 About F&D  Subscribe Back Issues Write Us Copyright Information Free Email Notification Receive emails when we post new
items of interest to you. |
|
|
|
Dictators and debt: Let´s clarify the rules In "Odious or Just Malodorous" (December 2004), Raghuram Rajan discusses proposals to restrict odious debt such as the one we proposed in F&D two years ago ("Odious Debt," June 2002). Rajan raises the concern that as an unintended consequence of restricting loans to odious regimes, legitimate governments might also find it harder to borrow. If a legitimate government borrows and an odious regime subsequently takes power, under the new system the odious regime will be both less able and less interested in repaying the debt it inherited, he argues. An odious regime will be less able to repay inherited debt if new loans are needed to fund ongoing and new projects that generate the country´s cash flow. While we agree that countries often grow themselves out of debt, it seems unlikely that odious regimes are really borrowing for this purpose. It would have to be the case that both being able to borrow enabled a dictator to expand the economy and, crucially, that the dictator spent the gains for the benefit of the country. If borrowing by a dictator is indeed in the interests of the citizens, we agree that it should not be blocked. The truly odious dictators, however, probably don´t borrow to grow the economy and, in any case, don´t pass the gains on to the people. Rajan also points out than an odious regime will be less interested in repaying debt because it no longer has the carrot of being able to continue to borrow as long as it repays. One solution to this problem is to roll over the inherited debt until the next legitimate government comes to power. The country would still be responsible for paying the debt plus arrears, and the creditor would expect to receive payment in time. Rajan is right to point out that, because there are many possible debt-market equilibria, we should be cautious of unintended consequences of a system that restricts odious debt. However, the benefits of eliminating odious debt are potentially enormous, so it would be unfortunate and premature for the proposal to be put in cold storage, as he suggests. If loans to odious regimes were restricted, people in poor countries would be saddled with less debt. Their rulers would have less incentive and ability to misspend. And there is another potential benefit: legitimate governments could find it easier to borrow. Currently, there is a movement to nullify some debt on the grounds of odiousness, but it is hard for creditors to anticipate which loans will be considered odious in the future. If the rules of the game were known in advance, lending to legitimate governments would be less risky and interest rates for legitimate governments would fall. Seema Jayachandran Michael Kremer IMF should back, not belittle, odious debt regime In his haste to dismiss the international legal Doctrine of Odious Debts and my arguments in favor of it (www.cato.org/pubs/pas/pa-526es.html), Raghuram Rajan ("Odious or Just Malodorous," December 2004) missed the long legal history in which the doctrine´s principles have been used to establish the responsibilities of creditors (or borrowers), and thus their rights to repayment (or repudiation). This time-honored legal principle holds that debts not used in the public interest are not legally enforceable: in 1898, the U.S. repudiated the "Cuban debts" after the Spanish-American War on the grounds that the money was spent contrary to the interests of the Cuban people; in 1919, the Reparation Commission refused to apportion debts under the Versailles Treaty to newly liberated Poland that had been incurred by the German and Prussian governments to colonize Poland; in 1923, Chief Justice Taft, sitting as arbitrator, ruled against the Royal Bank of Canada´s claim to repayment for monies it lent to a Costa Rican dictator. The list of precedents goes on. Not only is the doctrine well-rooted in international legal custom, it is also grounded in the rich jurisprudence of common and civil law: the principle of "unjust enrichment" undermines an odious creditor´s rights to repayment and strengthens a legitimate creditor´s rights to repayment; and the law of domestic agency governs the way in which agents can create legally binding obligations for those they represent, thus putting a dictator´s creditor at risk. The private sector has had no trouble grappling with the law and figuring out how to "odious debt—proof" its loans: in much lending and project finance today the lenders know the purpose of the loan and an elaborate set of representations and warranties binds the borrower. If a lender doesn´t exercise the due diligence to establish whether the steel imported is used for cannons rather than cradles, or for guns to shoot innocent civilians rather than criminals, as Rajan warns, then I say, as the American commissioners to the Spanish-American War peace conference said: "The creditors, from the beginning, took the chances of the investment." Already, private sector financiers are careful to establish their due diligence and evidentiary basis to defend today´s loans in future. The IMF should champion this application of the rule of law, rather than disparage it. While an odious debt regime might not stop all dictators "in their tracks," it would stop many and it would isolate as pariahs those who survived by selling off their nation´s assets. By giving creditors—public and private—an incentive to lend only for purposes that are transparent and of public benefit, the IMF would change the culture of international lending and reduce the moral hazard that has destabilized international finance for the past 60 years. It would also promote sound investment and growth, starve tyrants of their ability to finance themselves against their people, and thus better serve the cause of world peace. Patricia Adams Outsourcing: Enlightening demystification Mary Amiti and Shang-Jin Wei, in "Demystifying Outsourcing" (December 2004), provide a useful corrective to the hysteria that usually surrounds that topic. Their analysis of statistical data in the first part of the article is particularly illuminating and readers will be grateful for the lucid and balanced presentation of these facts. In the section following the heading "U.S. and U.K. realities," it is presumably a lack of data that forces them into the subjunctive (could, would, is likely). Obviously this section will be strengthened when further data become available. Your readership is looking forward to their new working paper on service outsourcing, productivity, and employment growth, in which one hopes their case will be made with equal evidential cogency and expositional clarity. Thank you for the enlightening demystification of this vexed economic challenge. David Driscoll The authors respond: Our article highlights two main findings from our research. First, increases in service outsourcing in U.S. manufacturing and services sectors go hand in hand with greater labor productivity. Second, jobs are not being exported, on net, from industrial countries to developing countries. Thus, the evidence suggests that job losses in one industry are often offset by jobs created in other growing industries. Our analyses utilize industry level data for the United States and United Kingdom. We make a number of conjectures that need to be verified with further research. More specifically, we state that "when jobs in one sector are outsourced, other sectors could also be affected" through, for example, a lower cost of inputs. We are currently working on developing inter-industry outsourcing measures to see if this is indeed the case. For each industry i, we are constructing an outsourcing intensity measure of industries that supply inputs to industry. We will examine whether productivity is higher in industries that purchase inputs from outsourcing intensive industries. We also raise another possible consequence of outsourcing, namely the possible change in the skill mix, which we are examining. We are collecting industry level data by different skill levels to see whether industries that are outsourcing intensive in services are becoming more or less skill intensive. There are yet still other conjectures that cannot be verified without more detailed firm level data on employment and output, as well as details of which parts of the production stage have been outsourced to other countries. For example, in trying to explain the first result we say that it is "likely due to firms relocating their least efficient parts of production to cheaper destinations." We go on to say that "the increased efficiency could lead to higher production and expansion of employment in other lines of work." Unfortunately, we do not have the data to verify the statement. We hope future research by us or others could make progress. In summary, many of the subjunctives (could, would, is likely) will be changed as additional research is completed.
|
