Today I will refrain from talking about the Middle East and switch our attention to Japan, which currently is facing probably the worst crisis since the Second World War.
Generally, people do not make any connection between natural disasters and geopolitics. History, however, shows that mother nature has always been a major player in politics. The rise and fall of Chinese dynasties were influenced by natural disasters. The Medieval Warm Period that hit the world between AD 950-1250 was a factor in the collapse of the Mayan Civilization and the establishment of Genghis Khan's "Golden Horde."
Of course, unlike in the pre-war period, Japan need not worry whether its neighbors will decide to attack during this disaster, as the United States and South Korea find that there are more to lose than gain from allowing countries such as China to invade. The Chinese themselves, of course, would not commit any diplomatic suicide by exploiting this crisis. North Korea might, but I am confident that even though North Korea might do something stupid, the pressures from Zhongnanhai will be so enormous to dissuade further action.
So why the analysis? For one, Japan remains the third largest economy in the world. It also contributes 12.5% of the United Nations' budget, second to the United States (22%), in addition to various foreign aid to third world countries through Japan International Cooperation Agency and other institutions. Furthermore, the fact that two of its nuclear reactors are close to meltdowns will have a major impact on debates on non-carbon sources of energy, nuclear proliferation, etc.
First, let us talk about the economic impact. We have yet to get an exact number of the total damage of this disaster to the Japanese economy, but I will not be surprised if this will further shrink the Japanese economy. As of today, the Japanese export industries are in standstill, and rolling blackouts, inundated factories, and damaged ports, notably in Eastern part of Japan, will surely not help stimulating exports.
While we can argue that the reconstruction in the aftermath of the Tsunami will provide a Keynesian boost to the Japanese economy, the other side of the coin is that the Japanese debt has already hit 196.4% of its GDP in 2010 (compared to America's 58.9%), and few weeks ago, Moody further cut Japan's credit rating to AA, equal to China, meaning Japan will face a higher interest rate.
Dysfunctional Japanese politics also fails to help the matter. Should the politicians go to a "business as usual" mode in the aftermath of the quake, there will be huge waste and the reconstruction and Japan's economic recovery will take a further hit.
This may be a good time for serious Japanese politicians and academics to think about the current political impasse, especially the long-term changes that could reform both Japanese economics and political system. Unfortunately, however, Prime Minister Naoto Kan, the most important figure in this situation, seems to unable to deliver or to show any strong leadership.
This will have a major impact on Japan's foreign aid and its other contributions to international organizations. Any rational recipient of Japanese foreign aid will have to consider that Japan may reduce its foreign aid further. Not to mention Japan will further reduce or restrict its imports either due to lower domestic demand or budget constraints. For many Asian and African countries, this means that they will face slower economic growth due to less money from Japan. Coupled with the economic (and confidence) crisis facing the European Union, this likely mean that the global economy outlook is bleak, at least for the next five or six months.
For the bloated United Nations, this means that the organization will need further belt-tightening. The British already noted that they would reduce its contributions. Obama, regardless of how partial he is to the United Nations, is currently facing a hostile House, demanding further cuts in the U.S. budget deficit.
Finally, on the impact to the debates on alternative/renewable energy: Up to now, there is simply no reliable alternative energy other than nuclear power. Wind farm is not that effective (as we can't store the power efficiently to use during the peak demands, not to mention its impact on bird migration). Solar power's technology is not that advanced yet. Not surprisingly, even liberal Europe still relies on nuclear power. 80% of French electric consumption is supplied by nuclear power. (The United States relies on nuclear power for just 20% of its electricity.)
Already, the disaster forces a moratorium in the decision to build more nuclear plants. Of course, this means that the US-European addiction to carbon-based energy (oil, coal, gas) will remain high. Coupled with current political crisis facing the Middle East, not to mention the Iranian problem, the Libyan civil war, and the potentially explosive condition in Egypt, the price of oil will remain high. It is true that the recession has dampened the impact on the global demands for oil. The total sum, however, remains negative: the debate on the nuclear power means that people will demand more inspections and safeguards, as well as shuttering old nuclear power plants without any alternative energy ready to replace nuclear power.
So what are my predictions?
1. The Japanese economy will not benefit much in the long-run from the short-term Keynesian boost, as the economic confidence toward Japan is already low. The reason why the Keynesian approach works is because the market is confident that the short-term increase in public debt will not hurt the economy in the long run. In the case of Japan, however, the long-term outlook is already horrid thanks to economic mismanagement and political dysfunction. Unless Japan is willing to pursue a complete economic transformation and overhaul its political system, the outlook is horrid.
3. China and the U.S. will remain the engine for global growth. The problem is that the Chinese economy is overheating and the U.S. economy remains in flux, thanks to uncertainties from Obamacare and other Obama-Pelosi domestic initiatives. It is also questionable whether other American states with dysfunctional economies (notably California), observing the ugly fights in Wisconsin, will dare to push for a strong curb on domestic spending.
Thus, the impact of this tsunami: horrid to global economy, and long-term structural problems abound. Either countries need to get their act together or a second major recession is coming soon.
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