The key to economic development and ending poverty is investment. Nations achieve prosperity by investing in four priorities. Most important is investing in people, through quality education and healthcare. The next is infrastructure, such as electricity, safe water, digital networks and public transport. The third is natural capital, protecting nature. The fourth is business investment. The key is finance: mobilizing the funds to invest at the scale and speed required.
In principle, the world should operate as an interconnected system. Rich countries, with high levels of education, healthcare, infrastructure and business capital, should supply finance to poorer countries, which must urgently build up human, infrastructure, natural and business capital.
Money should flow from rich to poor countries. As emerging-market countries become richer, profits and interest would flow back to rich countries as returns on their investments.
Illustration: Mountain People
That is a win-win proposition. Rich and poor countries would benefit. Poor countries become richer, and rich countries earn higher returns than if they invested only in their own economies.
Strangely, international finance does not work that way. Rich countries invest mainly in rich economies. Poorer countries get only a trickle of funds, not enough to lift them out of poverty. The poorest half of the world — low-income and lower-middle-income countries — produces about US$10 trillion per year, while the richest half of the world — high-income and upper-middle-income countries — produces about US$90 trillion.
Financing from the richer half to the poorer half should be about US$2 trillion to US$3 trillion per year. In reality, it is a small fraction of that.
The problem is that investing in poorer countries seems too risky. This is true in the short run. Suppose that the government of a low-income country wants to borrow to fund public education. The economic returns to education are very high, but need 20 to 30 years to realize, as today’s children progress through 12 to 16 years of schooling and only then enter the labor market.
However, loans are often for only five years, and are denominated in US dollars rather than the national currency.
Suppose the country borrows US$2 billion today, due in five years. That would be fine if in five years, the government can refinance the US$2 billion with another five-year loan.
With five refinance loans, each for five years, debt repayments are delayed for 30 years, by which time the economy would have grown sufficiently to repay the debt without another loan.
However, at some point along the way, the country would likely find it difficult to refinance the debt. Perhaps a pandemic, a Wall Street banking crisis or election uncertainty would scare investors.
When the country tries to refinance the US$2 billion, it finds itself shut out from the financial market. Without enough money to hand, and no new loan, it defaults, and lands in the IMF emergency room.
Like most emergency rooms, what ensues is not pleasant to behold. The government slashes public spending, incurs social unrest and faces prolonged negotiations with foreign creditors. In short, the country is plunged into a deep financial, economic and social crisis.
Knowing this in advance, credit-rating agencies such as Moody’s Investors Service and S&P Global give the countries a low credit score, below “investment grade.”
As a result, poorer countries are unable to borrow long term. Governments need to invest for the long term, but short-term loans push governments to short-term thinking and investing.
Poor countries pay very high interest rates. While the US government pays less than 4 percent per year on 30-year borrowing, the government of a poor country often pays more than 10 percent on five-year loans.
The IMF advises the governments of poorer countries not to borrow very much. In effect, the IMF tells the government that it is better to forgo education — or electricity, safe water or paved roads — to avoid a debt crisis. That is tragic advice. It results in a poverty trap, rather than an escape from poverty.
The situation has become intolerable. The poorer half of the world is being told by the richer half: decarbonize your energy system; guarantee universal healthcare, education and access to digital services; protect your rainforests; ensure safe water and sanitation; and more.
However, they are somehow to do all of this with a trickle of five-year loans at 10 percent interest.
The problem is not with the global goals. These are within reach, but only if the investment flows are high enough. The problem is the lack of global solidarity. Poorer nations need 30-year loans at 4 percent, not five-year loans at more than 10 percent. They need much more financing.
Poorer countries are demanding an end to global financial apartheid.
There are two ways to accomplish this. The first is to expand about fivefold the financing by the World Bank and the regional development banks — such as the African Development Bank. Those banks can borrow at 30 years and about 4 percent, and on-lend to poorer countries on those favorable terms. Yet their operations are too small. For the banks to scale up, G20 countries — including the US, China and EU nations — need to put a lot more capital into those multilateral banks.
The second way is to fix the credit-rating system, the IMF’s debt advice and the financial management systems of the borrowing countries. The system needs to be reoriented toward long-term sustainable development.
If poorer countries can borrow for 30 years, rather than five years, they would not face financial crises in the meantime. With the right kind of long-term borrowing strategy, backed by more accurate credit ratings and better IMF advice, poorer countries would access much higher flows on much more favorable terms.
The major countries have four meetings on global finance this year: in Paris in June, Delhi in September, the UN in September and Dubai in November.
If big countries work together, they can solve this. That is their real job, rather than fighting endless, destructive and disastrous wars.
Jeffrey D. Sachs, a professor and director of the Center for Sustainable Development at Columbia University, is president of the UN Sustainable Development Solutions Network. The views expressed in this column are his own.
Eating at a breakfast shop the other day, I turned to an old man sitting at the table next to mine. “Hey, did you hear that the Legislative Yuan passed a bill to give everyone NT$10,000 [US$340]?” I said, pointing to a newspaper headline. The old man cursed, then said: “Yeah, the Chinese Nationalist Party [KMT] canceled the NT$100 billion subsidy for Taiwan Power Co and announced they would give everyone NT$10,000 instead. “Nice. Now they are saying that if electricity prices go up, we can just use that cash to pay for it,” he said. “I have no time for drivel like
Young supporters of former Taiwan People’s Party (TPP) chairman Ko Wen-je (柯文哲) were detained for posting the names and photographs of judges and prosecutors believed to be overseeing the Core Pacific City redevelopment corruption case. The supporters should be held responsible for their actions. As for Ko’s successor, TPP Chairman Huang Kuo-chang (黃國昌), he should reflect on whether his own comments are provocative and whether his statements might be misunderstood. Huang needs to apologize to the public and the judiciary. In the article, “Why does sorry seem to be the hardest word?” the late political commentator Nan Fang Shuo (南方朔) wrote
Chinese Minister of Foreign Affairs Wang Yi (王毅) reportedly told the EU’s top diplomat that China does not want Russia to lose in Ukraine, because the US could shift its focus to countering Beijing. Wang made the comment while meeting with EU High Representative for Foreign Affairs and Security Policy Kaja Kallas on July 2 at the 13th China-EU High-Level Strategic Dialogue in Brussels, the South China Morning Post and CNN reported. Although contrary to China’s claim of neutrality in the Russia-Ukraine conflict, such a frank remark suggests Beijing might prefer a protracted war to keep the US from focusing on
There are no obvious connections between the 7-Eleven retail chain in Japan and the Philippines’ national security concerns in the South China Sea. Here is one, one that also takes in Canadian Broadcasting Corp (CBC), the government of Denmark and Taiwanese plastic surgeons on the way. Japan’s 7-Eleven on Friday last week posted on social media an image of uniforms worn by the chain store’s employees in various locations, including Taiwan, the US, Hawaii, Australia, Sweden, Denmark, Cambodia and the Philippines. If this was intended to promote a sense of camaraderie within the 7-Eleven family, it backfired. Taiwan was tagged with the
RSS