Economics
Student Videos
Debt and Economic Development
- Level:
- A Level, IB
- Board:
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 31 Jan 2020
In this video we look at the rising external debt issued by many developing and emerging countries and assess some of potential benefits and drawbacks.
Government debt as a share of GDP in emerging economies from 2001 to 2019 has risen from 27% in 2008 to 55% now. A growing number of African countries have issued Euro Bonds, totalling $115 billion at the end of 2019. Large economies such as Nigeria and South Africa have been followed by Ivory Coast, Angola, Kenya and Ghana.
Case for developing countries borrowing from overseas to finance their development
- Loan finance is often needed to overcome the savings gap
- Debt finance might be justified by the requirement to cover the cost of mega infrastructure projects
- Long term returns (including higher per capita incomes) can then be used to service the debt over future years
- Capital market discipline can sometimes lead to governments following better macroeconomic policies and introducing economic reforms
Risks from following a debt-led growth model
- Developing countries are exposed to higher market interest rates e.g. in the US and the EU
- Debt interest payments may then quickly become unsustainable (taking up a rising share of government spending / high share of exports)
- Developing countries have more currency risk (e.g. depreciation & devaluation increasing the real value of debt priced in $s or Euros)
- Government failure / corruption often causes long term growth returns from infrastructure projects to come in well below forecast
- There might be an incentive for highly indebted countries to inflate their way out of debt or announce a partial default (but big long-term risks from doing this)
You might also like
Development economics - new essays for practice
Practice Exam Questions
Macro Risks: China's Addiction to Debt
22nd August 2017
Debt
Study Notes
A* Exam Technique: Evaluating government borrowing to promote development
Practice Exam Questions
Debt crisis warning for poorest countries
4th April 2019
State of the UK Economy (May 2018)
Study Notes
Difference between National Debt and External Debt
Student Videos
Recommended

Exam support for 2022
Online Grade Booster Courses for A-Level Exams in May & June 2022
Exam technique, advance information support, live revision and more from the tutor2u subject specialist teams