Debt and governance? Could we get some functional indicators here?

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12/28/2013

Debt and governance? Could we get some functional indicators here?

This year I blogged quite a bit on using debt statistics as indicators of governance.

A number of readers found it a strange idea. I don't. If you think of governance as 'the exercise of authority by governments on behalf of citizens to further citizens' interests' then I think debt levels become really important to think about (and as indicators). They are part of a set of indicators related to the role governments play in the economy that I alluded to yesterday (in reflections on ports, trade and the use of turnaround times and other such metrics to indicate how well governments are exercising the authority they have to facilitate trade).

Why is debt related to governance?

Governments are authorized to play a key role in fostering macroeconomic stability in their countries. Debt levels are a key factor influencing such stability. Governments are authorized to incur debt on behalf of citizens, but this authority needs to be tempered by considerations of medium and long term fiscal stability. A similar measure could focus on monetary stability in a country, which is also a role governments (or government organizations like Central Banks) are authorized to play).

Why does debt matter in development?

In many developing countries, past debt crises have had seriously negative effects on development prospects, including human wellbeing. In many senses these crises sit alongside conflict and fragility and natural calamities as the major causes of extreme suffering in developing countries (and recently in more developed OECD countries like Greece).

An indicator?

Now I don't think a measure of this kind is easy to think about or calculate. This is because different countries seem to have different appetites for debt and there is no fixed rule on whether high or low debt levels are 'right' or 'wrong'. I discussed this earlier in the year on my other blog (http://matthewandrews.typepad.com/mattandrews/2013/01/dos-the-usa-exhibit-bad-debt-governance.html).

I did come to aproposal for thinking about and measuring governance in relation to national debt, however. I thought the figure here might be helpful in thinking through the idea. It shows in blue the 2010 level of Debt as a % of GDP in about 70 countries. In red it shows how far the 2010 level departed from the ten year average (where the departure is measured in number of standard deviations).

The graph shows that countries like Japan, Greece, Italy and Jamaica had relatively high levels of debt in 2010 (high blue bars) but these numbers may have been considered quite acceptable given debt to GDP levels in the prior decade, which were high or up and down. Governments in these contexts are expected to take time responding to high debt levels (because they seem authorized to have such levels). In contrast, Germany, the UK, Ireland and the USA had higher deviations from the norm (the red line) even though the actual level of debt/GDP was not as high as other countries. Governments in these countries can be expected to respond quicker to debt issues than others, because their authority to incur debt is lower.

Note this is not measuring whether debt is good or bad. Instead, I guess it's like talking about 'governance on a leash'…. And the leash is just a lot longer in countries like Greece than it is in countries like Ireland… because of past experience, political 'rules of the game', etc. If we have measures that capture the length of the leash and the level at which countries are testing the length of the leash, we might have an indicator of the extent to which governments are acting within the authority they have (or pushing on its boundaries). Sounds like a potential functional governance indicator to me.

Posted at 12:55 PM in Ideas for governance indicators, Post 2015 indicators (my thoughts) | Permalink

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12/28/2013