Debt in poor countries keeps many in poverty – 12/19/2023 – Martin Wolf

It has been almost four years since the world became aware of Covid-19. This triggered a huge drop in economic activity, followed by a rapid general recovery, the Russia-Ukraine wars and now Gaza — prices soared (especially for food and energy) and interest rates rose. In the background, climate change is becoming increasingly evident.

What does all this mean for the world’s poorest? The answer is that past progress in eliminating extreme poverty has slowed dramatically. In countries that contain most of the world’s poorest people, it has simply stagnated. For this to improve, these countries will need more generous assistance from official donor entities.

The much-criticized era of globalization has helped to enormously reduce the proportion of the world’s population living in extreme poverty. Currently, the World Bank defines this as an income of less than US$2.15 (R$10.46) per day at 2017 prices. The number of people in extreme poverty, defined as such, has fallen from 1.87 billion (31 % of world population) in 1998 to a forecast of 0.69 billion (9% of global population) in 2023.

Unfortunately, the rate of decline has slowed sharply: From 2013 to 2023, the global poverty rate will fall by a predicted just over 3 percentage points. In contrast, it fell 14 percentage points in the decade before 2013. (See charts.)

Why did this slowdown in the rate of decline in extreme poverty happen? The answer is that it has declined in the world’s poorest countries — those eligible for loans from the International Development Fund (IDF), the soft lending arm of the World Bank.

The proportion of the population in extreme poverty in the rest of the world has fallen from 20% in 1998 to a forecast of just 3% in 2023. It fell by around 4 percentage points between 2013 and 2023 alone. Meanwhile, in FID-eligible countries, the The proportion of extreme poverty also fell, from 48% in 1998 to a (still high) forecast of 26% in 2023. But the reduction was only 1 percentage point between 2013 and 2023, whereas it had been 14 percentage points in the previous decade.

It is not that extreme poverty has completely disappeared in the richest countries. There are still expected to be around 193 million in this condition in countries not eligible for FID today. But the number in FID-eligible countries is 497 million, 72% of the global total of 691 million.

Furthermore, with the proportion of extreme poor in the rest of the world at just 3%, it is reasonable to assume that, with modest overall growth, this will mostly be eliminated by 2030. It is clear, then, that the goal of eliminating extreme poverty from Our world will only be achieved by focusing attention and resources on the world’s poorest countries, where most extreme poverty is concentrated and where it is also most entrenched.

Seventy-five countries are poor enough to be eligible for FID resources. Of the 75, 39 are in Africa. Some of them are also eligible for loans on the more expensive terms from the International Bank for Reconstruction and Development. This includes Bangladesh, Nigeria and Pakistan.

There is no doubt that FID-eligible countries include many of the worst managed countries in the world. But they are also fragile in many ways and are therefore trapped in poverty traps that are desperately difficult to escape, especially when they are hit by shocks, as they have been. Furthermore, they don’t have to be “bottomless holes.”

The FID was created more than half a century ago largely to help India. In fact, the FID has sometimes even been called the “Indian Development Association”. However, India has now successfully graduated and is a donor. In fact, the FID has a long list of graduates, including China.

The FID is now using its 20th replenishment, from July 2022 to June 2025. Given the urgency to accelerate growth, reduce extreme poverty and address the challenges of climate change in impoverished countries, the next replenishment will need to be much larger, as argued Ajay Banga, president of the World Bank, in his midterm review.

The World Bank’s latest International Debt Report, released last week, reveals another powerful reason why more FID resources are needed: these countries have become too dependent on more unstable and expensive sources of financing. Thus, the report states that “For the poorest countries, debt has become an almost crippling burden: 28 countries eligible for loans from the [FID] are now at high risk of debt distress. Eleven are in distress.”The debt problem is more general. But it is especially significant in countries with such high concentrations of desperately poor people.

These debt problems aren’t all that surprising. Between 2012 and 2021, the proportion of FID-eligible external debt owed to private creditors jumped from 11.2 to 28.0 percent. Partly as a result of this, the debt service of IDA-eligible countries jumped from US$26 billion (R$126.5 billion) in 2012 to US$89 billion (R$433 billion) in 2022, with payments alone interest rates jumped from US$6.4 billion (R$31.14 billion) in 2012 to US$23.6 billion (R$114.83 billion) in 2022.

Above all, the share of bondholders and other private creditors in total commitments has fallen from a peak of 37 percent in 2021 to a mere 14 percent in 2022. This is classic lender behavior when dealing with marginal borrowers: they turn to home when the Federal Reserve tightens monetary policy. In total, the share of IDA-eligible countries at risk of financial distress reached 56 percent in 2023, the report says.

Commercial debt on the part of these countries is simply unsafe. Some of your outstanding debt will need to be forgiven. More importantly, they will need much more concessional financing. It is not only the duty of rich countries, but it is also in their interest to provide the resources they need to escape the poverty trap. Billions of people have already done this. Now let’s finish the job.

LINK PRESENT: Did you like this text? Subscribers can access five free accesses from any link per day. Just click the blue F below.