Acting in Parallel on Debt and Development before It is Too Costly and Too Late

Emerging market and developed countries must meet their shared climate and development goals to avoid the catastrophic costs of inaction. Yet, the International Monetary Fund (IMF) estimates that 26 low-income countries are in debt distress or default, and new academic research estimates say this number will double if countries mobilize the level of investment needed to reach climate and development goals. The development and debt crisis is creating lost decades for developing countries, slowing the growth of the world economy and preventing crucial action on climate change that will yield global impacts.

In a new report from the Center for Strategic and International Studies, Kevin P. Gallagher writes that the solution to these problems entails a combination of new international financial flows and an opening of fiscal space to invest in new growth paths aligned with climate and development goals. Space for growth will propel economies to both sustainability and prolonged solvency. Some cases may require debt restructuring, and others debt suspension.

Gallagher argues that China and the United States could engage in multilateralized cooperation accompanied by parallel coordination. The countries could work together to fix the flawed tools at the IMF and in parallel bring their respective commercial sectors in line with climate and development goals.

The report is a product of the US-China Global Economic Order (GEO) Dialogue, now in its ninth year, which focuses on strengthening dialogue and fostering cooperation around the three pillars of the Bretton Woods system: international trade, finance and development. In the report, experts from China, the US and elsewhere offered tentative solutions to the policy community in four topical groups: economic competition, economic security, finance and decarbonization and development.

Key points:

• China and the US could create multilateralized cooperation.
  • Reform the debt sustainability analysis (DSA) and subsequently divide developing countries into three categories: those that face insolvency problems; those that face liquidity issues; those that do not have solvency or liquidity concerns and do not need assistance.
• China and the US could bring parallel coordination efforts into the Group of 20 (G20) Common Framework.
  • Parallel Coordination: China 
    • Implement debt suspension or reduction (depending on whether a country is insolvent or illiquid after DSA) with a reward for Chinese commercial actors through guarantees on newly converted bonds from People’s Bank of China or Sinosure. A weaker version would be a reward for “staying in” developing countries during downturns. 
    • Create net inflows and credit enhancements from China-related development finance institutions, such as the China Development Bank and the Export-Import Bank of China, and exercise China’s voice and vote at the Asian Infrastructure and Investment Bank and New Development Bank. 
  • Parallel Coordination: United States
    • Implement debt suspension or reduction (depending on whether a country is insolvent or illiquid after DSA) with a voluntary enhancement guarantee for the private sector from a US guarantee program or the World Bank for participation, and through regulatory measures that have been deployed in the past. A weaker version would be a reward for “staying in” developing countries during downturns.
    • Create net inflows and credit enhancements from US-related development finance institutions, such as the International Development Finance Corporation and the US Export-Import Bank, and exercise the United States’ voice and vote at the World Bank and similar institutions.