With the world economy slowing down, which even many conservative economists have started calling a ‘secular stagnation’, the problem of external debt of several countries of the Global South is becoming serious. With declining export earnings, they are not able to meet both their import bills and their debt-service payments. When this happens, private financial inflows dry up precisely when they are needed the most, in anticipation of an exchange rate depreciation, which makes matters worse. The debtor countries are forced to approach the International Monetary Fund for loans but it imposes draconian ‘austerity’ measures that particularly hurt working people. A country can go from being a ‘medium income’ one to a ‘basket case’ in a jiffy, as instances in our own neighbourhood amply testify.
Several suggestions have been made in this context to help the debtor countries; these range from debt restructuring, to the issue of a new round of Special Drawing Rights, which inject fresh liquidity into the world economy, to an increase of lending within the Global South itself, including by the BRICS bank. These suggestions no doubt are valuable, but they do not go far enough. The objective ultimately must be not just to make the terms of borrowing by poor countries easier but to eliminate, as far as possible, the need for borrowing itself.
This need arises because at any given level of output in the world economy, which is distributed across countries in a particular way, the level of aggregate demand of the debtor countries exceeds what they produce. But since for the world as a whole, the level of aggregate demand must equal what is produced (for otherwise it would not be produced), this necessarily means that the level of aggregate demand of the creditor countries falls short of what they produce. Corresponding to any deficit (which requires borrowing) there is necessarily an equal magnitude of surplus.
Now if the surplus countries eliminate their surplus, by always ensuring that they increase their domestic absorption whenever a current account surplus arises on the balance of payments, then that would also automatically eliminate the deficits of the deficit countries, doing away with any need for borrowing by them.
This would have an additional advantage as well, apart from eliminating any need for borrowing. The total world demand would be larger than what it was initially, that is, before such adjustment took place and, hence, world employment, output and consumption. The world, in short, would be a better place, with no country being indebted to another country, if only all countries that happen to have current account surpluses made it a point always to eliminate them promptly. But why does this not happen?
In fact, when the Bretton Woods system was set up in 1944, there was a proposal that the surplus countries must be made to increase their domestic absorption to eliminate their surpluses; but it was vetoed by the United States of America, which was then a surplus country (it was later to become deficit) and was the leader of the capitalist world with a decisive voice in shaping it.
The win-win situation that arises if the surplus countries are forced to eliminate their surpluses can be illustrated with an example. Within the European Union, Greece has been a deficit country while Germany has been a surplus country. If the German government could raise its fiscal deficit by, say, one million euros and distribute the sum gratis among the German population to take a holiday in Greece, then Greece’s foreign exchange earnings would go up by this amount, with which Greece could retire some of its old debt. (Germany’s current account surplus would go down by this amount.) In this case, Greek indebtedness would have gone down, employment in Greece would have gone up, and for Germany, instead of holding claims on Greece, its people would have become better off with their Greek vacation.
This example also makes clear why this does not happen. First, a capitalist economy would prefer to hold claims upon another country, which gives it power over the latter rather than improve the living standard of its population. Second, an improvement in the living standard of its population, which consists overwhelmingly of workers, increases their bargaining strength, emboldening them to bargain for still higher wages. For both these reasons, win-win situations that appear eminently preferable if one exercises reason are ruled out under capitalism.
The prospects of having an international economic order where surplus countries are forced to make adjustments therefore appear remote. But that is an argument for the Global South to withdraw increasingly from any global order dominated by advanced capitalist countries and to set up local or sub-global trading arrangements where one country may hold claims on another but these are settled bilaterally or multilaterally within the arrangement itself and do not carry any interest burden. In the old days, India had such an arrangement with the Soviet Union; within this bilateral trade arrangement, only the rupee and the rouble were used, with the exchange rate fixed between them, not dollars or other hard currencies.
Such arrangements are coming into vogue again. Brazil has recently entered into such an arrangement with China and India with the United Arab Emirates. With the advanced capitalist countries led by the US imposing unilateral sanctions against dozens of countries without approval by the United Nations Security Council, many more such arrangements are likely in the coming days. They would not solve the problem of past external debt of the Global South but they should help in controlling debt in future.
Prabhat Patnaik is Professor Emeritus, Centre for Economic Studies, Jawaharlal Nehru University, New Delhi
