Preventing Odious Obligations

Too often, poor countries get saddled with the odious obligations made under former dictators. Think Antonio Somoza in Nicaragua, Mobutu Sese Seko in the former Zaire, and Ferdinand Marcos in the Philippines. This initiative sets out a way to prevent this all-too common form of theft from some of the world’s poorest people. In the status quo, an illegitimate, unelected regime can sign a contract with a foreign agent, handing over part of the national patrimony in exchange for a short-run payment, which the regime appropriates or uses in part to finance repression. Even after the illegitimate regime is gone, successor regimes often need to levy taxes on their populations to fulfill these contracts, for fear of legal retribution and loss of reputation with investors if they fail to repay.

A country should not be responsible for debt or other long-term obligations that were incurred without the people’s consent and were not used for their benefit, just as an individual does not have to repay money that someone fraudulently borrows in her name, and a corporation is not liable for contracts that its chief executive officer enters into without authority to bind the firm. Yet, as foreigners and bad regimes come together to steal the heritage of the poor, countries have few tools available to effectively counter that theft.

Motivated by the desire to alleviate the burden that unjust transactions impose on successor governments and their citizens, the Center for Global Development convened the Prevention of Odious Debt Working Group in June 2009 to consider whether a new tool could be added to the toolkit of international diplomacy, and, if so, how it could best be implemented.

In its final report, the working group proposes a declaration of contract non-transferability which would seek to prevent contracts in which foreigners make transfers to illegitimate regimes that may be used to loot state resources or finance repression in exchange for claims on citizens or successor governments after the current regime has gone. It would do so by providing that future contracts with such regimes would not be considered binding on successor governments. Even if "rogue investors" operated in defiance of the system, the declaration would help free successor governments from concerns about repudiating these contracts because they would no longer fear the loss of their reputation with legitimate investors worldwide and because the courts of participating countries would not enforce these contracts. The knowledge that successor regimes would have incentives to renounce these illegitimate contracts could help deter foreigners from signing these contracts in the first place.

This working group was co-charied by by CGD visiting fellow John Williamson, non-resident fellow Michael Kremer, and Seema Jayachandran of Stanford University, with the support at CGD of Cindy Prieto, program coordinator. Their work is being carried forward by Kimberly Ann Elliott, Owen McCarthy, and Jenny Ottenhoff. Please send feedback to Jottenhoff@cgdev.org.