Home Economics The Global Economy: Should We Take The Road Less Travelled?

The Global Economy: Should We Take The Road Less Travelled?

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May 25, 2017

Whenever the devil in you wants to see a spectacular economic fall from grace, look no further than Japan. After decades of strong economic growth, culminating with it becoming the world’s third largest economy in the latter part of the 20th century, growth has stalled in recent years, igniting strong fears regarding the long-term future of the Asian country. From Japan’s much publicized aging population to its astronomical debt to GDP ratio, the future looks bleak for Shinzo Abe and his countrymen, with no solution to its financial woes foreseeable.

Regardless, if much of the developed world want to stop themselves from plunging into the same economic quicksand that Japan finds itself in now, they need to look at the country and examine exactly where it went wrong. Only then can they stop history repeating itself, but with them being the victims, rather than the country across the waters. This is because the Japanese have many of the same problems that many developed countries such as the UK and USA have, but are simply feeling the pinch sooner, rather than later. To save ourselves from an economic depression, we need to learn from Japan’s horrendous situation, rather than simply standing by and watching.

One of the media’s most publicized stories about Japan is its aging population. With 1 in 4 Japanese being over 65, it is clear that the Asian country does not have much in the way of a substantial workforce. The main problem with an aging population is that it means that there are simply not enough people of a working age in a particular country, decreasing the total productive capacity of that country, hence decreasing GDP and GDP growth. When this is combined with the increased dependency ratio that Japan now faces, the problem seems almost insurmountable.

However, the most worrying thing about this is that the exact same thing is set to happen in many developed countries such as the aforementioned UK and USA. By 2050, the number of Americans aged over 65 is projected to reach over 80 million, with their percentage of the total population going over the 20% mark. From these harrowing figures, it is clear to see the direction in which the USA is going with regards to age, and therefore with regards to productive capacity. For a nation which is as dependent on industry as the USA, the problems associated with their population getting older, and hence their numbers of industrial workers dwindling are huge, and could perhaps result in economic growth completely grinding to a halt, or maybe even turning negative; a massive roadblock for one of the biggest economies in the world.

It has long been an economic axiom that debt is a large impediment to the growth of an economy, and this is proved even mores true when you look at Japan. In 2013, the public debt of Japan increased above a quadrillion yen (over $10 trillion), bringing their debt to GDP ratio to over 200%. This carries with it massive economic implications: nearly all the money that the Japanese government receive will have to go towards paying back its monstrous debt. This means that Shinzo Abe and his fellow policymakers will not have the funds to spend and improve Japan’s public services and infrastructure, thereby decreasing the standard of living for many Japanese citizens. This is a financial ailment which is echoed by their US counterparts, with their debt to GDP ratio reaching 102.98% in 2014.

Although not as severe as Japan’s, this is still growing and is showing no signs of stopping, with senior US policymakers acting as if they have an infinite debt ceiling, and eventually, it is a huge possibility that the US’ situation could very well reach the gigantic proportions that Japan’s has. This does not just have immediate ramifications confined within US borders, but given the US’ global stature, it has the potential to cause shockwaves all over the world, very possibly triggering another global depression.

A great reduction in aggregate demand has also been one of the prime factors behind Japan’s downfall. It has long been well known that Japan has a severe lack of consumer spending, with the Asian nation having consigned its citizens to hoarding, rather than spending. With the reduction in real purchasing power that the Japanese have seen in recent years, it would be illogical to blame them for not spending as much as they would otherwise, as they simply do not have the sense of economic security that they once did.

However, the real surprise regarding this lack of consumer spending is that the exact same thing, again, is beginning to happen in the USA. In December 2015 in the USA, spending on both durable and nondurable goods dropped by 0.9%, a clear indication that many Americans are turning to saving rather than spending. Of course, this results in a decrease in John Maynard Keynes’ positive multiplier effect, leading to a reduction in economic growth, a reduction in the purchasing power of the average American and also a reduction in the overall standard of living. If they do not amend their ways, America has a real chance of ending up like Japan, a nation of could-have-been. Although the USA has achieved a great deal in its time, they must look east to their Asian counterpart if they want this prosperity to continue.

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