Ecuador is home to the highest per-capita death toll from Covid-19 in Latin America and the Caribbean. Its largest city and commercial hub, Guayaquil, has seen a fivefold increase in mortality rates, with reports of corpses abandoned in the streets. The country entered into a recession after the price of oil—Ecuador’s largest single revenue source—crashed in 2014; amid a global demand drop and price wars, it’s now crashing again. Ecuador could soon come second only to Venezuela in terms of the dire economic outlooks in South America. President Lenín Moreno, meanwhile, has committed to paying off a $4.2 billion loan from the International Monetary Fund. Toward that end, he slashed investments in the public health system by 36 percent in 2019, part of a wave of cuts that sparked nationwide protests last October. This year, 3,680 people were laid off from the country’s health ministry. Buckling under a $17 billion debt load, much of it held by Wall Street, the government struck a deal with bondholders that may only postpone until August what many fear is coming: default. Ecuador is one of many places, then, where public health and debt crises are inflaming one another.
The scale of global devastation predicted to flow from the coronavirus crisis is almost unfathomable. As the death toll worldwide stretched past 165,000, the IMF last week projected an economic downturn 30 percent worse than the 2009 financial crisis and a $9 trillion hit to global gross domestic product. As with the climate crisis—the total scale of which will dwarf the ripples of Covid-19—the impact of this upheaval will be felt disproportionately through the so-called global south: emerging and developing economies frequently located in the tropics or the southern hemisphere. More capital has fled from poorer nations in the last three months than in any year on record, and the value of some Southern currencies has slid as much as 30 percent against an increasingly strong U.S. dollar. With demand and supply both seizing up generally, countries that were already struggling to make sovereign debt payments could soon face catastrophe.
As commodity prices tank, economies whose finances rely heavily on resource extraction, who were already facing headwinds before the shutdowns and price war between Russia and Saudi Arabia, are being hit especially hard. “Ecuador never recovered to anything like the commodity boom moment of growth. The long fallout from the [2014] oil price crash is still very much setting constraints on the government,” said Providence College political scientist Thea Riofrancos, whose research has tracked the country’s resource politics. “The oil crash recession is completely gutting their revenues.” They’re not alone. Nigeria—where oil accounts for over 60 percent of government income—is scrambling to make $7 billion in debt payments this year. Iraq had planned on covering 95 percent of its budget with oil revenues, assuming a $56 price per barrel; as of Tuesday evening, Brent Crude, the international price benchmark, was below $20 a barrel.
The IMF recently likened the economic fallout from the coronavirus to the Great Depression. But “there’s no Great Depression–like policy response, at least not to developing countries,” Richard Kozul-Wright, chief economist for the United Nations Conference on Trade and Development told me. “There’s a huge disconnect between the rhetoric of this being a once-in-a-lifetime global crisis and the kinds of things the leadership of the advanced economies seems to be willing to contemplate.”
Some initial steps have been taken to stop the bleeding. The G20 nations last week committed to a temporary moratorium on $20 billion worth of private and bilateral debt. With the group’s backing, the IMF and World Bank then announced that 77 of the world’s poorest countries would be eligible for a debt suspension from May 1 through the end of the year, with no clear next steps yet for the larger group of indebted nations. The IMF pledged around $215 million in grants to cover an initial list of 25 countries’ debt payments for the next six months and potentially up to two years; it has also encouraged countries to spend as much as is needed to deal with the crisis. And the IMF and World Bank have begun dispatching aid, with the former announcing it will issue $132 million worth of “pandemic bonds” over the weekend.
These policies, however, are operating on the assumption that things will bounce back to normal after this pandemic passes—a mythical “v-shaped” recovery, about which there are plenty of reasons to be skeptical. And given our warming climate, we can expect more destructive shocks to the system coming in the not-too-distant future; if normal was bad for low-income countries before, it won’t get better as seas rise. The current IMF and World Bank coronavirus response amounts to kicking the can of unsustainable debt burdens down a road filled with ever-more-expensive crises. The international financial system was due for a reckoning before the coronavirus hit. Its job now is to ensure there’s one capable of being salvaged on the other end of this spring’s shutdowns.
As poor countries know all too well, not all debts are created equal. In the name of keeping the financial system afloat, the Federal Reserve has extended a gigantic helping hand to overleveraged corporations that have lived large on cheap debt furnished by low interest rates and quantitative easing enacted after the last crash. Indebted economies in the global south, meanwhile, have so far received only temporary relief that could lead to more suffering down the line. Because of the superabundance of dollar-dominated debt issued around the world (it’s the world’s reserve currency), the Fed holds powerful sway over the functioning of the global economy. In dollarized economies like Ecuador, it has virtually total control over monetary policy. Elsewhere, however, the Fed chooses when to extend so-called “swap lines” to other central banks, exchanging lines of credit in respective currencies with the goal of making dollars less scarce; while the list of central banks who enjoy a credit line with the Fed has been expanded of late, low- and middle-income countries—with the exceptions of Mexico and Brazil—still haven’t made the cut. Critics say much bolder action is needed to prevent outright economic catastrophe in the so-called developing world, especially from multilateral institutions. This crisis in particular highlights the need to develop an international financial system that’s fit for the twenty-first century.
The kind of World Bank and IMF structural adjustment packages imposed since the 1970s have pushed lean public budgets, encouraging states to privatize key public services like health care in the name of servicing their debts. Punishing austerity packages sent down from on high, from institutions largely controlled by the world’s wealthiest nations, also stand at cross-purposes with tackling public health crises. A World Bank–negotiated public-private partnership in Lesotho (GDP $2.7 billion) in 2011 to modernize the tiny country’s health care system committed its Ministry of Health to a $32.6 million-a-year, 18-year contract with Netcare, the largest private hospital operator in the U.K. and South Africa. It cost $100 million just to build. Just 4 percent of costs for the facility were furnished by Netcare, with the rest falling on the Lesotho government and the Government Development Bank of South Africa. “The cost of the new hospital is depriving the entire health system,” one local administrator complained. Of 121 low- and middle-income countries whose finances were analyzed by the Jubilee Debt Campaign, 64 spent public money servicing debts rather than on their health care systems.
These austerian impulses aren’t any better suited to deal with the climate crisis than they are to deal with a pandemic. For countries looking to grow debt-servicing revenue by any means necessary, selling off all manner of drilling rights to multinational fossil fuel companies offers a quick buck at a high cost to the planet. And shrinking budgets for things like infrastructure and emergency services can also hamper recovery when climate-exacerbated disasters strike. Without another source of funds on offer, gas-rich Mozambique—home to massive ExxonMobil, BP, and Shell drilling operations—was forced to take out an IMF loan of $118 million in the aftermath of Cyclone Idai last year.
Debt relief and adequate funding for climate adaptation, mitigation, and recovery have been key demands of climate campaigners from the global south in U.N. climate talks—and among the points wealthy global north nations, including the United States, have reliably pushed back most strongly against. The World Bank, meanwhile, has pushed for loans to be a substantial piece of climate finance, potentially adding new principals, interest, and fees onto the balance sheets of already indebted countries. “It’s their knee-jerk response to all of these problems,” Lidy Nacpil, director of the Asian Peoples’ Movement on Debt and Development, told me. “You can’t solve a problem by creating another problem, and that’s what’s being created by lending for climate action.” It’s also, she said, “a subversion of the principle of climate finance,” which in theory should be “a form of compensation for the fact that all these rich countries are primarily the ones responsible for climate change.”
As ActionAid’s Brandon Wu recently pointed out, current World Bank head David Malpass couldn’t help but slip into the language of market-friendly structural adjustment in March even while appearing to extend a helping hand on the coronavirus. “Countries will need to implement structural reforms to help shorten the time to recovery and create confidence that the recovery can be strong,” he told a G20 finance ministers’ conference call. “For those countries that have excessive regulations, subsidies, licensing regimes, trade protection, or litigiousness as obstacles, we will work with them to foster markets, choice, and fast growth prospects during the recovery.”
ActionAid and APMDD are two of more than 200 organizations from around the world to have signed onto a letter from the U.K.-based Jubilee Debt Campaign calling to cancel debt principals, interest, and charges through the rest of 2020. For many, massive write-downs and restructurings remain the ultimate goal. The letter also calls for all IMF and World Bank aid offered during that time to come in the form of grants—not loans that will only heap more debt onto countries’ plates. Several current and former heads of state in Latin America are urging a two-year moratorium on government debt owed to private creditors there with no interest. There are more tools at the IMF’s disposal, too. UNCTAD and economist Jayati Ghosh are among several experts and campaigners who have called for the IMF to issue trillions of special drawing rights, or SDRs—essentially an IMF reserve currency that was deployed in 2009 as a lifeline to low- and middle-income economies struggling through the last downturn. Centrist leaders Angela Merkel and Emmanuel Macron have also backed an SDR extension. It hasn’t happened, thanks partly to the Trump administration’s objections.
Larger structural changes are needed, though, especially as we progress through a climate crisis. The Bretton Woods institutions, including the IMF and World Bank, were initially designed as a means to start moving away from a gold standard whose built-in scarcity ethic was credited with fueling first deflation and then fascism in Europe. John Maynard Keynes, notably, proposed an International Currency Union to be run on a new currency called the bancor, meant to facilitate easy trading and price stability without handing inordinate power to a single country’s central bank. Instead, the U.S. steamrollered over the idea, and its dollar became the world’s reserve currency. Today some 60 percent of all central bank reserves are held in U.S. dollars, and the Federal Reserve can turn the spigot of dollars on and off. Reformers who want to remake Bretton Woods institutions have repeatedly called for rethinking the centrality of dollars in the financial system, crafted as it was around America’s desire to secure geopolitical supremacy over the Soviet Union. “De-dollarization” has been a key demand of reformers looking to democratize the global economy. Adding more SDRs into the mix to help handle Covid-19, David Adler and Andres Arauz argued last month in The Nation, “could make the international monetary system much more resilient. Emergency funds would depend less on an unjust unilateral mechanism such as Federal Reserve swaps.… And it would give the IMF a role of fostering pro-poor global economic growth rather than imposing austerity.”
Trump’s announcement last week that the U.S. would stop funding the World Health Organization sent shock waves through the U.S. press, but it’s not exactly unique. The president has also pulled funding from the Green Climate Fund, the body set up by the U.N. to collect and allocate payments for climate mitigation and adaptation. Even when it was a member, the U.S. under Obama committed just $3 billion to the GCF; adaptation alone should cost $180 billion per year between 2020 and 2030, according to the Global Commission on Adaptation. In the case of both the WHO and the GCF, the biggest losers from such cuts aren’t the U.S. or China—whose geopolitical feud was cited for Trump’s WHO withdrawal and frequently features in conservative talking points against international climate cooperation—but rather smaller and lower-income countries. But prior administrations’ business-as-usual approach to international relations—when sovereign debt was already mounting, with multilateral institutions as undemocratic and out of touch with climate reality as ever—haven’t been much of a salve to global inequality either. Power imbalances in the global financial architecture run deep and won’t be righted without a fight.
“The big question for progressives is how you connect relief and recovery to reconstruction and a reform of the system,” UNCTAD’s Kozul-Wright said. “There’s a lot of talk about how we can’t return to the world pre-Covid-19, which I think to some extent is true. But it really underestimates the determination of the powers that be to go in that direction. They’re not going to lie down and roll over.”
The APMDD’s Nacpil likened Covid-19 and its fallout to a “dress rehearsal” for the climate crisis. “We should remember that things can be far worse,” Nacpil said. Perversely, governments might instead use the coronavirus as an excuse to set climate action aside at the moment when it should be ramping up.
The Bretton Woods institutions were created in the rubble of a depression and World War to suit a world that doesn’t look much like our own. The coronavirus and the disasters to come could be just as much cause to redesign the governance of the global economy before it’s too late.