Yves here. Jomo argues, even more pointedly than in past posts, that much of the Global South is at risk of a financial crisis worse than the one kicked off by the “Volcker Shock” of his late 1970s-early 1980s rate hikes. Not only are these economies being harmed by a continuing rollback of globalization and austerity policies, but much more of their debt than in the 1970s is market-based and so subject to rollover risk. Note how Jomo calls out the damage done by Obama’s “Pivot to Asia.”
Other negatives that Jomo does not add to his list are deflationary pressures in China, which are already dampening consumer demand, and the risk of a slow-moving bank crisis in the US as more midsized banks founder due to binging on commercial real estate loans, particularly to Class B and C office buildings.
And further keep in mind: if the Global South members are to a significant degree at risk of or actually soon in crises, and China is busy managing its real estate bubble hangover, this does not bode well for any grand new BRICS currency schemes any time soon. The no doubt can continue on improving the technology underpinning bi-lateral non-dollar trade deals, but much more will be an awfully tall order, at least in the next few years.
By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development. Originally published at Jomo’s website
A gathering ‘perfect storm’ – due to various developments, several quite deliberate – now threatens much devastation in the global South, likely to most hurt the poorest and most vulnerable.
Globalisation’s Protracted Decline
The age of globalization had mixed consequences, unevenly incorporating national markets for labour, goods and even some services. It ended gradually, with the trend far more pronounced following the protracted worldwide stagnation since the 2008 global financial crisis.
Sometimes still referred to as the Great Recession, Western central banks resorted to unconventional monetary policies, mainly ‘quantitative easing’, to keep their economies afloat. But easier credit enabled more financialization and indebtedness, rather than recovery, let alone sustainable development.
But the end of the era of globalization did not mean a simple return to the status quo ante. Most economies had been transformed irreversibly by economic liberalization, both nationally and internationally, with dire lasting consequences.
Market pressures for fiscal austerity were strengthened by conditionalities and advice from international financial institutions. This inevitably led to deep cuts in government spending, leaving little for public investments, which might contribute to the recovery of the real economy.
Interest Rate Hikes Accelerate Stagnation
The 2008 Wolfowitz doctrine, from late in the Bush Jr presidency, was revised by the Obama administration to launch the second Cold War. The COVID-19 pandemic and the last two years of war and sanctions have worsened supply-side disruptions exacerbating ‘cost-push’ inflation.
Some prices spiked due to opportunistic market manipulation by investors and speculators as well as deliberate disruptive interventions for political advantage. The rule of law – even once sacred property rights – has been sacrificed for political expediency, undermining trust, especially in states.
Hence, concerted interest rate hikes by influential Western central banks have proved to be an unnecessary, inappropriate and blunt demand-side tool to address contemporary inflation driven primarily by supply-side factors!
Instead of addressing inflation due to supply disruptions, higher interest rates have cut both private and government spending, resulting in less demand, jobs and incomes in much of the world.
In the US, successive presidents maintained full employment since Obama inherited the 2008 global financial crisis. Uniquely, its central bank, the US Fed, has a dual mandate to maintain full employment and financial stability.
All over the world, the deliberate and concerted interest rate hikes of 2022 and 2023 have proved to be both contractionary and biased against labour and jobs.
Global South’s Hands Tied
Policymakers in the Global South are greatly constrained by their circumstances. Exposed to global markets and with limited fiscal and monetary policy instruments at their disposal, they are captive to pro-cyclical policy biases.
The International Monetary Fund and other international financial institutions tend to demand fiscal austerity conditionalities in return for any credit relief provided.
Thus, recipient governments are subject to spending constraints instead of providing relief. Worse, many legislatures have imposed unnecessary spending constraints on themselves, supposedly to enhance government fiscal credibility.
Supposedly independent central banks have further compounded monetary policy constraints. Such central banks are primarily responsive to international and national financial interests rather than national policy priorities.
Following monetary and financial liberalisation in recent decades, developing countries are much more exposed to debt crises worse than those experienced in the 1980s.
Then, governments in Latin America, Sub-Saharan Africa and elsewhere had borrowed heavily, mainly from US and UK commercial banks. After US Fed chair Paul Volcker raised interest rates sharply from 1980, severe fiscal and debt crises paralysed many of these governments for over a decade.
The debt exposure level is much higher and borrowed from varied sources, significantly more market-based and non-bank. Governments have also provided guarantees for state-owned enterprises to borrow heavily, but less accountably than with sovereign debt.
New Divides in Post-Unipolar World
The unipolar world moment after the end of the first Cold War briefly saw unchallenged US hegemony. The Organization for Economic Cooperation and Development developed policies for the global North in trade, investment, technology, finance, tax and other vital areas, typically at the expense of the South.
More recently, the ‘new Cold War’ or geopolitical policies, including illegal sanctions, have frustrated developing countries’ aspirations to reach the Sustainable Development Goals, adapt to global warming and its effects, and retrieve a fairer share of global corporate income tax revenue.
With most economies barely growing, and efforts by many governments to reduce imports, export opportunities have become more uncertain and constrained, ending a crucial premise for globalisation. With higher interest rates, even finance has abandoned developing countries in ‘flights to safety’ to the US.
Lacking the ‘exorbitant privilege’ of issuing the US dollar, still the world’s reserve currency, most developing countries lack monetary, fiscal and policy space. Unlike rich nations which borrow in their own currencies, most developing countries remain vulnerable to foreign exchange rate vagaries.
Poorest Getting Poorer
With Obama’s ‘Pivot to Asia’ launching US efforts to check China, its lending to developing countries, including in Sub-Saharan Africa, fell from around 2016.
Despite higher borrowing costs, many of the poorest countries turned to private creditors. But private market lending to poor nations dried up from 2022 as the US Fed raised interest rates sharply for almost two years.
As debt service costs soared, distress risks have risen sharply, especially in the poorest nations. While not obviously due to a conspiracy against the global South, there is little concern for the predicament of the worst off in the poorest countries.
Meanwhile, poverty in the poorest countries has not declined for over a decade.
With international disparities growing at the expense of the poorest people in the poorest nations, the desire to emigrate continues to rise although mainly unaffordable to the poorest.
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I enjoyed reading this view of geo-economics. However, the mental effort of translating somewhat obtuse ‘econo-speak’ into tangible events was enervating.
The bronze age civilisations invented money and they also in invented debt forgiveness or a Debt Jubilee. Why can’t the debt just be canceled?
Because we don’t have an army capable of canceling it.
Because their debts are our oligarchs and their comprador elites’ riches — that’s how balance sheets and ledgers work. They must remain poor so that “our betters” can remain rich …
It’s a vicious cycle:
The more the Global South endures siege warfare (so-called sanctions), debt traps, US financial imperialism, and sometimes getting regime-changed, terrorized by US -backed mercenaries, bombed into the Stone Age, or even genocide in the case of Gaza (Sudan, DR Congo, Haiti, Yemen, Syria, Afghanistan, Venezuela, Cuba… getting hammered), the more refugees are created with few options but to move to the EU, US or UK.
Then US politicians can then distract the domestic population by scapegoating the refugees and blame them for the institutionalized corruption and abuses of oligarchy. The plebs fight among themselves, while the oligarchy pillage the place.
The BRICS movement, as noted, will find it very difficult and time-consuming to agree on an alternative to the USD to fully de-dollarize. Non USD bilateral currency swaps are chaotic and messy for BoP accounting. As the podcasts posted here from profs Desai and Hudson discussed, this cannot be a national currency and it will take much negotiation, trust and political will to bring something like that about. I think it will happen eventually, but yeah not any time soon.
Even domestically in the US mirrors what is happening in a way: the economy is polarizing, wealth is being concentrated into the .001%. We could see the first “trillionaire” sometime soon.
“With Obama’s ‘Pivot to Asia’ launching US efforts to check China, its lending to developing countries, including in Sub-Saharan Africa, fell from around 2016…”
Chinese Belt and Road lending has become increasingly strategic, to counter the American drive to “contain” China, but I do not find a problem here for countries in which China is building infrastructure such as Ethiopia or Laos. Also China continually sends soft-infrastructure about countries in Africa. Education and health care missions are working all about Africa.
https://news.cgtn.com/news/2024-02-01/China-remains-Africa-s-largest-trading-partner-for-15-consecutive-years-1qPEQsemht6/p.html
February 1, 2024
China remains Africa’s largest trading partner for 15 consecutive years
China has remained Africa’s largest trading partner for 15 consecutive years, with bilateral trade reaching a record $282.1 billion in 2023, a Ministry of Commerce official said on Wednesday.
“Economic and trade cooperation is the ballast and propeller of China-Africa relations,” said Ministry of Commerce official Jiang Wei at a press conference.
China’s State Council has approved a general plan to build a pilot zone for in-depth China-Africa economic and trade cooperation.
According to the plan, China will establish the pilot zone as a platform for opening-up to and cooperation with Africa that has a certain level of international influence by 2027.
“The main goal is to build an internationally competitive platform for cooperation with Africa,” Jiang said…
$10 trillion (yes that’s not a typo) in US Treasuries will also be coming to the market at significantly higher rates this year. The US can always print the money, but it’s also possible the bond vigilantes will start acting up. Looking like a Perfect Storm everywhere, but then again I thought 2023 would be filled with fireworks, but nope, the Fed can always cook up some alphabet soup bail out scheme to save the day!!!
The “bond vigilantes” are a political fiction — all of the FIRE participants rely upon a steady stream of US Treasuries upon which to spin their gold from straw.
Tell me again why the Fed, which is a what, “consortium,” rather maybe “cabal” or “trust” in the Teddy Roosevelt sense, of fraudster Giant Banks, and not a government agency nominally subject to “democracy,”gets to fork up the whole world, for bespoke fun and profit? Albeit with serious public gravamen and long grey faces?
Are there any other “institutions” that wield the kind of day-to-day destructive and wealth-concentrating powers? Other than serious-sounding instruments of imperial and financialist brute extortionate power like the “International Monetary Fund?
Or is this just another “you will eat the sh!t sandwiches and like thrm”case of “THERE IS NO ALTERNATIVE!”?
Anyone for a Jubilee, and an auto-da-fe of the principals and their pet jackals and agents?
Hoping, praying for a real enormous Black Swan that takes this “system of system of syndicates” permanently off-line…
Political leaders from the most disadvantaged corners of the world figured out all of this a long time ago. The fact that “Third World” (now “Global South”) foreign debts become burdens that completely curtail independence, and make almost impossible for those societies to function normally was clearly and repeatedly stated during the 1980s by, more prominently, Fidel Castro. His call to consider the paying back of such debts as something practically impossible found some sympathetic ears among African leaders and elsewhere, but of course Cuba’s situation was very unique at the time, because of his closeness to the USSR, and the West made sure that Castro’s proclamation would be given limited air time and be mostly ignored. The political will of the “Global South” to act in concert in order to protect its best interests has been lacking almost since, forever (except maybe for that brief moment in the 1960s when the Non Aligned Movement was born). But where are the Tito, Nasser, Castro, Sukarno, Nkrumah, Nehru, and Indira Gandhi (to mention just a few) of today? I don’t see leaders of such broad and ambitious vision and of that stature (notwithstanding the flaws of those mentioned above) even when looking really hard at the world today. This quote from the introduction to the speech linked below:
“In 1985, Fidel Castro launched an international campaign to build a front of countries who faced unsustainable debts. In the speech, given in August 1985 after an international meeting on debt, Fidel said: “We realized (…) that in the final analysis the watchword of debt cancellation was valid for all countries of the Third World.”
His efforts to promote unity among peoples for cancellation of Third World debt gained wide acclaim in Latin America among the social and intellectual movements of the radical Left. In Africa, Thomas Sankara, president of Burkina Faso, took up the watchword and endeavoured to launch a vast movement [in Africa] for non-payment of debt (see http://www.cadtm.org/Eric-Toussaint-parle-de-Thomas – in French). In Europe, the CADTM came into being out of the international campaign that began in Latin America (see http://www.cadtm.org/The-history-of-the-CADTM-and-its).”
https://www.cadtm.org/Fidel-Castro-The-debt-is-unpayable
I pretty much never read about Global Majority debt without wishing someone would explain to me why the very topic of a debt Jubilee–or debtors’ strike–never comes up, but most especially when the writer/interviewee is Michael Hudson.
If BRICS could take over all new lending, or the backstopping of Central Banks’ own MMT-style money creation, couldn’t the South just walk away from bad debt?
No. They would simply walk from one money lender to another.
I think that in order to untangle the topic one have to untangle human group dynamics and “morals”, and it is what set Graeber down the path of his book on debt.
In the opening pages he writes about a conversation with someone helping others restructure their debt. And how even as the person acknowledges that the debt was unjust there was still the expectation that it needed to be repaid in full in order for the debtor to maintain their standing as a moral member of humanity.
And this then leads down the rabbit hole that it was debt, not barter, that came first. And that barter, a tit for tat up front trade, only happened between parties that didn’t trust each other to uphold a debt.
Debt on the other hand was part of the village group dynamic where say a hunter would “lend” some of their catch to a farmer with the understanding that the farmer would reciprocate, honor their debt, come harvest time.
A dynamic that continued into the modern day, where say a seaman’s wife would accrue debt with the local merchant while the husband is out at sea. And then once the ship is back and wages paid, she would head straight to said merchant to cover the debt in full.
The “debt Jubilee” or “debtor’s strike” never come up because the racket is designed by “our” (Golden Billion/Global North) plutocrats with the connivance of their (Global South) comprador elites who get a cut of the action, along with convenient bolt-holes like London real estate to flee to should the natives get restless.
And then the modern day Smedley Butlers are on call to enforce the racket via what used to be called “gunboat diplomacy.”
And all of this is whitewashed by the Western corporate media organs to gull the groundlings with fairy tales of “global development” and the wonders of the “Washington consensus.”
It is a wretched and tawdry thing to behold …