To Make the Baker Initiative Work, Fine-Tuning Is in Order
Three years ago a consensus emerged on the debt crisis of the developing countries. Policy adjustments in the debtor countries would restore economic growth, if supported by adequate external finance and by policies in the industrialized nations bolstering growth and world trade. The consensus took the name “Baker initiative” after then-U.S. Treasury Secretary James A. Baker III, who formally proposed this strategy.
Today, despite some progress, an end to the debt crisis remains elusive.
Among the achievements, the threat to the international banking system has abated. The commercial banks in the industrial countries have strengthened their balance sheets. They have reduced their exposure to developing-country risk, increased their loan-loss reserves and increased their ability to absorb losses on discounted loan sales. Also during this period, economic growth in the industrialized countries has exceeded earlier expectations. Some progress also has been made by the debtors in restructuring their economies.
Most of the debtor nations, however, are no better off today than they were in 1982 when the debt crisis erupted. Some--the low-income nations of sub-Saharan Africa and the highly indebted middle-income countries--are actually worse off today than they were six years ago. The highly indebted group is made up of 17 nations--many of them in Latin America, including Mexico, Brazil and Argentina.
Per-capita income in the highly indebted countries has declined almost every year since 1980. Living standards in low-income sub-Saharan Africa have been declining steadily for more than a decade and are now far lower than at the end of the 1970s.
Net financial transfers from developing to developed countries increased from $10.2 billion in 1984 to an estimated $43 billion in ’88.
Net transfers from the highly indebted countries to creditors during 1985-87 amounted to $74 billion, about 3% of their combined gross domestic product and roughly equal to the decline in investment in those countries.
There has been some good news this year for sub-Saharan Africa, where most of the debt is owed to “official creditors"--other governments and international agencies and institutions. At the June, 1988, Toronto summit meeting of the seven leading industrial nations, new flexibility in dealing with the debt of low-income Africa was endorsed. Partial forgiveness, extended maturities and lower interest rates are among the options approved. While these steps and others by the international community will help ease the debt burden in some of these countries, they by no means constitute a solution for the region’s economic difficulties.
Most of the debt of the highly indebted countries, however, is owed to “private creditors"--mainly commercial banks in the industrialized world, thus ruling out debt-relief measures similar to the ones provided to Africa. The Baker initiative called for additional new lending to the highly indebted countries to enable these debtors to remain current on debt repayment while expanding investment and production. Since 1985, however, net long-term lending by private creditors to these nations has continued to decline. By the end of 1988 it had become clear that, for many in the highly indebted group, initial expectations about the Baker initiative were not being met.
Creditors and debtors, meanwhile, had begun examining and utilizing devices designed to reduce the debt itself. Much reliance was placed on the “market"--the discounted price that creditors were willing to accept to remove the debt of the developing countries from their books. Debt-equity swaps, in which a creditor exchanges debt for an investment stake in the debtor nation, have been expanding rapidly. In the first half of 1988 they reached a volume that was nearly 90% greater than for all of 1987. Mostly concentrated on a few countries like Brazil, Chile and Mexico, this total for the first half ’88 was $8.8 billion--certainly significant, except when compared with the outstanding 1988 debt of the highly indebted nations of $527 billion.
What is to be done?
It is time to rework the 1985 consensus, to modify and further adapt the Baker initiative. Support for low-income nations in sub-Saharan Africa undertaking economic-adjustment programs must continue and expand. The principal partners in this effort will be the African governments and their official donors--governments and international agencies like the World Bank, which provide the bulk of the region’s external financial assistance.
For the highly indebted nations especially, emphasis must be placed on productive investments that will enable them to eventually grow out of their current debt burdens. Voluntary debt-reduction measures can redirect financial resources from debt repayment into productive investment. Bank regulators and fiscal authorities in the major industrial countries can assist this effort by introducing more uniform accounting standards on the treatment of banks’ loss provisions and on the treatment of actual losses. Commercial banks should find more ways to share market discounts with debtor countries that are resolutely trying to reform their economies. The trade policies of developed nations that obstruct imports from developing countries should be changed.
The World Bank is prepared to continue its expansion of new lending to the debtor nations and its role as a catalyst for new commercial bank lending to these countries. Virtually all of the general proposals to deal with the debt crisis of the developing nations--some of which suggest that there is a single, all-embracing solution--raise fresh problems for which solutions have not been provided. It is not realistic, at the present time, to expect public financing support for broad debt-relief plans.