The Defense Industrial Policy and Public Choice: Defending our Defense from Rent-Seeking

Canada’s recently released Defense Industrial Policy is an ambitious document. But as with any government initiative that aims to use public money to grow private business, an unspoken risk is the potential for lobbyists and special interest groups to game the system. 

Public choice theorists warn that business interests can capture policymakers, who then craft rules that allow a select few industries to profit at the expense of the rest of us. The involvement of national security rhetoric makes this problem even more acute, as a whole host of questionable policy decisions can be justified, at least temporarily, under the guise of national defense. 

Ensuring the Defense Industrial Policy accomplishes its stated objectives will require the Government of Canada to be maximally transparent, holistic, and accountable. To do this, the government should consider investing heavily in making Defense Advisory Forum decisions “digital-ready,” adhere to objective performance metrics like fiscal multipliers, and consider involving post-secondaries heavily in the funding process.   

Digital-Ready Decisions 

Denmark, which is routinely ranked as the least corrupt country in the world, has processes that Canada can adopt to increase transparency around our defense industrial policy. For instance, according to the OECD (Organisation for Economic Co-operation and Development), the Danish government scores markedly higher than average in the Digital Governance Index, which measures the extent to which digital technologies are used to enhance transparency and data-sharing. This includes comprehensive legislation tracking, which is part of Denmark’s broader “digital-ready legislation” initiative. Legislation is designed from the ground up to be easily found and followed by Danish citizens on any device. This increases civil society’s awareness of their government’s actions and discourages legislation from being written in intentionally obfuscating ways. 

If Canada adopted a similar “digital-ready” framework for the Defense Industrial Policy initiative, this would dramatically increase the transparency of any funding agreements the government enters. The Defense Advisory Forum, which will handle industry/government interactions, can require that all evidence, evaluations, and final decisions be made digital-ready and accessible on multiple, continually updated websites. This would allow Canadians to follow the funding process from the proposal stage to the very end. If this was combined with an annual report detailing to the public a summary of all decisions and action items made during the fiscal year, civil society groups and opposition parties should be able to easily hold the government to account. 

One counterargument to this idea is that the defense industry naturally contains highly classified information. It’s true that leaking proprietary or strategically valuable information would defeat the purpose of protecting our national security. However, the onus should be on industry proving that certain information shouldn’t be publicly sharable. Unless that standard is met—which itself should be digital-ready and easily accessible—then the default should be that all components of the decision-making process are publicly viewable. 

The Multiplier Effect

Objective metrics—such as a secrecy standard—would go a long way in enhancing transparency, especially when combined with a digital-ready mindset. Key performance indicators like revenue raised and ships built are perhaps the most obvious one, but a central metric for any evaluation process should be the projected fiscal multiplier of a project.

In brief, the fiscal multiplier measures how much government spending increases overall GDP. The higher the multiplier, the more GDP increases. If the multiplier is above 1.0, that also means that government spending is crowding in private investment. Crowding-in indicates that there is a market failure holding up private investment in some productive enterprise that government spending has now unlocked. Frequently this is because an investment is too risky for the private sector to take on. Publicly funded research and development spending tends to have very high fiscal multipliers—which can get as high as 23.35 after 2 years—because private firms can’t fully capture all of the profits generated from innovation, meaning they underinvest in R&D relative to what’s socially optimal. 

Publishing an independent analysis on the fiscal multipliers of each project would help Canadians evaluate whether government spending actually addresses a market failure or a long-term need. Naturally, projects with a multiplier above 1.0 should be prioritized. This would have to be balanced against metrics designed to measure force readiness or robustness of our national security infrastructure; but the fiscal multiplier, at the very least, would disincentivize policymakers from supporting projects that only benefit politically connected businesses.

Post-Secondaries to the Rescue?

Finally, the government could lean heavily on universities, colleges, and polytechnics to locate industry partnerships. This could be done either by including post-secondary Presidents or Vice-Presidents (Research) in the Defense Advisory Forum or by earmarking a significant portion of R&D funding directly to these institutions. In the former case, they could ensure that basic and generalist research—which by its nature tends to be publicly available—is taken into consideration when the government funds R&D projects. In the latter case, they could then perform their own searches for industry collaboration based on their existing research stock. 

To be clear, post-secondaries employ their own lobbyists and are often a special interest in themselves. Public choice concerns don’t disappear just because an institution of higher learning is involved. Nor should the majority, let alone all, of the new research dollars be directed towards post-secondaries. But there are countervailing incentives within these institutions that can provide a check on self-interest turning the Defense Industrial Policy into a political boondoggle. 

For starters, post-secondaries rely heavily on enrollment numbers, and those enrollment numbers are influenced by public metrics like citation counts and awards by faculty and students. As such, they have both a reputational and a financial incentive to focus on producing high-impact research, and to centre their lobbying activities around the quality and quantity of research they produce. While far from perfect, this metric is far harder to game from a public choice perspective than profit margins for private businesses, not the least because you can’t bribe a politician with an H-index. 

Second, Canada has already begun to introduce performance-based funding (PBF) metrics to most post-secondary funding models. PBFs tie a portion of university funding to their meeting several KPIs (key performance indicators) like innovation, research impact, and graduation rates. As noted post-secondary expert Alex Usher has argued, these metrics can be gamed, but if done right, they can be an effective way to increase institutional transparency while avoiding heavy-handed regulation from governments. 

In a similar vein, the Ministry of National Defense and Industry, Science, and Economic Development Canada (ISED) could easily tie R&D funding to performance metrics. This would hold post-secondaries’ feet to the fire as they search out industry collaborations while making it more difficult for industry lobbyists to influence final spending decisions, since they would effectively have to double their lobbying efforts. 

All of these measures are mutually compatible. If the Government of Canada implemented a digital-first focus for Defense Advisory Forum decisions, adhered to public metrics like the projected fiscal multiplier, and involved post-secondaries in the decision-making process, we can be sure that the Defense Industrial Policy is aligned with the best interests of Canadians. 

Then, the policy’s ambitious goals can be realized, to the benefit of us all.