Thu, 03 Jul 2003

Oppressive regimes bring odious debts to poor African states

James K. Boyce and Lionce Ndikumana, Project Syndicate

One side effect of the American/British occupation of Iraq is that it sparked public debate on a dark secret of international finance: The debts taken on by odious regimes.

As Iraq's new rulers debate what to do about the billions of dollars in foreign debts inherited from Saddam Hussein's regime, voices ranging from the charity Oxfam-International to U.S. defense guru Richard Perle are calling for debt repudiation on the grounds that the debts Iraq now bears were contracted to sustain a corrupt, oppressive regime.

Iraq is not the only country burdened by such debts. Across sub-Saharan Africa, many of the world's poorest people struggle with the crippling legacy of profligate lending to corrupt, oppressive rulers.

During his 32-year dictatorship, Congo's former president Joseph Mobutu accumulated a personal fortune estimated at $4 billion, while his government ran up a US$12 billion foreign debt. More of the same in Angola, where last year an IMF investigation revealed that $4 billion disappeared from Angola's treasury over the past five years. It so happens that the Angolan government borrowed a similar sum from private banks in this period, mortgaging future oil revenues as security.

Much of Africa's ill-gotten wealth is now stashed abroad. In a study of 30 sub-Saharan African countries, we estimate that total capital flight for the period 1970-1996 amounted to $187 billion. Adding imputed interest earnings, the stock of Africa's capital flight stood at $274 billion -- a sum equivalent to 145% of the debts owed by those countries.

In other words, sub-Saharan Africa is a net creditor to the rest of the world: its external assets exceed its external debts. The difference is that the assets are private and the debts public.

Statistical analysis reveals that roughly 80 cents on every dollar borrowed by African countries flowed back as capital flight in the same year. Foreign borrowing and capital flight were connected by a financial revolving door, as funds borrowed in the name of governments were captured by politically connected individuals and channeled overseas as their private wealth.

Moreover, every dollar added to a country's total debt generated 3 to 4 cents of extra capital flight per year in subsequent years, implying that capital flight was partly a response to the deteriorating economic environment associated with rising debt burdens.

In the last decade, sub-Saharan Africa recorded a "net transfer" (new borrowing minus debt service on past loans) of negative $11 billion. That is, more money flowed out of Africa to creditors than returned as fresh lending. The countries of the region spend more on debt service than on health. Despite this hemorrhage, the debt burden grows ever larger.

But there is a remedy at hand. The doctrine of "odious debt" dates from the end of the 19th century, when the U.S. government repudiated Cuba's external debt after seizing the island in the Spanish-American war. America's authorities argued that Cuba's debt had not been incurred for the benefit of the Cuban people, nor with their consent, and that foreign loans helped to finance their oppression. Similar reasoning can be applied today not only to Iraq, but to Africa as well.

Properly functioning financial markets require creditors to bear the consequences of imprudent lending. The notion that lenders should always be repaid, regardless of how and to whom they lend, is indefensible. The logic of sound banking tells us that current and future African governments should accept liability only for those portions of public debts that were incurred to finance bona fide domestic investment or public consumption. Invoking the doctrine of odious debt, they could selectively repudiate that portion of the debt for which no such uses can be demonstrated.

This policy poses two practical problems. The first is to determine who should bear the burden of proof in identifying which debts are "odious." Given the evidence of widespread capital flight fueled by external borrowing, African governments can rightly insist that creditors have the responsibility of establishing that their loans were used for bona fide purposes. If the fate of borrowed money cannot be traced, then they must infer that it was diverted into private pockets.

The second problem is that creditors may withhold new lending from governments that have the nerve to reject odious debts. But today resources flow from Africa to creditors, rather than the reverse. In the short run, African countries will save money by staunching this outflow. In the long run, selective repudiation of odious debts will benefit both borrowers and creditors by promoting more responsible lending practices.

If Iraq's occupation gives impetus to legal challenges that free Africans from the burden of odious debts, then the war will have succeeded in dismantling at least one weapon of mass destruction.

James K. Boyce and Lionce Ndikumana are professors of economics at the University of Massachusetts, Amherst, and senior research associates at the Political Economy Research Institute. Their article "Is Africa a Net Creditor?", published last year in The Journal of Development Studies, was awarded the Dudley Seers Memorial Prize for economics.