Asymmetrical Information

Not to mention how badly this has damaged the marketability of those T-72's. :)

"...what you do need is a functioning economy in which property rights and obligations are sufficiently well defined, and markets are sufficiently free, to allow people incentive to build up businesses, invest in their homes and families, and otherwise build a better life for themselves and their country."

Exactly, which is why we need to keep the UN at bay to the extent possible - no way they have an understanding of this.

Jane, what is your opinion of the idea Glenn Reynolds has been floating of setting up a system whereby the Iraqi people have direct equity interest in a portion of the oil revenue? Apparently Alaska does something similar with oil revenue.

I have (had?) a post in the works on exactly this topic. If the US were to lead the debt reduction charge now, the press would spin it as retaliation against France and Russia, which would get ugly.

The US is clearly going to foot the bill for much of the reconstruction of Iraq. Instead of just paying, we should structure that aid as debt and then use our position as a leading creditor to lead an effort to erase all debts, including ours. Better yet, plant the notion amongst the anti-globalization folks and let _them_ lead the charge to get Iraq's debt forgiven.

-- Erik

Don't forget the Chinese.
The only thing is, it seems to me that both Russia and China really need the money to help their own populations and some of the social problems they are facing.
Is there a way to determine which debts were incurred illegally (such as in violation of sanctions) and just cancel those?
For example, if Iraq obtained MiG-25s from Russia before the sanctions were in place, I think that debt should be paid. The MiG-25s weren't used directly to oppress the people, and they DID help defend the people from Iran and/or other gulf states.
It truly is a difficult issue, I don't disagree with that.
I'd like to make sure no one gets rewarded for childish behavior, but neither do I want to engage in childish retribution. The question is, what is childish, and what is justified...
I don't know.

Let me be clear: I'm not advocating repudiating the debt because I want to stick it to the French and Germans. I'm advocating repudiating the debt because I think that in this case, it's neither feasible nor morally required for the Iraqi people to pay it. If that means that less capital gets allocated to dictatorial regimes, I won't cry too hard.

The problem with the UN, as I see it, is that some governments are rightful representations of their people(USA, France, Britain) and others are not ( Iraq, North Korea ). We need a way to differentiate the different nation memberships in the UN. Democracy is really the key. Debts should only be transferred to a nation as a whole if fair and free democracy is present. Otherwise the debt is to be paid by the regime itself, a much riskier proposition.
A UN-like organization could classify the different governments, perhaps the US could offer its own classification. Lenders would then prefer lending to democracies or regimes that had good plans of becoming a democracy.
Granted this does not help the decision making process in this circumstance, but this circumstance is fairly cut and dry, isn't it? If you lent money to Sadam, you are lucky all you are losing is your money.

I am one who would argue that reducing the borrowing of (most) developing nations is a good thing. As such, it seems to me that the doctrine of odious debt would be good. You write:

developing nations will generally borrow up to -- and beyond -- the limits of their ability to make the interest payments. And banks and other countries generally lend as long as the interest rate matches the risk. Thus, the countries won't have any less debt to pay off -- they'll just get less cash up front. Possibly a good thing for the world economy, but not so much for the countries in question.

I am fine with that, actually. The point here is to examine what effect borrowing by countries has. IMO, for most countries it is not, on net, positive. Borrowing (and gift aid as well) allows corrupt regimes to keep on being corrupt. So the less they borrow, the better, not just for us, but also for them - that is, their citizens. Clearly the men running the corrupt states themselves will be hurt by odious debt - but that's a good thing. Further, they will have the right incentive structure to liberalize their economy: the more they can structure the economy such that they will not be removed from power (and odious debt invoked), the lower their interest rate will go. The structure that works is, of course, capitalism.

Comparisons to South Africa are strained, Megan, as South Africa's transition was not nearly as abrupt a paradigm shift as I am confident we'll see in Iraq. Pretoria wasn't cleansed of the National Party, nor was South Africa's bureaucratic structure extensively altered; quite a lot of "power-sharing" was undertaken with the Government of National Unity (including participation with the infamous National Party), and the old regime has since been dismantled piecemeal.

It's unthinkable that Baghdad will not be subject to anything less than determined de-Ba'athification and, if the more Western-inclined interim leaders have their way, vastly different infrastructure will be built up. State's insistence upon utilizing "existing bureaucracy" is about as likely to happen as their 2001 outreach to "moderate Taliban," especially in light of the past few weeks' events turning in the favor of the White House's anti-internationalists and anti-Arabists.

So I would characterize the transition from police state to free republic as two governments far enough away from one another to be two distinct entities, whereas South Africa was a transition of power and reconstitution within what was essentially the same body.

It's going to be - and ought to be - one big default.

We are on the trail of an "odious debt" discussion here. The conventional view is that repudiation of "odious debt" makes borrowing harder, so should not be done under any circumstances. That is the message South
Africa got on the way to majority rule. The alternative, being considered by Iraqi opposition forces, is the same thing coming from the other direction. If creditors allow a reduction in principal (66% in the case of Yugoslavia), then it doesn't hurt access to credit because there was no repudiation. The tricky part, of course, is how the debtor gets the creditor to make this offer without going through some hint at repudiation. That is where the intervention of the US Treasury (as in the case of Brady debt) comes in handy.

Now, what about reparations? As I understand it, by far the largest obligation facing Iraq is war reparations owed Kuwait. By reputation, reparations are a terrible thing, having played a part (a predictable part, Mr Keynes would say) in leading to WWII. Presumably, the odds of Iraq making a Hilter-like play for near by real estate have now fallen considerably. However, from the ethical, rather than political, perspective, ending reparations payments is an easy call. It was obviously Saddam Hussein who called the shots when Kuwait was invaded, so reparations qualify as "odious" in that they were not incurred for the benefit of the Iraqi people.

I'm not all that confortable with the notion that odious debt repudiation is off limits, as it allows lenders far to much scope for claiming amoral ground in lending practices and burdening one party (citizens) with the debts incurred by another (the dictator). The argument that all forms of debt repudiation are bad leaves us with a big old moral hazard problem.

By the way, the qualifications for a successful democracy with which this post started -- they could be mistaken for a personal statement of political philosophy unless backed by example.

One more thing - "developing nation" is a pathetic, postmodern euphemism for "a country that stumbles about because most of the gross domestic product is shunted to the head of state," sort of a write-off for nations that are poor precisely because they're not (at least effectively) free.

The term's use and the sidecar illogic needs to cease. Thankfully, I think the next decade's goings-on in the Near East might put paid to it.

It is not a good idea to take away people's land and give to to other, more politically favored people. If the government can do it once, what's to keep it .... This is one reason most "land reforms" have been failures.

But the land reforms in Japan and Taiwan are generally considered successes. They took place in such special circumstances (Japan's defeat in WW II, Chiang's fleeing to Taiwan) that no one expected them to be repeated.

I think this war is a special enough circumstance that invoking the doctrine of "odious debts" here won't make people think it will invoked in a lot of other cases.

Though perhaps it would be a good thing if the Robert Mugabes and Charles Taylors of the world weren't able to borrow anything.

Though perhaps it would be a good thing if the Robert Mugabes and Charles Taylors of the world weren't able to borrow anything.

That's what I'm trying to say. Those jokers need to be dropped Noriega-style, not given legitimacy and more loans.

I think the coalition is more likely to be sensitive to this problem of, for example, pay checks than the UN - witness Kosovo (again) where truck drivers for the UN make more than local neurosurgeons - after four years, during which the UN seems to have accomplished nothing other than putting up their own HQ and driving the market for real estate and food out of sight.

Lebanon, Palestine, Korea, nearly all of Africa from Morocco to Cape Horn - what has the UN accomplished (outside humanitarian aid, eg WHO and UNICEF)?

Oh, on the point of debt relief looking like the US taking a shot at France and Russia - Russian finance officials were on news wires today saying that they expect some debt forgiveness to be offered. They intend to be part of the talks, but know that it has to happen. The French seem most interested in being involved, rather than in being made whole on what they have already lent. This goes back to the "why is France/Syria behaving that way" discussion. If we start out with a bunch of simplistic, ungenerous assumptions about those with whom we disagree, we are unlikely to understand their behavior very well. If one is headed for a carrier in diplomacy, perhaps its best too put aside patterns of thinking that are unhelpful. By the way, nobody holds "most of the debt." France is down for about $9 bln (plus unpaid interest, the $9 bln figure is 1999, I think), Russia for $8. That is a fairly small share of Iraq's total foreign debt. It is also inaccurate to say "will be repudiated" when such decision are yet to be made.

The original post suggests a bit of inflation could be a good thing, redistributing away from bad guys. That is only true if bad guys have held their ill-gotten bootie in domestic currency rather than real property or foreign assets. The pattern in ill govern economies is for those with access to property and foreign accounts to hold very little wealth in domestic financial assets. Thus a bit of inflation at best would hit lower level bad guys, while also hitting any good guys with a bit of spare cash and no access to real property or foreign assets.

"Though perhaps it would be a good thing if the Robert Mugabes and Charles Taylors of the world weren't able to borrow anything."

Absolutely. One advantage of repudiation is that the subsequent drop in lending will largely be loans made to odious dictators. I'm looking for the downside here.

Let's look at this from a due diligence point of view: The creditors knew, or should reasonably have known, that the business plan for Iraq, Inc. included total alienation of the customer base (oil markets and Iraqi people), was based on a strictly declining asset (oil reserves), attempted hostile takeovers of competitors without regard to cost or returns (Iran, Kuwait), and that the management structure was defined by vicious internecine fighting (including assassinations!) and complete lack of delegation of essential responsibilities.

Put in ordinary business terms, the Hussein regime was a sick organization that could never hope to be financially successful. The creditors have to accept responsibility for letting their greed blind them to an obvious pyramid scheme.

Since this is a "double transition" (dictator-
to-successor-regime, state-socialism-to-something-
less-awful) we should analyze the debt as Jane
first considered (phones, say, which even a free
econonomy might have bought; versus WMD's) and
pay off only the non-odious part. The rest
should be summarily repudiated. If this makes
it harder for "developing world" (sometimes
actually "de-developing world... look at Zimbabwe/
Rhodesia) *governments* to borrow, good!

Only individuals or private firms should borrow,
and lenders should set terms appropriately
(imagine Saddam Hussein borrowing against his
salary, rather than obliging the State of Iraq...
Hussein is dead and bankrupt now, and we would
not need any "doctrine of odious debts" to
absolve the Iraqi people of paying off his
credit card bills, would we?). Among other
benefits, this would improve lenders' incentives
to analyze credit risk more carefully.

I say this because I can only think of two or
three really legitimate reasons for governments
(credit based on taxing power) to borrow at all:
wars (losers usually default!), roads, maybe
dams & canals. All the other reasons are bad
reasons: Telephones? that's just (failed)
socialism... AT&T used private credit to give
the US better phone service than any European
PTT supplied. Schools? You mean "State
Indoctrination Centers for Children?" The
gov't can issue school vouchers and school
operators can borrow privately. Sport
stadiums? Why should we indulge rent-seeking
team owners? Dodger stadium in L.A. was
privately financed. State pension schemes?
Yeah, right... I don't want to label any debts
odious 'cause it might make gov't Ponzi schemes
harder to finance!

Considering public-choice problems, corruption,
and government sloth, practically all government
debts are "odious" to some degree. Since (as I
wrote) some government borrowing is legitimate,
and some more is merely deplorable, even I would
not want to repudiate all gov't debts. BUt I
wouldn't shed a tear for European (gov't owned!)
banks that loaned money for Saddam's nerve-gas
factories.

This goes back to the "why is France/Syria behaving that way" discussion. If we start out with a bunch of simplistic, ungenerous assumptions about those with whom we disagree, we are unlikely to understand their behavior very well. If one is headed for a carrier in diplomacy, perhaps its [sic] best too [sic] put aside patterns of thinking that are unhelpful.

Perhaps I'm misunderstanding, but this comment sounds aimed at Megan personally. That seems discourteous on Megan's blog, especially when she's openly asking to be enlightened. From her French post: "This is not, my pets, an invitation to bash the French.... Why did they do this? What am I missing?" To my view, she's not starting out with assumptions at all, much less simplistic, ungenerous ones.

According to Alan Krueger, in his NY Times column last Thursday:

" Iraq's total potential obligation — from war-related compensation claims, foreign debt and pending contracts — is $383 billion, according to Frederick D. Barton and Bathsheba N. Crocker of the Center for Strategic and International Studies in Washington. ....

" To gain some perspective on the crushing financial burden facing the Iraqi people, note that with a population of 24 million, pending obligations work out to $16,000 for every man, woman and child. The Central Intelligence Agency estimates, probably optimistically, that Iraq's per capita gross domestic product is $2,500. So, for the average person, financial obligations exceed income by a ratio of more than six to one."

and:

" Relieving Iraq's debt crisis is a particularly delicate diplomatic challenge, however, because Russia — with its own economic problems and veto on the Security Council — is owed $64 billion by Iraq."

Re: France, I don't think we should give the French the benefit of the doubt here, since there is not much doubt at all really: A cursory study of French mid-east/third world policy reveals that it is cynical and mercenary, despite pretensions to the contrary. In Iraq, France has sold billions of dollars in armaments as well as nuclear technology and basically hocked its security council vote for sweetheart infrastructure/oil deals. Acknowledging that is less a question of revenge than justice.

That being said, I think that it is important to distinguish debt incurred for infrastructure (electricity, water, telephone systems, etc.) that has had and should continue to have a benefit to the Iraqi people and debt for arms, palaces, etc.

An equally thorny question is that of recognizing or disavowing ongoing and future contract commitments. A system for review, scrutiny and potentially rejection or renegotiation of certain contracts - in particular, infrastructure including oil - with the Hussein regime should probably be put in place (hopefully not by the UN). Of course, the same kind of caution applies here as in the case of disavowing debt.

One discussion I have not seen advanced is the possibility of reconciliation by forgiveness of debt in exchange for an agreement to indemnify. Creditors of the previous regime, and their lenders whose businesses may have aided the prior regime in perpetrating human rights abuses in Iraq for which they might be later judged liable could earn indemnification by debt forgiveness.

"There's been a lot of talk about the doctrine of odious debts, which says that when a totalitarian regime is toppled, the new state shouldn't be responsible for that portion of the debts that was used to the detriment of the citizens of the country...

"But there is a problem with the doctrine, which is that there is currently no body or set of criteria charged with deciding whether debts are odious..."

Well then let's advance the notion by providing a concrete definiton -- say, "arms sales" made to nations ruled by dictators who invade neighbors, and/or made in violation of UN sanctions.

From the guestimates I've seen, these would amount to a pretty good start for Iraq. And I can't wait until the Russians, Germans and French come forward with their invoices and sales contracts to prove their claims in hard numbers. ;-)

"If banks or nations cannot be sure that the money they lend will not be shrugged off, when the bill comes due, as 'odious', they will be less likely to lend."

An extra benefit! If the repayment of loans made to finance arms sales to noxious dictators becomes speculative, there will be fewer such arms sales. Sounds good to me.

Besides, it could be time to make a virtue out of necessity. As Patrick noted, first guestimates make Iraq's debt look totally unustainable -- just a 5% interest rate (which would really be low) applied to the number Krueger gives above would consume > 30% of GDP without even paying down any principal.

If reality is anything like that, some things will have to go overboard to keep the ship afloat. We might as well give them clear definitions as we chuck them to clarify the "what is an odious debt" issue at the same time.

Assuming someone doesn't come forward demanding past-due payment for VX or sarin gas, I'd be happy naming "arms sales" as defined odious debt item #1. It's hard to see how major arms purchases really help any developing nation's economy. So if it wrecks that whole market, that's two benefits for the price of one.

This will be very simplistic, I know, but here is my take. The people who are owed money by Iraq knew exactly who they were dealing with, and what was being done with the money. They invested anyway. They accepted the risk because the payout was huge. Well, turns out it wasn't such a good idea afterall, thanks to a few US divisions. If they don't get paid now, tough luck. And how can we now allow the UN any role whatsover in the rebuild process, when it now appears to me that the UN was the main tool that France, Russia, and China used to keep their investments safe by maintaining Saddamm in place.

If I understand you right, you are hypothesizing that "odious" regimes will be able to borrow, but at a higher rate and shorter term to reflect the risk involved in their odiousness.

This seems largely to the good. Governments can lower their borrowing rates by being less odious. I guess it might encourage revolution over peaceful transition, though.

the framing of the issue of moral hazard facing a lender seems a little unfair to the lenders in this case (france & russia). let us not forget that most of these loans occurred before 9/11, when there was a reasonable consensus that iraq was not going to be invaded. the us position to embrace pre-emptive wars is unique for this country, and a radical departure from earlier formulations of foreign policy. if gore had been elected, would we be in baghdad, now? a little playfully, would it be fair to characterize this as an act of god for insurance purposes?

Iraq's debt is estimated at $383 Billion, $172B of which is repairations to Kuwait. I don't know the breakdown of the repairations, but I have heard the Kuwaiti stock market is on the rise due to optimization that a stable border will free up tons of land for development.

My opinion on odious debt is pretty straightforward (here, here and here )-- it dovetails with our pro-democracy/regime change policy perfectly. If creditors know going forward that tyrants can't write checks, then there should be a lot less lending going on in these countries which should contribute to fewer dictatorships.

At one point we were talking about $2 Trillion for the cost of the war (including macro effects)...what's a mere $383 Billion to put the death nail in the lines of credit to dictators around the world?

btw, the average for heavily indebted countries is about 3:1 debt to exports -- depending on how much oil Iraq can produce, it sits between 30 and 60 to 1. My question is this: if we cancelled enough debt to bring Iraq down to the average 3:1 ratio, does it do any good for the prospects of eliminating their debt or do we need to go even further than that to make a signifigant difference?

Hey, did y'all know that the very concept of "odious debt" was invented by a French lawyer? The irony just piles on.

http://www.commondreams.org/views03/0409-07.htm

"The problem with the UN, as I see it, is that some governments are rightful representations of their people(USA, France, Britain) and others are not ( Iraq, North Korea )." No, the problem is that the UN pretends to go beyond being simply a place where nations meet and negotiate the differences in their self-interests. The UN claims to moral authority - even though most (perhaps all) of the member nations, democratic or not, are simply voting their self-interests or the self-interest of their present leaders. For UN resolutions to carry the sort of moral force liberals like to pretend they do, they would have to be written and approved by impartial judges - not by governments with strong interests in the outcome.

French-bashers could add comments about people that can't even judge a figure-skating contest fairly - but remember, the French judge got caught because she was somewhat ashamed of what she did. I doubt I've ever seen a politician truly ashamed of his actions, rather than of getting caught...

Who says history doesn't repeat itself?
After the Boer war, a War similiar to ours in Iraq, with its jingoistic upsurge, its invasion sheathed in the thinnest of diplomatic excuses, and its stimulus to international opposition, the Conservatives ran on an anti-free trade ticket. They wanted to use the economic might of Britain's empire to punish their enemies. They lost, but eventually the doctrine of special tariffs for the Empire was established, contributing to the slump of the thirties.
Now we are seeing the same combination of right wing jingoism at work. It is funny. The idea of odious debt has actually had a day in court in Argentina, and it was resolved that most of Argentina's debt -- of which the lion's share is owed to Americans -- is odious debt. After all, it was loaned during the dirty war to Argentine dictators, and after the dirty war to Argentine politicians who the loaners knew were on the take -- partly because they weren't averse to greasing these politicos in order to institute "liberalization" in Argentina.

We do look forward to the causuistry that would distinguish Iraqi debt to the French from Argentine debt to the Americans. It ought to be delicious. Meanwhile, by one of those happy ironies of history, the anti-globalists in the Battle for Seattle have a new ally -- the Fox News watchers.

Is this great or what?

There is a part of me that think - too bad for the lenders. These guys were lending money to Hussein, knowing who he was and one of the risks of lending him money is that eventually tyrants get overthrown.

Compare it to here in the US, if banks were knowingly lending a company money which the banks knew the corrupt CEO was really just funneling into his accounts and buying art and houses. In this case the banks are really lending the CEO money and booking it to the company. Should the company have to pay whent he CEO gets sent to jail?

Seems like these lenders did not care, they gave Hussein money and booked it to Iraq. Why would a new country take on the debts of the old one, which lenders intentially put in that situation. I have no sympathy for someone who lent Hussein money and now wants it repaid. Let them find him and get it from him.

If a good faith effort were made to recover and return the Treasures looted from Kuwait, a few (?) planes repainted in Iraqi Airline colors, the missing people, etc., the Kuwaitis might well forgive the amount due in reparations - so long as the forgiven debt was not used to pay off "odious" lenders.

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