Tue - October 7, 2003

Red Queen Example - Capital Drain v0.0.1



Let's take two countries, country A and country Z. A is in the 1st world, Z is in the 3rd. In each of these countries let's take two investments. In country A, project (a) generates a 5 year ROI of 10%. In Z, project (z) generates a 5 year ROI of 18%. All things being equal project (z) would get funded over project (a). But they are not equal. The political risk factors of Z are much higher than A. In the current environment, the political risk is worth 14% ROI. That makes the politically adjusted ROI of (a) and (z) 10% and 4% respectively and the money stays in 1st world A to fund project (a). Now let's say that due to political pressure, treaty negotiations, or military invasion on the part of A, the political climate in Z changes and the new political risk levels are cut in half to 7% more risk for Z. That changes the ROI levels of (a) and (z) to 10% and 11% respectively and the money goes to fund (z), reducing capital invested in A for a few years.

So A spends money to reform Z and gets rewarded with lower capital investment, 'exported jobs' and a lot of brickbats from the 'international community'. So why do it at all? Because, in the future world where (z) doesn't get funded, somebody who would have been absorbed into (z)'s workforce gets ticked off enough to emigrate to A, grow botulinum toxin as a revenge attack, and stick it in the food supply at a meat packing plant causing a mass casualty event rivaling 9/11.

Posted at 12:01 PM    

Sat - October 4, 2003

Red Queen Economy v0.0.4


In Through the Looking Glass, the Red Queen advises Alice that to merely stay in place one has to run as fast as you can. To get anywhere, you have to go twice as fast. Welcome to the 1st world's medium term economic future. v 0.0.4

Thomas Barnett's New Rule Sets paradigm has significant implications for the world economy. Shrinking and eliminating the non-integrating gap nations implies that they must end up with significant economic growth and quickly. Given the pool of capital is not likely to increase as rapidly, the unescapable conclusion is that the 1st world will suffer relative capital loss for a time as all those third world pumps are being primed with capital that would have otherwise gone to the 1st world. We enter the world laid out by Lewis Carroll in Through the Looking Glass where the Red Queen runs Alice ragged only to find nothing much changed:

Alice looked round her in great surprise. `Why, I do believe
we've been under this tree the whole time! Everything's just as
it was!'

`Of course it is,' said the Queen, `what would you have it?'

`Well, in OUR country,' said Alice, still panting a little,
`you'd generally get to somewhere else--if you ran very fast
for a long time, as we've been doing.'

`A slow sort of country!' said the Queen. `Now, HERE, you see,
it takes all the running YOU can do, to keep in the same place.
If you want to get somewhere else, you must run at least twice as
fast as that!''

In the real life world of a Red Queen economy, we produce more and more capital but find a great deal of it shifting out of country to other lands, leaving us, if not standing still, certainly progressing much slower than we might have expected under an older regime. For a great many people, this will not be a happy economic situation. For those who do not earn anything from capital, their labor will constantly be devaluing. They're going to have to constantly improve in order to run in place. The short run bright side will be limited to those who are in the capital markets who will profit from those Gap capital inflows. As a country, the process is likely to help us on the national security front a great deal more than an even greater amount of foreign aid and we get the bonus of lower international graft levels and less government waste.

The long run consequence of our going into a Red Queen economy is that, eventually, the pumps are primed for self-sustainable growth all over the Gap and all over the world people are living their lives to their full economic potential in a truly integrated global economic system. When it arrives, poverty will only be relative, a failure to keep up with the neighbors. The kind of grinding, degrading poverty that robs lives and leaves talent useless for lack of opportunity will be gone from the world. That, in the end, is our best hope for avoiding catastrophe as the ability to cause mass destruction costs less and less and is available to more and smaller groups of people.

Unfortunately, most people aren't currently making the connection. Glenn Reynolds has noted that outsourcing is likely to be an election issue but doesn't connect up to the national security issue. If Barnett is right and, more importantly, if Barnett is truly being listened to in the White House, opponents of outsourcing (a manifestation of the Red Queen economy) are likely walking into a buzz saw.

Posted at 11:42 AM    

Is there enough? v0.0.1


The whole world wants to get rich, or at least developed. And with free market economics being more or less the last theory standing, they're likely to get there. Are there enough resources to fuel this ambition? Currently, no and that's the fundamental problem facing the world. v0.0.1

The problem is manifold. First, to get up to a first world standard, let's say, $15,000 USD per capita, requires the creation of a great deal of capital. How much more, nobody really knows as capital is not deployed with equal efficiency anywhere. You would have to tote up all the available ideas worldwide to increase incomes sufficient to hit your $15k target and their associated capital cost. The obvious reality would be that capital would be drained from the 1st world and proportionately be shifted to underdeveloped, poorer nations. The risks and challenges of such a Red Queen economy would be great.

Second, there needs to be a great deal more energy produced from any source than is currently available. Currently worldwide energy production is generally measured in quadrillion BTUs and the 2001 figure is 401 quads produced. Here is an excel spreadsheet with relevant figures for 2001. In the same spreadsheet, you can find the additional energy production needed to get the less developed world up to a per capita income level of $15,000. The figure is an additional 611 quads, slightly more than 1.5x current worldwide production which would drive up energy production to somewhat north of 1 quint. This is a daunting increase in energy production and it runs up against limits of current technology. A great deal of the problem goes back again to a lack of capital. Efficient factories tend to be more capital intensive. The limits of available capital mean that many third world countries simply operate very inefficiently.

If the less efficient below $15k per capita world were to create GDP at an efficiency the same as the US, the additional energy needed to create that GDP would be 446 quads. At Japanese levels of efficiency, it would require 417 quads. Even efficient third world economies mean that we need to have a massive increase in energy production to get them all to a decent level. Add to that the fact that world population is increasing and the numbers become even higher over time. Certainly, lowering the target per capita income floor will lower the number of quads needed but in any reasonable scenario, there's a great need for extra production if failed and non-integrating states are to be brought successfully into the functioning core.

At some point the pumps will start to be fully primed and the earlier investments will start spinning off capital of their own. But how long will it take? After a decade, has E. Germany made it? How long would it take N. Korea to do it under new management? How long until Iraq makes the transition?

Posted at 10:40 AM    

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