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How the Developing World Escaped the Debt Trap

The Eurocopter AS350 helicopter plant in Itajuba, Brazil, one of the fastest-growing major economies
The Eurocopter AS350 helicopter plant in Itajuba, Brazil, one of the fastest-growing major economiesPhotograph by Dado Galdieri/Bloomberg

As the sequester demonstrates new lows in America’s fiscal management and the European debt crisis drags on for its third year, it’s worth noting that most of the rest of the world’s financial health is pretty good. Developing countries used to rule the roost when it came to debt crises and defaults. But after a painful period of policy reform supported by considerable debt relief and restructuring, they were in a far stronger position by the end of the last decade. This has allowed them to follow policies that cushioned their citizens from the impact of the global slowdown, rather than having to ratchet up the pain—in contrast to the paths chosen by governments in much of Europe and now, the U.S.

In 1971, average external debt across 75 developing countries was worth less than a quarter of gross domestic product. Less than one in 10 saw ratios above 50 percent. By 1990, in the aftermath of the oil shock and two “lost decades” of growth, the average developing country had an external debt worth a little more than its GDP. More than six out of every 10 countries had ratios above 50 percent. As late as 2000, while average external debt levels had fallen to 83 percent of GDP, two thirds of countries still had external debt-to-GDP ratios above 50 percent.