NCPA - National Center for Policy Analysis

Repudiating Odious Debt

April 9, 2003

Iraq will have many economic and financial problems to deal with once war ends. But they are not insurmountable and there are proven ways in which they can be managed without excessive reliance on U.S. foreign aid.

Some analysts say that while oil could pay for much of Iraq's needs, it cannot do so until the issue of Iraq's foreign debt is resolved. Otherwise, much of the oil money will simply flow to Iraq's debtors without providing any benefit to the people, says Bruce Bartlett.

According to a careful study by the Center for Strategic and International Studies, ( ) Iraq's foreign financial obligations amount to some $383 billion:

  • About 15 percent represents pending contracts and 23 percent is due to borrowing from foreign banks.
  • The balance, almost $200 billion, is reparations owed to those victimized by Iraq's invasion of Kuwait in 1991.

The concept of "odious debt" developed after the First World War by a French legal scholar named Alexander Sack. He argued that loans to despots were personal and not sovereign debts. Therefore, the people had no obligation to repay them once the despot is overthrown.

Now, two Harvard economists, Michael Kremer and Seema Jayachandran, ( have updated Sack's theory. They argue:

  • A process for repudiating odious debt would discourage banks from bankrolling tyrants like Saddam Hussein in the first place.
  • Under their plan, once a regime had been declared despotic, no future regime would be responsible for any additional debt it incurs.
  • Such a system would do far more to discipline despots than trade sanctions, because the market itself would enforce it.

Source: Bruce Bartlett, "Critics of War in Iraq Were Wrong," April 9, 2003, National Center for Policy Analysis.


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