The Worldbank and “Global Waves of Debt”

It is common knowledge that global debt has risen sharply since the 2008 crisis. The Worldbank, which has just presented the first in-depth analysis of the similarities and differences in the post-1970 waves of debt accumulation, points out that the latest debt surge in emerging and developing economies has been striking: climbing to an all-time high of roughly 170 percent of GDP between 2010-2018, this is a 54-percentage point increase. The total global debt of 230 percent of GDP in 2018 is also a new record.


The Worldbank’s historical analysis, under the title Global Waves of Debt. Causes and Consequences, notes that roughly half of the hundreds of global debt surges ended in financial crises. The Worldbank also notes that the current debt wave is the largest, broadest and fastest growing of the four major waves that took place over the last 50 years. Compared to earlier situations, the current debt wave is taking more riskier forms, governments are no longer as effective in investing the loans in physical and human capital, public investment has been falling even as debt burdens rise, and economic growth is not keeping pace with the growth of debt.


History has shown that financial crises resulted in prolonged declines in per capita income and investment. Like now, earlier waves of debt were characterized by low interest rates, and financial innovations that promoted borrowing. When this resulted in a crisis, sharp increases in investor risk aversion and risk premiums could be witnessed. Pointing out the similarities with earlier debt waves, the Worldbank warns against the situation that we currently face – which is “similar to previous waves but larger, faster and broader”.


There are several candidates for triggering a global crisis. Some commentators point out that India is especially vulnerable. Having become globally integrated over the last decades, investor confidence is said to be rapidly declining due to high unemployment, close to zero export growth and a deeply polarized political environment.


Although interest rates are at historic lows and thus moderate the costs of the debt, the Worldbank notes that it is clearly time for corrections. The concrete steps that policy makers are recommended to take are centred around four strands of policies: debt management, macroeconomic frameworks, sound financial sector policies and robust institutions. If governments do not act on these policy recommendations, one of the abovementioned commentators suggests we better adopt the brace position.


Edited by: Dr. Olivier Vonk

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