Presented by ESMT Berlin
As Argentina's Minister of the Economy, Martín Guzmán managed a sovereign debt crisis and the second-largest debt restructuring in history. In his BGD Insights interview, he explains the link between climate, debt and developing countries - and how to finance a sustainable way forward.
Interviewed by Klara Marie Schroeder
Following the 2008 financial crisis in the US, the US government’s bailout of the American banking system created massive liquidity that flew to less developed countries, as the American financial private sector was searching for high yields. High yields obviously mean high risks. We had a two-fold incentives problem: first, creditors who wanted to lend seemed to have internalized the expectation that even in a bad scenario, they would be protected because money from international taxpayers would bail them out, as is happening right now; second, debtors were eager to borrow in international capital markets, under legislative frameworks that favored short-term political gains, lacked transparency for borrowing, and set only loose constraints for the terms of borrowing and debt restructurings.
Following the Covid-19 pandemic and the war in Ukraine, both domestic and global conditions changed. Liquidity tightened, and financing became more expensive. We are now seeing a development crisis in which many countries are overburdened by debt and have cut investments in education, health, and infrastructure, and can’t even dream in the short term of adapting their economies to the needed green transition. Those much-needed investments are even less possible given that these countries use many of the funds they receive from multilateral lenders supplied by global taxpayers to pay unsustainable debts at high interest to the private creditors.
The solution to this crisis requires a multidimensional approach, including debt operations that provide relief, changes in the lending policies of international financial institutions, and a scaling-up of multilateral financing for the green transition. In a recent paper with coauthors from Columbia University, the Paris School of Economics, and the Brookings Institute, we lay out a path forward.
One dimension of climate change is beginning to be incorporated in debt sustainability analysis: how climate shocks affect the probability distributions of the variables that determine debt payment capacity. But a fundamental dimension is not being properly incorporated: the endogenous consequences that not adapting to climate change or starting the green transition will have on the future competitiveness of developing nations.
The latter is especially important considering the current real risk that the climate agenda will be used for protectionist policies and green colonialism from countries that already have an advantage in green technologies. The international trade rules should adapt to prevent such a situation.
In analyze this matter in my recent work with Joseph Stiglitz on "Post-neoliberal Globalization". The international financial architecture must adapt to enable the kind of financing that is needed for a more level playing field between advanced and developing nations.
The way we have organized our global economic system creates enormous frustration for billions of people and creates unacceptable levels of inequality. We have a global architecture that causes unsustainable harm to the planet; prevents knowledge from turning into shared progress; allows the richest to avoid paying taxes, either directly or indirectly, as shareholders of large corporations; creates a transfer of rents from taxpayers of developing countries to the private financiers; and makes the resolution of sovereign debt crises almost intractable. Some say that the solution is just to get rid of the state—a self-serving argument that is deeply flawed, as well analyzed by Joseph Stiglitz in his recent book “The Road to Freedom”.
Humanity must find a path towards more progressive taxation, less market power, and using state resources to finance the education, science, and productivity-enhancing infrastructure that makes for a sustainable economy. The work of authors such as Joseph Stiglitz on globalization and inequality, Gabriel Zucman on taxation, Mariana Mazzucato on the role of state for innovation, Ha-Joon Chang on the history of economic development, and Thomas Piketty on inequality deserves deep attention.
The private sector will not resolve the climate problem. A sustainable environment is a global public good. There are externalities associated with climate investments that the private sector will not internalize. The ESG agenda is a bit of a show—it is way less effective for the purpose it defines than the private sector claims.
Global taxpayers must resolve the problem of climate financing. The ideal solution would be a progressive global tax, as proposed by Gabriel Zucman and backed by President Lula da Silva and Finance Minister Fernando Haddad of Brazil. However, we do not have a supranational tax authority that can effectively implement this proposal in the short term.
A second-best option is to use global seignorage, which essentially amounts to using the IMF special drawing rights (SDR) as the instrument and the multilateral development banks as the vehicle for climate financing. This solution would require both adapting IMF rules for SDR allocation among countries and the domestic legislation that currently impedes the central banks that are the recipients of SDR from transferring or lending them.
The last time the IMF issued SDRs, in 2021, for the equivalent of USD650 billion, a significant fraction ended up sitting in the coffers of central banks from advanced nations as reserves. That was because of two issues. The first is how the IMF allocates SDRs: each country receives a fraction proportional to its quota at the Fund. Hence, the largest shareholders receive more. Second, there are absurd constraints on how governments and central banks from advanced economies can re-channel the SDR; just think of the following: before the SDR allocation is issued, those new SDR do not exist, but once they are issued, they constitute assets of a “reserve quality” and thus cannot be touched, even though a minute ago they did not exist and thus the robustness of the balance sheet of the central bank that received them cannot be worse than if the SDR had not been issued.
Nevertheless, even with all these limitations, the SDR allocation of 2021 was still helpful to the global economy, and it demonstrated that SDR can be an effective tool for resolving the most pervasive challenges that the global society is facing.
Martín Guzmán served as Minister of Economy of the Republic of Argentina from 2019 to 2022.
Martín is a Professor at the School of International and Public Affairs at Columbia University, where he teaches Sovereign Debt and Power Dynamics. He is also a Professor of Money, Credit, and Banking at the National University of La Plata.
