The Dictator Debt Catch

A US-brokered deal to forgive billions in Iraqi debt is causing other countries to say “me too,” even as some Iraqis wish they’d said “no thanks.”

Illustration by Graham Roumieu

Despite the growing attention being paid to the cause of international debt relief led by celebrities such as Bono, little has actually been done to ease the financial burden on developing countries. But a sign of hope could be seen earlier this year in Iraq, when the Paris Club, an international group that has managed $470 billion (US) in problem loans that the West has made to some of the world’s poorest countries since 1983, erased $11.6 billion of debt amassed under Saddam Hussein’s regime. And it offered to forgive another $27.4 billion if the country implements sweeping free-market reforms under a plan dictated by the International Monetary Fund (imf). Since then, the leaders of a number of smaller countries with far fewer resources than oil-rich Iraq have been asking: if Iraq’s debts can be so easily erased, why not ours?

The deal to cancel Iraqi debt was supposed to be an important first step, delivering “a major international contribution to Iraq’s continued political and economic reconstruction,” as President George W. Bush phrased it last year. After the Bush administration waived its $4.1-billion share of the Paris Club’s claims against Iraq, American officials asked Baghdad’s other creditors to do the same. US Treasury Secretary John Snow framed the issue in moral terms, saying: “The people of Iraq shouldn’t be saddled with debts incurred through the regime of the dictator.” Richard Perle, former chairman of the government’s Defense Policy Board and a strong proponent of the Iraqi invasion, was similarly blunt. “If you loan to a dictatorship,” said Perle, shortly after the war began in March 2003, “don’t expect to be repaid if a democracy emerges.”

Bush entrusted the task of selling Iraqi debt relief to Japan, Germany, France, and Russia—each had loaned billions to Saddam’s regime—to James A. Baker iii, who was secretary of state during the Gulf War in 1990. Some Paris Club nations were quick to follow the United States’ lead—including Canada, which was owed $600 million for wheat sent to Iraq before the first Gulf War. But Baker had a tough assignment. Paris Club nations seldom forgive debts, especially for oil-rich countries. “Forgiveness is meant to rescue the world’s poorest countries,” commented a spokesman for the Japanese government, which initially opposed the American debt-relief plan. “As long as Iraq restores its industrial base, it will be in a position to start paying back.”

Although Japan and other Paris Club members eventually fell in line with Bush, those seeking wider debt relief found a certain irony in Bush’s moral crusade to rid Iraq of debts amassed under Saddam. “What the United States has argued for Iraq could be said about Tanzania, Ethiopia, Argentina, Chile, or the Congo—for any of a number of countries,” noted Joseph Stiglitz, former chief economist for the World Bank and an adviser to the Clinton administration. Others argued it was unseemly to put an oil-rich nation ahead of more impoverished countries in Africa and Latin America. Jeffrey Sachs, the high-profile economist who heads the United Nations’ anti-poverty Millennium Project, calls the United States push to forgive Iraqi debt self-serving. “What became obvious was how remarkably political debt forgiveness was in Iraq, where the Bush administration has a huge political investment,” he says. “Scores of more indebted countries still languish unaided.”

Exactly why the nations of the Paris Club changed their views on Iraq’s debt in such a hurry remains a mystery. Some analysts say they were persuaded by the prospect of lucrative Iraqi reconstruction and oil concession contracts. But Patricia Adams, whose 1991 book, Odious Debts, helped launch an international debate over Western loans to dictatorships, offers a more complex explanation. “Above all else,” says Adams, “the Paris Club creditors were afraid the Iraqis would sue for international debt arbitration.”

Arbitration, Adams believes, would have brought unwanted attention to the decision by Paris Club governments to lend billions to Saddam’s repressive regime during the 1980s, some of which was spent on the purchase of advanced weapons. International arbitration of this kind is rare, but Adams cites as a precedent the Iran-United States Claims Tribunal, established in 1981 in accordance with UN guidelines, to hear claims stemming from the 1979 Iranian revolution. The legal option grants the Iraqis some leverage, she suggests. “The Paris Club creditors have financed dictators in numerous places like Iraq,” she says. “These creditors don’t want their odious loans exposed in court. And that’s just what the Iraqis threatened to do.”

There is a further historical precedent for full debt repudiation after a change in government. Adams cites the case of Cuba after the Spanish-American War of 1898, when the United States assumed control of the island and declared the debt of its former government null and void. Similarly, after World War I, the countries gathered at the peace talks in Versailles decided that Poland would not have to repay some of the debts it incurred under the rule of Kaiser Wilhelm II of Germany.

According to Ottawa-based economist Shakir Issa, most Iraqis want the debt question settled through international arbitration. Issa, who is also the director of Jubilee Iraq, an organization seeking the cancellation of Iraq’s debts, travelled to Iraq in October 2003 and interviewed dozens of Iraqi politicians, senior officials, and civilian and religious leaders. He found the majority preferred debt arbitration to Baker’s backroom dealmaking, which risked sacrificing Iraqi autonomy to imf reforms. “Behind the scenes, and before they even had a government,” says Ann Pettifor, director of the UK-based Advocacy International, which lobbies on behalf of developing countries, “this poor little country’s hands were tied.”

The Paris Club debts are only part of Iraq’s financial burden. Kuwait still claims some $27 billion in reparations for damage done to their country during the first Gulf War, while Saudi Arabia lent Iraq $30 billion to finance the Iran-Iraq War during the 1980s. Although these obligations are separate from the Paris Club debts, the leaders canvassed by Issa view the whole lot as illegitimate. Soon after the Paris Club deal was struck, Sa’d Salih Jabr, chairman of the Iraqi National Assembly’s economic committee, called for his country’s debts to be submitted to “a fair and transparent arbitration process in accordance with United Nations rules.”

Pettifor vigorously condemns the Paris Club’s deal as the product of an arrangement struck between the Iraqi finance ministry and Central Bank officials appointed by the US-backed interim government. At the urging of Pettifor and others who want Iraq to confront its creditors in open and fair arbitration, the country considered reopening the Paris Club deal, but in the end agreed to imf terms. Still, Issa remains critical. “Far more needs to be done than the Americans did regarding the Paris Club claims,” he says.

While the Paris Club deal has been widely debated in Iraq, the reaction around the world has been equally strong. In Africa, nearly half of all international aid goes toward the repayment of debts—many of which were incurred under undemocratic, repressive regimes. In Nigeria, which was ruled until recently by a military dictatorship, the financial picture is especially stark. Abraham Nwankwo, director of the country’s Debt Management Office, says it has paid $42 billion to the Paris Club over the past thirty-eight years, to service a debt of $13.5 billion. As a result of compound interest, the country still owes $25 billion, a situation Nwankwo calls an “endless cycle of debt burden.” In March, the Nigerian House of Representatives called for debt relief of its own, specifically citing the Iraqi precedent. Sachs thinks they have a point. “James Baker got a deal for Iraq in thirty days,” he says. “Yet Nigeria, which is a struggling democracy much poorer than Iraq, with only a fifth of Iraq’s oil reserves, is told, ‘Sorry, you’re an oil country; you’ll have to wait.’ The lack of consistency is striking.”

The Iraqi case is also generating waves beyond Africa. Last March, Argentina, effectively bankrupt and still wrestling with the bill left by its former military regime, renegotiated its $103-billion debt, forcing international bondholders to accept about thirty cents on the dollar. Even though Argentina has a history of fiscal mismanagement, politicians there suggested that the Iraqi debt rollback meant their debts should be reduced even further. Mario Cafiero, a member of the Argentine parliament, argued that most of that debt was “contracted by a despotic regime, not to satisfy the needs of the nation, but to strengthen itself and repress people who fight against it.”

In each of these countries, debts amassed by dictators—whose human rights abuses could hardly have been a secret to Western lenders—are widely seen as illegitimate. According to Adams, politicians and debt managers in many more countries have been emboldened by the case of Iraq. She thinks the Philippines, where politicians have called for debt repudiation of their own, will be next. Filipino Senator Manuel Villar recently suggested that the Argentinian example could apply to his own country, which incurred much of its debt under the dictatorship of Ferdinand Marcos. Villar said that Argentina was able to reduce its debt to 28 percent of $103 billion; a similar dip would no doubt ease the pressure on the Philippines’ own $55-billion burden. “Iraq was a watershed,” Adams says. “People in many countries are starting to see that the threat of forcing legal arbitration on Western creditors can shame them into dropping these odious debts. It’s a very important moment.”

Still, it may be some time before the developing world’s debt wall comes down. After last December’s tsunami devastated a number of deeply indebted South Asian nations, Western leaders offered a one-year freeze on Paris Club debt payments totalling $5 billion. But the gesture was not as generous as it may seem: additional interest will still be charged for the delay period. That doesn’t surprise Pettifor. “The United States and the rest of the wealthy nations invoked a moral case for debt reduction in Iraq,” she says. “But the rest of the countries with odious debts are expected to keep paying. It’s a blatant double standard.”

Paul Webster
Paul Webster has reported from Russia on nuclear-weapons issues.