Bill Day
San Antonio Express-News
December 27, 2003

The United States, almost in spite of itself, has managed to convince European countries to forgive at least a portion of Iraq’s foreign debt.

This was a contentious issue, and the effort was nearly derailed by the Pentagon’s announcement that countries opposing the war would be prohibited from bidding on rebuilding contracts.

But in the end, special envoy James Baker won the cooperation of the European countries.

Otherwise, Iraq would be trying to cope with a shattered infrastructure and scrambled economy while repaying debt estimated between $350 billion and $500 billion.

The country probably can only muster a gross domestic product next year of $30 billion, so the debt level was beyond burdensome.

What largely was ignored during the debate, though, was that a good portion of Iraq’s debt is what political scientists call “odious” debt – amounts run up by despots for use in lining their pockets, building ostentatious palaces, filling jails and the like.

A helpful aside: Under international law, the debts and liabilities of one regime are assumed by whatever regime that follows it. Russia, for instance, assumed $120 billion in debts from the old Soviet Union. So the new regime in Iraq – whatever form it may take – technically is responsible for Saddam Hussein’s spendthrift ways.

Forgiving Iraq’s debt is one thing, but the United States should have worked with the United Nations to define exactly what is odious debt.

Then the U.N. could declare certain regimes to be running up odious debt and stipulate that such debts wouldn’t have to be repaid in the event of a regime change.

That would accomplish two things.

First, it would keep a democratically installed government from suffering the debts of its totalitarian predecessor. And it would help cut off funding to despots.

After all, who would loan money to a dictator if there’s a good chance the money wouldn’t be repaid? Any such loans would have to be made at prohibitively high interest rates.

As Harvard economists Michael Kremer and Seema Jayachandran have pointed out, choking off foreign loans to dictators would work better than simple economic sanctions.

“Profiteers have strong incentives to evade trade embargoes,” they wrote in the Financial Times, “but creditors would not want to flout a loan embargo because they would risk not being repaid.”

Economists caution that a lot depends on how an “odious debt” is defined. It could keep Texas companies from doing business with Cuba, for example, or could even discourage the democratization of China, since businesses would lose billions if China’s communist regime were declared odious.

That’s why – as much as the U.S. hates to think about it – the U.N. is needed.

Internationally acceptable guidelines could stifle the flow of money to terrorist states, for instance, while allowing commerce between bona fide governments. It’s a market-based solution to a long-vexing problem, and it would work.

Bill Day is the editor of Business Express.