Choices in forgiving debts

Last year, a committee of international lenders, led by France and China, reached what was hailed as a groundbreaking agreement to ease the debt burden of Zambia, the first African country to default on its loans during the pandemic. The deal was supposed to mark a new era of cooperation among creditors at a time when roughly 60% of low-income countries face debt crises.

The deal soon ran into delays, however, as Beijing has demanded that multilateral lenders like the World Bank and the International Monetary Fund (IMF) absorb more of the losses of debt restructuring. That’s a nonstarter for Washington and its European counterparts. They argue such an arrangement would simply enable debtor nations to use those savings to pay down their loans to Chinese creditors.

Resolving that impasse is a key focus for government officials and other stakeholders gathered this week in Washington for talks on reforming the World Bank and the IMF. On the surface, those talks are about creating new lending models to help poorer nations cope with global disruptions like climate change and pandemics.

But there’s a deeper question at stake in the attempt to harmonize Western and Chinese lending practices: Are values such as individual dignity universal and, if so, should they determine global rules on topics like debt? Or are global rules simply a contest of the competitive material interests of rival nations?

At a meeting of the Chinese Communist Party in February, leader Xi Jinping characterized his country’s development model as a “brand new form of human civilization” – a “path to modernization that [falls] on the shoulders” of the state.

In recent years, China has become the most prominent national lender of last resort to poorer countries in distress. By the end of 2021, a Harvard study found last week, China had issued 128 emergency loans – to 22 debtor countries – worth $240 billion, many on commercial terms. Only the IMF remains a larger creditor. As China has sought to export that development model through aggressive investment and lending, however, its practices have been shrouded in secrecy. Debtor nations must sign nondisclosure agreements.

The lack of transparency has complicated attempts to seek debt restructuring arrangements that share the costs equitably among lenders. It has also amplified distrust, prompting Samantha Power, head of the U.S. Agency for International Development, to observe recently in Foreign Affairs: “In contrast to the approach of autocratic governments, we showcase the potential benefits of our democratic system when we provide assistance in a fair, transparent, inclusive and participatory manner – strengthening local institutions, employing local workers, respecting the environment, and providing benefits equitably in a society.”

For decades, the goal of international development was poverty alleviation. Now in the context of climate change, argues the Carnegie Endowment for International Peace, “the challenge is increasingly one of insecurity.”

Ajay Banga, President Joe Biden’s nominee to head the World Bank, amplified that concern in a talk at the Center for Global Development last week. “The aspirations of people around the world, those are universal,” he said. “But we live in a world of greater polarization and extremes.” The imperative of development, he said, was protecting the dignity of all people, “particularly young people and women, who should be not only encouraged but ... empowered to reach for any opportunity that they desire.”

While the share of people living in poverty worldwide has fallen, the percentage of people facing food insecurity has risen. Disruptions like changing weather extremes and the war in Ukraine have underscored that global prosperity is increasingly a shared concern. Resolving the fundamental issues in debt relief is urgent.