Debt-related problems are far from being the only ones affecting large industrialized countries. André Cartapanis explains why the fragmentation of the world economy will place an increasing burden on developing countries
Since the 1980s, a number of emerging or low-income economies with a lack of savings or a lower capital / labor ratio than in industrialized countries have opted for a development strategy based on capital inflows and the use of international credit. Among the expected effects were lower cost of capital, increased investment, productivity gains, increased exports and stronger growth … This amounted to a combination of the theory of growth transmitted by capital inflows and the theory of growth driven by exports.
This, of course, raised the question of the sustainability of this debt. First, the economic operators of the recipient countries (state, companies) make effective use of this financing so that the return on investment allows the initial loan, capital and interest (or dividends) to be repaid. Then, or rather at the same time, the future absorption of net exported production by the rest of the world should be maintained. Because at the macroeconomic level, in the face of external debt, it is not just debtors, private or public, who have to ensure repayment. It is the national economy as a whole, by releasing the necessary foreign currencies in the form of an exportable surplus, with the exception of ad infinitum deferrals, thanks to the resumption of financing under unchanged rates. However, this has two consequences. First, limiting external repayment requires an extraversion of the economies of the South according to their ability to generate a long-term exportable surplus that “brings” foreign currencies, to the detriment of the country’s basic needs, such as food security. Second, it conditions debt sustainability through the continued openness of lending markets, the intensity of their growth and the stability of initial financial conditions (interest rates, exchange rates, terms of trade).
Today, the effects of COVID, the war in Ukraine, the sudden acceleration of inflation and rising interest rates, the effects of the energy or grain price explosion, the spread of protectionist measures, the beginnings of global stagflation (at best), all make imports more expensive and slow down exports from South countries energy). At the same time, these shocks dramatically burden the solvency of the foreign debt of the countries of the South, inherited after 40 years of financial liberalization and the amount of which has reached considerable proportions.
This is a phenomenon that will continue over time. As the slowdown and the foreseeable increase in military spending and compensation provided to households to cope with rising energy and food prices, not to mention the significant costs of decarbonisation and energy transformation policies, will inevitably increase industrialized public debt in the context of inflation-imposed monetary normalization, which will increase the burden . And now there is an eruption of new demands related to economic patriotism or the imperative of resilience, resulting in the regionalization of international production chains and the political will to stimulate relocations and reduce supply shortages. South could benefit. The new fragmentation of the world economy will be to the detriment of the countries of the South. It should deprive them of a substantial part of their endogenous capacity to repay external debt, while limiting their access to exogenous capacity for new financing, such as deferral. As we can see, the trap of international debt is closing for the countries of the South.