Global Policy Forum

By Charlotte Denny

They should have been cheering in the streets of Manila, Johannesburg and Kinshasa as well as in Baghdad as the statue of Saddam Hussein was toppled. As the last remnants of Saddam regime crumbled, the US treasury secretary, John Snow declared Iraq's citizens should not have to pay back the debts racked up by their former dictator.

Applying that principle around the world would save billions of dollars for citizens in countries such as the Philippines, South Africa and Democratic Republic of the Congo. When Ferdinand Marcos was overthrown in 1986, the Philippines owed $28bn to foreign creditors, while his personal wealth was estimated at $10bn.

It's a similar story in the Congo, formerly known as Zaí¯re. One of the world's poorest countries, torn apart by its neighbours for its mineral resources, was left with $12bn in debts when Mobutu Sese Seko died. All the citizens of the Congo had to show for his rule were lavish palaces decorated in the dictator kitsch style Saddam also favoured.

Unfortunately international law does not take into account the circumstances under which debts are contracted. Mr Snow's new doctrine did not even survive last weekend's meeting of Group of Seven finance ministers in Washington.

Russia, one of Iraq's largest creditors, declared that it had not been given a pass on its Soviet-era debt and saw no reason why Iraq should get special treatment. Finance ministers decided instead that Iraq's debts should be handled through the usual channels - the Paris club of creditor nations, which meets at the French finance ministry.

Rough justice

Paris club members are to discuss Iraq's debts this week. The group has a set of well worn formulas for dealing with indebted countries and the deal they offer Iraq is unlikely to be generous. With the world's second largest oil reserves, Iraq ought to be a relatively well off country. It will not qualify for the most generous debt forgiveness on offer to the poorest countries, and France and Germany as well as Russia favour restructuring the country's loans rather than writing them down. French finance minister, Franí§ois Mer suggested that African countries could lose out if Iraq gets a debt write-off.

It would be a mistake though if Iraq's debts became another opportunity for a replay of the pre-war splits in the security council. Germany and France, the biggest creditors in the G7 have nothing to lose by being generous - Saddam showed no signs of intending ever to repay their loans and was not even paying the interest. It is cynical for France to suggest that somehow the money will be taken away from Africa to forgive Iraq's debts. There is also a rough justice to a write-down in that most of the biggest creditors were the countries which sold Saddam arms. Why should the Iraqis pay their bills?

A one-off write-down for Iraq would be equally mistaken. Too often the middle-income countries which get special treatment for their debts happen to be countries America wants to cultivate. What the rest of the G7 should have done was welcome Mr Snow's pronouncement and suggest that to avoid suggestions of favouritism, his new doctrine should form the basis of a more generous deal for other indebted countries.

One approach to the problem of debts created by illegitimate governments has been suggested by Seema Jayachandran and Michael Kremer of Harvard University. Worried that retrospectively declaring debts illegitimate will discourage lending, they suggest an international tribunal which would rule on future loans. Anyone lending to regimes it declared illegitimate would face the threat that the debts would not be honoured, a more effective sanction they argue than trade embargoes.

"Dictators would no longer be able to borrow, loot the proceeds - or use them to finance repression - and leave the debt for their ill-treated citizens to repay," they suggest in the current issue of the Brookings Review.

Tricky decisions

Applying such a rule on future loans lets the creditors who lent to Saddam and his odious peers off the hook. Economists worry about moral hazard - that countries will borrow recklessly if they know they will get a debt write-down. But what about the moral hazard of the creditors who lent recklessly to Iraq knowing the money was not being invested productively, but in weapons and the instruments of repression? They should not expect to be repaid.

Pragmatism is likely to win out, even if the Paris club's instinct is to postpone rather than solve the problem. One quarter of the $20m Iraq earns from oil exports is pledged to paying compensation claims from the last Gulf war, while the rest goes on food handouts to the 60% of Iraqis dependent on the oil for food programme. There is no surplus cash about to start paying off the debts and that is even before the Americans started suggesting that Iraq's oil revenues could pay for the costs of rebuilding its economy.

The reality is that Iraq needs not only substantial debt relief but also fresh money from donors. African countries are worried that aid budgets will be raided at their expense. On past form, they are right to be concerned - the extra money which Britain and the US have budgeted for the task of rebuilding does not come close to even the most conservative estimates of the costs.

Debt relief is only one of many tricky decisions to be negotiated over the next few months. Far more pressing is the issue of resuming Iraq's oil exports. The US wants the World Bank to replace the United Nations as the chief accountant and guardian of the country's oil exports until a fully legitimate Iraqi government takes over. Britain, meanwhile, would prefer to see UN back in charge, fearing that the Bank could be too easily leaned on by its largest shareholder. France and Germany agree. But with No 10 rapidly backpedalling on its promise to put the UN in charge of post-war Iraq, the UN's best hope of retaining control of the oil for food programme is, paradoxically, the big oil companies. They are reluctant to buy oil from Iraq until the legal issues are clarified, fearing that they could be billed again when a legitimate government is elected.

Which leaves the thorniest issue of all - the shape of the new government. Arming a Shia theocracy with the world's second largest oil reserves is not quite what Donald Rumsfeld had in mind when the US invaded Iraq. The Americans claim they want Iraqis to decide on their new government as soon as possible.

If the outcome is that the people of Iraq decide that what they really want is to be ruled by the ayatollahs, what is the betting that they are told to go back to the drawing board? Or at the very least, that Mr Snow's generous debt write-down is suddenly no longer on offer.

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