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National Debt: Is it about Confidence?

Posted by Bhushan Singh on Monday, 29 August 2016 in General

In a report by Ian Bremmer it was noted that while Greece with a debt to GDP ratio- in the vicinity 173%-   has been the highlight of the news in the recent past; few might realize that Japan’s debt to GDP is in the vicinity of 229%.  For comparison Trinidad and Tobago has a debt to GDP ratio of 41.6%. For Greece and Japan that is a staggering amount of debt to be carrying you may say.

But it warrants further analysis.

Few might have expected Japan to be carrying such a huge debt burden. But on closer examination of the news reports you would note that Greece appears to be on its knees whilst Japan doesn’t seem to bat an eye.

How could this be true?

Greece is also part of the European Union and has the Euro as its official currency. The total nominal GDP of the EU (2015) is about $16.2 trillion and 20% share of global gross GDP by Purchasing Power Parity. The five largest economies in the world according to the IMF by nominal GDP (2014) are the European Union, USA, China, Japan and Brazil.

So how does this translate into the real world?

Greece as you know would have been literally begging for bailouts and the conditions of the bailouts have been austere to put it mildly.

A Different Brand of Bailout

National Debt Is it about Confidence 02

However, while Greece’s 10 year bond yield is around 11%, in Japan it is 0.4% and now into negative territory for the first time.  That was not an error. You read it correctly.

If we take a look at how each of the country’s debts are structured we would notice a difference.

Greece uses the Euro which is controlled by the European Central Bank. That would mean Greece doesn’t have control of its currency. Japan has control over its currency as its policy makes the latitude to deal with the economic trials. These can vary from stimulus to belt tightening as required.  In January the Japanese Central Bank decided to apply a negative interest rate so banks now had to pay for money held in reserves. This forced banks to now put that money into circulation to get the economy moving. Notice the private sector involvement in development.  Another important factor is that most of Japan’s debt is domestically owned. The majority of the Greeks debt is foreign owned. But there is more to this equation.

Japan: Samurai Nobility?

Japan Samurai Nobility 03

The World Justice project ranked Japan 11th  best for countries with the absence of corruption; Greece was ranked 49th. If we examine the public institutions in Japan they are perceived to be relatively strong while Greece’s are terribly inefficient. Some estimates indicate that Greeks owe more than $90 billion in unpaid taxes.   

Allegations of corruption were leveled against the Japanese Economy Minister Amari. He denied any wrong doing but accepted responsibility and resigned nevertheless. It is actions like these that instill confidence in public institutions and in turn this translates into increased confidence in the country.

National Debt Is it about Confidence 04

You would note that historically Japanese CEOs take responsibility for any wrongdoing in their companies. The strength of Japanese public institutions carry over and is reflected in the confidence investors have hence the low bond rate.

The Country in the Mirror

The Country in the Mirror 05

Here in Trinidad and Tobago we are currently experiencing a great deal of uncertainty in the price of our main exports and additionally a decline in the production of oil and gas. In 2015 real GDP would have contracted by 2% and we have been downgraded by the international rating agencies. We are currently experiencing budgetary deficits and are looking for ways to finance the deficit.

How are we going to deal with this current economic situation?

Are we going to try to wait it out and see if oil prices rise above the $50.00 per barrel mark? Or will we now make the policy shifts to take us beyond oil and gas to reduce our dependence on commodities for which we are price takers?

Public Institutions: Hidden wealth?

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While I believe we are making some steps in the right direction especially with regards to fuel subsidies; what about the strength of our public institutions?

It is estimated that up to 40 % of government expenditure is either stolen or wasted. Shocking isn’t it? Imagine if our deficit was cut by 40% due to increased efficiency. Now wouldn’t that be a confidence builder.

With this increased confidence we can then proceed to discuss the deeper issues involved in nation building. Apart from the macroeconomic fundamentals, efficient and effective public institutions are necessary for increasing national competitiveness.

Despite our great monetary windfalls of the past we have not taken the significant effort required to strengthen our public institutions. Perhaps it was the very windfalls that prevented us from doing it. Maybe we should make the effort now to increase efficiency and productivity in public institutions. We may not have the luxury of time as these economic shocks can come overnight.

Strengthening our public institutions is not about increasing technology or people by itself, it’s about public institutions functioning efficiently and having a positive impact on the people that they serve. This is how confidence is built. This is what development is supposed to do.

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Apart from how much you owe, it is important that the other parts of the national competitiveness equation are in place.  It is easy to let the status quo go on ad infinitum but then we all pay the price in the long run. We may not have control of all the external economic forces but we must do what we can to ensure that internally we are best prepared. This is how trust and confidence is developed.


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