Global economic growth is stabilizing, inflation is easing, and global interest rates have been declining. But these factors won’t fix a problem that has been more than a decade in the making: debt is rising too fast for developing economies to manage. As of 2022, debt in low-income countries reached an all-time high and was over 40 percent of their gross national incomes (GNI).
Three key factors led to the emergence of a Third World debt crisis: a second oil-price shock, which placed further strain on balance-of-payments pressures for oil-importing developing economies; the introduction of interest rate controls by central banks in rich countries, which made it harder for these countries to meet repayment obligations; and a shift in global finance that saw a growing share of emerging market countries’ external debt owed to private creditors. These lenders offer shorter maturities and charge much higher interest rates.
Debt servicing costs are crowding out investment in vital sectors such as education, health, and climate action. Almost half of the world’s lowest-income countries now spend more on interest payments than they do on these essential services and on combating the climate emergency. This is unsustainable.
The roots of this problem go back to the 1970s and 1980s, when OPEC quadrupled the price of oil. OPEC nations deposited their new wealth in commercial banks, which then provided loans to developing countries, often on unsustainable terms. The result was a series of debt crises as borrowing rose too fast for developing countries to manage, with resources diverted to repaying the debt rather than to investing in development. This ‘crowding-out’ effect reduces growth prospects, trapping economies in cycles of fragility.
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