Debt versus Growth
The low level of debt in developing countries augurs well for the continuing strong growth of their economies and markets. As Reinhart and Rogoff[1] demonstrate in their January 2010 paper, there is a strong relationship between the level of government debt and real GDP growth.
For both developed and developing countries, GDP growth is highest when Debt/GDP is below 30%. It tapers off slightly as this percentage rises and falls sharply when Debt/GDP reaches 60% for developing countries and 90% for developed countries.
The following three examples, taken from 24 Emerging Market Economies, illustrate this point.
The relationship between debt levels and inflation is less strong in most developed countries, with the exception of the United States. In Emerging Market Economies, this relationship is statistically significant. For the period from 1946 to 2009, the inflation rate of the Median of the 24 countries was 6.0% when Debt/GDP was below 30%. It rose to 11.7% when that percentage was 60-90% and climbed to 16.5% when debt was over 90%.
Analysing the US 216 data observations from 1790-2009, real GDP growth was 4%, when Debt/GDP was below 30%, dropped to 3½% when 30-90%, but turned 1½% negative when it was 90% and above. At this 90% threshold, the US inflation rate rose from 0.25 % to 4%.
The well documented findings of Reinhart and Rogoff are based on 3,700 observations over time periods varying from19 to 219 years. Many Emerging Market Economies, and for that matter Canada, have a Debt/GDP of 30-40%, while the United States, Japan and most European economies are, or will soon be, at the 90% threshold.
Real GDP Growth as the Level of Government Debt Varies:
Selected Emerging Market economies, 1900-2009
(annual percent change)[2]
[1] GROWTH IN A TIME OF DEBT by Carmen M. Reinhart (U of Maryland) and Kenneth S. Rogoff (Harvard), http://www.nber.org/papers/w15639 .
[2] Taken from page 15 of the Reinhart & Rogoff paper.