Dan Banik and Didac Queralt discuss the challenges of rising public debt in the Global South and the historical impact of early external finance on state building.
An increasing number of countries are struggling with rising debt and facing defaults. A recent World Bank report revealed that developing countries paid a record $443.5 billion in 2022 to service their public debts, a situation exacerbated by surging global interest rates and a strong U.S. dollar. This debt servicing cost represents a 5% increase from the previous year, with warnings of more challenges ahead for the world’s poorest nations. Therefore, it is crucial to gain a deeper understanding of which forms of globalized finance are more effective in fostering development. This episode focuses on the prize-winning book Pawned States: State Building in the Era of International Finance, which examines the consequences of early access to external finance for long-term state capacity. In the 19th century, developing countries frequently sought loans from European credit houses to manage their finances and cope with war. While this external financing provided opportunities for growth, it often allowed leaders of these borrower states to skip essential steps in developing institutions and making political systems more inclusive. "Pawned States" illustrates how this reliance on early foreign loans has resulted in persistent fiscal instability and diminished governmental effectiveness in the developing world.
Didac Queralt is an assistant professor of political science at Yale University, who studies historical causes of modern-day fiscal institutions. @DidacQueralt
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