Lending to Dictators: Bad Loans, Good Business

Lending to Dictators: Bad Loans, Good Business

Walter Wriston, former Citicorp chairman, declared that “Countries never go bankrupt.”

By: Andrew Hanauer\

Published on Jubilee USA’s Blog the Debt, http://jubileeusa.typepad.com/blog_the_debt/2012/12/lending-to-dictators-bad-loans-good-business.html#more
Consider the following narrative: a western creditor, perhaps a bank or a government, lends money to an African country.  The African country is run by a dictator, an eccentric man who has changed the name of his country from a western colonial moniker to that of an authentic African word at the same time that he spends much of his free time shopping in Paris.  The money loaned to this dictator, shockingly, does not go to build a hospital in a rural area.  It does not go to build roads or wind farms.  It does not create jobs.  It is spent on foie gras and champagne, two of the dictator’s favorite things, and perhaps on the guns necessary to ensure that nobody else takes his place.  It is spent on a villa in Spain and an apartment in Central Park West.  It is spent, in short, on the dictator himself, though the loan will be repaid, of course, by the public.  A selfish act, yes, but champagne can be very expensive…

This type of situation is the epitome of “odious debt,” a term used to refer to debt that is incurred for illegitimate purposes by a dictator but paid back by the democratic government that follows.  Academics and activists are fond of invoking odious debt as a moral and legal framework within which to call for the repudiation of some developing nation debt, particularly with regards to Africa, where a wave of democratization in heavily indebted countries swept away some of history’s longest serving dictators in the early 1990s.  The narrative above is a common one, and is often advanced by advocates of the repudiation of odious debt.  It is compelling, and features a clear cut villain (dictator) and victim (Africans).  What it lacks, however, is a proper understanding of the third party involved in odious debt: the lender.

In the developing nation debt conversation, creditors are often portrayed as neutral third parties.  Yes, it is acknowledged, they lent to dictators, but they were misled by false promises and their kind-hearted attempts to reform broken African states were thwarted by corruption and greed.  Their money was stolen, and now they are forced to choose between demanding repayment from some of the poorest people on earth and accepting the claim that they are not entitled to repayment at all.  In some cases, they are accused of having been negligent (“they should have known better”), and thus bearing some responsibility for the debt problem, though not moral culpability.

This façade of neutrality does not account for the numerous incidents in which western lenders deliberately lent money to repressive regimes despite full awareness of both the nature of the borrower and the final destination of the borrowed funds.  This lending had catastrophic effects on African countries and their people, and was entirely avoidable.  In some cases, lenders extended loans to further their own economic interests; in other cases, western governments lent money solely for political reasons.  Sometimes loans were pushed for internal institutional reasons, and reflected a broken system more than a sinister manipulation by a particular entity.  Regardless, creditors have interests and motives for lending, and those interests often matched those of the borrowing despot for selfishness and greed.  Lenders are not neutral.  And they deserve a starring role in any accounting of Africa’s odious debts.

Perhaps the symbol of irresponsible lending is former Citicorp chairman Walter Wriston.  Wriston (in)famously declared that “sovereign nations don’t go bankrupt,” essentially implying that long after a dictator has left office, the residents of a country will have the capacity to pay the bill, no matter how poor they might be.[i]  So even if a despot were to flee with his stolen loans and stash the money in an opaque Swiss bank account, a lender could rest assured that repayment would come, and with interest.  In the 1960s and 1970s, lenders took this assurance to heart, giving billions of dollars to kleptocrats, tyrants and military dictatorships, knowing full well that much of it would be stolen, laundered and/or used to repress dissent.  These loans are now being repaid by citizens of African countries who rarely benefited from the money in the first place, while the creditors have in many cases received repayment for the original loan plus huge sums in interest.  And in many cases, the loans actually perpetuated autocratic rule, thus consigning Africans to additional years of dictatorial rule and its accompanying misery.

Why, one might ask, would western governments and private creditors do this?  Unfortunately, a number of perverse incentives exist for loaning money to dictators:

  1. It’s the money.  If you’re confused as to why creditors would lend money to thieving dictators given the financial risk, just remember Walter Wriston.  If countries don’t go bankrupt, creditors don’t lose their money.  And while it may take years for the country to pay back the loan, the accrued interest often means the creditors make a hefty return on their original “investment.”  These loans are often accompanied by upfront fees which the creditors simply take out of the amount of the loan.  The borrowing despot doesn’t care, because he’s still getting free money.  But the people stuck with the bill pay that much more. 
  2. It’s that time of year.  Economics professors Leonce Ndikumana and James K. Boyce note that for many creditors, including multilateral institutions such as the World Bank, lending money near the end of a fiscal quarter is deemed critical.  After all, “failure to use appropriated funds by the end of the fiscal year may trigger reduced appropriations the following year.”[ii]  As a result, loan agents are urged to push loans regardless of the recipient, and “a loan officer who delays loans…owing to concerns about leakage of the money into private pockets…is not on the fast track to a promotion.”[iii]
  3. It’s the Communists (or Terrorists).  Much lending is also done for political reasons, regardless of the human rights record of the loan recipient.  Mobutu Seso Seko is the most commonly cited example of this; the Zairian dictator was a notorious kleptocrat who stole billions of dollars from his impoverished citizens and ruthlessly repressed dissent, but he was friendly to the West.  The end result was that the money kept flowing, and while Mobutu’s personal wealth was estimated in the billions, the Democratic Republic of the Congo (DRC) now has a debt burden hovering around $10 billion.  In short, creditors got paid, Mobutu got rich and the DRC got stuck with the bill.

Law professor Anna Gelpern argues that in many cases, odious debt is certainly odious but it is not truly debt.  That is, many of the loans made by western governments to African dictators, particularly those made for political reasons, were essentially grants and not loans, but had to be classified as loans to garner domestic support.[iv]  That African countries are now paying back these obligations is a result of the lack of western domestic support for such assistance to dictators in the first place, and speaks to the odious nature of these “debts.”

Realizing the extent of western complicity in Africa’s debt crisis should call into question many of the assumptions we make about both Africa and the West.  So often, western institutions are portrayed as neutral arbiters of senseless third-world conflicts or problems.  So often, the truth is murkier.  Westerners seeking to help the third-world through programs and aid might first want to push their governments to obey the Hippocratic Oath, and “first do no harm.”

[i] Ndikumana, Leonce, and Boyce, James K., Africa’s Odious Debts, Zed Books, 2011, page 29
[ii] Ibid, page 23
[iii] Ibid.
[iv] Gelpern, Anna, “Odious, Not Debt,” published in the Journal of Law and Contemporary Problems, 2007.

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