Developing countries should take on new debt to help them fight the economic impact of the coronavirus pandemic — but they will later suffer an unprecedented wave of debt crises and restructurings, World Bank chief economist Carmen Reinhart has warned.
The former Harvard University professor is best known for her work with fellow economist Kenneth Rogoff on the economic damage inflicted by financial crises throughout history, which was especially relevant during the great recession of 2008-09. But their work on the risks of high debt levels has been attacked for fuelling governments’ austerity policies in the following decade.
Ms Reinhart, who became chief economist at the World Bank this year, told the Financial Times in an interview that additional government borrowing was justified in the current circumstances.
“While the disease is raging, what else are you going to do?” she said. “First you worry about fighting the war, then you figure out how to pay for it.”
But Ms Reinhart has long argued that developing economies have a lower tolerance for debt than advanced economies. The impact of the pandemic will only exacerbate that problem, she said.
“Ken Rogoff and I wrote about debt intolerance in emerging markets 20 years ago,” Ms Reinhart added. “The level of debt that historically gets them into trouble is much lower.”
Ms Reinhart spoke as the World Bank and IMF prepare for their joint annual meetings, which will be held online next week.
How to deal with the sharp rise in government indebtedness during the pandemic — caused by falling output and rising public spending — will be one of the hottest topics of discussion.
The G20 group of leading nations is