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  October 26, 2011

The Legal Basis to Reject Odious Debt

Léonce Ndikumana and James K. Boyce: International law supports Africa rejecting debts that did not benefit the people
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Léonce Ndikumana is a Professor of economics at the University of Massachusetts, Amherst. He served as Director of Operational Policies and Director of Research at the African Development Bank, Chief of Macroeconomic Analysis at the United Nations Economic Commission for Africa (UNECA), and visiting Professor at the University of Cape Town. He is an Honorary Professor of economics at the University of Stellenbosch. He has contributed to various areas of research and policy analysis on African countries, including the issues of external debt and capital flight, financial markets and growth, macroeconomic policies for growth and employment, and the economics of conflict and civil wars in Africa. He is co-author of Africa’s Odious Debt: How Foreign Loans and Capital Flight Bled a Continent, in addition to dozens of academic articles and book chapters on African development and Macroeconomics. He is a graduate of the University of Burundi and received his doctorate from Washington University in St. Louis, Missouri. James K. Boyce teaches economics at the University of Massachusetts, Amherst, where he directs the development, peacebuilding and environment program at the Political Economy Research Institute. His most recent book is Africa's Odious Debts: How Foreign Loans and Capital Flight Bled a Continent (Zed Books, 2011), co-authored with Leonce Ndikumana.


The Legal Basis to Reject Odious DebtPAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington. This is the third and final part of our series of interviews based on the book Africa's Odious Debts: How Foreign Loans and Capital Flight Bled a Continent. In the first two parts of our interviews, we talked about the extent to which Africa's debt was accumulated because IMF and World Bank and private banks made loans to dictators, kleptocracies, in the name of the Cold War and for the sake of the scramble for the riches of Africa, gave these loans knowing they would be, essentially, misused, not used for the benefit of the people of the countries that did the borrowing. So the question in this segment we're asking: then why the heck should the people of these countries keep servicing these debts? And it turns out there is some international law that says maybe they shouldn't be. Now joining us to talk about solutions to this odious debt crisis in Africa are the authors of the book. Professor Leonce Ndikumana teaches economics at the University of Massachusetts at Amherst. He's a research associate at PERI institute there. Professor James K. Boyce is director of the Program on Development, Peace Building and Environment at PERI institute. Thank you both for joining us again.



JAY: So, James, why don't you kick it off this time? In terms of historical precedent, this seems to begin with the American-Spanish War over Cuba and the whole question of what would happen to Cuba's debt, which begins to establish some international law on this. So explain this.

BOYCE: Well, as you may recall, Paul, back in 1898, over 100 years ago, the US and Spain fought a war. The US won the war pretty quickly. And as a result of that, control over Cuba, among other Spanish possessions, was transferred to the United States. One of the most contentious--indeed the most contentious issue in the subsequent negotiations in Paris that were conducted to conclude a formal peace was over what would happen to the debts that had been accrued by the Spanish-Cuban government. The position of the Spanish and of the creditors, who were mostly European banks, was that the debts went with the territory, so that now that the US had Cuba, the debts were debts of the new US-Cuban colonial government. The position of the US commissioners was that that was ridiculous. They took the stance that the loans were acquired without the consent of the Cuban people, that the debts were not incurred for their benefit, indeed in many cases were incurred for their oppression, and that the creditors knew or should have known that these facts held, and that they took the full risks of their investment by making such loans to that prior regime. So they refused to accept responsibility for these debts, categorically. And that marks the beginning or one of the beginnings of what in international law is called the doctrine of odious debt.

JAY: And the United States supported this doctrine when it came to Cuba. And then, again, there's a precedent was established in Costa Rica. Leonce, what is that about?

NDIKUMANA: This was historical cases--before we go into the details--highlight the interplay between three groups of agents: the population of these countries, you have the governments of these countries, and you have the lenders. What is at stake here is debts that have been accumulated under governments which were irresponsible, were not advancing the development of the countries, therefore the debts have not benefited to the people. The problem is that after these governments have left, the people are saddled with debts. And the question is: why should these people keep servicing the debts? In fact, without even going too far from--in history, after the Iraq War, it was established that Iraq owed a lot of money to foreign lenders, and the question was: should the Iraqi people pay the debt that Saddam Hussein used to build the repressive infrastructure that he used against his own people? The advice from the US government was no, they should not. So we are not talking about hypothetical cases or hypothetical argument. There is real historical and not far away history of challenging the legitimacy of externally borrowed money that has been used for illegitimate purposes. And let me go to--I can even go to Africa. In Africa, Madame Ngozi, the minister of finance for Nigeria, the first time she came to be minister of finance, one of the things that troubled her was the amount of debt that this country had accumulated under the past corrupt regimes. And she challenged that. She said, we need to look into this, we need to figure out how much money was lent to this government, how much was used for development, and we are going not--we are not going to pay the loans that were not used for development purposes. Today in Latin America many countries are undergoing what they call audit of national debts. In Ecuador, for example, there are already reports that are coming out. And the governments of these countries are asking the question: how much money came into this country? Where did it go? How was it used for development purposes? I think that's the question that needs to be asked for--in African countries.

JAY: If we go back to the numbers in the previous parts of the interview and the book, just to remind everyone, the actual capital flow from Africa is significantly higher than the total external debt, the ongoing servicing of the debt more than is spent on health care now. And the issue is, if this money was recaptured and the servicing of this odious debt was to stop, it would be transformative to these African economies. So, James, how is that to be accomplished in some practical way? What kind of proposals are there?

BOYCE: I think there are a number of interesting possibilities out there, realistic possibilities for addressing the problem. You asked earlier, Paul, about the Costa Rican precedent, which is an important one in international law in terms of the assignation of the burden of proof. What happened was that there was a dictator--this was in the early part of the 20th century--who stole some borrowed money, and he fell, and then the creditors--the government of the United Kingdom on behalf of the creditor, the Royal Bank of Canada, demanded that the successor government repay the loan, and the successor government refused, saying that our people didn't benefit from this loan; if you want the money, go ask the dictator where he put it. That case was ultimately adjudicated in the United States, and the adjudicator was Chief Justice Taft (also at one point in his career President Taft), chief justice, at the time, of the US Supreme Court. And Justice Taft made the following ruling. He said that the debt was illegitimate, that it had not been used to benefit the people of Costa Rica, and that if the creditor wanted to establish the legitimacy of the debt, they were the ones that needed to show where the money went. It wasn't up to the government, the new government of Costa Rica, to show where in the bank accounts of the former dictator (whose name was Tinoco) the money was sitting. It was up to the creditor to demonstrate that the money had been used for legitimate purposes in the country.

JAY: If this precedent is to be used, and the other precedents, in terms of international law, if there's going to be some mechanism to try to recapture some of this looted money, as you called it, how is this to be done? It's so expensive, especially for countries that are under duress already economically, one, to go after finding the money, and two, to try to cancel the debt. What kind of proposal is there to deal with that?

BOYCE: Well, in terms of going after to find the money, there are some initiatives working on that. There's something called the Stolen Assets Recovery Initiative, launched a couple of years ago by the World Bank and the UN Office on Drugs and Crime, which is designed to assist countries in recovering stolen loot. The amounts of money that have so far been recovered in that way are small, and I'm afraid they're likely to remain small. These are important efforts. They help to lift up the problem and put it into public view. But, ultimately, tracking down this money and recovering it is a very difficult job, because a lot of sophisticated banks and lawyers have been involved in hiding the money. That's why we argue in the book that selective repudiation of debts that cannot be demonstrated to have benefited the people of Africa is also an important part of the toolkit for dealing with the problem. Now, of course, if you allowed any country to repudiate any debt it wanted to on the grounds that it didn't benefit their people, countries might be tempted to abuse that opportunity and to repudiate all sorts of debts, even debts that might have benefited the people. So any such efforts are going to ultimately need to be adjudicated, need to be arbitrated. Under the way the loan agreements are currently structured, the place where that arbitration would most often happen is in New York or in Great Britain, where both countries have very strong legal precedents, called domestic agency law, that establish that an agent is obligated to act in the best interests of the principal, and that if the agent--in this case the government--doesn't act in the interests of the principal, the people of Africa, those--that agent is guilty of a crime. And furthermore the law holds that anybody who aids and abets the agent of defrauding the principal, like the banks in this example, is also guilty of a crime. So there is a good possibility for pursuing these actions in the law courts. But as you've mentioned, Paul, it's an expensive thing to do, it's a difficult thing to do. And so what we recommend in our book is that an idea that was floated by the Norwegian government about four or five years ago, which was to establish an international arbitration body, presumably headquartered in New York, possibly at the United Nations, that body could be empowered to adjudicate these disputes.

JAY: Right. Leonce, what would that look like? And to what extent are African countries behind this? And is there a fight to establish this going on, I guess, at the UN? Or I guess that would be--would that be the venue, Leonce?

NDIKUMANA: The Stolen Asset Recovery Initiative is a global initiative championed by the World Bank and the UN. And, as you know, African governments are strong backers of--strong supporters of UN initiatives in general. There is a lot of interest in pushing for initiatives, in that, first of all, cleaning up the whole financial system, the lending and borrowing, we must insist that the ills that we are describing here are the results of irresponsible lending from the North and irresponsible borrowing by leaders, some leaders, from the South. It's not because commonly people tend to jump on the bandwagon that Africa is [incompr.] over many examples of corruption [incompr.] government and so on. No. In this case, it's the result of irresponsible lending from the North, irresponsible management of borrowed loans.

JAY: Right. But what would--what--this Norwegian proposal, what would that look like? And is it on the table? Are African countries pushing for something like this at the UN now?

BOYCE: We hope that they will, Paul. The idea was floated by Norway in the mid-2000s, and I think it's an idea whose time has come. We're hoping that our book and the efforts of others to shed light on these issues will help to inspire efforts to make that proposal a reality and to establish an international debt arbitration tribunal that will be able to efficiently, and at low cost to the African countries, adjudicate these debt disputes and help to relieve the legacy of odious debts, not only the burden it places on African populations to service these debts, but also helping to correct the dysfunctional elements of our current international financial architecture so that we're no longer in a situation where this game of lending money and then having it flow right back out again continues in the future.

JAY: Leonce, has there been any successful fight in either British or American courts? Has any of this odious debt been repudiated?

NDIKUMANA: Not that I know, in the case of African countries, although in terms of recovering stolen assets, some small amounts of money have been identified belonging to the family of former--family of Abacha. Even in the case of North Africa, right after the fall of the Ben Ali regime, for example, there was a clampdown on the families' bank accounts and assets. So it seems to me that what is needed is political will. Many people--many times people will tell you, but you will never know where this money is. But it's clear that when governments want to do it and can put their political will behind it, money is--the assets and the bank accounts can be found. It's not even being found. People know where they are. And they are managed by real banks.

JAY: And, I guess, James, the problem with individual countries trying to pursue this is the banks threaten them: well, you come after us for trying to repudiate these debts, we're not going to loan you any more money. And I suppose that both comes from the IMF, World Bank, and the private banks. So it's--I guess it's difficult for a country to do it on its own.

BOYCE: Well, I mean, to some extent, Paul, we need to recognize that that's an empty threat. For a country that is paying more in debt service than it's receiving in fresh lending, the threat that the creditors will pull the plug on new lending is rather a hollow threat, since the country would come out ahead if it simply had no new lending and at the same time stopped servicing its prior debts.

JAY: So why aren't more African governments just saying no?

BOYCE: Well, I think, as Leonce was saying, Paul, it is a matter of political will. And these things aren't going to change just by people in positions of power suddenly developing a conscience and deciding to do the right thing. It needs to be a popular movement, both in the borrower countries and in the creditor countries, to clean up this mess and to change the way that our international financial system works, so that it benefits both savers and borrowers rather than fleecing them coming and going. So I think the critical--or a critical element in building the political will to tackle these problems is to make sure that the public understands what's going on here. It's not a difficult thing to really understand, notwithstanding all of those layers of obfuscation that surround this problem. It's possible to peel those layers away. And, I mean, this is what I once heard described as an onion problem: you peel the layers away, and the closer you get to the center, the more you want to cry. But that sense of wanting to cry can be coupled with a sense of empowerment to try to make the changes happen that we need to see if we're going to get our international financial system under control so that it serves the interests of the people rather than serving the interests of irresponsible bankers on the one hand and irresponsible government officials on the other.

JAY: Well, thank you both for joining us. And the book again is Africa's Odious Debts: How Foreign Loans and Capital Flight Bled a Continent. So thank you both, gentlemen, for joining us. And thank you for joining us on The Real News Network.

End of Transcript

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