The
Bush Administration should formally call upon the European powers
(primarily Russia, Germany, and France) and Arab nations (including
the Gulf states and Egypt) to forgive the huge debts owed by the
Iraqi government. Forgiving these debts would constitute both an
historic contribution to the economic development of post-Saddam
Iraq and a major gesture of support for the Iraqi people.
The
world must heed the lessons learned from the immediate aftermath of
the Versailles Treaty of 1919, when France demanded $32 billion in
reparations from Germany. This onerous debt burden contributed to
Germany's financial collapse in the 1930s and the end of the Weimar
Republic, paving the way for the rise of the Nazi Party.
There has been a great deal of rhetoric
from European leaders in recent weeks calling for a prominent role
for the international community in shaping the future of the Iraqi
people. While Moscow, Paris, and Berlin are unlikely to play a role
in the administration or security of Iraq, they can make an
invaluable contribution to the country's future economic
prosperity.
The Extent of
the Debt
Estimates of Iraq's indebtedness vary greatly, from 60
billion to several hundred billion dollars. The most comprehensive
study of Iraqi debts, by the Center for Strategic and International
Studies (CSIS), calculates Iraq's total debt to be $127 billion, of
which $47 billion is accrued interest (based on 2001 World Bank
figures). Iraq owes a further $199 billion in Gulf War compensation
and $57 billion in pending contracts signed between the Saddam
Hussein regime and foreign companies and governments. Iraq's
overall financial burden, according to the CSIS figures, is $383
billion.
Based on these figures, Iraq's financial
obligations are 14 times its estimated annual gross domestic
product (GDP) of $27 billion--a staggering $16,000 per person.
Measured by the debt-to-GDP ratio, Iraq's financial burden is over
25 times greater than Brazil's or Argentina's, making Iraq the
developing world's most indebted nation.
U.S.
Treasury Secretary John Snow recognized the gravity of the problem
at the recent G-7 summit of finance ministers in Washington,
declaring that "the Iraqi people cannot bear the burden of current
debt levels." While Russian President Vladimir Putin has
acknowledged that Europe's leaders need to consider debt
forgiveness, his French and German counterparts have steadfastly
opposed it.
The
estimated debt owed to European governments, while much smaller
than that owed to Arab countries, is also of huge symbolic
importance. The Europeans, among the world's richest and most
powerful nations, have an historic opportunity to
lead by example and help pave the way for debt forgiveness by the
Arab world.
The Economic and
Moral Imperative
Establishing fiscal and monetary stability and a stable
currency will be virtually impossible if Iraq has no realistic
prospect of paying down the debt to manageable levels in the near
future. The Iraqi government has made virtually no debt-service
payments since 1991. With its huge debt burden, Iraq will have
extreme difficultly in attracting substantial foreign direct
investment, and this will further limit economic growth.
Free
of debt, Iraq has the potential to become an economic powerhouse in
the Middle East and an example for others to follow. With the
world's second largest oil reserves (112 billion barrels) and vast
supplies of natural gas (110 trillion cubic feet), Iraq's economy
can be transformed if it adopts sound principles such as keeping
tariffs and taxes low, privatizing state monopolies, and upholding
the rule of law. These principles will enhance economic freedom and
create the conditions for a thriving entrepreneurship. Without
substantial debt relief, however, Iraq's economic rejuvenation will
be significantly delayed.
The
case of Iraq also raises an important moral dilemma: Should the
citizens of a liberated country be burdened with the debts of a
brutal dictatorship? As U.S. Deputy Secretary of Defense Paul
Wolfowitz observed in testimony before the Senate Armed Services
Committee, much of the money borrowed by the Iraqi regime had been
used "to buy weapons and to build palaces and to build instruments
of oppression."
Arguably, the people of Iraq should not be
burdened with the lavish spending of a tyrannical regime, which
borrowed heavily to oppress its own people and enrich its rulers.
The U.S. General Accounting Office calculates that Saddam Hussein
and his family alone have amassed $6.6 billion in hidden accounts
internationally. Indeed, the doctrine of "odious debt," which dates
back to the aftermath of the Spanish-American War of 1898, could be
applied in the case of Iraq. (The doctrine of "odious debt" argues
that debts incurred by a dictatorship without the consent of its
citizens, and which were not used for the benefit of the
population, should not be transferred to a successor regime.)
Key
Recommendations
The Bush Administration should:
- Advocate debt
forgiveness as opposed to debt restructuring
Debt restructuring would not create a realistic prospect
for debt elimination and would only prolong the suffering of the
Iraqi people.
- Apply diplomatic
pressure on Paris, Berlin, Moscow, and Arab nations to consider the
issue of debt relief for Iraq
- Work closely
with Downing Street to develop a joint U.S.-U.K. position on
debt
Prime Minister Blair's support will be vital for future
negotiations with Britain's European partners on this issue and
invaluable in discussions with Arab leaders.
- Not allow a quid
pro quo
European nations must not expect a say--directly or
through the United Nations--over Iraq's political and economic
development in return for debt forgiveness, nor should their
companies automatically be given a role in post-war Iraqi
reconstruction.
Conclusion
If Iraq's debts are not forgiven, the Iraqi people will be
financially crippled for a generation, or even generations,
eliminating any prospect of a growing and prosperous Iraq. If
European and Arab leaders truly want to help the people of Iraq,
the best way to demonstrate this would be by easing the debt
burden.
Dr. Nile
Gardiner, is Jay Kingham Fellow in International
Regulatory Affairs in the Center for International Trade and
Economics, and Marc Miles, Ph.D., is
Director of the Center for International Trade and Economics, at
the Heritage Foundation.