In their article, Kose, Ohnsorge, and Sugawara (2021) proposed several measures that countries could take to address debt-related risks before the next crisis or pandemic. However, it is important to note that the suggestions might need more details. Hence, this post serves as a comment that would contribute to more detailed measures.
The first suggested measure is for emerging markets and developing economies (EMDEs) to have better spending and revenue policies in an improved institutional environment. This includes increasing spending on education, health improvement, and climate-smart investments, broadening government revenue bases by removing exemptions, strengthening tax administrations, and supporting private sector growth.
However, these policies may not apply universally to all EMDEs as they may depend on the economy’s structure, particularly in terms of government spending and economic complexity. For instance, countries like Honduras, Kazakhstan, and Nicaragua already allocated more than 20 percent of their government expenditure to education in 2021. Rather than increasing education spending, it might be more beneficial to improve the quality of education and health spending for these countries, such as by enhancing monitoring mechanisms and access equality.
From the revenue side, according to The United Nations Conference on Trade and Development (UNCTAD), 87 developing countries in the world heavily rely on commodity exports, making their revenue highly susceptible to global market price volatility. Therefore, promoting private sector growth to boost productivity gains might be ineffective in commodity-dependent countries that lack economic diversification. These EMDEs, which are typically commodity-dependent, may need to take additional measures to diversify their economy to lessen reliance on specific sectors that might be vulnerable to global financial shocks.
The second recommended way is to promote an open and rules-based environment for trade and investment, which has been a major driver of economic growth for many countries in the past. Nevertheless, to be effective, this approach needs to be more specific in terms of its focus on the business environment. For instance, in countries like Indonesia, which have a proportion of almost 99% of Small and Medium Enterprises (SMEs) of the business units in the country according to the Coordinating Ministry of Economic Affairs. Such businesses should be supported and taken into account when designing policies to promote trade and investment. This is because SMEs are a vital source of employment and economic growth in such countries.
The third suggested measure is to provide additional support, including debt relief, to some EMDEs and low-income countries to return their debt to manageable levels. Nonetheless, this policy requires careful consideration of the extent of debt relief and the need to ensure that it is effectively targeted. In addition to those actions, an important step that can be taken is to ensure debt transparency, which involves assessing all types of debt and creditors to gain a better understanding of the debt that poses a risk to a nation’s public finances.
In conclusion, Kose, Ohnsorge, and Sugawara (2021) proposed a number of measures that could help address debt-related risks before the next crisis or pandemic. However, it is important to note that these suggestions may need more detailed consideration, as policies may not apply universally to all countries and may depend on their specific economic structures. It is therefore essential to take a nuanced approach to these measures, taking into account the unique circumstances of each country. In addition, it is crucial to ensure debt transparency and carefully consider the extent of debt relief needed to effectively target support to countries in need.
References
Kose, M., Ohnsorge, F., and Sugawara, N. (2021). Navigating the debt legacy of the pandemic. Retrieved 19 February 2023 from https://www.brookings.edu/blog/future-development/2021/10/20/navigating-the-debt-legacy-of-the-pandemic/
United Nations Conference on Trade and Development. (2021). State of Commodity Dependence. United Nations Publications: Geneva.
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