Tuesday, June 2, 2009


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
misconceptions 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

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.

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

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

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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