Developing countries have serious debt problems

Public debt is a problem in the United States, but it is an even bigger problem for developing countries. A new study from the International Monetary Fund finds that developing nations are getting in over their heads.

Developing nations already have more debt than the developed world, say the authors:

  • Public debt in emerging economies amounted to an average of 71 percent of gross domestic product (GDP) at the end of 2002.

  • In comparison, developed nations had an average public debt of 65 percent of GDP.

  • This is very worrying, because the authors suggest that the sustainable public-debt ratio for a typical emerging economy is only about 25 percent of GDP.

    Not only do these countries have larger debt, but they also have a harder times paying it off:

  • Government revenue for developing countries amounts to an average of only 27 percent of GDP (as opposed to 44 percent in rich countries), because of inefficient tax systems and bigger black economies.

  • Interest payments on the debt are almost twice as high as a share of GDP as compared to rich countries.

  • Also, interest payments are more volatile, because in poor countries foreign-currency and short-term debt make up a larger share of the total.

    However, Chile reduced its public debt from 54 percent of GDP in 1990 to 21 percent at the end of last year by cutting spending, broadening its tax base, clamping down on tax avoidance and implementing privatisation. The rewards have been huge: Chile enjoys lower interest rates than other Latin American countries, and its uninterrupted access to capital markets has helped to support economic activity through downturns.

    Source: Into the Valley of Debt - The Sorry State of Developing Countries' Budgets, Economist, September 27, 2003; based on Survey, Public Debt in Emerging Markets: Is it Too High? World Economic Outlook, International Monetary Fund, September 2003.

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    For more on Third World Problems

    FMF Policy Bulletin\28 October 2003

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