Why the ‘vicious cycle’ of debt needs to be stopped

“Vicious cycle,” “odious,” and “unfair.” Those were some of the adjectives that Brian Kagoro of the Open Society Foundations used to describe the current financial architecture that has thus far largely failed to address the debt crises many African nations are grappling with. At the same time, he describes himself as hopeful that a “sense of urgency has almost overtaken the sense of despondency” of a year ago, when people worried “that the entire multilateral fabric was unraveling.” Today, while the system has been severely challenged, “there seem to be voices from across the board that are committed to ensuring that multilateralism continues,” Kagoro said at the Pro Content Studio of Devex Impact House on the sidelines of the World Bank-International Monetary Fund annual meetings. Kagoro, a self-described pan-Africanist who holds several positions at OSF, including managing director of programs, said debt servicing — which now outstrips funds available for health care and education in many countries — is preventing governments from investing in critical development sectors and industrializing their economies. That in turn is limiting their ability to repay debts. Hence the “vicious cycle.” Moreover, without “a broad enough industrial base, manufacturing base, domestically, your repayment will have to be drawn from taxes, and you have a narrow tax base” in many lower-income economies. “That means you are pushing the burden onto [an] overtaxed, small private sector, and this may lead to the sort of upheavals we’ve seen,” he said. Other barriers include the high cost of capital and a warped perception of risk by credit ratings agencies toward many African countries, which means these countries “borrow at a much higher rate because the perception of risk is high, but they also repay at a much higher rate than anybody else borrowing the same amounts of money,” Kagoro said. And just as debt repayments hinder domestic investment in development priorities, much of that borrowing occurred because of development-related issues beyond countries’ control, such as present-day climate disasters or past neocolonial legacy debts that have been carried over for generations. The recent rush to extract Africa’s critical mineral supply has sparked both hope that the continent can benefit from these resources and concerns that the benefits will only be accrued by wealthier buyer nations. Kagoro suggested that countries that are home to these minerals — from Indonesia to Mozambique to the Democratic Republic of Congo — ally with one another to form a kind of “OPEC of critical minerals,” referring to the Organization of Petroleum Exporting Countries. Creating a bloc could boost their negotiating power vis-à-vis wealthier countries while also helping them learn from each other to increase the skill level of domestic workers. “For a lot of the prospecting work, the extraction work, we're in early stages, but there is a critical mass of countries that are talking about linking critical minerals extraction to a just energy transition [and] green industrial growth,” Kagoro said. “It’s a long road, but I think that there’s an emerging civic, academic, as well as policy movement that’s thinking through options.” Kagoro also believes a consensus will emerge to defend the multilateral system, with or without certain countries that don’t come to the party, he said in a thinly veiled reference to the United States. And while the prospects of immediate reforms to the global financial architecture could be limited to communiqués and “well-crafted declarations” at global gatherings such as the World Bank-IMF meetings and the upcoming G20 summit, “I suspect there’ll be a stronger global consensus over the next four or five years on certain things that have taken us a long [time],” he said. “More substantively, we’ve learned our lesson: Whatever we take for granted and do not defend vigorously can always be taken away. And we’ve also learned we no longer have the luxury of taking forever to make decisions about things that matter,” he added. “So the moment with all these challenges has brought a sense of urgency — that freedom matters, that global cooperation matters, that human rights matter, all the things that we thought we had in the pocket but that seem almost uncertain now.”