Global Development Compact (GDC)

Why in the News?

India proposed a Global Development Compact during the third Voice of Global South Summit to address the rising debt issues faced by developing countries in the Global South.

What is the Global Development Compact (GDC)?

The GDC is a comprehensive and human-centric initiative designed to support the Global South by providing sustainable development solutions.

Key Features of the GDC

• Four Core Elements:
• Trade for Development: Promoting fair trade practices to support economic growth.
• Capacity Building for Sustainable Growth: Enhancing skills and infrastructure to enable long-term development.
• Technology Sharing: Facilitating the transfer of technology to bolster innovation and productivity.
• Project-Specific Concessional Finance and Grants: Providing financial support that does not impose a debt burden on recipient countries.
• No Debt Burden:
• The GDC aims to ensure that financing for development and infrastructure projects does not lead to unsustainable debt levels for developing countries, addressing concerns about falling into a "debt trap," particularly with regard to Chinese investments.
• Alternative Development Path:
• The GDC seeks to explore alternative pathways for economic growth, social inclusion, and environmental sustainability, moving away from traditional models that may not serve the interests of developing nations.

Reasons for Rising Debts of Developing Countries

• High Borrowing Costs:
• Developing countries face borrowing costs that are 2 to 4 times higher than those of the United States and 6 to 12 times higher than Germany, making debt management challenging.
• High Public Debt:
• In 2023, public debt in developing countries reached approximately $29 trillion, rising at twice the rate of that in developed countries.
• Limited Domestic Resources:
• Many developing nations struggle with inadequate domestic resources, poor debt management, and low government revenues due to inefficient tax policies and weak rule of law.
• Political Instability:
• Instability leads to policy uncertainty, which erodes investor confidence. This, coupled with downgrades in sovereign credit ratings, results in higher interest rates and borrowing costs.
• High Reliance on Private Creditors:
• Since 2010, the share of external public debt owed to private creditors has increased significantly, accounting for 61% of developing countries' total external public debt by 2022.
• New Global Challenges:
• Factors such as the COVID-19 pandemic, climate change, and geopolitical uncertainties (e.g., the US-China trade war) have exacerbated economic pressures and disrupted supply chains, increasing financial vulnerabilities for developing nations.

Impacts of High Debt Burden

• Debt Sustainability Issues:
• Approximately 60% of low-income countries are at high risk of debt distress or are already experiencing it, making long-term economic stability precarious.
• Resource Allocation to Interest Payments:
• 54 developing countries allocate more than 10% of their revenues to net interest payments, limiting their ability to invest in public welfare. In Africa, the average spending on interest ($70) surpasses that for education ($60) and health ($39) per capita.
• Impact on Climate Change Outcomes:
• Developing countries are currently dedicating a larger proportion of their GDP (2.4%) to interest payments than to climate initiatives (2.1%), hindering their ability to address climate change effectively.
• Overreliance on Private Creditors:
• High dependence on private creditors complicates debt restructuring and increases volatility, especially during crises. Private loans tend to be more expensive than concessional financing from multilateral and bilateral sources.
• Sovereign Debt Crisis and Global Financial Instability:
• Elevated debt levels in developing countries can lead to global financial instability, creating a vicious cycle of borrowing and repayment. This increases the risk of defaults and economic crises. For example, there have been 18 sovereign defaults in 10 developing countries in the past three years, more than in the previous two decades combined.

Recommendations by UNCTAD for Sustainable and Inclusive Debt Solutions

• Global Financial Reform:
• A comprehensive reform of the global financial architecture and the establishment of a global debt authority to coordinate and guide sovereign debt restructuring is essential.
• Concessional Loans:
• Expanding the lending capacity of multilateral and regional banks by increasing their base capital can provide much-needed financial support to developing nations.
• Transparency in Financing:
• Improving transparency in financing terms by reducing resource and information asymmetry will help countries make informed borrowing decisions.
• Discourage Predatory Lending:
• Introducing legislative measures to discourage predatory lending practices can protect vulnerable economies from exploitative loans.
• Crisis Resilience:
• Implementing standstill rules to halt debt repayments during external crises can provide temporary relief and stability.
• Automatic Restructuring:
• Developing automatic restructuring rules and strengthening the global financial safety net will enhance resilience against financial shocks.

Conclusion

Addressing the rising public debt of developing countries requires a multifaceted approach that includes both domestic initiatives and international cooperation. Strategies such as debt restructuring, fiscal consolidation, and growth-stimulating policies are essential for achieving sustainable long-term solutions. By implementing these recommendations, the global community can help alleviate the debt burden on developing nations and foster inclusive economic growth.