Indermit Gill and Ayhan Kose warn that low-income countries' mounting economic problems will have growing spillover effects

By Intermit Gill and Ayhan Kose*

The poorest countries are in desperate straits, and the rest of the world is looking the other way. Doing so comes easy, because low-income countries (LICs) matter little to the fate of the world in the near term. At the end of June, the combined GDP of the 28 countries in this group was roughly $500 billion – a drop in the $100 trillion ocean that is the global economy. The world’s poorest countries are also nobody’s ideal export markets: the average annual income is barely $1,000, and conflict and instability are the norm for about half.

Nonetheless, 700 million people live in these countries, and about half of them are in extreme poverty. Very poor people have long been accustomed to neglect from their own governments, which often have other priorities. For example, they spend about 50% more on war and defense than they do on health care. Nearly half their budgets go toward public-sector wages and interest payments on debt, while a mere 3% of total government spending across LICs goes to support the most vulnerable citizens. That is one-tenth the average for developing economies more broadly.

It therefore should surprise no one that a human tragedy is now unfolding in these countries. Key indicators of human development in today’s LICs are far worse now than they were in the LICs of 2000, before many of the latter had ascended to middle-income status. For example, maternal mortality is 25% higher now, and the share of the population with access to electricity has fallen from 52% to barely 40% across this cohort. Average life expectancy is now just 62 years, among the lowest rates in the world.

Making matters worse, the odds of these countries getting help from abroad have declined. Wealthier countries have chosen exactly the wrong moment to become less generous. Even before the pandemic, foreign-aid flows to the poorest countries, especially in Sub-Saharan Africa, were slowing. Today, wealthier countries are redirecting more of their foreign-aid budgets to meet the surge of refugees arriving on their own shores. These developments have left few avenues for economic recovery: by the end of 2024, the average income of people in the poorest countries will still be almost 13% lower than what had been expected before the pandemic.

Between 2011 and 2015, grants accounted for about one-third of government revenues in the world’s poorest countries; but that share has since dropped to less than one-fifth. Poor-country governments have made up the difference by going deeper into debt – and at punishing interest rates. Government debt-to-GDP ratios in these economies soared from 36% of GDP in 2011 to 67% last year – the highest level since 2005 (with the exception of 2020). Fourteen LICs are now in debt distress or at high risk of it – more than double the number just eight years ago.

As they gather in New York for the United Nations 2023 SDG Summit, global leaders cannot afford to turn a blind eye to these developments. They must not forget the fundamental promise of the Sustainable Development Goals: “to reach the furthest behind first.” Even as they remain generous to arriving refugees, wealthier countries should redouble their efforts to end the misery at the source.

That means enlarging the pool of resources available to multilateral development banks, so that they can increase grants and concessional financing for the poorest countries. Greater funding is not just a moral imperative to prevent a disaster in the poorest economies; it is a matter of self-interest for all countries with the means to help. Southern European countries struggling to manage migration flows should know that they will benefit from supporting development in poor countries such as Niger.

Wealthier countries, and all international financial institutions, should move decisively on three fronts. First, they must increase concessional financing for the poorest countries, with aid going to addressing emerging challenges such as climate change, economic fragility, and pandemics.

Increased aid also will help these countries invest in critical sectors such as health, education, and infrastructure, which will enhance their resilience and growth potential. Aid effectiveness (a major concern for donors) can be improved by strengthening donor coordination and building competent local institutions to select, manage, and monitor projects. International financial institutions, for their part, can help crowd in private finance in sectors that offer the promise of both development and profits.

Second, debt restructuring must be accelerated. The Common Framework for Debt Treatment Beyond the DSSI has struggled to deliver relief ever since the G20 announced it nearly three years ago. If finalized, Zambia’s debt-restructuring agreement with its creditors will be a welcome development; but it was concluded three months ago, and the country is still waiting for debt relief.

The framework’s glacial pace – and all the uncertainties that come with it – have deterred too many countries from seeking the relief they so urgently need. It is time to pick up the pace. For many lower-income countries, restoring long-term debt sustainability will depend on debt restructuring. Without it, they will remain paralyzed, unable to attract the private financing they need to tackle the formidable development challenges of this decade – from creating jobs and improving welfare to making the planet more livable.

Finally, we must double down on the reform agenda by ensuring that global initiatives to bolster the poorest countries are complemented by ambitious domestic measures. International financial institutions can make a difference by helping LICs mobilize domestic revenues and improve spending efficiencies and debt management. They can also support governments’ efforts to improve institutional frameworks, build human capital, ease impediments to private investment, and harness the potential of digital technology, all of which will boost these countries’ long-term growth prospects.

Time is running out. The growing hopelessness among citizens of the poorest countries will feed a vicious cycle that is already underway. Desperate to escape misery at home, many will risk everything to find refuge abroad. The suffering of millions of people in faraway lands is not as far away as it may seem. It is contagious, and it is already spilling over national borders, with unpredictable global consequences.

*Indermit Gill is Chief Economist and Senior Vice President for Development Economics at the World Bank. M. Ayhan Kose is Deputy Chief Economist and Director of the Prospects Group at the World Bank. Copyright: Project Syndicate, 2023, and published here with permission.