A clean slate for Iraq

James Surowiecki
The New Yorker
February 12, 2003

In February, 1895, Cuban nationalists seeking independence from Spain took to the hills and started a campaign of guerrilla warfare. When initial efforts to put down the rebellion failed, the Spanish military relocated hundreds of thousands of Cuban farmers into fortified concentration camps, where they soon fell prey to hunger and disease. In the United States, publicity about the camps fanned hostility toward the Spanish and, eventually, inspired calls for U.S. intervention in Cuba (where, not coincidentally, America had important economic and strategic interests). War began in the spring of 1898, and a few months later the Spanish Empire was gone.The end of the war presented a new dilemma. Cuba had a mountain of foreign debt, and during the peace negotiations Spain insisted that the Cubans were responsible for all of it. The logic was perverse; much of that debt had been run up by the colonial authorities in their effort to crush the Cuban struggle for independence. But international law seemed to be on Spain’s side. Debt, the Spanish argued, was attached to a territory, not to a regime. The money had been borrowed by Cuba, and Cuba, or the occupying Americans, had to pay it back. The regime might have changed, but the debt remained.

The U.S. rejected that argument. The Cuban people had had no say in the decision to borrow the money, and it had been spent in ways that damaged them. Therefore, Cuba should owe nothing. In the end, the new republic repudiated its debts and started over with a clean slate.

Before long, the Iraqi people will likely face a similar dilemma. In 1979, when Saddam Hussein took power, Iraq – thanks to the oil boom of the seventies – had a foreign surplus of about thirty-five billion dollars. A decade later, after the war with Iran, it had a foreign debt of some fifty billion dollars. And today, after more war and a dozen years of missed interest payments, the country owes, by many estimates, more than a hundred billion dollars. Its creditors, which include Kuwait, Bulgaria, and the Korean conglomerate Hyundai, are already jockeying for position to be repaid after the war.

Iraq has no hope of ever repaying its debts. Its annual gross domestic product is a mere thirty billion dollars, and even if this war does relatively little damage to the country’s infrastructure it will take years – and tens of billions of dollars – to repair the damage that Saddam has done to the Iraqi economy. Presumably, the U.S. and others will invest heavily in reconstruction. But, if Iraq is to become stable and prosperous, it needs to spend public dollars on public goods (health, education, roads), not on debt payments to creditors who willingly lent money to Saddam.

Even if the Iraqi people could afford to pay back Saddam’s debts, it’s hard to see why they should. Most of the money that Iraq borrowed in the past twenty years went either to Saddam’s military misadventures in Iran and Kuwait or to his internal security apparatus. Asking the Iraqi people to assume Saddam’s debts is rather like telling a man who has been shot in the head that he has to pay for the bullet.

Oddly, though, that’s pretty much what international custom seems to require. Lenders and borrowers still believe that debt belongs to a state, not to a regime. As a result, only a handful of countries have ever repudiated their debts. Even when tyrannical regimes have been deposed – Somoza in Nicaragua, Mobutu in Zaire, the apartheid system in South Africa – their successors have dutifully, if reluctantly, assumed their debts.

It might be time to change all that and consider an old idea that has recently been resurrected: the doctrine of odious debts. First articulated in the twenties by a former tsarist minister named Alexander Sack, the doctrine holds that a country is not responsible for debts incurred by a “despotic regime” and used for purposes “contrary to the interests of the nation.” Both criteria have to be met for the debt to be considered odious. (In other words, profligate Argentina couldn’t repudiate its debt, because it’s a democracy.) The idea is that when the despot falls his debt disappears with him. The Harvard economists Michael Kremer and Seema Jayachandran have proposed the creation of an international institution that would have the authority to declare a regime “odious.” Such a system would likely persuade lenders to avoid tyrants, as they would no longer expect to be repaid.

Western governments and bankers have long been intolerant of the odious-debt excuse; they’d prefer not to be in the business of judging whether a regime is illegitimate. They also like to get paid back. And no one wants countries to renege every time a general stages a coup. Still, even the hardest-nosed Western lenders now understand that burying new regimes under old debt is no way to encourage the spread of capitalism and democracy. In the early nineties, Poland had half its debt cancelled when it agreed to institute market reforms. More recently, a major

I. M.F. and World Bank initiative eliminated a significant portion of Third World debt, much of which is, if not odious, then at least really dislikable.

A post-Saddam regime could certainly cut a similar deal with its creditors, but that would still stick Iraq with a substantial burden of debt. Perhaps Saddam’s successors should turn theory into practice and, when the time comes, repudiate the debts that Saddam incurred to stock his arsenal and maintain his power. That would vastly improve Iraq’s economic prospects, and establish a worthy precedent: lend to tyrants, and you will get stiffed. The U.S., at least, is unlikely to object – two of Iraq’s biggest creditors are Russia and France.

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