Crash Course on Debt crisis in the global south, and radical solutions:

#1 Debt, Dependence and Development in Historical Perspective — with Andrew M. Fischer

Developmentalism has always engendered a structural dependency on external finance, which has played out in quite distinct ways in different geopolitical regions. This situation continues today, despite conditions having been rendered far more complex by financialization.

This lecture presents several past and present cases to demonstrate this dynamic and its continuing importance for facing the challenges of contemporary economic development, including the imperative of global redistribution.

Andrew M. Fischer

Andrew M. Fischer is Associate Professor of Social Policy and Development Studies at the ISS and the Scientific Director of CERES, The Dutch Research School for International Development. He is also editor for the journal Development and Change and founding co-editor of the Oxford University Press book series Critical Frontiers of International Development Studies. His latest book, Poverty as Ideology (Zed, 2018), was awarded the International Studies in Poverty Prize by the Comparative Research Programme on Poverty (CROP) and Zed Books and, as part of the award, is now fully open access.

Since 2015, he has been leading a European Research Council funded project on the political economy of externally financing social policy in developing countries.

He has also been known to tweet @AndrewM_Fischer.



Looking into these growing signs of a new generation of debt crises that seems to be brewing in the Global South. In the past decades there have been ebb and flow movements of capital in and out of developing countries in the past decades, but what happened since the start of the COVID-19 crisis seems to be something exceptional. In this second series we want to look at the structural issues and the structural problems that the Global South faces and the longer term issues and not only look at what COVID-19 has triggered, but what types of problems there are and what solutions we foresee. Today we are very happy to have Andrew Fischer with us on Debt, Dependence and Development in Historical Perspective.

Presentation Andrew Fischer: “Understanding the past”

The issue I will be looking at is financial crises during neoliberalism, with a focus on external constraints and development. There seems to be a rejection of external debt, especially on the left, perhaps with some justification. The underlying idea is that external debt is a vice, an addiction perhaps that countries are hooked to, and that successful countries in the past avoided it by exporting their way into success development instead. That is a common narrative that you even hear in academic papers.

First of all I would say it is wrong. And it is important to understand why it is wrong. It is wrong because successful countries, if we think of the few successful developing countries that went from being poor to relatively rich in the post-war period, being typically South Korea, Taiwan, and a few other countries. They relied on a lot of finance, debt in particular. But, importantly, not so much on FDIs (Foreign Direct Investments), but more on debt. Creating a narrative where you suggest that they didn’t is actually doing a disservice to our understanding of the challenges that developing countries face, and also sets up false expectations on what they might be able to achieve going into the future.

External constraints

I want to focus on the idea of external constraints of Late Development. This goes to the core of what we call structuralist development Economics, or structuralist macroeconomics. A field that came out of the very early period of development economics in the post-war period and has more or less disappeared, from the mainstream at least, under the shift to the neoliberal period from the 1970s onward. The idea of external constraints is that development in itself is constrained internally by certain factors and externally by other factors. The external factors refer to the subordinate and decolonialising development position of developing countries, which was characterised by being extremely import intensive and foreign exchange intensive. This means that the process of development itself intensifies and exacerbates that import intensiveness.

Unconstrained development tends to generate trade deficits because of import intensity and dependence. The economic infrastructure of developing countries is extremely dependent on imports. Think of Kenya. When they developed their mobile phone network it required about 3 billion USD. It had to be in USD because all of that material that was used to build the network was not produced in Kenya. It was produced elsewhere and imported. So even before we can talk about how a farmer can use mobile phones to get to know better prices for their crops in the local market, the government, or somebody, has to put down 3 billion US Dollars. You can do it through debt, or you can just give it to a foreign company and then they will own the network. Your economic infrastructure then gets locked into an import dependence. Whereas if you move from 2G to 3G, 4G, or help you, 5G, and so on, you then require continued reinvestment into the network, which requires foreign exchange, and so on. We can make the same analysis to ports, transport and industrial policy. The development process, involving industrialisation, or urbanisation, with well-developed public infrastructure, public transportation, involves a very strong import intensity.

We call it structuralist, because it is structural, it is based upon the technological and input characteristics of production and consumption, in a world that is becoming increasingly industrialised. As a result, foreign exchange (forex) becomes a specific constraint.

The symbiosis between aid, redistribution and development

There is another side of this which I have also written about, and that is what I call the symbiosis between aid, redistribution and development. In order for a country to absorb aid or foreign exchange, they have to run trade deficits. When there is a net transfer of foreign resources into the country, the implication is that that country is consuming or investing more, even if they produce or earn. That is by definition a trade deficit. Your savings equals what you earn minus what you spend. That’s a counting identity. In a balance of payment accounting identity you have a current account. You current account is basically your trade balance (exports minus imports) in goods and services, as well as your income account, which consists of profit remittances, wage remittances, etc. Aid also falls into that income transfer. Then there is the financial account, which equals all your financial flows, foreign direct investments, portfolio investments, debt flows, other types of speculative flows, and also reserves and gold etc. The implication is that your current account, by definition, equals the inverse of the financial account. If you have trade deficit, you need to have some flow of funds coming in to finance your trade deficit. If you have a trade surplus you actually have an outflow of finance from your country. You are not absorbing aid if you are actually running a surplus. And you’re not absorbing foreign finance if you are running a surplus. In early development economics there was what I call a classic post-war consensus that aid was justified by the fact that it was financing trade deficits, which was required by countries to industrialise and to develop in other ways as well. I have been arguing for many years that the world of aid or debt needs to be understood relative to this symbiosis. The role of aid can only be understood as playing a redistributive role to finance the process of development, not simply consumption.

Essentially countries in the post-war era faced two strategies. Either try to trade your way out of the external constraints – this means you try to export as much as possible, or you practice import substitution by trying to get rid of imports as much as possible – or you can finance your way out of it by running a trade deficit and relying on either aid, FDIs, debt or portfolio flows.

In all historical cases we usually see a mix of both strategies. Even South Korea and Taiwan are arguably both export oriented and practicing import substitution at the same time. What is crucial is that aid and the abundant supplies of long term stable and affordable concessional finance was essential for these countries to manage the constraints they were facing.

Case studies: South Korea versus Brazil

External finance flows in South Korea

What we see in the case of the Republic of Korea is that it overcomes these constraints with a combination of aid and debt. It doesn’t actually overcome them with export orientation, because even as it was exporting, it was importing even more than it was exporting.

What we see in the entire first period from 1953 right up to 1980 and beyond, is the trade deficit in goods, averaging over a 30- to 40-year period, probably in the range of 8 to 10 percent of GDP. And this was at a time when there was not a lot of private finance flowing around the world. So the only way they could finance this trade deficit was through aid flows, and later in the 60s and 70s as aid was ebbing off, the role of debt took over. South Korea became heavily indebted in the 1970s, much like Latin America. The key difference in the case of South Korea was that when crisis hit in 1982, international financial institutions, the West and Japan were willing to extend a huge amount of official lending to South Korea. Arguably it was only because of that that Korea managed to pass through this very vulnerable stage of their industrialisation, in the absence of this lending they would have had a lot more difficulty.

The second slide demonstrates a huge surge of public loans to Korea, extending from the mid 1970s into the mid 1980s, when the same figure for Brazil or a Latin American or African country would be flatlining. A lot of people would say that South Korea is a lot about geopolitics and the Cold War, that the US was supporting Korea because of the threat of communism, etcetera. The same story is often given for why they tolerated industrial policy, and I would be the first to acknowledge that. But the point is that where there is a will, there is a way. If we would take climate change or global poverty and equality with the same seriousness as they took the communist threat in the Cold War, we could achieve these things. It is not impossible. If there is a will to achieve them, we could achieve these things.

The case of Brazil

In the example of Brazil you see the exact opposite of the South Korean model. In most of the post-war period, Brazil is running trade surpluses instead of trade deficits. It was only in the 70s, when Brazil for a short period of time went into its second phase of import substitution and industrialisation and was borrowing heavily commercial debt and had sunken into loads of interest payments on debt, which eventually led it into crisis. It had its short period where it looked like South Korea of importing intensively to support the second stage industrialisation which then ended up in crisis. If you look at 2010, the amazing thing for Brazil is that it more or less looked the same as it looked like in 1947 in terms of its balance of payments. Which is a surplus financing huge outflows in payments to foreigners for services and income, and then also borrowing extra to facilitate that.

Neoliberal Era: liberalisation and fictionalisation

Post-80s we have globalisation, liberalisation and fictionalisation. The pre-80s are special, because of developments of states, industrialisation policy, capital controls (even in pro-western liberal countries), limited private finance to control besides FDIs and debt from the 60s onwards. The US was running trade surpluses injecting financing into the world, as well as running trade surpluses. Today the situation is far more convoluted. Lots of countries are running quite deep deficits, not necessarily developmental deficits, more driven by consumption of liberalised economies that are importing a lot of consumption goods. Examples are the Philippines and Cambodia.

Fictionalisation always also throws in a lot of complications. Zambia is a fantastic case (see below). The US is running massive trade deficits, reaching records. This creates a gravitational situation where the US is absorbing financial flows rather than ejecting net financial flows. And of course we have the Chinese surpluses.

The case of Zambia

Zambia looks like Brazil. In Zambia, there was a short-lived copper boom. It was drained out in the form of profit remittances of mining companies. Even in these years you had a current account deficit, even though there was a surplus on the trading goods account. We see a wacky financial situation in Zambia: on the one hand, there are massive FDIs. But if you break the economic situation down, you see the growth of public indebtedness paying off the sort of Zambian residents which could well be Anglo America Zambia Incorporated moving assets out of the country.

The case of Ethiopia

Ethiopia on the other hand is a fascinating case because it shows the exact opposite story. It is more like a South Korea in Africa. The country accelerates its growth in the 2000s and goes into an extremely deep trading deficit, far deeper than what we saw in Korea. It desperately tries to finance it with aid and wage remittances and all sorts of things. In 2017, they came to an agreement with the IMF that they could no longer borrow. So now they are restricted to only grant money or wage remittances to continue financing this model, which explains the problems they are facing economically.

Different patterns

Each one of those is a fascinating story and very, very different. When I started doing this research, I assumed I would see much more homogeneity across developing countries than I do in terms of their balance of payments. What we see is a variety of different patterns emerging. But they are all very disoriented. All this highlights the need for redistribution and serious alternatives to current development finance models. This whole story of removing development constraints is about removing constraints regarding the causes of what drives development.


Interview by Rodrigo and Sara:

Good versus bad debt

Rodrigo: It is interesting to see these varieties of capitalism in the Global South and see the similar constraints but different reactions to it. Reducing it to simple categories, there is ‘good debt’ linked to productive investments that may generate future income, and ‘bad debt’ linked to speculative activities or simple consumption by upper class, corporations moving assets outside, carry trade and so on. What type of medicine would you envision to get the good type of debt? What type of constraints are required for capital flows to have a good effect?

Andrew: Debt, as long as you can manage it, preserves your sovereignty, your autonomy. FDIs on the other hand lead to the denationalisation of your economy: you no longer control your economy. You need finance to support industrial policy, and there are a lot of economists who do recognise this and who would argue that the accumulation of debt should be limited only to investing in activities that actually earn income, so that you can pay back your debt. That’s a sensible argument. The only problem is that there is a lot of sunk investment in development that requires foreign exchange and that does not earn money. A lot of public goods require investments and foreign exchange, but cannot necessarily be expected to generate profits. So we do need long term concessional debt. Some people joke about how the UK only finished paying back its Marshall Plan loans a couple of years ago and ridiculing it. I think this is amazing. It shows what the Marshall Plan was all about. It was getting 70 years of low interest loans that the UK, a rich country, could use to patiently invest in long-term projects.

Rodrigo: But isn’t that exactly the aim of the G20 project on Financing for Development? To have a system in place that transforms the Global South into assets that can be traded on financial markets?

Andrew: Exactly. It is like micro-finance, where poor people end up paying 70 or 80 percent on their micro finance debt. Take countries like Zambia or Ghana that fell into a currency crisis and their policy rates go up to 40 percent, because they cannot manage these external constraints.

Loans versus FDIs

Sara: Many countries in the Global South are very heavily indebted. There are some calls for debt jubilees, but those have not been answered yet. Those countries might accept FDIs quicker because they cannot wait for a debt jubilee or new public loans. How to prevent that situation?

Andrew: The question is: how would the world need to look if we were to have massive amounts of redistribution? How would things need to be restructured? My belief is that we need the World Bank, but it needs to get back to its original purpose, which is getting out of all these policy advise areas and so on. It is a public bank that needs to provide patient finance, slow finance, long-term concessional loans to developing countries. The IMF, ok: stabilisation support, but without the imposition of these extremely draconian types of things. The IMF sees things in terms of maintaining international financial stability, which goes against the needs of development. The need of development requires imbalances in the system and requires rich countries to support the imbalances of poor countries. The IMF is constantly oriented towards actually trying to iron out these imbalances, which is actually to the detriment of and punitive on developing countries who try to achieve what they need to achieve.

Austerity on the ground

Rodrigo: It seems there is a sort of dualism in the IMF. When it comes to actual policy towards countries and deficits, it still imposes the adjustment programmes and philosophy of austerity. But in its research it seems to be ever more concerned about the problems it itself is creating. Is there indeed a struggle inside of the IMF?

Sara: Our attendee Guus Geurts has a similar question, namely “What is the role of structural adjustment programmes of the World Bank and the IMF on development?” Maybe you could envision what an ideal World Bank and an ideal IMF would look like?

Andrew: I think there is a disjuncture between the research bureaus and the country offices, which have the whole power – they are the ones doing the negotiations. The same is true of the World Bank. Ultimately it comes down to what the country office is doing and what they are negotiating with the governments. I am not jumping for joy just because the research offices look a bit more progressive. The approach that the IMF took during the crisis in the 80s and the supportive role of the World Bank in terms of a sort of cartel, is continuing up to today. There are modifications, but it is essentially to impose adjustment programmes and austerity on the debtor country.

For the Latin American countries in the 80s, it was very easy for them to quickly generate surpluses to pay off creditors. All you have to do is collapse your economy and public investment in particular. By reducing the consumption of imports you free up foreign exchange, and then you free up resources to pay off your creditors. Within a year all these countries turned their situations around and generated very large trade surpluses to pay off debt by going into massive economic crisis. You can do that in various ways, like jacking up interest rates or devaluing the currency. This is why Africa partly went through two ‘lost decades’. Of course it is not a wise strategy, because in the long run it is much better to maintain your debt and deficits and continue investment. In the long run, creditors will be much better off if a country keeps paying its debt and keeps growing.


External factors or domestic decisions?

Anna Wolkenhauer: If trade deficits are due to consumption and not developmental investments, is the difference explained by external factors or domestic decisions as to where to spend money?

Andrew: I think there is a mix of both. The core of your consumption is still being driven by your consumption needs. As Celso Furtado said: we live in an industrial civilisation. Even if you are not producing the goods, you are consuming the industrial output. Everything we consume is industrialised right now. You could say it is a choice: we do not have to consume these things, we do not have to consume cars, we do not have to consume packaged goods, but everyone does. Are you going to say: you should be just satisfied and live like peasants and only consume your own food, or are we accepting the fact that the world is strange?

Industrialization and the Philippines

Ryan Joseph Martinez: In the case of the Philippines, is it still feasible to sustain national industrialisation? How do you think this should proceed in order for it to be successful?

Andrew: In so far as we need to improve living standards in poor countries in one form or another this involves industrialisation. It has to be on the agenda, it has to be a strategy, governments need to engage and develop national programmes, and it needs to be financed. It’s getting more and more difficult to do and to finance. It is different if you need to generate returns to pay back your loans of 5 percent or 15 percent, whatever the financing terms would be.


Rodrigo: Would you say that the current context is less favourable than 40 years ago?

Andrew: Yes definitely. There are some countries that have been successful in latching on into value chains and so on. China has been very successful. China is misread in terms of how it is much more vulnerable than it is typically made out to be in the Western discourse that presents it as an emerging superpower. But nonetheless, China shows an example of a country that has faced these challenges through extremely strong state intentioniality. It has managed to grapple its way up the value chains and to merge with internationally competitive multinationals. Which is the basis of their success.

Capital Controls

Piet Jonker: Shouldn’t we advocate the reintroduction of capital controls? So the government could concentrate on industrial imports instead of consumptive imports?

Andrew: Yes! And not only capital controls but also trade controls. Liberalisation is basically people consuming what they want and a lot of unnecessary consumption. When you have a scarce foreign exchange and a lot of it is directed towards unnecessary consumption, like luxury consumption by rich people in unequal countries, then these things should be controlled. Should we be controlling speculative finance? Yes! The two main forms of say African governments to finance themselves now are either they are issuing international bonds, or opening up their local bond markets. The massive speculative flows of finance coming in is completely distorting the local bond markets. The celebration now is that the governments are issuing bonds in local currency so they move the exchange risk from the governments. But that’s only a short-term perspective. As soon as they refinance that debt, they are faced with the higher interest rates. So it was only basically pushing off the high interest rates into the future. And in any case a lot of the private sectors in these countries are building up huge amounts of debt, which is in foreign exchange, not in domestic currency.

Dependency and import substitution industrialization

Nedson Ng’oma: In your article, you say that these constraints on industrialisation compounds specialisation in primary commodities, how exactly would you explain this? Because, this implies industrialisation itself hampers itself in a way.

Andrew: Brazil was the most advanced industrial Global South country. There was the Brazilian Miracle in the 60s. As Brazil came out of the post-war period in a fairly good situation and then started to industrialise intensively, it very quickly hit the wall and started to have balance of payment crises in the 50s. And that is partly what drove it to open up to FDIs. The problem of FDIs is that it creates a short-term boost, but then undermines you in the long term in terms of exacerbating the outflows of foreign exchange. From the mid 50s onwards, Brazil was going through this constant period of crisis, up into the mid 60s when suddenly international lending stabilised and it could then finance itself through commercial debt until the end of the 70s. The dependency theory really emerged out of that period, stating that it was not such an issue that Brazil was once exporting coffee. Rather, even Brazil in the post-war period as a significant industrial power industrialising very rapidly and somewhat successfully was hitting the wall in terms of these external constraints, which were creating the necessity for further inflows of FDIs. Which then laid the seeds for dependence, or reinforcing dependence in the context of industrialisation. So you had the original colonial dependence of the late nineteenth century commodity exporting, and then you had the dependence of import substitution industrialisation. A lot of structuralist dependence theorists were criticising import substitution industrialisation because it was writing off the heavy involvement of transnational corporations, largely US corporations into strategic industrial sectors, like car manufacturing. So by the 90s over 90 percent of car manufacturing in Brazil was foreign owned. What they were arguing is that this is reinforcing dependence in the context of industrialisation.

QE = 70s on steroids

Rodrigo: we are definitely not done talking and only covered a small part of all the issues. One last thing to say is that we can definitely see a new age of dependency emerging due to Quantitative Easing. We have discussed this and will be discussing more in other episodes.

Andrew: Quantitative Easing is like the 70s on steroids. A lot of people blame the 70s on the oil crisis. But it was not the oil crisis, it was the liberalisation of banking in the 60s that drove the 70s. It is the same thing now. Quantitative Easing is not because of China, it is because of Central Bank policies in the rich countries. And that is creating, like in the 70s, this big massive bubble, which is now potentially collapsing. We have been saying it will.

Links & Sources

The articles for this session and for sharing, the problem is that earlier ones are not open access, so I am attaching the pdfs below under under downloads & links – given that this is for a course, feel free to share.

About this series:
Crash Course on Debt crisis in the global south, and radical solutions

In this series, we discuss the field of debt crises in the ‘developing world’, and the different aspects that determine the subordinate economic and financial position of the Global South and why this matters. Has anything changed since the 1980s debt crises when a global movement called for a debt jubilee? What are the prospects for change? And how can these kinds of debt crises be prevented in future?