Webinar Summary – Why Not Default?: The Political Economy of Sovereign Debt
On October 5, 2023, the Boston University Global Development Policy (GDP) Center hosted Jerome Roos, Fellow in International Political Economy at the London School of Economics & Political Science, to discuss the main ideas of his book, “Why Not Default? The Political Economy of Sovereign Debt.” The event, which was the third installation of the Fall 2023 Global Economic Governance Book Talk Series, was moderated by GDP Center Director, Kevin P. Gallagher. Roos and Gallagher discussed the genesis of the research that gave rise to the book, highlighted how modern debt crises can aid understanding of structural power dynamics in the international financial system, and what lessons can be learned from changes to those power dynamics in the modern geopolitical landscape.
Roos’ book unravels the question of why countries do not default in the face of severe debt crises when it means they must sacrifice contributions to key public welfare institutions like public education and healthcare. While economic research has suggested that countries pay off external debt at the expense of domestic constituents in order to avoid being cut off from international financial markets, Roos engages in a political economy analysis that explores national motivations during a crisis more deeply. He explores this using first a historical comparative approach, looking at debt crises prior to and after World War II, then by exploring three modern case studies – Mexico in the 1980s, Argentina in the early 2000s and Greece during the Eurozone crisis beginning in 2009.
Gallagher kicked off their conversation by pointing out that the United Nations Conference on Trade and Development just released their flagship report, in which they note that 3.3 billion people in the world are living in a country that is spending more on external debt service than they are on public education. Indeed, high levels of debt service today is often associated with austerity measures at home, which means that the domestic population bears the brunt of the difficulties brought on by the crisis. Roos pointed out that this reality is what gave rise to his initial interest in understanding the political economy of sovereign debt. He began to consider the research behind this book more than 10 years ago when he was living in Italy and began to see the widespread grassroots protests in Southern Europe in response to austerity measures, which, in the case of Greece, were required in order to pay its external creditors. Roos was then struck by the question – what is it that makes the Greek government more responsive to financial obligation to its external creditors than to its democratic obligations to its constituency?
As the research developed, Roos discovered, somewhat puzzlingly, that historically, this was not the case. In fact, prior to the 1970s, countries routinely suspended payments on external debt in the context of a crisis. In addition to the reality of creditors acting as monopolists in international financial markets, Roos, inspired by the research and writing of esteemed political economist Susan Strange, revealed a political structural system in which key national actors wield political power to keep countries from defaulting. Moreover, from an international legal perspective, there is no enforcement mechanism that forces them to pay their creditors and thus it seems like countries should make the opposite decision – to prioritize domestic constituents over external creditors – as they did in the earlier part of the 20th century. This is especially true given that paying down external debt is effectively a wealth transfer from domestic taxpayers (often in lower income countries) to foreign lenders (often in high-income countries).
In paying homage to Strange, Roos argues that global structural power is enforced on various levels by Global North governments, the Paris Club, the International Monetary Fund and other international institutions and agreements. Moreover, Roos argues that no borrower country should be treated monolithically, as domestic elites are often connected to the global structure of power.
Gallagher followed Roos’ initial comments by asking first, what difference, if any, does China’s rise as a global creditor makes to these power dynamics. In theory, if there is another international creditor that does not collude with the majority of creditors, then countries shut out of the conventional financial markets may have another option. Roos responded that China’s new role in the global financial market is a major game-changer, as China’s rise fundamentally alters the structural dynamic he explores in his book.
In a second question, Gallagher pointed out Roos’ argument in the book that policies of servicing debt instead of caring for constituencies should be “contested from below.” However, in the case studies included in the book, grassroots organizing and protests did not ultimately move the needle in their favor. He then asked what advice Roos has for constituencies in Kenya, Egypt, Argentina and other countries experiencing crippling levels of debt – what kinds of actors, coalitions, public education and other types of organizing could help yield greater success than movements in Mexico, Argentina and Greece found?
Roos pointed out that debt crises are always times of intense struggle over the allocation of scarce resources, and people should, and will, protest when they find their livelihoods at stake. However, contestation alone is not sufficient to make a difference for these constituencies. Protests are aimed principally at the debtor government, but individual government debtors are not strong enough to resist the structural power of united creditors. By treating these crises on a case-by-case basis – the approach preferred by creditors as a whole – each instance pits the individual countries against the universe of creditors. Instead, Roos argued, structural change is needed at the international level, involving international coordination and an international debt restructuring mechanism.
Gallagher and Roos closed their discussion by highlighting some of the key resources in the literature for further exploration of these themes. Roos recommended “The Long 21st Century: Money, Power, and the Origins of our Times,” by Giovanni Arrighi, a book which demonstrates that the rise of finance follows a cyclical pattern over time. He also mentioned “Buying Time: The Delayed Crisis of Democratic Capitalism,” by Wolfgang Streeck, which explores 40 years of neo-liberalization and the accumulation of public debt as it set the stage for the Eurozone debt crisis in the 2010s. Roos noted that he relied heavily on the work of Carmen Reinhardt and Kenneth Roggoff in “This Time It’s Different: Eight Centuries of Financial Folly,” for his understanding of the economic history assessment of international debt crises and for some of the data in his book. Finally, Roos pointed once again to the rich intellectual history of Susan Strange in inspiring him in this project.
Roos’ final comments pointed toward the potential for change in the international financial system, in light of the new and unknown role of China. While the United States Treasury has been a key pillar of the system, finance from China may allow countries to be less beholden to the vagaries of US Treasury lending. In the absence of global coordination, however, new lending options for debtor countries may be only a temporary solution to an enduring problem.
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