The debt problem is enormous and the system to solve it is broken

Martin Guzman was a freshman at La Universidad Nacional de La Plata, Argentina, in 2001 when a debt crisis led to bankruptcies, riots and a devastating depression. A dazed middle class suffered from ruin International Monetary Fund iinsisted that the government would implement misery-inducing cuts in exchange for a bailout.

Seeing Argentina fall apart inspired Mr. Guzman to change his major and study economics. Nearly two decades later, with the government in bankruptcy again, it was Mr. Guzman as finance minister who negotiated with IMF officials to restructure a $44 billion debt, the result of an earlier ill-conceived bailout.

Today, he is among a number of leading economists and world leaders who argue that the ambitious framework created at the end of World War II to ensure economic growth and stability, with the IMF and World Bank as its pillars, is failing in its mission.

The current system “contributes to a more inequitable and unstable global economy,” said Guzman, who resigned last year after a rift within the government.

The refund Mr. Guzman negotiated was the 22nd scheme between Argentina and the IMF Yet the country’s economic decline has only deepened, with annual inflation exceeding 140 percent, growing lines at soup kitchens and a new, self-styled “anarcho-capitalist” president, Javier Milei, who this week launched the currency devalued by 50 percent.

The IMF and the World Bank have drawn complaints from the left and right since their inception. But the latest critiques ask a deeper question: Does the economic framework designed eight decades ago fit the economy that exists today, as new geopolitical conflicts collide with established economic relationships and climate change poses an imminent threat?

This 21st century clash of ideas on how to fix a system created for a 20th century world is one of the most consequential facing the global economy.

The IMF was founded in 1944 at a conference in Bretton Woods, NH, to help rescue countries in financial distress, while the World Bank’s focus was on reducing poverty and investing in social development. The United States was the economic superpower par excellence, and dozens of developing countries in Africa and Asia had not yet achieved independence. The basic ideology – later known as the ‘Washington Consensus’ – stated that prosperity depended on unhindered trade, deregulation and the primacy of private investment.

‘Nearly 80 years later, the global financial architecture is outdated, dysfunctional and inequitable’ Antonio Guterres, the United Nations Secretary General said at a summit in Paris this summer. “Even the most basic goals on hunger and poverty have been set back after decades of progress.”

Today’s world is geopolitically fragmented. More than three-quarters of the current IMF and World Bank countries were not at Bretton Woods. China’s economy, left in ruins at the end of World War II, is now the world’s second largest, an engine of global growth and a crucial node in the world’s industrial machinery and supply chain. India, then a British colony, is one of the top five economies in the world.

The once vaunted “Washington Consensus” has fallen into disrepute, with greater recognition of how inequality and bias against women hinder growth, as well as the need for collective action on climate.

The discrepancy between institution and mission has increased in recent years. Impacted by the Covid-19 pandemic, rising food and energy prices due to the war in Ukraine, and higher interest rates, low- and middle-income countries are swimming in debt and facing sluggish growth. The size of the global economy and the scope of its problems have grown enormously, but IMF and World Bank financing has not kept pace.

Resolving debt crises is also much more complicated now that China and legions of private creditors are involved, rather than just a handful of Western banks.

The World Bank’s own analyzes outline the extent of the economic problems. “For the poorest countries, debt has become an almost crippling burden,” a report published on Wednesday concluded. Countries are forced to spend money on interest payments instead of investing in public health, education and the environment.

And that debt does not account for the trillions of dollars developing countries will need to mitigate the ravages of climate change.

Then there are the tensions between the United States and China, and Russia and Europe and its allies. It is harder to resolve debt crises or finance major infrastructure without facing security concerns – as when the World Bank awarded Chinese telecommunications giant Huawei a contract that turned out to conflict with the US. sanctions policy, or when China has resisted debt restructuring agreements.

“The global rules-based system is not built to resolve national security-based trade conflicts,” Gita Gopinath, first deputy managing director of the IMF, said Monday in a speech to the International Economic Association in Colombia. “We have countries competing strategically with amorphous rules and without an effective referee.”

The World Bank and the IMF have made changes. The fund has moderated its approach to bailouts, replacing austerity with the idea of ​​sustainable debt. The bank has significantly increased the share of money going to climate-related projects this year. But critics argue that the solutions so far are insufficient.

“The way they have developed and adapted is much slower than the way the global economy has developed and adapted,” Guzman said.

‘Time to revisit Bretton Woods’

Argentina, South America’s second-largest economy, may be the most infamous repeat failure of the global economic system, but it was Barbados, a tiny island nation in the Caribbean, that can be credited with driving tremendous momentum for change.

Mia Mottley, the Prime Minister, spoke out at the climate change summit in Glasgow two years ago and then followed up with the Bridgetown Initiativea proposal to overhaul the way rich countries help poor countries adapt to climate change and avoid crippling debt.

“Yes, it’s time for us to revisit Bretton Woods,” she says said this in a speech at last year’s climate summit in Egypt.

Ms Mottley states that there is one “fundamental collapse” in a long-standing alliance between poor countries and rich countries, many of which built their wealth by exploiting former colonies. The most advanced industrialized countries also produce the most emissions that warm the planet and cause extreme flooding, forest fires and droughts in poor countries.

Mavis Owusu-Gyamfi, executive vice-president of the African Center for Economic Transformation in Ghana, said even recent agreements to tackle debt, such as the 2020 Common Framework, were arrived at without input from developing countries.

“We are calling for a voice and a place at the table,” Ms. Owusu-Gyamfi said from her office in Accra, discussing a $3 billion IMF bailout for Ghana.

But if the fund and the bank focus on economic issues, they are essentially political creations that reflect the economic situation power of the countries which she founded, financed and manages.

And those countries hesitate to relinquish that power. The United States, the only member with a veto, has the largest part by to vote partly because of the size of the economy and the financial contributions. The country does not want to see its influence, and especially that of others, shrink Chinas – to grow.

The impasse is over redistribute votes has hampered efforts to increase funding levels to land across the board agree need to be enlarged.

‘Big hole’ in how to deal with debt

Still, as Mr. Guzman said, “even if there are no changes in governance, there could be changes in policy.”

Emerging countries need enormous amounts of money to invest in public health, education, transport and climate resilience. But they are saddled with high financing costs due to the often high market conditions overdone perception of the risk they pose as borrowers.

And because they are usually forced to borrow in dollars or euros, their payments soar when the Federal Reserve and other central banks raise rates to fight inflation, as they did in the 1980s and after the Covid pandemic.

The proliferation of private lenders and the variety of loan agreements have made debt negotiations impossibly complex, but no international legal arbiter yet exists.

Zambia defaulted on its foreign debt three years ago and continues to do so no agreement because the IMF, China and bondholders disagree.

There is a “big gap” in international governance when it comes to sovereign debt, says Paola Subacci, an economist at the Global Policy Institute at Queen Mary University of London, because the rules do not apply to private loans, whether sourced are from a hedge fund. or the Chinese central bank. Often these creditors have an interest in continuing the process to secure a better deal.

Mr Guzman and other economists have called for an international legal arbitrator to settle disputes over sovereign debt.

“Every country has passed a bankruptcy law,” says Joseph Stiglitz, a former chief economist at the World Bank, “but internationally we don’t have one.”

However, the United States has done so repeatedly opposite the idea and say it is not necessary.

Rescues have also proven problematic. Ultimately, IMF loans may end up as a last resort which contributes to a country’s budget problems and undermining the economic recovery because interest rates are now so high and borrowers also have to pay high fees.

Those like Mr. Guzman and Ms. Mottley who are pushing for change argue that indebted countries need significantly more subsidies and loans with low interest rates and long repayment terms, along with a range of other reforms.

“The challenges are different today,” Mr. Guzman said. “Policy must be better aligned with the mission.”