The Rise in Global Debt

Global debt as a share of GDP rose to an all-time high in 2020, according to the latest update of the IMF’s Global Debt Database. Here’s a descriptive figure from a blog post by  Vitor Gaspar, Paulo Medas, and Roberto Perrelli at the IMF showing the overall pattern.

As you can see, global debt jumps from 227% of global GDP in 2019 to 256% in 2020. The authors write:

Borrowing by governments accounted for slightly more than half of the increase, as the global public debt ratio jumped to a record 99 percent of GDP. Private debt from non-financial corporations and households also reached new highs. … Advanced economies and China accounted for more than 90 percent of the $28 trillion debt surge in 2020.

You can also also see in the figure the comparable jump in debt of 20 percentage points during the Great Recession from 2007-9. The rise in debt as a share of GDP in 2020 has already exceeded the rise from 2007-9, and one suspects the number will rise still higher in 2021.

The gradual rise in global debt over the decades should probably be viewed as a good thing. There is a natural pattern that debt tends to rise as the financial sector of an economy becomes more developed. After all, low-income countries with few banks and tiny bond markets tend not to have much borrowing and lending.

But two booms in global debt in the last 14 years–once in the Great Recession and now in the pandemic recession–also bring some constraints and vulnerabilities. If interest rates rise around the world, debtors who borrowed using adjustable rate loans, or who have been planning to roll over their old fixed rate loans with new borrowing, will find that their costs are much higher. Debt is often not that flexible, and so an inability to make payments on past loans, or to afford the borrowing for new roll-over loans, can lead to threatened defaults and forced reorganizations. The authors write: “But the debt surge amplifies vulnerabilities, especially as financing conditions tighten. High debt levels constrain, in most cases, the ability of governments to support the recovery and the capacity of the private sector to invest in the medium term.” Also, high debt levels mean that inflation becomes more attractive to governments and other borrowers, because it allows them to repay past borrowing in cheaper inflated dollars.

During a global financial crisis or a pandemic recession, it can make sense for governments and others to borrow heavily for a year or two. But such rises in debt should be viewed as a short-term palliative, with costs and risks and tradeoffs.

Lives Saved from the COVID Vaccination

As I have written before, the $18 billion spent on the Operation Warp Speed program to accelerate the development of COVID vaccines may well have the highest benefit-to-cost ratio of any government program that has ever existed. Moreover, the benefits will continue to grow as more people get vaccinated here and around the world, and as future vaccines are developed based on the accumulated knowledge. Over at the Commonwealth Fund, Eric C. SchneiderArnav ShahPratha SahSeyed M. MoghadasThomas Vilches, and Alison Galvani have updated their model to answer the question: “The U.S. COVID-19 Vaccination Program at One Year: How Many Deaths and Hospitalizations Were Averted?” (December 14, 2021). They write:

The U.S. vaccination program campaign has profoundly altered the trajectory of the COVID-19 pandemic, preventing nearly 1.1 million deaths. Even with only about 60 percent of Americans vaccinated to date, the nation has dodged a massive wave of COVID-19 deaths that would have started as the Delta variant took hold in August 2021. Because of Delta’s rapid and nationwide spread, deaths due to COVID-19 would have far exceeded all previous peaks. Our estimates suggest that in 2021 alone, the vaccination program prevented a potentially catastrophic flood of patients requiring hospitalization. It is difficult to imagine how hospitals would have coped had they been faced with 10 million people sick enough to require admission. The U.S. has 919,000 licensed hospital beds and typically accommodates about 36 million hospitalizations each year.

Their model predicts the death rates and hospitalization rates with and without vaccinations:


Of course, all models like this are open to question. Maybe the delta variant of COVID would not have been quite as bad for an unvaccinated population at their model predicts. If vaccines had not been available, probably alternative steps would have been taken to limit the spread of COVID in 2021–steps that would of course have had benefit and costs and tradeoffs of their own. But my point here is not to quibble over the numbers: after all, reducing deaths and hospitalizations by half of these projects, or one-tenth of these projections, would still be an extraordinary success. Instead, I want to emphasize that the COVID pandemic, awful as it has been, could have been much worse. And I’m not sure we have internalized the lessons we need to learn for the next pandemic, just in case “invent a vaccine really fast” doesn’t work so well next time.

The Challenge of Africa’s Rising Population

The countries of sub-Saharan African have the lowest per capita GDP and the highest birth rates of any region in the world. The December 2021 issue of Finance & Development, from the International Monetary Fund, has a series of short articles on some of the challenges and opportunities. Abebe Aemro Selassie offers an optimistic vision in “The African Century” (pp. 58-61). He writes:

The population of sub-Saharan Africa is projected to double from 1 billion to 2 billion by about 2050. This will account for half of global population growth, with the working-age population growing faster than any other age group. These projections—while not uniform across the continent—should be placed in the context of the opposite trend in advanced economies, which typically see aging populations, an inverted population pyramid, and a reduction in population once immigration is excluded. This trend represents perhaps the region’s single greatest opportunity. It embodies a growing pool of human talent and ingenuity coupled with large market size—historically important drivers of economic dynamism.

One possibility here is a happy outcome. Selassie writes:

Fast-forward to 2081. The demographic boom currently unfolding in most sub-Saharan African countries will likely have transformed many of the region’s economies into the largest and most dynamic in the world. Wishful thinking? Perhaps. But 30 to 40 years ago, not many would have thought that possible of China, India, Indonesia, or Turkey. Three factors will have an influential role in making this vision materialize:

• The demographic transition that is underway: By 2050, many sub-Saharan African countries will be among the few with a rising working-age population. Much investment and consumption demand will follow factors which are certain to entice considerable innovation.

• The ongoing digital revolution—which offers much scope for the diffusion of know-how, new business opportunities, and more efficient service delivery.

• How effectively the region’s economies deal with the transition to a low-carbon economy and the adverse consequences that climate change is set to unleash.

Of course, there are no guarantees here. One possibility is that a main consequence of Africa’s high population growth and low levels of economic opportunity will be an extraordinary wave of emigration from Africa to the the European Union and the rest of the world. The chances of a rising standard of living for most of sub-Saharan Africa are linked to the ability of these countries to make the necessary investments in education, health, and infrastructure to provide the basis for future growth.

Ken Opalo discusses these issues in Democratizing Africa’s Public Finance Management: Governments that fail to overhaul taxing, spending, and borrowing could face electoral backlash. Opalo describes the situation this way:

Weak public finance management systems are a significant impediment to economic growth and development in African states. On the revenue side, many African countries underperform on tax collection. In 2018, the average tax collection as a share of gross domestic production in Africa was 16.5 percent–varying from 6.3 percent in Nigeria to 32.4 percent in the Seychelles. On the spending side, weak legislative oversight means that budget appropriation, implementation, and oversight often reflect the priorities of the executive branch. The result: only some of the revenue collected in African states actually reaches the public in the form of public goods and services. Much gets lost to spending on poorly planned “white elephant” projects, corruption, and general waste. As for borrowing, recent increases in public debt in a number of African countries have raised concerns about a lack of transparency and accountability.

Opalo suggests that there is a need to build linkages from additional government revenues to publicly demonstrable spending outcomes. This step will also require additional power for public participation in tax and spending decisions via legislatures, rather than leaving most major decisions up the executive branch. I found this figure to be striking. Opalo emphasizes that most people in most countries think the president should be monitored by parliament. But look at how many African countries where 1/5 or 1/4 or 1/3 or more of the people think the president should just act, unmonitored by parliament!

Other papers in this symposium include:

The Economic Success of East Asia: Industrial Policy or Sound Fundamentals?

When it comes down to discussions of whether the United States needs an activist industrial policy to power future economic growth, maybe the most common argument I hear is that other countries like China are doing it, so the US needs to do it as well. “US companies can’t compete against foreign governments” is a common line. Just to be clear, I’m talking here about the kind of industrial policy that goes beyond general policies like supporting competition, education/job training, and and research and development, and instead focuses on government support for certain industries or companies (perhaps with financial subsidies or trade protection).

The modern version of this argument typically focuses on how the US needs to subsidize key industries as a counterbalance to China. But for economists, there’s some history here. I remember in the 1970s when the argument for US industrial policy was the need for competing against the USSR (because “US companies can’t compete against foreign governments”) and then in the 1980s and 1990s when the argument for US industrial policy was the need for competing against Japan (because “US companies can’t compete against foreign government”). Now, it seems pretty obvious that Soviet industrial policy didn’t work too well. In Japan, by far the biggest government subsidies always went to the agriculture industry, suggesting that once government industrial policy is run through the political system often more about propping up existing money-losing firms, than turbo-charging potential new firms that will take market share from incumbents.

But more broadly, the idea that the great economic success stories of the 20th century were driven by focused and specific industrial policies, rather than by policies that were broadly supportive of economic growth, doesn’t seem to be borne out by the evidence.  Gary Clyde Hufbauer and Euijin Jung discuss “Scoring 50 Years of US Industrial Policy, 1970–2020″ (Peterson Institute of International Affairs, November 2021). I discussed the findings of the report last week. Here, I want to focus on their brief summary of the evidence about how fundamentals like sound macroeconomic policy and expanded education were far more important for economic development in Japan and East Asia than targeted industrial policy. They write:

The World Bank’s acclaimed volume, East Asian Miracle: Economic Growth and Public Policy (Birdsall et al. 1993), while acknowledging industrial policies, emphasized sound macroeconomic policies (later labeled the “Washington Consensus”), together with superior education and land reform, as drivers of remarkable growth in Hong Kong, Japan, South Korea, Singapore, and Taiwan. A decade earlier, Chalmers Johnson (1982) had published MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975, giving outsized credit for Japan’s spectacular postwar economic growth to government support for specific firms and industries. These two volumes set the stage for prolonged
debate, still underway, on the role of industrial policy in East Asian economic prosperity. Numerous academic articles and books have dissected contributing factors. This brief section merely skims the surface of a substantial literature.

Three key facts … set the stage. Between 1950 and 1990 in the East Asian stars, real exports generally grew, real GDP soared, and per capita income dramatically closed the gap with US levels. Industrial policy protagonists saw cause and effect between government intervention—trade protection, easy credit, assorted subsidies, cartels—and these indisputable outcomes. … Japan, South Korea, and Taiwan were the clear
exemplars of industrial policy.

In 2003 Marcus Noland and Howard Pack authored Industrial Policy in an Era of Globalization: Lessons from Asia, first summarizing the literature, and then contrasting macro forces with industrial policy in the postwar recovery and subsequent growth of the three exemplars. Their analysis relied heavily on quantitative measures rather than accounts of targeted government policies or the rise of specific firms such as Mitsubishi, Toyota, POSCO, Samsung, China Steel, or Taiwan Semiconductor Manufacturing Corporation (TSMC). Analyzing sector growth, value added, capital accumulation, and total factor productivity in Japan and Korea, Noland and Pack (2003) found little or no
correlation between the quantitative outcomes and various industrial policy indicators such as tariffs, tax rates, and government loans … On the other hand, they found that the growth of physical capital per worker, education per worker, and total factor productivity fully explained the remarkable growth of output per worker in South Korea and Taiwan …

These contributing factors were much weaker in Latin America and South Asia, two regions that heavily favored industrial policy and fared poorly during the era of the East Asian miracle. The differing fates of East Asia and the other two regions owe to the political and economic stability and superior macroeconomic and education policies of East Asia: few coups, relatively low inflation, high savings rates, modest budget deficits, and high secondary and tertiary education rates. The authors conclude (p. 93) that, “on balance, the weight of the evidence derived from both econometric and input-output studies of these economies … indicates that industrial policy made a minor contribution to growth in Asia.” … The relevant lesson for our report is straightforward. If extensive industrial
policies made only a minor contribution to East Asia, far less extensive industrial
policies—minuscule by comparison—cannot be expected to shape the economic
destiny of the United States.

The ingredients for economic growth are fairly straightforward: people with more education and training, investment in physical capital and research, and an economy with flexible incentives to reward efficiency, quality, and innovation. If economic success were as simple as politically-directed and -focused industrial policy, then every country would just enact the requisite laws and succeed. Clearly, it’s not that easy.

I’ll close by saying that the extraordinary economic growth of China since the early 1980s is obviously not from China’s government carefully directing the development of its economy. China’s government has of course contributed with general policies like macroeconomic stability, dramatically rising educational achievement, opening up its internal markets, involvement in international trade, and support for science and technology. The growth and energy has all come from private firms, often in unexpected ways, while China’s state-owned firms have lagged behind. Moreover, the current push in China to strengthen its industrial policy of additional state control over its private firm seems much more likely to end up like the old-style Soviet industrial policy, rather than to set off a new wave of economic growth.

The US Treasury Review of Economic Sanctions

The use of economic sanctions by the United States has increased tenfold in the last 20 years. Is this because sanctions are working so well as a foreign policy tool? Or is it because imposing economic sanctions feels like a cost-free non-military response when there is a demand to “do something”? The Treasury 2021 Sanctions Review (October 2021) doesn’t seek to answer the big picture questions, but it provide some useful background on the current status of US economic sanctions and what steps could help to make them more effective.

Here’s a figure showing the rise in US use of economic sanctions since 2000 as tallied by the US Treasury’s Office of Foreign Assets Control (OFAC)’s List of Specially Designated Nationals and Blocked Persons:

Here’s a figure showing how the countries affected by sanctions have shifted over time.

The total count here is 37 existing sanctions programs administered and enforced by the Office of Foreign Assets Controls (OFAC). The 9,421 total sanctions at present includes over 12,000 OFAC designations and nearly 3,000 OFAC delistings, As the report explains, being listed means that “their property and interests in property are blocked.
When property is blocked (or `frozen’), title to the blocked property remains with the owner of the property and any funds constituting or arising from blocked property must be placed into a blocked, interest-bearing account at a U.S. financial institution. Blocking immediately imposes an across-the-board prohibition against transfers or dealings of any kind with
regard to the property.”

In other words, if you are under these sanctions you still own your assets (at least for the present), but you can’t do anything with them

The Treasury report describes what it views as some success stories of economic sanctions: freezing and seizing billions of dollars from front companies controlled by the Cali drug cartel, which contributed to breaking the organization up in 2014; preventing tens of billions of dollars from being taken by local officials in Libya after the fall of the Qaddafi regime in 2011; and the designations of over 1,600 terrorist entities and individuals, which have impaired their ability to raise money through front groups. But as the number of economic sanctions has proliferated, it’s natural to wonder if they are working.

There’s a skeptical case to be made here. A 2019 report from the Government Accounting Office found that the government rarely does any asssessment of whether sanctions have worked. Daniel Drezner estimates that when studies are done of economic sanctions, they seem to work less than half the time. He writes that the US has imposed “decades-long sanctions on Belarus, Cuba, Russia, Syria, and Zimbabwe with little to show in the way of tangible results.” The US Treasury report is not in the business of criticizing past US applications of economic sanctions, but it does quote former Treasury Secretary Jack Lew: “We must guard against the impulse to reach for sanctions too lightly or in situations where they have negligible impact.”

Instead, the Treasury report suggests some guidelines to follow for applications of economic sanctions in the future. As you read them, they may seem obvious. But remember that the reason for the guidelines is that these steps have not been happening in any systematic way.

Treasury will adopt the use of a structured policy framework in order to inform its recommendations on the use of sanctions. This framework should reflect key policy considerations and ask whether a sanctions action:

a) Supports a clear policy objective within a broader U.S. government strategy …
b) Has been assessed to be the right tool for the circumstances …
c) Incorporates anticipated economic and political implications for the sanctions target(s), U.S. economy, allies, and third parties and has been calibrated to mitigate unintended impacts …
d) Includes a multilateral coordination and engagement strategy …
e) Will be easily understood, enforceable, and, where possible, reversible …

Without this kind of process, economic sanctions will work in some cases, but much of the time will end up as just an exercise in unproductive political flexing.

Policing: What’s the Function?

Economists tend to think of public policy in terms of inputs and outputs: a policy is undertaken and there is a response. One can then evaluate how well the policy worked in terms of costs and benefits. When it comes to police work, the usual assumption has been that the function of police is to reduce crime, and that a higher quantity of police will tend to lead to lower levels of crime.

This approach isn’t exactly wrong, but it is incomplete. If the social goal is to have lower levels of crime, there may be multiple ways of accomplishing that goal along with hiring additional police officers. Policing is more than just the number of officers, but also has to do with how the policing is carried out: for example, are police often on foot or perhaps bicycles, being seen in the community, or are they arriving in cars with sirens blaring only after a crime has occurred? How do police manage their interactions with community members, including the continual need for aback-and-forth transition between being protectors and aggressors?

In the most recent issue of the Journal of Economic Perspectives, two papers address these issues of thinking through the functions of policing–and the input and output functions that researchers should use when studying policing. Emily Owens and Bocar Ba write “The Economics of Policing and Public Safety” (Fall 2021, 35:4, pp 3-28). Monica Bell contributes “Next-Generation Policing Research: Three Propositions” (pp. 29-48). I won’t try to summarize the articles here, but instead will pass along some thoughts worth considering.

(Full disclosure: I’ve been the Managing Editor of JEP since the first issue in 1987, so I am perhaps predisposed to find its articles to be of interest. These articles and indeed the entire corpus of JEP, from the most recent issue back to the first issue 35 years ago, is freely available online compliments of the publisher, the American Economic Association.)

There is considerable evidence, as Owens and Ba point out, that additional police do reduce the crime rate. The challenge to this research, as in so many cases, is to find a plausible way of separating cause and effect: for example, if one observes that cities with high crime rates had more police while cities with lower crime rates had fewer police, there would appear to be a positive correlation between police and crime. But of course, correlation isn’t causation, and responding to higher crime rates with more police doesn’t mean that the police caused the crime. The empirical challenge has been to find situations in which the number of police increased or decreased for reasons that had nothing to do with crime, and then to track what happened. One classic study, for example, note that politicians often boost the number of police before elections for political reasons–whether or not crime had actually been increasing–and that these increases in police do typically reduce crime. There is also considerable evidence that alternative strategies of policing, like the policies enacted in New York City in the early 1990s, helped to reduce the crime rate.

The benefits of lower crime rates can be divided into two categories: one is people not victimized; the other is that those who are not victims of crime can worry less and take fewer actions to protect themselves. On a per person basis, being a crime victim is much worse than just worrying about it. But there are many, many more nonvictims of crime than victims, and when you add up all the benefits, the total benefits of crime reduction are probably much higher for the nonvictims of crime than for the would-have-been victims.

Being the subject of police engagement is costly, and Owens and Ba report that about 24% of civilians have some engagement with police in a given year. These costs are not evenly distributed across society. Indeed, as Owens and Ba point out, those who fear crime and support more aggressive policing will also sometimes be those who do not bear the costs of more aggressive policing. Owens and Ba write:

External pressure on police departments tends to encourage crime reduction, with less attention to legitimacy costs. Even if a department was able to identify socially optimal police policies that carefully consider the distribution of direct and indirect benefits, it is not obvious those policies would be implemented by individual police officers. Current tools available to police managers to encourage individual officers to behave in the interest of the department are, from a personnel perspective, limited, and have been only rarely shown to alter police behavior in the field. Instead, many compensation and oversight strategies tend to encourage individual officers to make arrests and to emphasize officer’s personal safety. While these goals are both important and laudable, they are different from engaging with the public in a socially optimal way.

Owens and Ba take a granular look at the incentives of the various actors in the police structure. For example, politicians have an incentive to appeal to the median voter and to raise revenue. Thus, their policies toward policing will either vocalizing the views of those who fear crime or those who feel the costs of aggressive policing, depending on who they see as the median voter in the community. Politicians will also tend to favor actions by the police that lead to more revenue. These incentives may not coincide with encouragement of socially optimal policing behavior.

At a day-to-day level, police officers have an incentive to get home safely, clear offenses, and avoid complaints. Police departments can try to affect their behavior in the ways that officers are hired, trained, and monitored. But police unions typically enforce a salary structure where raises are based on experience and promotions–and there is little or no room for financial incentives aimed at other aspects of police behavior. In addition, police unions care about protecting their members from any and accusations. Many police departments have community outreach events, but the community members who participate in these events are not a randomly chosen cross-section. Some police departments do not reflective the ethnic mix of their community.

Putting all this together, Owens and Ba write:

While police departments and officers are tasked with solving a complicated social welfare problem, the structure of institutional incentives is relatively simple. The dominant incentives faced by police departments are to develop policies which provide indirect benefits—to make civilians feel safe and to see the police “doing something” about crime. As long as only a small fraction of the population is directly affected by criminal victimization and only a small fraction of the population bears the cost of achieving the direct and indirect benefits of crime reduction, we would expect that rational, vote-maximizing politicians might not object to policies that either under-provided or over-provided police engagement in specific areas of concentrated disadvantage. …

On top of truly optimal social policies being difficult to identify, individual officers
within a department have substantial discretion in how they engage with the
public. Standard strategies that organizations use to provide incentives for workers
are limited by structured wage and promotion mechanisms, high monitoring costs,
and limits on the ability to sanction employees. There is currently little evidence
base with which one might identify screening, training, or monitoring strategies
that support a department of officers who are able to make welfare enhancing decisions
about civilian engagement.

Monica Bell raises many similar issues from a slightly different perspective. She stresses the importance of spelling out the costs that arise from more aggressive police interactions: for example, there are studies that aggressive policing in certain areas is associated with lower educational performance for teenager, for lower stress-related health outcomes ranging from high blood pressure to anxiety/trauma, and even to increased residential segregation or lower voting rates. In short, the costs of aggressive policing are not to be brushed as a minor inconvenience.

Bell points out that alternative methods of reducing crime are often under-researched. Here’s one example:

But there are a number of other community-based programs or alternatives to traditional policing that remain largely unstudied, even though some of them are becoming models for other jurisdictions across the nation. For example, CAHOOTS (Crisis Assistance Helping Out on the Street) started in Eugene, Oregon, to send two-person clinical response teams to aid people in mental health crisis, without relying on armed police officers. Although the program has existed for more than three decades, in summer 2020 it gained national attention and became the model for numerous pilot programs—in San Francisco, Denver, Rochester, Toronto, and more. Eugene’s CAHOOTS program is funded and overseen by the police department, but some other emerging programs are funded and managed separately from police. Despite its long duration … CAHOOTS has never been rigorously evaluated.

Another largely unevaluated program seeks to develop quantitative metrics, based on local community involvement, for steps that might reduce crime. Examples might include improved outdoor lighting in certain areas, or an exercise program, or a youth jobs program.

My point here is not to be starry-eyed about possible alternatives to police, but instead to take seriously the idea that if more police are the only item in your policy toolkit for reducing crime, you aren’t serious enough about actually reducing crime–or about building the kinds of communities where young men in particular are less prone to crime. I would also say that if police and appropriate policing strategies aren’t a substantial part of your overall policy toolkit for addressing crime, you also aren’t serious enough about reducing crime.

China’s Growing Role in International Financial Flows

Most of the International Debt Statistics 2022 report just published by the the World Bank is region- and country-level tables about types of financial inflows and outflows with a focus on low- and middle-income countries. But the “Overview” essay at the start, which lays out some of the overall patterns, has a section called “China: The Largest Borrower and Lender among Low- and Middle-Income Countries.” The discussion emphasizes China’s decision to become central to international finances of low- and middle-income countries.

There are several kinds of international financial flows: debt, which includes corporate and government debt; foreign direct investment, which is a purchase of an ownership stake of at least 10% in a company; and portfolio investment, which is a purchase of equity that involves a smaller stake. The report notes that in 2020, net inflows of international capital to China rose, while net inflows to the rest of low- and middle-income countries dropped:

China accounted for over half of the combined aggregate net inflows to low- and middle-income countries in 2020. Aggregate financial flows to China rose 33 percent in 2020 to $466 billion, equivalent to 51 percent of aggregate financial flows to all low- and middle-income countries. Inflows to China were driven by a 62 percent increase in net debt inflows to $233 billion, from $144 billion in 2019, and a 12 percent rise in net equity inflows also to $233 billion. … This was in sharp contrast to aggregate net financial flows to other low- and middle-income countries, which fell 26 percent in 2020 to $443 billion, from $602 billion in 2019. The decline was due to a 21 percent contraction in debt inflows and a steeper 31 percent fall in net equity inflows. Within net equity flows, FDI fell 23 percent and portfolio equity flows were negative with an outflow of $24 billion compared to a small, $3 billon inflow in 2019.

Part of the reason for the rise in debt inflows to China is a set of policy decision to make the China Interbank Bond Market (CIBM) more accessible to international investors. As the report notes: “The CIBM, China’s domestic bond market to which non-resident have access, has an
estimated market value of $12 trillion at end-2020, making it the world’s second-largest
bond market after the United States, or third if the Eurozone markets are counted together
as one.” Here are some of the steps taken by China to encourage foreign bond investors include:

Since 2016, Chinese authorities have implemented various programs and measures to improve non-resident access to the CIBM. The introduction of the CIBM Direct Access program removed investment quotas or repatriation restrictions for foreign institutional investors. The Bond Connect program, launched in July 2017, gave investors the option of registering and settling trades onshore, easing investor concerns over repatriation and capital account risk since the assets are held and settled offshore. In 2018, repatriation and holding period restrictions were removed. In June 2020, quota restrictions were abolished, and repatriation of fund procedures simplified, while in November 2020, in response to investor feedback on ease of access, the application process was streamlined. Inclusion of renminbi (RMB) bonds in the Bloomberg Barclays Global Aggregate Index and China-A shares in FTSE Russell emerging market index and automated links between the Shanghai, London, and Hong Kong SAR, China markets also encourage and facilitate foreign investors’ appetite for access to RMB bonds.

The report breaks down the low- and middle-income countries into three categories: China, the other top-10 low- and middle- countries with the largest stocks of international debt (other than China, this would be Argentina, Brazil, India, Indonesia, Mexico, the Russian Federation, South Africa, Thailand, and Turkey); and other low- and middle-income countries. Here’s a figure and a description from the report:

Aside from China, the downturn in aggregate financial flows to the largest borrowers was much sharper than to other low- and middle-income countries. Aggregate financial flows to low- and middle-income countries’ nine largest borrowers, excluding China (defined on the basis of end-2020 external debt stock), fell to $151 billion in 2020, close to half the
comparable figure for 2019. This reflected a near total collapse in net debt inflows, which plummeted from $110 billion in 2019 to $4 billion in 2020 and a 33 percent contraction in net equity inflows. In contrast, other low- and middle-income countries recorded a 7 percent rise in aggregate financial inflows in 2020 to $292 billion underpinned by a 36 percent increase in net debt inflows to $198 billion. However, net equity inflows fell 26 percent, in parallel with those of the nine major borrowers. As a result, net debt inflows accounted for 68 percent of aggregate financial flows to these countries in 2020 as compared to 54 percent in 2019.

China has become a very prominent lender to other low- and middle-income countries: indeed, some of China’s borrowing is then used to support its overseas lending. Here’s a figure showing the rise in total lending from China to other low- and middle-income countries.

Low- and middle-income countries’ combined debt to China was $170 billion at end-2020, more than three times the comparable level in 2011. To put this figure in context, low- and middle-income countries’ combined obligations to the International Bank for Reconstruction and Development were $204 billion at end-2020 and to the International Development Association $177 billion. [These two organizations are arms of the World Bank.] Most of the debt owed to China relates to large infrastructure projects and operations in the extractive industries. Countries in Sub-Saharan Africa, led by Angola, have seen one of the sharpest rises in Chinese debt although the pace of accumulation has slowed since 2018. The region accounted for 45 percent of end-2020 obligations to China. In South Asia, debt to China has risen, from $4.7 billion in 2011 to $36.3 billion in 2020, and China is now the largest bilateral creditor to the Maldives, Pakistan, and Sri Lanka.

In a big-picture sense, what’s interesting here is that China’s expanded involvement in international financial flows also implies added interdependencies. When you rely on inflows of debt, you become interdependent with lenders. When you become a big lender, you are interdependent with borrowers. There is often a quick assumption that in these lender-borrower relationships, the lender has greater power to exert influence, but it seems to me that the situation is often more complex. For example, I don’t doubt that China seeks to expand its influence by lending to many other low- and middle-income countries, but as the US and many other high-income countries discovered decades ago, other countries can become surly, uncooperative, and downright unfriendly as a result of debts that they owe. In addition, if China wants a continued inflow of international capital, then its government will need to abide by and even expand the kinds of market-opening reforms that have encouraged that inflow.

Lessons from a Half-Century of US Industrial Policies

The fundamental idea behind government industrial policy is that the forces of a market economy are not moving, or not moving quickly enough, in a desirable direction. Thus, a shove from the government in form of subsidies, tax breaks, import limitations, research and development support, or other steps to support a particular industry might be needed. There is continual political pressure for such steps, and both the Trump and the Biden administration have pushed for industrial policy in non-identical but often overlapping ways. Set aside for now the philosophical disputes over whether industrial might work, or whether such efforts will be corrupted by politics. Also, set aside arguments over whether industrial policy in the broad-based form of supporting infrastracture for transportation and communications can help growth. Instead, focus on the question of what we have actually learned from policies aimed at supporting specific industries as enacted in the US during the last 50 years.

In that spirit, Gary Clyde Hufbauer and Euijin Jung discuss “Scoring 50 Years of
US Industrial Policy, 1970–2020″
(Peterson Institute of International Affairs, November 2021). They write:

Over the past half-century, the goals of industrial policy (as we define the term) have varied. In some episodes, the goal was to assist declining industries (e.g., steel, textiles and apparel), both to save jobs and to rescue firms. In others, the goal was to offset externalities (e.g., solar and wind energy), in particular to reduce carbon emissions. And in still other episodes, the goal was to promote US leadership in emerging technologies (e.g., semiconductors, communications). The Trump administration responded to the COVID-19 national emergency with Operation Warp Speed, designed to accelerate the discovery and dissemination of effective vaccines. Looking forward, the Biden administration and Congress are seeking to ensure that the United States stays ahead of China in frontier technologies such as artificial intelligence, cyberspace, and electric vehicles.

As Hufbauer and Jung write: “This study examined 18 US industrial policy episodes implemented between 1970 and 2020, dividing them into three broad categories: cases where trade measures blocked the US market or opened foreign markets, cases where
federal or state subsidies were targeted to specific firms, and cases where public
and private R&D was funded to advance technology. For each policy, they focus on three practical questions:

  1. Did the industry become competitive in international (or in some cases national) markets?
  2. Were jobs saved in the industry at a reasonable cost to taxpayers or purchasers? Their measure of “reasonable cost” is that the e costs did not exceed the wages paid to the workers whose jobs were saved.
  3. Was the technological frontier advanced through government assistance?

For each of the policies, and each of these measures, they provide a grade of A, B, C, or D. As they write: “Numerical equivalents of these grades, used for the summaries in chapter 5, are A+ = 4.5; A = 4; B = 3; C = 2; D = 1.”

To give a flavor of their discussion, here is their summary of the longer discussion on US industrial policy aimed at the steel industry.

• Has the US steel industry become internationally competitive? Failed outcome = D
The industry clings to protection in 2020 as strongly as it did in 1970. During the Trump administration (2017–21), national security tariffs of 25 percent were added to the existing armory of barriers (initially across the board, later subject to exceptions). Exports of steel, concentrated in high-value products, amounted to 8 percent of domestic production in 2019, about the same percentage recorded in 1970.
• Did protection save jobs at a reasonable cost? Failed outcome = D
Per job saved in the steel industry, the cost to steel users was near the top of US protection episodes. Trump’s national security tariffs cost steel users about $900,000 annually per steel industry job saved, a figure many times the industry’s average annual wage of $59,000 in 2019.
• Did protection advance the technological frontier of steel production? Failed outcome = D
The biggest technological advance in the past half-century—but not as a consequence of protection—was the rise of minimills, which make an ever larger range of steel items from scrap. The shift to minimill production continues to grow owing to the demand for high-quality steel. The leading minimill producer, Nucor, advocated free trade until former CEO Ken Iverson died in 2002. The industry has made other innovations, but none as spectacular.

The authors write: [W]e offer four policy observations, distilled from this study of 18 industrial policy cases.

• Industrial policy can save or create jobs, but often at high cost. A major political selling point for industrial policy is to save or create jobs in a specific industry or location. In about half our sample, this was achieved at a taxpayer or consumer cost below the prevailing wage. But our calculations do not reflect the probable loss of downstream jobs, and in many instances the cost per job-year vastly exceeds the prevailing wage. Moreover, jobs created in one state often come at the expense of comparable jobs that might have
been created in another state … At the national level, far better policies are available for creating jobs—for example, training programs and earned income tax credits.

• Import protection seldom pays off. A big exception: when actual or threatened barriers prompt a world-class firm to open in the United States. Toyota was an example in the 1980s; Taiwan Semiconductor Manufacturing Corporation (TSMC) is an example today. But in most cases, import protection does not create a competitive US industry and it imposes extreme costs on household and business users per job-year saved. Trade policy concentrated on opening markets abroad is a better bet.

• Designating a single firm to advance technology yields inconsistent results. Our study did not find single-firm triumphs that compare with the Manhattan Project. Perhaps they exist, but when government confines its support to a single firm to advance frontier technology, it forecloses alternative solutions that might be advocated by different scientists or business leaders. … The highly successful model of Operation Warp Speed vividly demonstrated that competition is an American strength.

• R&D industrial policy has the best track record by far. Among the 18 cases, DARPA has the outstanding record. The DARPA model entails broad guidance to science and engineering experts who, without political interference, award grants to promising but high-risk R&D. When public R&D strikes gold, private firms step in to commercialize the findings. This model finds favor both with the Biden administration and the Congress. In fact, the Biden administration has proposed other projects—ARPA-Health and ARPA-Climate—fashioned after DARPA. Renewable energy R&D, Florida’s biotech region, and the
North Carolina Research Triangle all attest to this industrial policy approach.