Government debt and wealth in the Global South

3 The scale of government debt: An ever-growing problem

Since the 1970s, global government debt has steadily increased. As you would expect, this trend accelerated during the COVID-19 pandemic, although some of that shock has been reversed since.

To learn more about how GDP is calculated, read Section 3.2 of The Economy 2.0: Macroeconomics.

gross national income (GNI)

A measure of the total amount of income earned by residents in a country, irrespective of where the income is produced (within the country or abroad). It is different from gross domestic product, which measures the production within a country, irrespective of who owns the income that the production generates.

gross domestic product (GDP)

A measure of the market value of the output of final goods and services in the economy in a given period. Output of intermediate goods that are inputs to final production is excluded to prevent double counting.

Government debt is usually measured as a percentage of gross national income (GNI). The difference between GNI and gross domestic product (GDP), which is the usual measure of the size of an economy, is relevant for debt analysis. GDP measures the total value of products and services produced within a country’s borders. The problem is that some of that production is actually owned by or owed to foreigners: it may be produced within the country, but it is not part of the country’s income. GNI measures the total amount of income earned by residents in a country, irrespective of where the income was produced. For example, many residents may receive income from investments abroad. If this is so, GNI may be higher than GDP. If, on the other hand, much of a country’s GDP is owned by or owed to foreigners, that country’s GNI can be lower than its GDP.

If you add up the whole of the world economy, GDP and GNI are exactly the same. However, on average, LMI countries have a GNI that is lower than GDP while higher-income countries have it the other way around. The standard used for analysing government debt is to compare with GNI because what is relevant is the resources that a country’s residents have available to pay the debt, that is, the income that they can engage in servicing the debt. You may have a very high GDP, but if it is owned by foreigners, it is of little use for paying your national debt.

In 2023, two comprehensive analyses of the debt problem in LMI nations were published. The Secretary General of the United Nations issued a report to the United Nations Conference on Trade and Development (UNCTAD) called ‘A world of debt: A growing burden to global prosperity’ and the World Bank published the ‘International Debt Report 2023’ which marks the fiftieth anniversary of the establishment of the International Debt Statistics repository.

Global public debt was around 50% of world GNI in the year 2000, and in 2023 it was just over 90%. Around a third of the outstanding global government debt has been issued by LMI countries which, in principle, sounds reasonable given that they represent around 35% of world GNI. However, the trend is more worrying. While debt levels have increased by 50% in high-income countries during the last decade, they have increased by over 200% in LMI countries over the same period. It seems that debt levels will continue to grow. The level of concern over global debt, particularly in LMI countries, increased during the 2020–2023 global COVID-19 pandemic that forced many countries to shut down their economies, use their reserves and savings, and issue more debt to finance social spending packages, vaccines, and other public health measures.

debt stock

The total amount or value of debt that an agent (for example, an individual, a company, or a government) has outstanding at any point in time. Another way of understanding debt stock is that it is the total amount that an agent would have to pay to be free of debt.

Panel a of Figure 1 shows the total debt stock for low- and middle-income countries in the US dollars of each year (with no correction for inflation). This panel shows that these debt levels have been steadily increasing. In fact, the total global external debt stock of the 131 countries that the World Bank classifies as low- and middle-income peaked in 2021 at 9.28 trillion dollars but fell to slightly less than 8.97 trillion in 2022. A problem in interpreting this number is what to compare it with. A high level of debt may be burdensome for a country with few means to service it but not a problem for a country with more options. This is the comparison made in panel b of Figure 1, where the debt stock is divided either by the gross national income or by the total value of exports of goods, services, and primary income, which are indicated by labels on either side of the graph.

On average, over the period shown in Figure 1, LMI countries have issued debt that represents around 25% of their annual GNI and around 100% of the value of their annual exports and net primary income from abroad. Although these averages include very extreme and worrying situations in particular countries (as we discuss later), it is worth noting that by these two measures, the average debt situation among low- and middle-income countries in 2023 was much better than in the 1980s and 1990s, when debt represented around 35% of GNI and over 200% of exports and primary income. This improvement is a result of a combination of factors: the debt restructuring programmes of the 1990s that we will discuss in Section 4.4 and the accelerated export-oriented growth that many LMI countries have experienced since. However, these averages contain a much more complicated situation when we account for the heterogeneity between countries.

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Figure 1 Total debt stock of the 131 low- and middle-income countries in trillions of USD (panel a), and as a percentage of gross national income or exports and primary income (panel b).

World Bank International Debt Statistics (2023).
Note: In panel b, the debt stock of each country was divided by the GNI or exports and primary income for that country, and the values shown are the averages taken across all countries in that year.

Cross-country differences

Examples of low-income countries are Ethiopia, Mozambique, Afghanistan, and Syria; lower-middle income: Bolivia, Haiti, Nigeria, and Pakistan; upper-middle income: Brazil, South Africa, Mongolia, and Indonesia.

Figure 2 shows the two measures of debt in panel b of Figure 1 for three different income categories of countries according to the World Bank lending group classification: low-income countries ($1,145 current USD of GNI per capita or less), lower-middle income ($1,146 to $4,515), and upper-middle income ($4,516 to $14,005). The problem is concentrated in low-income countries, where debt represents around 100% of exports and net primary income in 2022, meaning that they owe two years’ worth of foreign currency income sources (panel b of Figure 2). Debt as a percentage of GNI (panel a of Figure 2) was much worse in the 1990s but in 2022 it was a similar level to the 1980s for these countries.

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Figure 2 Total debt stock of low-, lower-middle-, and upper-middle-income countries as a percentage of gross national income (panel a) or exports and primary income (panel b).

World Bank International Debt Statistics (2023).

service (of a debt)

The total amount or value of debt that an agent (for example, an individual, a company, or a government) has outstanding at any point in time. Another way of understanding debt stock is that it is the total amount that an agent would have to pay to be free of debt.

interest rate

The price of bringing some buying power forward in time.

loan term

The amount of time the borrower has to repay the loan.

Another way of visualizing the burden of debt is not to examine the stock but the cost of servicing the debt. The service of a debt is the amount that is required to pay both the interest and the principal due on the loan. This is relevant because a large debt with a low interest rate or a long-term due date may generate a less burdensome service than a small debt with a very high rate or a short-term due date (as explained in the ‘Find out more’ box). The importance of the service of the debt is that it affects the way that the debt bites into the budget of the government and its ability to implement social and infrastructure policies.

Find out more The service of the debt

Consider two countries (A and B) that have a similar GNI. Country A has a foreign debt of 100 million USD while Country B owes 200 million. However, Country A must repay the debt in 10 years with an interest rate of 10% while Country B has 40 years with an interest rate of 5%. Consider that both countries have the policy of paying, every year, the interest accrued on the outstanding debt and the proportional fraction of the principal that allows them to completely repay the debt in the term that was contracted (the total amount divided by the number of years). The first year, Country A will have to pay 20 million (10 on the principal and 10 in interest) while Country B will have to pay 15 million (5 on the principal and 10 in interest). This means that although Country B has twice the debt of Country A, it has a smaller service, so it has to cut its social spending each year by less in order to deal with the debt. The debt is larger but less burdensome because of its more favourable conditions. Country B will take more years to repay their debt (since it has more debt and at a longer term) and will end up paying much more interest (405 over an initial loan of 200 compared to 55 over an initial loan of 100 in Country A) but it could still be much easier to accommodate in the short term within a fiscal budget.

Follow the steps in Figure 3 to understand how the debt service depends on the interest rate and loan term.

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Figure 3 How interest rates and the loan term affect the debt service. Debt service per year is calculated as the principal divided by the loan term, plus the interest on remaining debt.

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https://books.core-econ.org/insights/government-debt-and-wealth/03-the-scale-of-government-debt.html#figure-3a

The debt service of Country A and Country B

This chart shows the trajectory of the debt service of these two countries (the line ends when the country’s debt is repaid). The way to calculate the debt service is to divide the principal by the number of years and assume that each year the country will pay the rate on the debt outstanding and the quota on the principal. Up to the 7th year, Country A will have a higher service than Country B.

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Debt service when the interest rate doubles

Now suppose the interest rate for both countries doubles. The crossing moves back to the 4th year. (The dotted lines show the original situation.)

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Debt service when the due date increases by 50%

Now suppose the due date of the debt for both countries increases by 50% (for example, 15 years instead of 10). The crossing moves forward to the 8th year.

Figure 4 shows the evolution of the service of debt for low- and middle-income countries as a percentage of GNI and as a percentage of exports plus primary income. One of the more worrying developments is the increasing burden of the debt service within low-income countries, which has reached similar levels as in middle-income countries. In low-income countries, the need for social spending may be higher because of the underlying conditions of poverty and vulnerability of a greater proportion of the population, so the bite that debt service takes out of public finances has potentially greater social costs. Comparing the debt service of low-income countries today with that of the 1990s, it is three times the size and constitutes 2% of GDP which can mean around 10% of the budget lost to debt service (on average LMI countries have a budget that is around 20% of GDP).

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Figure 4 Total debt service on external debt of low-, lower-middle- and upper-middle-income countries as a percentage of gross national income (panel a) or exports and primary income (panel b).

World Bank International Debt Statistics (2023).

Half of all LMI nations spend over 7% of the value of their annual exports just servicing their debt.¹ As Figure 5 shows, the number of countries that spend more on servicing their debt than on education has gone up from 13 in 2010–2012 to 19 in 2019–2021. In the case of investment in infrastructure it has gone up from 9 to 21 and in the case of health spending from 30 to 45. The number of countries with debt levels over 60% of GDP (which is a frequent debt level target used by countries) was around 20 in 2010; it spiked at 70 during the COVID-19 pandemic and was still around 60 in the years following the pandemic.

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Figure 5 Number of LMI countries (out of 131) that spend more on servicing debt than on important budget items.

United Nations Global Crisis Response Group. 2023. A world of debt: A growing burden to global prosperity.
Note: The 2023 report was used because later versions of this report do not include investment in infrastructure.

Global governance systems for government debt

According to the United Nations, in 2023, 62% of government debt is held by private creditors and investors, up from 47% a decade ago.¹ This trend generates a global governance problem because the institutions that exist to deal with government debt problems, such as the Paris Club and the International Monetary Fund (IMF), are designed and structured for state-to-state debt crises. It is not at all clear that the way private markets and legal systems deal with private insolvency problems is the best for government debt defaults. A country going through a default has to go through a polit­ical process to deal with the problem and has to distribute the burden of the adjustment in a way that is politically feasible and does not collapse into violence. There is no reason that private markets and international legal systems would consider these variables.

government debt crisis

A situation in which a state somehow becomes unable to pay a substantial part of its sovereign debt. When this happens we usually say that the country has gone into ‘default’ and, as happens with individuals and companies that find themselves in similar situations, must renegotiate with its creditors.

Although government debt has many commonalities with debt incurred by other economic agents, it also has its own features: in particular, complicated political constraints faced by the governments involved. A country cannot stop delivering basic social services to its population as part of a debt restructuring deal. If it does, it will face a severe social crisis that could make matters worse. This means that when a debt crisis occurs and the terms of a loan must be renegotiated, the negotiation is not just a tech­nical issue and the final deal is not only a business settlement but a political agreement. It is very rare that a structural adjustment programme, such as those required when facing a debt crisis, will generate costs that are borne by everybody with similar intensity. The opposite is usually true: there are winners and losers, which requires a political settlement of one sort or the other. Thus, the new era of privately held government debt requires a specific governance system. However, at the time of writing this Insight, we do not have a coherent global governance system for government debt crises.

This new reality of government debt may require the design and implementation of a new governance system in the same spirit of the 1944 Bretton Woods accords. These accords were the result of a conference held at a resort hotel in New Hampshire, which was one of the major events of world economic history. The main figures involved were John Maynard Keynes representing the United Kingdom and Harry Dexter White representing the United States (although there is some interesting intrigue about him being a Soviet spy). The mandate of the Allies was to negotiate a global governance system for international relations regarding commerce, monetary policy, and finance.

To learn more about John Maynard Keynes, read the Great Economists box in Section 5.8 of The Economy 2.0: Microeconomics (Section 14.6 of The Economy 1.0).

The reason the Allies were debating these issues while the Second World War was still ongoing is because the nonexistence of global economic governance was part of the historical diagnosis of the origins of fascism and the Third Reich. In the absence of global governance, catastrophic economic events drove countries into crises, poverty, despair and political violence, and into the arms of fascist leaders: a thesis that had been argued for a long time by Keynes himself. The development of global financial capitalism during the late nineteenth and early twentieth centuries had been left to its own devices and was introducing intolerable levels of uncertainty, vulnerability, and risk into fragile political systems striving to stabilize countries. The result of the conference was the creation of the IMF and the World Bank (then called the International Bank for Reconstruction and Development), two institutions that were chartered with the mission of stabilizing exchange rates, trade flows, and the economic conditions of the postwar world.

If you are interested in historical perspectives of the debt restructuring problem, read ‘Sovereign Haircuts: 200 Years of Creditor Losses’ by Clemens Graf von Luckner, Josefin Meyer, Carmen Reinhart, and Cristoph Trebesch (2024).

The next section will explain why the problem of government debt will not go away and, if anything, may get more complicated. We might therefore need a ‘new Bretton Woods’ to govern this new face of globalization and world of government debt, and reduce the exposure of fragile countries across the Global South to unnecessary risk.

Exercise 1 Government debt levels

1. Use data from the World Bank Open Data site to find five countries that have a similar GDP per capita (measured in purchasing power parity or PPP) to your country. (Hint: You can find this data by searching for ‘GDP per capita, PPP’ and using the ‘constant international $’ measure.)

2. Use data from the World Bank International Debt Statistics site to download data on the government debt level of your country and the five other countries that you have chosen in Question 1, for all years for which data is available.

3. For these six countries, make a line chart comparing the government debt:

   a. in levels, measured in US dollars

   b. as a percentage of GNI

   c. in levels, measured in US dollars per capita.

   Based on your charts, comment on the size of government debt in your country and how it has changed over time.