IMF Debt Plan Seen as Major U.S. Policy Shift

The U.S. decision to move forward with a plan to ease the developing world’s massive and worsening debt crisis is a major policy reversal by the Reagan Administration but may offer too little too late, international finance experts said Tuesday.

The proposal, unveiled in Seoul, South Korea, in weekend briefings by U.S. officials attending the annual International Monetary Fund meeting, was presented formally Tuesday in a speech by Treasury Secretary James A. Baker III.

The plan calls for a joint effort by the World Bank and the IMF, by the major commercial banks that Third World debt affects most heavily and by the borrowing countries themselves.

The debtor nations would have to commit themselves to open their markets to trade and investment, cut taxes and promote private sector growth. The World Bank and the IMF, meanwhile, would commit $9 billion and commercial banks $20 billion in loans over the next three years.

In his speech, Baker made it clear that the debtor nations could not expect to see new loan commitments unless they took steps to gear their economies toward growth, along the lines of “supply-side” policies that the Administration has tried to apply at home.

But he outlined no specific program to achieve this.

At the same time, Baker called on the major banks affected by the crisis, which have lent about $450 billion to Latin America, Asia and Eastern Europe, “to make a pledge to provide these amounts of new lending and make it publicly, provided the debtor countries also make similar growth-oriented policy commitments as their part of the cooperative effort.”

New Demand for Austerity

But some governments, in particular those of Mexico and Brazil, have made it clear that they face increasing political resistance to further economic discipline before new funds are in hand.

Those governments will almost certainly view Baker’s strategy of making new loans conditional on new economic policies as just another demand for austerity.

“It is certainly positive that the Administration and Treasury have done a major about-face and recognized that there is a prolonged and serious debt crisis that requires government action,” said Richard E. Feinberg, a vice president of the Overseas Development Council, an organization here that generally presents a Third World viewpoint.

However, he added: “The question is, would there be enough capital flows to turn austerity into growth? If you are talking about only $29 billion in new funding over three years--that would hardly be noticed.”

Norman Bailey, an economic consultant in Washington who was at the National Security Council when the Administration helped weather an earlier stage in the Latin debt crisis two years ago, said the Administration did not consult enough with its allies before deciding to go ahead with its plan.

“It’s an important step forward that they woke up to the problem,” Bailey said. “But the program had to be worked out in great haste for the Seoul meeting. They didn’t have time to address all the problems that needed to be addressed.”

Baker’s proposal “will probably buy us some time in what was getting to be an extremely iffy situation, and it’s important to keep up the momentum. But I’m afraid that what may happen in Seoul is going to slow down the momentum,” Bailey said.

But early reports from Seoul suggest that the major commercial banks involved in the debt crisis are publicly supportive, having no choice but to go along with a program that, if followed, could at least keep outstanding loans still alive.

The major banks have no choice but to keep lending to protect what they have already invested. But there is virtually no chance that smaller regional banks, much less at risk but by now utterly unwilling to throw more loan funds into the debt crisis, will follow suit.

“I don’t see this as a panacea at all,” one East Coast regional banker said. “Asking banks to make a more general type of lending commitment that does not have the strong discipline of the IMF won’t solve anything. And it certainly won’t bring in more voluntary lending.”