World Bank's David Malpass on global debt & economic inequality | GZERO World with Ian Bremmer

Developing countries need to reach agreement on debt restructuring and actually carry it out, but this has been a consistent sticking point in negotiations.

“They need to reach agreement on how to do a debt restructuring, and then actually carry it out, which has been the sticking point.”

There is no existing political or institutional process to achieve convergence between wealthy and developing nations, and there seems to be little interest in creating one.

“So we don't have a process to do that, and there doesn't seem to be very much interest in getting to that process.”

The transition from a zero-percent interest rate environment to higher rates was necessary because the prior rate environment was artificially low and directed capital into wrong parts of the economy, concentrating assets and pushing investors into risky assets.

“We're coming off a 0% interest rate environment. I think it was artificially low. It directed capital into the wrong parts of, it centerized- - Into risky assets class. - It concentrated assets and also did this point of reach for yield, which put people into the wrong risky assets and duration mismatch as we're seeing-”

Silicon Valley Bank's failure exemplified the duration mismatch problem created by zero rates: banks used overnight deposits to buy long-term bonds, leaving them exposed when rates rose.

“SVB was a part of this, Silicon Valley Bank. - Some of the banks have, they were just using overnight deposits to buy long-term bonds. Not a smart move.”

UN Secretary General Antonio Guterres and other leaders believe existing global financial institutions like the World Bank and International Monetary Fund need fundamental transformation to address developing nation debt and poverty.

“She joins a growing chorus of leaders, including UN Secretary General, Antonio Guterres, who believe the existing global financial systems, like the World Bank and the International Monetary Fund, need to transform to confront today's realities.”

The US Federal Reserve has $9 trillion of assets on its balance sheet acquired through borrowing from the banking system, representing a fundamental change in monetary policy where the Fed regulates how banks use money rather than setting money quantity, which is more intrusive and does not allow as much growth.

“The US Federal Reserve now has $9 trillion of assets on its balance sheet that it's bought by borrowing money from the banking system. So it's a fundamental change in the way monetary policy is operating, where rather than setting the quantity of money, what you're doing is is regulating how banks use money. It's much more intrusive, and I think does not allow nearly as much growth.”

Global macro techniques being used end up concentrating debt at the top, and central banks are part of this mechanism through lack of debt limits on advanced economies.

“I think that's a grave concern. We have the global macro techniques that are being used that end up concentrating the debt at the top. The central banks are part of it as well. The lack of debt limits on the advanced economies, the US is going through that now, but it applies all equally to Japan and to Europe, of the government's able to spend money much more freely than anybody else within the economy.”

Advanced economies like the United States and European Union pumped trillions of stimulus dollars into their economies during the pandemic, while poor nations continued borrowing money they could not afford to pay back, amplifying global inequality.

“United States and the European Union, for example, pumped trillions of stimulus dollars into their economies to keep them afloat. But poor nations basically kept borrowing money they couldn't afford to pay back.”

Protectionism and isolation, while appealing, represent a grave narrowing of economic principles; there must be a global market for efficiency, though dependency on authoritarian regimes should be avoided.

“I think we have to guard against isolationism. You have to look at your national interest and say, what is going to be good for us? So if you say, 'Well, I only want to trade with my neighbors who are friends,' that's a grave narrowing of economic principles. There has to be some kind of global market in order to achieve efficiency.”

There is debate about whether raising the median income is best achieved through narrow nationalism or through global markets; Malpass argues we should want faster growth in poorer countries to enable them to catch up, which creates stability.

“This is that age-old debate of how do you raise the median income? I expressed it correctly. We want people at the bottom to have faster growth so they can catch up. That is a stabilizing force. So we can call it inequality or convergence. I like to use the phrase 'growth.' We want fast growth in poorer countries so that they can get ahead and stabilize and have fruitful lives with opportunity.”

Mia Mottley, Prime Minister of Barbados, called on wealthy nations to live up to neglected pledges of 0.7% of their GDPs for foreign aid and $100 billion for climate action in developing nations.

“In an op-ed published back in April, Mia Mottley, she's prime minister of Barbados, called on the world's wealthiest nations to live up to neglected pledges of 0.7% of their GDPs for foreign aid, and 100 billion for climate action in developing nations.”

Within the World Bank board, almost half of members have jointly expressed in writing that energy policy needs rethinking because the world needs more energy, not less, particularly given that 700-800 million people lack electricity.

“We hear it in the board discussions. There were 11, almost half of our board expressed in writing together, they did a joint missive inside the World Bank to say we have to rethink how we're doing energy because we need more energy, not less. And so, how do we find a pathway to that? And the investment choices have to be done better. The world still has some 700, 800 million people that don't have electricity. And so that's unacceptable.”

India is positioned to undergo a capital market transformation similar to China's 1993 shift, moving from bank loans to bonds and equity markets, which could accelerate Indian growth to 8% or higher.

“And so India is just one step away from that, and they could achieve that and then be growing 8%. And so think if India went through the same kind of transformation that China did.”

There is now discussion within the G7 and G20 about how to break out of the paralysis on energy and development policy, suggesting emerging openness to rethinking global energy and development frameworks.

“I'm happy to see that there is now discussion within the G7, within the G20 of how to break out of that paralysis.”

The US needs a better debt ceiling structure that constrains government spending rather than threatening default, and fiscal discipline is necessary checks-and-balances that have been lost in advanced economies.

“The US really needs a better debt limit, one that it doesn't threaten default, it instead allows some constraint on government spending. Fiscal discipline only makes sense, right? That's checks and balances. And we've seemed to have lost that in the advanced economies with the debt-to-GDP ratios going through the roof.”

Public debt globally increased from 70% of world GDP in 2007 to 124% by 2020, demonstrating the scale of debt accumulation during the low-interest-rate period and subsequent crises.

“In 2007, public debt stood at about 70% of the world's GDP. By 2020, that was 124%.”

China implemented both monetary and fiscal expansion after the 2008 financial crisis to strengthen the economy, achieving significant results, though it remains an authoritarian regime that will not be growth-enhancing long-term.

“China does that. Remember after 2008, the global financial crisis, they both did monetary and fiscal expansion at that moment in order to strengthen. And they achieved a lot of results. And so, you know, they're an authoritarian regime, which is not going to be, in the long run, growth-enhancing. But at moments, if you make decisions that are stabilizing, that can help.”

700-800 million people worldwide still lack access to electricity, which is unacceptable and represents a fundamental development failure.

“The world still has some 700, 800 million people that don't have electricity. And so that's unacceptable.”

Poorest countries are paying an average of 16% of their revenues to service loans, with Pakistan paying 47% and Sri Lanka paying 75%, leaving minimal resources for public health, education, and development programs.

“The poorest countries are paying an average of 16% of their revenues to service those loans. In Pakistan, 47%. Sri Lanka, it's 75%.”

The World Bank has the capability to address debt, climate, and macro policy rethinking, but the real challenge is getting an endpoint on these issues and having someone with standing to confront advanced economies about hoarding global capital.

“The bank has lots of capabilities, and so that, I think, will come naturally. The question is how do you really get to an endpoint on any of the issues we've just talked about- on debt, on the climate challenges, on how do you get to the end point on this global macro rethinking that's needed? Who's really going to stand up to the advanced economies and say, 'You're taking all the money so there's not enough left for the rest of the 6 billion people in the world that aren't in advanced economies'?”

Repayment obligations for developing countries are rising significantly in 2024-2025, making their immediate debt distress worse and requiring urgent progress on debt restructuring.

“So we have this real challenge right now that the repayments that are due looking into 2024 and 25 are going way up for these countries. So they're stuck today, but it's going to be worse next year. So that's the urgency of getting progress on this.”

World Bank President David Malpass states that world growth is slowing while debt continues to rise, creating challenges for both developing and advanced economies.

“World growth is slowing, but the debt is going up and up. So we have developing countries that are in trouble on debt, advanced economies as well.”

There is a consolidation of economic power in the hands of the wealthiest and a consolidation of political power in the same hands, but there is little orientation or inclination to break that concentration.

“What I see, and what I hear from you as well, is a consolidation of economic power in the hands of the wealthiest, a consolidation of political power in the hands of the wealthiest. What do you do? Is there any orientation or inclination to try to break that?”

Advanced economies maintain the existing global financial system despite its dysfunctionality because the system works for them in the short term, prioritizing stability over reform.

“The capital is all flowing to a centralized point. Is that really what you want? And the answer is, 'Yeah, it's working, and we'll keep the system the way it is.'”

Bremmer asks whether American in-shoring and near-shoring preferences, driven by desire to rebuild hollowed-out working and middle classes, reduce or conflict with the goal of developing nation convergence.

“Does that reduce in nature necessarily when America has more as a foreign policy driver in-shoring and near-shoring and the desire to rebuild its own working and middle classes that, to a degree, they felt were hollowed out through globalization?”

The global system is not equipped to fix the debt problem for developing countries, so the crisis persists 'year after year' without structural resolution.

“So they're in a real bind. It's adding to fragility. And the global system is not really up to trying to fix this problem. So it keeps going on and on year after year.”

The world is currently $300 trillion in debt, averaging $37,500 per person on the planet, or $75,000 for a couple, or $150,000 for a family of four.

“As of this year, the world is $300 trillion in debt. That's an average of $37,500 for every person on the planet. $75,000 for a couple, $150,000 for a family of four.”

60% of low-income countries are currently in debt distress or dangerously close to it, with rising interest rates and high inflation making debt repayment even more expensive.

“And right now, 60% of low-income countries are in debt distress or dangerously close to it. Rising interest rates and still-high inflation means it's even more expensive to pay down those bills.”

China has not reached the point of accepting that actual reduction in net-present value of debt is necessary for meaningful restructuring, which is a key blocker to coordinated debt relief.

“Is there a general consensus understanding that this debt, a lot of it just needs to get written off? No. And so that's part of the challenge. China hasn't reached the point of saying that there should be an actual reduction in net-present value.”

Over the last six months, there has been growing realization that developing countries are not satisfied with the solutions they are being asked to implement, and they are becoming more vocal about their dissatisfaction.

“You know, there has been, over the last six months, a realization that developing countries are not satisfied with the solutions they're being asked to do. - Absolutely. This Global South is going farther away, absolutely. Hear it all the time. - And they're more vocal.”

Developing countries are politically constrained from implementing the stabilizing policies Malpass advocates because they are coming out of the pandemic and high inflation environment, where it is much harder politically to argue for fiscal discipline.

“I mean, presently coming off of the pandemic and with high inflation rates, I mean, a lot of these developing countries are just taking it in the teeth. And they just, it's much harder for them politically to make the kind of arguments and implement the kind of policies that you are suggesting.”

Malpass was explicit in meetings that advanced economies are concentrating capital and creating fragility, but advanced economies are repeatedly distracted by new crises (Ukraine, China relations, debt problems) that prevent them from engaging with macro rethinking.

“I do say that in the meetings, you know, and it's a push forward. It's very hard because they are confronted over and over with a new crisis. So the attention goes to the current crisis, whether it's Ukraine, or whether it's relationships with China, whether it's the intractability of this debt problem.”

Malpass's advice to his successor Ajay Banga is that 'time is short' and requires pushing forward with urgency, particularly on debt issues.

“Time is short. You know, you need to push on with urgency. I tried to do that on debt.”