Fighting Dictatorships With Credit Restrictions
November 27, 2002
Corrupt dictators often borrow huge amounts abroad, backed by the state's taxing power to extract repayment from citizens. Much of these borrowed funds find their way into the private accounts of the ruling elite. As a consequence, the population is left with a heavy debt burden, along with poorly-conceived government projects.
For example, Zaire's former dictator, Mobutu Sese Seko, diverted $12 billion of borrowed money to his personal account. And there are many other examples in Africa, Asia, Latin America and Eastern Europe.
Scholars argue that a country's citizens are not obligated to repay government debts when the people have not consented to the government or the debt, and the funds are not used for their benefits. This is so-called "odious debt."
- They recommend creating an international institution to declare debt odious when it is borrowed by a corrupt government.
- Once a regime's debt is declared odious, the successors would not be obligated to repay the borrowed funds, and creditors would not be able to seize any of the country's assets.
- This system would severely limit the credit available to corrupt despots and dictators, reducing their incentive to take power in order to loot the country in the first place.
In the case of legitimate but financially negligent democratic regimes, Kremer and Jayachandran recommend that international financial institutions declare a country to be a "bad credit risk" when it pursues unsound economic policies. Loans made after this announcement would be excluded from future bailouts, giving governments incentives to be responsible.
Source: "The Borrow, Loot, and Leave," Economic Intuition, Spring 2002; based on Michael Kremer and Seema Jayachandran, "Odious Debt," Policy Brief No. 103, July 2002, Brookings Institution.
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