# 1. Introduction

Episodes of debt accumulation have been a recurrent feature of the global economy over the past fifty years, in both advanced economies and emerging market and developing economies (EMDEs). Sometimes, these have been highly synchronized eventually turning into global waves of debt (Kose et al. 2020). These synchronized waves have typically ended in widespread financial crises. At other times, rapid debt buildups have been country-specific, but half of these country-specific debt buildups have also been associated with crises (Koh et al. 2020).

Since the global financial crisis, debt has risen rapidly to an all-time high of roughly 230 percent of global GDP in 2018 (Figure 1). The increase has been driven by EMDEs, whose total debt also reached a record-high of almost 170 percent of GDP in 2018, an increase of 54 percentage points of GDP since 2010. While China accounted for the bulk of this increase, specifically in private debt—in part due to its sheer size—the debt buildup was broad-based. In contrast, in advanced economies, total debt has remained near the record levels reached in the early aftermath of the global financial crisis, at about 265 percent of GDP in 2018.

The current environment of low interest rates, combined with subpar global growth, has led to a lively debate about the benefits and risks of further government debt accumulation to finance increased spending (Kose, Ohnsorge, and Sugawara 2020; World Bank 2019a).<sup>1</sup> Although the focus of this debate has been mainly on advanced economies, it is also of critical importance for EMDEs. Borrowing can be beneficial for EMDEs, particularly in economies with substantial development challenges, if it is used to finance growthenhancing investments in areas such as infrastructure, health care, and education. Government debt accumulation can also be appropriate temporarily as part of countercyclical fiscal policy, to boost demand and activity in economic downturns.

However, particularly for EMDEs, high debt carries significant risks, since it makes them more vulnerable to external shocks (Kose, Ohnsorge, and Sugawara 2020). The rollover of debt can become increasingly difficult during periods of financial stress, potentially resulting in a crisis. High government debt can also limit the size and effectiveness of fiscal stimulus during downturns, and dampen long-term growth by weighing on productivity-enhancing private investment.

EMDEs have been navigating dangerous waters as the post-crisis debt buildup has coincided with multiple challenges for these economies. They have experienced a decade of repeated growth disappointments and are now confronted by weaker growth prospects in a fragile global economy (Kose and Ohnsorge 2019; World Bank 2020; Figure 2). In addition to their rapid debt buildup since the global financial crisis, these economies have accumulated other vulnerabilities, such as growing fiscal and current account deficits, and a compositional shift toward short-term external debt, which could amplify the impact of shocks.

> 1 For example, Blanchard (2019), Blanchard and Summers (2019), Furman and Summers (2019), and Krugman (2019) argue for increased borrowing, whereas Auerbach, Gale, and Krupkin (2019), CRFB (2019), Mazza (2019), and Riedl (2019) caution against debt accumulation.

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