How the wealthy world has failed poor countries during Covid-19

Like much of the developing world, Pakistan was alarmingly short of doctors and medical facilities long before anyone had heard of Covid-19. Then the pandemic overwhelmed hospitals, forcing some to turn away patients. As fear upended daily life, families lost livelihoods and struggled to feed themselves.

On the other side of the world in Washington, two deep-pocketed organisations, the World Bank and the International Monetary Fund, vowed to spare poor countries from desperation. Their economists warned that immense relief was required to prevent a humanitarian catastrophe and profound damage to global prosperity. Emerging markets make up 60 per cent of the world economy, by one IMF measure. A blow to their fortunes inflicts pain around the planet.

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Wages sent home to poor countries by migrant workers — a vital artery of finance — have diminished. The shutdown of tourism has punished many developing countries. So has plunging demand for oil. Billions of people have lost the wherewithal to buy food, increasing malnutrition. By next year, the pandemic could push 150 million people into extreme poverty, the World Bank has warned, in the first increase in more than two decades.

But the World Bank and IMF have failed to translate their concern into meaningful support, economists say. That has left less-affluent countries struggling with limited resources and untenable debts, prompting their governments to reduce spending just as it is needed to bolster health care systems and aid people suffering lost income.

“A lost decade of growth in large parts of the world remains a plausible prospect absent urgent, concerted and sustained policy response,” concluded a recent report from the Group of 30, a gathering of international finance experts, including Lawrence Summers, a former economic adviser to President Barack Obama, and Treasury secretary in the Clinton administration.

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The wealthiest nations have been cushioned by extraordinary surges of credit unleashed by central banks and government spending collectively estimated at more than $8 trillion. Developing countries have yet to receive help on such a scale.

The IMF and World Bank — forged at the end of World War II with the mandate to support nations at times of financial distress — have marshaled a relatively anemic response, in part because of the predilections of their largest shareholder, the United States.

During a virtual gathering of the two organisations this month, the US Treasury secretary, Steven Mnuchin, urged caution. “It is critical that the World Bank manage financial resources judiciously,” he said, “so as not to burden shareholders with premature calls for new financing.”

The World Bank is headed by David Malpass, who was effectively an appointee of President Donald Trump under the gentlemen’s agreement that has for decades accorded the United States the right to select the institution’s leader. A longtime government finance official who worked in the Trump administration’s Treasury Department, he has displayed contempt for the World Bank and IMF.

“They spend a lot of money,” Malpass said during congressional testimony in 2017. “They’re not very efficient. They’re often corrupt in their lending practices.”

Under his leadership, the World Bank has required that borrowers deregulate domestic industry to favour the private sector as a condition for loans.

“There is an ideological attitude here, a more conservative attitude of, ‘Well, it’s going to be money that goes to waste,’” said Scott Morris, a senior fellow at the Center for Global Development. In the midst of a crisis caused not by profligacy but by a pandemic, he added, “that’s a very wrongheaded attitude.”

World Bank officials said the institution had expanded lending at a historic pace, while defending Malpass’ demand for tighter conditions on loans as responsible stewardship. “He wants to have good country outcomes,” said Axel van Trotsenburg, the World Bank’s managing director of operations. “He wants to make sure that the programs reach people.”

The IMF is run by a managing director, Kristalina Georgieva, a Bulgarian economist who previously worked at the World Bank. She is answerable to the institution’s shareholders. The Trump administration has resisted calls to expand the IMF’s reserves, arguing that most of the benefits would flow to wealthier countries.

In April, as worries about poor countries intensified, world leaders issued elaborate promises for help.

“The World Bank Group intends to respond forcefully and massively,” Malpass said. At the IMF, Georgieva said she would not hesitate to tap the institution’s $1 trillion lending capacity. “This is, in my lifetime, humanity’s darkest hour,” she declared.

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But the IMF has lent out only $280 billion. That includes $31 billion in emergency loans to 76 member states, with nearly $11 billion going to low-income countries.

“We have really stepped up in terms of quick disbursement to be able to support countries that are in need,” Ceyla Pazarbasioglu, director of the IMF’s Strategy Policy and Review Department, said in an interview.

The World Bank more than doubled its lending over the first seven months of 2020 compared with the same period a year earlier but has been slow to distribute the money, with disbursements up by less than a third over that period, according to research from the Center for Global Development.

The limited outlays by the IMF and World Bank appear to stem in part from excessive faith in a widely hailed initiative that aimed to relieve poor nations of their debt burdens to foreign creditors. In April, at a virtual summit of the Group of 20, world leaders agreed to pause debt payments through the end of the year.

World leaders played up the program as a way to encourage poor countries to spend as needed, without worrying about their debts. But the plan exempted the largest group of creditors: the global financial services industry, including banks, asset managers and hedge funds.

“The private sector has done zilch,” said Adnan Mazarei, a former deputy director at the IMF, and now a senior fellow at the Peterson Institute for International Economics in Washington. “They have not participated at all.”

Concerns about developing countries’ debts rested atop the reality that many were spending enormous shares of their revenues on loan payments even before the pandemic.

Since 2009, Pakistan’s payments to foreign creditors have climbed to 35 per cent of government revenues from 11.5 per cent, according to data compiled by the Jubilee Debt Campaign, which advocates for debt forgiveness. Ghana’s payments swelled to more than 50 per cent of government revenues from 5.3 per cent.

As the pandemic spread, Pakistan raised health care spending but cut support for social service programs as it prioritized debt payments.

The debt suspension was at best a short-term reprieve, delaying loan payments while heaping them atop outstanding bills.

Some 46 countries, most of them in sub-Saharan Africa, have collectively gained $5.3 billion in relief from immediate debt payments. That is about 1.7 per cent of total international debt payments due from all developing countries this year, according to data compiled by the European Network on Debt and Development.

Summers recently described the debt suspension initiative as “a squirt gun meeting a massive conflagration.”

But the program has proved powerful in one regard: It conveyed a sense that the troubles of the poorest countries have been contained.

“Part of the reason why so little has been done is that there was a misguided expectation that you could provide all the support low-income countries needed simply by deferring payments on their debts,” said Brad Setser, a former US Treasury official and now a senior fellow at the Council on Foreign Relations in New York.

This month, the G-20 extended the program into the middle of next year. Georgieva has chided private creditors for remaining on the sidelines.

Private creditors have been reluctant to offer debt suspension in part because of uncertainty over who will reap the benefits. Many developing countries have borrowed aggressively from Chinese institutions in a process both opaque and uncoordinated. If American or European institutions forgo collecting on their debts, the money may simply be passed on to a Chinese lender rather than lifting health care spending.

Private creditors maintain that poor countries have not requested relief, recognizing that credit-rating agencies may treat debt suspension as a default — a status that jeopardizes their future ability to borrow.

“They don’t want to lose the market access,” said Clay Lowery, executive vice president of research and policy at the Institute of International Finance, a trade association representing financial companies around the world.

But that fear has been actively fomented by creditors, discouraging poor countries from seeking relief.

“The private sector is often highly misleadingly aggressive in suggesting that debt restructuring will cut countries off forever, and that complying with its wishes will get them new money very soon,” Summers said in an interview.

Some argue that anything short of debt restructuring, in which terms are renegotiated and creditors absorb losses on loans, merely extends the pain — for borrowers and lenders alike.

Critics of the IMF say its handling of the pandemic has displayed the same trait that has long defined its mission — a bias toward ensuring that creditors get paid, even at the expense of wrenching spending cuts in poor countries.

Since the pandemic began, the IMF has allocated $500 million to cover the costs of debt suspension, while handing out more than $100 billion in fresh loans. More than $11 billion from the loan proceeds has paid off private creditors, according to a report from the Jubilee Debt Campaign.

“International financial institutions are going to leave countries in much worse shape than they were before the pandemic,” said Lidy Nacpil, coordinator of the Asian Peoples’ Movement on Debt and Development, a Manila-based alliance of 50 organisations. “Their interest is not primarily about these countries getting back on their feet, but to get these countries back into the business of borrowing.”