Jehangir Pocha, CEO and Editor-in-chief of NewsX TV, New Delhi, writes:
In 2005, Harvard’s Michael Kremer and Seema Jayachandran of Northwestern University came up with a simple and neat solution to one of the world’s greatest economic problems – crushing national debt. Jayachandran and Kremer call it odious debt. Yes, unnecessarily literate, even archaic. But that’s how academics show their muscle.
Relevant seven years later: Ask any Greek. Or Italian. Or American . . .
Kremer and Jayachandran, who are also Fellows at the Center for Global Development in Washington, have rightly identified excessive debt as one of the central reasons nations are forced to cut social services and public spending. Ask any Greek. Or Italian. Or American.
The larger problem, as Jayachandran and Kremer point out, is that often a nation’s debt is run up under circumstances that are morally cumbersome, if not reprehensible. In such cases, they ask, isn’t it only fair to cancel such debt?
Is Iraq really liberated if its people are still chained to the debts of their oppressor?
Consider Iraq. Should Iraqi citizens who suffered and toiled under Saddam now have to suffer and toil to pay off the debts the dictator accumulated to buy his (Western) weapons and build his palaces? Is Iraq really liberated if its people are still chained to the debts of their oppressor?
Take South Africa. The apartheid regime took $23 billion in loans from Western banks, most of which was spent on the white population, save that which was spent on policing and terrorising the blacks. How is it acceptable or fair at any level to now ask black South Africans to repay this debt?
This is now the situation that faces much of the Arab world, as well as several Latin American, Asian and African countries.
Jayachandran and Kremer say it is time the world formulated a legal response to such “odious debts” brought on by war, dictators and such exceptional circumstances.
The argument is not new, but until now one had found a way to avoid the moral hazard inherent in such a move. After all, no matter how morally compelling the argument for cancelling odious debt, there is always the danger that some governments will mis-use it.
Bankers in London, New York, Zurich, and Paris line up to lend oppressive regimes money – at extortionate rates
This is where Kremer’s and Jayachandran’s genius shows up. Their proposal is as simple as it is great. They propose that whenever the international community identifies any particular regime or ruler as a pariah or illegitimate, it should also declare that any and all future contracts with that regime/ruler would be non-transferable to the state.
For example, if President Assad dictatorship in Syria was declared a pariah government, any money lent to Assad’s regime would automatically lapse if the regime was toppled. Assad’s debt would not pass on to the Syrian state that would succeed his tyranny.
This is essential to control sleazy bankers. When nations become pariahs, their aid and trade dry up. So bankers with addresses in London, New York, Zurich, and Paris line up to lend them money – at extortionist rates of course. The bankers become the pariah regime’s lifeline, often extending its lifespan – and the misery it speads – by decades.
Bankers don’t care much for human rights. But they do care for profit.
So whereas they once felt smug in the knowledge that their loans to dictators would have to be returned by their people, Jayachandran’s and Kremer’s proposal would make them think twice about funding dictators.
Without this funding, dictators and rogue regimes across the world would be squeezed and probably (or least hopefully) have their end hastened. Even support to dictators not yet declared rogues simply because they serve Western purposes, like Saddam Hussein in the 1980s, will find it hard to raise money because bankers will never be sure when the tables will turn and an ally become the enemy, like Saddam in the 1990s.
The work of Professor Jayachandran and Kremer could substantially change the world if their idea is adopted widely. Not only would it make Western bankers wary of bankrolling tyrants, it would allow newly liberated countries and people the freedom to start their new lives with a clean slate.
Read the paper here.
Read Jehangir Pocha’s blog here.