# 3. Benefits of debt

Additional debt accumulation by EMDEs may be needed to invest in growth-enhancing projects (e.g., infrastructure, health, and education), and to protect vulnerable groups. During periods of weak growth, it may also be appropriate to borrow in order to employ expansionary fiscal policy to stimulate activity. Moreover, government debt could act as a safe asset when borrowing conditions of investors are tightened.

# 3.1. Promoting long-term growth

Government investment in physical and human capital can provide an important foundation for stronger growth over the long term. There are two major reasons additional debt is needed in EMDEs for achieving long-term development goals.

First, sustained robust growth is the foundation of long-term poverty reduction (Dollar, Kleineberg, and Kraay 2013). The expected slowdown in potential growth—the rate of growth an economy can sustain at full employment and capacity—therefore lends urgency to the need for additional investment (World Bank 2018c). In EMDEs, in particular, potential growth is expected to slow by 0.5 percentage point to 4.3 percent during 201827, well below the longer-term average of 5.4 percent over 1998-2017. Investment can raise potential growth directly and indirectly. The direct channel is capital accumulation, which lifts labor productivity and potential output. Indirectly, investment can raise total factor productivity because of technological improvements embedded in investment.<sup>3</sup> Second, EMDEs have large investment needs to meet development goals and improve living standards. Several studies estimate the cost of investment needed to achieve the Sustainable Development Goals (SDGs). Rozenberg and Fay (2019) find that low- and middle-income countries face aggregate investment needs of 1.5 to 2.7 trillion dollars per year—equivalent to 4.5 to 8.2 percent of GDP—between 2015 and 2030 to meet infrastructure-related SDGs. Their cost estimates depend on policy choices, highlighting the importance of spending efficiency (i.e., the quality of spending) in achieving such goals. Infrastructure investment can have particularly large growth benefits if it connects isolated communities with input and output markets, allows companies to realize economies of scale by increasing market size, and increases competitive pressures (Égert, Kozluk, and Sutherland 2009; Calderón and Servén 2010).<sup>4</sup> 3 For example, using a panel of OECD countries, Fourier (2016) shows that a 1-percentage-point increase in the share of public investment in expenditure is associated with an increase in long-term output by 5 percent. The study emphasizes that public investment is more growth-enhancing in areas with large externalities, such as health and research and development. To the extent that debt-financed investment spending stems the slowdown in potential growth, it helps preserve the revenues required to service this debt (Fatas et al. 2019).

4 Gaspar et al. (2019) show that additional spending of about 1.3 trillion dollars in 2030 is required to meet the SDGs related to infrastructure in low-income developing economies and emerging market economies, and another 1.3 trillion dollars for the SDGs related to health and education. Similarly, UNCTAD (2014) discusses additional spending needs of 1.6 to 2.5 trillion dollars per year between 2015 and 2030 to achieve the goals related to economic infrastructure (i.e., power, transport, telecommunications, and water and sanitation). The additional annual investment needed to meet health-related SDGs in low- and middleincome countries is estimated at about 370 billion dollars (Stenberg et al. 2017).

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