A Q&A with Parag Khanna on why supply chains will rule the world.
Second in a series of conversations during Infrastructure Week. See the previous Q&A with Dan Katz, Transportation Policy Counsel at Hyperloop One.
One person who has never lost faith in the long-term trend toward a more tightly connected global economy is Parag Khanna, a self-described “geo-strategist” who grew up in India, the Middle East, America, and Germany, studied diplomacy at Georgetown and earned his Ph.D. at the LSE, and now lives in Singapore.
Khanna spends much of his time in and between leading global cities, meeting with businesses and governments to persuade them of the virtues of strengthening the economic and physical links between them. His recent book Connectography, published just over a year ago, is a guide to the world where megacities compete over the strength of their connective infrastructure and where supply chains are a more potent geopolitical force than nation-states. Khanna identifies Hyperloop as a catalyst for linking economies more tightly, so we thought we’d catch up with him to explore his latest thinking.
H1: One of Connectography’s main points, one that really resonates with us, is that functional geography [where people actually live and work] is becoming more important than political geography. Wanted to get more of your thinking on that.
Parag: I’ve been saying we need to transition from thinking about maps as political geography — antiquated, rectangular longitudinal states based on a vision from the 18th century — to a functional geography of connected urban hubs. The recent analysis done by urban geographers from Dartmouth College and the University of Sheffield, using data on millions of U.S. commuters, reveals how the functional geography of America is clustered around 40 particular urban nodes and corridors, more so than the political borders of the 50 states. You can see it in credit card data, too, and so many different ways. If we connect those hubs, we would become what I call the United City-States of America.
You can also see it at the international level. A lot of attention is going to China's One Belt, One Road initiative, but let's just take North America for example. Part of the reason you have politicians backing down from the plan to rip up NAFTA is the recognition of functional geography. Once you stop to think about how much timber, or oil and gas the U.S. gets from Canada, and how the automotive supply chains with Canada and Mexico are linked, and what would be entailed in a trade war, it makes no sense. The most important word in international relations is not sovereignty, it's reciprocity. Functional geography teaches us how much we physically and materially gain from each other every single day.
H1: You’ve been arguing for years that supply chains are an autonomous force in the world more powerful than any nation or military. Is global infrastructure strong enough to support that trend?
Parag: Supply and demand is the most powerful law in history and the most powerful organizing force in the world. Supply chains depend on infrastructure, and the more we have, the more frictionless supply chains can become. But in almost every single category the infrastructure we have is woefully inadequate. Even though there is a glut in the number of ships at sea, for example, there is a huge inadequacy in the size of port terminals. The largest container ships, like the Maersk Triple E class or the CSCL Globe, cannot dock at a single American port right now. Not even Los Angeles has a terminal berth tall enough to handle the world's largest ships. And so it sails between Rotterdam and Dubai and Singapore and Shenzhen. It doesn't come to America. There's inadequacy in aviation, in terms of the geography of certain fleets and airport congestion. In rail transportation, we have the stumbling inadequacy of the U.S. passenger transportation system, which is now looking at more funding cuts to long-haul Amtrak service.
“We need to transition from thinking about maps as political geography — antiquated, rectangular longitudinal states based on a vision from the 18th century — to a functional geography of connected urban hubs.”
Supply and demand might be a market principle but there's a qualitative element to it. If trains get stuck, no one is going to take them. But at the same time, if you build good transportation people will take it. The same will go for Hyperloop. If the administration says, well, no one's riding this Amtrak, therefore no one wants to cross America by rail, they're kind of missing the point, which is that, well, no one wants to ride *that* way of crossing America by rail because it takes too long. If you made it really good, the demand would be there to engage the supply.
I also think it’s important to point out the virtues of supply-led growth and investment-led growth — and the ability for connectivity to act as a catalyst for economic growth. A lot of Western economic theory disputes the value of supply-led growth, but I think the critics are wrong. China is a profound example that investment and supply-led growth begets demand. China's investment-led growth has had such a massive catalytic effect on the distribution of people and job creation across the country — and created a significant rebound since the financial crisis — because people were able to re-sort themselves geographically much more effectively with low-cost high-speed rail to find new jobs after the demand shocks to their manufacturing and export sector in 2009. The fact that Dubai and the entire UAE corridor is the fastest growing urban geography in the world is largely due to investment in infrastructure. Today's bright spots in the global economy have a very solid infrastructure.
H1: How might Hyperloop create even more frictionless supply chains?
Parag: I see a few options. The first is a supply chain solution for high-value goods. Cheaper things usually go by ship and the highest value things are either digitally transmitted or flown on planes. In between, you have this middle level where Hyperloop can compete for high-value goods in certain categories. Certainly, it makes sense for moving people. In Europe, rail has very significant passenger throughput because it is of higher quality and cities are not that far apart and trains can really cut the transport time. These are people for whom time matters such as tourists or people who conduct business in multiple places. There is very clear evidence that there is a very large unmet demand for human mobility between dense urban geographies — and the entire world is becoming dense urban geographies. In terms of the transportation of goods, Hyperloop may not at first compete for the huge volumes of freight that go by truck and rail, but because the infrastructure gap is so significant (especially in the U.S.), it's going to be a very long time before we see a lot of improved and expanded roads and highways or efficient driverless trucks come around.
“There's no question that agglomeration is a good thing for an economy and makes cities more productive.”
The issue is that it takes a long time for infrastructure to get done in America, especially with the public sector so heavily involved. It could very well be that the private sector can do a better and faster job at this, as was the case with chartered railroad companies of the 19th century. I see Hyperloop as the natural successor to the transcontinental railroads and interstate highway system, but a Hyperloop not for the 19th and 20th-century political geography of America but for the 21st century functional geography of America.
H1: Do you see the global economy becoming more on-demand, or is that just the view of an American jaded by Amazon Prime?
Parag: If Amazon is an example, it's a global example because the reason people say Amazon is going to beat out Apple and Google to become the first trillion-dollar market cap company is because it's expanding its on-demand model everywhere in the world, whether it's through Prime Air or drones or its expansion of warehousing and M&A in India and the Middle East and all over the place. Warehousing is a very fast-growing asset class in real estate, and the geography of warehousing combined with Hyperloop technology could be a really interesting way of fulfilling the global growth of the on-demand retail and e-commerce market. On-demand retail only works if it's backed by a very high-quality logistics infrastructure. Alibaba wouldn’t be worth close to $300 billion in market cap if it didn't have a speedy logistics network behind it. You need Hyperloop if you want to see that segment of the economy grow faster and to new heights in America and elsewhere.
H1: We talk about how Hyperloop can turn two cities into one to create a more economically competitive region. Does that theory hold up to scrutiny — that agglomeration is something all cities should achieve or seek to achieve?
Parag: There's no question that agglomeration is a good thing for an economy and makes cities more productive. That doesn't mean you want to have one giant built-up urban mass without a logic to it. This is what China has managed to avoid with its administrative configuration. China has 24-26 urban clusters and each is administratively re-defined to fuse and collaborate because they have better roads and rail networks connecting them.
The cities of the Pearl River Delta (see map below) have become the driving force in the Chinese economy because strong physical connections have allowed an incredible flow of product innovation and ideas. Companies have shifted their operations from Hong Kong to Shenzhen, and then Shenzhen to Dongguan, because these cities are more seamlessly connected and are clearly enriching each other from Hong Kong to Guangzhou.
There's no question that having these logistical agglomerations among cities increases the efficiency of commerce and flow of ideas within them. That's why we need to see this happen in the United States between Boston and Washington, between San Francisco and Los Angeles, and between Dallas and Fort Worth. The 4 states around Chicago want to plan their rail and transportation networks much more closely so there is a larger catchment area for the city of Chicago. Regional planners want the economic density and wealth of Chicago to radiate outward more efficiently into second tier city areas.
H1: What gets in the way of countries making the investments that have proven to work elsewhere in the world?
Parag: The usual litany of things, top of which is short-term fiscal thinking. Remember that infrastructure spending is an investment and not consumption, so governments should not be penalized by credit markets for making investments with very long-term economic payoffs. We simply need more appropriate accounting methods. Being a fiscal hawk is fine if you're talking about how to manage entitlements but it's not okay when you're talking about infrastructure because otherwise, you end up half-building a road. It's the ultimate paradox to issue short-term financial instruments to pay for long-term infrastructure. We also need financial regulations that allow insurance companies and big pension funds to hold infrastructure on their balance sheets as assets and not as liabilities. Infrastructure is the most stable asset class over time, and it's preposterous to have so many disincentives for these enormous pools of capital (pension, insurance, and private wealth) that want stable long-term assets. Every dollar spent on infrastructure has a higher return as stimulus than other kinds of stimulus. The massive monetary expansion by the U.S. Federal Reserve Bank of the last decade has delivered almost no measurable net gain in terms of long-term structural U.S. economic growth. We should be doing everything in our power to get these pools of capital into infrastructure.
NIMBYism and over-regulation are also problems. You need to have a certain alignment of forces at every level of government to push through approvals. You also need a shared, almost utilitarian approach if we're going to enable the new functional geography to benefit a large number of people as opposed to the old political geography of very narrow parochial interests defeating large, substantial national investment priorities. There's also disagreement over what to do: Should it be airports or should it be rail? I’m not a guns-or-butter type, I think it's all-of-the-above when it comes to infrastructure, because having studied this all over the world, I know the demand is growing. An America of nearly 300 million people has a barely adequate infrastructure. Now imagine an America of 400 million people and a North America of 600 million people by the year 2040 or 2045. It’s fairly obvious that it's not about this silly 2017 conversation about airports or rail — the answer is obviously both. Within our reasonable lifetime and fiscal planning period, we need to be thinking about serving almost twice as many people as there are right now. I don't know how to make people see that other than through maps...which is what I try to do all the time but, you know, this should not be a difficult conversation.
H1: Let’s finish up with a question about this trip you're taking next summer. It sounds epic.
Parag: We’re going from Scotland to Singapore, the furthest distance on earth that you can travel by continuous rail. No Hyperloop, unfortunately, but that's almost the point...to do it the slow way. It’s going to be about 3 months and the rule is you can't touch Russia because Russia makes it really easy with one rail that covers about ten thousand kilometers. So instead the route is going to cover Western Europe, Eastern Europe, Turkey, Iran, Central Asia, China, and Southeast Asia. The whole point of the trip is to highlight the fact that Eurasia, the world's largest land mass, is really a single continent. It has two-thirds of the world's population, ranks as the fastest growing economic zone of the world, and trade growth between Europe and Asia is expanding much faster than trade between either of them and America.
It’s an intellectual dream of mine to see the unification of the Eurasian continent. It's sort of what Genghis Khan thought he was doing —but that was back before we knew the world was round. Eight hundred years later, hopefully, we can achieve the same feat in a more peaceful way with railways as the unifying agents of this great land mass.
H1: Well, we'd also love to see it done by Hyperloop. It would take away some of the romance — Shanghai to Eastern Europe in less than 24 hours.
Parag: It might be less romantic but at the same time would be a lot more practical. But I don't do things unless they involve some degree of pain. We’re making this trip not just for the romanticism but to point out some necessary improvements. And that's obviously where Hyperloop would come in.