- The world still has some 700, 800 million people that don't have electricity, and so that's unacceptable.

I'm happy to see that there is now discussion within the G20 of how to break out of that paralysis.

[gentle music] - Hello and welcome to GZERO World.

I'm Ian Bremmer, and today we are talking about debt.

I don't mean your credit card bill or your mortgage payment, I'm talking about sovereign debt.

That's the money national governments borrow to pay their bills.

And the past few years of pandemic, a war in Ukraine, climate disasters, skyrocketing food prices have forced a lot of nations, particularly the world's poorest, to borrow a lot more than they can possibly pay back.

It could lead to a global economic emergency, and I'm talking about that and more with David Malpass, the outgoing president of the World Bank.

Don't worry, I've also got your Puppet Regime.

- Can Joe Biden, the disputed heavyweight belt holder, find the magic again?

- But first, here's a word from the folks who help us keep the lights on.

- [Announcer] Major corporate funding provided by founding sponsor First Republic.

At First Republic, our clients come first.

Taking the time to listen helps us provide customized banking and wealth management solutions.

More on our clients at firstrepublic.com.

Additional funding provided by Jerre and Mary Joy Stead, Carnegie Corporation of New York, Prologis, and by... [logo whooshes] - If GZERO were a Broadway show, and I know sometimes you think it is, it would be time for the jaw dropping, show stopping, really, really big number, and how about 300 trillion?

Ooh, ah, there you go.

As of this year, the world is 300 trillion in debt.

That's an average of 37,500 for every person on the planet, 75,000 for a couple, 150,000 for a family of four.

Don't worry, you can just Venmo us later.

How did this happen, you might be asking?

Well, for starters, loans were really cheap for a very long time.

Following the 2008 financial crisis, the Federal Reserve slashed already low interest rates to basically zero.

What followed was an explosion of borrowing globally.

2007, public debt stood about 70% of the world's GDP.

By 2020, that was 124%.

And then along came the biggest global crises we've faced since World War II, a pandemic that shut down economies, and the war in Ukraine that drove energy and food prices through the roof.

While those factors impacted pretty much every nation, they didn't hit them all the same way.

United States and the European Union for example, pumped trillions of stimulus dollars into their economies to keep them afloat.

But poor nations basically kept borrowing, money they couldn't afford to pay back.

And right now, 60% of low income countries are in debt distress or dangerously close to it.

Rising interest rates and still high inflation means it's even more expensive to pay down those bills.

The poorest countries are paying an average of 16% of their revenues to service those loans, in Pakistan, 47%, Sri Lanka, it's 75%.

In other words, Sri Lanka is basically out of business.

When that much cash flies out the door just to pay interest fees, critical programs for public health, for education, development, grind to a halt.

In an op-ed published back in April, Mia Mottley, she's prime minister of Barbados, called on the world's wealthiest nations to live up to neglected pledges of 0.7% of their GDPs for foreign aid, and 100 billion for climate action in developing nations.

She joins a growing chorus of leaders including UN Secretary General Antonio Guterres, who believe the existing global financial systems like the World Bank and the International Monetary Fund need to transform to confront today's realities.

New lending practices and policies are needed to ensure developing nations stay exactly that, developing, and not continue the slide into poverty, hunger, and further inequality that we have seen over the past three years.

To talk about that and more, I sat down with outgoing World Bank President David Malpass for a final exit interview.

Here's our conversation.

David Malpass, welcome back to the show.

- Nice to be on again.

- What I want to talk about today and the backdrop of course is a dramatic increase in global debt.

Lay out quickly where we are.

- World growth is slowing, but the debt is going up and up, so we have developing countries that are in trouble on debt, advanced economies as well.

So there's big debt challenges, and maybe we can talk about both sides.

- So many countries right now are either in direct debt distress or in severe risk of hitting that mark.

Some 40% of the world's poorest people are in that category.

Explain just quickly how we got to this point, because this is unusual.

- Well, there are cycles of debt through history, and so in this case, there was a wiping off of debt in the early 2000s, but then new debt came in to take its place with new creditors.

China and private sector, Eurobond creditors stepped in.

And now the countries themselves are facing rising interest rates, less resources coming in from the world, so they're in a real bind.

It's adding to fragility.

And the global system is not really up to trying to fix this problem, so it keeps going on and on year after year.

- Because when we talk about the United States and people are saying, oh my God, my trajectory's horrible and inflation, I can't handle the price of eggs, the price of gas, the fact is that it's really nothing in the US compared to what that driver is forcing the experience of the world's poor.

- That's right.

The US is able to run a really big fiscal deficit that a lot of the countries in the world can't do that at all because there's no financing.

What they have been doing, and it's dangerous, is drawing on their domestic banks.

So when they lose access to bond markets, then they turn to their banks and say, give me some money, I'm the government and I want to spend more money.

That's reaching its end.

So we have this real challenge right now that the repayments that are due looking into 2024 and '25 are going way up for these countries.

They're stuck today, but it's going to be worse next year.

That's the urgency of getting progress on this.

They need to reach agreement on how to do a debt restructuring and then actually carry it out, which has been the sticking point.

- Is there a general consensus understanding that this debt, a lot of it, just needs to get written off?

- No, and so that's part of the challenge.

China hasn't reached the point of saying that there should be an actual reduction in net present value.

If you think of the time value of money, if I owe you money today and you say, well, owe me the same amount of money two years from now, you figure you've done me a favor, but I'm still going to have to pay that whole amount.

- And you still have no capacity to pay.

- No capacity to do it.

I can't do it this year and I won't be able to do it two years from now.

- Are the Chinese counting in part on the fact that they can squeeze the West to pay for some of that?

- Well, the World Bank puts a net flow into these countries, so there is the risk that some of that money then ends up paying creditors.

And a practical thing going on now is what are called swap lines.

So the Central Bank of China makes a swap with a developing country, they don't call it a loan, but really it has the effect of a loan.

It's a debt like instrument where there's an interest rate, a term of the maturity, and so that then gets paid off first within a debt restructuring.

So China's finding new ways, they're sometimes non-transparent, to leap over others within the capital structure of a debt restructuring.

This is the kinds of things that are done in bankruptcy, but lawyers are onto it.

But in this international context, there's not really a set way to go at this.

- And those are economic efforts, but are there also political efforts?

In other words, I as a government, want you to continue to be indebted to me even if I know you can't pay it, because I can then squeeze you for other perhaps non-transparent political outcomes, diplomatic outcomes, that otherwise I wouldn't have.

If I had written off the debt, I would no longer have the ability to force you to do that.

- And this has gone on through history, where governments gain advantage on others by lending them money and then requiring repayment.

One added complexity of this one is the amounts are so large, there's no real process to how to break through that.

China's been more willing to lend into these situations, and as I mentioned, the innovations are coming from the creditors on how to keep the process going over and over again.

- But what I see and what I hear from you as well is a consolidation of economic power in the hands of the wealthiest, a consolidation of political power in the hands of the wealthiest.

What do you do?

Is there any orientation or inclination to try to break that?

- It should be broken because it's not really working for the world.

If you think about the fragility, the poor countries are not catching up, and we really want a world where there's some kind of convergence, where the people in lower income levels actually get to grow faster.

That's what creates stability.

We don't have a process to do that and there doesn't seem to be very much interest in getting to that process.

If you think about what the advanced economies are doing, justified by COVID or they used that as a rationalization, they spent huge, huge amounts of money.

Now the national debts of the advanced economies are super high, interest rates are going up, so much more of the world's capital is going just to pay off the debt of the advanced economies.

That leaves less for everybody else, and I think that's a grave concern.

We have the global macro techniques that are being used that end up concentrating the debt at the top.

The central banks are part of it as well.

The lack of debt limits on the advanced economies, the US is going through that now, but it applies equally to Japan and to Europe, of governments able to spend money much more freely than anybody else within the economy.

- You said what we should want is for the developing countries to converge with the West.

Do the Americans actually really want that?

Is the real preference the Americans don't want that?

- This is that age old debate of how do you raise the median income?

I expressed it correctly, we want people at the bottom to have faster growth so they can catch up.

That is a stabilizing force.

We can call it inequality or convergence, I like to use the phrase growth.

We want fast growth in poorer countries so that they can get ahead and stabilize and have fruitful lives with opportunity.

So that, yes, is a goal of the World Bank, but I think it also very much is the goal of a value-based society worldwide.

- Does that reduce in nature necessarily when America has more as a foreign policy driver inshoring and nearshoring and the desire to rebuild its own working and middle classes, that to a degree they felt were hollowed out through globalization?

- I think we have to guard against isolationism.

You have to look at your national interest and say, what is going to be good for us?

So if you say, well, I only want to trade with my neighbors who are friends, that's a grave narrowing of economic principles.

There has to be some kind of global market in order to achieve efficiency.

Then what you can say is, well, I don't want to depend on other countries, especially if they're authoritarian as is Russia and China.

I think there is plenty of room in a logical world to say, we don't want dependency, but we also want to have a vibrant global marketplace that is competitive.

And the US needs to lead and be in the center of that and initiate, be the starting point for a lot of this rethinking of the global system.

The US really needs a better debt limit, one that it doesn't threaten default.

It instead allows some constraint on government spending.

Fiscal discipline only makes sense, right?

That's checks and balances.

And we've seemed to have lost that in the advanced economies with the debt to GDP ratios going through the roof.

But it also applies to the monetary policies.

The US Federal Reserve now has $9 trillion of assets on its balance sheet that it's bought by borrowing money from the banking system.

It's a fundamental change in the way monetary policy is operating, where rather than setting the quantity of money, what you're doing is regulating how banks use money.

It's much more intrusive and I think does not allow nearly as much growth.

- Very rarely do we talk about the assets of the sovereign actors, where if we were talking about a corporation, we'd be talking about the debt on their books, but also the assets they happen to have.

Do we see a level of asset base or increase of asset base among many of the developed countries that make us less concerned about the nature of the explosion of the debt?

- That's a huge question, what investments are being made by governments and if they're crowding out the private sector, is it being done in a constructive way?

I'm skeptical of the latter, but certainly involvement of a society can create innovation.

We see that in the technology space, which is very important.

- The CHIPS Act, for example.

- Well, the CHIPS Act is can also be read as protectionism or industrial policy.

- True, true enough.

- So we wonder, will we actually get more innovation out of that, and will it actually strengthen the US?

There's a lot of pushback from other countries on both the IRA and the CHIPS Act, because it looks like the US is just taking care of itself.

I think that that is open to discussion, people should be thinking about what's the best way to get growth started and strengthened in the US, but also globally.

That is a global public good, because it stabilizes.

If we could have more global growth, there'd be more to go around for everyone.

And that should be a huge goal of, I think public policy.

We're not getting it.

Our growth forecast for 2023 for global growth, it's falling below 2%.

And as you look into 2024 and '25, there's not much improvement.

The investment levels in most of the world are negative, they're not putting in enough new money even to maintain the current capital stock.

- So give me a couple of countries, significant countries that you think are close to, if they were to shift their policies, their economies would take off with massive inbound private investment.

- We're seeing inflows into India and into Indonesia now.

And if you think of India, they've been doing it with bank loans, less so with capital market loans.

We know in order for an economy to really get going, it has to have capital markets.

That means bonds, that means non-bank financing for accounts receivable, for inventory, for short term financing, and very importantly, for equity expansion.

And so India is just one step away from that, and they could achieve that and then be growing 8%.

Think if India went through the same kind of transformation that China did.

Roll the clock back to 1993, China puts in a permanently strong and stable yuan.

They have an active policy to say, we want our currency to be strong and stable.

That makes it competitive globally, which is a worry for the US.

The US doesn't have a similar policy of stability for its currency.

China does, so investors gravitate toward that.

And it started right away in China.

They said, we're going to have market-based pricing, strong and stable currency, and have some fiscal discipline.

And India's in a position to do that and could really advance quickly, and it is now, but I think it can do better.

- I mean, presently coming off of the pandemic and with high inflation rates, a lot of these developing countries are just taking it in the teeth, and it's much harder for them politically to make the kind of arguments and implement the kind of policies that you are suggesting.

So in that environment, are you suggesting still that the private sector is 90% of the answer, or do governments need to come in to ensure that the developing countries aren't, they're already disadvantaged?

- Governments aren't doing countercyclical, they're actually going procyclical, meaning they find fiscal responsibility after the fiscal deficits have become huge.

- And by countercyclical, we mean?

- That means that when things slow down, you do more, and when things speed up, you do less in terms of spending, monetary policy.

I think governments do need to be countercyclical, but neither on monetary policy nor fiscal policy is that the lay of the land.

China does that.

Remember after 2008, the global financial crisis, they both did monetary and fiscal expansion at that moment in order to strengthen, and they achieved a lot of results.

They're an authoritarian regime, which is not going to be in the long run growth enhancing, but at moments, if you make decisions that are stabilizing, that can help.

So I think we need to do that.

But the core of what you're saying is right, we're coming off a 0% interest rate environment.

I think it was artificially low, it directed capital into the wrong parts, it concentrated assets and also did this point of reach for yield, which put people into the wrong risky assets and duration mismatch, as we're seeing- - And SVB was a part of this, Silicon Valley Bank.

- Some of the banks, they were just using overnight deposits to buy long-term bonds.

Not a smart move.

- This is probably our last time having a conversation on air with US World Bank president, and we've spoken many times before.

Tell me, just looking back since 2019, what do you consider your biggest accomplishment?

- The world went through multiple crises.

The World Bank was a leader in that, we were able to really expand commitments of the bank during the COVID crisis, the Afghanistan evacuation, which was traumatic, very sudden, huge number of people had to get out of Afghanistan.

Of course, the Ukraine war.

And the Bank was a smooth participant, very fast in the responses to crises, so I'm proud of that.

And also, being aware of the problems caused by slow growth and by debt, that permeates our economic analysis over the years, and I'm proud of that.

And we had a core vision that we want people in developing countries to have better lives tomorrow than today.

The personnel of the bank have really embraced that, so you end up with a 35% expansion of the Bank with no increase in the budget.

- Okay.

And then tell me finally, what's the one thing that you would like to tell your successor, Ajay Banga, that you wished someone had told you on your first day coming in?

Yeah, absolutely.

- Time is short.

You need to push on with urgency.

I tried to do that on debt.

- No one told you that?

That's so interesting.

I would've thought someone would've told you.

- The Bank has lots of capabilities, and so that I think will come naturally.

The question is, how do you really get to an endpoint on any of the issues we've just talked about, on debt, on the climate challenges, on how do you get to the end point on this global macro rethinking that's needed?

Who's really going to stand up to the advanced economies and say, you're taking all the money so there's not enough left for the rest of the 6 billion people in the world that aren't in advanced economies.

- What's the closest you came to doing that?

What's the closest you've come over the last few years and said, guys, you aren't getting it?

- I do say that in the meetings, and it's a push forward.

It's very hard, because they are confronted over and over with a new crisis.

So the attention goes to the current crisis, whether it's Ukraine or whether it's relationships with China, whether it's the intractability of this debt problem.

And so it's hard to get through, that this is the only moment where we can really rethink what's going on with fiscal and monetary policy and the capital flow.

The capital is all flowing to a centralized point, is that really what you want?

And the answer is, yeah, it's working, and we will keep the system the way it is.

- Is anyone close to getting it?

- There has been over the last six months a realization that the developing countries are not satisfied with the solutions they're being asked to do.

- Absolutely.

The global south is going farther away, absolutely, I hear it all the time.

- And they're more vocal.

We hear it in the board discussions.

There were 11, almost half of our board expressed in writing together, they did a joint missive inside the World Bank to say, we have to rethink how we're doing energy because we need more energy, not less.

And so how do we find a pathway to that?

The investment choices have to be done better.

The world still has some 700, 800 million people that don't have electricity, and so that's unacceptable.

I'm happy to see that there is now discussion within the G7, within the G20, of how to break out of that paralysis.

- David Malpass, thanks so much.

- Thanks, Ian.

[electronic music] - Now, to Puppet Regime, where President Biden is preparing for the 2024 election with his back against the ropes.

- [Announcer] Four years after his last title fight, an aging champion returns to the ring one last time to defend his title.

Can Joe Biden, the disputed heavyweight belt holder, find the magic again?

- Abortion, January 6th, Trump, Trump.

Cambodia is not Columbia.

The black and tans are not Trump.

Trump, abortion, Medicare, inflation, Afghanistan, inflation.

Woke, woke, Southern border.

It is a lot harder than I thought.

This is exhausting.

I wonder what the other guy's up to.

- Sure, let's do CNN again.

Why not?

♪ Puppet Regime ♪ - That's our show this week.

Come back next week, if you like what you see or you don't, but you're like, hey, I got a lot of debt too.

Who's going to help me?

You know who, check us out at gzeromedia.com.

[lighthearted music] [lighthearted music continues] [lighthearted music continues] [electronic music] - [Announcer] Major corporate funding provided by founding sponsor First Republic.

At First Republic, our clients come first.

Taking the time to listen helps us provide customized banking and wealth management solutions.

More on our clients at firstrepublic.com.

Additional funding provided by Jerre and Mary Joy Stead, Carnegie Corporation of New York, Prologis, and by.

[lighthearted music] [electronic music]