The return of geography to the international economic order

There was a time when economies dependent on export earnings from their raw materials were considered extremely vulnerable. Due to fluctuations in world prices, these economies suffered from a lack of diversification and a concentration of economic power in the hands of an often corrupt rent-based oligarchy. The economic specialization based on the availability of raw materials, which does not require special know-how, also did not stimulate investment in human capital and technology. Development economists saw this geographical determinism as a source of unequal exchange and a dead end for economic development.

The oil crisis that erupted in the late 1970s showed that not all commodities are the same and that some are more geopolitically powerful than others. The oil-exporting countries then occupy a unique position in the world economic order, with the availability of strategic energy resources not sufficient to ensure that they are at the top of the per capita wealth ranking, as Algeria (137th) vividly demonstrates. Venezuela (121st), or even Russia (81st).

Adaptation within certain limits

The crisis of the late 1970s also showed that the subordination of strong industrial dependence leads to the adaptation of specializations to reduce subordination. Thus, in addition to the price mechanism that accelerates substitution effects (when the price of good A rises sharply, it is easier to turn to good B, which is even imperfectly substitutable), the scarcity situation encourages investment to return more. independence. Thus, in France, investment in nuclear energy has intensified. In addition, investments have been made to make production processes more efficient in terms of oil usage. Let’s recognize that another way to reduce dependency asymmetries would also be to sell arms to the Arab countries, and hence fund the defense industries of the oil-importing countries from oil revenues.

But technology cannot always and immediately free us from dependence on nature and geography. Thus, neither the producer of wheat, nor the producer of aluminum, palladium, titanium, neon and lithium wants. What makes the Russian-Ukrainian conflict dramatic for food security today is the fact that Russia and Ukraine produce 29% of wheat exports and that, together with Belarus, they interfere in more than 20% of world fertilizer production. for energy security, that Russia produces 17% of the world’s gas production; and for the production of transport equipment, that Russia concentrates 40% of palladium production.

It must be recognized that the theory explaining trade in the relative abundance of specific factors of production (neoclassical HOS theory) still has a bright future ahead of it and that it supersedes the Ricardian theory of comparative advantage based on technology and know-how. , in the background. The return of geography and territory is once again needed in the world economic order.

two lessons

This is the double lesson of the myth of emancipation in relation to geography.

The first has to do with recent trading dynamics. The globalization of exchanges and production processes has led not only to the disconnection of the places of consumption from the places of production of an increasing number of products, but also to the deterritorialization of the production of the final good, or, in other words, to the creation of false “made somewhere”, so many imported components have become. We might think that we have freed ourselves from geography. But this is far from true. This does not mean that the factor supply of individual territories removes dependence on imported production factors. Autarky is no longer possible. Thus, wheat production depends on German chemicals and equipment, oil, imported equipment and foreign investors, gas, investments in gas pipelines, Chilean and Nigerian mines, Chinese and Australian investors. But for some products, territory remains a necessary, if not sufficient, condition for production.

The second lesson is confirmation that technology does not make it possible to completely free oneself from the nature and finiteness of its resources. Obviously, high-tech products, if they are based on a lot of research and development, innovation and specific know-how, require rare materials that only nature has so far produced. That’s right, mobile phones, aircraft, batteries, semiconductors. Nickel, copper, neon, lithium, aluminum, magnesium, titanium, palladium and other rare earth elements are needed. However, the geographic distribution of these materials across the globe is far from homogeneous.

But this is not the end of the story. The abuse of geo-economic power always has a boomerang effect, accelerating the empowerment of those being abused and isolating the perpetrators. This applies both to Russia in relation to countries that depend on its energy, and to the United States in relation to China. The harsh US sanctions against Chinese telcos Huawei and ZTE have only reinforced China’s push for software and semiconductor independence. The dramatic situation resulting from the Russian-Ukrainian conflict will have structural implications for the supply trajectories and specialization of many countries that will be affected by this food and energy crisis. Geography has returned, but trade is still an exchange. If the exchange is too asymmetrical, a gap is never far off.

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