IMF managing director Kristalina Georgieva
On 16 November, IMF managing director Kristalina Georgieva delivered an opening statement for the fund’s 10th IMF Statistical Forum which was entitled Measuring the Tangible Benefits of Intangible Capital.
The two-day event was addressed by fund officials, economists, civil servants, lawyers and tax experts.
Georgieva summarised the challenge the conference addressed.
“…intangible capital is playing an increasingly important role in the economy,” she said in a pre-recorded video. “There are still big questions to answer. One of the biggest is how can we measure things we cannot touch?”
“Think about the largest companies in the world– software, Internet, online retailers, and pharmaceutical companies– the difference between their market capitalization and the value of their tangible capital (buildings, machines, and equipment) is large.
The difference is largely due to valuable intangible capital.
But why are they missing? One reason is that intangible capital is HARD to measure… we need to measure intangible capital so we can increase the tangible benefits to society.”
It’s taken time, but at least the IMF is facing up to one of the most obvious truths about the structure of advanced economies.
A small minority of assets held on the balance sheets of their biggest companies are physical. The rest are various forms of intangible and non-physical capital including financial instruments.
The private sector is simply no longer investing in anything physical; buildings, machinery and stocks.
But Georgieva is asking the wrong question.
We shouldn’t be trying to measure what she herself admits can’t be measured.
We should be asking why business is rejecting tangible investments.
The consequences are most evident in energy. Chief executive of Saudi Aramco, the world’s largest hydrocarbon company which aims soon to be producing 13m b/d of oil, warned in September that investment in the energy supply chain is too little and too late.
Unless there are countervailing measures, the global energy system will struggle to meet the needs of the 8bn people that the UN confirmed last month now live on the planet.
There’s one obvious reason.
Refineries, factories, warehouses, machinery and all the requisites of manufacturing are expensive and take years to build.
They’re immovable. If you had a factory in Mariupol in Ukraine, you couldn’t shift it to avoid shells and bombs.
They need lots of workers and everyone knows how complex hiring, training and managing them is.
Fires, floods, earthquakes and wars can destroy them. And governments know where they are, making it easier to impose taxes and direct controls including nationalisation.
Why would anyone want to invest their savings in something as unattractive as that?
The second reason is equally obvious. Investing in intangible assets like securities is easier, safer and more profitable.
You can buy a stake in a factory after it’s built and has becoming profitable. You can sell shares almost instantly thereby evading fires, floods, earthquakes and wars as well as rapacious and hostile governments.
Your intangible assets can be located in the balance sheet of an offshore company, preferably located in a tax haven. Better still you can buy shares or invest in a firm that itself is making intangibles like Meta Platforms or Amazon.
These conclusions have motivated every company on the planet to run down the physical items in their balances sheets. Only about 10 per cent of the assets of the 25 largest companies listed on the London Stock Exchange are physical.
The rewards have been considerable. Intangible financial assets delivered fantastic returns during the Covid crisis while those owning and operating factories and farms were often forced to rely on government support.
Georgieva in her speech called on economists and statisticians to catch up with business and do more to measure the apparently unquantifiable.
But this would not only be a waste of time. It is the opposite of what needs to be done.
Intangible capital is an illusion, a piece of balance sheet conjuring by accountants and auditors responding to the demands of corporations, not the long-term needs of economies and the people that make them work.
As speakers at the IMF conference conceded, its irresistible rise has been at least partly driven by the desire to avoid tax which is nothing more than a transnational transfer.
And this in turn is increasingly invalidating conventional measures of national income and, most seriously, the quantification of productivity which most economists say is declining but in fact is almost certainly doing the opposite.
Policymakers studying trends in economic statistics and making consequential decisions about public spending and tax are being systematically and increasingly misled.
No wonder the world’s in a bit of a mess. But it’s not too late.
What the it actually needs is not more intangible capital that cannot and does not create value or support value-creation in the home, community or at work.
What’s required is more investment in the physical infrastructure that free societies depend upon: transport, energy, water, housing and communications as well as in the social infrastructure that underpin prosperity. That includes health, education, justice and security.
What exactly is the IMF doing to promote that? How is the fund supporting governments particularly in low income economies to build and operate infrastructure?
Billions of people across the world would like to know.
And they include me.