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Third World Debt: Toward a New Strategy
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16544 |
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CURRENT ISSUES
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11 / 1989 |
3,059 Words |
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Richard E. Feinberg
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The new strategy of U.S. Secretary of the Treasury Nicholas Brady marks a watershed in the analysis of the Third World debt problem. Whereas the Baker Plan--named after Brady's predecessor at Treasury--assumed that debtor nations could at once increase their indebtedness through borrowing and grow their way out of debt, the emphasis in Brady's approach is the reduction of debt and debt service as the necessary precondition for the resumption of growth.
The Brady proposals contain these key elements for the four parties involved:
·Asked the multilateral lending agencies--the World Bank and the International Monetary Fund (IMF)--to make additional resources available to support debt reduction for countries pursuing approved economic policies;
·Called on commercial banks to reduce the stock of debt and debt service and to provide modest new lending in order to reduce the financial drain that is sapping developing nations;
·Called on impoverished debtor nations to adopt market-oriented economic reforms and promote foreign investment and the return of flight capital;
·Asked creditor governments to ascertain that their regulatory, accounting, and tax policies do not impede debt reduction, and to provide financial support for debtor nations, in part through an increase in resources for the IMF.
The Brady proposals are more statements of principles than a clear strategy. While they signal a new direction, the details are only now being worked out in the context of specific country deals.
To understand why the Bush administration decided to concentrate on reducing the debt overhang choking off growth in many Third World nations, and the extent of the problems the administration faces in implementing its proposals, let us consider five questions: (1) Is debt reduction the way to go? (2) What debt reduction schemes will work best--what financial instruments should be placed on the menu? (3) What should the IMF and World Bank contribute? (4) What must the debtors do, and how should the system deal with nonperformers? And (5) Which strategic approach is best: voluntary, guided, or comprehensive?
1) Are we marching in the right direction--is debt reduction the way to go? The post-1982 debt strategy was centered on the belief that countries would be able to grow their way out of debt through rapid export expansion. Although this assumption was correct for some Asian nations, it proved overly optimistic for most debtors in Latin America and Africa. Analysts failed to foresee the weakness in commodity prices and the persistence of high real interest rates. The original debt strategy also assumed that commercial banks would extend modest amounts of new loans. This did occur in 1983-84, but more recently the banks have sought to reduce exposure instead. The expanded activities of some multilateral lenders did not compensate for the sharp decline in private lending to many countries.
Furthermore, the combination of high debt-service ratios and low capital inflows resulted in an unexpectedly large net resource transfer--the excess of
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