In March of 2020, the world stopped. Economies collapsed, schools closed, and families went dormant. Now, as those of us in the developed world salvage our economies, return to the classroom, and look forward to spending the holidays in the same room as family, those in the developing world continue to suffer. The World Bank Group (WBG) holds two key goals central to its mission: ending extreme poverty and achieving shared prosperity in a sustainable manner; in a Development Committee meeting on October 15, 2021, WBG actors explained :

“An estimated 100 million more people have fallen into extreme poverty, about 80% of them in MICs. Millions of jobs have been lost, while informality, underemployment, and food insecurity have increased. Children, especially girls, have lost schooling and educational gaps are widening, with long-term risks for human capital. Women’s economic and social situation has worsened, underscoring the importance of promoting gender equality through recovery. The pandemic has also heightened vulnerabilities in LICs, MICs, and in situations of fragility, conflict, and violence (FCV)”

As governments and economic agencies around the world scramble for solutions, we examine the problems emerging economies face today and why they persist.

How did they get here?

Every functional economy has their method of capital formation with which they fund government programs such as stimulus checks or vaccination initiatives. While more advanced economies can rely on taxation to fund many of the nation’s needs, in low-income countries, taxing the populace is an infeasible and often counterintuitive solution to their economic crises. This means that foreign investment is the only path to recovery. Herein lies the problem: at the onset of the pandemic, investors predictably panicked and fled to reliable and developed economies to maintain their savings. However, by the third quarter of 2020, these economies began to place an emphasis on domestic consumption, leading to nations like the US and UK to cut their interest rates to 0.5 and 0.15 percent respectively to spur domestic consumption. On the flip side, these investors transitioned towards economies in Sub-Saharan Africa – Nigeria, South Africa, Kenya – which promised more lucrative returns with interest rates of 8, 9, and 12 percent, respectively. This roller-coaster of fleeing and returning crucial capital continued when the US once again hiked interest rates, more than tripling them from 0.5 percent in August 2020 to 1.75 percent in March 2021. Keep in mind, for many of these LDCs, it is either not fiscally possible or in the best interest to repay these loans with 5 – 8 percent interest rates. Such payments eat into taxes which could have otherwise been funneled towards public programs which pay more gains in the short run, which is all that LDCs can afford to care about right now. Thus, crushing economic crises and unpromised returns in the developing world juxtaposed with ultra-safe, reasonably lucrative investments in the US caused global investors to pull $290 million out of the developing world and return to the developed world—that’s where the global community stands today. 

This pattern of fleeting capital is not new – the so-called ‘Taper Tantrum’ occurred in 2013 when the Fed announced it would taper its purchases of bonds, a practice it had adopted following the 2007-08 global financial crisis. In response to the crashing of bond prices and liquidity in the economy, money ebbed and flowed in different markets in search of stability. The only difference between then and now, the former executive secretary of the U.N. Economic Commission for Africa, Carlos Lopez, explains, is that “this time would be much more profound… with emerging market debt burden[s] groaning under the weight of higher health care expenditures, lower tax revenues, and depleted foreign reserves”.

What stands in the way of long-term solutions?

The world’s financial actors, from the IMF to World Bank, are leading the charge to rescue these economies but unfortunately have nothing to show for it. The Debt Service Suspension Initiative, pioneered in April of this year, planned to group the nations financing Africa’s economies and have them engage in loan forgiveness or loan extension schemes. However, the Western nations in this ‘group’ have recently been pulling their financial support from Africa’s debt-financing schemes. The lone actor rising to the scene? China.

China’s well-documented loan habits involve ‘opaquely constructed’ contracts that often leave emerging markets in a lose-lose scenario – they either take the loan and owe exorbitant interest payments down the road or abandon the loan and allow their economy to falter in the present. 

The other route for these economies is the IMF’s July 2021 Special Drawing Rights (SDRs) initiative which opened up $650 billion in capital to save economies worldwide. How do SDR’s operate? They function as free capital the receiving nation can use on anything from replenishing foreign reserves, to exchanging for foreign currency, to financing flagship infrastructure projects. Predictably, this solution once again falls short, as the aforementioned $650 billion is allocated to the IMF’s member nations based on the size of their economies, naturally leaving smaller economies and those most in need behind. While the entirety of Africa splits $34 billion amongst themselves, the US hoards nearly quadruple that in $113 billion. Even IMF Director Kristalina Georgieva urged that those nations with more robust economies provide their unneeded SDRs to vulnerable nations, which displays an unsustainable reliance on certain nations to act in a manner opposite to their self-interest, something many nations will not be willing to do during these tumultuous times.

Where do we go from here?

In the midst of cascading financial crises, it can be easy to forget the root cause; a global pandemic is still ravaging regions like India, Brazil, Argentina, and Sub-Saharan Africa. Many of these nations are struggling with a third or even fourth wave, with infections doubling every 18 days and a mere 1.3 percent of the population being vaccinated. The exponential growth of these problems leads to a similarly compounding economic catastrophe where every escape route leads to higher health care expenditures, lower tax revenues, and chronically depleted foreign reserves.

In the arsenal of efforts to defeat the coronavirus in developing nations, the IMF, World Bank, developed world, and actors at fault like China ought to add taking a more holistic approach on issues like debt servicing, loan forgiveness, and capital reimbursement. Perhaps advanced nations ought to be more lenient with loans — such forbearance may allow developing nations to recover faster and be more likely to pay back loans in full in the long-run. This notwithstanding, the global community needs a more permanent solution to catalyze real growth in the developing world.

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