The global debt crisis has deep roots in economic policy and development choices going back to the 1970s. When the oil prices soared in 1973, member countries of OPEC deposited their new wealth into Western commercial banks. These banks looked for investments for this money and turned to developing countries, whose oil imports were helping to balance the oil-exporting economies of the West. The private lenders were able to charge high interest rates, supposedly because they knew that these countries could not afford the original loans and that there was a risk of default.
The result is that the world’s poorest nations spend more on paying debt interest than they do on health and education. Their debt costs have risen twice as fast as those of advanced countries since 2010. The cost of this debt is stifling the growth and development of these economies, especially in the face of higher risks and higher trade tariffs.
To reduce the likelihood of future debt crises, the system needs to upgrade its apparatus for assessing a country’s debt sustainability. It must move beyond a simplistic approach based on whether a country needs loans to tide it over, and shift away from the assumption that debt write-offs are not needed. Instead, a menu of options is needed to support countries through economic restructuring and debt relief programs aimed at bringing debt levels down to the estimated “prudent” level of 52-54% of GDP. This will require a degree of fiscal discipline, but this can be done without harming growth or social programs and in ways that actually enhance long-term economic prospects.
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