This post is part of a series.
Part 1 – “The Coming Economic (R)Evolution” discusses the rise of technology and the creation of digital businesses that no longer need labor or capital…and why understanding their impact on the economy is necessary to navigate the shifting investment landscape in the coming decades.
Part 2 – “Empire(s) of the 21st Century” discusses how technology has eclipsed geography as the most important factor in geopolitics…and why this could potentially shift geopolitical competition from “country vs country” to “country vs tech”.
Part 3 – “A Physical World Under Siege” discusses how geography ensured US global supremacy…and why technology is destroying that geographic advantage.
Part 4 – “Democracy and the Fragmentation of the Internet” discusses how technology is undermining democracy by creating divisions within our governing system in ways that it was never designed to handle…and how investors should approach technology in a fragmenting world.
This is Part 5 where I will discuss how technology reshuffles the global geopolitical deck, potentially freeing lagging countries from poor geopolitical and economic cards…and why this creates opportunities for tech investors in developing markets (while complicating geopolitical affairs).
One of the most important themes running throughout this series is how large of a role geography has historically played in shaping our world, our countries, our cultures, and our pasts.
For example, most of the countries you know and the shape they resemble are more likely than not to have been defined by geography rather than people.
Most countries have their borders naturally defined by protective elements like mountain ranges and bodies of water. Even rulers as powerful and ruthless as Alexander the Great, Genghis Khan, and Napoleon had issues keeping sprawling empires together when the shape of those empires defied its natural borders. While these rulers had enough power during their life to temporarily set their borders at unnatural locations, sooner or later, the cost of defending borders not protected by natural elements simply became too great to bear.
Even culture and personality traits are influenced by geography in ways that few people think about. Though Capital Flywheels currently cannot resurface the anthropological study from which the following statement is based (I read it more than a decade ago)…hopefully it still makes some logical sense: Roughly, if you are a descendent of peoples / cultures based on coastal locations, you are more likely to be entrepreneurial and open-minded compared to people with ancestors from secluded inland geographies. This is because coastal cultures were more likely to have to deal with foreigners and were more likely to engage in water-based trade. Water historically encouraged foreign engagement in ways that land did not and could not. Over the centuries, this has led to soft selection for coastal people and cultures that are more likely to be open-minded and entrepreneurial because these traits were more able to take advantage of the coastal environment and foreign engagement. Being a conservative living on the coast was and is a handicap for most of history. This is not just a modern American / East or West Coast phenomena!
Geography defines us in ways that run deeper than most people are aware of.
But what’s really interesting (and important) is further exploring how much geography has defined countries beyond just its shape. Because advantages in one area often creates advantages in other areas. An advantage n geography very likely creates advantages in everything else that matters including education, economic productivity, and political stability.
Or stated differently, bad starting geography almost condemns a country to mediocrity in every way imaginable!
This concept is pretty easy to see and understand if you’ve played games like Civilization 6.
Capital Flywheels is a huge fan of learning through video games. Like your Excel model (or your supply / demand model if you’re an economist…or your viral infection model if you’re a virologist…or your…etc), the world is easier to understand when we can abstract away things and focus on core key drivers. Games like Civilization 6 are essentially simplified models of the world when it comes to geopolitics and development in the same way that an Excel model is a simplified version of the company you are trying to analyze. It’s not meant to be a perfect representation, but when used correctly, Capital Flywheels believes it can do wonders for understanding the world in a specific way.
And don’t just take my word for it. Even Shopify’s founder, Tobi Lutke, has repeatedly mentioned the power of learning through video games such as Factorio [a game about factories and supply chains], like so:
Patrick: [00:30:09] Can you describe the game Factorio, what you do in the game and how it relates to this idea of systems?
Tobi: [00:30:16] I’m a card-carrying member of the ‘video games are really good’ club, I guess. I don’t think that’s that small of a club. It just randomly not a lot of people openly carry that particular card in the business world, I find. I’m making a conscious effort to say there’s nothing wrong with playing video games. Video games are amazing. I learned so many things in my life from video games.
…
Obviously not all video games are created equal. I tend to point out a couple of which are extremely valuable. Factorio is one of those where I straight up say, it’s the one video game that everyone at Shopify can expense because it’s just bound to be good for Shopify if people play Factorio for a little while. Because part of Shopify is building warehouses and fulfilling products for our customers. We are building global supply chains, which is six networks. And Factorio is kind of something that makes a game out of that kind of thinking.
Source: Invest Like the Best: Tobi Lutke – Building a Modern Business
And when you play games like Civilization 6, you will quickly realize how difficult most geographic situations are.
For example, consider the “starting location” of a country like Egypt. Egypt is rightfully recognized as having created one of the most sophisticated civilizations early on, but it’s not that hard to see why it was very hard to progress too far from that starting point both geographically and developmentally:
Source: Reddit
Egypt benefitted from the fertility of the Nile, but once that was exhausted / utilized, there’s not much else that makes that geography even remotely attractive…
And even worse, Egypt is situated on wide open land. This is very bad from a defensive standpoint. It makes it easy prey for any number of neighbors to come in and interfere with Egypt’s development (which is what has happened throughout Egypt’s 5000 year history). Early on, Egyptian society rightfully assumed the Sahara (a wide open desert) to be a natural defensive barrier, but of course, the development of technology would eventually erode that advantage. And once that advantage went away, Egypt became widely exposed (before even considering Egypt’s exposure to the North via the Mediterranean Sea once sea travel became commonplace).
The combination of limited attractive land for development and lack of natural defenses makes it extremely hard for Egypt to progress developmentally because you have to spend an insane amount of effort fortifying defenses and tilling / improving the land. All of this effort is effort that cannot go into more advanced development like education and technology. As a result, you end up with an Egypt in 0 B.C. under Roman rule that was not that different and not that much more advanced than Egypt during its golden era in 2000 B.C. And even today, 2000 years later, Egypt is arguably only marginally better off than where it was 2000 years ago…foreign powers from all over the world are still interfering with its affairs today, especially since it sits right on top of the Suez Canal.
Geography has condemned Egypt. (And something similar can be said about most of the Middle East.)
Now consider Greece’s starting point.
Source: Reddit
What you’re looking at is the Greek peninsula overcrowded by the various Greek states (there were more states in actuality, but the game currently only includes 4 playable Greek / Hellenic states – also, note again, this is a game so the locations are not 100% accurate, but that’s not necessary for the points I’m going to make).
From a resource perspective, this land certainly looks a lot better than Egypt. Athens has the most protected spot on the southern tip of the peninsula, but all the states are in decent locations. The land is green and workable. There are some natural barriers in the form of bodies of water as well as mountain ranges to the north.
Without having to worry too much about defense and improving the land, it’s easy to see why Greek states were one of the earliest civilizations to have the freedom to invest in advanced technology, culture, and political governance.
In modern society, it’s easy to think of everything as a necessity, but in reality, for most of human history, there were only two true necessities: 1/ Food, and 2/ Defense. Unless either of these came easy to you because of the land / cards you were dealt, investing in luxuries like education, technology, etc was hard to justify.
(Though, it should also be easy to see why Greek states eventually ran out of steam…there just isn’t enough resources or land to support that large of a civilization, especially not that many separate states.)
Here’s another – Brazil.
Given Brazil’s modern-day prominence as a global power (9th largest economy globally as of 2019 and 6th largest country by population), you would hopefully guess that it’s decently well-endowed geographically.
And you would be right!
Brazil’s “starting point” includes a lot of resources and very fertile soil. The fertile soil is one of the reasons why Brazil is one of the largest agricultural exporters in the entire world today.
And a lot of land for natural expansion. If you “play” Brazil, it’s not hard to see why the land would make it easy for you to become a global power.
More importantly, all that land is mostly protected, especially by the large Atlantic Ocean to the East. The only exposure Brazil really faces is to the South (Argentina), which interestingly was one of the modern-day countries to almost successfully invade Brazil in the Paraguayan War in the mid-1800s.
However, if you look closely enough (or play long enough), you will also quickly realize that certain things make the land difficult to manage.
There are a lot of hills…which makes it a beautiful tourist destination like Rio!
Source: Rio Cultural Secrets
But good luck trying to develop that land and connect the country into a coherent piece…
One of the most fascinating examples of the difficulties of the Brazilian geography is to consider the logistical challenges that have served as a barrier for e-commerce adoption. Years ago I visited Brazil when Mercadolibre was still a wee-tiny company (~$5 billion market cap vs ~$80 billion today). At the time, Mercadolibre (and all e-commerce players) were routinely taking as long as 2-3 weeks to deliver packages. Obviously, if it takes that long to deliver a package, few people would want to try e-commerce (unless it is very cheap).
You are likely an Amazon consumer and hence can compare Amazon’s 2 day delivery promise against the 2-3 week wait times Brazilians faced just a few years ago. It’s night and day.
But to understand the true difficulties of the Brazilian geography, consider how long it took the Pony Express to deliver a letter (literally by pony) across the US in the mid-1800s:
Operated by Central Overland California and Pikes Peak Express Company, the Pony Express was of great financial importance to the U.S. During its 18 months of operation, it reduced the time for messages to travel between the Atlantic and Pacific coasts to about 10 days.
Source: Wikipedia
The US is relatively flat and endowed with beautiful, beautiful geography – It literally took just 10 days by pony to go across the US almost 200 years ago! The US was able to deliver a package across the country in the same amount of time almost 200 years ago as it did to deliver a package across Brazil just a few years ago!
Needless to say, the investments that are necessary in terms of infrastructure to make Brazil a traversable and connected country requires a lot of investments that otherwise could have gone into other important areas like education, healthcare, etc.
And that is before discussing the Amazon jungle…the Amazon jungle is very hard to tame and traverse. And the Amazon unfortunately covers up a lot of Brazil.
But regardless, Brazil has ore going for it than most other countries have in total, and that alone has allowed Brazil to excel in more advanced things like education and technology (for example, one of the world’s leading airplane manufacturers is Embraer, a Brazilian company), despite some of the challenges of the geography.
Now consider a country like China:
Source: Reddit
You know what?
That is a beautiful piece of land!
No wonder the Chinese for well over 2000 years have considered some of their lands to be “heaven on Earth”.
It’s quite fertile. It’s very big. And it’s generally quite flat unless you move too far west.
It’s easy to see why China’s geography allowed them and might have guaranteed them to be one of the relevant global powers throughout most of history. China is relevant now, but it’s not uniquely relevant now. China has been highly relevant for most of the last 2000 years except for periodic moments of distress.
Because resources have been decently abundant throughout most of its history, it has enabled China to invest more than most other countries into things like education and technology. China’s tradition of education began during the Han Dynasty 1500 years ago and remains though today. And investments in education and technology helped China discover important innovations like paper making, gunpowder, and compass / celestial navigation hundreds of years ahead of peers.
Advantages in geography often create advantages in other areas.
But as good as China’s geography appears, it does have its challenges, which have contributed to the cyclical nature of China’s history (despite it being one of the few civilizations to have lasted thousands of years). China has a natural defensive barrier to the East (the Pacific Ocean) and to the Southwest (the Himalayas), but it only has a semi-weak barrier to the Northwest (the Gobi desert). It should be no surprise then that every time China is invaded, it has been to the north. Whether it is the Huns, Mongols, Manchus, or even the Russians (China has a history of distrusting the Russians, despite what 50+ years of shared Communist history may suggest…). And of course, eventually with deep sea navigation, China also became exposed by sea to European powers and Japan.
In addition, while China has natural barriers to the Southwest and Northwest, China is not really one people (though this is a very controversial point in modern-day China). Han Chinese mostly live on the coasts and the center of the country. These areas are actually quite far away from the natural barriers. China has had to expend significant efforts over the centuries in order to control (effectively) non-Chinese people in order to push the borders all the way to the natural barriers. This includes control of areas like Tibet and Xinjiang, which are only questionably “Chinese” though have been under Chinese influence and control for hundreds of years. And China has had questionable success in controlling it over the last 1500 years.
And then it brings us to the single most unfair point the whole world has a hard time accepting – The US is endowed with quite literally the best piece of land in the entire world.
The US’ geography is so much better than anywhere else on Earth that it has allowed the US to go from quite literally nothing to leading the world by a large margin in just over 200 years.
It is this fantastically unfair geography that has allowed a people and culture that for 150 years believed in isolationism (“we’re so far away, let’s not worry about or entangle ourselves in the Old World’s affairs”), to suddenly start interfering with the rest of the world whenever it likes without so much as a care or much of a consequence (unfortunately).
Consider the US’ “starting hand”:
It’s large. It’s fertile. It’s almost entirely flat…(Another reminder that the Pony Express was able to get letters across the US in 10 days in the 1860s! This is something Brazil struggles with today even though it is smaller than the US and has advantage of modern engine technology…).
It’s not readily apparent in the image above, but as you likely well know, the US also has extremely advantageous defensive barriers as well.
Most countries have one or the other, but not both.
The US has both – A lot of really good land, as well as extremely defensive barriers. The east is protected by the vast expanse of the Atlantic Ocean. The west is protected by the vast expanse of the Pacific Ocean. The south is protected by the Rio Grande / deserts / mountains. And the north (Canada) is a very cooperative ally.
It shouldn’t be a surprise then that this geographic starting hand effectively guaranteed that the US would become the world’s most relevant country in short order.
To some extent, the US faced the same ethnic issues that China currently faces today, though. Similar to how China has had to subjugate non-Chinese people in order to push their borders to its natural position, the US has had to subjugate non-American people to accomplish the same. The only difference is that China is still trying to convert those people culturally (maybe now a little more forcefully), whereas the Americans (in a very dark part of history that has been almost completely papered over) largely killed off the native population through a combination of war and disease. If the non-X cease to exist, then the “problem” ceases to exist. And so it went…
Furthermore, geographic advantages often create advantages in other areas.
Because the land is fertile, less Americans needed to work on the land to feed themselves. Within 150 years of establishment, only 2% of Americans needed to work the land to feed the remaining 98% of the population. The people that were freed from the land were people that became the driving force for industry and scientific and technological development.
Simply put, if people were not freed from the land and needed to spend 12-16 hours per day tilling the Earth in order to feed themselves, it would have been impossible to imagine how the US would have excelled as much as it did because there would be no industrialists, no scientists, and no technologists to enable everything that has happened between the late 1800s through today.
Even in a highly modernized / modernizing country like China today, still close to 1/3 of China’s population tills the land. And even then, China still needs to import a significant amount of food stuff from the rest of the world to feed the population. In comparison, the 2% US population that farms the land not only feeds the remaining 98%, but produces so much that the US is one of the world’s largest agricultural exporters, feeding foreign nations like China.
But as you know, we have previously discussed why technology is changing all of this.
We’ve already previously discussed how technology has eroded the advantages of the Pacific and Atlantic Oceans in the prior post, “A Physical World Under Siege“.
In a way, technology has shrunk the world and has allowed foreign adversaries to penetrate the US without ever having to cross the oceans (physically). Adversaries can cross the oceans digitally and mostly invisibly now.
In a way, technology is eroding our two (free) ocean assets much like how time and technology eroded the protected Sahara desert for the Egyptians.
But it goes beyond that.
What technology is doing is not just eroding some of the most important assets that were (perhaps unfairly) endowed to this country, but it is also improving the hands that lagging nations were dealt.
It is not just weakening the competitive position of the US geographically, it is improving the competitive positions of nations that historically have been disadvantaged.
Digital technology cannot change the layout of the land or the farming productivity of the land much, but it can change a whole lot of other things…this is especially important because global economies are becoming less and less dependent on agriculture and even heavy industry. As more and more of the economy shifts to sectors that are not dependent on the land and layout of the land, the advantages that geography affords should also change.
This should make intuitive sense to you – If everyone’s economy is digital, then what truly differentiating factors would the internet in America have over the internet in the UK, France, Germany, China or even less developed nations like Brazil, India, or Indonesia?
The internet is the internet. The internet has no geography. There is no bad geography when it comes to the internet. The internet is all the same no matter where you are in the world!
But, the internet does have the power to increase productivity. And the more “bad” your geographic hand is, the greater the potential improvement.
For example, consider a country like Russia. Russia has a lot of land. But a lot of it is pretty bad. Russia ended up with most of this land largely because most other countries that could have competed for that land decided it wasn’t worth it.
And this land historically had very limited use in an agricultural society.
Because…it’s frozen for most of the year!
Here’s what a Russian spring looks like:
Source: Russia Beyond
Now, I’m sure there are some nice spring days in Russia, but those are more likely rare than not.
And when the land looks like that even in spring, it’s hard to see what you can do with it if your economy is tied to the land. Historically, Russia has relied on (what is modern-day) Ukraine for agricultural output, for example.
In fact, Russia did not hit its developmental stride (several centuries behind Western Europe) until the proliferation of modern-day industrial technology helped alleviate a lot of the disadvantages of this land.
In addition to being frozen for more months than other countries (which is a problem for agriculture), Russia is also closer to the pole than most other countries. This is a double whammy. This means that not only is the weather worse, it also means that Russia gets less light during one half of the year and an overwhelming amount of light in the other half of the year.
In Winter, parts of Russia experience 20+ hours of darkness. And in summer, parts of Russia experience 20+ hours of sunlight. Overall Russia experiences a similar amount of light and dark (throughout any given year) as any other country but with a more extreme distribution of light and dark. Unfortunately, humans do not work that way. Humans cannot “store” sleep. Russians cannot sleep 20+ hours during winter, only to be hyper-productive during summer when there is 20+ hours of light. Life simply doesn’t work that way. This means not only is Russia disadvantaged when it comes to agriculture, even for most of the industrial revolution, it’s been more challenging simply because even the lighting situation is not favorable. And this is not a problem unique to Russia. It’s also true of any country far to the south (close to the South Pole). And countries too close to the equator also experience suboptimal light and heat.
Geography tends to seep into life in more ways than most people can imagine unless you’ve traveled extensively (and most modern tourists travel during the high season, which means most tourists are spared from the truly disadvantaging situations a lot of geographies are endowed with).
This is not just Russia.
Most countries face a lot of geographic disadvantages like this!
In fact, the most optimal geography is in a very narrow band between the equator and the pole. In this narrow band, you get a very nice temperate climate. Not too hot, not too cold. Not too much life and dark variability. This is the climate of the US. This is the climate of parts of West / North Europe. This is the climate of parts of China. But other than that, most of the world is pretty disadvantaged!
These disadvantages are on top of the other disadvantages we’ve discussed in terms of natural defenses and overall resource availability.
But the internet changes this.
Russia started to hit its stride when people stopped having to go outside and do things with their hands. The more and more the economy shifts toward industrial and eventually knowledge work, the less and less you depend on the land. In an industrial setting, modern-day technology like electric lights can entirely alleviate the geographic disadvantages of the solar cycle.
And in a knowledge economy, even more so! For example, eve if you have electric lights, if you are engaged in service work, it might still be quite hard to do your work. I’d imagine it’s pretty hard to run a restaurant or a service-type business in Russia during the winter even if you have electric lights and heaters. Yes, you may be able to work, but your customers might not be all that enticed to go out.
But as more and more work becomes knowledge-based and digital in nature, the more and more your economy can totally disconnect from the land.
And the worse your land is, the bigger the bump you can get from adopting digital technology.
I’ve traveled to a decent number of countries searching for investments over the years. Nothing ever stands out so much to me as the 1-3 hours it takes to go from Sao Paolo airport to city center. Or the 1-3 hours it takes to go from Delhi airport to city center. It’s not even a far distance…just about 10 miles.
Part of the issue is infrastructure, but a lot of it is just the land! And if all your workers are subjected to this “tax” every single day, it’s a real drag on the economy. Time stuck in traffic is time not spent on producing GDP or progress.
But in a digital world, suddenly Delhi and Sao Paolo are on more equal footing. No matter where you are in the world, if remote digital work becomes the norm, suddenly a lot of countries are on more equal footing with the developed world than many developed countries realize.
Years ago, when Alibaba first went public, there was a lot of skepticism about the business.
For example, Barron’s ran a pretty scary cover story about how there was potentially >50% downside for Alibaba stock (when the stock was at $64!):
Source: Barron’s
While there are and still are reasonable areas for skepticism, a lot of the original skepticism turned out to be unwarranted. In particular, there was a lot of skepticism around whether Alibaba’s success is even possible because it would suggest that China / China tech was somehow outstripping the US in terms of penetration and spend (this was a major narrative violation in 2015 against the prevailing narrative that China tech was still a copy-cat industry lagging the US):
Perhaps more troubling is the seeming improbability of the growth numbers reported by the company over the three fiscal years ending in March.
…
Consider this: Alibaba claims to have 367 million users—about the same as one government agency’s estimate of China’s entire online-shopping population. Or this: Alibaba’s data suggest that its average customer’s annual spending on its sites amounts to nearly 75% of what the average U.S. online shopper spends on all sites. That’s hard to square with American consumers’ far greater affluence and ability to avail themselves of a vastly more developed e-commerce ecosystem.
Source: Barron’s
Or…here’s well-regarded Bronte Capital’s skepticism in 2015 regarding the plausibility of Alibaba’s delivery volumes:
So there was 278 million deliveries for a total prospective 650 million users. In one day! The question is how much bigger can this get and what drives it to be bigger?
I then pointed them to official numbers that said that Amazon (worldwide) had 244 million users. That was 244 million separate accounts made at least one order in the past twelve months. The Amazon numbers are here.
Alibaba delivered more parcels in a single day than Amazon had users in a whole year.
…
We should also note the scale of the 8.6 billion packages the network claims to have delivered. UPS delivered 4.6 billion packages per year and had 435 thousand employees, 539 aircraft (including charters), about 100,000 delivery vehicles and almost 2000 operating facilities. [UPS factsheet here.]
Source: Bronte Capital
And skepticism around Alipay’s transaction volumes:
Visa’s peak transaction volume globally is only about 30 percent of Alipay’s peak minute. This suggests a level of shopping in China that puts the US, Europe and most of Asia to shame.
Source: Bronte Capital
To be very fair and clear, Bronte Capital suggested that these claims are worth testing, not that these claims are impossible.
But what it does illustrate is that the prevailing world view in the developed world is that it’s very difficult to see how developing nations can leapfrog the developed world when it comes to technology. It’s very hard to imagine how Alibaba could have higher e-commerce engagement than Amazon or how Alibaba could have more deliveries than UPS + Fedex globally or how Alipay could have transaction volumes far higher than Visa + Mastercard globally.
While technology adoption is certainly hard when it comes to hardware and infrastructure technology like 5G telecom systems or satellites or rockets, etc, it’s actually not true when it comes to software.
China has certainly shown in the last 5 years that it is possible to leapfrog the US when it comes to software in some areas.
Fundamentally, the developed world seems to misunderstand the development advantages that geography has afforded them.
Good geography has allowed countries like the US, UK, and France to invest less into agriculture and defense, which allows them to invest earlier and faster into higher value areas like education and technology. But a lot of education and technology development is still highly tied to the land (e.g. education is still very much an in-person experience, and technological development still requires a lot of physical equipment and physical collaboration depending on the sector). It isn’t until the advent of the internet and widely distributed software that this fundamental link to the land can be somewhat broken.
China wants to tell the story that it is unique in this regard.
But it’s likely not true.
In fact, in the next 10-20 years, I believe a lot more of the developing world will adopt a lot more software and technology in a way that is very similar to what China has accomplished in the last 10 years.
They’re already doing it, but few people other than those that spend a decent amount of time looking at places like Brazil, India, or Indonesia have realized this.
But it’s happening.
And when that happens, these developing countries will suddenly start to close the gap with the developed world in a very fast way in some areas.
And that will be an interesting world and an interesting future.
Humans have been on this planet for close to 300k years. Human recorded history extends back at least 5000 years.
Yet for almost all of that history, the world was a very unfair place. And the greatest source of unfairness was literally where you were located. Good luck trying to create a robust agricultural economy if you lived in the desert. Not only did you have to try harder, you likely got less out of it.
But with the adoption and proliferation of software, and the shifting of our lives from physical space to digital space, a lot of those advantages and disadvantages are and will be reset.
In a way, technology is currently resetting the world and reshuffling the deck.
But nothing is ever truly free of this world. Even if the link to the physical world is thinning, there still is and will always be a link. Who will control those links? Will they be private companies or governments? And how will those that control those links leverage that power to influence the development of the digital world?
But most importantly, who understands this game? And who knows they’re playing it?