Total global debt is now nearly 25 percent higher than it was on the eve of the COVID-19 pandemic, when it already was at an all-time high, Indermit Gill, Chief Economist of the World Bank Group, has stated in a latest blog post. This overhang could undercut all economies’ ability to shield themselves against the latest shock: higher trade tariffs. While the global economy has held up remarkably well so far, the margin for error is dwindling. Although the world has so far managed to dodge a “systemic” financial meltdown of the 2008-09 variety, too many developing economies are now in a doom loop. To service their debts, many of these countries are cutting the investments—in education, health care, and infrastructure—that they need to assure future growth, he noted.
According to Gill, although debt is crucial for driving economic growth, it should be understood as a form of deferred taxation. By borrowing rather than taxing, governments can make long-term investments that will benefit future taxpayers without burdening the current generation; or they can prop up national growth and incomes during an economic emergency, when hiking taxes would only deepen the downturn. Eventually, however, the piper must be paid, and if national income does not grow faster than the cost of borrowing, taxes must be raised to repay the debt. Persistently high debt thus becomes a barrier to economic progress.
The blog post noted that over the last 15 years, developing countries got hooked on debt, which they amassed at a record-setting clip: six percentage points of gross domestic product (GDP) per year, on average. Such rapid debt build-ups often end in tears. Indeed, the odds that they will trigger a financial crisis are roughly 50-50. Moreover, this particular surge has been punctuated by the fastest increase in interest rates in four decades. Borrowing costs doubled for half of all developing economies, with net interest costs as a share of government revenues rising from less than 9 percent in 2007 to about 20 percent in 2024.