Yves here. Jomo has been warning for some time about the consequences of the debt load on smaller, less developed economies, both at a minimum lower growth, and high odds of cascading crises. Note that due to the fact that countries tend to trade actively with close neighbors, diminished activity can propagate in an area due to some states being afflicted with a borrowing overhang.
Here he stresses, as we have in many past posts (such as when the Fed tried tightening in 2014), that the impact of Fed interest rates on emerging economies can be catastrophic for them. Yet the central bank was and is indifferent to the damage.
By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development. Originally published at Jomo’s website
Much higher interest rates – due to Western central banks – are suffocating developing nations, especially the poorest, causing prolonged debt distress and economic stagnation.
US Fed-Induced Stagnation
After the greatest US Fed-led surge in international interest rates in more than four decades, developing countries spent $443.5 billion to service their external government and government-guaranteed debt in 2022.
The World Bank’s last International Debt Report showed most of the poorest countries in debt distress as borrowing costs began to surge. The increase has cut into scarce fiscal resources, reducing social spending on health and education.
Debt-servicing costs for all developing countries in 2022 increased by 5% over 2021. The US Fed continued to raise interest rates through 2023, compounding debt distress, while the European Central Bank warns against ‘prematurely’ lowering interest rates.
Poorest Worst Off
The 75 countries eligible to borrow from the World Bank’s International Development Association (IDA) – which only lends to the world’s poorest – paid $88.9 billion to service debt in 2022.
Over the last decade, the cumulative debt of IDA-eligible countries grew faster than their economies. Their foreign debt stock reached $1.1 trillion in 2022 – more than twice that in 2012. During 2012-22, their external debt rose 134%, over twice the 53% increase in national income.
Interest payments by the poorest countries have quadrupled over the previous decade to $23.6 billion in 2022. The Bank expects debt-servicing by the 24 poorest countries to jump by as much as 39% in 2023 and 2024.
Growing Debt Distress
Bank Chief Economist cum Senior Vice President Indermit Gill has warned, “Record debt levels and high-interest rates have set many countries on a path to crisis”. “Every quarter that interest rates stay high results in more developing countries becoming distressed…”
Without “quick and coordinated action by debtor governments, private and official creditors, and multilateral financial institutions” and “better debt sustainability … and swifter restructuring” arrangements, “another lost decade’’ seems unavoidable!
Higher interest rates have worsened debt distress in most developing countries. There have been 18 government debt defaults in ten developing countries in the last three years – more than in the previous two decades!
Poorest Hardest Hit
About three-fifths of low-income countries (LICs) are in or at high risk of debt distress. Debt service payments consume an increasingly large share of their export earnings. Over a third of their external debt has variable interest rates, which have risen sharply over the last two years.
The Bank acknowledges, “Many of these countries face an additional burden: the accumulated principal, interest, and fees they incurred for the privilege of debt-service suspension under the G-20’s Debt Service Suspension Initiative (DSSI).”
With higher Fed rates, the stronger US dollar worsens developing countries’ difficulties, raising debt-servicing costs. Besides high interest rates, falling export earnings – due to lower demand – are worsening things.
Where Have All the Lenders Gone?
New financing for the global South has dried up with the flight of capital ‘uphill’ to the North. New borrowing has been made harder by interest rate and debt-servicing cost increases.
New government and government-guaranteed foreign loan commitments to these countries fell by 23% to $371 billion in 2022 – the lowest in a decade.
Private creditors have been avoiding developing countries and got $185 billion more in principal repayments than they loaned in 2022. It was the first year they received more than they loaned to developing countries since 2015.
New bonds issued by developing countries internationally dropped by over half in 2022! New bond issues by IDA-eligible LICs and other countries fell by more than three-quarters to $3.1 billion.
With much less private financing, multilateral development banks, especially the World Bank, loaned much more. Multilateral creditors provided $115 billion in new concessional financing to developing countries in 2022, with half from the Bank.
The Bank provided $16.9 billion more in such financing than it got in principal repayments – nearly thrice the amount a decade before. The Bank also disbursed $6.1 billion in grants to these countries, three times the amount in 2012.
Wrong Medicine
As the US Fed continued to hike interest rates through 2023 while the European Central Bank still warns against ‘prematurely’ reversing the rate hikes, the prospects of early relief appear remote, threatening further devastation in the global South.
The excuse for higher interest rates remains inflation above the completely arbitrary two per cent inflation targeting rate now embraced by all too many central bankers as their ‘holy grail’.
But most recent inflation has been due to often deliberate supply-side disruptions in recent years associated with the US-led new Cold War, COVID-19 pandemic disruptions and geopolitically driven economic sanctions, especially since the Russian invasion of Ukraine.
Core inflation has largely receded in much of the world since mid-2022. But meanwhile, imported inflation has been exacerbated by exchange rate depreciation due to financial flow-induced refluxes¬.
No Solution on the Horizon
The 1980s’ government debt crises caused a ‘lost decade’ in Latin America and a quarter century of stagnation in Sub-Saharan Africa. It took almost a decade for the George H W Bush administration to resolve the Latin American debt crises with compromises around the Brady bonds.
This time, a resolution will be much more difficult owing to the varied creditors and much larger debt involved. Worse, there is little sense of responsibility in the West. Instead of seeking collective solutions, the evolving debt crisis is used to blame and isolate China in the fast-worsening geopolitical new Cold War.
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Super Imperialism and Confessions of an Economic Hit Man are evergreen.
We could smugly quip: “textbook”. But yeah, it sounds like Jomo Sundaram is familiar with those works.
It would be interesting to team him up with Perkins and Hudson for a discussion.
Defaulting is an option that might be preferable in a multipolar world. Ditching Western development loans for an alternative at least would be preferable to decades of stagnation.
But who’s going to lend? On what terms? And for what kinds of projects, where so much of the nominal notional “wealth” goes to loot-o-corps and favored sons?
Past time for a Jubilee Year, as one bit of the remedy. But what does a healthy political economy even look like, where financial capitalists/globalists hold the levers of power in an orgasmic death grip?
Nice to see that everything is going to plan. Destroy the economies of the Global majority and then strip mine them of resources on the cheap. But things may be slowly changing because of BRICS. Putin just gave an interview where he said ‘that over the past few centuries, the so-called “golden billion” has grown accustomed to being able to “fill their bellies with human flesh and their pockets with money” as they have been “parasitizing” other peoples in Africa, Asia, and Latin America.’ And then he said this-
‘But they must understand that the vampire ball is ending’
That is pretty harsh that even if truthful. It won’t happen overnight but it is happening slowly. It helps that the Collective west has virtually disarmed itself by shipping all their weapons off to the Ukraine and Israel but it is going to be a rough few decades-
https://www.rt.com/russia/594197-putin-vampire-ball-west/
Not all the weapons. Lots of nukes, way overkill’s worth, and bio and cyber weapons galore. And it’s no comfort to aver that nobody is insane enough to use them. US did it twice. All nuke war doctrine rests on the postulate that the national leadership must be demonstrably insane. MADness is just a button press away. Or the result of one of the dozens of near misses, many avoided by sensible action by goddam Rooskies.
We don’t need no stinkin treaties either. ABM, INF… we need Nuclear First Strike doctrine.
Nuclear weapons can be used preemptively to defend “vital interests”. Dr. Strangelove anyone?
https://www.armscontrol.org/act/2022-04/news/biden-policy-allows-first-use-nuclear-weapons
“…the “fundamental role” of the U.S. nuclear arsenal is to deter a nuclear attack, but will still leave open the option that nuclear weapons could be used in “extreme circumstances to defend the vital interests of the United States or its allies and partners…,”
As this article notes, this is rinse and repeat. In 1973 a tidal wave of OAPEC cash washed through Western banks. It could not remain in the West where it was already causing a significant inflation problem (aggravated by the disintegration of Bretton Woods and the failure of the Smithsonian Agreement). So it was recycled to developing nations on the basis that, per Walter Wriston’s famously silly aphorism (Wriston being the Dimon of his day), ‘countries don’t go bankrupt’.
That was all very well, but inflation increased anyway in the West. This led to a collapse of confidence in sterling in 1976 and in the dollar in 1978 (an argument has lately been advanced that West Germany bore a large portion of the blame for this: https://www.sup.org/books/title/?id=31036, in order to preserve its own social settlement at the expense of everyone else’s). The dollar crisis of 1978 led straight to the Volcker shock. That shock not only eviscerated the economic prospects of developing nations, now heavily indebted thanks to the post-1973 recycling (starting with the Mexican default of 1982), but to the financial evisceration of the Soviet bloc.
The Volcker shock crushed demand for the commodities which were the staple exports of developing nations, and the price of oil/gas. This was 1973 in reverse: https://www.bloomsbury.com/uk/countershock-9781838605827/. Not only did developing countries have to finance every higher debt loads, they had to do so out of falling revenues. This led to much political instability in the 1980s, and then to the collapse of authoritarian regimes everywhere at the end of the decade. This shift away from dictatorship was partly a play for sympathy from the US as the primary creditor: if a debtor nation was seen adhering to Washington Consensus policies, which included democracy, then this would facilitate better debt redemption terms, especially as part of the partial write-offs initiated by Nicholas Brady (Brady bonds being intended to incentivise debtor nations to adhere to Washington Consensus criteria).
All this history was a catastrophe for developing nations, although it preserved Western ‘hegemony’ for another generation. However, the present attempt to repeat the exercise in the context of rising Chinese and Russian influence looks much more problematic: China and Russia are not applying anything like the same conditionality as Western creditors (whom Western governments can no longer corral as in the 1980s or 1990s). This makes them a far more attractive proposition than the West. The growing realisation of what was done to them after 1973 and an appreciation of the baleful effects of the CFA (https://www.plutobooks.com/9780745341798/africas-last-colonial-currency/) is helping to turn much of the Global South (or global majority) away from the West. However, Western predation gives China/Russia some cover to be less indulgent than they might otherwise be obliged to be.
More generally, what is to happen to China’s surpluses? If the US applies subsidies, quotas and punitive tariffs to restore equilibrium to its current account, then who will function as vents to China’s excess supply and prevent depression in China (akin to the US crisis of overproduction up to 1929)? Unless developing nations get some debt relief they will not have the purchasing power to absorb this surplus production. Who else can do so? It looks rather like it will have to be Europe, and what this might portent is accelerating economic decline within Europe. Meanwhile Europe will also have to continue importing expensive US LNG, especially if European attitudes towards Russia remain fixed.
Moreover, if Western creditors cannot extract high coupon payments from developing nations, where else are they to get them, given seemingly perpetual stagnation at home? In other words, how are legal commitments to defined benefit pensioners (boomers) to be financed, and how is the future financial security of increasingly desperate defined contribution pensioners (present private sector workers) to be realised? It all looks grim for the West.
From the point of view of the people who matter, people of influence and authority, all this is a feature and not a bug.
Many of the issues of the Global South were created by themselves. How about they stop blaming someone else, put up their sleeves and work hard for a change? It’s all the same whining wee wee wee year in year out. They have corrupt elites and politicians that steal all their own wealth. Clean up your house first. Do something. Stop complaining.