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The Global South’s Debt Crisis and the New Dollar/Yuan Diplomacy

May 08, 2020


As I argued in an earlier article, the coronavirus pandemic has acted as the trigger for the deepest global economic crisis since the Great Depression of 1929. This crisis has opened with dramatic capital flight from the Global South, as capitalists correctly expect a collapse in commodity prices to fuel severe recessions throughout the developing world. These dependent countries have massive debt loads and little ability to marshal economic and political power to weather the storm, making a wave of sovereign defaults all but inevitable. As the hegemonic anchors of global capitalism, both the United States and China have the capacity to use their resources to aid struggling economies and build goodwill for the realignment to come. Surprisingly, neither seems to have recognized this fact—leaving a gap to be filled by the first to come to terms with the need for restructuring the global economic order. 

The post-2008 recovery laid the foundations for the ongoing crisis in many ways, and the Global South’s debt crisis is no exception. The spectacular growth of China and the rest of BRICS, along with the U.S. real estate boom, fueled skyrocketing prices for the agricultural goods, oil, metals, minerals, and other commodities exported by peripheral economies throughout the 2000s. This “commodity supercycle” hit a bump temporarily in 2008-09 before finally collapsing at the start of 2016. China had acted as the engine of global demand, especially after 2008, with massive spending raising factories and entire cities seemingly out-of-nowhere. When China’s economic policymakers attempted to put the brakes on the associated credit bubble, this demand dried up, bringing serious pain to emerging economies and fueling a “mini-recession” worldwide. 

Countries in the Global South are dependent on commodity exports because their economies have been forced to occupy a subordinate position within the global hierarchy for well over a century. These countries engage in unequal exchange with core countries—the U.S., Europe, Japan, and increasingly China—trading primary goods in severely competitive markets for higher-value manufactured goods and services produced by monopolies and oligopolies. They are dependent on foreign capital and must structure their economies to serve its needs, a fact reflected in the basic infrastructure of the Global South. (China is one of the only countries to have ever escaped this trap.) When demand for these exports dries up, peripheral economies have little else to rely on. Government revenues plummet, services built around the export economy suffer, and capital flees for brighter pastures. Central banks in these countries are further dependent on foreign exchange to secure the value of their currency—as capital leaves and trade plummets, so goes the value of the local currency against the dollar. 

In 2015 and 2016, however, the crisis in emerging markets provided an opportunity for capitalists in the core. The 2008 crash drove interest rates to near-zero (and even below) in the U.S., Europe, and Japan, making lending to developing countries at elevated rates particularly attractive to investors. External lending to low- and lower-middle-income governments jumped from under $150 billion in 2015 to well over $250 billion in 2016. By 2018, the situation in emerging economies constituted “the largest, fastest, and most broad-based” debt buildup in half a century. 

All of this preceded the historic shock provided by the coronavirus pandemic. Commodity prices—from metals to energy—have fallen at unprecedented rates, with U.S. crude oil famously trading in the negative earlier this month. To put it bluntly: the months ahead will make the 2015-16 lows look like a walk in the park. As income dries up and GDP shrinks, debt that was previously manageable for many governments and firms in the Global South will not be repaid. Lebanon, already reeling before the pandemic, defaulted in March. Argentina offered a “take it or leave it” proposal to its bondholders that will likewise precede a default. Ecuador joined the club not long after. These are only the first amongst dozens of countries that will almost certainly be forced to suspend payments and face currency crises, economic devastation, and political upheaval. 

A disorderly wave of defaults, however, is not inevitable. Ecuador’s missed bond payment, for example, was $800 million—about the same sum that the U.S. Pentagon “lost track of” in 2018, or 0.4% of China’s estimated spending on the Belt and Road initiative to date. The resources at the disposal of the major powers dwarf the debt burdens facing peripheral economies. All of Sub-Saharan Africa’s external debt in 2016, for instance, could have been paid off in full by a U.S. stimulus package which will realistically bridge one-to-two months. Moreover, loans to the Global South are disproportionately held by creditors dependent on or located in the United States, China, and other major powers, whether they originate from international institutions like the World Bank or private hedge-banks. 

Debt relief would not need to be as dramatic as outright cancellation or assumption by the U.S. or China. Either power could assist with payments, cancel a portion of the debt it holds, and pressure international institutions to extend grants and credit on highly-favorable terms. However, the IMF has offered a mere $500 million in grants to struggling countries while it sits on gold reserves of over $140 billion. Both China and the U.S. have thus far refused to consider much-needed real relief, even though it should be more than apparent that defaults are inevitable. The costs will be borne regardless, the only question is when. 

Debt is not a moral issue; it is a question of power and resource distribution. Lenders do not extend credit out of the goodness of their hearts; they ostensibly do so because they calculate and accept the risk of default. Laughable finger-wagging about “moral hazard” likewise ignores the massive sums that every government with means is doling out to avoid unnecessary hardship for its own firms and residents. There is no reason why this support should stop at the border. Publics in the Global South are not likely to forget which countries lent a helping hand when it was needed, and which countries kicked them when they were down. The political and strategic realignment produced by this Third Great Depression could hinge on whether the U.S. and China recognize how much farther the dollar and the yuan could really go toward securing lasting alliances in this period of turmoil.

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