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Global Waves of Debt: Causes and Consequences

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The global economy has experienced four waves of debt accumulation over the past fifty years. The first three debt waves ended with financial crises in many emerging and developing economies. The latest, since 2010, has already witnessed the largest, fastest and most broad-based increase in debt in these economies. Their total debt has risen by 54 percentage points of GDP to a historic peak of almost 170 percent of GDP in 2018. Current low interest rates mitigate some of the risks associated with high debt. However, emerging and developing economies are also confronted by weak growth prospects, mounting vulnerabilities, and elevated global risks. A menu of policy options is available to reduce the likelihood of the current debt wave ending in crisis and, if crises were to take place, alleviate their impact.

To shed light on the implications of the rapid debt accumulation, Global Waves of Debt presents the first in-depth analysis of the main features of global and national debt accumulation episodes, analyzes the linkages between debt accumulation and financial crises, and draws policy lessons.

Global Waves of Debt was launched on December 19 at an event that featured a conversation between World Bank Group President David Malpass and Kenneth Rogoff (Harvard University) followed by a panel discussion, moderated by World Bank Group VP Ceyla Pazarbasioglu, with Jahangir Aziz (J.P. Morgan), Valentina Bruno (American University), Anna Gelpern (Georgetown University), and Steve Kamin (Federal Reserve Board). 

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PRAISE FOR THE BOOK

"In this era of low volatility and extremely low global real interest rates, both the private and public sectors in emerging markets have been borrowing at a strong pace. Is another crisis looming or are we in a new normal? Global Waves of Debt puts the current debt wave in context by systematically comparing its features with the three major earlier emerging market debt waves since 1970, all of which ended in widespread crises. Is this time different? Deeply researched and with many novel insights, this book will be a useful reference for policymakers and academics alike."

 -- Kenneth Rogoff, Harvard University

"After a decade of slow growth and low interest rates, the world is awash in debt—issued by households, corporations, and especially governments. It is tempting to believe that with interest rates as low as they are today, including in emerging markets, much higher debt levels are sustainable indefinitely. This book’s impressive review of history and theory cautions against complacency and argues for proactive policies to buttress macroeconomic and financial stability. All analysts of the global economy’s past trajectory and future prospects will want to read this book. Hopefully, policymakers in authority, whether madmen or not, will do so as well—before the next crisis hits."

-- Maurice  Obstfeld, University of California, Berkeley

"The increase in debt around the world, and in particular in emerging market economies, is one of the most important global developments in recent years. It is also one of the main sources of risk to global financial stability and economic growth. Global Waves of Debt is an important contribution to understanding the process of rapid debt accumulation and its risks. It draws lessons from the experience of previous waves of debt build up through an outstanding comparative approach. Although the post crisis wave is very different from previous ones, sudden and large changes in risk appetite or global interest rates could nonetheless have severe negative repercussions in many economies. Policymakers must take the necessary steps to ensure that the consequences from this wave are also different from previous ones, and the insights from this book are of great help in this regard.

-- José De Gregorio, The University of Chile

"Just as it is easy for economies to get flooded by waves of debt, so it is easy for readers to drown in a sea of books and articles on debt. But this time the experience is different. Global Waves of Debt provides not only a very well-researched analysis of the history of debt over the last five decades with many new insights into its good and bad consequences, but it does so in an easy read. While it leaves one worried in light of the current, ongoing wave of debt, one will enjoy the ride."

-- Stijn Claessens, Bank for International Settlements

"This timely and important book documents the global experience of the four waves of public and private debt accumulation from 1970 to the present. The authors skillfully surf through the data, dissecting the cross-country experience from each episode with a focus on emerging and developing economies. They extract the key lessons from the thoroughly documented experience of the first three waves and map these into the current wave, which began in 2010. The rigorous exploration yields a better understanding of the fourth wave and possible future scenarios. The previous waves of debt ended in crises in many countries. The authors expertly explore whether the implications of the current wave could be different and what role policy can play. This book is an essential resource for anyone interested in the history and prospects of national, regional, and global public and private debt."

-- Warwick McKibbin, Australian National University

"As debt levels surge around the world, a comprehensive and systematic examination of previous episodes of debt accumulation—and how they end—is just the sort of analysis for these times. How the current experience compares against previous episodes, and the special conditions that currently prevail—including extremely low real interest rates—is examined in detail. Those who read the book thinking they already know the post-war history of debt will be surprised, and enlightened."

-- Menzie Chinn, University of Wisconsin

"This book is a timely contribution to the debate on the implications of global borrowing for economic performance. Taking a historical perspective, Kose, Nagle, Ohnsorge, and Sugawara provide a clear articulation of the potential vulnerabilities raised by the exceptionally large and rapid current buildup of global indebtedness.  The book documents well how current indebtedness positions are an artifact of our low interest rate environment, and illustrates the extent to which borrowing nations would face challenges given an abrupt change in global conditions.  It closes with an inspection of how pursued policies have affected historical outcomes in the wake of disruptive shocks to borrowing capacities, and discusses the implications of these experiences for current policy.  Arguments in the narrative are supported by a large array of empirical evidence that will be of use to researchers and practitioners alike. I would recommend this book most highly to anyone interested in international financial issues."

-- Mark M. Spiegel, Federal Reserve Bank of San Francisco

"Global Waves of Debt has done a signal service by reminding us that this time may be no different. In the current environment of low growth rates and interest rates, which are expected to remain low for the foreseeable future, and monetary policy at a seeming dead end globally, calls for fiscal stimulus and increased debt are becoming the flavor of the day in both advanced and emerging markets. The authors’  painstaking work reveals that the increase in debt globally has already been larger, faster, and more broad-based since the Great Financial Crisis than in the previous three waves. This should be seen as a leading indicator for the possibility of financial crises ahead and shake up the complacency that is evident in macroeconomic policy making today with regard to increasing levels of both public and private debt. Kudos to the authors for their fine analytical work in putting together this unprecedented volume that puts the current situation in comparable historical perspective."

-- Rakesh Mohan, Yale University

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Joseph Rebello
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