceeds supply, and the costs of fertility regulations are relatively high, the motivation for a household to regulate fertility remains relatively low. However, as modernization progresses, the excess supply of children grows and the

12. In Easterlin’s (1985) formulation the top five effects of modernization on fertility are: (1) innovations in public health and medical care, (2) innovations in formal schooling, (3) urban- ization, (4) the introduction of new goods, and (5) the establishment of the family planning program. Easterlin, however, admits there are many other aspects that influence fertility, such as the per capita income growth, female employment in the modern sector, modernization of HOUSEHOLDS’ REPRODUCTIVE BEHAVIOUR 91 cost of fertility regulations decreases. The burden of ‘unwanted children’, and the lower cost of fertility regulation, induces the motivation to limit fertility, until “at some point the balance between the motivation for the regulation and the costs of regulation tips in favour of the former” (Easterlin 1985: 25). At this point, the number of actual surviving children begins to fall below the potential supply, until a level of fertility is reached at which the actual number of children “supplied” corresponds to the number of children demanded.

Critique Easterlin’s main contribution to the study of households’ reproductive behaviour is the addition of the social component (i.e. the supply of children) and the cost of contraceptives. Moreover, the flexibility of Easterlin’s model is enhanced by the fact that it does not assume either priority or dominance among different economic, socio-economic or cultural explanations.13 Nevertheless, Kirk (1996: 371) contends that “its practical application faces difficulties.” First, Easterlin, like Becker, ignores gender-specific preferences and avoids issues of uncertainty and conflict within households. Although Easterlin does suggest that biological factors, and the variables related to household preferences, will explain fertility differen- tials, his model does not provide for explicit guidelines as to how these factors should be incorporated into the “empirical science of fertility” (Bulatao and Lee 1983: 46). Second, there is a lack of precise definition of ‘demand’ and ‘supply’ of children. A number of factors can be conceptualized to work either through the supply or the demand side of the model (i.e. the mortality rate is a prime example of a factor working through both sides of the model). Finally, Easterlin assumes a cohort rather than period perspective, which proves difficult for the analysis of current events. He assumes a fixed life cycle (i.e. parents decide at the time of their marriage what number of children they want), and does not allow for any effects of changes with time and experience (Kirk 1996: 371).

IV. THE NEED FOR EXPANDED CRITERIA Despite the complexity of the above-described approaches, empirical tests have not led to sufficient support for the models. It appears, government administration, and changes in human attitudes and personality. Easterlin, 20. 13. It is exactly this characteristic that induced the National Research Council’s Panel on Fertility Determinants to adopt it as the basic framework for its massive study. See: R.A. Bulatao and R.D. Lee (1983). 92 SASKATCHEWAN ECONOMICS JOURNAL therefore, “that present theories do not capture the most important elements in the process, which determines fertility at either household or societal level” (Bulatao and Lee 1983: 49). Demographic evidence suggests that, while the demand for children over the past fifty years experienced a drastic fall in less developed countries, the supply of children has remained unchanged (Altman 1999: 32). Despite the broad provision of fertility regulations (i.e. particularly in the form of family planning programs), the number of surviving children in developing countries does not correspond to their actual demand. Consequently, most developing countries now face a situation of excess supply of children. Demographic surveys further contradict the standard microeconomic approach by suggesting that neither the demand for children nor the excess supply situation is solemn- ly a product of economic variables (Altman 1999: 33) [See discussion below]. Although the negative relationship between economic development (i.e. modernization, industrialization, an increase of per capita income) and fertility is not explicitly rejected, a significant fertility decline has been achieved in countries where economic development has traditionally been slow (as has been the case in Bangladesh). The apparent paradox thus suggests that fertility transition theories should be formulated independent of, or controlling for, economic variables (Altman 1999: 32). Several innovative approaches have thus been introduced to the study of fertility transition. Most of the approaches have relaxed the assumption of homogeneous preferences within households, assuming instead heterogeneous preferences among men and women. Moreover, they have assumed the relationship within households to be one of cooperation and conflict, rather than benign submission to the preferences of an altruistic head. Finally, they have focused extensively on the bargaining powers among members within households; particular attention has, thus, been given to the position of women within the bargaining framework, and to the potential effects of women’s empowerment on households’ fertility. This paradigm shift in the study of households’ fertility behaviour has occurred primarily due to the empirical findings that suggest the existence of differential reproductive preferences between men and women. An extensive body of literature contends that social roles and power relations among men and women have important implications for the determination of fertility levels of a particular country. Oppenheim and Taj (1987: 611) thus assert “most of the information gathered through fertility surveys suggested that women consistently desire smaller families than their husbands.” Additionally, they claim “there is greater demand for children among women than men in settings in 14. A gender system is defined by Oppenheim and Taj (1987) as "the socially constructed expectations for male and female behaviour that are found (in variable form) in every known HOUSEHOLDS’ REPRODUCTIVE BEHAVIOUR 93 which women are relatively powerless.” Although, it remains unclear whether certain gender-systems, or particular socio-economic conditions, or a combination of both, cause the differentiated preferences among men and women, empirical research provides for clear verifica- tion of their existence.14 As noted above, the standard economic view assumes households to represent singular decision-units - units concerned with, among other things, the allocation of consumption, work, leisure, health-care, education, and fertility. Dagsputa (1995: 1885) correctly observes that the standard economic perspective tends not only to idealize the household’s decision-making (i.e. without disagreements or divergence of preferences within the household), but also to identify household’s behaviour with “a unitary view among its members of what constitutes their well-being.” In view of the household’s homogeneous preferences, standard economic theory also predicts the same level of demand for children by both male and female member of the household. Yet Dasgupta (1995) warns that empirical studies do not tend to support the notion of homogenous preferences and choices. Income in the hands of the mother, for example, has a bigger effect on the family’s health (i.e. in terms of nutritional condition of children, child mortality etc.) than the income allocated by the father. Diverging household tastes are also evident in the case of child- bearing. Holding relative prices, opportunity costs and levels of income constant, Altman’s (1999) findings suggest lower demand for children by women than by men. The results of his study are generated from a gender-specific utility maximization model which, allowing for differences in tastes, illustrates that women tend to perceive the marginal benefits of having children as much smaller than their marginal costs. Oppenheim (1997) offers a partial explanation for this finding. He suggests that due to their physiological role in reproduction, women face unique costs in having children, including pain, exhaustion and elevat- ed risk of morbidity and mortality associated with pregnancy, childbirth, and breastfeeding. While these costs are relatively low under modern conditions - where women’s health and nutrition are good, medical assistance is available, and conception is controlled - in developing countries these costs may be extremely high. Dasgupta (1995) makes a similar argument that rational, utility-maximizing women of the developing world would be expected, given the choice to do so, to opt for fewer children than men. Additionally, it has been observed, that socially and culturally induced differences between sexes are likely to determine the degree of divergence between male and female reproductive goals. Oppenheimer human society. A gender system’s expectations prescribe a division of labour and responsibilities between women and men and grant different rights and obligations to them.” 94 SASKATCHEWAN ECONOMICS JOURNAL

(1997) suggests that if the division of labour by gender is minimal and the power distribution between the sexes is equal, reproductive preferences are expected to converge (i.e. as it is usually the case in Western democracies). Conversely, in situations where strong division of labour and power exists between the sexes, the dominant sex’s reproductive decisions are likely to prevail.16 It has been argued, therefore, that women’s expressed preferences may not always be their “true” preferences (Sen, 1984). Empirical evidence suggests that in most contemporary developing countries, where rising rates of fertility growth are present, gender-biased divisions of labour and power are fairly marked. The relationship between gender inequality and fertility growth is particularly strong in areas such as Sub-Saharan Africa, Latin America and South East Asia. Finally, it is reasonable to expect lower birth rates in societies where women have greater ability to express and institute their preferences. Empirical studies on the status of women in the developing countries tend to confirm this assumption.17 According to McDonald (2000), the data display “an unmistakable pattern: high fertility, high rates of female illiteracy, low share of paid employment, and a high percentage working at home for no pay - they all hang together.”

V. C OOPERATIVE CONFLICT In light of the existence of heterogeneous preferences, the standard assumption of benign relationships within households appears artificial. The artifact of pure benevolence within households is particularly evident in societies where gender-bias and stratification of sexes are strongly present (i.e. in the countries that are currently undergoing fertility transition and which the models illuminated above are attempting to address). An alternative analysis of household behaviour - particularly of household’s fertility behaviour - should therefore account for potential divergence of interests. In other words, the analysis should account for the potential co-existence of conflict and cooperative rela- 16. Literature suggests several circumstances in which women and men are likely to have different family size preferences. These conditions include (1) when patriarchal systems are strong, (2) when economic conditions are premodern, (3) when kinship system is lineage oriented, and (4) when certain demographic conditions - a high average rate of fertility, a large average age difference between spouses, and a low rate of remarriage - obtain. For an in-depth discussion on these see: K. Oppenhein and Taj (1987). 17. Most of the empirical research has focused its surveys on women and the most common dilemma among researchers is the lack of an agreement as to how the concept of women empowerment should be defined and measured. Since women’s authority, as well as reproductive attitudes and practices, can be measured in different ways results of empirical studies differ substantially depending of the indicators used. For an elaborate critique of this approach see McDonald (2000). 18. The classic formulation of Nash’s bargaining problem is outlined as follows: n = 2, with both players having clearly defined utility functions. If parties fail to cooperate, this leads to HOUSEHOLDS’ REPRODUCTIVE BEHAVIOUR 95 tions within households. Perhaps the most influential analysis of household behaviour has been proposed by A.K. Sen, who envisaged “fertility determination between female and male […] as a repeated bargaining game which takes the form of cooperative conflict […]”(Altman 1999: 35). While Sen’s model of inter-household relations is formally based on Nash’s (1950) bargaining problem, Sen expands the model in several ways conducive to the understanding of household reproductive behaviour.18 The simplest structure of the ‘cooperative conflict’ model assumes the coexistence of two players within the household, each with a unique, well-defined utility function. While the two players can choose between cooperation and conflict, the failure to cooperate leads to the ‘breakdown position’ (in the present context this could be defined as a decision to have no children at all or even dissolution of the marriage arrangement). The bargaining problem arises from the existence of many collusive arrangements, whereby each such cooperative outcome is better for both persons than that obtained under non-cooperation (Sen 1995: 132). According to Sen (1999: 132-33), “it is this mixture of cooperative and conflicting aspects in the bargaining problem that makes the analysis of the problem potentially valuable in understanding intra-household behaviour.” The bargaining problem of ‘cooperative conflict’ - that is, finding a particular cooperative outcome which yields a particular distribution of benefits - is sensitive to various parameters closely related to the bargaining powers of household’d members. Sen identifies three particularly strong influences affecting the bargaining power and the position of the parties involved: (1) the nature of the breakdown position, (2) the impact of the perception of interests, and (3) the effect of the perception of contributions to the household’s well-being.19 The breakdown position indicates a person’s vulnerability or strength in the bargaining process; a more favourable position in the case of a breakdown would tend to secure a more favourable bargaining the ‘status quo’ or the ‘breakdown position.’ The situation of ‘status quo’ can be avoided or improved through cooperation and bargaining between the parties. Although cooperative positions are superior to the ‘breakdown position’, not all are equally good for both parties. Nash proposes a particular Nash Solution to the bargaining problem. For further discussion on the benefits and drawbacks of the bargaining structure interpretation of household behaviour see Sen (1990). 19. It is important to account for the following conditions - which were avoided by other bargaining problem formulations - in the setting up of the ‘cooperative conflict’ model: (1) one must distinguish between the perception of interests of both parties and some more objective notion of their respective well-being. Sen (1990) focuses on the ‘capabilities’ of - the functionings of - a person which provide for a direct approach to measuring a person’s well-being rather than the indirect and subjective approach via utility measurement (i.e. measurement of happiness and satisfaction). (2) Information base of the ‘bargaining problems’ (typically confined to the individual’s welfare and interests) must be expanded to distinguish between the 96 SASKATCHEWAN ECONOMICS JOURNAL outcome (Sen 1984: 375). For example, if men typically have better bargaining power than women - which may be related either to better outside job opportunities and possibly connected with persistent inequalities of education or training, or to sexist discrimination - this tends to provide them with a correspondingly more favourable cooperative outcome. Conversely, frequent pregnancy and persistent childrearing, along with greater illiteracy, lower education, and scarcer opportunities to participate in the labour market, hamper women’s bargaining power along with their ability to secure favourable cooperative outcome (Sen 1995: 137). Perception of interests by the bargaining parties tends to exert a significant bias on the positioning of the parties. According to Sen (1995: 139), “a person might get a worse deal in the collusive solution, if his or her perceived interest takes little note of his or her well-being.” Such perception bias in the interest of other family members is likely to apply particularly to women in traditional societies. Perceptions of contributions to the well-being and the welfare of a household tend to exacerbate the unequal positioning of the bargaining parties. Although the perception of who is producing and providing what might diverge form the actual contributions, the perceptions may be important in tilting the cooperative outcomes in favour of the perceived contributor (Sen 1995: 136). Moreover, the perception of larger contributions might also affect the legitimacy of the allocation of certain benifits where the perceived contributor might be legitimately entitled to a larger share of such benefits (Sen 1998: 106). In situations where women are confined to work within households, while men earn an income from the outside market, the male productive role is often perceived as more important than the female role. It has been noted, for example, that women tend to fare relatively better in societies where they play a significant role in the acquisition of food and earnings from outside of the household; in such settings, women’s contribution to the welfare of the household enhances the perception of women’s input, and ensures her a stronger position within the bargaining process (Sen 1998: 106). Sen (1984) also notes that the differential advantages between men and women can feed on themselves. A better deal for the male in one portion of the bargaining process can, inter alia, secure a better position in the division of labour, better training, or more profitable job experience. This, in turn, can lead to a better placing in the next period’s bar- interest, perceptions, and the measures of well-being. (3) Measures must include information about “who” is contributing “how much” to the overall family prosperity. This in turn determines the perception of legitimacy and obligation of a particular party. 20. For a detailed discussion on this approach see Sen (1985). HOUSEHOLDS’ REPRODUCTIVE BEHAVIOUR 97 gaining problem. Certain ‘traditional’ arrangements can thus emerge, whereby “the asymmetries of immediate benefits, sustain future asymmetries of future bases of sexual divisions, which in turn sustain asymmetries of immediate benefits”(Sen 1995: 137).

VI. CAPABILITIES APPROACH AND FERTILITY REDUCTION It is important to recognize that Sen is at variance with the standard economic theory in another significant element - the evaluation of a person’s well-being. While standard economic models evaluate a person’s well-being in terms of singular notion of utility - where utility represents whatever object of desire the individual or household maximizes - Sen distinguishes between two ways of seeing a person’s interests and their fulfilment: the person’s well-being, and his or her agency.20 This distinction is important not only because it differentiates Sen’s model from the traditionally rigid economic frameworks, but also because of the sig- nificance it has in terms of Sen’s public policy recommendations for fertility rate reduction. The conception of well-being, as employed by Sen, is concerned primarily with a person’s actual achievements. It cannot be judged either in terms of commodities or in terms of mental metrics of utilities. Rather, it must be understood in terms of a person’s capabilities. In other words, the well-being of a person must be understood in terms of what he or she is capable of ‘doing’ and ‘being’.21 According to Sen (1984: 376), “this is the perspective of ‘freedom’ in the positive sense: who can do what, rather than who has the bundle of commodities, or who gets how much utility.” This ‘capabilities approach’ evaluates individuals’ well-being as a function of positive freedoms which they can enjoy within the context of the household and society at large. While personal capabilities achieved by a person necessarily vary with the economic prosperity of a particular setting he or she is in, the perspective of capabilities provides for a relative - rather than absolute - judging measure. For example, Sen (1984) makes reference to the capacity to be free from hunger and to meet nutritional needs, an acheivement that is widely relevant in judging well-being in a poor country, though typically not so in a rich country in which this capabil- ity is typically unproblematic (except for specially deprived groups). Sen also introduces the important concept of ‘agency.’ Although the agency of a person is necessarily linked with his or her well-being, the delicate distinction between the role of a person as an “agent” and 21. Some of the most elementary functionings of a person are: the ability to be well nour- ished, to avoid escapable morbidity or mortality, to read and write and communicate, to take part in the community, and to appear in public without a shame. See also Sen (1985). 98 SASKATCHEWAN ECONOMICS JOURNAL

“patient” that fundamentally determines the ways and extent that such freedoms are realized. This elementary difference between the well- being and the agency of a person is especially important in light of the debate of social justice and women’s rights.22 While the relative dep- rivation of women’s well-being remains a pending concern to the debate, it is the limited role of women’s active agency - particularly with respect to their ability to control their reproductive functions - that is most crucial to women’s ability to enjoy basic civil liberties. According to Sen (2000b: 198), “the adverse effects of high birth rates powerfully include the denial of substantial freedoms - through persistent childbear- ing and child rearing - routinely imposed of many Asian and African women.” Empirical work of recent years has demonstrated very clearly how the relative strength of women’s agency is directly influenced by such variables as women’s literacy and education, their ability to earn independent income, to find employment outside of the household, and to actively participate in decision-making within and outside of the household (Sen 2000b: 191). Although these factors may appear to be diverse and disparate, they all have in common a positive contribution to the force of women’s voice and agency through greater independence and empowerment. Nevertheless, the factors displaying the most statistical- ly significant effect on the fertility rates are female literacy and female labour force participation (Sen 2000a). The negative linkage between female literacy and fertility has been widely observed in most countries undergoing fertility transition.23 According to Sen (2000b: 199), “the unwillingness of educated women to be shackled to continuous child rearing clearly plays a role in bring- ing about this [fertility rate] change.” The influence of education on fertility is assumed to derive from various dimensions of educational experience. Martin (1995) notes that while schooling provides for advance- ment of literacy skills, it also stimulates cognitive development and enables students to process a wide range of information. Moreover, education acts as an important agent of socialization; it shapes attitudes, opinions and values of the educated. Similarly, education enhances women’s economic opportunities and can be considered as a vehicle for social mobility (Martin 1995: 189). Each of these factors contribute to women’s agency and, in turn, to both their desire and ability to chose fewer children. Women’s education alone, therefore, can exert substantial influence on the revealed reproductive preferences of women. Although fer- 22 The 1994 Cairo Conference on Population and Development (ICPD) focused attention on the role of women's empowerment in influencing reproductive behaviour. 23 The powerful effect of female literacy contrasts with the completely ineffective roles of HOUSEHOLDS’ REPRODUCTIVE BEHAVIOUR 99 tility norms are strongly related to the economic organization of a particular society, its cultural setting, and its family structure, Sen (2000b: 192) notes that when controlling for these variables “the observed fertility among better educated women is close to their desired family size, [while] the actual fertility of unschooled women is usually twice their stated ideal size.” As education helps mothers to process information more effectively, it also enables them to use various social and community services more intensely (Dasgupta 1995: 1887). An increased level of education, therefore, appears complimentary to the efforts of family planning programmes, to the active use of fertility regulations and, consequently, to the reduction of fertility rates. Finally, Sen (2000a: 218) points out that school education can enhance a woman’s decision-power within the family, particularly “through its effects on her social standing, her ability to be independent, her power to articulate, her knowledge of the outside world, her skill in influencing group decision and so on.” The economic dependency of women on men plays another significant role in women’s ability to express, and implement, their fertility desires. This is particularly the case in traditional societies where women are confined to long hours of work at home, work that is often ignored in the accounting for the respective contributions of women and men to the household’s overall prosperity (Sen 2000b). Accordingly, men’s relative dominance - connected to their position as “breadwin- ner,” whose economic power commands respect within the family - tends to take precedence in the household’s reproductive decisions. There is considerable evidence, however, that when women can participate in the economic activities outside of the household, this tends to enhance not only their relative position within the household (i.e. in terms of the perceived share of contribution to the well-being of the family, thus, in terms of women's bargaining position and power), but also within the society.24 In light of the above evidence - which suggests a positive impact of education and economic participation on women’s agency - it is reasonable to explain an observed decrease in birthrates in some societies in terms of an improvement of women’s overall status and power within those societies. Although it is important to recognize that correlation is not causation, there are reasons for thinking that political and civil liberties of women are not only desirable in themselves, but also have an instrumental role in the reduction of fertility rates across the developing world. While gender equity - resulting form equal capabilities of men male literacy or general poverty reduction as instruments of fertility change. For further discussion see Sen (2000b). 24 For further discussion on the enhancement of women’s agency via economic participation see: A. Sen Development as Freedom, P. Dasgupta, 'The population Problem' etc. 100 SASKATCHEWAN ECONOMICS JOURNAL and women to pursue their well-being and agency - is not a sufficient condition for an effective fertility transition, it is a necessary one. Consequently, in an attempt to reduce fertility rates, particular attention should be given to public policies, which enhance gender equity and the freedom for women. The pursuit of such policies is important not only for the reduction of fertility rates per se, but also for the improvement of social justice and economic prosperity of women as well as men throughout the developing world.25

VII. CONCLUSION It has been the aim of this paper to advocate the need for revision of standard economic assumptions with respect to the household’s reproductive behaviour and decision making. By comparing three competing approaches, we emphasize that any study of fertility behaviour should take into consideration the existence of heterogeneous, gender- based preferences, and potentially conflicting behaviour within households. This is necessary not only to enhance the accuracy of the model but also for determining the appropriate public policy responces to overtly high fertility rates and population growth. In light of the various frameworks outline above, A.K. Sen’s model of ‘cooperative conflict’ appears to be the most far-reaching in describ- ing the mechanisms behind households’ reproductive behaviour. While the standard microeconomic model proposed by G.S. Becker indeed provides quantifiable measures for the demand for children, its foundations suffer significant shortcomings. The assumptions of households’ homogeneous preferences and benign relations among household members are simplifications that tend to blur crucial dimensions of household behaviour. Moreover, the ambiguities concerning substitution and income effects raise scepticism over the validity of the model’s predic- tions. While the special relation between quantity and quality of children is supposed to “explain” the negative relationship between households’ income and the demand for children, the definition of children’s “quality” itself is rather vague and its connection to observed fertility transitions remains uncertain. Similarly, the economic framework developed by R.E. Easterlin - while expanded to include the social component of fertility behaviour and the cost of contraceptives - also fails to gain credible empirical affir- mation. Although the relationship between modernization and declining fertility rates has indeed been observed, the large variation in fertility rates across more developed or “modern” economies emphasizes the omission of important explanatory factors. 25. For discussion on gender equality and social justice see Sen (1995). HOUSEHOLDS’ REPRODUCTIVE BEHAVIOUR 101

In his willingness to depart from the simplifying assumptions concerning household decision-making of the standard models, A.K. Sen considers how the interaction of gender-based preferences - via bargaining process between the two parties - can explain the number of children in a household. Perhaps the most important contribution of Sen’s model is its clear implication for public policy. His ‘capabilities approach’ to evaluating an individual’s well-being illuminates the necessity for respect of each individuals’ basic rights and liberties. More importantly, it advocates the enhancement of women’s rights and capabilities, through the promotion of higher education and social status, as the most appropriate and effective measure for achieving fertility rate reduction. Consequently, the model is conducive not only to the betterment of women’s physical and social condition, but also to the expansion of social justice.

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