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

When the international community wants to put pressure on a govern ment 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