Emerging Markets Less Indebted Than Developed Markets

Emerging markets are risky, right?  After all, emerging market funds are generally regarded as the the riskiest sector of the global stock market.  Indeed, emerging markets have been far more volatile than developed markets in the past.

It makes sense, too.  Emerging markets lack the regulatory oversight, deep capital markets, and robust private property rights of most developed nations.  All of these things add to the risk inherent in investing in the developing world.  But that may be changing.  As it turns out, emerging markets as a whole are far less indebted than their developed nation counterparts, according to a recent report.

A Look At The Numbers

It’s no secret developed markets have too much debt.  What’s surprising is just how much debt they have relative to “risky” emerging markets.  For instance, the world’s top 24 economies (including the United States, Germany, Japan, etc) comprise about 41% of the world’s Gross Domestic Product (GDP) yet owe approximately 90% of the world’s nearly $2 trillion in debt.  The United States, in particular, makes up 14% of the world’s GDP but owes about 25% of the world’s debt.  Japan is in even worse shape, owing 29% of the world’s debt even though it only makes up about 4% of the world’s economy.

Emerging markets, meanwhile, comprise around 43% of the world’s GDP yet owe only 10.5% of the world’s debt.  Are you surprised?  I am.    Like most people, I often associate emerging markets with financial and political instability, crushing debt loads, and high risk.  Yet these numbers indicate the tide may be turning.

What’s The Explanation?

Let’s not sugarcoat this:  if the developed world (including the U.S. and western Europe) doesn’t get its debt load under control, it will soon be supplanted.  Brazil, Russia, China, India, and the other currently emerging nations will become tomorrow’s developed nations.  Low sovereign debt loads give emerging markets a flexibility not enjoyed by debt-burdened developed-nation governments.

There is one plausible explanation:  since developed nations have access to deeper and more sophisticated capital markets, have more stable economies, and much broader tax bases they can safely afford to carry a higher debt load.  There is certainly some truth to this theory.  The more stable your income (tax revenue, in this case), the more you can afford to borrow.  For example, a steadily-employed office worker making $50,000 per year can probably afford to borrow $100,000 for a house.  A self-employed worker whose income fluctuates wildly but that averages $50,000 per year is probably taking on a lot more risk borrowing the same amount of money.

But that doesn’t come close to accounting for the sheer amount of debt developed nations face today. Without some serious cost-cutting, I think we’re headed for a serious economic crisis.  I do not think raising taxes too much higher than their current levels is a long-term solution to the problem, either.  What do you think we should do to combat our high debt loads?