Embedded Files
Helpful prior knowledge and learning objectives
Helpful prior knowledge and learning objectives
Helpful prior learning:
Section 1.1.1 The economy and you, which explains what an economy is and how it is relevant to students’ lives
Section 1.1.2 The embedded economy, which explains the relationship between the economy and society and Earth’s systems
Section 1.3.9 Power in the economy, which explains where power comes from and how it shapes economic relationships
Section 7.1.1 Global exchange as a system, which describes global exchange as a system with parts, relationships, functions and emergence
Section 7.1.2 History of global exchanges, which describes how global exchange systems have evolved over time, shaped by changes in technology, power, and environmental factors
Section 7.1.3 What moves across borders? which describes what flows across borders and explains how visible global flows are linked to less visible social and ecological effects
Section 7.2.2 Currency exchange, which explains what exchange rates are, identifies the factors that cause them to change, and analyses who gains and who loses when exchange rates move
Section 7.2.4 Balance of payments, which distinguishes between the current account and the financial and capital accounts and discusses what a persistent pattern in the balance of payments reveals about the conditions in an economy
Section 7.3.6 US dollar dominance, which explains how the US dollar shapes the global financial system, and is leveraged in global exchanges
Section S.1 What are systems?, which explains what a system is, the importance of systems boundaries, the difference between open and closed systems, and the importance of systems thinking
Section S.2 Systems thinking patterns, which outlines the core components of systems thinking: distinctions (thing/other), systems (part/whole), relationships (action/reaction), and perspectives (point/view)
Section S.5 Causal loops, feedback and tipping points, which explains the feedback loops that can stabilise or destabilise systems
Learning objectives:
explain how borrowing in foreign currencies creates vulnerabilities for countries in the periphery
describe how debt servicing, illicit financial flows and repatriated profits transfer wealth from periphery to core countries
explain why debt crises are difficult to resolve and who has power in restructuring negotiations
In November 2020, Zambia became the first African country to default on its debts during the Covid-19 pandemic. It could no longer make the payments it owed to international lenders, including Chinese state banks, commercial bondholders, and international institutions. The Zambian state asked these lenders to renegotiate the terms of its loans, to make it easier to pay them. The negotiations dragged on for more than three years. While they did, Zambia's government could not borrow, could not invest, and had to keep cutting public spending on health care, education and other vital public services. The debt crisis became a human crisis.
Figure 1. During the Covid-19 pandemic, Zambia asked for financial help with its debt crisis and had to follow IMF-imposed economic policies to receive it.
(Credit: Lau Ka-kuen, South China Morning Post)
Why does borrowing in foreign currencies create risk?
Why does borrowing in foreign currencies create risk?
Most of what we borrow as individuals, we borrow in our own currency. If you take out a student loan in Mexican pesos, you repay it in Mexican pesos.
The situation for states in the Global South is different. When they borrow money from international lenders, they usually have to repay in a hard currency, often US dollars, rather than the state’s own currency. This is because international lenders do not want to take the risk that the local currency will lose value before they are repaid. The result is that almost all of the risk of exchange rate movements sits with the borrowing country.
When the local currency loses value against the currency in which the loan was made, the cost of repaying the foreign-currency denominated debt increases (Section 7.2.2). Suppose a state borrows 100 million US dollars when one dollar costs 15 units of its local currency. The state's debt in local currency terms is 1.5 billion units. If the local currency then loses value so that one dollar now costs 20 units, the same dollar debt now costs 2 billion units in local currency without a single new dollar being borrowed.
This vulnerability comes from the rules of international finance. These rules give lenders the right to demand repayment in the currency stated in the loan agreement, which is usually outside the control of the borrowing country.
How do interest rate decisions made in the United States trigger debt crises elsewhere?
How do interest rate decisions made in the United States trigger debt crises elsewhere?
The connection between US interest rates and debt crises in low-income countries is one of the clearest examples of how financial flows transmit shocks across borders.
In 2022, the US Federal Reserve, the central bank, raised interest rates at the fastest pace since 1982, trying to down high inflation inside the United States. This decision had immediate consequences far beyond US borders. When US interest rates rise, investors around the world move money into US financial assets, because these now offer higher returns. To buy US assets, they need dollars, so demand for dollars rises. This pushes up the value of the dollar against other currencies, which means that any country with dollar-denominated debts now faces higher repayment costs in its own currency.
As financial capital was flowing into the United States, it was flowing out of other countries. Investors and speculators who had put money into bonds or equities in the Global South seeking high financial returns now found that US assets offered improved returns with less risk. Some sold their assets in Global South countries and moved the money to the United States. This is called capital flight, and puts further downward pressure on Global South currencies and makes dollar-denominated debt even more expensive to repay. The higher debts make it difficult for the state to carry out its functions (Section 5.1.3), which can further damage investor confidence and lead to more capital flight in a reinforcing feedback loop (Figure 2, and Section S.5).
Figure 2. A reinforcing feedback loop of capital flight when the United States increases interest rates.
(Note the + and - symbols refer to whether the relationship between the two variables is direct or inverse, see Section S.5 on causal loops.)
What financial flows leave the Global South?
What financial flows leave the Global South?
The standard picture of financial flows between rich and poor countries focuses on what flows into the Global South: foreign investment, development loans, development aid, and remittances. But there are large flows in the opposite direction that are harder to see and which, in total, are often larger than the inflows.
Debt service
Debt service
The most visible outflow is debt service, the regular payments states make to repay loans and interest. Of the 198 countries in the world, 44 in the Global South currently face very heavy debt burdens, spending at least 15 percent of state revenue on debt service to creditors outside the country. Another 25 countries are heavily burdened, and for some countries, this burden is extreme (Figure 3). Lebanon spends around 64 percent of state revenue on debt service, and several other countries spend well over a third. On average, Global South countries spend around 13 percent of state revenue on external debt service, more than twice the roughly 6 percent spent by countries in the Global North.
This means that for many countries, debt service exceeds what they receive in aid or new investment. These are resources that could otherwise be spent on health care, education, housing, and climate resilience.
Figure 3. Average public external debt service as a percentage of state revenues for very heavily burdened countries, 2026–2028
(Credit: erlassjahr.de)
Illicit financial flows
Illicit financial flows
Less visible is a category called illicit financial flows. These are movements of money across borders through illegal or hidden means.
Trade misinvoicing is one of the main channels for this. An exporter in a developing country reports the value of a shipment as lower than it actually is. This is called under-invoicing. The difference between the reported value and the real value goes to an account abroad, without being recorded. An importer can do the reverse. They overstate the value of goods coming in, so they can send more money abroad than the goods are worth. This is called over-invoicing. Either way, the trade itself is recorded, but at a false price.
Transfer mispricing works differently. It involves multinational corporations with operations in more than one country. One part of the company sells goods or services to another part of the same company, based in a different country. The company can set this internal price artificially high or low. This shifts profits to a low-tax location, so the company pays less tax where the economic activity actually happens.
Figure 4. Illicit outflows from the Global South. (Credit: Global Inequality)
The scale of these flows is difficult to measure precisely, and no reliable estimate exists for illicit outflows across the whole Global South. The most robust data currently available covers Africa only. Between 1970 and 2022, African countries lost at least 2.6 trillion US dollars through trade misinvoicing alone, an average of around 50 billion dollars a year. In most of these countries, these losses were larger than the foreign aid they received over the same period.
Profit repatriation
Profit repatriation
A third outflow is profit repatriation. This means profits that a multinational corporation sends back to the country where its headquarters are located, instead of reinvesting the profits locally (Section 7.1.4). Multinational corporations repatriate close to 400 billion US dollars in profits from the Global South each year. Most of this money flows to already wealthy countries. This is money that could otherwise be invested in the country where it was earned in new equipment, better wages, or local infrastructure. Many pension funds in wealthy countries hold shares in these corporations, so ordinary people in wealthy countries benefit indirectly from these repatriated profits.
Profit repatriation is entirely legal. Capital moves freely across borders in search of the highest profits, and this is one of the outcomes.
Figure 5. Gains/losses due to profit repatriation
(Credit: Global inequality)
These financial flows matter for how we understand the relationship between rich and poor countries. The common picture of wealthy countries providing resources to poorer ones through aid and investment does not capture the full pattern. Debt service, illicit financial flows, and profit repatriation all move money out of the Global South. Together, they substantially exceed what flows in through aid and investment.
This picture needs one more correction. Aid mostly comes from states. The outflows described above mostly go to private actors instead: banks, bondholders, and multinational corporations. Some of this money never reaches the treasuries of wealthy countries at all. Illicit financial flows, in particular, are often routed to tax havens, where profits escape taxation altogether.
Who has power when a country cannot repay its debts?
Who has power when a country cannot repay its debts?
Debt distress is a situation where a country cannot meet its debt payments without damaging its economy or cutting essential public spending. Countries in debt distress often enter a debt restructuring process. Debt restructuring means renegotiating the terms of a country's debt with the creditors that lent it money. The goal is debt relief, making debts easier to pay, or in some cases cancelling them outright. The debt restructuring process and who holds power within it reveal much about how global finance operates.
Three types of creditor
Three types of creditor
A country in debt distress may owe money to three different kinds of creditor:
bilateral creditors: other individual states that have lent the country money;
multilateral creditors: international institutions such as the International Monetary Fund (IMF) and World Bank;
private creditors: banks, investment funds, and other private investors, who buy a country's bonds.
A bond is a loan. When a state sells a bond to an investor, it is borrowing money from the investor. The state promises to pay back the money, plus interest, in the future.
Figure 6. Three types of creditors for debtor countries.
In the case of Zambia in 2020, bilateral creditors included Chinese state banks, which had lent large amounts to fund infrastructure such as dams, railways, and roads. Zambia’s private creditors included banks and investment funds in the Global North that held the country’s government bonds. Its third group of creditors was made up of international institutions, including the IMF and World Bank.
Each type of creditor has different interests and different legal obligations, which makes it hard to coordinate a response.
Private creditors: harder to bring into an agreement
Private creditors: harder to bring into an agreement
Private creditors now hold the majority of outstanding debt owed by Global South countries, around 60 percent overall. This reflects a longer-term shift. Over the past two decades, many Global South countries gained access to international bond markets for the first time. They began borrowing from private investors instead of relying only on other states and international institutions. Countries borrow this way because private lending is often faster to access and comes without the conditions that loans from institutions like the IMF usually carry. This shift to private creditors has made debt crises more likely to happen and then harder to resolve.
Private creditors typically charge higher interest rates than other states or international institutions do, and these rates have risen further since 2022. The higher the interest rate, the faster debt payments grow into an unmanageable burden.
Private creditors are also harder to bring into an agreement on debt relief, for two reasons. First, creditors that earn high interest payments have more to lose from renegotiating, so they have a strong incentive to resist debt relief. Second, creditor states coordinate debt restructuring through an informal group called the Paris Club, where they agree on how much debt relief to offer a struggling country. Private creditors are not part of this group. No process exists that can require every creditor, private or official, to offer a comparable level of debt relief. In four out of five major debt restructurings completed in recent years, private creditors agreed to provide less debt relief than states and international institutions did.
In Zambia's case, some private creditors refused to accept the terms other creditors had agreed to. They demanded full repayment while the Zambian government was cutting public services and waiting for the restructuring to conclude, a process that took more than three years.
Conditions that limit economic sovereignty
Conditions that limit economic sovereignty
Debt relief usually comes with conditions attached, and these create further pressure. To access emergency IMF funding, Zambia's government had to agree to a package of measures to reduce its budget deficit, called structural adjustment policies (SAPs). These policies included cuts to spending on health, education, and farm subsidies; tax increases on goods such as fuel and fertiliser; and a reduced role for state enterprises. These measures lowered the income and living standards of ordinary Zambians, at exactly the moment when the debt crisis was already squeezing public services.
The IMF negotiated these conditions with Zambia's government, but Zambia had little room to reject them without losing access to the funding it urgently needed. A country in debt distress loses much of its economic sovereignty, its ability to make its own economic decisions.
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The problems described in this section reflect a global financial system built at a time when most countries in the Global South had no voice in designing the rules. Reformers and campaigners around the world want to change this system. They want debtor countries to have more say over their own economic decisions. They also want to stop so much wealth from leaving the Global South in the first place. Subtopic 7.4 looks at these proposals more closely.
Activity 7.3.7
Activity 7.3.7
Concept: Systems, power
Skills: Thinking skills (transfer), Research skills (information literacy)
Time: varies, depending on the option
Type: Individual, pairs, or small group
Option 1: Calculating debt burdens with exchange rate change
Time: 30 minutes
This section showed how a falling exchange rate increases the local-currency cost of foreign debt, using an example where a country borrows 100 million US dollars. Use the same method to work through a new scenario, then think about what would have to be true for this risk to not apply.
Part 1: The loan gets more expensive
A country borrows 200 million US dollars, at a time when one US dollar costs 12 units of its local currency.
Calculate the country's debt in local currency terms at the time of borrowing.
The local currency then loses value, so that one US dollar now costs 16 units of the local currency. Calculate the country's debt in local currency terms now.
How many more local currency units does the country now owe, compared to when it borrowed the money?
Express that increase as a percentage of the original local-currency debt.
Part 2: What if it had gone the other way?
Using the same original loan (200 million US dollars at 12 units per dollar):
Suppose the local currency had instead gained value, so that one US dollar now costs only 9 units of the local currency. Calculate the country's debt in local currency terms in this case.
How does this compare to Part 1? What does this tell you about who benefits and who loses when exchange rates move?
Part 3: Reflection
In both scenarios, the country borrowed exactly the same amount of dollars and made no new decisions. What would have to be true about the country's economy for a falling currency to not be such a serious problem for its ability to repay this debt?
Click on the arrow to see sample responses, but give it a go yourself first!
Q1: 200 million × 12 = 2,400 million (2.4 billion) local currency units.
Q2: 200 million × 16 = 3,200 million (3.2 billion) local currency units.
Q3: 3.2 billion − 2.4 billion = 800 million more local currency units.
Q4: (800 million ÷ 2.4 billion) x 100 = approximately 33% more.
Q5: 200 million × 9 = 1,800 million (1.8 billion) local currency units, a decrease of 600 million, or 25% less than the original debt.
Q6: This shows that exchange rate risk cuts both ways. A country's debt burden can fall as well as rise, depending on how its currency moves. But since the country cannot control or reliably predict which direction its currency will move, it is exposed to this risk either way, and historically, Global South currencies have tended to lose value against hard currencies like the US dollar more often than they gain it.
Q7: There's no single correct answer. But a strong response could note that if the country earns money in the same foreign currency it borrowed in, the problem may not be as severe. For example, suppose the country sells oil, and buyers pay in US dollars. If the local currency falls, that oil revenue is now worth more in local currency too. This could help balance out the higher cost of repaying the debt. The problem is not the falling currency by itself. It is the mismatch where a country borrows in one currency, but earns its revenue in a different one.
Option 2: Data interpretation practice
Time: 40 minutes
Open the interactive debt map from erlassjahr.de.
Part 1: General analysis
Use a data interpretation strategy suggested by your teacher or your course to explore the map. If you do not have a data interpretation strategy, click on the arrow to see some guiding questions.
What is the title of the data? What does it measure? Clarify any questions you have about it.
What do the colours represent? Look closely at the legend. This map combines several different debt indicators into a single "debt situation" category, rather than showing one number like a percentage. Why might combining several indicators give a more complete picture of a country's debt situation than relying on just one?
Identify one country shaded ‘very critical.’ Identify one country shaded ‘not critical.’ Click on each country to see its individual debt indicators and how they compare to the threshold set for each one. The information is in German, but you can use an in-browser translator to convert to English or another language.
Is there a regional pattern in the data? Which parts of the world show the most critical debt situations? Which show the least critical? What story might that pattern tell?
Is there a country whose colour surprises you, based on what you already know about its economy or global exchange? Why are you surprised?
Part 2: Investigate one country
Choose one country from the map. Do not choose Zambia, since it is already discussed by name elsewhere in this section.
What is your chosen country, and what is its debt situation category? How many of its individual debt indicators exceed the threshold set for them?
According to its country profile, roughly what share of its foreign debt is owed by the government, compared to the private sector (companies and banks)? Who are its most important creditors: bilateral, multilateral, or private?
Using the ideas from this section, suggest one or two possible reasons for the country's debt situation.
What consequences might this situation have for the country, based on what you have read in this section?
Answers will vary depending on the country chosen.
Option 3: Data interpretation practice
Time: 40 minutes
Examine the map showing profit repatriation from this section Figure 5.
Part 1: General analysis
Use a data interpretation strategy suggested by your teacher or your course to explore the map. If you do not have a data interpretation strategy, click on the arrow to see some guiding questions.
What is the title of the data? What does it measure? Clarify any questions you have about it.
What do the colours represent? Look closely at the legend. Unlike some maps, this one has two directions: some colours show a net loss, others show a net gain, and the scale is not spread evenly around zero. Why might a map like this use uneven colour bands rather than one consistent step size?
Identify one country shaded dark blue (a large net gain). Identify one country shaded dark red (a large net loss). Hover over each country if you have access to the interactive version, to see its more exact figure.
Is there a regional pattern in the data? Which parts of the world show the largest net gains? Which show the largest net losses? What story might that pattern tell?
Is there a country whose colour surprises you, based on what you already know about its economy or global exchange? Why are you surprised?
Some countries are left blank on this map. What does the caption say about why, and what does that tell you about the limits of this kind of data?
Figure 5. Gains/losses due to profit repatriation
(Credit: Global inequality)
Part 2: Investigate one country
Choose one country from the map shaded in a loss colour (any shade of red or orange).
What is your chosen country, and roughly how large is its net loss from profit repatriation? Hover over it if you can, for a more exact figure.
Using the ideas from this section, suggest one or two possible reasons multinational corporations might be repatriating profits out of this particular country.
What consequences might this have for the country, based on what you have read in this section about what repatriated profits could otherwise be spent on?
If you have time, do some brief research on your chosen country to check your reasoning. A search for ‘[country name] foreign direct investment’ or ‘[country name] multinational corporations’ is a good starting point. Did your research support your explanation, or suggest something different?
Answers will vary depending on the country chosen.
Ideas for longer activities and projects are listed in Subtopic 7.5
Checking for understanding
Checking for understanding
Further exploration
Further exploration
The Global Financial System - a ca. 3 minute video by Financial Justice Ireland explaining the role of global institutions and rules in financial injustice. Difficulty level: easy
Debt Justice - Debt Data Portal - An interactive map revealing which countries are in debt crisis or at risk, and the type of debt (public or private). A great resource for spotting global patterns and sparking systems thinking. Difficulty level: medium
IMF Conditionality - The IMF's own explanation of why its loans come with policy conditions, and how it assesses whether countries are meeting them. Presents conditionality as a way to ensure loans are repaid and countries return to stability. Useful for seeing how the IMF frames its own practice, in contrast to the harms discussed in ‘Aid involves power relationships.’ Difficulty level: medium.
Global Sovereign Debt Monitor 2026 – a report by erlassjahr.de and Misereor that combines country-by-country data on debt service and creditor structures with case studies and testimonials from people living through debt crises. Includes downloadable maps and datasets covering nearly every country's external debt situation.
Global South debt is crushing our ability to tackle the climate crisis - but there's a solution - a ca. 3 minute video by Positive Money explaining how the international monetary system, shaped by colonial history and dominated by the US dollar, has made Global South debt a driver of the climate crisis, and outlining two proposed solutions: debt cancellation and a shift towards local currencies. Difficulty level: easy
Global Financial Integrity - organisation that tracks illicit financial flows. Their annual reports include accessible summaries and data. Difficulty level: medium
Here’s Why Foreign Aid Is a Scam | Doha Debates - In this ca. 7 minute video, economic anthropologist Jason Hickel explains how the global economy moves value from the Global South to the Global North through trade rules, financial flows, and power imbalances in international institutions. Difficulty level: easy
Sources
Sources
Eichengreen, B., Hausmann, R., & Panizza, U. (2003). Currency mismatches, debt intolerance, and original sin: Why they are not the same and why it matters (NBER Working Paper No. 10036). National Bureau of Economic Research. https://doi.org/10.3386/w10036
erlassjahr.de – Entwicklung braucht Entschuldung e. V., & Misereor. (2026). Global Sovereign Debt Monitor 2026. https://www.erlassjahr.de/gsdm2026
Grigorian, D. A., & Bhayana, A. (2024). Zambia: A case study of sovereign debt restructuring under the G20 Common Framework. Center for Global Development. https://www.cgdev.org/publication/zambia-case-study-sovereign-debt-restructuring-under-g20-common-framework
Hickel, J. (2017). The divide: A brief guide to global inequality and its solutions. Penguin.
Hickel, J., Sullivan, D., & Zoomkawala, H. (2025). Debt and financial outflows. Global Inequality Project. https://globalinequality.org/debt-financial-outflows/
Sarte, P-D., Mulloy, C., & Henry, E. (2023). A rate cycle unlike any other. Federal Reserve Bank of Richmond Economic Brief, No. 23-26. https://www.richmondfed.org/publications/research/economic_brief/2023/eb_23-26
Taneja, A., et al. (2025, January 20). Takers, not makers: The unjust poverty and unearned wealth of colonialism. Oxfam. https://www.oxfam.org/en/takers-not-makers-unjust-poverty-and-unearned-wealth-colonialism
Terminology
Terminology
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