Question

1. Like advanced nations, debt brings benefits and costs to EMDCs. However, developing countries are more vulnerable to debt than their advanced peers. Why so? (200 words)

Answer 1

As per World Bank report, waves of debt accumulation have been a recurrent feature of the global economy over the past fifty years, involving both advanced economies and emerging market and developing economies (EMDCs).Here, the debt of developing countries refers to the external debt incurred by governments of developing countries, generally in quantities beyond the governments' ability to repay.

Global debt has trended up since 1970, reaching around 230 % of GDP in 2018. Debt has risen particularly rapidly in EMDCs, reaching a peak of about 170 % of GDP in 2018. Much of the increase since 2010 has occurred in the private sector, particularly in China. Debt in low-income countries has started to rise after a prolonged period of decline following debt-relief measures in the late 1990s and 2000s. Advanced economy debt has been broadly flat since the global financial crisis, with increased government debt more than offsetting a mild deleveraging in the private sector.

Coming to the point of Borrowing; it can be beneficial for EMDCs, particularly in economies with substantial development challenges, if it is used to finance growth-enhancing investments in areas such as infrastructure, health care, and education. Government debt accumulation can also be appropriate temporarily as part of counter-cyclical fiscal policy, to boost demand and activity in economic downturns. However, particularly for EMDCs, high debt carries significant risks, since it makes them more vulnerable to external shocks. The rollover of debt can become increasingly difficult during periods of financial stress, potentially resulting in a crisis. High government debt can also limit the size and effectiveness of fiscal stimulus during downturns and dampen long-term growth by weighing on productivity-enhancing private investment. EMDCs have been navigating dangerous waters as the current debt wave has coincided with multiple challenges for these economies. They have experienced a decade of repeated growth disappointments and are now confronted by weaker growth prospects in a fragile global economy. In addition to their rapid debt build-up during the current wave, these economies have accumulated other vulnerabilities, such as growing fiscal and current account deficits, and a compositional shift toward short-term external debt, which could amplify the impact of shocks.