I have so many issues with Mohammed A. El-Erian’s piece at Marketwatch, “The people in the global penthouse should worry about the ‘little fires everywhere’ in the basement” I hardly know where to start. Here’s the kernel of the piece:
As Michael Spence, the Nobel laureate economist and an expert on growth and development dynamics, pointed out to me recently, the probability of simultaneous growth, energy, food, and debt crises is worryingly high for too many developing countries. If that nightmare scenario materializes, the effects will be felt far beyond individual developing countries—and will extend well beyond economics and finance.
and here’s his prescription:
It is therefore in advanced economies’ interest to help poorer countries reduce the mounting risk of little economic fires everywhere. Fortunately, there is a rich historical record, especially from the 1970s and 1980s, to draw on in this regard. Effective action today will require policy makers to refine proven solutions and support their sustained implementation with strong leadership, coordination, and perseverance.
For starters, a pre-emptive multilateral debt-restructuring and relief initiative is needed to provide essential space for overly indebted countries and overstretched creditors to achieve orderly outcomes on a case-by-case basis. A multilaterally coordinated approach is also crucial in order to reduce the disruptive—and sometimes paralyzing—risk of free riders, and to ensure fair burden-sharing among official creditors, as well as with private lenders.
Reinvigorating emergency commodity buffers and financing facilities is critical in order to reduce the risk of food riots and famines. Such measures can also play a useful role in countering some countries’ understandable but shortsighted inclination to ban agricultural exports and/or engage in inefficient self-insurance through excessive stockpiling.
Finally, rich-country governments will need to provide more official development assistance to support individual countries’ reform efforts. This aid should be extended under highly concessional terms through long-maturity, low-interest loans or outright grants.
My first objection was best characterized by a former business partner of mine in what I call the “reverse Voltaire”. I agree with what he says but I will deny to the death his right to say it. Mr. El-Erian isn’t just “in the penthouse”—he’s soaring above the penthouse in a floating villa. He can barely see the penthouse from where he is let alone the basement.
Second, I think he’s living in the past. Once upon a time most of the debt of the poorest countries was held by the countries of the Paris Club. Now per the World Bank 37% of the debt of the 74 poorest countries is held by China and China has exhibited very little willingness to engage in the sorts of restructuring and subsidies Mr. El-Erian proposes. They have insisted on full repayment throughout the pandemic, just to provide one example.
So, let’s consider a little thought experiment in which the Paris Club countries do what Mr. El-Erian proposes and China does not. I submit that at the end of the process the members of the Paris Club and the poorest countries will be poorer, China will be richer, and the poorest countries will be more dependent on China than they were at the start of the process.
Finally, I think he means that Uncle Sugar should be addressing this problem. Once again he’s living in the past. By world standards most Americans are in the upper middle class and the top decile of American income earners are in that “penthouse” he talks about but the reality of life on the ground is different. The U. S. just can’t be understood that way. As I’ve been saying for some time the U. S. can best be understood as two countries living side-by-side, intermingled, one a rich, developed country and the other a poor developing country. For the U. S. to address the problem he calls out we would need to ignmore the problems of that poor, developing country who live just down the street and focus on somebody else’s poor. But that’s not what would happen. It has been truly said that foreign aid largely consists of poor people in rich countries giving money to rich people in poor countries. That’s what would happen.
The West is more likely to wait for the troubles to begin in the poor countries and use that a an excuse to kill them.
China will engage in nation-scale peonage.