ECONOMIC VIEWPOINT: Third World debt
MANY Barbadians have come to associate the phrase “lost decade”, a term used to describe the Third World and Latin American debt crisis of the 1980s, with the way it highlighted debt and debt management of the previous Freundel Stuart-led administration.
While it has not been mentioned much in recent times and for obvious reasons, the subject came to light quite recently when Dr. Annamaria Viterbo, Associate Professor at the University of Turin, Italy, gave a lecture to the Faculty of Law at the University of the West Indies, Cave Hill campus. The lecture was titled, “Linking Debt Relief to Green Recovery”.
In the virtual presentation, she remarked that developing countries are heading for another lost decade on account of their external debt having reached alarming proportions.
The Professor said that for 2020, the external debt of developing countries had already surpassed Bds$16 trillion (US$8 trillion). “This year and next year (2021) debt service in developing countries is estimated at billions of dollars,” said the Economist from the Italian university.
The lecturer referred to an International Monetary Fund (IMF) paper which indicated that the present global economic crisis brought on by COVID-19, is the worst since The Great Depression of the 1930s and even more severe than the 2008/2009 economic meltdown.
To her, and the evidence has shown, the countries are struggling with unsustainable debt and insufficient fiscal and policy space, rising unemployment, falling commodity prices, a drop in export earnings, declining tax revenues, and steady capital outflows.
So instead of supporting their people to remedy the crisis, and investing in a sustainable and green economy, governments are using between 30 per cent 70 per cent of their revenues to repay creditors.
While many advanced economies still have the capacity to borrow, developing and low-income countries face a much higher risk and their ability to carry additional debt, she indicated while referring to a study done by the Economic Commis-sion for Latin America and the Caribbean (ECLAC) on the issue of debt in this region.
“So developing countries are heading for another lost decade as their debt profile continues to reach alarming proportions, while threatening their economic performance,” she reasoned.
By way of background the debt crisis of the 1980s emerged when a number of countries, some of them from Latin America, took a decision to default on their external loans owed to commercial creditors. Mexico, Peru, Argentina and several others decided on that course of action because they were unable to meet the payments.
Around that time (the early 1980s), the world economy had fallen into recession caused by higher oil prices, the second in about seven years, leading to economic crises in Latin America and other regions.
Those Latin American states especially, had borrowed heavily to finance infrastructure and to acquire capital to assist with their economic expansion.
The debt was estimated at that time to be in excess of Bds$2 trillion (US$1 trillion) and the money was owed mainly to private lenders. The oil importing nations were being asked to repay huge amounts for oil imports.
The crisis had also seen some of the states entering standby arrangements with the IMF. As usual the Fund resorted to their traditional script of cutbacks and austerity, throwing the affected countries into greater economic chaos that included no growth, high unemployment and depressed conditions.
Here in Barbados, the government of the day entered a similar agreement with the IMF, giving rise to a bout of austere economic policies. The Barbados economy declined in 1980-82 and the support from the Fund assisted in stabilising the situation here.
On a wider scale it took interventions from the global community and a series of debt reductions, debt cancellations, and debt restructuring to bring a halt to the Third World crisis in the early 1990s, thereby ending the so-called lost decade scenario.
The idea that Barbados encountered a lost decade surfaced in the lead-up to the last general elections when with a debt-to-GDP profile of 157 per cent between 2008 and 2018, the Stuart administration was bombarded with that situation.
It caught hold in Barbados and was effective as that situation contributed to the big defeat the then government experienced at the polls. A debt restructuring programme lowered that debt to about 120 per cent of GDP up to a year ago.
However, with loans from multilateral institutions, the crisis brought on by the COVID pandemic which caused more borrowings have pushed the debt-to-GDP ratio to almost 133 per cent of GDP.
Dr. Viterbo said that the world is facing not only health and social issues, but also a climate and environmental crisis and the looming debt challenges.
She revealed that in 2020 alone, hurricanes along with wild fires and droughts have ravaged economies and livelihoods that are already pushed to their limits. According to the World Meteorological Organisation, 2020 was the second warmest on record. How developing countries in particular will face this twin situation remains a bother.
As noted with the Third World debt crisis, the challenges to the looming debt situation will have to be resolved in a way where the global economic players: The Paris Club, G20, IMF and other multilateral institutions come together and deal with the issue.
“We need urgently to address the sovereign debt problem of developing countries,” the lecturer added.
Failing that, another lost decade seems likely.