Neoliberal Finance Undermines Poor Countries’ Recovery

Yves here. Sadly, the story of Covid, that it’s allowing the rich to get even richer at the expense of the poor, applies as much to nations as to individuals. This post describes how finance-friendly neoliberal policies have worked against the Global South, and rich country vaccine profiteering and hoarding has only made that bad situation worse.

By Anis Chowdhury, Adjunct Professor at Western Sydney University and University of New South Wales (Australia), who held senior United Nations positions in New York and Bangkok and Jomo Kwame Sundaram, a former economics professor, who was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. Originally published at Inter Press Service

After being undermined by decades of financial liberalisation, developing countries now are not only victims of vaccine imperialism, but also cannot count on much financial support as their COVID-19 recessions drag on due to global vaccine apartheid.

Financialisation Undermined South

Developing countries have long been pressured to liberalise finance by the International Monetary Fund (IMF) and the World Bank. The international financial institutions claimed this would bring net capital inflows. This was supposed to reduce foreign exchange constraints to accelerating growth, creating “a rosy scenario, indeed”.

Globalisation’s claim naively expects “more birds to fly into, rather than out of an open birdcage”. Instead, financial globalisation meant net capital flows from capital-poor developing countries to capital-rich developed countries, i.e., dubbed the “Lucas paradox”. A decade later, flows “uphill” had “intensified over time”.

The past decade saw the largest, fastest and most broad-based foreign debt increase in these economies in half a century. Total foreign debt of emerging market economies rose from around 110% of GDP in 2010 to more than 170% in 2019, while that of low-income countries (LICs) increased from 48% to 67%.

Pandemic Woes

Developing countries saw private finance drop by US$700 billion in 2020, while foreign direct investment flows to developing countries declined by 30-45% in 2020. Remittances fell by 7% in 2020, and are expected to fall by another 7.5% in 2021.

Meanwhile, developing countries’ indebtedness increased as total aid flows had long fallen short of even half the long promised 0.7% of donor countries’ incomes. In 2020, when developing countries needed it most, donor governments cut bilateral aid commitments by almost 30%.

With limited access to other finance, developing countries, especially LICs, face much higher borrowing costs, even in normal times. With the pandemic, developing countries have been downgraded by rating agencies, further raising borrowing costs.

Facing falling foreign exchange earnings needed to import essential drugs, vaccines and other vital supplies, including food, most countries have to borrow. In 2020, official foreign debt probably rose by 12% of GDP in emerging market economies, and by 8% in LICs. The pandemic thus greatly worsened developing countries’ debt distress.

Before the pandemic, more than a quarter of official revenue went to servicing debt. With the worst recession since the Great Depression in 2020, as well as declining revenue and foreign exchange inflows, debt is now blocking finance for more adequate relief and recovery in many countries.

Debt Relief?

Many – even World Bank Chief Economist Carmen Reinhart, once a ‘debt hawk’ – have called for debt relief, but little has happened. IMF debt service relief of about US$213.5 million for 25 eligible LICs ended six months later in mid-October 2020, as scheduled.

The G20’s ‘Debt Service Suspension Initiative for Poorest Countries’ for 73 mainly LICs for May-December 2020 covered around US$20 billionof bilateral public debt owed to official creditors by International Development Association and least developed countries (LDCs).

The G20 initiative did not provide lasting relief, not even reducing foreign debt burdens and barely addressing immediate needs. It merely kicked the can down the road. Debt still had to be repaid in full during 2022–2024 as interest continues to accumulate. It also offered middle income countries (MICs) nothing.

Also, private creditors refused to join in or help out. UNCTAD estimatesthat in 2020 and 2021, lower MICs and LICs will pay between US$0.7 trillion and US$1.1tn to service debt, as upper MICs pay US$2.0-2.3tn. Meanwhile, some countries have used US$11.3bn of IMF funds meant “for health budgets and food imports” to service private sector debt.

SDRs to the Rescue?

Undoubtedly, distressed developing countries desperately need foreign exchange to cope. But IMF Managing Director Kristalina Georgieva’s call to boost global liquidity with “a sizeable SDR” (Special Drawing Right) allocation was blocked by the Trump administration, who objected that it would give China, Iran, Russia, Syria and Venezuela access to new funds.

The Financial Times (FT) argues that the proposed new SDR1tn (US$1.37tn) issuance – almost five times the US$283bn issued in 2009 – is justified by the scale of the crisis. For the FT, it would be “the simplest and most effective way to get additional purchasing power into the hands of the countries that need it”.

It is now widely agreed that “new issuance of SDRs is vital to help poorer countries”. It would augment the IMF’s US$1tn lending capacity, already inadequate to address the ongoing pandemic and economic crises.

SDRs can only be used to pay other central banks, the IMF and 16 “prescribed holders”, including the World Bank and major regional development banks. Thus, SDRs can help foreign exchange constrained countries, especially if rich countries transfer their unused SDRs to the IMF or for development finance.

The IMF could thus expand two existing special funds for LICs: the Poverty Reduction and Growth Trust provides interest-free loans, while the Catastrophe Containment and Relief Trust pays interest and principal due on their IMF obligations.

But SDRs are not an equitable magic bullet as apportionment reflects the size of a country’s economy. In other words, rich countries would get much more, regardless of need, as during the 2008-2009 global financial crisis.

US Role Vital

With 85% of IMF votes required to issue new SDRs, and the US holding veto power with 16.5%, Biden administration support is vital. For SDR issuance under US$650 billion, the White House only needs to consult, rather than get approval from the US Congress.

Treasury Secretary Janet Yellen has urged the IMF and World Bank to do everything “they can to ensure that developing countries have the resources for public health and economic recovery”. She has supported new SDRsdespite conservative opposition, e.g., from Rupert Murdoch’s Wall Street Journal.

But Fund and Bank resources still pale in comparison with the challenge. With preferred creditor status, they can borrow at the much lower interest rates available to them. By so intermediating, they can help developing countries, especially LICs and LDCs, to more cheaply access desperately needed funds.

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  1. Thuto

    Entire countries are now up for sale. In a budget speech peppered with euphemisms (e.g. calling austerity fiscal consolidation), our finance minister here in South Africa dashed , in short order, any hopes of a stimulus to recharge a crippled economy. The enforcement cartel was also recently in town to downgrade, at the worst possible time, our sovereign credit rating and now we are being told the money will go towards debt service.

    While we watch with trepidation, the vultures sitting on enough dry powder to pick off wounded public services in global south countries and take them private watch with glee, and will soon take a victory lap. It’s primetime for sovereign debt to be weaponized to push through a neocolonial agenda.

  2. LowellHighlander

    If we accept that neo-classical economics provides the academic fig leaf for the neo-liberal program here, then I urge people to check out Mark Weisbrot’s Ph.D. dissertation. [Dr. Weisbrot is a co-founder of the Center for Economic & Policy Research in Washington, DC.] Dr. Weisbrot completed his dissertation in the early ’90s, so I am not sure that it would be available on UMI/ProQuest. That’s why you might have to contact him directly to find a copy.

    In his dissertation, Dr. Weisbrot documents how the field of Development Economics was originally founded by a Classical Economist. Eventually, Institutionalists and Post-Keysnians weighed in, and added to the field. However, ultimately, neo-classicals took over for rank, political reasons. [Yes, Dr. Weisbrot confirmed my interpretation here, many years ago; the deal was that he’d take me out for as much expensive ale as I would care to drink in one sitting if I read his disseration. And he lived up to his end of the bargain.] I think his insights laid out in that dissertation can help the better economists argue for better treatment of LICs, and even MICs.

    1. The Historian

      Have you ever read Dardot and Laval, “The New Way of the World: On Neoliberal Society”? I’d love to know what you think of it and how it compares to Weisbrot’s thesis. Sounds to me like they might be very similar but I can’t access a copy of Dr. Weisbrot’s thesis to validate that.

      1. LowellHighlander

        No, but thanks for the lead and the idea of comparing Dardot & Laval’s book to Dr. Weisbrot’s dissertation. Unfortunately, I’ve just begun studying for a graduate degree in Forensic Accounting, so that’s where my priorities now lie. However, I will try to make time to read Dardot & Laval. [By the way, don’t hesitate to contact Dr. Weisbrot at the Center for Economic & Policy Research to ask how you can access a copy of his dissertation. He’ll probably know who sent you.]

  3. flora

    Thanks very much for this post. My question: Is expanding the SDRs a rescue from US/EU IMF control, or is expanding SDRs only a globalized hidden neoliberal monetary trap? I don’t know.

  4. Susan the other

    Iran, Syria, Venezuela, Russia and China. This is oil/energy rationing by another name. Or weaponizing. A global depression is our best weapon against Russia, Iran, Venezuela, China and Syria – so we will be making all the money in the recovery. I really don’t see how it can work when all R, I, V and C have to do is barter. And then who is left out? The USA. At least it will solve our irrational terror and hysteria over inflation.

  5. Sound of the Suburbs

    How is an economy actually supposed to work?

    Banks – What is the idea?
    The idea is that banks lend into business and industry to increase the productive capacity of the economy.
    Business and industry don’t have to wait until they have the money to expand. They can borrow the money and use it to expand today, and then pay that money back in the future.
    The economy can then grow more rapidly than it would without banks.
    Debt grows with GDP and there are no problems.
    The banks create money and use it to create real wealth. 
    Like we used to do before 1980.
    What happened in 1979?
    The UK eliminated corset controls on banking in 1979, the banks invaded the mortgage market and this is where the problem starts.
    The transfer of existing assets, like real estate, doesn’t add to GDP, so debt rises faster than GDP until you get a financial crisis.

    Before 1980 – banks lending into the right places that result in GDP growth (business and industry, creating new products and services in the economy)
    Debt grows with GDP
    After 1980 – banks lending into the wrong places that don’t result in GDP growth (real estate and financial speculation)
    Debt rises faster than GDP
    2008 – The financial crisis

    We kept looking for investors to lend into business and industry forcing the banks to engage in unproductive lending that always leads to a financial crisis.
    Banks can create all the money they want; we don’t need money from investors.

    This was what happened in the Asian Crisis.
    They were enticed into financial liberalisation and were guaranteed that they would maintain the Dollar peg with their currencies.
    Companies could borrow more cheaply in Dollars and they were told there was no risk.
    The local banks were forced to engage in unproductive lending.

    It all worked well for a while until the Dollar peg was broken.
    Sustainable debt became unsustainable and the economy went into a tailspin.
    The asset bubbles that had been inflated with unproductive lending popped.
    There was a massive financial crisis stretching across Asia.

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