Foreign debt is not just a serious financial problem. It is a serious setback for the lives of the most vulnerable people. Countries that cannot afford debt payments suffer a drop in GDP per capita that has serious social repercussions. Infant mortality shoots up 10% and life expectancy is reduced by about three years. People who have had nothing to do with the economic or political management of their countries pay with their lives for the mistakes made by political and economic leaders.
A study by Open Society, with data from the World Bank, leaves no doubt about the human cost of debt. Clemens Graf von Lukner and Juan P. Farrah-Yacoub, authors of the report, state that defaulting on debt causes a “decline in living standards, increased poverty and deteriorating health”. The effects are most notable “among the most vulnerable, children, the elderly and the poor”. The longer it takes to resolve a default, the more pernicious are its consequences.
Today and tomorrow the creditor countries and institutions are meeting in Paris. On the table is the urgency of alleviating the burden of the debt on the most indebted. Lebanon, Ghana, Ethiopia, Sri Lanka and Zambia, for example, are having a very difficult time. The pandemic slowed its growth and internal conflicts have prevented an agreement with the banks and states that, in their day, lent them the money they did not have.
The number of countries that have not been able to meet their debt payments is the highest since the beginning of the century. There are also more countries than ever at risk of default.
When a country suspends debt payments, it enters a phase of stagnation. The consequences of this break continue over time and are very noticeable a decade later.
Infant mortality skyrockets. It happened in Venezuela. Today, five years after the 2018 default, the number of women with risky pregnancies has doubled.
Since 1960, countries that have defaulted on their debts have seen infant mortality rise by 10% in the ten years following the crisis.
Zambia, for example, fell into default two years ago. It has not yet reached an agreement with its creditors to solve the problem. He hopes to achieve it this week in Paris. The damage, however, has already been done. Between now and 2030, 3,079 babies will die due to debt, according to the study by Graf and Farrah-Yacoub, who have used the birth and infant mortality ratios that existed before the crisis.
These extra deaths are due, in large part, to worsening prenatal care for the mother and worse general health.
If the financial crisis is resolved in three years or earlier, infant mortality grows by 2.2%. If it lasts for more than three years, mortality shoots up 11.4%. The average is 10%.
Life expectancy also suffers. It falls in a year and a half at the beginning of the crisis and shoots up to three years if it lasts for a decade. Not only are more children and the elderly dying, but also young people.
Zambia is once again a paradigmatic example. Life expectancy in the eighties was 53 years. In the 1990s, after one of his numerous defaults, he dropped to 45 years of age.
Zambia demonstrates that it is not enough to delay the payment of the debt. This only delays the solution of the problem and aggravates the consequences. Forgiveness is necessary, as Mark Malloch-Brown, president of the Open Society, puts it.
Non-payment triggers poverty. GDP per capita falls 2.5% in the first year after default. In a decade a fall of 14.5% accumulates. The snowball becomes so big that it is increasingly difficult to pay back what is owed.
Uruguay, for example, is an exception. The default in 2003 was followed by a good debt restructuring that made it possible to allocate resources to the most vulnerable and the economy grew again.
Argentina, however, defaulted in 2001 and took five years to reach an agreement with its creditors. By then, poverty had skyrocketed past 50%.
Mark Malloch-Brown believes that debt-related human suffering “is entirely avoidable”. Enough with something as complicated as changing the international financial system.
Eighty years after Bretton Woods, the conference at which the International Monetary Fund and the World Bank were born, it seems obvious that linking the financing of vulnerable countries to standardized reforms and solvencies does not work. The very weight of the debt prevents paying it back.
The IMF, for example, according to Malloch-Brown, must grant loans even “in situations of delay”, that is to say when the financial solvency of the debtor is more than questionable.
Sovereign wealth funds, at the same time, should not demand full debt repayment if creditor countries decide to partly forgive it. It is a contradiction that, however, occurs frequently. The political decision to forgive is followed by the financial logic of the fund of not forgiving anything.
The pandemic and the rise in interest rates have left many countries unable to meet their debt. Lebanon, Ethiopia, Sri Lanka, Ghana and Zambia are the most affected.
Crises in these countries, as usual, coincide with very high inflation and the impossibility of accessing savings. For three years it has been almost impossible to withdraw money from Lebanese banks, a corralito that the Greeks and Argentines have also suffered.
In these situations, wage earners lose purchasing power, while the State cannot compensate with a solid social network because it has run out of resources to distribute subsidies and services.
The Paris Club, as the creditor countries that are meeting today and tomorrow in the French capital are known, plans to allocate 100,000 million dollars to forgive the most urgent debts. The money is scheduled to be distributed through the IMF.
Until today, the initiatives of the G-20, the World Bank and the IMF itself to modify the international credit system have failed. Now, however, there is an opportunity to launch the Bridgetown Initiative, as the program has been baptized which, thanks to the 100,000 million dollars, will also strengthen the public sector of countries in difficulties with the hope that the State is the main engine of growth.
It is a very important paradigm shift, which implies shielding the rule of law to prevent corruption from disrupting everything.
A robust and transparent public sector should improve a country’s credit rating, which will allow it to access international capital markets under good conditions. The same will happen with private companies.
Likewise, by reinforcing health and education, infant mortality and the decrease in life expectancy are combated. In the long run, the economy recovers and repayment of the outstanding debt can resume.
This logic of solidarity, which is also a capitalist logic, has not taken hold in the Paris Club. Creditors also need to obtain a high return on the money they lend and do so on time. A large part of its citizens, for example, have entrusted their retirement plans to investment funds that invest in sovereign debt.
Maturities set the pace for insolvencies and so far no one has been able to dismantle the mechanism to buy time and allow the poorest countries to breathe and recover before facing their debts. Today and tomorrow in Paris there is a new opportunity.
