The welcome announcement this weekend of one hundred percent debt relief for Heavily Indebted Poor Countries (HIPC) has prompted some discussion of whether we need arrangements to prevent the accumulation of debt in future. Debt relief skews development assistance away from priorities by shifting resources to countries that have been managed badly (and hence run up unafordable debts); and countries may find that benefiting from debt relief today makes it more difficult for them to get credit at affordable rates in the future. Furthermore, achieving full debt relief where it is both necessary and fair has taken a very long time, during which millions of dollars have been paid by poor countries to the rich. Today’s Guardian suggested this:
Surely, rather than rich nations sitting as judge and jury on the debts of the poor, it should be possible to establish an independent arbitration system to stop this situation ever developing again.
The establishment of an arbitration committee to regulate who can borrow does not sound practical or desirable. Here is another possible solution, focused on the particular problem of debts incurred by illegitimate and corrupt governments (often called "odious debts") – such as those accumulated by the apartheid government, or by the Government of Mobuto Sese Seko of Zaire. An institition would be nominated (perhaps the Security Council) which has the power to designate particular regimes as "odious". Countries such as the UK and US would change their laws to prevent the legal enforcement of any sovereign debts of those countries, for debts incurred after the regime was declared to be odious. Lenders would know that any loans to odious regimes could not be enforced or collected, and so lending would largely dry up. Such a mechanism (which has been proposed by economists Michael Kremer and Seema Jayachandran) would shut down access to credit for corrupt regimes (unlike trade or financial sanctions, it would be self-enforcing); and it would prevent the accumulation of debts by corrupt countries that might have to be forgiven in the future, with the consequential damage to credit worthiness of the government and skewing of aid resources.