I read an interesting report this morning, which resonated with some other work I had…
There is something deeply wrong with the world under Capitalism when the poorest countries in the world pay more out on debt servicing to loans that the wealthy countries have provided than they do on maintaining their health care services. I have been examining data derived from the World Bank WDI database and the IMF WEO database pertaining to the debt sustainability of the poorest nations in the world. Using 2019 data (most recent) 64 nations, for which coherent data is available, spend more on external debt services than they do on health care (Source). At the same time, the most recent assessment from the IMF and the World Bank, under their Debt Sustainability Program (DSA) shows that debt distress is rising fast across the low-income bloc of countries. The response of the multilateral institutions is to enter ‘agreements’ with these nations that impose fiscal austerity and enforce a range of changes such as privatisation, outsourcing and more. This strategy does not work and only serves to protect the assets of the rich countries and corporations. A debt jubilee is the only way low-income nations will escape the penury of debt distress and the austerity-obsessed clutches of the IMF and the World Bank.
In terms of the 70 nations that are included as eligible under the IMF/World Bank Poverty Reduction and Growth Trust (PRGT), 13 per cent are in debt distress and a further 39.1 per cent are at high risk of distress, according to the most recent assessment published on February 28, 2023 – List of LIC DSAs for PRGT-Eligible Countries.
The following Table summarises the most recent data.
|Risk of debt distress||Number||Proportion (%)|
|In debt distress||9||13.0|
In terms of the African nations, 35 per cent are at high risk of debt distress and 19 per cent are already in debt distress and being forced to cut social and health programs.
If all low-income countries are examined the proportion of those already in debt distress rises to around 15 per cent and those at high risk rises to 45 per cent.
On April 23, 2023, the – Global Sovereign Debt Roundtable – which began operation in February 2023 and comprises the IMF, World Bank, India (as G20 Presidency), in addition to “official bilateral creditors … private creditors and borrowing countries”, met to discuss the appalling global situation with respect to poor nation indebtedness.
They issued a – Global Sovereign Debt Roundtable Co-Chairs Press Statement – which contained its share of ‘motherhood’ statements and resistance to any widespread debt restructuring or debt jubilees.
The US, in particular, was highly resistant to the inclusion of debt originating from the multilateral development banks in any restructuring arrangements.
But it did note that the – International Development Association (IDA) – which is part of the World Bank and “aims to reduce poverty by providing zero to low-interest loans (called “credits”) and grants for programs that boost economic growth, reduce inequalities, and improve people’s living conditions” – would provide:
… positive net flows and the ex-ante implicit debt relief through increased concessionality and grants to countries facing higher risks of debt distress was welcomed.
With the onset of the Covid-19 pandemic, the debt to GDP ratios are rising fast among low-income nations and the number of nations in debt distress is rising.
The problem is that servicing the debt is now overtaking the outlays that the nations can make on human progress within their nations, with health care being an obvious casualty of the debt explosion.
Chapter 3, in the most recent IMF – World Economic Outlook (April, 2023) – is entitled “Coming down to Earth: How to Tackle Soaring Public Debt” – and continues the IMF’s obsession with so-called “fiscal consolidation”.
They claim that if low-income, highly indebted nations engage in fiscal austerity, “accompanied by growth-enhancing structural reforms and strong institutional frameworks” then they will be able to reduce their debt exposure.
It hasn’t worked very well to date.
They admit that as “fiscal consolidation tends to slow GDP growth, consolidations on average have negligible effects on debt ratios” but still hold the line that austerity, privatisation, implementation of user-pays etc are the way to go for countries in debt distress with some debt restructuring thrown into the mix.
Further on in the chapter they come clean and note that:
The empirical literature on the effects of restructuring on debt ratios is relatively limited, and the overall effects of debt restructuring and its interaction with fiscal policies have rarely been explored.
Which means the calls for a fiscal consolidation strategy, which is just the IMFs buzz term for harsh cutbacks in public expenditure that are usually targetted at education and health care, is based on ideology rather than hard evidence.
There is a huge body of evidence that the IMF strategies do not improve outcomes significantly and result in a transfer of wealth to wealthy individuals within the nations and the wealthy nations that suck out resources from the poorer nations.
The IMF has refused to reduce the total value of its debt for the low income nations but prefers to extend the terms of the arrangements when a nation becomes distressed and impose increased conditionality.
Even the World Bank has expressed concern over the way the IMF is responding to the debt crisis now besieging the poorer nations.
The flash point came with the IMF’s deal with Chad in early 2023.
In its January 2023 – IMF Country Report No. 23/7 – we learn that Chad was the “first country to reach a debt treatment agreement with official and private creditors under the G20 Common Framework.”
While Chad has oil revenues its remains in abject poverty.
The World Bank indicates the following (Source):
1. “between 2003 and 2011, the number of poor increased from 4.7 million in 2011 to approximately 6.5 million in 2019. In 2018, 42% of the population was living below the national poverty line.”
2. “a child born today will be 70% less productive in adulthood than a child who received a quality education and benefited from appropriate health services.”
3. “Moreover, 20% of Chadian children will not make it to their fifth birthday, and 40% of children suffer from stunting, which can have long-term implications for their cognitive development. Between the ages of 4 and 18, on average, children in Chad spend no more than five years in school.”
4. “Chad has one of the highest maternal mortality rates.”
5. “With more than 450,000 refugees from Sudan, the Central African Republic, and Nigeria, Chad continues to deal with the consequences of tensions in neighboring countries.”
In other words a disaster.
The IMF deal maintained the nation’s debt exposure to private creditors but extended the terms for repayment.
They also required the nation to maintain tight wage controls (except for the ‘military’), cut back “fuel and electricity subsidies”, and financial market deregulation (to allow banks to make more money).
Fiscal rules were imposed to limit net public spending.
The agreement also required the nation’s oil revenue to be “used to build buffers and accelerate the payment of debt” rather than improving the circumstances of the people.
After earlier suggesting that the IMF deal with Chad would not increase their ability to recover and that debt reduction strategies were necessary, the World Bank boss noted on April 26, 2023 in – Remarks by World Bank Group President David Malpass at the Breaking the Impasse on Global Debt Restructurings Conference – that the massive debt carried by the low-income countries was “one of the biggest obstacles to development” and with “60 per cent of low-income countries either in debt distress or at high risk of it”, we can conclude that:
… the global instruments to tackle debt sustainability and debt restructuring have been ineffective. Debt sustainability assessments have often proven to be overoptimistic — especially in terms of projections of the key variables such as growth, inflation, interest rates, tax revenues and government spending restraint. Not enough attention has been given to the rising danger of domestic debt and its consequences for growth.
He noted that in dealing with the debt crisis facing the low-income nations, the world institutions had to:
… avoid the Chad outcome ..
So what can be done?
The narrative that the likes of the IMF presents indicate that the blame for the debt crisis and poverty lies within the nations themselves.
They overspend on waste, they are riven with corruption and all that sort of stuff and to some extent there is some evidence base.
But those issues are small compared to the role that the first-world creditors and the official multilateral institutions play in enslaving the nations in debt.
We know that global corporations bleed the poorest nations dry through tax crime and other corrupt practices.
In its 2020 report – Economic Development in Africa Report 2020: Tackling Illicit Financial Flows for Sustainable Development in Africa – UNCTAD noted that:
At dinner parties in capital cities around the world, the world’s cosmopolitan elite compare notes on the best schools, the least-polluted cities,
the alarming spread of insecurity, the threat of populism, and the latest on tax havens. In a parallel reality, when educated men and women from the world’s disillusioned middle class meet, from the suburbs of industrialized countries to the compounds of African cities, they share common concerns about the future of their children, deep misgivings about inequality, injustice and a growing resentment towards the prosperous elite. The rhetoric is often the same: complaints about how the wealthiest individuals and the largest corporations are able to avoid paying taxes, how the poor cannot pay, and
how those in the middle are increasingly squeezed. In mineral-resource-rich developing countries, including in Africa, these conversations sometimes allude to the latest press reports on unfair contract deals in the mining sector and the prevalence of IFFs, a term that has made global media headlines for the past 10 years.
IFF – illicit financial flows from poor to rich – are massive and undermine the development process.
UNCTAD estimated (in 2020) that around $US88.6 billion leaves the poor nations in illicit capital flight, partly through “trade misinvoicing” (that is, criminal accounting practices).
There are many other ways that the rich and the rich countries plunder the poor nations.
Constructing the problem in that way opens the discussion to different solutions including widespread debt jubilees, which I support.
Nations will never grow in a sustainable way when they are continually forced into ‘fiscal consolidation’ mode and are forced to sell off public assets to private equity interests.
The only way forward is for currency-issuing nations to use that capacity to wipe the debt off their books.
Ultimately, the world needs a new multilateral structure and I have long advocated the abandonment of the IMF and the World Bank and the creation of a progressive new institution designed to reduce poverty not be a conduit in the transfer of real resources (and wealth) from the poor to rich nations and poor to rich people.
Many low-income countries can only access limited quantities of real resources relative to their population and are highly dependent on imports of food and other life-sustaining goods – where the well-being of their citizens cannot be solved within those nations’ own borders, especially if their export potential is limited, regardless of the measures that the country may employ to protect itself from speculative capital flows and to reduce its dependence on imports.
These countries may find no market for their currencies and may be forced to trade in foreign currencies.
A new multilateral institution should be created to replace both the World Bank and the IMF, which is charged with the responsibility of ensuring that these highly disadvantaged nations can access essential real resources such as food and not be priced out of international markets due to exchange rate fluctuations that arise from trade deficits.
In – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, September 2017) – we argued that instead of forcing these nations to run austerity campaigns just to keep their exchange rate higher and repay the massive debt burdens, new international agreements are needed to outlaw speculation by investment banks on food and other essential commodities.
More generally, a new framework is needed at the international level to ban illegal speculative financial flows that have no necessary relationship with improving the operation of the real economy.
Finally, this new multilateral institution would not force nations to cut taxes for high-income earners in return for aid, which is another bias in current IMF and World Bank interventions.
It would recognise that the role of taxation is to create non- inflationary space for the sovereign government to command real resources in order to fulfil its socio-economic programme.
The reality is that there are many idle resources in the poorer nations – land, people and materials – that can be bought by government and mobilised to reduce poverty without causing inflation.
Finally, it should be acknowledged that these nations will likely have to run continuous fiscal and current account deficits for many years to allow the non-government sector to accumulate financial assets and provide a better risk management framework.
A progressive international agency would help them to do just that.
We thus need debt relief immediately in the form of total forgiveness.
And the rich countries should see their fiscal responsibilities as extending beyond creating full employment and benefits in their own nations.
That is enough for today!
(c) Copyright 2023 William Mitchell. All Rights Reserved.