UNCTAD Research Warns on Rising Debt Levels, Says Developing Nations Vulnerable

A new research by the United Nations Conference on Trade and Development (UNCTAD) has warned that rising indebtedness may be a global phenomenon, but the debt levels of developing countries are amplifying their economic vulnerability.

Many developing countries have experienced growing – and in some cases premature – connectivity to international financial markets following the debt relief afforded by the Heavily Indebted Poor Countries Initiative and the Multilateral Debt Relief Initiative.

‘’There have been rising levels of developing country debt – the demand for which moves in step with international forces that have little to do with management of the debt sustainability by developing countries’’, the research paper says.

Ten years after the global financial crisis, UNCTAD estimates that the ratio of global debt to Gross Domestic Product (GDP) was a third higher at the beginning of 2018 than at the start of the crisis in 2007/2008, and roughly four times global GDP.

While rising indebtedness is a general and global phenomenon, it is the debt levels of developing countries that have highlighted future debt sustainability vulnerabilities.

In the paper, it is argued that it is only in the context of the conditions and mechanisms created by the global financial system that the increasing indebtedness of developing countries can be understood.

While it is generally accepted that the provision of unprecedented levels of liquidity by advanced economies to counter weakness and instability in their economies following the global financial crisis of 2007–2008 sowed the seeds for the next crisis by making portfolio capital flows to developing countries more attractive; the global financial system that created the crisis remains in place and continues to exert its influence over debt sustainability in developing countries.

The report is divided into five sections:

Section I provides the point of departure for understanding the debt sustainability challenges of developing countries.

Section II examines the debt indicators for 145 developing and transitional countries on a regional basis. The data are limited in scope but provide a useful point of departure for forming a picture of debt at the regional level. More specific data for emerging markets as a subcategory of developing countries show increasing exposure of emerging markets to spillover debt from advanced countries. Financialisation has not delivered on its promises of growth and, in the context of persistent downward pressure on aggregate demand, income and employment, together with systemic financial fragility and recurrent instability, a new development agenda must be found.

Section III introduces elements of a balanced growth strategy and section IV contains discussion of the financial elements that would facilitate such a strategy. In the absence of international commitment to reform the global financial system, second best approaches to pre-empt and circumvent its influence on developing countries must be found.

Section IV discussed a number of such approaches, including the development of regional and interregional monetary and financial cooperation and an invigorated role for development banks in local development.

Section V consists of a brief conclusion.

The UNCTAD research however, observes that the vulnerabilities now facing developing countries are influenced by global trends over which they have little control, and which influence their domestic outcomes.

The paper calls for a more balanced growth strategy in developing countries to better enable them to manage existing and future debt burdens.

Such a strategy requires a range of policy instruments for more careful internal and external integration.

It required polices to boost effective demand, to increase labour incomes and to reform and re-regulate financial markets, the paper notes.

According to the paper, an essential part of managing existing and future debt – and what developing countries need most – is long-term access to foreign demand and thus reliable export markets.

This would support their emergent domestic growth and investment to repay external debt.

The paper proposes four areas of reform in the context of UNCTAD’s commitment to Finance for Development:

  • Establishment of a robust domestic “profit-investment” nexus that promotes a dynamic interaction between private sector profit expectations, actual investment, realised profits and growing retained earnings. This necessitates a development strategy that involves well-planned public investment in essential infrastructure to create productive links with domestic private investment projects.
  • Encouragement of an international trade system that inclines towards development – with surplus countries investing in deficit countries and lending to them on reasonable terms.
  • Harnessing of regional payment systems and clearing unions to strengthen regional and macroeconomic stability, create liquidity buffers against exogenous shocks – and encourage promotion of intraregional trade.
  • Leveraging the strength of south-south multilateral development banks in providing subsidised loans for development in least-developed countries.

 

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