Harvard conference considers odious debt proposals

by Eurodad

3 February 2009

In mid-January a conference was organized at Harvard University to discuss a proposal on illegitimate debt. The meeting explored the possibility of getting political acceptance for a proposal that a successor regime cannot be prosecuted for failing to service loans that were declared odious by an appropriate international authority such as the UN Security Council before the loan was agreed. This idea was picked up last year in the Obama-Biden campaign white paper on economic development which stated: “and as president, Barack Obama will lead a multilateral effort to address the issue of ‘odious debt’ by investigating ways in which ‘loan sanctions’ might be employed to create disincentives for private creditors to lend money to repressive, authoritarian regimes”.

The conference was organised by Michael Kremer, Gates Professor of Developing Societies at Harvard and Seema Jayachandran, Assistant Professor Department of Economics, Stanford, who developed a proposal for such loan sanctions in a 2005 paper. At the meeting, representatives from many institutions discussed issues that the Obama administration may find useful on this topic. The group of 25 participants included representatives from universities and think tanks such as, Center for Global Development, Brookings Institute, Peterson Institute for International Economics, the Century Foundation and the World Bank. In addition some decision-makers and civil society group were present, including Jostein Hole Kobbeltvedt of Norwegian Church Aid, a Eurodad board member.

All participants in this meeting (held under Chatham House non-attribution rules) agreed that the status quo on illegitimate debt and responsible lending are insufficient. Views differed about the merits of the proposal and on the possible mechanisms to prevent governments ‘plundering the future’.

The proposal, in its current version, would primarily serve as a part of a sanctions regime approach, rather than as a comprehensive mechanism to deal with debt. Loan sanctions might serve as a strategy to target an undemocratic regime, with lesser costs to the population, compared to traditional trade sanctions. However, it was recognized by several participants that the proposal might not serve as a comprehensive mechanism to deal with broader development goals, thus reducing the potential incentives for developing countries to support such a mechanism.

Several called for consideration of a broader concept of illegitimacy, arguing for example that the historic evolution of the odious debt doctrine, including the US-Cuban debt and the Tinoco cases, is based on how the loans had been used, not simply on the characteristics of the regime. The ex ante declaration of ‘odious’ regimes is thus limiting.

The Jayachandran and Kremer proposal is based on the assumption that only through an ex ante declaration of odiousness would it be possible to avoid increasing borrowing costs for all developing countries. This perspective was shared by a number of participants. However others challenged this view. Hole Kobbeltvedt emphasized that any mechanism that does not allow for ex post assessment could represent a ‘carte blanche’ for irresponsible lenders.

Some participants argued that if the objective of the proposal is to not only assess the ‘odiousness’ of the entire regime, but also to assess the policies pursued, one should develop assessment criteria or warning signals that could be included in existing mechanisms such as the World Bank’s CPIA (Country Policy and Institutional Assessment) or the IMF’s Article IV consultations. Others cautioned against any mechanism that would be based on the assessments carried out by a lending institution.

In terms of how to move the proposal forward, one participant argued that building ‘coalitions of the willing’, coalitions made up of governments which want to work together, would be the most feasible approach. Many countries, for example China, are unlikely to support such a proposal in the UN at this time. Other said that a mechanism with only partial support would lack legitimacy in the international community. Better would be to base it in the UN, preferably the UN Security Council. Others said it would be effective to get a Paris Club agreement on loan sanctions against one country, as the ‘comparability of treatment’ would ensure compliance from all creditors.

The current financial crisis might be an opportunity to address systemic issues in international finance and promote more comprehensive solutions, including an alternative debt work out mechanism that can address both unsustainable and illegitimate debts.

The Jayachandran and Kremer proposal suffers from several weaknesses, including its narrow focus on odious regimes, its rejection of ex post assessments of illegitimacy and its trust in the Security Council being able to serve as an appropriate decision making body. Implicit in much of the discourse at the Harvard conference was the notion that the primary problem lies in the characteristics of the borrowing government and not with the lender.

Michael Kremer, Gates Professor of Developing Societies at Harvard and Seema Jayachandran, the conference hosts and authors of the original paper, were open to discuss the limitations of their proposal and sympathetic to some of the criticisms raised. A ‘task force’ is now likely to be set up under the auspices of the Center for Global Development which may lead to this proposal rapidly gathering political momentum in Washington D.C. This offers great potential to move forward politically on illegitimate debt. The proposal that is currently under discussion is, however, a very narrow concept of odious debt and a limited measure for dealing with it. It is a first step towards recognition of a broader concept of illegitimate debt, including demands made after the lending. If the Security Council recognizes the odious debt doctrine and is able to declare regimes odious ex ante, it might be politically difficult not to give in to civil society demands for a more comprehensive approach.

A ‘task force’ on illegitimate debt is likely to be established under the auspices of the Center for Global Development. The financial crisis and the possible emergence of a ‘new’ debt crisis could provide a political appetite for more comprehensive solutions than what is currently proposed by Jayachandran and Kremer. The Eurodad Responsible Finance Charter, launched one year ago, provides such a comprehensive solution - a set of clear (process related) criteria for what constitutes responsible lending and borrowing. If adopted internationally, it would discipline all lenders and borrowers, not just the very few likely to be targeted by the ex ante mechanism. A recently launched UNCTAD project on responsible lending and illegitimate debt provides one mechanism to increase discussion of these proposals among decision makers from different countries.

Published by Eurodad (http://www.eurodad.org) based on a report by Jostein Hole Kobbeltvedt, Norwegian Church Aid.