Odious Debt, Odious Credit, Economic Development, and Democratization

I INTRODUCTION Consider an all-too-common story. A dictator of a poor country borrows liberally from international donors, nominally to fund development projects. Some fraction goes to development projects, but a larger share ends up in the hands of the elites who are part of the dictator's governing coalition or in the dictator's Swiss bank account. At the same time, the dictator is misgoverning the country, not undertaking health and educational expenditures that could enhance the well-being of the citizens of the country, further enriching himself and his supporters from domestic sources. As the foreign debt and the dictator's personal riches add up, it increasingly looks as if the debt cannot be paid. Lending stops, the dictator's government collapses, and the country struggles to establish new democratic institutions. The new democracy tries to make the debt payments but finds that they draw away from necessary spending on social services to meet pent-up demands. The government becomes unstable; the democracy waivers and eventually collapses. In this story, the dictator has taken not just the present but also the future, dooming the country's democratic institutions in their infancy. Why then should the new democratic government pay the dictator's debts, even those made in the name of the nation? To put it in more concrete terms, why should the citizens of Zaire be saddled with the debt of Mobutu Sese Seko, under whom the country accumulated over $12 billion in sovereign debt, while Mobutu's personal assets reached $4 billion? Why should Filipinos today be responsible for the $28 billion in sovereign debt left by Ferdinand Marcos, who left his heirs a personal fortune of $10 billion? The standard international-law response is that states, not governments, are responsible entities. (1) So, for instance, when a country signs an international treaty, it is not the government but the state that is bound, and the obligation will stand until a subsequent government formally exits the treaty. Exit is presumed to be costly: a government that "repudiates" earlier treaty obligations will suffer reputational harm in its international relations. (2) This general background norm of international law applies as well to debt: a government can announce that it is renouncing debt, but it will suffer severe reputational harm in the debt marketplace, much as a government that repudiates public international law obligations suffers a reputational harm. In addition, assets of the repudiating state can be seized abroad, so there will be real enforcement of the obligation. There is, as yet, no form of sovereign bankruptcy to allow debtor nations to escape obligations. (3) A. The Odious Debt Problem At times, major powers--invoking what has come to be known as the doctrine of "odious debt"--have argued that new regimes should not be responsible for debts incurred by old ones. After the Spanish-American War, for example, the United States argued that neither Cuba nor the United States should be responsible for debt incurred by the colonial Spanish government. In the famous Tinoco Arbitration of 1923, the panel suggested that credits knowingly extended to a country for a dictator who used the money for his personal purposes should not be recoverable. (4) Recently, the fall of Saddam Hussein in Iraq has prompted renewed calls for reviving this doctrine and creating an odious debt exception to state succession. (5) Despite these incidents, the international community has not yet adopted a general doctrine of excusing odious debts. Rather, the default rule is that sovereign debt is to be repaid, regardless of the circumstances under which it was contracted or for which the debt was used. Whereas international powers may act in an ad hoc way to assume or restructure sovereign debt of favored countries, no general off-the-shelf doctrine is available to be applied in a neutral manner across cases. …