Odious Debt¶

Michael Kremer; Seema Jayachandran (2002). Odious Debt. Brookings Policy Brief #103. The Brookings Institution.


Type	report
Scope	Comparative and methods
Method	policy analysis
Period studied	1898–2002
Regions	South Africa, Philippines, Nicaragua, Zaire, Croatia, Cuba
Themes	sanctions divestment, macro fiscal finance debt, transition post apartheid, comparative theory
Citation key	`kremer2002`

Argument¶

The authors propose a new form of sanction: an independent institution would declare in advance that a regime is illegitimate, and debt it subsequently incurred would be 'odious' and not repayable by successor governments. Creditors would then stop lending to such regimes. The mechanism is self-enforcing, because successor governments would repudiate the loans without reputational cost. It also avoids the evasion and humanitarian costs of trade sanctions. Apartheid South Africa is one of several cases, alongside Marcos, Mobutu, Somoza and Tudjman, in which people inherited the debt of their repressors. The argument rests on game-theoretic reasoning about reputation and equilibria and on brief illustrative cases, not on systematic data.

Evidence and method¶

Illustrative cases drawn from the literature and press: Cuba 1898, South Africa, Nicaragua, Zaire, the Philippines and Croatia. A few figures are cited on loot and debt levels. Game-theoretic reasoning about repeated games. No archival or statistical analysis of South African debt.

Findings¶

The legal doctrine of odious debt rests on two conditions: absence of popular consent and absence of benefit to the people. (p. 2)

sovereign debt is odious and should not be transferable to a successor government if it (1) was incurred without the consent of the people and (2) did not benefit the people.
Apartheid South Africa borrowed from private banks in the 1980s while much of its budget financed repression. (p. 2)

The apartheid regime in South Africa borrowed from private banks through the 1980s, while a large percentage of its budget went to finance the military and police and otherwise repress the African majority.
The democratic South African people inherited the apartheid regime's debts. (p. 2)

The South African people now bear the debts of their repressors.
The post-apartheid government accepted responsibility for the debt despite calls for it to be declared odious. (p. 2)

the post-apartheid government has deferred to the current international norm and accepted responsibility for the debt.
The authors attribute the decision to repay to concern for investor confidence and a wish to be seen as orthodox. (p. 2)

South Africa 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.
In 1993, as apartheid was being dismantled, the commitment to repay was announced in the same days that Mandela called for normalised economic relations. (p. 2)

called for the world to normalize economic relations with South Africa; three days later, the finance minister announced at an investor conference in New York that South Africa would repay its sovereign debt
The HIPC initiative excludes South Africa because it looks at the debt level and country income, not at how the debt was incurred. (p. 3)

Indeed, South Africa, the Philippines, and Croatia do not qualify for debt relief under the HIPC Initiative.
Aid conditionality is one proposed enforcement mechanism against lending to odious regimes. (p. 4)

Second, foreign aid to successor regimes could be made contingent on non-repayment of odious debt.
Curbing odious debt is claimed to be self-enforcing, unlike trade sanctions that third parties have incentives to evade. (p. 5)

third parties have incentives to evade most trade sanctions, while curtailing odious debt, in contrast, is a self-enforcing sanction.
To keep the institution truthful and to avoid freezing the debt market, it should rule only on future loans. (p. 6)

the institution could be empowered only to rule on future loans to a government and not on existing debt.