Drop the debt? Whose debt? - STWR - Share The World's Resources

Aid, Debt & Development

Latest

Overview

Key Facts

More Info

News Alerts

Drop the debt? Whose debt?

Drop the debt? Whose debt?

James Waters ~ STWR Member

If you returned home one day to find that your neighbour had bought a car ? a Mercedes ? for themselves, but wanted you to pay for it, you would be understandably upset. If your neighbour had moreover re-mortgaged your house and beat up your family using baseball bats bought with the money, you would be rightly distressed with them and the bank which had provided the mortgage.

Such a scenario is ridiculous in the developed world, but at an international level it has unfortunate parallels in the way loans are made to some developing country governments. Take the case of Democratic Republic of the Congo. Its former leader notched up US$13 billion in external debt for it between 1970 and 1996, the year he left office. The money in large part vanished into the coffers of his friends and family, although there were a few white-elephant projects, his hometown was beautified, and his parties were "it is widely admitted" great events. The US$13 billion debt is still hanging over the heads of the Congolese people, who survive on around US$0.33 per day on official GDP figures.

Ethiopia (US$0.30 per day) clocked up US$9 billion in debt between 1975 and 1991. These years saw a regime which was alleged to be responsible for the murder of thousands of its political opponents, and breathtaking economic negligence. Burundi (US$0.25 per day) saw its debt rise by almost US$1 billion between 1976 and 1988. During that period, corruption and repression of civil society increased sharply. It goes without saying that Congo, Ethiopia, and Burundi were not democracies.

When individuals borrow money, they have to pay it back themselves and often have to advance their own assets as collateral. These two restrictions provide some discipline on their behaviour after borrowing. To remove them invites profligacy on the part of the borrower. Borrowers will borrow funds up to the point where the amount they have to repay exceeds the value they put on the fund's use. When there is almost no cost for the borrower, they will take large sums.

A corrupt leader's excesses may be viewed as a rational extension to international markets of this argument. The leader may use the loans personally, and guarantee them against the future income of their country. The personal risk they face is political, that they will be deposed and charged with fraud. But for successful politicians, such risks may be small, and the costs of borrowing, tiny. It is a rational choice for them to steal as much as possible.

To have a population pay for a leader's abuses is perverse and economically harmful. Knowing that the product of one?s work may be misappropriated is a strong disincentive to work and paying taxes; in developing countries, workers may switch out of the formal sector altogether. The incidence of the debt burden is contrary to economic efficiency, not to mention justice.

When loans have been stolen or used for gross human rights abuses, an efficient course is to compel the original borrower of the fund to repay in full, personally, without recourse to the assets of their country. Where the borrower attempts to repay using the funds of their country, those funds should be deemed unacceptable under the rules of the lender, or the legal system of their country of domicile or main capital source.

The efficiency problem arises because of the lack of democratic representation, not because the government is incompetent or abusive, although it may well be. Where people can vote to remove their government from office or campaign against a government's decisions, they can choose whether the benefits of borrowing are sufficient to outweigh the costs. They have a choice to maximise their utility, in economic parlance.

Where international lenders deal with non-democratic regimes, the choices that the government make only partially correspond with the self-interest of the population. In liberal economics, self-interest is the basis of major theorems of economic efficiency, and is the reason why individuals allow their property rights to be transferred and altered through contracts. When a government is using borrowed funds manifestly against the best interest of the population, efficiency is lowered and can be restored by revoking the government's rights to use a citizen?s property.

A technical issue of considerable practical importance arises when the government is partially democratic or allows limited civil liberties. The issue also presents itself when an autocratic regime attempts to act in the best interest of a population. In these circumstances, some efficiency may be restored by estimating the extent to which government and popular interests coincide. Theft of loans or their repressive use should shift the burden of repayment away from the population and on to government members, in all cases. Moreover, it should be the lender who has responsibility for collecting the debt owed, not the country hosting the regime.

Where a government acts incompetently but honestly in using loans on the population's behalf, then the degree of democracy could be considered. A fully democratic country has the opportunity to remove their incompetent leaders, and so they should be considered fully responsible for their debt. A partially democratic regime may have only moderate opportunity to reject the incompetent, and so their liability, whilst they have some responsibility in the event of loan mismanagement, should be capped. A highly repressive regime should be assumed to have very little scope for mismanagement, as their population cannot reject their ineptitude. Mathematically, the loan liability of the country would take the form of

Zero in the case of loans stolen or used for human rights abuses, A capped amount in reverse proportion to the level of democracy and civil liberties in the case of loans managed incompetently by the government, and A full amount for competently managed loans which benefit the population.

The capped amount for return of incompetently managed loans may be expressed as a formula such as P / x where x is an indicator of repression in the country and P is a financial constant to be decided. The total amount of such loans could be offset by competently managed loans over time. Liberal democracies where x = 0 would be liable for arbitrarily high repayment amounts, no matter what the success of the debt outcomes. The definition of competence and benefit to the population is subjective. Here, a compatible specification would be by reference to the likely liberal democratic assessment of the results, if the country had such a political system.

The scheme, whilst it represents an efficient and reasonable approach to international debt, is likely to be opposed by developed countries who have lent to repressive regimes with alacrity, and by the regimes themselves. Its implementation may occur through general acceptance of the underlying principles, which are hardly morally challenging. It would become the expectation of a country like Democratic Republic of the Congo that they would not have to repay debt taken in its name by corrupt leaders. One route to acceptance could be through a cartel of debt-owing democracies. If lenders decided to enforce repayment of Congolese debt by strong-arm tactics, then the cartel would stage a form of collective action, by refusing to pay all debt owed until the Congolese debt was pursued not against the Congolese people, but against the estates of its former leadership.

The proposal is actually very limited in its moral scope, and concerns mainly economic efficiency. If it was to include morality, it could reasonably be claimed that lenders who have financed repressive regimes should be considered to be complicit in their crimes, and asked for recompense. It could say that lenders whose loans helped to blacken the international reputation of poor states and prop-up kleptocracies have taken part in the pre-wash phase of money-laundering. But this proposal does not concern itself with morality. It simply asks dictators to buy their own Mercedes and their own baseball bats, rather than their victims.