Why we should repudiate not cancel odious Third World debt

By OKIYA OMTATAH OKOITI
Published July 25, 2009

Though there are compelling moral arguments to cancel crippling third world debt, they don’t amount to much when they appeal to pity and not to enforceable law. Furthermore, debt relief will not solve the problem of third world poverty if it does not address the root causes.

If industrialized countries really wish to eliminate third world poverty, they must among other things reform oppressive world trade laws skewed in their favour, drop subsidies that insulate and distort world markets, strengthen their efforts to curb graft, and help poor countries crack down on corruption by recouping their stolen assets stashed in Western banks.

Some of the “poorest” indebted nations are also the richest in natural resources, with industrious and well-educated work force. Kenya, Zimbabwe, DRC, Nigeria, and Tanzania experience poverty because their governments abuse their resources. Cancelling debt will not automatically improve their situation. It might even give bandit governments the funds to maintain illicit power.

Debt cancellation might encourage poor economic policies; let irresponsible lender and borrower governments off the hook, while conferring legitimacy upon corrupt regimes and their financiers. Most of debts are no more than an international fix, in which developed nations parcelled out third world resources to themselves to corrupt third world elites, or propped corrupt governments in order to further their “strategic” interests.

Writing off questionable debts without determining their legitimacy allows corrupt creditors to shrewdly conceal their complicity in the misuse of public funds by despotic rulers, then expect to be lauded for having contributed to the elimination of poverty through debt cancellation.

Blanket cancellation also means a country is not creditworthy. As Stephen Spath, a global equity analyst put it, “Forgiving the existing debt of poorer nations is really a quick fix that serves to sully the already negative impression the international capital markets have of the world’s poorest nations.”

Even if the debts are written off today poor countries still must borrow. Their inability to service their obligations today will affect the cost of their borrowing in the future. International lenders will be reluctant to lend to them or do so at very high rates due to perceived risks.

To avoid this, the third world should reject patronage by wealthy nations, stop seeking mercy from those who fixed them in the first place, and demand justice by holding both creditors and corrupt local officials to account. There is nothing to be forgiven-  looters on both sides just have to pay. Graft is a two-way street and the complicity of industrialised nations in third world corruption – the greatest underwriter of poverty – is well documented and must be punished.

Under international law, countries have a right to repudiate odious debts contracted without the consent of the people, not spent in their interests and creditors were aware of.

For example, demands that the Congolese repay Americans and those who helped Mobutu oppress them have no basis in law under the Doctrine of Odious Debts, which was created to further international finance by limiting the ability of governments to repudiate debts.

In 1927, Alexander Sack, a Paris-based Russian legal scholar on public debts, wrote: “If a despotic power incurs a debt not for the needs or in the interest of the state, but to strengthen its despotic regime to repress the population… this debt is odious for the population of all the state… This debt is not an obligation of the nation; it is a regime’s debt, a personal debt of those in power and consequently falls with the fall of this power.”

Most countries inherit the odious debts of former regimes for fear of political pressure or penalty by creditors, and the fact that translating a clear moral issue into a technically case in international law is a complex process. But there are clear precedents for the repudiation of odious debt such as Mexico (1867), Cuba (1898) and Poland (1919).

The United States repudiated Cuban debts consisting of Spanish Government loans secured on the island’s revenue. The Spanish asserted a principle of international law that state obligations belong to a land and its people, not to a regime. The Americans replied that the debt was “imposed upon the people of Cuba without their consent… was expended in a manner contrary to Cuba’s interests… (Since)

Cuba had no voice from the moral point of view; the proposal to impose them upon Cuba is equally untenable.” As such, the Americans argued, these debts could not be considered Cuban debts nor be binding on a successor. As for the lenders, the Americans replied that “the creditors, from the beginning, took the chances of the investment.”

Since under international law, citizens need not repay those who financed their oppression, our government should stop sleeping on the job and take the bull by the horns. If any part of Kenya’s debt is illicit, the government should establish a judicial debt arbitration panel composed of respected local and international jurists under internationally recognized rules of arbitration to vet claims by creditors and pay the genuine as we repudiate the odious. The money to pay off our genuine debt is there. What lacks is the political will to end corruption.

The alternative – asking for debts to be cancelled without establishing their legitimacy – is a grave mistake. Such a move doesn’t augur well for our future credit worthiness, and legitimises odious debts as debts of the local people, providing the guilty negligent lenders and corrupt borrowers with moral victory – a bailout that lets them off the hook.

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