A Country's Reputation Is Much More Important Than a Handful of Jobs
In defending itself from a crony capitalism scandal, the Canadian government has turned to that old chestnut: They acted on behalf of a global Montreal-based engineering firm in order to – wait for it – save jobs. In doing so, the Justin Trudeau government may have undermined one of Canada’s greatest economic assets – its reputation for integrity, stability and rule of law.
That reputation has already taken a hit. The SNC-Lavalin scandal – involving the Prime Minister’s efforts to obtain a deferred prosecution agreement for the company as a result of bribery of public officials in Libya – has brought down two cabinet ministers, Trudeau’s chief aide, and the head of Canada’s public service.
Since 2013, SNC-Lavalin’s Canadian workforce has already dropped from about 20,000 to just under 9,000, a workforce decline that few if any Canadians have even noticed, and that has had no visible impact on the Canadian economy. And no matter what kind of pressure tactics the company may have exerted on the federal government, it is hard to see how it could pull many of its existing jobs out of Canada.
SNC-Lavalin is primarily a services company. It could move its corporate headquarters wherever it wants, but it cannot reduce by much its Canadian workforce – which it needs in order to undertake infrastructure projects in Canada. In that respect, it is similar to a drugstore chain. How far would CVS get if it threatened to close its U.S. outlets and move elsewhere – leaving the lucrative U.S. market to Walgreen’s, Duane Reed and other drug chains? SNC-Lavalin employs thousands in Canada because it needs them to fulfill its Canadian contracts. It draws about a third of its revenue from Canada, and employs less than 20 percent of its workforce there. The company cannot move its corporate headquarters from Montreal until 2024 in any event, due to a contract it has signed with a Quebec investment fund.
On the other side of the ledger, the scandal threatens to undermine one of Canada’s greatest economic resources – its squeaky clean global image. A national economy’s ability to create jobs depends largely on its reputation. Canada’s hard-earned reputation attracts and preserves jobs in many industries. Harvard University economist Robert Barro has found that stronger laws and respect for them, as measured by the International Country Risk Guide, leads to increased economic growth. In fact, the difference between countries with the best and worst records in rule of law equals about 1.6 percentage points per year in GDP growth. Among countries as among individuals, he who steals my purse steals trash, but he who steals my good name makes me poor indeed.
There is no doubt that SNC-Lavalin has been blackening Canada’s good name. The World Bank has banned the company and its subsidiaries from bidding on the international agency’s infrastructure projects until 2023 for its involvement in corruption and bribery. As a result of that ban, Canada went from having no debarred companies in 2012 on the World Bank list to 116 a year later, topping all other countries in that dubious category. The company was also banned for two years from bidding on projects by the Asian Development Bank as a result of lying about the status and work experience of two of the engineers it employed on a multi-billion-dollar project. The company’s current leadership argues that the executive team at the time has left. But shareholders presumably continue to enjoy the stock market gains it made as a result of its illegal practices, which at least until the scandal broke were baked into the share price cake.
It is hard to decide which is worse, the notion that a Canadian government would risk soiling its own reputation or the fact it would do so to address an empty corporate threat to pull jobs out of the country. It is no surprise that Canada is home to one of the leading engineering firms in the world. The country has enormous engineering capacity. Politicians should realize that Canada offers SNC-Lavalin a lot more than SNC-Lavalin offers Canada.
