Emerging market
economies
want another round of debt relief. They also want $2 trillion a year to address
climate change
.
The
United States
should reject both requests.
CONSUMER CONFIDENCE BLOWS PAST EXPECTATIONS, SURGES BY MOST SINCE EARLY 2021
In its
latest
World Economic Outlook, the
International Monetary Fund
reported that a rising share of countries are “in or at high levels of debt distress.” A developing-world debt crisis is
looming
.
In 1996, when international lending organizations and countries embarked on comprehensive debt relief for emerging market economies, the indebted countries promised structural reforms in return for debt relief. But the promises of economic and political reforms were hollow. Indebted countries got debt relief but did not institute the promised reforms. So, here we are again today. Consider the countries that most want relief, for example, Argentina, Pakistan, and Zambia. These are the countries that promised much and delivered little.
Argentina has defaulted on its international sovereign debt nine times, including three times during the past two decades. Now, Javier Milei, the new president of Argentina, needs to restructure the country’s international debt again. He faces $16 billion in sovereign debt payments in 2024. The central bank of Argentina has
negative
foreign exchange reserves of $10 billion. Argentina is a revolving door of debt relief. At some point, the debt relief door must be shut and locked.
It is the same for Pakistan. For most of the past 40 years, Pakistan has relied on debt relief and new monies from the IMF to sustain its economy. Rather than more debt relief, Pakistan must
introduce and follow
through on economic reforms, including instituting a comprehensive progressive tax regime and eliminating energy and food subsidies that deplete government revenues.
Argentina and Pakistan are not unique in poor governance and corruption. Other countries that want debt relief without structural reforms include South Africa,
Sri Lanka
, and Zambia. The U.S. should say no to countries that won’t reform.
In addition to debt relief, emerging economies want more than $2 trillion a year in new capital to confront climate change. Here, too, the U.S. should say “no.” Climate change is a global challenge. Unless all countries cooperate, efforts to address the matter of global warming will fail. Among other nations, China, India, and Indonesia continue to rush ahead with new coal-powered plants.
Until the major nations of Asia get serious about climate change, the U.S. should not provide climate change funds to emerging economies, particularly when emerging economy countries could, in large part, self-finance climate change projects by reducing corruption, which drains $1 trillion a year from the economies of poorer nations.
Top line: The U.S. is running a large structural budget deficit. The federal fiscal deficit for the current fiscal year, which began on Oct. 1, will approach 6% of GDP, or more than $1.6 trillion. In addition, Congress in the new year will probably pass legislation that involves more spending on border security, as well as additional military assistance for Israel, Ukraine, and Taiwan. Moreover, Congress in 2024 will be
tempted
to extend the individual tax cuts of the 2017 Tax Cuts and Jobs Act that expire at the end of 2025.
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To compound the fiscal challenges the U.S. faces, the world is looking to the U.S. to solve the military and economic crises precipitated by Houthi militants attempting to close the southern end of the Red Sea.
The U.S. can’t solve all of the world’s problems. As important, some suggested solutions to problems are not solutions at all. Just blank checks down the money drain.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes
a daily note
on finance and the economy, politics, sociology, and criminal justice.
