An increasing number of Global South countries are now diverting growth and development spending to pay off insurmountable levels of external debts that ballooned as a result of a ‘polycrisis’ of external shocks from COVID-19, climate change, wars, and interest rate hikes. Upwards of USD 3 trillion annually is needed (USD 1 trillion in external financing) to put Global South countries on a sustainable growth path, yet theUnited Nations estimates that 3.3 billion people now live in countries that are paying more to service interest payments on external debt than on education and health. Worse, newWorld Bank statistics show that since 2022, net capital flows to low- and middle-income countries have been negative—meaning more capital flows out of the developing world rather than in .
As the G20 meets in South Africa and the Fourth International Conference on Financing for Development convenes in Spain in 2025, it is imperative that debt relief, new development finance, and private capital flow management be at the top of the agenda.
On debt relief, as the World Bank Chief Economist put it in his preface to the bank’s 2024 International Debt Report:
‘It’s time to face the reality: the poorest countries facing debt distress need debt relief if they are to have a shot at lasting prosperity. A twenty-first century global system is needed to ensure fair play in lending to all developing economies.’
This solution should involve the G20 reforming or replacing the Common Framework with a framework analogous to the successful Highly Indebted Poor Countries Initiative (HIPC), whereby major debt relief was granted to poorer nations who committed to investing a portion of the relief into poverty reduction strategies, but this time would go into low carbon, socially inclusive, and resilient growth investments.
Debt relief will not be enough. It is also imperative that a sustained big push of long term, counter-cyclical, affordable, and growth enhancing capital flows back into the developing world. As colleagues and I show in a new report—prepared for the Brazilian Presidency to the G20— this will require a stepwise increase in the paid-in capital of the Multilateral Development Banks (MDBs), new forms of hybrid capital, and further optimization of MDB balance sheets.
We also find that a significant increase in concessional financing—below market-rate finance provided by major financial institutions—will be needed to bend down the cost of capital such that debt distress doesn’t rear its head again. Finally, it is essential that MDB investments be countercyclical and growth enhancing. Recent research shows that not all MDBs have been countercyclical and that World Bank programs are no longer associated with economic growth (and interestingly China’s development finance is).
Finally, private capital flows need to be steered toward productive development in the Global South. Debt relief and growth enhancing public financing should entice private capital to return to developing countries. That is far from guaranteed and if private capital flows do resume, they are just as likely to retreat when internal and external conditions change. To ensure that private capital flows are in the right direction, there should be coordinated regulations in higher and lower income countries alike to direct private capital toward productive growth and structural change during boom times, and incentives to keep capital in these countries during busts.
The costs of inaction on this agenda are much higher than the amount of debt relief and new investment needed. Underinvestment in education and health hurts populations now, triggering social unrest, migration, and polarization—while at the same time it stifles prospects for growth and prosperity. According to a network of the world’s central banks, the lack of investment in climate mitigation and resilience alone could result in a loss of 15% of world GDP by 2050. The longer the world waits, the higher these costs will be.
Kevin P. Gallagher is the Director of the Boston University Global Development Policy Center where he is also Professor at the Frederick S. Pardee School of Global Studies at. He served as the Lead Expert on Multilateral Development Bank Reform to the Brazilian Presidency of the G20 in 2024.
The views expressed in this piece are those of the author(s), and do not necessarily reflect the views of the Institute or the United Nations University, nor the programme/project donors.