Countries as Corporations

Countries as Corporations

There is micro, then there's macro.
Then, there's macro-macro.

I am a firm believer in analogies, similes and extrapolations. Although laden with faults and traps, it's one of the best ways to learn things - by finding relationships and similarities between what you know and what you don't know.

I'm also a firm believer that although making specific economic projections is not possible and not worth the effort, a crucial part of a business's potential is the economic condition. There are few leaps of faith that needs to be made and assumptions that needs to be made. There is a general flow, and investing in economy laden with inefficiencies may lead to value trap or overpaying.

Countries, are run like companies. There are many, many similarities to draw from - they operate on asset, debt and equity, the CEO (head of state) seldom gets "fired" and countries have moats as well. It's also true that the same fundamental laws about overdrafting, overleveraging and capital structure apply to countries. This allows for many useful observations.

IMO, there are three main drivers of country's moat - technology, material and human. Other than those two, nothing much matters. Civilizations which could afford the two have advanced, and the ones that could not have not advanced as far.

Technology has several characteristics - it's contagious, it works by shoulder step rule and it provokes change. With advent of modern transportation, the ripple effect of technology can be felt everywhere (Case in point: cellphones in Africa), Moore's law (albeit a little clunky) is still among us and we are moving towards social networking, known as Web 2.0 - because technology is much more potent when more people work on it.

This is because technological advances follow the path of black swan - we depend on completely accidental discoveries by hobbyists and DIY enthusiasts. Apple was neither built nor spread via scientists and myspace, facebook, craiglists were not started by successful entrepreneurs. There's pwoer in experimentation, throwing our chances behind the laws of evolution. Whatever works will survive.

As for material, I can think of two types - structural and convertible. We either convert material into energy, or we use it in raw/processed form. I think it's closely linked to technology. We can get more out of the ground with better technology (horizontal fracturing and SAGD procedures for oil) and we can do more with it with better technology. So ultimately, technology is vastly more important than material under the assumption that we never simply just "run out" of all and every possible source of material. As long as we improve technology, especially in the transportation side, we will be able to fetch material. I'm with Boserup's theory.

Human capital is part material and part technology. It is the main driver behind the black swan process, we transmit technology, yet we are the energy as well. Hard to define, it's critical part of the world.


Having said that, America's moat had been comprised of all three aspects. They had technological advantage over the natives when first arrived, carrying all kinds of props from Europe. Against the Europeans, they were far ahead in material advantage. This, I believe, enabled them to grow fast. It also probably helped that they could "start fresh." After the initial period, human capital flew in. Then during the World War II, the whole world looked to America. Sure they had preiods of depression and extreme inefficiencies, but overall, it was less of a turbulent ride than what the European milleniums have been.

But, whilst this growth, America might have forgotten the simple rule - once you overextend and overleverage, it will strike back sooner or later. Problem arose, imo, because of diplomatic agreements on paper which kept account of how much America was using. Before the invention of diplomacy, coutnries could colonize and use voraciously from colonies - not anymore. While going through the growth phase, they used up material and human capital from rest of the world and they "owe" it back to them.

This certainly erodes America's moat. It also "strengthens" other countries moats - but how fast can they grow when most of their asset is in Accounts Receivable? Also, will America default? What happens when they do default?

American currencies have been devalued beyond recognition. Countries are now calling out for use of other currencies so they wouldn't lose so much money by just throughforex. So where will this lead?

Bit of a headache - that's what I see......