Wrongheaded policy proposal targets ‘diverse businesses’ in Ontario

Ontario NDP finance critic Catherine Fife recently tabled Bill 275, which aims to achieve social justice goals by awarding more government contracts to “diverse businesses,” defined as businesses majority owned, operated, managed or controlled by people from “one or more historically disadvantaged communities.”

At first blush, this policy might make sense to some people and was supported by, among other organizations, the Ontario Chamber of Commerce. But in reality, it would be ineffective in delivering financial benefits to disadvantaged Ontarians, which supposedly is its aim. Even worse, it would create perverse incentives for businesses, reduce accountability of politicians and government managers, and inflate costs to taxpayers. It would cause net economic harm, including to the people the policy is supposed to help.

The most obvious reason why this policy would fail is that it requires a certain level of business and political acumen for somebody to land government contracts by demonstrating to government officials the high degree of diversity within their firm. People with this acumen are unlikely to actually be in positions of financial disadvantage, even if they come from “historically disadvantaged” communities.

Next, the policy creates perverse incentives for businessowners and managers by incentivizing them to make business decisions—not in ways that will improve the productivity, efficiency or even inclusiveness (i.e. not unfairly discriminating against people) of their firm’s operations—but rather to appear more diverse to government officials in charge of awarding government contracts.

Importantly, because firms in competitive markets cannot afford to discriminate on unfair grounds against workers or customers, as this would mean paying a premium for labour or losing business to competitors, being inclusive is consistent with improving productivity and profitability. Since firms already have a powerful financial incentive not to discriminate unfairly, government efforts encouraging diversity are redundant at best.

But by making the profitability of firms less reliant on its ability to satisfy consumers through improving business operations and more on its ability to meet some arbitrary government criteria for diversity, the government will encourage firms to dedicate less resources to being productive and more resources to appearing diverse.

Finally, in addition to creating perverse incentives for businesses, this type of policy reduces accountability among government officials. When their department vastly overspends its budget, under-delivers on projects or fails to provide services at a satisfactory level, government ministers or bureaucrats have a ready excuse: “But look how diverse our supply chains are!” The entirely foreseeable result of politicians and government managers pursuing social justice rather than better services to citizens at lower costs, is that they will deliver worse services at higher costs. The government manager responsible, for example, for procuring information technology services for some department, is presumably expert in information technology. There’s no reason to suppose that he or she has any expertise in “social justice,” so it makes little sense to put this person in charge of delivering on such goals.

This is all not to say that governments should be unconcerned with helping disadvantaged people, but simply that discriminating in government procurement decisions with the aim of benefitting certain demographics is a deleterious policy that will not achieve its stated intention. Therefore, in this case, the NDP’s ideas should be rejected.