Martin Wolf: The threat of a lost decade in development

A way has to be found to resolve the debt problems that are now emerging for the world’s most vulnerable

The shocks of the past three years have hit all countries, but they have hit emerging and developing countries particularly hard. As a result, according to Global Economic Prospects 2023, just out from the World Bank, the convergence of average incomes between poor and rich countries has stalled. Worse, it might not soon return, given the damage already done and likely to persist in the years ahead.

By the end of 2024, gross domestic product levels in emerging and developing economies are forecast to be 6 per cent below those expected before the pandemic. The cumulative loss in GDP of these countries between 2020 and 2024 is forecast at 30 per cent of 2019 GDP. In fragile and conflict-affected areas, real incomes per head are expected to have fallen outright by 2024. If the global economy slows more than is now forecast, as a result of tight monetary policy and perhaps other shocks, these outcomes could easily be worse.

These losses, with all they mean for the plight of the world’s most vulnerable people, show the impact of the pandemic, the war in Ukraine, the rise in energy and food prices, the surge in inflation and the sharp tightening of monetary policy in high-income countries, especially the US, and consequent rise in the value of the dollar. An obvious danger now is that of waves of defaults in over-indebted developing countries. Taken together, these shocks will cause long-lasting effects, perhaps lost decades, in many vulnerable places.

That has happened before. Indeed, it is what happened in Latin America after the debt crisis of 1982. This crisis, it should be recalled, also followed a surge in private lending to developing countries, then called the “recycling” of the surpluses of oil exporters. Unhappily, this surge in debt was followed by Iraq’s invasion of Iran, a second “oil shock” (the first being in 1973), a spike in inflation, a sharp tightening of US monetary policy and a stronger dollar. A disaster ensued – a debt crisis lasting a decade.


Disturbingly, the recent tightening of monetary policy by the central banks of the Group of Seven leading economies has been more similar to those in the 1970s and early 1980s than to any since then, in both speed and size. On current market-implied interest forecasts, the cumulative rise will be close to 400 basis points over 17 months. The rise from May 1979 was ultimately bigger, but it also took longer. It is true that rates start from a far lower level this time. But that may not make that much difference if people have relied on these low rates. Moreover, the appreciation of the US dollar has been particularly strong. For the countries that have substantial external debt denominated in the US currency, this will also raise debt service costs sharply.

It is helpful that borrowing this time was not so much from banks at variable rates, but in bonds, which have longer maturities and fixed rates. Nevertheless, a sudden cut off in the flow of credit will create a merciless squeeze. The World Bank shows a rise of 17 percentage points in spreads on sovereign borrowing in foreign currencies of commodity importing countries with weak credit ratings in 2022. Effectively, these countries are shut out of markets. Moreover, the external debt of sub-Saharan Africa is high, too, at over 40 per cent of GDP. It is not surprising that there has been a huge decline in public and private bond issuance in emerging and developing countries since February 2022 compared with a year earlier.

Inevitably, highly indebted countries that have already suffered the Covid shock and a sharp deterioration in their terms of trade, as food and energy prices soared, will now be in even more serious and enduring trouble. This will also include a large number of low-income countries where the livelihoods of many are already on the margins of survival. According to the bank, the number of people suffering “food insecurity” (that is, on the borders of starvation) in low-income countries jumped from 56 million in 2019 to 105 million in 2022. When might this reverse?

We know, in addition, that many children lost parents during the pandemic and that their education was also seriously disrupted. Furthermore, physical investment has fallen sharply. Thus, for emerging and developing countries as a whole, the bank forecasts that aggregate investment in 2024 will be 8 per cent lower than expected back in 2020. If one adds the likelihood of long-lasting debt problems and so a cessation of flows of external capital, the possibility of a lost decade for convergence surely becomes highly probable for many countries. Needless to say, this will also not be an environment in which much progress will be made with the energy transition in many places.

Covid was not these countries’ fault. The lack of global co-operation in tackling it was not their fault. The lack of adequate external official funding was not their fault. The global inflation was not their fault. The war is not their fault. But if the high-income countries do not offer the help they now evidently need, it will unambiguously be their fault.

The high-income democracies wish to embark on a war of values with China. Well, here is one battle. A way has to be found to resolve the debt problems that are now emerging effectively and not, as happened in the case of Latin America, after almost a decade of pretence. A way has to be found to escape the vicious circle in which low creditworthiness begets unaffordable spreads, which beget debt crises and then even lower creditworthiness.

That is not just in the interests of poor countries. It is also in the interests of rich ones. The problems of fragile and impoverished countries will become theirs, too. It is time to do things differently. – Copyright The Financial Times Limited 2023