Document Type

Article

Publication Date

1-2007

Abstract

The despotic ruler of a poor nation borrows extensively from foreign creditors. He spends some of those funds on building statues of himself, others on buying arms for his brutal secret police, and he places the remainder in his personal bank accounts in Switzerland. The longer the despot stays in power, the poorer the nation becomes. Although the secret police are able to keep prodemocracy protests subdued by force for many years, eventually there is a popular revolt. The despot flees the scene with a few billion dollars of his illgotten gains. The populist regime that replaces the despot now has to pay the debts to the foreign creditors of the old regime. In effect, the populace suffers the costs of a despotic rule twice: first, when the despot was in power, depleting the resources of the nation and reducing the populace to penury; second, when the creditors whose funding sustained the despot collect payment for the debts of the despot. The foregoing scenario will strike some as unfair. Others might be less sympathetic, invoking the need for the populace to bear collective responsibility for the contractual obligations incurred by the state. The legal rule here, a creature of public international law, is an unforgiving one that supports the notion of strict collective responsibility for state contractual obligations. Governments inherit the debts of prior governments, regardless of their differing characters, philosophies, or populist bona fides. So the ANC-led government in South Africa inherited the debts of the predecessor apartheid regime. Corazon Acquino's populist government in the Philippines inherited the debts of the Marcos dictatorship. The Islamic Revolutionary government in Iran inherited the debts of the Shah. And so on and so forth. Unwilling to pierce the veil of the state entity and to separate the state from its government, sovereign-debt law views the state as strictly liable for debts accumulated by its prior despotic rulers. This situation poses a dilemma for international law that private law has been tackling in a variety of settings: who among the innocent parties should bear the loss created by a culprit that can no longer be held accountable? Surely, neither the creditors nor the populace are the primary "wrongdoers"- they did not steal any money or commit any violation. Still, the greater blameworthiness of the ex-dictator's intentional actions should not blur the different shades of fault for the less-guilty parties. If their relative fault can be compared, it might provide a formula for dividing liability among them. Thus, the purpose of this article is to borrow from a rich private-law tradition to explore the treatment of odious debt as a problem analogous to allocation of liability in private law.

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