• The London Finance Journal

Leveraging Growth: A Cautionary Tale?

Updated: Sep 7, 2020

By Unicast Entertainment


For the 12th episode of Unicast Entertainment’s running series of video interviews, they invited Dr.Mia Mikic - the Director of Trade, Investment and Innovation at the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP). Through this episode, they discuss a variety of topics ranging from tips and tricks for applying to the UN, to the conflict between the narrative that Asian development was a product of protectionism and the pro-liberalization stance of the United Nations itself.




Yet, one of the most critical economic challenges they discussed was the transnational rise in debt-to-GDP percentages. A problem once almost exclusively seen in developing economies, today it seems that even developed economies have started to struggle in finding an equilibrium between debt-fueled growth and fiscal prudence too. Of the 15 nations with the highest gross-debt-to-GDP ratios, 40% are developed economies, including the likes of Japan, Greece, Italy, Portugal, Singapore and the United States. So, what are the triggers for such apparent prudential mismanagement? Why do we now see it surpass the ‘barrier’ that developed economies previously were equipped with?

Well, according to Dr.Mikic, this is not a sign of prudential mismanagement as the tales of the past and today are fundamentally different due to the ideological evolution of economic management.

In a paper written by Dr.Mikic in 1989, she spoke extensively about this unprecedented rise in debt-to-GDP ratios in developing economies. However, the source of this, she argues in the interview was quite different back then, citing a range of economic and political variables that created a unique environment that bred instability and/or made access to credit much higher.

The first such variable she cites for indebtedness in the 1980's was the fall of Bretton Woods - a gold-backed system of monetary management where all nations maintained an exchange rate with the US Dollar, which was backed by gold itself. The fall of such a system at a time when post-war debt was already very high left developing economies far more susceptible to the accumulation of debt and the inability to repay and service these.


The second variable cited is oil in the 80's. Following the Iranian revolution of 1979, the nation saw immense stability, particularly in the oil sector where protests disrupted production leading to an enormous 75% reduction in oil output by early-1979. As a result, oil prices shot up from $13 per barrel in mid-1979 to $34 in mid-1980. The rapid and unprecedented rise of a commodity so fundamental to economic growth also burdened oil-importing developing economies to the point where it significantly harmed their ability to manage debt.

Yet, the variable that Dr.Mikic emphasises most strongly is the political tug-of-war for many Central European economies during the Cold War. As Dr.Mikic states, “the debt crisis was triggered by some countries….hitting high levels of indebtedness - such as Poland, Romania and Yugoslavia at the time.” Some countries were, in this time, considered to be ‘in-between’ which meant that bloc-leading nations in this time were providing these countries with financing opportunities in abundance to woo them to their side.


Thus, the tale back then was one that harmed developing economies asymmetrically and left them far more susceptible to such debt accumulation.

While for developed economies, the eurozone and the financial crisis can be cited as the causes for debt accumulation today, Dr.Mikic believes what is far more fundamental is the ideological change the world has undergone since the Washington Consensus - the set of policy recommendations of the time that preached liberalization, privatization, low-debt and fiscal prudence.


Since then, the policy recommendation has changed immensely as today the UN believes that debt needs to be issued wherever necessary to mitigate damage and support demand (especially for “small and medium enterprises” most susceptible to downfall). If well-strategised, the accumulation of such debt is not a problem but a form of short-term relief to prevent long-term decay. Thus, the normalization of debt as an instrument for good, rather than a symbol of weakness, is far more fundamental to nations agreeing to take on such high amounts of debt today.

Conclusively, through our discussions, Dr.Mia elucidated upon the unique geo-political and economic variables that defined the 1980's and their ramifications in the context of debt accumulation in developing economies. Furthermore, she contrasted the Washington Consensus to the post-GFC policy recommendations to explain why developed economies are far more comfortable with large amounts of debt on their balance sheet.


See the full interview at: www.youtube.com/watch?v=nG8kRGJnlnY



By Unicast Entertainment

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