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The Global South’s Coronavirus Debt Crisis

The staggering exodus of capital from the Global South is pushing developing economies to the brink of default – making it increasingly likely that the greatest cost for the coronavirus crisis will be paid by the world's poorest.

In early March, Lebanon defaulted on its debt. A couple of weeks later a financial ratings agency declared South Africa’s debt ‘junk’. Argentina has effectively been in default for several weeks, negotiating with creditors over what the government can pay. Many more countries, with Ecuador and Zambia in front, are expected to default over the coming months.

For most countries in the Global South, Covid-19 meant an economic crisis first, with the health and humanitarian crisis following behind. Nearly $100 billion of capital has flowed out of emerging markets – four times the damage caused by the 2008 crash in the same timeframe. The UN reports a 37% fall in the value of commodities, which many southern countries still depend on to earn dollars to pay their debts. They predict an $800 billion collapse in export revenue.

When the Covid-19 crisis hit Europe and the US, governments were able to inject massive sums of money into their economies. While we will continue to debate the nature of these stimulus packages – who benefits and who loses out – there is little dispute over their necessity. After all, we’ve recognised for at least 150 years that allowing the market to ‘make decisions’ about our society creates profound disparity at the best of times. In a crisis, markets fuel an endless downward spiral.

But the problem for most countries is that they are simply unable to intervene on anything like this scale. They were the first victims of neoliberalism, an economic system built on the back of the ‘third world debt crisis’ in the late 1970s, and which has handed financial markets power over every aspect of society. This debt crisis upended the hopes of many ‘third world countries’ (so-called because they were compared with the third estate, the commoners of the French Revolution, the element of society which would enact radical change). It ushered in a period in which the market was to provide the answer to all social problems. 

Debts and Dominoes

In August 1982, Mexico defaulted on its $80 billion debt, sending shock waves through the international money markets. Mexico was seen as an economic domino. If it defaulted, more than a dozen Latin America countries would follow, crashing the banks which had spent more than a decade lending them money at low rates of interest. The financiers screamed for the US government to step in and save them. 

The woes of countries like Mexico can be traced back in part to Nixon’s decision to rip up the Bretton Woods system. Banks had been let off the lead to go on a lending rampage, careless of how much they were lending and to whom. As long as the plates kept spinning, everything seemed ok. But in 1979, as the global economy nose-dived, banks persuaded the US to hike interest rates to protect them from inflation; debts suddenly became unpayable.

The concern of Western policy makers in the early ’80s was less about Mexico’s solvency, and more about the stability of the banks. A plan was hatched. Public bodies like the International Monetary Fund (IMF) and the World Bank would intervene, lending to indebted countries. This would allow them to repay the banks and preserve profits, essentially bailing them out.

The real price was paid by the countries which received these new loans, because in order to access them, they had to agree to a programme of ‘structural adjustment.’ This entailed sweeping austerity, privatisation of everything in sight, liberalisation of trade, and governments ceding control of capital flight. ‘Don’t worry,’ they were told, ‘the market will save you, just do what it wants.’

At a stroke, notions of universal healthcare and education, of fairer terms of trade, of being able to constrain the role of multinational corporations – were gone. The terms dictated by the IMF caused two ‘lost decades of development,’ in which dozens of countries saw their human development indicators reversed – an incredible achievement of sorts, as such a phenomena is almost never seen outside war or natural disaster. Neoliberalism, and the rule of finance, was imposed on large parts of the world, and it has constrained those governments ever since.


With a few exceptions – such as Burkina Faso in the 1980s, the Latin American ‘pink tide’ governments in the 2000s, and of course China – neoliberalism held sway across the Global South. Far from trying to control and regulate markets, governments should let them work their magic. As big business stashed wealth in tax havens, and governments were left without the means to fulfil their obligations, they were increasingly forced to turn to markets for funding.

A graph from the UN Conference on Trade & Development (UNCTAD) released recently exposes this in startling detail. Debt from richer governments (including, increasingly, China and the Gulf states) and from multilateral institutions like the IMF has grown considerably. But this increase is barely noticeable, dwarfed by the build-up of debt owed by Southern countries to private investors. 

The post-2008 spike in lending is particularly striking. As governments in the West poured cash into the financial sector and reduced interest rates to zero, investors scoured the world looking for better returns. The ‘African Miracle’ which caused such excitement in the financial press was a result of this ‘investment,’ inflating massive debt bubbles around commodity production and export markets which too many Africans countries were already overly dependent on.

Robbed of the tools to regulate and control this capital, wealth flowed upwards. Rapidly growing countries like Nigeria saw fast growth alongside rising poverty. And, when the chips are down, governments can do nothing to prevent an exodus of capital as it flees back to the West, where investors hope generous governments will protect them. 

The danger is that – as in the 1980s in the Third World, and post-2008 in the First World – the bill will be paid by the poorest. In response to Covid-19, the IMF and World Bank are again pouring loans into distressed counties, which will have to be repaid. Already, the institution is predicting the need for budget cuts as early as next year. And in order stem the bleeding, countries will be tempted to offer better terms to investors – more deregulation, more incentives for finance.

While the most powerful nations in the world can – and should – borrow for free, the countries in most trouble will have to offer their souls just to keep going, compounding their problems long-term. 

Reversing the Process

Financialisation doesn’t simply mean very powerful banks; it’s about enforcing the discipline of short-term profit maximisation throughout the economy – regardless of the cost to society, the environment, or future generations. A car manufacturer is not primarily interested anymore in producing better cars than other manufactures.

It needs to compete for investment and debt against the rest of the economy, meaning it must behave ruthlessly to extract profits regardless of negative impacts – even on its core business. If a car company can make higher profits speculating, asset stripping, enforcing patents, buying its own stock, than it can by making high quality cars, so be it.

Imagine this logic applied to public services, or indeed governments as a whole. Public services quickly become commodities, and governments must compete against one another (and other economic actors) for investment and debt. They must engage in a competition to turn their economies into havens for finance, regardless of the impact on the populace. 

Covid-19 exposes the real cost of this economy. In countries without proper health systems, without workers’ rights, without welfare safety nets, people are suffering unimaginable horrors. The ‘market knows best’ system has failed to build resilience, because that would have hindered wealth extraction. Rather than building decent public health systems, for instance, countries have been told to let the market provide them, leaving yet more debt while failing to provide universal healthcare.

This won’t be the last pandemic, and in any case climate change carries much higher costs than this terrible disease. A global reset is a matter of life and death for potentially billions of people. This will not be brought about by IMF lending, or by the G20 suspending debt repayments of developing counties for a few months – as necessary as this money might be short-term.

We need a thorough de-financialisation of the international economy. Debt cancellation is a vital part of that, but deep and broad debt write-downs, not ‘forgiveness’ (the only parties that should be asking for forgiveness are those that created this economic system of crisis and dependency). 

But one-off cancellation is not sufficient either. We currently have no means of forcing the private sector to behave responsibly or cancel debts. As things stand, debt write down by the UK government will simply flow into the pockets of financiers in the City of London. We need to create an international system, independent from creditor institutions, which can compel the private sector to cancel debt. We’re unlikely to get to this place without widespread defaults across the south, and activists here need to defend countries when those defaults start. 

There’s much we can do to change the financial system besides. Encouraging the use of capital controls so that the Global South can prevent massive outflows destabilising economies, banning speculative ‘short-selling’ (which allows financiers to profiteer from crises), a wealth tax on the financial sector and a financial transaction tax to dampen speculative capital – all can help. 

But we need much broader measures, because financialisation isn’t only about the financial sector. Trade rules currently encourage uncontrolled financial flows, prevent governments from regulating investment, lock in liberalisation of services, and enhance the patent rights of monopoly capitalists like the Big Pharma companies, ironically disincentivising them from fulfilling their supposed purpose: creating useful new medicines.

Clearly, we need an almighty effort to crack down on tax dodging, the single most important thing preventing southern countries expanding expenditure without resorting to debt markets. With that money, they could build public services. Admittedly that will require serious mobilisation in countries under the rule of governments which gave up on protecting their citizens many years ago, but forcing those governments to take responsibility for their actions will help foster that pressure. 

After the Second World War, those who returned decided they’d had enough of the market dictating the life they could live. Healthcare, education and housing, they argued, should not be privileges of the wealthy but rights for all. International rules encouraged governments to intervene to create employment and develop their economies. The system wasn’t perfect – it was the site of constant struggle between north and south, and class struggle within countries. But the suppression of capital – through both regulation and through expanding those parts of our economy which are outside the market mechanism – is surely how we begin to create a new society based on human need, as well as reversing climate change. 

Most world leaders will not voluntarily choose this path. So it will be up to us to push them every step of the way, just as citizens and movements pushed governments after World War Two to create a new international order.