Is sovereign borrowing a new form of colonialism?

By Ramses H Abul Naga, Reader in Economics, University of Aberdeen, 2018-2019 IMéRA fellow in partnership with AMSE – Aix-Marseille School of Economics.

As recently as 2010, when Greece declared it was likely to default on its sovereign debt, suggestions that its public finances should be managed by a consortium of foreign governments raised a great outcry. However, as argued by the historian James Barker in his entertaining Pyramid Sell Off, foreign meddling in the finances of sovereign nations has had multiple precedents in recent world history.

Is sovereign debt a recent phenomenon?

The first documented states to issue sovereign debt where the European city states. As early as the thirteenth century, city states were issuing life annuities to raise capital. It is known for instance that Genoa and Venice issued debt at a nominal interest rate of 3% by 1600. Larger states such as France and Castille started borrowing in a like manner in the sixteenth century.

As argued by Stasavage (2016), the development of sovereign debt was made possible by the influence the emerging class of merchants and money lenders were able to exercise over political institutions of European nations, and this at the expense of land owners (who paid land taxes and other indirect taxes). The more control merchants were able to exercise, the lower the resulting nominal rate of interest as the creditworthiness of the sovereign borrower was seen to be higher.

Nonetheless, public finances have throughout history been at the root of civil disobedience and national revolts. In some instances, these national revolts effectively forced states to default on their sovereign debt. This was for instance the case in the city-state of Genoa in 1339. Two centuries later, in 1576, the municipality of Paris announced it would default on the payment of interest on its Rentes sur l’Hôtel de Ville. The Urabi revolt of 1879-1882 was also prompted by the French and British intervention in the public finances of Egypt under the Commission de la Dette Publique, and later the Law of Liquidation. Many other cases of early default history, triggered by social unrest or state institutions, are surveyed in Stasavage (2016).

Does a debt crisis necessarily result in occupation?

One case in point is the history of sovereign debt of the Ottoman Empire and its provinces during the second half of the nineteenth century.

One such Ottoman province, Tunisia, had accumulated a large amount of debt under the rule of its reformer and modernizer Ahmed Bey (who ruled from 1837 to 1855). Eventually, Tunisia had to default on its sovereign debt in 1869. A debt commission representing the interests of the Great Powers was then formed, the so-called Commission Financière Internationale, that took control of the public finances of Tunisia. Some years later, in 1881, France occupied Tunisia under protectorate rule, and took on the obligation of servicing the country’s debt. The Tunisian financial crisis hence culminated in the French occupation that would only be terminated in 1956.

Egypt under the rule of Khedives Sa’id and Ismail had to resort to a large amount of borrowing from European countries, for multiple reasons ranging from the development of national infrastructure, a modern bureaucracy and raising the required capital to undertake the construction of the Suez Canal. When by 1876 it was become increasingly likely that Egypt may have to default on its international debt obligations, a Caisse de la Dette Publique was put in place by the Great Powers, granting the French and British full control over Cairo’s public finances. The resulting economic policies of the Great Powers, together with their removal of Khedive Ismail in 1879, lead to the Urabi revolt, that culminated in British occupation in 1882, under the premiership of Gladstone and Foreign Secretary Lord Granville. Britain exercised variable control over the domestic affairs of Egypt until 1952.

Over the 1850s, the Ottoman Empire had to resort to foreign borrowing in order to modernize its army and to maintain its war effort in the Crimea. However, neither of Germany, Britain nor France decided to impose direct rule on the Ottoman Empire, in the aftermath of its financial problems. It is to be noted however that while the Ottoman Empire was not occupied, by November 1881 it had in effect surrendered the control of its public finances to a group of European countries, under the Decree of Muharram.

Does foreign occupation entail economic progress?

It is clear that in the late nineteenth century, the perceived benefits of economic colonialism for France and Britain were deemed to cover the cost of occupation and the related political risks. Through the process of taking control of the finances of the borrowing nations of North Africa, the Great Powers  were also able to lobby for further concessions for their nationals and their business interests. My reading of these occupations is that they effectively enabled the creation of parallel political institutions in the debtor nations that would serve the interest of the creditors of the great powers, in the same way that the merchant class was exercising control over the political institutions of European city and territorial states at an earlier time.

A more subtle question to ask is whether this form of direct or indirect intervention in the domestic affairs of the borrowing nation was in any way beneficial to it. It is clear that the narrative of the great powers greatly emphasized the positive aspects of foreign presence: this was needed in order to maintain political support for occupation in the legislative bodies of Paris and London. Thus, the French and British authorities emphasized progress in the development of roads, railways, postal services and similar infrastructure as well as a modern bureaucracy and the growth of agricultural productivity, this especially in relation to cash-crops. The British in Egypt were also successful in reducing the tax burden on farmers, that since the time of the Mamluks had been historically very high.

The Lords in Egypt

In relation to the question of who the beneficiaries of occupation are, the case of Egypt is worth discussing in some detail. Egyptian historians often argue that the real purpose of occupation was to abort the Urabi revolt of 1879-1882. It is important, however, to recall that because Prime Minister Disraeli had purchased around 45% of Suez Canal shares, Britain’s financial stakes in Egypt in the 1870s were substantial. If the real motive of British occupation was to secure the financial interests of the great powers by avoiding insolvency, it is again important to stress that at the time, experts disagreed on whether the Khedive’s government was effectively bankrupt.

There were some objective difficulties in assessing the public finances of Egypt at the time, as national accounts and nationwide censuses were not available in this part of the world. There were also some further gray areas, as to what constituted private property of the Khedive as opposed to proper state assets.

Lord Cromer, the British Consul General in Cairo (1882-1907), maintained that Khedive Ismail’s administration was bankrupt, citing as supporting evidence the findings of the British Government’s Paymaster-General mission of 1876, which came to be encapsulated in the Cave report. The purpose of this mission was seen by some to draw an objective and accurate inventory of the Khedive’s finances. Others however have argued that the intent and purpose of the mission was to lay the grounds for British occupation. Finally, other experts at the time were of the view that Egypt had the means to service its accumulating foreign debt. De Leon for one (1877, chapter 19) expands his argument in some length that Egypt was in fact solvent, and that instead of occupation, a feasible adjustment of government spending, coupled with a revision of the terms of the loans could have avoided altogether the Egyptian debt crisis of 1870s.

Because the real motives behind the British invasion are still disputed, it is hard of course to find any consensus emerging as to the economic benefits of occupation for Egyptians. As discussed by Barker (2012), Lord Cromer,  stressed the benefits of British “Guidance” for the “Natives”, while Egyptian historians and nationalists, using the Urabi revolt as historical evidence, argued that occupation largely benefited foreign entities and their employees (see for instance Rifaat, 2005).

It is not impossible however to attempt to find some metrics that correlated with rising living standards at the time. In this respect, Roger Owen observes that the increase in the Egyptian population (especially the rural population) must have been made possible from the rise in agricultural productivity during British rule. When looking at the rise in agricultural output per capita, Owen (1993, p. 228) concludes:

“From a purely statistical point of view, therefore, it would seem that there was a substantial rise in the gross income of the average Egyptian rural family (if such an entity can be said actually to exist) during the 1890s, and very little progress after that.”

Another metric of economic success pertains to the state of public finances—though it is not immediately clear that balancing the books has the same distributional impact as rising agricultural productivity. A major success of Lord Cromer’s tenure was in balancing the budget by the turn of the century. This task was far from trivial because of the existing privileges that had been granted to European nationals and entities under the system of capitulations that Cromer inherited from the former rule of Khedives Sa’id and Ismail. However, progress in alleviating the foreign debt was less conclusive.  Cromer’s efforts in this respect were frustrated by the cost of Lord Kitchener’s campaign in the Sudan (1896-1898) as well as the decline in the world price of key Egyptian cash crops over the turn of the twentieth century.

Concluding comments

As early as the thirteenth century, European city states were issuing annuities in order to raise capital. Sovereign borrowing became more widespread in the sixteenth century when larger territorial states and monarchs also started to raise capital using various financial instruments. It is in the nineteenth century that the great powers, representing the interests of their creditors, started effectively occupying territories of the South on the grounds that direct rule or other forms of intervention were needed in order to help the occupied nation to meet its international obligations. Be it the Tunisian Commission Financière Internationale, the Egyptian Caisse de la Dette Publique, or the Ottoman Decree of Muharram, the indebted nations had to effectively surrender sovereignty over their public finances to a consortium representing the interests of their creditors. As recently as 2010, Greece witnessed foreign meddling with its public finances following the financial crisis of 2008. Sovereign borrowing may therefore come at a cost much higher than debt servicing, and has been at the origin of some forms of colonialism, especially so in the late nineteenth century. 

As Stasavage (2016) has pointed out, throughout history, creditors as well as wealthy individuals or corporations have successfully ensured that debtor state institutions were able to secure their specific financial interests. In this perspective, it is possible to view the occupation of nations of the South as the creation of a substitute institution in the debtor nation, in the form of direct rule, a Lord Cromer type of figure, or an international consortium of creditors, that promotes and protects the interests of those creditors.

Whether the occupied nations did derive any economic benefit from foreign rule depends to a larger extent on the chosen narrative. France and Great Britain emphasized that the public finances of their protectorates improved, in the same way as the development of national infrastructure and rising agricultural productivity. Nationalist movements however stressed that European corporations as well as citizens under various institutional and indirect mechanisms were reaping all the benefits of the presence of the great powers, were exempt from taxation, and had control over lucrative state monopolies of the time such as railways and postal services.

When taking a closer look at the case of Egypt, one can make a case that in some respects Lord Cromer was acting in good faith, in trying to ease the tax burden on farmers, and in ensuring that the country could met its international debt obligations. But even then, his economic record was mixed and his success was limited; perhaps because of his misguided conviction of British superiority over the “Natives”. Or perhaps because the scope for economic policy was very much compromised due to the special legacy of capitulations granted by Khedives Sa’id and Ismail to foreign entities.

In today’s world, the national sovereignty implications of government borrowing should be spelled out more clearly in public debates. Sovereign borrowing in the twenty first century is not likely to lead to direct foreign rule. But there is a sense in which surrendering sovereignty to a consortium of banks or international agencies—whose interests rarely concur with the immediate vital needs of the large majority of nationals of the borrowing nation—is a new form of colonialism.

Bibliographical references

Barker J. (2012): “Pyramid sell off,” History Today, May 2012, 44-46.

De Leon E. (1877): “The Khedive’s Egypt Or, The Old House of Bondage Under New Masters”, London, Sampson Low, Marston, Searle and Rivington.

Rifaat M. (2005): “The Awakening of Modern Egypt”, Palm Press.

Owen R. (1993): “The Middle East in the world economy 1800-1914”, I.B. Tauris

Stasavage D. (2016): “What we can learn from the early history of sovereign debt” Explorations in Economic History 59, 1-16.


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