A critique of the odious debt doctrine

Law and Contemporary Problems

Volumn 70, Issue 3, 2007, Pages 32-51

  Choi, Albert H ^a   Posner, Eric A ^b  

^a UNIVERSITY OF VIRGINIA SCHOOL OF LAW   (United States)

^b UNIVERSITY OF CHICAGO LAW SCHOOL   (United States)

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[No Author keywords available]

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EID: 38349187296     PISSN: 00239186     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (39)

1. See CONGRESSIONALLY APPOINTED PANEL, THE IRAQ STUDY GROUP REPORT: THE WAY FORWARD - A NEW APPROACH 37 (2006) (JAMES A. BAKER, III & LEE H. HAMILTON, CO-CHAIRS) (recommending that the United States "engage directly with Iran and Syria in order to try to gain their commitment to constructive policies toward Iraq and other regional issues").
2. See David Cortright & George A. Lopez, Are Sanctions Just? The Problematic Case of Iraq, 52 J. INT'L AFFAIRS 33 (1999).
3. See GARY C. HUFBAUER ET AL., ECONOMIC SANCTIONS RECONSIDERED: HISTORY AND CURRENT POLICY 92-93 (2d ed. 1990) (finding that, based on their criteria, sanctions were successful in about thirty-four percent of 116 postwar cases).
4. For recent discussions of the doctrine and its history, see, for exiample, Lee. C. Buchheit, Mitu Gulati & Robert B. Thompson, The Dilemma of Odious Debts, 56 DUKE L.J. 1201 (2007);
5. Adam Feibelman, Equitable Subordination, Fraudulent Transfer, and Sovereign Debt, 70 LAW & CONTEMP. PROBS. (forthcoming Autumn 2007).
6. See, e.g., PATRICIA ADAMS, ODIOUS DEBTS: LOOSE LENDING, CORRUPTION, AND THE THIRD WORLD'S ENVIRONMENTAL LEGACY (1991);
7. Seema Jayachandran & Michael Kremer, Odious Debt, 96 AMER. ECON. REV. 82 (2006) (arguing that loan sanctions would be more effective than trade sanctions);
8. ASHFAQ KHALFAN, JEFF KING & BRIAN THOMAS, CTR. FOR INT'L SUSTAINABLE DEV. LAW, ADVANCING THE ODIOUS DEBT DOCTRINE (Mar. 2003), http://www.odiousdebts.org/odiousdebts/publications/ Advancing_the_Odious_Debt_Doctrine.pdf. Some authors reject the doctrine but support its premises and seek other legal means for operationalizing them.
9. See, e.g., Buchheit et al., supra note 4 (describing domestic legal analogies);
10. Feibelman, supra note 4 (advocating a contractual mechanism).
11. [L]oan sanctions make the population better off in future periods [than trade sanctions do] since it has no debt repayment to make.").
12. However, Jayachandran and Kremer acknowledge in a footnote that this is false if the dictator can trade nonrenewable resources, id. at 88 n.7, which in our view is fatal to their claim.
13. See discussion infra Part III.C.
14. This model ends at t=4, but we can imagine that this is just one stage in a repeated game framework. For instance, if the dictator is not overthrown at t=3, we can think of the fourth period as being equivalent to the second, whereas if the dictator is overthrown at t=3, we can assume that the game starts again from t=1. While a repeated game can support many different types of equilibrium, one possibility is for the government to pay back at t=4 and the lending institutions to lend again in the future.
15. Although the dictator can use the existing resources (r) to finance the project, borrowing from abroad will be more beneficial for him since it leaves more for his consumption. Borrowing becomes even More attractive if the repayment obligation is partly borne by the future government.
16. This is the-view of many supporters of the doctrine. See sources cited infra note 15.
17. We can make the probability of overthrowing the dictator independent of the odious debt regime when the dictator does not borrow, but this will not change the substantive results of the paper.
18. It is also possible that, within each regime, the dictator's choice between investment and personal consumption will affect the probability of overthrowing. For instance, with the doctrine, when the dictator borrows for personal consumption, the public, by overthrowing, gets the additional utility of u(r). If the dictator invests, however, the public receives the additional utility of u(x+r). Hence, investing can actually provide more incentive to the public to overthrow the dictatorial regime. However, our analysis on how the probabilities are different across the two regimes will not be affected.
19. See ADAMS, supra note 5, passim;
20. MARTIN MEREDITH, THE FATE OF AFRICA passim (2006).
21. See, e.g., ADAMS supra note 5, at 110-18 (describing projects that yielded little or no gain or turned out to be unneeded).
22. See ADAMS, supra note 5, at 110-31 (describing projects).
23. As Buchheit et al., supra note 4, at 22, observe, the modern defenders of the odious debt doctrine appear to defend a broader version of the rule, one that applies to any debt incurred by a dictator.
24. A clear example is ADAMS, supra note 5 (discussing Tinoco).
25. See supra text at Part III.A.
26. Jayachandran & Kremer, supra note 5, at 90-91.
27. See infra Part IV.
28. Jayachandran & Kremer, supra note 5.
29. See generally supra Part III.A.3.
30. Jayachandran & Kremer, supra note 5, at 89.
31. Note that on the assumption that mere reputation is not sufficient to support sovereign borrowing, there must be an additional sanction, such as loss of assets.
32. The literature on trade sanctions is substantial, and the evidence of their effectiveness is mixed and hard to summarize. The classic monograph on the topic is HUFBAUER, supra note 3, at 92-93 (finding thirty-four-percent success rate in 116 postwar cases).
33. Jayachandran & Kremer, supra note 5, at 88 n.7.
34. For numerous examples, see ADAMS, supra note 5.
35. See ODD ARNE WESTAD, THE GLOBAL COLD WAR: THIRD WORLD INTERVENTIONS AND THE MAKING OF OUR TIMES (2005).
36. HUFBAUER, supra note 3, at 94-105.
37. See, e.g., BBC News, Chinese Leader Boosts Sudan Ties, Feb. 2, 20017, http://news.bbc.co.uk/2/hi/africa/6323017.stm (last visited Oct. 2, 2007).
38. They propose this institution in order to reduce uncertainty, so creditors will not refrain from lending to a deserving nation for fear that it will subsequently be declared odious. See also Seema Jayachandran, Michael Kremer & Jonathan Shafter, Applying the Odious Debts Doctrine While Preserving Legitimate Lending, ETHICS & INT'L AFF. (2006).
39. For reasons given in the text, we are skeptical about the viability of such an institution. On this problem, see Paul B. Stephan, The Institutionalist Implications of an Odious Debt Doctrine, 70 LAW & CONTEMP. PROBS. 213 (Summer 2007).