Debt relief: avoiding the problem in the future

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.

2 thoughts on “Debt relief: avoiding the problem in the future”

  1. an intersting and sensible sounding idea, but doesn’t it leave the would-be-doing-gooders caught on the same fork as ever – i.e. the trade off between propping up odious regimes or cutting them off and leaving their people to suffer.

    Nothing would be easier than to refuse to aid countries with odious governments, but, at least as I understand it, aid agencies and financing bodies often end up co-operating with those governments in hope of helping their people and/or try to promote reform. Refusing to finance such governments is just a variety of refusing to aid them, with the same trade off, is it not?

    I am confused by what is meant by “not letting this situation happen again.” I understand what it means for a country to be overburdened by debt, but excepting cases of outright corruption and misappropriation, it is a difference of degree, not of type. Surely poor governments – heck what am I on about, all governments – need to take on debt to finance infratructure projects and other investments, so it is perfectly sensible to see poor nations borrowing from rich (or institutions like the World Bank) and hence to see “millions of dollars paid by poor countries to the rich”. I’d like to see some clarity (from those campaigning for debt relief) about what financing mechanisms are envisaged in the future, and what the “cost” of debt forgiveness is in terms of the cost of capital / access to captial for poor nations in the future.

  2. N.B. i don’t want to give the impression I’m against debt relief, I’m not, I just want to see both sides of the cost/benefit ledger

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