The New Global Economy
Mubarak’s Odious Debts
Saifedean Ammous
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NEW YORK – A glance at Egypt’s public finances reveals a disturbing fact: the interest that the country pays on its foreign loans is larger than its budget for education, healthcare, and housing combined. Indeed, these debt-service costs alone account for 22% of the Egyptian government’s total expenditures.
The impact has become impossible to ignore. With growing political uncertainty and a slowing economy, Egypt is likely to witness decreasing government revenues, increasing demands for urgent spending, and rising interest rates on government borrowing. This could lead to a fiscal catastrophe for the government at the very moment when the country is attempting a complicated political transition.
Egypt’s public debt is around 80% of GDP, very close to the 90% level that economists Kenneth Rogoff and Carmen Reinhart identify as a harbinger of slower growth and heightened vulnerability to financial and fiscal crises. Egyptians need only glance north, at the European debt crisis, to understand they should sort out their debt problem now, rather than waiting until it reaches Greek proportions.
This debt was incurred during the 30-year reign of the deposed president, Hosni Mubarak. In international law, debt that is incurred without the consent of the people, and that is not used to their benefit, is referred to as “odious”; as such, it is not considered transferable to successor regimes. The reasoning is simple and logical: if someone fraudulently borrows money in my name, I am not expected to pay it back, and neither should a country’s population when an unrepresentative leader borrows in their name and to their detriment.
For three decades, Mubarak’s borrowing only enriched him and his ruling clique while impoverishing and repressing the rest of Egypt. Corruption was rife, but not just the covert type: public money was openly used to support many businesses under flimsy pretexts like “fostering economic growth” and “creating employment.” Along with regulatory capture, this harmed competitiveness, market openness, and Egypt’s small and medium-size businesses.
The beneficiaries of this largesse are now mostly sitting in prison awaiting trial. The rest of Egypt, however, only felt this money in the form of an ever-expanding state apparatus that solidified Mubarak’s rule, crushed dissent, and repressed millions. When Egyptians rose up against Mubarak in January, they were confronted by weapons paid for with borrowed money.
Is it fair to expect Egyptians to continue paying for their previous repression and impoverishment at the hands of Mubarak and his cronies? Since this money clearly benefited Mubarak but not his people, should it not be Mubarak, rather than his victims, who is held responsible for it?
The type of regime Mubarak was running had been clear for many years, and it was also clear how the money was being used. A prudent lender should have considered these facts before making the loans. So the banks and international institutions that lent money to Mubarak should bear the responsibility of their choice to bankroll his repressive regime.
The new Egypt should make a clean break with Mubarak and his creditors, and let them sort out their business among themselves without involving the Egyptian people. The Egyptian government’s only role should be to help liquidate Mubarak assets for repayment should the need arise.
This would be not only fair, but it also would teach an important lesson to those who bankroll dictators – a lesson that is likely to have an immediate positive impact worldwide. Lenders to a repressive regime will no longer expect these debts to be repaid by its successors, immediately making lenders worldwide careful about lending to them.
An Egyptian precedent would bring awareness and sobriety to an entire generation of lenders that is not accustomed to considering this type of risk, and that may even be unfamiliar with the doctrine of odious debt. Repressive regimes would find it harder to borrow, which would, in turn, make it harder for them to repress their people, and make it easier and cheaper for responsible and legitimate governments to secure important funding when they need it.
Transferring liability for foreign debt to Mubarak should not have negative economic consequences for Egypt in the long run. This move should not be understood as a move towards fiscal recklessness, but as a one-time break from it. With a smaller debt burden and interest payments, Egypt’s fiscal position would improve significantly, and threats to economic growth would recede. Foreign lenders’ resulting caution would prevent future Egyptian governments from irresponsibly saddling their populace with debt.
Perhaps most importantly, the days of borrowing to build a large state security apparatus would be gone for good – worldwide. For the sake of Egyptians and people living under tyranny everywhere, Egypt’s government must take a brave stand.
Saifedean Ammous is Visiting Scholar at the Center for Capitalism and Society in Columbia University and Lecturer in Economics at the Lebanese American University.
Copyright: Project Syndicate, 2011.
www.project-syndicate.org
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mvl28 07:34 06 Oct 11
This is something that already happen in other countries, such as Equador. The United States already used this concept, more than once. This documentary describes more recent similar situations while explaining the two cases above.
http://www.debtocracy.gr/indexen.html
It's about Greece's debt, altough here it is not so simple, because its different from an opressed regime like it was Egipt's case, where, I believe, that there should be no doubt that the use of the money was not for the benefit of the population.
Also, the creditors by writing off some of their debt, hopefully would make other creditors not give private loans so easily, because of the risk in losing money. Unfortunately, there are many and usually they always win more that they lose.
RobJones 02:30 07 Oct 11
Pardon my ignorance, but I thought that Islam prohibited acceptance or payment of interest. Is this true?
slightly_optimistic 12:03 07 Oct 11
Why do the Paris Club use their taxpayers continually to bail out private financial institutions?
"Someone I had better not identify said the reason international meetings seldom produce the positive co-operation that could help solve the world's problems is that the people sitting round the table are too often more interested in their next job than the next generation", reported financial and economics commentator Anthony Hilton. http://www.thisislondon.co.uk/markets/article-23932181-kings-five-points-deserve-respect.do
relkishky 01:36 10 Oct 11
Isn't it strange that Mr. Saifedean Ammous, an economics lecturer, doesn't understand the difference between domestic debt and foreign debt?
dismalscientist 08:15 11 Oct 11
Until very recently, Egypt's foreign reserves were approx equal to its foreign debt. That is changing now. The bulk of its debt is financed by local banks. and at $1,000 per capita, total debt not crushing.
And Egypt needs an external credit rating, because it will certainly need to borrow to kick start the economy again once it finds a leadership withthe courage to confront the difficult choices in front of it.
dismalscientist 08:16 11 Oct 11
And to Rob Jones' point, countries don't have religions, people do.
Hanias 06:50 07 Nov 11
if 85% of the debt is domestic, how can this count as odious? the debt payments you mention are somewhat innacurate and include both domestic and other debts.
slightly_optimistic 04:11 06 Oct 11
Interesting example. Many countries could no doubt appeal for debt write-off; the argument being that the population are unreasonably expected to repay debt that was not used for the needs or in the interests of the state.
Following the appeal the Paris Club of public creditors, or whatever replaces it in time, might be persuaded to write off some of the debt. This would switch the liability to the Club's taxpayers rather than the taxpayers of the indebted country.
However, significantly, there is no guarantee that private creditors would be equally philanthropic with the debts they are due - in fact the write off by the Paris Club makes it easier for the impoverished country to service private loans. More loans could then be taken out.
The European Union also has a problem with its debt. There is no effective cross-border management of debt levels yet.