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Reasons of State: Why Didn't Denmark Sell Greenland?

The reason why the US would want to buy Greenland is clear: being able to install anti-Russian military installations such as early-warning radar and nuclear bomber bases (Greenland being fairly close, on a great circle, to Russia)1. The US has famously often bought large chunks of land (Louisiana Territory & Alaska being the biggest & most profitable), so it was nothing new.

This appears to have been a large offer: 1946 US GDP was $200-228b, making an offer of $0.1b a nontrivial percentage of US productivity, and Denmark’s GDP appears to have been >50x smaller, ~$23b, as it recovered from WWII.

The reason why Denmark would want to not sell Greenland is… less clear. At first glance, it’s not clear. Nor the second.

Costs
By the economics, holding on to Greenland is a bad idea.

$100m in 1946 dollars is somewhere around $1b in 2011 dollars. Then one should consider the opportunity cost; $100m invested in 1946 until 2011 at a 5% return is around 24x (
1.05
2011

1946
=
23.8399
) or $2.4b. Denmark could have realized such a return just by leaving the money in the American stock market; the Dow Jones varied between 160 and 200 in 1946-1950, and over the past few years trades at 10-12,000 for a return of 60-63x, and this is an underestimate: stock market returns have been hurt badly by the late 2000s – if one took the old rule of thumb that stock markets return 8% over the long term, Denmark’s hypothetical return would have been 149x, not 63x (
1.08
2011

1946
=
148.779
). With a few more decades, the forgone returns may take off and return to the trendline; Denmark does not have a sovereign wealth fund as gigantic as Norway’s Statens Pensjonsfond, but the government or the pension funds certainly can take a long view on investing, so that’s not an issue.

We can deal with the economy of Greenland in one fell swoop: Greenland’s entire GDP is around $2b. The overall trade deficit is a few hundred million and has been in place for 21 years, since 1990. The official Danish subsidy was $512m in 2005. Greenland is not a going concern and would collapse within years. It’s hard to estimate the total subsidy sine 1946, but if we make the assumption that the subsidy is a constant percentage of Danish GDP then the subsidy totals (ignoring opportunity cost) somewhere upwards of $3-16b2.

Americans may find $3 billion or even $16 billion a pretty piddling sum given the colossal sums it spends (>$3t on Iraq and Afghanistan, $2.5b for B-2 Bombers, etc.); but remember the USA is the largest economy in the world with 300 million people. Denmark is closer to the 30th largest economy, and has just 5.6 million people. To get a better understanding, convert to per capita (multiplying by 60), to get a range from $180b to $960b – at which point it becomes clear that this is no laughing matter for a small country like Denmark. This money could have funded major projects like the Øresund Bridge.

Benefits
So what can we put on the positive side of the balance-sheet? Before evaluating something we need to ask ourselves whether Danish sovereignty over Greenland matters – sovereignty is what Denmark was asked to sell, nothing else. If something would benefit Denmark regardless of whether it sold Greenland or not, then it cannot count as a benefit. We are also interested in the changes on the margin based on Denmark not selling…[ ]

What do you think?

12320 points

Posted by obringer

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