Why Not Default: A Subaltern Perspective
By Sumanasiri Liyanage
Having read many opinions over the issue about what should be done with regard to the debt crisis in Sri Lanka, I think even a scary task of summarising the argument of a book of 384 pages in 1,000 to 1,200 words column would be a useful endeavour. In my previous columns, although I referred to this book entitled ‘Why Not Default: the Political’ Economy of Sovereign Debt by Jerome Roos, a Fellow in International Political Economy at the Department of International Development of the London School of Economics, the current debate demands a focused attention to the main argument of the book.
Why do countries repay their debts?
The sovereign States have power and authority to determine their policies. When a country has an accumulated debt, the repayment of them would create many issues with regard to the relationship between the Government and its people. Often times, governments have to impose austerity measures on its people as a substantial amount of resources move from debtor to creditor countries.
Hence, quoting economists at the International Monetary Fund, Roos referred to natural preference of the debtor nations in avoiding default “even if that implies running down reserves, shortening the maturity of the debt, and ceding part of their economic policy sovereignty to multilateral institutions.” So, Governments will generally prefer to negotiate an orderly settlement with its creditors over a unilateral suspension of payments.
We may see this logic in operation in Sri Lanka today. Even rightwing think tanks who have so hitherto talked about the Government’s incapacity to fulfil its debt servicing requirement, have started to talk about some kind of debt restructuring and defaulting 500 million dollar international sovereign bond that is to mature on 18 January 2022.
According to Roos, four explanations have emerged. They are: (1) the borrower’s long-term reputation; (2) legal and trade sanctions; (3) democratic institutions; and (4) spillover costs, respectively. The reputation hypothesis is based on the assumption that creditors usually discriminate between defaulting countries and non-defaulting countries so that the countries should be conscious about the timely repayment of debt in order to make sure that necessary resources are available when need arises.
Roos has shown that there is no clear evidence to support this hypothesis. “Lenders were eager to let bygones be bygones; what mattered was not the historical repayment record of individual sovereign borrowers, but the immediate prospect of easy profits”.
The second hypothesis highlights the main enforcement mechanism as the main reason for debtor compliance. Referring to legal enforcement in a variety of forms, Roos argues that legal sanctions alone do not appear to make for a credible enforcement regime. The third argument that emphasises the presence of a democratic institution as a factor conducive to debtor compliance is based primarily on the experience of the relationship between the state and the private individuals in developed capitalist regimes in the West: may not be applied in the same manner for underdeveloped debtor nations in which the relationship is weak and fragile.
As the book argues, “it usually does not apply to developing or peripheral economies, which (until recently at least) have tended to depend on credit denominated in currencies and contracted under legal systems other than their own—a form of a foreign credit dependence that economists like to refer to as original sin, and that is often considered an important determinant of default”.
The possible spill over cost of default as a reason for a debtor compliance is referred as the forth explanation. The argument goes like this: “Because it is often difficult for a Government to discriminate between domestic and foreign creditors, the costs of non payment could spill over into finance, trade, and production at home—not only harming bankers, traders, and industrialists, but also affecting the overall economic performance, industrial output and employment”. As a result, the stakeholders within the country would respond by forcing their Governments not to default and it seems to be a strong reason for Governments to comply.
The political economy of debt
Chapter 2 of the book gives author’s diagnosis of foreign -debt problem in which he brings in political and social dimension of the issue. The conventional literature on debt question assumes the national state is a unitary agent who weighs positive and negative impacts of debt repayment or default. Nonetheless, the political economy sees nations as an amalgam of different agents with different needs and interests: the decision that a government of the respective country depends on the interaction of varying social forces.
Hence Roos explains: “Yet this approach clearly glosses over a stark social divide between those who stand to lose from the austerity measures required to repay the debt, and those who are more exposed to the financial fallout of a potential default. Wealthy elites, in particular those who hold Government bonds, own capital and/or run credit-dependent businesses, are likely to derive much greater utility from uninterrupted debt servicing than others, giving them a clear interest in compliance, even if this inflicts harm on the wider economy and on the population at large”.
Roos takes us to an area in which conventional economists are silent. He writes: “One of the principal blind spots of the conventional explanations of debtor compliance is that they generally tend to treat the borrowing country as a singular entity whose different social groups and classes are aggregated into an overarching national interest. Governments, then, are merely “representative agents” that negotiate with foreign creditors on behalf of their country as a whole.
In the process of this aggregation, all conflicts of interest within the debtor country are quietly assumed away; different stratums of society are simply expected to share the same interest in compliance or noncompliance, repay mentor default, and the country’s Government is presumed to apolitically represent this collective set of policy preferences. Yet this approach clearly glosses over a stark social divide between those who stand to lose from the austerity measures required to repay the debt, and those who are more exposed to the financial fallout of a potential default.”
Political economists tend to ask a set of very appropriate questions: Why and how this mountain of debt is accumulated? In Sri Lanka this is a fairly recent phenomenon. Who has initiated this? Which social group is responsible? The questions of this nature may also help in finding a solution to the debt crisis. What should be done? What actions can be taken? As the experience of the last 43 years shows that this debt-based model is a necessary corollary of a continuous deficit in the trade balance, a heavy expenditure on imports catering to new consumerist demand and an unaffordable infrastructure development. Hence, it is totally unjustifiable to blame the lower classes of society. On the contrary, the lower classes, especially women, contributed immensely to get the country out of this impasse.
A simple arithmetic is adequate enough find a solution to the debt crisis. Default 2022 debt and cut down bigger portion of imports of consumer goods that is close to one billion dollars. These two steps save approximately five billion dollars for the country in 2022. Of course, default that may take three forms, namely, rescheduling, restructuring and moratorium, are not the answer. It is just a patching up operation. paradigm shift of development is necessary and unavoidable for a permanent solution.
The writer is a retired teacher of Political Economy at the University of Peradeniya.