Party platforms ignore intangibles that drive our economy

TORONTO—Think of political party platforms as boxes of lures used by fishermen to catch fish. We, the voters, are the fish and the political parties the fishermen. Each party has its box of lures, and the goal is to hook as many fish as possible. In this election, for example, will green economy enthusiasts bite the Liberal lures promising big dollars for green technologies? Will tech company founders seeking money bite the Conservative lure promising flow-through shares so that companies can monetize unused R&D tax credits? And will unionized steelworkers swallow the NDP lure promising more protectionism to block steel imports? What will turn out to be the most attractive lures, the ones that catch the most fish? All of this is fair game. The problem is that the bigger picture gets lost. In this election, for example, the building of successful businesses and good jobs in a highly innovative and productive economy should be at the centre. Future growth and prosperity will be driven less by how much we spend on new machinery and equipment (though that will still be important) and more by how much we invest in intangibles. They will be the key drivers of the innovation needed to create the scaled-up Canadian companies that can thrive in a fiercely competitive global economy. So the bigger question is, which party is most on track to accomplish this? Unfortunately, no political party has set out a plan for Canada to succeed in this intangibles economy. They each have proposals that would help. But these are simply patchwork, not a real plan or strategy. The intangibles businesses need for success include investments in software and databases, research and development, artistic and literary originals, design, new financial products, branding, market research, organizational structures, business processes and employer-provided training. They produce intangible assets such as patents, trade secrets, digital capabilities, copyrights, trademarks, brand equity, operating business models and firm-specific human capital. So how do we work to ensure that Canada can compete in these areas? The challenge is well captured in a recent analysis from the Organization for Economic Cooperation and Development, written by a team led by Carol Corrado of the Conference Board and including Jonathan Haskel, co-author of the ground-breaking book, Capitalism without Capital. What they show is that there is a growing gap between the world’s leading businesses and all the others, and that these leading businesses have higher levels of spending on intangibles so that the gap keeps on widening. In part that’s because intangible investments can be scaled up. This has two effects: it gives an even greater advantage to the leading businesses, and at the same time discourages other companies from trying to catch up. As a result, overall investment in the economy falls short of what is desirable for innovation and productivity. Another OECD study explains why intangibles are difficult to finance. Banks and other financial groups find it hard to provide capital when the assets of a business— patents, research and development, organizational capital, talent, database, managerial skills, and proprietary software—are hard to value and hard to seize if the business fails. “New technologies have seen unprecedented development, and investment into software, patenting, organization and distribution networks have generated new intangible assets” and these have become central to their strategy and success, the study on productivity and finance led by the OECD’s Lilas Demmou, says. In fact, most of the productivity growth in the economy today is “driven by innovative sectors that strongly rely on intangible assets, such as information-communications-technology producing sectors and high-tech manufacturing.” So the availability of finance plays a major role in their growth potential. Financial constraints can reduce investment, and make it harder for business to implement productive projects. The result can be an underinvestment in intangible assets, so that their level falls below what would been needed for a high level of innovation, good jobs and incomes, and productivity gains. Moreover, financially-constrained firms would be likely to pursue less radical innovations or challenge the biggest firms. All of this entrenches the power of the biggest firms, such as Alphabet/Google, Amazon or Apple. A big problem in this election campaign is that voters don’t have the analysis available to assess the platforms of the parties. One reason we fail to pursue better policies is that we have so little access to serious analysis and policy ideas. We underinvest in the knowledge and analysis we need. Governments operate behind high walls of secrecy and have neglected the analytical capabilities they need. Our think tanks lack the resources to undertake detailed analysis and research. Our university business schools and economics departments seem uninterested. This is why I have long believed that we need an independent Economic Council of Canada, publicly funded but operating at arm’s length from government, to do the kind of analytical research we need in Canada—our version of the OECD research in the intangible economy, for example. That could make us all much better informed on the big challenges and how to deal with them. Such a council could attract top researchers and put all of its work in the public domain, without meddling by policymakers or politicians. In its platform the Liberal Party promises to establish what it calls a permanent Council of Economic Advisers. The danger is that it will turn out to be just another advisory body which offers opinions and aspirations but not serious research. There is no commitment to backing it up with solid analytical capability, or that its work will be arm’s length from government, or that its work will be made public rather than secret. The small budget of $5-million a year suggests it will fall far short of the what’s needed for a serious Economic Council. Until Canadians have much better information on the challenges we face, we will fall short of the debates we need for a better Canada and hence the potential for a better Canada. David Crane can be reached at crane@interlog.com. The Hill Times