Debt in Developing Countries
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, and consequently it falls with the fall of this power
Alexander Nahum Sack
Professor of Law – 1927
The consequence of decades of financial and economic mismanagement by the governments of many developing countries, often assisted by the World Bank and the IMF, is that these countries have been left with crippling debts. According to the World Bank, the public debt of developing countries was $31 trillion in 2024, and payments on this debt were $921 billion. This was a 10% increase on the $847 billion paid in 2023. This escalation in debt payments is being driven by the high interest rates developing countries face when they need to refinance their loans: 5.5% in Asia and Oceania, 7.1% in Latin America and the Caribbean, and 9.8% in Africa. Compared to the 2.8% the US pays, these rates seem a bit extortionate.1
The impact of debt payments on a desperately poor country can be severe. 46 developing countries, with a combined population of 3.4 billion people, spend more on debt payments than on health or education, two of the most important drivers of economic development.1
Referring to these countries as desperately poor is no exaggeration. Even middle-income countries are poor by western standards. The World Bank ranks a nation’s economic status based on its per capita gross national income. The classifications for 2026 are:
- Low-income – GNI per capita of $1,135 or less.
- Lower middle-income – GNI per capita between $1,136 and $4,495.
- Upper middle-income – GNI per capita between $4,496 and $13,935.
- High-income – GNI per capita of $13,935 or more.2
With a GNI per capita of $13,660 in 2024 China is close to high-income status, but this is a bit misleading. The GNI per capita in the US was $83,660 in 2024, $70,000 more than that of China.3
Debt relief for desperately poor countries may be morally commendable, but it is not a legal obligation. There is, however, a legal argument for cancelling the debts of a country if they are odious or illegitimate.
Odious debt is sovereign debt incurred without the consent of the people that does not benefit the people. The argument for cancelling this debt is especially strong if the creditors were aware that this might be the case when they made the loan. When money is lent to a dictatorship that is known to be corrupt or repressive, the lending institution has a duty to ensure the money is used to benefit the people. If they do not do this and the money is used for the benefit of the dictatorship then the debt falls with the fall of the regime.4
Cancelling odious debt is not an unprecedented act—the US did it after Cuba ousted the Spanish in 1898. Spain was demanding Cuba repay the money it had borrowed, but the US contended the loans had been made to a government that was imposed on Cuba by force of arms, and that the money had benefited Spain rather than Cuba. A similar ruling was reached in a case in 1923, where money Great Britain lent to Costa Rica was deemed to have been loaned to an illegitimate government, and the debt was annulled.4
Cancelling odious debts doesn’t just right past wrongs, it also prevents future wrongs. If a creditor loses the money it lent to a despotic dictator it will be reluctant to lend to one in the future.
Illegitimate debt is similar to odious debt, just not as bad. Illegitimate debt results from loans that exploit the vulnerability or misfortune of a country, or that were made for the benefit of the lender. For example, during its 1976–1980 Ship Export Campaign, Norway loaned money to several developing countries to buy ships they did not need, or were financially unviable, to support its failing ship industry. Norway has since cancelled NOK 1.6 billion (US $144 million) of this debt.5
References
- https://openknowledge.worldbank.org/server/api/core/bitstreams/83f7aadd-dc5a-406b-98d4-9624e93993e5/content – WB International Debt Report 2023. https://unctad.org/publication/world-of-debt#:~:text=Developing%20countries’%20net%20interest%20payments,government%20revenues%20to%20interest%20payments – Debt refinancing costs.
- https://datahelpdesk.worldbank.org/knowledgebase/articles/906519-world-bank-country-and-lending-groups – International income status criteria.
- https://data.worldbank.org/indicator/NY.GNP.PCAP.CD – GNI per capita.
- www.imf.org/external/pubs/ft/fandd/2002/06/kremer.htm – Odious debt.
- www.regjeringen.no/en/dokumenter/Cancellation-of-debts-incurred-as-a-result-of-the-Norwegian-Ship-Export-Campaign-1976-80/id420457/ https://slettgjelda.no/assets/docs/Why-Norway-took-Creditor-Responsibility.pdf – Norway illegitimate debt.