How much attention do we give our intangible capital?

This post discusses intangible capital, its impact on the wealth building of countries and what more Caribbean countries should be doing to improved their comparative advantage.

“Intangible capital”, which is also termed “intangible assets’ in the financial world, is an area of growing importance as the value of information (as an asset) increases. Currently, emphasis worldwide is on developing Information Societies and knowledge-based economies, and critical to this transformation will be the ability to decisively measure and understand the impact of intangible capital on wealth creation.

Over the last 20 years or so, Caribbean countries have been concentrating on increasing direct foreign investment, and with the region still recovering from the global financial crisis, the influx of capital and the take-up of labour would be highly welcomed. However, recent reports, most notably from the World Economic Forum (WEF), indicate that the region is losing ground with regard to global competitiveness.

This post discusses intangible capital and its impact on the wealth building of countries. Thereafter, the topic will be considered within the Caribbean context, with a particular focus on ICT/technology in the region.

Country intangible capital

In a country context, intangible capital is generally considered a residual element. It captures all other factors that contribute to the total wealth of a country, but cannot be categorised as natural resources or produced capital (Figure 1).

According to the World Bank, in its report measuring the wealth of nations, intangible capital

is the difference between total wealth and the sum of produced and natural capital. Since it includes all assets that are neither natural nor produced, the residual necessarily includes human capital—the sum of knowledge, skills, and know-how possessed by the population. It also includes the institutional infrastructure of the country as well as the social capital—the level of trust among people in a society and their ability to work together toward common goals. Finally, the residual includes net foreign financial assets through the returns generated by these assets…

The World Bank produced estimated figures on per capita intangible capital for 120 developing and developed countries, excluding oil-producing nations, for the year 2000. It was noted that in 85% of the sample group, intangible capital contributed over 50% to the total national wealth, and in high-income/OECD countries, on average, it contributed up to 80% of the total wealth. In middle-income and low-income countries, intangible capital accounted for a bit less of the overall wealth, 68% and 59% respectively, but still is a significant contributor. However, in highly resource-dependent countries, intangible capital accounted for less than 20% of total wealth, and was even a negative figure in some instances, highlighting the adverse effect of critical but often overlooked contributors to wealth building. Figure 2 presents the contributions of natural capital, produced capital and intangible capital to total wealth.

What does this mean for the Caribbean and the ICT sector in the region?

To varying degrees, countries in the Caribbean have been focussing on elements that contribute to intangible capital, particularly education and governance. However, those efforts are frequently overshadowed by political, financial and other priorities, which may mean that relative to other countries worldwide, and with regard to total wealth, the Caribbean might be any better positioned than it was over 10 years ago.

This also appears to be the case in the telecoms and ICT sectors. Although many countries in the region have opened those markets to competition, which has resulted, to varying degrees, in lower prices, infrastructure development and wider choice, the world has changed considerably in the intervening years. No longer is affordable service desirable, it is expected. Further, to be internationally competitive in the ICT/technology space, there is an increasing emphasis on features that are not directly related to infrastructure and affordability, e.g.:

• skills and training of the labour force, and the availability of higher education
• the legal system, laws and governance
• the ease of doing business, the levels of bureaucracy endemic to key processes
• the relative sophistication of the corporate environment and/or industry
• the extent to which crime and corruption is managed
• the extent to which innovation is being fostered.

As reflected in the Global Competitiveness Report released by the WEF earlier this week, Barbados was the only CARICOM country to be ranked in the top 50, at 42^nd out of 142 countries assessed. Thereafter, Trinidad and Tobago was ranked at 84, Jamaica, 107; Guyana, 109; Suriname, 112; Belize, 123; and Haiti, 141. In The WEF’s discussion on the region’s performance, some of the points listed above were specifically highlighted as contributing to the loss of global competitiveness.

In that study, as well as others that have been conducted, a broad range of factors are considered. For ICT-related evaluations, such as the WEF’s e-readiness assessment, although telecoms infrastructure is an important component, the exercise also examined:

• how conducive countries are to ICT development and diffusion
• how prepared and interested individuals, businesses and governments are to use ICTs in their daily activities and operation, and
• the extent to which ICTs are actively being used by individuals, businesses and governments.

Hence, to attract more investment, especially in the technology/ICT sector, and to attract higher-value opportunities, it is imperative that attention is given not only to infrastructural, but also to the intangible contributors to wealth building. Those elements are usually seen as crucial indicators of a country’s level of development, as well as its ability to create an enabling environment for its own resources to thrive, and to support those that are invested in its domain.

_____________