Martín Guzman was a first-year college student at Argentina’s National University of La Plata in 2001. debt crisis It led to debt defaults, riots, and a devastating recession. The stunned middle class suffered ruin. international monetary fund iThe government insisted on making dire budget cuts in exchange for relief.
After seeing the situation settle down in Argentina, Guzman decided to change his major and study economics. Almost two decades later, when the government went bankrupt again, it was Mr. Guzmán, as finance minister, who negotiated with IMF officials to restructure the $44 billion in debt that had resulted from an earlier haphazard bailout.
He is now one of the leading economists and world leaders who argue that the ambitious framework created at the end of World War II to protect economic growth and stability, with the IMF and World Bank as its pillars, is failing to fulfill its mission. He is one of the leaders.
Guzman, who resigned last year amid rifts within the government, said the current system “contributes to making the global economy more unequal and unstable.”
The repayment amount negotiated by Mr. Guzman is 22nd placement Even between Argentina and the IMF, the country’s economic tailwinds are only increasing, with annual inflation exceeding 140 percent, lines at soup kitchens growing, and a new president, Javier Millei, a self-proclaimed “anarcho-capitalist.” was born. The currency’s value has fallen by 50 percent this week.
Since their inception, the IMF and World Bank have provoked discontent from the left and right. But the latest criticism raises deeper questions. Is the economic framework devised 80 years ago compatible with today’s economy, where new geopolitical conflicts are colliding with established economic relationships and climate change is an urgent threat?
The clash of 21st century ideas about how to fix the systems created for the 20th century world is one of the most important problems facing the global economy.
The IMF was founded in 1944 at a conference in Bretton Woods, New Hampshire, to help countries in financial crisis, while the World Bank focused on poverty reduction and investing in social development. The United States was the preeminent economic power, and many developing countries in Africa and Asia were not yet independent. The basic ideology, later known as the “Washington Consensus,” held that prosperity depended on unimpeded trade, deregulation, and the dominance of private investment.
“Nearly 80 years later, the world’s financial structure is outdated, dysfunctional, and unequal.” Antonio Guterressaid the United Nations Secretary-General at a summit in Paris this summer. “Even the most basic goals on hunger and poverty have been reversed after decades of progress.”
Today’s world is geopolitically divided. More than three-quarters of current IMF and World Bank members were not members of Bretton Woods. China’s economy, left in ruins at the end of World War II, is now the world’s second-largest economy, an engine of global growth, and an important hub for the world’s industrial machinery and supply chains. . Although India was still a British colony at the time, it was one of the top five economic powers in the world.
The once-vaunted “Washington Consensus” has fallen into disrepute, with widespread recognition of how inequality and bias against women are holding back growth and the need for collective action on climate change.
In recent years, the mismatch between institutions and missions has become more apparent. The impact of the coronavirus pandemic, soaring food and energy prices related to the war in Ukraine, and rising interest rates have left low- and middle-income countries in debt and facing low growth. The size of the world economy and the scope of its problems have grown enormously, but funding from the IMF and World Bank has not kept pace.
Resolving the debt crisis is also highly complex because it involves not just a few Western banks, but also China and a large number of private creditors.
The World Bank’s own analysis outlines the extent of the economic problem. The report, released Wednesday, concluded that “debt has become a near-paralyzing burden for the poorest countries.” 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 developing countries will need to mitigate the damage of climate change.
Additionally, there are tensions between the United States and China, Russia and Europe and its allies. It is more difficult to resolve debt crises or finance major infrastructure without facing security concerns. Like when the World Bank awarded Chinese telecom giant Huawei a contract that was found to be in violation of the United States. sanctions policy, or when China resisted Debt restructuring agreement.
“The global rules-based system was not built to resolve national security-based trade disputes,” IMF First Deputy Managing Director Gita Gopinath said Monday in a speech at the Colombian Institute for International Economics. ” he said. “There are countries that compete strategically under undefined rules and without effective referees.”
The World Bank and IMF have made changes. The fund has softened its approach to relief, replacing austerity with the idea of sustainable debt. The bank has significantly increased the proportion of its funds devoted to climate-related projects this year. But critics say the fixes so far aren’t enough.
“The way the global economy evolves and adapts is much slower than the way the global economy evolves and adapts,” Guzman said.
“It’s time to revisit Bretton Woods”
Argentina, South America’s second-largest economy, may be the world economic system’s most notorious and repeated failure, but it was the small Caribbean island nation of Barbados that accelerated the momentum of change.
Prime Minister Mia Mottley spoke at the climate change summit in Glasgow two years ago, and then bridgetown initiativea proposal to overhaul the way rich countries help poor countries adapt to climate change and avoid crippling debt.
“Yes, it’s time to revisit Bretton Woods,” she said. He said this in a speech at last year’s climate summit. In Egypt.
Ms Motley is “Fundamental bankruptcy” A long-standing agreement between poor and rich countries, many of which have made their fortunes by exploiting their former colonies. The most advanced developed countries also emit most of the emissions that heat the planet and cause extreme flooding, wildfires, and drought in poorer countries.
Mavis Owusu Gyamfi, executive vice president of the African Center for Economic Transformation in Ghana, said even recent agreements to address debt, such as the 2020 Common Framework, were created without the input of developing countries.
“We are speaking out and demanding a seat at the table,” Owusu Gyamfi said in his office in Accra to discuss the IMF’s $3 billion bailout for Ghana.
But even though foundations and banks focus on economic issues, they are essentially political creations; power of nations We set them up, fund them, and manage them.
And those countries are reluctant to cede that power.The United States is the only member state with veto power and the largest share of vote One of the reasons for this is due to its economic size and financial contribution. We especially don’t want to see our influence diminished or the influence of others diminished. Chinese – growing up.
The impasse is over Redistribution of votes Efforts to increase funding levels are being hampered. Country Overall agree need to be increased.
A “big hole” in how to deal with debt
Still, as Guzmán said, “even if there is no change in governance, there could be a change in policy.”
Emerging countries need huge sums of money to invest in public health, education, transport and climate resilience. However, due to frequent market fluctuations, they have high borrowing costs. exaggerated Awareness of risk as a borrower.
And because they are typically forced to borrow in dollars or euros, if the Federal Reserve or other central banks raise interest rates to combat inflation, as they did in the 1980s and after the coronavirus pandemic, they payments will skyrocket.
The proliferation of private lenders and different loan agreements have made debt negotiations incredibly complex, but there is no international legal arbiter.
Zambia defaulted on its external debt three years ago and continues to default. no agreement This is because the IMF, China, and bondholders are at odds.
Paola Subacchi, an economist at Queen Mary University of London’s Institute for Global Policy, said there was a “giant hole” in international governance when it came to sovereign debt, with rules restricting private loans, whether from hedge funds. He said that this is because it does not apply. Or China’s central bank. Often these creditors are interested in prolonging the process in order to get a better deal.
Guzman and other economists are calling for an international legal arbitrator to adjudicate disputes related to sovereign debt.
“Every country has a bankruptcy law, but internationally we don’t have one,” said Joseph Stiglitz, former chief economist at the World Bank.
However, the United States has repeatedly opposed The idea that it is unnecessary.
The rescue also proved to be problematic. Loans of last resort from the IMF could ultimately fail further worsen the country’s budget problems Current interest rates are very high and borrowers also have to pay high fees, which is hurting the economic recovery.
People like Mr. Guzmán and Mr. Mottley for change argue that indebted countries need significantly more subsidies and lower-interest loans with longer repayment terms, among a range of other reforms.
“Today’s challenges are different,” Guzman said. “Policy needs to be better aligned with mission.”