In the midst of the conflicts in North Africa and the Middle East, the world was shaken (forgive the pun) by the earthquake(s), tsunami and then the damage to the nuclear reactors in Japan. The human tragedy of the conflicts close to us and the natural disasters in a faraway land are bound to leave a strong impression on us. The crudeness of television images and the immediate reporting ensure that. But these events are also likely to have a fall-out of an economic nature.

The conflicts in North Africa and the Middle East have led to an increase in the international price of oil, the closure of business activities and a general feeling of uncertainty. These will all have a direct impact on our economy. The natural disasters in Japan may seem to be remote to us not only from a geographical perspective but also in economic terms. At first this seems to be a good line of reasoning. Further assessment shows that, directly or indirectly, the events in Japan are bound to leave their impact on our economy.

We need to keep in mind that Japan is the world’s third largest economy in terms of total gross domestic product, and China surpassed it recently only because of the size of its population. Its per capita income is among the highest in the industrialised world. The absence of natural resources and the relatively small size of the population have meant that it had to develop its economy on the strength of its ability to produce and sell goods abroad.

In fact, today we have grown accustomed to buying products of better quality at lower prices, primarily because of the effort made by Japan in the 1950s, 1960s and 1970s to produce consumer goods that could compete with goods produced in the US and Western Europe. We have seen this in the automotive, consumer electronics, household goods sectors and others.

The role which Japan had in the world economy was taken over by countries in Southeast Asia and more recently by China. But it still continued to play a big role in technological development. In this context it may be said that Japan has become a very mature economy and this explains the low growth rates it has had since the early 1990s. On the other hand the natural disasters of the past days, coupled with the damage to the nuclear reactors, has debilitated Japan’s productive capacity.

I believe that the world economy (and Malta will not be exempt from this) will be worse off as a result of this shrinkage in productive capacity. There will be lower aggregate demand, less investment and less technological developments. Such consequences would in turn create bottlenecks which may take time to clear. Even though there is little direct Japanese investment in Malta, when compared to other countries, the economic linkages between the two countries are bigger than we think, and this is why I feel that our economy will suffer more than expected as a result of the events in Japan.

The next aspect to consider regarding Japan is specifically about the damage to the nuclear reactors. Japan developed nuclear energy in order to move away from its total dependence on oil. It must be said that these reactors were damaged as a result of the earthquake, but it immediately raised the issue of how safe nuclear energy is. Suffice it to say that Germany closed down seven nuclear reactors this week and the EU Energy Commissioner referred to the Japanese situation as apocalyptic.

This needs to be seen in the context that we have not yet discovered an economical way of developing energy from renewable sources. This has certainly not been due to a lack of trying, because countries such as Japan have invested great sums of money into such research.

Thus, in order to have cheap energy the world has to continue depending on oil, and probably to a greater extent than before. And it so happens that most of the areas from where oil is extracted are not politically stable. It is easy to understand why the world’s economy is now more vulnerable than it was before. A vulnerable world economy will have its negative impact on Malta’s own open economy.

I believe one needs to keep constant watch on the fall-out from the events in Japan, because the effects can be as significant as the effects from the meltdown in the financial markets some 30 months ago.