New Approach to Downward Cycle of Third World Debt

A year ago this month, Treasury Secretary James A. Baker III launched his initiative to assist 15 key developing countries in pulling out of their debt morass and resuming economic growth. It is a three-year plan, but so far most of those economies remain anemic and capital-starved.

One reason for this disappointing start is that the creditors--commercial banks and the World Bank--have been slow to mount a response equal to the challenge.

The Baker initiative promised to spur growth by increasing lending from private creditors and official agencies. While commercial banks endorsed the approach in general terms, they have been reluctant to actually extend new loans. Among the Baker 15, only Mexico and perhaps Argentina and Nigeria seem likely to receive significant new lending during 1986. In fact, U.S. banks have $1 billion less on their books in loans to developing countries than they had last fall.

The World Bank has committed to many new loans, but disbursements to the Baker 15 have failed to rise because of project cancellations and delays. As a result, the World Bank supplied considerably less in net funds to the 15 this year than in 1985.

Most alarming is the continuing decapitalization of many developing countries by both private and some official lenders. Creditors are receiving far more in interest payments and amortization than they are extending in new loans. Private creditors will suck out about $27 billion from the Baker 15 in 1986. The International Monetary Fund also is guilty; it is expected to receive at least $1 billion more in repayments and interest than it will extend in new credits.

This hemorrhaging of capital helps to explain why, for the fifth straight year, investment declined in most of the Baker 15 countries. And without investment, sustained growth is impossible.

The Baker initiative called on the World Bank to attack more aggressively the twin problems of debt and development. The Bank’s new president, former Rep. Barber Conable (R-N.Y.), has wisely preferred to study the complex problems confronting that multilateral agency before instituting major reforms. But some World Bank staff members are growing anxious that Conable will be too cautious initially in exercising his command of the institution’s bureaucracy and tackling the pressing issues confronting it.

To breathe vigor into the once-welcome Baker initiative, Conable should establish target figures for reducing the drain of resources that afflicts so many developing countries. These country-by-country targets should be consistent with reasonable rates of economic expansion. Increased lending by official agencies, including the IMF and the World Bank, is part of the answer, but it should be accompanied by a renewed effort to narrow the gap between the interest being paid to commercial banks and the amount of new money that they extend to debtor countries. The Baker plan should be given teeth by establishing mechanisms to induce sufficient private bank participation.

This new approach to Third World debt should be genuinely case-by-case. Countries with relatively good prospects should maintain Baker’s goal of regaining growth through modest increases in debt, but those already carrying more debt than they can realistically service should be allowed to write off some of it, as Sen. Bill Bradley (D-N.J.) suggested recently. The debate between Baker and Bradley has unfortunately been cast as an either/or proposition. A more subtle judgment would allow countries and creditors to formulate strategies based on the weight of each country’s debt burden and growth prospects.

Conable should also suggest that Japan’s $56-billion trade surplus be tapped to provide growth capital for the Third World, just as the IMF established a special facility to help Saudi Arabia recycle its surpluses in the 1970s.

Ultimately, increasing trade is the only means for countries to grow their way out of debt. The World Bank should work with other international agencies to assure developing countries access to industrial-country markets. The United States recently agreed to consider making reciprocal concessions in the coming trade talks to countries that have unilaterally reduced their barriers to U.S. products as part of World Bank-supported reforms. The World Bank can seek a similar willingness from other industrial nations.

These proposed World Bank initiatives would build on the Baker plan while adding elements of firmness, flexibility and fairness. By providing more net capital and greater trade opportunities, this initiative has a better chance of breaking the downward cycle that still grips so many developing countries.