Summary by Tom Hooper

4/22/02

Until 1986, the notion that National Debts either could or should never be repaid was taboo, yet the International Debt crisis forced policy makers to re-access their stances on debt management. The Austerity approach was stagnating the 3^rd World and hurting US farmers, businesses, and trade balance. Treasury Sec. James Baker held the monopoly in debt debate until Sen. Bill Bradley proposed a partial debt write-off, claiming that it was essential to growth of the 3^rd World. The Baker plan was announced by the Reagan Administration to the IMF in October 1985, a "non-recognition" of the crisis, providing a "non-solution."

The Baker plan looks at the top 15 countries, with the characteristics of having the largest debt and least ability to pay, most of which resided in South America. It proposed three remedies:

1. Private commercial banks would extend $20 billion to these countries over 3 years.
2. Multilateral financial institutes (including the World Bank) would lend an additional $9 billion.
3. Developing Countries initiate domestic reforms to decrease gov't involvement in the economy and impose "market opening measures" encouraging direct foreign investment and free trade.

In effect, the Baker plan amounted to a taxpayer bailout of the banks without consulting the taxpayers of the debtor countries; responses were universally negative. Why?

The 1 debtor countries had already suffered a net drain of $15 b. in interest payments and growing, in one year alone. The total amount of interest payments paid in 1985 was $88b., with $45b. coming from the Baker 15. The Baker plan also ignores dozens of smaller countries without any ability to pay their debts, which seem small in comparison to the rest, but do not take into account the small GNP's of these countries.

Since 1982, per capita income declined by 15%, leading to slashed imports in the Baker 15 (and lost U.S. jobs), and hurt their own industrial infrastructure. Migration into the US had also increased. The authors assert that massive debt rescheduling is required to fix the debt crisis.

The loans under the Baker plan are made on the contingency of the countries adopting IMF's austerity program: cutting gov't expenditures, freezing wages, devaluating the currency, and cutting imports. Dismantling social security would basically be asked of these countries as well. The Reagan Administration claimed that be Baker plan was going to replace this austerity with economic growth. The plan also imposes Reaganomics' emphasis on privatization, removing roadblocks to foreign investment and promoting deregulation, etc. The idea was to supposedly increase growth through increased production of exports.

The plan ignores high interest rates that countries must repay their loans at, relying on variable-rate bank loans as the source of some of the new funds.

Treasury Dept. claims "progress" - 13 of 15 of the Baker countries were undergoing negotiations. Baker tried desperately to get major countries to sign up for the plan, but unforeseen consequences such as the major earthquake in Mexico made then unable to impose the austerity required. The five smallest countries were approached quickly, despite the fact that they were already in negotiations with World Bank. Private Banks asked for gov't guarantees for their debt bailout loans.

The appeal to larger banks had an ulterior motive - Castro and Peruvian president Alan Garcia were already making speeches highlighting the unpayability of the debt. Garcia said he would use no more than 10% of his country's export earnings to pay for the debt.

The Baker plan aimed to steal the show from Castro and 3^rd World leaders. The Joint Economic Committee of Congress pointed out that the lack of imports of US good hurt US farms, manufacturers, and trade balance. Big 9 money center banks earned record profits in these years, and many leaders argued that private banks could afford to write off the bad debts from the 3^rd World, in light of how much it had made off of them in the early 80's.

Bradley advocated his own plan, that:

1. 3% of the outstanding principal on the debt was to be written off in each of the next 3 years
2. interest rates to these countries would be reduced by 3%
3. in return, developing countries would be asked to ease up trade restrictions

The Bradley plan was expected to reduce the debt services / export ratio of the Top 15 debtors from 37% to 25% in the first year. Naturally, Bradley's plan sparked quite a reaction from bankers, Jack Kemp, the World Bank, and Paul Volcker.

Conclusion

The article ends with an entreaty for the US to challenge World Bank and IMF strategies in the first place, at least to do the same for the debt crisis of US farmers at home, just as Bradley tried to do for the 3^rd World.