germany – Future Economics

Peace and Prosperity in Israel’s Future?

In Israel’s last major war, in 1973, 0.08 percent of Israel’s population was killed. During Israel’s last serious financial crisis, in the 1970s and early 1980s, its economy faced hyperinflation. In the four decades since, Israel’s casualty rates have declined while its real income, per capita, has risen. Israeli casualty rates as a result of the Arab-Israeli conflict were 0.03 percent in the 1980s, 0.004 percent in the ‘90s, 0.03 percent in the 2000s, and just 0.001 percent since 2010. Israel’s per capita income has grown from $3,500 in 1975 to $35,000 in 2015. Since the end of Operation Protective Edge in Gaza in 2014, Israel has had a casualty rate of 0.0004 percent. Its economy grew at 3-4 percent annually during this time, twice the average rate of the developed world. Since mid-2015, the Israeli economy has been outgrowing the developing world’s too.

It may be that Israel will continue this success in the years and decades ahead. But it may not. Israel might instead have to face new challenges to its economy and security, which are already becoming visible from afar.

One new challenge Israel may face comes from the development of software and devices that replace human labour. Thus far, labour and technology have been Israel’s twin competitive advantages. Part of the reason that Israel’s economy and tech sector have been growing is that Israel has a labour force that is far younger than those of Europe, Northeast Asia, or the United States. Soon, however, Israel may enter a phase in which, for the tech sector to continue succeeding, it will have to create technologies that will directly undercut Israel’s labour advantage. A glimmer of this future challenge can already be seen, for example in Intel’s 15.3 billion dollar acquisition of a driverless-car technology company, Mobileye, earlier this year. It was the largest windfall in Israeli hi-tech history—yet it could also put Israeli nahagim out of work.

A second threat to the Israeli economy may be climate change. Though it is very difficult to know when, what or even whether the impacts of climate change will be, it is obvious that the Middle East is not a part of the planet one would love to be living in if and when they do occur. As many in Israel must have been thinking during the recent spell of nearly 40 degree temperatures—especially inside Gaza, where electricity has been mostly unavailable—any future warming or drying in the Middle East is a frightening prospect.

Perhaps even more importantly, it is not certain to what extent Israel’s trading partners will decide to enact carbon tariffs in the coming years. Such tariffs could put Israel in a difficult position, as Israel relies on burning fossil fuels, particularly coal, to generate its electricity. Israel has actually benefited from this of late, since fuel prices have plummeted worldwide. But with the possibility of large countries deciding to enact tariffs on carbon (or methane) emissions, these energy sources represent a risk for the Israeli economy.

A third risk to the Israeli economy also comes from its commercial relationships with foreign countries. Israelis do a lot of business in the world; particularly in Europe, where Israelis live and work in countries like Germany while French and British Jews spend tourist and investment dollars in Israel. Israel imports more goods from German-speaking countries than from the United States. Israel also increasingly does business with Asia: Israel exports roughly half as much to Chinese-speaking economies as to the United States.

Today, however, Israel’s economic relationships with both Europe and Asia are at risk, at least in the short term, because of the slow economic growth in both those continents. Europe has barely grown in the past decade outside of Germany, and continues to suffer extreme unemployment in its Mediterranean countries. China, meanwhile, which was growing at over 10 percent just a few years ago, is now growing at just 6.5 percent. And that’s the official rate: most analysts guess China’s real rate is now only 3-6 percent.

Growth in European and Asian economies could bounce back, of course. But until it does, it bodes ill for Israel.

Most worrying for Israel should be Germany, which has thus far been the major exception to Europe’s economic and unemployment crises. Germany has lately shown signs that it may finally be on the verge of succumbing to Europe’s general sluggishness. Germany is an enormously export-driven country, but the economies it exports to are either struggling or, in the case of the United States, have been talking about raising tariffs on imports of German goods. Israel could be hurt if Germany falters, as it is Israel’s largest economic partner by far apart from the US. Lots of Israelis could flow back from Berlin, needing jobs.

Germany also shares a political trend with Israel: long-lasting leaders. Merkel is now in her 12th year as Chancellor and approaching her fourth election. Netanyahu is in his 11th year in office (when counting his previous three-year stint in the ‘90s), approaching his fifth election. As Ruchir Sharma, a top investor at Morgan Stanley, argues in his recent book, The Rise and Fall of Nations, countries with leaders who stay on too long past their “best before date”, like Bibi and Angela are doing, tend to watch their markets do relatively poorly over time. Time will soon tell whether or not Israel will conform to this rule. It already has done so once before (though perhaps coincidentally), when it struggled in the ‘70s after Labor’s long reign.

Finally, there is Israel’s security challenge. This has declined in the past generation, first because of Israel’s peace with Egypt and then because Israel’s rivals in Arabia and Iran became distracted by their own wars; notably the Iran-Iraq War (1980-1988), the long Iraq war (1991-2017), and now of course the Syrian war (2011-2017). Israel’s smaller but nearer rivals, chiefly Hezbollah and Hamas, have also been distracted of late. Hamas’ supporters—in the Brotherhood, Damascus, and lately Qatar—have weakened. Hezbollah has become directly drawn into the civil war inside Syria. More recently still, in mid-2015, energy prices crashed, weakening Israel’s historic rivals in the Arab world, Iran, and Russia all at once. Though it is not certain how much these events have caused Israel’s casualty rates to drop, they have possibly played a big part.

But Israel is not the only power in the Middle East that can withstand both cheap oil and crises in the Arab world. The largest economy in the region, Turkey, can also do so. Indeed, Turkey is now facing a power vacuum in every direction. To its east are the oil economies of the Gulf Arab states, Iran, and Central Asia. To its north is another oil economy, Russia, plus a divided nation in Ukraine. To its west, Greece is stuck in a Great Depression, the Balkans are divided, and the European Union has fractured politically. And to its south, Syria, Iraq, and Libya (and more distantly, Yemen) are all at war. At some point, assuming that oil prices do not rebound, it might be presumed that Turkey will take measures to fill this vacuum.

Turkey’ government, led by Recep Tayyip Erdogan, has been consolidating its own power domestically in the past two years. Erdogan’s three recent victories—in the election of 2015, the coup of 2016, and the referendum of 2017— has put him ahead of rival factions like Turkey’s secularists, Gulenists, and Kurdish parties. While Turkey’s relationship with Israel today is not too bad (they have put the Mavi Marmara incident of 2010 somewhat behind them) there is no guarantee what they will look like in the future. Turkey’s economy is now estimated to be 2.9 times larger than Israel’s, twice as large as Iran’s, 1.3 times larger Saudi Arabia’s, and even two-thirds as large as Russia’s. If oil stays cheap, Israel might soon find itself sharing the Middle East with a significant regional power for the first time since….well, since the Turks, a century ago.

Of course, this is taking a rather negative view of things. There are reasons to be hopeful about Israel’s future as well. The fact, for example, that fewer Israelis have been killed by Palestinians since 2002 than there were in just two years from 2001-2002, bodes relatively well for Israel and Palestine both. Between this reduction in casualties and the possibility of an eventual cease-fire in Syria (even if it is gained by way of a victorious Iranian-supported regime, or a Turkish invasion of Syria), the region might even find some peace.

More broadly, if the long, slow trend towards global peace, integration, and economic convergence, which began in 1945 and has (contrary to popular wisdom) continued since, is not derailed, Israel could be an ideal place to live. It is at the crossroads of Africa and Eurasia and of the Atlantic and Indian basins; it can speak English, Arabic, and Russian; it can attract Christian and Muslim pilgrims; and it has Jewish and Israeli connections globally. Israel could do well in a peaceful and equitable world, should such a world come to be.

On the other hand, history may not be so nice. Israel’s past forty years have been pretty decent, all things considered. But new challenges are coming. It is still not clear whether Israel will finally secure the peace and prosperity it has been labouring towards; or instead merely catch a glimpse of them from its current peak.

The Return of the Atlantic

This article was written for an essay contest, so the style is a little bit different from others on this site. It was first written three years ago, when most people had not yet become bearish on the Chinese economy and politicians in the US were still talking a lot about America’s “pivot to Asia”. The essay discusses the possibility that the Atlantic regions – North America, South America, Europe, and much of Africa – will remain at the heart of the international system in the years and decades to come, for better or for worse.

Hope you like it!

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The Return of the Atlantic

For nearly 500 years, the Atlantic Ocean was the unrivalled centre of the international system, connecting Europe to its expansive economic and imperial networks in Africa, Asia and the Americas. Transatlantic trade continued to exceed transpacific trade as recently as the late 1980s, while at the same time the transatlantic alliance against the Soviet Union remained the world’s most important geopolitical partnership. Indeed it seems incredible to recall now, but China, India, Indonesia, Korea, and Australia combined had a smaller economic output than West Germany in 1990.

Today, in contrast, the European Union and United States both import more goods from China alone than they do from one another, and the Cold War has been over for a quarter of a century. The Pacific has in many ways become the new centre of the world: it is home to the three largest economies of America, China, and Japan, is the highway for East Asian imports of commodities and exports of manufactured goods, and acts as a base for nearly 75 percent of US soldiers stationed outside of North America or Afghanistan. Not surprisingly, a majority of economists, politicians, and journalists believe that the continued economic growth of populous Asian countries like China, India, and Indonesia means that the centrality of the Pacific has only just begun.

In this essay we will argue that, even as it remains popular to herald the arrival of a “Pacific Century” (to quote a famous Hillary Clinton op-ed in Foreign Policy magazine), it will actually be the Atlantic that will become once again the centre of the international system, serving as the corridor of an expanding economic network that will incorporate Europe, the Americas, much of Africa, and to a lesser extent even parts of southern Asia. Transatlantic commerce is likely to once again exceed the value of transpacific commerce and, partly by doing so, it will help to serve as an organizing force in global geopolitics. We hope it will serve as a force for good in the world as well.

To be sure, while we view this Atlantic phenomenon as likely to be brought about by economic, cultural, and linguistic circumstances that are already actively or latently in place, we will also argue that, from a policy perspective, the political effectiveness and ethical utility of such a reinvigorated transatlantic relationship will depend on the extent to which efforts are made to reduce carbon emissions in developed economies, as well as on the extent to which efforts are made to provide honest and constructive assistance to struggling countries within the developing world.

The Pacific Moment

The rise of transpacific trade during the latter half of the 20th century occurred as a result of a unique set of circumstances. These were, specifically, the reconstruction of the Japanese economy following its destruction in the Second World War, the emergence of South Korea and Taiwan following their adoption by the United States as strategically-located allies in 1950, and the rapid growth of coastal Chinese states following their devastation during the Sino-Japanese War, Chinese Civil War, and isolationist era under Mao, which occurred in an overlapping succession from 1927 until 1979. These four countries have caused transpacific commerce to soar in recent decades, with help from Southeast Asian success stories like Singapore, Thailand, and Malaysia.

While this rising transpacific trade has certainly deserved the widespread public attention it has received, it has nevertheless served to overshadow a number of other key characteristics of the global economy, which instead highlight the enduring significance of the Atlantic Ocean. These include the fact that roughly 65 percent of both the world’s nominal economic output and private consumer spending are located in the Atlantic basin rather than in the Pacific basin; that more than 70 percent of the populations of North America, South America, and Sub-Saharan Africa live within the Atlantic basin rather than the Pacific basin; that the Pacific generally takes 2-4 times longer to cross widthwise by ship than the Atlantic does; that the quantity of transatlantic investment is estimated to be 5-10 times greater than transpacific investment; and that Indian and Pakistani trade and labour crosses the Atlantic, Mediterranean, or Arabian Sea far more often they do the Pacific.

The reemergence of transatlantic interactivity as a defining feature of the international system will simply reflect these enduring realities. In addition, it will be driven by a set of economic evolutions that are beginning to revive transatlantic trade relative to transpacific trade, as well as by the continued spread of modern communications and the emergence of African and Latin American economies, which are helping to increase the political and economic significance of the cultural, social, and linguistic affiliations that bind together the four continents of the Atlantic world.

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Transatlantic Connections

Atlantic regions share a number of important connections with one another. The first is cultural: unlike in Asia, the overwhelming majority of people in the Americas are of European or African heritage. Most have ancestors that arrived within just the past century or two. This could have increasingly powerful political and economic consequences in the future, particularly as the economies of Africa develop and as African populations in the Americas become wealthier and more empowered (most notably the 40 million US African-Americans, 28 million Afro- Caribbeans, 15 million Afro-Brazilians, and 80 million Brazilians who identify as being of mixed ancestry), such that it will no longer just be white Americans and Europeans engaged in the most significant transatlantic partnerships.

The second transatlantic connection is a social one, the result of technology increasingly allowing first-, second-, and even third-generation immigrants in the developed world to maintain relationships with family members, friends, and acquaintances back in their countries of origin. Crucially, immigrants in North America and Europe come overwhelmingly from Latin America, Sub-Saharan Africa, or the Mediterranean basin. More than half of the foreign-born population in the United States arrived from Latin America alone, and there are about four times as many first-generation immigrants in the European Union from Africa or the Americas as there are from East Asia.

There are, in fact, already 2-3 million Latino-Americans living in Spain, and more than 50 million living in the United States. Africa’s emigration rate to both Europe and North America, meanwhile, has risen at a faster pace than that of any other region since 1980, and is likely to continue to do so as a result of the fact that the average birth rate in Sub-Saharan Africa is nearly twice as high, and the per capita income nearly twice as low, as that of any other part of the world.

Finally, and in our opinion most importantly, there are the transatlantic linguistic connections. Over 80 percent of the world’s nearly 1.5 billion native speakers of Spanish, English, French, Portuguese, or Arabic live within the Atlantic or Mediterranean basins; each of these languages is fairly prominent within at least three separate continents. English, moreover, is far more widespread in mainland Europe than it is in any other continent apart from North America (or Australia). Switzerland, Germany, Austria, Scandinavia, the Netherlands, and Belgium are particularly proficient; according to some estimates, 60-90 percent of their populations are able to speak English In France, Italy, and Poland, meanwhile, the share of English speakers is estimated at 30-40 percent, which is still far ahead of countries like China, Japan, Indonesia, and even India.

In Africa, European languages are also spoken more widely than in most other areas of the world. This is partially the result of to the continent’s colonial histories, many of which ended as recently as the 1960’s or 1970’s. It is, however, also the result of Sub-Saharan countries tending to be linguistically diverse, such that their use of European languages as lingua franca remains common practice. Indeed, despite having the world’s lowest density of accessible schools, televisions, computers, and satellite dishes, English is already spoken by a greater number of people in Africa than in more populous India, both as a native language and as a secondary one.

French, meanwhile, is used by an estimated 90 million Africans, Portuguese by an estimated 20 million Africans, and Arabic as far south as the Sahel.24 In South Africa approximately 20 million people understand Afrikaans, a language that is for the most part mutually intelligible with Dutch. Over 85 percent of Africa’s English-speaking population and nearly all of Africa’s French-, Portuguese-, Arabic-, and Afrikaans-speaking populations live within the Atlantic or Mediterranean basins.

Also important is that over 40 percent of Africa’s population is under the age of fifteen. This makes it the world’s youngest region by a considerable margin: by comparison, only 15 percent of China’s population and 29 percent of India’s population are younger than fifteen. Children possess the ability to learn languages many times more easily than adults can, particularly if they have access to schooling, books, media, and modern communications.

Africa’s current generation of children might become the first to grow up with widespread access to such tools, which might therefore help African economies to develop and integrate with the other continents of the Atlantic world. This is also one reason why it would be wise from a policy standpoint for Europe and North America to immediately support economic development in Africa, since doing so would help African populations gain access to more education and information now while they are still young.

Shifting Trade Patterns

In 2013, Chinese coastal cities had an average nominal per capita income of roughly $20,000, nearly as high as those of South Korea and Taiwan. The median age in China is 37, about the same as in the US; in South Korea and Taiwan the median age is 40. These are no longer really “emerging markets”, in other words. Rather than experience another lengthy period of rapid economic growth that would continue to drive up transpacific trade, they will instead be undergoing various structural evolutions, as all maturing economies tend to do over time.

In the coastal areas of China, this evolution is likely to be from an economy oriented around exports of lower-end manufactured goods to an economy that exports value-added goods and services and is more reliant on the private consumption of its own population. Such shifts are natural for a middle-income economy like China to experience, but they may also reduce the quantity of China’s transpacific imports of industrial commodities and transpacific exports of manufactured goods.

Economic growth in the poorer interior provinces of China, meanwhile, or in the even poorer Indian subcontinent, is not certain to bring about the continued rise of transpacific commerce either. The emerging provinces of the populous Chinese interior are likely to trade mainly with coastal Chinese provinces and other countries in Asia, rather than with economies overseas. Today, for instance, in Sichuan and Henan, the two largest inland Chinese provinces, exports account for around just 4 percent of provincial economic output, almost nothing compared to the 47 percent of economic output that exports account for in coastal China’s two largest provinces, Guangdong and Jiangsu.

In addition, given the crowdedness of China’s coastal cities and ports, the interior provinces of China may also increasingly avoid using the Pacific in favour of the more direct “Silk Road” routes to Europe, or in favour of using Myanmar’s commercially navigable Irrawaddy River to directly access the Indian Ocean.The economic emergence of the Indian subcontinent, meanwhile, could perhaps lead transatlantic commerce to rise faster than transpacific trade, as India and its neighbours may partially succeed China in supplying cheap goods or services to consumers in the Atlantic world.

As they emerge, the Indian subcontinent and the Chinese interior will also be importing rapidly growing quantities of oil and gas from the the Persian Gulf, Central Asia, and Russia. Indeed, India and Pakistan already receive roughly 75 percent of their oil and gas imports and an astonishing 30 percent of their imports of goods in general from the Persian Gulf. China’s interior provinces, meanwhile, get around 75 percent of their gas imports from Turkmenistan and Uzbekistan and 30 percent of their oil imports from Russia and Kazakhstan. These imports are likely to increase, not only because of India’s and China’s continued growth, but also because of their shared desire to consume less coal, on which they rely for an average of about 65 percent of their energy consumption.

This need to import large quantities of energy could lead to competition, rather than cooperation, between regional powers like China, India, and Japan, potentially undermining Asia’s ability to cooperate as a more coherent political unit. (In contrast, the Atlantic world consists mainly of synergistic relationships where energy is concerned: Europe is a net energy importer, South America and Africa are net energy exporters, and North America is not too far from reaching the “energy independence” it has long dreamed about). Moreover, because the European Union itself currently receives around 60 percent of its oil and gas imports from Russia, the Persian Gulf, or Central Asia, the increasing energy consumption of Asia may force Europe to begin importing much more energy from the Americas or western Africa instead, further boosting transatlantic trade.

Conclusion: Policy Framework

While the renewed significance of the Atlantic is likely to occur mainly as a result of the commercial, cultural, social, and linguistic factors discussed above, we believe that specific policy goals are nevertheless required to ensure that such a renewal occurs in a manner that is both ethical and politically effective on a global level. Two policies in particular may be advisable in this regard:

One is the implementation of per capita carbon emissions taxes. Such taxes would likely facilitate transatlantic commerce through the export of European energy-saving and clean energy production technologies to the emissions-intensive markets of North America, whilst simultaneously providing both Europe and America with a more responsible and defensible platform in climate treaty negotiations with industrialized Asian economies that have much lower per capita and historical emissions levels.

The other is increasing political outreach and economic assistance to struggling countries, particularly those within Africa. Africa contains many of the world’s greatest challenges if it is not constructively engaged with, and it also has a youthful and diverse population of more than a billion people, vast reserves of natural resources, and linguistic and social connections with Europe and the Americas. All of these qualities make it a necessary component of any revitalized transatlantic project.

Of course, each of these policies deserves much more focus than we have left to spare in this essay. Yet still we feel confident in saying that, if these two policies are diligently and honestly pursued, then the unexpected return of the Atlantic as the central corridor of the international system would not only become more likely to occur, but will also be much more welcome when it does.

Eurozone Geopolitics (and the Future of “Czechia”)

Since 2001, when Greece adopted the Euro as its currency, seven countries have joined the Eurozone. Slovenia began using the Euro in 2007, Cyprus and Malta in 2008, Slovakia in 2009, Estonia in 2011, Latvia in 2014, and Lithuania in 2015. These countries are small. Together, they are home to around 14.5 million people, just 4 percent of the Eurozone’s total population.

This is not surprising: from 2001 to 2008 European countries were more focused on expanding the European Union and NATO than expanding the Eurozone, while since 2008 the economic slowdown in Europe has limited the ambition of European institutions to expand in a meaningful way. Key economies in the region, like Britain, Poland, Sweden, Norway, and Switzerland, not to mention Russia or Turkey, do not appear likely to join the Eurozone any time soon, if ever.

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Still, the admittance of these seven small states has altered somewhat the geography of the Eurozone. Slovakia is the only state among the ex-“satellites” of the former Soviet Union (the others being Poland, Romania, Hungary, the Czech Republic, and Bulgaria) to adopt the Euro, and it is the only Eurozone country to border Ukraine.

Slovenia is the first among the states of the former Yugoslavia to formally join the Eurozone, and its membership gives Austria and Germany a Eurozone-only route to the Mediterranean that bypasses Italy. The Baltics are the only former Soviet Union republics to adopt the Euro, and their inclusion also means that Finland is no longer the extreme geographic outlier of the Eurozone that it was between 1999 (when it and all ten of the other Eurozone countries apart from Greece joined) and 2011, when Estonia joined.

Similarly, the Cyprus and Malta additions mean that Greece is no longer an outlier in the Eurozone. Even before they joined, though, Greece was still only 100 km from Italy — whereas Finland had been more than 800 km from any fellow Eurozone economies before the Baltics joined.

Among the Eurozone members that joined the group prior to 2007, the economies on the outer edges of the Eurozone — Portugal, Spain, Ireland, southern France, southern Italy, Greece, and Finland — have struggled the most during Europe’s nearly decade-long economic downturn. The inner countries of the Eurozone, on the other hand, as well as most of the non-Eurozone countries in the region, have not fared so poorly.

As the graph below shows, Germany and Austria may have been the only two pre-2007 Eurozone members to have experienced per capita income growth from 2008-2013, and Germany in particular (which accounts for an estimated 29 percent of Eurozone GDP) has been a veritable island of low unemployment within the Eurozone.

euro core periph — source: Future Economics

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Even among the newcomer Eurozone states, which apart from crisis-ravaged Cyprus have not done too poorly, it has been the more centrally located countries of Slovakia (the capital of which, Bratislava, is just 50 km from Vienna) and Lithuania (the westernmost Baltic) that have experienced the most growth. Slovakia and Lithuania are both thought to have had per capita income growth of 5.2 percent during the period 2008-2013, whereas Estonia, Latvia, and Malta had growth of just 1.6-2.7 percent, and Cyprus’s income shrank by 20.6 percent.

regional unemployment europe — Within Spain, Italy, and Belgium, the European countries with the largest internal regional divisions in their employment rates, their southern regions have higher unemployment in each case than their northern regions

Now, however, the economic slowdown may be moving towards the inner sanctuary of the Eurozone, in and around Germany, even as it has also lately been afflicting the outer regions of non-Eurozone Europe (Russia, Norway, Turkey, Scotland, etc.), which had performed relatively well in the wake of the 2008 financial crisis. Economies like Germany, northern Italy, and the Netherlands have increasingly appeared to be under threat of recession, while at the same time some of the Eurozone outsider “PIIGS”, like Spain and especially Ireland, are finally thought to be in recovery. Europe may be looking a bit topsy-turvy these days.

Much of this perception is simply anecdotal (which is not to say incorrect, necessarily), an adding-up of Brexit, Deutsche Bank’s falling stock price, the Volkswagen emissions scandal, the Syrian migration crisis, terrorist attacks in Paris and Brussels, and so forth.

There have also, however, been larger shifts. Falling energy prices are likely to help southern Europe more than northern Europe. Slowing economic growth in China, Russia, and other developing markets threatens export-oriented economies like Germany and the Netherlands. People in countries like Germany are getting old. The global shipping industry crash has been hurting parts of the Dutch and Danish economies. And there is a growing fear that Italy’s financial system may be reaching a crisis-point.

Eruzone Net Energy Imports Per Dollar of GDP — source: Future Economics

Developed Economies Energy and oil imports regional energy imports:exports

Now, it may be that these fears are overwrought, and that the centre of Europe will not undergo a reversal of fortune. But perception can often influence reality where economics are concerned, and the perception of countries like Italy, France, and even Germany has undeniably changed for the worse of late. It was less than a year ago that Germany was still popularly viewed as an unassailable economic and political stronghold of Europe, and less than two years ago that Spain, rather than Italy, was seen as the likeliest trigger for a Euro crisis (apart from Greece, of course).

Going Forward

When it comes to the “future of the Euro project”, the inward creeping of economic troubles from the Eurozone periphery to the Eurozone core should raise the question of whether or not the Czech Republic will join the monetary union as well.

The Czech, as well as most of the other Eastern Europe nations, were officially supposed to adopt the Euro, but many guess that this will not happen anymore given the current atmosphere in Europe. Nowadays, a “Czexit” from the European Union seems more likely, arguably, than a Czentrance into the Eurozone. The Czech Republic has the biggest GDP in Eastern Europe apart from Poland, more than double Slovakia’s. It is a “core” state: Prague is actually located closer to Frankfurt than Berlin is, and closer to Berlin than Vienna is.

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If the Czech Republic does join, Poland would then be surrounded by Eurozone states on all its EU land borders. The Czech Republic’s key trade partners, Slovakia, Austria, and Germany, have all joined now — and both the Czech and the Slovaks are arguably among the world’s five most trade-dependent nations. The Czech Republic also sits in the main route between Germany and Slovakia, both of which are in the Eurozone. Along with the financial fastness of Switzerland, or worldly London, or the half-in, half-out (but mostly out) ERMII monetary system of Denmark, the Czech Republic is now the only place within the core of the European Union not to have joined the Eurozone.

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Whether or not the Czech Republic joins could impact the future shape of the monetary union: its expansion, contraction, or dissolution. Yet for now the Eurozone seems focused on keeping the economies in its own centre intact, rather than expanding toward new peripheries in Eastern Europe.

Capital Idea — Image of the Day

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Countries have different way of ordering their own provinces and capital cities, and how they choose to do so may sometimes say a lot about what sort of politics they have. Where countries’ capital cities are concerned, there is usually something akin to one of the following four set-ups:

The Argentine model: the country’s capital city serves as its own unique administrative district and is surrounded on all sides by a single province that it influences to a large degree.
The American model: the capital city serves as its own unique administrative district but is not surrounded by a single province (or state, etc.), but rather by two or more provinces.
The Saudi model: the capital city is not its own unique administrative district, but is part of an important province that is named after itself.
The Canadian model: the capital city is sometimes annoyingly full of bureaucrats, but is otherwise more or less a normal place. It is not its own administrative district.

The Argentine Model

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Examples of the Argentine model include, of course, Buenos Aires, which is surrounded by the province of Buenos Aires (Argentina’s recent presidential election, in fact, was between the mayor of Buenos Aires and the governor of Buenos Aires province); Berlin, which is surrounded by Brandenburg (see map below); Moscow, which is surrounded by the Moscow oblast; the Australian Capital Area, which is surrounded by New South Wales (see map below), Vienna, which is surrounded by Lower Austria; Brussels, which is surrounded by Brabant (though Brussels does not directly border Walloon Brabant, which is several km to the south of Brussels); Prague, which is surrounded by the Central Bohemian Region; and Addis Ababba, which is surrounded by Oromia.

Australian-States

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Beijing probably also belongs in this category: it is surrounded mostly by the province of Hebei but in two spots also by the city of Tianjin, which like Beijing is one of China’s four “direct-controlled municipalities” (the other two are Shanghai and Chongqing). Tianjin was temporarily made part of Hebei province in the 1960s, and in recent years there has been much talk of increasing integration and cooperation between Beijing, Hebei, and Tianjin in order to form a sort of capital city macro-region, which is often referred to by the acronym Jingjinji.

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Seoul in South Korea has a similar set-up to Beijing. It is surrounded almost entirely by the province of Gyeonggi, but also touches the coastal city-province of Incheon, in the same way that Beijing does the city-province of Tianjin:

Note by the way that South Korea has a number of city-provinces. Of these, only Gwangju, in the southwest, conforms fully to the “Argentine model”.

Paris too may be included in this list; Paris is not itself a province, but it is surrounded on all sides by Ile de France, one of France’s 13 regions. (Prior to the beginning of this year Ile de France was one of France’s 22 regions, but these have since been reordered and reduced).

The American Model

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Capitals which are their own unique administrative districts but lack their own single encircling province include Washington D.C. (which is surrounded by both Virginia and Maryland), Tokyo, London, Delhi; Mexico City, Bangkok, Tehran; Hanoi, Abuja (though Nigeria’s largest city by far, Lagos, which was the capital until 1991, is an example of the Argentine model), Baghdad (which is surrounded by four other provinces), Manila, Jakarta, Madrid, Islamabad, Brasilia (though just barely …and the capital of Brazil prior to 1960 was Rio de Janeiro), Kinshasa, and Bogota (though in a relatively weird way; see map below, Bogota is the sliver between the departments of Cundinamarca – which Bogota is also the capital of – and Meta).

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One feature that a number of these have in common is that, while the capital city’s administrative district often borders two other provinces, it is usually surrounded much more by the less populous of the two other provinces. Notable examples of this include Washington D.C., which is surrounded much more by Maryland (population 5.9 million) than by Virginia (population 8.3 million); Delhi, which is surrounded much more by Haryana (25 million) than by Uttar Pradesh (205 million); and Brasilia, which is surrounded much more by Goias (6.5 million) than by Minas Gerais 21 million.

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Capitals which do not fit this pattern, however, are Mexico City, where the federal capital district is surrounded much more by the state of Mexico (population 16 million) than by the state of Morelos (population 1.9 million); and Islamabad, which is surrounded much more by Punjab (population 91 million) than by Khyber Pakhtunkhwa (population 27 million).

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A number of non-capital cities, meanwhile, such as Hamburg, which is the most populous city in Germany apart from Berlin, fit into this category as well.

The Saudi Model

saudi-arabia-political-map

A capital city which is not its own unique province, but rather is part of an important province named after itself. Examples may include Riyadh, Stockholm, Dhaka, Santiago, and Ankara. Bern also could probably be on this list, but Bern is only the de facto capital of Switzerland; Switzerland has no de jure capital city.

The Canadian Model

Examples of countries in which the capital city is not its own unique independent unit may include Ottawa, Amsterdam, Rome, and Warsaw.

According to Wikipedia “two national capitals in federal countries are neither federal units [like provinces, states, etc.], special capital districts, nor capitals of federal units: Ottawa, the capital of Canada [because Toronto is the capital of Ontario, the province in which Ottawa is located], and Palikir, the capital of the Federated States of Micronesia“. Ottawa is situated entirely within the province of Ontario, but also directly borders French-speaking Quebec.

93f88daab2d2ff195b57f9c71ee3db76 — Palikir

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Please let me know if I’ve made a mistake on any of these; administrative divisions can be a bit complicated – and I can be a bit lazy.

Image of the Day – Germany at a Crossroads

Deutschland_topo

Germany, which accounts for an estimated 21% of the European Union’s GDP and has an unemployment rate that is less than half as high as the EU average, is now facing five big economic challenges:

1. Germany has one of the oldest populations in the world: it’s old age dependency ratio is as high as Greece’s and higher than any other country apart from Italy and Japan; the share of its population aged 80 or older is higher than in any European country apart from France or the “PIGS” (Portugal, Italy, Greece, and Spain). The largest portion of Germany’s population is between 45-60 years old. Old age is beckoning.

2. Whereas Britain, France, Italy, Russia, India, China, and Turkey depend on exports of goods and services to account for an estimated 20-30 percent of their GDPs, and the United States, Japan, and Brazil for just 10-20 percent, Germany gets approximately 46 percent of its GDP from exports. As economies throughout Europe and the developing world are simultaneously growing slowly right now, such a dependence on exports may not be a good thing to have.

3. Low energy prices are not likely to benefit Germany as much as many think, nor will they benefit Germany’s neighbours in northern Europe, central Europe, or especially the former Soviet Union too much (see links for more: here, here, or here). According to the Wall Street Journal, oil imports account for just an estimated 2.4% percent of Germany’s GDP, compared to 3-6% in Spain, Greece, Turkey, Poland, Japan, South Korea, Taiwan, and India, while, according to the World Bank, imports of energy in general account for approximately 62% percent of Germany’s overall energy use, compared to 70-95% in Spain, Portugal, Italy, Turkey, South Korea, and Japan.

4. Germany is facing economic and political diminishing returns in its eastward economic integration. In the past generation it has looked to East Germany and Eastern Europe, but Eastern European countries are no longer so cheap. Czech Republic and Slovakia now have nominal per capita GDP’s of around $19,000, for instance, up from just $5700 in the year 2000; Russia has reached $14,000, up from $1800 in 2000. Increasingly there are also political limitations of various sorts to German involvement to its east. Many Eastern European countries, for example, would rather not see the Germans and Russians become too close with one another economically, and also do not want to become German economic satellites themselves. Things may be becoming more politically fraught than they were a decade or two ago.

5. A similar dynamic is true of Germany’s domestic politics. In the 1990s Germans could unite over the goal of German reunification, while in the 2000s they could unite over European expansion into Eastern Europe, a region located for the most part directly on the borders of Germany or German-speaking Austria. Now, though, with both those goals having been realized to a large extent, there could be room for inter-German regionalism to become more prominent.

It has still been just 145 years since German unification, and 25 since reunification; the three-way divide between eastern Germany, western Germany, and southern Germany, aka Bavaria, may still be somewhat in play. This was seen recently, when Merkel’s longstanding political coalition finally came under pressure as a result of internal opposition from Bavaria over the refugee issue. Germany is under no threat of dissolution, obviously, but regionalism could nevertheless threaten the ability of its central government to continue forming majorities, and it could threaten the ability of any majority governments it does form to take decisive political action.

Germany’s parliament is already regionally split to a slight degree: the Christian Social Union in Bavaria, the regional sister-party of Angela Merkel’s national Christian Democratic Union, holds 7 percent of the seats in Germany’s parliament. Southern German states, moreover, in particular Bavaria but also neighbouring Baden-Wurttemberg, tend to be more right-wing in their voting patterns, whereas eastern German ones tend to be the most left-wing. (Here’s an article describing some of the geographical patterns in Germany’s 2013 election). Bavaria and Baden-Wurttemberg are the second and third most populous of Germany’s 16 states, and have the closest ties to Austria.

There may be other triggers as well for regionalist challenges within Germany. If, for example, Europe’s banking and political system, which is currently under pressure from struggling economies like Italy, Greece, and France, ends up being badly damaged, it may hurt western or southern Germany more than eastern Germany. This is because Frankfurt (in central-western Germany) is Europe’s banking and transportation hub, and because southern Germany has relatively close connections with nearby northern Italy while western Germany is relatively close with France, Belgium, and the Netherlands (the latter two being Europe’s political and shipping hubs). Of course, this is all extremely speculative; I am not actually saying that political regionalism will reemerge within Germany, only that it cannot be ruled out.

The Crossroads

There are, perhaps, two basic roads Germany can now go down. One is to become a more nationalist, more insular country. German nationalism could be used as a tool to attempt to bring about cooperation in parliament. Germany could restrict immigration flows as most other countries (and Bavaria) have wanted to do. Germany could try to use technology rather than immigration to solve its looming old-age crisis. And Germany could attempt to overcome its dependence on exports by reorienting its economy: either by having the government buy up the surplus goods that Germany now exports to other countries, or else by producing fewer goods and attempting the difficult task of making money in other ways instead.

On the other extreme, Germany could become even less nationalist and even less insular than it is now — and it is already quite a bit less nationalist or insular than most other countries, as a result of its 20th century history and export-intensive economy. It could continue to welcome immigrants from places like Africa, Arabia, and Asia, which could help it to address its old-age problem and, along with the population of Turks and many other groups already living in Germany, would make Germany a globally diverse country, somewhat like Canada, Britain, and the United States are. Germany could continue to happily use the English language without being worried that this will threaten the German language, rather than move towards a linguistic protectionist model as countries like France often have. And Germany could continue to integrate economically with Eastern Europe, Russia, and Turkey, but become so non-nationalist in its identity that this expansion will not be as likely to create a political backlash.

Which direction will Germany choose? I suspect, regretfully, that it will be the former. Nationalism may simply be too difficult for a nation to overcome.

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For more, read Germany’s Trade Empire

Image of the Day – Now that’s a basin!

black-sea-map

Assuming this map is accurate, the areas it highlights are those in which rivers flow into the Black Sea. A number of things about this may perhaps be geopolitically noteworthy:

– some countries, most notably Ukraine, lie almost completely within the Black Sea basin, whereas others, most notably Poland, lie just beyond the borders of the basin. Others still, like Bulgaria, are neatly bisected by it.

– a number of important cities, such as Istanbul, Lviv (the largest city in western Ukraine, with the exception of Odessa), and the capital cities of Bulgaria (Sofia), Belarus (Minsk), and Bosnia-Herzegovina (Sarajevo), are situated precisely at the outer edge of the basin. Ankara, the capital of Turkey, is almost at the outer edge of the basin, meanwhile.

– the easternmost areas of Ukraine have rivers that flow into Russia’s Don River, and a coastline located along the Russian-controlled Sea of Azov rather than along the open Black Sea. Given that eastern Ukraine is relatively hilly (which this map does not show well) and is a leading producer of bulk goods like coal which are expensive to transport via truck, this Russian-oriented riverine and maritime access of eastern Ukraine is especially notable.

– The two most important rivers within this basin, namely the Danube and the Dnieper, empty into the Black Sea only about 200 km apart from one another, as a result of the fact that the Danube turns sharply north just before it reaches the sea, while the Dnieper turns southwest.

Image of the Day – December 2, 2015 – Motor Vehicle Production

Motor Vehicle Production

The non-per capita vehicle production stats came from wikipedia: https://en.wikipedia.org/wiki/List_of_countries_by_motor_vehicle_production

Note: there are countries which have higher per capita motor vehicle production than some of the countries on this list. Belgium, for example, which is not shown on this list, has a much higher per capita motor vehicle production than many of the countries that are shown on this list. The countries on this list were simply the ones with the highest overall motor vehicle production as of 2013, according to the source above.

The 10 Largest “Relative” Trade Networks

If you follow the financial news media, you will frequently hear of countries’ largest trade partners being either the United States, the European Union, or China. As a result, it can often seem like the US, EU, and China are at the centre of massive global networks of international trade. In a certain sense, of course, they are: the combined external merchandise trade of the US, EU, and China is equal to an estimated 11 trillion dollars a year. And yet, relative to the enormous size of their GDPs, the US, EU, and to a lesser degree China do not actually trade very much compared to most other countries.

North America and Europe are in fact relatively insular in their international commercial relations. The US and the EU, for instance, trade an amount of goods estimated at around 25 percent of their GDPs; by comparison, Germany trades an amount equal to an estimated 70 percent of its GDP, South Korea trades an amount equal to roughly 80 percent of its GDP, and the Netherlands trades an amount equal to roughly 150 percent of its GDP. Even China, which is generally viewed as a highly trade-dependent economy, trades an amount that is equal to only an estimated 45 percent of its GDP, which is lower than most of the countries in the world.

In other words, the economies of the US, EU, and China only seem so trade-oriented because their massive economic size makes them the largest trade partners of a large majority of the world’s countries. This confusion stems from the fact that the media tends to view the size of international trade values in absolute terms only, rather than by looking at the size of those trade values relative to some other relevant factor, such as the size of the GDP’s of the countries involved in the trade. By looking only at absolute trade values, the huge economies of the US, EU, and China end up getting almost all of the public attention, even though their “relative” trade with most other countries actually tends to be relatively insignificant.

In this article, therefore, we have tried to quantify the international trade networks of the world’s major economies in relative terms; specifically, by dividing the absolute value of their trade by the size of their trade partners’ respective GDP sizes. We already did this with Ukraine and Canada in previous articles, and found some interesting results in both cases. In this article, we will try to make similar graphs for the trade networks of China, the United States, Germany, Japan, Britain, Brazil, Russia, India, Australia, and Turkey.

Before we begin, however, it is important to note that measuring trade values is not always a simple process. There are a number of reasons why the following graphs should be viewed with a grain of salt. For example, the data they were made with may be inaccurate in some cases (the absolute trade values in data was taken from the MIT’s Observatory of Economic Complexity; the GDP data was taken from the World Bank). It also only includes trade in goods, ignoring trade in services, international investment flows, illegal smuggling, or tourism.

Arguably, the data can also be misleading in some instances, because it over-emphasizes trade hubs like Singapore, Hong Kong, Belgium, and the Netherlands (and, as a result, perhaps under-emphasizes the trade of countries that are closely commercially integrated with these trade hubs, such as Germany or China). It also treats Hong Kong as an independent economy rather than as part of China, which it probably should not do. Finally, since the Observatory of Economic Complexity only gives data for countries’ top 20 absolute trade partners, in most cases these graphs will still ignore some small countries. For example, the Bahamas probably has a huge relative trade relationship with the US, but it was still too small in absolute terms to be included.

All that being said, I think these graphs might be interesting and instructive. So, here they are:

China – Exports: $2.1 trillion, Imports:$1.4 trillion

China's Absolute Export Partners In the graph above we see China’s “absolute” export patterns – in other words, the type of trade patterns we would normally hear about in the media. The US buys an estimated 19 percent of China’s exports, Hong Kong buys an estimated 11 percent of China’s exports, Japan buys 8 percent, and so on. In the graph below, however, we see China’s “relative” export patterns, which tell a very different story:

As you can see, in relative terms (i.e. relative to GDP size), Hong Kong buys way more of China’s exports than any other economy does. (And of course, as we said earlier, Hong Kong should actually probably be considered part of China). Singapore and Malaysia, both of which are partially Chinese-inhabited, are next after Hong Kong, followed by Thailand, Taiwan, and South Korea. The US, meanwhile, which had a strong lead in China’s “absolute trade” export patterns, scores very low in this relative trade graph.

Here we see China’s import patterns, both relative and absolute. The US, though it supplies China with an estimated 8 percent of its overall imports, scores at the very bottom of China’s relative imports list, far behind every other country apart from France. Hong Kong again scores number one in terms of relative trade, but its dominance on relative imports is not nearly as high as it was with exports (this is because most of China’s imports from Hong Kong’s are of services, rather than goods, and the data here does not include services). Taiwan, conversely, is much higher on this imports graph than on the exports graph above. Angola, which was not even on the exports list, scores extremely high in terms of relative imports, because of the oil it supplies China with. Other resource suppliers like Chile, Saudi Arabia, Iran, and Australia also have higher scores on this relative imports list.

USA – Exports: $1.3 trillion, Imports: $1.8 trillion

Here we see that Mexico is higher than Canada in relative terms, even though Canada is higher in absolute terms. We see that Hong Kong is very high in relative terms, more than 7 times higher than China is (though perhaps most of the US’s exports to Hong Kong are really going to China anyway), as is Singapore. Latin American countries like Chile and Colombia score high in relative terms, as do Belgium, the Netherlands (though both may be trade hubs for US exports to other European countries), and Switzerland. US allies South Korea and Taiwan also score high in relative terms. Major economies like Britain, Germany, France, Japan, China, India, and Italy all score very low in relative terms.

For US imports, Mexico actually scores almost twice as high as Canada in relative terms (and this does not even include massive narcotics imports from Mexico). Ireland and Vietnam both score very high (higher even than Canada), followed by Colombia, Thailand, South Korea, Taiwan, and China. China scores much higher here than it did in terms of US exports. Nigeria also scores highly, since it sells oil to the US. For the US’s absolute imports, four countries dominate: China, Mexico, Canada, and Japan.

Germany – Exports: 1.32 trillion, Imports: $1.09 trillion

It is interesting to note that France, which buys more of Germany’s exports than any other country does in absolute terms, scores far lower in relative terms than most of the countries in Central and Eastern Europe. Given that most Eastern European countries are still developing, the fact that their relative imports from Germany are so high could be especially significant. Also notable is how tiny the relative exports of Germany to countries like China, the US, and Japan are. Germany is in general the most export-dependent of any economy we will look at in this article.

In terms of Germany’s relative imports, the Czech Republic and Hungary are again at the top of the list, this time joined by Slovakia. Britain scores lower on this list than it did in the exports list. Norway, which sells oil and gas to Germany, scores much higher. Russia, which also sells oil and gas to Germany, does not score higher, however (though it may be that much of this oil flows through the Netherlands, and is counted as a German import from the Netherlands instead of from Russia). The US scores extremely low.

Japan – Exports: $794 billion, Imports: $793 billion

Britain – Exports: $434 billion, Imports: $615 billion

India – exports: $275 billion, imports: $ 448 billion

India relative and absolute imports

Brazil – exports $247 billion, imports $223 billion

Russia – exports $470 billion, imports $324 billion

Apart from the countries we have looked at so far, France and Italy are the two largest economies in the world in terms of nominal GDP, according to the World Bank. However, since we have already looked at two European countries (namely, Germany and Britain), I made graphs for Australia and Turkey instead. Australia and Turkey are listed as the world’s 12th and 17th largest economies in terms of nominal GDP.

Australia – exports: $249 billion, imports: $240 billion

Turkey – exports: $161 billion, imports: $205 billion