Description
In the post-COVID era, many emerging market countries encountered sovereign debt crises, with 18 countries declaring sovereign default between 2020-2023. This study explores the role of expanding middle-class in sovereign defaults of emerging market countries by taking Sri Lanka and Ghana as case studies. Using Everyday Political Economy (EPE) approach, I argue that facilitating middle-class consumption patterns promoted domestic financialization and reliance on global capital markets while undermining the manufactiuring growth, setting the path for soverign defaults. Practice of such policies stemmed from benefits to local political elites, domestic financiars and global financiars in short term. Through the transition to middle-income countries, both Sri Lanka and Ghana witnessed a substantial growth of middle-class population with significant lobbying power. This growing middle-class’s major preferences include large scale public infrastructure projects, personal vehicles and urban and sub-urb housing. The governments facilitated these preferences through maintaining low income tax regimes, lending from domestic banks and clientalism. Availability of the capital to middle-class subsequently resulted in rise of consumption good imports, speculative growth in urban real estate, increased demand for private motor vehicles and fuel. These dynamics incentivised the non-tradable sector driven growth, expanded domestic financialization and undermined the manfacturing led growth. As high level of political significance was assigned to middle-class as a voting block, the governments continue to facilitate middle-class consumption preferences, and ignore the growing structural weaknesses and external vulnerabilities of the economies. This meant the governments had to tap into external capital to facilitate import demand that was facilitated by domestic financiers through extending loans to the middle class. Thus, the political need of facilitating middle-class consumption was subsequently met through increase reliance on global capital markets by issuing Eurobond issuances. The failure to increase manufacturing growth made it difficult to manage Eurobond repayments and led to sovereign defaults.
