August 10, 2022

Economist Jayati Ghosh: Global Debt Crisis Is Perfect Storm of Unrest, Economic Disaster, Starvation

12 min read

This is a rush transcript. Copy may not be in its final form.AMY GOODMAN: The International Monetary Fund warned Tuesday soaring inflation and the war in Ukraine could push the world economy to the brink of recession if immediate action is not taken to ease a worsening global economic crisis. The IMF’s chief economist, Pierre-Olivier Gourinchas, spoke in Washington, D.C., during the launch of the IMF’s quarterly World Economic Outlook report.

PIERRE-OLIVIER GOURINCHAS: The outlook has darkened significantly since April. The world may soon be teetering on the edge of a global recession, only two years after the last one. Multilateral cooperation will be key in many areas, from climate transition and pandemic preparedness to food insecurity and debt distress. Amid great challenge and strife, strengthening cooperation remains the best way to improve economic prospects for all and mitigate the risk of geoeconomic fragmentation.

AMY GOODMAN: The IMF expects inflation to keep rising, with lower-income countries in the Global South facing higher inflation rates than wealthy nations, as well as some of the worst impacts of rising food and living costs.
People around the world are taking to the streets in response. In Sri Lanka, months of massive protests in response to the country’s economic meltdown forced the former president, Gotabaya Rajapaksa, to resign. He was accused of bankrupting Sri Lanka, with massive corruption and economic mismanagement. Many also blame decades of neoliberal policies and forced dependency on international loans from the IMF and the World Bank for leading to Sri Lanka’s current economic catastrophe. Sri Lankans continue to face dire shortages of food, fuel and medicine. The new leader, Ranil Wickremesinghe, was sworn in last week and has been overseeing debt bailout talks for Sri Lanka with the IMF. Protesters gathered in Sri Lanka’s capital Colombo last week after the Sri Lankan Parliament chose Wickremesinghe as the country’s new president.

KASUMI RANASINGHE ARACHCHIGE: We won’t back down. We won’t let this be. We won’t settle for any less, because at the same time this is exactly what we’re fighting for. We are fighting to not settle for any less, but — and to not be comfortable in the uncomfortable, but fight for what we deserve. And the people deserve to get their basic necessities. They deserve fuel. They deserve transportation. They deserve anything that, you know, the citizens of Sri Lanka need.

AMY GOODMAN: But it’s not just Sri Lanka. This comes as global skyrocketing inflation is pushing many other countries to the brink of an economic collapse, including Pakistan, Nepal, Nigeria, Ethiopia, Panama and Argentina, which in March agreed to a new multibillion-dollar, 30-month debt repayment arrangement with the IMF. Argentinians have been leading massive protests in recent weeks against worsening poverty, unemployment and soaring living and food costs in the country. They also denounced the government of President Alberto Fernández over its handling of Argentina’s $44 billion debt with the IMF. This is a protester in Buenos Aires.

NAHUEL ORELLANA: [translated] Fifty percent of the population is below the poverty line, and the rates of severe poverty are increasing more and more. Inflation for food products is at 8%. They have just changed the minister of economy, and nothing has changed.

AMY GOODMAN: Well, for more, we go to New Delhi, India, where we’re joined by Jayati Ghosh, the economics professor at University of Massachusetts Amherst, who writes about all of this in her Guardian piece, “There is a global debt crisis coming — and it won’t stop at Sri Lanka.”
Professor Ghosh, welcome back to Democracy Now! Explain.
JAYATI GHOSH: Well, you know, really, what we are seeing is something that we should have seen coming even more than a year ago. And many of us have been warning since then that the COVID pandemic destroyed developing countries’ economies much more significantly than it did in the rich world, that these countries were not able to bring about the fiscal response that was required, that they’re still facing the pandemic because of the vaccine apartheid and inequity that we have seen, and then they are being ravaged by the impact of the food and fuel price increases.
I also just want to mention, you know, the Ukraine war is generally blamed for all of these big massive increases in the price of the food and fuel, but that’s only part of the explanation. A very large role has been played by profiteering of big companies and financial speculation in the commodities markets. And these are things that can easily be controlled by regulation. So, rich country governments are choosing not to control that. They’re blaming supply shortages and the war, when more than half of the inflation actually comes from these other forces. And then they’re doing nothing about this massive emerging debt crisis, which has been writing on the wall for a year, at least.
So, unless the G7 governments — and then, I suppose, by extension, the G20 — get their act together and decide that they will make immediate changes and do some immediate actions, we are going to see an absolute perfect storm of unrest, instability, economic disaster, hunger, starvation and all kinds of unpleasant social and political consequences.
JUAN GONZÁLEZ: But usually, Professor, the reaction of the international lending groups is just to — even when they do a debt restructuring, it’s just to roll over the debt for additional years. It’s not really to take the burden off of these countries. I’m wondering: What do you see as how the IMF and other international lenders are reacting to the current crisis?
JAYATI GHOSH: You know, that’s exactly the problem. What was done during the pandemic was a debt moratorium. That is to say, you don’t have to pay interest payments now, for a year or a year and a half or something. They’re all due now. They didn’t change the value of the debt. Now, debt restructuring that is reducing the debt, writing off a part of the debt, is something that happens regularly in all credit markets. It’s happening in the United States as we speak. It’s happening in India. Large corporations regularly write off significant parts of the debt; banks actually assume they’re never going to repay. This is not being done for sovereigns, and that’s a mess. It’s a disaster.
Now, it’s true that the bilateral debt, or the IMF and World Bank debt, is only a part — in fact, not even half — of the total debt of emerging countries. But right now what you need to do is have a global system for debt restructuring and force a debt write-off — we know they will never be able to repay a large part of this debt — and force a significant debt relief that involves a cutting down of the absolute values of debt. It was done for Germany in the 1950s. For some reason, it can’t be done to developing countries today.
JUAN GONZÁLEZ: Now, could you talk, as well, about the changes that have occurred in terms of this crisis? In previous debt crises in the past, it was largely the multilateral lending organizations that were essential players. But now, of course, in recent years, the People’s Republic of China has become an increasingly huge creditor to many developing countries, and most of its agreements are completely bilateral agreements, just between China and the government of a particular country. How has that affected the ability of the developing countries to reach sort of global settlements or uniform settlements with their creditors?
JAYATI GHOSH: You know, I think China is usually unfairly blamed for this. China accounts for only 10% of the debt of Sri Lanka, for example. And for most of the countries in distress, it’s not more than 10 or 15% of the debt is from China.
The big problem is private creditors. It’s the bond markets. It’s big multilateral international financial institutions, most of which are based in the U.S. and Europe. They are the ones that are really responsible now — the mutual funds, the pension funds. They’re the ones that are responsible for a large part of the debt. So, it’s private creditors that are really now, if you like, turning the screws on these countriies. And the IMF, the World Bank and the G7 are sitting back and letting this happen. What you really need to do is enforce a debt resolution mechanism in which these private creditors — and China — have to be involved.
And so, just blaming China or saying, you know, China is the one that’s responsible, that’s simply false. In fact, the real problem is that there are private creditors who are free-riding on the system, assuming that all of their debts will be repaid, and demanding complete and rigid repayments. And there is nothing to prevent them from continuing to do this. Whereas you can think about regulations. You can think about buying up the debt of many of these countries. A multilateral system can do it. There are ways in which to get a debt resolution. This is just completely lack of political will. It’s not because we don’t know what to do.
AMY GOODMAN: So, why don’t you lay out what should be done? And you can name names when you talk about these private creditors. And what countries do you feel can weigh in, and especially the role of the United States?
JAYATI GHOSH: Well, the United States definitely is responsible for, I would say, you know — that is to say, institutions based in the United States are responsible for more than half of the private debt that is now plaguing emerging markets where they’re facing crises.
The most obvious solution is to have some kind of a global debt authority that will buy up distressed debt. At the moment, you allow private equity funds, you allow what I call the vulture funds, to buy up this debt and then do everything possible to extract it from the poor countries involved. Why don’t we have an international agency that is buying up this distressed debt and basically writing it off? That’s what governments do routinely within their own countries. They have a so-called bad bank. So that’s the first step.
The second is that the IMF and the World Bank need to write off their own insistence on repayments. The IMF even has an obscene system of demanding fees, additional surcharges, on countries that are deeply in debt and cannot repay, which is, frankly, unacceptable. It should immediately abandon that practice. The bilaterals should be actually giving up on some of their debt. They will not notice it. There has been a big expansion of SDRs in the last year, in 2021, $650 billion worth. Four hundred billion of that went to the rich countries. None of them have used it. They don’t need to use it. Why not just release those SDRs for debt relief? It’s a fairly straightforward thing. It only requires a government action. It doesn’t require going to U.S. Congress. It doesn’t require anything. It requires a pure government action, because the fiscal cost of it is very, very low. It’s less than 1% even. So, why not do these creative measures, which are all feasible? If you can somehow manage the debt of these developing countries and if you have a fresh issue of SDRs, the developing countries, they get a small proportion of it. But, for them, it’s an absolute lifeline. It’s an emergency saving packet, which, otherwise, they will be starving their people of food and basic fuel and necessities.
So, these are straightforward solutions. Yet we find the IMF, the World Bank, they come to these meetings, they wring their hands, and they say, “Things are terrible. It’s very dire. There’s going to be a crisis.” Well, for God’s sake, we have multilateral institutions because they’re supposed to do something about a crisis, not just to complain about it and say, “Oh, it’s all terrible.”
JUAN GONZÁLEZ: I wanted to ask you also, as the United States — as the Federal Reserve continues to raise interest rates here in the United States, the U.S. dollar is becoming stronger and stronger versus other world currencies, because more and more people are fleeing now into — investors, into U.S. treasuries. How does this affect the debt crisis itself? Because aren’t quite a few of these loans sometimes denominated — they have to be paid back in equivalent U.S. dollars, not in the currencies of the different countries?
JAYATI GHOSH: Absolutely. That’s the real problem. The problem is that these are countries that have borrowed in foreign currency debt. They borrowed to provide for imports and so on. And what’s happened now, all of this capital flow, we know that it’s very volatile. It moves at the slightest hint of any kind of problem — and even when there’s not a problem. If a neighboring country has a problem, then the capital moves out of the other developing country. So, as the U.S. is raising its interest rates — this has happened so many times in the past. Every time it raises interest rates or tightens its own monetary policy, capital flies back to safety. And that means that the currencies of all these countries depreciate, which makes that debt and the repayment even more expensive.
So, you’re already losing foreign exchange, because your exports are down, your tourism revenues are down, your remittances are down. You are paying more for your food and fuel imports. And then your currency has depreciated, so that the repayment value of your debt in domestic currency terms is that much higher. So you’re being hit at from all sides. Even when food prices are coming down, like wheat prices are currently down from two months ago, it’s higher in developing countries, because their currencies have depreciated in this intervening period.
So, the U.S. monetary policy and fiscal policy has huge implications for the rest of the world. Unfortunately, no one in the U.S. administration — not the government, not the Congress — thinks about the implications for the rest of the world. They’re only looking at what happens in the U.S.
AMY GOODMAN: And, Professor Ghosh, what —
JAYATI GHOSH: Yet it is devastating.
AMY GOODMAN: What does this mean in Latin America, where you have, what, in Argentina, more than half the children now living in poverty; in Panama, massive protests like there have been in Argentina, this country one of the wealthiest in Central America but extremely unequal?
JAYATI GHOSH: Yes. You know, the thing is, these things hit the headlines when there are public protests or when there is some extreme case. But across the developing world, in large parts of Latin America, but also in Africa, in developing Asia, things are really dire. I mean, in India, I can tell you, the food situation is horrific. We are having child undernutrition levels that have shown that we’ve gone back two decades in terms of the kinds of nutrition for mothers and children. We’ve got starvation-level diets now for about one-third of our population. We have 72% of the country unable to afford what the FAO considers to be a nutritious diet. And this is just in India, which is supposedly a lower-middle-income country. The kinds of devastation that we’re seeing across the world are only going to hit U.S. headlines when they translate into very open protests, but they are generating not just extreme misery, but they’re also generating the seeds of instability and protest that will have devastating consequences everywhere, including in the U.S.
AMY GOODMAN: Jayati Ghosh, we want to thank you for being with us, economics professor at University of Massachusetts Amherst. We’ll link to your Guardian article, “There is a global debt crisis coming — and it won’t stop at Sri Lanka.” She’s speaking to us today from New Delhi, India.
When we come back, we look at inflation, the possibility of recession here and economic policy overall in the United States with the Marxist economist Richard Wolff. Stay with us.