Government Debt Is Symptom, Not Cause

By Ndongo Samba Sylla and Jomo Kwame Sundaram

DAKAR and KUALA LUMPUR, Jun 20 2024 (IPS) - Developing country governments are being blamed for irresponsibly borrowing too much. The resulting debt stress has blocked investments and growth in this unequal and unfair world economic order.

Money as debt

Myths about public debt are legion. The most pernicious see governments as households. Hence, a ‘responsible’ government must try to run a surplus like an exemplary household head or balance its budget.

This analogy is simplistic, unfounded and misleading. It ignores the fact that governments and households are not equivalent monetary entities. Unlike households, most national governments issue their currencies.

As currency is widely used for economic transactions, government debt and liabilities influence households’ and businesses’ earnings and wealth accumulation.

The standard analogy also ignores principles of double-entry bookkeeping, as one entity’s expenditure is another’s income, one entity’s debit is another’s credit, and so on. The government deficit equals the surplus of the non-government sector, which includes households, businesses, and the ‘rest of the world’.

Thus, when a government budget is in deficit – spending exceeds revenue – the government has created net financial wealth for the non-government sector. Government deficits, therefore, increase private savings and the money supply.

Since only the government issues the national currency, its spending does not ‘crowd out’ private-sector spending but complements it. As the currency is debt issued by the state, no money would be left in an economy if the government paid off all its debt!

Hence, media hysteria about public debt is unjustified. Instead, attention should be paid to the macroeconomic and distributive impacts of public spending. For example, will it generate inflation or negatively impact the balance of payments? Who would benefit or lose?

Debt-to-GDP ratio useless

Another widespread myth maintains that public debt beyond a certain level is not sustainable or negatively impacts economic growth. Allegedly supportive studies have been discredited many times, including by IMF research. Yet, the myth persists.

Mimicking eurozone criteria, many West African governments have set policy targets, including public deficits of less than 3% of GDP and debt-to-GDP ratios of less than 70%.

The debt-to-GDP ratio undoubtedly shows relative levels of indebtedness. But otherwise, this ratio has no analytical utility. After all, public debt is a ‘stock’, whereas GDP or output is a ‘flow’.

Suppose a country has an annual income of $100 and zero debt. Suppose its government issues debt of $50 over 25 years, with annual repayments of $2. Its public debt-to-GDP ratio will suddenly increase by 50%.

This poses no problem as GDP will likely increase thanks to increased investments while repaying the $50 debt. With an annual economic growth rate averaging 3%, GDP will more than double over this period.

Second, public debt is always sustainable when issued and held in domestic currency, and the central bank controls interest rates.

With a debt-to-GDP ratio of 254%, the Japanese government will never lack the means to pay off its debt. Unlike developing countries that take on foreign currency debt at rates they do not control, it will always be solvent. Thus, Peru defaulted in 2022 with a debt-to-GDP ratio of 33.9%!

Monetary ‘Berlin Wall’

Thus, there is a significant difference between the governments of the North – mainly indebted in their own currencies – and those in the South, whose debt is at least partly denominated in foreign currencies.

But governments in the South are not indebted in foreign currencies due to inadequate savings.

They can always finance any spending requiring local resources, including labour, land, equipment, etc. Objectively, no country issuing currency can lack ‘financing’ for what it has the technical and material capacity to do.

The chronic indebtedness of most developing countries and the ensuing crises are thus manifestations of the international economic and financial system’s unequal and unfair nature.

Global South countries have been required to accumulate ‘hard currencies’ – typically dollars – to transact internationally. This monetary ‘Berlin Wall’ separates two types of developing countries.

First, net exporting countries that accumulate ‘enough’ dollars usually invest in low-yielding US Treasury bonds, allowing the US to import goods and services virtually free.

Second, those which do not earn ‘enough’ hard currencies resort to transnational finance, typically increasing their foreign indebtedness. Most eventually have to turn to the IMF for emergency relief, inadvertently deepening their predicament.

However, as they have to cope with prohibitive terms and conditions for access to emergency foreign financing, it is difficult to escape these external debt traps.

Paradoxically, countries of the South with chronic dollar deficits are often rich in natural resources. Bretton Woods institutions typically demand protracted fiscal austerity and economic denationalisation, undermining developing countries’ chances of getting fair returns for their resources and labour.

Abuses and mismanagement may aggravate Global South governments’ indebtedness in foreign currencies, but these should always be understood in the context of the unequal world economic and financial order.

Related IPS Articles

·                   Developing Countries’ Government Debt Crises Loom Larger

·                   Global South Stagnating under Heavier Debt Burden

·                   Onerous Debt Making Poorest Poorer

·                   Debt-Pushing as Financial Inclusion

·                   Inflation Phobia Hastens Recessions, Debt Crises

Available onilne here: Government Debt Is Symptom, Not Cause

Land Grabs Squeeze Rural Poor Worldwide

By Jomo Kwame Sundaram

KUALA LUMPUR, Malaysia, Jun 17 2024 (IPS) - Since 2008, farmland acquisitions have doubled prices worldwide, squeezing family farmers and other poor rural communities. Such land grabs are worsening inequality, poverty, and food insecurity.

Squeezing land and farmersA new IPES-Food report highlights land grabs (including for ostensibly ‘green’ purposes), the financial means used, and some significant implications.

Powerful governments, financiers, speculators, and agribusinesses are opportunistically gaining control of more cultivable land. The report notes the 2007-08 food price spike and financial crash catalysed more land acquisitions.

Quantitative easing and financialization after the 2008 global financial crisis enabled even more land grabs. Investors, agri-food companies, and even sovereign wealth funds have obtained farmland worldwide.

Agribusinesses and other investors want land to make more profits, urging governments to enable takeovers. Cultivable land is being used for cash crops, natural resource extraction, mining, real property and infrastructure development, and ‘green’ projects, including biofuels.

The land squeeze has developed in novel ways, with most large-scale deals diverting farmland from food production. Instead, environmentally damaging ‘industrial agriculture’ has spread, worsening rural poverty and outmigration.

The new land rush has displaced small-scale farmers, indigenous peoples, pastoralists, and rural communities or otherwise eroded their access to land. It has worsened rural poverty, food insecurity, and land inequality. Marginalising local land users has made family farming less viable.

‘Green grabs’ involve governments and corporations taking land for dubious large-scale tree planting, biodiversity offsets, carbon sequestration, conservation, biofuels, and ‘green hydrogen’ projects. Water and other resource demands also threaten food production.

The land rush has slowed recently, but underlying pressures and trends continue. The pandemic, Ukraine and Gaza wars, and government and market responses have revived alarmist ‘food shortage’ narratives, justifying more grabs.

Investing in dispossession

Agricultural investments rose tenfold during 2005-18. By 2023, 960 investment funds specialising in food and farming assets had properties worth over $150 billion.

Nearly 45% of all farmland investments in 2018, worth $15 billion, were by pension funds and insurance companies. During 2005-17, pension, insurance and endowment funds invested $45 billion in farmland.

Unsurprisingly, land prices have risen continuously for two decades in North America and three in Canada. During 2008-22, land prices nearly doubled worldwide, even tripling in Central and Eastern Europe!

Pension funds and other private investments doubled UK farmland prices during 2010-15. More recently, investments in US farmland have doubled since the pandemic!

The largest one per cent of farms worldwide now have 70% of farmland. In Latin America, 55% of farms only have 3% of farmland!

More than half the farmland thus obtained is for water-demanding crop production. While a fifth of large-scale land deals claim to be ‘green’, 87% are in areas of high biodiversity!

Mining accounted for 14% of large-scale land deals over the past decade.Growing demand for rare earths and other critical minerals is driving mining on former farmland, worsening environmental degradation and conflicts.

Instead of protecting national, social or community interests, regulations seem to protect the culprits. The terms of such deals often make things worse. Thus, foreign corporations successfully sued the Colombian government for trying to stop their large-scale mining project.

Green land grabs

Some governments and big businesses advocate compliance with environmental, social and governance (ESG) standards. They invoke sustainability, including climate goals, to justify elitist conservation and carbon offset schemes.

Over half of government carbon removal pledges involve the land of small-scale farmers and indigenous peoples. ‘Green grabs’ – for carbon offsets, biodiversity, conservation and biofuel projects – account for a fifth of large-scale land deals.

Government pledges to absorb carbon dioxide into the land surface commit almost 1.2 billion hectares, equivalent to the world’s cropland area! Despite modest climate benefits, problematic carbon offset markets are expected to quadruple over the next seven years, driving even more land grabs.

Carbon offset and biodiversity markets drive such transactions, drawing major polluters into land markets. Oil giant Shell alone has committed over $450 million for offset projects.

African land grabbed

The land squeeze is worldwide, affecting various places differently. Land grabs have significantly affected Sub-Saharan Africa and Latin America, while land inequality grows in Central and Eastern Europe, Latin America, and South Asia.

Susan Chomba and Million Belay found almost a thousand large-scale land deals in Africa since 2000. Mozambique had 110 such deals, followed by Ethiopia, Cameroon, and the Democratic Republic of Congo (DRC).

Some 25 million hectares involve Blue Carbon, run by a Dubai royal. The company has bought rights to forests and farmland to sell carbon offsets. The land is from five Anglophone African governments, involving a fifth of Zimbabwe, a tenth of Liberia, Kenya, Tanzania, and Zambia.

Large-scale land deals put indigenous and pastoralist communities at greater risk. In Ethiopia, Ghana, and elsewhere, land sales have forced farmers to work on smaller fragmented plots, become wage labourers, or migrate, undermining their ability to feed themselves, their communities and others.

African smallholders, pastoralists, and indigenous communities have long protected their land and biodiversity. However, most now lack the rights and means to do so more effectively, let alone feed Africa and improve climate action. Thus, the climate crisis is being used against rural African communities.

Related IPS Articles

·                   Peasants Marginalized by Big Farmers

·                   Another False Start in Africa Sold with Green Revolution Myths

·                   World Bank Dispossessing Rural Poor

·                   Hunger in Africa, Land of Plenty

·                   We Can Overcome Poverty and Hunger by 2030

Available online here: Land Grabs Squeeze Rural Poor Worldwide

South Suffering Due to Powerful Nations’ Policies

By Jomo Kwame Sundaram

KUALA LUMPUR, Malaysia, May 30 2024 (IPS) - The World Bank expects the international economic slowdown to be at its worst in over four decades in 2024. This is mainly due to powerful Western nations’ contractionary macroeconomic and geopolitical policies.

Dismal outlook

According to the Bank’s last Global Economic Prospects report, world economic growth will be weakest by the end of 2024. Only the US economy’s strength will statistically prevent a world recession.

World economic growth was expected to slow to 2.4 per cent in 2024. But even the US-controlled World Bank acknowledges growing geopolitical tensions are the main threat.

Medium-term prospects for most developing economies have worsened due to slower growth in most major economies. This has been exacerbated by tighter monetary policy and credit, sluggish trade and investment growth.

2024 would be the third year of economic slowdown due to tighter monetary policies supposed to rein in inflation. Central banks are fixated on bringing inflation below their two per cent target by tightening credit.

Worldwide growth was expected to slow from 2.6% in 2023 to 2.4% in 2024 – well below the 2010s’ mean. Developing economies would only grow by 3.9% in 2024, more than a percentage point below the previous decade’s average.

World Bank Chief Economist Indermit Gill feared, “Near-term growth will remain weak, leaving many developing countries – especially the poorest – stuck in a trap: with paralysing levels of debt and tenuous access to food for nearly one out of every three people.”

Gloomy prospects

The Bank projected that developed economies would slow as most developing economies outside Asia recover. It also acknowledges precarious prospects for vulnerable developing economies due to much higher debt financing costs.

At the end of 2023, the Bank expected things to worsen due to the Gaza invasion, related commodity market pressures, financial stress, more indebtedness, higher borrowing costs, persistent inflation, China’s weak recovery, trade disruptions, and climate disasters.

US unwillingness to broker a ceasefire in Ukraine or to stop the Gaza massacre or South China Sea militarisation has worsened geopolitical risks and recovery prospects while diverting more resources for war.

Financial stress and higher interest rates have exacerbated inflation and stagnation. Meanwhile, the new Cold War has slowed growth in China and much of Asia by worsening ‘trade fragmentation’ and global heating.

The Bank urges multilateral cooperation to provide debt relief, especially for the poorest countries, address global heating, enable the energy transition, revive trade integration, address climate change, and reduce food insecurity.

The world economy has lost $3.3 trillion since 2020. Yet, instead of strengthening developing countries’ recoveries, the Bank still urges fiscal austerity and financialization.

A quarter of developing countries and two-fifths of low-income countries (LICs) would be worse off in 2024 than in 2019, before the pandemic. With limited fiscal space, developing nations with poor credit ratings are especially condemned.

With rich economies expected to slow from 1.5% last year to 1.2% in 2024, demand for primary commodities will further dampen. Despite other dismal projections, the Bank wishfully projected LICs would grow by 5.5% in 2024!

But instead of prioritising economic recovery, finance ministers and central bank governors agreed to continue policies worsening the situation by suppressing demand and ignoring ‘supply-side disruptions’ responsible for inflation.

Fiscal follies?

For decades, the Washington-based Bretton Woods institutions urged developing economies to be much more open and market-oriented. Unsurprisingly, the global South now faces problems due to earlier procyclical policies.

The report advises commodity exporters – two-thirds of developing nations – how to cope with price fluctuations. Breaking with past advice, the Bank now calls for a more counter-cyclical fiscal policy framework.

Fiscal policies in recent decades have often been procyclical, overheating economies and deepening slumps. The Bank found fiscal policy in commodity-exporting nations 30% more procyclical and 40% more volatile than in other developing economies.

It argues commodity exporters’ fiscal policies have worsened price vicissitudes. It estimates that when commodity price increases enhance growth, government spending increases can boost growth by an additional fifth.

Greater fiscal policy pro-cyclicality and volatility amplify business cycles, hurting economic growth in commodity-exporting developing economies.

The Bank argues this should be addressed with “a fiscal framework that helps discipline government spending, by adopting flexible exchange-rate regimes, and by avoiding restrictions on the movement of international capital”.

The report claims such policy measures will help commodity-exporting developing economies boost per capita growth by about 0.2% annually.

Misrepresenting statistical correlations, the Bank urges easing restrictions on international financial flows, claiming this would “help reduce both fiscal procyclicality and fiscal volatility”.

Ignoring developing countries’ experiences, it urges the adoption of developed-economy “exchange rate regimes, [lack of] restrictions on cross-border financial flows, and … fiscal rules” as part of a “strong commitment to fiscal discipline.”

The report ignores overwhelming evidence of fiscal austerity and capital account openness exacerbating procyclicality and volatility.

Clearly, Bank advice has not changed much since the 1980s, when such policy recommendations worsened Latin America’s and Africa’s lost decades.

Related IPS Articles

·                Chronicle of a Catastrophe Foretold

·                Developing Countries’ Government Debt Crises Loom Larger

·                Global South Stagnating under Heavier Debt Burden

·                North Ignores ‘Perfect Storm’ in Global South

·                Onerous Debt Making Poorest Poorer

·                Rich Nations, IMF Deepen World Stagnation

·                Inflation Phobia Hastens Recessions, Debt Crises

·                1980s’ Redux? New context, Old Threats