In Keynesian Economics, Countries create debt for future generations. A country can fail only if it cannot pay its debt. Now, Let’s expand on the factors affecting a country’s debt payment abilities, using examples and data points from the provided sources and broader economic contexts:

1. Population Growth Slowdown and Debt Sustainability

  • Key Mechanism: A shrinking or aging population reduces the labor force, lowering tax revenues and increasing dependency ratios (fewer workers supporting more retirees). This strains public finances, especially for countries reliant on pay-as-you-go pension/healthcare systems.
    • Example: Japan’s debt-to-GDP ratio exceeds 260% (2023), the highest globally. Its population decline (projected to fall from 125 million to 100 million by 2050) and aging society (28% of the population over 65) limit growth and tax bases, making debt servicing harder.
    • Data: Greece’s debt crisis (debt-to-GDP peaked at 180% in 2018) was exacerbated by a population decline (-4% since 2008) and youth emigration, reducing future economic capacity.

2. Natural Resources as a Mitigator

  • Key Mechanism: Resource-rich countries can leverage commodities (oil, minerals) to generate revenue, stabilize economies, or build sovereign wealth funds.
    • Example: Norway’s $1.4 trillion sovereign wealth fund (2023), built on oil revenues, allows it to manage debt and fund public services despite an aging population.
    • Contrast: Venezuela’s debt defaults (e.g., 2017) stemmed from overreliance on oil without diversification, leaving it vulnerable to price shocks.

3. Innovation and Productive Investment

  • Key Mechanism: Keynesian theory supports deficit spending for productive investments (infrastructure, R&D) that boost long-term growth, offsetting demographic pressures.
    • Example: South Korea’s post-war investments in tech (e.g., semiconductors, 5G) drove GDP growth (3-4% annually), enabling debt-to-GDP stabilization at ~50% despite an aging population.
    • Contrast: Countries lagging in innovation (e.g., Italy, with stagnant productivity and debt-to-GDP at 140%) struggle to generate growth needed to service debt.

4. Other Critical Factors

  • Global Economic Conditions:
    • Developing countries face higher debt servicing costs due to rising interest rates and currency volatility. For example, 26 nations paid more on debt than they received in climate finance in 2021.
    • China’s Belt and Road Initiative loans to developing nations have created debt traps (e.g., Sri Lanka’s Hambantota Port), highlighting how external debt can amplify vulnerabilities.
  • Political Stability and Governance:
    • Poor governance (e.g., corruption in Argentina) erodes investor confidence, raising borrowing costs. Argentina’s 2020 default (9th in history) was tied to political instability and mismanagement.
  • External Shocks:
    • The 2020 pandemic increased global debt by $24 trillion, with developed nations (US, Japan, UK) accounting for 80% of the buildup. Their ability to borrow cheaply (reserve currencies) contrasts with emerging markets facing higher spreads.

Conclusion

A country’s debt sustainability hinges on:

  1. Demographics: Slowing population growth weakens growth potential, as seen in Japan and Greece.
  2. Resource Management: Prudent use of natural wealth (Norway) vs. mismanagement (Venezuela).
  3. Innovation: Productive investments in technology and infrastructure (South Korea).
  4. Global Context: Interest rates, trade dynamics, and geopolitical risks.

Without these mitigators, debt becomes a “burden on future generations” through austerity, reduced public services, or defaults.

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