Debt overhang risks another lost decade and could derail progress on poverty reduction and SDGs

8 December 2022

Person holding coins. Credit: Riya Kumari/Pexels

Progress on eradicating extreme poverty in the Global South, already declining since 2015 and significantly set back by the Covid-19 pandemic, is now further endangered by widespread debt distress. Both the UN and World Bank are raising the alarm that the Sustainable Development Goals (SDGs) are unlikely to be met without action on the growing debt crisis.

The Trade and Development 2022 report by the United Nations Conference on Trade and Development (UNCTAD) released in October argued that difficult global economic conditions, a significant debt overhang and the lack of an effective mechanism for debt relief could make this another lost decade for development goals.

According to the World Bank’s 2022 Poverty and Shared Prosperity report titled Correcting Course, the pandemic marks a grim turning point, with an era of global income convergence giving way to significant divergence. The report argues the pandemic produced the first reversal of the reduction in poverty globally in more than two decades, and noted that the world is now significantly behind on SDG 1.1 of eradicating extreme poverty by 2030.

Correcting course, but in which direction?

The after effects of the pandemic’s massive and asymmetric supply and demand shocks have been compounded by the war in Ukraine. Further, the IMF is supporting a broad turn towards austerity, which will see government budgets squeezed for 85 per cent of the world’s population in 2023 (see Observer Summer 2022, Autumn 2022, Winter 2022; Dispatch Annuals 2022), which is likely to further hobble the recovery and make the SDGs even more difficult to achieve.

Over 60 per cent of low-income countries and more than 25 per cent of middle-income economies are in or at risk of debt distress, and are in danger of being unable to fulfil their fiscal obligations. UNCTAD warned that this could end any prospect of the SDGs being realised by the 2030 deadline.

While the pandemic has certainly worsened the outlook on eradicating poverty outcomes, the current trends predate Covid-19, calling into question the Bank’s approach to private-sector led development financing. The Bank has acknowledged that the rate of reduction in extreme poverty achieved between 2000 and 2015 had already slowed in the five years before the pandemic, and has called for a “significant course correction”.

Unfortunately, the current debt crisis afflicting the Global South is more than a glitch in the system. It represents a recurring feature of the international financial architecture over the last four decades: An October 2020 letter signed by over 550 civil society organisations calling for an urgent reform of the international debt architecture described the ‘indebtedness’ of these countries as “both a consequence of and a tool for domination” – with serious impacts on development.

No shortage of alternatives

In its report, UNCTAD argued the SDGs are achievable, but only with systemic action to address a systemic crisis.

Many proposals address particular aspects of the international financial system that are driving negative development outcomes. The Global Action for Debt Cancellation Movement is calling for the unconditional cancellation of all external debt repayments, including debt owed to the World Bank and IMF, and for national debt audits and a fair and transparent UN framework for debt crisis resolution. A September report by Matthew Cummings and Isabel Ortiz set out a range of alternatives to the austerity paradigm that countries can pursue to expand their fiscal space and prioritise social investments (see Observer Winter 2022).

UNCTAD’s proposals are more far reaching, including addressing underlying global supply side issues as an alternative to tightening monetary policy to tamp down inflation, anti-trust and market regulation to counter speculation, new rules for managing sovereign debt crises and a new Bretton Woods to support equitable global growth (see Observer Summer 2022). UNCTAD’s Richard Kozul-Wright and Boston University’s Kevin P. Gallagher have also proposed the Geneva Principles for a Global Green New Deal, at the heart of which is a new values-driven multilateralism.