Politics vs. Debt at the IMF : Baker Plan Faces Nagging Doubts

At the last annual meeting of the International Monetary Fund and the World Bank in Seoul, South Korea, a year ago, U.S. Treasury Secretary James A. Baker III announced an ambitious plan to resolve the Third World’s $960-billion debt problem.

The three-pronged initiative was designed to foster economic growth in indebted countries, expand the influence of international agencies such as the World Bank and encourage commercial banks to provide new loans to the Third World.

“The strategy was right and it is indeed working,” James Conrow, the Treasury Department official in charge of developing nations, said in an interview last week.

“Incomplete,” said one of Baker’s more generous critics, Peter Hakim, staff director of Inter-American Dialogue, a Washington group that promotes cooperation between the United States and Latin America.

“What Baker plan?” asked a cynical East Coast banker, who said the Baker speech in Seoul was intended primarily to quiet Latin American calls for debt repudiation and coerce reluctant banks into lending more billions to their heavily indebted clients.

Debate over the success or failure of the initiative will be one of the themes of this year’s IMF-World Bank annual meeting, which brings financial and economic officials of 151 member countries to Washington this week.

But many expect the Third World debt crisis to be overshadowed by serious conflicts among the major industrial nations over currency fluctuations, interest rates, protectionism and trade. Japan and West Germany will come under vigorous U.S. pressure to stimulate their economies and increase their purchases of American goods.

Dominating the cloakroom sessions and cocktail party talk will be speculation about who will succeed IMF Managing Director Jacques de Larosiere, who said last week that he will step down at the end of the year after eight years in the visible and difficult post.

Closely watched also will be Barber Conable’s first major address as president of the World Bank. He took over the international development bank in July after the departure of A. W. Clausen, the former Bank of America president whose five-year tenure as head of the bank was considered administratively competent but less than successful in enhancing the bank’s stature.

The appointment of Conable, a former congressman from New York, was welcomed by Third World delegates to the bank because of his knowledge of official Washington and his presumed ability to persuade U.S. policy-makers of the need for additional resources for the bank. His speech will be read as a blueprint for bank policy and emphasis over the next several years.

The IMF and World Bank are sister agencies that grew out of the Bretton Woods international monetary conference in 1944.

The IMF was created to ensure orderly exchange rate and balance of payments systems among member states, while the World Bank, formally known as the International Bank for Reconstruction and Development, would finance the postwar rebuilding of Europe and Japan and modernization of the Third World.

The role of both agencies has shifted markedly in the intervening years. The IMF today is the lightning rod for foreign debt issues, enforcing austerity programs on heavily indebted nations as they try to balance their external accounts.

The World Bank is shifting its emphasis from strictly development projects--ports, irrigation systems, highways--to lending conditioned on Third World countries’ adopting major market-oriented structural changes.

The meeting of the IMF and World Bank is the most important yearly gathering of world economic policy-makers.

The speeches and plenary sessions often set the tone for the coming year’s discussions of global monetary issues.

Baker’s speech last year, for example, was the pivotal event of the Seoul meeting and dictated the terms of policy debate for months afterward.

Key Private Sessions

But as important as the public meetings and the formal discussions are the private sessions and social functions that are read for clues to shifting ties and strategies.

Guest lists are studied for indications of possible future alliances. The declining lavishness of the receptions given by major banks is seen as a sign of increasing unwillingness to lend to the Third World. The appearance of Federal Reserve Board Chairman Paul A. Volcker can make or break a party.

In those private, informal discussions, two issues are expected to dominate: speculation about De Larosiere’s successor and industrial country coordination--or lack of it--on economic and monetary policy.

“All the substantive issues will be overshadowed by the fact that De Larosiere is resigning,” said Christine A. Bogdanowicz-Bindert, an international investment banker with Shearson Lehman Bros. and a former IMF official. “There’ll be a lot of talk in the corridors, but I think it would be premature for the U.S. government to announce who is the replacement.”

The IMF managing director has traditionally been a European, but the United States, as the single largest contributor to the fund and the World Bank, has a decisive voice in the appointment. The World Bank presidency, by tradition, is held by an American.

The leading candidate for the IMF post appears to be Dutch Finance Minister H. Onno Ruding, who is also head of the fund’s key Interim Committee.

Other frequently mentioned candidates are Lamberto Dini, deputy governor of the Bank of Italy; Manfred Lahnstein, a former senior West German economic official; Michel Camdessus, head of the Bank of France, and Christopher MacMahon, former deputy governor of the Bank of England.

The central policy questions during the public sessions of the annual meeting will be growth targets and trade disputes in the major industrial nations known as the Group of Five, or G-5: the United States, Japan, West Germany, Britain and France.

Health of Industrial Economies

“The component that will get most of the attention is the industrial nations’ economic performance,” Treasury’s Conrow said. “We need to see more growth and the further opening of markets in Germany and Japan so developing countries can export.

“The United States takes an enormous amount of the developing countries’ exports. There is a need to share that with the other industrialized countries. That’s the one main theme that will come out of these meetings.”

American policy-makers want to see more coordination among the major trading partners but as of last week had not been able to agree among themselves on the central question of the value of the dollar.

Baker said last week that the dollar should decline further to boost U.S. exports; a day later, Volcker suggested that it has fallen far enough this year.

Delegates from indebted nations--by far the majority of the IMF and World Bank’s membership--are closely watching developments in Mexico, which is enmeshed in difficult negotiations with commercial banks over a request for $6 billion in new loans to help meet interest payments on its $97-billion foreign debt.

Although World Bank officials point to successes in implementing the pro-growth Baker plan in smaller countries with lower debt burdens, such as Ecuador, Uruguay, Colombia and Chile, the real test case is Mexico.

The World Bank will lend Mexico nearly $2 billion in 1986, a huge commitment to a single country from an agency that approved total loans of $13.1 billion in its last fiscal year.

Much of the lending is conditioned on Mexico adopting free-market economic policies, such as reducing subsidies for public services, opening its markets to more imported goods and selling dozens of state-owned industries. Acceptance of these supply-side policies is one of the key components of the Baker plan.

Critics of the plan, however, say it serves only to ensure that the banks get repaid and will push Mexico even deeper into the debt hole. What Mexico needs is forgiveness, not new loans, they argue.

Bradley’s Alternative Plan

“I don’t think throwing new money after old will get the job done,” said Sen. Bill Bradley (D-N.J.), who has proposed a debt relief program of his own. “I don’t see how a Mexico with $110 billion in debt is more likely to grow than a Mexico with $100 billion in debt.”

The Baker plan “represented a positive change in attitude and set the right goal, which is growth. But it had insufficient means to achieve that end,” Bradley said.

Baker’s proposal envisioned an additional $29 billion in loans for the Third World over the next three years--$9 billion from the World Bank and other multilateral institutions and $20 billion from the commercial banks.

Bradley’s plan calls for nearly double that amount, with the majority of the money coming from the banks in the form of interest rate reductions and writeoffs of existing loans.

Most banks rejected Bradley’s plan outright, as they have all proposals for debt forgiveness. Third World officials have not embraced the plan, either, but Bradley blames their reluctance on political considerations.

He said Third World officials will not publicly endorse a plan that is an implicit rejection of U.S. official policy at a time when they are seeking new funds from U.S.-influenced institutions such as the World Bank and the IMF.

The World Bank, for its part, is seeing its role in the Third World evolve from a benign, rather passive reconstruction and development agency into a more hard-nosed lender dictating domestic policy in borrowing nations.

The Baker plan ratified the bank’s movement toward lending conditioned on policy changes, formerly the sole province of the IMF.

“The Baker speech put an additional emphasis and additional urgency to this whole program,” said David Knox, the World Bank’s vice president for Latin America. “I’m pretty sure that even if he hadn’t made this speech, we would have gone on this way. But he dramatized the situation and made it easier for us to get support for pushing hard in this direction.”

Whether that push will be welcomed in the Third World, which is growing increasingly weary of advice and intervention from rich nations, should provoke some lively discussions at this week’s meetings.