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The writer is a professor at Columbia University and a Nobel laureate in economics
The late Pope Francis was right to raise the alarm on the debt and development crisis facing developing countries. And he was right to link the issue of debt to broader questions of global justice, human dignity and intergenerational responsibility.
Some have claimed that the debt problem in the developing world is dissipating, but in fact the situation in many low- and lower-middle-income countries (LLMICs) has become deeper and more entrenched. While these countries may not be defaulting on their debt contracts, they are defaulting on development. Strapped for cash, governments are diverting precious public resources away from education, health, infrastructure and climate adaptation to service debts contracted earlier, when global financial conditions were more favourable.
Recent data from the UN’s trade and development body Unctad reveals that 54 countries spend over 10 per cent of their tax revenues on interest payments alone. The average interest burden for developing countries, as a share of tax revenues, has almost doubled since 2011. More than 3.3bn people live in countries that now spend more on debt service than on health, and 2.1bn in countries that spend more on debt than on education. This is not a path to sustainable development — this debt is a roadblock.
Meanwhile, borrowing costs are rising sharply. Debt contracted in the aftermath of the 2008 financial crisis, when interest rates plunged to near zero, is now being rolled over at far higher interest rates. Even as spreads have eased since the pandemic and outbreak of war in Ukraine, the cost of rolling over debt in today’s capital markets remains prohibitively high for many LLMICs. Compounding the crisis is a weakening global economic environment. Slower growth further undermines debt sustainability, deepening the crisis.
Today’s crisis reflects a systemic failure, which lies in the persistent asymmetry of global capital flows. Whereas capital tends to flow counter-cyclically to advanced economies — supporting them in downturns — it flows pro-cyclically for developing countries, worsening shocks. The result? Net external transfers have turned negative. In 2023 alone, low- and middle-income countries (excluding China) experienced a net outflow to the private sector of $30bn on long-term debt — a slight improvement from almost $50bn in 2022, but still a major drain on development.
Multilateral institutions are also falling short. Net transfers from the IMF to LLMICs — that surged during the pandemic — have now collapsed. From a positive transfer of $22bn in 2020, the net has fallen to zero in 2022 and minus $5bn in 2023. This is due to lower disbursements and a massive rise in interest payments.
Still, without the multilateral development banks, things would be much worse: there is a hidden bailout occurring, with money flowing from the MDBs providing the hard currency poor countries are then using to finance repayments to the private sector, rather than true development objectives.
The imperative could not be clearer. We need a systemic response — and that begins with acknowledging the crisis. Pope Francis showed precisely the kind of leadership that is lacking among stakeholders, both on the debtor and creditor sides. His call for a jubilee year that prioritises debt justice is not merely symbolic. It reflects an urgent need to rethink the structures that are failing billions of people.
To that end, he asked Martin Guzmán and me to create a Jubilee Commission, convened at the Pontifical Academy of Social Sciences and composed of leading economists, legal scholars and development practitioners, that I have the honour of chairing. On June 20, we will present our report, offering a blueprint for resolving this crisis — based on the principle that debt sustainability must not come at the cost of human development.
There is growing consensus among experts: current debt policies in many developing countries are serving financial markets, not the people. This threatens to condemn entire nations to a lost decade — or worse. A lost decade or more for some of the poorest and most vulnerable is something the world can ill-afford.
The debate must move beyond narrow narratives of success based simply on avoiding financial defaults. It must reflect the lived realities of billions whose futures are being mortgaged to serve old debts under unsustainable terms. And it must begin to address the fundamental flaws in the global architecture that have led to recurrent debt and development crises. Now is the time for responsible action.
