The debt problem is enormous and the system to solve it is broken

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Martín Guzmán was a first-year student at the National University of La Plata, Argentina, in 2001 when a Debt crisis It caused defaults, riots and a devastating depression. A stunned middle class suffered ruin, as International Monetary FundHe insisted that the government make misery-causing budget cuts in exchange for a bailout.

Watching Argentina fall apart inspired Guzmán to change careers and study economics. Almost two decades later, when the government was bankrupt again, it was Guzmán, as finance minister, who negotiated with IMF officials to restructure a country. debt of 44 billion dollarsresult of a previous ill-conceived rescue.

Today he is one of several 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 the World Bank as its pillars, is failing in its mission.

The current system “contributes to a more unfair and unstable global economy,” said Guzmán, who resigned last year after a rift within the government.

The payment that Mr. Guzmán negotiated was 22nd arrangement between Argentina and the IMF Still, the country's crisis economic nosedive has only increased with an annual inflation rate of more than 140 percent, growing lines at soup kitchens and a new self-proclaimed “anarchocapitalist”president, Javier Milei, who this week devalued the currency by 50 percent.

The IMF and World Bank have drawn complaints from left and right since their creation. But the latest criticism raises a deeper question: Does the economic framework devised eight decades ago fit the economy that exists today, when new geopolitical conflicts collide with established policies? economic relations And does climate change represent an imminent threat?

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

The IMF was created in 1944 at a conference in Bretton Woods, New Hampshire, to help rescue countries in financial difficulty, while the World Bank focused on reducing poverty and investing in social development. The United States was the preeminent economic superpower, and dozens of developing nations in Africa and Asia had not yet gained independence. The founding ideology – later known as the “Washington Consensus” – held that prosperity depended on unimpeded trade, deregulation, and the primacy of private investment.

“Nearly 80 years later, the global financial architecture is obsolete, dysfunctional and unfair.” Antonio GuterresSecretary-General of the United Nations, said this summer in a summit in Paris. “Even the most fundamental goals on hunger and poverty have regressed after decades of progress.”

Today's world is geopolitically fragmented. More than three-quarters of the current IMF and World Bank countries were not in Bretton Woods. China's economy, in ruins at the end of World War II, is now the world's second largest, an engine of global growth and a crucial hub in the world's industrial machinery and supply chain. India, which was 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 climate.

The mismatch between institution and mission has worsened in recent years. Hit by the Covid-19 pandemic, rising food and energy prices related to the war in Ukraine and higher interest rates, low- and middle-income countries are swimming in debt and facing slow growth. . The size of the global economy, as well as the scope of the problems, have grown enormously, 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, rather than just a handful of Western banks.

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

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

Then there are the tensions between the United States and China, and Russia and Europe and its allies. It's harder to resolve debt crises or finance major infrastructure without running into security concerns, such as when the World Bank awarded Chinese telecommunications giant Huawei a contract that turned out to violate U.S. rules. sanctions policy, or when China has resisted Debt restructuring agreements.

“The global rules-based system was not built 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 that compete strategically with amorphous rules and without an effective referee.”

The World Bank and the IMF have made changes. The fund has moderated its approach to bailouts, replacing austerity with the idea of ​​sustainable debt. The bank this year significantly increase the part of the money that goes to climate-related projects. But critics argue that the solutions so far are insufficient.

“The way they evolved and adapted is much slower than the way the global economy evolved and adapted,” Guzmán said.

Argentina, South America's second-largest economy, may be the most notorious failure of the global economic system, but it was Barbados, a small island nation in the Caribbean, that can be credited with driving the change.

Mia Mottley, the prime minister, spoke two years ago at the climate change summit in Glasgow and then followed up with the Bridgetown Initiativea proposal to reform the way rich countries help poor countries adapt to climate change and avoid crippling debt.

“Yes, it's time for us to revisit Bretton Woods,” he said. he said in a speech at last year's climate summit in Egypt.

Mrs Mottley maintains that there has been a “fundamental break” in a long-standing pact between poor and rich countries, many of which built their wealth by exploiting former colonies. The most advanced industrialized countries also produce most of the emissions that are warming the planet and causing extreme flooding, forest fires and droughts in poor countries.

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

“We are asking for a voice and a seat at the table,” said Owusu-Gyamfi, from his office in Accra, as he discussed a $3 billion bailout by the IMF for Ghana.

However, if the fund and the bank focus on economic issues, they are essentially political creations that reflect the power of the countries that establishes, finances and manages them.

And those countries are reluctant to give up that power. The United States, the only member with veto power, has the largest share of votes partly because of the size of its economy and its financial contributions. He does not want his influence to be reduced and others (particularly China – grow.

The deadlock on vote redistribution hampered efforts to increase funding levels, which countries in all fields accept it is necessary to increase.

Still, as Guzmán said, “even if there are no changes in governance, there could be changes in policy.”

Emerging nations need huge amounts of money to invest in public health, education, transportation and climate resilience. But they face high borrowing costs due to frequent market fluctuations. exaggerated perception of the risk they represent as borrowers.

And since they are typically forced to borrow in dollars or euros, their payments skyrocket if the Federal Reserve and other central banks increase interest rates to combat inflation as they did in the 1980s and after the Covid pandemic.

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

Zambia defaulted on its foreign debt three years ago and there are still whitout deal because the IMF, China and bondholders are at odds.

There is a “big hole” in international governance when it comes to sovereign debt, said Paola Subacci, an economist at the Global Policy Institute at Queen Mary University of London, because the rules don't apply to private loans, whether of a hedge fund. either China's central bank. Often these creditors have an interest in prolonging the process to wait for a better deal.

Guzmán and other economists have called for an international legal arbitrator to resolve disputes related to sovereign debt.

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

However, the United States has reiterated opposite the idea, saying it is unnecessary.

Bailouts have also proven problematic. IMF last resort loans may end aggravating a country's budget problems and undermining the economic recovery because interest rates are very high now and borrowers must also pay high fees.

Those, like Guzmán and Mottley, pushing for change argue that indebted countries need significantly more subsidies and low-interest loans with long repayment terms, along with a host of other reforms.

“The challenges are different today,” Guzmán said. “Policies must be better aligned with the mission.”



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