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Charles Kenny is a senior fellow and the director of technology and development at the Center for Global Development. His current work focuses on gender and development, the role of technology in development, governance and anticorruption and the post-2015 development agenda. He has published articles, chapters and books on issues including what we know about the causes of economic growth, the link between economic growth and broader development, the causes of improvements in global health, the link between economic growth and happiness, the end of the Malthusian trap, the role of communications technologies in development, the ‘digital divide,’ corruption, and progress towards the Millennium Development Goals. He is the author of the book "Getting Better: Why Global Development is Succeeding, and How We Can Improve the World Even More" and “The Upside of Down: Why the Rise of the Rest is Great for the West.” He has been a contributing editor at Foreign Policy magazine and a regular contributor to Business Week magazine. Kenny was previously at the World Bank, where his assignments included working with the VP for the Middle East and North Africa Region, coordinating work on governance and anticorruption in infrastructure and natural resources, and managing a number of investment and technical assistance projects covering telecommunications and the Internet.
Want to know what Americans think about the foreign aid budget? They think it is big. If they thought it were small, they might want to cut it less. On the other hand, they might not. In fact the real problem isn’t the actual or perceived size of the aid budget, it is what people think is done with it. They believe a lot of aid money is wasted. Want to shore up support for development assistance? Rather than say ‘but it is such a small amount!’ try persuading people it might do some good.
Senior Fellow Charles Kenny writes his weekly column in Bloomberg Businessweek on how the developing world avoided the debt trap in wake of the global slowdown.
The following article originally appeared in Bloomberg Businessweek.
As the sequester demonstrates new lows in America’s fiscal management and the European debt crisis drags on for its third year, it’s worth noting that most of the rest of the world’s financial health is pretty good. Developing countries used to rule the roost when it came to debt crises and defaults. But after a painful period of policy reform supported by considerable debt relief and restructuring, they were in a far stronger position by the end of the last decade. This has allowed them to follow policies that cushioned their citizens from the impact of the global slowdown, rather than having to ratchet up the pain—in contrast to the paths chosen by governments in much of Europe and now, the U.S.
In 1971, average external debt across 75 developing countries was worth less than a quarter of gross domestic product. Less than one in 10 saw ratios above 50 percent. By 1990, in the aftermath of the oil shock and two “lost decades” of growth, the average developing country had an external debt worth a little more than its GDP. More than six out of every 10 countries had ratios above 50 percent. As late as 2000, while average external debt levels had fallen to 83 percent of GDP, two thirds of countries still had external debt-to-GDP ratios above 50 percent.
The last decade brought dramatic change. By 2011, suggests the World Bank, the average external debt-to-GDP ratio fell to 42 percent and less than one in three developing countries had a ratio over 50 percent. Compare that to the euro zone, where gross external debt is worth about 125 percent of GDP. Similarly, public debt service in the developing world, measured as a percentage of exports, has fallen from 18 percent in 1990, through 8 percent in 2000, to below 3 percent in 2011.
This change involved three big factors: reform, relief, and growth. Reforms—including deficit reduction, moving to market interest rates, and introducing competitive exchange rates—were first introduced by Latin American governments in response to the debt crises of the 1980s. They were so strongly taken up by the U.S. Treasury, the World Bank, and the IMF that they became known as part of a broader package labeled the “Washington Consensus.”
The Washington troika pushed the “consensus” reform agenda, using the incentive of debt relief and restructuring. The Brady Plan, named for then-Treasury Secretary Nicholas Brady, restructured the debt of countries with considerable obligations to private banks. The multilateral lending institutions, meanwhile, introduced the Heavily Indebted Poor Countries (HIPC) initiative for the poorest countries that owed debt to the IMF and the World Bank. Under HIPC and its successor agreement, 30 African nations received over $70 billion in debt relief. Liberia and São Tomé actually received debt relief worth more than a year of GDP. Debt service paid by the HIPC countries declined from about 4 percent of GDP in 1999 to about 2 percent in 2005.
The third factor that helped with debt burdens in the last decade in particular was strong economic performance. Developing countries as a whole saw GDP expand by 79 percent from 2000 to 2010. That’s enough to reduce a constant debt stock as a percentage of GDP by about 44 percent.
Lower debt levels are associated with good things—not least, fewer debt crises. Carmen Reinhart and Kenneth Rogoff report in the American Economic Review that while more than one-third of the countries they study were in default at the peak of the 80’s debt crisis, the proportion was closer to one in 10 by 2010. The sustainability of debt has led to a distinct stability of inflation and global currencies. Reinhart and Rogoff suggest that during a five-year peak around 1990, more than half of all countries in the world saw a 15 percent or worse devaluation of their currency, with inflation scoring above 20 percent. In the last few years, this has dropped to below 5 percent.
Lower initial debt levels have also helped developing countries respond more forcefully to the global financial crisis. World Bank economists note that emerging economies didn’t sink as low during the 2008 crisis and bounced back faster than did advanced countries. In the past, they suggest, skittish foreign investors would force developing countries to cut spending and raise interest rates in the midst of a recession, worsening their slumps. This time around—thanks to lower debt, strong reserves, more flexible exchange rate regimes, and increasingly credible central bank leadership—many developing countries have possessed the ability to reduce interest rates and increase spending. And (unlike, say, the U.K.) most were smart enough to use that policy space to avoid shrinking their economies.
But the lessons for Europe aren’t straightforward, and they are even less so for the U.S. For a start, whatever restructuring or forgiveness Greece manages to milk out of its creditors is going to be considerably less generous than an HIPC settlement. Second, cutting long-term fiscal deficits and improving the current account situation is, to put it mildly, a bit late now. A “more flexible exchange rate” in the context of Greece or Portugal means to “leave the euro”—something that would carry considerable economic (and political) costs of its own. Finally, faster growth is possible at the margins, not least through greater competition in innovation, but rich economies will never expand at the pace that poor countries have managed over the last decade.
Any lessons probably apply to the next crisis—but there they apply to everyone. If what is going on in Europe isn’t enough of a defense against complacency in the developing world, the last lines of Reinhart and Rogoff’s paper might be: “There is little to suggest in this analysis that debt cycles and their connections with economic crises have changed appreciably over time.” Today Greece. The day after tomorrow: back to Latin America and Asia?
Read it here.
This week, eight polio vaccination workers in Sindh and Peshawar have been killed in Pakistan during a three day anti-polio drive (see here). Last week in Afghanistan, two polio vaccinators were also killed. Suspicions of CIA involvement in the campaign have been identified as causes of the attacks. “Our teams are getting attacked, and we are having a hard time hiring health workers because they are worried about being called a spy,” said the Head of Medicine in Khyber Pakhtunkhwa province earlier this summer.