Wolf, however, said that there would be a sense of uncertainty about a possible escalation in various directions, while commenting “Uncertainty is bad for the world economy – it affects people’s willingness to take risks.”

We have already seen what the Russia-Ukraine war has done to the global economy. As the battle completed its one year on February 2023, daily necessities like food items and electricity became dearer in significant pockets of the world, as trade disruptions became a routine affair. Add the price rise into it, the problem gets murkier. Even though the developed economies around the world tried to be resilient in front of the crisis, they too felt the pinch of skyrocketing inflation.

Even though the situation is easing now, the central banks and experts are predicting a growth slowdown in the coming days.

Listing down the risks

“A world ordered for decades by globalisation and geoeconomics has quickly become a world grounded in geopolitical risk. Accumulating shocks such as the COVID-19 pandemic and the Russia-Ukraine conflict have persisted, significantly reorganising global structures and relationships in 2023,” commented a report from S&P Global, clearly implying the role of the geopolitical risks in deciding the economy’s course.

In fact, the above report, which came out in June 2023, listed the principal geopolitical risks for the global economy in the coming days. These were Russia-NATO tensions in Ukraine (resulting in greater risk exposures in capital flows, trade and commodity markets worldwide), cyber-attacks (Russia-linked threat actors wreaking havoc in United States and Europe), US-China strategic competition (Beijing’s increased military presence in the South China Sea, technological advancements and ongoing trade tensions with Washington in the domains like semiconductor), climate risks (growing incidents of hurricanes, droughts, floods and wildfires across the world) and energy security (Europe’s energy supply from Russia facing uncertainties as Ukraine conflict continues).

Add the impacts of the COVID pandemic too. Although the global supply chains are at the final stages of their recovery period, no one can predict that what we witnessed during the 2020-2021 period was the last such occurrence on our planet.

Understanding the pattern

“A potential decoupling of the global trading system into two blocs – a US-centric and a China-centric bloc – would reduce global welfare in 2040 compared to a baseline by about 5%. Losses would be largest (more than 10%) in low-income regions that benefit most from positive technology spillovers from trade,” comments a VOXEU article.

We are all part of the globalised world and such ‘Decoupling’ efforts will complicate matters further.

In fact, we are living in the era of ‘Open Markets’ (an unrestricted market with free access by and competition of buyers and sellers, governed by the principles of supply and demand, with limited interference/outside influence from large conglomerates/governmental agencies) and ‘Free Trade’ (international buying and selling of goods, without limits on the amount of goods that one country can sell to another, and without special taxes on the goods bought from a foreign country), an international order which emerged from the ruins of the Second World War.

“A large consensus on the benefits of lower trade costs and prioritising gains from trade led to a continuous deepening of the international trade regime. With the end of the Cold War, that consensus moved eastwards. The EU expanded to the east and many countries joined the WTO, including Russia and China,” commented economists Carlos Goes and Eddy Bekkers in their research titled “The impact of geopolitical conflicts on trade, growth, and innovation: An illustrative simulation study.”

“However, the last decade has witnessed the beginning of a backlash against global trade integration. Political scientists conjecture that the emergence of China as a new superpower against the incumbent US might lead to strategic competition between these countries, one in which geopolitical forces and the desire to limit interdependence take primacy over win-win international cooperation,” the experts commented further.

To prove their point, Goes and Bekkers took the Ukraine war as an example. As the battle broke out in February 2022, the United States-led Western Bloc imposed sanctions on anything and everything Russian.

The West thought of hurting Russia’s energy trade, the same resource on which Europe’s entire economy keeps running. Moscow countered it by diverting much of the commodity to allies like China and India. It resulted in the United Kingdom’s domestic population almost sliding into the ‘Energy Poverty’ in 2022.

The European country’s economy too got plagued due to inflation and the cost-of-living crisis. Although the energy scarcity situation is not so severe now, the uncertainties are there as the West is in no mood to give up on capping Russia’s trade revenues.

The Black Sea Grain Deal, signed in 2022 by Ukraine, Russia, Turkey and the United Nations has constantly come under the worry of breaking down. The deal, which till August 2022, saw some 32.9 million metric tonnes of food items to be exported from Ukraine, helped some of the developing and impoverished regions of the world to feed their populations under the World Food Programme (WFP). In July 2023, Russia pulled out of the deal, thereby putting the arrangement in jeopardy.

“The Russian invasion of Ukraine led to sanctions imposed by a group of Western economies and has reinforced the debate on decoupling between blocs of regions. Although the sanctions are so far focused on Russia and Belarus, there is a risk that the conflict could widen and reinforce support for a policy driven by geopolitical considerations. This raises the question of how much real income might be lost if win-win international trade cooperation were given up and the global economy were to decouple, disintegrating into an Eastern bloc and a Western bloc,” Goes and Bekkers summarised the situation perfectly.

In fact, what we are now witnessing is not only a geopolitical crisis dominating the global economy, it literally challenging the concepts of ‘Open Markets’ and ‘Free Trade’, as one can’t dismiss the notion of Russia, armed by the Chinese support, may end up severely challenging the concept of a ‘Globalised World Order’, thereby leading to the restoration of the Cold War-era ‘Eastern Bloc’ and ‘Western Bloc.’

Fragmentation of the global order

The worry raised by Goes and Bekkers gets further backing from the Atlantic Council which stated that the geopolitical tension between China and the United States has fragmented the world on political, economic, trade, and financial fronts. This is challenging the existing globalised monetary and financial system, so much so that the International Monetary Fund (IMF) whose core mission is to ensure that the market remains in a liberal, deregulated and reformed manner, to facilitate easy capital flows, may face operational difficulties as well. A rigid global economy divided into two camps, will spell doom for the emerging markets as well.

In 2017, the then United States President Donald Trump criticised China’s ‘unfair trade practices’ behind substantial and persistent US trade deficits and “hollowing out its manufacturing base”. Since then, the world’s largest economy has kept on punishing China economically, be it unilaterally imposing tariffs on imports from Beijing, restricting the latter’s access to cutting-edge technologies like semiconductors, and acting against Chinese telecom companies. The Inflation Reduction Act is incentivising high-tech investment and manufacturing in the United States through the use of subsidies, tax incentives, and other favourable regulatory treatments.

Europe too has followed the lead by launching the ‘Critical Raw Materials Act’ to reduce its dependencies on countries that are not union members. Targeting China, some nations in this part of the world have restricted the use of Huawei equipment in their telecom infrastructures. The reality is instead of liberalising the global economy, developed nations are taking the lead to make the system a rigid one by adopting protectionist policies.

China, under the leadership of Xi Jinping, has termed these moves as unfair ones, born out of ‘suspicion’, and countering them by promoting a ‘multipolar world’, something which has increased manifold after Moscow came close to Beijing after being globally isolated post Ukraine war.

Be it projecting its BRICS alliance as an alternative to the West-led groupings or promoting the idea of ‘de-dollarisation’, China has been playing an aggressive game since 2022. In addition to participating and hosting a series of government-to-government groups like BRICS and the Shanghai Cooperation Organisation (SCO), China is also conducting meetings with the Association of Southeast Asian Nations (ASEAN) and Central Asia, Africa, Middle East, and Latin America groupings.

China is also creating international development banks like the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB).

“The aim is to build up alternative international institutions to facilitate cooperation between China and other countries on China’s terms and not under the tutelage of the United States and Europe—which has contributed to the fragmentation and weakening of the current global order and its institutions,” commented Atlanta Council.

If China wants a global order sensitive towards its geopolitical aspirations, global bodies like the IMF, World Bank and World Trade Organization are coming under a severe threat. While China is now taking a key role in giving out loans to some of the world’s small and emerging economies, IMF, World Trade Organisation and World Bank have been and will be at the forefront, when it comes to bailing out world economies from any sticky situation, while protecting the low-income and vulnerable nations from the crisis’ fallouts.

IMF’s ability to continue functioning seamlessly looks secure as of now, as voting power is weighted by members’ capital contributions. while the United States commands 16.5% of the total votes, the G7 has 41.25% of the voting shares. West is in the driver’s seat here. However, the Atlanta Council feels that the rising level of mistrust and hostility between the United States and China will make it very difficult for the IMF to develop an international consensus to reform its governance structure and give more voice and representation to emerging markets and developing countries (EMDCs).

Is globalisation under threat due to the existing geopolitical crisis? Yes. Will we see the restoration of ‘Eastern Bloc’ and ‘Western Bloc’ kind of economic order? Maybe, that’s a subject of debate. However, the unanimous verdict here says that geopolitics is certainly dictating the 21st century world economy and it doesn’t augur well.

The post Global economy’s uncertain future appeared first on International Finance.

Credit rating agency Standard & Poor’s (S&P) now sees Israel’s economy contracting some further, as the Gaza conflict shows no signs of settling down.

S&P, which affirmed Israel’s rating at AA-, the fourth-highest score, cites lower business activity, depressed demand from consumers, and a very uncertain investment environment, as well as the massive call-up of reservists, as reasons for the downturn.

S&P analysts Maxim Rybnikov and Karen Vartapetov also see Israel’s average budget deficit rising to 5.3% of GDP in 2023 and 2024, due to a wartime increase in fiscal expenditure to support households and businesses and an increase in defense spending. That is more than twice the S&P’s previous forecast of 2.3% of GDP.

The ratings agency also predicted that Israel’s economy will expand by only 1.5% in 2023 and 0.5% in 2024, followed by faster growth of 5% in 2025 as consumer confidence returns and reconstruction and the investment cycle kick in more fully.

The Bank of Israel’s research department also assessed a grim picture by the end of October 2023, as it foresaw the costs of the war leading to an increase in Benjamin Netanyahu’s government deficit to about 2.3% of GDP in 2023, from 1% forecasted previously, and to about 3.5% in 2024. The central bank now expects the economy to grow by 2.3% in 2023 and by 2.8% in 2024, as private consumption falls and the ability to work is constrained.

S&P reiterated that the negative outlook reflects the risk that the “Israel-Hamas war could spread more widely or affect Israel’s credit metrics more negatively than we expect.”

To ensure the Israeli economy’s return to a stable rating outlook, S&P has laid out the pre-requisite of “reduction in regional and domestic security risks without a material longer-term toll on Israel’s economy and public finances.”

The cost of default insurance has skyrocketed, and construction and restaurant firms have closed. On October 19, the finance ministry announced intentions to increase defence spending and help unemployed citizens. Four days later, the central bank lowered its annual growth prediction from 3% to 2.3%.

Since military and economic forces fight the war against Hamas in Gaza, an essential concern arises. Can Israel handle the economic pain of a protracted armed conflict? The country’s conflicts since leaving Gaza in 2005 have been expensive, to say the least.

Military and infrastructure repairs cost billions of shekels—a considerable chunk of their GDP. The country has one of the highest per-person incomes in the Middle East, therefore, the conflicts did not seem like a threat initially.

Thus, Hamas’s October 7 attacks and inevitable battle are sending economists to the history books. Israel nearly collapsed in 1973 due to the cost of armaments and drafting 200,000 army reservists for Yom Kippur. The central bank estimates that a year of intifada (Palestinian uprisings from the late 1980s to the 2000s) cost 3.8% of GDP in 2002.

As per Israeli officials, three major challenges await the Israeli economy. The first is employment. Workers are scarce due to the economy and conflict. Since October 7, the military has mobilized about 360,000 reservists, or 8% of the workforce, higher than in 1973. Most jobs have been abandoned, leaving a huge economic gap as the reservist forces are Israel’s most productive workers.

Start-Up Nation, an Israeli NGO, estimates that 10% of tech workers have been called up. Industry workers are 25% more productive than the OECD average of predominantly developed countries. The rest of the economy workers are two-fifths less productive. Few reservists are from ultra-Orthodox communities that refuse work.

There is another reason for labour shortages. About 200,000 West Bank Palestinians work in Israel or its settlements in low-skilled occupations. Unrest in the West Bank prevents many workers from crossing the border, and even if they do, they might unionize and strike. The IMF said absent Palestinian labour slowed the Israeli economy during the second Palestinian intifada, which lasted from 2000 to 2005.

Due to Israel’s restricted labour market, reservists and Palestinians have few replacements. Unemployment is 3.2%, according to the central bank, which has raised interest rates to calm the economy for months.

Firms may only hire temporary military replacements due to strict labour restrictions, which is unattractive. Investors fear cash will leave “Silicon Wadi” for California. According to Start-Up Nation, 70% of tech companies were already failing. After the conflict, there may be fewer jobs.

Moreover, policymakers face the collapse of private consumption. Staying home has impacted consumption habits due to uncertainty and fear of a protracted war or a second front opening with Lebanon or Iran. For nearly three weeks restaurants and malls have been without customers. Those with workers to open found few customers.

Tourism, Israel’s primary industry after IT, has halted. The border towns with Gaza and Lebanon have been cleared, halting commercial activity. All war-affected firms except the largest will receive covid-style grants for fixed costs. VAT payments were delayed. Workers who work in dangerous environments have been promised benefits. These are all expenses draining the zionist exchequer.

The final difficulty for Israeli officials is controlling the conflict’s monetary costs. Restoring companies, paying reservists, and sheltering towns in hotels will be costly. A substantial boost in defence funding is needed to fund a ground invasion this year and arm Israel for next year.

Israel’s debt is 60% of GDP, a very low percentage for an affluent nation. It is expected to grow to 62% even if the war continues until the end of the year. The central bank has USD 170 billion in forex reserves.

Additionally, if Congress approves President Joe Biden’s USD 14 billion military aid request, America will assist. However, uncertainty increases over time as the conflict could expand to a regional war if unchecked. The primary deficit in Israel is expected to rise from 3% to 8% in 2024.

The economy was struggling before Hamas’s attack, as after a rough first eight months, government revenue fell 8% in September. The revenue base is shrinking and borrowing costs are rising. More destruction and expensive reconstruction will result from a longer war.

Now Or Never

A chorus of local politicians says that a ground invasion of Gaza should be brief and effective since the government cannot pay its way forever. There is also the question of waning international support for the Israeli cause after gruesome reports and images of civilian casualties flood the internet.

In the next few months, individuals and enterprises will receive considerable financial aid, but fighting is eroding Israel’s labour, capital, knowledge, and support from the international community faster than it can be replaced.

Other economies may have endured much worse damage in pursuit of military victories, but Israel cannot afford to be too weak among too many hostile neighbours and no reliable regional partners.

Though war is profitable for the military-industrial complex, it remains more expensive than ever for the global economy.

The post IF Insights: Israel feels ‘Gaza Pinch’ as its economy struggles appeared first on International Finance.

The bank slashed its global growth prediction from 4.1% in January to 2.9%. It is a very alarming statistic but not so far-fetched considering we are amidst a pandemic, a European war, global civil discord, and supply-chain disruptions.

The bank said this is the sharpest plunge the global economy took after a post-recession rebound in nearly a century. Experts don’t expect much improvement in the next two years either.

There is also the risk of a global food crisis because of the Ukrainian war. David Malpass, president of a Multilateral Development Institution in Washington, said if the worst materializes, there would be zero growth in the next two years.

However, not everyone is a pessimist. Nathan Sheets, the chief global economist of Citigroup, said that the chance of stagflation in the US is remote. He urged policymakers to nullify or mitigate the consequences of the war in Ukraine. He also stated the need to provide debt relief to countries and help them pay for food and fuel while evading the trap of distortionary policies like price control and export bans.

Malpass remarked that the ideal way to fight inflation was by increasing production capacity for key goods, but he sees no such efforts. The energy market disruption due to the Russian invasion has brought Europe to the brink of a recession. As the continent weans itself from Russian oil, it finds that alternative suppliers are struggling to keep up with demands. The price of a barrel of crude has shot up by 50% this year.

The post World Bank warns of 70s-style stagflation ahead appeared first on International Finance.

On expected lines, oil and natural gas prices had shot up to record highs before plateauing to steep valuations. This in turn had meant that energy bills, food prices, and the cost of basic commodities across the world have gone up.

Even though once a superpower, Russia only contributes to 3% of the world’s GDP and Ukraine is in the 57th position of the world’s global economies. All this can also kindle a spiral of political instability and give rise to extremist governments and move away from the trend of liberal governments coming into power.

The other short or immediate-term impact of the war will be a staggering food crisis in many vulnerable parts of the world, especially in the Middle East and North Africa. Fifty percent of their food is sourced from Russia and Ukraine.

In the mid-term or long term, the war will have effects on equity and welfare as governments will be forced to look into increasing their spending on defense budgets and cutting on social spending.

Further, this environment of volatility will hurt investor sentiments and restrict cash flow in emerging markets. All this combined, economists predict global stagflation– an unenviable combination of recession and inflation. The world’s stock market indices had breathed a sigh of relief with Russia avoiding a sovereign default.

Another fall out of Vladimir Putin’s ‘special military operation’ is the solidification of a new world order with two cold war-like blocs with one led by the US along with the majority of the West and the other led by China and ostracised nations like North Korea, Iran, and Russia. This, in turn, will restrict the decades-old trend of increased globalisation in the form of the free flow of goods and human capital.

The only bright side is that Europe which is currently overly dependent on Russian oil and gas may look to invest big in greener energy sources.

The post Impact of Russia-Ukraine war on global economy appeared first on International Finance.

The institution’s Board of Directors approved the Second Expenditure Rationalization, Energy Efficiency and State-owned Enterprise Governance Development Policy Financing (DPF) Project for a total of $1.443 billion, including guarantees from the governments of the United Kingdom ($371.82 million) and Canada ($72 million), a testament of strong international support to Iraq. The DPF’s key development objectives focus on: (i) supporting expenditure rationalisation; (ii) improving energy efficiency; and (iii) enhancing the transparency and governance of state-owned enterprises.

“Despite an ongoing war and low oil prices, Iraq is undertaking bold transformational reforms that will safeguard economic stability and lay the foundations for longer term private sector development and inclusive growth for all Iraqis,” said Ferid Belhaj, Director for the Middle East, World Bank. “The reforms will help build trust between Iraqi citizens and their government, by making the management of public funds more efficient and transparent and expanding social safety nets to reach the most vulnerable segments of the population.”

Separately, the Bank’s governing body also endorsed a $41.5 million operation for the Modernization of Public Financial Management Systems, which supports the overall objectives of the DPF series and aims to support Iraq’s public financial management system.

“This operation is complementary to the objectives of the DPF and will support the government in its goal to improve transparency in the management of public funds and financial information and modernise public procurement practices across many federal and governorate agencies,” said Robert Bou Jaoude, the Bank’s Country Manager for Iraq.

The overall financial assistance package is aligned with the government’s recovery blueprint for 2015-2018. It is also in line with the World Bank’s strategy for the Middle East and North Africa, which calls for renewing the social contract in fragile states, supporting regional cooperation, bolstering the resilience to refugee crises, and initiating reconstruction and recovery programs where needed.

With the new package, the World Bank’s present engagement in Iraq rises to nearly $3.4 billion, including multi-sectoral support to the reconstruction and rehabilitation of areas recently recovered by government forces and a transport corridor investment.

In addition, the Bank is providing wide-ranging technical assistance to the Kurdistan Regional Government.

The post New $1.485 billion package to support Iraq appeared first on International Finance.

Suparna Goswami Bhattacharya

May 13, 2016: With oil price continuing to show no signs of improvement, it is no secret that oil dependant nations have to think of alternatives to run their economy. The Kingdom of Saudi Arabia recently announced a slew of measures titled ‘Vision 2030’ to help the economy make a smooth transition away from oil.

Thirty-year-old Deputy Crown Prince Mohammed bin Salman emphasised that urgent steps needed to be taken to save the economy from running out of cash reserves. According to estimates, the Kingdom had cash reserves of $746 billion in 2014, which is now down to $616 billion. “To be fair, this is still a lot compared to other nations, but the fact is cash reserves are depleting fast. And there is no major alternative source of income apart from oil,” says Hassan Ahmed, an independent researcher who studies Middle East economies closely.

Saudi Arabia’s budget deficit in 2016 stood at $87 billion, which was slightly less than the 2015 figure of $98 billion. However, these figures do not take into account the cost of the war in Yemen. So, in actuality, the numbers could be well above $100 billion.

Vision 2030 aims to restructure the economy such that it will not rely on oil as its primary source of revenue. It also includes a much-awaited National Transformation Programme (NTP), which will include a drive for efficiency, tax increases, strategic spending cuts and a bigger role for the private sector.

The goals will be achieved by 1) replacing imported products; 2) creating an ecosystem for entrepreneurship; 3) transforming the welfare state.

According to Saudi American Public Relation Affairs Committee (SAPRAC), the vision revolves around, but is not limited to, privatisation, governance, investing in human capital and economic diversification.

“I am mostly impressed by the aim to increase non-oil government revenue. I believe it is the most ambitious and vital cornerstone of Saudi’s vision for 2030, as it will require an extensive reformation of Saudi Arabia’s income model,” says Salman al-Ansari, founder and president of SAPRAC.

The reforms envision increasing the role of women in the workforce from 22% to 30%. Towards this end, the government announced a special business park for women, which is expected to create around 21,000 jobs.

Saudi Arabia is restructuring its housing ministry to increase supply of affordable housing by creating a ‘green card’ system within five years to give expatriates long-term residence.

Masood Ahmed, director of the IMF’s Middle East and Central Asia department, says, “I do see a number of actions plans to address the budget deficit. That gives us comfort and encouragement. The scale of the plan measures up to the challenge facing the economy.”

A report by SAPRAC states that the Kingdom should create a specialty industry. For example, the country should produce experts in building and designing carbon fibre vehicles. Such experts can turn Saudi Arabia into a premiere destination for acquiring expertise and logistical advice in the industry in question. For example, Taiwan produces computer chips so cheaply yet effectively that barely any other country bothers making them, leaving Taiwan to reap all the financial and economic benefits.

“There is a need to create a technical working middle class, which is now almost totally comprised of expatriates. The young generation have got used to doles from the government. Saudis should be made to realise that everything cannot be taken care of by the government,” says Ahmed, an independent research analyst.

For instance, all 1.2 million college students inside the country receive free university enrolment, free books, free use of labs, dorms and professors. In addition to that, they all receive SR 990 ($26,399) monthly regardless of their economic status. This is unheard of in any other nation.

Additionally, Saudi Arabia has been a country where money was sent out as quickly as it was made. To build a nation with a robust economy, capital is needed from both private and public sectors. With the private sector having no incentive to keep their money inside the country, this will be a handicap to the development and diversification of the economy. Hence, it is important to move away from cradle-to-the-grave social welfare by introducing taxes to people that can afford them (say, property tax and VAT on retail products).

The government aims to increase foreign direct investment (FDI) to 5.7% of GDP as against the current 3.8%. Traditionally, the compiled wealth has left the country as fast as it’s been accumulated, as expats transfer up to 90% of their income to their home countries. Even wealthy Saudis regularly invest in foreign stock markets and various savings accounts abroad. Since the slump of 2014, Saudi Arabians have sent about $73 billion out of the country.

The steps have been announced and now it’s about implementation.

“One of the goals is to have a more efficient government that is less hampered by bureaucratic red tape. Steps to achieve this are already being undertaken. At the very latest, you will start to see these reforms come to fruition some time in mid-2017,” says al-Ansari.

Though the road ahead is not easy, the fact that the government has made a start is reassuring for the global economy. And, what happens in Saudi Arabia will impact the global economy, or at least the Middle East countries.

The post Saudi announces Vision 2030 to transform its economy appeared first on International Finance.

Suparna Goswami Bhattacharya

July 6, 2015: For the past two decades, Japan has been searching to get its economic mojo back. Several governments have done their bit, but nothing seems to have paid the desired dividends.

In the 1940s, the then start-ups like Honda, Nikon, Sony and many others helped Japan rise from the ashes of World War II. These world-class companies gave many Western firms a run for their money and helped Japan catch up with the First World within decades. Though even today it remains the third largest economy after US and China, Japan has been trapped in a cycle of economic stagnation and deflation since the 1990s.

A comparison of the two eras show that the missing link has been the lack of creative spirit. Hence, it is not surprising that Prime Minister Shinzo Abe has put startups as one of the focus points of ‘Abenomics’ policies. What followed was a series of reforms, including deregulation of special economic zones, which is bound to create more opportunities for entrepreneurs. The Prime Minister’s intent to promote startups can be measured by the fact that he recently became the first sitting Japanese leader to visit Silicon Valley.

Hence, things have started looking up a little. “Startup activity in Japan has been on the rise, especially in the past five years. This is in large part due to the changing risk/reward structure of starting/joining a startup. Today, it is much cheaper to start a venture and an entrepreneur can finance it with equity, not debt. Even if the startup fails, the entrepreneur can survive,” says C. Jeffrey Char, President & CEO, J-Seed Ventures, a Tokyo-based venture incubator and Japan market entry specialist.

However, a lot needs to be done. And it starts from changing the attitude towards failure. Abe recently admitted that “in the US and Silicon Valley, risk-takers are respected. This, I believe, is something that is most needed by Japanese businesspeople.”

Terrie Lloyd, serial entrepreneur who is based in Tokyo, echoes Abe’s views. “The startup environment here is underdeveloped mainly because Japanese are risk averse. From a young age,children are taught to be obedient, quiet and submissive. Hence, they grow in an environment where having a safe career is looked up to and given more priority over following your passion and starting your own firm,” says Lloyd.

Beyond the attitude and psychological barriers, there are other roadblocks as well. For instance, there are not enough venture capitalists in place to support startups. “The past six years has seen more and more youngsters getting interested in startups, but there are less number of people out there supporting these startups in the form of VCs, angel investors or mentors,” remarks Kaz Terada, CEO, A2O, a Tokyo-based venture capital fund.

The venture capitalist market in Japan is worth $2 billion whereas the same in the US is $30 billion in size, says Terada adding that Japanese companies still prefer IPOs to mergers and acquisitions. “In Japan, only 10-20% of companies say they want to be targeted for mergers and acquisitions, but in Silicon Valley, it’s 80%,” says Terada adding for Japanese the company is family whereas for young Americans the company is a tool to achieve something bigger.

Also, despite sitting on a pile of cash,large organisations do not utilise it for innovation. Open innovation as a culture has never been encouraged or emphasised upon leading to big companies losing their competitiveness in the international market.

Experts do not seem to be too impressed withthe government’s efforts to improve the startup scenario. “There is a lot of talk, but not much effective action taking place.I feel lack of venture capital is not the main bottleneck to a vibrant startup ecosystem. The Japanese government has a tendency to over-regulate, which makes it difficult for ventures with innovative solutions to gain traction in the market place,” says Char. Hence, an overhaul of the regulatory framework is required to reduce and remove regulations that are no longer appropriate. “Moreover, the government should stop supporting small companies and instead encourage young companies (<5 years=”” since=”” incorporation=”” these=”” are=”” the=”” ones=”” that=”” create=”” employment=”” government=”” should=”” also=”” a=”” preference=”” policy=”” to=”” purchase=”” some=”” nominal=”” amount=”” e=”” g=”” 1-5=”” of=”” goods=”” and=”” services=”” from=”” startups=”” when=”” possible=”” suggests=”” char=”” p=””>

Additionally, the government should also make it easier and cheaper to shut down failed ventures. This will enable human capital, especially those with relevant startup experience to work on more productive ventures.

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