The 2007-2008 Global Financial Crisis (GFC) not only brought a sharp economic st

Question

The 2007-2008 Global Financial Crisis (GFC) not only brought a sharp economic strike and uncertainty but also resulted in large increases in budget deficits and government debt, especially in some EU and EURO-zone countries. But also, other countries outside the EU area have been affected by the GFC. For example, South Africa since 2008 saw a steady increase in the external debt to GDP ratio and it has been argued that if this trend continuous, South Africa may be heading towards a debt crisis….
With reference to the above, you are required to:
a) Provide a brief review of the theoretical and empirical literature on the economic effects of public debt (50%).
b) Collect data on South Africa’s external debt as a share of GDP, investment (Gross Fixed Capital Formation) as a share of GDP, Gross Savings as a share of GDP and GDP growth over the period 1994-2016 and present this data on a Table. Then plot the first 3 variables on a graph and discuss their evolution over time (25%).
c) Also, collect data on External Debt as a share of GDP for Botswana, Ghana and Kenya over the period 1994-2016. Prepare a graph to present this data along with South Africa’s data on External Debt. That is, on the same graph you should plot the External debt as a share of GDP for the 4 countries and you should briefly discuss the evolution of External Debt in these countries (25%).

Explanation / Answer

a) When economic ression or recessionary cycles come in any economy then governmrnt responds with expansionary fiscal policies (Which involves tax cuts and increase in govt. spending) to shift Aggregate demand (AD) to the right- generate optisim in economy and increase jobs. Govt. may also advice central banks to adopt expansionary monetary policies (Which aim at decreasing interest rates and increasing money supply again to generate economic activity).

All these steps need more money and government may borrow from internal sources ( by selling bonds or treasury bonds ) or from external sources (borrowing from banks abroad or selling bonds to foreigners or borrowing from internal organizations).

So obviously when govt. borrows more it will have to repay more interest and principal and money left for developmental purpose is less and development projects are compromised.

This also results in increase in debt/gdp ratio. Earlier for example if it was 10/100 it becomes 50/100. It means out of 100 rs GDP Collected, 50 will go as loan repayment and anyone can understand the problem severity. Govt. hardly has any money left and likely that country may default on loans. Once a country becomes defaulter, its credit in international market will go down and no new investor will invest in such country.

Again a vicious cycle of low investment- low productivity-low income- low savings- low investment will start and country may suffer. It may result in political and social instability with lots of social problems.

Part b and c are research based questions.

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