Why first world countries have astonishing amount of foreign debts, but third world countries don't?

Question

USA, for example, having a total foreign debt of over 23 trillion dollars (according to the statistics provided in 2019), is still on the frontline of those countries which are considered to be successful first world states, making remarkable achievements and development day in and day out, in the field of technology, businesses, public services, trade, etc. Alongside USA, there are other powerful countries with booming economy such as UK, Russia, France, Germany, China etc, which are essentially perceived as kinda the rulers of the new world. These countries are also drowned in significant and serious international debt, on a scale of trillions of dollars.

On the other hand, South American countries like Argentina and Chile, African countries like Egypt and Uganda, and Asian countries like Pakistan and Thailand, don't have foreign debts anywhere near the levels of the countries mentioned in my previous paragraph. But still, these countries are considered as third world countries and basically, poorer states.

So my question basically becomes what is the relation and connection between a state being a first world or a third world, with the amount of foreign debt they are immersed in? Doesn't the first world countries (which essentially proclaims to be the rulers of the new world) which are under trillions of dollars of foreign debt feel pressurized that they have to return the loan they have taken? How can they still thrive and prosper after being such huge debtors?

List of countries by external debt

Answer 1

Because a debt to GDP ratio is usually the wrong metric.

The terms "first world" and "third world" are imprecise and not unproblematic for other reason, but they typically correspond to "wealthy" and "not wealthy." As such, the question seems to be asking why many countries are considered wealthy despite their high debt.

For instance, consider the United States of America. It is widely considered to have a high debt to GDP ratio of over 100%—not the highest in the world, but it is quite high. If absolute foreign debt or a debt-to-GDP ratio captured what we meant by a wealthy country, the USA would be considered quite poor.

However, consider a hypothetical wealthy CEO who has billions of dollars. Let's say that in their current job, they "only" make as much money as Lisa Su, a trifling 50 or 60 million dollars per year, but they own an enormous mansion that they have taken out a mortgage on, so they owe the bank 70 million. Are they poorer than I (not a billionaire) am, if I do not have any debt at the moment? Why am I not living a mansion, then?

No, of course they are not. We have made the mistake of considering the ratio of their debt to their income without considering their tremendous wealth. We have also forgotten that what matters for their ability to use their wealth is the absolute difference between their wealth and mine, not so much the ratio of their debt relative to their wealth.

Let's consider the total debt to total household wealth ratio of the United States instead. According to this article, it is about 12%. Much of that is internal (owed by Americans to Americans) but even if it were all external, the difference between debt and wealth would still be around USD 124 trillion. That means that as a country, the US has about USD 123 trillion more than Kuwait, for instance, even though Kuwait has quite a low debt to GDP ratio. For another definition of wealth vs debt (the average economic standard of living as measured by debt minus wealth per capita) we see that the average American has USD 376,000 or so after subtracting debts, whereas the average Kuwaiti has USD 119,000 at most. Obviously, this has its own problems: it does not take into account income inequality or purchasing power parity. However, it still conveys the general idea: one country can have both a higher absolute debt and a higher relative debt than another, and its residents can (both individually and collectively) have much more money to spend after subtracting their debts.

Going back to the example of the CEO, why do they have so much more debt than I do, both in absolute and relative terms? It is because their enormous wealth and substantial income make banks view them as more trustworthy. If I tried to take out such a large loan, the bank would laugh me out of their exclusive boardroom (which I actually would not be invited to in the first place). They would know that I could never pay off such a debt over my entire lifetime. However, they know that the CEO will be able to do so.

As such, wealthier people (if they want to expand their ability to consume still more) get more debt in absolute and sometimes relative terms because they can. The same applies to countries, to an extent, with a major exception: a low-income person might take on student loans or housing mortgages that exceed their real or expected wealth (in other words, low in absolute terms but high in relative terms), which the companies will give them because they anticipate that the interest payments will make it worthwhile. A country, however, has much more power to default, and it can be difficult for politicians to convince their constituents to take on large relative debts if they know that they will not be able to pay them off under any circumstances. This means that low-wealth countries rarely take on more relative debt than the average wealthy country.

Answer 2

what is the relation and connection between a state being a first world or a third world, with the amount of foreign debt they are immersed in?

The wealthy countries usually have a long history of stable government and economy, which is why lenders are willing to loan them money with low interest. By taking out the loan, the country can invest the money in developing its infrastructure and economy, becoming even more wealthy.

The reason why most less wealthy countries do not have as much debt is simple: No-one is willing to lend them money at an interest rate that the country could afford. At a low interest rate it would certainly make sense to take out the loan and invest it in developing the country. But if the payback in forms of increased economic activity and higher tax revenue is smaller than what the interest accumulates, the investment and loan stops making sense.

Answer 3

There are a couple of things going on here with the numbers you cited.

The 23 trillion dollar number you mention for the USA (and the entire linked list for other countries) is total external debt including private (non-government) debt, not just public (government) debt.

Wealthy countries are usually more likely to be home to large, international corporations which are more likely to own facilities all over the Earth. It is quite common for companies to borrow money in their course of business and this would often be borrowed in the country where the facilities in question are located. Thus, for locations outside of their home country, this would count as "external debt" for the purposes of the linked source for the company's home country, even though it's being used in the country where the debt was taken out for developing business in that country. It's quite normal for businesses to take on debt and, as long as the size of the debt is within reason compared to the size of the company, it's not considered at all unhealthy, but rather just a normal part of growing the business for the future.

The other piece of this is what it sounds like the OP may have been assuming was the entirety of these figures: external public (i.e. government) debt. As of October 2021, approximately $7.65 trillion USD of U.S. federal government debt was held by other countries. While this is the most of any country in the world, its $22.7 trillion GDP is also the largest by a rather wide margin. So, it's not particularly surprising that the country with by far the largest economy would have the largest absolute value of external debt. Indeed, that $7.65 trillion of external debt exceeds the size of the entire economy of any other country on Earth except China.

Beyond just the absolute numbers, though, as other answers have discussed, more wealthy countries are generally more able to guarantee that their debts will be paid back and on time. Buying treasury bonds of a wealthy country is typically one of the lowest-risk investments that can be made. Due to the extremely low risk of these bonds, these countries can borrow money much more cheaply than less stable countries and/or those with developing economies where their ability to pay back the loans is not nearly as certain. For largely the same reason as with the large corporations, it can make sense for these countries to borrow relatively large amounts of money at these low interest rates to invest in growing their economies. As long as they keep their debt/GDP ratios within reason, borrowing money can allow them to provide the services they want to provide with less internal taxes slowing their economic growth.

Answer 4

The reason why this is puzzling to you is probably because you have the following underlying assumption: debts must be paid. Reconsider your question without making this assumption and you'll probably see the situation makes a lot more sense.

It is precisely because wealthy countries are "ruling the world" that these countries can afford to borrow gigantic amounts of money without fear of ruin by debt recollection.

Poor countries, on the other hand, cannot fight against institutions such as large banks headquartered in powerful countries, the IMF and so on. If they take on debt, they will have to pay it back, and usually paying vastly more interest for much longer than the real risk of the loan would justify.

This scenario already played out on a massive scale when, during the decolonization period of the 50s and 60s a lot of third world countries came to be ruled by dictators which borrowed heavily from large first world banks. At first it might seem reckless and stupid for a bank to do that: a third world dictator is likely to not pay back the borrowed money for a number of reasons. But they did it anyway, because they could still use their home country's power projection to force the third world state to pay up, even if the dictator had been deposed. In essence, geopolitical power eliminated the risk of those loans, and incentivized the banks to lend to weak countries regardless of risk.

Obviously, the consequences of this were catastrophic for the borrowers. They had to pay interest on a debt that they never contracted. Which to this day amounts to a pure racket operation.

Current day poor countries have mostly wizened to this now, and the IMF has been reformed into a slightly less damaging version of itself. Though one has only to look at Greece to realize that banks are still virtually guaranteed their money back provided the lender is defenseless, no matter what sacrifices it takes and how reckless the loan was. Which explains why poor countries tend to not have debt. It's not that they can't, it's because it's a trap.

The other side of the picture is rich countries "in debt" up to ridiculous numbers. This debt, on the other hand, is mostly unenforced and thus imaginary. Everyone expects this sort of debt to continue growing forever as long as the country which has contracted it is strong enough to dissuade debt recollection, whatever form it may take. These countries do pay interest, but the lenders are powerless and so economically dependent on the country they borrowed to that they cannot do anything.