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Illegitimate debt

Why are poor countries required to pay back debt contracted by undemocratic and suppressive regimes? Who are supposed to pay back the billions stolen by dictators such as Mobutu (Zaire/DR Congo), Marcos (Philippines) and Saddam Hussein (Iraq)? And how can the lenders expect the population of South Africa to pay back loans contracted by the Apartheid regime, which was used to oppress the black population in the country?

Debt as a result of money lent to undemocratic regimes, for the purpose of suppressing the population, when the lenders should have known that the loans would not benefit the population, is called illegitimate – or odious – debt. The struggle to cancel illegitimate debt has been at the core of the global debt movement as it is unfair that the population of poor countries is required to pay back debt used to finance oppression and luxurious living for the elites. In Norway, the term illegitimate debt has been put on the agenda by politicians and organisations and is widely used, but internationally the term has not been recognised, and debt activist continue to argue for the cancellation of illegitimate debt.

The discussion on illegitimate and odious debt is crucial to ensure more responsible lending and avoid a new debt crisis.

-       Erik Solheim, Minister of Environmental and Developmental affairs, 2007

The word illegitimate describes something illegal, unfair, amoral or unacceptable. Loans taken up by authoritarian and oppressive regimes, where the loan have not been used in the public’s interest is often referred to as ”dictator debt”. Unfortunately, there are many examples of countries still repaying these debts.

Argentina is still paying on the dictator debt contracted by the military junta that governed the country between 1976 and 1983. Large-scale loans were contracted to strengthen and enrich the junta that killed roughly 30 000 people and committed numerous human rights violations. The Argentinean state has later had to take up new loans to service the old ones, thereby increasing the debt from 45 billion dollars following the end of the junta regime to 132 billion dollars today. Another example is South Africa, which is still repaying debt contracted by the Apartheid regime, and used to, among other things, purchase weapons to oppress the majority of the country’s population. Following the dissolve of the regime and the introduction of democracy, the South African government has had to cut welfare budgets to pay back the debt of the former regime. These loans should not have been given in the first place because the lenders should have realised that the loans would be used to oppress the population.

Solutions

Today there are no internationally recognised definition of illegitimate debt, nor any mechanism to consider the legitimacy of a loan. There have, however, been made several proposals for guidelines and criteria for how to approach and consider debt cancellation of illegitimate debt. Examples can be found in:

 The World Bank report Odious Debt: Some Considerations from 2007

The UNCTAD study The Concept of Odious Debt In Public International Law fra 2007

Eurodads Responsible Finance Charter from 2011

Wipe out Illegitimate Debt made by Norwegian Church Aid, together with Church of Sweden and World Lutheran Fundation.

Norway’s illegitimate lending – The Ship export campaign

In 2006, Norway became the first country in the world the cancel debt based on creditor responsibility. This was a historic victory for the Norwegian debt movement, which had worked hard for over a decade to ensure that the debt from the so-called “Ship export campaign” would be cancelled. In the 1970s, Norway provided loans and guarantees to 21 development countries to help them purchase Norwegian ships – in order to save its own shipping industry from a serious decline. Norwegian business interests were front and centre, but development aid were used, and the projects were branded as “development enhancing”. To ensure the employment of Norwegian workers there was a lack of attention to following normal procedures of quality control, risk-assessment and assessing development promoting effects. As a result, many of the projects were high-risk, and many ships were sold with errors and defects. Norway had set aside its own rules and safety mechanism to save Norwegian workers in the shipping industry. In the 1980s the debt crises kicked in, increasing the debt levels of many developing countries drastically.

Following years of campaigning, the Norwegian government recognised that the “Ship export campaign” was a wrongful developmental policy, but only in 2006 did Norway cancel remaining loans to Sierra Leone, Peru, Ecuador, Jamaica and Egypt- Still, two countries remained: Burma had its debt cancelled in 2013 following a change in its political situation, while debt relief to Sudan is on hold until it is clarified whether the debt now belongs to Sudan or South-Sudan. By basing the decision to give debt relief on the responsibility of creditors as well as debtors, Norway took its share of the responsibility for the irresponsible loans, setting a historic precedent. Read more about the Ship export campaign here

Norway’s illegitimate loans to Indonesia

In the 1990s, Norwegians governments used aid financing and state guarantees to ensure that Norwegian exporting businesses does not suffer losses (export credit) to finance a wave powerplant and a maritime surveillance system in Indonesia. The wave powerplant was proven to be useless in Norway, but was still sold to Indonesia, and while the maritime system meant to monitor pollution in the ocean was not equipped for the tropical conditions in Indonesia, it was nonetheless exported to the country. Indonesia has not seen any of the benefits promised when signing the contract with Norway, but still has to the service debt. These are clear examples of wrongful development policies that did not benefit the people of Indonesia, but rather served Norwegian interests. Debt Justice Norway believes that Indonesia’s debt is illegitimate, and should be cancelled.

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