Most economic textbooks will tell you that there can be real dangers in running up a big national debt. A major concern is how the debt you add now could slow down economic growth in the future. Economists have not been able to nail down how much debt a country can safely take on. But they have tried.

Back in 2010, two economists took a look at 20 countries over the course of decades, and sometimes centuries, and came back with a number. Their analysis suggested that economic growth slowed significantly once national debt passed 90% of annual GDP... and that is when the fight over debt and growth really took off.

On today's episode: a deep dive on what we know, and what we don't know, about when exactly national debt becomes a problem. We will also try to figure out how worried we should be about the United States' current debt total of 26 trillion dollars.

This episode was hosted by Keith Romer and Nick Fountain. It was produced by Willa Rubin and edited by Molly Messick. It was fact-checked by Sierra Juarez with help from Sofia Shchukina and engineered by Cena Loffredo. Alex Goldmark is Planet Money's executive producer.

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Ipek Ozkaya joined host Jeff Doolittle to discuss a book she co-authored entitled Managing Technical Debt. In the book, Ozkaya describes nine principles of technical debt management to aid software companies in identifying, measuring, tracking...

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Independent Thinking: Will debt constrain Western foreign policy? Audio john.pollock 24 October 2024

Patrick Wintour and Ranil Dissanayake join the podcast ahead of the UK Budget to discuss the high debt facing G7 economies and its impact on foreign, defence and development policies.

On this episode

Ahead of a crucial Budget by Chancellor Rachel Reeves, UK national debt is at almost 100 per cent of GDP – and it’s not alone. Many G7 economies face massive debt levels, restricting ambitions when it comes to foreign policy and global engagement. 

Bronwen Maddox is joined by Patrick Wintour, the Guardian’s diplomatic editor and Ranil Dissanayake, a senior research fellow at the Centre for Global Development. With them are Olivia O’Sullivan and David Lubin from Chatham House.

About Independent Thinking

Independent Thinking is a weekly international affairs podcast hosted by our director Bronwen Maddox, in conversation with leading policymakers, journalists, and Chatham House experts providing insight on the latest international issues.

More ways to listen: Apple Podcasts, Spotify.

The UK needs to address growth and debt problems if it is to match resources to ambitions on international priorities Expert comment LJefferson 5 November 2024

The budget marks the lowest amount in decades the country has spent on development, and it is struggling to fund other international priorities too.

The UK’s Chancellor Rachel Reeves unveiled her much-anticipated budget last week, the first of the new Labour government. Labour is in a difficult place. There are numerous calls on the public purse and public services are not performing well. Meanwhile, public debt remains close to 100 per cent of GDP, and there has been a long run of sluggish growth.
 
Reeves argues with some justification that the previous government left her a challenging inheritance – gaps in this year’s spending plans, and persistent debt questions left unresolved. More importantly, there are longer-term concerns about the sustainability of UK public spending – the country’s Office for Budget Responsibility has warned public debt could triple by the 2070s due to an ageing population, the climate crisis, and security risks. The focus has understandably been on kitchen table questions about tax rises and funding public services.
 
But this picture also has longstanding implications for international policy – on whether the UK can afford to invest in its foreign policy. The Chancellor did announce an increase of £2.9bn for defence. But the question of whether the UK can get on a sustainable path to spending 2.5 per cent of GDP on defence is still being worked through in the ongoing Strategic Review, and remains challenging despite increasingly urgent warnings from parliamentary committees about the UK’s defence readiness.

The budget also marks one of the lowest amounts in recent years the UK will spend on development overseas, despite setting an ambition to reset relations with the Global South and recover the UK’s role as a leader in international development.
  
The UK needs to either match resources to ambition, spend much more efficiently, or, in the case of the aid budget, it could seek to focus on priorities that are less dependent on spending. But even this will still require consistent resources, alongside significant diplomatic attention, intellectual leadership, and focus.

Longer-term, the UK may need to consider larger questions: addressing broader problems with its lack of growth and productivity will be critical to fund an expansive international role.

With this budget, UK aid spent overseas is at a historic low

In 2020 the UK government cut its goal for spending on international development to 0.5 per cent of Gross National Income (GNI), ending a longstanding policy of spending 0.7 per cent. Labour have echoed this, promising to only return to previous levels when fiscal circumstances allow.
 
But this masks a bigger issue. Since 2022, significant amounts of the UK’s aid budget have been spent on accommodation for asylum seekers in the UK. This is within the rules governing aid, but reduces the amount spent on reducing poverty overseas. In 2023 this spending was 28 per cent of the £15.4bn aid budget. In 2016, it was 3.2 per cent. 

Previous Chancellor Jeremy Hunt quietly allowed a top-up of aid spending over the last two fiscal years to offset how much is being spent at home on asylum seeker accommodation. That provided an additional £2.5 billion for 2022–23 and 2023–24.

But Rachel Reeves declined to provide extra funding this time, meaning the amount being spent overseas is likely the lowest its been since 2007 – an effective cut – under a Labour government.

The Minister for Development, Anneliese Dodds, speaking at Chatham House last month, said the government is working on clearing the backlog of asylum claims, which should free up more to spend overseas.

But beyond this there has been little clarity on plans to address the issue. And costs for asylum seeker accommodation have increased significantly – the UK appears to spend much more than comparator countries per head, according to the Center for Global Development, raising questions about how this spending is managed.

Development is not just about money – but money is important

The UK debate about development has often focused on the 0.7 per cent figure, which can distract from larger questions about what development policy is intended to achieve. As many experts have argued, development aid is about more than spending, and the wider, complex process by which the UK contributes to broad-based growth and stability for poorer countries is not about hitting a specific number.
 
There are things the UK can do that aren’t about spending more directly. This might include focusing on priorities like reforming multilateral development banks so they provide more low-cost public finance, and more flexible and agile loans to poorer countries – a priority echoed by Dodds. It might also incorporate focusing more broadly on helping developing countries attract more investment to bolster growth. 

There is also the issue of developing country debt, much of which is held by the private sector. Dodds previously said, when she was shadow chancellor, she might consider changing the law to address this issue. However,  she declined to recommit to this when questioned at Chatham House. 

None of this can be done unilaterally – on debt, for example, the UK has spearheaded some creative policies. Its UK Export Finance body developed climate-resilient debt clauses – agreements that countries can pause debt repayments in the event of a climate shock – but the UK holds limited amounts of developing country debt. Impact will only come by galvanizing and coordinating others to adopt similar approaches.

16 July 2020

Climbing out of the Chinese debt trap The World Today mhiggins.drupal 1 August 2022

Beijing must play a pivotal role in soothing African economic distress, says Alex Vines.

Poorer countries across the world – including many in Africa – are facing $35 billion in debt-service payments in 2022. According to the World Bank, around 40 per cent of this total is owed to China.

Across the African continent, the economic impacts of the coronavirus pandemic have increased rates of extreme poverty and inequality. Since early 2022 the situation has worsened even further, due to the knock-on effects of spiking inflation and interest rates following the Russian invasion of Ukraine. Shortages of fuel and foodstuffs have caused prices to leap upwards. Urban unrest is on the rise, and African governments are having to make tough economic choices as their budgets are squeezed ever more tightly.

Across the continent, progress on the UN’s Sustainable Development Goals is being jeopardized, and non-energy-producing lower and lower-middle income African governments are struggling to repay their loans.

During the Covid pandemic, the G20 assisted 31 out of 36 eligible African countries with its Debt Service Suspension Initiative (DSSI). Established in May 2020, the DSSI helped countries concentrate their resources on fighting the pandemic and safeguarding the lives and livelihoods of millions of the most vulnerable people before it expired at the end of 2021. From 2022, it has been replaced by the G20’s Common Framework for Debt Treatments.

As the second-largest economy in the world after the United States, and the dominant lender for many African states, China has an important role to play in such initiatives. Beijing still tries to keep a low profile and renegotiate its terms on a bilateral basis – although it did support Angola’s early call for G20 action on an initiative that would fulfil what the DSSI delivered. The challenge is to encourage more consistency and trust in such initiatives, as Chinese officials consider them to be too western-oriented. 
 

China’s lending to Africa peaked in 2016

Contemporary views of Chinese lending in Africa remain coloured by the rapid expansion of Chinese finance from the early 2000s to resource-rich African states, and oil producers in particular. The reality is that much of China’s lending has evolved, and is neither intrinsically predatory nor problematic for African partners – and China increasingly prefers to do business with states it considers to be better run.

In fact, as commodity prices and growth rates declined from 2015, Chinese lending to Africa fell significantly, from a peak of $29.5 billion in 2016 to $7.6 billion in 2019. The socio-economic impact of the pandemic has made this situation worse.

That China has attracted criticism is often due to a lack of transparency in its investments, especially those in Kenya and Zambia. This reputation has not been helped by opaque lending arrangements imposed by Chinese state-owned banks, requiring borrowers to prioritize them for repayment. This could lead to cutbacks in key areas of social spending, with direct impacts on African communities.

Over the past two decades, Chinese finance has contributed to an infrastructure boom in many African countries. Angola, for example, was able to undertake a rapid post-conflict reconstruction of its infrastructure, with new roads and bridges being built across the country. New models of financing are being developed: in Kenya, the new Nairobi expressway was constructed under a $600 million Build-Operate-Transfer model that provides for ownership to revert to the national government after a 30-year concession period.

Chinese companies have helped African countries build and upgrade over 10,000km of railway, around 100,000km of highway, 1,000 bridges and 100 ports, as well as power plants, hospitals and schools.

China’s involvement in African debt has varied considerably between countries and over time. Although in recent years this involvement has been framed in the context of the Belt and Road Initiative, it has for the most part been uncoordinated and unplanned, with credit being offered by competing lenders with links to different elements of the Chinese state.

In recent years, as reports have emerged around the poor quality of some of China’s past lending, the authorities in Beijing have sought greater control over new development lending and have imposed new sustainability requirements. At the same time, African countries have sought to diversify sources of supply for infrastructure contracts beyond China. Loans are generally now on a smaller, more manageable scale.

With the introduction of its Global Development Initiative in September 2021, there are indications that China is moving to a ‘new development paradigm’, with the emphasis on providing flows of foreign direct investment rather than loans and a focus on supporting small and medium-sized enterprises, human capital investments and green development.
 

African debt distress

A paper drawing on expertise from Chatham House’s Africa, Asia and Global Economy and Finance experts will be published before the G20 summit in Bali in November 2022. It examines seven African countries that the World Bank deemed in 2020 to be in most debt distress or at risk of debt distress because of their Chinese stock – Angola, Cameroon, Republic of Congo, Djibouti, Ethiopia, Kenya and Zambia. Two countries – Côte d’Ivoire and South Africa – have received new loans from China and are not in any distress.

The paper observes that a lack of transparency over the nature of the terms agreed by these African governments has led to intense domestic criticism and international accusations that China is seeking control over strategic assets.

In fact, in Angola and Zambia, China may have accidently fallen into its own debt trap through profligate and uncoordinated lending.

Zambia became the first pandemic-era default in 2020 and is seeking relief on $17 billion of external debt. After holding general elections in August 2022, Angola and Kenya will also seek additional debt relief, but both may also seek more funds from the private commercial market because of the slow progress of the G20’s Common Framework – something flagged as a concern by China.

All seven of the countries that are most indebted to China are actively seeking to reduce this financial reliance on Beijing in the future.

China has a pivotal role to play in finding effective solutions to these and other African countries’ debt distress. Improved coordination and cooperation between creditors in China and in other parts the world could enhance the positive impact of multilateral initiatives, such as the Common Framework, which has aimed to bring China and India to the negotiating table along with the IMF, the Paris Club group of creditor nations and private creditors.

So far, Chad, Ethiopia and Zambia are the only African countries to have signed up to the framework since its launch in 2020. Although China is suspicious of the IMF, if African states collectively encouraged Beijing to engage with the Common Framework, it could be improved so as to provide debt relief to those African countries finding it difficult to repay their loans.

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[Radio Dalsan] In a move to bolster Somalia's economic recovery and stability, the United States has forgiven $1.14 billion in debt owed by Somalia. The debt cancellation, announced by US Ambassador to Somalia Richard Riley in Mogadishu, is part of a larger $1.2 billion assistance package for Somalia this fiscal year.

Prime Minister Shehbaz Sharif on Tuesday said that debt cannot become the “acceptable new normal” in climate financing, as he addressed the challenges faced by developing countries within the global climate finance framework.

His statement came during a Climate Finance Round Table Conference organised by Pakistan on the sidelines of the two-day World Leaders Climate Action Summit, also known as COP29, currently being held in Azerbaijan’s capital of Baku.

“We stand at a crucial threshold where global climate finance framework must be redefined to effectively meet the needs of vulnerable nations,” PM Shehbaz said.

He explained that financing in the form of loans increases the debt of developing nations and pushes them towards “mounting debt traps” which he referred to as “death traps”.

He added, “Debt cannot become the acceptable new normal in climate financing which is why we must resume focus on non-debt financing solutions enabling countries to fund climate initiatives.”

“Despite years of promises and commitments, the gaps are growing, leading to aggregate barriers in achieving objectives of the UN Framework Convention on Climate Change (UNFCCC).”

PM Shehbaz called climate financing an “urgent need of the hour”, stating that developing countries need to deliver Nationally Determined Contributions (NDCs) and “need an estimated $6.8 trillion by 2030 to implement less than half of their current NDCs.”

The prime minister further urged donor countries to “fulfil their commitment” which is 4.7 per cent of their gross national product (GNP) and capitalise on existing climate funds.

“One such commitment is a $100bn annual climate pledge established a decade ago at COP15 [which] is now reported by OECD to have reached only $160bn,” he said.

PM Shehbaz said that Pakistan can relate to the “agony and pain of other vulnerable countries”, highlighting how the country faced two devastating floods.

“In 2022, one-third of Pakistan was under water and the country had to repurpose all development and climate funds for financing basic relief and humanitarian efforts,” he said.

Pakistan is ranked among the top 10 most climate-vulnerable countries, according to the Global Climate Risk Index 2021. It has faced increasingly frequent and severe weather events, such as unprecedented floods, intense monsoon rains, devastating heat waves, rapid glacial melting and glacial lake outburst floods.

Pakistan witnessed devastating floods during the 2022 monsoon season, induced by climate change, resulting in the loss of at least 1,700 lives.

With 33 million people affected and swathes of agricultural land washed away, the damage incurred losses worth $30 billion, according to government estimates.

In June 2024, a heat wave brought record-high temperatures, severely impacting public health and agriculture.

While emphasising transparency and coordination in financial commitments made to developing countries, he stated that Pakistan alongside other developing countries, calls for stronger more equitable climate finance mechanisms under the UNFCCC.

He reiterated the pertinent need for reform of international financial architecture saying that “now is the time to build up on the momentum for international financial reforms” so that no nation is left behind in the global response to climate change.

PM to highlight ‘balanced and ambitious’ climate action

According to the Foreign Office, several high-level events and roundtable discussions hosted by Pakistan will also take place at the Pakistan Pavilion during COP29.

It added that at COP29, Pakistan will call for “balanced and ambitious progress on all issues such as loss and damage, adaptation, mitigation and means of implementation”.

“It will seek predictable financing to address developing countries’ climate goals. Pakistan will also underscore the historical responsibility and the principle of Equity and Common but Differentiated Responsibility and call on developed nations to undertake deeper emission cuts.”

PM Shehbaz was warmly received by Azerbaijan President Ilham Aliyev and UN Secretary-General António Guterres upon his arrival at the summit venue today, state-run Radio Pakistan reported.

The first day of the Climate Action Summit will feature statements from various heads of states, beginning from 3pm Pakistan time.

Speakers include the United Kingdom’s PM Keir Starmer, Saudi Arabia’s Crown Prince Mohammed bin Salman, Turkiye President Recep Tayyip Erdoğan and Ukraine President Volodymyr Zelenskyy.

Among those scheduled to address the high-level meeting tomorrow, besides PM Shehbaz, are Bangladesh leader Muhammad Yunus and Russia’s PM Mikhail Mishustin.

PM Shehbaz is listed as the 37th speaker out of 47 leaders during the session scheduled from 10am to 6pm (Pakistan time).

The prime minister will also participate in a high-level event ‘Glaciers 2025: Actions for Glaciers’ organised by Tajikistan President Emomali Rahmon on the protection of glaciers.

PM Shehbaz will also hold separate meetings with the prime ministers of Denmark and the Czech Republic, who are also attending COP-29, Radio Pakistan stated.

PM meets world leaders

On the sidelines of COP29, PM Shehbaz interacted with UAE President Sheikh Mohammed bin Zayed Al Nahyan and discussed cooperation on climate change and matters of mutual interest, Radio Pakistan reported.

The premier also met with PM Starmer, where the two discussed enhancing Pakistan-UK cooperation.

He also met with Turkish President Recep Tayyip Erdogan and his wife Emine Erdogan, where they discussed environmental pollution as well as matters of mutual interest between the two friendly nations, the report added.

In his interactions with Nepal’s President Ramchandra Paudel and Bangladesh’s Yunus, PM Shehbaz discussed growing temperatures, the threat of rising sea levels, and forest conservation in South Asia.

Kazakhstan President Kassym-Jomart Tokayev and PM Shehbaz explored strengthening bilateral relations as well as expanding regional connectivity.

In his meetings with Uzbekistan President Shavkat Mirziyoyev and Tajikistan’s Rahmon, the leaders spoke about the conservation of glaciers and water resources in Central Asian countries and Pakistan.

They also exchanged views on expanding communication links among Pakistan, Tajikistan and Uzbekistan, Radio Pakistan highlighted.

World leaders meet for climate talks, but big names missing

Dozens of world leaders convene in Azerbaijan for COP29 but many big names are skipping the UN climate talks where the impact of Donald Trump’s election victory is keenly felt.

UK’s Starmer will unveil an “ambitious” update to the UK’s climate goals later today, and said he wanted his country “to show leadership on the climate challenge.”

Joe Biden, Xi Jinping, Narendra Modi and Emmanuel Macron are among G20 leaders missing the event, where uncertainty over future US unity on climate action hung over the opening day.

“It’s not an ideal situation,” acknowledged Steven Guilbeault, Canada’s environment minister. “But in 30 years of COP, it’s not the first time that we’ve faced obstacles,” he told AFP.

“Certainly, everything is still possible.”

Washington’s top climate envoy John Podesta is seeking to reassure countries in Baku that Trump’s re-election will not end US efforts on global warming, even if the issue will be “on the back burner”.

But despite calls for global cooperation, the opening day got off to a rocky start, with feuds over the official agenda delaying by hours the start of formal proceedings in the stadium venue near the Caspian Sea.

“This will be a tough COP,” said Fernanda Carvalho, global climate and energy policy lead at WWF.

“Countries are divided. There is a lack of trust,” she told AFP, and divisions over climate finance “will be reflected in every room of those negotiations.”

• At COP29 leaders’ summit, Shehbaz Sharif reminds West of broken promises, calls for overhaul of global climate financing framework
• Links humanity’s survival with health of glaciers, says Pakistan ready to work with world for their protection
• Meets British, Danish, Turkish, Central Asian leaders among others on sidelines of climate summit

BAKU: Prime Minister Shehbaz Sharif on Tues­day said that debt cannot become the “acceptable new normal” in climate financing, as he addressed the challenges faced by developing countries within the global climate finance framework.

“We stand at a crucial threshold where global climate finance framework must be redefined to effectively meet the needs of vulnerable nations,” he told a Climate Finance Round Table Conference organised by Pakistan on the sidelines of the two-day World Leaders Climate Action Summit.

He explained that finan­c­ing in the form of loans increases the debt of developing nations and pushes them towards “mounting debt traps” which he ref­erred to as “death traps”.

“Debt cannot become the acceptable new normal in climate financing which is why we must resume focus on non-debt financing solutions enabling countries to fund climate initiatives,” the PM said.

“Despite years of promises and commitments, the gaps are growing, leading to aggregate barriers in achieving objectives of the UN Framework Convention on Climate Change (UNFCCC).”

Pakistan is ranked among the top 10 most climate-vulnerable countr­ies, according to the Glo­bal Climate Risk Index 2021. It has faced increasingly frequent and severe weather events, such as unprecedented floods, int­ense monsoon rains, devastating heat waves, rapid glacial melting and glacial lake outburst floods.

Calling climate financing an “urgent need of the hour”, PM Shehbaz said that developing countries need to deliver Nationally Determined Contribu­ti­ons (NDCs) and “need an estimated $6.8 trillion by 2030 to implement less than half of their current NDCs”.

He further urged donor countries to “fulfil their commitment”, which is 4.7 per cent of their gross nat­io­nal product and capitalise on existing climate funds.

The PM said that Pakis­tan can relate to the “agony and pain of other vulnerable countries”, highlighting how the country faced two devastating floods.

While emphasising tra­n­sparency and coordination in financial commitments made to developing countries, he stated that Pakistan alongside other developing countries, calls for stronger more equitable climate finance mechanisms under the UNFCCC.

He reiterated the pertinent need for reform of international financial architecture saying that “now is the time to build up on the momentum for international financial reforms” so that no nation is left behind in the global response to climate change.

Call to protect glaciers

In remarks delivered later at an event on glaciers, the PM linked the survival of mankind with the health of glaciers, adding that Pakistan, as one of the most affected country, was ready to work with the international community to protect these valuable natural resources.

Addressing Glaciers 2025; Actions for Glaciers, hosted by Tajik President Emamoli Rahmon, the prime minister called upon all the countries to unite in the efforts of protecting glaciers from pollution and snow melt by taking concrete and decisive actions to secure the future of glaciers as well as protect the mankind.

He said Pakistan was home to 7,000 glaciers which provided an approximately 60 to 70 per cent water for the Indus River flow, supporting 90pc of agriculture and serving its 200 million people.

However, the glaciers that provide water for this river have been shrinking over a period of time and at an alarming time, which is estimated at about 23pc decrease since 1960, he added.

The prime minister said this retreat was driven by rising temperatures and the consequences of these changes were glaringly visible.

He shared that accelerated glacial melt had led to the formation of more than 3,000 glacial lakes in the northern areas of Pakistan which were posing great threat. Out of these, he said, about 33 lakes were estimated at the risk of outburst flooding, putting lives of over 7 million people in danger.

Meetings with world leaders

On the sidelines of COP29, PM Shehbaz interacted with UAE President Sheikh Moha­m­med bin Zayed Al Nahyan and discussed cooperation on climate change.

Mr Sharif also met with UK PM Sir Keir Starmer, where the two leaders discussed enhan­c­­i­ng bilateral ties.

He also met with Turkish President Recep Tayyip Erdogan and his wife Emine Erdogan, where they discussed environmental pollution as well as matters of mutual interest between the two friendly nations, the report added.

PM Shehbaz also met with the Czech PM Petr Fiala and Danish PM Mette Frederiksen and stressed the need to enhance bilateral cooperation as well as build global consensus on the key climate change priorities.

In his interactions with Nepal’s President Ramchandra Paudel and Bangladesh’s Muhammad Yunus, PM Shehbaz discussed growing temperatures, the threat of rising sea levels, and forest conservation in South Asia.

Kazakhstan President Kassym-Jomart Tokayev and PM Shehbaz explored strengthening bilateral relations. In his meetings with Uzbek President Shavkat Mirziyoyev and Tajikistan’s Rahmon, the leaders spoke about the conservation of glaciers and water resources in Central Asian countries and Pakistan.

With input from APP

Published in Dawn, November 13th, 2024