On November 21, 2004, the 19 industrialized nations that make up the so-called Paris Club issued a decision that, in effect, traces the outline of Iraq’s economic future. The decision concerns a portion of Iraq’s $120 billion sovereign debt — a staggering amount that all concerned parties recognize is unsustainable. In their proposal to write off some of the debt, the Paris Club members took advantage of the opportunity to impose conditions that could bind the successor government in Baghdad to policies of free-market fundamentalism.
Iraqis, in general, are contemptuous of the idea that loans made to Saddam Hussein’s government should be repaid. Much of that debt was contracted for purposes such as purchasing military equipment that was used to invade neighboring countries, which is not a spending priority that the Iraqi people voted to pursue. Iraqis and international campaigners argue that much of Iraq’s debt is in fact "odious" — a category of debt that should not be repaid because the loan proceeds were used against the interests of the indebted country’s population. "Odious debt" need not be written off or forgiven; it is simply not owed at all because it is illicit in nature. A number of legal precedents on odious debt exist, but from a strictly legal point of view, authorities such as the Paris Club are under no obligation to apply the precedents or even to take them into account.
The Paris Club probably calculated that Iraq will not invoke the odious debt doctrine to refuse any repayment whatsoever. Such action would invite a boycott on the part of public and private lending institutions, leading to a severe shortage of capital and guaranteed economic meltdown. Iraq will likely stop repaying only if repayments were exerting such budgetary strain that it would be better off not paying back its debt, regardless of whether or not capital flows dried up. As the creditor nations are perfectly aware, compelling Iraq to repay its debt completely would push the country into an economic crisis so severe that debt servicing would halt.
It was therefore decided long ago that a portion of the debt would have to be written off. Although this reduction is often couched in humanitarian terms, the reality is that creditors are simply vying to bleed Iraq as much as possible without actually killing it.
The Paris Club agreed to write off a portion of Iraq’s debt in three stages. The first 30 percent, amounting to $11.6 billion, is to be written off unconditionally. A second 30 percent reduction will be delivered "as soon as a standard International Monetary Fund program is approved." A final 20 percent reduction will be granted "upon completion of the last IMF board review of three years of implementation of standard IMF programs." In other words, 30 percent of Iraqi debt will be excused only if the IMF and Iraqi authorities agree on an economic "reform" package, and another 20 percent will be written off only if the Fund is satisfied that Iraq has implemented the terms of that package.
Since 1947, the IMF has extended loans to debt-ridden, developing countries in return for those countries’ adherence to "conditionalities," typically including privatization of state enterprises and other major restructuring of the economy. In the case of Iraq, 50 percent of the debt piled up by the country’s former dictator — amounting to $19.38 billion — is tied to as yet unspecified conditionalities. As Paris Club members claim around $40 billion, Iraq will still owe $7.78 billion to the Paris Club even if the IMF certifies its adherence to the conditionalities. If Iraq does not satisfy the Fund, it will owe $27.16 billion to the society of 19 industrialized nations.
As soon as the substance of the Paris Club’s decision was made public, the Iraqi National Assembly, the closest thing Iraq has to a representative institution, issued a statement declaring that "[Iraq’s] debts are odious and this is a new crime committed by the creditors who financed Saddam’s oppression." Sheikh Muayyad of Baghdad’s Abu Hanifa mosque, the one raided by US troops in mid-November, added: "In the Paris Club process, the enemy is the judge, and this cannot be fair." Although Iraqis rightly object to the deal’s failure to acknowledge the odious nature of much of the debt, their incentive to meet the terms of the Fund’s program will be very strong. What type of future can Iraq expect under the guidance of the IMF? Two cases from recent history offer some clues.
The Southeast Asian crisis of 1997 is a commonly cited illustration of IMF ideology in practice. Reacting to rumors that Thailand would devalue its currency, the baht, speculators confirmed the prophecy by moving capital out of the country and converting it into dollars, thereby weakening the baht. A number of other factors converged to send the entire region into a brutal recession, as foreign investors withdrew money into dollar accounts in "safer" places. The mass flight of foreign capital from Southeast Asia was possible mainly because many of these countries had undertaken capital market liberalization reforms prior to 1997 — upon the advice of the IMF.
As the crisis spread, the IMF offered approximately $95 billion in loans to the afflicted countries, but not without stipulating conditionalities. Most importantly, the Fund required governments to balance their budgets, inducing governments to slash important social programs and abandon their goal of full employment. These "reforms" came at great social cost. In Indonesia, for example, riots broke out the day after the government cut food subsidies. In addition, the IMF insisted that Southeast Asian countries boost interest rates to attract foreign capital back to their banks. The ironic result was that a number of domestic firms were forced into bankruptcy, widening the recession and diminishing the region’s allure for investors.
The countries that swallowed the IMF’s poison pill — including Thailand — were still in recession in 2000. Malaysia, on the other hand, famously rejected the Fund’s advice and followed its own path. Pegging its currency, the ringgit, to the dollar and cutting interest rates, Kuala Lumpur ordered that all ringgit invested offshore be repatriated within one month, imposed tight limitations on transfers of capital abroad and froze the repatriation of foreign capital for 12 months. In the meantime, the country took the time to restructure its corporate and banking laws. As a result, Malaysia emerged from recession much sooner and with a smaller debt than its neighbors.
Throughout the 1990s, the IMF held up Argentina as a shining example for others to follow, but there, too, its recommendations are now closely associated with economic disaster. Before Argentina entered a recession in 1998, the IMF enjoyed control over the country’s economic policies through past loans and the conditioning of other financial packages upon a "standard IMF program." Argentine authorities happily carried out all the demanded reforms, including selling off huge amounts of state property and opening up just about every industry in the country to 100 percent foreign ownership. Before Argentina’s eventual economic collapse in 2002, for instance, foreign institutions dominated the banking industry. While these banks readily provided funds to multinational corporations, and even to large domestic firms, small and medium-size firms complained of a lack of access to capital. The resulting lack of growth was pivotal. Many argue that the main culprit in Argentina’s dramatic crash was not the IMF but the government, which never saw anything wrong with selling off the country wholesale. Even if so, the IMF certainly did not help.
By the time the crisis started in 1998, the Argentine government had already incurred a large amount of foreign debt. The recession caused tax revenues to plummet, therefore aggravating its balance of payments problem. Buenos Aires made up the difference by increasing borrowing from international lenders such as the IMF. The Fund provided $3 billion in 1998, $13.7 billion in 2000 and a pledge for a further $8 billion in 2001. In addition, it arranged for an additional $26 billion to be granted by other sources at the end of 2000. The bailout came with strings attached: the IMF decreed that Argentina should, among other things, balance its budget by drastically cutting public spending and by raising taxes. The Fund aimed thereby to make the country more attractive to foreign capital, but the downside was that unemployment worsened and vital social programs were canceled. Despite the astronomical sums made available to Argentina, and despite the government’s budget cuts, the recession’s effect could not be overcome, and the gap in the budget continued to grow until the government could no longer sustain debt repayments.
Argentina officially defaulted on its debt of $141 billion on January 3, 2002, and devalued its currency over IMF objections shortly thereafter. Investors lost confidence in the Argentine economy and began pulling their money out of the country. The government foresaw that the outflow of capital might cause a banking failure and so imposed a limit of $1,000 per month on withdrawals by ordinary Argentinians. In addition, officials converted bank deposits that were originally made in dollars into local currency, thereby increasing the liabilities of the population, as debts that were incurred in dollars remained in dollars. Following the devaluation, the debts of ordinary Argentinians increased in value by over 300 percent.
In the six months following the devaluation, Argentina’s gross domestic product dropped by 16.3 percent. As of June 2002, 19 million people out of a total population of 35 million were earning less than $190 per month. Amidst riots, looting, increased crime and police brutality, 8.4 million Argentinians were destitute, with monthly incomes of less than $83 per month. Reports surfaced of malnutrition and children missing school in order to beg.
MORE, NOT LESS
In a July 2004 report from its Independent Evaluation Office, the IMF conceded that it should not have continued urging Argentina down the budget-cutting road after "the growing vulnerabilities in the authorities’ choice of policies" became apparent. Instead, the report concluded, the Fund should have diverted its loan funds to help Argentina cover "the inevitable costs of exit" from its chosen policies. But this internal audit of the IMF’s role in the crisis makes clear that the Fund has not altered its basic views about what indebted countries should do to reduce their burdens. "During the pre-crisis period," reads a July 29 press release on the audit, "the IMF correctly recognized fiscal discipline and structural reform, labor market reform in particular, as essential to the viability of the convertibility regime." Further, the IMF believes that Argentina should have done more, not less to adhere to its program before the crisis: "Conditionality was weak, and Argentina’s failure to comply with it was repeatedly accommodated."
To date, the approach of the Bush administration in Iraq strongly suggests that the same "more, not less" mentality will govern their recommendations for Iraq’s economic future. Most infamously, the Coalition Provisional Authority (CPA), which ruled Iraq from May 2003 to June 2004, legislated that "[a] foreign investor shall be entitled to make foreign investments in Iraq on terms no less favorable than those applicable to an Iraqi investor, unless otherwise provided herein." This Order 39 also provides that "[f]oreign investment may take place with respect to all economic sectors in Iraq, except that foreign direct and indirect ownership of the natural resources sector involving primary extraction and initial processing remains prohibited." Order 39 also substituted a flat tax of 15 percent for Iraq’s system of progressive taxation, wherein the top rate was 45 percent.
Assuming that the successor government in Baghdad does not overturn Order 39, the long-standing ban on foreign investment in Iraq has been abolished, allowing foreigners to own up to 100 percent of any enterprise except those controlling oil and other natural resources. Although foreign ownership of land remains illegal, companies or individuals will be allowed to lease properties for up to 40 years. Another CPA decree, Order 81, sets out the circumstances under which the reuse of seeds by farmers constitutes patent infringement. For the US-British occupation authority, such neoliberal policies were an article of faith. Speaking to journalists aboard a US military transport plane in June 2003, ex-CPA head Paul Bremer emphasized the need to privatize government-run factories with such enthusiasm that his voice could be heard over the din of the cargo hold. "We have to move forward quickly with this effort," he said. "Getting inefficient state enterprises into private hands is essential for Iraq’s economic recovery."
It is uncontroversial to argue that US policies and interests are widely reflected in the decisions taken and the statements made by the Iraqi interim authorities. In relation to debt and IMF programs, however, the government of Iyad Allawi seems to have surpassed all expectations.
On September 24, three Iraqi interim ministers sent a "letter of intent" to the managing director of the Fund. Such letters — a standard requirement in IMF procedure — are officially the work of national authorities, though IMF officials typically dictate their content themselves. A quick examination of the Iraqis’ letter of intent, as well as the documents on Iraq already published by the IMF, reveals multiple references to "restoring Iraq’s external debt sustainability," "tax reform," "financial sector reform," "restructuring state-owned enterprises" and "macroeconomic stability." The tenor of these documents bears a remarkable resemblance to the Fund’s prescriptions for Argentina and Southeast Asia during the 1990s. Absent from the letter, moreover, is any statement about the priority that Iraqi authorities or the IMF will place upon reduction of unemployment. A statement on Iraq issued by the IMF’s deputy managing director on September 29, meanwhile, makes not a single reference to unemployment or to poverty. On October 14, the Iraqi interim government took still another step in the direction of free-market fundamentalism when it applied for membership in the World Trade Organization.
INTRANSIGENT ARAB CREDITORS
To make matters worse, and despite all the attention garnered by the Paris Club negotiations, most of the debt incurred by the deposed regime is not actually owed to Paris Club members. Iraq’s main creditors are Arab states. Saudi Arabia claims $30 billion, while Kuwait demands repayment of a further $16 billion in debt as well as more than $30 billion in reparations from Iraq’s invasion and occupation of the country from 1990-1991. Billions of dollars are also claimed by the United Arab Emirates, Qatar and other Arab countries. Finally, on October 25, Iran was reported to have claimed $97 billion in reparations from Iraq for damage caused during the Iran-Iraq war of 1980-1988.
At first, Arab creditors were loath even to consider writing off any of the Iraqi debt. Kuwait was particularly intransigent, eliciting a rather confused reaction from senior US officials. "I have to say that it is curious to me," Bremer said, "to have a country whose per capita income, GDP, is about $800…that a county that poor should be required to pay reparations to countries whose per capita GDP is a factor of ten times that for a war which all of the Iraqis who are now in government opposed." Bremer was referring to monies transferred to Iraq during the 1980s, which were most probably intended to assist Iraq in its war against Iran.
Iraq, under Saddam Hussein and subsequently, has long argued that these funds were grants and not loans. Kuwait obviously disagrees. Kuwaiti Foreign Minister Muhammad Sabah Al Salim Al Sabah affirmed on December 1 that Kuwait has in its possession official documents demonstrating the transfer of monies to Iraq. "Any single dinar that Kuwait paid to Iraq without a legal and official proof will be worthless," he said. But, from a legal point of view, the fact that transfers were made does not suffice to prove that Iraq is under any obligation to pay back any money unless the terms of the transfer are specified. If creditor nations insist on being rigid in their interpretation of the law, and argue that they have no obligation to apply the doctrine of odious debt to Iraq, then Iraq should not hesitate to argue that a loan is not a loan without a written contract to prove it. It is unclear whether such contracts exist. What is true of Kuwaiti "debt" is also true of Saudi Arabian claims.
There is a solid legal basis, by contrast, for enforcing the war reparations claimed by Kuwait, as they are based on UN Security Council resolutions. Iraq will have difficulty avoiding payment of any amounts claimed by the Kuwaitis and granted by the UN Compensation Committee, unless Iraq decides unilaterally to refuse payment, which may or may not work out in its favor.
LESSONS FOR REFORMERS
Post-Saddam Iraq offers a perfect illustration of how the industrialized world has used debt as a tool to force developing nations to surrender sovereignty over their economies. Iraq had no bargaining chip — save its economic weakness — with which it could have forced Paris Club members to write off a greater portion of debt. Indeed, had Iraq’s economy been in better shape, less of its debt would have been written off. The odious debt doctrine has considerable moral force, but it is not binding, and it comes as no surprise that Iraq’s creditors do not think in altruistic terms. Nor does the Iraqi case even constitute a precedent that other highly indebted countries could use in their favor; the Paris Club was careful to note that Iraq’s is an "exceptional situation." What implications does the November 21 Paris Club deal have for activists seeking to ameliorate the financial burdens thrust upon poor countries by corrupt regimes?
When arguing with government officials in relation to existing debt, campaigners face two obstacles. First, the legal context in which existing debt was contracted cannot be modified retroactively, and there is therefore no legal obligation on the creditor’s part to determine whether or not the subject matter of a financial agreement is illicit. Second, there is a clear financial disincentive for creditor nations and financial institutions to forgive outstanding loans. Neither of these obstacles applies to future debt. Any reform that is put in place today will necessarily apply to loans made in years to come. In addition, the legal status of future debt has no real impact on a lender’s balance sheet.
Campaigners should move to establish the equivalent of odious debt doctrine for loans yet to be lent. The legal framework relating to international loans can be reformed through a number of different mechanisms, including, but not limited to, a new international convention, or a Security Council resolution. The European Union could even begin drafting an international convention, while leaving open the possibility for other states to ratify the agreement in the future.
Many argue that if repayment of loans were subject to scrutiny of how the borrower spent the money, loan funds would dry up. So the international convention or Security Council resolution should provide for a mechanism for dispute resolution or to refer all disputes to an already existing dispute resolution mechanism. One possibility would be for the International Center for the Settlement of Investment Disputes, a tribunal organized under the auspices of the World Bank, to deal with international lending disputes. Whatever the case may be, the advantage that opting for a particular dispute resolution mechanism would present in practice is that it would allow for the creation of a significant body of law that would serve to clarify rules relating to the illicit purpose exception.
Any such reforms will come too late for Iraq, however. As creditor nations are unlikely to have a change of heart and forgive a greater portion of Saddam’s odious debt, the new Iraqi government will need to determine whether there are ways to force debt renegotiation and to resist pressure to adopt IMF prescriptions. The first priority should not be to please outside creditors. It should be to reduce unemployment and to redistribute wealth in such a way as to reduce social divisions, something that is particularly important in Iraq. The struggle over Iraq’s economic future has moved from Paris to Iraq.