Global Debt Is Beyond Control

The debt of developing countries is at “crisis” levels, the World Bank said recently. A story in The New York Times on Dec. 16 was headlined, “The Debt Problem is Enormous, and the System for Fixing It is Broken.”

“The foundational ideology — later known as the ‘Washington Consensus’ — held that prosperity depended on unhindered trade, deregulation and the primacy of private investment,” the article explained. “Nearly 80 years later, the global financial architecture is outdated, dysfunctional and unjust.”

Indeed, the world is awash in government debt, led by the United States, Japan and China, which together account for about half the total. But great powers have many options for handling indebtedness. Small, economically weak countries do not.

The Washington Consensus reflects American and European economic predominance — not just World Bank and International Monetary Fund leadership, but also the U.S. Treasury Department and the global network of financial centers that stretches from New York and Chicago to Frankfurt and Zurich.

Predominance means the ability to dictate terms of loans. Over many years, World Bank and IMF decisions have aimed to condition loans to poor and middle-income countries on their openness to private investment, free trade, and deregulation of state-run agencies — roads, railways, banks, key industries.

Openness translates to opportunities for Western capital to penetrate developing-world economies, often resulting in the hollowing out, if not the elimination, of private and state-owned businesses.

Large borrowers also face high interest rates. To ensure repayment, the World Bank and IMF preach austerity: Governments should slash social welfare programs to pay down their debt. Any family deeply in debt would understand the terrible choice facing those governments: Stay on good terms with the bankers by eliminating or reducing subsidies to the poor for food, health care, and fuel.

Consequently, António Guterres, United Nations secretary general, said in the Times article: “Even the most fundamental goals on hunger and poverty have gone into reverse after decades of progress.”

The global debt crisis isn’t a new problem, just one that is surging again. As the Times explained, “Pounded by the Covid-19 pandemic, spiking food and energy prices related to the war in Ukraine, and higher interest rates, low- and middle-income countries are swimming in debt and facing slow growth.”

Meanwhile, China has made billions of dollars in loans to poor countries that cannot possibly be repaid. China proclaims that its loans come without demands for austerity and with lower interest rates. But recipients may have to pay the loans back with access to ports and rail lines, extraction of mineral and other resources, use of Chinese labor, environmental damage, and adherence to Chinese policy views on, for example, human rights and Taiwan.

The debt crisis is one symptom of a development crisis, in which far too many countries do not have the financial resources to support decent living conditions. Moreover, these countries are often the victims of rich countries’ behavior, as in the case of climate change. As one source pointed out, the richest 1 percent of the world’s population, 80 million people, account for about half of global carbon emissions, while the poorest 50 percent, 3.9 billion people, account for about 8 percent of carbon emissions.

The typical solution to the debt problem has been to give developing countries seats at the table where decisions are made. That might help if the major players, starting with the U.S., were ever persuaded to reduce their voting power.

Even then, it is the loan conditions — the amount of money available, the high interest rates and terms of repayment — that would still depend on the good graces of the major financial institutions. And those institutions, to put it mildly, don’t believe in being charitable.

The Times story failed to report on bottom-up approaches to development in the human interest. Giving aid or loan relief means dealing with governments that may be corrupt, excessively bureaucratic and incompetent, dominated by the military, and authoritarian — in any of these cases, giving low priority to human security.

Channeling funds to non-governmental organizations with experience in promoting human development is far more likely to help than providing unworthy governments with debt relief. There are plenty of grass-roots development programs that work — for example, in microfinance.

The real choice for international financial organizations is, do you want to bail out governments, or empower people?

Mel Gurtov, syndicated by PeaceVoice, is professor emeritus of political science at Portland State University and blogs at In the Human Interest.