June 20, 2006
Odious Debts: Loose Lending, Corruption
and the Third World’s
Publisher of Odious Debts Online
European Commission Conference
Export Credit Agencies and Sustainable Development:
Challenges and Opportunities
June 20, 2006
Thank you very much to FERN and to the European Commission. It is an honour for me to be here to discuss this very important subject – how to prevent more unpayable Third World debts being created by the world’s export credit agencies.
In 1991, I published a book called Odious Debts: Loose Lending, Corruption, and the Third World’s Environmental Legacy in which I resurrected a century old legal doctrine called the Doctrine Of Odious Debts to argue that most of the loans made to the Third World in the past half century have been odious. The doctrine says that debts not incurred for the needs or in the interest of the State, but to strengthen a despotic regime, to repress the population, or for interests that are “manifestly personal” would be deemed odious. In such a case, the creditors would have committed a hostile act against the people in extending those loans and would lose their claim to repayment.
I suspect the vast majority of ECA loans, credits, and guarantees to the Third World – which have doubled and now account for 34% of all Third World official debts – could be deemed “odious.”
Why? The evidence of boondoggles made possible by ECA support – the Three Gorges dam in China, the Norwegian shipping deal to Ecuador, the Manantali dam in the Senegal River basin, the Bataan nuclear power station in the Philippines, pulp and paper mills in Indonesia, the Ok Tedi Mine in Papua New Guinea, military exports to Iraq – is extensive and well documented. ECAs back projects that are too risky and in markets that are too “dodgy” for the private sector. Their feasibility studies are prepared by equipment suppliers, their products marked up by as much as 100%. They operate in secret, without effective public oversight. Their business environment – state to state deals in the absence of sunshine laws – makes their operations a hothouse for corruption. Because they insist on sovereign guarantees, and counterguarantees from Third World governments, should purely private deals sour, they convert private corporate risk into public risk.
As such, ECAs are moral hazard machines. Most damning is that their mandates are political, not economic: the mandate of all ECAs is to win contracts for their country’s exporters away from the next country’s, at any cost, without attracting the discipline of the OECD “Arrangement” or the WTO’s “Agreement.” The economic viability of the projects ECAs finance is irrelevant to, and thus not a factor in their support. It is inevitable that the deals ECAs subsidize in Third World nations do not generate the wealth needed to repay the loans.
Now, in perhaps the most stunning acknowledgment of what I would call the greatest financial scandal of the past half century – in which Third World taxpayers have been forced to subsidize northern multinationals by repaying them for boondoggles – the OECD Working Party on Export Credits and Credit Guarantees has issued a Statement of Principles that ECAs should no longer extend credits to “unproductive expenditures” in the poorest and most indebted Third World nations.
And to ensure that these “unproductive expenditures” don’t occur again in future, I would recommend the following steps.
The first step is to call for an immediate moratorium on the repayment of current ECA claims against Third World nations and then, under an odious debt arbitration procedure, conduct public audits of all claims to determine their legitimacy. Many ECA claims for odious debts would fail and be written-off. The legitimate debts that remain – those that can be proven to have been spent in the interests of the people – could then be forgiven if countries are too poor to repay them. Third World nations have been threatened for the past 60 years into honouring illegitimate contracts. This must end and the burden of proof must now be placed on lenders to establish the legitimacy of those contracts.
Holding them to account will embarrass the ECAs, it will certainly inform Northern taxpayers of the waste laid by their ECAs to the Third World’s environment and economies, and it will lead to write-offs of most Third World ECA debts. But it won’t stop new ECA debt from being created in future. As a former American National Security Council member and debt consultant commented when the US Ex-Im Bank went into technical insolvency in 1990 after it set up a special reserve to cover losses on delinquent Third World loans, “not that anybody gives a damn.”
And therein lies the key to the problem of the ECAs – their governments don’t “give a damn” if they lose money. Their purpose isn’t to make money. Their purpose is to push exports, usually for favoured firms in politically important constituencies. They are in the business of patronage, porkbarrel, and cronyism.
Can ECAs be reformed to “do no harm”? Not likely. As long as they are charged with the mandate of subsidizing exports, all other goals – environmental, economic, social, anti-corruption – will remain secondary, unenforceable, and outside of their legal mandate. Oh sure, the OEDC may try to harmonize this standard or that standard upward, but the fact remains, in the absence of tough national laws to stop ECAs from causing environmental harm, corruption, human rights abuses and the like, civil society will be helpless to stop these ill-effects from happening.
For example, Canada’s enabling legislation for our ECA, Export Development Canada, or EDC, was carefully rewritten a few years ago to give it, in the words of a Parliamentary advisory body, “complete, unlimited freedom to make any decision,” that “would be virtually immune from Judicial review” on its environmental decisions. Meanwhile, Canada’s anti-corruption legislation is full of holes and EDC saw no reason to bar Acres International, the first company to be convicted in the landmark Lesotho trials, after it had been debarred by the World Bank, and even though loss of business is about the only effective deterrent to corruption. As for disclosure, one of Canada’s top forensic accounting firms who we asked to review EDC’s financial statements concluded that there was no way for taxpayers to tell which of EDC’s sovereign financing deals was politically motivated. Moreover, to silence critics, EDC now has the extraordinary power to jail and fine anyone who uses the letters EDC in any circumstance that could be characterized as a “business purpose” or an “advertisement” without EDC’s written consent! Under Canadian law, I could be fined $10,000 and jailed for the presentation I am making before you today.
Can ECAs be reformed to “do good”? I would ask, why would we want to? Why would we want to turn ECAs into agents of the Millennium Development Goals, in effect turning them into aid agencies, when we can’t even get the existing aid agencies – the MDBs and bilateral agencies – to stop supporting environmentally damaging and odious projects. What on earth would make us think that we could turn this sow’s ear into a silk purse. It makes me think that perhaps reform of international financial institutions has become a business in itself.
Here is what we know about ECAs. We know that ECAs are modern mercantilist organizations that distort markets, give life-support to smokestack industries, destroy environments, finance dictators against their people, turn private sector risk into public sector debt, and promote cronyism. We know they have no legitimate public policy purpose or economic function. As Eugene Lawson, a former acting chairman and president of the U.S. Export-Import Bank, explained, export aid is a “lousy and costly way to do business.” Robert Richardson, former president of EDC, agreed that concessionary financing is not economical. “If other countries didn’t do it, we wouldn’t either, he said. “Our approach is merely to match others.” Jeffrey Garten, former dean of Yale’s School of Management and Undersecretary of Commerce for International Trade, said “In the best of worlds, governments ought to get out of this business altogether.”
In the absence of any legitimate public policy benefit, and in the presence of overwhelming evidence of harm done by ECAs, here are three steps to protecting future generations: first, force the ECAs to account for their past operations with disclosure and audits of all claims; second, write-off the odious debts they created, and; third, begin the orderly shut down of their operations post-haste.
For more information about the agenda and speakers, click here.