Forgive Them His Debts

NOW THE RECONSTRUCTION BEGINS. What it will cost no one yet knows. Nor do we have a clear idea where the many billions will come from. But we do know this. The amount of outside aid that Iraq will require will depend on a prior decision: How much of the country's oil and other resources should be devoted to paying off the debts and obligations incurred by Saddam Hussein to pay for his wars, his weapons programs, and his palaces?

We do not know enough yet to answer that question. But the data already in hand suggest that debt repudiation might play an important part in the rebuilding of Iraq's economy.

Well over 2,000 years ago Aristotle wrote what might serve as the executive summary for any policymaker wrestling with the finances of postwar Iraq. "At the time when a democracy replaces an oligarchy or a tyranny . . . some do not want to fulfill [public] agreements on the grounds that it was not the city [i.e., the government] but the tyrant who entered into them, . . . the assumption being that some regimes exist through domination and not because they are to the common advantage."

Would a current-day wonk, his copy of "The Politics" tucked under his arm, tell the president to have the new, democratic Iraqi government forget about past debts? Not necessarily. I am told by my Hudson Institute colleague Ken Weinstein, whose understanding of philosophers' musings far exceeds that of this mere economist, that Aristotle intended to provoke a discussion rather than provide a clear guide to policy. So let's discuss.

Americans will probably be torn by our natural inclination to support the sanctity of contract, and the contradictory feeling that the Iraqi people should not have their futures blighted by debts incurred by a bloody tyrant. Such debts are known by students of the subject as "dettes odieuses"--odious debts--a concept developed by Alexander Nahum Sack, a government minister in czarist Russia and, after the revolution, professor of law in Paris. Sack argued that when a government changes hands, the liability for public debt remains intact, with one important exception:

If a despotic power incurs a debt not for the needs or in the interest of the State, but to strengthen its despotic regime, to repress the population that fights against it, etc., this debt is odious for the population of all the State. This debt is not an obligation for the nation; it is a regime's debt, a personal debt of the power that has incurred it, consequently it falls with the fall of this power.

I leave to the lawyers the question of the validity of this thesis, and instead turn to the numbers, some of which have all the transparency and accuracy of the corporate balance sheets that have dominated recent headlines. The best guess, gleaned from studies by the World Bank, the Center for Strategic and International Studies, and various news organizations (notably the Financial Times and the Wall Street Journal), is that Iraq's current financial obligations consist of some $127 billion in debt, $57 billion in pending contracts (mostly with Russian companies), and $27 billion in compensation so far known to be due to victims of Saddam's invasion of Kuwait. Debts to Kuwait are estimated to be $17 billion, to the other Gulf states $30 billion, and to Russia some $12 billion (excluding any obligations under pending contracts). But be warned: Even experts who have pored over these numbers emphasize that there is probably a wide range of error in all of these estimates, which may explain why the World Bank's table on external debt leaves the line for Iraq completely blank.

Still, even if these are just ballpark figures, the old Iraqi regime will leave the new Iraqi government with a substantial pile of IOUs, "dettes de régime," to use Sack's term. In order to determine whether this debt load is manageable, we have to estimate the nation's ability to pay, an exercise that involves some heroic assumptions. It seems not unreasonable to assume that in the relatively near term, although not without investment of perhaps $5 billion, Iraq will be capable of producing some 3-3.5 million barrels of crude oil per day from its vast reserves, with a longer-term goal of 6-7 million barrels not out of reach, but only after a massive investment estimated by industry experts at as much as $35 billion. My reasonable and conservative guesses as to oil prices, the cost of production, and profit margins suggest that the sale of 3 million barrels per day will net the country something like $15 billion per year in profit. (Rubar Sandi, head of the U.S.-Iraq Business Council, puts the figure at $20 billion.)