In a year – or two or three – we will have mostly forgotten the pandemic. But the unprecedented third world debt the virus has created could last decades or longer and cripple the global south’s chances at development. Rich nations should seize this opportunity to nurture, not subjugate, the developing world, and re-establish their moral leadership through debt relief.
This will lessen the impact of the global recession by acting as a worldwide fiscal stimulus. It will also avert a humanitarian crisis in the developing world, and help industrialised economies’ growth by boosting export demand.
Global debt currently sits at $277 trillion dollars, or 356% of global GDP. As with any financial crisis, this is hitting developing countries the hardest.
Particularly increased borrowing in the global south will mean that those developing countries that have often had the lowest death rates will be faced with the longest enduring legacy of the coronavirus: crippling debt.
Rich nations, by contrast, will recover faster. They attract a lower risk-rating from international creditors, making it easier for them to borrow money. Countries like the US and UK are able to increase their taxes and raise the necessary revenue to service the debts – that tax infrastructure is often lacking in developing nations.
For them, debt carries a much heavier burden. Loans are seen as riskier, meaning the debts are secured against foreign currency. Developing nations are then more susceptible to weakening local currencies and global economic slumps, making it even harder for them to pay back the debt in the long run. It’s a vicious cycle that ultimately harms those nations’ as well as the industrialised world’s interests.
Developed nations need to grow their export markets by fuelling the emerging middle class around the world. That can’t happen when these developing countries are forced to prioritise repaying debt over investing in their own economies.
As COVID spread through the world in the spring, the G20 created an agreement that would allow 73 of the world’s poorest countries to postpone their bilateral debt repayments for three years. So far, 43 of the countries have applied for the initiative.
But it is not enough. One of the most vocal critics of the international response to developing-nation debt has been Ghana, whose Finance Minister openly said “The ability of central banks in the West to respond [to the pandemic] to an unimaginable extent and the limits of our ability to respond are quite jarring.”
The West can and should step up, to nudge regions like sub-Saharan Africa away from increasing China influence.
They can also lead the way in the fiscal innovation that often follows debt crises. For example, the global debt crisis in the 1980’s was solved when illiquid bank loans were turned into tradable “Brady” bonds, named after Nicholas Brady, the American Treasury Secretary at the time. Now is the time for another innovative American fiscal policy.
Most people assume that relieving debt would constitute a wealth transfer from the creditor to the debtor. However in the current economic climate, this is not the case.
By simply extending repayments, countries have a chance to implement the necessary economic reforms to start servicing that debt. This has worked in the past, as demonstrated in South Korea between 1997 and 1998. Donor countries like the US and UK will still get their money back – in fact, they may get it back sooner in the long-term, if they can delay or reduce repayments in the short-term.
Debtor countries want to do anything to avoid defaults and being seen as pariahs in the eyes of the international community, with Argentina, Ecuador and Lebanon being the most recent examples. Sometimes to help them achieve that, some debt relief is essential.
This argument was first made by Marriner Eccles, Roosevelt’s chairman of the Federal Reserve, in 1934. Eccles argued that if a country is in perpetual debt, there is never enough confidence amongst local business, industry and agriculture to make the necessary investment to kickstart the economy. This is known as financial distress; when the fear of the debt itself prevents economic recovery.
In most cases in history, it is only when the financial distress is eased through debt write-off that indebted country’s economies will start to grow again. However, it often takes creditors and policy-makers a long-time to reach this decision, leading to longer economic stagnation, and ultimately a longer period of time for the money to be repaid, if it is repaid at all.
If a country is unable to pay its debts, it must make up for this by exporting more than it imports, which harms the export capacity of creditor countries like the US and UK and destroys their manufacturing and farming jobs. If emerging markets cannot buy their produce, agriculture and industry suffers as a result.
The next generation of Western leaders are inheriting countries of low growth, high-unemployment and low demand.
Debt relief will allow them to trade debt repayment for international export demand, which will create jobs and show their increasingly disenfranchised post-industrial communities that they care.
It will also strengthen their image abroad and improve the standard of living for millions of the world’s poorest.