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Federal Finance Minister Jim Flaherty was in Toronto to get his new pair of prebudget shoes at Mellow Walk on Feb. 7, 2014. (Peter Power/The Globe and Mail)
Federal Finance Minister Jim Flaherty was in Toronto to get his new pair of prebudget shoes at Mellow Walk on Feb. 7, 2014. (Peter Power/The Globe and Mail)

Ottawa’s venture capital plan: Picking winners and distorting markets Add to ...

The federal government recently poured $36.3-million into the Northleaf Venture Catalyst Fund – the first of many soon-to-come government-sponsored funds comprising Ottawa’s $400-million “Venture Capital Action Plan.” The plan, conceived with the view that Canada’s lacklustre venture capital industry requires a government solution, ignores Canadian evidence that shows government-sponsored venture capital is ineffective. More fundamentally though, it represents a further blurring of the lines between pro-market and pro-business government policy.

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We witnessed similar thinking during a recent pre-budget consultation with federal cabinet ministers. In response to the question what should government do to “help businesses grow,” one business participant suggested the government come up with ways to encourage businesses to operate more efficiently – implying the competitive pressures of the market are insufficient. The notion that bureaucrats and politicians have the knowledge and ability to help businesses become more efficient is, no doubt, a far cry from reality.

But we can’t solely fault business people for blurring the lines between markets and government, when federal Finance Minister Jim Flaherty himself claims his new taxpayer-funded venture capital fund will “revitalize Canada’s venture capital sector and increase private-sector investments.” This type of pronouncement belies the evidence on government intervention in the venture capital market.

Canadian studies on government-sponsored venture capital and labour-sponsored venture capital corporations have found government venture capital initiatives underperform. Part of the reason is that government lacks the information and/or expertise of private investors, and typically injects political calculations into decision-making.

Yet despite these findings, self-proclaimed pro-market types can sometimes exhibit cognitive dissonance. They claim we need more government “incentives” to “level the playing field” because, of course, their industry is “different,” and in any case it will produce a “multiplier” in the form of more investment and jobs.

Ottawa’s move into venture capital is a reminder that an important distinction exists between government policies that are pro-market and ones that are merely, and unwisely, pro-business. The distinction is one that governments and businesses too often forget.

Markets are decentralized, voluntary and dynamic. They are generally good at allocating resources based on supply and demand. Price signals help inform sellers and buyers how much goods and services ought to cost. Markets deliver this information in a neutral way, without biases toward specific sectors or firms.

With pro-market policies, the government’s role is to establish the rules of the game, including the legal and regulatory frameworks. It allows the market to function efficiently and generate positive economic outcomes, while limiting unnecessary interventions that can cost taxpayers money.

In contrast, pro-business policies involve the government propping certain sectors or firms – in other words, picking winners. But the government is a poor substitute for market forces, since the government and bureaucrats, no matter how well-intentioned, cannot replicate the real-time information produced by the various interactions in the market.

Propping up failing or questionable firms is the most anti-market policy a government can implement, and the roundtable participant’s call for pro-business policies is an example of this pro-business but anti-market thinking. In these instances, politicians are pleased to trade market forces for state intervention, to subsidize certain companies or industries. That’s the political calculus in action.

But the policies that stem from this thinking – such as corporate welfare and regulations that create barriers to entry for new competitors – distort the functioning of markets, and often hurt consumers and other businesses.

There is no better example than the perversity of Canada’s supply management system, which limits competition and artificially secures large profits for a small number of dairy producers at the expense of consumers – especially low-income consumers – who are burdened with less choice and higher prices when purchasing milk and cheese.

Our Fraser Institute colleague, Mark Milke, has extensively documented the federal government’s long history of corporate welfare. His most recent study examining only one federal department – the Department of Industry – found more than $22.1-billion in direct subsidies from 1961 to 2012, including as many as 75 disbursements to the same company.

The solution is not to double down on more pro-business policies that produce these outcomes. Instead, Canada needs a pro-market agenda that eliminates corporate subsidies, liberalizes ownership restrictions in protected sectors such as telecommunications and airlines, and enacts a neutral and competitive tax regime for all businesses and individuals.

These policies would reduce the scope for government interference in the functioning of markets, and eliminate preferences for certain industries or businesses at the expense of their competitors or consumers. That is a positive pro-market agenda that Canadian governments ought to embrace.

Sean Speer is the associate director of fiscal studies and Charles Lammam is resident scholar in economic policy at the Fraser Institute.

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