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Advice on strategic issues for governments

On the revenge of geography

David Skilling
12 March 2017

I spent some of the past week high above the Indian Ocean, flying from Singapore to Doha and back, roughly tracing out the maritime route of the Silk Road. Flying through the congested skies of the Gulf and over the crowded shipping lanes of the Straits of Malacca is a powerful illustration of the enduring power of old trading routes. Indeed, to understand the outlook for economies and markets, a world map on the wall – and a sense of the underlying dynamics of a changing economic geography – is valuable.

I say this as a New Zealander, coming from the ‘last bus stop on the planet’ as the Economist had it. About 15 years ago, I started writing about the economic implications of being the most remote developed country in the world. It turns out that a significant part of New Zealand’s per capita income gap is due to its physical isolation. I now live in Singapore, which has powerfully used its hub location to drive economic development. Economic geography exerts a significant influence on national economic potential and exposures. The world is not flat.

There are two themes that are worth reflecting on in this context. First, when much of the global news coverage is driven by President Trump, the ongoing Eurozone challenges, Brexit, and so on, it is it useful to remember that the global centre of gravity continues to shift away from the Atlantic economies. This is a return to the status quo ante after 200 years of Western economic dominance. Angus Maddison’s long-term economic data shows that five hundred years ago, and as recently as the start of the 19th century, Asia accounted for 60-70% of the global economy.

Economic outcomes in emerging markets are uncertain, of course, and many of these countries face substantial economic and political risks. But the sheer size of countries like China and India means that this long-term rebalancing process is a strong likelihood, even if it is bumpy.

And globalisation is in better heart in many parts of Asia (although variably so) than in some large advanced economies. The number of supporters of global markets in these emerging markets means that a worldwide reversal of globalisation is unlikely, although the liberal, rules-based system is likely to change significantly. This structural shift in the global centre of gravity will contribute to the emergence of a multipolar global system, which will likely be more demanding to navigate.

Second, new trade and investment routes are emerging, which will have a significant impact on the shape of the global economy. It is often said that the 21st century will be the Pacific century, much as the 19th and 20th centuries were the Atlantic centuries – dominated by the US and Europe. But the Pacific is an unusual organising device given its huge size (note, by way of example, the lack of sustained US commitment to the pivot). Rather, it is more useful to think of Eurasia as the relevant unit of analysis: a ‘horizontal Asia’, stretching from North East Asia, through South East Asia and the subcontinent, to the Middle East (or West Asia), incorporating over half the world’s population. [Books by Robert Kaplan, from which I took the title to this note, are a useful introduction to the geography and history of this region].

And there is much activity underway across the region. The Saudi King is currently on a month-long tour of Asia, with a 1500 person entourage. Israel’s Prime Minister has just visited Singapore and Australia, as part of Israel’s rotation to Asia, leveraging its high technology sector. And China’s various One Belt One Road initiatives are contributing to deepening relationships across Eurasia. Similarly, the potential for new shipping routes through the Arctic and new rail links from China are developing the connective tissue between East Asia and Europe.

The geographical pattern of globalisation over the past decades has advantaged certain countries, including many small advanced economies. As globalisation’s geographic footprint changes, countries will need to adapt to be successful. Indeed, these new economic links are already having economic impacts on countries, from Singapore to southern Europe. Looking forward, the priority for countries is to integrate into this new economic geography.

Some will benefit from proximity to these new economic routes. Economic flows remain heavily shaped by geography; there is significant home bias in trade and investment. Countries like Russia and the Nordics may benefit from the Arctic route, for example, while Singapore faces risks from a westward shift in Asia (e.g. the Gulf carriers) and new shipping routes. More broadly, Europe’s proximity and connectivity to Eurasia is one reason that I remain long-term positive on Europe. My sense is that Europe is better positioned to participate in these new trade and investment flows than is the US.

But the effects are not deterministic: there is much that countries can do to shape their environment to take advantage of these new trends. Finnair’s efforts to position Helsinki as the Dubai of the North, offering quick connections to Asia, for example; and Friday’s announcement of work to restart FTA negotiations between the EU and ASEAN. Small advanced economies have benefited from being relatively integrated into emerging markets growth over the past decades, and need to continue to do so.

Overall, geography powerfully shapes national economic and political opportunities and challenges – and the options open to countries. Just as the geographic pattern of globalisation over the past several decades has had a widely varied impact on countries – consider the various experiences of New Zealand, Singapore, and Ireland – so too will today’s changing global economic geography have a powerful impact on the outlook for economies and markets. Countries that do not respond to these new realities will struggle. Even in a hyper-connected world, economic relationships remain strongly influenced by geography.