By Ali Bolbol, Chief Economist at BLOM Bank and Alexandre Mouradian, Head of Investor Relations at Blominvest Bank
Introduction
It is still fairly hard in the economics literature to come up with a decisive ratio for the public debt to GDP (debt ratio) beyond which economic growth would slow down considerably. For instance, the Maastricht Treaty failed to live up to its criterion of 60% as the debt ratio that will qualify EU members to the Euro Area when Greece and Italy were admitted at much higher ratios. More recently, and more importantly, extensive research by Reinhart and Rogoff (2010) established a threshold ratio of 90% that was widely cited as a justification for austerity measures for countries at or exceeding this threshold. But a rigorous look at this research revealed that the data used to arrive at this conclusion were erroneous, and soon enough the conclusion was forgotten but not so much the policy implications that emanated from it.
What we want to explore in this short note is not a new threshold for the debt ratio, but a new and simple way of analyzing debt by looking at its inverse, the GDP to debt ratio. This ratio, GDP/DEBT, measures quite simply the average productivity of debt since debt, or the accumulation of budget deficits, can clearly be considered an input into GDP as it mobilizes and uses resources to meet government expenditures. As important, we can also identify the marginal productivity of debt, dGDP/dDEBT, which measures the impact of additional debt or budget deficits on GDP. So what we are interested in is the productivity of debt, not necessarily its threshold, sustainability, or burden; and what are some of the basic and crucial drivers behind this productivity.
In Keynesian models of recessionary economics and an income multiplier that is greater than one, we expect the marginal productivity of debt to be larger than one. In neoclassical models of full employment, we expect it to be zero. In reality, it could be anywhere between these two values, but what is important is how its behavior varies over time as more debt is transacted. More important is what constitutes the additional spending behind the larger debt: is it capital expenditures? Or is it current expenditures? If the latter, is it interest payments, is it salaries, is it transfers, is it appropriated money (corruption), or is it all four?
That is what we want to find out for the post-war Lebanese economy of 1993-2016. To this end, we analyze in section 2 the Lebanese public debt from the perspective of its productivity during the post-war period; in section 3 we interpret the results obtained in section 2 and provide some explanations as to why the debt has risen largely unchecked; and in section 4 we conclude the note and briefly argue for some of the essential needed policy reforms.
For the full study, click below:
A Simple Note on the Productivity of Lebanon’s Post-War Public Debt, 1993-2016