Government Debt and Good Governance: Rich Countries Now Lag Poorer Countries....

Regular visitors to this blog know that I spend a fair amount of time thinking about governance and governance indicators. I have proposed a range of ideas for measuring governance in the past. Let me try a new one today.

As in the past, I like to define governance as being about the way governments exercise authority on behalf of citizens. In this respect I think that governments are given authority to raise revenues through taxes and debt (and other means) to responsibly finance interventions in society.

It makes sense then to say that good governance must be reflected in the degree to which governments exercise this resource mobilization and management authority.

A potential measure of this--which is clear to understand--is the level of debt to GDP in a given country. This was certainly used as a measure to argue that African and other developing country governments could not govern in the 'stabilization' years of the 1980s. Many many governance reforms came from such logic.

So I looked at World Bank data on this for about 70 countries and generated the following simple excel graphs. They show how countries with lower GDP per capita tended to have higher debt/gdp ratios as recently as 2001 (with a trend line showing slight negative relationship between the variables). But if you look at the other two graphs you will see that the trend line changed over the 2000s and there is now a positive relationship: Wealthier countries now have higher debt to GDP ratios on average than poor countries.

As with all indicators we should contextualize the measure and i need to say up front that this is the product of an hour or so tinkering around...so don't go presenting this to your class as gospel! This is all the more important given that debt is now the political focal point in countries like the USA. So it behooves us to remember that 'ggod governance' could lead to higher debt to GDP ratios in some times than in others (like after a financial crisis).  It is also important to look at actual data and remember that US government debt to GDP is only about 75 % now. IT IS NOT GREECE (sitting at 1bout 135%, behind Japan at over 150% according to the World Bank). In this list of about seventy the USA ratios are lower than a variety of countries: Hungary,Malta, the United Kingdom, France,Ireland,      Belgium, Portugal, Barbados, Singapore, Iceland, Italy, Greece, and Japan.

I will bog a little more on the US situation in coming days, thinking about the kinds of processes that might help improve the governance of resource mobilization and management when this crisis is over...

In the meantime I really wanted to revel (as a development person) in the fact that poorer developing countries seem to have managed to keep their debt to gdp ratios in check over the past decade. Of course this reflects the fact that the 2008 crisis hit wealthier countries disproportionately. It could also suggest that developing country governments don't try to spend more in downturn because they realise fiscal policy is blunt if you can't actually implement the spending plans you propose (because of some of the process problems I have recently discussed).

Comments

[Philipp]

"It makes sense then to say that good governance must be reflected in the degree to which governments exercise this resource mobilization and management authority."

I'm not sure if I agree with the argument following this. The shift in debt levels in rich vs poor is certainly impressive, but what does that mean for governance?

Arguably, you could say that the higher the debt per GDP at a given interest rate, the better the governance. In other words, the fact that Japan, Italy et al are able to sustain debt levels far higher than what would have led to rapid default in poorer countries is a sign of strength.

[matt andrews]

Great comment. Yes. As with all measures of governance I struggle to always see how we come away with clean and clear ideas about what 'good governance' and 'bad governance' is... The interesting thing, of course, is that countries like Japan and Italy have been burdened by interest payments that take up 15+% of their revenues each year because of the debt. Even with low rates, this suggests higher debt comes at the opportunity cost of having lower taxes or more spending on other things.