Over at Dani Rodrik's blog, a post that mentions Argentina has touched off a discussion about the ethics of sovereign debt (which Argentina has recently been opting not to pay). Some of the remarks seem to attack the conceptual foundations of sovereign debt generally. For example:
if you are a government and you have a million dollar that you can either give to Citibank (who lent it to you predecessor govt) or to feed hungry children, which is the ethical thing to do? I can tell you what the Kirchners' voters here will respond...
Actually, if it's ethical to default on debts in order to give money to the poor, it would seem to undermine the principle even of private credit markets as long as there is any poverty in the world. Although perhaps the point applies to governments in a special way. But then there's this:
I simply can't think of this as an issue of ethics... WHO in Argentina borrowed in the 90s? WHO in Argentina defaulted? WHO in Argentina should now pay that debt? Are these 'WHOs' the same entity?
Underlying these questions are even deeper questions. What is a state? What is a nation or a people? What is sovereignty? I was tentatively articulating, without necessary endorsing, the view that maybe the Argentineans have a moral obligation to pay their debts independently of whether it's in their interests to do so. But it's true that it's far from clear who really incurs any obligations that may be associated with sovereign debt, and who is really bound by them.
I would strongly lean towards the view that governments which are not based on the consent of the people as expressed in elections under conditions of comparative freedom of speech have no moral authority to undertake financial commitments which will be binding on their people. I would applaud a young democratic regime which refused to pay debts incurred by its autocratic successor on principle, on the grounds that the lenders shouldn't have given money to the pirates who ruled without right, and that indeed they ought if anything to pay indemnities to the country for collaborating with such rulers. Of course, this would wreak havoc on the business models of the World Bank and the IMF.
But just because a government is democratic doesn't make the ethical issues go away. Did the next generation consent to the debts which the US government has already incurred? Of course, one can keep ethics out of it and assume the lender is not buying a right to be reimbursed with interest, but rather gambling that the political dynamic of the country will result in a stream of payments to a certain class of persons of which he is therefore willing to pay to be a member. One almost wants to invent a new word for such an arrangement, for the word "debt" has such profound and ineradicable associations with ethical obligation to repay, that a new amoral sense of the word would probably be impossible for the public ever to understand.