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Tuomas Toivonen

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    Fri, 16 Feb 2007

    Zambia, vultures and the need for a Drago Doctrine (version 2.0)

    Was reading about the agreement between Lula and Evo on gas price increases, another $100m windfall for Bolivia, when I stumbled upon an interesting news item about Zambia, of all places. Apparently Zambia is in south central Africa, burdened with about $6bn of external debt, has GDP of roughly $10bn and imports and exports both howering at little under $2bn. Zambia's economy used to depend on copper exports and do rather okay by African standards. However, in late 1960s the copper industry was nationalized with unfortunate results. Come the 1970s and the oil shock hit and was then followed in mid-decade by a halving of copper prices on the world markets. By the 1980s, Zambia was neck deep in IMF debt. Decade on the copper industry was privatized again and reforms implemented in textbook Washington Consensus fashion. Not much good in that as opening of the economy decimated local industry. Recently, the copper industry has been showing some promise (with strong investment interests by the Chinese), but the HIPC initiative hasn't worked any wonders on the debt relief front.

    Enough on the background. The news today was about some tractors that the Zambians bought from Romania in 1979. Not that they had the money, but kindly the Romanian government was keen on promoting its agricultural equipment industry and lent the Zambians what they needed. Presumably the tractors eventually arrived and were put to productive use. Fast forward twenty years. The Romanian government is still owed the debt by the Zambians. Nominally the debt is valued at around $30m, but the Romanians are taking a reasonable position and have all but agreed to settle the debt for $3m. Before the contract is signed an investment fund, Donegal International, registered in the British Virgin Islands, appears. Michael Sheehan, a US national and owner of Donegal contacts president Chiluba of Zambia and a donation to "Chiluba's favourite charity" is offered, a cool $2m. Suddenly, Zambia isn't interested in a deal with the Romanians anymore. Instead, the Romanians sell the debt to Donegal for $4m. At the time the Zambian government approves the move.

    Fast forward again, this time to February 2007 and a court room in the UK. Donegal is demanding $55m from the Zambians. Apparently interest and "costs" have ballooned the debt somewhat. President Chiluba has been out of office since 2001 and the Zambians are no longer as pleased with their deal with Donegal. Despite protests from Gordon Brown and an assortment of debt relief activists, the judge is forced to approve of Donegal's case. Legality is on the vulture fund's side despite the gross immorality of the affair. As a result all of Zambia's assets in the UK are frozen; whether there are any, the reports don't tell. The case is still ongoing, but the speculation is that the judge would force Zambia to pay Donegal anywhere between $10m and $20m. Not nice, considering that the sum total of debt relief expected for Zambia this year is under $50m.

    What I find interesting in the case is the clear abrogation of the Drago Doctrine. In 1902 the Europeans (Britain, Germany and Italy) were imposing a naval blockade on Venezuela and for good measure shelling the ports. The reason: Venezuela was hugely indebted and the Europeans were intent on collecting. Back in 1823, James Monroe, president of the US, had formulated what came to be called the Monroe Doctrine. Essentially the doctrine stated that the Latin American wars of independence had been concluded to the detriment of the Europeans and that the new order was irreversible, "America to the Americans" as it is succintly put. Building on the Monroe Doctrine, the Argentine foreign minister Luis María Drago in 1902 defined what has become to be known as the Drago Doctrine: "the public debt cannot bring about a military intervention or give merit to the material occupation of the soil of the American nations by a European power" (Drago's letter to the Argentine ambassador to the US, quoted in Joseph Stiglitz, Making Globalization Work, p. 213).

    Drago continued "in the first place the lender knows that he is entering into a contract with a sovereign entity, and it is an inherent qualification of all sovereignty that no proceedings for the execution of a judgement may be instituted or carried out against it, since this manner of collection will compromise its very existence and cause the independence and freedom of action of the respective government to disappear" (ibid., p. 214).

    The crisis in Venezuela was eventually defused by US allusions to the Monroe Doctrine, and more concretely, by the proximity of the US Caribbean fleet. What precisely prompted the US to act was German imperial ambitios and intention to establish a permanent base on the Venezuelan coast. Having spared Venezuela of mafia-style debt collection by the Europeans, the US was quick to reconsider. Only two years later, in 1904, president Roosevelt announced the Roosevelt corollary to the Monroe Doctrine. If debt default was a sovereign right, then what of the US investments in Latin America? Early on in the 20th century Britain was still the largest investor in Latin America, but by the Great Depression the US would have claimed its role as the foreign nation with most vested (financial) interest in the stability of its southern neighbours. "All nations are sovereign, but some are more sovereign than others," might be the succint version of Roosevelt's diluted Monroe Doctrine.

    Having Zambia's assets frozen by a UK court on the behest of a private company, hmmh, doesn't that sound a bit contradictory if the Drago Doctrine and sovereignty in general are to hold? Neat that coercion can be achieved by switching a bit or two in some bank databases. No need for the fleet and all that shelling. Except, of course, that the UK is not the villain here, its doing its job in upholding the law though it mystifies me somewhat that case has even been accepted at a UK court. Presumably the tax haven where Donegal Investment is registered falls under British jurisdiction and perhaps the debt sale contract with the Romanians also applies under British law.

    Common sense dictates that the bad guys here are Donegal, and perhaps the Zambian administration that approved the debt sale. Earlier the Zambians had offered Donegal $14m, but apparently that wasn't enough. Rather a pity that Zambia needs to go through the ordeal of an odious court case like this. Not easy to be a faithful debtor and maintain the good graces of the multilaterals. In the hopes of debt relief Zambia can't simply default and let Donegal feel the pain of a risk realized: that's what you get buying discount debt - it tends to be bad.

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