Odious Debt Revisited

Only a short while ago a call for the cancellation of ‘third world’ debts was an invitation to derision. Nowadays, world leaders compete amongst themselves for the honour of (seemingly) making the largest cancellations. Within the space of two years, debt cancellation has moved from the world of loony lefties to become as much part of everyday common sense as the view that the US way of electing a President could do with an injection of democracy.

An important paradigm shift has been part of this recognition of the havoc debt is inflicting on hundreds of millions of people throughout the world. Until recently, the anti-debt campaign was based primarily on the fact that the level of debt repayment was simply not sustainable for a large number of countries. When all or most of a country’s foreign earnings go on debt servicing it is clear that the numbers add up to an unpayable sum. Countries are increasingly being forced to borrow money to pay back previously borrowed money. Adding compound interest to the equation means that countries are getting deeper and deeper into debt at the same time that they are spending ever increasing amounts of scarce resources servicing their debts. This is the problem that used to define the debt burden debate. Much energy went into determining what portion of debt was unpayable and, hence, appropriate for debt ‘forgiveness’ by the kind western creditors.

The new respectability given to debt cancellation has contained a further paradigm shift. Legitimacy is replacing questions of sustainability. The call for debt cancellation is now increasingly based on the understanding that the debt itself is illegitimate: that, far from being the debtors, so called Third World countries are in fact the creditors, and that the inversion of the true relationship mirrors the overwhelming domination exercised by the powerful in the economically developed nations over the rest of the world.

The reason why the ‘Third World’ is the true creditor is because its debts are dwarfed by what it is owed by the people masquerading as its creditors. The reparations owed by the West as compensation for the slave trade and the depredations of colonialism and imperialism, together with the accumulated value of the manifold exploitations of what is now euphemistically called ‘globalisation’, greatly exceed even the national book value of what the false creditors–the IMF/World Bank and private commercial banks–think they are owed.

The Doctrine of Odious Debt–and, crucially, the analysis that apartheid’s foreign debts are odious in terms of the Doctrine–has played a pivotal role in transforming the categorisation of the debt problem from sustainability to illegitimacy.

Very recent research now shows the Doctrine of Odious Debt to have an even richer history than previously realised. The research reveals, moreover, that the Doctrine has a far greater contemporary resonance than hitherto appreciated. Finally, the argument that the apartheid debt is an odious debt is even more secure than Jubilee 2000 and others have argued in their various publications.

The research in question is that provided by Charles Abrahams. Abrahams, a South African, has just completed an LLM degree in Public International Law at the University of Leiden, in the Netherlands. His thesis for this degree was on the Doctrine of Odious Debt, with apartheid debt serving as a contemporary case study.

The Doctrine of Odious Debt deals with the one exception to the inheritance of state debt. The norm is for a new government automatically and unconditionally to accept the debts contracted by its predecessor. As a departure from this norm, a debt is odious and not transferable to a successor government if the previous regime was any form of dictatorship acting contrary to the needs and wishes of the subjugated population. Apartheid was a racial dictatorship, a circumstance that contaminated all loans to apartheid South Africa, thereby making the debts automatically odious. This, in its barest essence, is the argument Abrahams subjected to further historical and contemporary investigations.

Historic Precedents

Prior to Abrahams, it was thought that Cuba was the only instance of the Doctrine of Odious Debt being used in practice. The 1898 repudiation by the US of Cuba’s Spanish debt still remains the trailblazer. However, we now know that the Doctrine of Odious Debt was used in a number of other cases in the early part of the 20th century.

Indeed, the second time the Doctrine was used was in South Africa itself. Britain, having annexed the Boer Republics after their defeat in the Anglo-Boer War, had to decide whether it was legally bound to assume the Republics’ debts. It determined that it was not. In a proclamation published by the British Government on 6th June 1900, it announced that it would not honour the bonds floated by the South African Republic to finance its military operations against Britain. The Crown Law Officers, asked for an opinion on the repudiation of these war bonds as well as other loans, concurred with the position of the British Government. The Crown Counsel, in presenting its opinion to the Colonial Office in November 1900, declared:

Regarding the public debts, other than the way debts, of the annexed Republics, the Crown officers found that there was no legal obligation on the part of Britain to do more than leave the annexed States competent to discharge their own debts. They advised:

The effect of this ruling, according to Abrahams, was the recognition that the obligation to repay these loans was a moral one, not a legal one.

Concurrent with the reference to the Crown Law Officers, the British Government appointed the Hon. A. Lyttelton, in August 1900, to chair a commission to examine the maintenance of concessions granted by the South African Republic to a number of foreign companies. One of the many companies investigated was a Dutch incorporated company, the Netherlands South African Railway Company. The Commission found that the local managers of the company, with the approval of the Board of Directors in Holland, had supported the South African Republic in its warfare beyond the obligations which would have fallen upon them according to the South African law. It recommended that the concession should not be recognised and no compensation should be paid to the shareholders. The Commission concluded that:

The Commission further argued that the shareholders were legally responsible for damages which third parties had suffered by acts of the company. The Commission advocated the view, in other words, that neutral creditors of belligerents, or neutral holders of property rights in belligerent countries forfeited their rights if they supported a belligerent whose country was later annexed.

West Rand Central Gold Mining Company Limited v the King provides yet another example–and in some respects the most surprising–of the debt repudiation precedents established by Britain in South Africa. In this case, the South African Republic seized gold belonging to West Rand Central Mining, a British company, in a manner allegedly contrary to the law of the Republic. Following

Britain’s annexation of the Republic, the company brought a petition against the Crown to recover the gold or compensation for its loss. The Court was not persuaded by the arguments put forward by Lord Robert Cecil, on behalf of the company. The court adopted the view that a

Although this finding is outside the parameters of the Doctrine of Odious Debt, it does serve to highlight the readiness of British Courts to give legitimacy to a broad spectrum of debt repudiations.

The post–First World War Treaty of Versailles brings us much more directly back to the Doctrine of Odious Debt. Article 254 of the Treaty exempted Poland from those debts which

Only German public debts contracted prior to August 1, 1914, the date of the outbreak of the war, were assumed by successor States, in accordance with this Article.

The 1947 Treaty of Peace with Italy replicated the principle underlying Article 254 of the 1919 Treat of Versailles. The Franco-Italian Conciliation Commission established under the 1947 treaty ruled that

Cuba’s debts to the Spanish King are an instance of subjugation debts. Abrahams fleshes out the Cuban debt controversy to a greater extent than has been done popularly hitherto. Some of the additional information he provides bears repeating. The American Commissioners at the Paris Peace Conference between the US and Spain advanced two arguments that go to the heart of the Doctrine of Odious Debt. First, they argued that the loans were not contracted for the benefit of Cuba but were, in fact, contrary to the interest of Cuba. Secondly, the Commissioners maintained that the financial burdens created by the loans had been imposed on Cuba against her will and without her consent. In the Commissioners’ words:

With regard to the pledge to honour the Spanish bonds, the Commissioners pointed out that the creditors knew that the revenues were pledged

Indonesia’s repudiation of its Dutch debts in 1949, represents yet another, and more recent, instance of subjugation debts being odious. Indonesia refused to assume liability for debts incurred by the Netherlands as part of its military operations against the Indonesian national liberation movement. In 1956, it further denounced as ‘odious’ some of the other debts it had agreed to pay in 1949 [40].

The role and contribution of Alexander Sack, the professor of law in Paris, in his 1920s codification of the Doctrine of Odious Debt has been well recognised. Thanks to Abrahams, we now know that there have been other major contributions during the latter part of the 20th century, especially by the International Law Commission (ILC), through its Draft Articles on Succession of States in respect of matter other than treaties.

In 1977, ILC published its extensive elaborations on the application of the Doctrine of Odious Debt and considered the inclusion of an article on the non-transferability of "odious debts" in the final Convention. The ILC ultimately abandoned the recommendation for practical rather than theoretical considerations. The Draft Articles nonetheless retain their cogency as a definitive legal opinion, even though, like Sack’s earlier codifications, they are not binding,

The ILC’s Special Rapporteur on these Draft Articles, the previously mentioned Mohammed Bedjaoui, the now judge at the International Court of Justice, argued that ‘odious debts’ designate a genus, whereas ‘war debts’ and ‘subjugated or imposed debts,’ form the species within that genus. His definition of subjugation debts has already been quoted. But his further elaboration of these debts is highly pertinent, bearing in mind what Thabo Mbeki had to say about the purpose of the apartheid debt. Let us first listen to Bedjaoui before hearing from Mbeki.

According to Abrahams, Bedjaoui singles out two import points to clarify the definition of ‘odious debts. In Abrahams words:

This second point is an especially important development of Sack. To be odious, according to Sack, the debt not only had to be contrary to the interest of the successor State but the creditors had to be aware that their loans were being contracted by or on behalf of a despotic regime for its own benefit.

A third criteria can now be added, due to Bedjaoui’s elaborations. In terms of this new development, debts from loans made in breach of international law are automatically odious.

The reason for this is that international jurisprudence now imposes a duty on governments to uphold a core of fundamental rights or prohibitions. Pre-eminent amongst the prohibitions are acts of aggression, slavery, genocide and racial discrimination.

Consistent with the primacy given to this core of rights, is the principle that upholding these rights takes precedence over commercial treaties between states or contractual business or financial obligations of any kind. Thus Article 103 of the Charter of the United Nations stipulates:

This Article is of particular relevance in the context of the repudiation of odious debts.

Regarding the rights enshrined in the Charter of the United Nations, the International Court of Justice (ICJ), the UN’s General Assembly and the Security Council all hold that the Charter imposes legal obligations upon its Members.

Hitherto, the popular view has been to downplay resolutions from the General Assembly on the ground that they are not binding. Abrahams informs us that this view is being challenged within legal circles. Some authoritative practitioners are beginning to see resolutions of the General Assembly as authentic interpretations of the provisions of the UN Charter. T. Elias, a judge of the International Court of Justice, for instance, argues that:

For the time being the practice is still for General Assembly resolutions to remain unenforceable. This is not supposed to be the case with respect to the findings of the International Court of Justice. In its definitive judgement given in 1970 in a Belgium v Spain case the Court found that:

Influenced by the Court’s decision, the International Law Commission (ILC) saw fit to include a provision on criminal liability in its 1976 Draft Articles on State Responsibility, Article 19(3)(c) which reads:

Article 53 of the Draft Articles imposes obligations on all other States in their dealings with a criminal State. It declares that:

In its commentary, the ILC expanded on why it considered contemporary international law to have reached the point of outright condemnation of violations of certain fundamental norms:

Significantly, the US, which has taken it upon itself to act as the world’s policeman against countries it deems to be in criminal breach of human rights, opposed the inclusion in the Draft Articles of criminal liability on the part of States. According to Abrahams, it is doubtful whether the concept will be retained in the final text, in view of this US-led opposition, even though the opposition is from what is numerically a minority group. [72]

The criminal liability on the part of States has, however, now become an important concept within the development of international jurisprudence. And, of course, the ICJ’s 1970 ruling in the case involving Belgium and Spain remains intact.

(a) Quantifying the debt

The size of apartheid’s foreign debt is very conservatively put at US$25.699 billion or R192,74 billion in today’s terms (taken at R7.5 to US$1). The profits from apartheid which left South Africa to enrich foreign corporations happy to do business with the international outcast totalled at least US$41 billion, or R307.5 billion, during the 13 year period 1980 to 1993 alone. These debts and profits are odious, in terms of the new extension to the Doctrine of Odious Debt, if the loans to or business with apartheid was contrary to international law.

That apartheid was repeatedly and variously condemned by the international community as a crime against humanity or, in the words of a 1972 United Nations resolution denounced as:

has been widely argued prior to Abrahams. Abrahams, however, marshals still further facts to show why loans to apartheid South Africa were indeed contrary to international law.

Apartheid policies violated most of the rights contained in the 1948 Universal Declaration of Human Rights, the two international Human Rights Covenants, the International Covenant on the Elimination of All Forms of Racial Discrimination, and ultimately, as we have just seen, the UN Charter itself [671]. The General Assembly, additionally and in many different ways, requested all States to refrain from any action that would provide or imply legitimacy to the apartheid regime. [52]

Deserving of special mention is the Seminar on the Legal Status of the Apartheid Regime and Other Legal Aspects of the Struggle against Apartheid, which in 1984 issued a Declaration that built on this right to self-determination. The Declaration affirmed that:

With apartheid recognised as a colonial situation, the UN took the next logical step, which was to recognise the struggle of the South African people as a struggle for national liberation. Indeed, as early as 1983, the General Assembly called upon states to provide the necessary "moral, political and material assistance" to both the ANC and PAC, which were recognised as legitimate liberation movements.The struggle against apartheid was therefore much more than an internal conflict. As ascribed by international law, the anti-apartheid struggle became an international armed conflict to which the laws of war apply. This is clearly indicated in Article 1(4) of Protocol 1 of the Geneva Conventions, which classifies armed conflicts in which people are fighting against colonial domination and alien occupation, and against racist regimes in the exercise of their right to self-determination [55]

as international conflicts for the purpose of applying the laws of warfare.

The UN’s response to the violations by apartheid South Africa is contained in a plethora of Security Council and General Assembly resolutions, describing apartheid as a crime against humanity and the regime as illegitimate. [69]
The prolonged and extensive failure of governments, especially those of the major western powers, to respect their international legal obligations against apartheid South Africa is especially relevant in the context of the new initiatives linking reparations with the apartheid debt. The failure of the major western governments gives special force to the argument that they are a principal body from whom reparations to the peoples of Southern Africa are expected.

(c) The role of the International Monetary Fund (IMF)

The role of the IMF in supporting apartheid has, like the detailing of apartheid’s violations of international law, often been reported on before. Once again, Abrahams provides additional information which further strengthens an already strong case.
Abrahams’ primary contribution in this regard is to put the IMF’s 1976 loan in its proper context. The cost of apartheid’s extensive and rapid military expansion, which includes the establishment of strategic oil supply reserves and the regime’s invasion of Angola, finally caught up with the government’s already-in-deficit budget. Foreign capital became an urgent requirement in order to alleviate the effects of the military strategic sector spending on the internal capital market and the balance of payments.
It was to address this problem that the regime, in 1976, requested a loan of US$464 million from the IMF. As Abrahams points out, this amount almost equalled the increase in South Africa’s military expenditure for that same year. The IMF granted the loan, despite the Soweto Uprising of June 1976.
The IMF was similarly ready to assist the odious regime in 1982 with a further loan of $1.1 billion, despite the fact that the apartheid state continued to violate international law, and, most tellingly, despite the fact that the UN General Assembly voted 121 to 3, with 3 abstentions, against IMF aid to South Africa. As some IMF directors at an Executive meeting pointed out, according to the authors of a 1987 book:
It is highly doubtful whether South Africa needed that loan economically.... South Africa is credit worthy enough to meet its requirements without any difficulty whatsoever on the international capital markets.... The Apartheid regime is primarily interested in the area of international capital approval which goes with IMF loans, and would thus demonstrate to critics and sceptics at home and abroad how ineffective UN boycott calls are [59]

As is well known, the IMF was forced to stop further loans to apartheid only because pressure within the US was sufficient to enable the passing in 1983 of the Gamm Amendment. This Amendment, as noted elsewhere, was based, probably unconsciously, on the principles of the Doctrine of Odious Debt as codified by Sacks.

From Anger to Action

If fairness and justice settled disputes, the international community would have cancelled apartheid’s foreign debts a long time ago. Abrahams’ contribution, for all its power, is on its own, unfortunately, unpersuasive in the not so gentle realities of power politics. His academic endeavours add up to little more than yet a further dimension to the already compelling argument that the debts of apartheid are odious and not the responsibility of the new South Africa.
Saying this is in no way to diminish the anger his work engenders against the injustice of those who profited from apartheid expecting to have their loans honoured by and at the expense of those who suffered apartheid. On the contrary, his academic researches fuels the anger. But for all this, the challenge remains how to translate the anger into effective action.
 

The writer is with the Alternative Information and Development Center (AIDC) South Africa.