Greek Debt and Bangladesh

I live in London: the greatest city in the world AFTER Dhaka. Greek debt crisis is one of hottest topics in breakfast table here. There are extremists in both ends. Some people think Greeks are just lazy and they should be strangled to death till they pay their debt. There is no shortage of people who on the contrary think austerity is not the right way to go and EU is just fending away the inevitable. This morning, I was trying to focus on the baked beans and egg on my plate while my European colleagues were passionately debating on how much debt Greece in the first place should have been allowed to take and it suddenly dawned on me: what about our country? Really, we never talk about it. Are we just playing blind? Well, my research says we have borrowed too little. Sounds irrational? Not so.

Almost all of us were in some fashion advised that piling up loans to repay is a bad thing. However, people like me who ended up studying finance now know that that’s not really the case. The whole concept of ‘financial leverage’ tells you that an entity should borrow up to a sustainable level to benefit from financial leverage. I work in corporate finance division for one of the largest corporations in aerospace industry. Here, a low level of borrowing is deemed as poor management of shareholders’ equity. For a country, the shareholders are the taxpayers. Of course countries are not necessarily just giant corporations. There are more than a few additional variables when it comes to a nation. However, a very well run country like Singapore show similar attributes to successful corporations. You might say, OK, intelligent people must have worked on this before. You are absolutely right. More than a dozen economists have contributed to this knowledge bank. The most widely used and simple parameter that can indicate a country’s debt level is its gross public debt as percentage of GDP. Greece has an unusually high figure of 175% and Bangladesh the opposite: 35%.

In 2002, Catherine Pattillo, a high profile economist from IMF found that the average impact of external debt on per capita GDP growth is negative for debt levels above 35–40 percent of GDP for developing countries. Sounds promising? Wait. About five years ago, two famous Harvard professors (Reinhart and Rogoff) concluded that growth rates for countries with public debt over roughly 90 percent of GDP are several percent lower. In fact, their finding was deemed so valuable that it served as an intellectual bulwark in support of austerity politics post financial crisis. However, three students from MIT proved recently that there is no real evidence that GDP growth is affected after 90 percent debt to GDP ratio. So, in essence, the scholars are divided and there isn’t enough to draw a conclusion that supports this desire to lower sovereign debt, if not the opposite. You’d think that with all that’s going on in the western world, researchers would be keen to understand the developing countries better. In reality, that has not happened.

Now let’s look at Bangladesh and our peers. It appears that we have tried to reduce our debt levels over time. There are not too many countries that are doing the same. The other obvious question is what countries with similar economic conditions are doing. According to IMF’s country classification, Bangladesh falls under Emerging & Developing Asian country category. And within that group, we are sitting at the lower quadrant in terms of debt to GDP level. Countries below Bangladesh are also mostly much smaller or unique economies.

From every angle, it really feels like we are just being too risk averse. May be not! May be our finance ministry are too smart and as citizens we should not be worrying about these things at all. It is not also absolutely unlikely that our thinking regime is still living in the medieval age and hoarding us to believe we are driving very aptly towards becoming an efficient and successful economy. We always talk about the need of infrastructural development in Bangladesh. Surely we could borrow more and help accelerate economic growth? Surely we could build more educational institutes that will improve our productivity as a nation and hence again, accelerate growth? These are the questions we should be asking ourselves and if possible our decision makers.