Debt crises in the developing world are nothing new. They have become a predictable cycle, with nations caught in a pattern of capital inflows and sudden reversals. “Latin America has been in this loop for over 150 years—capital flows in, then abruptly stops, and you’re left with a financial and debt crisis,” Ghosh explained. This recurring predicament has ensnared 72 countries in the 1990s alone, leaving them vulnerable to external shocks. The issue often centres on foreign currency-denominated debt, which becomes unsustainable when the dollar strengthens or interest rates rise.
The origins of today’s crises, according to Ghosh, lie in the monetary policies adopted by advanced economies following the 2008 financial meltdown. Central banks in the US and Europe slashed interest rates and injected liquidity into the global system, creating a flood of capital seeking higher returns in developing markets. While this might have appeared beneficial in the short term, it created a precarious situation for these economies. “When advanced economies begin to tighten monetary policy, as we’re seeing now, the tide turns. Capital flows out, leaving developing countries in crisis,” Ghosh noted.
The role of the International Monetary Fund (IMF) in this unfolding crisis has been a point of sharp criticism. Rather than advising caution, the IMF encouraged countries to integrate further into global capital markets, a strategy that often exacerbated their debt burdens. Sri Lanka provides a glaring example of the risks involved. By opening its bond market in 2009, the country saw its external debt balloon, culminating in a default by 2022. Ghosh criticised the IMF-backed restructuring deal that followed, calling it a raw deal for the nation. “The agreement prioritised bondholders over the nation’s economic recovery,” she said, underscoring the need for more equitable approaches.
Ghosh offered a historical lens to highlight alternatives, pointing to the London Debt Agreement of 1953, which helped post-war Germany rebuild its economy. The agreement wrote off half of Germany’s debt and tied repayments to export revenues, incentivising creditors to support Germany’s economic growth. “Imagine if developing countries were given similar terms today,” she said. “Instead, they’re locked into austerity measures that stifle their economies.”
India, a nation with immense potential, has also fallen into the trap of misplaced priorities, Ghosh argued. Despite its demographic dividend, the country faces a demographic disaster, with millions of young people entering a job market unable to absorb them. Ghosh lamented India’s over-reliance on services and neglect of manufacturing, contrasting it with Vietnam’s success in driving growth through industrial policy. Vietnam, she noted, has demonstrated how targeted investments and export-led growth can yield transformative results.
The global dominance of the US dollar adds another layer of complexity. For developing nations, the dollar’s role as a reserve currency creates vulnerabilities, as they must hold dollar-denominated assets while grappling with fluctuating exchange rates and interest payments. Moves by China and BRICS nations to explore alternatives signal a potential shift, but Ghosh cautioned against overestimating their impact in the near term. “The dollar isn’t going anywhere for at least another decade,” she remarked. However, the weaponisation of the dollar, particularly through sanctions and asset freezes, has accelerated discussions around finding alternatives. “When you freeze the assets of a major country like Russia, you send a message to the rest of the world: your reserves aren’t safe,” Nicholas added.
Despite these daunting challenges, Ghosh saw opportunities for developing countries to break free from entrenched dependencies. Periods of global uncertainty, she argued, often create space for bold policy experiments and shifts. This requires a willingness to embrace industrialisation and foster regional cooperation, strategies that have proven effective in countries like Vietnam and Germany during pivotal moments in their histories. However, such transformations demand leadership that can resist the pull of established global norms and prioritise long-term national interests.
As the world heads into 2025, the choices before developing nations are stark. They can either continue on a path dictated by external forces or seize the moment to carve out a more sustainable and equitable future. Whether they succeed will depend on their ability to navigate a shifting global economic order with creativity, courage, and an eye on the lessons of history.
