By Peter Zeihan
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.)
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 paths.
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
Mexicoas 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.

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.