Every fall, the United Nations issues its Trade and Development Report to discuss and analyze the state of the global economy, challenges facing the developing countries and policy alternatives that could deal with these challenges. The report, prepared by the United Nations Conference on Trade and Development (UNCTAD), also assesses the challenges of today's globalization and the ramifications of the on-going economic policies of the wild-unteamed neoliberalism. The 2019 report entitled "Financing a Global Green New Deal", was launched last September.
The report calls on policymakers in the developing world to focus on job creation, and increase wages and productive investments rather than their obsession by the stock markets, share prices, and financialization, which seeks to profit from speculation, rent and inflationary increases in asset prices.
What is presented, by the advocates of neoliberalism, to policymakers on the economic convergence between the North and South countries is nothing but exaggeration. On the contrary, the historical divergence in the average per capita income between the North and the South has become the reality. The average per capita income of the developed economies, which was seven times that of the developing economies (except China) in the late 1970s, increased to ten times in recent years.
This fragile picture is reflected in the huge accumulation of debt in the developing world, which is mostly short-term debt and in foreign currency, with the private sector having a significant share. In 2017, developing countries’ total debt reached its highest level ever, where it accounted for 190% of the GDP of these countries. This suggests weak ability to repay along with high probability of default in the future.
In Egypt, the debt to GDP ratio increased from 95% to 118% between the fiscal year 2017/2018 and 2018/2019 (Egypt's GDP was 5.25 trillion pounds in 2018/2019). But the problem in the Egyptian case goes beyond the fact that the increase of 23 percentage points occurred in one single year. A more worrying problem, which may have serious negative effects in the long run, is that government servicing of debt, (i.e., only payment of interest on debt; not the principal) represents 36% of all public spending in this year's budget – equivalent to 50% of all government revenues and 125% of the budget deficit. The fact that the largest share of government spending is directed towards debt servicing leaves little space to increase spending on education, health, social justice and future developmental investments.
In today’s globalized world, debt was promoted as an effective engine for global growth, particularly in developing countries. But it led to more financial speculation and failed to boost real, productive capacities. In this environment, debt which used to be looked at as a long-term financing instrument to stimulate productive investment and foster growth in developing countries, has become a risky financial asset exposed to the volatility of global financial markets and subject to the growing short-term interests of the creditors.
This is disturbing because the structural transformation of the developing economies, needed for the achievement of the new Global Environment Deal and the Sustainable Development Goals (SDGs), requires an unprecedented increase in the financing of productive investment. At the very least, $2 to $3 trillion per year, at the global level, are needed only to reach the simplest SDGs by 2030 (elimination of poverty, promotion of nutrition, good health and quality education).
To deal with the debt problem in the developing world, a set of recommendations at the international and national levels is pertinent. At the national level, borrowing should be limited to productive investments that will benefit the society and the economy in the future, so that loans can be serviced and repaid without heavy burdens on future generations. Debt should enhance social justice and reduce the polarization between rich and poor, by directing public loans towards investments that benefit the poorest classes. As for the burden of debt, it should be borne by the affluent classes through a progressive and equitable tax system that also considers the interests of future generations.
At the international level, a global lending program should be established not only on concessional terms, but without stringent conditions similar to those attached to the World Bank and IMF loans and programs. There is also a need to establish additional external lending facilities to meet the needs of the developing countries till 2030. UNCTAD recommends the establishment of a global fund to support the achievement of the Sustainable Development Goals and the financing of the Global Green New Deal. This fund could be financed by donor countries that have, over the past four decades, failed to fulfil their official development assistance (ODA) commitment of 0.7% of gross national income.
The list of recommendations includes strengthening regional monetary cooperation among developing countries to refinance and promote regional trade and technical cooperation within each region, and moving beyond mere regional foreign exchange reserve swaps and pooling agreements towards the development of full-scale regional payment systems. Furthermore, consideration should be given to establishing an alternative system to facilitate equitable restructuring of sovereign debt that can no longer be serviced and repaid in accordance with original contracts. This system should be governed by the provisions of international law and a set of internationally agreed principles.
*Dr. Mahmoud Elkhafif is a senior economist at the United Nations
**This article expresses the opinion of the writer and not necessarily the position of the United Nations.