Addressing the Developing World’s Debt Crisis with Former World Bank President David Malpass

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The developing world is mired in its worst debt crisis in a generation, with 60 percent of countries facing debt distress according to the International Monetary Fund (IMF). In the post-COVID world, the United States and its traditional allies have not been able to muster the political capital to institute long-term solutions for these developing nations as their debt-ridden economies deteriorate. China has become the largest source of development assistance but is reluctant to work with multilateral development banks and Western creditors to help find sustainable solutions. 

Former World Bank President David Malpass has been sounding the alarm about this crisis. At Hudson, Malpass will present a new paper outlining constructive and cooperative ways to address these issues. Then he will sit down for a discussion with Senior Fellows Thomas Duesterberg and Joshua Meservey.

Event Transcript

This transcription is automatically generated and edited lightly for accuracy. Please excuse any errors.

Tom Duesterberg:

Okay. Good afternoon ladies and gentlemen, and welcome to the Hudson Institute. My name’s Tom Duesterberg, I’m a senior fellow here at Hudson. We are honored today to have the recently retired president of the World Bank, David Malpass, with us. We are, according to the IMF, in the world’s deepest developing world debt crisis in a generation. 60 percent of developing nations are in some form of debt distress. As David Malpass whose paper we are publishing today, and we put on the seats of your chairs, has noted this is a major indictment of development and many indicators of development are going backwards. The reasons for this crisis are lack of rapid growth, lack of investment, but also lack of Western urgency to address the problems and the increasingly important and sometimes difficult role that China is playing in resolution of debt issues in developing countries.

This week, the poster child of slow debt resolution, the president of Zambia made an urgent appeal for more attention to this problem. After three years of trying to resolve their debt issue, he said that the bankrupt nation’s other creditors’ standoff offer of $13 billion in debt restructuring, calling the delay an indictment of the credibility of the global system. As I noted, we published a paper by Mr. Malpass today that outlines his creative approach to addressing these problems. Mr. Malpass has had a long and distinguished career in public service and in the private sector.

In the private sector he worked for Bear Stearns as chief economist and as head of his own economic development consulting firm, but a good chunk of his career has been here in Washington where starting in the Reagan administration and the first Bush administration, he’s been a major player in economic policymaking. He was deputy assistant Secretary of State at both the State Department and Treasury. He worked in the Congress as head of the Joint Committee on Economic Affairs of the Congress. More recently, he was the undersecretary for Treasury from 2017 to 2019 before becoming the head of the World Bank. David Malpass, welcome and we look forward to your remarks.

David Malpass:

Thank you very much Tom and thanks to Hudson Institute. And Tom and I worked together long, long ago when he was at the Commerce Department, and so it’s good to see him and also good to be with Josh today. We’re going to have, I hope a good conversation. I wanted to set the scene a little bit. Many of you are experts, some are not, and so I’ll talk in both areas, but the bottom line is development is not moving very fast-forward if at all. The global economy I think needs much more growth and also strength in order to get through the various problems, and we’ll be discussing some of those here today. Let me set the stage first. One is global growth is dangerously slow and expected to remain slow. The IMF just came out with its outlook of 2.5 percent growth for 2024, which is simply not enough to allow for development in poorer countries or in poorer parts of the United States.

An important part of the paper is to make clear that we are connected to what’s going on in other parts of the world, we can’t ignore it, and there is a tendency for us to just look inside. And I want people to realize we interact with the world in terms of markets for our products, and also in terms of just the human interaction that goes on around the world, so it’s important to us that there be development, that there be growth outside the US. And so the problem and the reason for the discussion is the outlook is grim for most of the world right now. That’s in part . . . And so I’ll make a macro point. Part of the challenge here is the advanced economies have been absorbing so much of the world’s capital that there’s not much in the way of investment going on.

In fact, we’re at a point now for the developing countries, for the poorer developing countries that they’re having a net exodus, meaning the outflow payments on past investments are bigger than the inflow going in, so they’re de-capitalizing at a time often when many of them have growing populations. This absorption of capital is getting worse by the advanced economies. We saw it in the new US budget that has just come out. CBO, just the Congressional Budget Office just yesterday released its long-term outlook, and so I was looking at that and if you want a grim prospect, you can look there. The US is expected to spend, the US government spend $80 trillion over the next 10 years, so think of that in terms of how much money does the whole world have and you’re taking up a big chunk of it with the US government directing that money. $80 trillion. And the real growth rate in CBOs projection is just 2 percent in real terms, 1 percent in per person terms, and therefore, if you think about that, that’s barely development in the US.

And the point I’m making is that it’s less than that outside the US. The US is the most credit worthy and therefore able to absorb the first dollar of money from the whole world and is intending to do that. We’ve all seen the numbers on the debt to GDP ratio going from marketable debt from 100 percent now to 160 or 70 percent and worse when you add in the debt of the trust funds. And so I’ve advocated a change in the US and similarly in Japan and in Europe, the advanced economies that there be an actual constraint or check and balance on the spending of the government. There isn’t that now, and so you see every year the spending going up with no real boundaries on it. That would mean right now we have something called the debt limit law, but what we’ve seen for 100 years is it enables more and more debt. It’s mislabeled, so I really think we have to look at the debt limit and say that there needs to be a limitation, a check and balance on the size of government that actually works, which isn’t the case right now.

Then as we move abroad, there are blockages on growth of various kinds and we want to talk about them. One is the regulatory structure globally guides capital to the people that need it the least, so the governments get first dibs on all the capital that comes out of the Basel risk regulatory structure. And so that means that new entrants, developing countries, emerging markets, small businesses have to wait until the preferred creditors have all that they want and then there’s a little bit left over. And so that means the regulatory structure is biasing the world toward bigness and toward lack of innovation rather than innovation. And then also the unfriendly investment climates in developing countries themselves are a real constraint on their ability to absorb capital efficiently.

Okay, so that leads us to the need for substantial change in the developing countries themselves and also a direct address of the investment climate. At Treasury and then at the World Bank, I advocated a system that would improve the investment climate to the point where there could be investment as an asset class. Meaning if you think of it, diversification is very important in a portfolio, and so right now there’s no standardization of the contracts or of the ability to make investment, so you can invest in a diversified portfolio of US stocks, but you can’t do the same thing on infrastructure on a global basis, even though you might be able to show that it should be an efficient kind of investment. We need quite a bit of work to be done and I’ve laid out how that could be done. Okay, so I want to bring us to the debt.

Why is this something that we’re talking about? Well, we have billions of people right now who are going backward by many indicators of development. Poverty is going up, education is going down. The per capita income often is going down, and part of it is the buildup of debt that occurred over the last 15 years and the inability to restructure when the debt became unsustainable. We have interest rates rising, that means debt service has gone up rapidly for countries, and without expectation of that. Remember the world community, I went to countless conferences where they said, “We’re going to keep interest rates low for long and there’s no inflation on the horizon.” That was a signal to the poorer countries to borrow as much as they could, which many of them did, and now there’s no process to restructure that. It’s different than in the United States where there’s a bankruptcy process.

If a corporation or a business or an individual makes a mistake, there’s a legal process to adjust that. There’s no equivalent of that in the international sphere, so I advocate and the paper lays out major changes needed in the debt restructuring process. The current process is kind of the fourth generation, if you want to think of it that way, of debt restructuring. In the 1980s there was the Latin America debt crisis, which involved big emerging markets or developing countries, and it was basically bank debt from the advanced economies to the sovereigns. And there needed to be a process. I worked extensively on that in the ’80s, and then in the ’90s there was another round of debt for smaller countries that extended across Africa and it was resolved or is still actually being resolved. I worked from the World Bank on the arrears clearance under HIPC, the highly indebted poor country initiative, which worked for Sudan and then it just occurred for Somalia, so these are the final countries in the HIPC write-off initiative of the 1990s.

But in the meantime, in 2010s, there was a change in the composition where China and private sector creditors began to lend heavily into poorer countries, so the composition of the debt has changed, but the system for resolving it hasn’t changed, and that’ll be most of our conversation today. The system is still one where if a country hits the wall, meaning their previous government did so badly that they have an unsustainable debt, and that’s happening in now 60 percent of the countries of the developing world, so it’s a huge overhang of problems that are causing conflict and fragility in countries, the solution then for that in the current system is a G20 process, the group of 20 countries, and I lay out in the paper why that’s not working.

It was developed during COVID, it was written in a way that favored private sector creditors and favored China and didn’t favor the people in the developing country itself, so we’ve had . . . The landscape is littered with failures of the G20 Common Framework where countries have asked for help for four years without ever getting to a process that restructured their debt in a way that made it manageable during that period. And the big problem is the countries then don’t get investment, so they go backward and backward and backward waiting for the world to come up with a process that could redo their debt. The problems, I’m just going to give a short list and then we’ve got conversation, the sequence right now is the same one that occurred in the 1980s and in the 1990s, so it’s a 50-year-old sequence. The official creditors are supposed to restructure and then the private sector creditors, and the problem is the official Paris Club creditors have basically no exposure.

You’ve got an oddity in a bankruptcy situation where the people doing the bankruptcy don’t have any skin in the game, nothing at stake, so a different way to do that would be to allow a rethinking of the sequence so that the debtor country could talk directly with its various creditors and begin to reach some kind of workout situation. That’s happening informally now with China in the driver’s seat in bilateral renegotiations of debt in countries such as Sri Lanka. A second area is the debt sustainability analysis. The IMF working with the World Bank comes up with the numbers as far as what needs to be restructured for the developing country, and the problem is that system hasn’t been revised for years and years and years, so it uses a concept of debt to GDP ratio, which is not really a workable . . . It’s the most crude or basic way of evaluating the debt sustainability.

It is supposed to be revised now, but it’s not getting revised, so we have the document that forms the core of the debt restructuring is unworkable. A third area is the G20 itself, so that’s the group of 20 countries, but it includes China and Russia, it includes Argentina, and so a variety of the bigger economies is in charge of the debt restructuring. Well, you can see that that isn’t going to work very well because they have such a wide variety of interests, so I’ve advocated the idea of world leaders saying to the IMF and with help from the World Bank that they should take the lead in actually trying to work with the countries to reduce the debt. That’s not currently on their responsibility list, and it means that for seven years, I started on this in 2017, nothing . . . There’s really been basically no progress in getting these unsustainable debts resolved.

And then another area is the comparability of treatment. This is the idea that when you go into a bankruptcy, the creditors are treated similarly in the bankruptcy. That system has been undercut on the international stage, so at each point with the countries that are in trouble, and this is ongoing, I don’t know if you’re all familiar, but if you read Bloomberg for example, they cover day by day the failure of the international system to help with the restructuring in Chad, in Zambia, in Ghana, in Suriname, in Sri Lanka and so on around the developing world. And the comparability of treatment is studiously not defined by the current process and therefore there’s arguments among the creditors and stalemate. The solutions, I’ve hinted at them, I’d like to revise the debt sustainability analysis, have it be shared. Right now there’s this very small group of very high paid people that are the only ones that get to see the numbers and get to work on the restructurings and they trade jobs and trade positions, and so having the information shared would be good.

There needs to be information also transparency shared on the debt itself, and that could be done under the IMF Article IV, for example, so there is a global monitoring system, but it doesn’t right now give the information that’s needed in order to actually know what the countries owe to the various creditors. And then as I mentioned a little bit, I think there needs to be clear responsibility to the IMF helped by the World Bank to actually make progress on the debt reduction. That responsibility doesn’t reside there now, and the problem is not being reduced. And then as I mentioned a little bit earlier, allow the debtors to work with different classes of creditors right from the beginning. Once they’re in default, they should be able to talk with their various creditors and see what could be done to help exit from the restructuring process. They’re not allowed to do that now, it has to go through this old, old process of the official creditors decide they don’t actually have a stake in the outcome, and so it’s all been stalled.

And the consequence for all of us is the investment in the world is not going into the places that need it, and there are constant international conferences. I attended too many to count, and I can tell you from being in them that there’s just no progress being made nor actually very much interest in the international community in finding a solution to this, so year after year, the new governments come into countries, they say, “I really want to fix this problem. I’d like to get straight with the international community and invite new investment into my country.” And that’s been failing country after country with I think dire consequences. Thank you very much.

Tom Duesterberg:

We’re going to be joined in this conversation by my colleague Josh Meservey, who’s a senior fellow here at Hudson, has had a long career in working in Africa, thinking about Africa, writing about Africa. Africa is not the only region that’s affected by this inability to address the debt crisis, but it’s going to be much for our focus today. Josh, I want to start with you for a few comments. David mentioned that Western countries, United States, the Europeans basically don’t have any skin in the game, especially in Africa, the result of lack of investment and lack of attention to Africa over the last many years. This has not only financial consequences for the countries involved and the international financial system, but geopolitical consequences. There’s a vacuum, if you will, in Africa as the United States, France which is traditionally very active in Africa, has departed from the scene. We have things like the crisis in Niger now, and malign actors seem to be coming in to fill the vacuum, so could you comment a little bit on this dynamic?

Joshua Meservey:

Yeah, sure. Well, you’re right. Things have gone poorly I would say over the last several decades for American interests on the African continent, which is also the same time period as the continent has become more strategically important to the world for a whole host of reasons, so the trends have been really negative. The United States is actively engaged, but in certain very particular ways. On public health, for instance, United States has had extraordinary programs on the continent, the President’s Emergency Plan for AIDS Relief, PEPFAR, has saved probably 20, 30 million African lives, so the US, as I say, has been engaged and does have a really positive story to tell. But despite that, this phenomenon you just referenced is happening where the Irans and the Russias and particularly the Chinas of the world have become much, much more influential on the continent.

China is by far the largest lender, bilateral sovereign lender, it’s by far the largest trader with Africa. It’s not the largest source of FDI by stock, but it is significant. It has the largest diplomatic presence on the continent, et cetera, et cetera. And recently Iran has made some significant inroads. I lay this all out in a little essay at the end of David’s excellent essay, but Iran has made some inroads and Russia is increasingly looking to the continent as a source of diplomatic support, as a source of raw materials, as a source of revenue to fund things like the Ukrainian war, so the continent is massively strategically important. Our competitors are gaining more and more influence there while American influence fades, not because we’re absent, but because we haven’t been strategic or smart enough about how we operate on the continent.

David Malpass:

Tom, can I give some numbers? I neglected to do so.

Tom Duesterberg:

Please.

David Malpass:

In my paper there is the idea that the debt service from the poorer countries, the world’s 75 poorest countries are, we’ll call them the IDA countries under the World Bank designation, they paid $10 billion out in 2021. That has tripled now in 2023, so 30 billion of payout from the poorest countries actually making those payments or being responsible for them. And to put that in perspective, the IDA20, which is the operable World Bank program for those countries is only $23 billion over three years. And the next one, the next 3 years is going to be smaller than that in terms of the amount of money that the world puts in in grant money for these countries. Compare that. They’re putting out $30 billion and in the only really big program to put in, it’s 23 over 3 years, so you can see the unsustainability of that system. As people think about can foreign aid solve this problem, right now you would be looking at needing a huge giant increase at a time when the countries, the advanced economies in their negotiations are actually looking to reduce the amount that they’re putting into the country.

Tom Duesterberg:

Okay. I’d also like to broaden the context a little bit. Both of you have mentioned the role of China. China is now the largest supplier of development assistance, but the way China does development assistance is somewhat different than what the traditional Western pattern, which was official assistance from governments, oftentimes grants or low interest loans, and coupled with commercial loans. And resolution of problems was done cooperatively through the Paris Club when needed, and there was a good system of cooperation in the past at least. But China goes about this differently. Their form of aid oftentimes through the Belt and Road program, which has implications for Chinese economic development and their acquisition of resources which they lack, raw minerals, oil, et cetera, China goes in and their assistance is in the form of loans which are tied to collateral. They’re oftentimes tied to projects. They demand funds to be set aside like you do with a mortgage, but also they require the countries that receive aid when there is a problem not to participate in the Paris Club system of negotiating reductions in the debt loads.

My question, David, you’ve been in the belly of the beast for a long time and have been involved in these negotiations, so there is a lack of Western commitment now tied to the lack of skin in the game, as you indicated, but also China makes it difficult because they demand payment before other creditors and in essence they ask for their debt to be subsidized by payments from Western banks, but also by the multinational institutions such as the IMF and the World Bank. How do you assess the relative importance in the failure of the current system to lack of Western engagement, but also to the influence of the Chinese in these negotiations?

David Malpass:

Yeah, it’s important. It happened relatively quickly, so in the 2000s and 2010s China really expanded its lending and created the terms that it wanted, and China lends differently. One is there’s non-disclosure clauses in the contract so that people can’t see what the deal is that’s being done. One is, and you mentioned the escrow accounts, so for example, Angola borrows from China, China helps build things in Angola, but then Angola’s oil is exported through with the proceeds going through an escrow account controlled by China. And so that gives substantial influence, and that’s operating in many of the countries which is different from the system, and I’ve advocated that there be a more clear agreement on the international scale that governments not borrow by giving up collateral. Think of if the US government in order to issue a Treasury bond was asked by China or Japan or other lenders, we would like to have control of your road system if you don’t pay us.

That wouldn’t be a workable system, but that actually is the norm in many of the developing countries, and so the numbers are staggering now of the . . . I gave you the size. The debt service has tripled from 2021 to 2023 to $30 billion of which $16 billion is going to China, so they’re more than half of the extraction that’s coming from the poorer developing countries. Okay, so how do we change that? One is, and I mentioned in the Article IV consultations, the IMF could try to get countries to disclose how much they owe, and that would be a starting point to getting it restructured. As long as it’s secret or under the table, it’s hard to know what the legitimacy of the contracts are. I think another thing that could be looked at is collective action clauses. Within bond covenants and within lending arrangements there is the idea that if you’re in a class of lenders, you can have with either majority rule or a 75 percent or an 85 percent collective action, you can agree to restructure the debt.

What’s happening right now is the countries are having to wait for unanimity among their creditors, meaning China has to agree with the same restructuring that the US government might, and so a change would be to have clauses within contracts. The World Bank often has negative pledge clauses. I invoked one of those in Angola. I mentioned the escrow situation with China. That violated a negative pledge clause that the World Bank had in its loan contracts. Those aren’t being enforced by the World Bank in other countries, so that again, would be an avenue to try to put pressure on the international system to give a more balanced opportunity for the debtor countries because the reality right now, the world system is working actively and almost solely on behalf of the creditors. And as I’ve just described, China is the biggest creditor, so the world system is working aggressively to help the creditors against the developing countries that we have so much national interest at stake in.

Tom Duesterberg:

Many of the analysts, including myself, who study the Chinese economy, know that their economy has reached a period of slow and sometimes even negative growth. If they’re the biggest creditor to the developing world, do they have likely the resources to continue investing in developing countries, and as an additional question, is there anything that the United States and its allies could do to incentivize China to be more cooperative with, if not the Paris Club process, then some other collective process to actively address this crisis? And let’s face it, we’re going to have to write off some of this debt. The Chinese just don’t want to do that.

David Malpass:

Right, so China’s making money on the debt and within the debt restructurings, they’ve taken the position and so far been able to hold it that they never take write-downs. And so that means from your point of can we connect it to the health of their economy, not really because it ended up, especially with . . . These are floating rate debts to countries that get money from the IMF and the World Bank and the international community, and as the interest rates go up, the profit for China goes up, and so these so far have been good or have worked out in terms of their investment. What could we do to incentivize them to be part of this? I mentioned I think there has to be a shift. As long as you have the G20 and the Paris Club dominating the process, it’s working heavily in China’s favor, so rethinking that from . . . And the US government actually taking a position that this process is not working.

So far, they’ve taken the position, well, if we’re just patient and keep doing this, but as I described, the payout to China is bigger and bigger every year. And so I think to incentivize it, we have to one, want to change the system and then really work through with the advanced economies to think about what is a way to work with . . . We would like China and other countries to be making productive investments in developing countries, but not ones that extract resources and end up with only benefiting China, so how do you find a fairer system that actually works? Right now there’s no discussion of that. Each country is sinking pretty rapidly.

Joshua Meservey:

Yeah. And on that, in the African context, China is the largest bilateral sovereign creditor, but as David mentioned in his remarks, commercial lenders now are a much bigger part of the story in Africa. And interestingly, we have seen some shifts in how China is lending to Africa because I think both perhaps the domestic economic problems that it’s having, but also because of these debt crises, China is I believe looking across the landscape and seeing a whole bunch of bad debt coming due and it does not want to take write-offs, to your point. It doesn’t want to establish that precedent for one thing because if it does it in Zambia, then it’ll have to do it in all the other countries that are in Africa that have bad debt coming due.

They’re switching from these large mega loans that finance things like massive rail projects or big hydropower dams to what they call small but beautiful, which have shorter time horizons, they’re more bankable, so we are seeing Chinese behavior in the African context change around lending. They will occasionally still, if there’s a particularly strategically important project, you’ll still see them splash out large loans, but it is changing. We’re in the midst of China rethinking its approach to African lending at least, and I’m curious to see where it goes if they eventually return to the large projects, but I think this will be the future for a while, these small but beautiful as phrase them.

David Malpass:

Tom, there’s a mathematical way through the restructurings, and so I don’t want to be too nerdy for the audience, but net present value is a way that finance has to come up with comparability of treatment across creditors. China has so far taken the position that they understand net present value, but also want to make sure that they don’t get their money out later than other creditors, which is . . . Those two concepts don’t actually work in combination, and so that means from the Paris Club and the international system to say, “Look, we’re doing comparability of treatment, that was the agreement within the G20, so let’s get on with it,” and then more forceful decision process. I tried to do that from the World Bank in setting up the global sovereign debt work, roundtable, Global Sovereign Debt Roundtable, GSDR, which started at the end of ’22 and then met in 2023 with the idea it was supposed to be a forum where the debtor, the debtor country, Zambia, which is trying hard to have a better life for their people, could sit at the same table with their creditors, including China and actually talk about their debt.

Because that hadn’t been going on. The problem is that roundtable has not been assertive in describing this kind of situation that net present value is the way to have comparability of treatment. Sorry to get nerdy, but the reason that this is important is billions . . . You read the clip from Hichilema, the president of Zambia saying $13 billion is at stake and the international community is not stepping up, but this is the core of it, that there hasn’t been direction from the international community on how to evaluate comparability of treatment in a way that will bring China along in a structuring.

Tom Duesterberg:

Okay.

David Malpass:

With that.

Tom Duesterberg:

One of the better analysts of the whole debt horizon and situation is an outfit called AidData, I think associated with William & Mary University. They, a while back took a look at Chinese assistance and came up with a figure, and I’m trying to remember the exact figure, something like 30 to 35 percent of all the Chinese investments in African development assistance were affected by some form of corruption. And that leads to another question, which is African nations have to take some responsibility for being more attractive and more transparent with lenders, especially in the West, because after all, most Western aid is commercial bank aid, but also governments have to pay attention to factors like corruption. What does Africa need to do, African nations need to do to make themselves more transparent, more attractive to Western investors? Josh, you’ve thought a lot about this.

Joshua Meservey:

Yeah, and you’ve articulated the dilemma here for American policymakers with this debt crisis in Africa, because it clearly is already exacting a really serious human toll in Africa. I’m sure it is deepening already instability in parts of the continent, and I expect it will continue if the economic repercussions of all this are not ameliorated in some way, so that’s bad for American interests and the US wants to deal with that. The other side of the dilemma, however, is that David mentioned the HIPC process that began in the ’90s. A lot of the countries that are now today racing towards debt distress were the very same countries that got debt relief starting in the ’90s, so for American policymakers, how do you deal with what is a very real crisis with very real consequences for American national interests without creating this moral hazard or deepening or furthering this moral hazard that clearly exists of just encouraging future reckless borrowing or mismanagement, corruption you mentioned?

I jotted down a statistic that is included in my essay as well, but in 2018, a UMass Amherst report found that $1.4 trillion had illicitly left 30 African countries in less than 50 years, which was more than the combined amount of aid and investment that they received into those countries. The debt crisis is fundamentally a problem. In the African context is fundamentally a problem of African government mismanagement and corruption, which includes corruption, but that doesn’t change the fact that we have this debt crisis that is bad for American national interests. To your other part of the question about what can African countries do, one of the challenges that African elites, and I’m speaking in broad generalities, so there’s many exceptions, but African elites are not particularly incentivized to clean up the corruption in their countries and in their systems because they’re the primary beneficiaries oftentimes.

As I’ve thought about this over the years, I think the United States should focus much more on the actors that are incentivized to in a good faith and committed way, tackle corruption in the African context. That would be African civil society, the people who suffer most from the government corruption, so watchdogs. There are really valiant organizations on the continent that tackle government corruption and have done extraordinary things in exposing it and even bringing it to book in some cases, strengthening judicial systems, strengthening institutions, all very hard, all very long term, but there’s no substitute. There’s no silver bullet out there, there’s no quick fix, at least as far as in my limited capacity I’ve been able to discover. I hope maybe somebody smarter in the audience can come up with one, but I think that’s the situation we face.

David Malpass:

I wrote down eight things.

Joshua Meservey:

Rattle them off.

David Malpass:

One is to have transparency of the debt, so if it’s secret, then you don’t know who’s on the take within a contract, so that means some kind of international agreement that you’re not going to have collateral and non-disclosure clauses. I forced the issue on Ecuador in 2019 when they were doing a debt restructuring where they had signed under the previous government, so the communist government had signed with China an oil contract that was under a non-disclosure clause, and no one had seen it for years what that contract required, and that means where the money was going. We were able to force, but only up to a point, the historical contracts not the current one that they were under, but that required the full force of refusal to lend into the program until there was some disclosure. The world saw that China had been able to use the very best law firms in the US and the UK to write clauses in the contracts that not even the World Bank or the IMF could get through to see what was in the contract, so one is pushing that issue.

Number two, no order here, having the private sector be more the recipient. Right now a lot of the countries are allowed to be government-dominated and government-focused, and it’d be better to have it distributed because right now the corruption can be concentrated in a small group. Number three is statutory reforms in the UK and in the money centers, that New York and London that didn’t give so much pressure advantage to the creditor. The whole system’s been written to be dominated by the creditors, which means China has a strong incentive to keep lending because there’s never losses, and so having statutory changes that lessened the attachment power of the bond holders, we’re talking about Eurobond holders that are writing the contracts in a way that benefits basically rich people within the advanced economies.

One that is the Foreign Corrupt Practices Act in the US puts real constraint on the ability of Americans, of US people to operate abroad because they’re under such a high bar ethically, higher than the whole rest of the world that they can’t travel to the countries and actually get engaged, so one would be to have the US comply with the OECD standards for ethics as people are working with countries because China is simply not. Their business people are not constrained, and so that gives them a huge advantage within negotiations. I mentioned the need for losses. The moral hazard problem that Josh mentioned is a very real one. If you never take losses, the incentive is to lend without thinking about the quality of the loan that you’re making, you just go ahead and make the loan, so that’s the dominant part of the system right now. If you’ve lent to a sovereign, the whole international system comes down to support you the creditor, no matter how dumb your loan was. And so that has to be fixed and changed.

That actually applies to the World Bank and the other multilateral development banks and the IMF, they have what is called preferred credit or treatment, meaning they always get paid first no matter how unsupportable the loan might have been, so they’re themselves part of the problem. You can go into a country, make a loan that you look at and say, “Boy, it’d be very hard for them to repay this loan,” and yet you’re going to get repaid first. And one more, maybe the most important one is the currency systems in the countries. There’s not an international consensus strong enough at least that people in countries should be allowed to keep their money. What we have is a system where the governments control the money and then devalue it, which is a way for the governments to provide corruption into their practices. It’s in fact, if you’d say what’s the single biggest source of corruption, it’s the multiple exchange rate systems. If you think about Nigeria, why is Nigeria, which is an oil superpower, why are 25 percent of the people in extreme poverty and it’s getting more?

And the reason in my view is they have a multiple exchange rate system where if you are friends and family, you get the better exchange rate and everybody else gets the worst one, so it concentrates. Ethiopia has been doing that, and so these are countries that could be rich and could make that change. Argentina is a clear example where it’s a country with huge resources, but the government controls the peso, so what do you think is going to happen? The people just get poorer and poorer, so that would be part of the system to reduce corruption. I think there should be a very firm international consensus that countries should not have favorable differential exchange rates for different people and that central banks should in general try to have their currencies be stable rather than unstable, but that isn’t what economics is doing right now. They fully endorse the idea of free floating exchange rates that offer this huge ground for corruption.

Tom Duesterberg:

Okay. I’m going to ask one more question, then turn to the audience, so if you have questions, as soon as we get through this next question, we’ll try to get a few in from the audience. But David, I’m going to put you on the spot because you say the Paris Club process is not working and needs to be changed. Let’s face it, it’s called the Paris Club and France has always been the convener of Paris Club negotiations. As you said, they really don’t have any skin in the game anymore. Should we disinvite Paris from being the convener of restructuring negotiations and form some new organization formally or informally?

David Malpass:

When you say we, you mean you the Hudson Institute or what? Who are we?

Tom Duesterberg:

I’m a think tank guy.

David Malpass:

The US government? This could . . .

Tom Duesterberg:

G7, I don’t know.

David Malpass:

. . . be the core of it. The G7, I think the deputies are meeting in Florence, Italy today or yesterday, and so I think a starting point, and we should recognize the US is the world’s biggest economy, the biggest military power, and the world really looks up or wants to look up to the US. This took a massive setback because of Afghanistan. We’re still seeing the consequences of that. And so you saw in Niger . . . I was in Niger a year ago. It’s a really important country. Many haven’t heard of it, so it’s north of Nigeria. It’s twice as big as Texas, it has oil, it has uranium. It’s an important mainstay within the world, and so I went and gave an important speech in Niger wanting to strengthen or at least provide some kind of international support. They, some months later, unrelated to my visit, had a coup. The military took over and now the US closed the base. It was announced this week.

And so this is emblematic of the fading US power that’s going on, so when you say we and the Paris Club, France is a strong player within the international system, and so they are currently the chair of each debt restructuring, and firms based in Paris are the private sector firms that carry out the restructurings. It would take a real discussion on the international stage to say, “Look . . . “And China’s been clear that the . . . I’m sorry, for people that don’t know the background, the Paris Club for 50 years has been the arbiter of the restructuring for countries. In the 1980s with the Latin debt crisis, it was restructured using the system I described. The Paris Club chaired by France decides on the terms, and then the private sector is requested to go along with the terms that are determined by the countries chaired by France, so that still is the system going on.

I think what I suggested was a system maybe within the G20 Common Framework or within the Paris Club where there would be a recognition that the debtors could choose to work with a variety of creditors in order to work out the restructuring in order to incentivize. Meaning if the Eurobond holders wanted to reach a deal, meaning a write-off with the country, they would be allowed to go ahead and do that. And that would at least allow the country to then go back to the official creditors, that’s the US Export-Import Bank and the China Export-Import Bank and other official creditors and say to them, “Look, we’ve already reached a deal with the private sector creditors, you should be going along with that because you’re rich countries,” and they would have a lot of leverage in order to do that. But right now there’s nothing like that on the horizon, so I don’t want to put it quite the way . . . I can envision there being latitude within a Paris Club or a framework centered in Paris that actually got the job done. That would be the goal.

Tom Duesterberg:

Okay. Let’s go to the audience. Let’s see. In the back there, the second row from the . . . 

Juan Regatta:

My name is Juan Regatta, I’m from Argentina originally. I am at the IMF for 15 years. My question is regarding to the comment earlier in the conversation between the interaction between China and some countries in Africa. What role the Asian Investment Infrastructure Bank has there between this interaction? They-

David Malpass:

Say that again. Who has?

Juan Regatta:

The Asia Investment Infrastructure Bank, the new bank that came out during the last 10 years.

David Malpass:

Oh. No, no, he’s talking about the New Development Bank.

Juan Regatta:

No, no.

Tom Duesterberg:

That’s the BRICS.

Juan Regatta:

Not the BRICS.

David Malpass:

AIIB you’re talking about.

Juan Regatta:

Precisely.

David Malpass:

Okay.

Juan Regatta:

Does he has any role this bank between this interaction through the . . . The money lending goes through the Asia Investment Infrastructure Bank or it’s just an interaction between the government itself of China and the countries in Africa? Thank you.

David Malpass:

Both are involved. For background for people, over the years there have developed . . . In 1944, the IMF and the World Bank were created out of the Bretton Woods Conference in the hope that World War II would end and there would be a reconstruction process for Europe. And they had different roles, the IMF to more protect the gold standard and the World Bank to do . . . It was called the International Bank for Reconstruction and Development, and the first loan was to France, some of the early loans to Luxembourg and so on. Over the years, those roles changed, but also over the years there became a proliferation of multilateral development banks that had the same powers as the World Bank. That means preferred credit or treatment, so when they lend, the country has to pay them back, and that applies to . . . China has seen this and created two in China, the AIIB, the Asian Infrastructure Investment Bank based in Beijing, and then the New Development Bank based in Shanghai.

They both are, at least seem to be receiving preferred credit or treatment when they make a loan. AIIB so far has been a good partner with the World Bank, piggybacking onto World Bank loans, so they add exposure to a World Bank loan, but China’s the biggest shareholder and has offered to increase the capitalization of AIIB and then they would get preferred credit or treatment when the loan is made. But currently AIIB is relatively small compared to the other lending coming from China. It comes from China Export-Import Bank, from the China Development Bank, CDB, which is a big lender, and also from the PBOC, the People’s Bank of China, which has innovated in the last five years. China’s constantly innovating new techniques for making loans and one of the big new ones is the swap lines. That means the Central Bank of China goes to the central bank of a country and says, “We’ll exchange currency.” And so the country is then able to spend yuan in China.

This was an issue with Mongolia, for example. It’s now become for Argentina, where you’re from. China a year ago stepped into the Argentina disaster that was unfolding and did a swap arrangement, which means they’re at the top of the capital stack. That means the central bank will get paid first by Argentina even before, I think . . . This might be tested. Before the IMF and the World Bank. And it used to be that that kind of lending from China was not recorded in the international statistics because they treated it just as if it’s a swap, so there’s no loan. Under my tenure at the World Bank, we began collecting that data and disclosing it because in operation it becomes just a very preferred loan that’s made from China, from the government of China to countries. To your question, what kind of lending is going on in Africa, each of these kinds of lending, and it was going up very rapidly and now all of those are floating rate loans. As the Federal Reserve has gone from zero to 5.5 percent, the profit on those loans is enormous and there’s no technique to restructure those debts.

Tom Duesterberg:

David can’t say this, but I can. Some of us think that this is part of the . . . This AIIB and other Chinese banks, which are controlled by the People’s Republic of China, basically by the leadership, there’s always a price to pay for getting aid from China. And even things like swap lines, there’s always a price to pay and China is always looking out for its own interests. We have time for-

David Malpass:

If you think about what price, one standard thing is China says, “Well, we would need to have you make a state to state visit to China if we were to go forward with negotiating this loan that you’re so interested in.” One of the things going on is the leaders from across Africa, each one makes the pilgrimage to Beijing to see what China really wants in terms of this loan that they’re going to make.

Tom Duesterberg:

Okay, we’re over time, but one more question. This gentleman’s been waiting patiently.

Todd Wiggins:

Yes, thank you. Good afternoon. My name’s Todd Wiggins and Mr. Malpass, I’m going to provide you with a promotion. I’m going to call you Dr. Malpass. But I would also, since we’re in the midst of an election year, I’d like to ask you what you feel we should be looking at between now and November and which of the current administration should hire you as their primary advisor going forward?

David Malpass:

Maybe another . . . Really I made a point that the world really would like the US to be strong. I really feel that. I went into lots of conferences where they genuinely wanted to know what the US thought was a good direction, so there is this well of goodwill that you don’t see playing out right now. And so I think we really have to work hard to reestablish that in the world because the alternatives are communism, socialism, and poverty.

Tom Duesterberg:

Okay, on that note, we’ve gone over time. You’ve been a patient audience. I think there’s been a lot of very creative ideas advanced here to think about, so I want to thank David Malpass and Josh Meservey, and please join me in giving them a . . . [clapping].