THE FINANCIAL TIMES
FRIDAY, MAY 9, 2003
Michael Kremer and Seema Jayachandran
Make Odious Debt Too Risky To Issue
Under Saddam Hussein's rule, Iraq
amassed an estimated Dollars
100bn in debt, or over three times
its gross domestic product. In all
likelihood postwar Iraq will refuse
to repay the debt in full. The
country can make a strong case
that Mr Hussein borrowed without
the consent of the Iraqi people and
then spent much of the money to
finance violence and repression.
Hence, Iraq might argue, the debt
is illegitimate. An individual is not
responsible for repaying debt that
someone fraudulently incurs in his
or her name. Why should a
citizenry be?
The US may welcome an Iraqi
decision to repudiate its debt, just
as after the 1898 SpanishAmerican War it encouraged Cuba
to repudiate the debt that Spanish
rulers had run up in Cuba's name.
Indeed, John Snow, the treasury
secretary, and Paul Wolfowitz, the
deputy defence secretary, have
suggested as much. Regardless of
Washington's stance on the moral
or legal right to repudiate
illegitimate debt - or "odious debt",
as early 20th-century legal scholars
who advocated its nullification
termed it - the US knows that an
Iraq burdened with debt would be
more dependent on American aid.
Moreover, there is no love lost
between the US and two of Iraq's
biggest creditors, Russia and France.
An Iraqi move to renounce its debt
would have important consequences
for international lending generally.
Creditors would think twice before
lending to repressive or rapacious
governments if they did not expect to
be repaid. In turn, such regimes might
behave better to avoid losing their
borrowing privileges.
However, Iraq's repudiation of its debt
would also have an unwelcome side
effect. Creditors might be more
reluctant to lend to a legitimate
government out of fear that opinion
might later turn against it. Creditors
that feared loan nullification would
lend at very high interest rates or not
at all, so legitimate governments might
not be able to borrow to finance
worthwhile infrastructure or education
projects.
Clearly, the world needs a system to
determine which loans should be
considered legitimate. The way to
prevent lending to illegitimate regimes
without jeopardising legitimate
borrowing is to make clear in advance
which loans will be considered odious
rather than nullifying them after the
fact. Retroactively, there is a
temptation to apply the odious label
liberally and nullify legitimate loans as
a way of transferring money from the
rich to the poor.
to vow that it would give political and
financial backing to any successor
government that repudiated new loans
issued to the current regime.
A declaration that a particular
government is odious and that future
lending to it will be considered
illegitimate would constitute a new and
better form of sanction - a "loan
embargo" that cuts off the flow of
funds to targeted countries. Profiteers
have strong incentives to evade trade
embargoes, but creditors would not
want to flout a loan embargo because
they would risk not being repaid.
Creditors would stop issuing loans to
odious regimes, not because such
loans are illegal or immoral but
because they would be more likely to
be unprofitable.
If the international community added a
loan embargo to its tool kit of
economic sanctions, creditors would
know the rules of the game in
advance and would not risk
nullification of their loans. Accordingly,
legitimate governments would be able
to borrow at lower interest rates. Most
importantly, governments deemed
illegitimate would find it much harder
to borrow in world markets and use
the funds to finance repression; and it
would become impossible for them to
saddle their ill-treated people with
debt.
For example, suppose the UN
Security Council declared that any
future borrowing by another
dictatorship - be it Syria, Zimbabwe or
Burma - would be the regime's
responsibility, and not that of the
citizens or any future government of
the country. When the regime went to
the debt market to borrow, this
sanction would discourage creditors
from lending to it. Even if the US
imposed the sanction on its own,
creditors in other countries would
abide by it. The US would need only
A decision by the postwar Iraqi
government to renounce Mr Hussein's
debt would be greeted with dismay in
some quarters; but that might also
spur the creation of a system that
prevents lending to such repressive
rulers in the first place.
Michael Kremer is a professor of
economics at Harvard University; Seema
Jayachandran is a doctoral student in
economics at Harvard