How to Tackle Venezuela’s (and the World’s) ‘Odious Debt’ Problem

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Venezuela could be a test case for reforming international finance’s lending to authoritarian governments.

Nicolas Maduro is gone in Venezuela, but the country is a wreck—vast numbers of its people have fled, its infrastructure is in ruins, and it is drowning in debt. A return to democracy is vital for the Venezuelan people, for Western Hemisphere stability, and for American interests, including meaningful American investment. But any new democratic government would struggle to survive under these economic headwinds. For democracy to take root once again in Caracas, re-establishing a baseline of economic stability is key. A new take on the old concept of “odious debt” could help.

Venezuela’s Odious Debt Problem

Venezuela’s government faces approximately $150–$170 billion in external debt. Venezuela’s GDP, by contrast, is only about $120 billion, with some credible estimates as low as $80 billion. While some of Venezuela’s debt is legitimate, a significant portion is simply the product of corruption, self-dealing, and authoritarian abuses. 

Maduro and his cronies borrowed wildly, often using funds to pay for repression rather than development. Loans were often secured with bribery rather than popular consent. China, in particular, lent enormous sums to the Venezuelan regime through opaque, corruption-tainted, and oil-backed agreements that delivered few benefits to the public. Why should Venezuela’s people be forced to repay corrupt loans that funded their own persecution, arbitrary detention, starvation, and torture?

Economists call this “odious debt.” The doctrine of odious debt holds that obligations incurred by a regime to repress its population or enrich its leaders should not bind the public once that regime falls. 

The idea of odious debt as a theory has a long history. In 1923, for instance, former President and then-current Supreme Court Chief Justice William Taft relied on the logic of odious debt while arbitrating a dispute between the United Kingdom and Costa Rica. In that case, Taft refused to enforce loans granted by UK companies, which had lent them with the knowledge that Costa Rica’s dictator would use them for his personal use.

Since then, the concept has resurfaced periodically in debates after the fall of notoriously corrupt dictators, such as Ferdinand Marcos in the Philippines and Mobutu Sese Seko in Zaire. In such cases, where the personal fortunes of repressive dictators ballooned in lockstep with sovereign debt, it seems both cruel and economically backwards to leave the bill for that national theft with the very populations impoverished by the corrupt regimes. But while odious debt has instinctive appeal, it has never been systematically operationalized.

The moral logic of odious debt is compelling. Its economic implications are more complicated. To begin with, lenders are generally ill-positioned to monitor how funds are ultimately used, and an overly broad or retroactive application of the odious debt doctrine risks undermining the viability of international credit markets. New rulers often call their predecessors “corrupt.” If every political transition carried the threat of sovereign debt repudiation, credit would become scarcer and more expensive, harming the populations most in need of investment. 

Many risk-averse international creditors would simply stop lending to emerging market countries. Used indiscriminately, odious debt would almost certainly undermine economic growth rather than support it. Recognizing this, many new democracies—such as post-apartheid South Africa—chose to honor the debts of their former oppressors, rather than lose access to international credit........

© The National Interest