Create Growth-Linked Bonds

A year ago, at the Summit of the Americas, 34 western hemisphere heads of state agreed to promote the creation of government-issued growth-linked bonds whose payout is tied to gross domestic product (GDP). But progress has mostly stalled. Only one major proposal related to such bonds, from Argentina, is on the table. A unique opportunity to strengthen the world’s financial infrastructure and increase economic efficiency for many years to come could be slipping away.

I have argued for growth-linked bonds since my 1993 book Macro Markets . GDP is the most comprehensive measure we have of an economy’s success. The simplest form of growth-linked bonds would be a long-term government security that pays a regular dividend proportional to the GDP of the issuing country.

Suppose that the Argentine government issued perpetual bonds that paid an annual dividend equal to one ten-billionth of Argentine GDP, payable in pesos. Because Argentina’s annual GDP now runs at about 500 billion pesos, one of these bonds today would pay a dividend of 50 pesos (about $17 or €13) a year. The dividend would rise or fall as the success of Argentina’s economy is revealed through time.

The market for GDP-linked bonds would arrive at a price that makes them attractive to investors, reflecting expectations and uncertainties about the issuing country’s future. Until there is a market for such bonds, we cannot know what the price will be. But we can expect that the market for long-term GDP-linked bonds from countries like Argentina, where the future of the economy is uncertain, would be volatile, as investors adjust their expectations of future GDP growth up and down in response to new information.