Wednesday, July 2, 2014

Geopolitics, Natural Resources, and Economics are Intertwined

In an economics class, we're told that it's possible to have exponential growth forever. There's very little talk in economics about the role of natural resources or about the risks that natural resource issues can create. To think that we can have infinitely (and exponentially) rising productivity without taking into account natural resources is inherently flawed.

Let's take a look at the devices that have given us the most productivity gains over the past few decades. It's inventions like the computer, cell phones, smartphones, etc.. The computing power of these devices combined with their relatively light weight and durability comes, in large part, from the natural resources and metals used to make them. Many of these metals are rare earth metals or something similar (ex. Beryllium). The metals used to make things like smartphones often have very low substitutability and supply risks are created. Below is a map of the production of "critical raw materials" as determined by the European Commission.

Due to the "progress" and "growth" that we've had coming from inventions like smartphones and computers, the supply of many of these metals--include rare earth metals--are critical for economies to function. It's also important to note that the extraction and refinement of these kinds of metals can be very damaging to the environment. There's a reason why most developed countries (and most countries period) tend to not allow or carefully allow the refinement and extraction of these metals that are so important for maintaining global demand.

Although the extraction of these metals increases GDP growth, technology, and production in the countries supplying these metals, the costs of such policy affect the whole world in the long run. In other words, all of the costs are hidden in the tails while the benefits are obvious and immediate. If we were to take China as a classic example, there's a real possibility that China could wipe out entire mountain ranges in order to continue its extraction and refinement of these kinds of metals. This kind of thinking and behavior creates major tail risks.

Basically, what's called "progress" and "growth" is heavily dependent on the supply and transport of natural resources. Almost all of the developments in technology and productivity have relied on natural resources. Keeping supply lanes and trade routes to certain metals is extremely important with regards to maintaining "growth" around the world.

If there's a disruption in supply lanes and trade routes or if there's some kind of event that reduces our ability to extract, refine, distribute, or trade natural resources, global growth will come smashing down. In other words, there are major economic/financial risks created when we realize the importance of natural resources. In this post, I primarily described the relationship of minerals used in making certain technological devices (ex. smartphones); however, similar arguments apply to the transportation and shipping of things like oil and natural gas.

We cannot look at risks towards economic systems if we do not look at natural resources or geography or geopolitics of some kind. All of these factors are critical to the success and failure of economic systems.

P.S. I've got nothing against smartphones. I actually own a smartphone. It's just a very good example for the point I'm trying to make.

1 comment:

  1. IMHO dynamics that rules current world affairs is pushing China out of the markets where it tries to obtain real acquisitions, mainly resources and keep it in T-bonds and Anglo-American controlled markets. "War on Terror" coincided with Chinese "Going-Out" policy.

    What is more stunning is the fact that there doesn't exist any direct pipeline between Russia and China. It supposedly is to change soon.

    Interesting times ahead. China is completely surrounded by US military. It's everlasting Mackinder's war for World Island.

    You are right, it's all about resources