2008/10/15

Japan and the risks of a huge government debt

Japan - a country of 127 million people, highly industrialized economic powerhouse and one of three Western outposts in East Asia.
The country is just pacifist due to its constitution, but is eroding this limitation by military participation in overseas missions.
It might build a powerful military to deter the PRC in the future.

Right? Not really.

Japan was the horror of European industries around 1990 when Europeans hurried to understand the efficiency of Toyota's automotive business and Sony's miniaturization of consumer electronics, as well as other advances of Japan's industry.
Shortly thereafter Japan fell into a long-lasting economic crisis and its governments reacted wastefully with somewhat Keynesian fiscal policy, lending more and more money for more and more spending in an attempt to jump-start the economy again.

Japan is still a rich country with a very positive trade balance and a capable industry. The Japanese central government isn't financially strong, though.
The government debt is a disaster. It's somewhere close to twice* the GDP (gross domestic product).
It's a disaster, catastrophe, calamity, debacle, cataclysm. Terrible.

A government with a debt of about 80-100% GDP or more is very hard-pressed to fulfill its basic services and pay the interest, but never in an acceptable position to enter an arms race.

There are such governments in the NATO as well.

Government debt:
Italy - 105.3% of GDP (2007)
Greece - 94.5% of GDP (2007)
Belgium - 94.3% of GDP (2006)
Spain - about 70%, but Spain has a terrible trade balance deficit

The typical old NATO member state has a government debt of 25-70%.
The Eastern European NATO members have rather low government debts, 25-40% is typical.
This is sometimes just the federal debt and does probably not include obligations like pensions or debts of parafisci (non-state budgets like national social insurances).

Spain and Italy - two major European allies with financial/economic long-term problems that exceed even the (significant) long-term problems of countries like Germany, UK and France.

Many Western nations have quite mature states and economies, and piled up problems over decades. The vitality of the 60's is long gone, and we should recognize the 'new' situation: Our nations don't have much power reserves to mobilize in situations that are no total war. It's even questionable whether the current military spending levels can be sustained (in % of GDP).

This government debt situation has certainly implications for the ability to spend the same or more on military power in the future. The Grand strategy of NATO and its nations should attempt to avoid large arms races due to its mature and not vital enough economies/societies/governments.



*: (The CIA World Factbook mentions both 170% (2007 estimate) and 182% (probably a more recent figure). A recent article in the Financial Times Deutschland tells about 199%.)

Sven Ortmann

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