The developing world faces a grim economic forecast for 2025. With high US interest rates, a potential global recession, and entrenched policy inequities, economist Jayati Ghosh warns of a perfect storm brewing for already debt-stricken nations. Speaking on a recent podcast Research Intelligence Unit, Ghosh dissected the recurring debt crises, calling for a complete overhaul of the global financial system.
Many of these crisis stem from nations taking on foreign currency-denominated debt, leaving them exposed when the US dollar strengthens or interest rates rise. Ghosh highlighted the historical pattern of capital inflows followed by abrupt reversals, a loop that has trapped countries for decades. “Latin America’s been caught in this cycle for over 150 years,” she noted, emphasising the systemic nature of the problem.
Sri Lanka’s recent experience serves as a cautionary tale. Encouraged to expand its bond market after 2009, the country’s external debt ballooned, culminating in a default by 2022. Ghosh criticised the IMF’s handling of the crisis, arguing that prioritising creditors over recovery was a costly mistake.
Drawing from history, she pointed to the 1953 London Debt Agreement that helped Germany rebuild after World War II. The agreement tied repayments to export revenues, allowing the economy to recover. Ghosh lamented the absence of such equitable measures for today’s developing nations, where austerity policies often exacerbate poverty and economic stagnation.
India, despite its potential, has also been caught in poor policy decisions, according to Ghosh. Its focus on services over manufacturing, she argued, has hindered job creation and economic resilience. Meanwhile, countries like Vietnam have shown how industrial policies and targeted investments can deliver transformative results.
The dominance of the US dollar adds another layer of complexity. While BRICS nations and China are exploring alternatives, Ghosh warned against expecting rapid change. “The dollar isn’t going anywhere for at least a decade,” she remarked. However, the weaponisation of the dollar, through sanctions and asset freezes, has accelerated the conversation about alternatives.
Despite these challenges, Ghosh remains optimistic about the potential for change. Periods of global uncertainty often create openings for bold policy shifts. Developing nations, she argued, must seize the opportunity to industrialise and foster regional cooperation, breaking free from dependency on volatile capital markets. Whether this moment leads to lasting transformation depends on the willingness of leaders to prioritise long-term goals over short-term gains.
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