Humankind & Resource Distribution —VII: Debt & Wealth Extraction

Debt is among the most extraordinary inventions in economic history. It allows tomorrow’s productive possibilities to be financed today. A farmer can acquire machinery before harvesting a crop; a household can purchase a home before accumulating its full price; a government can build infrastructure whose benefits extend across generations. Without credit, much of modern economic life would become slower, more uncertain and less productive.

The question is not whether debt is inherently harmful. It is whether the obligations created by borrowing enlarge society’s capacity to produce and live with dignity, or establish enduring claims upon income without corresponding improvements in productive capability. That distinction is essential to understanding why countries rich in people, land and potential can remain financially constrained.

The previous part examined wealth creation through labour and cooperation, the social function of money and the value added through trade. Debt connects all three. A loan is a claim upon future resources. Its economic justification depends upon what those resources finance, who bears the risks, and whether repayment leaves the borrower better equipped to generate income. Debt used to finance an efficient irrigation network differs from debt repeatedly contracted to service earlier liabilities or protect privileged consumption.

Hyman Minsky demonstrated that financial systems can move from arrangements in which borrowers comfortably service principal and interest to increasingly fragile structures dependent upon refinancing and rising asset values.[1] His analysis concerns the evolution of financial vulnerability, not an assertion that every loan is exploitative. It reminds us that apparently stable financial arrangements can accumulate risks precisely when confidence is strongest.

The same question arises at the household level. A small enterprise borrowing to expand production may increase employment and earnings. A family compelled to borrow for essential medical treatment may face repayments that diminish nutrition, schooling and future security. Identical contractual language can conceal profoundly different economic circumstances. Freedom of contract is meaningful only when bargaining power and available alternatives are also examined.

Historically, debt has accompanied both development and subordination. Credit financed commerce, infrastructure and industrial expansion; it also enabled creditors and politically powerful intermediaries to acquire land, labour and public revenues when borrowers could not meet obligations. The legal enforceability of a debt does not by itself establish that its distributional consequences are socially desirable. Nor does the hardship of repayment automatically make a debt illegitimate. The issue demands careful examination of purpose, terms, risk allocation and institutional context.

At the national level, the stakes become especially consequential. Governments borrow in domestic and foreign currencies, from private investors, commercial banks, multilateral institutions and other states. These liabilities are not interchangeable. Domestic-currency debt, foreign-currency debt, concessional financing and market borrowing carry different risks, maturities and policy implications. A serious assessment must distinguish them rather than treating every liability as evidence of identical dependence.

Foreign-currency debt is particularly sensitive to export earnings, exchange-rate movements and access to international finance. A country can collect more revenue in its own currency and still struggle to meet external obligations if its export capacity remains weak. Currency depreciation can increase the domestic cost of foreign liabilities. Higher global interest rates can compound the burden of refinancing. Consequently, debt sustainability cannot be reduced to the size of the fiscal deficit alone.

The IMF and World Bank debt-sustainability frameworks assess prospective repayment capacity under alternative economic conditions, including shocks.[2] Their existence reflects an important truth: the future path of debt matters more than any single headline figure. But these exercises depend upon assumptions about growth, revenue, exports, interest rates and political implementation. Forecasts must therefore be interrogated, not treated as inevitable outcomes.

There is another difficulty. The adjustment programmes intended to restore financial stability may impose immediate costs upon households through taxes, reductions in public spending or higher administered prices. Some adjustment is unavoidable when expenditure persistently exceeds sustainable resources. Yet its distribution is a political choice. A programme that protects untaxed privilege while curtailing primary education or essential healthcare may improve a fiscal indicator while weakening the very human capabilities required for long-term repayment.

The United Nations Conference on Trade and Development has drawn attention to the growing burden of public debt and interest payments in developing economies, including the pressure they place upon development spending.[3] Such evidence does not prove that all debt service displaces social investment. It establishes the need to examine budgetary trade-offs and the beneficiaries of each financing arrangement.

Pakistan illustrates these tensions. Recurrent borrowing, limited export diversification, narrow and unevenly enforced taxation, losses and inefficiencies in public enterprises, and weak expenditure accountability have constrained fiscal choices. The problem cannot be solved by describing creditors as the sole authors of economic distress. Domestic policy decisions, elite privileges, institutional failures and the structure of production also determine why external support is repeatedly sought.

A government may raise taxes without enlarging the productive base. It may borrow for development while failing to complete projects or maintain existing assets. It may report improvements in primary balances while the burden on salaried households and documented enterprises grows. Each outcome must be assessed against measurable changes in employment, exports, productivity, public services and the distribution of economic opportunity.

Debt also raises a question of intergenerational justice. Borrowing for infrastructure that serves future generations can be reasonable, provided the asset yields lasting benefits. Borrowing that finances current privilege while transferring liabilities to children who receive no corresponding asset represents a very different bargain. The distinction is not between present and future consumption alone, but between investment in future capabilities and the extraction of future income.

A useful test has several elements. Did the borrowing create or preserve productive assets? Were the terms transparent and risks reasonably allocated? Did the benefits reach those who would bear the costs? Did the financing strengthen the borrower’s capacity to meet obligations without repeated emergency support? And were less costly or more equitable alternatives considered?

These questions apply equally to sovereign debt, commercial lending and household finance. They shift attention from the moral condemnation of borrowing towards the institutional design of credit. Cooperative finance, development banking, carefully governed public investment and competitive commercial lending can each serve productive purposes. None is immune from mismanagement, capture or the temptation to transfer losses to the public.

The ultimate objective must be to transform credit from an instrument of dependence into a means of expanding economic capability. That requires credible taxation, productive investment, efficient public services, stronger exports, enforceable transparency and protection against predatory practices. Above all, it requires recognising that repayment capacity is created by people, enterprises and institutions—not by accounting entries alone.

A nation cannot borrow its way permanently out of a failure to produce, distribute and govern wealth. Equally, it cannot build prosperity by rejecting every form of credit. The relevant choice is between finance that creates new capabilities and finance that perpetuates claims upon capabilities never allowed to develop.

The next question follows naturally: when the returns from ownership and privilege are continually concentrated, does accumulation eventually cease to serve production and begin to govern society itself?

Endnotes

[1] Hyman P. Minsky, Stabilizing an Unstable Economy (1986); Levy Economics Institute research archive.

[2] IMF and World Bank, Debt Sustainability Framework for Low-Income Countries. Source

[3] UNCTAD, A World of Debt, global public-debt analysis.

[4] World Bank, International Debt Statistics. Source

[5] IMF, Pakistan country information and published staff reports.

[To be continued]

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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.