The debts of corruption

(May 10, 1999) A global movement is asking Western nations to forgive ‘odious’ debt extended to despotic regimes. The cause has merit, but opposition is building.

Tomorrow, a coalition of Canadian churches will present the government with one of the largest petitions in Canadian history – 600,000 signatures calling to cancel the foreign debt of heavily indebted Third World countries. Using biblical language, the Jubilee 2000 coalition asks the prime minister to free the oppressed of their debts by the start of the new millennium. So do the Pope, the Dalai Lama, other top religious leaders, and Jubilee 2000 coalitions formed in 155 countries to oversee this groundswell movement, which has collected seven million signatures to date, and still counting. The petitions will be submitted to the G7 leaders at their meeting in Cologne, Germany, this June.

Sensing a political nightmare – as well as an opportunity to cleanse their books of embarrassing loans – the G7 governments, the World Bank, and even the International Monetary Fund are scrambling to produce debt relief proposals to appease the activists. The U.K. believes $50-billion in debt forgiveness is feasible (all figures in U.S. dollars); the U.S. proposal, led by Bill Clinton, aims for $100-billion.

But the proposals could meet surprising opposition. Unlike their pleading predecessors, today’s debt campaigners – who have expunged “debt forgiveness” from their vocabulary – are not strictly asking for charity. Invoking international law, they are challenging the very legitimacy of much of the Third World’s $2-trillion debt.

Ground zero in the debt campaign is South Africa, where a little-known but potentially potent international legal doctrine known as the Doctrine of Odious Debts surfaced just two years ago in that country’s super-charged Truth and Reconciliation Commission. South African Archbishop Njongonkulu Ndungane of Cape Town, Desmond Tutu’s successor, argues that South Africa’s foreign debts were largely incurred under the apartheid regime to suppress the majority population. Thus, they should be declared odious and written off.

Though South Africa’s foreign debts are relatively small, the country’s debt relief campaigners resent repaying monies used to deny them their civil rights. Despite the apartheid regime’s outlaw status, large commercial banks continued to lend it money, and in increasingly clandestine ways, to escape public ire. Archbishop Ndungane wants the financial institutions that colluded with apartheid to face the consequences of lending to an illegitimate government. If they do, much of the private financing available to today’s despots would dry up, while credit to legitimate regimes would be unaffected.

The archbishop’s counsel in this matter is the world’s undisputed legal scholar on the succession of public debts, Alexander Sack, dead in body but alive in spirit through his 1927 treatise on the subject. Mr. Sack, a former minister of Tsarist Russia who became a professor of law in Paris after the Russian Revolution, was no radical. He believed the liability for public debts should remain the obligation of the state – the state being the territory, rather than a specific governmental structure – based not on some strict dictate of natural justice, but on the exigencies of international commerce. Without strong rules, chaos would reign in financial relations between nations.

But Mr. Sack believed that debts not created in the interests of the state – which he termed dettes odieuses – should not be bound to this general rule. “If a despotic power incurs a debt not for the needs or in the interest of the State, but to strengthen its despotic regime, to repress the population that fights against it, etc., this debt is odious for the population of all the State,” he explained. “This debt is not an obligation for the nation; it is a regime’s debt, a ‘personal’ debt of the power that has incurred it, consequently it falls with the fall of this power.” Mr. Sack also included debts that “serve interests manifestly personal” as odious.

Back to present-day South Africa, whose post-apartheid government of Nelson Mandela, shortly after taking office, cancelled Namibia’s debt. “[We] did not ask whether the debt was payable or unpayable. Nor did we impose any conditions on our neighbour. We merely declared those debts as immoral, odious debts incurred while Namibia was occupied by the apartheid regime,” says Archbishop Ndungane, in asking the rich countries to follow their example.

The South African government, with little to gain by repudiating its debts and much to lose – the IMF is preparing to sell off part of its gold hoard to help retire the debts, affecting South Africa’s most important industry – fears the debt movement. Under pressure from foreign lenders and the country’s business community, it vows to “pay back every cent.”

Yet the archbishop’s clarion call has hit a chord with South Africa’s citizenry that reverberates around the world. Earlier this year, the Latin American and Caribbean Jubilee 2000 Coalition described the foreign debt of member nations as “illegitimate because, in large measure, it was contracted by dictatorships, governments not elected by the people, as well as by governments which were formally democratic, but corrupt. Most of the money was not used to benefit the people who are now being required to pay it back.” To understand how the debt was created, these activists want tribunals to conduct audits that fully disclose just where the money went. Legitimate debts, they believe, should be repaid, illegitimate ones torn up. Later this month, Argentina’s federal court is expected to make a major ruling on the legitimacy of debts incurred under the military junta.

While Jubilee 2000 activists sometimes stray from the strict legal definition of odious debts – arguing, for example, that the debilitating social effects of debt repayment make the debts odious – they are demanding reforms for financial accountability that their governments have eschewed for the past 50 years, and which, ironically, echo demands made by fiscal conservatives in Western countries intent on restraining government excesses. To ensure public knowledge and approval of public debts, they advocate referenda and caps on public borrowing. To stop foreign aid financing for massive hydro dams and other state vanity projects, they would tie repayment to those projects’ profits, rather than allow creditors to claim general state funds. The activists cite “moral hazard” – the tendency of lenders to make reckless loans when they are confident governments will bail them out – to buttress their call for odious lenders, not taxpayers, to take the hit.

To some extent, these arguments have come too late: Western governments have already bailed out the Chase Manhattans and Citicorps for much of the reckless private-sector lending that precipitated past Third World debt crises. But private lenders are still on the hook for several hundred billion dollars, and still inclined to back corrupt regimes in the belief that governments will inevitably come to their rescue. Private lenders oppose objective, legal tests of which loans should be repaid.

In this, they have co-conspirators. Western governments and their agencies – now the main creditors of the poorest countries – also want no-fault debt relief to avoid financial accountability for an estimated $400-billion in outstanding odious debts. In most cases, Western governments knew that substantial portions of their loans – up to 30%, says the World Bank – went directly into the pockets of corrupt officials, for their personal use. If the World Bank and other development agencies faced arbitration panels that could deem their loans to have been odious, the outcome could bankrupt them.

The G7 countries’ export credit agencies, such as Canada’s Export Development Corp., similarly need bail-outs to cover up their sordid loan portfolios. Over the past eight years, Ottawa transferred to EDC nearly $600-million to let it quietly write off an equal amount in bad debts from Third World and Eastern European countries. EDC’s pretense of being a viable business would evaporate if its many odious debts were so identified. Little wonder it prefers that the government feign compassion for the world’s poor while transferring its problems to the Canadian taxpayer.

In preparation for the G7 meeting in Cologne next month, the Canadian government has offered to totally write off the debts of numerous dictatorial regimes Canada had backed, including those in Liberia, Rwanda, Sudan, and Zaire. To avoid a repeat of these mistakes, it plans a code of conduct to stop government-owned export credit agencies and other trade finance institutions from providing credit to projects that don’t benefit recipient countries.

But instead of averting another Third World debt crisis, this code – arbitrary, unenforceable, and subject to political manipulation – would only speed the next one’s advent. Debt crises will stop only when moral hazard and unaccountable lending stop. They will stop when the Doctrine of Odious Debts is enforced.

The History of Odious Debt

At the turn of the century, after the United States won Cuba in the Spanish-American War, the Americans refused responsibility for the “Cuban debt,” saying its proceeds prevented Cubans from revolting against Spanish domination. “They are debts created by the Government of Spain, for its own purposes and through its own agents, in whose creation Cuba had no voice,” they declared, establishing a precedent that would later help inspire The Doctrine of Odious Debts.

Then came Great Britain v. Costa Rica, a landmark 1923 case involving the new Costa Rican government and the Royal Bank of Canada. Chief Justice Taft of the U.S. Supreme Court, sitting as an arbitrator, did not uphold the legitimacy of a loan to the government of the former dictator, Federico Tinoco, because “the bank knew that this money was to be used by the retiring president, F. Tinoco, for his personal support after he had taken refuge in a foreign country.”

Because of its significance, Mr. Taft accepted no payment for adjudicating the case. “I am glad to have the opportunity of manifesting my intense interest in the promotion of the judicial settlement of international disputes, and accept as full reward for any service I may have rendered, the honour of being chosen to decide these important issues between the high contracting parties.”

Patricia Adams, executive director of Probe International, a Toronto-based economic and environmental think-tank, is an economist and the author of Odious Debts (Earthscan).

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