Almost half the global population is affected by the current global debt crisis. Some Global South countries are now spending more on debt servicing than health, education and social protection combined. Development economists Jayati Ghosh and Charles Abugre explore its root causes and consequences. And a Kenyan barber tells us how tax increases there are affecting his business and family life - and why he took to the streets in protest.

From the International Development Economics Associates - a network of progressive economists who centre the perspectives and needs of the Global South.

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Hi there.

Welcome to Economics from the South, where we rethink economics, give a voice

to marginalized communities, and come up with lasting solutions to ensure a fairer,

more sustainable future for all of us.

I'm your host, Julians Amboko, a Kenyan business journalist.

Karibu sana.

It's great to have you on board this six part series from the International

Development Economics Associates.

IDEAS is a network of progressive economists from Latin America, Asia,

and Africa who challenge the way the world is run and put forward viable

alternatives that center the perspectives and needs of the global south.

Our main focus this series will be on two really important research areas for IDEAS.

How to break the endless cycle of debt distress and rethinking how the

international financial institutions are structured, governed, and operate.

I'll be speaking to world renowned economists, academics, and development

experts, and we'll also hear some personal stories of ordinary people trying to

cope in very difficult situations.

I'm delighted to be joined by two development economists who are at

the forefront of the IDEAs network.

Jayati Ghosh from India and Charles Abugre from Ghana.

Jayati is a founding member of its executive committee and Charles

is the current executive director.

I'm Jayati Ghosh.

I teach economics at the UMass Amherst in the US at the moment, but I have

been teaching in India at the Jawaharlal Nehru University for 35 years.

I am Charles Abugre.

I am currently the executive director for IDEAs and I have

been in the UN for some time and a lot of my time in the NGO world.

Thank you very much both for joining us.

Welcome and delighted to have you on this conversation.

So firstly, Are we in another debt crisis?

Let me start with you, Jayati.

Yes, I think we are in another global debt crisis.

Certainly, it is a major debt crisis if you consider that hundreds of millions

of people across the developing world are affected by it and that their

standards of living have been forced to be cut, that governments are spending

more on debt service than they're spending on health, education and social

protection put together, that many countries are on the verge of default

or really facing major difficulties in meeting their debt service repayments.

So yes, we are in a global debt crisis.

Unfortunately, the leaders of the World economy don't really see it that way.

They don't see this as a systemic problem.

They don't think that this is something that is fundamentally going to

alter the global financial system.

These countries individually hold relatively small amounts of

debt, if you compare it to the portfolios of the big creditors.

And so if they default, it's not really a big crisis for them.

It doesn't matter that people are suffering.

It doesn't matter that that country's growth prospects are

destroyed for a generation or more.

It doesn't matter that the human rights, the social and economic

rights of people are damaged.

It doesn't matter that, you know, women's unpaid labor increases dramatically and

food and basic needs all get undermined.

All of that doesn't matter.

What matters is that it doesn't affect the international financial system so much.

And that's why they have allowed this to fester for so long.

So we have a global debt crisis that is Actually impacting around half of

the global population actually, and yet it is one that is not really seen as

significant enough for immediate relief or for emergency action by those who

control the global financial architecture.

Charles, what's your assessment?

Are we in a global debt crisis and has it been allowed to fester?

Yes, for many countries in the global south and low and middle

income countries, they are suffering severe resource constraints and the

proportions of their incomes that they are spending to service debt.

In some countries exceed the amount of money that they

spend on health and education.

This has become quite critical in Africa, in particular, where more than half

the countries are either in distress, teetering on the border of debt distress

and those that have not declared debt distress and have no program with the

IMF are taking very expensive steps to avoid it meaning that they are either

starving their economies and their societies with the basic expenditure

the need to provide health education public services, or they are taxing the

poor to, um, even greater poverty and they're squeezing their economies in

order to avoid formally declaring debt distress and taking up an IMF program.

This is growing.

The number of countries in this situation is growing across the African

continent, but it is also obvious in Latin America and in Asia as well.

So for the majority, of people in the world and the countries.

There is a serious debt problem.

There is a debt crisis.

But as Jayati says, it doesn't threaten the banks, the international banks,

the large American and European banks.

And so they are able to turn a blind eye.

Thank you so much, Charles, for that context setting.

What triggered the present debt crisis?

Well, in fact, this is something that, uh, was almost going to

happen like a bit of a Greek tragedy.

Everybody assumes that it's the result of the COVID 19 pandemic.

And certainly the pandemic had a role, the pandemic, and then the big increase

in food and fuel prices afterwards, uh, because of the Ukraine war and the

subsequent profiteering, all of that had an impact, but this was a crisis waiting

to happen for a whole bunch of countries.

Because, uh, It's one of the changes that occurred after the

global financial crisis of 2008.

So here I want to step back a little bit and say why I'm saying this is

a crisis that has been allowed to fester, because we know that when

there is really something that, shall we say, the lords of the universe

think is going to affect the global financial system, they act promptly.

They act in a very massive manner and they make sure.

that the system survives.

So we saw this in the global financial crisis.

There was a massive move from the rich countries in terms of a fiscal expansion,

but most of all, a monetary expansion and really bailing out the large banks,

which would have gone under many of them.

And bailing out their own economies as a result.

We've also seen them more recently bailing out Syndicate Bank, Silicon Valley Bank,

California, Credit Suisse in Switzerland.

They do everything that they promised they would never do.

They bend all of the rules and regulations to ensure that these survive.

And that's because these are seen as systemically important.

Now, what happened in 2008, that big global financial crisis, after

that, what happened is that the rich countries went in for very

expansionary monetary policies.

Very low interest rates, huge increases in liquidity, trillions and

trillions of dollars and euros and yen released into the economies of their

own economies and other countries as well, just to keep banks afloat.

So banks basically had all this massive increase in the money that they had.

And so they were really encouraged to go out there and do all kinds

of lending, including what used to earlier be seen as risky lending.

So for example, you know, this phenomenon of emerging markets, which is really

middle income countries that were getting integrated with global finance.

This had already started in the 2000s.

But from the 2010s, we see this new phenomenon of frontier markets.

Now, what are frontier markets?

They are countries that previously didn't get access to private credit,

to the private bond market, to private loans, because they were seen

as risky or, you know, because the returns were not seen as high enough.

Basically, banks were so flush with funds and all these financial institutions

were, because of monetary policy, they were so full of huge amounts

of resources that they had to spend somewhere, that they were willing

to take up all kinds of new loans.

and buy all kinds of bonds.

So a whole range of low and middle income countries got access to these markets.

And this was encouraged by the IMF, by the World Bank, by the Davos crowd.

It was actively encouraged.

So countries were really encouraged to float bonds in the

global sovereign bond market.

They were encouraged to borrow.

They were encouraged to allow their private players to borrow in global

financial markets and guarantee that debt.

So all of them ran up.

Fairly high debts in a very short time.

And this is something that was inevitable, that at some point

there would be repayment problems.

Because these are economies that are structurally in deficit.

They are not economies that can immediately or in five or six years

generate dollar or foreign exchange that will allow them to repay the debt.

So that by 2022, we had more and more countries getting into this debt stress.

And by 2023, we've had, as Charles mentioned, even the countries that

are not identified as debt stressed.

There are more than 70 of them to take.

But even other countries are spending much more on debt service than

they are on health, education, and all forms of social protection.

Interesting take there, um, Jayati.

Let me come to Charles.

Let me also back up a little bit and um, just say a few

things about the recent character of the debt crisis in Africa.

Africa still has the greatest numbers of low income countries and

even the middle income countries are actually low income countries.

There is a characteristic we need to keep in mind.

We need to remember that for nearly two decades.

In the period of structural adjustment, the eighties, nineties, up to the, in

fact, nearly three decades, um, the, the continent, um, you know, under,

um, very strict austerity measures.

So the structural adjustment programs basically built up a huge deficit

in public service, um, expenditure, um, schools were collapsing.

The health systems were collapsing.

Um, rules were not being constructed.

There was no power systems and so on.

So for nearly three decades, there was a huge buildup of basic

public investment, uh, you know, deficit in public investment.

And so, uh, after the debt, um, restructuring, um, by the multilateral

debt restructuring initiative that ended somewhere in the mid 2000s and

that provided a little bit of, um, space, uh, for many African countries,

there was an internal desire to a need to, to increase public expenditure.

And fortunately for many, for many of these countries at that time, uh,

increased demand by, by, by China of commodities led to a commodity boom.

So it provided a little bit of space for countries to, to, to start to borrow.

And during that period of structural adjustment programs, the multilateral

institution, the IMF and the World Bank deliberately, as Jayati

said, pushed countries to borrow.

away from, you know, borrowing from official sources, bilateral

and multilateral official sources.

It was a mark of improvement, the mark of progress if these countries

actually transitioned into the, into private capital markets.

So many countries with increasing commodity prices, uh, rebased their

currencies and rebase their GDPs, further increasing the space for them to borrow.

And this is how they were introduced into private capital markets.

So many of them have found themselves now with an entirely

different portfolio of credit.

Unfortunately, with a greater dependence on commodities, it also means that

when the commodity price, um, the commodity market sees a downturn, the

ability to, to, to service this debt in foreign exchange, many of these

countries become very pressured.

And this is what has been the beginning.

So when COVID hit, many of these countries were already in debt distress and

rapidly going into debt distress, largely because commodity prices had decreased,

had fallen in international market.

Secondly, uh, many of them remain very deeply rooted in import dependency.

So many countries on the continent, in particular, import everything from

food to basic commodities and so on.

And so.

Increased imports, inability to industrialize and to diversify domestic

production, increasing import, especially for food and medicines, then tie these

countries, um, into the, to dependency in, in the private capital markets.

And they are borrowing to recycle debt.

Ghana is an, uh, an example that's carried on recycling these debts, borrowing from

private capital markets at increasingly higher prices and so on and so forth.

Good point there, Charles.

So let's look at, uh, what's really causing this vulnerabilities and

making certain lower and middle income countries to be more likely to

fall into an endless cycle of debt.

You remember, we, we had what we normally call the HIPC

initiative around debt distress.

So what really underlies this vulnerabilities and

recurrent cycle, Jayati?

You know, uh, basically we know that low and middle income countries

or developing countries in general.

tend to have structural deficits.

That is to say, because they are at a lower level of development, they haven't

fulfilled their development project, they are industrializing, they don't have the

kind of diversified economies that would provide them with all the imports that

they would like to have or that they would need for their growth process or that

would be desired by their population.

Now, one reason why developing countries had trade controls was precisely

that, recognizing that, you know, if you just leave it to free trade, then

especially the rich in your own country will want to have consumption that is

heavily import dependent, and that that will generate these structural trade

deficits, and then you'll have a problem financing them, and you'll have to cut

down on all kinds of other essential imports, perhaps just to enable that.

We saw in from the 1990s, this whole phase of global globalization,

liberalization, privatization, et cetera, we saw the opening up of trade

balances, and this was followed then by the opening up of capital accounts.

And the whole argument was, you don't have to control your trade anymore.

You don't have to try and do industrial policy through trade

policy, because now you can actually.

free your imports, just export what you can and the rest of it you can get capital

inflows to enable your growth process.

And the way the world panned out, it did happen, especially from the

2000s onwards, that because the U.

S.

was providing these very low interest rates and large liquidity.

And because subsequent to the global financial crisis, more and more other

rich countries did the same, there was a lot of money sloshing about the

globe looking for places to invest.

And so all these countries did get into this, but remember those structural

constraints that mean that they are basically running deficits persisted.

And they were made worse by the fact that open trade meant that your elites

could have this very import based consumption, which added to the imports

that you didn't necessarily need, but you were stuck with anyway, whereas

your exports didn't always cover that.

Yes, if you were a primary commodity exporter and there was a good

shift in your terms of trade, you benefited in some years, but that

fundamental problem remained.

Now, what happened in around the mid 1990s?

Part of the decade of the 2010s is that many countries were already experiencing

difficulties even in servicing their debt to the multilateral institutions,

to the World Bank, the IMF, the Regional Development Bank, and so on.

And so they actually were encouraged to have sovereign bonds in

international markets, or even domestic bonds that foreigners could buy.

And because, as I said, there was so much liquidity and there were so

many of these multinational investors looking for places to invest, and it

was just a tiny part of their portfolio.

So they didn't really care very much.

They got this money.

They got these resources.

Sri Lanka, for example, it was completely what we call Ponzi borrowing.

They were borrowing to repay earlier debts.

They had debts to the World Bank, to the IMF, to the Asian Development Bank

that they couldn't repay with their own exports, with the net exports.

Also, because they were allowing the rich to import lots of things, right?

And so what did they do?

They floated sovereign bonds.

And those sovereign bonds were then used to finance the repayment

to the IMF and the World Bank.

And the IMF, knowing all of this, seeing all of this, does not say to

the, to Sri Lanka that don't do this.

It encourages them.

Now, you know this is going to end in tears.

If you are borrowing to repay your debt, you know that this is an unsustainable

process and it's going to end in tears.

And it's always the case.

That's what happened in the US housing crisis, the subprime crisis that

generated the big global financial crisis.

That's what happened in the Eurozone crisis.

So it's not just developing countries.

Any country that does this, this is what's going to happen.

So yes, there are structural reasons why, let's say, even hippie

countries that benefited from a significant debt haircut in the 1990s

are back in that same boat again.

And some of it, yes, is their own policy fault, I would say.

But A large part of it is the responsibility of those institutions

and those international forces that actively egged them on

and encouraged them to do this.

Thank you.

Thank you for that clarification, Jayati.

And, uh, Charles.

Okay.

So, um, just Two other issues on the systemic, um, underlying

factors driving the debt.

You will recall that, um, in the, in the period of, um, the structural

adjustment programs in the 2000s and 1990s, countries were encouraged to,

um, Uh, to privatize their, uh, their natural resources and, uh, even,

even, uh, public services in order to attract foreign direct investment.

And it was, it was felt that foreign direct investment would be the path to

growing these economies, but also growing them in a non debt accumulating way.

So many developing countries.

Privatize their most productive assets, um, their natural resource

deposits and Africa is, uh, is, is, is very complicit in this.

And so what you have seen is that they, the main source of revenue for, for

government that, that would have reduced the need for boring foreign exchange,

which is, you know, Earnings from the production and export of, uh, natural

resources in particular, that many countries lost those and increasingly had

have a very little share of these exports.

Um, many of them made concessions that, um, even reduces the availability of

the foreign exchange that is earned.

So foreign companies are not even required to deposit their, um,

their foreign earnings, their exchange earnings in central banks.

So they lost both revenues as well as the availability of foreign exchange in their

reserves to support their development.

Where still, This privatization process in the large foreign companies

became a conduit for resource outflows both legally and illegally,

uh, legally in the, in the form of, um, you know, profit repatriation.

So Zambia is both Zambia and Ghana examples of countries that lose more

money from primary income repatriation than they, than they actually in

the case of Zambia in particular, than the cost of debt servicing.

So they're losing money from what they should have earned domestically,

and they are losing money, uh, from, uh, profit repatriation.

And in that process, especially through the natural resource exports, they are

losing billions, uh, both in revenues, And in foreign earnings exchange through

illicit means into various tax havens.

So there is a bleeding process that has also happened and it's,

it's, it's integrated into the conditionalities, um, of the 1990s and

2000 and continues to be so, to be so.

So there's a leakage, there's a big pot leaking In addition to debt sustainability

and other problems of the IMF, there is also the credit rating companies

that are continuously discriminating.

And the Economic Commission for Africa published this paper that,

that said that there's a special tax for African sovereign, uh, ratings.

So they are continuously, uh, rated poorly, which means that they have less

and less access to a diversified portfolio of resources, but also that they are

paying higher and higher interest rates.

So that expands the bleeding.

I think these processes is important to keep in mind.

So it is not only the debt servicing that, that is bleeding the continent.

It is also the, these inequitable.

Contractual arrangements and privatization and the role of large

foreign companies in the economies of developing countries that, that is

also exacerbating the, the, the debt distress forcing them to have to borrow

from very expensive sources and so on.

Many thanks to Charles Abugre and Jayati Ghosh for

such an illuminating conversation.

We'll be hearing more from them in episode 4 when we explore lasting

solutions to the debt crisis.

But right now, let's turn to my own country, Kenya, to take a closer look

at an issue brought up by Charles.

The consequences on working people when governments raise taxes to

avoid formally defaulting on debt.

What started as anger on TikTok

spilled out onto the streets in June 2024 as thousands of Kenyans protested

against yet more tax proposals forcing President William Ruto to back down.

Our reporter Michael Kaloki met a barber who took part in those protests.

He asked us to protect his identity because a number of

activists have been abducted.

Michael Kaloki and Kenyan barber: I see some oils, some, is this dye?

Dye, dye, dye, cotton wool.

Dye, there's some cotton wool.

There's some various chemicals here, that they use at the barber shop.

There's just a motorcycle taxi outside here, and it's quite busy.

The government of William Ruto has increased taxes since

coming into power in 2022.

Which tax has hit you the hardest?

He says the cosmetics tax.

He says that a packet of hair dye used to cost 250 shillings

but it now costs 500 shillings.

That's about two US dollars to four US dollars.

Shampoo was 200 shillings, it's now 300 shillings.

Massage oil went from about 600 shillings to 900 shillings.

The cost of a scrubber used to be 600 shillings and has

now gone up to 800 shillings.

And shaving spirit also.

And how has it affected your business?

And Ada used to cost 400 shillings, but now he has to charge 500.

And as a result, the number of people coming to the shop is going down.

In fact, as we are talking, there are no customers at all.

And he says that sometimes clients even refuse to pay the full amount.

For example, a shave is 200 shillings, but some people will only pay 150 shillings.

What measures were you especially opposed to in the finance bill?

He says that he was especially concerned about the proposal to increase the

price of women's sanitary pads.

He thinks they should be free of charge.

He says fuel, because when the price of fuel is increased, it causes

the cost of everything to go up.

Flour has gone up, sugar has come up, and he says it's better

to drink tea without sugar.

Now, do you have a family at home?

Uh, no.

Family are not?

Yes.

Yes.

He has a family, a wife, and two children.

Both boys.

How did this affect your family at home?

Daily,

you would give his family a total allowance of 800 shillings, which

is the equivalent to about six US dollars, but he now can only give.

500 shillings, which is about three US dollars.

Has it affected your family in any other way?

Hmm.

He used to be able to afford to give his son snacks to take to school, but

at the moment he's only able to send him to school with a bottle of water.

Why did you make that decision to go out on the streets to protest?

He says he joined the protestors because he feels life has become so hard.

He says, I was ready to die for the sake of my children.

to try to give them a better life in the future.

What was the reason that you decided to enter parliament

with the rest of the protesters?

He says that the members of parliament do not know what ordinary people

in the slums are going through.

They just don't know, he says.

They have no idea that people are really suffering.

The MPs just went ahead and voted to pass the Finance Act without really

knowing what it is they were passing.

Hearty appreciation to that Kenyan barber for sharing his story.

Reminder that he asked us not to use his name because he's scared of repercussions.

Next episode on economics from the south.

I sit down with two eminently respected economists, Columbia's former finance

minister Jose Antonio Ocampo and a former high level UN official and

highly regarded economist Jan Kregel.

The SDRs can be used in order to plug the hole

until the Cocoa Bunny market.

It recovers, but if it never recovers, now you have a solvency problem.

And the solvency problem can't be solved by the SDR solution.

So this is the difficulty that you have in terms of the system that we're

now looking at climate changes and other things are not simply things

that can be solved with liquidity.

Jose Antonio Ocampo: We need responsible borrowing and responsible lending.

In the case of official financing, one of the problems is that some of the

official creditors don't want to reduce debts, so don't want, in the jargon

of this debate, don't want haircuts.

And then there is a problem of coordination.

And that's why there has to be a very specific ad hoc initiative

to manage this problem, because otherwise there will be no solution.

Thanks for listening to Economics from the

South from the International Development Economics Associates.

Please subscribe or follow wherever you get your podcasts so that

you can get new weekly episodes automatically, effortlessly.

I'm Julians Amboko.

The producer is Penny Dale.

The concept is by Charles Abugre, C.P.

Chandrasekhar and atieno Andomo of the International

Development Economics Associates.

Check out the show notes for links to the Ideas website where you

can find lots of really insightful articles and research papers on

the issue of debt and so much more.

And also you can sign up to the IDEAS newsletter.