Some thoughts on the Brady plan: Putting a fourth leg on the donkey?

The failure of the Baker Plan to produce any significant improvement in the circumstances of the highly indebted middle-income countries was not surprising. The plan is most readily described as a three-legged donkey. The first leg was to be the adoption by debtor countries of policies aimed at achieving “adjustment with growth.” Macroeconomic adjustment (first and foremost the elimination of unsustainable fiscal deficits) was to be complemented with internal and external liberalization policies. The aim of these structural reforms was to improve the operation of markets, shift resources into the tradables sectors (especially production for exports) and eliminate waste and inefficiency in the large public enterprise sector. Since the plan was announced in a speech, it is understandable that it contained only a vague and broad description of policies and few operational specifics. No quantitative assessment (and barely any qualitative characterization) of how the policies were to promote growth and ease structural adjustment was ever provided. Key issues like the definition, monitoring and enforcement of conditionality of financial support were not adequately addressed. There was some doubt whether the policy conditionality of the plan was laxer in some ways or no different from that of the International Monetary Fund (IMF) and of the World Bank for structural adjustment lending. Nevertheless, a number of countries made efforts to bring their budgetary deficits under control, eliminate some glaring inefficiencies in the public sector and the parastatals, and pursue export-oriented trade strategies. With the notable exceptions of Mexico and Chile, most of them did not persist in these efforts long enough to make a difference in their situations. The second leg of the Baker Plan, continued financial support by the IMF, the World Bank and other multilateral development banks (presumably contingent on the adoption of suitable policy reforms), as well as national export agencies, was present, but turned out to be a short leg at best. The third leg, increased net lending by commercial banks to debtor nations, never materialized for the simple reason that the banks were given no incentive in the plan to provide new loans, With the exceptions of Argentina and Mexico, the highly indebted countries have failed to receive any “concerted” bank loans since 1986.’ The Baker Plan in action thus turned out to be a two-legged donkey. It is hardly surprising that it did not go very far. It is surprising that people in positions of authority believed that the private banks, burdened by a large portfolio of nonperforming sovereign debt, would be willing to pledge additional funds. It is also something of a mystery why the very same banks that brought us the lending spree of the 1970s should be invited and encouraged to return for an encore. Indeed, it may not even be desirable to have a large part of the commercial banking system with no longterm interest in international finance participate in medium-term lending to countries of which they have little knowledge, and in which they have even less interest. Even if the commercial banks had been willing to supply more funds, the debtor countries might have been well advised to “just say no.” Borrowing short to invest long is not a prudent strategy. Short-term commercial bank loans at variable rates of interest impose a significant share of the risk due to macroeconomic policy changes and performance in the creditor nations on the debtors. Long-term fixed rate loans or equity participation are much more suitable instruments for financing long-term investments. Additional variable rate bank debt may only have led to repeated adjustments of structural adjustment programs to meet exogenously fluctuating repayment streams. Without significant new inflows, Mexico’s interest obliga-