Guerrilla Entrepreneurship — Is it self-sustainable? October 29, 2007

I’m intrigued by Robb’s portrayal of Guerrilla Entrepeneurship in Iraq:

“As a failed state, Iraq is unable to provide economic alternatives to the insurgency. Further, even though Iraq is a failed state, it is awash in money. Fortunes will be made through the perpetuation of its chaos (as we see with the Narco warlords in Afghanistan, who combined generate $2.5 billion a year in revenue).

Given this trend line, we will likely see more advanced forms of this in the future, particularly market-derived financing. Guerrilla entrepreneurs will use prior knowledge of attacks to generate revenue from global financial markets [...]. These efforts will include:

—Assaults on individual corporations [...]. Attacks on resources (particularly oil infrastructure) will influence the oil market. Billions could be made through this process.

—Attacks on oil infrastructure. Global guerrilla methods make it possible for the rise of a “Shadow OPEC” and all the financial leverage that entails.”

Is this a viable strategy? Suppose a hypothetical guerrilla entrepreneur had just enough capital to build up a insurgency start-up cell (i.e. recruit some demobilized soldiers or foreign fighters, acquire know-how and military equipment, etc.). Could this enterprise survive and expand without external funding? In other words, would it be profitable?

The above quotation suggests that the necessary revenue could be raised by trading in financial instruments. For example, trading in futures contracts effectively represents “betting” on uncertain future performances of a company. For example, a futures contract that confers the right to sell shares of a particular company for a fixed price at some specified future date would turn out to be very valuable if at that date, the actual share price is below the specified fixed price.

By manipulating the share prices of foreign companies in Iraq, while simultaneously engaging in speculative financial transactions, our hypothetical guerrilla entrepreneur could raise revenues. Attacks on employees, for example, could force a US contruction contractor in Iraq to withdraw from the country. Its share price would likely fall subsequently, resulting in a payoff for the holder of the futures contract described above.

This raises the possibility of a market for guerrilla entrepreneurs that is independent of external funding. Insurgency would thereby become more than a way to drive the infidels out of Iraq — it would become good business.

The following questions remain:

1. How good are financial markets at pricing in the risk of guerrilla entrepreneurs trying to engage in this kind of “insider trading”? How big are the profits this kind of strategy could generate? How many guerrilla enterprises could such a market sustain?

2. Does spending more money on Iraqi reconstruction increase the incentives for guerrilla entrepreneurs to pursue this strategy? Would the US be better of not awarding contracts to publicly-traded companies in Iraq at all?

3. What are the chances of policing/suppressing this kind of “insider trading”?