“The static models describe short- or long-run equilibriums in economies in which there is no growth. The dynamic models investigate the process of regional growth, with some models predicting the divergence of regional growth rates over time … “One shortcoming of the literature on the causes of regional disparities is that there seems to have been more emphasis on the development of theories than on testing them. In large part that may be because of a scarcity of data available at the regional level … (p. 13).
“This [above] review of models from trade theory has identified a number of factors that can cause regional disparities in wage rates: increasing returns to scale, barriers to trade in goods, and barriers to the movement of capital and labour between regions. The evidence available suggests that these factors do exist and contribute to regional wage disparities … (p. 16).
The Report then goes on to cite:
a) size of a region as aiding returns to scale, b) internal barriers as distance and government policy (including regulation and subsidy), c) barriers to capital (including taxes and subsidies), d) barriers to labour mobility (including moving costs, taxes, unemployment insurance).
With respect to Labour Mobility, the Report says:
“Most recent studies of migration in Canada have put particular emphasis on policy-induced barriers to labour mobility, such as regional differences in taxation, the provision of local public services and the availability of unemployment insurance benefits. Much attention has been focused on intergovernmental transfer payments from the federal to the provincial governments. Because such payments allow provincial governments to offer lower tax rates or higher levels of services than would otherwise be the case, outmigration from low-wage, high-unemployment provinces could be discouraged. The federally administered unemployment insurance program may have a similar effect because more generous benefits are available to individuals who live in high unemployment regions.” (p. 21).
4.8. Focus on “Disparities” Tom Courchene (a leading Canadian political-economist) said the following:
“Equalization Payments are payments that the federal government makes to the poorer provinces. The monies come from Ottawa’s [that is, the federal government’s] general revenues and are unconditional transfers that can be spent as the recipient provinces please (see also transfer payment). Their purpose is to reduce the horizontal imbalance among the provinces.
“In general, 2 kinds of fiscal imbalance can arise in a federation – vertical and horizontal. The former is an imbalance between the levels of government, federal and provincial, eg, when the responsibilities of the provinces are disproportionately large compared with their share of revenues. Such an imbalance can be remedied by a transfer of responsibilities to the federal government (eg, family allowances and unemployment insurance) or by a transfer of revenues from Ottawa to the provinces. By contrast, horizontal imbalance is a fiscal imbalance among the provinces themselves – the fact that some provinces have more sources of revenue and are therefore richer then other provinces. Equalization payments can help adjust these horizontal imbalances.
“The Constitution Act of 1982 states ‘Parliament and the Government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services and reasonably comparable levels of taxation.’ The concept of equalization can be traced to the statutory subsidies in the Constitution Act, 1867, and more recently to the National Adjustment Grants recommended by the Royal Commission on Dominion–Provincial Relations [Rowell Sirois Commission, 1937– 1940] as part of an overall reorganization of federal-provincial financial arrangements … “The first formal equalization program was introduced in 1957.
The transfers were designed to ensure that per-capita revenues of all provinces from shared taxes – personal income taxes, corporate income taxes and succession duties – matched those of the wealthiest provinces, at that time BC and Ontario.
“In the first of the required 5-year revisions, the level up to which these transfers were equalized became the all-province average … [In brief, the program continues with various permutations and complexities over the following years.] At least to a degree, without more, these policies interfere with market allocation mechanisms, and thus can serve to impair possible further growth in the equalization giver and also the equalization receiver.
RELOCATIONS & TRANSITIONS Both Canada and the US had a “Baby Boom” after the Second World War – demographically much larger than the groups immediately before or after. Thus as the “boom” matured, it generated higher than previous levels of demand for all kinds of products – schooling, housing, jobs, health care, and – in the future – pensions.
As indicated: (i) Canada has needed immigration to grow; and (ii) with the Wheat Boom, there was extensive immigration to Canada from abroad, and considerable internal migration in response.
Although much of the migration to the Prairies was both encouraged by the government and even subsidized, the allocations were fundamentally economic in nature, profit-motivated, if you will;
and thus largely successful.
Without detailing them, suffice it to say that government policies (in Newfoundland and the Northwest Territories) encouraging people to move, so that government could provide services to them more effectively have been viewed as either unsuccessful or as having no better than “mixed” results.
CREATIVITY & INNOVATION For Canada, the coming together of technology, markets, and globalization with the new urban reality, and the need for creativity and innovation, at least, means several things:
• That “regional” focus will need to become more “city” centred.
• That education and life-long learning will need to receive renewed stress.
• That the system should be open to, and give opportunity to, all – a diverse all.
• That SMEs will need more attention, and support, than they have hitherto received.
• That markets and competition will become more central.
It also means that – given the collapse of distance – that creativity and innovation, and the economic engine that they fuel can oc cur wherever the right minds “cluster”. No longer is there a need for over-aggregation either in remote natural resource-proximate locations, or in overly large urban “sprawls”. The “best and the brightest” (to use the term from Paul Martin’s speech) can, to a great degree, choose their location; and that choice will, more and more, be guided by “quality of life”.
And, as well, it means the fostering of an attitude – an openness, a curiosity (a “thirsty mind”), an imagination, plus a practicality (since innovation is simply applied creativity).
ECONOMIC GROWTH AND PROVINCIAL DISPARITY (Extracts), Serge Coulombe (CD Howe Institute, March 1999) Fiscal federalism has helped to remove many of the regional imbalances in per capita income among the provinces since the early 1950s, but given current institutional and political realities, the remaining disparities will persist, concludes a CD Howe Institute Commentary.
Coulombe notes that, despite Canada’s huge size and geographic diversity, many disparities between rich and poor regions were gradually removed between 1950 and the mid-1980s through the “convergence phenomenon”, whereby human and physical capital tend to accumulate more quickly in regions where they are relatively scarce. Interregional transfers, Coulombe argues, played their part by helping to finance improvements (in the form of better education and training) in human capital in the poorer regions, especially Atlantic Canada. This, in turn, helped to attract financial and physical capital into those regions.
Since the mid-1980s, however, the catch-up process generated by the convergence of capital seems to have exhausted its effects, and the disparities that persist reflect not only the industrial structure of the regions but also the institutional and political context.
The downside of fiscal federalism, Coulombe argues, is that, by financing the delivery of health care, education, and income support by the poorer provinces at levels comparable to those found in richer provinces, it encourages Canadians to remain in low– productivity regions. Individuals who cannot find work in their home province need not, therefore, move to benefit from adequate public services.
In the future, Coulombe says, the regional distribution of Canada’s economy will be affected by the relative decline of the manufacturing sector, the westward shift of the economic centre of gravity, and the continuing development of north-south patterns of trade in place of more traditional east-west patterns. These stresses could undermine Canadians’ support for interregional redistribution. Yet, Coulombe argues, a transfer system more adequate than the current Canada Health and Social Transfer will be required in order to eradicate the under-funding of postsecondary education and improve the stock of human capital in the poorer provinces. Such an improvement would eventually make the poorer provinces richer by raising their level of economic.
Main Findings of the Commentary:
• Provincial disparities in per capita gross domestic product, per capita income, and productivity have lessened since World War II, but they are still substantially larger than those among US states.
• The persistence of regional disparity in Canada is the result of the country’s diversity and its model of fiscal federalism.
• Since 1961, interprovincial migration has resulted in much redistribution of population, caused by the relative decline of manufacturing and the increase in farm productivity.
• Various economic indicators – per capita income, earned income, output, labor productivity, and the labor force participation rate – have grown faster in the poor provinces than in the rich ones since WW II. But disparities in unemployment rates have not lessened.
• Disparities in human capital can largely explain the level and changes of provincial disparities in per capita income and output. Measuring human capital is difficult, but logical proxies such as measures of schooling, especially postsecondary schooling, suggest that the provincial distribution of human capital is indeed moving toward a national average.
• Federal government financing of university education in the poor regions can improve the Canadian social optimum. Without that funding, the poor provinces would tend to underinvest in postsecondary education. Since 1977, however, Ottawa’s contribution to postsecondary education has been part of block grants not tied to identifiable spending in the provinces. That arrangement may be leading to underinvestment in education, especially in the poor provinces.
• Modelling suggests that the current level of provincial disparities has reached a steady state that reflects the industrial structure of the regions and the institutional and political context. Of course, regional economies will continue to be subject to unpredictable localized shocks, as with the effects of the failure of the Atlantic groundfishery.
• Nevertheless, disparities in Canada’s per capita output are still a problem because of their size – about 50 percent higher than that of the disparities among US border states. This situation results from the fact that, because of Canadian policies on labor and employment insurance, Canadians are inclined to remain in areas of low productivity and high EI–benefit eligibility, even if they do not work. And they need not move to benefit from adequate public services.
Canada’s regional diversity has resulted in great disparities in provincial economies, but should this fact concern anyone except, perhaps, residents of the worst–off provinces [Yes] … for at least four reasons:
 The first is the diversity of the country’s settlement patterns … The implication of this diversity is that Canada’s various regions can follow different lines of development, that their economic cycles are not necessarily correlated, and that one industrial policy formula cannot be applied uniformly across the country.
 The second reason is the persistence of major economic disparities, which have been noted ever since Confederation. Although one can say that interprovincial disparities in per capita gross domestic product, per capita income, and productivity have tended to diminish since World War II – a phenomenon known as convergence – these differences are still substantially larger than those among US states. Their existence and persistence raise the problem of equity. They also greatly complicate the achievement of vertical and horizontal equilibrium in the finances of governments of a highly decentralized federation in which provincial and local administrations provide a large proportion of public services such as health care, education, and social security. The issue of substantial economic disparities is entangled with fiscal federalism. Indeed, Canada has traveled further down the road of interregional redistribution than almost any other federation (Courchene 1994).
This approach took shape mainly in the late 1950s and coincided with the birth of the welfare state. With the aim of promoting the introduction of national programs, Ottawa began to finance various provincial expenditures in health, postsecondary education, and social security. It set up an equalization program to ensure that provinces were able to offer public services of comparable quality without unduly increasing their tax burden, and the principle of equalization was entrenched in the 1982 Constitution [see 2 below].
Yet interregional redistribution is not an intrinsic characteristic of a federal system. In the United States, for example, the federal gov ernment redistributes a smaller proportion of resources through transfers to municipalities and states, and this redistribution is not driven by the goal of equalizing fiscal capacity across local governments. Other federations, such as Germany, are in an intermediate position between the United States and Canada.