Image of the Day – December 2, 2015 – Motor Vehicle Production

Motor Vehicle Production

The non-per capita vehicle production stats came from wikipedia:

Note: there are countries which have higher per capita motor vehicle production than some of the countries on this list. Belgium, for example, which is not shown on this list, has a much higher per capita motor vehicle production than many of the countries that are shown on this list. The countries on this list were simply the ones with the highest overall motor vehicle production as of 2013, according to the source above.





The Other Greek Economy

Four months ago, Greek politics dominated the news. Even the Chinese stock market downturn, in which the Shanghai index dropped by over 30 percent in the month leading up to the Greek referendum, took a far backseat to Athens on every broadcast. Greece’s own stock market fell nearly to 26-year lows at the time, was shut down for five weeks in July, and then, immediately upon reopening, set a modern record by losing more value in a day than even Wall Street had on Black Monday in 1987. Even today the Athens index remains 11 percent lower than it was during its midsummer hiatus.

(All graphs compiled by author unless otherwise stated)

The media’s focus has completely flipped since then: it is now China’s economy and its impact on commodity prices that has the world’s attention. Even the re-election of Greek Prime Minister Alexis Tsipras and his political party Syriza a month ago barely made a blip in American news coverage; it fell well behind other stories like the visits of Pope Francis and Xi Jinping to the United States, the ongoing migrant and refugee flows into Europe, and the Volkswagen emissions-hiding scandal. One wonders if the Greek economy will soon grab the global spotlight once more as it has periodically been doing for almost a decade now, or if new media and economic patterns are emerging instead.

This article is not just about Greece, however. It is also about the world’s only other Greek-speaking state, Cyprus. The Greeks and Greek Cypriots have a lot in common with one another, financially speaking. Both use the euro as their currency, both have been struggling with severe bailout-related crises, and both depend quite heavily on imported oil. (See the two graphs below; also, notice in the graph above how the Athens stock market index responded to the two US invasions of Iraq, which many investors worried would cause the price of oil to spike in the short-term).

This dependence on imported energy, like that of other struggling European countries such as Spain and Portugal – and in stark contrast to Scandinavia, Britain, the Netherlands, and most of Eastern and Central Europe, which produce a lot more of their own fossil fuels or else have less energy-intensive economies- has generally been overlooked in the popular narrative of the Eurozone crisis, which has instead tended to emphasize cultural differences that exist between northern and southern European countries. Yet while it has been much more common to explain Europe in terms of thrifty, efficient Germans and nifty (or shifty) tax-dodging Greeks, the cost of importing energy was perhaps even more significant a factor in weighing down Europe’s Mediterranean economies relative to northern Europe when crude oil was still at well above $100 per barrel.

[Even Italy, which unlike other southern European economies is a mid-sized oil producer in its own right, with a slightly higher oil production than Germany or than the combined oil production of France, Spain, Turkey, and Greece, has still been hurt by energy economics: it is the world’s third largest natural gas importer, and was a leading customer of Libya before Gaddafi was overthrown. Still, Italy’s unemployment rate has not been nearly as high as Spain’s or Greece’s in the past decade (though notably, when oil prices were low around the turn of the millennium their unemployment rates were roughly the same), and indeed, Italy’s unemployment rate has even been lower than that of southern France].

This year, in contrast, when oil and gas prices have plunged, Spain has been the fastest-growing economy in Western Europe, experiencing a bigger GDP gain than it has in any year since 2007. Portugal and France are also thought have grown by a relatively decent amount, and Italy to have avoided recession. The two Greek economies are looking at Spain and hoping for a similar much-needed bounce.

Cyprus – or, more accurately, the 63 percent of Cyprus’s territory and 76 percent of Cyprus’s population that is governed by Greeks rather than by Turks – retains close ties to mainland Greece. Cyprus and Greece tried to unite formally in 1974 under the control of a Greek military junta, prompting a Turkish invasion of the island, and today Cyprus remains dependent on Greece for an estimated 20 percent of its trade as well as  for much of its foreign investment. Had the Eurozone Grexit actually occurred as many expected it would, it could probably have triggered a “Cyprexit” as well, which doesn’t have quite the same ring to it.

Cyprus’s relations with Turkey remain poor, meanwhile, and Turkish-inhabited Northern Cyprus continues to go diplomatically unrecognized by every country in the world outside of Turkey. That said, in 2008 the wall between Greek Cyprus and Turkish Cyprus that ran through the largest city on the island, Nicosia, was taken down, and in 2014, a decade after a failed reunification referendum in 2004, reunification talks were renewed between the two sides.

Now could be a good time to think about investing in Cyprus, not only because of how un-repeatably poorly it has done in recent years or because of the “White Swan” possibility that it could surprise the world by signing a deal that would finally reunify its two estranged halves, but also because its economy could perhaps benefit more than any other in Europe from today’s lower oil prices.

Indeed, Greece too, as well as other nearby countries like Serbia, Bulgaria, Croatia and to a lesser extent Turkey, could similarly benefit from the mix of relatively low oil prices and extremely low expectations. Growth in these countries could also benefit Cyprus, particularly if technology increasingly allows Cyprus to become even closer with its fellow Greeks in Greece and Turks in Turkey.

(Cyprus is located about 900 km from Athens, where around a third of Greece’s 11 million people live, and 750 km from Istanbul, which is the world’s fifth largest city by some measures. Cyprus is, in fact, located closer even to Moscow, Lahore, or Addis Ababa than it is to its fellow Eurozone members in Dublin or Lisbon).

Cyprus’s general stock market index has already fallen by 24 percent in the past year and by over 90 percent since 2011, so it might now be possible to pick up some valuable Cypriot assets for a cheap price.

Here are ten other things about Cyprus and Greece to consider:

1. Cyprus speaks English better than most other European states (with the exception of Scandinavia, the Netherlands, Switzerland, and Austria, which are also excellent at English) because it was controlled by Britain from 1878 until 1960, maintains a British air force base today where over 8,000 Brits continue to live along with their families and thousands of Cypriot employees, and has a large international tourism sector. Cyprus’s neighbors, namely Greece, Israel, and Lebanon, are also great at English. Egypt, another former British-ruled neighbor that attracts lots of tourists, is not too bad at English either, and is getting better because its population is still extremely young.

english %

Note: Second-language statistics are difficult to be certain of, so you should take this graph with a large grain of salt.

2. Cyprus and Greece are both not too dependent on exports of goods and services, compared to other European countries. In fact, as the graph below shows, Greece is the only small economy not to be dependent on exports; the other six countries closest to the top of this list are Europe’s six largest economies. Not being too dependent on exports is probably a good thing for Greece and Cyprus right now, considering that economic growth in Europe and the world has not been strong this year.

(You will notice, for example, that Ireland is by far the most dependent on exports, which may be part of the reason it was hit especially hard during the global financial crisis and recession around 2008. In contrast, Turkey, which may be the least export dependent, bounced back strongly from the global recession, notching an estimated nine percent GDP growth in both 2010 and 2011).

3. Cyprus, even more than Greece, is economically dependent on tourism. Going forward, both hope to attract aging northern Europeans – including Russians, who like Greeks are Christian Orthodox – fleeing the winter and now being able to vacation abroad more easily because of technologies like the Internet. With Russia having frigid winters, a population of 144 million (by far the largest in Europe), and a Baby Boomer cohort that is now almost 60 years old on average and mostly cannot afford to travel to more distant and more expensive summer vacations in places like Spain, Italy or France, both Cyprus and Greece are hoping for a big tourist increase in the years ahead.


One area to look to here is Turkish-Russian relations. Turkey has become the biggest destination for Russian tourists in recent years, but if the relationship between the two regional powers deteriorates again as historically it has on many occasions (in fact they have already begun to deteriorate in the past week), more Russians could be steered toward Greece, Cyprus, and the Balkans instead, as well as toward countries like Egypt which has been Russia’s second most popular tourist destination in recent years.

Another place to look is the Caucasus, both within Russia and without: any renewed militancy in that region could threaten Russia’s tourist infrastructure build-up around Sochi along the coast of the Black Sea. The same is true for the Balkans, where dormant conflicts in tourist havens like Croatia could, if they were to turn violent once again, make Cyprus and Greece more appealing alternatives.

4. It is difficult, and in a certain sense effectively impossible, to find good statistics on the length of countries’ coastlines, as a result of the coastline paradox. That being said, I have given it a rough shot, and come up with the following stats:


It shows that, along with the remote New Zealand-Australia-Papua New Guinea region in the southern Pacific, the Greece-Cyprus-Croatia region has by far the world’s longest warm-climate coastline per capita. In fact, even Turkey, with a population of 74 million, does not do too badly in this respect since it has lengthy coasts along the Mediterranean, Aegean, and Black Sea. Considering how much people like owning seaside land, this could be a good characteristic to have. Nearby Italy also does somewhat decently, because of its long peninsular shape and its islands of Sicily and Sardinia, which are the only two Mediterranean islands with a larger population than Cyprus.

5. According to the World Bank, Cyprus has one of the lowest “total age dependency ratios” in the world and, with the exception of Slovakia, the lowest total age dependency ratio in all of Europe. The total age dependency ratio measures the number of people in a country aged 15 and under or 65 and older relative to those aged 15-65. Cyprus has very few children or seniors relative to the size of its working-age population, which is arguably a very good thing to have. Greece, on the other hand, does not have this, as you will notice on the graph below.

Total Age Dependency Ratio

Cyprus also has the lowest share of its population aged 80 years old or older in Europe with the exceptions of Slovakia and Ireland. Cyprus’s neighbors – Israel, Lebanon, Turkey, and Egypt – have even smaller shares of their population aged 80 years or older. Greece, in contrast, has the highest share above 80 in Europe with the exception of Italy, which is likely part of the reason its public finances are so strained. Other troubled economies like Spain, Portugal, and France are at the very bottom of this 80-and-up list, along, interestingly, with Germany.

80+ ratio

The same is true of the “Old Age Dependency Ratio”, which is the number of people a country has aged 65 years and older relative to those it has aged 15-64.

old age ratio

6. Outside of Scandinavia or the former Soviet Union, both Greece and Cyprus have some of the most land per capita in Europe, as can be seen in the graph below. So too do some of their neighbors, like Turkey and other Southeast European countries. This relative wealth of land could be good for Greece and Cyprus, but there is also a catch: Greece, and especially Cyprus, are lacking in freshwater. Indeed as the second graph below shows, Cyprus is the most water-strained country in Europe.

pop density
Graph Source: European Environment Agency

And of course, many of Cyprus’s Middle Eastern neighbors are in very poor shape on this front as well, though some, like Israel, are trying to come up with technological solutions for their freshwater shortages – and both seawater desalination and wastewater treatment are significantly cheaper to do when energy prices are low as they have become in the past year.

Two months ago, by the way, Turkey finished constructing a freshwater pipeline to Northern Cyprus which, at 80 km in length, is the longest underwater water pipeline in the world. It is supposed to have a significant effect upon Northern Cyprus’s agricultural production. Greek Cypriots are wary of becoming dependent on this pipeline, however, and Turkey is far from being rich in freshwater itself.

7. This graph below shows that Cyprus’ economy performed abysmally in 2014 and especially in 2013, yet is expected to finally start growing again in 2016. Greece, meanwhile, already started growing again in 2014 and is forecast to do so even more in 2016 while Cyprus’s closest neighbors, Lebanon, Israel, Turkey, and Egypt, are expected to grow quite quickly in 2015 and 2016.

gdp growth europe

Other Mediterranean economies, particularly Spain, are also expected to recover from their poor performances in recent years, and Russia is expected to start growing again in 2016 after the sharp contraction it has been experiencing in 2015. Three other countries in Cyprus’s general neighborhood, Syria, Ukraine, and Libya, have of course also been doing horribly in recent years, and will hopefully recover as well.

8. Britain has had very strong economic growth this year compared to many other countries in Europe or the developed world. This could help Cyprus since the two countries retain ties in a number of different ways, even beyond the tourist or banking sectors. Britain is in fact home to a large Greek Cypriot diaspora, most of (the first generation of) whom left the island when the Turks invaded in the mid-1970s. Today the Cypriot population in Britain is about 20-25 percent as large as that of Greek Cyprus itself. With London and Cyprus over 3,000 km apart from another, British economic growth as well as distance-shrinking technologies like the modern Internet could help the Cypriots benefit from their British connections.

Another country with potentially close ties to Cyprus, as we have already discussed, is Russia. Russia’s economy had a bad year as oil and other commodity prices fell, but it is nevertheless expected to start growing again at a fairly decent pace in the years ahead, at least relative to more developed Western European economies.

Moreover, it is not impossible that Russia’s slowdown could actually benefit Cyprus, if wealthy Russians worried about their domestic situation decide to start parking more of their assets abroad in these countries. That said, Russians may be less likely to do so than they used to be, because in 2013 the Cypriot government used the excuse “it’s just the money of shady Russians” in order to help justify its seizure of cash from Cypriot bank deposits in accounts with over 100,000 euros in order to pay off Cypriot debts.

9. Cyprus has resources it can use to play a role in the global battle against coal production. As of 2011, it generated more solar power per capita to heat space or water than any other European country: 611 W per capita, compared, for example, to 385 W for Austria and 253 W for Greece, and 120 W for Germany, which were some of the other top solar producers in the region. Cyprus and Greece also potentially have wind power because of their long coastlines per capita and because of their many windy cliffs and hilltops.

Cyprus, and perhaps Greece as well, may also have large reserves of offshore natural gas. The Eastern Mediterranean around Cyprus has been the site of some of the world’s largest discoveries of late, not only in Cyprus, but also in neighbouring waters off the coast of countries like Israel. Less than a month ago, in fact, the Italian energy company ENI may have found the Mediterranean’s largest discovery ever in Egyptian waters not too far from Cyprus’s. The Egypt gas find could put Cyprus’s gas production dreams at risk, though in theory it could also help justify the construction of an underwater pipeline to Europe that both countries could feed their gas into.


At present, Cyprus faces logistical challenges in exporting its gas to Europe, particularly if it does not want to be dependent on exporting via a yet unbuilt pipeline that would run underwater to Turkey, which has an estimated construction cost of 3 billion dollars, in comparison to the estimated 10 billion dollar gas liquefaction and export terminal that it has been considering building instead.

Still, its gas could ultimately prove valuable if, for example, Western Europe’s relationship with Russia continues to deteriorate, if gas production in fields in the North Sea continues to drop, if its gas supplier Algeria undergoes any political instability like it faced in the 1990s as its leader Abdelaziz Bouteflika (who has ruled since 1999 and is now thought to be 78 years old) continues to age or passes away, or if government pricing of carbon emissions rise a lot and thus make gas ever more desirable when compared to coal.

10. Cyprus’s position next to the Suez Canal, which was expanded this year, puts it in a position astride some of the world’s major shipping lanes. By sea, Cyprus is halfway between Mumbai and London, and halfway between New York and Kuala Lumpur. Cyprus’s ability to leverage its central shipping position to become a significant manufacturing economy has thus far been limited by its lack of a sizeable labour force, as its population is barely more than a million. Going forward, however, as machines become used more and more in industry in place of human labour, Cyprus’s manufacturing output could perhaps take off, if – a very big if – it can produce a skilled workforce to run its industries and cheap energy to power them.

Greece, similarly, has an enviable position near Suez and at the point where the Black, Adriatic, and Mediterranean seas converge, and has more natural harbours and sheltered seas than perhaps any other country in the world. It is in fact these protected coasts which allowed its city-states and kingdoms to dominate regional commerce throughout most of antiquity, and to have more registered merchant vessels in the present day than any other country in the world apart from China.

In theory, Greece could save ships traveling between Asia and Europe from taking their usual lengthy detour through the western Mediterranean and northern Atlantic. The Greek port of Piraeus next to Athens already handles more containers ever year than all but three other ports among Mediterranean EU countries and eight other ports in the EU as a whole. By 2016 it may become the Mediterranean’s largest port. As of 2013, according to Eurostat, Greece handled approximately 5 percent of the European Union’s “gross weight of seaborne goods handled”, which is a lot considering that Greece only accounts for an estimated 1.3 percent of the EU’s overall GDP.


Similarly, Russia could be likely to look to Greek ports as a way of carrying out trade that bypasses the Turkish Straits that separate the Black and Mediterranean seas and the Skagerrak Strait that separates the Atlantic from the Baltic Sea. Given Russia’s escalating involvement in the Syrian civil war, which is hurting Russia’s relationship with Turkey while at the same time making it need to send supplies into the Mediterranean through Turkish waters, Russian access to Greek ports could become especially important.

In order to do this, however, Greece would need to overcome the political and geographical challenges of transporting goods overland between Greek ports and European (or Russian) markets via Southeastern Europe. In addition to logistical challenges, doing so would also represent a direct challenge to the established megaports of the Netherlands and Belgium, as well as to the hopes of Italy which would like to achieve a similar goal for the coast along its own southern heel.

That said, there may actually be some reasons for Greece to be hopeful in this area. Greece’s ports are roughly 20-40 percent closer the Suez Canal by ship than southern Italy is, and Greece has far more and better sheltered harbours than southern Italy does. What Greece really needs, however, is a much cheaper way of transporting goods via its rugged mountain roads, as well as a cheaper way of transporting goods intermodally so that it would not be too expensive to unload goods at Greek ports, take them by land to the Danube River (which is 400 km from Thessaloniki and 850 km from Athens), and then load them back on to barges or trains in order to get them to their final destinations in Europe. (The Danube-Main-Rhine canal was completed in 1992, and can handle barges up to 190 metres long and 11.5 metres wide, with a depth of 2.7 metres).

I don’t want to dig in to this topic here, but I suspect there are technological reasons to think that both of these challenges might actually be overcome in the not-too-distant future. In fact it may wind up being the political factors, rather than the purely logistical ones, that are more difficult for Greece to get past. In particular, Bulgaria, Romania, or Hungary could put up formal or informal trade barriers that make it difficult for such a trade corridor to become prominent, and the former Yugoslavian countries in the Balkans could be too unreliable to provide alternative overland routes.



China’s Hidden Regionacracy, part 1: China’s Borderlands


How can one measure China’s economic stability? In the West, it is common to look to Hong Kong and Tibet as litmus tests of the strength of the central Chinese government. While it is true that both Hong Kong and Tibet are very important places, their combined populations do not account for even one percent of China’s overall inhabitants.

To get a better sense of China’s stability, then, one must also examine the other areas of China where the dictates of the central government are most likely to be resisted. Arguably, these include the following six regions: Southwestern China (namely, the provinces of Yunnan and Guizhou, plus the “Autonomous Region” of Guangxi), Southeastern China (the provinces of Guangdong, Fujian, and Hainan), Northeastern China (the provinces of Heilongxiang and Jilin), the Sichuan plateau (the province of Sichuan and “Direct-controlled Municipality” of Chongqing), and the “Autonomous Regions” of Xinjiang and Inner Mongolia.

These regions have a total population of over half a billion. They are home to a majority of China’s 120 million or so ethnic minorities, 300-400 million speakers of languages other than Mandarin, tens of millions of speakers of dialects of Mandarin that are relatively dissimilar to the Beijing-based standardized version of Mandarin, 20-30 million Muslims, 50-100 million recent adopters of Christianity, and tens of millions of family members of the vast worldwide Chinese diaspora.

Together, these regions form a cordon around the flat, triangle-shaped Chinese heartland that extends for more than a thousand kilometres from Beijing to Shanghai, where most of the rest of China’s population lives. Several other provinces, meanwhile, such as Shanxi, Gansu, Hunan, and the Hui Muslim “Autonomous Region” of Ningxia, arguably fall somewhere in between China’s central and peripheral territories, from both a geographical and political perspective.

Along with the high-altitude Tibetan(-Qinghai) Plateau and the Chinese Himalayas, these six peripheral regions possess by far the most rugged, expansive, and insular terrain within China. Their territories consist either of:

  • subtropical hills and mountains (throughout most of Southeastern and Southwestern China)
  • vast semi-desert plateaus (in Xinjiang and Inner Mongolia)
  • enormous mountains (in Xinjiang, where mountains cover an area larger than England and regularly reach heights higher than the highest Rockies)
  • mountainous or hilly islands (within the archipelagic coastal waters of Southeastern China, in places like Hong Kong, Macau, Hainan province, Xiamen, Zhoushan, Pingtan County, and nearby Taiwan)
  • mountain-enclosed riverlands (in Sichuan and Northeastern China)

Not surprisingly, Chinese central governments, whether they are controlled by ethnic Han Chinese as is the case today, or else by outside invaders like the Manchu or Japanese as was the case for most of the past half-millenium, have almost always had trouble subduing most or all of these areas.

Indeed, China’s peripheral regions contain all of China’s land borders, which are the longest in the world, more than two thousand kilometres longer than all of Russia’s land borders and well over double the length of the continental United States’. These borders remain almost impossible for the Chinese government to fully control, not only because of their incredible length and difficult terrain, but also because they are located an average of between one and a half thousand and three thousand kilometers away from the Chinese heartland. Only two significant railway lines cross the western half of this enormous distance as of yet.

Complicating matters further, China’s borders are shared with fourteen different countries, nearly all of which possess either ethnolinguistic or religious ties with the areas of China they are adjacent to. These include:

  • the long Himalayan border that separates Tibet from India, Nepal, and Bhutan, across which the exiled Tibetan Buddhist leadership resides
  • the even longer border that seperates Inner Mongolia (where more than one-fifth of the population are ethnic Mongols) and Xinjiang from the country of Mongolia (which in turn shares a three and a half thousand kilometer-long border with Russia)
  • the Manchurian-Korean border, where China is terrified of millions of refugees flowing in from North Korea in the event of a disaster there, and where nearly two million people living in the Manchurian provinces of Heilongxiang and Jilin are already Korean
  • the twin Siberian borders with Xinjiang, Inner Mongolia and Manchuria; Xinjiang’s borders with Khazakstan, Kyrgystan, Afghanistan, Pakistan, and Kashmir, where, as in Xinjiang, a plurality of the population is Muslim and/or ethnolinguistically Turkic
  • the southeastern and southwestern Chinese borders with Southeast Asia, throughout which there is a diaspora of tens of millions of southern Chinese, and where ethnic minority populations span both sides of China’s borders with countries like Myanmar and Vietnam.

As the economies of these peripheral Chinese regions as well as China’s neighbouring countries emerge, as in recent years many have begun to do at a faster pace than the Chinese economy has as a whole, they may deepen this array of cross-border relationships, and in turn could undermine efforts by China’s central government to enforce national unity within the huge Chinese economic and political system. The Chinese have certainly been worried about their neighbours within the relatively recent past: China sacrificed hundreds of thousands of its citizens during the Korean War in the 1950’s and then thousands during the Sino-Vietnam War in 1979, which, as a point of comparison, may be more casualties than the United States has suffered in all of the wars it has ever fought put together.

Since the 1980’s, however, as the China-US alliance took root and the Chinese economy began rapidly expanding, and as the economic growth of most of China’s neighbours collapsed in the early 1990’s (Japan and the Soviet Union), late 1990’s (South Korea, Taiwan, Southeast Asia, and British-era Hong Kong), or during the the 2008 global recession (Russia, Japan, Taiwan, Europe, and North America), while around the same time the power of China’s English-speaking rivals became preoccupied with Afghanistan and Iraq throughout the 2000’s, China has not had to worry about its borderlands nearly so much.

This is not to say that these regions were problem-free during this period. The Chinese government has in fact been concerned with many of them, including, for example:

Yet all such risks proved to be manageable ones, eased as they were by the amazing Chinese economic boom that was then still in full swing, and by the fact that China, which until 2010 still had an economy thought to be smaller than Japan’s, had not yet attracted the full attention of other powers intent on containing it.

Lately, in contrast, just as the United States has been disengaging from Afghanistan and Iraq and the economies of the US and Britain have begun speeding up again following their multi-year post-recession slog, and just as Japan, which continues to have the third largest economy in the world by a large margin, has finally begun to rebuild its will to implement an aggressive economic stimulus program and outwardly post-pacifistic foreign policy, many of China’s peripheral provinces and most of the countries surrounding China either grew or accelerated their economies at a faster pace than did the overall Chinese economy, which has slowed significantly in recent years.

In some of these areas, for instance on both sides of the border between south-western China and northern and eastern India, growth in 2014 accelerated at a much faster pace than in China as a whole. While China’s overall economic growth nevertheless remains quite strong compared to most of the rest of Asia and the world – at least, according to Beijing’s own official estimates, which admittedly are dubious – this constellation of recent trends does not bode well for its central government going forward.

The Physics of Japanese Economics

With the downward revision of Japan’s GDP growth figures last month, the Japanese economy is technically back in recession, projected to shrink by a slight amount during the year as a whole. Even though most analysts had previously forecast Japan’s economy to expand at a rate of 2 percent in 2014, nobody was too surprised by the news that is contracting instead. The recession is the country’s fifth since 1997, and its third since the global credit crisis of 2008. While some might see a silver lining in this – namely, that Japan’s economic growth going forward could not possibly get any slower than it has already been – many economists do in fact view the country’s problems as likely to grow more rather than less acute during the years ahead.

Unlike in recent decades, Japan must now grapple with an empowered China, with slowing economic growth among key trading partners like South Korea, Taiwan, coastal Chinese provinces, and Europe, with net government debt that has risen from 80 to 145 percent of GDP over the past decade, and with a Baby Boom generation that has reached between 65 and 70 years old on average (about a decade older than those of Europe or America). These trends arguably provide the backdrop to Japan’s current slowdown, even as the catalyst for the recession has been viewed as a rise in the country’s consumption tax, from five percent to eight percent, which came into effect earlier in the year.

What might be more surprising than the recession itself is that investors in Japan’s stock market seem basically unperturbed by the news of it. The Nikkei 225 index is actually higher now than it was before the recession become public knowledge; it continues to trade at around a seven-year high, virtually double the price it averaged between 2008 and 2013. Admittedly, this is a far cry from the Nikkei’s all-time highs in 1992, when it was worth well over double what it is today. In fact it does not even match the highs of 2000, 1997, 1994, and several other years going back all the way, astoundingly, to 1986. That’s right: Japanese stocks were worth more 29 years ago than they are today. Still, a seven-year high amidst the onset of an economic recession is something that is difficult to ignore.

Of course, the rise in the Nikkei may simply reflect the fact that investors have become so accustomed to seeing Japan’s economy shrink that they built in the risk of a recession to the price of Japanese stocks ahead of time, which meant that those prices did not require much revising when the recession actually arrived. The Nikkei’s rise may also reflect the fact that investors have faith in prime minister Shinzo Abe, who has loudly promised to stimulate the Japanese economy and revive Japanese prestige, and who is already using the recession as an excuse to call a snap election intended to extend his party’s leadership by an additional two years, from 2016 (when parliamentary elections would have otherwise been held) to 2018. [update: the elections have now happened. Abe’s party won a two-thirds majority, though with the lowest voter turnout since WW2].

Or it may be that investors have so little faith in Europe, China, and commodity-exporting economies like Brazil or Australia, and see US equities as being too expensive now that the S&P 500 has again reached all-time highs in recent days, that they have been forced into Japan’s stock market almost by default. Finally, and most intriguingly, the Nikkei’s performance may reflect the possibility that the potential of Japan to achieve a renewed, meaningful pace of economic growth is actually more promising than most Japanese themselves recognize.

With Japan’s stock market and GDP indicators pointing, almost paradoxically, in far-opposing directions, Japan’s economy now resembles Schrodinger’s infamous Cat: its true health is in a state of uncertainty, the resolution of which seems to depend on the specific approach at which it is observed. Of course, unlike the Cat itself, Japan’s economy is a paradox that we know can probably be resolved. All we need to do is take a look underneath the lid, so to speak, at the underlying fundamentals of the country’s medium-term (say, within the next decade or two) economic prospects. What are those underlying fundamentals? It turns out that the originator of the Cat query, Albert Einstein, might be of some use here as well:

General Economic Relativity 

One of the most fundamental theories of conventional economic forecasting is the idea that, in general, countries that are relatively poor will grow at a faster pace than those that are relatively rich. This is, of course, why a country like India disappointed investors when it grew at 6.5% in 2011 and 5% in 2013, whereas even 2% growth in the European Union or 3% growth in the United States would be a widely celebrated event.

In the case of Japan, the extremely high income levels the country had two decades ago might have limited its economy’s ability to grow. According to the IMF, in 1995 Japan’s per capita income was 1.5 times higher than that of the next wealthiest large developed economy (the United States), 2 times higher than that of the next wealthiest large economy in the western Pacific (Australia), and 3.3 times higher than that of the next wealthiest economy in Northeast Asia (Taiwan). As a result of being so wealthly at the time, Japan’s room to expand its economy further may have been somewhat constrained.

Today could scarcely be any more different. If the idea that relatively poor countries are in general likely to grow relatively quickly (i.e., the theory of general economic relativity) is to be believed, Japan is now in a much more favourable position where its growth potential is concerned. The country has become much poorer than other developed economies in terms of its per capita income, especially in comparison to regional counterparts like Australia, New Zealand, and Singapore, which have grown rapidly since the mid-1990’s. Japan’s lead over developing East Asian economies is also not nearly as large as it used to be (see charts below), as a result of the emergence of China and the strong rebound of other East Asian economies following their financial crises in 1997 and 2008. Arguably, this comparatively low level of nominal wealth bodes well for the Japanese economy going forward, relative to how it has performed during the past two decades.



Special Economic Relativity 

Another fundamental principle of economics is that of “comparative advantage”, the idea that economies will tend to construct themselves in ways that reflect their greatest advantages (or smallest disadvantages) in relation to other economies. This begs the question: what makes Japan special, relative to other countries? More to the point: is what makes Japan special likely to help its economy grow at a decent pace during the years ahead?

One of the main qualities that makes Japan special is its “economic mass”. This does not only refer to its economic size — Japan’s economy is the third largest in the world, 1.7 times larger than fourth-place Germany and just 1.6 times smaller than second-place China, according to the World Bank — but, just as important, refers also to Japan’s internal unity and compactness. Unlike in other major economies like the US or China, Japan’s population is not spread out over a vast territory, but is instead crammed into an area that is only about the size of Montana. Japan’s economic activity is even more highly concentrated: the Greater Tokyo Area alone accounts for an estimated 40 percent of Japanese GDP, and the island of Honshu (in which Tokyo is located) for upwards of 80 percent of Japanese GDP.

Japan is also socially cohesive. Its income inequality is relatively low (unlike the US, China, or Brazil, where income inequality is extremely high), and its unemployment rate is the lowest of any developed nation apart from Switzerland. Japan also possesses no major ethnic, linguistic, or religious divisions. An estimated 98 percent of Japan’s population is ethn0-linguistically Japanese, and, religiously, less than 2 percent is Christian. By comparison, Japan’s neighbour China is home to an estimated 23 million Muslims (mainly living in the country’s northwest), more than 100 million non-Muslim ethnic minorities (mainly in the southwest), 250-300 million native speakers of a variety of non-Mandarin Chinese languages (mainly in the southeast), and perhaps as many as 100 million evangelical Protestants.

Even Japan’s developed-economy competitors cannot compare to it in terms of internal unity. In the German economies, there has been a slowly (re)emerging commercial divide between eastern Germany, Austria, and Bavaria on the one hand and western Germany on the other, reflecting the fact that Eastern Europe has been growing quickly while Western Europe has been lodged in a seven-year economic funk. Within both France and Italy, meanwhile, northern regions have been growing while southern regions have been virtually in depression. And in Britain and Spain, secessionist movements like those of the Scots and Catalans have been growing in prominence of late.

Even in the United States there has been a growing divide between the Northeast and the South/West, a result of the fact that Texas alone has accounted for more than one-fifth of US economic growth since 2007, and that globalization and demographic shifts have had the effect of integrating states like Texas, California, and Florida more closely with Latin America than ever before, and states like California, Oregon, and Washington more closely to the rest of the Pacific world than ever before. (In Canada a similar trend has been occurring). All of these developed countries remain internally cohesive, of course; just not as potentially cohesive as Japan. Indeed, many of the above trends may be likely to continue in in the years ahead, which could make Japan’s internal unity even more distinctive.

Japan’s unique combination of economic size and internal unity may become increasingly significant during the years ahead, as it may allow the Japanese to throw their weight around in a world economy that, cliches of globalization notwithstanding, is in many ways still becoming rapidly smaller and smaller. The continuation of the Internet Revolution will probably be the most significant near-term driver of such globalization, but further leaps in conventional transport — by air, sea, or land — cannot be ruled out either. If rapid globalization does continue, and if large, internally cohesive economies like Japan are among its beneficiaries, economics may increasingly resemble Einstein’s actual theory of special relativity, with an economy’s mass beginning to directly correlate with its economic momentum.

Commercial Entanglement

Another characteristic that makes Japan special is its relative level of isolation from the rest of the global economy. According to the World Bank, the value of Japan’s international trade of goods and services is equal to just 30 percent of its GDP, a lower share than any other large developed economy apart from the US, and much lower than Japan’s most notable neighbours, China (50%), South Korea (103%), and Australia (41%). Indeed, many East Asian economies, such as Thailand, Vietnam, Malaysia, and Singapore, are among the most trade-dependent economies in the entire world. Japan, by comparison, is not only not dependent on trade in general, but is also not dependent on either imports or exports in particular.

What this means is that Japan might be able to manage a regional or global economic slowdown more easily than most other economies can. During the past few decades this ability has not mattered much, since global growth, and particularly East Asian growth, has been so formidable. Going forward, however, Japan may find itself able to manage persistently slower growth in places like China and Europe more easily than most other countries around the world will be able to.

A slowdown in China, for instance, would hurt Japanese neighbours like South Korea, Taiwan, and Australia, countries in which 30-40 percent of exports go to China and exports in general are equal to 20-60 percent of GDP, far more than it would hurt Japan, which sends just 23 percent of its exports to China (including Hong Kong) and where exports in general are equal to just 15 percent of GDP. This ability to withstand external sluggishness could be a major advantage for Japan. It has certainly been helpful for the US, where a low dependence on exports is currently shielding the American economy from simultaneous recessions in most of Europe and Japan.

Crucially, even as Japan’s trade patterns might shield its economy from the full brunt of external crises, Japan also has the potential to benefit from becoming a more vigorous trading nation in the future. In the past, Japan’s ability to access global markets has been limited by its lack of proximity to the Atlantic world, where most of the globe’s economic and consumer activity is located. As a result, Japan is likely to benefit from the expansion of the Panama Canal, which is finally set to be completed in 2016, with significant consequences for inter-oceanic shipping. (In fact, arguably the most important consequence of the canal expansion is that it will allow 80% of LNG tankers to use it — currently none do — which will benefit Japan specifically, since Japan accounts for nearly 40% of the world’s LNG imports, and since, on the opposite side of the canal, Texas, Lousisiana, and Latin America may account for much of the world’s LNG export growth in the years ahead). Similarly, Japan could benefit from the continued growth of the East Asian and Indian consumer markets, as well as from more efficient cargo shipping worldwide, by air or by sea.

Finally, Japan might benefit from being able to use the Trans-Siberian railway to directly access European markets. This may finally occur because: a) the Russians increasingly need Japan as an ally because of their growing concerns with both China and the West; b) Russia’s rail network is becoming less crowded as a result of falling commodity prices and falling European demand for coal (since coal accounts for one-third of Russian rail freight, and commodities in general account for two-thirds of Russian rail freight); and c) because technology may make it cheaper and faster to maintain and operate railways and to load and unload cargo containers, which on the Japan-Russia-Europe route you expensively have to do twice: once at the seaports on Russia’s Pacific coast, and a second time in Eastern Europe because Russia’s and Europe’s rail networks use different gauges.

In addition to its foreign trade, Japan’s global investment position looks to be relatively strong. Japan has the highest NIIP in the world (NIIP = Net International Investment Position; basically, this is the amount of money a country’s government, businesses, and people are owed after you take into account the amount of money they owe to other countries). Though trustworthy, up-to-date NIIP statistics are notoriously difficult to come by (which is why people often focus instead on public and private debt-to-GDP ratios, which can be misleading because they only take into account a country’s foreign liabilities, while ignoring its foreign assets), as recently as 2010 Japan’s NIIP was estimated to be the same as those of China and Germany – which are the world’s next two largest creditor economies – combined. Indeed, while in America the media tends to obsess over Chinese ownership of US government debt, Japan owns just 3 percent of US debt less than mainland China does, and only 13 percent less than mainland China plus Hong Kong. Japan may have lots of assets with which it can potentially revive itself, in other words.

Energy Matters 

Does the inertia of a body depend upon its energy content? In economics, the answer to this famous question of Einstein’s appears to be yes. Developed countries in which energy imports account for a high share of GDP, such as Japan, Spain, Italy, Greece, and Portugal, have suffered some of the worst growth rates in recent years, when oil and gas prices have been very high. Developed economies that are major energy exporters, on the other hand, like Canada, Australia, and Norway, or that are relatively energy neutral, like the US, Sweden, or Denmark, have generally performed much better.

Developed Economies Energy and oil imports

With oil prices having reached a five-year low, falling by well over 50 percent since just the beginning of October, countries like Japan may now be better positioned for success than they have generally been in the recent years. In fact, it is not only lower energy prices that will have a positive impact on the Japanese economy, but lower prices for other commodities as well, which to varying extents are often correlated with energy prices. Japan, to be sure, is the world’s largest importer of tin, the second largest importer of iron ore, aluminum, copper, nickel, and silver, the largest food importer among developed economies, and by far the largest spender on coffee imports apart from the US.

Of course, a developed, energy-efficient economy like Japan is not going to benefit nearly as much from falling energy prices as an energy-intensive, import-dependent emerging market like India, Pakistan, Thailand, the Philippines, or, on the wealthier side of the emerging market spectrum, South Korea or Taiwan (see graph). Even China, which only imports an estimated 13 percent of its energy (compared to 94 percent for Japan), will probably benefit much more from falling energy prices than Japan will, since the Chinese use about 5 times as much energy per dollar of GDP than the Japanese, are enormously dependent on importing commodities in general, and may be able to reduce some of their domestic pollution by replacing coal production with oil and gas imports.


But in this way too Japan stands to gain, relative to most other developed economies. This is because most of the main buyers of Japanese exports are energy-intensive emerging Asian economies, many of which are among the greatest beneficiaries of falling energy prices. Indeed, more than 40 percent of Japanese exports go just to China, South Korea, Thailand, or Taiwan, whereas no energy-exporting country receives more than 2.5 percent of Japan’s exports. In contrast, the US sends 25 percent of its exports to Mexico or Canada, both of which are substantial oil exporters. The Europeans, meanwhile, trade mainly among themselves, and include enormous energy exporters like Norway and Russia.

Japan is also in a unique position where alternative energy sources are concerned. It has far and away the most nuclear energy potential in the world, since it has the world’s third highest nuclear energy-generating capacity (virtually double that of fourth-place Russia), but has not been running any of its nuclear plants since the Fukushima incident in 2011 soured public support for them. Japan could, and might, turn many of them back on in a fairly short period of time.

Japan also has the fourth highest hydroelectric energy generation among developed countries (double that of fifth-place Spain), the third highest biomass/waste energy generation among developed countries (more than 50% higher than fourth-place Britain), the third highest geothermal energy production among developed countries, and the third highest solar energy generation of any country in the world (50% higher than fourth-place US). In addition, because of the growing possibility of using industrial machines to run manufacturing plants overnight, Japan may no longer be forced to waste much of the energy produced by hydroelectric, nuclear, geothermal, and wind, which unlike oil or gas cannot be shut off at night.

Finally, Japan may be able to get more commodities from Pacific Russia. First, as mentioned above, Russia is increasingly in need of allies outside of China or the West, and Japan is the obvious choice in this regard (South Korea is also an obvious choice, but South Korea is very closely embedded into the economies of both China and the West, and it is also much smaller than Japan). Second, as technology may continue to make resource-extraction much less dependent on labour, the commodity-producing potential of the Russian Far East could perhaps finally be realized in spite of the region’s tiny population of just around five million (less than one million of whom live in the gigantic territory to the north and east of Lake Baykal). Sakhalin island and the Kamchatka peninsula, both of which are relatively inhabited, rich in natural resources, and particularly accessible to Japanese influence, could be two interesting places to watch in this regard.


Demographic Entropy

Analysts who are bearish on Japan ultimately tend to focus on one factor above all others: Japan’s aging population. This is certainly not an unreasonable concern; Japan’s population is the oldest in the entire world, with a large Baby Boom generation that is on the cusp of old age, a large Echo Boom population that is on the cusp of middle age, and a population of seniors (above 65 years old) that accounts for 26 percent of Japan’s total population, compared to only 14 percent in the US, 17-18 percent in Britain, France, and Spain, and 20 percent in Germany. This is, really, the main reason the Nikkei 225 index has been trading at prices that are just 13.9 times its earnings and just 1.3 times its “book value”, compared to a 19 price-to-earnings ratio and 2.8 price-to-book ratio for the S&P 500 in the US, or 15-19 price-to-earnings ratios and 1.8-2.1 price-to-book ratios in France, Britain, and Germany, where populations are more youthful.

While it would be unwise to ignore Japanese demographics, or try to spin them somehow as being an economic advantage rather than a disadvantage, it may nevertheless be useful to play devil’s advocate here for a bit, and explore the possible reasons why Japan’s aging population may not end up being even close to as bad for its economy as it is generally expected to be.

Reason 1: Japan’s retiring population means that it alone among countries in the developed world may not be negatively affect by the one-two punch of outsourcing and automation, which could rapidly lead to unemployment and income inequality crises in other countries. This could further increase Japan’s internal unity compared to other nations, giving it even more of an edge in terms of its economic “mass”.

Reason 2: Japan’s economy is not a closed system: it can decrease its demographic entropy by way of immigration. While it has become common for journalists to point out the fact that Japanese culture is not accustomed to dealing with immigration, the truth is that Japan has historically been able to adapt its mode of behaviour in very short periods of time, so it would not really be such a surprise if the Japanese were to begin bringing in lots of immigrants in the future, breaking with tradition. Certainly Japan’s high standard of living and proximity to Asia means that it can probably attract immigrants if it wants to. Japan has not needed immigrants in the past, but if and when it does, it may turn out that it doesn’t have such an affliction to them after all.

In fact, one way of looking at the fact that foreign-born individuals only account for an estimated 1.9 percent of Japan’s population (compared to 12 percent for Germany, France, and Britain, 14 percent for the US, 21 percent for Canada, and 28 percent for Australia) is that Japan still has a lot of room to increase the share of its total population that immigrants account for. Japan could actually bring in millions of immigrants and still have them account, for example, for less than one-fifth of its population, whereas a country like Germany or even the US would perhaps start feeling uncomfortable with immigration if immigrants were to make up more than a quarter or a half of their total populations.

Reason 3: Another way to look at Japan’s population of seniors is as the first wave in an enormous global demographic shift, with the aging populations of the developed world (particularly Europe and Canada) and the former Soviet Union only about a decade behind the Japanese, and with China not too far behind them. What this means is that many of the age-related issues that Japanese populations have already been dealing with for a while may now be coming to much of the rest of the world. This might actually help the Japanese economy, if it finds some of the goods and services it has been focusing on — among them robotics, health care, pharmaceuticals, and age-related consumer products — in demand from other countries.

In other words, Japan may be able to export some of its expertise and products to aging Western, Russian, Korean, and Chinese populations who are dealing with their own increases in age-related illnesses. In fact, because of the pollution in China, the coming decade may see an enormous increase in certain types of environment-related illnesses in China, even though China’s population is still somewhat younger than most Western populations. Many wealthier Chinese may even go to Japan to receive health care. The aging of China and the West is obviously not the happiest of prospects to contemplate, but it may nevertheless be something the Japanese economy is relatively well-positioned to benefit from.

Reason 4: Even if Japan’s aging population is a long-term problem, it may not be such a burden for its economy during the next decade or so. Japan’s Boomer population is only around 65-70 today, and is still extraordinarily healthy for its age. Because of the Internet, Japanese seniors  may also be able to keep their productivity and consumption up more than people of the same age have historically been able to do. Japan’s Echo Boomers, meanwhile, are still just around 40-45 years old. Because Japanese have so few children (13 percent of Japan’s population is below the age of 15, compared to 19 percent for the US, Britain, France, and Australia), they have more time and money to spend on other things, whether work-related or leisure, which can be economically stimulative. Spending time and money on children may be great for an economy over the long term, but in the short term it can arguably hold an economy back.

Alternate Dimensions 

Economists have historically tended to view wealth as being derived from a combination of three “inputs”: capital, labour, and land. Japan is very well endowed in the capital and labour departments, but it has been held back to a certain extent by its scarcity of land. Excluding mountainous regions, which constitute an estimated 75 percent of Japanese territory, Japan is only about the size of Michigan. Even including its mountains, Japan’s population density is 1.5 times higher than Germany’s and ten times higher than in the US. Among significant economies, only India, South Korea, and the Netherlands are more densely populated than Japan (and none of them by much).

Japan has paid a steep price for its density: according to the Economist, between 1980 and 2000 Japanese property prices were consistently the highest in the world, both in real terms and in relation to average income levels. Japan’s lower property prices today are simply a reflection of its slow pace of population and economic growth; if the economy of Japan is to rebound, it will need to find a way to make due without much physical space. Indeed, even today, following two decades of deflation, Tokyo is the fifth most expensive city in the developed world and the eighth most expensive city in the entire world to buy an apartment in.

Can technology finally allow Japan to overcome its lack of space? To a certain degree the answer may be yes. Japan’s vast multitude of mountain valleys, for instance, are no longer nearly as isolated as they were even just five years ago. Today, with the modern Internet, their inhabitants can access national markets and social networks, and can increasingly bargain collectively for goods and services. Over the next decade they may become even less isolated, as technology is likely to sharply reduce traffic on the country’s crowded road network (which will also free up plenty of room in Japan’s large cities), gasoline prices may remain lower than they have been in recent years, and elderly and retired Japanese may travel less frequently than Japanese populations have done in the past.

Japan’s mountain regions may also be aided by technologies like the Aeroscraft, an airship the length of a football field that is currently being developed in the US as a response to the difficulties its military has faced in mountainous landlocked Afghanistan. The Aeroscraft could allow non-bulk goods to be shipped efficiently in mountain valleys where there is not enough cheap land available for significant airports, and where the need to take-off and land in each individual valley makes ordinary airplanes (which have extremely high take-off costs) highly inefficient. While it is impossible to know for sure, it seems possible that Aersocraft airships will be ready for regular use within five to ten years. In addition to helping Japan’s mountainous territories better participate in the Japanese economy, they could potentially also help Japan access markets in nearby economies like South Korea and northern China more quickly than can be done by ship.

Another way to overcome a lack of conventional space is to construct high-rise apartment buildings. Japanese cities have already done this, of course, yet they have been somewhat limited in their efforts to do so by the high cost of construction. Going forward, however, such costs may decline. As Japanese workers retire en masse, for example, and as many white-collar jobs in Japan begin to be automated or outsourced while more work can be done from home offices because of the Internet, Japan is likely to see a large number of its commercial high-rises transformed into residential buildings. While this transformation is not inexpensive, it can be done at a tiny fraction of the price of building a high-rise from scratch.

In addition, if commodity prices remain low, and if China’s enormous construction frenzy finally ends, Japan will find it much cheaper to import building materials. It might even be able to import some skilled Chinese engineers, or Chinese-built apartment modules. Indeed, modular construction might might significantly reduce both the costs and the required labour and time of high-rise construction. This could be a huge help for a country as incredibly compact and mountainous as Japan.

In Search of a Unified Theory 

How will Japan’s real estate, demographic, commodity, commercial, sociopolitical, and income factors combine in the years ahead? It is not clear. What is clear, though, is that ignoring Japanese stocks remains something that cannot be done lightly. Japan’s economy continues to have Potential. With the Nikkei still relatively cheap on a price-to-earnings and price-to-book basis, then, it is not surprising that the recession has not led to a market drop. The cat may yet be alive.