The Global Financial System is Out of Sync with Development: Evidence from Tunisia - Rawan Al Gharib

Introduction:

Debt accumulation in developing countries is often attributed to internal factors such as fiscal mismanagement, corruption, and economic instability i. However, a closer examination reveals that the shape of the Global Financial System plays a far more critical role. This power imbalance within the global financial architecture significantly influences the recurring debt crises that undermine development and human rights.

Global financial institutions like the International Monetary Fund (IMF) and the World Bank (WB) hold significant power over borrowing nations, particularly during crises when they provide loans with strict conditions. These conditions often include structural adjustment programs (SAPs) that enforce austerity measures and privatization, leading to severe social and economic impacts such as cuts to essential public services, increased poverty, and inequality. The human cost of these policies highlights how the interests of lenders often overshadow the development needs and rights of the borrowing countries. High borrowing costs and debt servicing burdens further hinder development as resources are diverted from crucial investments in infrastructure, healthcare, and education, perpetuating poverty. Additionally, the power imbalance in negotiations favors lenders, resulting in agreements that reinforce debt dependency and limit the borrowing nations' development prospects.

Global Debt Crises: Historical Overview

Debt crises have been a recurring feature of the global economy, largely due to external pressures. In the 19th century, Latin American and European nations faced crises exacerbated by harsh lending conditions from foreign creditors. The 1930s Great Depression saw widespread defaults as global trade collapsed and capital flows reversed. Post-World War II, developing countries accrued debt under stringent conditions set by international financial institutions. The 1980s Latin American debt crisis was driven by high global interest rates and falling commodity prices. The 1990s witnessed the Asian financial crisis, precipitated by sudden capital flight and currency speculation, and the Russian default, influenced by global market dynamics. The early 2000s featured Argentina's debt crisis, while the 2008 global financial crisis triggered sovereign debt crises in the Eurozone. The 2010s were dominated by the Eurozone debt crisis and emerging market challenges.  The COVID-19 pandemic in the 2020s resulted in significant borrowing under unfavorable terms, highlighting ongoing concerns about debt sustainability due to external economic shocks and stringent global financial conditions.

Failure of the GFS: Evidence from Tunisia

Following the 2010-11 Jasmine revolution, The IMF approved a two-year SBA for Tunisia in June 2013, an Extended Fund Facility (EFF) in May 2016, and Rapid Financing Instrument (RFI) in April 2020 aiming at stabilizing the economy, reducing fiscal and external imbalances and promoting growthii. Despite being a diligent recipient of IMF assistance, Tunisia continues to face socio-economic challenges, including income disparities and high unemployment, especially among the youth.

Source: World Development Indicators

Table 1 shows that Tunisia faces significant economic challenges, with a youth unemployment rate of 40.6%, far exceeding the MENA region's average of 25% and the global rate of 14.3%. The disconnect between IMF loans aimed at increasing GDP growth and the persistent high unemployment in Tunisia highlights the prevalence of the joblessness problem, where macroeconomic growth does not automatically translate into job creation and reduced unemployment. Tunisia’s adherence to stringent conditions such as subsidy reductions, public spending controls, and tax reforms has resulted in considerable short-term hardships for its population, particularly among lower and middle-income groups. These measures, while aimed at restoring economic stability, have disproportionately affected vulnerable demographics, including youth, amplifying economic disparities and social tensions.

	Net Personal Wealth	Net Personal Wealth	Pre-tax National Income	Pre-tax National Income
	Bottom 50%	Top 10%	Bottom 50%	Top 1%
Tunisia	16.60%	41.40%	48.80%	58%
MENA	9.20%	57%	1.30%	75.70%
World	8%	53.20%	1.90%	75.90%

Source: World Inequality DatabaseNotes: Wealth denotes net personal wealth, computed as the total value of non-financial and financial assets (housing, land, deposits, bonds, equities, etc.) held by households (age 20+) minus their debts. Pre-tax national income is the sum of all pre-tax personal income flows accruing to labor (20+) and capital before tax but after accounting for pension.

The bottom 50% of the population holds 16.6% of the nation’s wealth, while the top 10% controls 41.4%. Income distribution is even more skewed, with the top 1