The debt problem is enormous. Experts say repair system is flawed

The debt problem is enormous.  Experts say repair system is flawed

Martin Guzman was a first-year student at the National University of La Plata, Argentina, in 2001 when a Debt crisis led to default, riots and a devastating depression. A dazed middle class has been ruined, while the International Monetary Fund iThey insisted that the government make poverty-inducing budget cuts in exchange for a bailout.

Watching Argentina collapse prompted Mr. Guzman to change his major and study economics. Nearly two decades later, when the government was bankrupt again, it was Mr. Guzman, as finance minister, who negotiated with IMF officials to restructure a $44 billion debt, the result of ‘a poorly designed rescue plan.

Today, he is among many prominent economists and world leaders who argue that the ambitious framework created at the end of World War II to safeguard economic growth and stability, with the IMF and World Bank as pillars, is failing in his mission.

The current system “contributes to a more inequitable and unstable global economy,” said Mr. Guzman, who resigned last year after a division in the government.

The reimbursement negotiated by Mr. Guzman was 22nd arrangement between Argentina and the IMF Despite this, the country’s economic decline has only increased with an annual inflation rate of more than 140 percent, long queues outside soup kitchens and a new self-proclaimed “anarcho-capitalist” president, Javier Milei, who last week devalued the currency by 50 percent.

The IMF and the World Bank have sparked protests from left and right since their creation. But the most recent critiques ask a deeper question: Is the economic framework designed eight decades ago fit for today’s economy, as new geopolitical conflicts collide with established economic relationships and that climate change constitutes an imminent threat?

This 21st century conflict of ideas about how to fix a system created for the 20th century world is one of the most important facing the global economy.

The IMF was established in 1944 at a conference in Bretton Woods, New Hampshire, to help save countries in financial difficulty, while the World Bank focused on poverty reduction and investment in the social development. The United States was the preeminent economic superpower, and many developing countries in Africa and Asia had not yet achieved independence. The core ideology – later known as the “Washington Consensus” – held that prosperity depended on free trade, deregulation and the primacy of private investment.

“Nearly 80 years later, the global financial architecture is outdated, dysfunctional and unfair. » Antonio Guterres, Secretary General of the United Nations, declared this this summer at a summit in Paris. “Even the most basic goals on hunger and poverty have been reversed after decades of progress. »

Today’s world is geopolitically fragmented. More than three-quarters of current IMF and World Bank countries were not at Bretton Woods. China’s economy, in ruins at the end of World War II, is today the world’s second-largest economy, an engine of global growth, and a crucial hub of the global industrial machine and supply chain . India, then still a British colony, is one of the world’s top five economies.

The once vaunted “Washington Consensus” has fallen into disrepute, with greater recognition of how inequality and bias against women hinder growth, as well as the need for collective action on the climate.

The mismatch between institution and mission has increased in recent years. Hit by the Covid-19 pandemic, soaring food and energy prices linked to the war in Ukraine and rising interest rates, low- and middle-income countries are drowning in debt and facing to slow growth. The size of the global economy and the scale of the problems have grown dramatically, but financing from the IMF and World Bank has not kept pace.

Resolving debt crises is also much more complicated now that China and legions of private creditors are involved, instead of just a handful of Western banks.

The World Bank’s own analyzes highlight the scale of the economic problems. “For the poorest countries, debt has become an almost crippling burden,” concludes a report published Wednesday. Countries are forced to spend money on interest payments instead of investing in public health, education and the environment.

And this debt does not represent the billions of dollars that developing countries will need to mitigate the ravages of climate change.

Then there are tensions between the United States and China, between Russia and Europe and their allies. It is difficult to resolve debt crises or finance major infrastructure without running into security concerns – like when the World Bank awarded Chinese telecommunications giant Huawei a contract that turned out to be a state violation -United. sanctions policy, or when China resisted debt restructuring agreements.

“The global rules-based system was not designed to resolve trade conflicts based on national security,” Gita Gopinath, the IMF’s first deputy managing director, said Monday in a speech to the International Economic Association in Colombia. “We have countries in strategic competition with vague rules and no effective arbitrators. »

The World Bank and the IMF have made changes. The fund has moderated its approach to the bailout, replacing austerity with the idea of ​​sustainable debt. This year, the bank significantly increased the share of money going to climate-related projects. But critics argue that the fixes so far are insufficient.

“The way they have evolved and adapted is much slower than the way the global economy has evolved and adapted,” Mr. Guzman said.

Argentina, South America’s second-largest economy, is perhaps the most notorious repeated failure of the global economic system, but it is Barbados, a small island nation in the Caribbean, that can be credited with a momentum for change.

Mia Mottley, the Prime Minister, spoke at the climate change summit in Glasgow two years ago, then went on to Bridgetown Initiativea proposal to rethink how rich countries help poor countries adapt to climate change and avoid crippling debt.

“Yes, it’s time for us to see Bretton Woods again,” she said. said in a speech at last year’s climate summit in Egypt.

Ms Mottley maintains that there was a “fundamental breakdown” part of a long-standing pact between poor and rich countries, many of which built their wealth by exploiting their former colonies. The most advanced industrialized countries also produce most of the emissions that warm the planet and cause floods, wildfires and extreme droughts in poor countries.

Mavis Owusu-Gyamfi, executive vice president of the African Center for Economic Transformation, Ghana, said even recent agreements to address debt, such as the 2020 Common Framework, were reached without input from developing countries.

“We are demanding a voice and a place at the table,” Owusu-Gyamfi said from her office in Accra as she discussed a $3 billion IMF bailout of Ghana.

Yet while the fund and bank focus on economic issues, they are essentially political creations that reflect the power of countries who created them, finances them and manages them.

And these countries are reluctant to give up this power. The United States, the only member with veto power, has the largest Compare of vote in part because of the size of its economy and its financial contributions. He does not want to see his influence diminish and that of others, in particular China -to grow.

The impasse ended redistribution of votes hampered efforts to increase funding levels, resulting in countries at all levels accept we must increase.

Yet, as Mr. Guzman said, “even if there is no change in governance, there could be changes in policy.”

Emerging countries need huge sums of money to invest in public health, education, transport and climate resilience. But they struggle with high borrowing costs due to market fluctuations. exaggerated perception of the risk they represent as borrowers.

And because they are usually forced to borrow in dollars or euros, their repayments soar if the Federal Reserve and other central banks raise interest rates to fight inflation, as they have done in the 1980s and after the Covid pandemic.

The proliferation of private lenders and the diversity of loan agreements have made debt negotiations incredibly complex, yet there is no international legal arbiter.

Zambia defaulted on its external debt three years ago, and there is still disagree because the IMF, China and bondholders are at odds.

There is a “big hole” in international governance over sovereign debt, said Paola Subacchi, an economist at the Global Policy Institute at Queen Mary University of London, because the rules do not apply to private loans, which they come from a hedge fund. or the central bank of China. These creditors often have an interest in prolonging the process to get a better deal.

Mr. Guzman and other economists have called for the appointment of an international legal arbitrator to decide disputes over sovereign debt.

“Every country has a bankruptcy law,” said Joseph Stiglitz, former chief economist at the World Bank, “but we don’t have one internationally.”

However, the United States has, on several occasions, opposite the idea, saying it’s useless.

Rescues also proved problematic. Last resort loans from the IMF can succeed aggravating a country’s budgetary difficulties and undermine economic recovery because interest rates are currently very high and borrowers also have to pay high fees.

Those like Mr. Guzman and Ms. Mottley who advocate change argue that indebted countries need far more grants and low-interest loans with long repayment terms, as well as a range of other reforms .

“The challenges are different today,” Mr. Guzman said. “The police must be better aligned with their mission.”

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David B.Otero

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