Initiatives & Programs

Aboriginal Economic Development

Table of Contents:

	I. CURRENT REALITIES: CANADA'S SHAME
	II. THE RISING COST OF THE STATUS QUO
	III. RCAP's ECONOMIC STRATEGY
	IV. AFFORDABILITY OF THE RCAP STRATEGY
	V. CONCLUSIONS

Overview John McCallum
CHIEF ECONOMIST
ROYAL BANK OF CANADA
OCTOBER 1997

It is, for me, a pleasure and a privilege to team up with the Council for the Advancement of Native Development Officers (CANDO) to offer a perspective on the economics of aboriginal economic development. We live at a time of both despair over the current economic conditions of Canada's first peoples and hope that the massive research conducted by the Royal Commission on Aboriginal Peoples (RCAP) might point the way to a better future. Yet so far the response of Canada's business community to the Commission's work has been almost deafening in its silence. My colleague, Charlie Coffey, and I hope that this conference might help to end that silence an stimulate both debate and action by corporate Canada.

My role is to focus on the macro side, or the big picture, while Charlie will speak in more specific terms about the role of business in general and banks and Royal Bank in particular. My remarks will be divided into four parts:

• The statistics leave no doubt as to the very sad state of aboriginal economic and social development today.
• If one is not moved by these statistics, one might instead be moved by the high and rising cost of the status quo. Failure to improve the situation will extract a large and rising charge on the public purse.
• RCAP's economic strategy is based on additional annual government expenditures of about $1.5 billion for a period of some 15 years, followed, they argue, by a net benefit to government finances as the economic and social conditions of the aboriginal peoples begin to approach those of the population at large.
• Whether or not it will be accepted by government, the RCAP strategy is becoming increasingly affordable to the federal government. The next 10 to 20 years should see a large and rising "fiscal dividend" as the country's national debt declines in relation to the size of our economy.

I. CURRENT REALITIES: CANADA'S SHAME

Although the general fact of aboriginal economic deprivation is well known, it is worth reviewing a few of the statistics to underline just how bad things are.

Poverty
In 1991, the latest year for which data are available, the mean income of aboriginals aged 15 and above was just $14,700, or 61% of the non-aboriginal average (Chart 1)

Chart 1

Unemployment
In 1991, the aboriginal unemployment rate was 24.6%, as opposed to a Canadian average of 10.2% (Chart 2). Moreover, the unemployment gap has been rising over time.

Chart 2

Dependency
In 1991, 42% of people living on reserves received social welfare, as opposed to 8% for the Canadian population at large (Chart 3).

Chart 3

Education
Only 42% of the aboriginal population finish high school compared to 61% in the broader population (Chart 4).

Chart 4

Health
The incidence of TB and diabetes among aboriginals is, respectively, 17 and three times that of the broader population (Chart 5).

Chart 5

Housing
According to a report commissioned by CMHC, aboriginal housing conditions are below acceptable standards for 65% of on-reserve households and 49% of off-reserve aboriginal households. The corresponding figure for the non-aboriginal population is about 30% (Chart 6).

Chart 6

Incarceration
The rate of incarceration in federal and provincial jails in 1995-96 was at least five times greater for aboriginals than for non-aboriginals (Chart 7).

Chart 7

Suicide
Suicide rates are 2.5 times higher among aboriginals than in the broader population (Chart 8).

Chart 8

Homicide
Homicide rates are six times higher than in the broader population (Chart 9).

Chart 9

So there is a strong social and moral case for measures to improve the living conditions of Canada's first peoples. This, however, is not the only strand in the argument, for a dollars and cents case can also be built, based on the high and rising cost of the status quo to the Canadian taxpayer.

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II. THE RISING COST OF THE STATUS QUO

RCAP estimates the annual cost of the status quo at $7.5 billion in 1996. Of this amount, $2.9 billion is borne by the aboriginal people and $4.6 billion is borne by government. For the aboriginal people, the cost is equal to the gap between their earned income and that of the rest of the population, minus the income taxes foregone and financial assistance from government. For governments, the costs consist of direct expenditures (over and above what governments spend on non-aboriginal Canadians) plus tax revenues foregone (Chart 10).

Chart 11

This, however, is not the end of the story, as there is a potential time bomb in the form of demographics. Between 1991 and 2016, the population with aboriginal identity is projected to rise by 52% (compared to 22% for non-aboriginal Canadians). More striking, because of differences in demographic structure, the working-age aboriginal population (aged 15-64) is expected to grow by 72% over this same period, as compared with only 23% for non-aboriginal Canadians (Chart 11)

For Canada as a whole, this high growth rate of the working-age aboriginal population could be a blessing or a curse. It is sometimes said that the United States and Canada benefit from the inclusion of Mexico in NAFTA because Mexico's much younger population will provide a welcome offset to the aging populations of Canada and the United States over the next decade or two. It is equally true, but less recognized, that the same can be said of our own aboriginal population. As the country ages, there will be a premium on younger Canadians whose efforts will be needed, in part , to support the aging baby boomers. If, then, the more youthful aboriginal population can become productive workers and taxpayers, they could make a significant contribution to the economic health of the country as a whole.

That, however, is a big "if". Under status quo conditions, large numbers of the rising population of working-age aboriginal people will fail to get jobs and will be seen as an economic cost to the state rather than a benefit. Indeed, according to RCAP, for demographic reasons alone, the cost of the status quo will rise from $7.5 billion in 1996 to $11.0 billion in 2016.

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III. RCAP's ECONOMIC STRATEGY

Chart 12

RCAP proposes a strategy that is summarized in Chart 12. Compared with the costs of the status quo, which rise without limit, the RCAP strategy calls for government expenditures that exceed the cost of the status quo for some 15 to 20 years. It is argued, however, that as economic and social conditions among the aboriginal people improve and some of the dismal statistics shown in Charts 1-9 reverse themselves, the strategy will begin to pay off from a government finance point of view. As a result, the net cost of the strategy will eventually fall below the cost of the status quo.

Relative to the status quo, the strategy calls for government expenditures that peak at $1.5 billion to $2 billion higher than is the case today. In the earlier years, priority is to be given to economic and social measures, but costs in these areas decline as progress is made. Land claims settlements represent a major part of the cost, estimated at $1 billion in 2016, but these are offset and eventually more than offset by government revenue gains (Chart 13).

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IV. AFFORDABILITY OF THE RCAP STRATEGY

Before commenting on the merits of the RCAP strategy, let us consider its affordability. Here the news is definitely good. For many years Canada was trapped in a vicious circle of rising government debt and interest payments. Now, however, we are at the point of a balanced budget, or at least on the verge of a balanced budget. We are about to enter a much happier time of a virtuous circle as healthy growth and falling interest rates and interest payments reduce the national debt, if not in absolute dollar terms then at least in relation to the size of the economy.

There is clearly a risk - indeed, a very major risk - of a premature declaration of victory over the deficit and debt. While we still have a unacceptably high unemployment rate, we are also living in the best of times in terms of job creation and economic growth. Times may not be so good a year from now when, for all we know today, we might be in a run-up to a Quebec referendum. This suggests that the federal government should display great caution before opening its purse strings too widely.

Chart 14

Nevertheless, the RCAP framework runs to 20 years or more and, in the context of that time frame, it is clear - barring major calamities - that the federal government will have a large and rising fiscal dividend at its disposal. As shown in Chart 14, the federal government's fiscal dividend is likely to rise very rapidly over the next twenty years, reaching $24 billion in 2004, $46 billion in 2010, and a massive $79 billion in 2017. These numbers, which are denominated in dollars at the prices prevailing in 1997, are based on very conservative assumptions. (1)

So, if one asks whether the RCAP proposal is affordable, the answer must be "yes". Certainly it is a whole lot more affordable today than a few years ago. This is not to say, however, that the federal government will necessarily buy into the RCAP proposal.

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V. CONCLUSIONS

What we have established in this paper is that the economic state of Canada's first peoples today is deplorable, that the costs of the status quo to the public purse are high and rising, and that any costs incurred by the federal government in addressing these problems are a lot more affordable today than was the case just a few years ago. We have also provided a brief outline of the economic strategy recommended by RCAP.

While all of this is certainly suggestive, we stop short of recommending that the government adopt the RCAP recommendations because we lack the expertise to comment intelligently on their viability or likely success. As well, it is not really the role of a bank to tell the federal government how to conduct its policy. Nevertheless, it is our view that this is a matter of great national urgency and that the business community should lend its support to the goals, even if it lacks the expertise to assess the means by which public policy might best achieve these goals. Moreover, in areas closer to our expertise, we can be more specific, as will be the case in Charlie Coffey's remarks on the involvement of corporate Canada in this enterprise.