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Reader riposte: Why companies don't buy countries

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8 May 2012 09:06

Club Troppo has opened a discussion on this topic in response to Sam Roggeveen's post. And here's reader Matt Moore with his thoughts:

A few observations come to mind (which are separate from Anton Kuruc's, although the point about the risk of hostile takeovers is a valid one):

1. Running a country requires a lot of different capabilities — policing, armed forces, finance, education, etc. So many capabilities, in fact, that it's a wonder that most countries work at all (although many might argue a significant number don't).

In contrast, the thinking since the late '80s in most private companies is to focus on a few core competencies — eg. designing smartphones and similar gadgets in the case of Apple. Much of the iPhone's capability is not even made by Apple: component manufacture & assembly is outsourced to companies like Foxconn, the 3G network is operated by local phone carriers and the vast majority of the apps on the phone are created by 3rd party developer.

If Apple don't want to own all the parts of its own products, why would they want to own a country with all kinds of problems that Apple has no idea how to solve? Scott Adams glides over that one in a single sentence ('The company's existing management structure would need to add several functions, such as education, healthcare, and police' — well, indeed).

2. Governments have traditionally offered safe but low-yielding financial returns that can be accessed via bond markets. If you took a large 'equity' stake in a government then what are your potential returns? Yes, you could drastically cut expenditure and jack up taxation but, as we are seeing, there are all kinds of consequences to that.

Some governments are effectively run like profit-generating entities for a small group of 'owners'. They can offer spectacular returns for their owners — although succession planning may involve few opportunities to gain a board position and a higher probability of being shot in a ditch. These are typically not pleasant places to live if you are not an owner. Scott Adams seems to assume that benevolent dictatorships can remain benevolent through transparent accounting and employee freedom to leave. I have less faith in the goodness of humans given significant power over others as subjects (unfortunately the academic research indicates that power does, indeed, corrupt).

3. While outright ownership of governments by companies is relatively rare, 'regulatory capture' is frequent enough to merit an academic literature of its own. And there are other ways of avoiding taxes that don't mean acquiring the taxing entity.

4. To Adams's last point: 'But the main reason a company might want to form its own country is to attract the best minds, and the lowest cost of labor, from all over the world without any immigration issues.' But the issue here is that multinationals already do this. Yes, occasionally immigration issues can be a hassle but they already have many of the best minds and also access to the lowest cost of labour — without having to manage drain cleaning or prisons.

Perhaps a less exciting but more important question might be: Should governments and companies be run in the same manner? The consensus in government for the last 30-odd years seems to have been to adopt the language and outward practices of the commercial world. What have been the implications of this for the formulation and execution of foreign policy?

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