Consequences of debt

Dear Ministers, Vice Minister, Ladies and Gentlemen,

Welcome to Oslo. I am happy see that so many distinguished people have come here for this symposium on illegitimate debt.

Let me start by thanking the Lutheran World Federation, the Church of Sweden and Norwegian Church Aid for organising this event. The heavy burden that foreign debt put on many developing countries is an important concern to the Norwegian government. In those cases where government loans have not been used to promote development and the welfare of the people, it is easy to understand that servicing this debt is felt particularly hard and unfair.

We therefore see it as vital to have a discussion of the causes and consequences of debt, and the burden it places on countries and on development. The current international financial crisis also makes this discussion very timely. A significant amount of new lending is likely to take place in the weeks and months to come.

Bringing together a variety of key international stakeholders – governments, academics, civil society and multilateral organisations – is an accomplishment in itself, and an important way to move the discussion of the debt issue forward. And I am honoured to be invited to share the Norwegian government’s perspectives on these issues.

The past, the present, and the future are all important in considering debt and legitimacy.
The past can tell us about the multitude of reasons why government debt was contracted, and the circumstances surrounding it. Functioning credit markets are important for any agent in the economy, and the possibility to both lend and borrow are part of the normal operation of governments. But government borrowing involves both business and politics. While most global debts that have been contracted by governments are uncomplicated, some debts are problematic.

Let me give you some examples. The apartheid regime in South Africa was massively condemned by the international community for its racism, oppression, and violation of human rights. Should the people of South Africa today pay for loans contracted by a small minority to finance the oppression of the majority? And during the cold war, the superpowers gave easy loans to dictators for domination and to fight wars by proxy. Should these commitments be honoured?

The notion of odious debt has a certain basis in international law and suggests that debt incurred by a regime for purposes that do not serve the best interests of the nation should not be enforceable. In the case of odious debt, Nobel laureate Joseph Stiglitz has said it would be “immoral to force the people of these debtor countries to repay the debts”. The cancellation of Iraqi debt after the fall of Saddam Hussein in 2003 suggests that this notion at least has a certain moral standing in the international community.

How we relate to these and other debts is a question we are faced with in the present. Today, the custom is to consider the state a sovereign, and its debt as an absolute contract that must be upheld. Debt restructuring and cancellation takes place at the discretion of creditors. Unilateral attempts by a state to default on its debt obligations have been largely unsuccessful, and usually at detrimental costs to the national economy.

There are few historical examples of countries that have refused to honour part of its debt obligation on the grounds that it was odious or illegitimate. Should this continue to be the current state of affairs? I know many of the civil society organisations would answer a clear “no”, and I honour their work to put illegitimate debt on the international agenda.

I read illegitimate as broader term than odious, which mainly is related to regime change. And I would agree with civil service organisations that dubious debt is not limited to odious debt. However, illegitimate debt is a very young concept and does not yet have a clear legal and practical content.

While I see merit in questioning legitimacy, in the meaning of whether some debts rightly should be paid or not, I also think it is important to consider a country’s ability to pay. To what extent a country is able to service its debt stock, and the amount of resources that debt service would take away from development and poverty reduction, is relevant. I think it would be fair to say that ability to pay rather than illegitimacy has been the starting point of existing international debt relief mechanisms.

Looking towards the future is crucial because we want to encourage responsible lending practices and avoid creating new debt crisis. The emergence of developing countries as bilateral creditors is something that needs to be taken into consideration in that context. I also think we need to recognise that the solutions we chose today have consequences for the future. Does the cancellation of odious debt have the potential to bring democracy and stability because dictatorships will have a harder time to secure loans and financing? If so, the forward-looking impact could be an argument for taking action today.

The notion of illegitimate debt also raises many severe dilemmas. I will mention five:

• First, what criteria should be used to decide if a project is bad enough – if borrowers sufficiently corrupt or illegitimate enough – to defend cancellation on the basis of illegitimacy? What about successful projects in illegitimate regimes, unsuccessful projects in legitimate regimes, and how do you define when a regime is illegitimate, especially if its status changes over time? Who should make those judgements?
• Second, how do you ensure that debt cancellation does not dry out credit markets for developing countries? How do you ensure that both lender and borrower are given good incentives and bear the right amount of risk, also without drying out credit?
• Third, how do we move forward with illegitimate debt without threatening the progress of existing initiatives? Debt cancellation must be given on a multilateral basis, and HIPC and MDRI are the cornerstones of Norwegian debt relief policy. These initiatives work, and Norway will continue to fund and improve them. We must not make the best an enemy of the good.
• Fourth, when granting loans, to what extent should the international community undermine the principle of a nation’s sovereignty? Process and quality requirements, such as parliamentary approval, also represent a form of conditionality. We need to further discuss the forms of conditionality that are legitimate and efficient.
• Fifth, where are our limited resources best spent? If our goal is to ensure more resources and a better framework for development, the benefit-cost ratio of pursuing illegitimate debt must at least as high as other projects.

Norway seeks to be a leading force for debt cancellation. We work through existing multilateral mechanisms. We are a strong supporter and founder of the existing debt cancellation initiatives, the HIPC and MDRI, and work to improve these arrangements. We work to encourage responsible lending practices and Norway was among the five countries to formulate and present the new OECD guidelines on sustainable lending. Norway is also the biggest donor to the UN’s work to build debt management capacity in poor countries.

Norway works by taking new multilateral initiatives. We have financed studies on the “odious debt” doctrine, both by the World Bank and UNCTAD. This is a first step towards translating these ideas into practical policies, and towards building international support for these ideas. Norway also supports the work for a new internationally accepted debt workout mechanism, including assessments of the legitimacy of debt, enhancing the transparency and accountability of procedures of existing mechanism, and the possibility of crafting more permanent debt mediation or arbitration mechanisms. The Sovereign Debt Restructuring Mechanism (SDRM), proposed by the IMF in 2001 to give earlier, quicker, cheaper and less painful debt settlements, might be a starting point for this work.

Norway also has taken unilateral action as a creditor. As I am sure you are aware, we have unilaterally cancelled the debts incurred as a result of the Norwegian Ship Export Campaign. As the first country ever to do so, we have accepted creditor co-responsibility for this debt. Our Minister of International Development, Erik Solheim, will talk more about the Norwegian efforts when he speaks at this conference tomorrow.

The waters of debt cancellation are difficult to navigate for creditors and debtors. In addition to supporting multilateral initiatives, countries can independently undertake reviews of their debt stock. Let me end by underlining the importance of this topic and continuing this debate. As we more forward, I would also like to encourage debtor governments to involve themselves more actively in the debate on illegitimate debt. Governments in developing countries are in a unique position to bring these ideas to multilateral fora.

While the waters are difficult to navigate, the journey is thrilling. My hope is that we will arrive to a world where state debt can be handled through a transparent and fair multilateral mechanism, where debtors and creditors take joint responsibility for debts incurred, where blatantly odious debts are cancelled with clear implications for the creditworthiness of future illegitimate regimes, and where responsible lending and risk sharing practices are the order of the day.

This conference is a part of the journey, and you the participants are potential agents for change. I wish you the best of luck.

Thank you for your attention.