Loan sanctions: a new tool for diplomacy?

Seminar

Speaker(s)

Seema Jayachandran, Stanford Univesity

Date and Time

February 3, 2009 12:00 PM - 1:30 PM

Availability

RSVP

Open to Stanford faculty, students, staff, and visiting scholars.

RSVP required by 5PM February 02.

Location

Encina Ground Floor Conference Room

Seema Jayachandran is an assistant professor in the Department of Economics at Stanford University. She is also a Faculty Research Fellow at the National Bureau of Economic Research (NBER), and a Research Affiliate of the Bureau for Research and Economic Analysis of Development (BREAD), Centre for Economic Policy Research (CEPR), and Stanford Center for International Development (SCID).

Her research focuses on microeconomic issues in developing countries, including health, education, labor markets, and political economy. Her work has been published in the American Economic Review ("Odious Debt," on sovereign debt incurred by dictators), Journal of Political Economy ("Selling Labor Low," on labor market risk in India), and the Quarterly Journal of Economics ("Life Expectancy and Human Capital Investments," on increased education caused by declines in maternal mortality in Sri Lanka), and other journals.

Her current projects are based in India, Nepal, and Zimbabwe. She also works on social issues in the United States. Previously she was a Robert Wood Johnson Scholar in Health Policy Research at the University of California, Berkeley. She also worked as a management consultant with McKinsey & Company in San Francisco. She earned a PhD and master's degree from Harvard University, a master's degree from the University of Oxford where she was a Marshall Scholar, and a bachelor's degree from MIT.

Seminar summary:

Seema Jayachandran's presentation focused on the problem of what to do about "odious debt" -- that is, debt lent to rogue regimes that ultimately must be borne and paid by successive (legitimate) governments. She asks to what extent the status quo can change so that lenders will not want to lend to illegitimate governments. Her solution lies in increasing the costs of lending to rogue regimes through a policy of loan sanctions. Adopting an ex ante posture, Jayachandran argues that interests rates for loans would move toward infinity if banks knew that future legitimate governments would repudiate the debts of past regimes, particularly if new governments would have the blessing of the international community to do so. The loan-sanctions solution addresses a challenge faced by the debt relief movement, which focuses on debt "overhang," which weakens a poor country's economy. Instead, loan sanctions focus on the notion that some debt is, simply, illegitimate. And while trade sanctions pose problems (Jayachandran mentions that trade sanctions are often easy to evade and hurt people more than government), loan sanctions prevent a sanctioned government from borrowing. Loan sanctions are also self- enforcing (e.g., a lender would not lend if that lender knew it was unlikely to be repaid). The author raised questions for debate about who or what international body would implement loan sanctions or policy, the problem of banks making short-term loans to dictators who pay, and defining bad behaviors narrowly (or broadly) enough so as to target rogue or illegitimate regimes.

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