Iraqi Debt

Tyler Cowen posts a reader email today pointing out the recent rally of Iraqi government debt. At a time where developing nation debt has been hurt by increasing risk aversion, Iraqi five-year credit default swaps have fallen to 520 basis points from around 635 bps at the start of the year.

Here are some other developing nation swaps for comparison from Bloomberg:
282 bps - Average developing nation debt
145 bps - Brazil
611 bps - Venezuela
520 bps - Iraq

This is partially a statement of how bad things are looking for holders of Venezuelan debt, which is trading much worse that Mexican, Peruvian, Panamanian, and other comparable debt. The sad situation in Venezuala asside, Cowen points out that Iraqi debt may be improving due to rising Republican prospects in the Presidential election; Republicans being more likely to continue a large troop presense in Iraq and (if you're optomist) create a stable country that five years from now will be able to pay off it's debt. Intrade shows evedence that could support this view. The odds of a Republican winning the 2008 election have increased from low 30s to about 41% this year.


Debt prices are, of course, affected by many factors. Most likely this price reflects the combination of recent developments in Iraqi reconstruction, likelihood of Republican victory in November, the perceived success of the Surge, events in other risky developing nations, and many addition smaller factors - factors that are not all moving in the same direction. Overall, I think it’s a good sign for Iraq but not enough to make me, at least, bullish about the country.

Planning Democracy

Econtalk's Podcast this week with Christopher Coyne was particularly interesting. Coyne, an Austrian economist, gives an economic view of the inherent problems of using foreign intervention to build a liberal democracy. He makes the important point that it really isn't that difficult to create a democracy - all you need is elections. Iran, Egypt, Zimbabwe, and Venezuela are all democracies. What is great about Western Civilization is not democracy but the liberal institutions like the free market economy, freedom of speech, a functioning free press, and the rule of law. These, of course, take a very long time to build, and are near impossible to impose through military intervention.

Japan and Germany both had much of the foundation for liberal democracy and when their respective illiberal regimes were removed, liberals were the obvious group to take over. Iraq certainly doesn't have the institutions. It has a society splintered along various ethnic and religious groups, with poisoned relations between each other. Coyne points out some mistakes the occupiers made in Iraq, but it's unlikely that even without these mistakes a liberal democracy could be established.

Yet, I'm not certain that military intervention cannot be beneficial to a society and help establish liberal democracy even in a developing nation. Japan and Germany are bad examples because of their wealth and level of human capital in 1945. But, what about Korea? U.S. intervention stopped a takeover from the Stalinist North, which would have been a tragedy. South Korea had no history of democracy before World War II, and was underdeveloped economically. As an occupoier, the United States created a democracy and imposed it's favored leaders. Korea's politics have had some bumps, but it has developed into one of the most stable liberal democracies in Asia, with Japan. Likewise, it's standard of living would now qualify it as a developed nation.

Certainly ethnic homogeneity and the outside threat of communism were benefits for stability and development as they were for Germany and Japan. But, this still indicates to me that an international coalition may be able to further liberalism in a country through intervention. Unfortunately, Iraq appears to have too many complications for foreign intervention to improve things. Hopefully, the Iraq of 2040 will prove us wrong.