For decades, the global financial community has treated sovereign debt crises like a broken thermometer: improve the reading through transparency, hold the technician accountable via regulation, and the fever will break. Yet from Colombo's streets to Dhaka's manufacturing hubs, the fever is rising. As development finance dries up and emerging economies lean on market resources, the standard good governance playbook pushed by the IMF and World Bank is proving woefully inadequate.
Sovereign debt crises often stem from a deliberately created ecosystem where domestic elites and external actors collude to generate unsustainable debt for private gain. To fix this, we must move beyond transparency and embrace a framework that understands the cold realities of power, capabilities, and interests.
The Failure of Vertical Oversight
Traditional anti-corruption strategies rely on vertical enforcement: a principal uses information to hold an agent accountable. But in many developing nations, this assumes a rule-following environment that doesn't exist. Instead, actors are embedded in dense networks of informal negotiations where rule-breaking is rational for those in power. When a multi-billion-dollar infrastructure project is on the table, incentives for kickbacks are so high that insiders can manufacture plausible justifications for inflated costs. External monitors, no matter how transparent the data, often lack the technical capability or political muscle to challenge these narratives.
The recent experiences of Sri Lanka and Bangladesh offer a sobering look at this collusion. In Sri Lanka, the Mannar wind power project linked to the Adani Group was flagged for significantly overpriced contracting. The levelized cost of electricity should have been roughly 5.58 US cents per kWh, but the agreed price was 8.26 cents, representing a potential overpayment of over $600 million. Sri Lanka was lucky: a change in government and public outcry forced a retreat. Bangladesh was not as fortunate. The Godda coal-fired power plant, another Adani-funded venture, moved forward with a price roughly double the rate of electricity imported from the Indian grid. With Bangladesh paying roughly $1 billion annually for the next 25 years, a 30% to 50% overpricing margin creates a massive, unnecessary foreign currency liability. These are no accidents; they are logical outcomes of systems where vertical oversight exists only on paper, while underlying power dynamics favor collusion.
The Case for Horizontal Enforcement
If vertical oversight is failing, where do we turn? Our research suggests an alternative: a framework that identifies the Power-Capabilities-Interests (PCI) of actors in the transaction ecosystem. The PCI understands rule-following as the net effect of formal and informal arrangements, using relative power and influencing policy. Policies will be feasible, implemented, sustainable, and effective only if they build on emerging behavioral changes and pockets of effectiveness arising from the organizational distribution of power and capabilities. Instead of imposing rules from the top down, we must design self-enforcing processes that empower actors with a direct, selfish interest in seeing rules followed. We call this horizontal enforcement.
Horizontal enforcement works by creating checks within the policy flow. In more developed economies, this often happens naturally because rival firms and political actors benefit from exposing a competitor's corruption. In developing countries, we must build this ecosystem with targeted interventions. Our research highlights two strategies with notable impact in Sri Lanka and Bangladesh. The first is splitting the rents: instead of one massive mega-project that invites massive collusion, governments should shift toward a larger number of smaller-scale projects. This introduces more players, increasing competition and making it harder for a small group of insiders to control the narrative. In Sri Lanka's wind sector, as more investors entered with smaller technologies, the opportunity for corruption dropped alongside prices. The second is empowering productive rivals: by lowering the cost of capital for investors who participate in truly competitive bidding, we attract unconnected firms. These actors have a massive incentive to ensure their competitors are not getting sweetheart deals. In Bangladesh, even modest competitive bidding reduced contracted prices by at least 25%.
The goal is to change the ecosystem of project selection, debt contracting, and implementation from the bottom up. We cannot simply overlay a transparency sticker on a corrupt system. We must identify specific entry points where rival interests can be leveraged to act as a check on one another. This approach is also relevant for other developing country contexts, including those facing similar challenges in South Asia's water wars or the structural strains seen in Indonesia's rupiah crisis. By understanding power dynamics and fostering horizontal enforcement, we can build a more resilient framework for sovereign debt management across the Indo-Pacific.
