Developing countries are experiencing the worst debt crisis in human history. Voices raising the issue of unsustainable levels of debt in the Global South are not new. Affected communities and social justice movements have long advocated for the correction of this gross historical inequality, which is reflected in today’s widespread demands for debt cancellation and progressive tax reforms. There is a need to look back at the origins of these debts to understand why they have no legitimacy, and why repudiation is being called for with renewed vigour by a growing range of actors.
After all, the debt crisis in the Global South is no accident, but is by design. Former colonies may have won independence struggles, but colonial exploitation and theft have made economies in the Global South dependent on the export of cheap natural resources and the import of expensive manufactured goods from developed countries. This has created perennial trade deficits, generating the need to intensify the extraction of natural resources to facilitate foreign exchange and fund ever-growing import bills.
To finance education, health, housing, transport, and other social services, southern governments took out loans from governments and institutions in the Global North. This laid the ground for the consolidation of a global finance and trade architecture that serves to perpetuate neocolonial dependency and a legacy of underdevelopment.
International Financial Accountability
Debts come at a high cost. Developing countries not only have to pay interest but they also must swallow the bitter pill that accompanies loans: policy prescriptions that will supposedly enable them to pay off their loans and “develop” faster. These policies, and the need to adhere to them, mean restructuring economies to make them attractive to foreign-owned corporations. This in turn has led to more privatization, liberalization, and the deregulation of vital public services — and a vicious debt trap.
Fifty-four countries are now in a debt crisis, and instead of heeding calls for the cancellation of debts that have harmed people and planet, lenders have opted to suspend payments and restructure the debts of some countries. At a recent UN General Assembly, leaders of developing countries called out financial institutions, holding them accountable for the global debt crisis. They also highlighted how high levels of debt and debt payments severely hinder their ability to respond to climate change.
Debt and Climate Crisis
Debt and climate justice intersect when it comes to nations’ capacities to respond to events linked to climate change. These events include floods, droughts, heatwaves, and storms, all of which are growing in frequency and intensity, and are experienced more acutely in the Global South. Adapting to these impacts could include the improvement of physical and governance infrastructures. Developing countries borrow money on international markets at high interest rates to invest in resilient infrastructure that protects their citizens from risks they did not themselves cause. Barbados Prime Minister Mia Mottley described this situation as “unconscionable” at the UN Climate Ambition Summit in New York.
It is therefore not surprising that, according to recent research, the countries most vulnerable to climate change are also those in the highest levels of debt. The interconnectedness of debt and high vulnerability to climate change thus also increases the risks of climate-related loss and damage in affected regions.
Another important aspect of this intersection is the transition to renewable energy production systems, a transition which is much easier for industrialized countries. After decades of profiting from colonization and resource exploitation, industrialized nations can develop and own advanced technology that enables more efficient conversion processes. Energy production systems in the Global South are less advanced and more dependent on fossil fuels, in particular coal, making the transition to renewables increasingly dependent on massive financial investment. However, with massive debt, repaying lenders is often prioritized over investing in the transition toward renewable energy production systems.
Problematic Climate Finance
The vicious cycle created by the relationship between the debt and climate crises makes it all the more problematic that 71 percent of climate finance provided from Global North to Global South countries is in the form of loans. Not only have Global North countries failed to fulfil the promises made at COP15 in Copenhagen, to provide USD 100 billion annually in climate finance by 2020, but the funds that have been provided are predominantly in the form of loans, as opposed to grants. Policy conditions that come with these loans severely restrict the fiscal sovereignty of countries in the Global South, including their capacity to implement meaningful climate action.
The Bretton Woods Institutions, i.e. the World Bank Group (WBG) and International Monetary Fund (IMF), were founded to preserve the hegemony of American and European interests after World War II, and share the common goal of “raising living standards in their member countries”. Democratic deficit and colonial orientation are not the only problems with these institutions, but are rather the neoliberal and exploitative paradigm to which they adhere.
An illustration of this is the current allocation practice of Special Drawing Rights (SDR), the IMF tool that enables countries to trade with other countries for hard currency such as dollars or euros. During the COVID-19 pandemic, the IMF distributed reserve assets to its member countries in proportion to their shares. This resulted in the wealthiest countries getting the most SDRs while the poorest countries got the least.
It is no surprise therefore, that the policies of the WBG and IMF have completely failed at alleviating poverty in the world’s poorest countries and protecting the global financial system from recurring crises. Research even suggests that countries such as China and some Southeast Asian nations that have not followed IMF-WB prescriptions have been more successful in raising the living standards of their citizens.
Failed Recipes at the IMF and WBG Annual Meeting
As finance ministers met recently in Marrakesh for the 2023 IMF-WBG Annual Meetings, neither their statements nor their proposals came close to matching the severity of the situation developing countries find themselves in. Jean Saldanha, Director of the European Network on Debt and Development (Eurodad) was quoted as saying: “What we heard throughout this week was a quick dismissal of proven solutions like debt cancellation and an injection of public resources. Instead we again saw the promotion of tried and failed recipes: mainly the push to leverage private finance, with risk transferred to the public purse, coupled with more austerity.”
Climate and debt justice advocates saw that proposals discussed in Marrakesh were not only counter-productive, but actually served the purpose of upholding a financial architecture that is clearly broken. It does not help at all that global financial institutions are reinventing themselves as green in order to get a foothold in the attractive world of climate finance. This broken financial system cannot adequately provide the funding that is so urgently needed for climate policies, as was demonstrated by the negotiations impasse caused by the insistence of developed nations that the World Bank host the Loss and Damage Fund.
Debt and climate justice advocates are calling for a debt restructuring mechanism from the United Nations. To achieve the necessary transformation of international financial architecture and enable meaningful action on climate change, debt restructuring must be embedded within wider structural reforms. While Marrakesh may not have delivered even close to what is necessary, upcoming UN climate change negotiations in Dubai present the next crucial opportunity for civil society to make its demands heard.
David Williams directs the Rosa Luxemburg Stiftung’s International Climate Justice Program in New York.
Tetet Lauron lives in the Philippines and works as a consultant to the Rosa Luxemburg Stiftung – New York Office.
Nadja Charaby is head of the International Politics and North America units at the Rosa Luxemburg Stiftung and an advisor on climate policy.