Global South Stagnating under Heavier Debt Burden

By Jomo Kwame Sundaram

KUALA LUMPUR, Malaysia, Mar 13 2024 (IPS) - 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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Building Popular National Economic Alternatives*

By Jomo Kwame Sundaram

KATHMANDU, Nepal, Mar 6, 2024 (IPS) - Viable, popular national economic alternatives require conditions to help build and sustain them. An independent, accountable government can ensure supportive institutions, including laws.

National economies

For the Global South, globalisation has often meant renewed foreign domination. While dating back to the age of empire, foreign domination is less evident in post-colonial times, making it more difficult to organise against it.

National sovereignty and independence are necessary to develop and sustain viable popular economic alternatives. This requires addressing contemporary realities. Some unexpected opportunities may even emerge from the new challenges faced.

Cooperation among significant national social forces must be maintained for an alternative to be popular and sustainable. Negotiating, preserving, strengthening and ‘updating’ such collaboration is necessary to advance popular national interests.

This becomes challenging when those involved are not on a level playing field. After all, we live in a world dominated by powerful private interests, typically working through corporations, with transnational ones being the most influential.

Most people know that such domination is exercised via economic assets. But it has increasingly also involved control of the main means of communication. Global public discourses have thus been reshaped, even in multilateral institutions.

Thus, for example, the unrepresentative corporate-dominated Davos World Economic Forum sets agendas for multilateral conferences in the interest of the ‘lords of the universe’. More than seventy heads of government and state attended the last Davos event, many more than the UN General Debate.

Can developing alternative means of communication better shape our discourses, as our interests rarely coincide with those effectively in control?

Rule by law

Katarina Pistor has shown how law is hardly neutral but instead crucial to capitalism’s functioning. Thus, setting and enforcing rules privileges the interests shaping them.

Law is made by the powerful to legitimise their interests and practices, e.g., by enforcing contracts, property rights, etc. The legal framework defines how we operate, what is considered legal and illegal, and what is licit and illicit.

The African Union-Economic Commission for Africa study, chaired by former South African President Thabo Mbeki, recognised that many illicit practices are not illegal. Such massive illicit financial outflows characterise most of the Global South.

Such haemorrhage has worsened in recent decades as developing countries competed to attract foreign investments. In recent decades, they opened their capital accounts, believing economists who claimed finance would then flow ‘downhill’ into them. Instead, it flows ‘uphill’ from ‘capital-poor’ to ‘capital-rich’ nations.

Finance has transformed economies and communities in recent decades. The growing influence of such interests has increasingly constrained national monetary and financial authorities’ ability to manage interest and exchange rates.

Hence, only governments and multilateral financial institutions can create arrangements enabling preferential access to concessional finance. Inclusion and accountability can help ensure governments better serve the public interest.

Taxation

The Independent Commission for the Reform of International Corporate Taxation recommended a minimum universal corporate income tax rate of 25%.

US Treasury Secretary Janet Yellen later proposed 21%, the current US rate, to minimise political opposition in Washington. However, UK Prime Minister Boris Johnson cut this to 15% at the G7 meeting he hosted.

The OECD-G20 Inclusive Framework for Base Erosion and Profit Shifting (BEPS) seems to share the OECD view that such tax revenue be distributed by the country of sale, not production.

Developing countries lose out as they generally produce much more than they can afford to consume. With foreign advice shaping developing countries’ policies, their tax rates and revenue shares of output have fallen for decades. Hence, indebted nations believe they have to cut government spending.

Unsurprisingly, most developing countries have supported the African group’s resolution to make the UN the sole legitimate body for international tax cooperation, thus undermining the Inclusive Framework’s pretensions.

Trade liberalisation bias

Trade liberalisation is a double-edged sword. It can enhance exports to earn more foreign exchange but also destroys economic capacities, e.g., for industrialisation and food security.

Rich countries – including the US, the world’s biggest agricultural exporter – have sustained food production with government support using protection and subsidies. But while such subsidies are allowed, developing countries have been stopped from using tariffs for food security.

The US subsidises maize production for corn oil to make bioethanol. Corn syrup and chicken feed also get subsidised in the process. Consequently, US chicken exports have wiped out many poultry farmers worldwide.

Food prices increased sharply for some months after the Russian invasion of Ukraine. Jayati Ghosh showed these food price spikes were mainly due to speculation and price manipulation rather than wartime supply disruptions.

Futures markets once reduced commodity price fluctuations but have had significant disruptive effects more recently. This is mainly due to the changed nature of commodity spot, futures and options markets, especially with massive programmed financial speculation using algorithms and artificial intelligence.

* Edited remarks to the World People’s Economic Forum at the World Social Forum in Kathmandu on February 18, 2024.

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Hapless New Year for Global South

By Jomo Kwame Sundaram

KUALA LUMPUR, Malaysia, Feb 28 2024 (IPS) - As dire economic predictions for 2023 did not materialise, pundits began 2024 far more optimistically. But policy ghosts from the last half-century will likely undermine such wishful thinking.

Optimistic forecasts

As New Year celebrations of different cultures decline with the coming of spring in the northern hemisphere, it is useful to review and reconsider various end-of-2023 and early-2024 economic prognoses against what happened in the previous year.

Macro-financial economist Nouriel Roubini agrees that worst-case scenarios – including a “severe recession, leading to a credit and debt crisis”, stagflation, and other financial crises – are unlikely for now.

But he acknowledges this can easily be “derailed by any number of factors, not least geopolitics”. Such developments – especially the US-China conflict – are likely to undermine growth.

Former Goldman Sachs Asset Management chair Lord Jim O’Neill warns against overconfidence in such forecasts. He warns of the many “known unknowns”, particularly geopolitical ones, besides “unknown unknowns lurking on the horizon”.

For former Wall Street pundit Mohamed El-Erian, “the chances of robust global growth in 2024 appear tenuous”. He dismisses “optimistic sentiment” based on “central banks aggressively cutting interest rates amid the softest of all soft landings for the US economy”.

After all, the European Central Bank has emphasised it will not follow the US Fed in ending interest rate hikes. Even the International Monetary Fund (IMF) has become an inflation hawk, accelerating world economic contraction.

El-Erian agrees central banks alone “may not be enough to generate the necessary growth momentum to withstand the headwinds facing the global economy”. Meanwhile, fiscal austerity policy pressures limit the means for counter-cyclical policies.

World Bank Chief Economist and Senior Vice-President Indermit Gill and Ayhan Kose agree on the risks of tepid world growth for developing economies. However, their main recommendation is to pursue the same policies that have led to the current predicament.

The duo urge developing countries to pursue policies “generating a broadly beneficial investment boom”, including contractionary fiscal austerity! Governments are told to “avoid the kinds of fiscal policies that often derail economic progress”, such as counter-cyclical efforts.

Western central banks resorted to unconventional monetary policies – mainly ‘quantitative easing’ (QE) – to keep their economies afloat after the 2008 global financial crisis. But QE enabled more financialisation and indebtedness rather than real investments or recovery.

Dismal recovery prospects

The World Bank’s 2024 Global Economic Prospects is pessimistic, fearing “the weakest global growth performance of any half-decade since the 1990s”. After all, growth has slowed in most of the world since the pandemic, falling from 6.2% in 2021 to 2.6% in 2023.

Growth in 2023 in most developed economies was below the 2010-19 average of the Great Recession after the 2008 global financial crisis (GFC). Consumer prices began to rise, driven by supply-side disruptions and increased demand, thanks to more government expenditure after the 2020 pandemic-induced recession.

Fuel and food price speculation followed the February 2022 Ukraine war outbreak, further raising prices. Soon, however, as C. P. Chandrasekhar and Jayati Ghosh have shown, speculation receded as adequate supplies became evident, bringing price levels down from their mid-2022 peaks.

But decelerating inflation was attributed to US Fed-led sustained interest rate hikes long after inflation had peaked, over a year before central bank rates peaked. Falling global growth has thus been misrepresented as the unfortunate but inevitable and necessary cost of taming inflation.It is widely believed that growth can now be revived as interest rates come down. However, over a decade of low-interest rates from late 2008 to early 2022 did not end the slow growth after the GFC.

Most governments backtracked as soon as the ‘green shoots’ of recovery appeared in 2009. Similarly, budget deficits were quickly cut in 2021 and 2022, with the post-pandemic recovery rapidly losing momentum.

With the policy mantras of balanced budgets and fiscal austerity – dictated by financial interests – dominant in recent decades, more government spending to stimulate recovery and growth remains unlikely. Instead, all hopes are on interest rate cuts still eschewed by many central banks.

South under greatest threat

Harvard Professor Kenneth Rogoff expects 2024 to be a “rocky year for everyone”. He forecasts the likelihood of a US recession at “probably around 30%”, twice the “15% in normal years”, and notes China’s recovery efforts “face several daunting challenges”.

Almost alone among Western economic oracles, he recognises developing economies “are in the most danger”. Now much more vulnerable after decades of earlier Western-promoted globalisation, most struggle to avoid stagnation if growth fails to recover as expected.

After over a decade of tepid growth and deteriorating conditions in much of the Global South, especially the poorer nations, prospects will depend on policymakers thinking realistically and acting pragmatically to expedite sustained recovery rather than pursuing the failed prescriptions of recent decades.

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