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Sprout in coin money, showing that growth requires financial resources

Photo credit: iStockphoto/RomoloTavani

More and more developing countries in the Asia-Pacific region are struggling under mounting public debt, making it difficult for them to invest in sustainable development.

External debt servicing burdens in several Asia-Pacific countries have doubled or tripled, reaching a high of 10 per cent of GDP in 2022 in some countries. According to our research in the Economic and Social Survey of Asia and the Pacific 2023, 19 countries are deemed as facing a high risk of debt distress based on the joint World Bank-IMF Debt Sustainability Framework for Low-Income Countries or equivalent credit ratings assessed by credit rating agencies. Worryingly, many of these countries most need to step up public spending to deliver on their pledge to achieve the Sustainable Development Goals (SDGs) by the year 2030.

Given that ESCAP estimates from four years ago found the need for an additional average annual investment of $1.5 trillion to deliver on the SDGs in the region (an amount that has most likely significantly increased since the pandemic), it is time for policymakers to  rethink their approach to public debt issuance and its sustainability assessment.

This requires moving away from the conventional view that higher public debt is necessarily bad for economic growth and stability and that there is a common ‘optimal’ debt level applicable to all countries even though they may be in different circumstances.

There is not only a wealth of empirical evidence challenging this limited thinking but this view is also becoming increasingly outdated due to the changing circumstances of the Asia-Pacific region.

What research shows

Current policy debates seem to miss the point that the achievement of development goals or the mitigation of climate risks have a positive socioeconomic and environmental impact which in turn increases the capacity of a country to issue public debt. Bua, Pradelli and Presbitero (2014), for example, criticized conventional criteria and argued that increasing debt thresholds by considering non-financial variables related to the SDGs can be more effective. Azzimonti, Francisco and Quadrini (2014) find that strengthened financial stability allows the level of public debt to increase too, a feedback loop mechanism rarely taken into account.

An analysis of data for the period 1980-2012 by Asteriou, Pilbeam and Pratiwi (2021) found that while increase in public debt had a negative impact on economic growth in 14 ESCAP member countries, a decrease in public debt did not significantly improve short-term economic growth. A study by Pham (2018) shows empirical evidence of a significant and positive impact of increasing public debt on real GDP growth during the 1995-2015 period in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Viet Nam, which can be attributed to the use of debt to fund productive direct investment and capital formation.

The changed Asia-Pacific context

Public spending needs to effectively pursue sustainable development in most developing Asia-Pacific countries are huge and growing. Massive investment is needed in the SDGs to ensure universal access to good health, basic education and decent jobs while protecting the physical environment.

This is why the ESCAP Economic and Social Survey of Asia and the Pacific 2023 has argued for looking on public debt as a powerful tool for development that can be judiciously deployed to raise living standards of the people and hence their economic productivity, making it a win-win proposition.

A higher public debt is not synonymous with higher risk of debt distress which is instead dependent on the goals and composition of the debt, a country’s macroeconomic fundamentals and the quality of public institutions.

Indeed, the conventional argument that high public debt undermines economic growth and stability needs to be weighed against the long-term adverse impact of not investing in promoting socioeconomic and environmental well-being that underpins national productive capacities and climate ambitions.

Asia-Pacific governments should not shy away from borrowing for investing in people and planet as this will pay dividends that will ensure not only the socioeconomic well-being of their populations but also the long-term sustainability of the increased debt burden.

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Shuvojit Banerjee
Economic Affairs Officer
Macroeconomic Policy and Financing for Development +66 2 288-1234 [email protected]