Demographics in eastern Europe (2012)

After the end of the Cold War and the economic collapse of the late 1980s and early 1990s, demographic trends in eastern Europe took a decisive turn for the worse. Several interesting observations can be made in this respect. First, the countries in the region with the highest per-capita income (Czech Republic, Slovakia) seem to have experienced more favourable demographic developments. Second, the eastern European countries closer to western Europe seem to have fared better in demographic terms than their peers further east. Third, demographic projections suggest that 2010-30 will be more or less a continuation of the trends observed in 1990-2010.

Population decline will decelerate, but the overall dynamics will remain adverse. Only two out of twelve countries will experience population growth during this period. The relationship between demographic trends, per-capita income and economic growth is complex. Lower per-capita income should lead to higher growth, but it also has a negative impact on labour supply. Clearly, eastern Europe will have to rely on capital accumulation and productivity growth rather than labour force growth to generate economic growth.

Source: UN

RMB internationalization & China’s development strategy (2012)

The Chinese authorities have been talking about internationalizing the RMB for a decade or so. Rising – but in our view unwarranted – concerns about the viability of the USD as the world’s dominant reserve currency combined with a string of reforms aimed at increasing the cross-border use of the RMB have led to expectations that the Chinese currency might soon replace the USD as the global reserve currency.

The internationalization of the RMB and, even more so, the emergence of the RMB as a reserve currency require China to put in place a number of far-reaching reforms. For the RMB to emerge as a, let alone the, “major” reserve currency capable of rivaling the USD, China needs to (1) open the capital account to both foreign official and private investors and, for all practical purposes, (2) allow greater exchange rate flexibility and (3) reform the domestic financial system. Financial sector reforms would need to create safe, liquid, transparent and market-driven bond and derivatives markets. The opening of the of the capital account would, in turn, require the re-capitalisation of the banking system in order to enable it to cope with the potential loss of a captive depositor base, while the liberalisation of domestic interest rates would also make broader governance and regulatory reforms necessary. For the RMB to become partially “internationalized”, allowing the RMB to become a “minor” reserve currency (like the JPY), less far-reaching reforms are required.

An important question that is less frequently discussed is what domestic political interests are behind the drive to internationalise the RMB. A complete internationalization of the RMB, a pre-condition if the RMB is to become a global reserve currency, would have important domestic political, economic and financial consequences. It is therefore worthwhile exploring which domestic actors support and which oppose the internationalization of the RMB and the accompanying economic-financial reforms.

The push for RMB internationalization and all this implies, such as capital account liberalisation, greater RMB flexibility and, ultimately, broader domestic financial reforms, has come from reform-minded technocratic groups affiliated with or residing in the People’s Bank of China (PBoC), including the State Administration of Foreign Exchange (SAFE), and the regulatory agencies such as China Banking Regulatory Commission (CBRC) and the China Securities Regulatory Commission (CSRC). These institutions have been the major force behind financial modernization in general. The PBoC, for instance, is fully aware of the potential risks continued FX reserve accumulation poses to domestic financial and economic stability (e.g. asset price bubbles, inflation). Concerns about macro-stability and its own balance sheet explain why the PBoC was a major supporter of breaking the RMB-USD peg and the move towards greater, albeit limited RMB flexibility in 2005.

In terms of bureaucratic mandate and intellectual outlook, the PBoC is most inclined towards financial reform and modernization, which ultimately comprises RMB internationalisation. The ultimate goal is to move towards a more market-based system, allowing for greater efficiency in terms of capital allocation, and one less prone to the build-up of large economic and financial imbalances. Similar motives explain the general support for modernisation by the regulatory agencies. Both the PBoC and the agencies find ready political allies in regional political and financial interests in Shanghai, which support both financial modernization and RMB internationalisation with a view of establishing Shanghai as a major global financial centre. All these groups regard the move towards RMB internationalization and the reforms it will engender as part and parcel of a broader modernization agenda.

The Ministry of Finance (MoF) has in the recent past been a bureaucratic rival of the PBoC, as the wrangling over control of the large state-owned banks in the context of the recapitalisation efforts and the establishment of the China Investment Corporation (CIC) demonstrated. More importantly, the MoF is tasked with ensuring the financial viability and stability of the Chinese public sector. To the extent that the PBoC is ultimately backed by the MoF, the sharp rise in US government debt since 2008, Fed quantitative easing and the continued rapid accumulation of US assets by the PBoC have at the very least increased concerns about the financial value of Chinese foreign assets. This has made the MoF more receptive to laying the groundwork for a greater international use of the RMB, that is, a lesser reliance on the USD. If internationalization were to turn the RMB in a widely accepted reserve currency, it would reduce its dependence on USD asset accumulation, thus at least reducing currency risk.

To the extent that RMB internationalization implies greater currency flexibility, export interest interests are concerned about possible significant RMB appreciation. No doubt, the export sector and its bureaucratic allies (esp.  Ministry of Commerce or MOFCOM) prefer to stick to the status quo. This is all the more true as the labour-intensive Chinese export sector has only a limited ability to pass on price increases. Domestic consumers favour currency appreciation. However, losses stemming from currency appreciation would be more concentrated in the politically well-organized/ -connected export sector (including foreign MNCs) than the gains accruing to domestic consumers. True, currency flexibility against the backdrop of greater capital account convertibility will not necessarily lead to currency appreciation. Greater exchange rate flexibility would nonetheless raise the prospect of currency appreciation and export interests therefore support the status quo policy of limited, controlled RMB appreciation.

The National Development and Reform Commission (NDRC) is in charge of formulating and implementing macroeconomic policies. Leaving aside the issue of currency flexibility and export-led growth, capital account opening would need to be preceded by the creation of a sound, market-driven financial system, lest liberalisation substantially increase the risk of capital-flow-related instability. With foreign investors gaining access to on-shore capital markets, domestic banks would also be exposed to greater competition. This will require their recapitalisation (which is one of the reasons why the MoF is not a more outspoken supporter of RMB internationalization). Even a partial opening of the capital account would make it more difficult to control resident capital outflows, which carries the risk of limiting the amount of (or raising the price of hitherto) captive funding in the form of domestic deposits available to domestic banks. This would increase the cost of credit and weaken government control over it. The NDRC is surely aware of the potential risks and the loss of state control that capital account liberalization implies. It perhaps also understands that over the medium- to long-term, the model is not sustainable. The NDRC is therefore supportive of a gradual, for now only limited approach to RMB internationalization.

Last but certainly not least, there is the State Council, effectively the Chinese government, headed by the premier. The State Council represents broader economic and political interests and has the authority to veto ministry-level initiatives. The Chinese government exercises significant control over the economy in the interest of economic development and of maintaining political stability. RMB reform would undermine government control. China’s successful economic development model has relied on a combination of factors: state playing a central role in the economy, state-directed capital allocation, capital controls and a stable, undervalued currency supporting export-oriented growth underpinned by large investment in infrastructure and manufacturing. Capital account liberalization, greater RMB flexibility and reducing state control of the financial system will hence not look like an attractive proposition in the eyes of the senior Chinese political leadership. From a short-term perspective, little political incentive exists fundamentally to transform the foundations of a hitherto successful development strategy, whatever the longer-term benefits might be.

First, the opening of the capital account would translate into the government losing significant control over the financial system, even in absence of further market-oriented reforms of the financial system. Large cross-border capital flows would expose the Chinese economy to potentially destabilising capital flows – not least given relatively shallow and underdeveloped domestic financial markets. As capital account liberalization ultimately requires greater exchange rate flexibility and a more market-driven financial system, complete capital account liberalization is unlikely to be welcomed by the political leadership. In addition to carrying potential short-term risks, it would also undermine China’s economic development strategy. Politically, an “if it ain’t broke, don’t fix it” attitude will prevail – after all, the Chinese continues to grow at 9% annually, for the time being.

Second, throwing open the capital account would make further flexiblisation of the exchange rate highly desirable in order to limit the sensitivity of the domestic economy to capital flows. This would further undermine China’s export-oriented development strategy based on moving cheap labour out of agricultural sector into a higher-productivity export-oriented manufacturing sector, supported by significant foreign direct investment and massive domestic investment. Greater exchange rate volatility and, more so, greater nominal RMB appreciation would make the pursuit of this policy more difficult. True, there are many reasons why China should adjust its strategy given concerns about its longer-term economic and political viability. Politically, abandoning the present development model won’t be seen as a very palatable option, however, for the time being.

Third, and most importantly, wider reforms of the domestic financial system would reduce government control over the largely state-directed financial, and especially, banking system. Increasing the size and depth of local capital markets and further developing derivatives markets would not cause the political leadership much concern. The necessary re-capitalisation of domestic banks may also be acceptable. However, the loss over state-directed lending and investment would be hard to stomach. Just imagine how the authorities would have fared in 2008-09 without being able to get the banks to extend massive loans and without banks being able to rely on captive, low-cost deposit funding!

The political leadership, concerned about economic development and economic stability as a pre-requisite for political stability, is unlikely to support full-scale internationalization, for this would imply the wholesale transformation of the very economic model that has served China very well for more than three decades. Once the political leadership realises that complete RMB liberalization implies loss of control over the financial system, they will slam the brakes. This may also explain why the authorities are laying the groundwork by way of a controlled and gradual capital account opening, RMB flexibilisation and, to a lesser extent thus far, domestic financial reform. The authorities pursue what could be termed a reversible reform strategy, allowing them to push forward or reverse the reform as it sees fit, without losing control. This applies to both gradual, but reversible RMB flexiblisation and capital account liberalization.

Another strand of thought sees RMB internationalisation and flexibilisation as instrumental and inevitable in terms of moving the Chinese economy towards greater domestic consumption and away from a model relying on ever-increasing domestic investment and large external imbalances that will ultimately prove unsustainable. This may be so. But this scenario will not materialize in the short term given the political economy of RMB internationalization sketched out above. The short-term political incentives at the highest political level militate against the short-term inevitability of reform. But granted: A declining sensitivity to currency appreciation on the back of a declining trade share and/ or declining price sensitivity of exports will increase the incentives for greater RMB flexibility. A declining capacity of the state-controlled financial system to generate high growth will make greater market-based credit allocation more palatable. This would make full-blown capital account liberalization less unpalatable.

A longer period of economic stagnation (say, below 5% growth) would by changing the economic benefits/ political cost trade-off and convince the political leadership make a shift away from state-directed lending and export-led growth diminish a more palatable, even desirable option. In this scenario, RMB appreciation would help move China away from its investment-heavy, export-led development towards a more consumption-driven, service-oriented economy. The move from a heavily state-directed financial system to a more market-oriented one would allow a more efficient allocation of capital less focused on heavy industry and manufacturing. Once these reforms have been successfully implemented, the actual and potential political and economic costs of full-blown capital account opening would be very small. In short, RMB internationalization would both bring about and facilitate the transition from state-led development to a market-based model. That said, the political incentives to bring about the demise of “Beijing consensus” model are very limited.

Where does this leave things? If China does not open its capital account for private-sector capital accounts transaction, private sector demand for RMB and hence the incentive of central banks to primarily hold reserves in RMB is much diminished, even if foreign central banks are granted (unfettered) access to onshore RMB market. (In this context, it is worth recalling that both the German and the Japanese authorities were reluctant to see their currencies play a larger global role, mainly for fear of losing control of monetary policy.) Foreign central banks may end up holding a small share of their reserves in RMB, mainly for (limited) trade settlement and risk diversification purposes. The bulk of global FX reserve holdings will remain invested in USD. None of this is meant to suggest that the RMB will not eventually become a more important currency. It does, however, look unlikely that the RMB will become a major reserve currency rivaling the USD or the EUR (equivalent) over the next decade or so; for China will be taking a gradualist approach to capital account liberalization, RMB flexibilisation and domestic financial reform. The Chinese authorities will stick to what Deng called “fording the river by feeling for the stones.”

The domestic political economy of RMB internationalization suggests that the process of RMB internationalization will slow down, once it dawns on the political leadership what it means in terms of state control of the economy, including the government’s ability to respond to potentially politically destabilising economic-financial shocks. RMB internationalization requires the effective dismantling of the main pillars underpinning China’s economic development strategy: capital controls, domestic financial repression, state-directed credit allocation, a non-market-determined exchange rate and export-led industrialisation. Complete RMB internationalization would spell the demise of the Chinese development model. Sooner or later, this will (have to) happen. But it is unlikely to happen this decade. To paraphrase Mark Twain, the reports of both the imminent demise of China’s development model and the emergence of the RMB as the global reserve currency as are greatly exaggerated.

Power, preferences & euro area crisis (2012)

Germany’s economy is among the most highly integrated among the world’s largest economies. The US and Japan are comparatively closed economies and China’s trade openness has been declining in the past few years. In recent years, Germany managed to maintain its share in international markets, while the share of most advanced and European economies declined. Manufacturing represents a more important share of economic activity than elsewhere. In a way, a line can be drawn from Imperial Germany’s over-industrialisation to today’s persistently large industrial and manufacturing sector and goods trade surpluses. Germany is particularly specialised in advanced manufacturing. Monetary union and the rise of Chinse have increased specialization. In Germany’s case, this has led to increased export dependence and two increased vulnerabilities in terms of external trade shocks. 

European economic integration has has lead to agglomeration effects (Krugman 1993) as well as the emergence of complex supply chains. This has particularly benefitted Eastern European economies. Following their entry into the EU, Germany and less so other countries heavily invested in Eastern Europe in order to take advantage of a relatively low-cost and educated workforce. Eastern European economies benefitted from foreign investment and technology transfers. In practice, the high degree of integration has benefitted both Germany and new member-states. This is presumably why in spite of all the political antagonism over issues such as immigration and the rule of law, no Eastern European leader has ever questioned economic integration.

Germany has also been running the largest external surpluses. Germany has always tended to run trade surpluses. German has always run sizeable external surpluses. The only exception were the two oil crises and German reunification. Germany, like Japan, seem to run a structural trade and current account surpluses. Germany has generally been running trade and current account surpluses following the completion of economic reconstruction after WWII. So has Japan. Leaving aside the question as to what drives them, these surpluses translate into large net foreign financial claims. Foreign claims take the shape of foreign direct investment, credit or portfolio claims, both equity and debt.

European monetary union represents by and large an extension of the DM zone. No wonder Germany was better adapted to life under fixed exchange rate and low inflation While interest rate convergence led to a demand and in some cases a financial boom in the so-called  periphery, relative German economic stagnation led to important labour market reform under the Schroder government. This helped intensify intra-EMU divergence. German surpluses began to surge under EMU and especially following the Hartz IV reforms. An important measure of competitiveness, unit labour costs barely increased just as other EMU members unit labour costs began to rise rapidly elsewhere. Fiscal consolidation also kept a lid on domestic demand and import growth. leading to large German trade and current account surpluses.

Germany is economically and financially the most powerful state in Europe. It has the largest economy and the most favourable fiscal position and lowest interest rate costs (among the larger European economies) and hence the greatest borrowing and lending capacity. Very large external surpluses and a commitment to low inflation make Germany the “safe haven’ of the Euro Area. Moreover, Germany’s commitment to fiscal rectitude has been institutionalised in constitutional law (so-called ‘debt brake’). Last but not least, it has Europe’s largest and most competitive export sector, allowing it more than other Euro Area members to tap external sources of demand (e.g. China, Russia).

In the 70s, 80s and 90s, German power was largely structural in nature. Today Germany’s economic strength allows it to exercise relational power and, ultimately, have its economic policy preferences prevail. It goes further. Not only is it able to maintain its economic policy preferences (monetary stability, fiscal discipline) and thereby, for better or worse, push the ‘transitory costs of adjustment’ onto the financially weaker countries. It seems also poised to export the German approach to macroeconomic policy to the rest of Europe by way of conditional financial support and by leading by example. This position of preponderance allows it to stick to its economic policy preferences, while getting others to adjust economically and financially. Naturally, Germany benefits from the support of other financial sound European countries. But Germany, by virtue of its size and borrowing capacity, plays the leading role. Without its financial support, a Euro Area would be impossible. 

This does not mean that Germany is omnipotent in terms of having complete control over other countries’ policy choices. First of all, its borrowing capacity may be the largest among European countries, but it is not nearly enough to provide a bail-out package large enough to save the larger EZ members, should they run into re-financing difficulties. Being the financially strongest country, Germany has by far the largest say over rescue policies and retains an effective veto over rescue efforts and concomitant reform. Second, a sovereign default or a Euro Area exit would hurt Germany economically and financially. The German public and/ or private sector would incur significant financial losses as a result of a default and/ or currency re-denomination. It would also be faced with an appreciating currency, undermining its export competitiveness and potentially severely hurting economic activity. Nonetheless, it is clear that the costs to the defaulting (exiting) country would be far higher than to Germany in both the short- and long-term. Mutual dependencies are rarely symmetrical, but rarely are they completely asymmetrical either.  It is this asymmetry in terms of vulnerability and the provision of conditional financial support that provides Germany with significant influence over on-going rescue efforts. 

One solution is to force the entire burden of adjustment on the weaker countries, albeit flanked by conditional financial support. There may be political and economic limits to such a one-sided approach. Not only may deflation undermine the very fiscal adjustment that is required to make debt sustainable. Austerity and structural economic reform may lead to domestic political breakdown in some of the weaker countries against the backdrop of high unemployment, low growth and declining living standards (e.g. Argentina 2001). Another solution is for the fiscally sound countries to pump-prime and reflate their economies in order to generate growth and import demand, thus easing the adjustment burden for the weaker countries. Naturally, the two solutions can be combined. In practice, it is unlikely that Germany will allow itself to be forced into a fiscal expansion and internal revaluation. It almost certainly will not accept any arrangements that would lead to more symmetric burden sharing, other than providing conditional, temporary financial support (e.g. John Maynard Keynes versus Harry Dexter White at Bretton Woods).

Germany naturally prefers to push the burden of adjustment on the deficit countries by forcing them to implement fiscal austerity to re-establish government debt sustainability, to introduce structural reform to raise (medium-term) economic growth and to deflate the economy to make it more competitive. Germany is willing to support this by way of conditional financial support. But Germany is unwilling to reflate its economy by pursuing an expansionary fiscal policy, which would facilitate the adjustment of the debt-constrained Euro Area economies. Being in an economically and financially stronger position, Germany is not willing to compromise its economic policy preferences, notably low inflation, fiscal discipline and export-led economic growth. 

Germany’s stance is, however, not solely determined by an ideological commitment to or a preference for s a certain type of economic policy. Reflating its own economy or going for the so-called ‘bazooka’ solution – whether in the form of offering unlimited financial resources or encouraging the ECB to intervene more aggressively – would create moral hazard and it could undermine Germany’s financial position. Eurobonds, permanent fiscal transfer or an ECB-led bail-out, to the extent to which these are options at all given the domestic and supra-national legal constraints, carries the risk of undermining the Euro Area´s commitment to price stability and, more seriously, could lead to a permanent weakening of the regime. 

It is true that the gradual approach to solving the crisis and the ‘too little too late’ approach played a role in exacerbating the crisis. It is also true that imposing fiscal austerity on a country unable to gain competitiveness via currency devaluation makes achieving sustainability more difficult, perhaps impossible. These arguments carry a lot of weight if what Europe is dealing with is a liquidity crisis rather than a solvency crisis. If it is not, it is difficult to see how the provision of bazooka-like, even unlimited financial support will help solve the crisis. It would only end up undermining the entire regime. Thus the German approach does make political sense. 

By providing conditional financing, albeit at subsidized rates, is the most cost-effective way to try to solve the crisis from a German perspective. It is also the more cautious approach. It limits the risk of a potential German financial over-commitment (or a weakening of ECM commitment to low inflation) by limiting the risks to its own balance sheet, which provides the backbone of any credible Euro Area rescue effort. While it is cumbersome and has worsened the crisis, it allows Germany to deal with moral hazard and to retain room for manoeuvre in case the current crisis is more than a liquidity crisis. Last but not least, by choosing a gradual approach and maintaining conditionality, it allows Germany to determine the characteristics of the newly emerging, more integrated fiscal regime. 

Germany as the economically most powerful country has been able, by and large, to have its preferences prevail during the economic integration efforts over the past couple of decades (EMU, fiscal compact). Pre-EMU, it sought to prevent currency devaluation in its major European trading partners through FX intervention. Today, it is seeking to rescue the Euro Area by offering limited and conditional fiscal support. In both cases, the support was limited and pushed the adjustment burden on the financially weaker country. By institutional (constitutional) design, habit and, perhaps, cultural inclination, it will stick with a policy of –as some (critics) call it – competitive disinflation. Germany is visibly willing to act as a “financial stabiliser”, for good, self-interested reasons, ranging from the financial exposure of its banking sector over a potential EMU sovereign default to preserving EMU for both economic and political reasons. Germany’s policy DNA, a mix of institutions and beliefs, does not seem to allow it to act as a significant (discretionary) “economic stabiliser” in terms of generating intra-EU demand, but it is willing to act as a temporary “financial stabiliser” and as an economic moderniser by compelling other countries to implement structural reforms. This prudent, cautious and gradual approach has no doubt exacerbated the Euro Area crisis. Then again, leaving the domestic institutional and ideological commitment aside, would any government in the world run the risk of providing large-scale financial support without policy reform commitment.

How large is China’s debt - and does it matter? (2012)

Is Chinese government debt 20% of GDP or 150% of GDP, and does it matter? The short answer is no, not really. Chinese general government debt, which comprises central government debt (including banking sector restructuring related debt) and should comprise local government debt, amounts to 20% of GDP. China does not provide (net) public sector debt statistics, which would consolidate the balance sheets of the general government sector and “public corporations”, including the central bank, state-owned corporations and banks as well as government-owned entities such as the China Investment Corporation (CIC).

Against the backdrop of China’s bank lending stimulus following the 2008 financial crisis, a lot of attention has been focused on (off-balance sheet) local government debt. Being barred from taking out bank credit, local governments set up funding vehicles to raise bank loans. This is presumably why they do not seem to show up under in the reported general government statistics. The National Audit Office (NOA) recently put local government debt (provinces, cities, countries) at RMB 10.7 tr (USD 1.6 tr or 27% of GDP) at end-2010. This would raise general government to nearly 50% of GDP.

Moody’s believes that this underestimates local government debt by RMB 3.5 tr (USD 520 bn or 9% of GDP), as the NOA only accounts for debt directly guaranteed by local governments. Other analysts (Shih) put the amount of total local government liabilities even higher, at RMB 15-20 tr (37-45% of GDP). But LGFV carried RMB 5 tr and “business units subsidised by the budget” another RMB 5.7 tr in debt. Rmb15,400bn (Rmb9,700bn in LGFV debt plus Rmb5,700bn in non-LGFV debt) and Rmb20,100bn (Rmb14,400bn in LGFV debt plus Rmb5,700bn in non-LGFV debt). If this estimate is correct, combined local and central government debt may be as high as 70% of GDP.

This does not take into account other public sector debt such as the debt of SOEs and other entities linked to the central government. For instance, the Ministry of Railways (5% of GDP) and policy banks (10-15% of GDP) have incurred substantial debts in recent years. The major “off-balance” item, however, is related to local government borrowing. If, unrealistically, all the debt of all government-owned entities were added up, public debt may add up to 150% of GDP or so. Naturally, failing to net out intra-government holdings, this greatly overstates the public sector’s debt position (e.g. lending by policy banks to local governments).

Even if the government were forced to underwrite all outstanding domestic debt liabilities, this would not break the “sovereign” bank. This would hold true even if economic growth declined substantially, real interest rates rose and the primary fiscal balance worsened. Naturally, the actual increase in consolidated public sector debt would be substantially less once intra-government holdings and the collateral transfer associated with the potential takeover of local-government debts are taken into account. As long as China maintains a growth rate of 5%, the government will be in a position to underwrite all outstanding debt liabilities.

With the financial system as a whole implicitly guaranteed by a very creditworthy central government, the banking sector faces little risk of a systemic destabilization. Significant government ownership, potential regulatory forbearance, a captive depositor base and financial repression further help limit risk. Similar to the bank restructurings of the late 1990s and early 2000s, the government can help out the banks by removing NPLs and recapitalizing the banks. Or it can bail out the local governments (and thus directly the banks) by guaranteeing or taking over local government debts and resolving the issue with the help of strong nominal GDP and cheap financing costs due to low/ zero real interest rates.

In practice, the resolution will likely be a mix of the central government taking on part of the local government debt and the banks taking limited write-downs in order not to jeopardize their financial stability. (While the government will not allow the write-off to be destablising, it would nonetheless impact the banks’ bottom line.) Another way of looking at this is that a chunk of the investment goes bad and gets absorbed, largely, by the central government – either though recapitalizing the banks or assuming local government debts. The direct financial costs to the central government of the second option will be larger, but the economic costs may be smaller. An economy with a savings and investment rate as high as China’s can afford to do this. The more important question is whether, going forward, government-driven bank lending and government investment is the best way to generate high productivity gains and economic growth and the return on investment to finance the debt. If the marginal productivity of investment were to decline, whether as a result of poor lending decisions or a structural decline in marginal productivity growth, rising debt levels could become a problem. But, in all likelihood, this day is still a decade or so away.

Source: IMF