A Tragedy Unfolding in the Poorest Countries

Sep 23 , 2023

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In a global economy where GDP soared past 100 trillion dollars, the 28 poorest nations struggle with a combined GDP of merely half a trillion. Over 700 million people, with half living in extreme poverty, have their plight often remains invisible to the world at large. Can the world afford to turn a blind eye? Indermit Gill, a chief economist and senior vice president for development economics at the World Bank, and M. Ayhan Kose, a deputy chief economist and director of the Prospects Group at the World Bank, ask in this commentary provided by Project Syndicate (PS).

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The poorest countries are in desperate straits, and the rest of the world is looking the other way. Doing so comes easy because low-income countries (LICs) matter little to the world's fate in the near term. At the end of June, the combined GDP of the 28 countries in this group was roughly half a trillion dollars, a drop in the 100 trillion dollar ocean that is the global economy.

The world's poorest countries are also nobody's ideal export markets: the average annual income is barely 1,000 dollars, and conflict and instability are the norm for about half.

Nonetheless, 700 million people live in these countries, and about half are in extreme poverty. Impoverished people have long been accustomed to neglect from their governments, which often have other priorities. For example, they spend about 50pc more on war and defence than healthcare. Nearly half their budgets go toward public-sector wages and interest payments on debt, while a mere three percent of total government spending across low-income countries goes to support the most vulnerable citizens. That is one-tenth the average for developing economies more broadly.

It should surprise no one that a human tragedy is unfolding in these countries.

Key indicators of human development in today's low-income countries are far worse now than they were in the LICs of 2000, before many of the latter had ascended to middle-income status. For example, maternal mortality is 25pc higher now, and the share of the population with access to electricity has fallen from 52pc to barely 40pc across this cohort. Average life expectancy is now 62 years, among the lowest rates in the world.

Making matters worse, the odds of these countries getting help from abroad have declined. Wealthier countries have chosen the wrong moment to become less generous. Even before the pandemic, foreign aid flows to the poorest countries, especially in Sub-Saharan Africa, were slowing. Today, wealthier countries are redirecting more of their foreign aid budgets to meet the surge of refugees arriving on their shores.

These developments have left few avenues for economic recovery. By the end of 2024, the average income of people in the poorest countries will still be almost 13pc lower than expected before the pandemic.

Between 2011 and 2015, grants accounted for about one-third of government revenues in the world's poorest countries; but that share has since dropped to less than one-fifth. Poor-country governments have made up the difference by going deeper into debt, and at punishing interest rates. Government debt-to-GDP ratios in these economies soared from 36pc of GDP in 2011 to 67pc last year, the highest level since 2005 (except 2020). Fourteen LICs are now in debt distress or at high risk, more than double the number eight years ago.

As they gather in New York for the United Nations Summit on Sustainable Development Goals (SDGs), global leaders cannot afford to turn a blind eye to these developments. They must not forget the fundamental promise of the SDGs: "to reach the furthest behind first." Even as they remain generous to arriving refugees, wealthier countries should redouble their efforts to end the misery at the source.

That means enlarging the pool of resources available to multilateral development banks to increase grants and concessional financing for the poorest countries. Greater funding is not just a moral imperative to prevent a disaster in the poorest economies; it is a matter of self-interest for all countries with the means to help. Southern European countries struggling to manage migration flows should know that they will benefit from supporting development in poor countries such as Niger.

Wealthier countries, and all international financial institutions, should move decisively on three fronts.

They must increase concessional financing for the poorest countries, with aid addressing emerging challenges such as climate change, economic fragility, and pandemics.

Increased aid will also help these countries invest in critical sectors such as health, education, and infrastructure, enhancing their resilience and growth potential. Aid effectiveness (a major concern for donors) can be improved by strengthening donor coordination and building competent local institutions to select, manage, and monitor projects. International financial institutions, for their part, can help crowd in private finance in sectors that offer the promise of both development and profits.

Debt restructuring must be accelerated.

The Common Framework for Debt Treatment Beyond the DSSI has struggled to deliver relief ever since the G20 announced it nearly three years ago. If finalised, Zambia's debt-restructuring agreement with its creditors will be a welcome development; but it was concluded three months ago, and the country is still waiting for debt relief.

The framework's glacial pace, and all the uncertainties that come with it, have deterred too many countries from seeking the relief they so urgently need. It is time to pick up the pace. For many lower-income countries, restoring long-term debt sustainability will depend on debt restructuring. Without it, they will remain paralysed, unable to attract the private financing they need to tackle the formidable development challenges of this decade, from creating jobs and improving welfare to making the planet more livable.

Finally, we must double down on the reform agenda by ensuring that ambitious domestic measures complement global initiatives to bolster the poorest countries. International financial institutions can make a difference by helping LICs mobilise domestic revenues and improve spending efficiencies and debt management. They can also support governments' efforts to improve institutional frameworks, build human capital, ease impediments to private investment, and harness the potential of digital technology, all of which will boost these countries' long-term growth prospects.

Time is running out. The growing hopelessness among citizens of the poorest countries will feed a vicious cycle already underway. Desperate to escape misery at home, many will risk everything to find refuge abroad. The suffering of millions of people in faraway lands is not as far away as it may seem. It is contagious and already spilling over national borders, with unpredictable global consequences.

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PUBLISHED ON Sep 23,2023 [ VOL 24 , NO 1221]

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