Human beings are allowed to go bankrupt. Some of them don’t want to go bankrupt, but in many cases, it’s the best thing for them to do in the face of the overwhelming debts they’re attempting to repay. The alternative to bankruptcy is to spend the rest of their life tied to repayments that they struggle to make, and with their quality of life suffering as a result. Bankruptcy has severe adverse effects in the short term, but in the long term, it allows that individual to make a fresh start and to get their financial affairs in order. This is a humane way of dealing with financial matters.
Nations – especially developing nations – do not have this luxury. When they get into debt, they remain in debt for the long term. Often, the terms on which borrowing is offered to them appear to be designed to keep them in debt and ensure that they come back in the future looking for a larger loan. They’re stuck with these debts forever, continually borrowing more money in order to support their repayments, and with no end to the pattern in sight. This is not humane. This is a form of financial abuse that benefits the world’s wealthier nations at the expense of the world’s poorer nations, and there’s no bankruptcy equivalent that the indebted nation can use to escape from the burden. There is, however, the prospect of debt forgiveness or debt relief.
For those of you who don’t know, debt forgiveness is exactly what it sounds like. The moment a debt forgiveness plan is agreed upon, the debt covered by that plan ceases to exist. A country that was laboring under the weight of a trillion dollars’ worth of loans will suddenly have none to repay. Their economy can begin to recover. They might even become self-sufficient, with no need to borrow money in the future. In doing so, they become better trading partners for the countries around them. The money that they once owed in debt can be generated through trade, and everyone’s happy. While this might sound like cuddly socialism to some of you, the approach has been advocated by David Malpass, the President of the World Bank, and he ought to be qualified to make that assessment.
While debt relief has probably been the best approach to take with developing nations for the past decade, now might be the best time in recent memory to go about implementing the strategy – and that’s because everyone owes everybody else money anyway. The financial disaster than 2020 has inflicted upon the world has seen all nations, both developed and developing, borrow massive amounts of capital to stay afloat. Developed nations will still be paying these debts back decades from now. Developing nations may never pay them back within the lifetime of anyone who’s alive known in those countries. In the context of this vast sea of debt, the loans owed by developing nations to developed ones are inconsequential. Canceling them will make very little difference to the bottom line of most countries that are owed money by them. Leaving them in place might inflict generations of hardship on the countries and the people who live in them.
Developing countries always suffer the worst effects of a global recession, but based on recent press reporting and studies, this may be the gravest situation faced by the world’s poorest nations in recent history. That’s why the IMF has joined in with the world bank to plea for urgent action, including debt forgiveness. According to the IMF, the alternative is a new wave of poverty and child poverty in parts of the world that had begun to make progress away from such scenarios in recent years. In the past, the financial impact of pandemics on developing nations have included a reduction of health funding, higher death rates, closure of education facilities, and the loss of local business. All of those outcomes are back on the table for countries like Sierra Leone, which had only just begun to shake off the decline that set in following the Ebola outbreak in 2013.
Debt forgiveness might feel like an unfair outcome for the countries that are owed money because they’ll never get their money back. That might be true, but this is always a risk when you offer a loan. Lending to a country with no obvious means of repaying a loan is no more sensible an investment route than spending all of your money at an online slots website and expecting to walk away in profit. Sometimes, if everything goes well and you strike lucky, that will happen. You’ll hit the jackpot on a few of the online slots such as Fluffy Favourites online slot, and you’ll make a profit. Just as often, though – if not more often – the online slots website will swallow all of your money, and you’ll walk away empty-handed. Developing nations are not online slots websites in that they don’t make a profit when the people who loan money to them lose their ‘bet’ – but by their very definition, they’re unsafe bets. As many economists have said for many years, the best way to support a developing nation financially is through grants and investments, not through offering them loans that will hinder their ongoing development.
Even with the World Bank and the IMF joining forces to argue for large-scale debt relief, we don’t expect to see it happen. There are too many people owed too much money, and too many nations whose sole focus in the short-term will be getting as much cash back in the national coffers as possible. Every economy in the world has seen a downturn during the past twelve months, and we stand on the verge of the largest recession in the past century. At a time like this, almost nobody is likely to volunteer to pass on money that they are, on paper, owed. The fact that they’re never going to get that money in full, and the attempt to make that money available is crippling the people who are trying to pay it to them, is likely to be lost on them. As we said at the start of this article, though, countries cannot go bankrupt. It would be interesting to see what happened if one of them simply refused to pay and washed their hands of the matter. We hope that at least one of them is brave enough to find out.