Michael asked me to talk about the iraq debt situation, which by some reports could measure as large as $350bn dollars. To me, the solution seems pretty straightforward - they need to be largely, if not completely forgiven.
The only argument I've heard against the forgiveness of the debt is that it will set a bad precedent for future lending to other iffy regimes, such as perhaps china, or any place that may make a future transition to democracy, but I feel that iraq is an extremely unique case due to over a decade of economic sanctions and the nature of its regime. But there is an important point, in that there are no international rules for this sort of thing. The paris and london clubs will write down or reschedule payments on iraqs debt for sure, but they will base it entirely on the iraqis ability to pay, not whether or not they should have to. Perhaps, as I said, iraq is too unique to set a precedent of any kind, But rules do need to be set, internationally, regarding loans to recognized bad regimes, perhaps as part of UN sanctions, stating that loans debt will not carry over to any replacement government.
As for the argument for forgiveness have eveything to do with iraqs ability to develop economically - they would be crippled by the reckless spending of an obviously screwed up government. And the limbo situation that exists now, with no definitive answer on the loan forgiveness, is killing new investment in the country - expedient forgiveness would definitely help the transition. If the situation is similar to anything in recent history, it would be Germany after WWI. Then, Keynes and others argued for debt forgiveness for similar reasons; You all know what the lack of debt relief ended up like. Without debt forgiveness I am hard pressed to believe the new iraq will succede.
What's the difference between this situation, and Alexander Hamilton's decision to have the US pay off it's old debt after the Revolution? Most people view that as a good idea.
Although the scale is different, since US debt was 40% of GDP at the time, and Iraqi debt may be as high as 400% of GDP.
These acts are completely unrelated. Hamilton was consolidating and repaying the war debts, not the debts incurred by, say, the english government. This debt consisted of both foreign debt to the dutch and the french, and domestic debt in IOUs to soldiers, merchants and suppliers. Repaying the foreign debt was a no brainer, as the new nations credit was on the line, and I don't think it was particularly controversial or brilliant. THe domestic debt was a little different, if only because most of the IOUs had already been sold to wealthy speculators, so repayment of them would not have benefited the original recipients. Madison tried later to discriminate by finding the original holders of the IOUs, but it wasn't feasible.