Once a nation’s public debt hits 77% of its Gross Domestic Product (GDP), it reaches a tipping point that hurts economic growth, conclude the authors of a World Bank research working paper, “Finding the Tipping Point–When Sovereign Debt Turns Bad.” Every percentage point increase in the debt/GDP ratio above the tipping point costs the economy 0.174 percentage points on average in annual average economic growth.
The authors, Mehmet Caner, Thomas Grennes and Fritzi Koehler-Geib, based their analysis on a data set of covering 101 countries (75 developing and 26 developed) between 1980 and 2008. Their findings follow the highly publicized and extensively quoted work of Carmen Reinhardt and Kenneth Rogoff, who contend that economic growth declines when countries reach a debt/GDP ratio of 90%. The new paper’s conclusions are important for at least two reasons: They confirm the thrust of Reinhardt and Rogoff’s work using a different database and a different statistical methodology, and they more precisely define the relationship between higher debt and lost growth.
