Debt cancellation is not the answer

The trouble with debt cancellation is that it subsequently affects the credit rating of a country. Since the proposed debt cancellation is designed to provide targetted help to the best run developing countries it is particularly damaging. It undermines the credit of those countries which might otherwise have a fairly good rating, and thereby undermines future development.

It would be better by far to cancel debt only when it has been declared "odious". That would mean cancelling debts undertaken by governments which were oppressive not representative, but only after the government has changed. On obvious example is Iraq. Why should the government - and therefore the taxpayers - of free Iraq bear the cost of debts incurred for the enrichment of Saddam Hussein, his family, and his clients. Another example would be Nigeria. Let Sani Abacha's creditors pursue his heirs and their Swiss bank accounts, not the people he oppressed in Nigeria.

Unlike a general debt cancellation policy, the development of a procedure for declaring debts odious would create positive incentives. No government could be relieved of debt while still in power, or it would create an incentive for a government to become oppressive. But it would mean there would be clear financial incentives for countries to rid themselves of evil and corrupt dictatorships. People like Saddam, Abacha and Mugabe would no longer be able to borrow, but sensible uncorrupt regimes like that of Botswana would. Countries simultaneously crippled by debt burdens and incompetent governments could shed the former by disposing of the latter.

The only real losers would be governments like those of Jacques Chirac in France, which love to lend money to the most appalling dictatorships to encourage them to buy French guns. Plans for declaring debt odious were widely discussed in the US before the liberation of Iraq, which is why Chirac opposed plan. Under such a procedure, Jacques would never see his money again. Good.

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