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Shaping, then Seizing, BC's 'Comparative Advantage'

To create new areas of economic growth here government needs to 'set the table.'

Ken McFarlane 22 May 2012TheTyee.ca

Ken McFarlane founded, in 1990, The Katalysis Group, a partnership specializing in industrial technology development and was its managing director until 2005. He has no vested interest in seeing any of the proposals he suggests here coming to fruition in British Columbia other than a concern for the economic well-being of family, friends and neighbours.

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Symbol for 'up-cycling,' the emerging growth industry of converting solid waste into products. A BC natural?

We are one year away from a provincial election likely to be fought on who is best to create economic growth and particularly good jobs in B.C. Here is a question all candidates should be asking themselves: What is our province's "comparative advantage"?

First put forward by the classical economist David Ricardo in 1817, the principle of comparative advantage -- as distinct from competitive advantage -- states that each nation should pursue the economic activities that it can accomplish more efficiently and effectively than other nations, at least in relative terms relating to opportunity costs. If all nations follow this path then the rest will buy from them and eventually all parties will have the resources to purchase at least what they need if not what they want.

Comparative advantage has been a useful economic concept for almost 200 years. And it lies at the heart of the debate about whether or not British Columbians are too complacent in accepting the role of "hewers of wood and drawers of water." Those who think so commonly urge that B.C. establish industries that fully process our traditionally harvested resources here into value-added goods.

Unfortunately, it's not likely to happen. The costs around building an infrastructure to do this in direct competition with long-established facilities abroad is likely prohibitive in anything other than niche situations. At this point, there would have to be a very compelling "secret sauce" innovation to justify the substantial investment necessary to disrupt entrenched markets.

Instead, are there any emerging areas of business that British Columbia might embrace, creating for itself a new set of comparative advantages? Should government try a proactive approach to fostering that new comparative advantage for B.C.? A credible body of research says yes to both questions. See, for example, the extensive work of Josh Lerner, Jacob H. Schiff Professor of Investment Banking at Harvard Business School, whose research has shown what the next generation of public policies relating to economic development should look like.

Setting the table

First, what to avoid. Direct investments or tax credits by governments for targeted sectors or particular enterprises have not been particularly successful. Bleeding edge regulation to cause businesses to become leading edge producers does not work very well if other jurisdictions don't follow suit. Broad based deregulation often creates more problems than it solves.

However, the tools of loan guarantees and assured public supply contracts to leverage private investment have played a positive role more often than not. Moreover, recent attempts to replicate the successes of Silicon Valley in California and The Research Triangle in North Carolina -- developments which happened more organically than deliberately -- are beginning to bear fruit.

The appropriate role for government is described by those in the know as "setting the table" by providing the basic groundwork for research, development, commercial and industrial activity to take place. It involves policies that encourage metro area and regional clustering with cross-fertilization among sectors and markets that lead to the formation of valuable networks with concrete goals. It also entails ensuring that infrastructure is of the highest standard, basic and applied research is facilitated, intellectual property is respected, bureaucratic procedures for the planning and development of facilities are streamlined and local educational outcomes are maintained at impeccable standards.

Tax write-offs, grants or public direct investments are not part of the tool kit in anything other than an extremely limited and keenly targeted sense related to, say, freeing up genuinely new risk capital. In short, the process must pay its own way, in terms of direct costs, to attain the optimal economic spin-offs and benefits. Also, there must be a good return on the public investments noted above.

This means governments need to get from business activity more than just jobs and spikes in demand for local goods and services. They must also get, through realistic tax structures, the cash to invest, without excessive borrowing, in the schools, hospitals and public services that make it all worthwhile for the ordinary citizen. Otherwise the social pact between capitalism and democracy remains broken as has been the case in recent decades. And as we have seen recently, it is inevitable that citizens will start to push back with increasing effectiveness.

Good bets

Experience in Europe, Asia and South America shows that the policies described here work best in creating new comparative advantages when they are tailor made for specific industries. What industries, then, might be successfully encouraged within the British Columbia economy?

I'd vote thumbs down to the B.C. finance minister's suggestion that our future is to be found in the ephemeral financial services industries and the here-today-gone-tomorrow hi-tech software fields that have few hard assets and can easily decamp to the locales of the highest bidder. The much touted bio-tech sector has similar shortcomings unless solidly aligned with the long-term interests of local universities.

More fertile opportunities lie in up-cycling and remanufacturing, advanced materials, vertical urban farming, pre-fab affordable housing, components for alternative energy sources and anything related to the emerging fields of 3-D printing additive design/manufacturing or computer numerical control equipment. Some of these are "shovel ready" and others are not there yet but would, in my opinion, handsomely repay the new forms of public investment outlined above.

Here is a specific example of what I am talking about. In Vancouver there are only two remaining tracts of land zoned for full-fledged industrial development. One is South East False Creek Flats just adjacent to the Strathcona area and the Downtown East Side neighbourhood. The Flats would be an outstanding location for an up-cycling, remanufacturing industrial park that produces high value products, based on proven and emerging clean technologies, for the domestic market and foreign export. Europe already has a number of such success stories in locations very much like the Flats but North America has been slow to follow suit.

Vancouverites would provide the feed stock resource for the companies involved. Instead of having an ongoing solid waste problem within Metro Vancouver, this new waste-to-products industry would fill a burgeoning market demand. Local universities could benefit from collaboration on ongoing technology development and transfer arrangements. Both entry level jobs as well as higher-end ones for semi-skilled and highly skilled workers would be created and our educational institutions would do the training. Infrastructure requirements would be large enough that it would not be easy for companies to leave and the tax benefits for the public purse would be more than just significant.

Time is right

There will be those who suggest what I propose here smacks of an "industrial strategy" -- something that has been an anathema to Canadian sensibilities for some time because, to be sure, government has not been very good in the past at "picking winners."

This is a fair point but the quantity and quality of historical data along with the tools for economic projections at our disposal now are far superior to those of a generation ago. We are at a point where we no longer have to simply say "we are open for business" but rather we are open for particular types of business that best suit the needs of our citizens and for which we can add tangible value for entrepreneurs and other private risk-takers.

The modest goal of this piece is to get the discussion going. Let's do so right away, because the window of opportunity -- the up-side of all the chaos created by the Great Recession -- is fairly wide open now but will close tight very soon. Those left out in the cold will be jurisdictions that continue the race to the bottom by "staying the course" rather than taking a bold but enlightened new tack.  [Tyee]

Read more: Local Economy, Environment

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