By Eric Vandenbroeck and co-workers

Four out of ten people in the world live in a country that spends more money servicing the interest on its sovereign debts than it does on education or health care. Such figures may feel abstract to creditors, which are primarily wealthy countries, multilateral banks​, and large bondholders​, but they could not be more consequential to debt-burdened countries. Every dollar spent repaying sovereign debt is a dollar that could have been spent on public services—building roads, fixing schools, climate-proofing infrastructure, paying doctors and civil servants. It’s in this way that repayment schemes, many of them predatory, help keep developing countries under the weight of debts that seem unshakable.

Low- and middle-income countries—the states of the global South—have a collective external public debt stock of $3 trillion, a figure that has doubled since 2010. That burden amounts to a significant threat to global stability. The countries most vulnerable to climate change, for instance, are also most likely to be hobbled by debt payments. This means that low- and middle-income countries facing acute climate pressures cannot invest in the mitigation measures and infrastructure they need the most. But reaching both climate and development goals requires significant funding. According to some estimates, Africa needs $2.8 trillion by 2030 just for climate action, about 90 percent of it from external sources, including through taking on increased debt burdens. Insufficient action on emissions threatens global stability, including by inflaming poverty and intensifying migration.

This state of affairs is not the result of a broken international economic system; it is the system’s intended design. In the postwar era, wealthier countries and private investors have found ways to make money off low- and middle-income countries at every turn. This includes Haiti, which was devastated by an earthquake in 2010. The damages were estimated at more than the country’s total GDP, and so to rebuild, Haiti relied heavily on loans, which increased its debt burden. Another recent example is Sri Lanka, which experienced a debt crisis in 2022 stemming from reduced government revenues coupled with high external debts. That led to an economic collapse and social unrest. Globally, the collective burden has reached a breaking point: low-income countries, as well as those most vulnerable to climate change, spend twice as much on servicing their debts as they receive in climate finance.

Thus far, reform efforts have had little effect, owing to failures of both imagination and implementation. Mechanisms such as the Common Framework launched by the G-20 have failed to address the roots of the problem. To truly effect change, creditors and debtors should build partnerships with each other but also act independently. Creditors need to realize not only the moral but also the economic, environmental, and political incentives of debt restructuring or cancellation. Debtors must seriously reconsider how and when they issue debts, especially those in foreign currencies, and tighten the controls over their export revenues, which would lessen the need to take on onerous debts in the first place.

 

Collect Call

The global South’s structural indebtedness stems from how the current world financial system obliges low- and middle-income countries to accumulate foreign currencies, such as the U.S. dollar, to buy foreign goods or services sold in those currencies. In the 1970s, for example, many African countries enlarged their debts to finance their post-independence development. By the following decade, however, rising global interest rates and declining commodity prices meant that many of these countries were suddenly struggling to meet their debt obligations. As a result, international financial institutions such as the International Monetary Fund and the World Bank imposed economic reforms on debtor countries that caused major cuts to public spending and an array of austerity measures. These only served to worsen what had become a global crisis of sovereign debt. In 1987, Thomas Sankara, then the president of Burkina Faso, called such debt “a skillfully managed reconquest of Africa, intended to subjugate its growth and development through foreign rules.” He could have been speaking of many regions across the globe.

In the aftermath of the 2008 financial crisis, the unconventional monetary policies of central banks in the global North—notably zero-interest-rate policies and quantitative easing—created vast amounts of liquidity and low returns. This aroused the appetite of global financiers for “exotic” markets in which they could secure higher yields. At the same time, governments in the global South seized this opportunity to sell bonds in foreign currencies to these private creditors, because this form of debt was viewed as more attractive. In contrast to the debt crisis of the 1980s, in which low- and middle-income countries owed debts to Western banks, most ​current ​external debts are owed to private creditors, including bond investors, such as asset-management companies, and new global creditor countries, such as China and various Gulf states. These developments have contributed to ballooning debt burdens. This year, for instance, ​Ghana’s sovereign debt ​amounts​​​ to more than 80 percent of its GDP; Argentina’s and Egypt’s, both more than ​​90 percent; ​​Laos’s, more than 1​​​​08 percent.​

Sovereign debts cripple a country’s potential. In the nineteenth century, as the cost of its independence, Haiti had to pay France—its erstwhile colonial overlord—reparations. To do so, it was forced to take out loans, first from France and later from U.S. banks, to finance the payments. The sovereign debt component of this scheme severely encumbered Haiti for more than a century, and the consequences reverberate still: researchers estimate that without this debt burden, Haiti’s GDP in 2020 could have been eight times higher than it was.

To try to ease the burden, indebted developing countries are incentivized to pursue projects that yield the greatest monetary returns which can then be converted into hard currency, such as highways and toll roads, tourism development, and mining and natural resource extraction. But these projects are rarely aligned with the best interests of citizens. They come at the expense of investments in education, health care, and other services, especially those benefiting women and children—including maternal health care and access to child care—which tend to be among the first targets of austerity measures. This means that much of the material strain of a country’s debt burdens are transferred directly to that country’s citizenry, particularly to its families and especially to women.

Despite what creditors might believe, this plight has far-reaching and long-lasting consequences for the entire world, not only for countries with unsustainable debt burdens. Developing countries tend to be more susceptible to the consequences of climate change and less equipped to adapt to it. Debt payments by the 50 countries most vulnerable to the effects of climate change have also doubled since the start of the COVID-19 pandemic, further impeding their ability to invest in mitigation or adaptation projects. This dynamic has given rise to a senseless cycle: rich creditors are supposed to help low- and middle-income countries finance their climate resiliency measures or repair climate-change-related damages; then they come to collect high-interest debt payments from the very same countries. What’s more, vulnerable countries are sometimes forced to take out new loans to rebuild after disasters that they were never prepared to deal with in the first place, in part because the money that they would have spent on necessary infrastructure or preparedness efforts was instead used to pay off previous loans.

Carrying vegetables at a market in Colombo, Sri Lanka, June 2023

 

Reform and Function

Governments and international institutions are aware of the scale and complexity of this knotted crisis and have taken some steps to address it. In 2020, for instance, the G-20 established the Common Framework, in which both traditional lenders, such as Western governments, and newer ones, such as China, were meant to work together with low- and middle-income countries to restructure debts and suspend some debt repayments. At the time, many hailed the framework as a serious step toward alleviating the debt burdens of the global South. In practice, however, it has proved to be wholly inadequate—and has produced, according to the World Bank’s chief economist, not “a single dollar of debt relief.” Many middle-income countries with heavy debt burdens, such as Sri Lanka, cannot qualify for the Common Framework, owing to the program’s arbitrary income thresholds. And a majority of indebted countries that do qualify have not even applied for the program. This is because a diverse group of creditors, with different perspectives and incentives,​ ​have to reach a consensus on the framework’s debt-restructuring strategies, which can cause prolonged delays in relief. A debtor’s participation in the Common Framework can also be perceived negatively by creditors, resulting in downgrades to its credit rating and increased borrowing costs in the future, so many countries that could have benefited from the framework have refrained from participating in it.

In the face of such failures, pressure for reform is building. Leaders across the global South are pushing for change through international civil society groups such as the Sustainable Debt Coalition, which provides a framework for creditor-debtor collaboration; the International Trade Union Confederation, which defends workers’ rights through the cooperation of international unions; and the V-20, or Vulnerable Twenty, an assembly of countries especially vulnerable to climate change. And a cadre of economic-justice organizations and movements in the global South—such as the African Forum and Network on Debt and Development, the Asian Peoples’ Movement on Debt and Development, and the Fight Inequality Alliance—are applying pressure to resolve the debt crisis with more equitable means, including through the greater inclusion of global South voices in venues such as the G-20.

But ultimately, the pressure may need to rise to a larger body, which is why civil society organizations worldwide have called for the establishment of “a multilateral legal framework under the auspices of the UN” that would address the issue of unsustainable debt more comprehensively. Among other things, this multilateral framework would prioritize fair burden sharing among all creditors, including private ones, and independent dispute mediation, which would protect against predatory lending practices. Crucially, it would also encourage debt cancellation.

Another tool is visibility. Indonesia, India, and Brazil have hosted the past three G-20 summits; South Africa will host next year’s. These countries have highlighted the debt crisis in their messaging around the meetings. In line with demands from debt-relief advocates and debt-burdened countries, Brazil’s presidency reiterated the G-20’s commitment to “addressing global debt vulnerabilities, including by stepping up the Common Framework’s implementation”; this built on India’s presidency, during which the bloc granted the African Union full-member status. But diplomatic rhetoric, however well intentioned, is no substitute for significant action. Fundamentally, the problem is one of agency: of foreign creditors refusing to positively amend the advantageous system they inherited, and of global South governments neglecting to think creatively and courageously about how they might maneuver their economies to prioritize the interests of their people.

Creditors, for their part, must seriously consider canceling unsustainable debts. The last major global debt-cancellation process started 30 years ago and significantly helped low- and middle-income countries invest in health care, education, infrastructure, and their economies, leading in some cases to higher growth rates and improved living standards. If wealthy creditors decided that they wanted to end these debt burdens, they could. What it will take is for external debt restructuring to be seen not only as an ethical or a humanitarian decision but also as fiscally prudent, politically sound, and environmentally productive. Creditors must realize that they will also bear the costs of impoverished countries’ debt burdens. The global economy is interconnected, and instability in debtor countries can lead to negative economic consequences for creditors, including disrupted markets, social strife, and reduced potential for future growth. Taken together, these factors constitute lost investment opportunities for creditors.

For too long, conversations about debt cancellation have been derailed by discussions of compromise solutions that are ultimately insufficient. These have included “debt-for-climate” swaps, in which debt burdens are reduced in exchange for climate actions—a reasonable idea in theory, but one vulnerable to creating pernicious forms of “green colonialism” and to encouraging problematic conservation practices. Ultimately, creditors must realize that a short-term hit to their balance sheets might be exactly what is necessary to secure the planet’s political stability and environmental well-being—and to protect their own interests in the long term.

​​For their part, countries across the global South must realize that they themselves can always finance ​projects when they have the local technical and material capacities to complete them​: this is a critical aspect of monetary sovereignty, of having one’s own currency. ​​​​For instance, Japan, the United States, and Canada have exorbitant sovereign debt–to–GDP ratios (254 percent, 144 percent, and 113 percent, respectively), and yet they are not in debt crises. This is because their debts are essentially denominated in their own currencies. As a result, they can always remain solvent, because their central banks have control over interest rates and cannot run out of their own money. Global South governments, on the other hand, routinely issue debts in foreign currencies, out of a false belief that they lack the money or savings needed for their own spending. ​Often, the growth of their foreign debt outpaces the growth of their export revenues, resulting in unsustainable debt burdens, as witnessed in Ethiopia, Ghana, Kenya, and Zambia. Global South ​countries, too, can find more opportunities to mobilize their own financial systems to meet some of their needs​.​

Improved fiscal control of export revenues would also help. For years leading up to the pandemic, the African continent as a whole suffered financially more from foreign investors’ profit transfers and from illicit financial flows than from foreign debt payments. This means that most resource-rich African countries could reduce their need to issue sovereign debts if they only manage to capture a greater share of the export earnings coming from their own extractive sectors. This is the model of Algeria and Botswana, countries that as a result have relatively little sovereign debt in foreign currencies and refrain from borrowing from private creditors.

Indeed, countries across the global South should look to their people for the way forward, and international institutions must give those people—including members of civil society, movement leaders, and economists—a seat at the table. The people most affected by debt burdens must have a voice in shaping their way out of them.

 

 

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