James K. Boyce and Leonce Ndikumana
Bangkok Post, Thailand
July 2, 2003
One side-effect of the American/British occupation of Iraq is that it has sparked public debate on a dark secret of international finance: the debt taken on by odious regimes.
As Iraq’s new rulers debate what to do about the billions of dollars in foreign debt inherited from Saddam Hussein’s regime, voices ranging from the charity Oxfam-International to US defence guru Richard Perle are calling for debt repudiation on the grounds that the debt Iraq now bears was contracted to sustain a corrupt, oppressive regime.
Iraq is not the only country burdened by such debt. Across sub-Saharan Africa, many of the world’s poorest people struggle with the crippling legacy of profligate lending to corrupt, oppressive rulers.
During his 32-year dictatorship, Congo’s former president Joseph Mobutu accumulated a personal fortune estimated at $4 billion (168 billion baht), while his government ran up a $12 billion (503 billion baht) foreign debt. More of the same in Angola, where last year an International Monetary Fund investigation revealed that $4 billion disappeared from Angola’s treasury over the past five years. It so happens that the Angolan government borrowed a similar sum from private banks during this period, mortgaging future oil revenues as security.
Much of Africa’s ill-gotten wealth is now stashed abroad. In a study of 30 sub-Saharan African countries, we estimate that total capital flight for the period 1970-1996 amounted to $187 billion (7.84 trillion baht). Adding imputed interest earnings, the stock of Africa’s capital flight stood at $274 billion (11.49 trillion baht) – equivalent to 145% of the debt owed by those countries.
In other words, sub-Saharan Africa is a net creditor to the rest of the world: its external assets exceed its external debt. The difference is that the assets are private and the debt public.
Statistical analysis reveals that roughly 80 cents on every dollar borrowed by African countries flowed back as capital flight in the same year. Foreign borrowing and capital flight were connected by a financial revolving door, as funds borrowed in the name of governments were captured by politically connected individuals and channelled overseas as their private wealth.
Moreover, every dollar added to a country’s total debt generated three to four cents of extra capital flight per year in subsequent years, implying that capital flight was partly a response to the deteriorating economic environment associated with rising debt burdens.
In the last decade, sub-Saharan Africa recorded a “net transfer” (new borrowing minus debt service on past loans) of negative $11 billion (461 billion baht) – that is, more money flowed out of Africa to creditors than returned as fresh lending. The countries of the region spend more on debt service than on health. Despite this haemorrhage, the debt burden grows ever larger.
But there is a remedy at hand. The doctrine of “odious debt” dates from the end of the 19th century, when the US government repudiated Cuba’s external debt after seizing the island in the Spanish-American war. America’s authorities argued that Cuba’s debt had not been incurred for the benefit of the Cuban people, nor with their consent, and that foreign loans helped to finance their oppression. Similar reasoning can be applied today not only to Iraq but to Africa as well.
Properly functioning financial markets require creditors to bear the consequences of imprudent lending. The notion that lenders should always be repaid, regardless of how and to whom they lend, is indefensible. The logic of sound banking tells us that current and future African governments should accept liability only for those portions of public debt that were incurred to finance bona fide domestic investment or public consumption. Invoking the doctrine of odious debt, they could selectively repudiate that portion of the debt for which no such uses can be demonstrated.
This policy poses two practical problems. The first is to determine who should bear the burden of proof in identifying which debt is “odious”. Given the evidence of widespread capital flight fueled by external borrowing, African governments can rightly insist that creditors have the responsibility of establishing that their loans were used for bona fide purposes. If the fate of borrowed money cannot be traced, then they must infer that it was diverted into private pockets.
The second problem is that creditors may withhold new lending from governments that have the nerve to reject odious debt. But today resources flow from Africa to creditors, rather than the reverse. In the short run, African countries will save money by staunching this outflow. In the long run, selective repudiation of odious debt will benefit both borrowers and creditors by promoting more responsible lending practices.
If Iraq’s occupation gives impetus to legal challenges that free Africans from the burden of odious debt then the war will have succeeded in dismantling at least one weapon of mass destruction.
James K. Boyce and Leonce Ndikumana are professors of economics at the University of Massachusetts, Amherst, and senior research associates at the Political Economy Research Institute.