The Economic Problem in Global South

 

 

In this 21^st century, we have seen so various problems of economics in developing countries mainly in the global south that are so chronic and dangerous. The worst case is about having foreign denominated debt which is absorbing most of economic surpluses, impoverishing the whole of society with austerity measure and causing large polarization of society that is undoubtedly a big threat for democracy and humanity.

 

In Indonesia alone, foreign denominated debt has been increasing from around less than 150 USD Billion in 2004 and growing rapidly to around 400 USD Billion in the second quarter of 2020. Mainly, the only thing that can be done to erase that debt is through doing export to obtain the USD. Unfortunately, Indonesia’s current account balance is always deficit since 2013, means there is no ability to obtain USD and the debt will remain be a burden with exponentially growing every time. Sadly, most of increase in currency reserve is coming from financial transaction –it can be FDI or adding External debt- which is unsustainable in the long run.  

 

When we can trace back of what are the main problems, misunderstanding of economic paradigm by giving up the sovereignty of its own currency and inadequacy of pivotal supply sectors that creates the dependency of imports –mainly food, energy, and manufacturing products- are the roots that should be solved.

 

The spreading of an extraordinarily orthodox perspective after post-war era creates indigenously various problems and mismatch in real economic policy which specifically having a thrust to nullify the role of government. This understanding is so abstract and based on barter and economic agent which is incompatible to depict the whole of economic dynamics. The clear example is when orthodox economists have an assumption that market is always clearing by itself and no financial crisis is endogenously constructed, it just happens sometimes because of external shock which is disequilibrating the cross-cut between ‘market’ demand and supply. The horrific accident had been happening and telling that orthodox economy is wrong when the tendency toward global financial crisis (GFC) had been ignored by them. Even after the GFC itself, there wasn’t any reparation has done in order to prevent such crisis that will occur again in the future which is certainly more frequent, severe and acute.

 

The saddest condition when a country is applying the orthodoxy is creating the inability (cutting the hand) of public sector to service the private domestic sector necessities. The fiscal deficit which is adding the net financial wealth is becoming displaced with the dogma that it is unsustainable because it will create higher tax tomorrow and draining up the saving of the private sector. EU members are the tangible example how euphemism of orthodoxy application. They are destined by themselves to fail, the simple analogue when they have different necessities of fiscal policy but they have been forced to follow one monetary policy (one sixe fits all) the only result is the destabilizing of internal stability. A country will never survives based on external stability when internally it is inconsistent or broken.

 

Internal instability forces of orthodox policies in the scope of nullifying the role of government which in the end is drowning the society on private debt, sucking up the wealth from majority to 1% population, and creating the financial instability are few main results of how dangerous orthodoxy is. Without having a change especially on the paradigm on economic lesson, it is impossible to repair those wrong direction. Unfortunately, because the orthodoxy is giving a huge benefits to 1% population, they have been creating a vicious circle where the mainstream media, mainstream journal publication, mainstream policy maker, have sounded on the notion that there is no alternative except for accepting the orthodoxy. This massive brainwashing program is everywhere, we need a new shifting mind to the alternative one as soon as possible.

 

Revolution needs a gradual process, learning about the alternative perspective, spreading it in various ways to society, building up a community based on alternative aim, are few example how the way we can move toward a change that we want. Unfollowing the mainstream is having a consequences indeed, can’t be hired in mainstream universities, banks and so many more as the price that should be paid, however, even when we go to the north we will have been going far away from the south consequently. Be deterministic on this movement is the only step we must take, and after the momentum will have arrived combined with the readiness of society to change the mainstream system, the new deal revolution will happen undoubtedly.

 

The second problem which has related to first problem is deficiency on primary sectors in which can be done by import activities. A country with 100 ton of rice in supply production but having 200 ton in demand should grasp the rest of it through doing import. In international trade, every transaction mostly should use USD. When a country doesn’t have USD while in the same time it requires to do import, the only thing that can be done is borrowing from IMF or other parties which have USD. This is the beginning of the root of all evil. In basic principle, when a country has foreign denominated debt it should pay more of USD of its principle and interest. The only thing to obtain USD usually coming from having current account surplus. However, when a country has a heavy dependency on imports –food, energy, and manufacture product in developing countries generally- it will be impossible to repay that debt, giving up its assets that is the only consequence when a country gets default.

 

Paradoxically, when a country tries to always have trade surplus every time, it will increase its competitiveness. It is happening because the appreciation of its currency brings the other countries buy less because its export is too expensive, they probably change their trade to other countries.it will be impacting to that country which has external debt strives so hard to obtain USD. Now, even in very narrow analysis, having foreign debt isn’t be able to be paid through current account surplus.

The manipulation of exchange rate in order to maintain the debt ratio to not increase, allowing privatization to invite USD inflow through foreign direct investment (FDI), selling assets or raw material without adding any value –because the maturity sometimes gives high pressure or because of the order of creditor country- and other demerit policies should have been done just in order to obtain USD for repaying the external debt. These are the main consequences for having foreign debt. Furthermore, when a country falls down into Ponzi scheme there is no alternative except struggling to annulling all of the external debt which is usually this aim should go through the war. The simple mantra is “the debt which unable to be paid, wont be.”

 

After the problems of global south economy have been explained, it will be useless without discussing the possible solution that can be done for every country which has lived in a trap of having foreign debt. First, change the economic curriculum in micro and macro level to not using the mainstream analysis. Having sovereignty of the currency is the first step that every country especially in global south should obtain to. Having less of it will reduce the fiscal and monetary space in order to build up the public purposes. France under Mitterrand (1981-1985) was the pivotal example that should be learnt. Some wise people said “when the people understand about monetary sovereign power, they really convince that tomorrow the revolution will be happened.”

 

Second, when a country has deficiency of outputs –dependency on imports, that government should create a targeted program focused to reduce that deficiency. When the private sector doesn’t provide the outputs which are needed, government should be the employer of last resort to increase the supply and demand sector. The detail of this program could be various depends on the condition in every country (i.e. infrastructure, availability of land/workers, and so on).  Fundamentally, when a country understand about its sovereignty power of its currency, for minimum, it can buy everything –including unemployment- domestically. With fiscal and monetary spaces it is possible for that country reduces all of the dependency and it could be going out from the evil of debt gradually.

 

Third, cancelling the foreign denominated debt can cause a big calamity except when some exceptional situations happen (i.e. debt jubilee at international scope that is supported by all debtor countries). For minimum, doing debt restructuring, doing debt swap, doing some lobbies or even creating the international organization which is focused on solving the external debt are the things that must be done rapidly. We have already known when the amount of debt is surpassing the real economy –because of interest bearing debt is exponentially growing faster than real economy- in the end of it will cause debt deflation. Before it will happen and before some countries will declare that they are insolvent, do those things are being pivotal program for today economy.