Odious Debt

Literature › Works

Michael Kremer; Seema Jayachandran (2002). Odious Debt. Finance & Development (June 2002). International Monetary Fund.

Type	journal article
Scope	Comparative and methods
Method	theoretical or conceptual
Period studied	1898–2002
Regions	South Africa, Nicaragua, Philippines, Croatia, Nigeria, Democratic Republic of Congo
Themes	sanctions divestment, macro fiscal finance debt, comparative theory, transition post apartheid
Citation key	kremer2002a

Argument

Kremer and Jayachandran argue that debt borrowed by illegitimate rulers without the people's consent, and not used for their benefit, is odious and should not bind successor governments. They propose an independent institution that would declare regimes illegitimate and so declare their future borrowing odious. Creditors would then expect repudiation and stop lending. Enforcement would come from creditor-country laws that bar seizure of assets, and from aid to successor regimes made conditional on non-repayment of odious debt. They present this as a self-enforcing sanction that is better than trade sanctions because it harms dictators, not the population. Apartheid South Africa is one of several cases, cited as an example of a regime whose repression was financed by private bank borrowing and whose debt the post-apartheid state kept servicing.

Evidence and method

Short policy article. It draws on illustrative cases (Cuba 1898, Somoza, Marcos, Duvalier, Mobutu, Abacha, Tudjman, apartheid South Africa) and on game-theoretic reasoning about equilibria and moral hazard. It summarizes a longer IMF conference paper by the authors. It has no new empirical data on South Africa.

Findings

• Enforcement lever: donors should make aid to successor governments conditional on repudiating odious debt. (p. 2)

  Second, foreign aid to successor regimes could be made contingent on nonrepayment of odious debt.