Rewarding the profligate and punishing the prudent and poor: Some recent proposals for debt relief

At a conference organized in June 1986 by the Overseas Development Council on the future of The World Bank, former West German Chancellor Helmut Schmidt, investment banker Felix Rohatyn and the Chairman of the Federal Reserve Board Paul Volcker all suggested that the massive ($60 billion) trade surplus of Japan be mobilized to solve what they termed as the debt problem of the Third World. Mr Barber Conable, the new president of the World Bank is quoted by the New York Times (3 July 1986) as saying “Clearly, there is the expectation that Japan, in view of the light defense burden it carries will participate fully in (solving) collective debt problems of the world.” He characterized the Japanese surpluses as “a considerable world asset” and suggested that establishing a special facility (such as the one established by the IMF in the 1970s to tap Saudi Arabia’s surplus petro dollars) to recycle them “would be one way of dealing with it.” Nearly a year ago in October 1985 at the annual meetings of the World Bank and IMF at Seoul US Treasury Secretary James Baker signaled a shift in the US approach to the debt crisis. The Baker Plan aimed to help highly indebted middle-income countries (15 were mentioned by Baker, 10 of them in Latin America) resume growth and achieve adjustment towards a sustainable debt position through the adoption of the following course of action by lenders, debtors and multilateral agencies: within the context of the (then) prevailing IMF-supervised case-bycase approach, commercial banks, the World Bank and other multilateral development banks were to increase lending to these countries. Baker suggested that the commercial banks commit a total of $20 billion in net new lending over 198688 and the multilateral development banks an additional $9 billion during the same period. This increased net lending was to be in support of the adoption of market-oriented policies by indebted nations. Growth was to be promoted, inflation reduced and external balance restored by expanding the role of the private sector and of markets, both domestically and internationally. The first offspring of the Baker Plan is the recent “growth-oriented” adjustment plan for Mexico, which was foisted upon a reluctant IMF (perhaps the world’s last unreconstructed bastion of adjustment through austerity) by the combined pressure of the US Treasury and Federal Reserve Board and the Mexican threat of repudiation. (The IMF’s reservations concerned the budgetary features of the package, not the novel real growth and oil price contingency clauses, which it supported.) The 18-month standby arrangement with the IMF provides Mexico with SDR 1.4 billion (about $1.7 billion) in support of what is described as a comprehensive program of adjustment and structural reform. The total financing package amounts to $12 billion of which $6 billion is to come from the commercial banks. Mexico’s economic problems had of course been intensified dramatically as a result of the drop in the price of oil. Policies aimed at bringing Mexico’s real GDP growth to 3.5% by 1987 (from recent negative growth rates of 4 or 5%) involve a variety of growth-oriented, market-friendly adjustment measures (increased public investment, current expenditure cuts, tax reform measures, marketbased adjustments in tariffs and prices charged by public sector enterprises, liberalizing trade measures (Mexico is about to join the GA7T) and only very mild (by traditional IMF standards) budgetary restraint (a reduction in the deficit-GDP ratio by three percentage points over 1986-87). The aspect of the Mexican program of most interest for this discussion is the actions taken