Social unrest, fiscal adjustment and debt sustainability after Covid-19
Without a human rights-based alternative to austerity, many countries will find themselves trapped in a vicious cycle of self-defeating fiscal adjustments, instability and unsustainable debts.
The economic and social impact of the Covid-19 pandemic is pushing societies to breaking point. In a context marked by rising poverty and hunger, school closures and overstretched healthcare systems, governments in developing countries haven't been able to mobilise the required resources to meet the scale of deprivation faced by their populations. A boiling sense of injustice is pushing people to take to the streets in growing numbers across the globe. The ongoing multilateral response is at risk of making this situation worse. To tackle the substantial increase in debt levels caused by the crisis, countries are expected to rely on large fiscal adjustments over the coming years. Budget cuts will put further pressure on the capacity of governments to guarantee the basic rights of their citizens. Toppling the status quo might be the only choice for millions of people who are being denied their most basic rights.
Prioritisation of creditor claims over people’s rights is both economically and morally short sighted. Ignoring the unprecedented amount of human suffering that we are witnessing will only increase the costs of tackling the crisis. This makes the blind pursuit of fiscal consolidation in the name of debt sustainability a self-defeating strategy. The notion of debt relief as an act of charity must be abandoned. Without a human rights-based alternative to austerity, many countries will find themselves trapped in a vicious cycle of self-defeating fiscal adjustments, instability and unsustainable debts.
With this in mind, this article looks at the evolution of protests around the world in recent years and provides an assessment of its potential implications for fiscal adjustment and debt sustainability in the near future.
The evolution of protests around the world
The Armed Conflict Location & Event Data (ACLED) is an initiative that tracks protest events across developing countries. Its data allows us to follow the evolution of protests with comprehensive global coverage since 2018. While the lack of historical data limits the ability to compare ongoing events with previous crises, a short-term comparison of the number of protests in developing countries before and after the pandemic shows a concerning picture (see Figure 1). For a group of 118 countries (covered simultaneously by the ACLED and World Bank International Debt Statistics databases), the number of protests increased from 92,166 to 125,959 between the two-year periods of 2018-2019 and 2020-2021. Most of these increases, equivalent to 36.7 per cent between both periods, took place in middle-income countries.
A closer look at the evolution of these protests calls attention to three characteristics of the current wave of social unrest. The first relates to the timeframe of the comparison. Figures included in this analysis include data until July 2021. Thus, the final number of protests registered in 2021 could be substantially higher by the year’s end. This highlights the scale of the surge in the number of protests that has taken place over the last 18 months.
Second, most countries in the world introduced lockdown measures in response to Covid-19 in 2020. Restrictions on gatherings and mobility raised concerns about the implications of these measures for freedom of expression and the right to protest. Yet, despite the restrictions, people took to the streets in massive numbers to express their growing sense of discontent. An analysis of the evolution of protests and lockdown measures highlights this dynamic (see Figure 2). The introduction of restrictions caused a sharp decline in protests during March and May 2020. This was followed by a large increase in the following months. There has been an average of 244 protests per day since June 2020. This is almost twice as many as the 127 protests per day registered in the 2018-2019 period.
The third characteristic relates to the widespread nature of the protests. Rather than being concentrated in a handful of countries, there has been a synchronised increase across regions. The largest increases in the number of protests took place in Latin America and Europe and Central Asia (see Figure 3). Countries eligible to participate in the G20 Debt Service Suspension Initiative (DSSI) also experienced a sharp increase in the number of protests. This points to the ineffectiveness of the G20 DSSI when it comes to alleviating the social and economic strains caused by the pandemic.
At a more granular level, at least 92 countries have experienced an increase in the number of protests since 2020. Hotspots of unrest include South America, Western Africa and Central Asia (see Figure 4 - Country-level data is available in the interactive figure).
Protest, fiscal adjustment and debt sustainability
The substantial increase and widespread nature of the protests has direct implications for debt sustainability in the aftermath of Covid-19. This relationship is clearly established in the definition of debt sustainability used by the International Monetary Fund (IMF) and other creditors. The IMF defines a public debt as sustainable when “the primary balance1 needed to at least stabilize debt under both the baseline and realistic shock scenarios is economically and politically feasible”. Under this framework, debt sustainability is effectively an assessment of the willingness and ability of governments to sacrifice domestic priorities, such as the full enjoyment of human, economic, social and cultural rights, to meet creditors’ claims.
The process of identifying how much a country will sacrifice in order to meet debt repayments before being engulfed by economic and political instability is more of an art than a science. The IMF approaches this question by comparing a baseline fiscal adjustment path with the distribution of adjustments under an IMF programme over the last decades. A fiscal adjustment path that falls in the top quartile of the distribution is considered a warning sign that it might not be a credible policy. For example, in the case of low-income countries, this threshold has been identified as an adjustment of the fiscal primary balance of 2.5 per cent of GDP, or higher, over a three-year period.
This approach introduces an additional bias in the process of assessment of debt sustainability in the aftermath of Covid-19. The increase in social unrest caused by the increase in social and economic inequalities brought about by the pandemic will decrease the ability of governments to implement large fiscal adjustments. Measures imposed to achieve debt sustainability, such as tax increases and expenditure cuts, will exacerbate the plight of millions of people around the world. The current methodology to assess debt sustainability is unable to take into account the scale of human suffering created by the pandemic. This creates the risk of overly aggressive and ultimately counterproductive attempts at fiscal consolidation.
An examination of the overlap between protests and projected fiscal adjustments over the next three years illustrates the relevance of this issue. Places that have recently experienced a large increase in the number of protests can be expected to experience more turmoil going forwards. Political instability will, in turn, make it more difficult to implement a given amount of fiscal consolidation. Conversely, countries with ambitious fiscal consolidation plans could end up exacerbating social unrest. Figures 5 and 6 provide an overview of these dynamics for G20 DSSI and middle-income countries, respectively (country-level data is available in the interactive figure).
The figures separate countries into three groups. The red group includes countries that have experienced an increase in the number of protests since 2020 and are projected to improve their fiscal primary balance by 2.5 per cent of Gross Domestic Product (GDP), or more, over the next three years. This group is likely to experience substantial economic and political challenges in implementing the required fiscal adjustment to ensure debt sustainability. The yellow group includes countries with a decrease in the number of protests but with a fiscal adjustment over the threshold. Countries with large adjustment plans in this group could risk exacerbating social unrest. The green group includes the remaining countries with fiscal adjustment plans below the threshold.
This review allows us to identify countries that are at risk of a destabilising process of adjustment. In the case of countries that are eligible to participate in the G20 DSSI for which data is available, at least 24 out of 61 countries are in the red and yellow groups (see Figure 5). The red group includes a total of 14 countries, all of which, excluding Zambia, have an IMF programme in place (including emergency financing programmes). Notable countries due to the combination of large volumes of public external debt, increases in the number of protests and challenging consolidation plans include Angola, Ghana, Pakistan and Zambia. The yellow group comprises 10 countries, six of which have an IMF programme. Relevant countries in this group include Kenya and Mozambique. Finally, the green group includes the remaining 37 countries, 29 of which have an IMF programme. Nigeria and Bangladesh stand out within this group due to their size and noticeable increase in the number of protests.
The picture in the case of middle-income countries shows a more problematic landscape. Out of 47 countries, 33 are in the red and yellow groups (see Figure 6). The red group comprises 25 countries, of which 12 have an IMF programme. This group includes many relevant countries due to different factors such as size (Brazil, Indonesia and South Africa), recent political turmoil (Colombia and Peru) and potential problems for IMF programmes (Costa Rica, Ecuador, Jamaica and Tunisia). The yellow group includes eight countries, of which four have IMF programmes. This group includes China and India. The green group comprises 14 countries, of which only two have an IMF programme.
This analysis highlights two issues. First, for many countries the level of fiscal consolidation required to stabilise debt levels is most likely to exacerbate social unrest. For a minority of developing countries that were able to mobilise resources to tackle the impact of the pandemic, withdrawal of support measures will likely translate into a politically difficult process of adjustment. For the rest of the countries that were not able to implement these measures due to lack of resources, fiscal consolidation could prove to be economically and socially devastating. The vicious loop of political instability and fiscal adjustment is associated with a second issue. Placing creditor rights over people’s rights is a self-defeating policy. Unsustainable debts and messy defaults will inevitably increase the costs of the crisis for debtors and creditors alike. Hence the need for, on the one hand, alternative approaches to debt sustainability that are consistent with the protection of human rights; on the other hand, the establishment of a multilateral debt work out mechanism alongside an ambitious debt relief mechanism to ensure countries can overcome debt distress in an orderly, fair, transparent and durable manner. These measures must be understood as a prerequisite to preserve domestic resources and prioritise their mobilisation towards the full enjoyment of economic, cultural and social rights of people around the world.
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1 The primary balance is defined as government revenues minus expenditures, excluding interest payments.