Financial crises are not synonymous with recessions. They typically occur when multiple factors go wrong simultaneously. Growth rates slow down, inflation rates skyrocket, supply chains are disrupted, and commodity prices drop, negatively affecting developing countries whose exports are primarily raw materials. When these factors occur along with a war in Europe, unprecedented in 70 years, and a devastating pandemic, we call it a "crisis."
Do we Really Fear a Slowdown?
Nowadays, economists are not worried about the most likely short-term slowdown in 2023. They barely see monetary tightening as a real threat to the global economy. On the other hand, wise economists raise doubts about the longer-term economic prospects. They do not see the comeback of cheap money in the near future, which will definitely affect debt, mortgage, and stock markets. This, in turn, will push indebted developing countries towards much worse solvency issues than what they witnessed in the pre-COVID-19 times, causing more persistent supply shocks. Costly investments will be a direct effect of the higher interest rates and hence a higher cost of debt.
The absence of cheap money is disguised under the ugly faces of hyperinflation and debt crises. They both put developing countries in agony. When hyperinflation continuously punishes vulnerable populations, shoving more people under the poverty line, most developing countries are obliged to boost public expenditure on safety networks. They can only finance this in the short term through more debts. Debt inflows are channeled from rich nations to poorer ones, but with higher costs and a higher probability of default. Developing markets can only survive by depending on their natural resources. So, while debts are flowing to the south, resources are flowing to the north, but with much lower prices than they should be. Higher commodity prices will only cause more damage to poor nations as they will lead to much higher inflation rates.
Costly Money and Cheap Natural Resources
Although there are no winners in the game of hyperinflation, some market players are in a better position than others. Manufacturers are in a better position than miners and farmers; this is clear when comparing the price movements of raw materials and commodities versus end-user manufactured goods, which capture most of the inflation in their prices. The fruits of production are biased towards the northern part of the planet. A classic struggle between upstream and downstream, the source of value and the value added all through the production process, is provoked under that assumption.
De-globalization trends and disrupted supply chains pose a real challenge to the developing world. They make labor and capital flows much harder and require each country to make survival decisions concerning its capability to enjoy real economic independence. In the meantime, they offer a good opportunity for the same set of nations to capitalize on their own strengths and formulate a united standpoint towards economic challenges and the newly evolving global regime.
As cheap and free money vanishes, free and cheap raw materials and natural resources should immediately stop flowing. The United States and the West are persistently pushing fossil oil prices down. Main commodity exchanges are also dominated by a few traders who belong to this part of the world. Grains and foodstuffs are almost kept inflation-free during the current crisis, with a claim that this is better for the poor people who are already suffering from surging prices. This is partially true, but it omits the fact that this kind of good is the only real source of value in developing countries. Selling them cheap means making the poor even poorer.
Rich and powerful countries, led mostly by the United States, are favoring the current regime, despite its intrinsic biases. They value knowledge and high-tech stored in advanced weapons and manufactured products more than any other source of value. This pattern reinforces Western hegemony over the globe and shapes the future of the planet under the same rules that were prevailing in the dawn of the post-World War II era.
Weaponizing Debts and Capital Flows
It is worth mentioning that the United States is practicing control over capital flows and funding activities through many arms, one of which is membership in international and regional financial institutions. The US is a vital member of six international financial institutions (IFIs): the International Monetary Fund (IMF), World Bank, Asian Development Bank (AsDB), African Development Bank (AfDB), European Bank for Reconstruction and Development (EBRD), and Inter-American Development Bank (IDB). Since 1945, the United States has contributed multibillions to the IFIs and has agreed to provide billions in callable capital.
The external debt structure of many indebted countries seems to be less severe as it is heavily owed to IFIs. Egypt is an obvious case, with the share of IFIs reaching almost one-third of the total external debt. A deeper look at this structure tells us that the US seems to be the main creditor of most external debts and facilities extended to developing countries everywhere.
Weaponizing debts and capital flows is a common practice and weakness of globalization. It might not be seen as hostile as weaponizing the payment system (SWIFT) or natural gas trading in the Russian-Ukrainian war, but it can be fatal to any nation that can't be self-sustained. De-globalization, on the other hand, is not the perfect solution to such a problem, especially if the country is already suffering from a structural deficit and longstanding default.
How can Developing Countries Survive the Dependency Loop?
Samuel P. Huntington once said, "becoming a modern society is about industrialization, urbanization, and rising levels of literacy, education, and wealth. The qualities that make a society Western, in contrast, are special: the classical legacy, Christianity, the separation of church and state, the rule of law, civil society."
In the short term, low-income and many high-income emerging countries, with minimal levels of self-sufficiency and economic security, struggle to localize and deepen domestic production. To drive consumers away from highly sophisticated goods towards less, yet value-rich, commodities, a major shift in the pattern of consumption is required. This can only be achieved if these countries unite and boost integration between them. Commodities can then be priced in more fairly managed exchanges, and any surplus achieved from the trade of oil and natural resources should not be heavily exhausted in the debt market.
In the longer term, better industrialization and modernization models will take place in developing countries, while self-sufficiency can still be maintained at a more advanced level of welfare.
Under this development model, international trade can still be a primary driver for economic growth; it should not be suspended on the back of unfair terms of exchange. Only rationalization and re-negotiation of these terms are required for the sake of future generations.
The status quo perpetuates the imbalances between developed and less developed nations, leaving little chance to break the loop of development inequalities between both sides.
