Many developing countries are facing a renewed debt crisis. This is directly related to Covid-19, which is now sweeping across many poor countries in a new wave.
Between 2016 and 2020, debt service as a percentage of GDP rose from an average of 7.1% to 27.1% for South Asian countries, from 8.1% to 14.1% for Sub-Saharan African countries, from 13.1% to 42.3% for North African and Middle Eastern countries, and from 5.6% to 14.7% for East Asian and Pacific countries. These percentages are expected to climb again in 2021 by around 10% of GDP.
Incomes have fallen in developing countries with illness, lockdowns and business failures. This has been compounded by a fall in their exports as the world economy has contracted and by a 19% fall in aid in 2020. The fall in incomes has led to a decline in tax revenues at the same time as demands for increased government expenditure on healthcare and social support. Public-sector deficits have thus risen steeply.
And the problem is likely to get worse before it gets better. Vaccination roll-outs in most developing countries are slow, with only a tiny fraction of the population having received just one jab. With the economic damage already caused, growth is likely to be subdued for some time.
This has put developing countries in a ‘trilemma’, as the IMF calls it. Governments must balance the objectives of:
- meeting increased spending needs from the emergency and its aftermath;
- limiting the substantial increase in public debt;
- trying to contain rises in taxes.
Developing countries are faced with a difficult trade off between these objectives, as addressing one objective is likely to come at the expense of the other two. For example, higher spending would require higher deficits and debt or higher taxes.
The poorest countries have little scope for increased domestic borrowing and have been forced to borrow on international markets. But such debt is costly. Although international interest rates are generally low, many developing countries have had to take on increasing levels of borrowing from private lenders at much higher rates of interest, substantially adding to the servicing costs of their debt.
International agencies and groups, such as the IMF, the World Bank, the United Nations and the G20, have all advocated increased help to tackle this debt crisis. The IMF has allocated $100bn in lending through the Rapid Financing Instrument (RFI) and the Rapid Credit Facility (RCF) and nearly $500m in debt service relief grants through the Catastrophe Containment and Relief Trust (CCRT). The World Bank is increasing operations to $160bn.
The IMF is also considering an increase in special drawing rights (SDRs) from the current level of 204.2bn ($293.3bn) to 452.6bn ($650bn) – a rise of 121.6%. This would be the first such expansion since 2009. It has received the support of both the G7 and the G20. SDRs are reserves created by the IMF whose value is a weighted average of five currencies – the US dollar (41.73%), the euro (30.93%), the Chinese yuan (10.92%), the Japanese yen (8.33%) and the pound sterling (8.09%).
Normally an increase in SDRs would be allocated to countries according their IMF quotas, which largely depend on the size of their GDP and their openness. Any new allocation under this formula would therefore go largely to developed countries, with developing economies getting only around $60bn of the extra $357bn. It has thus been proposed that developed countries give much of their allocation to developing countries. These could then be used to cancel debts. This proposal has been backed by Janet Yellen, the US Secretary of the Treasury who said she would “strongly encourage G20 members to channel excess SDRs in support of recovery efforts in low-income countries, alongside continued bilateral financing”.
The G20 countries, with the support of the IMF and World Bank, have committed to suspend debt service payments by eligible countries which request to participate in its Debt Service Suspension Initiative (DSSI). There are 73 eligible countries. The scheme, now extended to 31 December 2021, provides a suspension of debt-service payments owed to official bilateral creditors. In return, borrowers commit to use freed-up resources to increase social, health or economic spending in response to the crisis. As of April 2021, 45 countries had requested to participate, with savings totalling more than $10bn. The G20 has also called on private creditors to join the DSSI, but so far without success.
Despite these initiatives, the scale of debt relief (as opposed to extra lending) remains small in comparison to earlier initiatives. Under the Heavily Indebted Poor Countries initiative (HIPC, launched 1996) and the Multilateral Debt Relief Initiative (MDRI, launched 2005) more than $100bn of debt was cancelled.
Since the start of the pandemic, major developed countries have spent between $10 000 and $20 000 per head in stimulus and social support programmes. Sub-Saharan African countries on average are seeking only $365 per head in support.
Articles and blogs
- Imagine you are an economic advisor to a developing country attempting to rebuild the economy after the coronavirus pandemic. How would you advise it to proceed, given the ‘trilemma’ described above?
- How does the News24 article define ‘smart debt relief’. Do you agree with the definition and the means of achieving smart debt relief?
- To what extent is it in the interests of the developed world to provide additional debt relief to poor countries whose economies have been badly affected by the coronavirus pandemic?
- Research ‘debt-for-nature swaps’. To what extent can debt relief for countries affected by the coronavirus pandemic be linked to tackling climate change?
Late January sees the annual global World Economic Forum meeting of politicians, businesspeople and the great and the good at Davos in Switzerland. Global economic, political, social and environmental issues are discussed and, sometimes, agreements are reached between world leaders. The 2019 meeting was somewhat subdued as worries persist about a global slowdown, Brexit and the trade war between the USA and China. Donald Trump, Xi Jinping, Vladimir Putin and Theresa May were all absent, each having more pressing issues to attend to at home.
There was, however, a feeling that the world economic order is changing, with the rise in populism and with less certainty about the continuance of the model of freer trade and a model of capitalism modified by market intervention. There was also concern about the roles of the three major international institutions set up at the end of World War II: the IMF, the World Bank and the WTO (formerly the GATT). In a key speech, Angela Merkel urged countries not to abandon the world economic order that such institutions help to maintain. The world can only resolve disputes and promote development, she argued, by co-operating and respecting the role of such institutions.
But the role of these institutions has been a topic of controversy for many years and their role has changed somewhat. Originally, the IMF’s role was to support an adjustable peg exchange rate system (the ‘Bretton Woods‘ system) with the US dollar as the international reserve currency. It would lend to countries in balance of payments deficit to allow them to maintain their rate pegged to the dollar unless it was perceived to be a fundamental deficit, in which case they were expected to devalue their currency. The system collapsed in 1971, but the IMF continued to provide short-term, and sometimes longer-term, finance to countries in balance of payments difficulties.
The World Bank was primarily set up to provide development finance to poorer countries. The General Agreement on Tariffs and Trade (GATT) and then the WTO were set up to encourage freer trade and to resolve trade disputes.
However, the institutions were perceived with suspicion by many developing countries and by more left-leaning developed countries, who saw them as part of the ‘Washington consensus’. Loans from the IMF and World Bank were normally contingent on countries pursuing policies of market liberalisation, financial deregulation and privatisation.
Although there has been some movement, especially by the IMF, towards acknowledging market failures and supporting a more broadly-based development, there are still many economists and commentators calling for more radical reform of these institutions. They advocate that the World Bank and IMF should directly support investment – public as well as private – and support the Green New Deal.
- What was the Bretton Woods system that was adopted at the end of World War II?
- What did Keynes propose as an alternative to the system that was actually adopted?
- Explain the roles of (a) the IMF, (b) the World Bank, (c) the WTO (formerly the GATT).
- What is meant by an adjustable exchange rate system?
- Why did the Bretton Woods system collapse in 1971?
- How have the roles of the IMF, World Bank and WTO/GATT evolved since they were founded?
- What reforms would you suggest to each of the three institutions and why?
- What threats are there currently to the international economic order?
- Summarise the arguments about the world economic order made by Angela Merkel in her address to the World Economic Forum.
According to a an article in The Guardian, The best news in the world, by the president of the World Bank, Jim Yong Kim, there has been a dramatic fall in global poverty over the past two decades. The number of people in extreme poverty is projected to fall this year to below 10% of global population for the first time. This has been made possible, he claims, by unprecedented economic growth, especially in China.
But this raises three questions.
The first is whether, in the face of falling growth rates, progress in poverty reduction can be maintained.
The second is whether the World Bank is measuring extreme poverty in the right way. It is now defined as living on less than US$1.90 a day in 2011 prices – until a few weeks ago is was $1.25 in 2005 prices. As a result of this rebasing, global poverty falls from 14.5% of the world’s population (or 1011 million people) under the old method to 14.2% (or 987 million) under the new.
The third question is whether countries can improve their data collection so that a truer estimate of poverty can be made.
As far as the first question is concerned, Kim states that to stimulate growth, ‘every dollar of public spending should be scrutinised for impact. Every effort must be made to improve productivity.’ What is more, three things must happen:
||Economic growth must lift all people. It must be inclusive.
||Investment in human beings is crucial – especially investing in their health and education. Malnourished and poorly educated children will never reach their full potential and countries, in turn, will fall short of their economic and social aspirations.
||We must ensure that we can provide safety nets that prevent people from falling back into poverty because of poor health, economic shocks, or natural disasters.
As far as the second question is concerned, there are many who argue that $1.90 per day is far too low a measure of the extreme poverty threshold. It is a purchasing-power parity measure and is equivalent to what $1.90 would buy in the USA in 2011. But, according to the Jason Hickel article linked below, ‘the US Department of Agriculture calculates that in 2011 the very minimum necessary to buy sufficient food was $5.04 per day. And that’s not taking account of other requirements for survival, such as shelter and clothing.’ Peter Edward of Newcastle University, claims Hickell, ‘calculates that in order to achieve normal human life expectancy of just over 70 years, people need roughly 2.7 to 3.9 times the existing poverty line.’
But even if living on below $1.90 a day is defined as extreme poverty, it is important not to see the problem of poverty as having been solved for people who manage to achieve an income slightly above that level.
The third question is how to improve data. There is a paucity and unreliability of data in many developing countries. According to Kim:
Our report adds that data is sparse and inconsistent across the region and globally. Some 29 countries around the world had no poverty data from 2002 to 2011, so they could not track their progress. Another 28 had just one survey that collected poverty data during that time.
This is a situation that must change to improve the world’s ability to tackle poverty. In fact, we can’t accomplish our goal if we do not have enough information to know whether people are actually lifting themselves out of poverty. For that we need to address huge data gaps. We need robust data.
The best news in the world: we have made real progress towards ending extreme poverty The Guardian, Jim Yong Kim (3/11/15)
Could you live on $1.90 a day? That’s the international poverty line The Guardian, Jason Hickel (1/11/15)
Making international trade work for the world’s poorest The Guardian, Jim Yong Kim and Roberto Azevêdo (30/6/15)
Global Poverty Will Hit New Low This Year, World Bank Says Huffington Post, Lydia O’Connor (23/10/15)
The international poverty line has just been raised to $1.90 a day, but global poverty is basically unchanged. How is that even possible? World Bank blogs, Francisco Ferreira, Dean Mitchell Jolliffe and Espen Beer Prydz (4/10/2015)
Why Didn’t the World Bank Make Reducing Inequality One of Its Goals? World Bank blogs, Jaime Saavedra-Chanduvi (23/9/13)
$1.90 Per Day: What Does it Say? Institute for New Economic Thinking, Rahul Lahoti and Sanjay Reddy (6/10/15)
Reports and papers
The Role of Trade in Ending Poverty WTO and World Bank (2015)
Poverty in a Rising Africa World Bank (1/10/15)
Ending extreme poverty and sharing prosperity: progress and policies World Bank, Marcio Cruz, James Foster, Bryce Quillin and Philip Schellekens (October 2015)
- Explain how the World Bank calculates the extreme poverty line.
- Why, if the line has risen from $1.25 per day to $1.90 per day, has the number of people recorded as being in extreme poverty fallen as a result?
- Why has the number of people in extreme poverty been rising over the years and yet the percentage of people in extreme poverty been falling?
- What policies can be adopted to tackle poverty? Discuss their practicality?
- Are reduced poverty and increased economic growth consistent policy goals? (See the blog post Inequality and economic growth.)
- What are the inadequacies of using income per day (albeit in ppp terms) as a measure of the degree of poverty? What other indicators of poverty could be used and how suitable would they be?
- How could international trade be made to work for the world’s poorest?
In the developed countries of 2015, extreme poverty is (or should be) a thing of the past. With well-developed welfare states and hence safety nets, no-one should be living in deep poverty. However, that is not the case across the rest of the world, where extreme poverty is still a common thing – though much reduced compared to a decade ago.
In the article linked below, Linda Yueh of the BBC asks whether it is possible to end global poverty. Looking at some of the key data, we are certainly moving in the right direction, with the poverty rate in the developing world halving since 1981. Projections suggest that ending global poverty by 2030 is possible, though it will require significant investment and commitment. The World Bank data indicates that 50 million people would need to be brought out of poverty every year. Economists, on the other hand, suggest that the poverty rate may have fallen to around 8% – still progress, but perhaps a more realistic target?
How we measure poverty is clearly important here, as the higher the threshold income required to be ‘out of poverty’, the longer it will take and the more people will currently be in poverty. It is also important to consider things like changes in the population as although more people may be brought out of poverty, if an even greater number of people are being born in a country, then it is entirely possible that poverty actually increases in absolute terms.
A key thing to bear in mind when it comes to reducing poverty is that there is no ‘one size fits all’ policy. What works in one country is not necessarily going to work in another country. Policies will have to be targeted to the needs of the population and this means more time and resources. The numbers are definitely moving in the right direction, but whether they are going quickly enough to meet the 2030 target is another story. The BBC News article is linked below, as are some interesting documents and items from the World Bank and United Nations.
Is it possible to end global poverty? BBC News, Linda Yueh (27/3/15)
Poverty will only end by 2030 if growth is shared World Bank, Espen Beer Prydz (19/11/14)
Far greater effort needed to eradicate extreme poverty in world’s poorest nations United Nations News Centre (23/10/14)
Ending Poverty and Sharing Prosperity World Bank Group and International Monetary Fund, Global Monitoring Report 2014/2015 2015
- What is poverty and how to we measure it?
- If the growth rate of the world is high, does this mean that poverty is falling?
- What factors have explained the success of China in reducing poverty? Why might similar policies be ineffective in Africa? What types of policies would you recommend to reduce global poverty in Sub-Saharan Africa?
- Does Aid or Debt Forgiveness from developed countries help poorer nations or could it create a moral hazard?
- How important is economic growth in eliminating global poverty?
- How important are the Millennium Development Goals in driving efforts to eradicate global poverty?
- What are the 3 elements that the Global Monitoring Report focuses on to make growth inclusive and sustainable? In each case, explain how the elements would contribute towards global efforts to end poverty.
The International Monetary Fund is made up of 186 countries, which together strive for global monetary co-operation, financial stability, the facilitation of international trade, as well as promoting high employment and sustainable economic growth. At the same time, the IMF and the World Bank also aim to reduce poverty around the world. Some task! – especially with the current financial crisis putting strains on even the richest of countries. In its annual meeting on the 2nd October 2009, the ‘rescue’ of more than 12 governments has already been organised by the IMF.
But it is not just countries who are suffering. The World Bank has said that it could run out of money within the next year and the IMF’s Managing Director has also suggested that it will run out of money for its low-income-country loan facility, which loans money to low-income countries at zero interest rates. However, France and Britain have stepped up with a $4 billion allocation to the IMF to help poorer countries, which may lead to other countries doing the same.
Meanwhile, Alistair Darling continues to fight to keep Britain’s seat at the IMF, as some suggest that Europe has too many seats and should give them up to make room for growing economies. This comes at a time when Britain is also facing the prospect of being side-lined from a new group of economic superpowers that would include the US, Japan, China and the Eurozone countries. The following articles consider the role of the IMF and the WB, as the global economy continues to face financial turmoil.
Doubts remain over global power of IMF Financial Times, Alan Beattie (3/10/09)
Pledge for more IMF help for poor BBC News (4/10/09)
World Bank could run out of money ‘within 12 months’ Telegraph, Edmund Conway (2/10/09)
Will tough new G20 measures work? BBC News (26/9/09)
France, UK to loan IMF$4 billion for poor nations Bloomberg, Sandrine Rastello (3/10/09)
Darling rejects call for UK to lose permanent seat on IMF Guardian, Larry Elliot (4/10/09)
Alistair Darling battles to keep UK on the world’s economic top table Telegraph, Edmund Conway(3/10/09)
World Bank Homepage
- How do the roles of the IMF, the World Bank, the G7 and the G20 differ and overlap? Do we need all of them?
- What are the arguments for less European representation at the IMF? How may this affect decision-making?
- If the G4 does go ahead, with the Eurozone as one of its members, why will the UK be sidelined?
- It is often mentioned that all countries are interdependent, but what do we mean by international policy harmonisation and why is it desirable?
- The BBC News article and the Telegraph article talk about money shortages at the IMF and the WB. What does this mean for the poorer countries and also for the UK and France which have allocated $4 billion to the IMF?