Debt and Economic Development

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)