• Debt was already high before the first COVID-19 lockdowns, now the war in Ukraine is adding risks to unprecedented levels of public borrowing, the IMF says.
  • Low interest rates had reduced concerns about record high public debt, but this is changing as central banks raise interest rates to contain inflation.
  • Sharp rises in energy and food prices place most pressure on the poorest, with food accounting for most household spending in low-income countries.
  • There is an urgent need for reforms to improve debt transparency as well as to strengthen debt management frameworks in order to reduce risks, the IMF says.

We live in dangerous times. The world faces renewed uncertainty, as war comes on top of an ever-changing and persistent pandemic, now in its third year. Moreover, problems that predated COVID-19 have not gone away. When policymakers return to Washington in the coming days for the Spring Meetings of the IMF and World Bank, one of the central topics will be growing debt vulnerabilities in the world.

Debt was already very high before the first coronavirus lockdowns. As the pandemic hit, unprecedented peacetime economic support stabilized financial markets and gradually eased liquidity and credit conditions around the world. In many countries, fiscal policy was able to protect people and firms during the pandemic. It supported monetary policy, too, by adding to aggregate demand and avoiding deflationary dynamics. It all contributed to financial and economic recovery.

Now the war in Ukraine is adding risks to unprecedented levels of public borrowing while the pandemic is still straining many government budgets. The situation highlights the urgent need for authorities to undertake reforms, including governance reforms, to improve debt transparency and strengthen debt management policies and frameworks to reduce risks.

The Fund will continue to help address the root causes of unsafe debt with granular policy advice and capacity-building activities. But, with elevated sovereign debt risks and notable budget and financial constraints, international cooperation to minimize stress during the period ahead will be needed. In cases where liquidity support alone is not enough policymakers need to take a cooperative approach to ease the debt burdens of the most vulnerable countries, foster greater debt sustainability, and balance the interests of debtors and creditors.

Stakeholder Capitalism series

Beyond GDP: read the full transcript here

Stakeholder Capitalism: Beyond GDP - measuring what matters

Natalie Pierce: Welcome to Stakeholder Capitalism, a show from the World Economic Forum exploring how economies can be made to work for progress, people and the planet. I'm Natalie Pierce. And with me is the co-author of the book Stakeholder Capitalism, exploring what's gone wrong with capitalism and what can be done to fix it.

Peter Vanham: It's a real pleasure to be here with you, and indeed, to talk about this book that I co-authored with Klaus Schwab, the founder and executive chairman of the World Economic Forum. He's been thinking for 50 years about how capitalism can work, not just in the short-term interest of shareholders, but for all of a company's stakeholders, including employees, the communities it's operating in and, of course, the planet as a whole.

Stakeholder Capitalism - the book
Stakeholder Capitalism: A Global Economy that Works for Progress, People and the Planet
Image: WILEY

Natalie Pierce: Let's explore how this show will play out. In each episode we will explore one problem outlined in your book associated with capitalism and globalisation.

Peter Vanham: Then we'll turn to two expert guests. The first one will talk more in detail about what the issues are related to this problem. And then the second one will talk more about what are possible solutions.

Natalie Pierce: And at the end of each episode, we will have a 'post-match analysis' exploring if we've arrived at answers or solutions or where we might go next from here.

Peter Vanham: Today's topic is 'beyond GDP'. Why that magic number that countries used to measure their economic success may not be fit for purpose anymore.

Natalie Pierce: Peter, in a nutshell, what's gone wrong with GDP?

Peter Vanham: Let's look at the global picture. Let's look at what happened with GDP from 1970 to 2019. Now, we see an absolute explosion in nominal terms over the last 50 years: [global GDP growth of] 30 times.

But it doesn't tell us the full picture. We have to adjust for inflation. in economic terms, we have to look at 'real GDP'. And the second adjustment we need to make is we have to adjust for population growth. So we have to look at 'real GDP per capita'. If we do that, then we see that that number only increased twofold. Still not bad, but quite a lot less than that 30-fold increase we saw the first time. And remember, there is something called 'median income'. This is the real incomes that people have. If we look at that number in the US, for example, the world's largest economy, we see that number only increased by 40% - less than 1% increase per year.

Stakeholder Capitalism: Beyond GDP
Does GDP growth really mean we're all richer?
Image: WEF

All this growth happened at the expense of the planet. If we look at our 'bio capacity', that's the planet's capacity to regenerate what we used up last year, we see that that was more or less in balance with our ecological footprint in 1970. But over the years, we started to create what's called an 'ecological deficit'. And by 2019, we started using twice as much as what the planet could regenerate. Two planets? There's only one. That's clearly an unsustainable situation. So income increases that are not so high, and we use up much more of the planet's resources than we can regenerate. Those are the problems with GDP.

Stakeholder Capitalism: Beyond GDP
GDP rises, the environment falls
Image: WEF

Natalie Pierce: Thanks, Peter. It's now time to call on our first expert witness, Peter, who have you found on your travels to tell us more about the failings of GDP?

Peter Vanham: Diane Coyle. She's a professor of public policy at the University of Cambridge in the UK and also a former adviser to the UK Treasury. She's, amongst other things, the author of GDP A Brief and Affectionate History. And she's also the head of something called the Beyond GDP initiative.

Peter Vanham: You've called GDP a 'wartime metric'. Could you tell us what you mean by that?

Diane Coyle: The initiative to understand the economy as a whole, to find some aggregate measure of national income and production, actually dates from the Great Depression in the 1930s, but it was wartime that gave the impetus to the development of what turned into the GDP that we're so familiar with. The governments in the US and UK wanted to understand how much could they produce for the war effort - what sacrifices was the civilian population going to have to make in terms of consumption and saving? And then after the war years, this became naturalised by the United Nations in a process to develop a whole statistical framework known as a 'system of national accounts' - GDP is one part. And all countries are meant to do this the same way so that we can compare across countries, we can compare over time, and understand the extent to which economic progress is happening,

Natalie Pierce: Pioneers of the metric voiced their concerns about GDP. Can you tell us more?

Diane Coyle: There were intense debates right at the start about what should and shouldn't be include, because how do we define what we mean by the economy? So the decision was taken not to include most informal work done in the home. A lot of it falls to women in many countries. Things like childcare, cleaning, cooking. A lot of the services that we get from nature are not included, either. And through the 1960s and 70s, there were environmentalists pointing out the adverse consequences of not understanding the cost that nature was going to be paying for current economic activity. So those debates have been constant, and I think the reason that there's so much more impetus now in the Beyond GDP initiative is because we've understood that the gap between that definition that was created in the early 1940s. We understand that we have not been taking account, literally, of some really important consequences of our activity.

Natalie Pierce: What is the Beyond GDP initiative?

Diane Coyle: I would describe it as a coalition of policymakers, economists, campaigners who are trying to work towards better metrics of progress in our society. The debate about how we should measure the economy dates back quite a long time, and my sense is that particularly with the impact of the pandemic in the past year, we're at a kind of turning point when this initiative could really start to reshape the way that decisions get taken in business and in policy.

Natalie Pierce: Diane, you mentioned in your book that a tree standing does nothing for GDP until it is cut down and consumed. Does GDP promote environmental destruction?

Diane Coyle: It, unfortunately, has often done so because short-term increases in money spent in marketing services and goods based on natural resources or the resources themselves has added to GDP growth. And the consequence of that has been not thinking about the longer term and therefore sustainability. So just as any company would have a profit and loss account on the balance sheet, we need that too. We need to be able to understand the long-term consequences on the stocks of natural assets for today's activities so that we can have sustainable growth.

Peter Vanham: One of the things that you also wrote about is how the contributions of the financial sector were not included in GDP before, and they are now. Could you tell us a little bit more about why and how those adjustments were made?

Diane Coyle: You're highlighting the importance of understanding that this is a human-constructed definition of things that are important to us. And the financial sector is a great example because its definition in the statistics has changed several times over the decades since the Second World War. All of the changes have increased its apparent contribution to GDP. What we use currently in the latest set of revisions is called financial intermediation services indirectly measured, and that does kind of measure the price that they receive, but it also measures the risk that they're taking. But these kinds of issues point you towards the fundamental question, which is how well is GDP measuring what we really care about, which is economic welfare. And there are some quite profound questions now being raised by the Beyond GDP initiative about what do we care for.

Peter Vanham: Then could median income perhaps be a better way to say how people are really faring, since it's a measure that more people can relate to than GDP?

Diane Coyle: There's been a divergence between the increase in GDP in many countries and the increase in what people are receiving in their incomes from their work and an increase correspondingly in profits which have been increasingly concentrated in the hands of a smaller and smaller number of companies. Something about that mechanism for sharing prosperity has gone awry. GDP isn't measuring the increase in prosperity the way it used to until maybe 10 or 15 years ago. So certainly, looking at median household incomes gives you a much better idea of how the typical person in a particular country is getting on and are they seeing their lives getting better.

Natalie Pierce: Diane, what's the key takeaway for those that are listening with us today?

Diane Coyle: The key takeaway is don't take any statistics as gospel. They are ideas. And what we need to do is think about which ideas matter, which purposes matter, and therefore what should we be measuring? And that's the conversation that we all need to take part in now.

Natalie Pierce: Thank you, Diane. You have presented the case against GDP persuasively and presented some alternative ways we might measure economic progress. You can learn more about Diane's work at the website for the Bennett Institute for Public Policy.

Our second expert witness who has gone beyond GDP and found an alternative way to measure our economy's. In this next segment, we are going to explore solutions, where should we look in the world, Peter?

Peter Vanham: Well, we would have to travel quite far. In fact, all the way to New Zealand, where they're trying some new and different metrics than GDP. Let's first listen to Jacinda Ardern, the prime minister of New Zealand, speaking at the World Economic Forum's annual meeting in Davos in 2019.

Jacinda Ardern: In New Zealand, we're roughly projecting 3% growth, unemployment's at 3.9% on traditional measures, budget surpluses. People would look at us and go, you're doing okay. But we have homelessness at staggering rates, one of the highest rates of youth suicide in the OECD. So our plan is through the wellbeing work that we're doing, a living standards framework to address the societal wellbeing of our nation, not just our economic wellbeing.

Peter Vanham: That was Jacinda Ardern speaking about the Living Standards Framework. And joining us now live from New Zealand is one of the architects of this framework. Professor Girol Karacaoglu. He's the head of the School of Government at Victoria University in Wellington and also the former chief economist of the New Zealand Treasury. And there, of course, he developed this framework. So could you tell us what the Living Standards Framework is and how it came about?

Girol Karacaoglu: The framework is very much based on the OECD's Better Life, or How's Life, indicators which recognises that income and employment are very important contributors to people's wellbeing, but also acknowledges, based on a lot of empirical evidence from around the world, that people care about other things as well, such as social connections. The Wellbeing Framework tries to turn it into public policy, a public policy that's trying to improve both material and non-material sources of wellbeing, including social connections and environmental quality.

Natalie Pierce: How is New Zealand faring, according to the framework?

Girol Karacaoglu: The recent data shows that the evidence and performance of New Zealand is very mixed. In some domains, such as per capita income, housing affordability, we are doing very poorly. On the other hand, life expectancy, social connections, safety are relatively high and pollution is low. Natural capital is under huge stress - biodiversity is getting worse. But social capital, including trust in government, is quite high. So it's a mixed picture.

Natalie Pierce: And how is it received by the people in New Zealand?

Girol Karacaoglu: Almost all the public sector, both central and local regional government, are now framing policy propositions and investment propositions around the Wellbeing and Living Standards Framework and regional and local governments are doing their long-term planning exercises by asking people what they care about, and trying to capture that.

Peter Vanham: What's the benefit of thinking in terms of stocks of capital as opposed to yearly production value?

Girol Karacaoglu: The reason they are important is they highlight that, while we need to deliver the flows in order to keep and give current prosperity to people living today, if we can preserve appropriately those capital stocks, that means that we can also deliver wellbeing to future generations. One of the big themes in New Zealand public policy today is intergenerational wellbeing. In other words, how can we ensure wellbeing to the wider population while at the same time preserving the capital stocks to ensure that future generations also have and enjoy wellbeing?

Peter Vanham: So how do we know if these metrics are successful?

Girol Karacaoglu: What it forces us to do, and this is something very live and active in New Zealand, is to think of public policy as packages of policies that complement each other. So a policy package that focuses on both improving the wellbeing through mental health of an individual while at the same time incentivising a switch of production and consumption towards greener, cleaner technology as a package, would serve both purposes.

Natalie Pierce: If you had one takeaway that you would like to share from this conversation with your students, what would it be?

Girol Karacaoglu: There is a circularity between individual ways of living and the total social and communal outcomes. So I would urge them in whatever they do to always think: 'Is it helping society? Is it good for the environment? Does it give me good material comfort? And does it give everyone the right to speak and contribute?' If you live that way, then society will benefit as well, both today and across generations.

Natalie Pierce: Thank you Girol Karacaoglu for joining us. Your book, Love you: Public policy for intergenerational wellbeing, is out now.

Natalie Pierce: Peter, you set the problem out for us: GDP is no longer fit for purpose. What did you hear today that makes you more optimistic for a different way forward?

Peter Vanham: Well, I like that first idea that we heard - that quick fix of looking at median household incomes rather than aggregate GDP. I think if you look at incomes, it tells you much better how real people are doing in an economy as opposed to that dumber GDP that really doesn't say much. So that's the first thing that I thought was very helpful.

Natalie Pierce: GDP may work for an economy, but GDP does not work for people, and incomes is a better metric that actually means something to people. But Professor Karacaoglu still told us that income can still be an aggregate number that is detrimental to the environment or for work-life balance.

Peter Vanham: When he talked about this idea of wealth being a stock of capital as opposed to only a flow, I think that that was quite helpful too, because indeed, you know, it helps you see these things as more sort of something that was given to us from our parents and our grandparents, everyone that came before us, and we have to leave to those who come after us. And so that looking at wealth and capital and everything that really produces value more from that stock perspective than from the flow perspective, I think, is the other aspect.

Natalie Pierce: I totally agree. I think for Professor Karacaoglu, that emphasis on intergenerational wellbeing was something that as a young person obviously really resonated with me. I also really liked what Diane mentioned around GDP as a concept - it is just that - it can be transformed, it can be altered, it can be reimagined entirely.

Peter Vanham: She talked about that idea that previously we looked at GDP and we looked at it as a wartime metric, and therefore, for example, we didn't include those unpaid household chores, whereas we all know that they're very valuable. And I think in a peacetime economy, perhaps we should value that more also by including it in that number that GDP is.

Natalie Pierce: Yes, it's not GDP or its GDP and. And Jacinda Ardern also emphasised some of those other indicators. That's all the time we have. Thank you to Peter and thank you to our guests, Diane Coyle and Girol Karacaoglu.

Peter Vanham: We'll be back soon with another episode of Stakeholder Capitalism, and this time we'll look at employees and they are treated. And we'll also ask if we should perhaps re-evaluate the role of trade unions.

Natalie Pierce: Join us for the next episode of Stakeholder Capitalism. See you next time at wef.ch/stakeholdercapitalism.

Record global debt

During the pandemic, deficits increased and debt accumulated much faster than they did in the early years of other recessions, including the largest: the Great Depression and the Global Financial Crisis. The scale is comparable only to the two 20th century world wars.

According to the IMF’s Global Debt Database, borrowing jumped by 28 percentage points to 256 percent of gross domestic product in 2020. Government accounted for about half of this increase, with the remainder from non-financial corporations and households. Public debt now represents close to 40 percent of the global total, the most in almost six decades.

Charts showing how global debt has changed from 2007 to 2020 in different economies
Global debt seemed to increase substantially in advanced economies between 2019 and 2020
Image: IMFBlog/IMF Global Debt Database; IMF, World Economic Outlook (WEO); and IMF staff calculations

Emerging market and developing countries (excluding China) accounted for a relatively small share of the increase. Although their public debt remains far below 1990s levels, debt in these economies has risen steadily in recent years. This partly reflected their ability to tap private markets, increased creditworthiness, and development of their domestic debt markets. Servicing costs have also been on a steep incline. About 60 percent of low-income countries are now in, or at risk of, distress.

Risks from rising inflation

Until recently, low debt service costs assuaged concerns about advanced economies’ record high public debt. There were two elements. First, nominal interest rates were very low. In fact, they were close to zero or even negative all along the yield curve in countries such as Germany, Japan and Switzerland. Second, neutral real interest rates were on a significant downward trend in many economies, including the United States, the euro area, and Japan, as well as a number of emerging markets.

This, combined with real interest rates below real growth rates, contributed to a perception of painless fiscal expansion. However, with heightened risk perception and expected monetary policy tightening, debt vulnerabilities are back in focus.

High public and private borrowing contribute to financial vulnerabilities, which are already concerning. The number of advanced economies with debt ratios larger than the size of their economy has increased significantly. There is a risk that ever-higher levels of debt lead to a widening of interest rate spreads for countries with weaker fundamentals, making it costlier for them to borrow. Moreover, although inflation surprises may lower debt-to-GDP ratios in the short-run, persistent inflation—and inflation volatility—ultimately can raise the cost of borrowing. This process can happen quickly in countries with short debt maturities.

In advanced economies, economic activity, the primary balance, spending, and revenues are projected to return close to pre-pandemic projections by 2024. But the situation in developing countries is much more concerning. Both emerging and low-income economies face persistent GDP and revenue losses. This implies that primary spending will be persistently lower as a consequence of the pandemic, pushing countries further back from reaching the Sustainable Development Goals. That is a matter of global concern.

Sharp increases in energy and food prices are adding to these pressures for the poorest and most vulnerable. Food accounts for up to 60 percent of household consumption in low-income countries. These countries face a unique confluence of factors: dire humanitarian needs intersect with extremely tight financial constraints. For low-income countries that rely on imported fuel and food, the shock may require more grants and highly concessional financing to make ends meet while supporting those households in need.

Global financial conditions are tightening as major central banks raise interest rates to contain inflation. In most emerging markets, sovereign spreads are already above pre-pandemic levels. The credit crunch is exacerbated by declining overseas lending originating from China, which is confronting solvency concerns in the real-estate sector; expanding lockdowns in Shanghai and other major cities; the transition to a new growth model; and problems associated with existing loans to developing countries.

A cooperative approach to global debt

Debt restructurings are likely to become more frequent and will need to address more complex coordination challenges than in the past owing to increased diversity in the creditor landscape. Having mechanisms in place for orderly restructuring is in the best interest of creditors and debtors alike.

For low-income countries, the Debt Service Suspension Initiative expired at the end of 2021. And the Group of Twenty’s Common Framework for Debt Treatments beyond the DSSI has yet to deliver. Improvements are needed. Options should also be explored to help the broader range of emerging and developing economies that are not eligible for the Common Framework but who would likely benefit from a globally cooperative approach in the period ahead. Muddling through will amplify costs and risks to debtors, creditors and, more broadly, global stability and prosperity. In the end, the impact will be most sharply felt by those households that can least afford it.

With sovereign debt risks elevated and financial constraints back at the center of policy concerns, a global cooperative approach is necessary to reach an orderly resolution of debt problems and prevent unnecessary defaults. The views and interests of debtors and creditors must be reflected in a balanced way.