Debt diplomacy refers to the practice of using debt as a tool for exerting influence and control over other countries. It typically involves wealthy countries or institutions lending money to developing countries, often with conditions attached that give the lender greater leverage and influence over the borrower.
Debt diplomacy can take many forms, but some common examples include:
Economic and financial conditions: Lenders may require borrowers to implement certain economic and financial policies, such as austerity measures or structural reforms, as a condition for receiving loans or debt relief.
Strategic investments: Lenders may use debt to fund strategic investments in a borrower’s infrastructure, energy, or other critical sectors. This can give the lender greater control over the borrower’s economy and strategic interests.
Debt traps: Lenders may intentionally lend more money than a borrower can realistically repay, leading to a debt trap in which the borrower becomes increasingly dependent on the lender for debt relief or restructuring.
Debt diplomacy has been criticised for its potential to exacerbate economic and political inequalities between developed and developing countries. Critics argue that it can lead to unsustainable debt burdens for borrowers, and that it can be used to pressure countries into making political concessions or ceding strategic interests to lenders.
Some countries and institutions have sought to address the negative impacts of debt diplomacy by promoting debt relief and restructuring, promoting greater transparency and accountability in debt negotiations, and supporting alternative sources of financing for developing countries.
In the early 1800s, a British diplomat named Robert Liston negotiated a debt settlement between the Ottoman Empire and the UK. The Ottoman Empire owed the UK a large sum of money and Liston was tasked with negotiating a repayment plan. Liston was successful in his diplomatic mission and the Ottoman Empire paid back the debt in full. Liston’s negotiation tactics were so successful that the Ottoman Empire named him their ambassador to the UK. As a result of his diplomatic success, Liston became known as the ‘Father of Debt Diplomacy’.