The Debt Problem Is Enormous, and the System for Fixing It Is Broken


Martin Guzman was a college freshman at La Universidad Nacional de La Plata, Argentina, in 2001 when a debt crisis prompted default, riots and a devastating depression. A dazed middle class suffered ruin, as the International Monetary Fund insisted that the government make misery-inducing budget cuts in exchange for a bailout.

Watching Argentina unravel inspired Mr. Guzman to switch majors and study economics. Nearly two decades later, when the government was again bankrupt, it was Mr. Guzman as finance minister who negotiated with I.M.F. officials to restructure a $44 billion debt, the result of an earlier ill-conceived bailout.

Today he is one of a number of prominent economists and world leaders who argue that the ambitious framework created at the end of World War II to safeguard economic growth and stability, with the I.M.F. and World Bank as its pillars, is failing in its mission.

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

The repayment that Mr. Guzman negotiated was the 22nd arrangement between Argentina and the I.M.F. Even so, the country’s economic tailspin has only increased with an annual inflation rate of more than 140 percent, growing lines at soup kitchens and a new, self-proclaimed “anarcho-capitalist” president, Javier Milei, who this week devalued the currency by 50 percent.

The I.M.F. and World Bank have aroused complaints from the left and right ever since they were created. But the latest critiques pose a more profound question: Does the economic framework devised eight decades ago fit the economy that exists today, when new geopolitical conflicts collide with established economic relationships and climate change poses an imminent threat?

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

The I.M.F. was set up in 1944 at a conference in Bretton Woods, N.H., to help rescue countries in financial distress, while the World Bank’s focus was reducing poverty and investing in social development. The United States was the pre-eminent economic superpower, and scores of developing nations in Africa and Asia had not yet gained independence. The foundational ideology — later known as the “Washington Consensus” — held 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 unjust,” António Guterres, secretary general of the United Nations, said this summer at a summit in Paris. “Even the most fundamental goals on hunger and poverty have gone into reverse after decades of progress.”

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

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

The mismatch between institution and mission has sharpened in recent years. Pounded by the Covid-19 pandemic, spiking food and energy prices related to the war in Ukraine, and higher interest rates, low- and middle-income countries are swimming in debt and facing slow growth. The size of the global economy as well as the scope of the problems have grown immensely, but funding of the I.M.F. and World Bank has not kept pace.

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

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

And that debt doesn’t account for the trillions of dollars that 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 bumping up against security concerns — like when the World Bank awarded the Chinese telecommunications giant Huawei a contract that turned out to violate U.S. sanctions policy, or when China has resisted debt restructuring agreements.

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

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

“The way in which they have evolved and adapted is much slower than the way the global economy evolved and adapted,” Mr. Guzman said.

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

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

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

Ms. Mottley argues that there has been a “fundamental breakdown” in a longstanding covenant between poor countries and rich ones, many of which built their wealth by exploiting former colonies. The most advanced industrialized countries also produce most of the emissions that are heating the planet and causing extreme floods, wildfires and droughts in poor countries.

Mavis Owusu-Gyamfi, the executive vice president of the African Center for Economic Transformation, in Ghana, said that even recent agreements to deal with debt like the 2020 Common Framework were created without input from developing nations.

“We are calling for a voice and seat at the table,” Ms. Owusu-Gyamfi said, from her office in Accra, as she discussed a $3 billion I.M.F. bailout of Ghana.

Yet if the fund and bank are focused on economic issues, they are essentially political creations that reflect the power of the countries that established, finance and manage them.

And those countries are reluctant to cede that power. The United States, the only member with veto power, has the largest share of votes in part because of the size of its economy and financial contributions. It does not want to see its influence shrink and others’ — particularly China’s — grow.

The impasse over reapportioning votes has hampered efforts to increase funding levels, which countries across the board agree need to be increased.

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

Emerging nations need enormous amounts of money to invest in public health, education, transport and climate resilience. But they are saddled with high borrowing costs because of the market’s often exaggerated perception of the risk they pose as borrowers.

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

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

Zambia defaulted on its external debt three years ago, and there is still no agreement because the I.M.F., China and bondholders are at odds.

There’s a “big hole” in international governance when it comes to sovereign debt, said Paola Subacci, an economist at the Global Policy Institute at Queen Mary University in London, because the rules don’t apply to private loans, whether from a hedge fund or China’s central bank. Often these creditors have an interest in drawing out the process to hold out for a better deal.

Mr. Guzman and other economists have called for an international legal arbiter to adjudicate disputes related to sovereign debt.

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

The United States, though, has repeatedly opposed the idea, saying it is unnecessary.

Rescues, too, have proved to be problematic. Last-resort loans from the I.M.F. can end up adding to a country’s budgetary woes and undermining the economic recovery because interest rates are so high now, and borrowers must also pay hefty fees.

Those like Mr. Guzman and Ms. Mottley pushing for change argue that indebted countries need significantly more grants and low-interest loans with long repayment timelines, along with a slate of other reforms.

“The challenges are different today,” said Mr. Guzman. “Policies need to be better aligned with the mission.”

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