Third world debt (the sequel)

by | Mar 1, 2008


Lots of concerns lately about stagflation, given how commodity prices have continued their inexorable rise even as the US economy falters.  Inevitably, some have wondered whether it means it’s the 1970s all over again. But here’s another reason to think about dusting off those flares: what about the risk of a new third world debt crisis? 

Consider how rising commodity prices – especially food and energy – are affecting low income countries.  I saw a very worried-sounding email this week from UNDP in Yemen, noting that the country is 75% dependent on food imports, that the price of a bag of wheat is now over two and a half times its level a year ago – and that fuel subsidies are already going to absorb 30% of government expenditures this year “against a backdrop of declining revenues due to a combination of reduced production and rising local consumption of oil and its derivatives”.  Not good.

On top of that, consider how much aid is being diverted towards coping with these price increases.  As I noted back at the start of the year, we already know from the International Energy Agency that oil importing low income countries in Africa have seen all of their aid and debt relief over the past three years offset by increased costs for energy imports.  That’s before food prices are even factored into the equation – and as WFP head Josette Sheeran’s alarm bell-sounding interview last week underscores, there are plenty of problems on that front too.

If aid isn’t enough to offset the problem, then it follows that some countries may have to take out loans to cope with the balance of payments problems.  One place they might look to is the IMF; the Institute of Development Studies’ Stephany Griffith-Jones made such a proposal in January, when she wrote in a letter to the FT that

When oil prices went up in the 1970s, the International Monetary Fund created low conditionality oil lending facilities. These helped sustain growth and facilitate adjustment in many developing economies. Should not a similar facility be created now in the IMF to ease the burden, especially on the poorest countries? Or should not existing IMF facilities, like the different windows of the Poverty Reduction Growth Facility, be modified to provide rapid, significant, cheap, low conditionality loans to poor countries facing the external shock of a large deterioration of their terms of trade?

The Fund itself subsequently confirmed that this was already happening: “several countries already receiving support under the International Monetary Fund’s poverty reduction and growth facility have recently requested additional lending in response to a terms of trade shock”.

But of course it may not be the Fund that emerges as the key lender in all this.  Just as in the 1970s, the world economy is suddenly awash with petrodollars from newly flush oil producers – hence all the fuss about the rapidly evolving role of sovereign wealth funds.  China, too, is also starting to invest some of its vast dollar reserves – now around $1,500 trillion – in Africa.  So far, these investments have concentrated on commodity producers rather than importers, but this could change if China comes to regard balance of payments lending as an inexpensive means of purchasing influence more generally.

In all cases, the underlying question on balance of payments loans to poor countries is: what happens if – as many commentators believe – the current food and oil price shock isn’t just a cyclical blip, but is instead a longer term structural shift?  Are low income countries just supposed to keep borrowing? 

One to add to the agenda when food prices come up at the IMF / World Bank spring meetings, perhaps…

Author

  • Alex Evans is founder of Larger Us, which explores how we can use psychology to reduce political tribalism and polarisation, a senior fellow at New York University, and author of The Myth Gap: What Happens When Evidence and Arguments Aren’t Enough? (Penguin, 2017). He is a former Campaign Director of the 50 million member global citizen’s movement Avaaz, special adviser to two UK Cabinet Ministers, climate expert in the UN Secretary-General’s office, and was Research Director for the Business Commission on Sustainable Development. Alex lives with his wife and two children in Yorkshire.


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