Debt and Growth in LIC, MIC, and HIC What the Heck!

Transcription

1 Debt and Growth in LIC, MIC, and HIC What the Heck! Ugo Panizza UNCTAD These are my own views 3 rd DMF Stakeholders Forum, Accra

2 Debt and Growth in LIC, MIC, and HIC What the Heck! Ugo Panizza UNCTAD These are my own views 3 rd DMF Stakeholders Forum, Accra

3 Outline Which Debt? Theory What we think we know Debt and Growth in developing countries (LIC and MIC) Debt and Growth in High Income Countries Causality Challenges Tentative conclusions in the spirit of Donald Rumsfeld, Mark Twain, and, of course, Bertrand Russell

4 Which debt? Total external debt Public and private External public debt Total public debt External and domestic What is external debt? Panizza (2008)

5 Outline Which Debt? Theory What we think we know Debt and Growth in developing countries (LIC and MIC) Debt and Growth in High Income Countries Causality Challenges Tentative conclusions in the spirit of Donald Rumsfeld, Mark Twain, and, of course, Bertrand Russell

6 Theory Debt is BAD for growth Debt overhang Relevant for external debt Macro instability and uncertainty Relevant for all types of debt Higher interest rates through crowding out Relevant for domestic debt Higher interest rates through country risk Relevant for external debt Debt is GOOD for growth Keynesian effects in bad times and hysteresis Possibility to finance projects with high economic returns Debt is IRRELEVANT for growth Ricardian Equivalence

7 Outline Which Debt? Theory What we think we know Debt and Growth in developing countries (LIC and MIC) Debt and Growth in High Income Countries Causality Challenges Tentative conclusions in the spirit of Donald Rumsfeld, Mark Twain, and, of course, Bertrand Russell

8 Debt and Growth in Developing Countries Growth and total external debt Pattillo, Poirson, Ricci (2011) Growth Debt Laffer curve 15%-20% 35%-40% Debt (NPV)/Y

9 Debt and Growth in Developing Countries Growth and total external debt Cordella, Ricci and Ruiz-Arranz (2010) Debt overhang threshold (30%) Debt overhang threshold (20%) Debt overhang threshold (15%) Debt irrelevance threshold (40%) Debt irrelevance threshold (60%)

10 Debt and Growth in Developing Countries Growth and total external debt Presbitero (2008)

11 Debt and Growth in Developing Countries Growth and total public debt Presbitero (2012)

12 Outline Which Debt? Theory What we think we know Debt and Growth in developing countries (LIC and MIC) Debt and Growth in High Income Countries Causality Challenges Tentative conclusions in the spirit of Donald Rumsfeld, Mark Twain, and, of course, Bertrand Russell

13 Debt and Growth in High-Income Countries Reinhart and Rogoff (2010) Public debt is bad for growth when it surpasses 90% of GDP Kumar and Woo (2010) Public debt (above 30% of GDP) is bad for growth and it may become worse when it surpasses 90% of GDP Also includes EMs Cecchetti, Mohanty and Zampolli (2011) Public debt is bad for growth and it may become worse when it surpasses 90% of GDP Minea and Parent (2012) Public debt is bad for growth in the % of GDP range Padoan, Sila, van den Noord (2012) Public debt is bad for growth and it becomes worse when it surpasses 90% of GDP

14 Outline Which Debt? Theory What we think we know Debt and Growth in developing countries (LIC and MIC) Debt and Growth in High Income Countries Causality Challenges Tentative conclusions in the spirit of Donald Rumsfeld, Mark Twain, and, of course, Bertrand Russell

15 Growth Implosions, Debt Explosions, and My Aunt Marylin: Do Growth Slowdonws Cause Public Debt Crises? William Easterly (2001)

16 Causality Why are there so many sick people in hospitals? Debt has an effect on growth: G=g(D) Growth has an effect on debt: D=d(G)

17 G=g(D) D=d(G) We run a regression and get: Growth G=g(D) But we were trying to estimate this D=d(G) Debt

18 Growth G=g(D) D=d(G) Debt

19 How does the existing literature address causality? Reinhart and Rogoff No attempt Cecchetti et al. Lagged debt Pattillo et al.; Cordella et al.; Kumar and Woo; Presbitero; Padoan et al. System GMM with lagged debt as instrument

20 What we find: The correlation between debt and growth: Source: Panizza and Presbitero (2012)

21 What we find: The causal effect of debt on growth: Source: Panizza and Presbitero (2012)

22 Outline Which Debt? Theory What we think we know Debt and Growth in developing countries (LIC and MIC) Debt and Growth in High Income Countries Causality Challenges Tentative conclusions in the spirit of Donald Rumsfeld, Mark Twain, and, of course, Bertrand Russell

23 Challenges Identification, Identification, Identification Data Better data on the level (face value and NPV) and composition of debt Channels Heterogeneity The relationship between debt and growth is likely to depend on many different things

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25 Outline Which Debt? Theory What we think we know Debt and Growth in developing countries (LIC and MIC) Debt and Growth in High Income Countries Causality Challenges Tentative conclusions in the spirit of Donald Rumsfeld, Mark Twain, and, of course, Bertrand Russell

26 Some conclusions Donald Rumsfeld There are known knowns Things we know that we know There are known unknowns Things that we now know we don't know There are also unknown unknowns Things we do not know, we don't know Mark Twain It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so

27 Some conclusions Known knowns There is a negative correlation between debts and growth Debt has a causal negative effect on growth This negative effect becomes especially important when the debtto-gdp ratio reaches a certain threshold 90% in advanced economies 15-40% in developing countries Known unknowns Is there a negative effect of debt and growth? The threshold Unknown unknowns Bertrand Russell The whole problem with the world is that fools and fanatics are always so certain of themselves, but wiser people are so full of doubts

28 Debt and Growth in LIC, MIC, and HIC What the Heck! Ugo Panizza UNCTAD These are my own views 3 rd DMF Stakeholders Forum, Accra