October 12, 2004

Global Capital Shortage

In comments in the recent thread An Interview With Dr. Barnett the subject of capital shortages came up and it's gotten to the point where I think it's better broken out as an article in itself.

First of all, there is no such thing as a capital shortage apart from a specific project. Capital is a particular good that has a supply. In a perfect market, you list all projects in order of ROI, you allocate your capital until you run out and you find your market clearing level of capital using economic projects. If capital supply shrinks, you need a higher ROI to get funding at the new market clearing point. All projects that do not meet ROI requirements see a "capital shortage" but it's just an artifact of their not being profitable enough to make the cut.

When you have a project like shrinking the Gap in order to avoid more 9/11s (and worse, the loss of entire cities) things change. The ROI of not losing Chicago is huge but the connections between that and a water project in Afghanistan are too diffuse to meaningfully assign even though driving average income in Afghanistan above the $3k per year level would likely take that country out of the Gap and could prevent just such a city loss 20 years from now.

The problem is that taking one nation or another from the Gap doesn't really solve the problem. It just makes monitoring the rest of the Gap nations easier as you have less and less territory and population to cover. Instead of using Sudan as a headquarters, Al Queda moved to Afghanistan. Further moves are likely from Gap nation to Gap nation. So you have to tote up the price tag of doing all of them. Instead of a global list, you make up a list of individual Gap nations and projects that would economically benefit them (again in ROI order but this time by country). You draw the line at how many projects would have to go forward to raise incomes to the $3k level at which point you start to see significant middle class formation and internal civic society strength reaching the point where a critical mass wants into the Core and has the resources to get that wish into national public policy.

Once you create those lists and tote up the total costs, you see that there just isn't enough money out there to elevate all these Gap nations out of the economic danger zone, not enough troops to remake the political apparat in the nations who don't want to get with the program and certainly not enough willpower in the international community to starve Core economies of more profitable uses of capital locally in order to ship money to Gap nations so they can graduate to the Core.

We end up having to take what money is available and concentrate them on high value targets, such as the axis of evil countries where you have the worst of the security risks grouped. You end up driving the terrorists from base to base that way but doing that reduces their ability to attack in the Core while you shrink the Gap as fast as you can.

That's not the best strategy there is out there. It's the best one we've got as long as a capital shortage constrains our action in bringing all nations in the Gap into the Core.

Posted by TMLutas at October 12, 2004 03:04 PM