A fresh start for Iraq: The case for debt relief

Oxfam International
May 30, 2003

The reconstruction of Iraq is a pressing problem for the international community. Failure would have grave implications not just for the people of Iraq, but for regional and international peace and security. But the challenge is daunting. It extends beyond the immediate costs of financing physical infrastructure destroyed during the war, to reversing two decades of lost development. Since 1990, Iraq has suffered a catastrophic decline in living standards – and an associated increase in poverty. Human-development indicators for health, education, and nutrition have worsened dramatically. Improving them is the key to forging a new start for Iraq’s people.

Of the many problems confronting attempts at social and economic recovery in Iraq, one crucial area which has received insufficient attention is foreign debt. After years of misrule, war, and deteriorating living conditions, Iraq’s people are among the most indebted in the world. Each of the country’s citizens owes its creditors around $11,000, as much as 55 times the annual income of Iraq’s most impoverished people. Saddam Hussein’s regime was responsible for the borrowing that created the debt, but this was matched by irresponsible lending on the part of commercial creditors, Northern governments, and a number of Gulf States.

Iraq’s debt is not re-payable. Repayment would require the transfer of all of Iraq’s oil revenue, for twenty years. Even if the repayments were rescheduled, creditors’ demands would divert resources from vital investments in social and economic infrastructure. The projected costs of these investments are far higher than those associated with other recent cases of post-war reconstruction, such as Afghanistan and Kosovo.

Under any circumstances, foreign assistance will have to play a critical role in reconstruction. The danger is that creditors’ demands will lead to an undue dependence on aid, with damaging consequences for governance and accountability. As the British economist Keynes warned after the First World War in relation to Germany’s war reparations, unsustainable debt may act as a destructive political and economic force, undermining reconstruction efforts within Iraq and the harmonious integration of Iraq into the international community.

Powerful as the economic case for debt relief may be, it is reinforced by the fact that much of Iraq’s debt is illegitimate in a wider sense. The doctrine of ‘odious debt’ clearly sets out the reasons for this illegitimacy. Debt is considered odious if borrowing was undertaken by a regime which had no popular mandate; if debt money was not used to the benefit of the population; and if creditors acted in the knowledge that lending was being used to finance activities – such as gross corruption, invasion, human-rights violations, or genocide – damaging to human welfare.

Oxfam maintains that much, and perhaps all, of Iraq’s debt falls into the odious category. Many creditors acted in full knowledge of the nature of the regime to which they were lending

– and of the purposes to which their loans were put. Some of the governments most loath to discuss debt relief – including those of France, Germany, Russia, Kuwait, and Saudi Arabia – lent irresponsibly to and effectively buttressed Saddam Hussein’s regime. And there is clear evidence that some governments – including those of the USA and Britain – encouraged commercial links with Saddam, despite clear evidence that debt was being used to finance the violation of human rights, military adventures, and the development of chemical weapons. Ignorance represents a weak defence. Information about the regime was publicly available. Yet loans were made which helped to finance war, perpetuate genocide, and violate human rights. Iraq’s commercial creditors can legitimately claim that Northern governments and certain Gulf States encouraged them to lend to a brutal regime. The coalition governments that removed the regime account for only a small portion of the current debt burden. However, their predecessor governments bear a large share of responsibility for creating in the 1980s an environment in which lending to Iraq was deemed politically acceptable.

Iraq’s creditors may claim, with some justification, that Western governments actively encouraged them to lend to Saddam Hussein’s regime. However, if creditors feel that they were misled by the signals being sent by certain governments they should seek redress from those governments – and not from ordinary Iraqis.

Aside from the economic and moral arguments for debt relief, there is a political case. By recognising their own role in financing Saddam Hussein’s regime and accepting the odious nature of the debt that they helped to generate, Northern governments and Gulf States would send an important signal to the people of Iraq. It would mark a willingness to accept their share of responsibility for sustaining a regime that they helped to nurture and – in the case of the coalition countries – ultimately destroy.

The question that remains is this: should ordinary Iraqis be held responsible for paying debt incurred as a result of reckless lending to one of the world’s egregious violators of basic human rights? Expressed differently, even if Iraq could pay the economic costs associated with debt, is it morally right that it should pay?

Oxfam believes that the answer to both questions is an unequivocal ‘no’. Now that Saddam Hussein has been removed from power, the people of Iraq should not bear the burden of debts accumulated in their name by a tyrannical ruler. The doctrine of odious debt provides a clear rationale for making such a case. Under law in many countries, individuals do not have to bear the cost if others fraudulently borrow in their name. Similarly, corporations are not liable for contracts entered into without proper authority. The doctrine of odious debt extends this principle to foreign debt. Its starting point is that people should not be held responsible for debts incurred without their consent and used against their interests.

Iraq’s debt problems cannot be viewed in isolation. It is imperative that any debt-reduction programme is financed from additional resources, rather than by a diversion of funds from Africa and other developing regions. More broadly, Iraq’s plight powerfully demonstrates the need for an internationally agreed framework to deal with odious debt as situations arise, and ultimately to prevent them from occurring. Multilateral agreement to halt lending to egregious regimes is a more effective strategy than dealing retrospectively with the debt legacies that they leave behind. The development benefits that would be gained if such a strategy could be applied globally are potentially massive. The Iraqi case can therefore be seen as setting a precedent for both dealing with odious debts in other highly indebted countries – such as Nicaragua, Nigeria, and Haiti – and preventing such odious debts accruing in the first place. At the same time it is vital that debt relief for Iraq does not divert financing from other highly indebted countries.

What is needed now is a plan of action which addresses Iraq’s immediate problems, while developing a longer-term strategy. In this context Oxfam is proposing the following measures:

The creation under UN auspices of an independent panel of economists, jurists, and others to rule on the legitimacy of Iraq’s debt.

An immediate moratorium on all debt repayments until such a panel reports and odious debt is written off.

Creditors to work with future legitimate Iraqi authorities, UN agencies, and civil society to convert debt into financing for development initiatives.

The initiation of a process to create a standing body to establish and monitor world-wide norms to assess odious debt.

Related Links:

A Fresh Start For Iraq: The case for debt relief, Oxfam International briefing paper

Oxfam on Iraq  [PDFver here]

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