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Debtors of the world, unite!

Jayati Ghosh tells Liam Kennedy about deepening debt crises in the global south, the IMF’s affinity for austerity and the need to confront financial capital

7 to 8 minute read

Against a bright yellow background, an illustration shows a young person holding a large key in the air and a placard that reads: NO MORE DEBT

Liam Kennedy

This year, 91 low and middle-income countries are expected to spend 16.3 per cent of their revenue on debt repayments – the highest level in 25 years. How did we get here and what does this mean?

Jayati Ghosh

From the turn of the century, and especially after the global financial crisis (GFC), global investors got much more interested in what they called “emerging markets” or what I’d call developing countries. This was celebrated by the IMF, Davos, the World Economic Forum – private finance was going to be somehow emancipatory for these people and places.

But this borrowing comes at a much greater cost to debtor countries [through the higher interest rates of private borrowing], and international finance remains very hierarchical so these big players are encouraging countries to borrow even more. Of course, there is a much longer history of colonialism and extraction that predates the GFC which cannot be ignored.

But meanwhile, there is an explosion of lending on bond markets which has created huge uncertainty in debtor countries as the value of bonds can change massively overnight as investors sell the bonds looking for larger profits elsewhere. This often meant that debtor countries faced even higher borrowing costs, as a consequence of being deemed risky, even though they had done nothing wrong.

The much longer history of colonialism and extraction that predates the global financial crisis cannot be ignored

So many countries end up in a situation, with multiple creditors, where they are using one loan to pay off another, trying to implement various conditionalities that are often regressive, all the while unable to invest in the things that are actually going to bring prosperity and growth to their country. This obviously is going to end in tears, which is basically where we are at right now. Then, of course, the pandemic impacts developing countries the hardest (through decreased tourism and exports) and the war in Ukraine has increased food and fuel prices, a result of corporate greed and not genuine supply constraints.

It’s worth noting here that there is also the entry of China into the global debt system from the mid-2000s onwards. There is a tendency in the Western media to say ‘oh it’s all China’s fault’ and ‘they have created debt traps’, but this is nonsense. China is now the largest bilateral lender for many countries, some of the lending was self-serving and involved vanity projects (a good example is Hambantota port in Sri Lanka) but some of it did create infrastructure that is useful and was needed. Their behaviour is really no different from many other large creditors.

Liam Kennedy

There is an interesting tension here in that the IMF has a long history of structural adjustment programmes in the global south that have been broadly regressive and cemented disparities between countries. At the same time, more recently the IMF has also spoken about the need to move away from austerity and the dangers of inequality.

You’ve called this ‘schizophrenic’ but what do you think explains this paradox? For context, recent Oxfam research suggests that for every $1 in additional spending incentivised by the IMF, they demand $4 of cuts elsewhere.

Jayati Ghosh

I think there are two things going on here. One is that there is a discrepancy between IMF research (as an internal department that yields very little power) and IMF programmes (the arm that agrees and implements deals around the globe). So, in terms of the role of taxation, the different kinds of fiscal multipliers and even the significance of capital controls, all of this is there in IMF research. When you get down to the actual programmes at country level, it’s the same old. Well, actually, there have been some changes.

First of all, they are much more careful to put in agreements that they explicitly want to protect social spending (health and education, for example) and they want to bring in social protection measures (that expand the social safety net). However, those social protection measures are almost always small scale cash transfers and pale in comparison to other regressive changes, as the Oxfam report shows.

But the other thing that has changed, and it’s very recent, is that the IMF now does not put a lot of their requirements into the agreements, because they know those will be criticised, so they ask countries to do a lot of the unpleasant changes (privatisation, liberalisation, removal of subsidies etc…) before they are even willing to sign an agreement. This happened in Pakistan and Zambia, and is now happening in Ghana.

Liam Kennedy

So the obvious question is where is the pressure to do this coming from? Is it as simple as saying that it’s corporate interests leaning on the IMF?

Jayati Ghosh

I guess you’ve got the answer when we don’t know what goes on inside these institutions. But in any of these situations, you have to follow the money. And so who is gaining from this? The domestic elites gain, international finance and international corporations gain. It’s also a very short term game. These agreements promote a rather blinkered view of what constitutes growth, one that is defined by extraction rather than genuine development.

Liam Kennedy

What would you say have to be some of the key demands that would move us towards debt justice given the parameters – corporate power and undemocratic multilateral institutions – that we’ve already covered?

Jayati Ghosh

Debtors have to coordinate. There is a problem with the accountability of a lot of these debtor country governments that are either unresponsive to the needs of the people and/or more widely authoritarian. But it’s so important for debtor countries to be able to share information with one another, to say, look, the IMF is asking me for this. Did they ask you for that? How were you able to get better conditions? There is a significant problem also in the reliance on external consultants in negotiations that erodes state capacity and prevents internationalist alliances.

But given the power imbalances that we have, groups of debtor countries have to talk and, in certain situations, threaten joint default. We have seen this year that when it comes to events that are seen as of systemic importance, say Silicon Valley Bank or Credit Suisse, governments will come up with rescue packages in a few days. Countries that go for debt resolution, under the common framework, wait for three years, and even then there are no guarantees. It’s because they’re not seen as systemically important. And you won’t be systemically important if you’re on your own.

On a yellow background, an illustration of a chain held together by a padlock. There are currency symbols within the links of the chain

Liam Kennedy

You’ve highlighted the role of massive consultancies here and the flagrant abuse they often enact across the globe, yet there is very little concern within the boundaries of the so-called West about what goes on in the global south. A generous diagnosis would say, look there’s a deliberate lack of transparency here, the topics at hand are quite dense etc. So is it just a case of visibilising external suffering or what truly can be done to raise consciousness in the West?

Jayati Ghosh

This is such a tough question. Because I think that you’re right, debt and taxation are deliberately obfuscated to alienate people. But then there’s the other part, and this is where I despair, to be honest. Let’s take something like Covid-19 vaccines where the impact is so exceedingly obvious and concern amongst progressives in the US, where I live, was minimal. There was next to no mainstream coverage of the deliberate prioritising of corporate profits over lives of people in the global south.

Liam Kennedy

Finally, what would you say to a progressive government in the UK or the US are some absolutely non-negotiable commitments or principles that would move us towards a more equal and just world.

Jayati Ghosh

Well, to begin with transparency. Who is advising government, at what cost and for what ends? This also extends of course to the international financial institutions; they don’t release their debt sustainability assessment methodologies for instance. They don’t reveal who all the creditors are. Trade deals are another area where this a disgraceful lack of transparency. Take the deal currently being negotiated between the UK and India, we have no idea what is in it.

Regulation of private capital is another absolutely critical feature, we just have lost all the basic regulations that we had in the 1950s and ‘60s. We have to enforce conditions on and have accountability for private players, rather than just rely on carrots that are completely ineffectual. The complete eradication of tax havens is also obviously needed and we need strong requirements for access to public funding, if you are taking US $2 billion from the government, you bloody well share your technology.

More widely it’s important to recognise this is a world economy in flux. Things we have taken for granted are now up for debate, US dollar dominance for instance. The major architecture of the international system is being questioned, often by some of the chief architects themselves! So a lot of these massive institutions are fragmenting and are being forced to adapt or disintegrate, that leaves a lot of things open. In the past, these periods of flux have led to tangible steps forward for developing countries. That’s not to say that this will happen again but the future is ultimately what we make of it.

This interview first appeared in issue #240, Summer 2023, Debt. Subscribe today to get your magazine delivered hot off the press!

Jayati Ghosh is a professor at University of Massachusetts Amherst
Liam Kennedy is a Red Pepper editor

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