The Age of Geo-economics
Driven by the economy and society, the role of geographic space has transformed radically in the 21st century. With the reduction of transportation costs and technologies spanning physical space, actual space has shrunk. Yet, it is also becoming “denser,” to refer to the words of Attila Korompai. Economic barriers are decreasing, international standards are integrating, and consumption habits are homogenising with the simultaneous development of a global economy that increasingly functions as an organic unit. Globalisation is not a surprising process to anyone, but what is the role of geography in this homogeneous world?
A good example of standardisation is that large financial institutions have representation offices in almost each important economy, and capital flows freely among the various regions of the world. Richard O’Brien published a book analysing the international financial system in the beginning of the 1990s under the title Global Financial Integration: the Death of Geography.
According to O’Brien, even now, billions of dollars are exchanged on international financial markets every day; with the help of modern information technology, billions of dollars can be sent from one corner of the world to another in seconds. O’Brien also predicts “geographic situation will no longer be a factor in economic development in the near future”.
These days we can certainly state that O’Brien’s projection did not come true. What we find is that, over the last ten years, geography has gained importance in professional-scientific and economic policy discussions related to the global restructuring of the world. A number of “bestseller thinkers” focusing on the global economic and social issues of the world write about the increasing role of geography – e.g., towns. For example, in the process of an emergent creative class that determines competitiveness, Richard Florida considers the role of places – more specifically, cities – essential. Moreover, Edward L. Glaeser, while Professor of Economics at Harvard University, wrote one of his most important works of 2011 about the (economic) triumph of cities.
At the same time, we must also note that Robert D. Kaplan, a geopolitical “guru,” draws attention to the recognition of the determining role of spatiality in global processes in his book entitled The Revenge of Geography, which can be considered a published response to O’Brian. These days we find that although geography as a science may still be moderately in the background, geographic aspects appear in more popular disciplines. The geography of the world and smaller regions is gaining importance in the various fields of social science.
The new economic geography, introduced in 2008 by Paul Krugman, a Nobel Prize winner, established a spatial balance model of growth and made geography a recognised part of economics. The revised cohesion policy of the European Union should also be noted in terms of the appreciation of geography. Since the publication of the Barca report in 2009, the implementation of location-based development came into the focus of attention for the 2014-2020 programme period.
Territorial cohesion, which appeared in the Lisbon Treaty as a new objective, indicates a deeper understanding of geographic space and the influence of spatial organisation, which can also be achieved by introducing opportunities for territorially integrated programmes supported by targeted instruments (ITI – integrated territorial investment; CLLD – community-led local development). The introduction of the principle of flexible geography is another new component. It facilitates and encourages the implementation of development programmes aimed at different geographic areas, independent of economic border lines (NUTS system categories), but related to the implementation of European macro regional strategies (e.g., European Danube Strategy).
WHAT HAPPENS IN THE GLOBAL ECONOMIC SPACE?
What we can certainly state is that globalisation helps to reduce transportation costs, connecting remote areas and increasing spatial production systems that stretch across the globe. In a knowledge-based economy, a first glimpse suggests that information totally disregards physical space and can reach almost any point of the globe immediately, owing to the unbroken development of digital technologies.
At the same time, we still see that there are strong territorial concentration tendencies in the economy, where the role of municipalities is increasingly important.
The technical literature has revealed numerous reasons for this. On one hand, the importance of the effects of agglomeration is becoming stronger. Although considerable parts of product markets are globalising, and more and more companies are present over a larger territory of the world, the workforce and technology are very much fixed to particular locations. Although it is, in fact, true that the production networks span the entire globe, there are totally different types of activities present in the central regions of economies, and again fully divergent activities are pursued in the less developed peripheries of the world. The difference can be grasped primarily through added value: the high wage costs of advanced economies can be funded only through continuous innovation and monopolies of new products. Mass production can be pursued in less advanced regions where costs are lower. The competitiveness of globally efficient companies is very strongly determined by the conditions of their operating environment and regional specificities.
Imre Lengyel, one of the best known Hungarian researchers of the spatial operation of economy, summarises the main consequences of globalisation in terms of the spatial features of geography. He believes that – as a result of the main globalisation processes and the spread of info-communication and deregulation – these days, we can observe a dual spatial process. In addition to the geographic spread of economic activities, local tendencies are also becoming stronger. In other words, the economic role of spatial concentration has become more important, and long-term relations between remote business partners have also grown stronger.
The companies of global industries make plans in country groups in terms of product markets and sales, while thinking of sub-national regions (generally in terms of municipalities and their vicinities) when organising their input markets and production. Globally competing companies have long recognised that the sources of their competitive advantages are concentrated in space, and therefore they must take action locally to strengthen those advantages. This industrial competition led to the appreciation of the economic role of regions and territorial units, which was reflected partly in the rivalry between regions and the competition of muncipalities with special characteristics, as well as in the increased utilisation for business purposes of the agglomeration advantages stemming from spatial concentration – practically, spatial external economies of scale. (Lengyel 2015) As a result of the above processes, it is certain that several initial assumptions of economic science must be re-assessed, including territorial competition and the economic growth and development closely related to it, as well as economic policy and development ideas as responses to new challenges.
WHERE DOES KNOWLEDGE COME FROM?
Knowledge is created where there is a diversified creative workforce and where different types of activities are pursued. The same is true of companies that have different profiles, but which supplement or stimulate each other’s operations. In fact, the process of acquiring dominance in the knowledge economy is also of a dual nature in terms of the role of geography.
In his book, The Triumph of the City, Glaeser stresses the importance of personal meetings in relation to the progress of the internet and information technology (IT) – not to mention their frequent excessive valuation – referring to numerous research results which showed that groups which maintained contact only electronically broke up sooner than groups whose members also met each other.
Consequently, communication through IT devices supplements and improves the efficiency of personal meetings, but it is no substitute for them. Personal relations lead to more trust, esteem and more effective cooperation. In relations to patents, geographic closeness is another important factor, because it has been shown that, with regard to patent references, there are twice as many patents referring to and quoting each other within the region of one metropolis.
According to Glaeser, in the age of information technology and society, contrary to previously projected visions, the importance of geographic space does not disappear. New ideas and knowledge creation, as well as the conditions for them, are still determined geographically, and geographic space (geographic configuration of development actors) still has an important impact on innovation and productivity.
In 2006 Imre Lengyel pointed out in his work that only part of knowledge, the knowledge suitable for digitisation, may be transported globally with the help of information technology. There is a dimension of knowledge that can only be passed on through personal face-to-face connections. In fact, this is the only way it is created and reduced. This is cognitive knowledge, tacit knowledge, which carries the true secrets of innovation, production technology and the successful operation of the economy.
GEO-ECONOMIC FORECASTS
There are also remarkable efforts to integrate the geographic dimension, which are becoming increasingly obvious in the economic development of countries and the world, as well as in the mainstream of economics.
However, even though the framework of economics has expanded, it is clear that practically neo-classic economics, in addition to the Keynesian approach, can explain, much less forecast, changes less and less. A partial list may include China’s becoming an economic superpower; the economic crisis that broke out in 2008; the Middle East power arena, transformed after the Arab Spring, which also affected the essence of Europe; or the rise or fall of various macro regions. New knowledge areas are taking shape based on the recognition that global development is better explained by geographic and historic correlations.
Geo-economics, formed on the borderline of geopolitics, geography and economics, is just such an experiment. The concept was introduced in the technical literature at the end of the 1990s (e.g., Bárdos – Féltoronyi 2002, De Castro 2000, Lorot 1999, Soilen 2012, Solomon 1992, Ducastel 2001). To learn more about development paths, we definitely need to take into account the recognition of geography and political events related to space, which occasionally clearly shape our future even if they cannot be explained by the models of mainstream of economics.
WINNERS AND LOOSERS OF GEO-ECONOMICS
The World Economic Forum study brings to our attention seven global economic challenges in the first half of the 21st century.
The amount of capital available for investment has become more important than the volume of firearms; civil innovation capability has become more important than military and technical development; and market progress has been given preference over the invasion of military units. As globalisation expands, states can no longer define their strategies only according to internal interests. They must extend them into a global geo-economic strategy, in order to be able to integrate into the global economy more effectively, while improving their interest-enforcing capabilities. At the same time, the clear leading role of the United States seems to be dissolving. There are signs suggesting a multi-polar world, the impacts of which will also be reflected in economic relations. However, the essence of geo-economics cannot only be grasped in terms of which state will be capable of developing into a new economic superpower in the new international arena. What will be far more important is whether they will be able to transform acquired economic power into interest-enforcing political or perhaps military power. Globalisation allowed large powers to build strategies covering the whole world, but it never meant that they waived their regional hegemonic status. In recent years, smaller powers also concentrated around the regional hegemonies. However, excessive interdependence can just as easily maintain this fragile security as lead to the breakout of war. Relations, when too tight, can easily snap, especially when they are unbalanced. In the age of wars conducted with new economic sanctions, competing trade regimes, currency exchange rates, raw material and currency manipulations, the World Economic Forum identified seven challenges that affect geo-economic strategies.
ECONOMIC WARFARE
Advanced societies lack the support of their population for military intervention. Therefore, they opt for economic sanctions (as seen in relation to the Ukrainian crisis). However, an economic war can be a double-edged sword. The attacked country may introduce counter-sanctions, and a game hurting both parties with a non-zero-sum may begin. The greatest winners are the “laughing third parties” (e.g., China), who exploit the despair of the sanctioned party and grasp the new trade opportunities. The biggest losers are international organisations which lose their credibility if they are unable to prevent these conflicts in the international trade system.
Also losers of the process are potentially multinational companies seated in the West, which may lose their potentially significant markets. This trend can later lead to the de-globalisation of global companies. The injuries suffered in external markets may encourage multinational companies to return to their national roots and also, in order to mitigate risks, to make their decisions in line with the foreign policy of their own state. Another similar consequence could be the transformation of the international trade pattern.
GEO-POLITISATION OF TRADE DIALOGUES
The global and single trade system is becoming fragmented, with regional and pan-regional trade organisations, giving a boost to multi-polarisation and competition between regional blocks (trade and otherwise).
Efforts by China and Russia to develop a new world order are the best example of the above: China intends to build a Regional Comprehensive Economic Partnership within the Trans-Pacific Partnership led by the USA. Meanwhile, Russia is trying to create the Eurasian Union vis a vis the EU. In Latin America, four emerging countries (Mexico, Columbia, Chile and Peru) would like to break Brazil’s hegemony by forming a Pacific Alliance, later to be extended to other rich Asian countries. Within the new alliances, the role and responsibility of regional development banks will also increase, as those banks may become the backbone of these economic alliances (e.g., Asian Infrastructure Investment Bank and Eurasian Development Bank).
THE AGE OF GEO-ECONOMICS
Geopolitical rivalry increases political and economic competition, and the losers of these processes will be global consumers and companies as well as countries situated on the peripheries of the regional powers.
STATE 2.0
After the financial crisis, central banks obtained a great deal of influence through the shaping of the monetary policy.
By using unconventional tools, central banks promote the enforcement of national interests, exerting pressure beyond national borders, sometimes even on a global scale.
Countries that have many major international companies (i.e., national champions) are undoubtedly the winners in this process. However, the USA has low state ownership in corporations and might emerge shaken from this game. The biggest losers might again be international organisations that have a global mandate, but limited instruments. Therefore, these might be replaced by regional cooperation.
COMPETITION FOR CLOSED MARKETS
In the age of geo-economics, the main objective is not so much to conquer an area that has raw materials, but much rather to acquire technology development opportunities and markets with sufficient populations. This transformation stems from two factors:
1) Resources are becoming cheaper and cheaper due to technological development (e.g., shale gas). Thus, dependence on traditional suppliers is also decreasing.
2) The demographic and economic growth of developing countries simultaneously generates significant global demand and a relatively cheap and trained workforce.
The expansion in the relations between the US and Asia and the global infrastructural spread of China are good illustrations of the shift in the direction of strategic competition.
The winners in this process will be countries that have increasing populations and income, in addition to a trained and cheap workforce. Countries that are attractive for investments and have a significant political and economic stability stand out even within that group.
At the same time, the economic power of the countries producing mineral resources is also falling (e.g., Russia, Saudi Arabia and Iran). The residents of advanced countries with average qualifications can also have a competitive disadvantage against any significantly cheaper workforce of similar qualifications.
SURVIVAL OF THE BIGGEST AND HOLLOWING OUT OF THE PERIPHERY
Many people think that the gridlock of global governance will lead to a world of orderly and harmonic regions rather than a world of chaos. The WEF points out that regionalisation fragments international trade and divides its assets among the states, forming blocks, unevenly.
In fact, it also makes it more difficult to come up with a single global response to global challenges (epidemics, terrorism, internet crime, etc.).
These integration blocks are concentrated around an economic hegemony that is geographically close to them, where it is in the interest of the centre to build a new centre-periphery relationship, where the smaller peripheral economies will become the economic, political and geostrategic servants of the centre. The three most obvious examples of this are the regional activities of Russia, China and Germany. For the time being, it is not clear whether these asymmetric bilateral relations will bring stronger regional powers and hollow out the peripheries. Unfortunately, the development of a multi-polar world order is likely to produce more Ukraines and fewer Singapores.
CHINA’S ALLIANCE NET
In relation to China, the organisation foresees a problem. The forming of new alliances does not stem from identical geopolitical interests, but from the purchase of commitments through investments. This can lead to political tensions not only at the local, but also at the global level.
China’s infrastructure development projects could become an important foreign policy tool in the 21st century, as the establishment of sea lines by America was in the 20th century. These days, China surpasses even the traditional actors (e.g., the World Bank) in that field. Its primary targets are the Indian Ocean countries, Africa and Latin America.
China has also launched a series of new multilateral institutions to expand infrastructure finance activities, to improve infrastructure and to remove customs barriers and commercial bottlenecks that will benefit Chinese resource inflows and export outflows.
China and export-oriented countries profiting from advanced infrastructure will be the clear winners of this process. China may also create dangers for itself. The heavy indebtedness towards China and the low raw material prices can easily lead to political tensions (e.g., in Myanmar and several African countries).
THE DECLINE IN OIL PRICES
After three years of unusual stability, oil prices fell steeply in the second half of 2014, dropping from USD 115 a barrel to USD 60 a barrel. On the one hand, this is a reminder that Saudi Arabia no longer plays the same stabilising role in oil markets that it once did and that price fluctuation can take another turn at any time.
The ultimate winners and losers will depend on how nimbly governments respond to changing oil prices. India, for example, was able to reduce fuel subsidies because of the price reduction.
Iran and Russia could be encouraged to strengthen their economies in different areas and not to rely only on their resources, that are only sporadic sources of revenues. The vulnerability of the two countries is often underestimated, but their stake in this conflict is far more geopolitical than economic.
Authors: Géza Salamin, Norbert Csizmadia, Júlia Gutpintér, Fruzsina Simigh
