Developing countries are facing the worst international debt crisis since the end of World War II. However, there have been four successive waves of debt since the 1970s, all of which were associated with deep economic crises, some of which also had adverse repercussions in creditor countries in the Global North. Financial and capital market liberalization played, and continues to play, a crucial role in triggering these crises.
The most recent wave of debt began in 2010 and has persisted for the last fifteen years. It threatens the social and economic wellbeing of developing countries to an unprecedented degree. Domestic and external debt service now equals the combined total spending on education, health, social protection and climate in low- and middle-income countries.
Development has become financialized: market-based financing, often at exorbitant interest rates, is supplanting public financing, but paving the way to debt distress and, increasingly, to default. Pathways out of the debt crisis include debt restructuring, domestic resource mobilization, international tax cooperation and reform, and reforming the international financial architecture.
The Four Global Debt Crises in the Past 50 Years
The current debt crisis, and all debt crises over the last five decades, should be understood in the context of fiscal policies and international arrangements put in place in reaction to the Great Depression (1929-39). The Great Depression resulted from a combination of domestic and international factors: a collapse of domestic demand, exacerbated by restrictive fiscal and monetary policy, worsened by a breakdown of international trade and finance as countries attempted to insulate themselves from the deepening crisis through beggar-thy-neighbour policies (e.g. tariffs).
In the three decades following World War II, international trade and finance reacted to the instability of the Depression. International capital flows were restricted by regulatory controls and sanctioned by the International Monetary Fund. These flows began to recover in the 1960s with the establishment of the unregulated Euromarket with the support of the United States and the United Kingdom (Helleiner, 1994). There have been four waves of debt crises since the 1960s. The first was triggered by two oil price shocks: the first in 1973 with the Yom Kippur War, and the second in 1979 with the Iranian revolution. Oil importing countries were faced with significantly higher prices, but were able and encouraged to borrow at the relatively low interest rates available at that time to finance their growing trade deficits (Helleiner, 1994). Meanwhile, oil producing countries borrowed to finance domestic investment and expenditures, and to finance public sector deficits. This was facilitated through a rapidly growing syndicated loan market which accommodated governments’ desires to meet their short-term borrowing needs.
The relatively low interest rate environment in the 1970s fuelling the growth of this market suddenly ended in late 1979 with the “Volcker shock”. The U.S. Federal Reserve (chaired by Paul Volcker) adopted highly restrictive monetary policies to quell rising inflation in the United States, resulting in dramatically high interest rates. This was followed by interest-rate hikes in other industrial countries for similar reasons. Short-term international debt consequently became unsustainable, leading to defaults by Mexico in 1982 and a series of debt crises across Latin America, the Caribbean, and in low-income countries in sub-Saharan Africa. It took much of the 1980s for creditor countries to resolve the crises in Latin American countries, much of it through writeoffs by creditor banks. Meanwhile low-income African countries had to wait to obtain debt relief, primarily through writeoffs by official creditors, until the mid-1990s through the Heavily Indebted Poor Countries initiatives and until the early 2000s, through the Multilateral Debt Relief Initiative (Khose et al, 2021).
It is important to understand this and subsequent waves of debt crises as an outcome of the financial and capital market liberalization after the mid-1960s. During the first wave of debt, many industrial country banks, heavily exposed to developing country debt, sustained significant losses.. Notwithstanding, financial and capital market liberalization continued in the industrial countries during the 1980s and 1990s as the instability of the Depression was forgotten and as creditors unleashed from regulatory constraints sought new and more lucrative lending opportunities abroad.
Accordingly, a second wave of debt ran from 1990 until the early 2000s as financial and capital market liberalization enabled banks and corporations in the East Asia and Pacific region and governments in the Europe and Central Asia region to borrow heavily, particularly in foreign currencies. It ended with a series of crises in these regions in 1997-2001 once investor sentiment turned unfavorable.
The third wave was a run up in private sector borrowing after 2000 in Europe and Central Asia, as European Union-headquartered “mega-banks” took advantage of regulatory easing. This wave ended when the global financial crisis disrupted bank financing in 2007-09 and tipped several economies in Europe and Central Asia into recessions. (Khose et al, 2021)
There were similarities and an important difference among the three waves of debt crises. They all started with low real interest rates and were facilitated by financial and capital market liberalization that promoted international borrowing. They ended with financial crises that were triggered by shocks such as sudden increases in interest rates in the Global North, aimed at subduing inflationary pressures. In the later waves, the main difference was a shift in the nature of developing country borrowing, with a growing share of the local private sector and a diminishing share of the public sector in total borrowing. The fourth, most recent wave of debt accumulation began in 2010 and has already seen the largest, fastest, and most broad-based increase in debt in developing countries in the past 50 years. Whereas previous waves were largely regional in nature, the fourth wave has been widespread with total debt rising in almost 80 percent of developing countries and rising by at least 20 percentage points of GDP in just over one-third of these economies. (Khose et al, 2021)
The Current Crisis: 2010-Present, Emerging Market and Developing Economies
Unlike the first three waves of debt, which threatened the solvency of bank lenders and creditors in the Global North, the current wave primarily threatens the economic and social welfare of low-income developing countries.
A Global South debt crisis is no longer a risk but a very tangible reality. Increasing debt payments are crippling governments’ ability to provide essential public services and tackle the climate crisis. Debt service, including both domestic and external debt payments, is absorbing an average 38 per cent of budget revenue and 30 per cent of spending across the Global South, rising to 54 per cent of revenue and 40 per cent of spending in Africa. These figures are more than twice the levels faced by low-income countries before the Highly Indebted Poor Countries (HIPC) Initiatives of the 1990s and the Multilateral Debt Relief Initiative (MDRI) in 2005. This is already the worst debt crisis the world has ever seen. (Eurodad, 2024)
Countries in the Global South are doing whatever it takes to keep repaying their debts, even if that means implementing draconian austerity measures. They are following International Monetary Fund (IMF) conditionalities and advice. Debt service payments are drowning out vital public spending. Domestic and external debt service now equals the combined total spending on education, health, social protection and climate in low- and middle-income countries, and exceeds it by 50 per cent in Africa. It is 2.5 times the spending on education, four times the spending on health and eleven times the spending on social protection. (Eurodad 2024)
Implications of the Current Crisis for International Political Economy and the Global South
The financialization of development has upended the relationship between creditors and debtors, shifting risk from the rich nations to the poor, and diverting the net flow of resources from Global South to Global North (rather than from North to South).
At a time when the world is expected to achieve only 15% of the Sustainable Development Goals (SDGs), prevailing conditions are such that governments in the world’s poorest countries are being forced to devote more resources to debt service than to health, education, and infrastructure combined. As a result, in the last four years, 165 million people have fallen into poverty; one in ten people now live on less than $2/day (Bridgetown Initiative 2024). Meanwhile, more than 3.3 billion people now live in developing countries that spend more on interest payments than on education or health. (UNCTAD 2024)
A crisis that will set back many developing countries for decades has been intensifying since the onset of the COVID-19 pandemic. The debt defaults began slowly in 2020 but are now speeding up; Chad and Zambia defaulted in 2020, then Ghana and Sri Lanka in 2022. Ethiopia, Egypt and Tunisia are expected to default next. (Cooray and Walker, 2023)
The “financialization of development”, viewed as the substitution of footloose market-based private financing (through bond issues and bank lending) for public development financing (through ODA and other official flows), is a product of the last two decades. Prior to 2006, for example, no sub-Saharan African country other than South Africa had issued an international foreign currency bond. By 2021, fifteen countries in the region had issued at least one Eurobond. (Landers and Martinez, 2024)
Such bonds offer significantly higher interest rates than those offered on the capital markets of the Global North. For example, three recent African issuers—Côte d’Ivoire, Benin, and Kenya—are paying an average coupon of 8.5 percent (Landers and Martinez, 2024). Regionally, developing country borrowers borrow at rates that are 2 to 4 times higher than those of the United States and 6 to 12 times higher than those of Germany. (UNCTAD, 2024) That makes developing country bonds very desirable to global investors constantly on the search for higher yields, so it is not surprising that these bonds are heavily oversubscribed. (Landers and Martinez, 2024) This indicates that global investors consider the higher risk of lending to developing countries—frequently referred to as “frontier markets”—well worth the much higher returns.
But it is not only the lenders that face risk by investing in frontier markets. It is also the developing country borrowers that face risk in the form of volatility of capital flows. There is no guarantee that foreign bond investors will be willing to roll over their investments, for example, upon the maturity of their bond issues, or prior to maturity. Investors’ willingness to keep lending depends on a few key variables, notably the interest rates prevailing in international capital markets. The Volcker shock was only the first among other sudden shifts in monetary policy that led to a sudden escalation in interest rates in Northern capital markets. When those rise, developing countries face two choices, neither of them desirable: either offer commensurately higher interest rates to foreign investors, or face capital flight to Northern markets as the risk/return ratio tips in favour of the latter.
Sudden shifts in the interest rate environment have indeed led to large net outflows of footloose capital from South to North. In 2023, nearly $200 billion was taken out of developing countries by private creditors in interest and net repayments of principal. Support from international financial institutions and bilateral donor agencies was inadequate to fully offset these negative private capital outflows (G20 Independent Expert Group, 2024).
There are other examples of the financialization of development. In the realm of climate finance emphasis is increasingly placed on “blended finance” for developing countries. This transforms concessional (low-interest) or grant finance provided by unblended ODA into a debt obligation. It also skews funding away from adaptation projects that do not typically yield a cash return, but which should get priority over mitigation, since the developing countries contribute a relatively small share of global GHG emissions. The principal needs of the Global South are for climate financing to invest in adaptation (or to pay for the devastating losses and damage wreaked by extreme weather), not mitigation. In contrast, the principal financing needs of the Global North, the principal sources of emissions, are for mitigation.
Four Pathways Out of the Crisis
There are four distinct pathways out of this debt crisis: debt restructuring, domestic resource mobilization, international tax cooperation and reform, and reform of the financial architecture. Each will be touched on briefly.
Debt reduction through restructuring
To speed up the debt restructuring process, which historically has been long and damaging to everyone involved, the Group of 20 countries introduced the “Common Framework” on Debt in late 2020, with the International Monetary Fund (IMF) playing its usual role as lead coordinator and technical advisor. The Common Framework was hastily established when low-income countries including Zambia and Chad defaulted in late 2020. The Paris Club of traditional Western government creditors became anxious that China—now the biggest official creditor in the world—would both drag its feet and not participate on equal terms with everyone else. (Cooray and Walker, 2023)
Three years on, however, it is clear that the Common Framework has failed, with the debt restructurings that have occurred so far taking three times as long as in the past. (Cooray and Walker, 2023)
A proper solution would force all creditors to recognize losses on the face value of their debt through write-offs—as they did in earlier waves of debt—not simply a restructuring of when payments are due or at how much interest, which only defers a proper resolution of the debt crisis. (Cooray and Walker, 2023) Low-income debtor countries are otherwise destined to remain in a “doom loop” of growing indebtedness. (Fofack, 2024)
Domestic resource mobilization
At the domestic level, vulnerability to financial shocks and debt distress can be reduced via greater reliance on domestic resources. In particular, domestic taxation, levied principally on corporations and wealthy individuals, could generate revenues for developing country governments that would reduce the need for international or domestic borrowing and help avoid debt distress. But major challenges confront the creation of an effective and equitable tax system in most developing countries. These include tax evasion and tax dodging: it has been estimated that governments, in the Global North as well as the Global South, lose around $480 billion USD annually due to tax avoidance and evasion. Moreover, consumption and value-added taxes, while easier to collect than corporation or wealth taxes, tend to be regressive—falling more heavily on lower-income households. (Eurodad, 2024)
There are also questions as to how the rights to tax the profits of multinational corporations should be shared between countries. In particular, concerns have been raised about a bias in favour of richer (mainly Northern) countries at the expense of developing countries. Other challenges include: whether and how polluting activities should be discouraged with targeted taxes to support climate policy objectives; how to avoid such taxes from being regressive; how to deal with corporations’ transfer pricing systems which enable them to shift profits and tax liabilities to offshore entities and tax havens; how to tax the consumption of the ultra-rich, e.g. by taxing the use of private aircraft and private yachts. (Eurodad, 2024) A UN Framework on international tax cooperation (see below) would greatly facilitate the ability of developing countries to expand their domestic tax base.
International tax cooperation and reform
At the international level, greater efforts are needed to facilitate capturing a fair share for developing countries of tax revenue from international corporations and high net worth individuals. This will require reform of the international institutional architecture to facilitate cooperation on taxation to make it more supportive of sustainable development.
Over the last few years, there has been a rapidly growing recognition of the fact that action is needed to strengthen the inclusiveness and effectiveness of global tax governance. At the end of 2022, all UN member states agreed—by consensus—to a landmark UN resolution on international tax cooperation.
Following the adoption of the resolution, an ad hoc committee was established to begin the negotiations of the terms of reference for a new UN Framework Convention on International Tax Cooperation, and in February 2024, at the organizational session of the new committee, all UN member states reached consensus on a roadmap towards finalising the Terms of Reference by the end of August 2024. (Eurodad, 2024)
The negotiation of the UN Framework Convention kicked off in early February 2025 in New York where all delegates who spoke, from every region of the world, affirmed their country’s commitment to the principles of the UN tax convention. The only objection came from the United States, which urged delegates to walk out of the room. No country acceded, leaving the US isolated. UN Member States now have a golden opportunity to prove their stated commitment to the process by addressing the key issues of the negotiations. (Tax Justice Network, 2025) Negotiating the framework convention is expected to take around three years, with the final text aimed to be submitted to the UN General Assembly by the end of 2027.
Reform of the international financial architecture
In their reports of July and October 2023, a G20 Independent Expert Group identified a better, bolder, and bigger system of multilateral development banks (MDBs) as a key element of a global program to help developing countries secure adequate levels of affordable finance. That goal envisaged a transformed MDB system that would lend three times more by 2030 and mobilize five times more private capital through a variety of new instruments and strategies. Equally importantly, the MDBs would broaden their mission and vision and play a central role in helping countries set up platforms for scaling up and speeding up investment programs in climate related and other global challenges. (G20 Independent Expert Group, 2024) If implemented, such a transformed system could enable developing countries to access capital at the lowest possible commercial rates rather than the elevated rates many developing country borrowers have had to accept.
In a more sweeping call to reform the international financial architecture in July 2022, Prime Minister Mia Mottley convened a high-level retreat in Bridgetown, Barbados, which resulted in the Bridgetown Initiative. What began as a loose set of ideas and calls for change from developing countries was initially codified as the Bridgetown Agenda, and then subsequently renamed the Bridgetown Initiative. This initiative calls for an additional $1.8 trillion annually to address the climate crisis and an additional $1.2 trillion annually to achieve the sustainable development goals. (Bridgetown Initiative, 2024)
The Bridgetown Initiative does not stop there in its demands for reform of the international financial architecture. Among other things, it calls for:
- A reform of the Common Framework to resolve debt problems more expeditiously, with sufficiently robust debt relief to ensure that countries are able to finance their development and climate goals;
- The issuance by the IMF of at least $650 billion in Special Drawing Rights (SDRs) to support the Sustainable Development Goals and climate action;
- More rapid financing and insurance to cover the needs of countries faced by natural disasters;
- More than $300 billion a year from the MDBs in long-term financing for the SDGs;
- More than $500 billion a year in private financing. (Bridgetown Initiative, 2024)
While the orders of magnitude in the Bridgetown Initiative are ambitious, they likely do not overstate the funding needed to reach the climate goals and development goals.
Successive waves of debt in the past five decades have demonstrated that systemic debt crises inevitably follow periods of financial liberalization. A combination of financial deregulation and relaxation of constraints on international lending and capital flows sets up the conditions for crises. Moreover, as a result of internationally mobile capital, development has become increasingly financialized. Volatile, short term and footloose private capital is supplanting stable, long-term public financing which is crucial for long-term economic and social development, and for climate investments.
Each of the four pathways out of the crisis has strengths and limitations. Debt restructuring can be slow in materializing and needs to be accompanied by significant debt reduction—which is resisted by creditors. Domestic resource mobilization is in some ways the most attractive option, but faces a number of challenges including regressive impacts of consumption-based taxes and the problem of assessing corporate income for taxation. An international tax convention under the aegis of the UN, currently under negotiation, would help to reconcile the claims of developing countries to a fair share of taxation on multinational corporations and high net worth individuals—but may not be consummated for three years. Finally, calls to reform the international financial architecture, which have been a constant refrain particularly after each major debt crisis including the present one, may seem excessively ambitious, but they serve to remind us of the magnitude of financing required if the world is to achieve its sustainable development and climate financing goals.
References
Click to expand for a full list of references.
Bridgetown Initiative (2024) Bridgetown Initiative on the Reform of the International Development and Climate Finance Architecture, Report. Available online.
Chaparro-Hernandez, S. (5 February 2025) Trump’s walkout fumble is a golden window to push ahead with a UN tax convention, Blog Post, Tax Justice Network. Available online.
Cooray, M. & Walker, R. (16 November 2023) “The G20’s approach on debt has failed” The Interpreter. Available online.
European Network on Debt and Development— Eurodad (May 2024) Financing development? An assessment of domestic resource mobilisation, illicit financial flows and debt management, Report.
Fofack, H. (8 April 2024) “The Way Out of Africa’s Debt Doom Loop”, Project Syndicate,. Available online.
G20 Independent Expert Group (April 2024) Implementing MDB Reforms: a Stocktake, Report, G20 Independent Expert Group on Strengthening Multilateral Development Banks, Center for Global Development. Available online.
Gilens, M. & Page, B. (2014) “Testing theories of American politics: Elites, interest groups, and average citizens,” Perspectives on Politics, 12(3), 564–581. Available online.
Helleiner, E. (1994) States and the Re-Emergence of Global Finance: From Bretton Woods to the 1990s, Cornell University Press.
Kose, M., Nagle, P., Ohnsorge, F. & Sugawara N., (2021) Global Waves of Debt: Causes and Consequences, Report, World Bank Group. Available online.
Landers, C. & Martinez, N. (27 March 2024) “Is Sub-Saharan Africa’s Credit Crunch Really Over?” Blog Post, Center for Global Development. Available online.
United Nations Conference on Trade and Development — UNCTAD (2024) A World of Debt: a Growing Burden to Global Prosperity, Report. Available online.
