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The past five years has seen an increased importance placed on a country's level of debt. Trying to deal with this problem can differ greatly by country. From the gradual debt reduction approach seem to be preferred by the United States to the austerity measures that became a popular tool by Eurozone governments, countries are waking up to the realization that too much debt is a bad thing. What is too much debt? The groundbreaking academic paper released by Carmen Reinhart and Kenneth Rogoff in 2010 seemed to have solved the problem when the models they ran indicated that when a country exceeds a 90% debt to GDP ratio it greatly diminishes growth rates.
The report was widely cited across the world by leaders who argued that shedding debt was the most important action a government could take for its country. Since then controversy has arisen about the integrity of the models used in the 2010 publication. So we now return to the question, how important is debt?
Looking at 2011 data for both real GDP growth rates and national debt interesting information is revealed. Fifteen countries currently are above the “widely acknowledged” 90% threshold. Of those, four of the countries are experiencing negative growth rates. Also included in the fifteen are four countries who are experiencing growth rates in excess of 3%. The largest outlier is Eritrea who is has an astounding debt level of 133.8% of GDP and yet is boasting an impressive 8.7% real GDP growth rate. With the remaining countries GDP growth rates ranging from 0.4% to 2% it seems to be a relatively mixed bag with no true discernible pattern emerging.
Taking into account only the most recent figures of real GDP growth and debt as a percentage of GDP it is hard to make any solid conclusions of the effect of one on the other. Each country and economy is too complex to batch them together by a single identifier. So let the debate commence again, how important is debt?
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