Odious Debts

In Thursday’s Economic Scene column in the New York Times, economist Alan Krueger raises the issues of post-Saddam Iraqi debt, and particularly points readers to this paper on the economics of odious debt by Michael Kremer and Seema Jayachandran of Harvard University. Many thanks to William Sjostrom at AtlanticBlog for posting on this. I also posted on this topic back in mid-February, based on an article by Lawrence Solomon in the National Post.

[I can’t believe I’m going to say this] Advantage: Knowledge Problem!

Seriously, Kremer and Jayachandran recommend that debts deemed odious ex post should not be transferable to successor governments. I think there are a host of problems with this suggestion, not the least of which being the subjectivity inherent in having a “security committee”-style determination after the fact of what’s odious and what’s not. There’s a dynamic that open to lots of political and diplomatic manipulation. And if you are considering becoming a creditor of a government, you will have to factor in the nonzero probability that your debt will be deemed odious, so you are going to demand a higher interest rate from them. Hey, wait, that’s probably a good thing … in any case, the effect on capital markets and on incentives/moral hazard/adverse selection types of issues is something we should definitely analyze carefully.