Iraqi Debt Write Off

Thu, 22 May 2003 06:23:00 -0400
/economics

Here’s a good idea from an Economist article about Iraqi debt. Writing off the debt of deposed dictatorships will discourage lending to active ones.

Some economists, such as Michael Kremer of Harvard University, argue that, after a change of regime, a country’s new government should have no legal obligation to service the “odious debt” of an illegitimate predecessor, an idea dating back to the Spanish-American war of 1898. In theory, establishing the right of a country to write off odious debt would have potentially huge benefits, not least by discouraging banks from lending to nasty governments that might one day be overthrown. Indeed, says Mr Kremer, setting out precise rules for what counts as an “odious regime”, and thereby making it harder for such regimes to borrow, may be a better form of economic sanction than the traditional approach of obstructing trade. Restrictions on trade hurt ordinary people, whereas making it harder to borrow hurts the baddies in charge more directly.

However:

As Harold James, another Princeton economist, has argued, this could destabilise the global credit markets by making creditors fearful that other countries might one day describe their debt as odious. It is not hard to imagine circumstances in which, say, a newly democratic China might try to shed the external debt “$170 billion at the end of 2001” of the “odious” undemocratic regime it replaced.

Still, in the UK, memories of the dodgy arms deals bailed out by the ECGD make me hope it could work.