Brookings: Experts - Michael Kremer

The Hajj: Mecca and Moderation

Asim Ijaz Khwaja, David Clingingsmith and Michael Kremer — Tue, 20 May 2008 12:00:00 -0400

For many people in the West, Islam is increasingly associated with violence and terrorism. According to a 2007 survey conducted by the PEW Forum, 45 percent of Americans believe Islam is more likely to encourage violence than other religions, up from 36 percent in 2005. Close to a third of respondents use negative words like fanatic, radical and terror to describe their impressions of Islam.

Does increased religious orthodoxy promote violence and intolerance? Our research on the hajj pilgrimage to Mecca suggests this association is wrong. The hajj is one of the most important institutions in Islam and a singular experience for many Muslims.

Our recent study of Pakistani pilgrims shows that while performing the hajj leads to greater religious orthodoxy, it also increases pilgrims' desire for peace and tolerance toward others. And this greater tolerance is not just toward fellow Muslims - it also extends to non-Muslims.

These findings echo the experience of Malcolm X, who drastically altered his views on race after performing the hajj. In a letter from the hajj, he wrote: ''We were all participating in the same ritual, displaying a spirit of unity and brotherhood that my experiences in America had led me to believe never could exist between the white and non-white ... what I have seen, and experienced, has forced me to rearrange much of my thought patterns previously held.''

The hajj is an inherently communal and international phenomenon, with over 2 million Muslims from all over the world gathering for several days in intense prayer and rituals. Pilgrims interact with fellow Muslims of different races and ethnicities in a religious context. At the hajj, men and women often pray alongside one another, an entirely new experience for many pilgrims.

Our study isolates the impact of performing the hajj using a method common in medicine. When doctors want to test a new drug, they give it to a randomly selected treatment group and compare their outcomes to a statistically similar control group. While social scientists rarely have the opportunity to use this method, we are able to do so by taking advantage of a randomized lottery for allocating hajj visas in Pakistan. We compare the attitudes of 800 successful lottery applicants, the ''treatment'' group, to an equal number of unsuccessful ones. The results are incredibly revealing.

Pilgrims are more observant of orthodox religious practice even five to eight months after returning from the hajj. They are 16 percent more likely to pray, 26 percent more likely to do so regularly in the mosque, and double their likelihood of non-obligatory fasting. Interestingly, however, pilgrims are less likely to believe and participate in localized religious practices, such as using amulets.

What may be surprising to some is that the hajj makes pilgrims more tolerant of both fellow Muslims and non-Muslims. The experience of diversity on the hajj really does seem to matter: Hajjis have more positive views about people from other Muslim countries and are more likely to believe that different Pakistani ethnic and Islamic sectarian groups are equal and that they can live in harmony. Despite non-Muslims not being part of the hajj experience, these views also extend to adherents of other religions: Pilgrims are 22 percent more likely to declare that people of different religions are equal and 11 percent more likely to state that different religions can live in harmony by compromising over their disagreements.

Paralleling the findings on tolerance, hajjis report more positive views on women's abilities, greater concern for their quality of life, and are also more likely to favor educating girls and women participating in the workforce.

Hajjis are also less likely to support the use of violence and show no evidence of any increased hostility toward the West. They are more than twice as likely to declare that the goals of Osama bin Laden are incorrect, more likely to express a preference for peace between Pakistan and India, and more likely to declare that it is incorrect to physically punish someone if they have dishonored the family. Hajjis also become more sensitive to crimes against women.

While these results are specifically about the hajj, they have broader implications.

The impact of an event like the hajj demonstrates that even deep-rooted attitudes such as religious beliefs and views about other social groups can be changed. While all religions may have radical seminaries or extremist groups that promote an orthodoxy that goes hand in hand with hostility toward outsiders, our study shows this is not an inherent attribute of orthodoxy.

The promotion of tolerance doesn't therefore need to be defined in immediate opposition to religious orthodoxy. There may be ways, as demonstrated in the hajj, to leverage religious beliefs to foster compromise and mutual respect.

There is also a broader lesson about exposure to a diversity of peoples. Although lacking a common language, mixing with others across national, sect, and gender lines can help promote tolerance - both toward fellow participants but even more significantly, to those who are not part of the experience.

Authors

Asim Ijaz Khwaja
David Clingingsmith
Michael Kremer

Publication: International Herald Tribune

Loan Sanctions: A New Tool for Diplomacy?

Michael Kremer and Seema Jayachandran — Wed, 07 Feb 2007 00:00:00 -0500

As part of its efforts to sanction Iran, the US has recently been pressuring international banks and foreign governments to deny Iran loans for expansion of its oil production. Can and should "loan sanctions" be used more broadly as part of the toolkit of international diplomacy? If so, when and how?

In the case of Iran, sanctions are being applied out of concern that the regime poses an international security threat, but in other cases the international community imposes sanctions because a regime is mistreating its own population (e.g. South Africa in the 1980's, Burma today). A number of dictators have borrowed internationally, stolen the proceeds or used them to finance repression, and then saddled successor regimes and their populations with the debt.

Loan sanctions could be particularly effective in these cases. Currently, many creditors lend to governments without regard to their legitimacy. And when illegitimate governments saddle countries with debt, successor governments typically repay the loans. For example, South Africa today is repaying apartheid-era debt. Its rationale is that repudiating the debt would hurt its reputation in capital markets.

Wealthy countries could discourage repayment of illegitimate debt, and in turn discourage lending to sanctioned regimes in the first place, by announcing that they will consider future loans to sanctioned regimes to be illegitimate. The US and other countries could disallow assets held abroad by legitimate successor governments from being seized to enforce payment of this debt. They could further announce that they will not provide foreign aid to successor governments of illegitimate regimes if those successor governments repay illegitimate debts.

This type of loan sanction puts creditors on notice that any future loans to a regime would be considered the responsibility of that regime only and nontransferable to successor governments. The US would not need to pressure creditors to withhold credit, as it has had to do in the case of Iran. Creditors would stop lending simply out of profit motives.

Trade sanctions are often ineffective because they create incentives for evasion by third parties; when effective, they often harm the population of the target country as much as the targeted regime. Loan sanctions, particularly when applied against regimes that are repressive and corrupt, overcome these problems. There would be few incentives for a creditor to evade a loan sanction and lend to a sanctioned regime if the citizens view the borrowing regime as illegitimate and would not hesitate to repudiate the debt in the future. In addition, loan sanctions can help the population and inflict targeted damage on a dictator who is stealing or otherwise misusing money. The sanction delivers a large benefit to the citizens by reducing the country's debt burden, which likely would outweigh any short-term hardship from less money flowing into the country.

Beyond punishing dictators, loan sanctions fill a fundamental gap in the debt relief movement. To date relief policies have helped write off debt in the poorest countries but have taken little action regarding the loans that other poor countries, such as South Africa, have illegitimately inherited. Loan sanctions would help address that issue directly.

A policy of nullifying past debt raises the concern that creditors might stop lending to legitimate governments for fear that the loans will disingenuously be deemed illegitimate in the future as a way to help the debtor. Deeming only future loans as illegitimate¿those issued after the loan sanction is imposed¿avoids this problem.

Some potential target regimes run their country into the ground economically and cannot borrow, even without loan sanctions in place. In other cases, major powers might protect an illegitimate regime from loan (and other) sanctions for strategic reasons. However, in cases where they could be applied, loan sanctions could be a potent diplomatic tool. Suppose there were a coup in, say, Nigeria and the international community wanted to respond. Imposing loan sanctions alongside trade sanctions would increase the impact that the international community could have.

There are important implementation issues. How should loan sanctions be structured to minimize uncertainty in the financial markets? Is there a way to allow humanitarian loans to flow to sanctioned governments, given that money is fungible? Despite these practical questions, though, loan sanctions can be a potentially valuable addition to the toolkit of international diplomacy.

.....

Seema Jayachandran is an Assistant Professor in the Stanford Department of Economics. Michael Kremer is the Gates Professor of Developing Societies in the Harvard University Department of Economics, Senior Fellow at The Brookings Institution, and Faculty Fellow, Center for International Development.

Authors

Michael Kremer
Seema Jayachandran

Publication: washingtonpost.com

Contracting for Health: Evidence from Cambodia

Michael Kremer — Sat, 01 Jul 2006 00:00:00 -0400

Abstract

In 1999, Cambodia contracted out management of government health services to NGOs in five districts that had been randomly made eligible for contracting. The contracts specified targets for maternal and child health service improvement. Targeted outcomes improved by about 0.5 standard deviations relative to comparison districts. Changes in non-targeted outcomes were small. The program increased the availability of 24-hour service, reduced provider absence, and increased supervisory visits. There is some evidence it improved health. The program involved increased public health funding, but led to roughly offsetting reductions in private expenditure as residents in treated districts switched from unlicensed drug sellers and traditional healers to government clinics.

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Michael Kremer

Publication: Bureau for Research in Economic Analysis of Development Conference

Why is There No AIDS Vaccine?

Christopher M. Snyder and Michael Kremer — Thu, 01 Jun 2006 00:00:00 -0400

Abstract

For diseases such as HIV/AIDS, for which individuals vary considerably in infection risk, a pharmaceutical manufacturer's ability to extract consumer surplus differs depending on whether the firm produces a vaccine or a drug.

Vaccines are sold before consumers are infected, when consumers still have private information regarding their infection risk, whereas drugs are sold after a consumer's infection state is realized. If consumers vary only in infection risk, drug revenue will exceed vaccine revenue. If consumers also vary in income, relative revenues are determined by the joint distribution of infection risk and income and by the manufacturer's ability to sell advance insurance contracts. Simulations based on the distribution of infection risk and income in the U.S. population suggest that revenue from a HIV/AIDS drug may be twice that from a vaccine. We extend the analysis to allow for competition among manufacturers and for negotiated government prices.

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Christopher M. Snyder
Michael Kremer

Cost-effective prevention of diarrheal diseases: A critical review

Alix Peterson Zwane and Michael Kremer — Wed, 01 Mar 2006 00:00:00 -0500

Abstract

This paper critically reviews the existing research on the cost-effective prevention and treatment of diarrheal diseases, and identifies research priorities in this area aimed at finding ways to reduce the diarrheal disease burden. In contrast to the empirical knowledge base that exists for traditional child health programs to reduce diarrheal morbidity and mortality, evidence on the relative effectiveness and costeffectiveness of various environmental health interventions is limited and subject to significant methodological concerns. There is a limited understanding of the determinants of long-term water and sanitation technology adoption and behavior change at the individual level. Even less is known about how collective action problems in water and sanitation infrastructure maintenance can be overcome. An agenda for future research includes evaluating alternative transmission interruption mechanisms, improving understanding of the determinants of individual-level technology adoption in the water and sanitation sector, and assessing the quality of infrastructure maintenance under different management schemes.

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Alix Peterson Zwane
Michael Kremer

The Illusion of Sustainability

Edward Miguel and Michael Kremer — Wed, 01 Mar 2006 00:00:00 -0500

Abstract

We use a randomized evaluation of a deworming program in Kenya to examine peer effects in technology adoption and to shed light on foreign aid donors' movement towards helping communities sustainably provide local public goods. Deworming is a public good, since much of the social benefit of worm treatment comes through reduced disease transmission. People were less likely to take deworming drugs if their direct first-order social contacts or indirect secondorder contacts were randomly exposed to deworming. Several efforts to replace subsidies with sustainable worm control measures were ineffective: a drug cost-recovery program reduced takeup by 80%; health education did not affect behavior, and a mobilization intervention designed to boost drug take-up failed. At least in this context, it appears unrealistic for donors to think that a one-time intervention can lead to the sustainable voluntary provision of local public goods.

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Authors

Edward Miguel
Michael Kremer

Publication: Quarterly Journal of Economics (forthcoming)

Education and HIV/AIDS Prevention: Evidence from a randomized evaluation in Western Kenya

Esther Duflo, Michael Kremer, Pascaline Dupas and Samuel Sinei — Wed, 01 Feb 2006 00:00:00 -0500

Abstract

We report results from a randomized evaluation comparing three school-based HIV/AIDS interventions in Kenya: 1) training teachers in the Kenyan Government's HIV/AIDS-education curriculum; 2) encouraging students to debate the role of condoms and write essays on how they can protect themselves against HIV/AIDS; and 3) reducing the cost of education. Our primary measure of the effectiveness of these interventions is teenage childbearing, which is associated with unprotected sex. We also collected measures of knowledge, attitudes, and behavior regarding HIV/AIDS. After two years, teacher training increased students' tolerance toward people with HIV/AIDS. Girls exposed to the program were more likely to be married to the fathers of their children. The program had little other impact on students' knowledge, attitudes, and behavior, or on the incidence of teen childbearing. The condom debates and essays increased practical knowledge and self-reported use of condoms without increasing self-reported sexual activity. Reducing the cost of education by paying for school uniforms reduced dropout rates, teen marriage, and childbearing.

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Authors

Esther Duflo
Michael Kremer
Pascaline Dupas
Samuel Sinei

Encouraging Private Sector Research for Tropical Agriculture

Alix Peterson Zwane and Michael Kremer — Sun, 01 Jan 2006 00:00:00 -0500

Summary

Agricultural needs in poor tropical countries differ significantly from those in temperate, rich countries. Yet little agricultural research is performed on products for the tropics. Private research is particularly concentrated in rich countries. This is a result of significant failures in the market for research and development (R&D), in particular, the difficulty of preventing the resale of seed in developing countries. To encourage private R&D in tropical agriculture, traditional funding of research may be usefully supplemented by a commitment to reward developers of specific new agricultural technologies. Rewards tied to adoption may be especially useful in increasing up-take. An illustration of how a commitment to reward developers of new agricultural technologies might work is provided.

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Alix Peterson Zwane
Michael Kremer

Publication: World Development

Asian Growth and African Development

Marcos Chamon and Michael Kremer — Sun, 01 Jan 2006 00:00:00 -0500

Introduction

Since World War II, integration with the world economy has arguably been the chief route from poverty to wealth. Japan initially exported cheap goods and later moved on to more technologically sophisticated products. When Japan became rich, Korea, Taiwan Province of China, Hong Kong SAR, and Singapore replaced Japan as low wage exporters, and when these countries moved on to more sophisticated products, Thailand and Malaysia filled their niche. More recently, China has become an important exporter of manufactured goods and India is increasingly moving into services exports.

No mainland sub-Saharan African country has experienced this type of transformation. Even countries that have undergone major economic reforms seem far from takeoff. Forecasts for Africa based on extrapolation of its historical experience tend to be bleak. We consider whether it is possible to construct a model, consistent with the data, which supports a more optimistic view.

Motivated by the Asian experience, the model assumes countries can potentially undergo rapid economic transformation only if they integrate into the world economy by producing non-traditional exports. For the purposes of constructing a long-run model of the world economy, we are agnostic on whether exports matter due to technological learning by doing spillovers, political economy considerations, or other factors. As each developing country transforms and becomes advanced, it further improves trade opportunities for the remaining developing countries. For example, if China becomes rich, a billion more people will live in countries that import toys and a billion fewer will live in countries that export them.

Our approach is similar to that of Robert E. Lucas (2000) in that we assume that growth prospects improve with the state of the world economy, potentially generating accelerating world growth. However, unlike Lucas (2000), we allow for differential population growth between rich and poor countries. The steady-state proportion of the world population living in advanced countries depends on the rate at which developing countries transform into advanced ones and on the magnitude of population growth differentials between these two groups of countries. The economic transformation process will overcome the demographic trend, leading to a prosperous steady state, only if the initial share of world population is above a threshold. A simple calibration using historical data suggests that the long-run prospects for lagging developing regions may hinge on a race between economic growth in China and India and population growth in the lagging regions, particularly Africa. If the former "wins," we may eventually observe accelerating global growth. This suggests some caution should be used when interpreting empirical studies on growth determinants, as these results may not be stable over time. Country characteristics that lead to poor performances today may well allow for rapid growth in the future if and when the world economy reaches a sufficiently advanced stage.

Our model also suggests a queuing effect, where the order in which countries are absorbed into the world economy is determined by the quality of their policies. Economic reforms in one country may potentially have a large impact on growth if they move the country to the front of the queue. But similar reforms in all countries may have a much smaller impact on world growth.

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Marcos Chamon
Michael Kremer

Publication: American Economic Review Papers and Proceedings

The Role of Randomized Evaluations in Making Progress Towards Universal Basic and Secondary Education

Michael Kremer — Tue, 01 Nov 2005 00:00:00 -0500

Introduction

Although there has been tremendous progress in expanding school enrollments and increasing years of schooling in recent decades, 113 million children of primary-school age are still not enrolled in school (UNDP, 2003).

This paper reviews what has been learned from randomized evaluations of educational programs about how best to increase school participation. I first outline the intuition behind the important role of randomized evaluations in obtaining credible estimates of the impact of educational interventions, review other non-experimental methods of evaluation, and present some evidence on the biases that can arise with such non-experimental methods. I then discuss two types of programs that have been found to be extremely cost-effective and that could be implemented even within a very limited budget: school-based health programs and remedial education programs (that take advantage of available inexpensive sources of labor). I then outline a series of programs aimed at lowering the costs of school, or even paying students for attending school, that could be implemented if a higher level of financial support is available and discuss the possibility of educational reform through school choice, which could be implemented given sufficient political will within a country. The paper concludes by drawing some general lessons about the contribution of randomized evaluations to understanding the cost-effectiveness of various interventions.

Given the widespread consensus on the importance of education and the several reviews of the impact of education on income and other outcomes, this paper focuses not on the effects of education but on issues internal to the education system. The scope of this paper is also limited in that it does not address interventions intended to improve the quality of education, such as computer-aided instruction, unless these interventions cut costs and thus free resources that can be used to expand education.

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Michael Kremer

Publication: American Academy of Arts and Sciences

The Globalization of Household Production

Michael Kremer and Stanley Watt — Wed, 05 Oct 2005 00:00:00 -0400

Abstract

Immigration restrictions are arguably the largest distortion in the world economy and the most costly to the world's poor.

Yet, these restrictions seem firmly in place due to fears in rich countries that immigration would exacerbate inequality among natives, fiscally drain the welfare state, and change native culture. Many "new rich" countries are creating a new form of immigration that we argue may help overcome these obstacles. Foreign private household workers, primarily female, constitute more than 6% of the labor force in Bahrain, Kuwait, Hong Kong, Singapore, and Saudi Arabia, and about 1% in Taiwan, Greece, and Israel. Providing temporary visas for these workers can potentially allow high-skilled native women to enter the market labor force. This increased labor supply by native high-skilled workers can increase the wages of lowskilled natives and provide a fiscal benefit by correcting distortions toward home production created by income taxes. Calibration suggests welfare gains to natives from a Hong Kong style program may be equivalent to those from a 2.0% increase in income. However, multicultural societies with a norm of extending citizenship to long-term residents may find this type of migration inconsistent with ethical norms. Programs with temporary, non-renewable visas may be more acceptable in these countries.

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Michael Kremer
Stanley Watt

Incentives to Learn: Lessons from Kenya

Edward Miguel, Michael Kremer and Rebecca Thornton — Sat, 01 Oct 2005 00:00:00 -0400

Abstract

We report results from a randomized evaluation of a merit scholarship program for adolescent girls in Kenya, and discuss their implications for understanding educational production and for the policy debate surrounding merit awards. Girls who scored well on academic exams had their school fees paid and received a large cash grant. Girls eligible for the scholarship showed substantial gains in exam scores and gains persisted in the years following the competition. Both student and teacher school attendance increased in the program schools. Our results suggest not only that study effort is responsive to incentives but also that there are positive externalities: boys, who were ineligible for the award, also experienced exam gains, as did girls with low pretest scores (who were very unlikely to win). These large externalities address some of the equity concerns raised by critics of merit awards, and provide further rationale for public education subsidies.

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Edward Miguel
Michael Kremer
Rebecca Thornton

Making Markets for Vaccines : Ideas to Action

Michael Kremer, Owen Barder and Ruth Levine — Sun, 01 May 2005 00:00:00 -0400

Center For Global Development 2005 113pp.

Making a commitment in advance to buy vaccines if and when they are developed would create incentives for industry to increase investment in research and development. New commercial investment would complement funding of research and development by public and charitable bodies, accelerating the development of vital new vaccines for the developing world.

This report presents the proposal from theory to practice, by showing how a commitment can be consistent with ordinary legal and budgetary principles. By creating arrangements that devote the same scientific effort to diseases of the poor as we put into diseases of the rich, we can make a lasting contribution to the defeat of poverty.

ABOUT THE AUTHORS

Michael Kremer

Owen Barder

Owen Barder is a Senior Program Associate at the Center for Global Development. He has previously worked in the U.K. Treasury, No. 10 Downing Street, the U.K. Department for International Development.

Ruth Levine

Ruth Levine, senior fellow and Director of Programs at the Center for Global Development, currently leads the Center's Global Health Policy Research Network.

Ordering Information:

{9ABF977A-E4A6-41C8-B030-0FD655E07DBF}, 1-9332-8602-4, 17.95 Order
{9ABF977A-E4A6-41C8-B030-0FD655E07DBF}, 978-1-933286-02-0, $17.95 Order

Long-Term Educational Consequences of Secondary School Vouchers: Evidence from Administrative Records in Colombia

Eric Bettinger, Joshua Angrist and Michael Kremer — Fri, 01 Apr 2005 00:00:00 -0500

Abstract

Colombia's PACES program provided over 125,000 poor children with vouchers that covered half the cost of private secondary school. The vouchers were renewable annually conditional on adequate academic progress. Since many vouchers were assigned by lottery, program effects can reliably be assessed by comparing lottery winners and losers. Estimates using administrative records suggest the PACES program increased secondary school completion rates by 15-20 percent. Correcting for the greater percentage of lottery winners taking college admissions tests, the program increased test scores by two-tenths of a standard deviation in the distribution of potential test scores.

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Eric Bettinger
Joshua Angrist
Michael Kremer

Publication: American Economic Review

Loan Sanctions and Odious Debt

Michael Kremer and Seema Jayachandran — Fri, 01 Apr 2005 00:00:00 -0500

Abstract

Many analysts argue that trade sanctions are ineffective because they generate incentives for evasion. Others object to them as hurting the population of the target country as much as its leaders. We argue that loan sanctions unlike trade sanctions may be self-enforcing, and that they help the population by protecting it from being saddled with "odious debt" run up by dictators to finance looting or repression. In particular, governments could impose sanctions by instituting legal changes that prevent seizure of a country's assets for non-repayment of debt if the debt was incurred after the sanction was imposed. This would reduce creditors' incentive to extend loans to sanctioned regimes. However, decisions on whether assets can be seized to enforce debt repayment would be subject to bias if they were made ex post and the deciding body asymmetrically valued the welfare of debtor countries and their creditors. Restricting such decisions to cover only future lending would help avoid this time-consistency problem.

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Michael Kremer
Seema Jayachandran

A Preview of the World Bank/IMF and World Trade Organization Meetings

Tue, 09 Sep 2003 16:00:00 -0400

Event Information

September 9, 2003
4:00 PM - 5:30 PM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue, N.W.
Washington, DC 20036

This year's World Bank and International Monetary Fund (IMF) meeting, to be held Sept. 20-22 in Dubai, focuses on the challenges and opportunities in achieving regional and global prosperity. These questions are particularly timely as the international financial institutions face the task of rebuilding Iraq and eradicating extreme poverty and hunger by the year 2015.

A panel of Brookings experts will preview the World Bank/IMF meeting as well as the fifth World Trade Organization ministerial conference in Cancun. Several of the participants are the authors of recent books on international economic governance (Ralph Bryant), restructuring sovereign debt (Lex Rieffel), and foreign aid and the Millennium Challenge Account (Lael Brainard and Carol Graham).

This press briefing will address a host of policy issues, including:

Foreign aid, the Millennium Challenge Account, and the challenges of coordinating donor efforts
International economic governance and cross-border finance
The international financial institutions and proposed sovereign debt restructuring mechanisms
Relations between the IMF and Argentina
Obstacles for the international financial institutions in financing Iraq's reconstruction
The 2004 World Development Report on "Making Services Work For Poor People" and the corresponding Millennium Development Goals

Transcript

Transcript (.pdf)

Event Materials

20030909

Participants

Moderator

Panelists

Andrew Powell

Visiting Fellow, Governance Studies, Brookings

Make Odious Debt Too Risky To Issue

Michael Kremer and Seema Jayachandran — Thu, 08 May 2003 00:00:00 -0400

Under Saddam Hussein's rule, Iraq amassed an estimated Dollars 100bn in debt, or over three times its gross domestic product. In all likelihood postwar Iraq will refuse to repay the debt in full. The country can make a strong case that Mr Hussein borrowed without the consent of the Iraqi people and then spent much of the money to finance violence and repression. Hence, Iraq might argue, the debt is illegitimate. An individual is not responsible for repaying debt that someone fraudulently incurs in his or her name. Why should a citizenry be?

The US may welcome an Iraqi decision to repudiate its debt, just as after the 1898 Spanish-American War it encouraged Cuba to repudiate the debt that Spanish rulers had run up in Cuba's name. Indeed, John Snow, the treasury secretary, and Paul Wolfowitz, the deputy defence secretary, have suggested as much. Regardless of Washington's stance on the moral or legal right to repudiate illegitimate debt - or "odious debt", as early 20th-century legal scholars who advocated its nullification termed it - the US knows that an Iraq burdened with debt would be more dependent on American aid. Moreover, there is no love lost between the US and two of Iraq's biggest creditors, Russia and France.

An Iraqi move to renounce its debt would have important consequences for international lending generally. Creditors would think twice before lending to repressive or rapacious governments if they did not expect to be repaid. In turn, such regimes might behave better to avoid losing their borrowing privileges.

However, Iraq's repudiation of its debt would also have an unwelcome side effect. Creditors might be more reluctant to lend to a legitimate government out of fear that opinion might later turn against it. Creditors that feared loan nullification would lend at very high interest rates or not at all, so legitimate governments might not be able to borrow to finance worthwhile infrastructure or education projects.

Clearly, the world needs a system to determine which loans should be considered legitimate. The way to prevent lending to illegitimate regimes without jeopardising legitimate borrowing is to make clear in advance which loans will be considered odious rather than nullifying them after the fact. Retroactively, there is a temptation to apply the odious label liberally and nullify legitimate loans as a way of transferring money from the rich to the poor.

A declaration that a particular government is odious and that future lending to it will be considered illegitimate would constitute a new and better form of sanction - a "loan embargo" that cuts off the flow of funds to targeted countries. Profiteers have strong incentives to evade trade embargoes, but creditors would not want to flout a loan embargo because they would risk not being repaid. Creditors would stop issuing loans to odious regimes, not because such loans are illegal or immoral but because they would be more likely to be unprofitable.

For example, suppose the UN Security Council declared that any future borrowing by another dictatorship - be it Syria, Zimbabwe or Burma - would be the regime's responsibility, and not that of the citizens or any future government of the country. When the regime went to the debt market to borrow, this sanction would discourage creditors from lending to it. Even if the US imposed the sanction on its own, creditors in other countries would abide by it. The US would need only to vow that it would give political and financial backing to any successor government that repudiated new loans issued to the current regime.

If the international community added a loan embargo to its tool kit of economic sanctions, creditors would know the rules of the game in advance and would not risk nullification of their loans. Accordingly, legitimate governments would be able to borrow at lower interest rates. Most importantly, governments deemed illegitimate would find it much harder to borrow in world markets and use the funds to finance repression; and it would become impossible for them to saddle their ill-treated people with debt.

A decision by the postwar Iraqi government to renounce Mr Hussein's debt would be greeted with dismay in some quarters; but that might also spur the creation of a system that prevents lending to such repressive rulers in the first place.

Authors

Michael Kremer
Seema Jayachandran

Publication: Financial Times

Odious Debt: When Dictators Borrow, Who Repays the Loan?

Michael Kremer and Seema Jayachandran — Sat, 01 Mar 2003 00:00:00 -0500

When the international community wants to put pressure on a government that suppresses democracy and human rights, it commonly imposes economic sanctions. Traditional sanctions, however, are often either ineffective or inhumane. Targeted governments find ways around the sanctions, which offer third parties—smugglers and even other national governments enticed by the promise of large profits—incentives to evade them. And when the sanctions work, they often harm the targeted government's people, impoverishing them further through the loss of national income. We propose a new form of sanction—a loan embargo.

Unlike a trade sanction, a loan embargo would be self-enforcing. Not only would it not offer third parties incentives to evade it, it would eliminate the existing incentive of some creditors—banks, bondholders, or governments—to collude with dictators, issuing loans that enrich themselves. Because a loan embargo would be self-enforcing, it would be more effective than trade sanctions—and thus could help pressure dictators to undertake needed reforms by limiting their ability to borrow abroad and then loot borrowed funds—or use the funds to finance the repression of their people. At the same time, a loan embargo would protect the people's interests by freeing them of the obligation to repay the accumulated debts after they finally rid themselves of their illegitimate government. The key to a loan embargo is a concept known as "odious debt."

Odious Debt

By law, in most countries, individuals do not have to repay money that others fraudulently borrow in their name. Similarly, a corporation is not liable for contracts that the chief executive officer enters without the authority to bind the firm. But international law does not exempt citizens of a dictatorship from repaying a debt incurred by a dictator for personal and nefarious purposes.

This inequity has not gone unnoticed. As early as the 1898 peace negotiations after the Spanish-American War, the U.S. government contended that neither the United States nor Cuba should be held responsible for debt incurred by Cuba's colonial rulers without the consent of its people and without regard for their benefit. Although Spain never accepted the validity of this argument, the United States prevailed, and Spain took responsibility for the Cuban debt under the Paris peace treaty. The Soviet state repudiated tsarist debt in 1921 using a similar rationale. Legal scholars subsequently elaborated a doctrine of "odious debt," arguing that sovereign debt should not be transferable to a successor government if it was incurred without the consent of, and without benefiting, the people. Some scholars added the requirement that creditors must have been aware of these conditions when they issued the loans to repressive or looting governments.

Beginning in the late 1990s, a worldwide campaign called Jubilee 2000 attempted to call attention to the concept of odious debt by enlisting spokesmen as diverse as the pop star Bono and Pope John Paul II in a mass mobilization to eradicate Third World debt. But the doctrine of odious debt has gained little momentum in international law, which continues to hold countries responsible for repaying illegitimate debt.

The apartheid regime in South Africa, for example, borrowed from private banks through the 1980s, while a large share of its budget went to finance the military and police and otherwise repress the African majority. Today the South African people bear the debts of their repressors. The Archbishop of Cape Town has campaigned for apartheid-era debt to be declared odious and written off. South Africa's Truth and Reconciliation Commission has voiced a similar opinion. But the post-apartheid government has deferred to the current international norm and accepted responsibility for the debt out of fear that defaulting would hurt its chances of attracting foreign investment. Indeed, its top ministers recently denounced a lawsuit seeking reparations from banks that loaned to the apartheid regime, because "we are talking to those very same companies named in the lawsuits about investing in post-apartheid South Africa."

Similarly, although Anastasio Somoza was reported to have looted $100 million-500 million from Nicaragua by the time he was overthrown in 1979, and the Sandinista leader Daniel Ortega told the United Nations General Assembly that his government would repudiate Somoza's debt, the Sandinistas reconsidered when their allies in Cuba advised them that repudiating the debt would unwisely alienate them from Western capitalist countries.

Numerous other dictators have borrowed from abroad, expropriated the funds for personal use, and left the debts to the population they ruled. Under Mobutu Sese Seko, the former Zaire accumulated more than $12 billion in sovereign debt while Mobutu diverted public funds to his personal accounts (his assets reached $4 billion in the mid-1980s) and used them to retain power by paying cronies and military expenses. Similarly, when Ferdinand Marcos lost power in 1986, the Philippines owed $28 billion to foreign creditors, while Marcos's personal wealth was estimated at $10 billion.

In 1996 the World Bank indicated a willingness to depart from traditional international lending practices by launching the Heavily Indebted Poor Countries initiative, which provides debt relief for poor countries on the basis of the level of a country's debt and its income. The initiative, however, does not take into account the circumstances under which the debt was incurred. As a result, South Africa and the Philippines, for example, are not on the current list of debt-relief candidates despite plausible claims that their debts are illegitimate.

Policies to Curtail Odious Debt

One potential solution to this problem is for the international community to empower an independent institution to assess a regime's legitimacy and to declare any sovereign debt subsequently incurred by an illegitimate regime "odious" and thus not the obligation of successor governments. In this new setting, debtor countries would no longer need to fear that their ability to borrow from abroad or to attract foreign investment would suffer if they refused to repay debts fraudulently incurred in their name. Creditors, both private and public, would curtail loans to regimes identified as odious, knowing that successor governments would have little incentive to repay them. Such a reform would not only limit the debt burden of poor countries but also reduce risk for creditors and hence lower interest rates for legitimate governments that borrow.

Two enforcement mechanisms could help eliminate lending to odious regimes. First, new laws in creditor countries could make it illegal to seize a country's assets for nonrepayment of odious debt. Odious debt contracts, in other words, could be made legally unenforceable. Second, foreign aid to successor regimes could be made contingent on nonrepayment of odious debt. Donors could refuse to give aid to a country that, in effect, was handing the aid over to banks that have illegitimate claims. If the foreign aid were valuable enough, successor governments would have incentives to repudiate odious loans, so banks would refrain from originating them.

As noted, repudiating odious debt is self-enforcing. Successor governments will have incentives to repudiate odious debt as long as creditors and investors are willing to continue lending to and investing in the country after its legitimate government refuses to repay the odious debt. Banks will think twice before lending to an illegitimate, repressive regime if the world's leading powers, international organizations, and financial institutions declare the regime odious and announce that they will consider legitimate successor governments justified in repudiating any new loans the odious regime incurs.

Because more countries engage in foreign trade than in sovereign borrowing, limits on borrowing could not be applied as widely as trade sanctions. Nonetheless, the move could have a significant impact. Franjo Tudjman of Croatia, for example, was arguably an odious ruler, having suppressed the media, instigated violence against political opponents, and looted public funds. In 1997 the International Monetary Fund cut off aid earmarked for Croatia because the United States, Germany, and Britain were concerned about the "unsatisfactory state of democracy in Croatia." Commercial banks nevertheless lent an additional $2 billion to the Croatian government between the IMF decision and Tudjman's death in December 1999. Had the loan-embargo system been in place, creditors might not have granted Tudjman that $2 billion in loans, and the Croatian people would not bear the debt today.

Incentives for Truthfulness

One reason for the international legal community's reluctance to accept the doctrine of odious debt is the fear that debt will be declared odious after a loan has already been made, making it impossible for a creditor to be repaid. If creditors anticipate being unable to collect on even legitimate loans, they will be wary of lending at all, raising the possibility that the debt market will shut down. To overcome the risk that creditors' loans might be declared odious after the fact, the newly empowered institution could be authorized to rule only on future loans to a government and not on existing debt.

Another concern about the doctrine of odious debt is that an institution charged with assessing the legitimacy of debt might be more mindful of the welfare of the people of developing countries than of that of banks and other creditors. But if the institution rules only on future loans, it will be more likely to make accurate, impartial judgments. Even if it weighs more heavily the welfare of debtors than that of creditors, it would have every reason to judge a regime impartially because an accurate judgment would benefit the population. If the institution wrongly calls a legitimate government odious, it deprives a country of profitable investments financed by loans. If it wrongly calls an odious government legitimate, the repressive government can borrow and loot the country.

Requiring the institution to rule on the legitimacy of loans only before they are incurred limits the potential for favoritism in yet another way. Before a loan is issued, it offers only small expected profits for banks, which have many alternative uses for their capital. Once a loan has been made, however, outstanding debt is a zero-sum game between creditors and debtors. A biased institution can help whichever party it favors in deciding whether the loan should be repaid. False rulings about debt that is yet to be issued can hurt the people in borrowing countries and cannot substantially help creditors. Thus, an institution empowered to rule only on future lending is unlikely to make biased judgments in favor of either.

Still another possibility for institutional bias involves a lack of evenhandedness toward certain governments. If the major powers regard a country as an important trade partner or a strategic ally, the institution might fail to brand the government odious regardless of misdeeds. It would, for instance, be unlikely to label either China or Saudi Arabia odious. Because such regimes with powerful friends can borrow at present, biased decisions in their favor would not be a change for the worse; they would simply maintain the status quo. But what if instead the institution makes a judgment against a government for foreign policy reasons, cutting that government off from lending even though it has the consent of the people or spends for their benefit? For example, the United States might wish to block loans to the current government of Iran regardless of whether the government satisfies the definition of odiousness. If the Iranian government were to be blocked from borrowing money that would have been spent for the benefit of its citizens, the citizens would be worse off than under the status quo. Requiring unanimity or at least a two-thirds vote to declare a regime odious could safeguard against that possibility.

Who Should Assess Regimes?

A key question for the international community is which institution to empower to rule on odiousness. The United Nations Security Council, which already imposes sanctions against governments, is a natural candidate. The United States and the other permanent members of the council might prefer this option, for it would give them a veto power. Another option is to create a new international judicial body to hear cases brought against particular regimes—a court similar to the newly established International Criminal Court in the Hague.

Major creditor countries could also implement this system using solely domestic institutions. If the United States changed its laws to prevent seizure of the assets of a foreign government that repudiated odious debt, if a U.S. court ruled that a regime was odious, and if the U.S. government announced it would oppose IMF or World Bank aid packages to a successor regime that repaid illegitimate debt, then banks (both in the United States and abroad), other governments, and even the international financial institutions would likely be reluctant to lend to that regime, fearing that successor governments would not repay.

It might also be possible for civil society to begin putting pressure on banks not to lend to illegitimate governments. If a highly respected nongovernmental organization like Transparency International—or a panel including prominent citizens like Nelson Mandela, along with international lawyers and human rights scholars—were to identify odious regimes and promulgate a list of them, creditors might be reluctant to lend to governments on the list.

Looking Ahead

If the international community were to empower a global institution to rule that a country is not responsible for odious debt issued after the ruling—and if creditors were therefore to refuse to issue odious debt—both legitimate debtors and their creditors could benefit. All creditors would gain from knowing the ground rules. If odiousness were declared in advance, banks would avoid lending to odious regimes and would have no fear that a successful popular debt-relief campaign would arise to nullify their outstanding loans. Greater certainty would also ensure lower interest rates for legitimate borrowers. Most important, dictators would no longer be able to borrow, loot the proceeds—or use them to finance repression—and leave the debt for their ill-treated citizens to repay.

Authors

Michael Kremer
Seema Jayachandran

Preview of IMF-World Bank Meetings: What to Expect

Mon, 23 Sep 2002 14:00:00 -0400

Event Information

September 23, 2002
2:00 PM - 3:30 PM EDT

Peter G. Peterson Conference Center
Institute for International Economics
1750 Massachusetts Ave., NW
Washington, DC 20036

On the eve of another controversial meeting of the International Monetary Fund and the World Bank in Washington, the Brookings Institution and the Center for Global Development (CGD) are jointly presenting a press preview of the issues to be discussed at the conference.

The briefing will focus primarily on the two major issues likely to dominate the Sept. 28-29 IMF-World Bank sessions—development aid to poor countries and problems (both current and long-term) in the world's financial architecture.

Specific issues to be discussed by the panel include:

Bush administration policies toward developing nations, particularly the new Millennium Challenge Account
Development success stories
Longer-term development challenges that may not be solved by money alone
After the Financing for Development, G8, and World Summit on Sustainable Development conferences, will the Bank/Fund meetings be business as usual?
Is the new attention to the poorest countries at the expense of unresolved crises in middle-income countries?
What changes need to be made in international financial architecture?
Is there a danger that financial market contagion may lead to ideological contagion?

In addition to discussing these and other issues, the panelists will answer questions from attendees.

Transcript

Transcript (.pdf)

Event Materials

20020923

Participants

Panelists

John Williamson

Senior Fellow, Institute for International Economics

Nancy Birdsall

President, Center for Global Development; Nonresident Senior Fellow, The Brookings Institution

What Right Does an Odious Government Have to Borrow?

Michael Kremer and Seema Jayachandran — Fri, 30 Aug 2002 00:00:00 -0400

Edward Fagan, a lawyer, recently filed a $50-billion class-action lawsuit in New York against UBS, Credit Suisse and Citigroup, demanding reparations from these banks for lending to—and thereby propping up—South Africa's apartheid regime. South Africans who suffered torture and repression under apartheid are the plaintiffs.

Meanwhile, debt relief campaigners are seeking a different recourse for South Africans. They want the debt accumulated by the apartheid regime—which the South African people inherited when apartheid ended—written off. Their goal is to expand the current programme of debt relief for the poorest countries to encompass countries that bear illegitimate or "odious" debt that was incurred without the consent of the people and not for their benefit. While apartheid's victims have a strong moral case, institutionalising reparations and debt cancellation involves a slippery slope. Banks may be more reluctant to lend to legitimate as well as illegitimate governments in the future. They will worry that even if a government is regarded as legitimate now, opinion might turn against it later.

Many governments around the world can be labelled as to some degree undemocratic or repressive or corrupt, especially in hindsight. If banks fear a lawsuit or nullification of their loans, they will lend at very high interest rates or not at all. Legitimate governments that want to borrow to finance infrastructure or education projects will be unable to do so.

This dilemma raises the larger question of how to prevent lending to illegitimate regimes in the first place, without jeopardising legitimate borrowing. The answer is to issue an international declaration in advance that an odious government cannot rightfully borrow in the country's name.

In 1985 there was sufficient international consensus against apartheid that the United Nations Security Council adopted trade sanctions without dissent, yet apartheid survived nearly a decade longer, aided by the lifeline of bank loans. What if the international community had also imposed another kind of sanction—a loan embargo—in 1985?

The Security Council could have declared that any future lending to the apartheid regime would be considered illegitimate and that the successor governments of South Africa would be justified in repudiating it. Because of how the debt market operates such a declaration could have deterred lending.

South Africa is repaying its debt because failing to do so would make it harder to borrow again or to attract foreign investment.

If the international community had announced in 1985 that further loans to the apartheid South African regime would be considered illegitimate South Africa would suffer few if any consequences if it repudiated the debt now, just as individuals' credit ratings are not hurt by their refusal to pay debts that others fraudulently incur in their name.

If banks had expected the post-apartheid government to renounce new loans issued to the apartheid regime, they would not have issued the new loans in the first place and apartheid's collapse might have been hastened. Herein lies the power of this policy: banks will "do the right thing" not because loans to odious regimes are illegal or immoral, but because such loans are unprofitable. This is a sanction they will not want to evade.

The declaration of a regime's odiousness should ideally be made about future lending and not retroactively. Retroactively, there is a temptation to apply the odious label liberally and nullify legitimate loans as a way of transferring money from rich banks to poor debtor countries. Decisions about future loans create no such conflict between compassion and truthfulness. Cutting off loans to a legitimate government would deprive a poor country of beneficial investments. Allowing an illegitimate government to borrow would enable repression and increase the debt burden of its people.

The international community could take further steps to reinforce the declaration. Domestic law in creditor countries could prevent creditors from seizing assets to recover illegitimate debts. Successor governments could be encouraged to repudiate illegitimate debt by requiring them to do so as a condition for foreign aid. In other words, donors could refuse to give aid to a country that is, in effect, handing it over to banks with wrongful claims.

The international community should add the loan embargo to its toolkit of economic sanctions to be applied to illegitimate regimes. Banks would benefit from knowing the rules of the game in advance and eliminating the risk of lawsuits or nullification of outstanding loans. Legitimate governments could borrow at lower interest rates.

Governments recognised by the international community as illegitimate, like that of apartheid South Africa in the past and perhaps Iran or Zimbabwe in the future, would be unable to borrow internationally, use the funds to finance repression or loot the money and then saddle their people with the debts.

Authors

Michael Kremer
Seema Jayachandran

Publication: Africa News