The geography of recession

This article was
first published on the website of Stratfor
the world’s
leading online publisher of geopolitical intelligence.
Peter Zeihan is a senior analyst for Stratfor. 

The global recession is the biggest development in the global system
in the year to date. In the United States, it has become almost dogma
that the recession is the worst since the Great Depression. But this is
only one of a wealth of misperceptions about whom the downturn is
hurting most, and why.

Let’s begin with some simple numbers.

As one can see in the chart, the U.S. recession at this point is
only the worst since 1982, not the 1930s, and it pales in comparison to
what is occurring in the rest of the world. (Figures for China have not
been included, in part because of the unreliability of Chinese
statistics, but also because the country’s financial system is so
radically different from the rest of the world as to make such
comparisons misleading. For more, read the China section below.)

World GDP Change

But didn’t the recession begin in the United States? That it did, but the American system is far more stable, durable and flexible than most of the other global
economies, in large part thanks to the country’s geography. To
understand how place shapes economics, we need to take a giant step
back from the gloom and doom of the current moment and examine the
long-term picture of why different regions follow different economic

The United States and the Free Market

The most important aspect of the United States is not simply its
sheer size, but the size of its usable land. Russia and China may both
be similar-sized in absolute terms, but the vast majority of Russian
and Chinese land is useless for agriculture, habitation or development.
In contrast, courtesy of the Midwest, the United States boasts the
world’s largest contiguous mass of arable land — and that mass does not
include the hardly inconsequential chunks of usable territory on both
the West and East coasts.

Second is the American maritime transport system. The Mississippi
River, linked as it is to the Red, Missouri, Ohio and Tennessee rivers,
comprises the largest interconnected network of navigable rivers in the
world. In the San Francisco Bay, Chesapeake Bay and Long Island
Sound/New York Bay, the United States has three of the world’s largest
and best natural harbors. The series of barrier islands a few miles off
the shores of Texas and the East Coast form a water-based highway — an
Intercoastal Waterway — that shields American coastal shipping from all
but the worst that the elements can throw at ships and ports.

The real beauty is that the two overlap with near perfect symmetry.
The Intercoastal Waterway and most of the bays link up with
agricultural regions and their own local river systems (such as the
series of rivers that descend from the Appalachians to the East Coast),
while the Greater Mississippi river network is the circulatory system
of the Midwest. Even without the addition of canals, it is possible for
ships to reach nearly any part of the Midwest from nearly any part of
the Gulf or East coasts. The result is not just a massive ability to
grow a massive amount of crops — and not just the ability to easily and
cheaply move the crops to local, regional and global markets — but also
the ability to use that same transport network for any other economic
purpose without having to worry about food supplies.

The implications of such a confluence are deep and sustained. Where
most countries need to scrape together capital to build roads and rail
to establish the very foundation of an economy, transport capability,
geography granted the United States a near-perfect system at no cost.
That frees up U.S. capital for other pursuits and almost condemns the
United States to be capital-rich. Any additional infrastructure the
United States constructs is icing on the cake. (The cake itself is free
— and, incidentally, the United States had so much free capital that it
was able to go on to build one of the best road-and-rail networks
anyway, resulting in even greater economic advantages over competitors.)

Third, geography has also ensured that the United States has very
little local competition. To the north, Canada is both much colder and
much more mountainous than the United States. Canada’s only navigable
maritime network — the Great Lakes-St. Lawrence Seaway —is shared with
the United States, and most of its usable land is hard by the American
border. Often this makes it more economically advantageous for Canadian
provinces to integrate with their neighbor to the south than with their
co-nationals to the east and west.

Similarly, Mexico has only small chunks of land, separated by
deserts and mountains, that are useful for much more than subsistence
agriculture; most of Mexican territory is either too dry, too tropical
or too mountainous. And Mexico completely lacks any meaningful river
system for maritime transport. Add in a largely desert border, and
Mexico as a country is not a meaningful threat to American
security (which hardly means that there are not serious and ongoing
concerns in the American-Mexican relationship).

With geography empowering the United States and hindering Canada and
Mexico, the United States does not need to maintain a large standing
military force to counter either. The Canadian border is almost
completely unguarded, and the Mexican border is no more than a fence in
most locations — a far cry from the sort of military standoffs that
have marked more adversarial borders in human history. Not only are
Canada and Mexico not major threats, but the U.S. transport network
allows the United States the luxury of being able to quickly move a
smaller force to deal with occasional problems rather than requiring it
to station large static forces on its borders.

Like the transport network, this also helps the U.S. focus its resources on other things.

Taken together, the integrated transport network, large tracts of
usable land and lack of a need for a standing military have one
critical implication: The U.S. government tends to take a hands-off
approach to economic management, because geography has not cursed the
United States with any endemic problems. This may mean that the United
States — and especially its government — comes across as disorganized,
but it shifts massive amounts of labor and capital to the private
sector, which for the most part allows resources to flow to wherever
they will achieve the most efficient and productive results.

Laissez-faire capitalism has its flaws. Inequality and social stress
are just two of many less-than-desirable side effects. The side effects
most relevant to the current situation are, of course, the speculative
bubbles that cause recessions when they pop. But in terms of long-term economic efficiency and growth, a free capital system is unrivaled. For
the United States, the end result has proved clear: The United States
has exited each decade since post-Civil War Reconstruction more
powerful than it was when it entered it. While there are many forces in
the modern world that threaten various aspects of U.S. economic
standing, there is not one that actually threatens the U.S. base
geographic advantages.

Is the United States in recession? Of course. Will it be forever? Of
course not. So long as U.S. geographic advantages remain intact, it
takes no small amount of paranoia and pessimism to envision anything
but long-term economic expansion for such a chunk of territory. In
fact, there are a number of factors hinting that the United States may even be on the cusp of recovery.

Russia and the State

If in economic terms the United States has everything going for it geographically, then Russia is just the opposite. The Russian steppe lies deep in the interior of
the Eurasian landmass, and as such is subject to climatic conditions
much more hostile to human habitation and agriculture than is the
American Midwest. Even in those blessed good years when crops are
abundant in Russia, it has no river network to allow for easy transport
of products.

Map: Russia

Russia has no good warm-water ports to facilitate international
trade (and has spent much of its history seeking access to one). Russia
does have long rivers, but they are not interconnected as the
Mississippi is with its tributaries, instead flowing north to the
Arctic Ocean, which can support no more than a token population. The
one exception is the Volga, which is critical to Western Russian
commerce but flows to the Caspian, a storm-wracked and landlocked sea
whose delta freezes in the winter (along with the entire Volga itself).
Developing such unforgiving lands requires a massive outlay of funds
simply to build the road and rail networks necessary to achieve the
most basic of economic development. The cost is so extreme that
Russia’s first ever intercontinental road was not completed
until the 21st century, and it is little more than a two-lane path for
much of its length. Between the lack of ports and the relatively low
population densities, little of Russia’s transport system beyond the
St. Petersburg/Moscow corridor approaches anything that hints of
economic rationality.

Russia also has no meaningful external borders. It sits on the
eastern end of the North European Plain, which stretches all the way to
Normandy, France, and Russia’s connections to the Asian steppe flow
deep into China. Because Russia lacks a decent internal transport
network that can rapidly move armies from place to place, geography
forces Russia to defend itself following two strategies. First, it
requires massive standing armies on all of its borders. Second, it
dictates that Russia continually push its boundaries outward to buffer
its core against external threats.

Both strategies compromise Russian economic development even
further. The large standing armies are a continual drain on state
coffers and the country’s labor pool; their cost was a critical
economic factor in the Soviet fall. The expansionist strategy not only
absorbs large populations that do not wish to be part of the Russian
state and so must constantly be policed — the core rationale for
Russia’s robust security services — but also inflates Russia’s
infrastructure development costs by increasing the amount of relatively
useless territory Moscow is responsible for.

Russia’s labor and capital resources are woefully inadequate to
overcome the state’s needs and vulnerabilities, which are legion. These
endemic problems force Russia toward central planning; the full
harnessing of all economic resources available is required if Russia is
to achieve even a modicum of security and stability. One of the many
results of this is severe economic inefficiency and a general dearth of
an internal consumer market. Because capital and other resources can be
flung forcefully at problems, however, active management can achieve
specific national goals more readily than a hands-off, American-style
model. This often gives the impression of significant progress in areas
the Kremlin chooses to highlight.

But such achievements are largely limited to wherever the state
happens to be directing its attention. In all other sectors, the lack
of attention results in atrophy or criminalization. This is
particularly true in modern Russia, where the ruling elite comprises
just a handful of people,
starkly limiting the amount of planning and oversight possible. And
unless management is perfect in perception and execution, any mistakes
are quickly magnified into national catastrophes. It is therefore no
surprise to STRATFOR that the Russian economy has now fallen the
furthest of any major economy during the current recession.

China and Separatism

China also faces significant hurdles, albeit none as daunting as Russia’s
challenges. China’s core is the farmland of the Yellow River basin in
the north of the country, a river that is not readily navigable and is
remarkably flood prone. Simply avoiding periodic starvation requires a
high level of state planning and coordination. (Wrestling a large river
is not the easiest thing one can do.) Additionally, the southern half
of the country has a subtropical climate, riddling it with diseases
that the southerners are resistant to but the northerners are not. This
compromises the north’s political control of the south.

Central control is also threatened by China’s maritime geography.
China boasts two other rivers, but they do not link to each other or
the Yellow naturally. And China’s best ports are at the mouths of these
two rivers: Shanghai at the mouth of the Yangtze and Hong
Kong/Macau/Guangzhou at the mouth of the Pearl. The Yellow boasts no
significant ocean port. The end result is that other regional centers
can and do develop economic means independent of Beijing.

With geography complicating northern rule and supporting southern
economic independence, Beijing’s age-old problem has been trying to
keep China in one piece. Beijing has to underwrite massive (and
expensive) development programs to stitch the country together with a
common infrastructure, the most visible of which is the Grand Canal
that links the Yellow and Yangtze rivers. The cost of such linkages
instantly guarantees that while China may have a shot at being unified,
it will always be capital-poor.

Beijing also has to provide its autonomy-minded regions with an
economic incentive to remain part of Greater China, and “simple”
infrastructure will not cut it. Modern China has turned to a
state-centered finance model for this. Under the model, all of the
scarce capital that is available is funneled to the state, which
divvies it out via a handful of large state banks. These state banks
then grant loans to various firms and local governments at below the
cost of raising the capital. This provides a powerful economic stimulus
that achieves maximum employment and growth — think of what you could
do with a near-endless supply of loans at below 0 percent interest —
but comes at the cost of encouraging projects that are loss-making, as
no one is ever called to account for failures. (They can just get a new
loan.) The resultant growth is rapid, but it is also unsustainable. It
is no wonder, then, that the central government has chosen to keep its
$2 trillion of currency reserves in dollar-based assets; the rate of
return is greater, the value holds over a long period, and Beijing
doesn’t have to worry about the United States seceding.

Because the domestic market is considerably limited by the
poor-capital nature of the country, most producers choose to tap export
markets to generate income. In times of plenty this works fairly well,
but when Chinese goods are not needed, the entire Chinese system can
seize up. Lack of exports reduces capital availability, which
constrains loan availability. This in turn not only damages the ability
of firms to employ China’s legions of citizens, but it also removes the
primary reason the disparate Chinese regions pay homage to Beijing.
China’s geography hardwires in a series of economic challenges that
weaken the coherence of the state and make China dependent upon
uninterrupted access to foreign markets to maintain state unity. As a
result, China has not been a unified entity for the vast
majority of its history, but instead a cauldron of competing regions
that cleave along many different fault lines: coastal versus interior,
Han versus minority, north versus south.

China’s survival technique for the current recession is simple. Because exports, which account for roughly half of China’s
economic activity, have sunk by half, Beijing is throwing the
equivalent of the financial kitchen sink at the problem. China has
force-fed more loans through the banks in the first four months of 2009
than it did in the entirety of 2008. The long-term result could well
bury China beneath a mountain of bad loans — a similar strategy
resulted in Japan’s 1991 crash, from which Tokyo has yet to recover.
But for now it is holding the country together. The bottom line
remains, however: China’s recovery is completely dependent upon
external demand for its production, and the most it can do on its own
is tread water.

Discordant Europe

Europe faces an imbroglio somewhat similar to China’s.

Europe has a number of rivers that are easily navigable, providing a
wealth of trade and development opportunities. But none of them
interlinks with the others, retarding political unification. Europe has
even more good harbors than the United States, but they are not evenly
spread throughout the Continent, making some states capital-rich and
others capital-poor. Europe boasts one huge piece of arable land on the
North European Plain, but it is long and thin, and so occupied by no
fewer than seven distinct ethnic groups.

These groups have constantly struggled — as have the various groups
up and down Europe’s seemingly endless list of river valleys — but none
has been able to emerge dominant, due to the webwork of mountains and
peninsulas that make it nigh impossible to fully root out any
particular group. And Europe’s wealth of islands close to the
Continent, with Great Britain being only the most obvious, guarantee
constant intervention to ensure that mainland Europe never unifies
under a single power.

Every part of Europe has a radically different geography than the
other parts, and thus the economic models the Europeans have adopted
have little in common. The United Kingdom, with few immediate security
threats and decent rivers and ports, has an almost American-style
laissez-faire system. France, with three unconnected rivers lying
wholly in its own territory, is a somewhat self-contained world, making
economic nationalism its credo. Not only do the rivers in Germany not connect, but Berlin has to share them with other states. The
Jutland Peninsula interrupts the coastline of Germany, which finds its
sea access limited by the Danes, the Swedes and the British. Germany
must plan in great detail to maximize its resource use to build an
infrastructure that can compensate for its geographic deficiencies and
link together its good — but disparate — geographic blessings. The
result is a state that somewhat favors free enterprise, but within the
limits framed by national needs.

And the list of differences goes on: Spain has long coasts and is
arid; Austria is landlocked and quite wet; most of Greece is almost too
mountainous to build on; it doesn’t get flatter than the Netherlands;
tiny Estonia faces frozen seas in the winter; mammoth Italy has never
even seen an icebreaker. Even if there were a supranational authority
in Europe that could tax or regulate the banking sector or plan
transnational responses, the propriety of any singular policy would be
questionable at best.

Such stark regional differences give rise to such variant policies
that many European states have a severe (and understandable) trust
deficit when it comes to any hint of anything supranational. We are not
simply taking about the European Union here, but rather a general
distrust of anything cross-border in nature. One of the many outcomes
of this is a preference for using local banks rather than stock exchanges for raising capital. After all, local banks
tend to use local capital and are subject to local regulations, while
stock exchanges tend to be internationalized in all respects. Spain,
Italy, Sweden, Greece and Austria get more than 90 percent of their
financing from banks, the United Kingdom 84 percent and Germany 76
percent — while for the United States it is only 40 percent.

And this has proved unfortunate in the extreme for today’s Europe.
The current recession has its roots in a financial crisis that has most
dramatically impacted banks, and European banks have proved far from immune. Until Europe’s banks recover, Europe will
remain mired in recession. And since there cannot be a Pan-European
solution, Europe’s recession could well prove to be the worst of all
this time around.


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