An Era of Debt Crisis Catastrophe Is Dawning

Consider Zambia, and a tale of great potential being crushed by the millstone of debt. Until recently, this southern African country with a population of 19 million had for three decades been (for the most part) a functional multiethnic, multi-party democracy. With its wealth of raw materials and its booming capital, Lusaka, it long looked set to be one of the more successful states of Sub-Saharan Africa. But reckless borrowing, combined with the economic fallout of the COVID-19 pandemic, saw Zambia default on its debt in November 2020. The cost of essentials such as food, energy, and transportation soared; businesses laid off workers; public-sector salary payments were delayed. The country has been in economic limbo ever since.

As of this article’s publication, the Zambian government is reportedly—at long last—on the verge of a restructuring agreement with its bilateral creditors. Whereas Silicon Valley Bank was bailed out in three days, Zambia has waited almost three years.

A new report supported by Open Society Foundations, of which I am president, reveals the devastating impact of such delays. In it, Clemens Graf von Luckner and Juan Farah-Yacoub, graduate students at Sciences Po and Harvard University, respectively, chart the human costs of inaction on global debt. They note that Zambia’s last debt crisis in the 1980s saw life expectancy fall from 53 years to 45 years over the decade following the default (it rebounded to 62 years by 2020). Drawing on their research with Carmen Reinhart, former World Bank chief economist, Graf von Luckner and Farah-Yacoub show that, on average since 1960, countries that defaulted saw an increase of 10 percentage points in infant deaths a decade later. Applied to Zambia’s recent default, that would mean an additional 3,079 infant deaths per year by 2030, the report notes.

This week, international leaders gather in Paris for the Summit for a New Global Financing Pact as a vicious financial bushfire rages across low- and middle-income countries. The West is rightly focused on Ukraine’s defense of its sovereignty and democracy from Russia’s invasion. But tragically, it has not managed to focus simultaneously on the other great calamity of our polycrisis age: the debt crisis. The overlapping shocks of the COVID-19 pandemic, the Russia-Ukraine war, and rising interest rates has meant 14 defaults since 2020, compared with 19 defaults from 2000 to 2019. The non-governmental organization Debt Justice estimates that 54 countries are currently in debt crisis (defined as having a large financial imbalance with the rest of the world and large government payments on external debt), up from 22 in 2015 and 31 in 2018. Africa and Latin America are hardest hit.

Too often such stories are reported in one of two ways: abstract reports on debt figures, and anecdotal evidence about how the crisis is experienced on the ground. The Open Society Foundation’s report, “The Human Costs of the Failing Global Debt System,” launched on Wednesday online and at the summit in Paris, seeks to link the two. It finds, for example, that GDP in the year following a default is typically 2.5 percent lower than what would be expected otherwise, a gap that grows by an average 1.5 percent annually over the following eight years. By the 10th year, GDP is 14.5 percent smaller and (based on the global average) life expectancy is one year, two months, and 12 days shorter.

We are frequently reminded of the horrors of Russia’s war by television footage of missile strikes on innocent civilians. But the horrors of the debt crisis typically play out much farther from the cameras: the child or the mother dying from avoidable illness; the lives shortened by the lack of healthcare or stunted by the lack of education, opportunities, or infrastructure; the moves towards long-term green prosperity thwarted by the cold logic of the balance sheet.

This week’s Paris finance summit was announced by French President Emmanuel Macron at the 27th U.N Climate Change Conference last year; it seeks to build a “new consensus,” as Macron has put it, to generate more investment in the twin goals of development and climate progress. Its goal is to reach a new agreement between the so-called global north and global south on concrete actions for the next 18 months that will advance this agenda, which naturally includes tackling unsustainable debt. Thus, the summit represents a chance for the dozens of heads of state and government, and representatives of multilateral institutions, in attendance to act collectively to at least begin to bring the crisis under control.

Doing so means creating firm timetables for debt agreements within the current Common Framework mechanism designed by the G-20. This would put an end to the sort of limbo Zambia has experienced over the past three years. There must also be a shift in norms: The International Monetary Foundation (IMF) should use its authority to “lend into arrears” (to organize debt relief without repaying creditors who refuse restructuring), and states should take measures to prevent private creditors from refusing to participate in debt settlements agreed to by other creditors. That also demands significantly more funding by rich countries for international financial institutions such as the IMF, the World Bank, and other multilateral development banks to support countries’ recovery from default and enable the economic growth needed to avoid further defaults.

How events play out this week in the French capital will also give us a glimpse of the wider future of international order. Negotiations will demonstrate whether the global north and south can establish a more constructive relationship, whether the international community and especially those economies responsible for the overwhelming share of historical emissions can find the ambition needed to finance an equitable global green transition, and more widely whether multilateralism itself still has a chance of renewal and resurgence. Along with upcoming meetings of the G-20, World Bank, IMF, and U.N. Climate Change Convention Conference of Parties, the summit’s success or failure will shape the future of countries such as Zambia. It will be a defining moment.