Odious Debt

• Author: Michael Kremer and Seema Jayachandran
• Position: Professor of Economics at Harvard University and Senior Fellow at the Brookings Institution/Graduate student in the Department of Economics at Harvard University

Many developing countries are carrying debt incurred by rulers who borrowed without the people's consent and used the funds either to repress the people or for personal gain. A new approach is warranted to prevent dictators from running up debts, looting their countries, and passing on their debts to the population.

Under the law in many countries, individuals do not have to repay if others fraudulently borrow in their name, and corporations are not liable for contracts that their chief executive officers or other agents enter into without the authority to bind the corporations. The legal doctrine of odious debt makes an analogous argument that sovereign debt incurred without the consent of the people and not benefiting the people is odious and should not be transferable to a successor government, especially if creditors are aware of these facts in advance.

Box 1: Possible candidates for the odious label

The doctrine of odious debt originated in 1898 after the Spanish-American War. During peace negotiations, the United States argued that neither it nor Cuba should be held responsible for debt the colonial rulers had incurred without the consent of the Cuban people and not used for their benefit. Although Spain never accepted the validity of this argument, the United States implicitly prevailed, and Spain took responsibility for the Cuban debt under the Paris peace treaty. Soon after, legal scholars elaborated a similar doctrine. Since then, numerous regimes have evinced odiousness. Some potential recent examples include

* Anastasio Somoza (Nicaragua)

Reportedly looted $100-500 million

* Ferdinand Marcos (Philippines)

Amassed a $10 billion fortune

* Jean-Claude Duvalier (Haiti)

Successors claim he absconded with $900 million

* Apartheid government (South Africa)

Widely condemned by the international community

Spent heavily on police and military to repress the African majority

* Mobutu Sese Seko (Congo/former Zaïre)

Thought to have expropriated $4 billion to personal accounts

Enriched cronies

* Sani Abacha (Nigeria)

Reportedly held $2 billion in Swiss bank accounts in 1999

* Franjo Tudjman (Croatia)

Looted unknown amount

Suppressed the media and reportedly was behind violent attacks on his political opponents

However, this doctrine has gained little momentum within the international legal community, although many countries could qualify (see Box 1). For example, through the 1980s, South Africa's apartheid regime borrowed from private banks, devoting a large percentage of its budget to finance the military and police and otherwise repress the African majority. The South African people now bear the debts of their repressors. Despite appeals-from the Archbishop of Cape Town and South Africa's Truth and Reconciliation Commission-to have the odious apartheid-era debt written off, the postapartheid government has accepted responsibility for the debt. It seems to fear that defaulting would hurt its chances of attracting foreign investment and wants to be seen as playing by the rules of capitalism. South Africa is not poor enough to qualify for debt relief under the Heavily Indebted Poor Countries Initiative.

Similarly, Anastasio Somoza was reported to have looted $100-500 million from Nicaragua by the time he was overthrown in 1979. Sandinista leader Daniel Ortega told the United Nations General Assembly that his government would repudiate Somoza's debt, but reconsidered when his country's allies in Cuba advised him that doing so would unwisely alienate Nicaragua from Western capitalist countries.

Some countries have attempted to confiscate and restitute funds that an ex-ruler salted away abroad, but with mixed results. For example, Nigeria recently recouped money from Sani Abacha's family, but the Philippines has little to show for its protracted campaign to repatriate Ferdinand Marcos's fortune. Moreover, any money that has been squandered is gone forever.

What can be done to eliminate odious debt? In a recent study, we argued for the creation of an independent institution that could assess whether regimes are legitimate and declare any sovereign debt subsequently incurred by illegitimate ones odious and thus not the obligation of successor governments. If structured correctly, such an institution could restrict dictators' ability to loot, limit the debt burden of poor countries, reduce risk for banks, and lower interest rates for legitimate governments that borrow. This policy can be...