According to the World Bank, developing countries are on the “path to crisis” and face another “lost decade” unless more support from creditors is forthcoming.
The term “lost decade” here refers to a period of economic stagnation that happened in Japan between 1991 and 2001. During that period, Japan’s growth rate was the lowest among the major industrialized countries.
The World Bank’s fears are rooted in the fact that developing countries spent a record $443 billion servicing their external debt in 2022. Debt levels have been steadily increasing, with IDA-eligible (low-income) seeing a 134% increase in external debt between 2012 and 2022, compared to a 53% increase in their gross national income.
The World Bank warns that this rising debt burden could lead to a debt crisis in numerous countries, which could trigger a “lost decade” of economic stagnation similar to the one experienced by Latin America in the 1980s and in Japan in the 1990s. Moreover, the crisis could further exacerbate poverty and inequality, hindering development progress.
Ethiopia became the latest African country to default on its debt after missing a bond payment. It would join Ghana and Zambia as Africa’s latest debt defaulters. Indermit Gill, the World Bank Group’s chief economist and senior vice president said:
“Record debt levels and high-interest rates have set many countries on a path to crisis. Every quarter that interest rates stay high results in more developing countries becoming distressed—and facing the difficult choice of servicing their public debts or investing in public health, education, and infrastructure.”
There are several factors that contributed to the rising debt burden including the global economic slowdown, currency fluctuations, and high borrowing costs. Regarding the global economic slowdown, reduced trade, and investment opportunities make it harder for developing countries to earn income and service their debts. On currency fluctuations, the depreciation of local currencies against the dollar increases the burden of servicing dollar-denominated debts. And on high borrowing costs, rising interest rates make it more expensive for countries to borrow and refinance existing debts.
The World Bank and other international institutions are calling for various measures to address the situation including debt restructuring, concessional financing, and improving domestic resource mobilization. And here is where the problem lies. These solutions provided by the World Bank do not tackle the root cause of the issue.
The root cause of the problem is that government is using deficit spending to fuel growth, and using deficit spending increases public debt, and compounding public debt reduces the value of future growth and development because instead of using the funds toward productive investments, these funds are diverted from productive investments towards servicing the debt.
Thus, what the World Bank is proposing as solutions here will not weed the issue out because these solutions themselves are based on what government has already been doing: relying on debt and various governmental fiscal measures to fuel growth while these very measures are exactly why these countries are defaulting in the first place. restructuring the debt through concessional financing does not eliminate the debt. It simply means having a reduced debt burden that is less expensive to carry. But a debt burden remains a debt burden no matter how small it is because it uses the real value of future resources to enhance present consumption, which in turn, reduces the real value of future growth and yet makes the cost of living for ordinary people more expensive than it should be.
And improving domestic resource mobilization, which means strengthening those countries’ tax systems to generate revenue domestically means increasing taxes on ordinary people. We know that increasing taxes on people will discourage them from producing more.
The solution here is so simple. Why doesn’t government stay away from the economy and let people organize themselves? If people are left alone to organize themselves, they will produce optimal results due to efficient resource allocation rather than letting government interfering and making everything more expensive through its interference.