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The Developing World Has an Alternative to Debt

Before rushing into another round of borrowing, developing countries should consider another option that has long been staring them in the face. By taking the steps needed to connect untapped sources of wealth to the global economy, the developing world can finally start to accumulate capital instead of liabilities.

LIMA – Faced with the effects of the COVID-19 pandemic, emerging and developing economies have been taking on massive debt backed by no more than governments’ future ability to tax their citizens directly, or to tax them indirectly by inflating away the debt’s value. Already, the International Monetary Fund and sovereign bond markets have provided tens of billions of dollars in emergency financial assistance and debt relief to member states across Latin America, Africa, the Middle East, and South Asia.

In the short term, these countries have no choice but to issue additional debt. Developing and emerging economies are home to most of the two billion people working in the informal economy (“informals”). According to Guy Ryder of the International Labor Organization (ILO), these workers suffered a 60% collapse in earnings just in the first month of the crisis. With “no savings or access to credit,” he warns, “Millions of businesses around the world are barely breathing. … If we don’t help them now, [they] will simply perish.”

But there is a better and more enduring remedy than debt-led finance, or what Thomas Jefferson, in 1819, called “fictitious capital” (a full 40 years before Karl Marx made the label his own). In Jefferson and the classical economists’ view, debt-led finance is “fictitious” because “capital” is not a synonym for debt ownership.

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