Journal Issue

Progress on the International Debt Strategy: Excerpts from recent speeches

International Monetary Fund. External Relations Dept.
Published Date:
March 1987
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By now there is widespread recognition of two basic realities of the debt situation. One is that improved growth performance in debtor countries is essential for a successful resolution of the problem. The second is that improved growth requires the implementation of sound policies in the debtor countries themselves. But there is a third basic reality. The kinds of policy changes and structural reforms that can reproduce higher durable growth in debtor countries take time to fully put in place and to work… . Financing provides the means to sustain these policy efforts.

Phoenix, May 1986

Baker initiative

The Baker Initiative of October 1985 contains three essential and mutually-supporting elements: the adoption by debtor countries of comprehensive macroeconomic and structural policies to improve growth and reduce inflation; a continued central role of the Fund and an enhanced role for the multilateral development banks; and increased lending by commercial banks in support of debtor countries’ policy efforts.

Phoenix, May 1986

…the broad framework of the reinforced debt strategy—as outlined by US Treasury Secretary Baker—remains appropriate… . What is needed is stronger implementation.

Atlanta, October 1986

Further progress on the debt problem depends on each of the major parties pulling his weight. Co-responsibility must therefore remain the cornerstone of the strategy.

Quito, November 1986

Policies in debtor countries

Debtor countries can maximize the odds for success by putting in place appropriate macroeconomic and structural policies and by persevering in their implementation. Each country’s economic program must be designed for its specific needs and circumstances… .

Debtor countries need to make the most of their export opportunities. Export earnings are crucial for generating the foreign exchange necessary to service external debt and for stimulating domestic production… . This means that real exchange rates have to be continuously maintained at competitive rates and that—where necessary—foreign trade regimes should be liberalized to eliminate excessive protection for domestic producers… .

Improved growth also implies more and higher-quality investment… . Given the recent sluggishness of capital flows and the need to service existing debt, domestic savings have assumed even greater importance as a source of new investment. It is therefore essential to maintain real interest rates at levels that encourage private saving, to ensure that government deficits do not absorb an unduly high share of private saving, and to orient the tax system toward the reward of saving rather than consumption. … It is equally necessary to see that those savings are put to efficient use… .

Structural, supply-oriented policies are also essential, especially where they spur the development of the private sector. In this regard, deregulation, relaxation of price controls … rationalization of public enterprises, tax policies that reward work and investment, the provision of adequate credit to private firms, and efforts to keep real wages in line with labor productivity all have constructive roles to play… .

A prerequisite for all the other elements in the growth-oriented adjustment strategy [is] the maintenance of overall financial stability and the confidence it provides to traders, savers, investors, and lenders—be they domestic or foreign. Nowhere is such stability more central than in seeking a repatriation of flight capital… .

Quito, November 1986

Role of industrial countries

Adjustment policies in the debtor countries—central as they are to the debt strategy—cannot do the job alone… . The industrial countries can provide crucial support by rolling back protectionism and by following sound fiscal and monetary policies that are compatible with healthy, noninflationary growth in world demand, lower international interest rates, and an appropriate pattern of exchange rates.

In addition, they can facilitate financial flows to indebted countries through adequate official export credits and increased official development assistance. The massive transfer of resources from the Third World to the industrial countries caused by recent declines in developing countries’ terms of trade—a figure on the order of $80 billion this year alone—also means that creditor countries are in an improved financial position to support the growth efforts of the indebted countries… .

A disturbing feature of the current global environment is the continuing threat posed by protectionism. If… . debtors … struggling to earn their way out of debt…find their path blocked by restrictions against the very products in which they hold a comparative advantage, what incentive will they have to adopt more “outward-looking” policy reforms?

… I [have] stressed the enormous contribution that an improved global economic environment would bring to the debt strategy. It is not enough to ask that the large existing external imbalances among the largest industrial countries be reduced. Instead, the objective must be to reduce those imbalances in a way that permits the expansion of output to continue at an adequate pace and that facilitates the further lowering of international interest rates. But experience shows that this cannot be left to “go it alone” economic policy management… . Put in other words, we need enhanced economic policy coordination.

Quito, November 1986

International cooperation requires that countries take full account of the international repercussions of their own policies. Protectionism is the antithesis of that principle. … At a time when the developing countries are struggling with enormous debt-servicing problems, and—equally important—when both industrial and developing countries are counting on the private sector to become the mainspring of growth, we simply cannot allow the drift toward protectionism to continue… . The Declaration agreed at the recent GATT ministerial meeting in Punta del Este … is a good agreement. … It is crucial for the health of the entire international economic and financial system that in the period ahead these commitments be translated into action.

Atlanta, October 1986

Role of commercial banks

A third major prong of the debt strategy [is] the participation of commercial banks. … No one is calling for a return to the unsustainable rates of bank lending that prevailed in the 1974-81 period. Nor is there any questioning of the goal of returning to reliance on spontaneous capital flows. Nor can commercial banks be faulted for asking that new lending be underpinned by genuine policy reform. But it must also be appreciated that ambitious programs of growth-oriented adjustment take time to bear fruit. A resumption of new net lending at a reasonable pace is crucial to support and to guide these programs through the difficult early stages.

Atlanta, October 1986

Banks’ new loan commitments to major debtors during [1986] appear to be well short of the amounts implied in the US debt initiative. … It is encouraging that some debtor countries who had earlier needed the bridge provided by concerted lending to help them through the difficult early stages of adjustment have now graduated to more normal market assess.

In this respect the resumption of spontaneous bank lending to Ecuador and Uruguay … is most heartening. One promising avenue—already under way in a number of debtor countries, including Brazil, Chile, Mexico, and the Philippines—is the conversion of existing bank debt into equity… . Another interesting technique is cofinancing with the World Bank, as illustrated in the arrangements for Côte d’Ivoire and Uruguay… . Given what is at stake, I can only expect that creditors and debtors will increasingly recognize their common interest in arranging farsighted and equitable solutions to financing problems.

Quito, November 1986

… a too-rapid disengagement [by commercial lenders] risks pushing debtors away from genuine policy reform toward quick-fix policy options that are incompatible with healthy long-term growth of international trade and finance. … In the end, financing gaps always get filled or eliminated in one way or another. But there is a world of difference between dealing with those gaps by restrictions on imports and accumulation of arrears, and dealing with them by moderate borrowing directed at building greater capacity to service future debt. For much the same reason, it would be unwise during this transition period to try to replace completely basic balance of payments support with trade and project lending.

Phoenix, May 1986

World Bank-IMF collaboration

Another essential element in the reinforced debt strategy is close collaboration between the Fund and the World Bank. Balance of payments viability and sustainable growth cannot be achieved unless exchange rate, fiscal, monetary, and foreign borrowing policies—main areas of particular interest to the Fund—are complemented by structural, sectoral, institutional, and other supply-oriented measures—areas where the Bank has particular expertise.

Zurich, April 1986

The objective of the intensified collaboration between the Fund and the World Bank is not to produce “cross-conditionality.” It is instead to ensure that immediate recovery measures are consistent with longer-term structural aims and requirements, that development projects and sectoral measures can be carried out within the constraints of external finance, and that the potential to enhance the efficiency of the economy is fully exploited. This is the way to get adjustment and growth to reinforce—rather than to conflict with—each other.

Atlanta, October 1986

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